(1) Approximately $420 million in previously unused funds will be rolled over into FY 2003. This is a surprise. Although the FCC had earlier approved rollover funding in principle, and the SLD had identified the $420 million in unused funds, the assumption was that the first use of extra funds would be for FY 2004. By adding this amount on top of FY 2003’s $2.25 billion, the SLD should be able to fund Internal Connections down to a discount level of 70% this year.

(2) With limited exceptions, E-rate rules will henceforth prohibit the transfer of equipment purchased with E-rate support to other locations within a three year period. In part, this restriction is designed to cut down on program abuses under which applicants install equipment in 90% discount schools and then quickly move it to lower discount schools.

(3) Beginning most likely in FY 2005, applicants will be limited to requesting discounts on Internal Connections equipment in only two years out of every five (presumably on a site-by-site basis). The 2/5 limitation will apply to new installations, upgrades, and replacements. Importantly, this limitation will not apply to basic maintenance services which may be funded annually.

(4) As a harbinger of the future, the FCC is seeking comments on: (a) changes to the discount matrix that might lower the maximum discount rate on Internal Connections from 90% to 70-80%; (b) ceilings in total applicant funding; (c) stronger criteria for technology planning; and (d), additional record keeping requirements.

(1) Dark fiber: The FCC decided in September that dark fiber systems are not eligible for discounts beginning in FY 2004. Dark fiber systems are defined as systems provided by carriers who do not also provide the modulating electronics. This has raised two important questions for applicants currently receiving services under existing dark fiber contracts. First, what is the minimum configuration of “modulating electronics” that must be provided by a carrier to avoid the “dark fiber” designation? While this issue is still pending before the FCC, SLD comments in this week’s service provider conference call indicated that it will be “TX to FX Converters” (e.g., Cisco’s “GBICs”). These are typically low cost components that convert signals from optical to electronic and vice versa. Second, must contracts be re-bid to upgrade from “dark” to “lit” fiber? Again, the SLD indicated that service changes involving only “negligible” costs, as might be the case with the addition of carrier-provided converters, would probably not have to be re-bid for E-rate purposes.

(2) PINs: In mid-November, the SLD changed the security procedure for applying for the Personal Identification Numbers that are used to electronically sign and certify forms online. In the process, the SLD deactivated all existing PINs. Applicants planning to e-certify this year’s Form 471 online must re-apply for new PINs in advance. Early users of the online PIN re-application process experienced some problems that now appear to have been resolved. To get new PINs, applicants must have: (a) previously filed a Form 471 or 486 online, (b) actually signed that form; and (c), reference the security code that had been assigned for that online filing. Do not wait until the last moment to apply or re-apply for a new PIN if you want to use the electronic signature option for this year’s Form 471 filing.

(3) VoIP: This fall, the FCC ruled that Voice over Internet Protocol services were not E-rate eligible, but failed to fully define such services. The ruling appears to apply only to VoIP services, not to VoIP equipment. Newly emerging services such as Centrex IP are still unknowns. Clearer examples of ineligible services are local and long distance IP services such as those recently announced by AT&T and Time Warner (that are designed to compete with traditional transmission services, but do not involve carrier payments of Universal Service fees).

(4) State master contracts: E-rate rules require contracts for all services (except for certain specified tariff and month-to-month arrangements). In FY 2002, the SLD denied several funding requests for state master contract services on the basis that there was no binding legal contract between the vendor and the applicant (only between the vendor and the state). This position would have been a huge problem for many other applicants, but the SLD is now indicating that the state contracts will serve as the required applicant contracts. Applicants relying on these contracts, however, should be careful to abide by all state contracting rules. The SLD has also indicated that applicants could reference a state Form 470 when using state contract services, but has only recently clarified (and only in this week’s service provider conference call) that reliance on a state Form 470 is valid if, and only if, the service was bid on a price competitive basis. For additional information on this subject, see our “Use of State Master Contracts and State Form 470s” in the E-Rate News for the Week of 11/24 – 11/28/2003.

(5) State Procurement Laws: E-rate’s competitive bid assessment rules require price to be the primary factor in the vendor selection process, and that the prices to be considered relate only to E-rate eligible services. This requirement may be in direct conflict with state procurement rules for total cost comparisons when bidding involves both eligible and ineligible services. Example: Cellular Carrier A bids a lower monthly service charge than an applicant’s existing Carrier B, but a switch to Carrier A would require the replacement of all the user’s cellular phones, an ineligible E-rate cost. This would give Carrier A the edge under E-rate procurement rules, but would be inconsistent with most state laws. This situation is currently under review by the FCC. Until better guidance is forthcoming, our best advice is to be creative in defining service requests so as to normalize ineligible E-rate service costs or to incorporate offsetting, non-price factors (e.g., ease of implementation) in the bid assessment process. For general guidance on the bid assessment process, see our “Competitive Service Provider Selection Procedures” in the E-Rate News for the Week of 12/1 – 12/5/2003.

