An Aug. 11 ruling by the FCC regarding Tennessee’s first-year eRate application could have far-reaching implications for schools.

In partly reversing the SLD’s decision to deny the state’s request for $17 million in funding, the FCC broadened its definition of “internet access” to include so-called “turnkey” solutions that bundle features like web site caching and filtering along with a basic conduit to the internet. The agency also confirmed that schools can consider the level of service they will be getting ahead of the cost when taking bids from service providers.

Tennessee had requested about $17 million in first-year eRate funds to provide internet access to the state’s 1,600 schools. The state contracted with Education Networks of America (ENA) to provide the service at a total cost of $74 million over three years.

Under current program rules, building or upgrading a state-owned wide area network can’t be done with eRate funds. So ENA offered to buy the state’s existing public education network, ConnecTEN, which already linked at least one computer in each school to the internet. In return, the company promised to upgrade the network to provide a “turnkey” internet service that expanded the number of internet-connected computers the network could support at any given time and added web site filtering and caching services in addition.

Turnkey service means that all equipment, access, security, and support–from the school to the internet and back–are supplied by the provider. As part of its service, ENA offered to install a point of presence (POP) at each school so it could charge the state for direct internet access only instead of routers, hubs, switches, and other services that the state would not be eligible for discounts on.

In what became a high-profile case, however, the losing bidder for service to Tennessee’s schools–a company called ISIS 2000–filed complaints with the SLD and FCC contending that the state’s application violated the rules of the eRate.

Transferring a public telecommunications network to a private company lets the company upgrade the network at taxpayers’ expense and violates the spirit of the rules, ISIS 2000 argued. ISIS 2000 also said that Tennessee’s application stretched the definition of “internet access” beyond what was intended by the program by bundling such add-on services as web site filtering and caching into its internet access charges.

The company further contended that Tennessee failed to comply with the FCC’s competitive bidding requirements because it chose ENA’s bid over its own, even though ENA’s bid was $23 million higher than ISIS 2000’s.

The SLD in part agreed with ISIS 2000. In rejecting Tennessee’s request, the agency ruled that some of the network hardware costs did not qualify as internet access expenses under the eRate.

In particular, the SLD cited the construction of “education hub sites” at each school and the purchase of caching servers as items that were ineligible for discounts. Although ENA and Tennessee argued that the hub sites were an integral part of ENA’s provision of internet access, the SLD ruled that these items were either “internal connections,” in which case they received no support because Tennessee’s aggregate discount rate was less than 70 percent; or they were wide area network components and therefore were ineligible.

Appeals ruling

Tennessee filed an appeal with the FCC, and the agency issued its ruling on Aug. 11. In regard to services related to existing ConnecTEN components, the FCC upheld the SLD’s decision that these components were eRate-ineligible because they constituted not new, but pre-existing services.

But in regard to services related to ENA’s network upgrades, the FCC reversed the SLD’s decision. The agency ruled that “the service offered by ENA is internet access service that is fully supportable, with the exception of charges related to the purchase of existing ConnecTEN components.”

The FCC agreed with Tennessee’s assertion that there is no rule barring the sale of an existing public education network to a private entity, and because ENA plans to use the network to provide internet access only, and not telecommunications service, the company is an eRate-eligible service provider.

The FCC also found that Tennessee had complied with the program’s competitive bidding requirements, which offer schools “maximum flexibility to take service quality into account and to choose the offering . . . that meets their needs ‘most effectively and efficiently.'” Therefore, schools “are not required to select the lowest bids offered, although the Commission stated that price should be the ‘primary factor.'”

Furthermore, the FCC ruled that “costs related to ENA’s purchase of hub sites and caching servers made to provide internet access service to Tennessee may be properly characterized as part of its internet access service.” Tennessee will have no ownership of the hub sites and caching servers, the FCC noted, and because they mark ENA’s point of presence where internet access begins in the schools, they are part of the company’s end-to-end internet service.

“We recognize that all service providers include within their prices to customers some amount of the cost of building facilities to provide the service,” the FCC wrote in its decision. In other words, the cost of purchasing caching servers and installing hub sites in each school can be attributed to ENA’s operating expenses and therefore can be factored into the cost of providing internet access to the state’s schools.

ISIS 2000 had argued that the significant up-front, non-recurring costs of service to Tennessee’s schools–which exceed the recurring access charges for each successive level of service–have the effect of subsidizing ENA’s construction of a network that the company can then use to make a profit.

In response, the FCC wrote, “When we started this program, we did not envision providing support to fund significantly the backbone of a provider’s network. At the same time, we obviously did not wish to foreclose competition by funding only established service providers. Indeed, if we concluded that ENA were prohibited from support in this instance, we could very well start down the path of excluding significant competition.”

Implications for schools

School districts can take two important points from the FCC’s decision:

  1. Cost doesn’t have to be the overriding factor in choosing a level of service. Tennessee chose a solution that was $23 million more expensive but provided a superior level of service, including greater network capacity, security, and download speeds. School districts should keep this in mind when soliciting bids for their own products and services.

    In light of the movement underway in Congress to require filtering technology, for example, consider requesting discounts on an internet file server that includes the capacity to filter unwanted sites when you apply for next year’s eRate. The bottom line should be whether you can afford to pay the non-discounted portion of your bills for more expensive products or services.

  2. Service providers can bundle such premium services as web site filtering and caching into the cost of providing internet access. If you qualify for discounts of less than 70 percent, which up to now has been the cut-off point for the funding of internal connections, have your internet service provider build the ability to cache and filter web sites into your internet service. That way, you can receive these services at a discount under the eRate.