News of the Week

Funding Status

Wave 34 for FY 2014 will be released on Wednesday, December 31st. Funding for FY 2014 is available for Priority 1 services only. Priority 2 funding is being denied at all discount levels. Cumulative funding for FY 2014 is $2.10 billion.

Wave 99 for FY 2012 will be released on Monday, December 29th. Funding for FY 2012 is available for Priority 2 funding requests at 90 percent and denied at 89 percent and below. Cumulative funding for FY 2012 is $2.87 billion.

E-Rate Modernization – End of Year Developments

FCC Summary of the E-Rate 2.1 Order:

The FCC released a summary last week of its recent E-Rate 2.1 Order (FCC 14-189). See also the summary in our newsletter of December 22, 2014.

Available Funding for FY 2015:

The E-rate modernization rules, as set forth in both the July and December orders, make it clear that there will be sufficient funds to fully meet Category 1 demand with room to spare. Full funding for Category 2 for FY 2015 is more of an open question. The FCC believes that funding for FY 2015 will also cover Category 2 demand, but hedges its bet. The E-Rate 2.1 Order notes:

Raising the annual E-rate cap to $3.9 billion allows us to provide certainty to the applicant community, allowing local decision-makers to proceed at the pace that best serves their students and patrons. In doing so, we do not expect that program demand will immediately reach that funding level. Indeed, there is no way to perfectly predict what precisely individual schools and libraries will seek support for or when unserved schools will gather the resources to pay the non-discounted portion of special construction charges. For instance, we have already identified sufficient unspent funds to be confident in funding for category two services in funding years 2015 and 2016…

Quantifying the level of funding available for Category 2 in FY 2015 requires answers to the following two questions:

1. After covering all Category 1 demand, plus USAC expenses, how much of the new $3.9 billion annual cap will be available for Category 2?
2. How much roll-over funding — for which the FCC has targeted at least $1 billion — will be available for Category 2?

To estimate Category 1 demand, we first look at the most recent historical experience. Approximately $2.6 billion was required in FY 2014 to cover all Priority 1 demand and USAC expenses. This included the $2.4 billion funding cap, plus $200 million in roll-over funding. There was no funding for Priority 2.

We would expect Category 1 demand in FY 2015 to be slightly lower than Priority 1 demand in FY 2014. This assumption reflects changes to the Eligible Services List making certain previously eligible services ineligible, and phasing out the discounts on legacy voice services. Although the demand for broadband connectivity services may grow somewhat, the changes to increase broadband funding instituted in the E-Rate 2.1 Order either come too late to dramatically impact demand for FY 2015 or do not take effect until FY 2016. We would not expect Category 1 demand and USAC expenses in FY 2015 to exceed $2.4–2.5 billion.

Although this would theoretically leave $1.4–1.5 billion of the $3.9 billion cap for Category 2, the E-Rate 2.1 Order does not clearly state that the excess will be fully available. The actual regulation, as amended, now reads:

§ 54.507 Cap.
(a) Amount of the annual cap. The aggregate annual cap on federal universal service support for schools and libraries shall be $3.9 billion per funding year, of which $1 billion per funding year will be available for category two services, as described in § 54.502(a)(2), unless demand for category one services is higher than available funding. [emphasis added]

The answer to the first question, therefore, appears to be that at least $1 billion of the annual cap should be available for Category 2 in FY 2015. Or, if the language of § 54.507(a) does not limit Category 2 use of the cap, our estimate suggests that up to $1.5 billion would be available. Let’s assume a range of $1.0–1.5 billion of the FY 2015 cap is available for Category 2.

Additionally, the FCC has been promising at least $1 billion in roll-over funding for both FY 2015 and FY 2016 to be designated for Category 2 funding. On December 15th, the FCC took a step in fulfilling this promise by issuing new, and less conservative, guidance to USAC on maintaining E-rate reserves (see our newsletter of December 22, 2014). Last week, USAC updated its projection of funds available for roll-over from $600 million, as of September 30, 2014, to a total of $1.575 billion, as of November 30, 2014. As shown in the table below, almost all of the increase can be attributed to the elimination of reserves for uncommitted requests and pending appeals for FY 2011 and earlier.

The answer to the second question regarding the roll-over amount for FY 2015 will depend upon the FCC. Traditionally, the FCC does not designate the roll-over amount until the beginning of the funding year, well after the preliminary demand for the funding year is announced. By that time, the projected amount available for roll-over is normally based on USAC’s projections as of the end of the third or fourth fiscal quarter (i.e., March 31st or June 30th). By that time next year, USAC’s projections could show available funds of $2 billion. Depending upon Category 2 demand for FY 2015, the FCC could roll over the $1 billion initially targeted or up to our full $2 billion estimate.

