Modernization of the Schools and Libraries “E-Rate” Program

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 54

[WC Docket No. 13-184; FCC 14-99]

Modernization of the Schools and Libraries “E-Rate” Program

AGENCY:

Federal Communications Commission.

ACTION:

Final rule.

SUMMARY:

In this document, the Federal Communications Commission (Commission) takes major steps to modernize the E-rate program (more formally known as the schools and libraries universal service support mechanism). Building on the comments the Commission received in response to the

E-rate Modernization NPRM,

and the

E-rate Modernization Public Notice,

as well as recommendations from the Government Accountability Office (GAO), the program improvements the Commission adopts as part of this document begin the process of reorienting the E-rate program to focus on high-speed broadband for our nation's schools and libraries.

DATES:

Effective September 18, 2014, except for amendments in §§ 54.502(b)(2), (3), and (5), 54.503(c), 54.504(a) and (f), 54.507(d), 54.514(a), 54.516(a) through (c), and 54.720(a), which are subject to the Paperwork Reduction Act and will become effective upon announcement by the FCC in the

Federal Register

of OMB approval of the subject information collection requirements; and except for amendments in §§ 54.500, 54.501(a)(1), 54.502(a), 54.507(a) through (c) and (e) through (f), 54.516, and 54.570(b) and (c), which shall become effective on July 1, 2015; and amendments in §§ 54.504(f)(4) and (5) and 54.514(c), which shall become effective on July 1, 2016.

FOR FURTHER INFORMATION CONTACT:

James Bachtell or Kate Dumouchel, Wireline Competition Bureau, Telecommunications Access Policy Division, at (202) 418-7400 or TTY: (202) 418-0484.

SUPPLEMENTARY INFORMATION:

This is a summary of the Commission's Report and Order, in WC Docket No. 13-184; FCC 14-99, adopted on July 11, 2014 and released on July 23, 2014. The full text of this document is available for public inspection during regular business hours in the FCC Reference Center, Room CY-A257, 445 12th Street SW., Washington, DC 20554. Or at the following Internet address:

http://www.fcc.gov/document/fcc-releases-e-rate-modernization-order.

The Further Notice of Proposed Rulemaking (FNPRM) that was adopted concurrently with the Report and Order is published elsewhere in this issue of the

Federal Register

.

I. Introduction

1. In this Report and Order we take major steps to modernize the E-rate program. In so doing, we recognize E-rate's extraordinary success as the federal government's largest education technology program. Over the last 17 years, the E-rate program has helped to ensure that our nation's schools and libraries are connected to the digital world. At the same time, we acknowledge and embrace our responsibility to make sure the program evolves as the needs of schools and libraries evolve. In particular, the E-rate program must evolve to focus on providing support for the high-speed broadband that schools need to take advantage of bandwidth-intensive digital learning technologies and that libraries need to provide their patrons with high-speed access to the Internet on mobile devices as well as desktops. Access to high-speed broadband is crucial to improving educational experiences and expanding opportunities for all of our nation's students, teachers, parents and communities. Building on the comments we received in response to the

E-rate Modernization NPRM,

78 FR 51597, August 20, 2013, and the

E-rate Modernization Public Notice,

79 FR 13300, March 10, 2014, as well as recommendations from the GAO, the program improvements we adopt as part of this Report and Order begin the process of reorienting the E-rate program to focus on high-speed broadband for our nation's schools and libraries.

2. The record clearly demonstrates the power of high-speed broadband connectivity to transform learning. High-speed broadband, to and within schools, connects students to cutting-edge learning tools in the areas of science, technology, engineering and math (STEM) education, necessary for preparing them to compete in the global economy. High-speed broadband also creates opportunities for customized learning, by giving our students and their teachers access to interactive content, and to assessments and analytics that provide students, their teachers, and their parents real-time information about student performance while allowing for seamless engagement between home and school. Finally, high-speed broadband expands the reach of our schools and creates opportunities for collaborative distance learning, providing all students access to expert instruction, no matter how small the school they attend or how far they live from experts in their field of study.

3. High-speed broadband is also a critical component of 21st Century libraries. In many communities, libraries are the only source of free, publicly available Internet access. As a result, high-speed broadband at libraries provides library patrons, many of whom have no other Internet access, the ability to participate in the digital world. Broadband services at libraries are crucial for enabling and fostering life-long learning, and they enable students at all stages of their education to perform research and complete their homework. Broadband at libraries is also crucial for students studying for and taking their General Educational Development (GED) tests and allows students to take and study for college and graduate-level courses. Broadband at libraries enables patrons to seek and apply for jobs; learn new skills; interact with federal, state, local, and Tribal government agencies; search for health-care and other crucial information; make well-informed purchasing decisions; and stay in touch with friends and family.

4. In adopting this Report and Order, we recognize the critical role the E-rate program plays in the lives of our students and communities and the importance of ensuring that the program supports sufficient, equitable, and predictable support for high-speed connectivity to and within schools and libraries. It is a crucial part of the Commission's broader mandate to further broadband deployment and adoption across our nation. We therefore adopt a number of the proposals made in the

E-rate Modernization NPRM

and begin the process of re-focusing the E-rate program on providing the necessary support to ensure our nation's schools and libraries have affordable access to high-speed broadband.

5. To maximize the benefits of the E-rate program to our nation's schools and libraries, we adopt the proposal made in the

E-rate Modernization NPRM

to establish clear goals and measures for the program. The three goals we adopt for the E-rate program are: (1) Ensuring affordable access to high-speed broadband sufficient to support digital learning in schools and robust connectivity for all libraries; (2) maximizing the cost-effectiveness of spending for E-rate supported purchases; and (3) making the E-rate application process and other E-rate

processes fast, simple and efficient. We also adopt approaches for measuring our success towards meeting those goals.

6. In addition, we adopt the following updates to the E-rate program aimed at furthering each of those goals:

• To ensure affordable access to high-speed broadband sufficient to support digital learning in schools and robust connectivity for all libraries, we:

○ Set an annual funding target of $1 billion for funding for internal connections needed to support high-speed broadband within schools and libraries;

○ test a more equitable approach to funding internal connections for applicants who seek support in funding years 2015 and 2016; and

○ reorient the E-rate program to focus on supporting high-speed broadband by phasing down support for voice services and eliminating support for other legacy services.

• To maximize the cost-effectiveness of spending for E-rate supported purchases, we:

○ Adopt transparency measures to encourage sharing of cost and connectivity data;

○ encourage consortia purchasing; and

○ emphasize that providers must offer the lowest corresponding price.

• To make the E-rate application process and other E-rate processes fast, simple and efficient, we:

○ Streamline the application process by:

Simplifying the application process for multi-year contracts;

exempting low-cost, high-speed business-class broadband Internet access services from the competitive bidding requirements;

easing the signed contract requirement;

removing the technology plan requirement;

requiring electronic filings; and

enabling direct connections between schools and libraries.

○ Simplify discount rate calculations by:

Requiring a district-wide discount rate;

modifying the definition of urban and rural;

addressing changes to the national school lunch program (NSLP); and

modifying the requirements for applicants using surveys.

○ Simplify the invoicing and disbursement process by:

Allowing direct invoicing by schools and libraries; and

adopting an invoicing deadline.

○ Create a Tribal consultation, training and outreach program.

○ require the filing of all universal service appeals initially with USAC.

○ direct USAC to adopt additional measures to improve the administration of the program by:

Speeding review of applications, commitment decisions and disbursements;

modernizing USAC's information technology systems;

adopting open data policies;

improving communications with E-rate applicants and providers.

○ Protect against waste, fraud, and abuse by:

Extending the document retention deadline; and

ensuring auditors and investigators access to an applicant's premises upon request.

7. The most fundamental step we take today is to overhaul the support system for internal connections, including the deployment of high-speed Wi-Fi in classrooms and libraries nationwide. When the E-rate program was created, the idea of wired connections to classrooms was revolutionary. Today, students and teachers can and do take their devices with them wherever they go, which means they need to have Internet connectivity throughout their schools. Likewise, in 1997, desktop computers offered state of the art connectivity in libraries. Now, library patrons bring their own devices and use those that belong to their libraries. By modernizing the E-rate program to expand schools and libraries access to more predictable E-rate funding that is sufficient to meet their needs for Wi-Fi connectivity, and other internal broadband connections.

8. Of course, Wi-Fi in classrooms and libraries requires broadband connectivity to schools and libraries. We therefore also take steps in this Report and Order to ensure that all eligible schools and libraries will continue to be able to receive E-rate support to purchase broadband services to their buildings.

