What’s in the E-rate Order? A Request for More Input and Data

Although the Federal Communications Commission adopted many changes to the E-rate program on July 11, 2014, the FCC also launched a new proceeding – a Further Notice of Proposed Rulemaking – seeking public comment on additional issues. Specifically, the FCC seeks input on the future funding needs of the E-rate program; discrete issues that may further simplify the administration of the E-rate program; promoting cost-effective purchasing through multi-year contracts and consortium purchasing; and how best to calculate the amount of funding eligible libraries need in order to purchase Wi-Fi networks and other internal connections.

In general, the FCC asks:

• To encourage the deployment of whole networks, are there additional changes to the E-rate program that the FCC should adopt to meet the connectivity needs of schools and libraries?
• Are there other ways the FCC can foster cost-effective purchasing throughout the program?
• Are there more changes that the FCC can make to further improve the application process or to otherwise improve the administration of the program?
• Are there other data that the FCC can and should collect in furtherance of our goals for the E-rate program?

I. Meeting Future Funding Needs

The FCC is seeking specific comment on how much funding is needed to meet the E-rate programs goals, keeping in mind the commission’s responsibility to minimize the overall Universal Service Fund contribution burden on businesses and consumers.

In particular, the FCC seeks data and analysis in the following four areas:

1. The gap between schools’ and libraries’ current connectivity and the FCC’s new connectivity targets and, in particular, data with respect to WAN connections and Internet connections. How is the accelerated deployment of internal connections likely to affect the pace at which high-speed connectivity needs to school and library premises grow?
2. How much funding is needed to bridge those gaps in light of likely pricing for broadband services – both WAN and Internet – taking into account the FCC’s efficiency measures as well as general industry trends in broadband pricing over time?
3. Per-student and per-square foot budgets for internal connections for funding years 2015 and 2016. Should these budgets be continued in future funding years, and the closely related question of the $1 billion funding target the FCC adopted for category two services. Will these budgets be sufficient to meet schools and libraries needs for Wi-Fi and other internal connections? Are they too generous? Are there other approaches the FCC can take to ensuring sufficient funding for category two services?
4. Will FCC-adopted reforms, especially focusing the program on broadband, free up sufficient funding?

The FCC also seeks comment on how the substantial reduction in the real purchasing power of the E-rate budget since the program’s creation should affect the commission’s analysis.

II. Ensuring That Multi-Year Contracts Are Efficient

The FCC seeks comment on the benefits and drawbacks of limiting multi-year contracts for E-rate-supported services to no more than five years. Currently, there is no limit, but the FCC seeks to balance the advantages that longer term contracts give applicants against the opportunity that shorter term contracts give applicants to take advantage of rapidly falling prices in a dynamic marketplace.

The FCC asks:

• Are there particular E-rate supported services for which the FCC should require shorter maximum contract lengths because the price of such services is so dynamic or for other reasons?
• Are there services for which the FCC should allow longer maximum contract lengths?
• How could the five-year limit affect schools’ and libraries’ ability to purchase from state or other master contracts, service agreements, or joint purchasing agreements?
• Are there other ways the FCC could achieve the goal ensuring that schools and libraries can take advantage of falling prices for E-rate supported services while minimizing administrative burdens? Could the FCC simply have a requirement that prices are renegotiated every five years?

The FCC proposes to exempt from this requirement contracts that require large capital investments to install new facilities expected to have a useful life of 20 years or more. Concerning this proposal the FCC asks:

• The E-rate program currently provides support for special construction charges separate from the charges for recurring services. Does this obviate the need for longer-term contracts?
• Would the winner of an initial short term contract likely face any serious competition over subsequent terms, once it had recovered its capital investment?
• Could a 20-year contract allow a service provider to amortize its installation costs once over the entire contract, while some indexing or similar arrangement could provide E-rate applicants with the increasing bandwidths they would likely desire over the period at no additional cost above the costs of upgrading the electronics to provide the higher bandwidth?

