Periodically, the SLD identifies funds that have been awarded in earlier years, but that have not actually been used by applicants. In the past, these “unused” funds were used to reduce the contributions being made by the telecom carriers into the Universal Service Fund. For example, if the SLD identified $500 million in unused funds during a particular year, the carriers would be required to contribute only $1.75 billion to reach the E-rate program’s $2.25 billion funding target. Earlier in 2003, the FCC ordered that, in the future, unused funds would be rolled forward into the program. Thus, to continue the previous example, the unused $500 million would subsequently be added to the carrier’s annual $2.25 billion contribution, making $2.75 billion available for E-rate funding that year.

At the time of the FCC’s original roll-over Order, the presumption was that the first impact of the roll-over would be for FY 2004 and that this would include $420 million in funds that the SLD had identified as “unused” as of mid-2003. The recent FCC Order, however, directs that these funds be used for FY 2003.

The impact of this decision is that Internal Connections funding for FY 2003 should flow to lower discount rate applicants. We believe that the SLD had been about to tell applicants that Priority Two funding would not be available below 80%. However, with the additional roll-over funding, the SLD should be able to provide Internal Connections funding to (perhaps) as low as 70%. We expect that additional unused funds will be identified for use in FY 2004.

“Technical Support” vs. “Basic” Maintenance:

In recent years, there has been an increasing number of funding requests for discounts on a wide variety of technical support services categorized as “maintenance.” The SLD’s most recent Eligible Services List attempted to clarify that E-rate maintenance support would be provided only for “basic” services.

The FCC Order reiterates the “basic” maintenance concept and further defines the term. Specifically, the FCC ruled that: “On-site technical support is not necessary to the operation of the internal connection network when off-site technical support can provide basic maintenance on an as-needed basis. Services such as 24-hour network monitoring and management also do not constitute basic maintenance.” Additionally, the FCC’s rules now prohibit any allocation for “basic” maintenance within a broader “technical support” service. Thus, as a specific example, an on-site Help Desk, that supports both workstation and network equipment, would be entirely ineligible.

The full implications of these maintenance changes will not be known until implementing review procedures are developed by the SLD. One concern is that FCC language stating that technical support would be fully ineligible “if it provides any ineligible features or functions” might be used to deny funding for any service incorrectly including maintenance on even a single piece of ineligible equipment. This would be a major departure from the leeway provided under the “30% rule.”

Applicants planning to file for maintenance discounts in their FY 2004 applications should take particular care to confine their requests to standalone “basic” services. When in doubt, maintenance components should be divided into separate FRNs to avoid inadvertently combining eligible and ineligible services.

Equipment Transfer:

The FCC Order states that transfers of equipment purchased with E-rate support are generally prohibited for three years. This rule is meant to put an end to questionable practices employed by some applicants to install Internal Connections equipment in certain high discount schools, then to quickly move it to lower discount schools which would not otherwise be funded.

The rules provide limited exceptions for legitimate needs to move equipment (e.g., in the event of a school closing). Such exceptions must be supported by transfer justification documentation and inventory records.

Service Substitution:

E-rate rules provide an applicant with limited flexibility to use the funding awarded for one service for another comparable service. Such a “service substitution” must be requested by the applicant and approved by the SLD subject to a series of functional and procedural criteria.

Two of the historic criteria for a service substitution were that the new service not cost more than the original service and that it not have a higher percentage of ineligible components. Since only the original funding would be provided under either scenario, neither criteria seemed entirely sensible.

The new FCC Order eliminates the pricing criteria, but retains the ineligibility percentage limit. An applicant will still have to be careful to exclude extraneous ineligible components from the description of the new service being requested.

On-Premise Priority One Equipment:

The FCC and SLD continue to tighten the conditions under which on-premise equipment can be treated as Priority One. The new FCC Order essentially codifies the SLD’s recent guidance.

Telephone PBXs (and, hence, key systems) are now specifically classified as Priority Two equipment. Applicants, who have been leasing telephone switches and applying for discounts on the lease charges as Telecommunications services, must reclassify their requests as Internal Connections. This may change PBX leasing economics for many low discount applicants (see other comments on leasing below).

Technology Plans:

The FCC Order clarifies that an applicant must have a technology plan before filing a Form 470, and that funding requests must be based on that plan. Actual plan approval is not required until the start of services, normally July 1 of the funding year. Specifically, the FCC stated: “Prior to applying for discounted services, an applicant must conduct a technology assessment and develop a technology plan to ensure that any services it purchases will be used effectively.” And: “Failure to have an approved technology plan is a violation of our current rules. We expect funding requests to be based on an applicant’s technology plan, not based on a scheme to maximize funding. A funding request that is not reasonably based on a technology plan does not constitute a bona fide request for services.”

There are several important implications of this new rule, including:

(1) Maintenance of Internal Connections equipment is excluded. Discounts on “basic” maintenance service may be applied for every year. The Form 471 for FY 2005 will be revised to include a separate maintenance category. Look for additional guidance at that time for handling discounts on multi-year warranties included in equipment purchase prices.

(2) The funding limitations will apply on a site-by-site (or grouped-site) basis and will presumably be administered using the entity or worksheet references in Item 22 of the Form 471 Block 5 Funding Requests. As such, applicants with multiple sites may have to rethink how they plan and stage Internal Connections projects over a five year horizon. Large school districts, which have traditionally grouped multiple entities on single worksheets, but which have phased construction projects for these groups over multiple years, will have to become more site-specific in terms of annual funding plans.

(3) The “2 in 5” limitation makes no exception for multi-year equipment leases. Thus, one apparently unintended consequence of the new rule will be to dramatically reduce E-rate incentives for leasing equipment (including PBXs). Applicants planning to sign new equipment leasing contracts for FY 2004 may want to include early buyout provisions.

In the absence of official FCC guidance on outstanding dark fiber conversion issues, which may arrive too late for FY 2004 application purposes, E-Rate Central has prepared its best guesses to a set of Frequently Asked Questions we have heard from applicants on the subject, most importantly: (a) what is the minimum “modulating electronics” that must be provided by the carrier; and (b), what procedures must be followed to modify a contract?

The E-Rate Central FAQ is based on a combination of formal and informal information from the FCC and SLD, and on what we believe is good E-rate common sense. Applicants should be aware that the conclusions expressed herein are solely those of E-Rate Central. Applicants should continue to check the SLD Web site for future announcements on this subject.

The invoice deadline for any particular FRN can be, or may have been, extended as a result of late funding awards, service substitutions, SPIN changes, or other special situations. To check whether the receipt of service deadline and/or invoice deadline has been extended for a specific FRN, see the SLD’s FRN Extension Table that can be searched on the SLD web site.