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FCC Issues Details of Major Changes in E-rate Program

The Federal Communications Commission December 23 issued a 72-page report and order providing details of the major changes in the E-rate program it approved last week, some of which will take effect immediately and some of which will be delayed until the 2005 funding year.

Restrictions on Internal Connections: The order implements a new "twice-every-five-years" approach to supporting internal connections other than maintenance and stipulated that the new system will not start until the 2005 funding year. Applicants are currently in the middle of preparing their requests for support for the 2004 funding year. Commitments for Priority Two service received in funding years before 2005 will not be considered in determining an applicant's eligibility for the funding going forward.

The Commission specified that it is "the receipt of support" for Priority Two services, rather than the application for support, that will count toward this policy. The Commission said that this approach of "making support available to more applicants on a regular basis and preventing wasteful and abusive practices" should outweigh any problems associated with reducing applicants' flexibility in using their discounts.

As examples, the Commission said that a school could receive support for internal connections in the 2005, 2008 and 2011 funding years, or a school that received support in the 2005 and 2006 funding years could receive support again in 2010.

Under the new approach, when an applicant receives support for shared internal connections services in a particular year, it would be credited against all of the shared sites. The FCC made this stipulation to prevent applicants from "gaming the system" by applying on both a shared and a site-specific basis. Consortium members will not be penalized if other consortium members receive discounts on internal connections.

Limiting Transfers: The Commission changed its rules to expressly prohibit the transfer of equipment purchased with E-rate discounts for a period of three years after purchase.

The Commission expressly prohibited the practice of purchasing equipment with E-rate funds "and then transferring that equipment to other schools and libraries with lower discount rates." Before three years, applicants would be able to transfer equipment if schools and libraries are closed, either temporarily or permanently. It said it would not require the two facilities to have comparable discount levels, as long as both are eligible for discounts. It said applicants must notify the SLD of these transfers and keep records of the reason for a period of five years. It said that once it received approval from the Office of Management and Budget, it would require all recipients of internal connections support to maintain asset inventory records for a five-year period.

The Commission specified that the restriction on transferability was not intended to prevent applicants from trading in equipment to a service provider for other equipment, but noted that its new "twice-in-five-years" rule could limit an applicant's ability to finance trade-ins using E-rate funding. The Commission said an applicant could not use the credit for the trade-in to pay for the non-discounted portion of the services it receives in return.

Use of Roll-Over: In a change from its previously detailed proposal, the Commission agreed to make undisbursed E-rate discounts, currently totaling about $425 million, available to E-rate applicants, starting in funding year 2003. This could help the SLD lower the threshold for approved internal connections this year. The FCC said that "no decisions previously made by USAC concerning distribution of funds for the 2003 funding year will be reversed or revisited." The Schools and Libraries Committee of USAC has voted to authorize USAC to begin denying internal connections requests from applicants at 79 percent or below, but as of this writing has not yet begun to do so.

Funding for Maintenance Contracts: The Commission directed the Universal Service Administrative Company to revise Block 5 of the Form 471 to create a separate category for requests for internal connections maintenance, starting in the 2005 funding year, so that applicants could continue to apply for support for maintenance every year.

Eligible Maintenance and Tech Support: Because of concerns about waste, fraud and abuse, the Commission clarified its definition of what it considers to be "basic maintenance services" that are eligible for E-rate support. It said basic maintenance services are those that, if not provided, "the connection would not function and serve its intended purpose with the degree of reliability ordinarily provided in the marketplace to entities receiving such services without E-rate discounts." It said basic maintenance services "do not include services that maintain equipment that is not supported or that enhance the utility of equipment beyond the transport of information, or diagnostic services in excess of those necessary to maintain the equipment's ability to transport information."

As examples, the Commission said basic maintenance would include "repair and upkeep of previously purchased eligible hardware, wire and cable maintenance and basic technical support, including configuration changes." It said "on-site technical support is not necessary to the operation of the internal connection network when off-site technical support can provide basic maintenance on an as-needed basis." It said services such as "24-hour network monitoring and management" and "on-site help desks" do not constitute eligible network maintenance.

The Commission said that because it is "administratively difficult and burdensome" to derive reasonable cost allocations of eligible technical support, it said that going forward, tech support would not be eligible if it included any portion of ineligible services. It instructed USAC to begin reviewing funding requests on this basis "as of the effective date of the Order." Applicants will be given 90 days in which to renegotiate tech support contracts, if necessary, or provide the Schools and Libraries Division with an itemized breakout of the components of their contracts for tech support.

Service Substitution: In a change that should be applauded by all stakeholders, the FCC said it would permit applicants to seek service substitutions when the price of the product or service increased, recognizing that applicants would not be able to qualify for any additional funding. Many applicants had been upset that they could not spend their own dollars to buy new, improved products under the Commission's previous policies. The Commission acknowledged that "events may occur between the time of the original funding request and the time when commitments are made that make the original funding request impractical or even impossible to fulfill."

Eligible Services List: The Commission said that going forward, USAC would be required to submit by June 30 a draft of its updated eligible services list for the following funding year to provide for a period of public comment, and that the Commission would issue a public notice with the final list "on or before September 15 of each year." The Commission said this process would permit interested parties to bring to the FCC's attention "areas of ambiguity in the application of current rules in a rapidly changing marketplace." The FCC acknowledged that under its previous rules, the only way an applicant could determine if a particular service or product is eligible is to seek funding and then appeal if it is rejected.

On-Premises Equipment for Priority One Services and Lit Fiber: Reviewing the details of its Tennessee order, the Commission stipulated that applicants can qualify for discounts on cable modems as part of Priority One Internet access, but reasserted that PBXes cannot qualify as part of a Priority One service. It said in this case, the fact that a cable modem created a de facto exclusivity arrangement did not mean it had to be treated as internal connections. It also said that it was appropriate to provide Priority One Discounts on "service provider charges to recoup the cost of leasing optical equipment to light fiber when that optical equipment is the single basic terminating component of an end-to-end network and it is necessary to provide an end-to-end telecommunications or Internet access service." Again, it said it reached that conclusion even though "the optical equipment on the customers' end, as a technical matter, is dedicated to the customer's sole use."

Cost Allocation: The Commission formalized its rules for cost allocating eligible and ineligible portions of a product's cost. It noted that "without this cost allocation approach, applicants may fail to pursue the purchase of certain advanced telecommunications and information services." Its rules, it added, "should permit the marketplace to flourish in ways that meet consumer needs and facilitate access to these innovations."

Real Costs: The Commission said it "cautioned" applicants and service providers that "price reduction, free goods or services and trade-in values are among the promotions that require accounting and proper allocation to capture the true cost of service."

The full text of the order is available at As part of that document, the Commission also issued a Notice of Proposed Rule-making, which will be described separately.

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