III. Standardizing the Collection of National School Lunch Program Data

The FCC proposes to standardize collection of data about participation in the United States Department of Agriculture’s (USDA) National School Lunch Program (NSLP for purposes of calculating schools’ and libraries’ E-rate discount rates. Currently schools use NSLP data to determine their level of economic disadvantage for the E-rate program by measuring the percentage of student enrollment that is eligible for free or reduced price lunch under NSLP or a federally approved alternative mechanism. The FCC is proposing to require schools to use the NSLP information reported by state agencies to USDA’s Food and Nutrition Service (FNS) and by requiring schools that participate in NSLP to use NSLP data for purposes of determining their discount rate.

The FCC asks:

• Do all states and territories report NSLP data to FNS by November 15th every year?
• Is state reported NSLP data available on a district-wide basis and is it calculated in a way that is consistent with our new discount rate calculation rules?
• When does state reported NSLP data become available to schools?
• Can libraries access information about state-reported NSLP data?
• Would the requirement to use state-reported NSLP data impact Tribal schools and libraries, and if so, how so?
• Is there alternative reporting data that would better reflect the level of economic disadvantage for Tribal schools and libraries? Is there other better reporting data that we should use for any other set of schools?

IV. Encouraging Consortium Participation

In the interest of doing more to encourage consortium purchasing, the FCC is seeking further comment on how to break down barriers to schools and libraries joining consortia. Specifically, the FCC propose to change the way consortia discount rates are calculated and also seeks comment on additional ways to encourage consortium participation.

1. Consortium Discount Rate Calculations

The FCC proposes to require consortia with only schools or school districts to use a weighted average formula that would account for the number of students in each member school or school district as well as the individual discount levels. Under this proposal, a consortium lead would calculate the consortium discount rates by multiplying each member’s individual discount rate by its number of students, adding those figures for each member and then dividing by the total number of students in the consortium. After determining the consortium discount rate, the consortium lead could then adjust each member’s funding so that it better reflects each member’s individual discount rate.

The FCC seeks comment on whether it should require the consortium lead to adjust each member’s funding. By using the weighted average, consortia should be better able to allocate the funding according to each applicant’s own discount rate. The FCC seeks comment on the benefits and drawbacks of such an approach, and on whether it would encourage more schools and school districts to join consortia. The FCC also seeks comment on whether there are any safeguards it needs to put in place to ensure that consortia leads equitably allocate funding. Some services, such as fiber backbone access, are shared among consortium members, which makes it difficult for consortium leads to determine the proportion of the service each member uses. Are there additional issues the FCC need to consider for such shared services?

For consortia that include libraries, the FCC seeks comment on how best to calculate a weighted average discount rate, given that libraries do not have student counts. The FCC proposes to count each 50 square feet of library space as one student for the consortium discount rate calculation. Would a formula based on number of patrons, volumes of books or another square footage benchmark be better substitutes for student count? Are there any other better and/or simpler alternatives?

The FCC seeks comment on how common it is for consortium leads to re-adjust the consortium discount rate for each member to more accurately reflect that member’s individual discount rate. Additionally, the FCC seeks comment on how common it is for consortia to seek to inflate their discount rates by adding high-discount members with few students. If consortium leads neglect to re-adjust each member’s discount rate, would the weighted approach the FCC is proposing be sufficient to encourage high-discount applicants with many students to join consortia?

In the alternative, the FCC seeks comment on whether it should require consortium leads to submit applications for E-rate support that would ensure each consortium member receives the exact discount rate it would be entitled to if it were to apply for services on its own. To do this, the consortium lead would create separate funding requests in an application for each group of consortium members who share the same discount rate. To the extent a consortium application included shared services, the lead would explicitly cost-allocate those services among the different funding requests.

The FCC asks:

• Would ensuring that high-discount applicants receive the same discount rate whether they apply for services as a consortium member or individual applicant encourage consortium participation for high-discount applicants?
• Would grouping discounts by funding request be too administratively burdensome for consortium leads?
• Would the benefit to consortia with multiple payers outweigh the administrative burden on consortia with multiple payers?

The FCC notes that some consortia have only one payer and that this grouped approach would not provide them with any additional benefit. The FCC seeks comment on how common it is for a consortium to have one payer.

2. Additional Ways to Encourage Consortium Participation

The FCC is seeking public comment on additional programmatic or rules changes it can adopt to encourage consortium participation.

