News of the Week

Wave 7 for FY 2014 will be released on Wednesday, June 25th. Funding for FY 2014 is currently available for Priority 1 services only. This will be another large wave, pushing cumulative funding for the year to close to $1.2 billion. This means that USAC will have issued commitments of roughly half of the annual cap before the start of the funding year on July 1st — an unprecedented achievement (see further discussion below).

Last Friday, FCC Chairman Wheeler released a Fact Sheet and supporting documents laying out his proposed framework for E-rate modernization. If the Chairman has the votes, we would expect to see E-rate modernization to remain on the agenda at the FCC’s July 11th public meeting. An actual order might not be released for another month or two.

Key points in the Chairman’s Fact Sheet are:

• Commit at least $1 billion in support of Wi-Fi for both FY 2015 and FY 2016.
• Provide multi-year funding predictability for Wi-Fi.
• Begin a multi-year process for phasing-out support of non-broadband services.
• Reduce the maximum discount, at least for Wi-Fi, to 80%.
• Speed the processing of consortium applications (a process already begun for FY 2014).
• Move to electronic filing of all documents.
• Simplify discount calculations.

It is important to stress that these are the Chairman’s proposals. Based on recent speeches, blogs, and ex parte meetings, there continues to be consensus on the need to modernize E-rate to focus on broadband, but there is little agreement on key details. More specifically, it appears that the five FCC Commissioners are split on the need to increase E-rate funding. Apparently, Chairman Wheeler and two Commissioners favor retaining the current funding cap; two other Commissioners would like to see a funding increase based on a post-1998 inflation adjustment. This inflation adjustment would add about $800 million to the annual cap. The difference has both political and operational consequences.

Politically, there are at least three issues or questions, namely:

1. With mid-term elections this fall, is this the right time to increase E-rate funding?
2. Assuming that the FCC — and particularly Chairman Wheeler — wants to show strong support for the President’s ConnectEd initiative, can that be done with existing funding?
3. How would Congress respond to an increase in E-rate funding?  Although E-rate funding is not directly limited by statute, the Congressional Review Act allows Congress to review “major” rules issued by federal agencies that are likely to have an annual effect on the economy of $100 million or more. While some in Congress would support a higher level of E-rate funding, we note that Greg Walden (R-OR), Chairman of the House Communications and Technology Subcommittee quickly released a statement praising Wheeler’s proposal, stating that it “appropriately reflects the advice of the committee to pursue improvements to the E-Rate program within its current funding.”

Operationally, the level of available funds is likely to have a significant impact on the way final new E-rate rules are formulated to allocate limited funding. Specifically, it will affect the phase-out of “legacy” (or “non-broadband”) services and the mechanism for distributing funds for intra-building Wi-Fi equipment.

The $2 billion referenced in the Chairman’s proposal is in addition to the normal inflation-adjusted annual funding cap. Presumably, the annual cap amount would be used to fund Priority 1 services. The extra $1 billion/year would be roll-over funding set aside for Wi-Fi. (Since the $1 billion would be a separate pool, this may be called “Category 2” rather than “Priority 2.”)  Here is what this may mean for FY 2015:

For Priority 1 (perhaps renamed “Category 1”):

In FY 2014, the annual E-rate funding cap was $2.41 billion. USAC’s preliminary demand estimate for Priority 1, however, was $2.63 billion. To close that gap, the FCC rolled over $200 million in additional funding.

Assuming an inflation adjustment of 1.5%, the annual funding cap for FY 2015 would be about $2.45 billion. It is hardly farfetched to believe that the Category 1 demand for next year might rise 10% to nearly $2.9 billion. That’s a $450 million gap. If all available roll-over funds for FY 2015 are to be used for Category 2, how will the FCC act to close the gap?  We see the following three options, or some combination thereof:

1. Adopt a funding threshold, as has been done with Priority 2 in the past. This would eliminate or limit Category 1 funding for the lower discount applicants.
2. Reduce discount rates for Category 1. The Chairman’s Fact Sheet suggests that a proposed 80% maximum discount may apply to Category 2.
3. Aggressively phase-out the eligibility of legacy services. The Fact Sheet proposes a multi-year phase-out plan. Based on our estimates, it would require the elimination of web hosting and half or more of all voice telephone service discounts to close a $450 million gap in FY 2015. More legacy discounts may have to be phased-out completely by FY 2016.

A further point to note is Chairman Wheeler’s comment that this order is focused on Wi-Fi, but that he “remains committed to an ongoing modernization process to address other important connectivity issues.”  This suggests that a second order is in the works, perhaps later in 2014, focusing on Category 1 services.

For Category 2:

The Chairman’s proposal promises $1 billion for Category 2 Wi-Fi for FY 2015, an equal amount for FY 2016, and “predictable support” in future years. This raises several questions about what this will buy and for whom, namely:

1. What Wi-Fi equipment will be eligible?  Most likely, “Wi-Fi” is shorthand for a broadband subset of equipment previously eligible as Priority 2. This would likely include data cabling, hubs and switches, and wireless access points. There has been no indication that maintenance of this equipment will remain eligible.
2. Assuming that the demand for Wi-Fi far exceeds $1 billion per year, how will Category 2 funding be allocated?

