A r c h i v e d  I n f o r m a t i o n

Implementing the E-Rate

Summary of Section X of FCC Report and Order, In the Matter of Federal-State Joint Board on Universal Service, CC Docket No. 96-45, released May 8, 1997, and Subsequent Orders1

Revised as August 5, 1997

Prior to the Telecommunications Act of 1996, the Universal Service Fund (Fund) operated as a mechanism by which interstate long distance carriers were assessed to subsidize telephone service to low-income households and high-cost areas. In this historic ruling under the new legislation, the Federal Communications Commission (FCC) has expanded the Fund to create an "E-rate", or education rate, for schools and libraries. As part of the E-rate, telecommunications carriers must now offer their lowest corresponding rates to elementary and secondary schools and to public libraries. Their current assessments to the Fund will be increased by up to $2.25 billion per year. The additional assessments will be used to support 20-90 percent discounts to schools and libraries from competitively-bid pre-discount rates for telecommunications services, Internet access and internal connections. Special application and auditing processes, including self-certification and third-party review, have been established to protect the integrity of the Fund.

A number of organizations have prepared basic primers on the E-rate for persons who are unfamiliar with telecommunications and information technology concepts and laws. School and library officials who actually plan and implement the use of technology and order the necessary services will also need a detailed familiarity with the ruling itself, which is a long, complex legal document. The section of the initial report and order dealing with the E-rate is 93 pages, and other portions of the full ruling are pertinent to the E-rate. Accordingly, this summary is intended for persons who already have a basic familiarity but need a detailed understanding of the ruling.

I. Eligible Service Acquirers

A. Schools

        Elementary and secondary schools as defined in Elementary and Secondary Education Act of 1965, whether public or private, but non-profit and no more than $50 million endowment (¶¶552, 554); include individual schools, school districts and consortia of schools and/or school districts (¶425 n.1087)

B. Libraries and Library Consortia

       Eligible for assistance from State library administrative agency under Library Services and Technology Act, but non-profit, funded as independent entities (completely separate budget from any institution of learning) and not international cooperative associations (¶¶552, 558, 560); include individual library branches, library facilities, library systems and library consortia (¶425 n.1087)

II. Eligible Services

A. Telecommunications Services

       All telecommunications services for voice or data commercially available to schools and libraries (for example, ordinary telephone lines (POTS) for calls to teacher in classroom, Integrated Digital Services Networks lines (ISDN) to connect to information services, private lines between eligible acquirers and paging services for security officials) (¶¶431-32 & n.1117, 434; Errata); maximum flexibility to choose among types and levels of service (¶¶431-33, 457)

B. Internet Access

       Basic "conduit" access, including telecommunications (data links) and additional (associated) services, such as "information services" needed for classroom access to Internet (¶¶436, 439-41 & n.1145, 589); eligible associated information services include (1) protocol conversion, (2) information storage, (3) information transmission as common carrier, (4) information transmission as part of gateway to information service (not involving generation or alteration of content but possibly including data transmission, address translation, protocol conversion, billing information, introductory information content and navigational systems not affecting presentation to users) and (5) e-mail (¶¶439, 444)2; other information content or information services, such as voice mail, not eligible (¶441, 444-45)

C. Internal Connections

       Installation and maintenance (¶¶439, 450-53, 460, 589; §54.500(a)(2))3; must be necessary to transport information within school (all the way to individual classrooms) or library, including routers, hubs, network file servers, wireless local area networks (LANs) and software needed for operation of file servers (¶¶459-60); no specific restrictions on size (type) of internal connections network (¶460); personal computers (unless used solely as switches or file servers), storage functions on file servers to supplement personal computers on network, fax machines, modems and asbestos removal not eligible (¶¶459-61)

D. Bundled services

        Eligible Internet access may be acquired as part of a combined procurement (bundled) with (1) content otherwise available free of charge, (2) content separately available (but only supported at difference between bundled price and price for content alone) and (3) minimal content (if not offered separately and affirmatively shown that more cost-effective means of securing basic conduit access, but only non-content portion supported) (¶¶445-47); eligible internal-connections services must be priced separately, with charge for eligible services reduced by proportional amount of price reduction for joint acquisition (¶462 & n.1206); provider of internal connections may not force selection of particular provider for other services, even if internal connections previously provided free of charge (¶463)

E. Resale

       Resale prohibited, whether or not for profit (¶¶552, 566, 577)4; does not preclude fees or charges for ineligible services (such as computer lab or training fees) or amendment of approved contracts to allow extension to other eligible entity at discount no greater than eligible (¶567) (see III(B), below, for rules on aggregations)

