The funding threshold for Internal Connections remains at 85%. No Internal Connections funding will be available below 70%. The availability of funding for applicants in the 70-84% range is still uncertain, although funding requests in this range are currently being reviewed by the SLD. We are hopeful that one outgrowth of the FCC appeal decisions reported below will be to provide greater clarity within the month on the FY 2003 funding threshold for Internal Connections.

The basic issue in the denials covered by this one appeal was a “two-step” procurement process used by Ysleta (TX) Independent School District and the seven other applicants. Step #1 was a competitive bid, won by IBM, for a “System Integrator” contract. Step #2, undertaken with the substantial involvement of the Systems Integrator, was the specification of actual E-rate service requirements and price determinations. As a part of the process, the winner of the Step #1 bidding was designated as the vendor of most services required in Step #2.

The FCC’s decision expressed deep concern “…about a number of practices that undermine the framework of the competitive bidding process....” With regard to the two-step process, the FCC noted: “First, Ysleta sought competitive bids for a Systems Integrator without regard to costs for specific projects funded by the schools and libraries support mechanism. Second, Ysleta negotiated with the Systems Integrator it had selected regarding the scope and prices of E-rate eligible products and services, but it never sought competing bids for those products and services…” In other words, although Ysleta competitively bid for consulting andz planning services, it never bid for the actual E-rate services for which it sought funding. Instead, these services and their prices were effectively established by IBM and the school district. The FCC was also concerned about a number of other issues (discussed below) such as the use of overly broad Form 470s and undisclosed RFPs.

While strongly condemning a number of the practices it found present in these cases, the FCC recognized that its “…rules and past decisions did not expressly address the circumstances presented here.” As a result, and within certain limitations, the FCC granted the appellants a waiver permitting them to re-bid and re-file applications for FY 2002 funding. Further, in the other decision (FCC 03-314) involving Winston-Salem/Forsyth County School District, the FCC determined that the same procurement problems were not present and remanded the application back to the SLD for reconsideration.

In addition to ruling that the two-step process violated E-rate procurement rules, the FCC’s decision dealt with a number of other issues of broad significance to applicants. One discussion of these implications has been posted on the SLD web site. From our prospective, the following points are the most important:

(1) Compliance with both E-rate and state procurement rules: Rejecting an argument that the two-step process was proper because it complied with state law (and without ruling on the assertion that it did comply), the FCC stated: “Although compliance with any applicable state and local procurement laws is one of the minimum requirements for selecting services under the E-rate program, there are also certain specific FCC requirements with which all E-rate applicants must comply, regardless of state and local law. Section 54.504(a) of the Commission’s rules specifically states that the Commission’s ‘competitive bid requirements apply in addition to state and local competitive bidding requirements . . . .’”

(2) No E-rate bidding exemptions for small contracts: As another example of the difference between state requirements and E-rate rules, the FCC addressed the situation in which state laws might not require competitive bids on contracts below certain dollar limits (and, by extension, might not require “mini-bids” on multi-vendor state contracts) by stating that “…even though a state or local procurement law may permit an applicant to forego competitive bidding for products and services under a certain dollar threshold, the Commission’s rules require that applicants for E-rate services seek competitive bids on all such services, to the extent that the services covered by the state law are eligible for discounts from the federal universal service fund.”

(3) Form 470 must not be overly broad: The decision indicated that the FCC was “troubled that Ysleta submitted an FCC Form 470 listing virtually every possible product and service for which it could conceivably seek discounts. Rather than representing the outgrowth of a carefully designed technology plan as required under our rules, offering potential bidders specific information on which to submit bids, Ysleta’s FCC Form 470 failed to “describe the services that the schools and libraries seek to purchase in sufficient detail to enable potential providers to formulate bids…” While noting “…that past practices arguably could be construed as permitting broad FCC Form 470,” the FCC went to great lengths to “…clarify prospectively that requests for service on the FCC Form 470 that list all services eligible for funding under the E-rate program do not comply with the statutory mandate that applicants submit “bona fide requests for services.” More specifically, the FCC indicated that applicants must “…provide potential bidders with sufficient information on the FCC Form 470, or on an RFP cited in the FCC Form 470, to enable bidders to reasonably determine the needs of the applicant.”

(4) Technology plans should drive Form 470 requests: Following on the new requirement indicated above, the FCC stated that “…all products and services listed on the FCC Form 470 must be linked in a reasonable way to the applicant’s technology plan...” More explicitly, “…research and planning for technology needs should take place when the applicant drafts its technology plan, with the applicant taking the initiative and responsibility for determining its needs. The applicant should not post a broad Form 470 and expect bidders to do the ‘planning’ for its technological needs.” In other words, an applicant’s Form 470 must be based on a technology plan. By extension, and as indicated in recent SLD guidance, an applicant’s technology plan should cover all services — including telecommunications services such as Centrex — on which E-rate discounts are to be sought.

(5) Disclosure of RFP usage: One basis for SLD denials in some of these cases was that the applicant’s Form 470 indicated that there was no RFP but that competitive bids were subsequently solicited by RFP. The confusing aspect of this issue is that the current form 470 asks an applicant to indicate only if there is a RFP, not whether there will be a RFP. To clarify this issue for the future, the FCC directed that the Form 470 be revised to require an applicant to certify either “Yes, I have released or intend to release an RFP for these services” or “No, I have not released and do not intend to release an RFP for these services.” To provide further consistency and clarification, the FCC also noted that “[t]o the extent that the applicant also relies on an RFP as the basis of its vendor selection, that RFP must also be available to bidders for 28 days.” Until such time as the Form 470 and its instructions are revised, we recommend the following:

(a) At a minimum, if “No” RFP is checked on a Form 470 but a subsequent RFP is planned, that intention should be described in the description of “other bidding procedures” specified in Item 12 of the Form 470.

(b) A better approach would be to file a separate Form 470 to coincide with the RFP, making sure that the bid submission date for the RFP does not precede the 28-day Allowable Contract Date for that Form 470.

(6) Selection of cost-effective services: The FCC’s decision states that “[e]ven if an applicant receives only one bid in response to an FCC Form 470 and/or RFP, it is not exempt from our requirement that applicants select cost-effective services.” The FCC notes that it “…has not, to date, enunciated bright-line standards for determining when particular services are priced so high as to be considered not cost-effective under our rules. There may be situations, however, where the price of services is so exorbitant that it cannot, on its face, be cost-effective. For instance, a proposal to sell routers at prices two or three times greater than the prices available from commercial vendors would not be cost effective…” These statements are a hint that the FCC and/or SLD may develop pricing guidelines for eligible services. This would be in line with the recent recommendation of the Waste, Fraud, and Abuse Task Force that “…the SLD work with stakeholder groups to develop voluntary, instructional guidelines on what would be considered the generally reasonable cost and functionality for common E-rate-eligible products and services.”

(7) Ineligibility of end-user “Help Desk” activities: The FCC decision expressed concern with certain funding requests in these applications to support general Help Desk costs as a component of E-rate eligible installation and/or maintenance services. This concern is in line with the tightened definition expressed in the most recent Eligible Services List indicating that only basic maintenance services “…necessary to the operation of the internal connections network” are eligible. As an example, the FCC notes that “…calls from end-users may involve problems with end-user workstation operating systems and hardware, and Help Desks typically field questions about the operation and configuration of end-user software. Such end-user support is not eligible for E-rate funding.” This suggests that applicants seeking E-rate discounts on a portion of vendor Help Desk services must be careful to allocate total costs between eligible and ineligible support activities and to document this allocation with detailed service logs.