Earlier this month, The Washington Post headlined a story: “‘There has to be an accounting’: Former AT&T lawyer says company systemically overcharged neediest schools.” The article appears to be generating a lot of interest over a situation that has been evolving over many years. We have covered this story before, but perhaps it’s time for a review.
In the beginning, from an E-rate perspective, there has been a “Lowest Corresponding Price” (“LCP”) rule. LCP requires every E-rate vendor to provide services to any E-rate customer at the lowest price that the vendor charges to other “similarly situated” nonresidential customers. The rule is designed to ensure that E-rate charges are not artificially marked up just because applicants are getting discounts. In concept, LCP is simple. In practice, LCP has proved difficult to define — and, therefore, to enforce.
The regulatory controversy traces back primarily to 2010 when The United States Telecom Association ("USTA") and CTIA – The Wireless Association filed a joint petition with the FCC seeking a declaratory ruling clarifying certain aspects of LCP. The FCC sought public comment on the petition, but never publicly provided any clarification. In 2012, USTA and CTIA filed an ex parte notice with the FCC renewing their concern, again with no formal resolution.
Meanwhile, in the real world, others began to take notice. The Washington Post story has its roots in a 2011 suit filed against AT&T by a telephone auditor, Todd Heath. The Heath vs. AT&T suit, alleging that AT&T had ignored the LCP rule in multiple states, has a long and torturous history. AT&T is now seeking to have the suit dismissed arguing that much of the evidence presented by Mr. Heath was obtained improperly from Theodore Marcus, a former AT&T attorney, prior to Mr. Marcus’ resignation from AT&T.
In a separate action in 2016, the FCC proposed to fine AT&T and recover $170 thousand for alleged LCP violations involving charges to two Florida school districts that had been charged more than state contract rates. AT&T argued that the higher rates were justified because the two districts had selected month-to-month service rather than the longer-term state contractual rates. The FCC subsequently dismissed the action based on a statutory limitation issue.
The key question for E-rate applicants is: what does LCP mean for us and what are our responsibilities?
The most important point for applicants to note is that LCP compliance is technically a service provider responsibility. This is not to say, however, that LCP problems don’t affect applicants. Here are two potential problems:
- LCP issues being investigated at the vendor level can delay application or invoice approval. In 2020, for example, apparent — not formally announced — LCP problems in CDW billing delayed applicant BEAR payments for months on end. The BEARs, when finally paid, reflected lower LCP-based charges, with CDW providing offsetting applicant credits for both discounted and non-discounted charges.
- The Heath vs. AT&T suit discussed above highlights a potential auditing problem. Telephone auditors typically work on a contingency basis, reviewing customer telephone bills and applying for refunds when errors are found. For many customers, this is a no-lose situation. If no errors are found, the auditor doesn’t get paid. If errors are found, the auditor garners a percentage of the refund; the customer gets the rest. The customer also benefits from lower ongoing rates. For E-rate applicants which have already received discounts on the higher charges, the situation is a bit more confusing.
To the extent that E-rate discounts were received on excess service charges, the extra discounts must be returned to USAC. This could mean money out-of-pocket for higher-discount applicants. Here’s an example:
- Assume that a telephone auditor, operating on a 30% contingency fee, finds and recovers a $1,000 billing error.
- The auditor receives a $300 fee, netting the applicant $700. So far, so good.
- But an applicant, with a 90% discount rate, had already received a $900 E-rate discount on the excess charge. That discount must be returned to USAC. (Indeed, some telephone companies will not return amounts billed in error until they return the extra discount to USAC themselves.)
- In total, therefore, the applicant has paid the auditor $300 and $900 to USAC. Out-of-pocket, the audit has cost the applicant $200. The only benefit in this case is that the applicant’s charges going forward will be lower.
Moral: Auditing historic service charges is a good business practice, but E‑rate applicants need to understand the post-discount impact of errors found.
The best approach is to try to avoid LCP errors upfront by: (a) requiring upfront certifications from bidders that their pricing meets LCP requirements; and (b), doing your own research on market pricing. One particularly useful tool for researching comparative local internet charges is the Connect K‑12 tool, originally developed by EducationSuperHighway and now being supported Connected Nation.