Category 2 funding allocation is another contentious issue. Providing the greatest good for the greatest number of applicants, at least as far as E-rate is concerned, appears impossible. The logical choices are to provide: (a) the greatest good for some applicants, or (b) some good for the greatest number of applicants.

Through FY 2012, the allocation method of choice was (a) — providing full Priority 2 funding for the poorest applicants, but none or little to others. Chairman Wheeler appears to favor “choice (b),” providing some Category 2 funding to all applicants on a projectable annual basis. In a recent letter to Congress, the Chairman noted “According to internal staff estimates, allocating an additional $1 billion to Wi-Fi next year without updated program rules will allow us to reach fewer than 4 million students, mostly in urban areas.”  This appears politically inconsistent with the President’s ConnectEd goal of providing broadband services to 99% of students within five years.

The Chairman’s preferred alternative, according to all indications, is to budget some Category 2 funding to all applicants over a five year period on some sort of “per student” basis. One pre-discount budget number being rumored for the five years is $150 per student. Let’s see how that might work in theory:

1. $150 per student for five years is $30 per student in each year.
2. The average discount for all applicants, as measured by Priority 1 requests in recent years, is in the range of 73-75%.
3. If the maximum discount in Category 2 is 80%, as indicated in the Fact Sheet, the average discount for Category 2 might be closer to two-thirds. This would imply average annual E-rate discounts of $20 per student.
4. As a very rough number, there are about 50 million primary and secondary students in the country.
5. $20/student multiplied by 50 million students equals $1 billion. Bingo!

But how would this work in practice?

The first practical question is: Would this provide enough funding to do any good?  The average enrollment in primary and secondary schools is just over 500 students per school. At a $30/student pre-discount budget, that’s an average of $15,000 in Wi-Fi equipment per school per year — or $75,000 over a five-year span. Our answer to this first question, echoing the basis for the “choice (b)” allocation method, is that it can do “some good” for every applicant.

The second practical question is: How would this actually work?  As always, the details will be important. At the moment, we know none of them. And even if the FCC approves the Chairman’s proposals on July 11th, we may not know the details until later — post-order and post-implementation procedures. The following are just a few of the questions that must be addressed in a per-student allocation system:

1. Exactly how many students are there?  The 50 million figure used above includes public and private schools, but does not include the Head Start and pre-K students that are eligible in many states. On the other hand, not all schools apply for E-rate.
2. Will the system set a minimum level of funding per school or applicant?  Assuming this is the case, the average amount of funding per student decreases.
3. How will year-to-year funding tie into a five-year budgetary cycle?  Note, for example, that a five-year figure of $150 per student could mean either (a) pre-discount funding of $30 per student (as illustrated above) for all schools every year, or (b) pre-discount funding of $150 per student for individual schools once every five years.
4. How will the system set aside funding for libraries?  Initial indications are that about 10% of the funding will be allocated to libraries, reducing the per student amount available for schools.
5. How will funding be allocated for consortia if consortium members can also apply for other funding independently?
6. How will PIA validate student counts?
7. When, during the application cycle, will the per-student allocation for the year be determined?
8. How will the per-student allocation system affect actual funds utilization?

Implications for FY 2014 Priority 2 Funding:

Given the importance of the FCC’s E-rate modernization efforts for FY 2015 and beyond, particularly in light of the President’s ConnectEd initiative, applicants still hoping for Priority 2 funding for FY 2014 may rightly question how aggressive the FCC may be in finding additional roll-over funds. Here’s the current situation as we see it:

1. In early May, USAC released its 3Q14 funds projections showing $600 million available for roll-over. This is usually the quarterly projection that the FCC uses to establish a roll-over amount for the following year.
2. The third quarter’s $600 million was exactly the same amount shown as available for roll-over in February’s 2Q14 funds projections. Normally, this number goes up quarter-by-quarter, often with the largest increase in the third quarter.
3. The $600 million was before the FCC rolled over $200 million to fund Priority 1 for FY 2014, meaning that there is currently only $400 million available for Priority 2.
4. Since USAC’s preliminary demand estimate for Priority 2 at 90% alone was $1.67 billion, the current shortfall is substantial.

Although we believe that USAC’s third quarter projections are conservative, we see no incentive for the FCC to push a more aggressive approach to FY 2014 Priority 2 funding. To the contrary, we expect that the FCC views the current $400 million projection of available funds as a down payment on the additional $1 billion it has promised for FY 2015. If this is the case, there will be no Priority 2 funding for FY 2014.

The SLD News Brief for June 20, 2014 reviews the SLD’s online Date Retrieval Tool (“DRT”) that provides basic data on all funding requests since the program’s inception. The DRT provides access to funding data on a state-by-state, applicant-by-applicant, and year-by-year basis in both standard and user-defined formats.

Applicants seeking multi-year data on their funding histories will find it easier to use E-Rate Central’s online Funding Quick Search Tool that can be accessed by state from the State Information page. The Tool provides direct access to all of an applicant’s funding history since FY 1998, with additional detail that can be drilled down into by funding year and FRN.