The FCC has released a Second E-rate Modernization Report and Order (“Second Order”) and Order on Reconsideration following up on the E-rate Modernization Order (“First Order”) adopted in July. Highlights of the Second Order include: • Expanding payment options for large non-recurring capital costs for high-speed broadband construction; • Decreasing restrictions on purchasing dark fiber; • Permitting schools and libraries to construct their own broadband facilities when such construction is the most cost-effective option; • Providing up to 10% more category one funding to match state funding for special construction charges for last-mile facilities; • Requiring certain recipients of Universal Service Fund (“USF”) funding to offer broadband to schools and libraries located in the same area where the recipient receives high-cost support at rates reasonably comparable to similar services in urban areas; • Expanding the five-year budget for category two internal connections through 2019; • Adjusting the funding cap to $3.9 billion; • Directing the Universal Service Administrative Company (“USAC”) to track and provide performance information on the Commission’s policy changes; and • Clarifying deadlines for appeals of USAC decisions. Expanding Payment Options for Large Non-Recurring Capital Costs The FCC directed USAC to temporarily suspend its policy of requiring applicants to amortize large, non-recurring category one charges over multiple years. The suspension is intended to give applicants more flexibility in infrastructure investment by assuring applicants that they can recover E-rate support for non-recurring costs upfront. The policy will be suspended for four years. Amortization of the Non-Discounted Portion of Category One Special Construction Charges Based upon a review of the record from the E-rate Modernization proceeding, the Commission found that its current rule – requiring applicants to pay the entire non-discounted portion of special construction projects within 90 days of delivery of service – acts as a barrier to schools and libraries obtaining high speed funding. Thus, the Commission revised the rules to permit applicants to enter into installment payment plans for the non-discounted potion of category one special construction charges beginning in funding year 2016. Applicants must specifically include requests for installment plans on their Forms 470. Service providers are not required to offer the installment plan and may only do so in response to a Form 470 request for an installment plan. The FCC also amended Section 54.504(a)(1)(iii) of the rules to require 2 applicants utilizing the installment payment plan option to certify on their Forms 471 that they are able to pay the discounted charges for services from funds secured in the current funding year. Leveling the Dark Fiber Playing Field Beginning in funding year 2016, the Commission will remove the funding distinction between lit and dark fiber, permitting those who seek funding for dark fiber to receive category one support for special construction charges for leased dark fiber and modulating electronics needed to light dark fiber. To prevent warehousing of dark fiber for future use, applicants will not be able to receive E-rate funding for recurring costs associated with dark fiber until it is lit and applicants will only receive funding for special construction when the dark fiber is lit within the same funding year as the charges are incurred. Further, the FCC codified USAC’s current policy regarding special construction charges, allowing category one infrastructure costs to be incurred six months before the funding year where: (1) construction commences after selection of a service provider subsequent to submission of a Form 470; (2) category one recurring charges depend on the installation of infrastructure; and (3) the actual service start date of recurring service is on or after July 1st of the funding year, i.e. the start of the funding year. Applicants that commence construction prior to receiving a funding commitment decision letter risk that funding may not be granted. Applicants will also be permitted to receive up to a oneyear extension to light fiber if they can show that construction was delayed due to weather or other unavoidable reasons. Self-Construction of High-Speed Broadband Networks Starting with the 2016 funding year, the Commission will permit applicants to construct their own or portions of their own networks when self-construction is the most cost-effective option. Applicants seeking funding for self-construction must solicit bids for service and construction in the same Form 470. Applicants who don’t receive any bids for a services-only option will be permitted to post a second Form 470 for the same funding year seeking a self-construction option. Applicants may only receive funding for self-construction if facilities are built and used within the same funding year. As with dark fiber, applicants seeking self-construction funding will be permitted to seek a one-year extension of the service start date due to an unavoidable construction delay. Discounts for State-Matched Funds The Commission will provide additional category one funding to match state funding for special construction charges for high-speed broadband connection. Beginning in funding year 2016, the FCC will increase an applicant’s discount rate for special construction charges up to another 10% in order to match state funding. So, for example, if an applicant had a 90% discount rate and the state contributed 5% of the project cost, the FCC would match the state funding by providing an additional 5% discount. For Tribal nations, the Commission will match funding from states, Tribal governments, or other federal nations. To ensure effective purchasing, the Commission will only provide additional funding where the projects provide broadband that 3 meets the capacity goals and measures adopted in the First Order. Moreover, any school or library connection built with matching funds will be ineligible for additional matching funds for special construction to the same building from E-rate for 15 years. Obligation for Recipients of High-Cost Support Beginning with funding year 2016, the FCC will impose an obligation for recipients of high-cost support to offer broadband at rates reasonably comparable to rates charged to schools and libraries in urban areas for similar services. The obligation will apply to rate-of-return carriers that receive support from the high-cost program, price cap carriers serving the non-contiguous United States that elect to receive frozen support in lieu of model-based support for Phase II, and competitive bidders that are awarded support in the Connect American Fund Phase II competitive bidding process. When requested by a school or library, a high-cost support recipient will be required to offer high-speed broadband to meet target levels set forth by the First Order. For Eligible Telecommunications Carriers (“ETCs”) that receive Phase II support through a competitive bidding process, the obligation will become effective during the first funding year after the support is authorized. Raising the E-rate Cap The Commission raised the annual cap to $3.9 billion starting with funding year 2015. The FCC also expanded the availability of category two budgets of $150 per student pre-discount established in the First Order from two to five years through funding year 2019. For