F. Existing Contracts

       No disadvantage for schools and libraries in States already aggressively invested in telecommunications technologies (¶¶432, 549); contracts negotiated prior to Joint Board's Recommended Decision (November 7, 1996) eligible without need to renegotiate or rebid pre-discount price, but commitment of funds required and no voluntary extensions of contract length without reapplication (¶¶545, 549, 607); contracts signed after that date but before competitive bidding system becomes (fully) operational similarly grand-fathered if cover only services provided (on or) before December 31, 1998 ({¶¶} 2, 9); both grand-fatherings only for services provided (on or) after January 1, 1998 {¶¶} 2, 13)

III. Eligible Service Providers

       Telecommunications carriers not otherwise eligible under Fund (such as independent Internet service providers (ISPs)) and entities in other businesses (non-telecommunications carriers) encouraged to make business arrangements with long-distance and local telephone companies, but independently eligible to provide eligible non-telecommunications services (Internet access and internal connections) (¶¶449, 458, 589-90, 594, 599)

IV. Discount Methodology

A. Pre-Discount Price

            1. Lowest Corresponding Price

       Telecommunications carriers required to offer to schools and libraries in geographical area sought to be served (not whole State) no higher than lowest price currently or previously charged to similarly (but not identically) situated non-residential customers for similar (but not identical) services (tariff or contract) ("lowest corresponding price") (¶¶484-87); higher prices allowed on showing of demonstrably and significantly higher costs (not limited to traffic volumes) or non-compensatory pre-discount price as result of (1) significantly lower traffic volume or (2) significant difference with respect to other cost factor recognized by State PUC as significant (¶¶488-89); rebuttable presumption that rates offered within previous three years still compensatory (¶489); prices offered under special regulatory subsidy or in contract negotiated under very different circumstances not required if below Total-Service Long-Run Incremental Cost (¶489); carrier must certify that price offered no greater than lowest corresponding price (¶487); recourse to FCC and State public utility commissions (PUCs) by schools and libraries (rate offered not lowest corresponding price) and carriers (lowest corresponding price not compensatory) to avoid unfairness (¶490); PUCs expected to employ same standards for intrastate services (¶488)

            2. Competitive Bidding

       Competitive bidding required for interstate services (¶¶480, 575); in addition to price as primary factor, experience (including past performance), personnel qualifications (including technical excellence), management capability (including schedule compliance) and environmental objectives considered (¶481); no additional Federal bidding requirements, but no exemption from applicable State or local procurement rules (¶482); competitive bidding for intrastate services governed by relevant State PUC policies (¶483); no release from eligible existing contracts but exemption from competitive bidding (¶¶545, 549)

B. Aggregation

       Schools and libraries encouraged to create consortia with both eligible and ineligible entities to aggregate demand (¶¶476-77, 561-63, 569); consortia-negotiated low prices are pre-discount prices (¶563); if ineligible entity, other than rural health care providers and governmental customers (such as State post-secondary schools, State educational broadcasters, counties and municipalities), included in consortium, pre-discount price from incumbent local exchange carriers not below tariffed rates for interstate services (¶¶478, 483; §54.501(d)(1)); States should undertake measures to enable such consortia and may impose same structure for below-tariff prices (¶¶478, 569); ineligible entities not entitled to discounts as members of consortia (¶¶ 562, 564); service providers to consortia must keep careful records, maintained on reasonable basis of approximation established by FCC or Schools and Libraries Corporation (SLC)5 and available for public inspection, of allocation of cost of shared facilities (¶569); discounts available for connections to content of ineligible entities but only for educational purposes of eligible entity (¶562); higher-level school entities (such as school districts or State agencies) may compute discounts on individual-school basis or average discount but must strive to ensure that each school receives full benefit of discount to which entitled (¶523); same for higher-level library entities and individual branches (¶524)6

C. Level of Discounts

       20-90 percent for both telecommunications and other eligible services, based on economic disadvantage and on areas with high prices (¶¶492-93, 599); no hardship appeals process now but reconsidered when Joint Board reviews program in 2001 (¶526); discount matrix as follows (¶520):

SCHOOLS AND LIBRARIES DISCOUNT MATRIX DISCOUNT LEVEL
HOW DISADVANTAGED? urban
discount
(%)		 rural
discount
(%)
% of students eligible for national school lunch program (estimated % of US schools in category)
< 132025
1-19314050
20-34195060
35-49156070
50-74168080
75-100169090

