Monthly Archives: May 2013

Comments on the FCC’s Bundled Components Proposal

The FCC requested comments (DA 13-592) on the eligibility of otherwise ineligible components bundled, without cost allocation, with other eligible services. Examples include cellphones, wireless tablets, and VoIP phones. The FCC proposes to clarify, effective FY 2014, that such end-user equipment is fully ineligible. It also requested comments on the cost allocation procedures and on the definition of “ancillary.” Initial comments were due May 23, 2013; reply comments are due on June 7, 2013. Several of the more interesting comments, both pro and con, are summarized below.

Pro:

Broadcore, a VoIP provider, supported the FCC’s proposal requiring cost allocation of all bundled services, but argued that the “clarification” should become effective as of FY 2013 rather than waiting for FY 2014.

E-Rate Central supported the FCC’s proposal. While simple in concept, E‑Rate Central noted that the procedural aspects of cost allocation may be complex. The cost allocation of cellular service devices, for example, is difficult to do precisely for accounts covering multiple users with different types of devices and with overlapping two- to three-year term agreements. In such cases, E-Rate Central encourages the FCC to work with USAC to develop monthly “safe harbor” eligibility percentages based on weighted averages of each carrier’s bundled product offerings.

E-Rate Provider Services supported the FCC’s proposal. It proposed a simplified approach to allocating the eligibility of Web-based services.

Steven Kaplan supported the FCC’s proposal, expanding on E-Rate Central’s concern regarding “eligibility creep” and to discuss the negative and related impact that “price creep” has been having on Priority 1 funding.

Con:

Funds For Learning disagreed with the FCC proposal citing “untested, unsupported assumptions about how much ‘free’ ineligible services have been costing and will cost the E-rate program in the future.” FFL used its comments to promote its own plan to fix the E-rate funding problem by limiting discounts to a maximum dollar per student.

Sprint Nextel asked the FCC to retain the current policy of permitting “free” cellphones without cost allocation. Sprint agreed with the FCC that as a “theoretical matter” the real cost of a free or reduced priced device “results in a more expensive bundle,” but argued that “there is no data to support this supposition.” Sprint did not discuss the issue of extending the current practice to other non-cellular components.

E-Rate Updates and Reminders

SLD Fall Applicant Training Schedule:

The SLD has scheduled eight one-day applicant training sessions this fall from late September through early November. As of last Friday, registrations are being accepted on a waiting list only basis for Washington DC, Houston, and Los Angeles. Regular registrations are still being accepted for Newark (10/8), Minneapolis (10/15), St. Louis (10/22), Atlanta (10/24), and Portland (11/7), but less than 200 spaces are available in total.

FCC Appeal Decisions Watch:

The FCC continued its recent support of USAC findings involving competitive bidding violations by denying an appeal by Fall River PSD (DA 13-1159). Similar to the Henrico County SD decision (DA 13-999) the FCC agreed that Fall River had failed to assign the highest weight to price in its vendor selection process. The district had weighted price the same as another factor, “knowledge of infrastructure.” The FCC again rejected the argument that the same bidder would have one had price been weighted higher, noting that all four bidders had received identical scores in the “price/charges” category, suggesting that price was an irrelevant factor.

Update on the FCC Chairmanship:

Former FCC Chairman Julius Genachowski’s resignation became effective May 17th. President Obama has nominated Tom Wheeler to replace him, but has not yet sent his name to the Senate for confirmation. We expect that the President will first make a second nomination to replace Robert McDowell, who also recently resigned, so that the two nominees, a Democrat and a Republican, can be presented to the Senate for confirmation as a package. In the interim, Mignon Clyburn is serving as Acting Chairwoman.

FY2013 Funding Status

Funding Status

Wave 1 for FY 2013 will be released on Wednesday, May 29, 2013, for over $130 million. The wave will provide funding for Priority 1 only, mostly for small straight-forward applications which did not require PIA outreach to applicants for additional information. In total, USAC will be mailing approximately 12,000 Funding Commitment Decisions Letters (“FCDLs”) with funding averaging about $11,000 per application. Last year’s first wave was much larger, but was not released until July 10th. The earlier start to FY 2013 funding will mean that many applicants will be able to start receiving discounted services July 1st — once they file their Form 486s. (Note that the SLD’s online Form 486 has just been updated to include FY 2013 dates in the pull-down menu.)

Wave 45 for FY 2012 will be released on Thursday, May 30, 2013, for $48.9 million. Priority 2 funding is being provided at 90%, and is being denied at 89% and below. Cumulative funding for FY 2012 will be $2.33 billion.

Wave 94 for FY 2011 will be released on Friday, May 31, 2013, for $19.1 million. Priority 2 requests are being funded at 88% and above, and denied at 87% and below. Cumulative funding for FY 2011 will be $2.60 billion.