purposes of determining the school budgets based on student-count, the Commission clarified that schools should only include part-time students in their budget when the presence of those students regularly increases the maximum number of students on school premises at the same time. So, a school should not count, for example, students who attend virtual classes or students attending after-school activities or events. For libraries, the Commission also extended the budget model for an additional three years, so libraries will be able to seek $2.30 per square foot pre-discount through 2019. After reviewing the record, the FCC further adopted a separate budget of $5.00 per square foot for libraries located in cities and urbanized areas with a population of 250,000 or more, as identified by the Institute of Museum and Library Services locale codes of 11, 12, and 21. The Commission also extended the category two budgets for basic maintenance, managed Wi-Fi and caching for an additional three years through 2019. New Performance Management System at USAC The FCC directed USAC to develop a performance management system to analyze the effectiveness of USAC’s administration of the E-rate program. The performance management system will include/evaluate the following: (1) an on-going analysis of the impact of programmatic changes made by the First Order and Second Order and USAC’s success at implementing the changes; (2) on-going evaluation of USAC’s success in upgrading its IT systems; (3) providing an interface for applicants to calculate their discount rates; (4) exploring the possibility of providing online tools to assist applicants with the competitive bidding process; (5) focusing on improving the experience of program participants; (6) an analysis of 4 how the USAC program can maximize cost-effectiveness of E-rate supported purchases; (7) evaluation of how USAC can provide applicants with neutral, expert technical assistance; (8) a review of USAC’s data tracking and reporting capabilities; (9) a review of pre- and postcommitment procedures; and (10) a review and update of its financial management processes, such as its process for evaluating and recommending amounts reserved to fund appeals, pending applications and undisbursed funding commitments. Bureau and OMD Oversight Over USAC Beginning with funding year 2015, the Commission delegated authority to the Bureau and OMD to conduct an annual performance review of USAC. USAC must report information on at least the following: pending applications, pending invoices (noting whether delayed or rejected); USAC’s strategy for reducing any application backlog, invoices necessary for USAC approval; and an annual program integrity assurance analysis. Filing Deadlines for Appeals In the First Order, the Commission revised its rules regarding appeals of USAC actions, requiring appellants to seek review from USAC prior to filing an appeal with the Commission. The Commission further stated that because USAC is unable to waive the Commission’s rules, parties seeking waiver of the rules must file for waiver directly with the Commission. In the Second Order, the Commission clarified that parties seeking review of USAC decisions must file an appeal within sixty days of the issuance of a decision. The parties then have an additional sixty days after denial of an appeal by USAC to request review of the decision from the Commission. Order on Reconsideration In addition to the modifications made by the Second Order, the Commission considered petitions for review filed by various parties and determined the following: • The Commission granted in part petitions for reconsideration filed by SECA, the Utah Education Network, NCTA/Utah Rural Telecom Association, and the West Virginia Department of Education which requested a reconsideration of areas designated as urban for purposes of the E-rate program. The Commission modified section 54.505(b)(3) of the rules to designate an area as “urban” if it is located in an “Urbanized Area” or an “Urban Cluster” with a population equal or greater than 25,000, as determined by the most recent rural-urban classification by the U.S. Census Bureau. Any school or library not designated as “urban” will be considered “rural”. The Commission, however, retained the portion of the rule requiring that a school district or library system have a majority of schools or libraries in a rural area in order to qualify for the additional rural discount. • The Commission denied a petition from USTelecom seeking a reconsideration of the Commission’s extension of the document retention period for E-rate related documents from five to 10 years.5 • The Commission denied petitions for reconsideration from Verizon and WVDE seeking reconsideration of the Commission’s treatment of telephone components and the phaseout of support for voice services. • The Commission denied petitions from SECA, Verizon and WVDE seeking a reconsideration of the Commission’s designation of category two funding. • The Commission clarified that applicants seeking funding for data plans and air cards for mobile devices should compare the cost of all components necessary to deliver connectivity to the end user device, including the costs of Internet access and the costs of connectivity to a school or library to the cost of the data plans or air cards when considering which option is most cost-effective. For schools that have existing fixed broadband connections, the cost comparison should account for the recurring cost of the internet access and any additional costs associated with the need for upgrading the service in order to allow for a WLAN with capital investments amortized for the expected lifespan of the system. The Commission also noted that seeking support for air cards/data plans in addition to fixed internet access and WLAN would trigger the duplicate service prohibition. Further, the Commission stated that an applicant could not take into account the likelihood of receiving category two E-rate support when evaluating the cost-effectiveness of purchasing data plans or air cards. • In response to a petition from Verizon, the Commission made the following clarifications regarding cost allocations for circuits carrying both voice and data services: o Where bundled voice and data service is provided over a single circuit, the voice must be cost allocated and the phase down must accounted for. o For circuits that are only voice service, the full cost of the service is subject to the phase down. o For services that dedicate a part of a data circuit to voice service, the cost of the portion of the circuit dedicated to voice must be cost allocated and subject to the phase down. o For voice applications that run over a data circuit, but do not require utilization of a dedicated circuit capacity, no cost allocation is required. The Commission clarified that it expects funding for the E-rate program to be sufficient to meet demand, but that the Commission cannot guarantee that funding will be available. If you have any questions, please contact Mark Palchick, Rebecca Jacobs, or any member of the firm's Communications Law Group.6 Womble Carlyle client alerts are intended to provide general information about significant legal developments and should not be construed as legal advice regarding any specific facts and circumstances, nor should they be construed as advertisements for legal services. IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).