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Universal Service reform: What it means for schools

Broadband providers and their customers, including schools, will face new compliance challenges as the web of federal programs supporting broadband service grows larger and more intertwined.

With broadband service becoming an increasingly essential tool for participating in modern life, federal policy makers are pursuing regulatory reforms that will fundamentally refocus the government’s “Universal Service” programs and related regulations to spur more broadband deployment and adoption—a marked departure from the historical primacy of circuit switched voice services.

These reforms promise to give community anchor institutions, including schools and libraries, access to a wider variety of affordable broadband service than ever before. The changes also promise to expand the range of broadband services eligible for support under the federal Schools and Libraries Universal Service Support Mechanism (also known as the “e-Rate”).

At the same time, broadband service providers and their customers—including schools—will face new compliance challenges as the web of federal programs supporting broadband infrastructure grows larger and more intertwined.

Today, the Federal Communications Commission (FCC) has under consideration:

  • Multiple proposals—chiefly including the America’s Broadband Connectivity (ABC) Plan, proposed by large and midsize telecommunications companies, as well as an alternative plan championed by Google, Skype, Sprint, Vonage, and others—to transform the High-Cost Universal Service Support Mechanisms to provide direct support for broadband facilities and services, in accord with the blueprint outlined in the National Broadband Plan. These proposals would create the Connect America Fund (CAF), described last year in the  National Broadband Plan. The ABC Plan would provide $2.2 billion annually in support for broadband facilities and services where no unsupported competitor offers such services today, while the Google Plan would create separate technology-neutral Broadband Build and need-based Broadband Operations components. The ABC Plan also would create the Advanced Mobility/Satellite Fund (AMF), as described in the National Broadband Plan, to provide $300 million for mobile broadband service in unserved areas, including limited support for the installation costs of satellite broadband equipment installations.
  • A proposal to create a Low-Income Broadband Support pilot program, which could include support for deployment of network facilities and customer premises equipment, provision of broadband service, and digital literacy training to encourage sustainable broadband adoption.
  • Reforms to the Rural Health Care Support Mechanism, which has struggled to fulfill its promise since it was created. Complementary programs—such as Health Information Technology (HIT) loans, offered through the joint efforts of the Department of Health and Human Services and the U.S. Department of Agriculture (USDA), and USDA Community Connect grants—might help rejuvenate this program.

In addition, the FCC will be watching to see the results from the 2011 “Learning on the Go” wireless pilot program for schools and libraries, which could expand the range of mobile broadband services eligible for federal e-Rate support as early as Funding Year 2013.

As these proposals become reality, broadband providers and e-Rate customers are likely to see expanded service options and more affordable rates. However, compliance with all of the requirements of overlapping and complementary federal programs will become increasing complicated.

This article discusses the details of the FCC’s various proposals and highlights some key compliance questions that broadband providers, and the schools and libraries they serve, will need to consider as these proposals become reality.

High-Cost Reform

On July 29, a group of the nation’s largest incumbent local exchange carriers submitted the ABC Plan. This is the highest-profile concrete proposal to date to implement Universal Service reforms that would reduce intercarrier payments and—for the first time—provide federal high-cost support directly for broadband facilities and services.

On Aug. 3, the FCC issued a Public Notice seeking comment on this plan, as well as two competing views offered by state regulators and rural local telephone companies, respectively. On Aug. 18, Google, Skype, Sprint, Vonage, and the Ad Hoc Telecommunications Users Committee filed an alternative proposal to support broadband adoption, explicitly foster IP-to-IP interconnection, and modernize the Universal Service funding mechanisms. Various other interests, including cable and small wireless providers, also have weighed in.

The comments, which were due to the FCC Aug. 24, have produced a massive record for the agency to review. Nevertheless, this appears to be the FCC’s best chance to enact comprehensive intercarrier compensation and Universal Service reform—which has stymied the agency for over a decade—since its late 2008 efforts under former Chairman Kevin Martin.

