• Questionable Service Procurement Developments
• New Cost Allocation Guidelines for File Servers
• SLD Clarifications on Several Issues
• Upcoming E-rate Deadlines

So far in December, there have been three key developments in the SLD's war on "waste, fraud, and abuse." All point to stricter enforcement of the E-rate program's Form 470 competitive bidding requirements.

On December 3 (revised on December 4 and updated on December 12), the SLD posted a warning concerning a pattern it had found in certain FY 2002 applications and competitive bidding processes that were not consistent with FCC rules. The warning indicated that the SLD had identified a sizable number of problematic applications associated with one service provider and that it had already denied one application. Reports in other media subsequently identified the vendor as IBM and the applicant as the Ysleta Independent School District in Texas. Two articles addressing the IBM problem are posted as Bulletins on the E-Rate Central Web site. A related article on Ysleta appeared in the El Paso Times on December 13.

On December 6, the FCC's Office of Inspector General ("OIG") released its semi-annual report on its investigations that highlighted its actions and concerns regarding E-rate. The report indicates that OIG is currently tracking 26 investigations and that formal working arrangements have been established with the FBI and the Justice Department. The primary focus of these investigations appears to deal with allegations that "no competitive procurement process took place and that, as a result, the cost of goods and services was inflated." The report also noted that the FCC has tasked the SLD to develop a "suspension/debarment" procedure that will be included in a future rulemaking.

On December 18, Federal prosecutors charged the owner and several employees of Connect2 Internet Networks (Staten Island, NY) with fraud in connection with numerous E-rate applications. An early report on this indictment is available from the New York Times.

There are several lessons to be learned from these developments. All are related to an applicant's selections of, and dealings with, potential service providers.

(1) Filing applications which include funding requests for services provided by vendors under investigation will subject applicants to high risks of denials or delays. For FY 2002, only two applicants have received funding on FRNs involving IBM; none have received funding on FRNs involving Connect2. Most of the unfunded FRNs have not been actually denied, but are being held by the SLD pending further investigation.

(2) An effective way to identify questionable vendors who may be under investigation is to use the SLD's Data Request Tool to summarize the status of FY 2001 or FY 2002 FRNs associated with any given vendor that may have been denied or are still pending. Instructions for using the tool for this purpose are provided in our E-rate News for the Week of October 7, 2002, which is available in the Weekly News Archive section of our Web site.

(3) Although E-rate policies have always required the posting of service needs to provide a competitive basis for vendor selection and service pricing, audit results and certain vendor practices are focusing increasing attention on applicant procurement practices. Applicants need to place greater emphasis on providing potential vendors with a level playing field in competing for their business and on documenting that they have done so.

New Cost Allocation Guidelines for File Servers

One of the most complicated issues of E-rate eligibility is dealing with products and services that either incorporate both eligible and ineligible components or that can be used for both eligible and ineligible services. Servers are a prime example of the latter issue.

The general rule, reflected in the SLD's earlier reference material, was that costs must be allocated between eligible and ineligible components. If the product or service contained inseparable eligible and ineligible components, the entire package would be considered ineligible. An exception was made only if an ineligible component was considered "ancillary," to the otherwise eligible service. For details, see Cost Allocation Guide.

This week, the SLD not only clarified the definition of "ancillary" (noting that it applies to a feature of only limited capability), but posted new guidelines on the allocation of costs of mixed use products such as file servers. The guidelines are available at File Servers.

File server eligibility is particularly important for any small, high discount applicant that may have only a single server used to run the network and to support application software and data. In such a case, only a portion of the server (and related components and maintenance services) is likely to be eligible.

Since most servers are general purpose in nature, they can be used for various functions, singly or jointly. The SLD's Eligible Service List provides a list of eleven server functions, only four of which are eligible. When a server provides multiple functions, both eligible and ineligible, the SLD's new guidelines require that costs be apportioned on some rational basis. The suggested basis is to use a percentage of functions. If, for example, a single server is being used as a terminal server (eligible) and as an application, data, and print server (all ineligible), only 25% (one of four functions) is eligible.

SLD Clarifications on Several Issues

In addition to the "ancillary" issue discussed above, the SLD provided clarifications on several additional items, namely:

(1) Administrative charges added to user fees by state networks - and, by extension, by consortia - are not eligible for E-rate discounts.

(2) Wide Area Network facilities, provided exclusively for an applicant's use, are not eligible for E-rate discounts. This provision tracks with previous guidance given for on-premise Priority 1 equipment. While practically, such facilities may only be used by one applicant, there can be no contractual exclusivity. The underlying premise for this rule is that eligible WANs are common carrier facilities.

(3) If equipment, previously funded with Internal Connection discounts, is sold to a third party and leased backed to an applicant, the resulting lease payments are not eligible for E-rate discounts.

(4) Applicants must not request funding for the same products or services in a single year under different funding requests. If duplicate funding is discovered during PIA review, the applicant will be requested to cancel one request.

(5) When other federal funding is available to cover specific E-rate eligible services, applicants are encouraged to use those sources so as to conserve the limited E-rate funds. As an example, the FCC administers Telecommunications Relay Services (TRS), which offers text-to-speech operators for the telephone conversations of the hearing and speech impaired.

Upcoming E-rate Deadlines

While most applicants are focusing on the upcoming February 6th deadline, the last day of the Form 471 application window for FY 2003, there are actually several other earlier deadlines that apply to the FY 1999 (out of the window) and FY 2002 filings.

The first is the FY 1999 deadline for filing invoices (BEAR reimbursement or supplier invoices) for non-recurring services. These invoices must be postmarked by Monday, December 30. Another non-recurring services deadline is January 28, 2003 for FY 2002 invoices. Invoices postmarked after these deadlines will not be processed and funding will be lost. Remember that BEAR forms must be acknowledged by suppliers before they can be submitted.

The other upcoming deadlines are for FY 2002 Form 486s which must be filed within 120 days of the start of service (normally July 1, 2002) or the date of the Funding Commitment Decision Letter ("FCDL"), whichever is later. The deadlines for applicants funded in Waves 1-9 have already passed. Applicants funded in subsequent waves, have later Form 486 deadlines. Here are the next few:

The penalty for missing a Form 486 deadline is a reduction in funding. If, for example, an applicant funded in Wave 6 did not file the associated Form 486 until November 29th, the SLD will adjust the start date to 120 days prior to the postmark date (i.e., to August 1, 2002) and reduce the funding accordingly (i.e., to 11/12ths of the originally approved amount).