USAC released its preliminary estimate of FY 2014 demand last week. As shown in the tables below, total demand, as well as two critical components of demand, is down 3-4% from FY 2013.
As explained further below, the two key conclusions that can be drawn from these demand estimates are:
- Priority 1 requests will be fully funded; but
- Priority 2 requests, even those at the 90% discount level, are not likely to be funded.
| |
Total Demand |
% Change |
| FY 2014 |
$ 4,824,728,476 |
-3.2% |
| FY 2013 |
$ 4,985,990,377 |
-4.8% |
| FY 2012 |
$ 5,236,939,650 |
21.5% |
| FY 2011 |
$ 4,309,942,527 |
10.1% |
| FY 2010 |
$ 3,915,889,487 |
-1.8% |
| |
|
|
| |
Total Priority 1 |
% Change |
| FY 2014 |
$ 2,630,256,838 |
-2.9% |
| FY 2013 |
$ 2,709,451,463 |
10.9% |
| FY 2012 |
$ 2,444,087,363 |
12.5% |
| FY 2011 |
$ 2,172,884,435 |
6.6% |
| FY 2010 |
$ 2,038,141,531 |
-0.3% |
| |
|
| Priority 1 + Priority 2 at 90% |
% Change |
| FY 2014 |
$ 4,304,155,283 |
-3.7% |
| FY 2013 |
$ 4,469,240,699 |
16.9% |
| FY 2012 |
$ 3,822,939,650 |
20.2% |
| FY 2011 |
$ 3,180,888,705 |
4.6% |
| FY 2010 |
$ 3,041,558,623 |
6.7% |
Available funding for FY 2014 has two components. The first component is the inflation-adjusted funding cap of $2.41 billion announced by the FCC last month. The second component will be the roll-over amount (funds previously committed, but not used) expected to be announced by the FCC early this summer. As of USAC’s last quarterly Funds Projection, with one quarter left to go, there was $600 million available for roll-over (see our newsletter of February 10, 2014). As a rough number, we can expect available funding for FY 2014 to total about $3.2 billion. That’s clearly enough to fund all valid requests for Priority 1.
Funding for Priority 2, even at just 90%, is another matter. Although the estimated $3 billion in available funding falls short of the $4.3 billion of the preliminary demand total for Priority 1 and Priority 2 at 90%, the actual gap will be less than the implied $1.3 billion. This is because preliminary demand totals have historically exceeded realized demand totals as applications are reviewed by USAC. Typically, actual Priority 1 demand is 80-90% of preliminary demand, and actual Priority 2 demand is 80% or less of preliminary demand. Our projections of actual demand, encompassing both Priority 1 and Priority 2 at the 90% level, are shown in the table below.
Based on this analysis — and to be conservative, focusing on the upper range of the commitment estimates — it’s easy to see why there is no Priority 2 funding at 90% in FY 2013. The roll-over gap was just over $1 billion dollars more than the $450 million actually available.
The numbers projected for FY 2014 are only marginally better. The demand is down slightly, and the inflation-adjusted cap is up slightly. By our estimates, the FCC would not feel comfortable funding Priority 2 at 90% unless it could roll over at least $1.3 billion — an unprecedented amount.
90% Internal Connections Funding Analysis
($ in billions) |
| |
FY 2014 |
|
FY 2013 |
| Estimated Commitment Demand |
|
|
|
| Preliminary P1 Demand |
2.63 |
|
2.71 |
| Commitment Estimate @ 80-90% |
2.10 – 2.37 |
|
2.17 – 2.44 |
| |
|
|
|
| Preliminary 90% P2 Demand |
1.67 |
|
1.76 |
| Commitment Estimate @ 65-80% |
1.09 – 1.34 |
|
1.14 – 1.41 |
| |
|
|
|
| Preliminary P1 + 90% P2 Demand |
4.30 |
|
4.47 |
| Total Commitment Estimate |
3.19 – 3.71 |
|
3.31 – 3.85 |
| |
|
|
|
| |
|
|
|
| Available Funding |
|
|
|
| Inflation-Adjusted Cap |
2.41 |
|
2.38 |
| Roll-over Gap |
0.78 – 1.30 |
|
0.93 – 1.47 |
| |
3.19 – 3.71 |
|
3.31 – 3.85 |
In considering the possibility of a large roll-over for FY 2014, we should note that the process for calculating the dollars available for roll-over each year is hard to predict with any accuracy. Changes in reserve policies, for example, can have a dramatic effect on available funds. We saw this in 2010 when the reserves for early funding years were cut substantially to free up additional funds. This led to a roll-over of $1.15 billion — the highest ever — permitting Priority 2 funding at all discount levels.
Similar changes, even if possible, are not expected for FY 2014. If anything, we would expect the FCC to be ultra-conservative this year in an effort to conserve as much funding as possible for E-Rate 2.0 in FY 2015 and beyond.
To the extent that there is more funding available for FY 2014 than needed for Priority 1, but not enough to fully fund 90% requests for Priority 2, the FCC has at least three options, namely:
- Prorate the available funding either by cutting the Priority 2 discount rate below 90% or by cutting the pre-discount amount subject to a 90% discount. Proration is permitted under current rules, but has never been used and is seen as administratively problematic.
- Retroactively restrict the list of eligible Priority 2 services by, for example, eliminating the eligibility of maintenance and/or legacy hardware. This would require a rule change.
- Simply not funding Priority 2 at all, essentially carrying forward excess funds into future funding years. This was the strategy used for FY 2013 — and, in our view, the one most likely to be used again for FY 2014.