Today, even as broadband plays an increasingly central role in filling the nation’s day-to-day communications needs, services such as internet access, eMail, voice over Internet Protocol, text messaging, and others have reduced overall demand for voice telephony and blurred the distinctions between local, long distance, voice, data, intrastate, interstate, and international services, upon which this legacy regulatory framework is based.

Under that legacy framework, when two or more telephone companies interconnect their networks to complete a voice call, the originating and terminating local exchange carriers may receive revenue from up to three primary sources: the end user (customer), the carrier with which they interconnect, and—in areas of the nation where the costs of service are significantly above national averages—federal High-Cost Universal Service Support Mechanisms. Today, none of these payments support broadband internet services directly.

The ABC Plan would reduce the terminating intercarrier compensation rate for most calls to $0.0007 per minute and create the CAF, which was described in the FCC’s National Broadband Plan. The CAF would distribute some $2.2 billion annually, nearly equal to the total e-Rate funding available today, to support deployment of facilities and provision of broadband services to residential and business locations at a speed of at least 4Mbps downstream and 768Kbps upstream. CAF support would be available in areas where there is currently no private-sector business case for doing so, because it would cost too much for providers to offer service—and specifically in areas where there is no unsupported broadband competitor as of Jan. 1, 2012, and that exceed the plan’s high-cost benchmark.

In addition, the ABC Plan would create the AMF, a fund to provide $300 million in support for mobile broadband deployment, including a portion that would be available for installation of satellite broadband equipment for a limited number of subscribers in the highest-cost areas of the nation. While the AMF is not described in as much detail as the CAF, it fills a complementary role, as a provider would not be permitted to receive both CAF and AMF for the same facility.

The Google Plan would separate the CAF into two components. The Broadband Build portion would be technologically neutral by not providing wireline carriers with a “right of first refusal” for CAF support, and by ensuring “efficient broadband build-out” by considering the costs of alternatives to wireline technologies. The Broadband Operations portion would be contingent on the provider’s showing of need based on “all current and foreseeable revenues,” which would have to be reassessed periodically, such as every three years.

The Google Plan also proposes that recipients of these funds must adhere to more stringent safeguards than apply to universal service funding today, such as those applicable to the Broadband Technology Opportunities Program (BTOP), administered by the Commerce Department’s National Telecommunications and Information Administration (NTIA), and other federal grant programs. The Google Plan specifically proposes to impose independent audit requirements, background screening for key individuals, and detailed annual and quarterly reporting requirements on support recipients.

Finally, the Google Plan proposes (1) to replace the current funding mechanism, based on interstate, end user, and telecommunications revenues, with a mechanism based on the number and bandwidth of each user’s connections; and (2) to take steps to foster IP-to-IP interconnection by, among other things, establishing a bill-and-keep default for traffic that originates or terminates on an IP network.

Either plan would, for the first time, offer explicit federal high-cost support directly for broadband facilities and services. If the FCC takes this step, community anchor institutions—such as schools and libraries—in areas of the nation without broadband service today might find that, not only will service become available, but this service might be eligible for e-Rate support as well.

Already, at least two groups have offered proposals that would further increase the benefits of the ABC Plan for schools, libraries, and other community anchor institutions. First, on June 29, the Schools, Health, and Libraries Broadband (SHLB) Coalition filed data with the FCC to argue that many institutions will need broadband with greater capacity than 4Mbps to fulfill their community missions. As a result, the SHLB Coalition proposed that the broadband speed supported by the CAF for community anchor institutions should increase over time to as much as 1Gbps, based on goals in the National Broadband Plan. In addition, on August 2, the Bill and Melinda Gates Foundation requested that approximately $450 million from the CAF be allocated each year to build fiber laterals to schools and libraries.

While the CAF and AMF, if enacted, would provide obvious benefits to broadband providers and community anchor institutions—such as schools and libraries—that purchase their services, both groups must take care to avoid duplication of federal funding that might create compliance violations.

First, potential CAF and AMF recipients already might receive support from BTOP, the Rural Utilities Service’s Broadband Initiatives Program (BIP), the RUS Broadband Loan Program, or other federal programs. Neither the ABC Plan nor the Google Plan explicitly states whether a recipient of such support would be eligible for CAF support.