9. At the same time, we are mindful of the importance of continuing to improve the E-rate program in order to achieve the goals we adopt herein. In order to ensure the E-rate program evolves to meet the connectivity needs of our nation's schools and libraries, we leave the record open in this proceeding to allow us to address in the future those issues raised in the

E-rate Modernization NPRM

that we do not address today. We also issue an accompanying Further Notice of Proposed Rulemaking (FNPRM) to seek comment on some additional issues.

II. Performance Goals and Measures

10. Based on overwhelming support in the record, and consistent with the Congressional directives in sections 254(b) and (h) of the Communications Act (the Act), we adopt three goals modeled on those proposed in the

E-rate Modernization NPRM:

(1) Ensuring affordable access to high-speed broadband sufficient to support digital learning in schools and robust connectivity for all libraries; (2) maximizing the cost-effectiveness of spending for E-rate supported purchases; and (3) making the E-rate application process and other E-rate processes fast, simple, and efficient. We also adopt associated performance measures and targets to determine whether we are successfully achieving these goals. Clearly articulating goals for the E-rate program, along with specific performance measures and targets, will help us focus our efforts as we modernize the E-rate program, monitor our progress over time, and adjust course as needed. In choosing these goals, performance measures, and targets, we also recognize the need to be sufficiently flexible to accommodate the evolving technological and connectivity needs of schools and libraries.

11. Establishing clear performance goals is also consistent with the Government Performance and Results Act of 1993 (GPRA), which requires federal agencies to engage in strategic planning and performance measurement. In 2007, the Commission adopted measures to safeguard the universal service fund (USF or Fund) from waste, fraud, and abuse as well as measures to improve the management, administration, and oversight of the USF generally. More recently, the Commission has adopted goals in the other USF programs it has modernized over the last few years. In the

E-rate Modernization NPRM,

while the Commission recognized the importance of these measures, it also acknowledged the subsequent finding by the GAO that the E-rate program, specifically, lacked sufficient performance goals and measures. In its 2009 report, the GAO emphasized that successful performance measures should be tied to goals, address important aspects of program performance, and provide useful information for decision making. The goals, measures, and targets we adopt today respond directly to the GAO's recommendations and place the E-rate program on a clear strategic path, consistent with the GPRA.

12. Throughout this Report and Order, we use these three goals as guideposts for our decisions about how to close the

gap between the broadband needs of schools and libraries and their ability to obtain those services. As part of the performance measures, we set connectivity targets by which we will evaluate progress towards meeting our goals. We also adopt reporting obligations for USAC and for E-rate program participants that will enable us to measure progress towards meeting the goals. While we identify specific reporting obligations, we delegate authority to the Bureau, working with the Office of the Managing Director (OMD), to finalize the format and timing of those reporting obligations.

13. Using the adopted goals and measures, we will, consistent with the GPRA, monitor the performance of the E-rate program over time, and regularly reassess our rules and policies to ensure that they are continuing to support our goals. If we find that the E-rate program is not making progress towards meeting the performance goals, we will consider corrective actions. Likewise, to the extent that the adopted targets and performance measures do not help us assess program performance, we will revisit them.

A. Ensuring Affordable Access to High-Speed Broadband Sufficient To Support Digital Learning in Schools and Robust Connectivity for All Libraries

1. Goal

14. We adopt as our first goal ensuring affordable access to high-speed broadband sufficient to support digital learning in schools and robust connectivity for all libraries. This goal is widely supported by commenters and implements Congress's directive in section 254(h) of the Act that the Commission “enhance access to advanced telecommunications and information services” to schools and libraries “to the extent technically feasible and economically reasonable,” and determine a discount level for all E-rate funded services that is “appropriate and necessary to ensure affordable access to and use of such services.”

15. Our record demonstrates that high-speed broadband is essential for students, teachers, and library patrons seeking to take advantage of the rapidly expanding opportunities for interactive digital learning. As the Commission observed in the

E-rate Modernization NPRM,

the availability of high-speed broadband in schools transforms learning opportunities and expands school boundaries by providing all students access to high-quality courses and expert instruction. We also agree with commenters that high-speed broadband connections should be available to students and teachers

throughout

a school, enabling them to utilize online materials and blended learning throughout the day and as part of their curriculum.

16. High-speed broadband is also critical in libraries, where it provides patrons with the ability to access the Internet, search for and apply for jobs, engage with governmental entities, learn new skills, and engage in life-long learning. High-speed broadband to and within libraries is especially important in communities where many lack home access to broadband, including minority and low-income communities. Libraries in these communities provide broadband access during non-school hours to students who do not have home access to broadband.

17. The record demonstrates that schools and libraries, recognizing the importance of high-speed broadband to utilize the variety of Wi-Fi-enabled devices for educational purposes, are racing to deploy and upgrade their networks. Specifically, schools and libraries are working to upgrade local area networks (LANs) and wireless local area networks (WLANs or Wi-Fi networks) to deliver high-speed broadband to every student and patron device. School districts are increasingly implementing one-to-one student to device initiatives and bring your own device (BYOD) programs that require high-density Wi-Fi coverage in every classroom and common area. The WLAN upgrades necessary to support one-to-one digital learning may include upgraded switches, wireless routers, Cat 6 or fiber cabling, and 802.11n (or better) wireless access points (WAPs). Though the increasing number of Wi-Fi-enabled devices in schools provides exciting educational possibilities, 57 percent of school districts responding to a recent survey by the Consortium on School Networking do not believe that they have Wi-Fi capacity capable of handling a one-to-one deployment.

18. Libraries are also seeing a rapid increase in bandwidth demand driven by Wi-Fi-enabled devices and the public's need for broadband access. The percentage of libraries providing free Wi-Fi to the public grew from 37 percent in 2006 to 91 percent in 2012. Several commenters note that the public library is sometimes the only place offering free Internet access to the community. Many libraries report that patron-owned devices connected to their network will soon surpass library-provided devices. New technologies such as digital media labs, interactive learning tools for adult education, and videoconferencing services also contribute to increasing bandwidth demand in libraries.

19. Finally, it is also crucial that high-speed broadband to schools and libraries be affordable, consistent with section 254(b)(1). The record makes clear that, in some areas today, schools and libraries are unable to afford high-speed broadband services or the services they can afford provide insufficient bandwidth to support digital learning or provide their patrons with robust Internet access. We have collected voluminous data on the current state of connectivity to schools and libraries, and the prices schools and applicants are paying for their connectivity. The record reveals a wide variance in the speed and price of connectivity at schools and libraries nationwide. Location, access to fiber connections, financial resources, access to a research and education network (REN), statewide or regional coordination, ISP competition, and a well-informed IT staff are among the many factors that can affect a school's or library's ability to procure high-speed connectivity at a reasonable price.

2. Measures

20. We will evaluate progress towards our first goal by comparing connectivity to and within schools and libraries with widely accepted connectivity targets that are based on digital learning and library needs. As illustrated in Figure 2, the connectivity needs of schools can be divided into three components:

•

Internet Access

—School districts and some library systems purchase Internet access for the entire district or system at a single point of aggregation. For the purposes of this measure, we refer to “Internet access” as the connection or connections that allow traffic to flow from that aggregation point to the public Internet. As part of the purchase of Internet access, the school district (or library system) may purchase dedicated connectivity (e.g., dedicated transport) from its point of aggregation to its Internet Service Provider's (ISP's) point of presence. For schools and libraries that are not connected to a district Wide Area Networking (WAN), Internet access simply refers to the school's or library's direct connection to the public Internet.

•

WAN/Last-Mile

—As just described, school districts and library systems frequently connect individual schools and libraries to a central aggregation point, such as a district, county, or regional data hub, that hosts the Internet demarcation point for the entire district, county, regional, or library system. We refer to these connections as WAN or last mile connections.

•

Internal Connections

—This category encompasses the infrastructure necessary to deliver Internet access from the edge of a school or library to the actual student, faculty, or patron end-user device. Internal connections include Wi-Fi.

ER19AU14.000

21. For each of these three network components, we adopt separate measures of progress, including distinct connectivity targets.

a. Internet Access

22.

Connectivity Targets.

