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February 13, 2012

Introduction

The E-Rate Central News for the Week is prepared by E-Rate Central. E-Rate Central specializes in providing consulting, compliance, and forms processing services to E-rate applicants. To learn more about our services, please contact us by phone (516-801-7804), fax (516-801-7814), or through our Contact Us web form. Additional E-rate information is located on the E-Rate Central website.

Funding Status

The FY 2012 Form 471 application filing window opened on January 9, 2012, and will close at 11:59 pm EDT on Tuesday, March 20, 2012. The last possible date to file a valid Form 470 for FY 2012 is February 21, 2012. (Note:  The required 28-day posting period for a Form 470 filed on February 21st would end March 20th, the last day of the filing window. Please do not wait this long.)

Wave 34 for FY 2011 will be released on Tuesday, February 14th, for $25.7 million. Cumulative funding for FY 2011 will be $1.79 billion. Priority 2 funding for FY 2011 is currently being provided only at the 90% level.

Wave 85 for FY 2010 will be released on Wednesday, February 15th, for $14.9 million. Cumulative funding for FY 2010 will be $2.98 billion. Priority 2 funding is being provided at all discount levels.

Priority 1 Eligibility Creep

Here's what should be a simple E-rate question:  Are computers and telephones E-rate eligible?

To those who would answer "of course not," our response is "not so fast!"

The possible funding of end user devices appeared on the radar over a year ago when some cellular carriers began offering netbooks as a part of wireless data service plans, arguing that the entire bundle was E-rate eligible. The carriers had been offering increasingly sophisticated phones/PDAs on a "free" or heavily-discounted basis for a number of years, but the netbook offerings appeared to take bundled services to an entirely new level. The FCC, however, went along with 100% eligibility of such bundled services — but only if similar service packages were being offered to a broader class of customers, i.e., not just E-rate eligible schools and libraries.

Explicit FCC guidance on this issue first surfaced in December 2010 in an order (DA 10-2355) clarifying the E-rate gift rules. Specifically, footnote #25 states:

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.

This year, apparently, the same principle may be applied to the eligibility of digital telephone sets bundled with hosted VoIP services. In our mind, this raises two critical questions, namely:

  1. How does this principle square with the long-standing policies on free services and/or the cost allocation requirement for products and services involving both eligible and ineligible components?
  2. What other types of bundled services might be acceptable, and what will this do to the demand for Priority 1 E-rate funds?

Allocating costs between eligible and ineligible services has long been a mainstay of the program. Quite properly, at least in theory, it prevents awarding E-rate discounts on ineligible products and services. Further, if done properly, it assures that eligible costs are not inflated to cover ineligible costs. The only exception is that, as an administrative convenience, a minor "ancillary" component can be bundled into a much broader product or service without allocation. For additional information, see the SLD's Cost Allocation Guidelines for Products and Services.

Exempting cellular service from allocation requirements may simplify the application process for such services, but it does mean that E-rate discounts may be provided for significantly-priced ineligible products. Note that the condition that bundled pricing be made available to a broad class of users is in no way limiting. Cellular carriers typically offer a broad range of standard plans to the public at large. Let's consider two hypothetical plans that a carrier might consider as business models with equivalent returns:
            Plan A: $75 per month on a 2 year Internet access plan, including a notebook.
            Plan B: $50 per month on a 2 year Internet access only plan.

Under current FCC rules, the full monthly cost of each plan is E-rate eligible. Discounts under Plan A, therefore would be provided on an additional $600 over the course of two years, effectively discounting the cost of the otherwise ineligible notebook. Was allocation to be required, presumably only about $50 per month would be eligible.

The broader issue is whether the unallocated bundling of ineligible mobile devices in a cellular service represents a new way of handling any bundling of eligible and ineligible products and services — essentially undermining the existing allocation rules.

This issue recently came to the forefront when a VoIP provider began offering bundled digital telephone sets in with their hosted VoIP services, claiming full E-rate eligibility. The provider noted that, just like cellular, its bundled service is available to a broad class of customers, and that it has correspondence from USAC suggesting that the principle is the same.

If so, where would the FCC draw the line?  Consider, for example, a company bundling Web hosting with a full complement of Web creation tools. Heretofore, such a service would have to be cost allocated. Only the basic Web hosting would be eligible. But under the cellular eligibility model, wouldn't the entire Web bundle be eligible?  And if cost allocation is torn asunder, wouldn't the demand for E-rate funding skyrocket?