If CAF or AMF support is available in areas served by recipients of BTOP, BIP, or other federal broadband grants, recipients that also obtain CAF or AMF support will need to maintain detailed financial records documenting compliance with the terms of each program. Specifically, they’ll need to be able to demonstrate that they have not received duplicate funding to construct the same facilities, and that they have not used federal Universal Service funding to satisfy the matching component of a BTOP, BIP, or similar grant award.

While neither NTIA nor RUS has explicitly ruled on the question, it is possible that the prohibition on using federal Universal Service funding as a matching contribution will extend to in-kind contributions of facilities previously constructed with CAF or AMF funds.

In addition, broadband providers—as well as schools and libraries that purchase their services—will need to carefully observe non-duplication of funding requirements. When it enacts rules governing the distribution of CAF and AMF funding, the FCC should address questions regarding whether broadband internet access supported by the CAF or AMF is eligible for e-Rate support as well. In addition, recipients of BTOP grant awards for public computer center (PCC) or sustainable broadband adoption (SBA) projects will need to ensure that they do not violate NTIA’s prohibitions on duplication of federal funding. While NTIA’s existing guidance does not address CAF or AMF support, it has stated that e-Rate support may not be used as matching funds for a PCC or SBA project. We expect NTIA would view CAF and AMF support similarly.

Low-Income Broadband Pilot Program

As with its high-cost universal service mechanisms, the FCC is working to reform its low-income support program to support the availability, affordability, and adoption of broadband service.

On Aug. 5, the FCC issued a Public Notice seeking comment on specific issues it will need to resolve to create a pilot program to support broadband adoption by low-income consumers. The FCC sought additional comment on (1) its legal authority in this area; (2) appropriate eligibility criteria for consumers (for example, based on level of income); (3) whether the FCC can require that pilot participants not be forced to change their voice service provider, purchase bundled broadband and voice services, or otherwise be penalize for the purchase of pilot low-income broadband services; and (4) what metrics to use to measure the results of the pilot projects, including whether a single pilot project should test multiple design elements to facilitate comparisons within its population of users, or whether each project should test a single set of design elements, and be compared to pilot projects operated by others.

This Public Notice builds on the FCC’s March 2011 Notice of Proposed Rulemaking on this subject. The record the FCC received this spring was generally favorable, and the FCC now appears to be in the process of working out the legal and operational details required to launch a series of pilot projects. Many broadband service providers—including those that already might serve schools, libraries, and other community anchor institutions—might be well-positioned to propose pilot projects that expand their missions to include low-income users.

Universal Service Reform for Schools and Libraries

The FCC already has made significant adjustments to the e-Rate program, and it has an ambitious slate of reforms still under consideration.

The FCC already has significantly increased e-Rate funding. Based on inflation, it has increased the e-Rate funding cap for Funding Year 2012 to a record $2.29 billion, an increase of $40 million. In addition, it has authorized the Universal Service Administrative Co. (USAC) to carry forward $850 million in unused e-Rate support to fund FY 2011 requests and to fund all eligible Priority Two funding requests at all discount levels for FY 2010.

More changes are on the way. The State e-Rate Coordinators Alliance (SECA) recently filed proposals to (1) improve invoice processing, (2) lower the maximum discount for Priority Two services, (3) reform and unify e-Rate filing processes in a paperless, electronic format, (4) create a comprehensive requirements manual that would incorporate all of the disparate sources of policy and procedural guidance that is now spread among reference materials, training presentations, SLD news briefs, FAQs, and other sources, and (5) further streamline and update the Form 470.

This filing builds on SECA’s earlier recommendations that the FCC accelerate USAC’s decision-making process and eliminate funding “black holes” by increasing the transparency of USAC’s operations, adopting an e-Rate “Bill of Rights” for applicants and service providers, and making other changes to increase the quality, speed, and finality of USAC decisions. The FCC might seek comment on one or both of these proposals soon.