(6) Technology Plans: Recent SLD guidance suggests that technology plans must address all services on which E-rate discounts are being sought (including all non-“basic” telephone services). This degree of operational specification means that previously approved plans, covering only the five basic E-rate components, may be insufficient. Applicants, whose plans do not address all E-rate services, should supplement their plans with a special addendum until more complete plans are submitted for renewed approval.

(7) Eligible Buildings (and Services): The FCC Order released last April expanded the definition of “educational purpose” to include activities that are “integral, immediate, and proximate” to the education of students or the provision of services to library patrons. The stated presumption is that this encompasses activities that occur on school or library properties including administrative-only buildings. In mid-November, the SLD indicated that a “new document, ‘Eligible Users and Locations,’ will be posted shortly with revised guidance on this topic.” This has not yet happened. A key point of confusion is that the text of the FCC Order appears to make all school and library activities eligible, but that the Order did not actually modify the regulation that makes Priority 2 administrative services (e.g., administrative-only LANs) ineligible. Unless clarified by the FCC, applicants should assume that only Priority 1 administrative services (e.g., cellular service for all employees) are eligible.

(8) Entity Numbers for Every Building: As an outgrowth of the expanded educational purpose definition, entity numbers may have to be assigned to every building covered in an application. To date, the SLD has not yet provided guidance on the need for applicants to obtain entity numbers for non-instructional buildings (a process that could ultimately require the issuance of thousands of new numbers). Given the little amount of time left before the Form 471 deadline for this year, we do not expect the SLD to make such numbers a mandatory requirement for this year. Instead, the SLD may initiate an interim procedure while working to encourage applicants to obtain administrative entity numbers by the following year. Applicants wishing to beat the rush, should call the Client Service Bureau (888-203-8100) to request new entity numbers. Then, when filling out a Block 4 discount rate worksheet in a Form 471, non-instructional buildings and new entity numbers should be listed on separate lines. For schools, the non-instructional building entries would indicate zeros in the student count columns and would use the aggregate discount (what the SLD calls a “non-matrix discount”) in the “Discount %” column.

(9) PBX Systems: The SLD’s revised guidance on on-premise Priority 1 equipment indicates that a PBX telephone switching system cannot be eligible as a Priority 1 service. Applicants, who have been receiving PBX services from a telecom carrier under a multiyear contract as a part of their telephone service, and who are waiting for SLD guidance, may be disappointed. The SLD’s existing guidance is clear; only Priority 2 discounts are available for PBX services. Applicants filing for PBX discounts should do so under separate Internal Connections FRNs. Combining PBX services with Priority 1 telecom services risks having entire funding requests reclassified as Priority 2.

Two other outstanding issues, not mentioned in the eSchool News article, also should be discussed.

(10) Eligible Telecommunications Providers: Discounts on telecommunications services can be provided only by eligible telecom providers (“ETPs”) identified in the SLD’s SPIN Search online database by a “Y” in the ETP column. Unfortunately, the FCC is now refining its ETP definition and the SLD is reviewing the ETP status of certain vendors. In a hopefully limited number of cases, this review may lead to the cancellation of existing ETP designators or to new SPINs reflecting ETP status only in specific states. The potential for such changes is highly problematic for applicants who have signed, or are about to sign, contracts with questionable telecom carriers. For services no longer considered telecommunications under existing contracts, the good news is that we do not expect the SLD to reverse funding decisions based on earlier ETP status indications; the bad news is that they will not continue to fund such services in the future. The fairness of this position may ultimately have to be addressed by the FCC. For applicants about to sign new contracts for telecom services, we recommend that provisions be included to make the carrier financially responsible for maintaining ETP status.

(11) ESAs as Vendors: A number of states have educational service agencies (“ESAs”) that provide a variety of services (including E-rate eligible services) to member school districts. In some of these cases, the school districts are applying for discounts against their ESA as an E-rate vendor. The E-rate status of such an ESA arrangement can become confusing if the ESA: (a) is also an applicant for E-rate discounts; (b) may be involved in approving member technology plans; and/or (c) is subject to special state competitive bidding exemptions to procurement of its services. Since the E-rate rules make no special provisions for ESAs as vendors, these roles must be carefully defined — a process that the SLD is currently reviewing. At a minimum, until additional guidance is provided, we recommend the following:

(12) Number Twelve: In the spirit of the season, we conclude this list by simply wishing you one and all a wonderful holiday and a happy New Year.