We adopt the State Education Technology Directors Association's (SETDA) target recommendation of Internet access for schools of at least 100 Mbps per 1,000 students and staff (users) in the short term and 1 Gbps Internet access per 1,000 users in the longer term. We agree with those commenters who support both the shorter and longer-term connectivity SETDA targets as reflecting schools' bandwidth needs as they increasingly adopt digital learning strategies and one-to-one device initiatives. SETDA's long-term targets are also consistent with President Obama's initiative to connect 99 percent of students to high-speed broadband within five years.

23. We will measure Internet connectivity at the district level for school districts and at the school level for schools that are not members of a district (e.g., private schools). We recognize that the SETDA target for Internet access connectivity may not be appropriate for every school or school district, especially very large or very small districts or individual schools, and will take that into account when measuring success towards the targets we set today. Large school districts often keep a significant amount of traffic on their internal networks and are able to oversubscribe Internet connections, thereby requiring less per-student Internet access bandwidth. For example, the Los Angeles Unified School District's (LAUSD) network has approximately 750,000 total users and LAUSD is implementing a district-wide one-to-one initiative. LAUSD anticipates that 90 Gbps Internet access connectivity, or approximately 120 Mbps per 1,000 students, will deliver sufficient bandwidth to every classroom and device with the help of bandwidth optimization measures that compress data and eliminate redundant traffic. We will continue to analyze data on broadband demand.

24. This ongoing examination of our Internet connectivity targets should include regular input from schools and libraries. We therefore direct the Bureau to seek, as part of the application process, feedback from schools and libraries on the sufficiency of their Internet access bandwidth to meet their needs. The Bureau will consider all responses, in conjunction with usage and demand data, when refining the Internet connectivity targets.

25. With respect to libraries, we initially adopt as a bandwidth target the American Library Association's recommendation that all libraries that serve fewer than 50,000 people have broadband speeds of at least 100 Mbps and all libraries that serve 50,000 people or more have broadband speeds of at least 1 Gbps. We agree with commenters that the size of the community served by a library must factor into the library target.

26.

Affordability.

To measure affordability, we will track pricing as a function of bandwidth. We direct the Bureau, working with OMD and USAC, to regularly report normalized pricing (e.g., price per Mbps) for Internet access connectivity and to identify any outliers.

b. WAN

27.

Connectivity Targets.

We adopt as a target for WAN connectivity the total number of schools that have a connection capable of providing a dedicated data service scalable to the SETDA long-term WAN target of 10 Gbps per 1,000 students. At this time, the vast majority of districts and libraries that operate WANs do not have demand for, and therefore do not purchase, 10 Gbps circuits. Indeed, schools and districts have varying broadband needs that will increase at different rates. For example, some elementary schools may not require the same bandwidth per student as middle or high schools. Very small schools with

fewer than 100 students, particularly those that are part of small districts, may not require WAN connections scalable to 1 Gbps (equivalent to 10 Gbps per 1,000 students). However, in some instances small schools in small districts may require more bandwidth per student because they may not be able to take advantage of high oversubscription ratios or conserve bandwidth by using network optimization tools to the same extent as larger schools and larger districts. Conversely, large school districts may be able to optimize their networks to deliver very high speed broadband to the classroom without having WAN connectivity of 10 Gbps per 1,000 students. We therefore adopt a target that focuses on the

scalable capacity

of school district WAN connections to 10 Gbps per 1,000 students. In most cases, a 1 Gbps fiber connection can be readily scaled to 10 Gbps with upgraded networking equipment.

28. The WAN connectivity target that we adopt today is the result of careful analysis of the record and our programmatic experience. Several commenters agree that the SETDA WAN targets accurately reflect the rapidly increasing broadband demand in schools. Others argue that the SETDA WAN targets are too low given the increasing bandwidth demands of standardized testing, educational applications, streaming video, and the growing number of Wi-Fi-enabled devices in schools. Many school districts report that they have doubled their WAN bandwidth in recent years and are planning for future increases. Commenters opposed to adoption of the SETDA WAN targets express concerns about uniform targets for all schools because districts have widely varying student populations, broadband availability, and financial resources. Other commenters recommend that the Commission conduct a comprehensive analysis of schools' actual broadband needs before establishing specific bandwidth targets.

29. We find that a WAN connectivity target measured by the capacity of connections available to schools properly balances the concerns identified by commenters opposed to the SETDA bandwidth targets with the need to ensure that all schools have affordable access to high-speed broadband that supports digital learning. Several factors are driving the need to increase bandwidth to and within schools. School districts across the country are implementing one-to-one and BYOD programs that require more robust connectivity. Cisco notes that the density of devices and demand on the network in many schools surpasses the demand of other high-density environments such as hotels, restaurants, and corporate offices. The peak bandwidth usage of media-rich curriculum and streaming video applications far exceeds the usage of basic web browsing and email. Online assessments will require high-speed connections that are also highly reliable and secure. A target of ensuring that all schools connected to WANs have a connection scalable to 10 Gbps per 1,000 students will ensure that schools have access to bandwidth sufficient to meet growing demand while maintaining the flexibility to purchase the bandwidth that meets their needs.

30. We direct the Bureau to continue analyzing data on WAN connectivity. As with the Internet connectivity targets, this ongoing examination should consider input from schools and libraries. We therefore direct the Bureau to seek feedback from schools and libraries, as part of the E-rate application process, on its WAN connectivity and whether its WAN provides sufficient bandwidth to meet the schools' and libraries' needs.

31. For libraries, our record is not sufficiently developed to establish a performance measure and a WAN connectivity target at this time. However, to the extent that libraries are connected by a WAN, similar to our approach with schools, we will measure the total number of libraries that have a connection capable of providing a data service scalable to at least 10 Gbps.

32.

Affordability.

As with Internet access, we will measure affordability of WAN connections by tracking pricing as a function of bandwidth. We also direct the Bureau, working with OMD and USAC, to regularly report normalized pricing (e.g., price per Mbps) for WAN connectivity and to identify any outliers.

c. Internal Connections

33.

Connectivity Targets.

Pending the development of a suitable available bandwidth measure for internal connectivity, we find that a survey of school districts and libraries is the best method to gauge the sufficiency of internal connections at this time. Our record is not sufficiently well developed at this time to allow us to identify the appropriate level of bandwidth per device in either schools or libraries. We are also concerned that schools and libraries would find such a measure difficult to report, as the responsible individuals may not have access to the necessary technical data. We therefore decline to adopt such a measure at this time, but direct the Bureau to continue to develop the record on this issue.

34. Several commenters emphasize that Wi-Fi performance is best measured by throughput to the student or library patron device rather than classroom or library coverage. Other commenters suggest that the high-density Wi-Fi demands of schools require at least one high-capacity wireless access point (WAP) per classroom. Library commenters discuss increasing Wi-Fi demand, but generally did not endorse specific Wi-Fi targets. At this time, we do not think counting the number of WAPs is the right approach to measuring connectivity within schools and libraries. Several unique considerations impact WLAN design. For example, some school districts opt for very high-capacity WAPs that deliver ample bandwidth to multiple classrooms, while others have installed multiple lower-speed WAPs per classroom. Distribution of WAPs in libraries depends on specific factors such as user density and building design. Therefore, we agree with commenters that available bandwidth per device is a more suitable measure to determine whether internal connections are sufficient to support the needs of each individual user at a school or library. However, we need further information from schools and libraries before we adopt a specific measure. We therefore direct the Bureau to seek feedback from schools and libraries, as part of the survey, on the sufficiency of their LAN/WLAN capacity and coverage to support the educational or library activities conducted at their school or library site. The answer to this question will help provide the Commission with insight on progress towards the stated goal pending the development of a more technical measure.

35.

Affordability.

Consistent with our decision to use a survey to measure internal connections availability pending the development of a more precise measure, we direct the Bureau, as part of the survey, to also seek feedback from those schools and libraries that have insufficient WLAN capacity and coverage to support the educational or library activities conducted at their school or library site as to the reason for the lack of sufficient capacity and coverage (e.g., affordability of equipment, or lack of demand for Wi-Fi).

3. Reporting and Further Development of Measures and Targets

36. We direct the Bureau to revise the information collections from E-rate applicants and vendors to collect data regarding the specific measures

adopted. The Bureau should analyze data collected from applicants to track progress toward meeting program goals and to inform revisions to the performance measures and E-rate program rules, and if necessary, to the goals themselves. We also agree with commenters that data should be publicly accessible so that applicants can make informed decisions regarding broadband purchasing and network design.