In addition, on July 11, the FCC adopted new reporting requirements for the 20 recipients of its “Learning on the Go” wireless pilot program, also known as the “e-Rate Deployed Ubiquitously 2011 Pilot Program.” The FCC chose these recipients in March 2011 to deploy projects designed to investigate the merits and challenges of using e-Rate funding to support mobile learning devices, such as smart phones, netbooks, or laptop computers, with wireless internet connectivity outside of school premises.

Through a series of questions addressing project benefits, costs, and the efficacy of legal compliance measures, the FCC will gather data to inform its judgments as to the value of the program. Reports are due to the agency Feb. 24, 2012, and Oct. 31, 2012, perhaps opening the door to broader availability of support for these services as early as Funding Year 2013.

Rural Health Care Service

The FCC’s Rural Health Care Universal Service Support Mechanism has struggled, almost since its inception, to fulfill its promise. The FCC is now working to implement changes that would implement the recommendations in the National Broadband Plan to expand the use of broadband service to improve the quality and delivery of health care.

New programs might, in some ways, help rejuvenate and augment the FCC’s efforts. The Department of Health and Human Services has teamed up with USDA to offer Health Information Technology (HIT) loans, designed to help rural health care providers purchase software and hardware needed to implement health care IT. These loans will be available starting in 2012.

In addition, USDA recently has announced nearly $300 million in grants and loans to support rural broadband facilities and services, in each case citing potential benefits to health care providers, as well as schools, libraries, and other community anchor institutions. On Aug. 2, USDA announced $192 million in loans in eight states supported by the Telecommunications Infrastructure Loan Program (part of $690 million committed during Fiscal Year 2011). Shortly thereafter, on Aug. 22, USDA announced $103 million in grants to expand broadband access across rural areas in 16 states under the RUS Community Connect Program.

Nonduplication of Federal Funding: What You Need to Know

As the FCC works to transform its Universal Service Support Mechanisms for a broadband world, these new broadband programs are likely to create new risks of duplication or overlaps in federal funding. Schools, libraries, and service providers alike will need to understand the intersection of e-Rate rules with those governing other support mechanisms, and maintain detailed records to document compliance with these rules. Failure to do so will create unnecessary exposure during audits and other compliance reviews, potentially endangering funding.

A recipient of federal technology funding from two or more sources absolutely must know and understand the rules governing each. Federal rules generally prohibit a recipient from using federal funds received from two different federal programs to pay for the same costs.

Several federal technology grant programs, such as BTOP, have objectives that overlap with those of the e-Rate (and, increasingly, the FCC’s other Universal Service Support Mechanisms). BTOP award recipients are required to contribute non-federal matching funds to their grant-funded projects. The NTIA prohibits BTOP award recipients from using federal funds, including federal Universal Service funds, to meet these obligations. So, for example:

  • A school or library may purchase services from a service provider that has received a BTOP infrastructure or comprehensive community infrastructure grant award, because those awards do not cover any portion of the recurring costs of operating the network.
  • If the service provider will construct facilities as part of its delivery of e-Rate funded services, in addition to BTOP-funded infrastructure, both the provider and the school or library customer should maintain detailed records to demonstrate that none of the e-Rate funded infrastructure was paid for with BTOP funds.
  • A school or library that has received a BTOP grant award for a public computer center or sustainable broadband adoption project may not use e-Rate funds to pay any of the non-federal portion of its award costs, particularly the costs of obtaining broadband services, without explicit federal approval.
  • A school or library may only use BTOP award funds to pay for the non-discounted share of the costs of services supported by e-Rate if it included such funding in its approved BTOP budget and receives and pays for the service during the award period.

As part of the process of purchasing services, if federal funds are involved, a school or library should confer with its service provider to discuss explicitly any possible risk of such prohibited duplication of funding. The school or library and the service provider must maintain detailed records demonstrating compliance with the funding requirements of each program in which it participates.

Cynthia Schultz is president of The Schultz Group, a consulting firm that specializes in compliance with federal technology programs, and is Of Counsel for the firm Patton Boggs LLP. For more information or to discuss any federal grant, loan, or e-Rate compliance question, you can contact Ms. Schultz at (202) 361-6550, or contact Richard R. Cameron, Vice President, The Schultz Group, at (202) 457-7665.

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