Reversing previous guidance issued in 2010, the Wireline Competition Bureau (“Bureau”) once again will require applicants seeking E-rate support to cost-allocate the price of all ineligible components (unless they are ancillary, as described below) from the cost of services bundled with eligible components, including, but not limited to, ineligible end user devices such as telephone headsets, VoIP handsets, computers, and cell phones. The reversal is based on the Bureau’s finding that allowing E-rate applicants to purchase bundled services without requiring cost-allocation of ineligible components creates the risk of overpayment by the E-rate program and service provider and applicant confusion. The new guidance takes effect beginning with the upcoming 2015 funding year.

Background

In  the 2010 Schools and Libraries Sixth Report and Order, the Commission adopted new gift rules for the E-rate program that prohibited the provision of gifts that could influence the competitive bidding process. Subsequent to release of the Sixth Report and Order, the Bureau issued the 2010 Clarification Order explaining that charitable donations to applicants would violate the gift rules if they were provided for the purpose of influencing the competitive bidding process. Moreover, the Bureau stated that “service providers cannot offer special equipment discounts or equipment with service arrangements to E-rate recipients that are not currently available to some other class of subscribers or segment of the public.” Expanding upon the statement, the Bureau noted that cell phones are often offered to the public for free or at a discount and that schools and libraries could, therefore, take advantage of the same type of deal without cost allocating the cost of the phone.

In 2012, the State E-rate Coordinators Alliance (“SECA”) filed a petition with the Bureau seeking clarification on whether certain devices could be offered without cost-allocation and suggesting standards for purchasing ineligible components in bundled offers without cost-allocation. In August of 2012, the Bureau issued a Public Notice seeking comment on SECA’s petition.

Discussion

After reviewing comments responding to the 2012 Public Notice, the Bureau determined that returning to the simplicity of its former cost allocation guidance – requiring cost allocation of ineligible components in a bundle -- best conformed to the Commission’s rules. Thus, starting with the 2015 funding year, applicants will be required to deduct the value of all non-ancillary ineligible components from their funding requests when seeking support for bundled services and identify on their Form 471 both the eligible and ineligible costs in a bundle.

Pursuant to the Commission’s rules, costs must be allocated to the extent that there is a “clear delineation” between eligible and ineligible components. The clear delineation must have a “tangible basis” and the price for the eligible component must be the most cost-effective means of obtaining the service. Cost allocation is not required for ineligible ancillary components – where the cost of the ineligible component cannot be determined separately from the eligible component and the service containing the eligible and ineligible component is the most cost-effective means for the applicant to receive the service.