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Global Media and Communications Watch The International Legal Blog for the Tech, Media and Telecoms Industry
Posted in Policy & Regulation, Telecoms & Broadband Ari Fitzgerald

USA: Federal Communications Commission Rewrites E-Rate Rules for Technology Support for Schools

The main telecommunications regulatory body in the United States has adopted new rules governing the administration of the country’s multi-billion dollar education technology fund.  Schools and libraries in the U.S. will want to review the final rules closely to see how changes to this program will affect their future technology procurement plans and budgets, while telecommunications service providers doing business in the U.S. should be aware that the changes could open the door to a future increase in regulatory fees.  The new rules also create a significant new revenue stream for providers of managed Wi-Fi services (and, indirectly, vendors of Wi-Fi equipment), and vendors of caching servers.

In the United States, the E-rate program is the federal government’s largest education technology program.  Adopted as part of the Telecommunications Act of 1996, the E-rate program subsidizes access to “advanced telecommunications services” for schools and libraries.  The Federal Communications Commission (FCC) oversees distribution of E-rate subsidies, which are part of the broader Universal Service Fund (USF) that was created to ensure that all consumers have access to telecommunications and advanced services such as broadband at affordable rates.  Funding for all USF programs, including E-rate, comes from fees paid by mobile and fixed telecommunications carriers, as well as certain other providers.

The E-rate stakes are high—the program operates with an annual budget of $2.4 billion—and in the past the program has been subject to allegations of potential fraud, waste and abuse.  As recently as 2008 the FCC’s internal investigative office found that the program had made erroneous payments of nearly $233 million.  To address these serious financial concerns, and to improve the delivery of high speed, high capacity broadband to schools and libraries, the FCC initiated a rulemaking proceeding to reform its E-rate regulations last year.

The FCC adopted a long-awaited order on July 11, 2014 that revised the rules governing E-rate. Although the full text of the FCC’s decision is not yet available, the FCC reports that the order implements three primary reforms: (1) significant expansion of funding for Wi-Fi networks; (2) maximization of the cost-effectiveness of E-rate spending through greater pricing transparency, by encouraging consortia and bulk purchasing, and through better enforcement of existing rules; and (3) streamlining and simplification of the E-rate application process and overall program administration.

The FCC’s order maintains the current distinction between priority one services, for external connections, and priority two services, for internal connections (relabeled as “category one” and “category two”).  It also earmarks $2 billion for Wi-Fi support, including caching servers, for the next two years.  After that period, the FCC will “target” an additional $1 billion for Wi-Fi support annually for the following three years, although the availability of this funding is contingent on the successful phase-out of support for non-broadband services, such as pagers and telephones, and through increased program efficiencies.  According to the FCC, the revised E-rate rules could provide a 75 percent increase in Wi-Fi funding for rural schools over the next five years, and a 60 percent increase in funding for Wi-Fi in urban schools during that period.

The order also reportedly adjusts the discount for category two services to 85 percent for the highest poverty schools.  In terms of fund administration, the order streamlines the process for multi-year applications, and increases document retention and site inspection requirements for eligible entities.

Significantly, the order does not resolve all issues on which the FCC previously sought comment, and in the accompanying Further Notice of Proposed Rulemaking (FNPRM) the FCC seeks comment on potential future increases to the E-rate funding cap to meet the revised goals of the E-rate program.

The finite nature of the E-rate fund, coupled with the significant need for support for access to broadband, has long led to debates between members of the Chairman’s Democratic party, who are generally more open to increases in the regulatory fees that make up the USF, and Republicans, who tend to favor program efficiencies more than increases in fees.  The FCC’s E-rate order received a mixed reaction from Chairman Wheeler’s fellow Commissioners.  The senior Democratic Commissioner, Mignon Clyburn, offered a guarded endorsement of the plan, while noting her concern that support for Wi-Fi could endanger the ability of schools and libraries to obtain support for robust connectivity to their buildings.  The junior Democratic Commissioner, Jessica Rosenworcel, concurred, in part, arguing that the FCC should have addressed an increase in the E-rate funding cap in the order, rather than deferring that issue for further consideration in the FNPRM.  Both Republican Commissioners offered heated dissents, with Commissioner Pai arguing that the order unfairly favored urban schools, and Commissioner O’Rielly warning that the E-rate reforms will either increase consumer bills through larger USF fees or lead to a “funding cliff” for schools and libraries when current USF fees prove inadequate to support the expanded program.  The new rules will go into effect in time for the 2015 funding year.