In total, the range of possibilities for Category 2 funding for FY 2015 is $2.0–3.5 billion.

The level of Category 2 demand for FY 2015 is open to speculation. The preliminary demand for Priority 2 in FY 2014 was just over $2 billion for those with 80-90% discounts. With fewer products eligible in Category 2, the reduction in the maximum discount to 85%, and the new five-year budget limitations, the hope is that the high-discount rate demand for Category 2 will be less than $2 billion. Should up to $3.5 billion be made available for Category 2 in FY 2015, funding should be available down to the mid-level discount rates, if not lower.

USAC Releases New Urban/Rural Tools:

USAC activated its new online urban/rural lookup tools last week. There are two versions, both available in the Search Tools section of USAC’s E-rate website, namely:

1. The Urban/Rural Lookup Tool that can be used to check the urban/rural status of individual schools or school districts, libraries or library systems, or any list of entities; and
2. Urban/Rural Reports by State that can be used to produce urban/rural status reports on all schools, libraries, or consortium entities within a given state.

Instructions for using the new urban/rural tools are contained in the S&L Special Edition News Brief of December 23, 2014. Based on our early work with the tools, several additional points should be noted.

Most importantly, we would encourage applicants to use the Urban/Rural Lookup Tool to review the U/R status of all the entities (or at least all the schools and/or libraries) they intend to list on their Form 471 applications — even if they believe they know whether those entities are urban or rural. We have found that the tools appear to be very sensitive to abbreviations, periods, and/or capitalization in the way addresses are listed in the USAC database(s). In our tests, approximately 10% of the entity lookups (and a higher percentage of the entity listings in the state reports) result in “Invalid Address” indicators. We understand that certain Block 4 fields in the new online Form 471, including the urban/rural designation, will be completed automatically based on the entity numbers. Presumably using the same Urban/Rural Lookup Tool database, entry of an “Invalid Address” entity number may halt the online entry process until the U/R status of that entity is corrected. (Alternatively, the status of that entity might default to “Urban.”)  We recommend that “Invalid Address” entities be “corrected” well ahead of time.

Instructions for the Urban/Rural Lookup Tool indicate that non-instructional facilities for school districts and library systems should not be included in the lookup lists. The rationale for excluding such NIFs (with or without classrooms) appears to be that the urban/rural status of a district or system, as a whole, is dependent only on the urban/rural status of the schools and libraries themselves. The Urban/Rural Lookup Tool, however, will return U/R status indicators for NIFs as well. Even though the U/R status of a NIF may not be needed, an “Invalid Address” indicator may point to an address that should be corrected as an entity receiving service.

The Urban/Rural Reports by State tool appears to include entities, not only from USAC’s public Entity Search database, but from another internal USAC entity database. A number of entities from the internal database have entity numbers not found in the public database — many in the Invalid Address category, often with no street addresses at all. As a result, we have found problems with 15-20% of the entities listed in the state reports. A December 24th copy of a U/R state report for New York is available for review, sorted by city and highlighting the “Invalid Address” entries. Although a bit disconcerting, we see no reason to correct “Invalid Address” entities in the state report that are not going to be used in Form 471 applications.

Searches yielding “Invalid Address” results come with instructions to contact the Client Service Bureau to make corrections. This can be done by calling the toll-free number (888-203-8100) or using the online “Submit a Question” facility. Our early experience suggests that address corrections may be an iterative process. On a first pass, nearly two-thirds of our “corrections” — in many cases, just changes in formats to what appeared to be valid addresses — still led to “Invalid Address” results. Under current procedures, it appears that address changes need to be submitted by CSB for database updates. Although this can be done quickly, it may take an hour for the updates to become effective, at which point the Urban/Rural Lookup Tool can be tried again. We repeat: “Invalid Address” entities need to be “corrected” early in the application cycle.

E-Rate Updates and Reminders

FY 2015 Form 471 Application Window:

On December 19th, USAC announced that the FCC Form 471 application filing window for FY 2015 will open at noon EST on Wednesday, January 14, 2015 and will close at 11:59 pm EDT on Thursday, March 26, 2015.

USAC E-Rate Webinars:

USAC has scheduled a series of six instructional webinars on E-rate topics over five weeks beginning December 9th. The schedule and registration links are shown below. All live webinars will be at 3:00 p.m. EST. A link is provided to the recording of one of the webinars that have already been held.

Schools and Libraries News Brief – Not Published Last Week

The S&L News Brief was not released last week as USAC was closed mid-afternoon Wednesday, December 24th through Friday, December 26th. USAC is re-opening, and operating normally, as of Monday, December 29th.