37. In addition to the connectivity and affordability measures adopted, we agree with commenters who recommend that the Commission evaluate actual bandwidth usage and network performance statistics to continually refine our connectivity targets over time. Digital education and the technologies that deliver it are rapidly evolving. In such a dynamic environment, it is important that we understand changes in the bandwidth demands of school and library networks supported by E-rate as well as the performance of those networks. We direct the Bureau to work with school districts and libraries to develop network measurement methods that gather data on network usage and performance.

B. Maximizing the Cost-Effectiveness of Spending for E-Rate Supported Purchases

1. Goal

38. We adopt as our second goal maximizing the cost-effectiveness of spending for E-rate supported purchases, thereby minimizing the contribution burden on consumers and businesses and maximizing the benefit of each dollar spent on services for schools and libraries. Our rules require that applicants “select the most cost-effective service offering.” Moreover, when evaluating bids, applicants “may consider relevant factors other than the pre-discount prices . . . , but price should be the primary factor considered.” Commenters broadly support the Commission's proposal to adopt cost-effectiveness as a goal of the E-rate program, in recognition of the limited amount of E-rate funds available to meet the connectivity needs of all schools and libraries throughout the nation. This goal is also consistent with section 254(h)(2)(A) of the Act, which requires that support to schools and libraries be “economically reasonable.” As the Commission recognized in the

E-rate Modernization NPRM,

we have a “responsibility to be a prudent guardian of the public's resources.”

2. Measures

39. We will focus our evaluation of progress towards this goal by measuring the prices paid for the E-rate services delivered to schools and libraries. We will separately measure and track the prices paid for the E-rate services delivered to schools and libraries for

connections to

and for

connections within

schools and libraries. Detailed pricing information is essential to our goal of maximizing cost-effectiveness as well as “affordability” under our first goal. We thus direct the Bureau and OMD working with USAC, as necessary, to develop the process by which we will measure, track, and report on the prices paid for E-rate services. In addition, we will continue to monitor the results of USAC's audits and other reports to track progress in reducing improper payments and waste, fraud and abuse.

40. For connectivity to school and library locations, we will measure and report on prices paid as a function of bandwidth (e.g., dollars per Mbps) and also as a function of number of users (or unique devices). In addition, we will track pricing as a function of various potential cost drivers, which may include physical layer type (e.g., fiber, copper, coax, fixed wireless), service type (e.g., DSL, cable modem, metro Ethernet, Internet access), geography (e.g., rural, urban), carrier, carrier type, and purchasing mechanism (e.g., individual school, district, regional consortium).

41. An equally important component of cost-effectiveness is the matching of capacity purchased with need. We direct the Bureau, working with USAC, to develop and maintain best practices and benchmarks regarding network utilization, network architectures, network performance, and network optimization and management.

42. For connectivity within schools and libraries, we will measure and report pricing as a function of number of users or unique devices. We will track pricing of eligible expenses associated with LANs and WLANs (e.g., Wi-Fi), including pricing of eligible network components (e.g., switches, routers, wireless access points, cabling), managed services, and other eligible services associated with LANs and WLANs. In addition to tracking the pricing and capacity, we will seek to track utilization and performance of these internal connections to more fully measure the value delivered with E-rate support. We will also track replacement and upgrade cycles and LAN/WLAN architectures to accurately measure cost-effectiveness.

C. Making the E-Rrate Application Process and Other E-Rate Processes Fast, Simple and Efficient

1. Goal

43. We adopt as our third goal making the E-rate application process and other E-rate processes fast, simple, and efficient. Each year, USAC reviews tens of thousands of funding requests from schools and libraries, and processes thousands of appeals, invoice requests, deadline extension requests, and additional inquiries from schools, libraries, and other parties requesting information. Simplifying and improving these procedures will help applicants receive their funding in a timely fashion, which will allow them to plan better and maximize the impact of their support. Simplification of the E-rate application process also eases the administrative burden on applicants—which is particularly important for smaller schools and libraries that lack extensive administrative support. Conversely, complexity and delay discourage participation and ultimately result in fewer schools and libraries fully investing in needed high-speed broadband connections.

44. Commenters overwhelmingly agree that making E-rate process fast, simple, and efficient is critical to the overall success of E-rate. Commenters specifically highlight, among other things, the importance of simplicity and transparency in the application submission and review process, and the need for timeliness in making funding commitments and paying invoices, reclaiming unused funds, and completion of the application and selective review processes. We recognize that there are a number of considerations that compete with our efforts to simplify the program for applicants, speed processing of applications and appeals, and minimize overhead costs. For example, we will need to appropriately balance our need for data to appropriately monitor program performance, with our efforts to minimize the application burden on applicants. Likewise, we must ensure that a simplified E-rate program does not open the door to waste, fraud, or abuse.

2. Measures

45. In 2007, the Commission adopted certain E-rate performance measurements related to the application and invoicing processes and the resolution of appeals submitted to USAC. Building on that work, in the

E-rate Modernization NPRM

the Commission sought comment on what additional measures we should adopt to

support the goal of making the E-rate application process and other E-rate processes fast, simple and efficient. While commenters are very supportive of streamlining and simplifying the administrative process, few offer actual performance measures to support this goal.

46. Based on our experience with the E-rate program, as an initial measure, we will evaluate progress towards our third goal by measuring the timely processing of funding commitments to eligible schools and libraries by USAC by tracking the processing time against an established target. Working with OMD, USAC has dramatically improved its rate of application processing for this funding year (funding year 2014). In both funding year 2013 and 2014, USAC received applications requesting between $2.6 and $2.7 billion in priority one E-rate support. By July 1, 2013, USAC had only committed approximately $181 million in support. By contrast, as of July 1, 2014, USAC has already committed approximately $1.22 billion in support. In 2013, USAC did not reach $1 billion in commitments until October.

47. We applaud the progress USAC and OMD have made in improving the timeliness of processing of funding commitments to eligible schools and libraries. In light of this progress, and to ensure continued progress and further expedite the commitment process and increase the timeliness of funding commitment decisions, we direct USAC to aim to issue funding commitments or denials for all “workable” funding requests by September 1st of each funding year. A September 1st deadline provides USAC with approximately five months beyond the application filing window deadline to review all timely filed and complete funding requests and gives applicants certainty regarding a funding decision for those timely filed and complete requests by the beginning of the school year. “Workable” means that a funding request is filed timely and is complete, with all necessary information, to enable a reviewer to make the appropriate funding decision, and the applicant, provider, and any consultants are not subject to investigation, audit, or other similar reason for delay in a funding decision. Funding requests from applicants that decline to respond to USAC inquiries over the summer may be considered “unworkable” for purposes of this performance goal, though USAC will process these applications as quickly as possible when school staff return for the year. USAC shall continue to report at least monthly on its progress toward this goal, based on the dollars of requests processed and the total count of schools and libraries represented in those requests, as well as any other specific metrics OMD identifies, and on any obstacles to achieving the application processing target.

48. In adopting this target, we recognize that even “workable” funding requests may be time consuming for USAC to process and may, after initial review, require further input from the applicant before USAC can issue a funding commitment. Our adoption of a specific application processing target should not affect in any way USAC's contacts with applicants to seek additional information concerning a funding request and USAC's thorough review of each application. USAC must continue to provide applicants with an opportunity to respond to their questions. While we seek to expedite USAC's processing of applications, we remain committed to guarding against waste, fraud, and abuse in the E-rate program. We note that failure of an applicant to timely respond to requested information could constitute an obstacle to receiving a funding decision by the target date. Therefore, we strongly encourage applicants to timely respond to USAC requests for information.

49. We will also evaluate our progress towards the third goal by having USAC survey applicants and service providers about their experience with the program. A survey will provide useful and useable information to USAC and to the Commission about what is working and what needs to be improved.

50. These performance measurements, taken together, will help provide greater certainty to applicants and providers, and will assist applicants in more timely deployment of eligible services. Additionally, these measures will help to ensure that the E-rate program is operated as efficiently as possible by minimizing the need for the submission and review of other requests, such as service delivery deadline extensions, service substitutions, service provider identification number (SPIN) changes and FCC Form 500 filings to change contract expiration dates, which are often necessitated due to the delay in the issuance of timely funding commitment decisions letters.

III. Ensuring Affordable Access to High-Speed Broadband Sufficient To Support Digital Learning in Schools and Robust Connectivity for All Libraries

51. Having set our goals for the E-rate program, we now turn to the process of modernizing the program to meet each of those goals. In this section, we begin to update the E-rate program to ensure that schools and libraries have affordable access to the high-speed broadband connections needed for digital learning. The record in this proceeding and our own analysis of the program lead us to a particular focus on the internal connections, including Wi-Fi, needed for robust broadband connectivity in all classrooms and libraries.

