The Universal Service Administrative Company (USAC) has recently begun issuing Payment Quality Assurance (PQA) assessments to E-Rate service providers in the Schools and Libraries Program (“S&L Program”). E-Rate is a federal program that provides eligible K-12 public schools and libraries discounts on approved telecommunications services, broadband Internet access and internal network connections. Although PQAs are generally common, the circumstances surrounding this particular round of PQAs warrant special attention, as they require service providers to certify compliance with the “lowest corresponding price” (LCP) requirement—a  requirement that is a well-documented source of confusion.

In the context of providing E-Rate services as part of the S&L Program, the LCP is “the lowest price that a service provider charges to non-residential customers who are similarly situated to a particular school, library, or library consortium for similar services.” 47 C.F.R. § 54.500(f ). The actual LCP rule is set forth in the Code of Federal Regulations and states as follows:

Providers of eligible services shall not charge schools, school districts, libraries, library consortia, or consortia including any of these entities a price above the lowest corresponding price for supported services, unless the Commission, with respect to in- terstate services or the state commission with respect to intrastate services, finds that the lowest corresponding price is not compensatory. 47 C.F.R. § 54.511(b).

Although the LCP requirement is not new, there is very little regulatory guidance available on the scope and meaning of the rule, and as a result, there is significant confusion on how exactly to comply. Even the Federal Communications Commission (FCC), under whose direction USAC administers the S&L Program, has acknowledged this lack of clarity.

The FCC raised the question of LCP certification back in March 2013, when it released a Public Notice seeking comment on proposed revisions to Form 472, Form 473 and Form 474, which are E-Rate forms that applicants and/or service providers must complete as part of their participation in the program. One of the proposed revisions to Form 473,  the  Service Provider Annual Certification Form, on which the FCC solicited comment, was the addition of the following certification:  “I certify that this Service Provider is in compliance with and has taken reasonable steps to implement the lowest corresponding price rule as required by the Commission’s rules at 47 C.F.R. § 54.511(b).” Interestingly, however, the FCC ultimately decided against adding an express LCP certification and the current, revised Form 473 does not include that language.

On July 23, 2013, the FCC released a Notice of Proposed Rulemaking (NPRM) again seeking comments, this time on various E-Rate topics in an effort to modernize the S&L Program. Significantly, the NPRM also addressed a number of issues surrounding the LCP requirement.

For example, the FCC specifically sought comments on the following:

  • whether to measure compliance with the LCP rule as a measure of affordability to ensure that service providers are providing schools and libraries with the lowest corresponding price;
  • the extent to which the LCP rule helps to ensure that service providers charge cost-effective prices, as well as its role in competitive bidding; and
  • if clarification of the LCP rule is needed, particularly with regard to (1) whether the obligation applies only to competitive bids submitted by a provider in response to a Form 470, (2) whether compliance is a continuing obligation throughout the term of the contract, (3) whether there are procedures to ensure compliance, (4) how the LCP requirement applies to service bundles, and (5) whether, if challenged, the initial burden falls on the challenger to demonstrate that the service provider did not offer the lowest corresponding price.

Other issues that have never been addressed by the FCC include the geographic scope of the requirement, whether there are distinctions between Priority 1 and Priority 2 services, and whether the prices on state master contracts are presumptively cost-effective and compliant with LCP. Initial comments to the NPRM were due on September 16, 2013, and reply comments were due on October 16, 2013. Hundreds of comments were received, but to date, the FCC has not yet issued a final rule.

In the meantime, USAC has issued requests for LCP certifications to many service providers for the first time in its history, from what we can tell. See receive -pqa-requests. The PQA Program is essentially an auditing program under which USAC reviews certain funding payments as a way to determine if the payments were accurate, properly documented and in compliance with the applicable regulations. The purpose of this program, according to USAC, is to prevent waste, fraud and abuse of federal universal service funds, with this round targeting the LCP requirement.

Having elected not to issue formal guidance on the LCP rule or modify the Form 473 to include  a  specific certification by service providers, it appears that USAC is now using the PQA process, and a formal certification of LCP compliance, as a way to test LCP requirements, despite the numerous unanswered questions. ( We might have anticipated, for example, USAC to engage in the analysis of LCP compliance before funding requests were approved, rather than through demanding formal certifications of compliance for past funding requests that were approved by USAC and, at least in some instances, already performed and paid.)

Although these PQAs may appear innocuous, they could potentially pose a major risk for service providers and expose them to liability for already-paid invoices. While it is well-settled that enforcement actions are not the proper means to provide guidance to service providers on the meaning of vague and previously ignored regulations, we advise all service providers to scrutinize their pricing practices—even in the face of aggressive competitions for E-Rate awards—to ensure a good-faith basis exists for each price invoiced to the applicant and USAC.