• Funding Status: PY2 – PY4
• Release of New Service Substitution Rules
• Minor Change to FCC Certification on Filtering

The following is a summary of the E-rate News for the Week of April 16, 2001, prepared by E-Rate Central. Official SLD news appears in the “What’s New!” section of the SLD’s Web site . Additional and archived information appears elsewhere on this Web site.

Funding Status: PY2 – PY4

PY2: Although we have been disappointed before, it now appears that the first wave of funding commitments for out-of-the-window PY2 applications may be released this coming Friday, April 27. Packages with these commitments will include a Form 500 on the assumption that many successful applicants will have to notify the SLD that their “PY2” contracts have been extended.

Current FCC rules should permit use of newly committed PY2 funds through September 30, 2001. Applicants, who have delayed services pending funding, and who now find that a somewhat different type of service is more appropriate, should carefully review the new service substitution rules discussed below. If the service is no longer needed, an applicant should use the enclosed Form 500 to cancel the funding.

PY3: The SLD has issued administrative decision letters on over 75% of PY3 appeals. Formal funding commitment letters on successful appeals will not released until most of the other appeals are decided, hopefully within the next few weeks.

Under current FCC rules, funding awards for PY3 must be used for services received by June 30, 2001. We expect – but note that there is a risk in assuming – that the FCC will ultimately allow non-recurring PY3 funds to be used up until September 30, 2001 (or later, for more recent awards affect by appeals or SPIN changes) as they have dome in past years.

PY4: SLD reviews continue on PY4 applications, but the first funding wave is not expected until at least mid-May. The delay is a function of two factors.

(a) The SLD has not yet received confirmation from the FCC on the level or allocation of PY4 funds. The difficult issue being faced is that the demand for funds (newly estimated at $5.2 billion, down from an initial estimate of $5.8 billion) greatly exceeds the annual $2.25 billion cap, suggesting that dollars available for internal connections (Priority Two) are insufficient to fund all 90% discount rate applicants and will have to be allocated.

(b) New FCC rules on the implementation of the Children’s Internet Protection Act (“CIPA”) will require a revision of Form 486 and the introduction of a new Form 479 (for consortium members). The SLD would prefer to have these forms available before releasing funding commitments.

Release of New Service Substitution Rules

Based on a major FCC appeal decision in February (the “LA Unified” decision), the SLD has released a new series of rules that an applicant should follow if the services it wants to use are different from the services initially approved for funding .

Under the new rules, a substitute service will be approved if it meets the following criteria:

(a) The substituted service or product has the same functionality as the original proposal.

(b) The substitution does not result in an increase in price.

(c) The substitution does not violate any contract provisions or state or local procurement laws.

(d) The substitution does not result in an increase in the percentage of ineligible services or functions.

(e) The substitution is consistent with the Form 470 posting and original RFP, if any.

To receive SLD approval for a substitute service, an applicant must manually file a new Form 471 using Block 2 to request approval for a minor contract modification. Attachments to the Form must fully describe the substitute service and must address the criteria listed above.

The new rules are somewhat easier and more flexible than the old rules, but still place an ominous burden on applicants (and on the SLD to review). Technically, any contract or service change, no matter how small (e.g., a new server with a 50 Gigabyte hard disk rather than the 25 Gigabyte drive specified in the original Form 471 attachment), would require the filing of a Form 471 modification to maintain funding on the substitute service.

Perhaps because these are new FCC rules, untested by appeal, the SLD is reluctant to provide practical guidance on certain key questions. With some trepidation (and with the disclaimer that this is not legal advice), we offer the following comments:

(a) From a very pragmatic standpoint, it is hard to imagine that either the SLD or the FCC expects (or could deal with) a Form 471 modification to be filed for every service substitution. The new rules, however, do clearly place an applicant at risk if a change is made without approval. If, for example, E-rate discounts are used for a specific service that, upon subsequent audit is deemed to be an inappropriate substitute, those funds may have to be repaid. It behooves any applicant, desiring to substitute a service, to safe, the applicant should file a Form 471 modification and receive formal SLD approval before making the change.

(b) The criteria that the “substitution does not result in an increase in price,” is unfortunate. If, for example, an applicant had been approved for a discount on ISDN Internet access, and subsequently wished to upgrade to more expensive T-1 access, the original discount would no longer be available under the rules. To try to preserve the discount, the applicant has two options -- either stay with the ISDN service until the next funding year or try to get approval for a service substitution. In the latter case, we expect that the SLD, following the rules, would deny funding for the substitution; the applicant could then appeal to the FCC.

(c) A separate set of rules applies to change of vendor situations (see SPIN change rules ). In many cases in which an applicant wishes to use a new vendor, however, there is likely to be some degree of service substitution (e.g., a different server). A SPIN change is always required to switch E-rate funding from one vendor to another. If the service also changes, and Form 471 modification has to be filed, the attachment should clearly indicate that a vendor SPIN change has been filed separately.

(d) Note carefully the 90-day deadline referenced in the last FAQ in the SLD’s rules announcement. It indicates that a service substitution request must be filed 90 days before the end of the relevant service period. For recurring services (e.g., monthly telephone), this normally means April 1 (90 days before the end of the funding year on June 30). For non-recurring services, the 90 days apparently precedes either the actual installation date or the contract expiration date (as reported to the SLD). Since this would mean, in many instances, that PY3 service substitution requests could no longer be filed within the 90-day deadline, we would hope and expect that the SLD or FCC would consider waivers to the deadline to accommodate this year’s applicants who have been waiting for the release of the new rules.

Minor Change to FCC Certification on Filtering

Two weeks ago, the FCC released an order detailing its regulations under the Children’s Internet Protection Act (“CIPA”). For background see our news item for that week.

This week the FCC issued a short Erratum revising and clarifying the certification language that an E-rate applicant must attest to in its PY4 Form 486. The most significant clarification is that CIPA compliance must be certified “as of the date of the start of discounted services.” As an example, an applicant receiving discounted Internet service from July 1, 2001, must certify compliance by that date, even if the actual Form 486 is not submitted until several months later.

This clarification parallels another change we might to see in a revised Form 486 for PY4 whereby an applicant will be asked to certify that a technology plan had been approved as of the start of discounted services.