• Should the FCC require applicants to consider services on all master contracts available to them in the bid evaluation process?
• What would be the advantages and disadvantages of such a rule?
• How could the FCC ensure that applicants would be aware of the services available to them on master contracts?
• Would requiring applicants to consider options from all master contracts available to them in their bid evaluations be unduly burdensome for small applicants?
• What can the FCC do to accommodate the unique financial constraints that schools and libraries on some Tribal lands deal with and the unique relationships among Tribal Nations? Should the, for example, establish different consortia rules for schools and libraries on Tribal lands or operated by Tribal Nations? What should such rules be?

The Education Coalition proposed, and the FCC seeks comment on, a model that would provide an additional 5 percent discount rate for consortia meeting minimum size standards. The applicant would have to:

• serve at least 30 percent of the students in a state, include at least 30 percent of the local education agencies in the state, or be designated as a consortium by the state,
• document the participation of individual entities,
• maintain a level of governance,
• perform large-scale, centralized procurement that results in master contracts, and
• open participation to all eligible schools and libraries, including public charter schools and private schools.

On the Education Coalition proposal, the FCC asks:

• Would applicants be more likely to form consortia if an additional 5 percent discount were available for consortia?
• Should the discount of consortia be limited to the otherwise-applicable top discount rate, regardless of the additional discount (i.e., top discount of 90 percent for category one purchases and 85 percent for category two purchases)?
• Should demonstrated effectiveness in lowering prices be a condition of any additional consortium discount?
• Would the minimum size thresholds in this proposal ensure that consortia are large enough to receive significant discounts?
• Would states designate small groups that do not have much bulk buying power as consortia so that they can take advantage of the additional discount?
• Should the FCC limit or eliminate the separate state designation prong of the Education Coalition proposal?
• How would the Education Coalition’s proposal affect those E-rate participants who, because of their geographic location, receive the best prices from smaller, local service providers?
• The Education Coalition’s proposal would allow libraries to participate in consortia eligible for an additional discount rate, but only if the libraries participate in consortia with schools and school agencies. Are there ways it should be modified to ensure libraries can get the benefits of such consortia? Should the FCC require that all such consortia make their prices available to all libraries within the area encompassed by the consortium, and allow libraries to take advantage of these contracts without conducting a separate bidding process?
• Should there be an alternative approach that allows for consortia made up only of libraries or only of schools?
• How would this proposal affect schools and libraries on Tribal lands or operated by Tribal Nations?

The FCC asks if private sector entities should be allowed to join E-rate consortia.

• Would a consortium consisting of E-rate participants and private-sector entities provide the economy of scale sufficient to reduce the cost of E-rate eligible services and encourage E-rate participants to join consortia, particularly in rural areas?
• Is there any data or other information showing the impact on connectivity or pricing that allowing this consortium combination?
• What safeguards would the FCC have to put in place to ensure that the Universal Service Fund does not support services used by ineligible entities?
• Would prohibiting private-sector consortium members from using membership in the consortium to evade generally tariffed rates be a sufficient safeguard?
• In rural areas where abundant fiber is available for private-sector entities but not for schools and libraries, are there additional rule changes that we can implement to allow schools and libraries to gain access to that fiber?

V. Ensuring Support for Libraries is Sufficient

The FCC seeks public comment on the funding eligible libraries need in order to deploy robust LANs/WLANs within their buildings and the best method(s) to calculate libraries’ internal connections budgets. In its latest order, the FCC adopted a pre-discount budget of $2.30 per square foot for libraries with a pre-discount funding floor of $9,200 in category two support available for each library over five years for those libraries that apply for E-rate support in funding years 2015 and/or 2016.

The FCC asks:

• Should the FCC establish more than one method of establishing a library’s budget and give libraries the option to choose a method based on their particular community, architecture, and service levels?
• If the FCC allows libraries the option to choose between different methods, should the libraries be locked in to the selected budget each subsequent funding year or should libraries be able to select a method each funding year?

The FCC seeks data on efficient library deployments as well as data on the LAN/WLAN deployment costs in small libraries, and whether the $9,200 funding floor adopted above is either too high or too low.

VI. Deadlines

The FCC is requesting the first round of public comments by September 15, 2014. Reply comments are due September 30, 2014.

Also in this series:

What's in the E-rate Order? Affordable High-Speed Broadband To and Within Schools and Libraries
What’s in the E-rate Order? Maximizing E-rate Dollars
What’s in the E-rate Order? A Streamlined Process