            1. Economic Disadvantage

       Measured by student eligibility for national school lunch program (¶509); either actual count or Title I alternative mechanisms (for example, surveys or existing sources such as Aid for Dependent Children or tuition scholarship programs for private schools) (¶510); for libraries, average discount for public schools in their school districts (¶¶512-513; but see ¶¶514, 524)7; for libraries whose towns have no schools, average of each school district where town's children attend school (¶515); Department of Education's (ED) five poverty categories for administering school lunch program used, with additional category for least economically disadvantaged (¶¶519-20)

            2. High Price Areas

       Based on categorization as rural (high cost) or urban (low cost) under definition adopted by Office of Rural Health Policy of Department of Health and Human Services (Office of Management and Budget list of metropolitan counties and additional rural areas within those counties identified by Goldsmith Modification) (¶¶502, 504, 507)

D. Notification

       Service providers encouraged but not required to notify annually each school and library association and State education agency (SEA) in States served of availability of discounted services (¶582)

V. Intrastate Discounts

       Federal funding provided for discounts on both interstate and intrastate services (¶550); E-rate only available in States that set intrastate discounts at least equal to interstate, but lower pre-discount prices, greater discounts or discounts for additional services for schools allowable if funded from intrastate support obligations (¶¶434, 550-51); waivers possible for lesser intrastate discounts but only on temporary basis and for unusually compelling cases (¶551); States not required to supplement Fund support and thus may prohibit use of special State-supported rates to schools and libraries using E-rate (¶551)

VI. Cap and Trigger

A. Cap

       Calendar year funding year, starting January 1, 1998, with requests for annual support accepted starting each preceding July 1 (¶¶535, 607)8; annual cap of $2.25 billion for all E-rate services on both collection and spending (¶¶529-30, 534-35); only $100 million per month collected for January-March, 1998, with sub-cap of $1 billion for January-June, 1998 (¶¶529, 532); rollover of unused funding authority, except no more than one-half of any rollover to be spent in 1999 and 2000 (¶529); support committed on first-come-first-served (date and time) basis (¶¶535-36); if SLC estimates cap to be reached in current year, or if estimated funding requests for following year demonstrate cap to be exceeded, recommendation by SLC of reduction in percentage discounts for next year for all but two most disadvantaged categories by uniform percentage (¶¶538, 542); need to revise caps considered in comprehensive universal service review in 2001 (¶¶534, 542)

B. "Trigger" To Protect High-Discount Acquirers

Total commitments posted on SLC's website on at least weekly basis and on day trigger reached (¶540); trigger reached when only $250 million uncommitted from year's cap and any applicable rollovers (¶535, 539); when reached, reasonable additional steps to notify educational and library communities that applications still accepted but funds committed for the shorter of 30 days or remainder of funding year only for schools and libraries in two most disadvantaged categories and without support (other than basic telephone service) for previous and current years (¶540); after that period, requests from two most disadvantaged categories with prior support processed first and then first-come-first-served basis resumed (¶540)

VII. Procedure

A. Application

E-rate application process to be administered by SLC ([¶]26); FCC will consult with ED in designing applications (¶571)

            1. Technology Inventory/Assessment

Inventory-assessment required to be submitted, prepared by person authorized to make purchases for school or library, reviewing existing and planned facilities and providing at least information as to (1) computer equipment, (2) number and speeds of modems, (3) internal connections and specific plans for voluntary installations (such as Net Days), (4) communications software, (5) experience and training of staff in equipment connected to telecommunications network and training programs, (6) computer maintenance contracts and (7) capacity of electrical system (¶¶570, 572)

            2. Technology Plans

                a. Content

       Specific plans also required for using inventoried technologies over near term and into future, including integration into curriculum (¶573)

                b. Approval

       To ensure that plans based on reasonable needs and resources of the applicant and consistent with goals of program, must be independently approved, ideally by State agency overseeing schools or libraries, unless already approved for other purposes (for example, participation in Federal or State programs such as Goals 2000 or Technology Literacy Challenge) (¶574); SLC may approve plans when State agency indicates that unable to review within reasonable time ([¶]67); guidance will be received from ED and Institute for Museum and Library Services for alternative approval measures for new or otherwise approved plans (¶574)

