FCC Moves to Reform E-Rate Program

The number of digitally-connected schools has increased 83 percent during the past 15 years, thanks in part to E-Rate, a $2.3 billion federal program centered on providing schools and libraries with high-speed broadband and wireless Internet. The program has helped to revolutionize learning by facilitating schools’ access to modern telecommunications services and equipment. Today, 97 percent of American classrooms are connected to the Internet.

But the needs of schools and libraries have shifted with the ever-evolving technological landscape since Congress established the program in 1996. Bipartisan reports dating back to 2005 called the E-Rate program “a well-intentioned program that nonetheless is extremely vulnerable to waste, fraud and abuse, is poorly managed by the FCC, and completely lacks tangible measures of either effectiveness or impact.” The program is also struggling to supply sufficient high-speed broadband; nearly 80 percent of respondents to a 2010 survey of E-Rate applicants said that their broadband connections did not fully meet their current needs.

The highlighted portion of the quote above about the E-rate program reflect a great naivity about E-rate specifically and the USF in general. As a result of those hearings, many reforms were approved and implemented, including substantial reform of the application process (at its worst, before reforms, likely less than 3% of all E-rate subsidies were ever related to fraud or abuse schemes, and that number is currently way down). Now, as more and more of available USF funding for E-Rate goes for Priority1 subsidy (recurring Broadband costs), the actual fraud and abuse opportunities prevalent in the Priority2 programs(one time purchases of hardware and related software)has diminished. The end result of changes made by USAC and the FCC to prevent fraud and abuse was a nightmarish increase in required process control, draconian penalties assessed (later mitigated somewhat), a "guilty till proven innocent" auditing process, and tremendous wasted effort for applicants. It is generally agreed that the cure was more costly than the disease (the actual cost fraud and abuse) needing a cure.

In my opinion, those highlighted criticisms of the program were also mostly untrue as to degree, and also unfair in their disparagement of both the FCC and USAC. They are also "red herrings", masking the real stategic problems or issues now currently part of the E-Rate program.

Strategic Issues.
First, it is widely agreed that E-Rate dollars can only provide a fraction of the cost of connecting America's K-12 schools and libraries to the Internet. Unfortunately, because State legislators and State Executive branches (Governors, Agency Directors and administrators), with few exceptions, know little about the program, and overly rely upon E-Rate as a substitute for their own funding responsibilities for better Internet for schools. (I constantly heard my legislative colleagues complaints questioning the suggested appropriations for connectivity with the statement, "Doesn't E-rate pay for this?"). This abdication by States (not all) has led to our K-12 education system NOT keeping pace with the rest of the world. nor are we making the necessary education paradigm shifts required by the “information age”. Such shifts are not really E-Rate issues, but are part of the context in which E-Rate discussions now take place, unfortunately with E-Rate seen as a funding panacea.

A second strategic issue for E-Rate is the alignment of expections for E-Rate with its funding source. The very source for E-Rate funding, USF fee collected on “voice” based POTS connections and services, is in decline. Where only a few years ago, it was a given that one of the first things a new homeowner or renter would do was install a landline based phone, now a significant and growing percentage of residential customers forego signing up for a POTS line, relying instead on cellphone service or VOIP for their phone connectivity. Overcoming the dilemma of a shrinking USF revenue pool and an increasing expectation and demand for E-Rate is a basic strategic problem needing to be fixed.

Just appropriating tax dollars to increase the fund is not possible. The USF fee is NOT a tax, it is a FEE collected by the private sector - Eligible Telecom Companies (ETC), and forwarded to a private company, the Universal Service Administration Company, Inc (USAC) for distribution to specific eligible schools and library entities, or to eligible High Cost provider service areas, or to Low Income recipients, or to eligible Rural Health entities, all under FCC Rule making authority. The distinction that USF is a fee and NOT a tax is huge. If Tax dollars were used, the program would likely quickly cease to exist. Just Federal law concerning procurement dollars would quickly bury the program in so much red tape, uncertainty and legal precedent, that it would freeze all provider selection processes now extant. Add congressional politicization of the program rules governing E-rate “discount” or subsidy rates would make them impossible to apply.

A third strategic issue to overcome is the misapprehension that E-rate funding can be matched with today's ever increasing Internet capacity needs. E-Rate intended purpose was to subsidize the last mile connection of classrooms to EXISTING broadband and telephone circuits. E-Rate was never intended to create infrastructure (middle mile backbone). Only recently have FCC rules (6th Order) hinted at decreased constraints against using E-Rate subsidies for middle-mile infrastructure. Some say its possible, but only in an ancillary way. Only vigorous collaboration and high level planning, including the creation of certified LEA consortia and coordinated demand aggregation with other public/private broadband projects will meet current E-Rate subsidy rules. And that is only happening where there are enlightened and broadband savvy State Administrations or enlightened legislative policy makers.

The fourth strategic issue needing a solution goes to the monopolistic mentalities of the Provider community. E-Rate was created of, by and for the Telecom industry. They are the main beneficiaries of the E-Rate and other USF programs. By rule, E-Rate pricing is often tied to rates regulated by State PUCs, which rates often have guaranteed profits built in. Even RFP based competed rates become high prices over the life of a contract. Schools don't need to demand lower prices, because higher broadband costs are obviated with subsidy discounts, as much as 90% of invoiced costs are returned to schools and libraries. The real impact of E-Rate, then, has been to subsidize high prices (notably not one of the conclusions or criticisms about E-rate reached by the Congressional panel). The truism that “if you want something increased, subsidize it” is especially true regarding prices for Broadband and telephone services subsidized by E-Rate.

The fifth and final Strategic issue needing a solution is to make the E-Rate subsidy useful for both the target entity (School or Library) and the community of rate payers supporting those schools and libraries. Per current E-Rate rules, Broadband capacity or supply paid for by E-Rate is ONLY available to the eligible school or library entity receiving the subsidy. This has created thousands of availability silos across the US, but has done little to incrase the supply of Broadband capacity to the geographic aress surrounding the schools, ironically those rate payers being the source of E-rate funding. Even more galling, out of vested self interest, most providers have passed on any opportunity to use their increased profits for at-large or area-wide capacity building because increased supply eventually means lower prices when demand is satified. The bottom line is that E-rate dollars have fed corporate bottom lines, and has done little to increase the general availability of broadband capacity (bigger middle mile pipes, for example). This strategic issue is easily solved. It is a simple policy change to demand that E-rate subsidies create real capacity upticks within the surrounding rate paying communities. There are hundreds of ways to solve the “competitive” issues raised by such a shift in policy. And they are “happy” issues to solve, compared to the disaster the US faces if we do not increase our capacity to abundant levels, compared to the rest of the world, in the “information age”.

These are the five major strategic issues to be addressed in any E-Rate program changes. E-rate program changes need to be authored by rate payer stakeholders, not the provider community. Who the FCC finally empanels to make those changes will define what strategic solutions will receive consideration.

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