One way or another, it is incumbent on the FCC to at least address the expansion of the cellular eligibility model to other products and services. The most immediate question is what guidance will be given with the limited time left in the FY 2012 application window?  If none, what is an applicant — specifically one considering bundled VoIP services — to do?  We would propose the following:

  1. On the assumption that bundled VoIP phones do not have to allocated out, apply for discounts on 100% of the recurring service costs. Presumably, additional information will be made available by PIA review time.
  2. Recognize, however, that the FCC may ultimately decide that the package is not fully eligible. If the economics are such that the VoIP system is justified only with 100% eligibility, consider strategies to share the risk with the provider (e.g., with a contract provision guaranteeing that the provider will itself discount any portion of the service  not discounted by E-rate).

Low-Income, E-Rate, and Digital Literacy

The FCC released a Report and Order and Further Notice of Proposed Rulemaking (FCC 12-11) last week dealing with a comprehensive reform and modernization of the Low-Income program, one of the four Universal Service Fund ("USF") programs. Although Low-Income and E-rate are separate programs, the Low-Income NPRM includes a section on digital literacy training with important E‑rate implications.

Historically, the purpose of the Low-Income program has been to subsidize telephone service for low-income subscribers. As with other USF programs, the Low-Income modernization would begin to shift the focus from universal support of telephone service to broadband service. The conceptual leap in the Low-Income NPRM is the recognition that simply making affordable broadband services available to low-income Americans is not enough. "[B]arriers to broadband adoption also include lack of digital literacy, and a perception that the Internet is not relevant or useful."

The NPRM, therefore, seeks comments on:

…using universal service support for targeted, time-limited funding to ensure that low-income Americans who have not adopted broadband have the digital literacy skills they need to access and use broadband. In particular, we seek comment on the details of providing digital literacy funding, including whether such funding should be used for digital literacy training programs, what types of entities should receive such funding, how much funding to provide and for how long, and how funding should be administered.

Although the four USF funds have traditionally been accounted for separately, the FCC notes that there is no statutory requirement to do so. As a result, the FCC is seeking comment "…on whether a digital literacy program should be administered through the existing E-rate program, the low-income program, or a separate program…"  The rationale for administering a literacy program through E‑rate would be "…to enable library patrons to effectively utilize the Internet access provided at libraries, or to enable parents and other members of the community to learn skills to use E-rate funded connections…" in schools (now permitted outside of regular school hours).

If digital literacy training is to be provided through the E-rate program, funding is a critical issue. In this regard, the NPRM makes two key points, namely:

  1. Training would not create an open-ended commitment. The proposed limit on training expenses is $50 million over a four-year period.
  2. More importantly, funds for training would presumably not reduce existing E-rate funding. Specifically, the NPRM suggests that digital literacy could be funded by eliminating waste, fraud, and abuse in the Low-Income program (or savings realized in the High-Cost fund).

Comments on the Low-Income NPRM will be due 30 days after publication in the Federal Register; reply comments will be due 30 days thereafter.

E-Rate Updates and Reminders

FRN "Under Review" Status:

In an effort to accelerate FRN funding, the SLD has indicated that it will make greater use of the "Under Review" status indicator in Funding Commitment Decision Letters ("FCDLs") being issued over the next couple of months. Normally, an FCDL is not issued on a multi-FRN application until the SLD can approve (or deny) every FRN. In some cases, however, this means that an FCDL will be held up, not because of questions on the application as a whole, but because of an issue with one or two of the FRNs.

With the "Under Review" approach, the SLD can issue an FCDL providing firm commitments on some FRNs and deferring decisions on others. As is normally the case, the FCDL will show all FRNs, but the status of one or more may indicate "Under Review."  The applicant can then file a Form 486 for the approved FRNs and begin receiving discounts. If and when the "Under Review" FRNs are finally decided, the applicant will receive a revised FCDL.

Sentencing in E-Rate Fraud Case:

FCC Chairman Genachowski released a short, and therefore somewhat cryptic, statement last Friday stating "The E-Rate program brings enormous benefits to students everywhere. I applaud today's action by DOJ. This successful prosecution reflects the collaborative efforts of the DOJ and FCC to protect E-rate from waste, fraud, and abuse, and to deter future misconduct."

The Chairman's statement was referring to a  U.S. Department of Justice news release announcing the 30-month sentencing of Gloria Harper for E-rate fraud. Ms. Harper, the former owner of two Illinois technology companies, had pled guilty to conspiracy last June for providing bribes and kickbacks to school officials in Arkansas, Florida, Illinois, and Louisiana. More broadly, the DOJ release notes that in its ongoing investigations into E-rate fraud, "a total of seven companies and 24 individuals have pleaded guilty, been convicted at trial, or entered civil settlements. Criminal fines and restitution have totaled more than $40 million.

Schools and Libraries News Brief Dated February 10 – Form 471 Information

Last week's SLD News Brief for February 10, 2012, reviews some of the information required on Form 471 applications. Topics covered include:

  • Billed entity information
  • Recipient of service information
  • Establishing Form 470 number
  • Service and contract information
  • Applicant financial resources