            3. Description of Services To Be Acquired

       Services described in sufficient detail to enable potential providers to formulate bids (¶¶570, 575); may be formal requests for proposals, particularly if required or most consistent with State or local acquisition requirements, or less formal descriptions (¶575); submission for posting does not pre-empt State, local or other procurement processes (¶575)

            4. Self-Certifications

       Application signed by person authorized to order eligible services for school or library (¶577); poverty level of each school for school applicants and each school district for library applicants ¶¶522-25, 576); funds necessary to meet financial obligations of technology plans (including necessary hardware, software and staff training) committed (budgeted and will have been approved) for current funding year (¶¶574, 577); other certifications as to (1) eligibility of school or library, use of services solely for educational purposes, (2) no resale or other transfer for consideration, (3) identities of all co-purchasers and allocations of services in aggregated purchases and (4) compliance with applicable State and local procurement processes (¶577); under oath and subject to potential civil and criminal liabilities (¶¶570, 577-78 & n.1493)

            5. Review

       SLC reviews for completeness (¶575)

B. Posting

           Application, including description of services sought, posted on website by SLC to attract bids (¶575); actual discounts calculated by SLC and posted to supplement poverty information from applicant (¶528, 576); website searchable by zip codes, number of students (schools) or patrons (libraries), number of buildings and other data in the applications (¶576); confirmation of posting provided by SLC (§55.504(b)(3)); four-week waiting period after posting before binding contracts signable (¶579)

C. Commitment of Funds

       Funding requests submitted to SLC by schools and libraries with estimated funding needs after contracts made, but contract may be contingent on funding (¶¶535 & n.1396, 579); contracts filed electronically or by paper copy (¶536); if sufficient funds remain, SLC commits them and notifies service acquirer that funding approved (¶579); commitments based on recurring and non-recurring fixed charges and estimated variable usage charges, based on documentation from school or library as to estimated charges that budgeted to pay (¶536); funds to be requested for following year must also be estimated (¶579); although annual application and posting not required for multi-year contracts, funds committed only for service during current funding year (¶¶536-537, 544, 579); support only for portion of advance payment on multi-year contracts, with rebates from service provider when further support of advance payment received (¶544)9

D. Beginning of Service

       Permitted as soon as approval of purchase order received (¶580); once service received, acquirer notifies SLC to approve reimbursement (¶580)10

E. Auditing

       Schools, libraries and carriers required to maintain appropriate records necessary for future audits and produce them to any auditor appointed by SLC, SEA or any other State or Federal agency with jurisdiction (¶581); schools and libraries consent to cooperate in random compliance audits of them for appropriate use of services (¶581)

F. Funding Mechanisms

       Single universal service fund but separate accounting category for E-rate (¶¶585, 599); funding starts January 1, 1998 (¶¶529, 607); contribution assessments adjusted quarterly by Universal Service Administrative Company based on demand to avoid unnecessary accumulation, with reporting to FCC ([¶]44); service providers may elect offset or reimbursement but may not require full payment from schools or libraries (¶586); contributions obligation based on interstate, intrastate and international telecommunications revenues of interstate carriers (revenues for Internet access and non-telecommunications internal connections excluded) (¶597; see generally Section XIII of the report and order); reimbursement to service provider no later than 40 days following notification from service acquirer ([¶]51)

1 ¶ refers to a paragraph of the initial report and order. § refers to a section of the regulations under Title 47 of the Code of Federal Regulations, as amended in Appendix I of the initial report and order. Errata refers to the Errata to the initial report and order, released June 4, 1997. {¶} refers to a paragraph of the Order on Reconsideration, released July 10, 1997. [¶] refers to a paragraph of the Report and Order and Second Order on Reconsideration, released July 18, 1997.
2 Information storage mentioned in first cited paragraph but not included in apparently comprehensive list in second
3 Ruling uses word "basic" in some cited sources, but unclear whether modifies installation, maintenance or both
4 Cited paragraphs refer to all resales, except last sentence of second paragraph, which refers only to resales to ineligible entities
5 SLC to perform the functions originally assigned to the Fund Administrator with respect to the E-rate application process ([¶]65)
6 Clarification needed of method for computing averages (compare ¶¶523-24 with §§54.505(b)(1-2), (d))
7 Method of calculating average, simple or weighted by some factor, not specified
8 For 1998, requests accepted as soon as website open and applications available (Errata)
9 Clarification needed whether advance payment allocated by when service actually furnished or pro rata by time
10 FCC later referred to this document as form designating services provided and support amount due, including submission of bills ([¶¶] 51, 65)

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Last Updated -- August 19, 1997, (dob)