52. Wi-Fi is a transformative technology for education, allowing schools and libraries to transition from computer labs to one-to-one digital learning. Yet, in most funding years, the E-rate program has been able to provide priority two support for internal connections, including Wi-Fi, only to schools and libraries entitled to the highest discount levels. In funding year 2012, for instance, the program committed approximately $800 million for internal connections and was only able to fund applicants at the 90 percent discount level. As a result, nearly 60 percent of that funding went to urban applicants—almost double the share of students in urban schools nationwide. In 2013, for the first time ever, no E-rate support was available for internal connections.

53. By contrast, the E-rate program has always been able to meet demand for services that provide connectivity to schools and libraries. However, only about half of the $2.4 billion E-rate budget is used to support priority one funding requests focused on broadband connectivity to schools and libraries.

54. In short, the E-rate program has become increasingly ill-equipped to meet the demands of the modern classroom and library. Therefore, we now act to modernize E-rate to ensure more equitable, reliable support for Wi-Fi networks, and other internal connections supporting broadband services, within schools and libraries. While we focus in this Report and Order on providing funding for internal connections, we remain committed to ensuring schools and libraries have high-speed connections to their buildings. In order to help ensure E-rate funding is available to support high-speed broadband to and within schools and libraries, we also eliminate support for certain legacy, non-broadband services to help free up funding for these internal broadband connections. We begin, however, with a short review of our legal authority to set the list of E-rate supported services and define the mechanisms of E-rate support.

A. Legal Authority

55. Sections 254(c)(1), (c)(3), (h)(1)(B), and (h)(2) of the Communications Act collectively grant the Commission broad and flexible authority to set the list of

services that will be supported for eligible schools and libraries, as well as to design the specific mechanisms of support. This authority reflects Congress's recognition that technology needs are constantly “evolving” in light of “advances in telecommunications and information technologies and services.”

56. In creating the E-rate program in 1997, in the

Universal Service First Report and Order,

62 FR 32862, June 17, 1997, the Commission designated all commercially available telecommunications services as services eligible for support (or discounts) under the E-rate program. At the same time, the Commission determined that it could provide E-rate support for additional, non-telecommunications services, particularly Internet access, email, and internal connections, provided by both telecommunications carriers and non-telecommunications carriers. The Commission reasoned that such services enhance access to advanced telecommunications and information services for public and non-profit elementary and secondary school classrooms and libraries.

57. We update this eligible services framework for today's needs. Revisiting our approach to this issue is consistent with 254(c)(1)'s definition of universal service as an “evolving level” of service, which the Commission must revisit “periodically,” “taking into account advances in telecommunications and information technologies and services.” We are also guided by section 254(h)(2)(A)'s directive that we “enhance, to the extent technically feasible and economically reasonable, access to

advanced

telecommunications and information services” for schools and libraries.

58. Taken together, and considered in light of the Commission's “responsibility to be a prudent guardian of the public's resources,” these provisions lead us to take a more focused approach to the definition of E-rate eligible services today than was adopted in 1997. In particular, based on the record of this E-rate modernization proceeding, and as described in more detail, we find that E-rate support should be transitioned to focus specifically on those telecommunications and information services, including associated inside wiring, necessary to support broadband to and within schools and libraries. The Commission has long supported these types of services, and we think it clear that the statute authorizes their support. Section 254(c)(1) and (c)(3) each provide ample authority for the support of broadband telecommunications services, and sections 254(c)(3), (h)(1)(B), and (h)(2) provide authority to support advanced telecommunications and information services, including associated inside wiring.

59. At the same time, in order to focus E-rate funding on these services, we must redirect funding away from services that are less essential to education, less directly tied to educational purposes, and/or more likely to be affordable without E-rate support than when the program began, including fixed and mobile voice service. The statute also amply supports this decision. Even if the E-rate fund was not capped at its current level, we have a responsibility to be prudent stewards of universal service funds, knowing that that those funds are ultimately paid for by consumers. Because the amount of available E-rate funding is finite, we must make thoughtful decisions about what services are not just permissible to support, but are the most essential to support for schools and libraries. We have relied on the record to inform these choices.

60. As we focus E-rate support on high-speed broadband, we recognize that we will ultimately reach a point where E-rate no longer supports voice service, which we have defined as the 254(c)(1) supported service for purposes of the High Cost (Connect America Fund) and Lifeline programs. But nothing in section 254(c)(1) or elsewhere bars the Commission from establishing different supported services for different elements of the overall Universal Service Fund.

61. Indeed, in establishing the definition of the telecommunications services that are supported by the Federal universal service support mechanisms, the Commission is charged with considering the extent to which the telecommunications services meet the criteria section 254(c)(1)(A) through (D). This list of criteria implies that the definition of supported services can vary depending on the particular universal service program at issue. For example, section 254(c)(1)(A) requires the Commission, in designating supported services to consider the extent to which services “are essential to education, public health,

or

public safety.” Congress recognized that telecommunications services deemed essential for education (and by extension the E-rate program) may well not be the same as telecommunications services essential for health (or the Rural Health Care program). Likewise, what is consistent with the public interest, convenience and necessity in section 254(c)(1)(D) could vary depending on the specific universal service program at issue.

62. Moreover, reading section 254(c)(1) to bar the Commission from establishing different eligible services for different universal service programs would place section 254(c)(1) in tension with section 254(b), which requires the Commission to ensure that rates charged to consumers nationwide are “just, reasonable, and affordable,” and therefore to keep universal service contributions, typically passed through in customers' rates, as low as possible. We think the better reading of 254(c)(1) provides the Commission authority to support services in more granular ways, such as only in the specific USF programs where the Commission concludes that such a definition of supported services is warranted after considering the (c)(1) factors, and thereby minimize the overall USF burden on consumers who pay into the Fund.

63. Finally, in the sections that follow we change to some extent the mechanisms by which E-rate support is allocated and the discount levels provided under the program. Sections 254(c) and 254(h) give the Commission broad authority to design these mechanisms and set discount rates at the level “appropriate and necessary to ensure affordable access to and use of” E-rate supported services. This authority amply supports the changes we make here.

B. Providing More Equitable Funding for Broadband Within Schools and Libraries

64. In this section, we focus on providing schools and libraries more equitable access to funding for Wi-Fi networks and other internal connections that allow high-speed connectivity within schools and libraries. We begin by designating internal connections that support broadband connectivity as “category two” services, rather than “priority two” services in recognition of the importance of Wi-Fi networks in connecting students and library patrons. In the short term, in order to provide schools and libraries more access to category two funds over the next two funding years, we accept the recommendation of commenters who suggest that we focus the additional E-rate funds identified by the Bureau earlier this year on internal connections. Consistent with this focus, and with the record in this proceeding on the funding needs for Wi-Fi and other internal connections, we also set an annual budget target of $1 billion for category two services. Next, we increase the minimum contribution rate for these

category two services from 10 to 15 percent to encourage applicants to pursue the most cost-effective options. For applicants that apply for category two support during the next two funding years, we also test reasonable maximum per-student and per-library pre-discount budgets for category two services in order to ensure greater access to category two funding sufficient to deploy robust LANs and WLANs. Finally, we update our rules regarding eligible services to align with this new focus on providing E-rate support to services necessary for broadband connectivity and direct the Bureau to update the ESL accordingly.

1. Providing Support for Internal Connections

65. As an initial matter, we change the E-rate program's existing priority funding nomenclature. We agree with commenters that schools and libraries should take a “whole network” approach to planning their purchase of E-rate eligible services that bring connectivity both to the building and to devices. In place of the priority nomenclature, we designate the services needed to support broadband connectivity to schools and libraries as “category one” services, and those needed for broadband connectivity within schools and libraries as “category two” services because we recognize that deploying internal connections is an important element in connecting schools and libraries to high-speed broadband.

