News of the Week

Funding Status

Wave 13 for FY 2012 will be released on Tuesday, October 2, 2012, for $86.4 million. Priority 2 funding is being provided at 90%, and is being denied at 89% and below. Cumulative funding for FY 2012 is $1.28 billion.

Wave 63 for FY 2011 will be released on Wednesday, October 3, 2012. Priority 2 requests are being funded at 88% and above, and denied at 87% and below. Cumulative funding for FY 2011 is currently $2.36 billion.

No funding wave for FY 2010 is scheduled for release this week.

FCC Releases ESL for FY 2013

Just in time for the start of the SLD's fall training, and clearing the way for the opening of the next application window later this year, the FCC released the final version of the Eligible Services List ("ESL") for FY 2013. The new ESL adopts a major change in the categorization of Priority 1 services for Form 470 purposes, but makes no changes to the eligibility of actual products and services, except for some minor clarifications in language.

In the original draft of the FY 2013 ESL, released for comment in July, the FCC proposed to reorganize Priority 1 services under three new service types and to include a check box indicating whether any specific service should be listed as "Telecommunications Services" and/or "Internet Access."  The check boxes were proposed to assist applicants, when filling out their Form 470s, to post required services in their correct categories. This was important because discounts requested in one category, but not covered by a Form 470 posting in the same category, would be denied.

To the FCC's credit, the final Report and Order (DA 12-1533) for the FY 2013 ESL adopts a much simpler approach. In line with a recommendation in the ESL comments submitted by the State E-Rate Coordinators' Alliance ("SECA"), and supported by other responders, the FCC consolidated all Priority 1 services into a single list.

For Form 470 purposes, this consolidation effectively eliminates application problems associated with misclassifying a Priority 1 service as either "Telecommunications Services" or "Internet Access."  While it is too late in this cycle to update the Form 470 itself, the FCC directs "USAC, in conducting program integrity assurance (PIA) reviews, not to treat an applicant's failure to correctly identify the type of Priority One service it is seeking on the FCC Form 470 as an automatic violation of the competitive bidding requirements."  Several points should be noted, namely:

1. Although the change eliminates denial consequences of the most common type of Form 470 posting error, it does not eliminate others. For Form 470 purposes, services must still be correctly posted as Priority 1 or Priority 2, and within Priority 2 as Internal Connections or Basic Maintenance of Internal Connections.
2. Priority 1 service providers, searching for postings of a specific service, should look under both "Telecommunications Services" and "Internet Access."
3. The two Priority 1 service categories will still be used for Form 471 purposes, in part because Telecommunications Services, by statute, can only be provided by eligible carriers. The advantage of the change, however, is that if PIA corrects a Form 471 request from "Telecommunications Services" to "Internet Access," or vice versa, the request will no longer be denied if the service was only listed in the other category on the applicant's Form 470.

The new ESL explicitly leaves outstanding the issue of the eligibility of certain end-user equipment — particularly VoIP handsets — provided "free" as a part of a bundled Priority 1 service. This issue had been raised in a SECA petition seeking clarification on "free" bundled end-user equipment (see DA 12-1325) put out for comment this summer by the FCC. The deadline for reply comments was last Monday, October 24th (see SECA's own reply comments summarizing its position and addressing previously filed comments). Because this issue is still pending, the FCC's ESL Order indicates that it will "defer acting on these issues for now."  This language is in response to marketing approaches taken by some hosted VoIP providers alleging that handsets can be provided, without cost allocation, as a part of a fully eligible E-rate service. Effectively, the FCC is warning applicants signing such VoIP contracts, that they are doing so at their own risk.

LCP from an Applicant's Perspective

The SLD News Brief for October 21st  and our newsletter of October 24th both discussed the longstanding, but often ignored, requirement for vendors to provide products and services to E-rate applicants at the "lowest corresponding price" ("LCP"). For the most part, SLD guidance on LCP has been directed at the service providers, not the applicants. On the SLD Web site, for example, LCP is included as a special topic in the Service Providers' Step 2: Responding to Bids section, but there is no comparable discussion in the Applicants' Step 2: Competitive Bidding section.

The focus on LCP from a service provider's viewpoint is not altogether surprising since the rule clearly places the burden of compliance on the vendors. The SLD's guidance, for example, states: "A service provider – regardless of the size of the company or the category of service provided – must ensure that the LCP is provided to E-rate applicants. The applicant is not obligated to ask for it, but must receive it."

From a practical point of view, however, it doesn't make sense for an applicant to passively assume it is receiving the lowest corresponding price from its E-rate providers. The problem, of course, is that it is much easier for a supplier to determine its LCP than for an applicant to determine the LCP it should be charged.

What then is an applicant to do?  We have a few suggestions — and one warning.

LCP from an applicant's perspective can be viewed prospectively and/or retrospectively. An applicant soliciting bids for a new product or service should:

1. Undertake some basic research on market pricing. This might involve checking with other applicants in the area, searching the Web, or investigating state master contracts.
2. Make potential bidders aware of their LCP responsibilities. This might include adding language to RFPs and/or Form 470s (Item 13) reminding bidders of the LCP requirement.

A little market research also makes sense for existing services. If an applicant finds it has been paying more than LCP, a refund or credit should be requested.

