E-rate Reforms Adopted: Fund Indexed to Inflation

Last week the Federal Communications Commission (FCC) issued an order implementing various reforms that had been proposed in the National Broadband Plan and set out in more detail last May, the most significant of which were to increase E-rate funding for the Schools and Libraries program to keep pace with inflation, and to fund the lease of dark fiber. (Please see our prior advisory regarding the FCC’s May Notice of Proposed Rulemaking.)

The Schools and Libraries program, commonly referred to as the E-rate program, has been subject to a $2.25 billion annual cap on funding since 1999. The FCC will now annually adjust this cap based on the general rate of inflation, the GDP-CPI index, rather than a telecommunications-sector-specific index as was advocated by FCC Commissioner Robert McDowell. This will result in an increase to $2.27 billion for funding year 2010-2011.

The FCC suggests that this adjustment will not increase the universal service contribution factor because of decreased high-cost support payments to certain large competitive wireless providers that will no longer be receiving funding. The FCC also confirmed that in any years of deflation, the cap will not be decreased and the prior year’s cap will remain in effect.

Despite reservations voiced by many service providers, the FCC also adopted the proposal to fund the lease of dark fiber, but with some limitations. For example, costs associated with building out facilities beyond the school or library property are not eligible for funding (including design, engineering, management costs, digging trenches, or laying fiber off campus premises). The electronics used to light the fiber are also ineligible, and funding eligibility for the fiber lease will begin only once the school or library lights the fiber.

Moreover, dark fiber will still be subject to the general requirement that schools and libraries choose the most cost-effective solution for obtaining service. The FCC has temporarily included dark fiber under the “miscellaneous” category on the E-rate Eligible Services List, but starting with the 2011-2012 funding year, dark fiber will be in a new, separate category of “telecommunications” and may be provided by a telecommunications carrier or other service provider.

The proposal to fund off-campus wireless Internet access was scaled back to a limited pilot program to address concerns raised in the comments, such as the fact that the proposal was not technology-neutral and increased the risk of waste, fraud, and abuse. Applicants seeking to participate in the first phase of the pilot will be limited to schools that have already implemented or are in the process of implementing wireless off-campus connectivity.

Additional reforms adopted in the order include:

  • Making permanent the ability of schools to permit, at their option, general community use of E-rate funded services after hours to encourage broadband use through “School Spots”
  • Eliminating the requirement to prepare a technology plan for all Priority One services (telecommunications services and Internet access), although applicants still may need to prepare such plans under state law
  • Retaining the E-rate competitive bidding process, but with a new, streamlined FCC Form 470 to be released
  • Allowing midyear changes in service providers only for “legitimate” reasons and using the second highest bidder (if there was more than one)
  • Strengthening and clarifying of the rules governing gifts to applicants from service providers
  • Affirming the continued eligibility of Web hosting services

Following are links to the order, the Sept. 23 news release, and the Commissioners’ statements:

Order (PDF)

News release (PDF)

Chairman Julius Genachowski’s statement (PDF)

Commissioner Michael Copps’ statement (PDF)

Commissioner Robert McDowell’s statement (PDF)

Commissioner Mignon Clyburn’s statement (PDF)

Commissioner Meredith Attwell Baker’s statement (PDF)

Davis Wright Tremaine advises numerous service providers participating in the E-rate program. Please contact your DWT attorney if you have any questions regarding the implementation of these reforms.