66. For category one services, we are confident that the changes we make to the E-rate program in this Report and Order will ensure that we can continue funding all eligible category one requests, as we continue to evaluate the long-term, overall program needs. For category two services, the additional funding announced by the Bureau earlier this year will allow the Commission to make $1 billion available over each of the next two years. Building on the use of the identified program funds for the next two years, and to give applicants longer-term visibility into our approach, we also set a funding target of $1 billion annually for category two services on an ongoing basis. In contrast to the current system, providing a target of $1 billion a year annually for category two services will ensure greater access to E-rate support for the Wi-Fi networks needed to connect 10 million students a year to 21st Century educational tools. We recognize the concern of some commenters, however, that, in the absence of a full review of long-term program needs, a hard funding allocation for category two services could put at risk our ability to provide sufficient support for category one requests. For that reason, the budget we adopt will remain a target, rather than a fixed allocation, as we continue to evaluate the long-term program needs, and we direct USAC to shift funds targeted for category two services to meet all eligible requests for category one services, in any funding year in which demand for category one services exceeds available funds. Given the availability of funding for the next two years, the need for continued analysis of longer-term trends in category one demand, as well as savings from the reforms we adopt today and future additional reforms, we do not increase the overall cap at this time, but seek additional comment on that issue in the accompanying FNPRM.

67. If demand for internal connections exceeds the available funding for category two services, we will prioritize access to internal connections funding based on concentrations of poverty. Those schools and libraries entitled to a higher discount will receive internal connections funding ahead of those entitled to a lower discount rate. If there is insufficient funding available to meet the need at a particular discount rate for category two, we will prioritize funding within a discount rate based on the percentage of students that are eligible for free and reduced school lunches within each applicant's school district. Funding for libraries will be prioritized based on the percentage of free and reduced lunch eligible students in the school district that is used to calculate the library's discount rate. Funding for individual schools that are not affiliated financially or operationally with a school district, such as private or charter schools that apply individually, will be prioritized based on each school's individual free-and-reduced student lunch eligible population.

68. This prioritization method maintains the core of the existing system that E-rate applicants are familiar with, and gives applicants serving the highest poverty populations first access to funds, while allowing us to fund within a discount-band even where funding is not sufficient to reach all schools in that band. As explained, however, and unlike the existing system, we adopt additional measures in an effort to provide the opportunity for a broader range of applicants to obtain funding for category two services.

69. In the event that requests for category one services are less than the available funding and demand for category two services is higher than the $1 billion target for category two services at the close of the funding year window, the Bureau, working with OMD and USAC, may redirect the excess funding to category two services in the same funding year. If USAC does not commit the entire category two budget for a funding year, or committed funds are not used or returned, such funds may be carried forward to be used in subsequent funding years. Each year such funds are available, we direct the Bureau, working with OMD and USAC, to determine the proportion of carry-forward funds to be used for category one and category two services.

2. Increasing the Minimum Applicant Contribution Rate for Category Two Services

70. In order to ensure more equitable access to limited internal connections funds, we will increase the minimum contribution applicants must make towards E-rate supported category two purchases from 10 to 15 percent. We agree with commenters that requiring applicants to pay a larger share of the cost of E-rate supported category two purchases will spread available universal service funds more widely and increase the incentive for applicants to find the most cost-effective options that meet their internal connection needs.

71. In deciding to reduce the top discount rate for internal connections from 90 percent to 85 percent, as with other changes we are making to the E-rate program, we remain mindful of the challenges faced by our most vulnerable schools and libraries in areas with the highest levels of poverty. Taken together, the changes we make in this Report and Order should benefit all schools and libraries, including those receiving the highest discount rate. At the same time, we have taken a measured approach in making changes that could negatively impact applicants entitled to the highest discount rates. For example, we reduce the top discount rate only for category two services, and only by five percent. Likewise, we phase down support for voice services over several years, to give applicants time to adjust to the loss of support for such services. We also seek to counterbalance potential reductions in funding by adopting proposals aimed at driving down the prices all applicants will pay for E-rate supports services, including increased pricing transparency and encouraging consortia purchasing and bulk buying.

72. We expect that requiring higher matches will lead applicants that have been eligible for 90 percent discounts for priority two services to pursue lower prices for eligible category two services

more aggressively. Commenters note that applicants in the highest discount level spend more in pre-discount dollars than those that have a larger required match. Consistent with this analysis, E-rate Central, a member of USAC's 2003 Task Force on Waste, Fraud, and Abuse, observes “many examples of excessive spending by applicants at the highest discount levels, often driven by overly aggressive sales efforts by vendors targeting the poorest schools and libraries.” Thus, as the Iowa Department of Education argues, requiring applicants to “[h]av[e] more `skin in the game' . . . will guard against waste, fraud, and abuse.” We therefore set the highest discount level for category two services at 85 percent. Applicants that would have been eligible for discounts of 86 to 90 percent will now be eligible for an 85 percent discount, and those eligible for a discount of 85 percent or less will see no change. This decision is consistent with a similar change to the Rural Health Care program that requires recipients of the new Healthcare Connect fund to contribute 35 percent of the costs of the support services, which the Commission found “appropriately balances the objectives of enhancing access to advanced telecommunications and information services with ensuring fiscal responsibility and maximizing the efficiency of the program.”

73. Although some commenters recommend even higher minimum applicant contribution rates—20, 25 or even 30 percent (80, 75 or 70 percent maximum discount rates, respectively)—we recognize the concerns voiced by some stakeholders that we not raise the net cost to the most disadvantaged schools and libraries above levels that they can afford. Therefore, in order to minimize the impact of this change on these schools and libraries, we reduce the maximum discount rate only by five percent and only for category two services as a first step. We note that the per-student and per square foot applicant budgets for funding year 2015 and 2016 described below mitigate some of the concerns about overspending at this time. Other commenters agree that the discount level should be changed, but ask for it to be a temporary change. We see no reason, however, why the greater incentives for cost-effective purchasing introduced by a slightly higher applicant match would be appropriate in the near term but less so in the future; to the contrary, we believe such incentives will remain important over time, whereas changing the discount rate from year-to-year could distort efficient decision making. Finally, because we are only reducing the maximum discount rate by five percentage points, and only for category two services, we make this change fully effective for funding year 2015 rather than phasing it in over multiple years.

3. Setting Applicant Budgets

74. In order to provide broader and more equitable support for category two services, we adopt budgets for applicants who apply for category two discounts during the next two funding years, as we continue to evaluate long term program needs. Under this approach, schools in districts that seek category two funding during funding years 2015 or 2016 will be eligible to request E-rate discounts on purchases of up to $150 (pre-discount) per student for category two services over a five-year period. Likewise, library systems and libraries that seek category two funding in funding years 2015 or 2016 may request E-rate discounts on purchases of up to $2.30 (pre-discount) per square foot over a five-year period. If an applicant receives funding for category two services in funding year 2015 or 2016, the five-year budget will apply in the subsequent five funding years, in lieu of the existing “two-in-five” rule.

75. We agree with commenters that E-rate must maintain its historic focus on poverty in distributing support. Therefore, as described, we will continue to use the discount matrix to calculate applicants' E-rate support on their eligible costs, and applicants that have a higher percentage of students eligible for NSLP will continue to receive a larger proportion of support. For example, over a five-year period, schools or districts at the 80 percent level will be able to request up to $120 in E-rate support per student (an 80 percent discount on $150 in services) and be required to pay 20 percent of the cost of eligible category two services that they purchase. Districts at the 20 percent level will be able to seek up to $30 per student over a five-year period, and be required to pay 80 percent of the costs of the eligible category two services that they purchase. Similarly, a library with 10,000 square feet would be eligible for discounts on purchases of up to $23,000, so a library at the 80 percent discount level could request up to $18,400 in E-rate funding, while a library at the 20 percent discount level could request up to $4,600 over a five-year period.

76. We recognize that this approach represents an important change to our handling of applicant requests, and we are committed to ensuring that the new five-year budgets not in any way compromise the program's fundamental commitments to providing sufficient support and to permitting local flexibility to address localized conditions, even as they expand access to program funds. Therefore we will consider funding years 2015 and 2016 to be a two-year test period, subject to further review by the Commission.

a. Methodology

77. It would be impossible to identify, building-by-building, the precise amount of funding each eligible school and library will require in a given year to deploy or upgrade LANs and WLANs necessary to support broadband services within their buildings. As commenters note, building size, construction characteristics, where applicants are in their upgrade cycle, and other factors make each deployment unique. We can, however, establish a multi-year budget for category two services that will serve our goal of ensuring affordable access to high-speed broadband for schools and libraries by ensuring that (a) eligible schools and libraries have greater access to E-rate funding for internal connections necessary to distribute high-speed broadband within their buildings and (b) that category two budgets will be sufficient to ensure that eligible schools and libraries will be able to afford the deployment or upgrade of those internal connections. In setting such a budget, and the related budget-cycle, to fund internal connections, we find support from a broad array of cost data in our record.

78.