Let's assume that an applicant with an 80% discount was charged $1,000 per month for Internet service for 2011-2012, but now finds that the LCP for the same service should have been only $800 per month. On a pre-discount basis, the applicant was charged $2,400 too much for the year. On a post-discount basis, assuming the service provider had been discounting the applicant's bills or that the applicant has already received a BEAR reimbursement, this means that the applicant is out-of-pocket $480 (20% of $2,400) and USAC has paid $1,920 (80% of $2,400) too much. If the applicant gets a refund, USAC must be repaid. In this example, this means:

1. If the service provider had discounted the bills (using the SPI process), it should refund the $480 to the applicant and refund the $1,920 directly to USAC.
2. If the applicant had filed a BEAR, and is refunded the full $2,400 from the vendor, the applicant should return the $1,920 directly to USAC.

Instructions for Returning Funds to USAC are on the SLD Web site.

Determining LCP is often a difficult process. As a result, we are starting to see third-party consultants offering LCP auditing services to E-rate applicants. Typically, such services are offered for a contingent percentage fee based on the gross amount of any refund obtained. On the surface, this appears to be a no-lose proposition for an applicant. But the USAC repayment issue complicates the process. Herein lays the warning.

Using the same example, let's further assume that a consultant uncovers the same $2,400 overpayment and that the consultant charges a 30% fee. The $2,400 accounting is as follows:

1. The consultant's fee is $720 (30% of $2,400).
2. USAC will still have to be repaid its full discounted share, i.e., $1,920 (80% of $2,400).
3. The applicant loses $240 ($2,400 minus the consultant's $720 fee and minus USCA's $1,920 repayment).

This is not meant to be an argument against using consultants to audit E-rate bills. Even if the audit costs the applicant a bit — and the gain or loss depends on the applicant's discount rate — savings may be realized in terms of ongoing service costs.

For completeness, one other E-rate issue should be noted. In some cases when overcharges are found for a multi-year period (particularly in telecommunications situations), the total refund amount may have two components — one for the overcharges themselves and an interest rate component. It is not clear whether a discounted portion of the interest rate component needs to be returned to USAC. This issue has been broached informally with the FCC, but to date there has been no guidance.

E-Rate Updates and Reminders

October Deadlines:

The invoicing deadline for recurring FY 2011 services is Monday, October 29, 2012. Associated SPIN changes, if required, should also be made by this date. Invoice deadline extension requests, if required, will generally be granted if filed within the next few months. Additional information is provided in last week's SLD News Brief discussed below.

Normally, the Form 486 deadline for early funding waves would have also been on October 29th. However, since the first two waves for FY 2012 were not issued until July 10th (Wave 1) and July 11th (Wave 2) this year, those Form 486 deadlines will be November 7th and November 8th, respectively.

The FCC is seeking nominations (DA 12-1469) to fill nine of the eighteen outside director positions on the USAC Board that are being filled temporarily, are vacant, or will soon become vacant. Nominations are due by October 15, 2012.

Reissue of Form 486 Notification Letters:

Due to SLD system problems, service providers have not been receiving copies of their customers' Form 486 notifications. That problem has apparently been solved. However, in order to make sure that applicant and service provider notifications are consistent with respect to issuance dates — which, for example, affect Form 486 appeal deadlines — the SLD will be reissuing applicant Form 486s with the new dates. Applicants who have recently received Form 486 Notification Letters are receiving e-mails advising them of the reissued letters.

FCC Appeal Decisions Watch:

The FCC issued two decisions last week addressing older appeals. In one instance (DA 12-1525), the FCC granted a 2005 request for waiver of the appeal deadline for the Missoula Public Library (MT), and remanded the case back to USAC. The question at issue is whether or not the Missoula County Department of Communications was an eligible telecommunications carrier. In granting the waiver, the FCC noted that Missoula's appeal to USAC overlapped with an FCC decision that, under certain circumstances, a state-owned telecommunications network could be considered an eligible carrier. The issue here is whether a county-owned network might meet the same criteria.

The second decision (DA 12-1526) involved almost a million dollars in COMADs for a Louisiana district resulting from competitive bidding violations for FY 2000 and FY 2001. At the time the actual COMADs were issued, E-rate rules specified that recovery would be made through the service providers. In this case, it included BellSouth which had played no part in the competitive bidding problems. BellSouth appealed and, during the pendency of the appeals, the FCC changed its recovery rules. Thenceforth, recovery was to be sought "from the party or parties at fault," applicant and/or service provider. In last week's decision, the FCC denied the district's appeal, stating that no new information had been provided. But the FCC approved BellSouth's (now AT&T) appeal and directed USAC to "discontinue its recovery actions" against the carrier.

SLD Fall Applicant Training:

The SLD's first fall training session for applicants will be held today, Monday October 1st, in Washington DC. The full SLD training schedule is shown below. Most of the sessions are now full, but a few slots are available on a waiting list basis. The training agenda and presentation slides are now available online. We will be discussing key update topics in upcoming newsletters.

Schools and Libraries News Brief Dated October 28 – OOW Letters and Invoice Deadline

The SLD News Brief for October 28, 2012, indicates that USAC will be issuing about 420 Out-of-Window Letters to applicants who missed the FY 2012 application window. Applicants receiving these letters have 60 days to appeal or request a waiver. To challenge an out-of-window decision, we suggest the following:

• If you believe an application was properly submitted and certified within the window, but was erroneously treated as out-of-window, appeal to USAC.
• If you agree the application was not submitted and certified within the window, but believe there is a good explanation, request a waiver of the application window deadline from the FCC (that only the FCC can waive).

Last week's News Brief also discusses the October 29th invoice deadline for FY 2011 recurring services. It provides a number of tips for:

• Applicants filing BEAR forms;
• Service providers approving BEAR forms; and
• Service providers filing SPI forms.