Commissioner Rosenworcel Calls for eRate 2.0

At a recent education technology policy summit, Commissioner Jessica Rosenworcel made a compelling case for a major overhaul of the E-Rate program. The E-Rate of the future – E-Rate 2.0 – would “reboot, reinvigorate, and recharge” the E-Rate program as we know it.

As Commissioner Rosenworcel explains, the current system is not keeping pace with reality. Year after year, the demand for E-Rate support is double the annual $2.3 billion currently available. More than 80% of schools and libraries do not feel that their existing broadband connections meet their needs. As a result, school administrators face tough choices about how to divvy up that connectivity and determine which grades (sometimes, which classrooms) will get it and which programs can reasonably be run at the speeds available. Increased adoption of the Common Core education standards – a key part of which involves an online assessment of students – only serves to increase the need for more bandwidth. Regrettably, however, roughly half of E-Rate schools only have Internet connectivity at speeds of 3 Megabits or less. Access to adequate broadband capacity is “not a luxury,” according to Rosenworcel, but rather “a necessity for our next generation to be able to compete.”

Commissioner Rosenworcel proposes a multi-pronged approach to revamping the current E-Rate program and realizing the benefits of E-Rate 2.0. Among the suggested changes are:

• Increase E-Rate funding levels by redirecting money saved from audits of the Lifeline (low-income) universal service program to E-Rate 2.0. Audits of the Lifeline program have already saved more than $200 million in 2012 and are on track to save as much as $400 million in 2013.

• Set clear capacity goals for schools seeking E-Rate funding. Currently, only 15% of schools believe they have the capacity they need. Commissioner Rosenworcel proposes that, by the 2015 school year, every school should have access to 100 Megabits per 1,000 students; and, by the end of the decade, every school should have access to 1 Gigabit per 1,000 students. Going forward, every E-Rate applicant should also be required to collect information from applicants about their existing capacity and projected needs.

• Establish more public-private partnerships to create “cost effective technologies, educational applications, and devices” for classrooms across the country.

• Simplify the process for E-Rate applicants by allowing multi-year applications and greater use of consortia applications. These changes would reduce paperwork and administrative expense, while allowing for greater scale and more cost-effective purchasing.

• Increase the availability of broadband connectivity outside the classroom. Commissioner Rosenworcel notes that many students have no broadband access outside of school hours, making it difficult for them to complete basic school assignments. The Commissioner calls for a study of the FCC E-Rate School Spots program – which allows schools to stay open after classroom hours for community broadband needs – to see how it might help close the digital learning gap.

Any such changes would need the approval of the full Commission before taking effect. We are likely to see whether any of them have traction in the coming year.

USAC – Schools and Libraries News Brief

First Funding Wave for FY2013

On Friday, May 17, 2013, USAC ran the first funding wave for FY2013. Funding Commitment Decision Letters (FCDLs) for this wave will be dated Wednesday, May 29, 2013.

This wave contains over $130 million in commitments for Priority 1 services (Telecommunications Services and Internet Access) requested in 12,023 applications.

On the day the FCDLs are mailed, you can check to see if you have a commitment by using USAC’sAutomated Search of Commitments tool.

E-rate Discussed at Senate FCC Oversight Hearing

On March 12, 2013, the Senate Commerce Committee held an oversight hearing on the Federal Communication Commission (FCC). While much of the hearing was devoted to other issues, the E-rate was an important topic discussed. The Commissioners agreed with Senate Commerce Committee Chairman Rockefeller that the program not only needs to be preserved, but strengthened and modernized to deal with 21st century education. Senator Rockefeller stated “…simply put, we need to create E-rate. 2.0.” He further argued that “…by the end of the decade every school in America should have 1 Gigabit of connectivity…”

To date, no E-rate related reform bills have been introduced in the 113th Congress, which started in January 2013. However, the FCC can create many reforms without Congressional action. Since starting to implement the National Broadband Plan Agenda in 2010, many new program rules and regulations have been issued based on the Broadband Plan. I expect the FCC to continue to reform and update the E-rate program over the coming months.

In December 2011, Congress exempted Universal Service from the Anti-Deficiency Act (ADA) but only provided for a two year exemption, which expires on December 31, 2013. While the ADA exemption was not discussed at the hearing today, many in the education community would like to see a permanent exemption passed this year.

Priority 2 Funding Projections for FY 2013

For the past several years, the E-rate community has been concerned with the availability of funding for Priority 2 services and, ultimately, if demand trends continue, with full funding for Priority 1 services.  USAC’s preliminary estimate of demand for FY 2012, released at this time last year, showed total requests over $5.2 billion, up 21.5% from the comparable total for FY 2011. Total Priority 1 demand rose 12.5% to over $2.4 billion — slightly above the inflation-adjusted cap for the year. Despite the roll-over of $1.05 billion, Priority 2 funding was, for the first time ever, available only at 90%.

