News of the Week

Funding Status

The FY 2013 Form 471 application filing window closed March 14, 2013. USAC's preliminary estimate of FY 2013 demand should be released later this month.

Wave 39 for FY 2012 will be released on Tuesday, April 16, 2013, for $11.6 million. Priority 2 funding is being provided at 90%, and is being denied at 89% and below. Cumulative funding for FY 2012 will be $2.1 billion.

Wave 88 for FY 2011 will be released on Wednesday, April 17, 2013, for $2.1 million. Priority 2 requests are being funded at 88% and above, and denied at 87% and below. Cumulative funding for FY 2011 will be $2.55 billion.

FCC Seeks Comments on Bundled Services

The FCC released a Public Notice (DA 13-592) last week seeking comments on the eligibility of bundled components and related issues, namely:

1. As of FY 2014, the FCC proposes to clarify that "any ineligible components must be cost allocated, even if bundled with E-rate eligible services and offered to the public or some class of users."  If so clarified, this would effectively eliminate the eligibility of "free" (or heavily discounted) bundled end-user equipment such as cellphones, other wireless devices, and/or VoIP handsets.
2. The FCC is asking whether further clarification is needed with respect to its current standards for cost allocation for end-user — and potentially other — bundled components.
3. The FCC is also asking about the need for further clarification on the exception to permit "ancillary" components to be bundled with otherwise eligible equipment and services without cost allocation. Specifically, the FCC indicates that it does not believe that a "telephone handset, cell phone or tablet" "could ever be considered ancillary to the services with which they are paired."

The eligibility of bundled end-user equipment has been a contentious issue for almost three years, so we are glad to see the FCC addressing it head on. To review:

1. Late in 2010, the FCC released a Gift Rule Clarification Order (DA 10-2355) which stated, in part, that "service providers cannot offer special equipment discounts or equipment with service arrangements to E-rate recipients that are not currently available to some other class of subscribers or segment of the public."  The exception that this implied was further explained in a footnote reading:

   25   For example, many cell phones are free or available to the general public at a discounted price with the purchase of a two-year service contract. Schools and libraries are free to take advantage of these deals, without cost allocation, but cannot accept other equipment with service arrangements that are not otherwise available to some segment of the public or class of users. Therefore, a service provider may not offer free iPads to a school with the purchase of telecommunications or Internet access services eligible under E-rate, if such an arrangement is not currently available to the public or a designated class of subscribers.

2. Note that compliance with the E-rate gift rules and compliance with eligibility rules are really two different issues. Since this Order was designed to clarify gift rules, it was not surprising for it to recognize that widespread commercial practices of providing free or discount devices with contracted cellular service should not be considered gifting violations. The footnote, however, went further. It suggested that, under certain circumstances, cellphones or tablets could be bundled in with cellular service without cost allocating out the intrinsic value of what would otherwise be ineligible end-user equipment.
3. Certain service providers — most publicly, Jive Communications — took the cellular exemption one step further, and began offering "free" bundled VoIP handsets.
4. In mid-2012, concerned that this exemption was getting out of hand, further burdening E-rate funding, the State E-Rate Coordinators' Alliance ("SECA") filed a petition for clarification regarding the eligibility of free VoIP handsets and other end-user equipment. In response, the FCC released a Public Notice (DA 12-1325) requesting comments on the SECA petition.
5. Shortly thereafter, when the FCC released the final ESL for FY 2013, its accompanying Report and Order (DA 12-1553) explicitly deferred action on the eligibility of certain end-user equipment — particularly VoIP handsets — provided "free" as a part of a bundled Priority 1 service. Effectively, the FCC was warning applicants signing such VoIP contracts that they were doing so at their own risk.
6. For a while, awaiting FCC guidance, USAC held up funding involving FY 2012 discount requests for Jive Communications services. In December 2012, apparently with the FCC's concurrence, USAC began funding these requests. Informally, USAC indicated that it was doing so on the basis of the only written FCC guidance to date, namely the infamous footnote #25. Presumably, the same will hold true for similar FY 2013 requests.

For FY 2014, however, assuming the FCC adopts the proposed "clarification" released in last week's Public Notice, all end-user equipment will again become fully ineligible. Free or discounted devices may still be bundled, but their attributable costs must be broken out (i.e., cost allocated) from the eligible service costs. If this occurs, applicants who signed multi-year contracts for bundled equipment extending into FY 2014 or beyond may experience increases in their non-discounted costs (to which the FCC may say, "We warned you").

It is important to realize that the FCC's additional requests for comments on cost allocation standards and on the definition of "ancillary," may lead to changes other than the eligibility of bundled end-user equipment. Cost allocation, in particular, is an interesting issue. The current standard on cost allocation is exceedingly vague. It requires only that the allocation method used be "based on tangible criteria that provide a realistic result."  Any tightening of this standard, such as to make the allocation process more market-price oriented, may reduce the eligibility percentage of other bundled services such as the Web hosting component of a number of online services.

Comments on these issues will be due 30 days after the Notice is published in the Federal Register (hopefully within the next couple of weeks). Reply comments will be due 15 days thereafter.

E-Rate Updates and Reminders

FCC and USAC Reply Comments:

Last week was the reply comment deadlines on the FCC's proposed revisions of Form 472, 473, and 474 (DA 13-363) and on USAC's Information Technology Modernization program (SLITM). Initial comments on these two issues were summarized in our newsletters of April 1, 2013, and March 25, 2013, respectively.

Reply comments on the form revisions were filed by the National Cable & Telecommunications Association and Edline, Inc. Both parties took issue with new certifications to be incorporated in the Form 473, the Service Provider Annual Certification ("SPAC") form. Of particular concern was: (a) Item 15, requiring the service provider to certify information provided on the applicant Form 471, and (b) Item 20, requiring the service provider to certify that services were being provided at the Lowest Corresponding Price ("LCP") (which many suppliers believe the FCC has not fully defined). Edline also (c) supported other comments to include remittance contact information on the Form 472 ("BEAR" form), and (d) made several suggestions to streamline the invoicing process by reducing documentation requirements.

As of last Friday's deadline, no reply comments had been posted on USAC's IT Modernization program. If filed, reply comments should be available this week in the SLITM Comments section of the SLD's Web site.

FCC Commissioner Outlines a Vision for E-Rate 2.0:

In a speech last week at the Washington Education Technology Policy Summit, FCC Commissioner Jessica Rosenworcel spoke at length about her vision of the future of E-rate. She made several points, specifically:

1. E-rate needs more funding. One source would be generated from saving from other USF programs, including further reforms and audits of Lifeline.
2. E-rate needs clear capacity goals. "By the 2015 school year, every school should have access to 100 Megabits per 1000 students. Before the end of the decade, every school should have access to 1 Gigabit per 1000 students."
3. There is a need for "new and creative public-private partnerships."
4. The application process should be simpler. The FCC should encourage greater use of consortia and should consider multi-year applications.
5. The FF cannot forget that students need access to broadband Internet access outside of schools.

Schools and Libraries News Brief Dated April 12 – PIA Review, cont.

The SLD News Brief for April 12, 2013, continues the previous week's discussion, focusing on the eligibility, partial eligibility, conditional eligibility, and/or ineligibility of products and services.