The FCC Delivers of Phase II of E-rate Modernization

New Order Brings More Money and Better Rules Supporting Fiber Investment
Blog Post
Jan. 14, 2015

Schools and libraries are going to get a big boost in their Internet connectivity over the next few years.

The Federal Communications Commission (FCC) released a second E-rate Modernization Order in December, making further changes to the program that subsidizes Internet connectivity at schools and libraries across the country. Building on the FCC’s July E-rate Modernization Order — which took initial steps to improve Wi-Fi connectivity in schools and libraries and streamline program administration and data collection — the new order tackles the underlying connectivity challenges and addresses the fact that the program has been historically underfunded. While the media coverage of the latest reforms has focused primarily on the $1.5 billion expansion of E-rate funding, it’s important to recognize that the additional money comes alongside key changes to the program rules to streamline and incentivize cost effective purchasing and investment in long-term, scalable infrastructure solutions. Taken together, these changes will substantially help schools and libraries to meet the connectivity challenges of today and tomorrow.

In July, the FCC took a first step toward E-rate modernization, revamping the program to focus on high-speed Internet connectivity by phasing out support for legacy services and directing $5 billion over the next five years to help close the wireless connectivity gap in schools and libraries. But as we argued over the summer and in our latest E-rate filing in September, the success of the first round of reforms hinged on more aggressive changes to the program that address the underlying connectivity challenges. Simply put, robust Wi-Fi connectivity is useless if an institution’s wired broadband capacity can’t support it. And one of the biggest challenges facing schools and libraries today is the “fiber gap” — by the FCC’s own estimates, at least 35 percent of schools and 85 percent of libraries lack access to fiber infrastructure today. That’s why we’re excited the Commission adopted changes recommended by OTI and many of our allies to make it easier for schools and libraries to use E-rate support to invest in fiber.

Although the FCC decided not to explicitly create a dedicated “upgrade fund” to incentivize one-time, upfront infrastructure investments as we had recommended, it did take important steps to help address the infrastructure challenges that school and libraries face. In particular, the FCC made several changes aimed at increasing flexibility for payment of special construction charges. These improvements included suspending the current policy that requires applicants to amortize large category one non-recurring costs — a move which should incentivize efficient infrastructure investments and increase fiber deployment. The FCC explains that the change “will result in more students and library patrons enjoying access to scalable, high-speed broadband connections,” adding that it expects “increasing flexibility for applicant’s non-recurring payments for special construction will allow applicants to structure the agreements with service providers so as to lower future costs for recurring services.”

Similarly, the new order amends the eligible services list to “equalize” the treatment of dark and lit fiber. Under the old rules, when a school or library opted to lease lit fiber, the modulating electronics (which are necessary to “light” that fiber) were considered a category one service, making them more likely to receive E-rate funding. By contrast, schools that leased dark fiber — meaning that they purchased capacity on a provider’s network without paying the provider for transmission services — could not get category one support for the modulating electronics, a distinction that created a strong disincentive for schools and libraries to choose dark fiber, even if it was a more financially prudent option. But in the new order, the FCC recognizes that “leveling the playing field between lit and dark fiber will expand options for applicants and will likely reduce costs.” For example, the order highlights Georgia’s statewide research and education network, will leverage dark fiber investments to increase broadband connectivity to each school district from 3 Mbps to 100 Mbps per school this year while reducing the per Mbps cost of service by 96 percent. Even so, the rules include new safeguards to ensure that purchasing dark fiber is actually a more cost effective solution for each particular school or library.

The new order also goes a step further to allow schools and libraries to construct their own networks (or portions of their own networks) if it is the most cost effective solution. This rule is designed to help schools and libraries that receive few or no bids in response to their Form 470 submissions by giving them the option to direct E-rate dollars toward direct investment when it makes financial sense to do so. The FCC was not convinced by the skeptics and industry advocates who argued that schools and libraries do not have the technical capabilities to build and run their own networks. Nor was it willing to limit this option only to schools without broadband or in rural areas, finding that “there are schools and libraries that currently have broadband access, including in non-rural areas, that may be able to purchase more affordable broadband services if they take advantage of the self-construction option.” Indeed, if allowing self-construction creates more competitive pressure in areas where providers already exist, that would be a positive benefit of the change. And like the rules around investments in dark fiber, there are additional safeguards in place to ensure that self-provisioning only happens in cases where it would be more cost effective than relying on existing providers.

Finally, in an effort to maximize the overall effectiveness of USF dollars, the FCC established a requirement that applies to broadband providers that also receive Connect America Fund (CAF) money, directing them to provide affordable broadband service in high-cost and rural areas of the country. Going forward, CAF recipients will be required to bid in response to Form 470 submissions made by schools and libraries in the areas where they receive CAF funding — and to offer service at pre-discount rates that are “reasonably comparable to rates charged to schools and libraries in urban areas for similar services.” By linking the two USF programs in this way, the rule aims to promote efficient spending and to prevent E-rate funds from being used unnecessarily in areas where broadband providers are already getting CAF support to provide affordable connectivity.

Many of these changes were made possible (or easier) because the FCC increased the size of the E-rate cap. The E-rate program has the unique distinction of being the only Universal Service Fund program which has been undersubscribed since its inception, and during the first 17 years the E-rate cap was never raised (or even adjusted for inflation until 2010). Although the FCC identified $2 billion in unused and rollover funds at the beginning of 2014 — which it will use to help address the Wi-Fi connectivity gap and other changes made in the July E-rate Modernization Order — constituents have made it clear that the program needs a more permanent injection of cash to be sustainable for the long term. That’s why the newest reforms include an upward adjustment to the E-rate cap by $1.5 billion per year to provide much-needed additional support for infrastructure investment and other category one services. The FCC reached the final number by drawing upon cost estimates filed by both EducationSuperHighway and the Schools, Health, Libraries Broadband (SHLB) Coalition. The expansion will be financed by a small increase in the Universal Service Fee that appears on your phone bill — roughly 16 cents per month — but comes with substantial benefits, including greater predictability for the applicant community, which should allow local decision-makers to make deliberate investments in the services and infrastructure that they need.

As the 2015 funding cycle gets underway, the focus for the E-rate community is now shifting from FCC advocacy to actual implementation of the new rules, which go into effect in 2015 and 2016. We hope that schools and libraries will take advantage of greater flexibility and increased funding to make smart, sustainable investments in their broadband futures.