“E-Rate and the Fiscal Cliff.”  The article pointed to two basic issues, namely:

  1. The continued and growing demand for Priority 1 funding. This is believed to be driven primarily by the trend towards higher bandwidth connections as schools across the country move towards online assessments. It may also reflect the bundling of end-user equipment in wireless services and the high eligibility percentage allocations to Web hosting in online services — both issues addressed in the FCC’s request for comments discussed in the Updates section below.
  2. The continued demand for Priority 2 funding, particularly at the 90% level.  At first glance, the preliminary demand numbers for FY 2013 look encouraging. Priority 1 demand continues to grow, up 10.9% over FY 2012. But total demand is down 4.8% as the result of an 18.5% drop in aggregate Priority 2 demand.

At second glance, however, the picture is bleaker. In particular:

  • At $2.71 billion, the aggregate demand for Priority 1 is almost 14% above next year’s inflation-adjusted cap of $2.38 billion. Over the past six years, actual commitments, as a percent of preliminary demand, have ranged from 80-90%, averaging 84%. At the high 90% level, this would mean that USAC would require $50 million in roll-over funding to fully fund Priority 1. Although USAC has indicated that it is ready to start funding Priority 1 applications, the FCC may delay Wave 1 until it makes a decision on roll-over funding for FY 2013 — a decision it may not reach for a few months.
  • As indicated above, the aggregate demand for Priority 2 funding dropped sharply. But the critical demand for Priority 2 at the 90% level rose over 27% to $1.76 billion. Interestingly, Priority 2 demand in the 80-89% band dropped 63%.  We suspect that the shift from 80-89% to 90% was due in large part to districts with average discount rates below 90% choosing to apply separately for Priority 2 for their 90% schools rather than applying for all their schools at the lower average rate.
  • With Priority 1 requests likely to require almost all, if not more, of the annual cap, Priority 2 requests, even at 90%, will have to be funded entirely with whatever funds the FCC is able to roll-over from previous years. This may not be enough, particularly if a decision on Priority 2 funding is to be made without first carefully reviewing all applications. Historically, Priority 2 commitments are less than, but over 50% of, the initial demand estimates. For FY 2010, the most recent year for which most commitments have already been made, awards reached 65% of the preliminary demand estimate. If the same percentage were to hold for FY 2013, the FCC would have to find roll-over funds of at least $1.2 billion — or more. This would be a higher roll-over amount than has ever been provided, and would have to come one year after the FCC apparently stretched to provide $1.05 billion for FY 2012.

Based on what we know now, our conclusion is that full Priority 2 funding at the 90% level for FY 2013 is going to be difficult. Unless additional funding can be found, we may see extended delays in Priority 2 funding commitments as USAC reviews all 90% level applications and/or the FCC develops a partial funding strategy.

Previous projections estimated that full funding of Priority 2 requests at the 90% level for FY 2013 would require the FCC to roll-over “at least $1.2 billion — or more” of previously unused funds. Upon further analysis, it appears that “or more” is a better estimate. As indicated below, using FY 2012 as a guide, the required roll-over amount may need to be at least $1.5–1.6 billion. The key aspects of this analysis are as follows:

  1. USAC’s preliminary estimate of FY 2013 demand showed an increase of 17% in the critical components of Priority 1 and the 90% level for Priority 2. This includes $2.71 billion in Priority 1 demand and $1.76 billion in 90% Priority 2 demand, for a total of $4.47 billion. In terms of available funds, the inflation-adjusted cap for FY 2013 funding, before roll-over, is only $2.34 billion — a shortfall of $2.09 billion (plus $10 million for SLD operating expenses, net of interest income).
  2. Fortunately, as stated in the cover letter to the preliminary demand table, “USAC’s reviews will ultimately reduce the FY 2013 demand” to a lower commitment level. This reduction can be estimated from past experience — an estimate that becomes more accurate over time as more and more applications are reviewed. If USAC and the FCC are to make final decisions on Priority 2 funding, however, they must either (a) use conservative estimates of the expected reduction in demand, or (b) wait a year or more until almost all the applications are reviewed.
  3. In recent years, committed funding for Priority 1 has averaged about 84% of the preliminary demand, with a range of 80-90%. The table below shows the full range, but assumes that any relatively early funding decision (as occurred in FY 2012) would be based on the upper end of the range.
  4. Priority 2 commitments, as a percentage of preliminary demand (for any given threshold level), have historically been lower, but have shown greater variation. For our analysis, we have assumed a range of 65-80%, again focusing on the upper end.
  5. The table below provides FY 2012 and FY 2013 estimates of required commitments (based on each year’s preliminary demand estimates) for Priority 1 at all levels, Priority 2 at 90%, and the combination. It shows that $1.50 -1.60 billion in roll-over funding would be required to fully fund Priority 2 at 90% in order to achieve the same level of available fund coverage as in FY 2012.