Budget Cycle.

As an initial matter, for applicants that receive support in funding years 2015 or 2016, we establish a five-year budget cycle for category two services. The record demonstrates that most category two equipment has a typical lifecycle of approximately five years. After that point, schools and libraries likely will need additional support to upgrade their networks. This five-year budget cycle will give applicants the flexibility to determine when to make upgrades or changes.

79.

School Budget.

We set a pre-discount budget of $150 per student over five years for schools. The record demonstrates that $2,500 per classroom, which is equal to just under $150 per student based on a ratio of 17 students per classroom, should be a sufficient budget to deploy LANs/WLANs to elementary and secondary school classrooms and common areas across the nation. States and districts submitted into our record specific cost data for recent upgrades to state-of-the-art deployments that were largely under this per-classroom amount. Likewise,

participants at the E-rate Modernization Workshop described spending differing amounts per classroom below this $2,500 range, from $1,300 to an average of $1,900 per classroom. North Carolina, which is in the middle of a statewide upgrade to Wi-Fi in its schools and libraries, originally estimated the upgrade cost at $2,200 per classroom, and has found actual deployment costs below this initial estimate, ranging from approximately $2,100 per classroom for a comprehensive high school upgrade to $900 per classroom for a more limited high school upgrade. In some parts of Mississippi, the $500 cost per classroom is well below this budget.

80. Based on NCES data for average class sizes and other sources, commenters estimate that there are 18 to 20 students per classroom in the United States, an estimate supported by consultations with district technology officials and equipment vendors. Data in the record from a sample of states and districts suggests that the true number is slightly lower, however. In particular, statewide data from three states representing almost five million students (approximately 10 percent of all students in the country) give an average of 17.8 students per classroom, likely because not all classrooms are in use at all times of the day. Several individual districts also submitted classroom counts, both rural and urban, with an average of 19.6 students per classroom. Combined, the state and district data provide information on schools serving over 5.6 million students, with an average of 18 students per classroom. We believe it makes sense to use a relatively conservative estimate to ensure support levels are sufficient for schools with smaller class sizes, such as smaller rural schools. Accordingly, in translating the various per-classroom cost estimates in our record into per-student costs (and vice-versa), we use an estimate of 17 students per classroom. Dividing $2,500 by 17 gives a per-student budget of $147, which we round up to $150 for simplicity of administration.

81. A pre-discount budget of $150 per student over five funding years, or $30 per student annually, is also consistent with the market rate for elementary and secondary school managed Wi-Fi solutions, described. Because these costs include installation and maintenance, we find them to be a strong, market-driven representation of all-inclusive, per-student LAN/WLAN deployment costs. For example, Education Networks of America (ENA) currently provides managed Wi-Fi to 82 percent of public and charter high schools in Idaho for $21 per student and teacher per year, including installation, management, maintenance, and content filtering. C-Spire Fiber has several deployments in Mississippi that average an annual cost of $19 to $29 per student for the managed Wi-Fi product it is piloting. In Ohio, several Information Technology Centers offer a managed Wi-Fi service to member school districts for $9-15 per student per year plus vendor installation charges.

82. Commenters also submitted three different Wi-Fi cost models into our record: The EdSuperHighway/CoSN ConnectED Cost Model, the EdSuperHighway/CoSN Ongoing Cost Model, and the Cisco Model. The first of these, the EdSuperHighway/CoSN ConnectED Cost Model, produces the lowest estimate of required costs, producing a nationwide, average cost of approximately $21 per student per year, well below the budget we set here. This model assumes substantial existing infrastructure however, the extent of which will vary greatly between districts, so it is poorly suited to setting reasonable, nationwide budgets that will be sustainable on an ongoing basis. We thus do not rely on this model.

83. The remaining models confirm our conclusion based on the record evidence discussed that a pre-discount $150 per student five-year budget we adopt here is reasonable. In contrast to the EdSuperHighway/CoSN ConnectED Cost Model, the EdSuperHighway/CoSN Ongoing Cost Model and the Cisco Model each attempt to estimate the full, ongoing costs of internal connections deployments, averaged over the lifecycle of the equipment used. Both models consist of two basic components: An overall framework for estimating costs and a set of inputs for various costs and equipment lifecycles. Although they differ somewhat, the frameworks of both models appear to provide generally reasonable approaches to estimating Wi-Fi deployment costs. The deployment and maintenance cost estimates generated by the EdSuperHighway/CoSN Ongoing Cost Model and the Cisco Model differ, with EdSuperHighway/CoSN estimating an annual average cost of $869 per classroom, or $44 per student, and Cisco estimating an annual average of $1,081 per classroom, or $59 per student. The staff's sensitivity analysis of the key cost drivers, however, shows that the range of reasonable cost estimates that can be produced by the basic model frameworks is quite a bit wider than shown by these two data points. Specifically, with plausible changes to a small number of inputs, the models could support annual cost estimates ranging from approximately $22 all the way to $75 per student. The $150 per student five-year budget we adopt here falls comfortably within this range, albeit toward the lower end. The EdSuperHighway/CoSN Ongoing Cost Model and the Cisco Model thus help confirm the conclusions we draw from the diverse data on real world deployment costs and the market-driven costs of managed Wi-Fi services, and, based on these data sets, we are comfortable choosing an estimate toward the lower end of the range produced by the models.

84. In sum, the record suggests $150 per student is a reasonable budget, with many schools able to complete Wi-Fi deployments or upgrades for less than that amount. Some schools may still choose to spend more than $150 per student on their wireless deployments based on individual design decisions, and nothing in the approach we adopt prevents these decisions. Because the evidence shows that $150 per student has proven sufficient in numerous deployments over several geographic areas, however, we limit E-rate discounts to this budget.

85. In finding that $150 per student over five years should provide sufficient support for category two services, we acknowledge that some cost variation exists across or even within LAN or Wi-Fi networks. For example, different building construction materials and variations in labor costs can affect upgrade costs. However, in contrast to some other costs, such as the costs of digging trenches for fiber deployment, the majority of the costs of LAN and Wi-Fi networks are commodity equipment costs, and therefore cost variation for efficient upgrades is far less than that for connectivity to schools and libraries. For the same reason, schools' costs for LAN or Wi-Fi networks generally should scale linearly by the number of classrooms (and therefore the number of students). We therefore conclude that a per-student system of setting budgets for category two funding (combined with a poverty-based discount rate and subject to the funding floor, as discussed below) reasonably suits the manner in which category two costs are incurred.

86.

Library Budget.

We set a pre-discount budget of $2.30 per square foot over five years for libraries. Square footage provides a simple to calculate, predictable, and reasonably accurate method of setting budgets. Some commenters suggest that we should use patron counts, average daily users, peak hour users, or other metrics to help set reasonable internal connections budgets for libraries. We decline to adopt any of these other suggested metrics at this time because (a) we have identified no

available sources of data on these metrics for all libraries, and (b) patron count, average daily users, and peak hour users may vary dramatically and could be difficult to measure. As a result, using these metrics at this time could reduce predictability, complicate the application process, and slow down application reviews.

87. We choose $2.30 per square foot over five years as the budget amount based on three data sets in our record. First, Vermont libraries submitted state data showing the average equipment cost for deploying wireless networks in 35 libraries in the state to be approximately $0.81 per square foot. Second, the Urban Libraries Counsel (ULC) urged the adoption of a budget of $4 per square foot for libraries, which was supported by a number of libraries. Finally, the ALA filed an analysis reporting per square foot costs for a variety of libraries in the range of $1.79 to $2.29, which focused more specifically on E-rate eligible costs.

88. Considering the range of all the cost data in the record and recognizing that the $2.30 budget is a cap, not a grant, we find that ALA's recommendation of $2.30 per square foot, taken with the $9,200 funding floor over five years as set below, is a reasonable budget level. The ALA recommendation is based on a more thorough analysis and specifically limited to E-rate eligible costs. While we note that a number of libraries supported the ULC proposal, in general, these commenters did not provide sufficiently detailed data for the Commission to ensure that the estimates included only E-rate eligible services. Further, four ULC member libraries that did provide more specific cost data in response to requests from Commission staff indicate a range of $0.82 to $3.08 per square foot. Even so, we consider ULC's data in evaluating all the cost data in the record and selecting the $2.30 per square foot funding budget.

89. Finally, we note that nationwide, schools have a median of approximately 150-175 square feet per student. The $150 per-student budget we adopt therefore equals about $0.86 to $1.00 per square foot for schools. The budget we select for libraries today is substantially above this amount. Therefore, we believe that $2.30 represents a generous figure that will not unnecessarily restrict library funding. Since our record suggests that usage density is unlikely to be substantially higher in libraries than it is in schools, the school costs in our record provide additional support for our finding that ALA's proposed $2.30 per square foot funding budget will provide sufficient support for library deployments.

90. Notwithstanding this analysis, we recognize that the library data are less robust than that for schools. Accordingly, in the accompanying FNPRM we seek additional comment on these issues.

91.

Funding Floor.

To ensure the category two budgets we set are sufficient to meet the minimum demand that certain schools and libraries might have regardless of size, we also establish a pre-discount funding floor of $9,200 in category two support available for each school or library. While WLAN costs tend to scale by classroom size, schools and libraries will need the baseline funding to purchase a router and/or switch, at least one small wireless access point, and cabling necessary to deploy WLANs in even the smallest buildings. Our record is not, however, as well developed on this point as we would like, and so we take the conservative approach of adopting ALA's recommended floor of $9,200, based on ALA's consultation with its library members. Our record indicates that $9,200 should be sufficient to cover the costs to purchase necessary equipment, cabling, and installation for these libraries. We set the floor for schools at the same level to ensure equity and because the costs of deployment in small schools and libraries should be similar. Increasing the floor by this amount has a minimal budget impact. Therefore, all schools and libraries, including smaller schools and libraries, will be eligible to request pre-discounted support for up to at least $9,200 for category two services over any given five-year period.

92.

Per-Entity Basis.

Applicants will be required to seek support for category two services on a school-by-school and library-by-library basis, although school districts will use a single district-wide discount rate for all of their schools, as will library systems for all of their libraries. Under this approach, school districts, whether public or made up of more than one independent school under central control, will have the flexibility to request support for any school or group of its schools each funding year, using the number of students in any school getting LAN/WLAN upgrades to determine the maximum eligible pre-discount amount in a given funding year for that school. This flexibility will allow districts to decide how to sequence deployment of LANs/WLANs based on their individual needs. For example, a large district may choose to upgrade one fifth of its schools in each of the five funding years, while a small district may request support to upgrade all of its schools in one funding year. To the extent that a district seeks or receives funding commitments for less than the category two budget for E-rate support available to a school, it may request additional category two E-rate support up to that budget in the following four funding years. The costs for services shared by multiple entities shall be divided between the entities for which support is sought in that funding year. Likewise, library systems that include multiple libraries will have the flexibility to request support for all or a portion of their library branches each year, using the floor area of the libraries being updated to determine the maximum budget available each year.

93. Similarly, eligible schools that operate independently of a public school district, such as a private or charter school, are eligible for E-rate discounts on the purchase of eligible internal connections services up to $150 per student (or a minimum of $9,200). If an independently operated school seeks or receives less than the maximum amount of internal connections E-rate support available to that school in year one, it may request additional internal connections E-rate support up to that maximum in the following four funding years. Likewise, libraries that are not part of a library system may request E-rate support for a pre-discount purchase of up to the greater of $9,200 or $2.30 per square foot, and any amount less than that will be available in the following four funding years. For example, a 10,000 square foot library may request support for a purchase of up to $23,000 over five years. If it seeks E-rate support for a purchase of $13,000 in the first funding year, it may request discounted support for another $10,000 in eligible services over the next four years.

94.

Application of Budgets to Funding Years 2015 and 2016 and Five-Year Funding Cycle.

The question of applicant budgets is closely linked to the question of the long-term funding levels for category two services. As described, at this time we set funding for category two as a budget target rather than a firm allocation. In light of the funding identified by the Bureau earlier this year, we are confident we can meet this target for the next two funding years, and therefore we apply the budget approach adopted here to those two funding years. We will evaluate the longer-term application of this approach in conjunction with our evaluation of the overall, longer-term program needs.

95. While the budget approach will only apply to applicants that receive funding in funding years 2015 and 2016,

we clarify that the budget themselves are five-year budgets. In other words, for schools in districts seeking funding in years 2015 and 2016, we adopt a rolling funding cycle of five years for category two services and remove the two-in-five rule that applied to priority two internal connections. As explained, Wi-Fi equipment has a lifecycle of approximately five years. Therefore, excluding any priority two support received before funding year 2015, schools in districts that seek category two support in funding years 2015 or 2016 will calculate their available support budget as $150 per student, multiplied by their discount, less any E-rate support received in the prior four years. In the first funding year that an applicant requests category two support, the full amount of the pre-discount $150 per student budget will be available to request. In later years, applicants will calculate the available budget based of $150 per student less any support received in the prior four funding years. Applicants that receive support in funding year 2015 will have $150 per student available divided over funding years 2016, 2017, 2018, and 2019. Applicants that receive support in funding year 2016, but not in funding year 2015, will have a budget of $150 per student divided over funding years 2017, 2018, 2019, and 2020. Likewise, libraries in library systems that receive support in funding years 2015 or 2016 will calculate support over the five-year funding cycle using the number of square feet less any support received in the prior four funding years. This approach will allow schools and libraries to plan for how best to upgrade their facilities, and plan for future upgrades based on their own prior spending. In contrast, adopting a shorter budget, such as a two-year budget, would create a mismatch between the budget cycle and real equipment lifecycles, and would likely encourage applicants to inefficiently front-load expenses in the next two years.

b. Reasons for a Multi-Year Budget Approach

96. Our decision to limit applicants' total category two requests based on a five-year budget reflects broad consensus in the record that some reasonable limits on requests are necessary to spread support more broadly than under the current system. In the

E-rate Modernization Public Notice,

the Bureau outlined three options for such limits, and invited comments on alternatives. The five-year budget that we adopt here is a middle course between two of these options—an annual per-student allocation and a one-in-five rotating funding schedule. After carefully evaluating the arguments for these and other options, we conclude that the approach we adopt today will bring several important benefits to applicants and the program.

97. First, the approach we take to distribute category two funding provides greater predictability. Since funding year 1999, applicants have had no certainty from year-to-year that category two services would be supported. As such, administrators, budget managers, and technology planners have been discouraged from planning for E-rate support for Wi-Fi in their schools and libraries because annual funding was far from assured. Some commenters express concern regarding the predictability of other approaches, such as a rotating approach or a one-in-five approach. On the other hand, some commenters support an allocation approach in order to provide needed certainty. Unlike in previous years, when there was no funding for internal connections, or funding went to connect a small percentage of the nation's students and library patrons, the approach we adopt today provides greater predictability and will be able to provide support for 10 million students and thousands of libraries each year.

98. Second, the approach we adopt today maintains the E-rate program's priority for the highest poverty schools and libraries. We continue to use poverty measures when distributing support under this approach. Applicants with the highest percentage of students eligible for free and reduced lunch will receive a greater proportion of E-rate support and be eligible earlier in the five-year cycle if demand exceeds the annual budget for category two services.

99. At the same time, this approach guarantees a broader distribution of funding for internal connections—adjusted as appropriate to reflect greatest levels of poverty—by setting reasonable limits on category two requests in order to deploy Wi-Fi networks to a far greater number of eligible applicants. Many applicants debate the costs and benefits of different distribution approaches, but focus on a core principle that distribution must be made more equitable. As we noted earlier, the existing priority two methodology has resulted in E-rate funding for priority two services being distributed only to schools and libraries with the highest discount levels. Additionally, a disproportionate amount of available funding has gone to urban schools. Commenters point out that some proposals, like a one-in-five limitation, would not help to achieve a more equitable distribution of support. Similarly, an increase in the cap without these additional measures to encourage efficient purchasing would not achieve more equitable distribution. This five-year budget approach should provide sufficient support per student or per square foot for far more schools and libraries to access needed funding, but places a limit on less cost-efficient spending requests.

100. Importantly, this approach to funding category two connectivity also provides flexibility to districts, schools, and libraries to deploy and maintain Wi-Fi as best suits their own circumstances. Many commenters argue that flexibility is essential for setting reasonable budgets each year, and this five-year budget approach allows applicants to decide the rate at which school networks are updated. This approach allows applicants to plan how to deploy their networks over five years, whether by requesting support for all or just a portion of entities each year, or by purchasing a managed Wi-Fi service through which a third party provider installs and manages the necessary LAN and WLAN.

101. Finally, the approach we take today promotes cost-effective purchasing by applicants while providing support that the record demonstrates should be sufficient to support these badly needed deployments. In the past, applicants at the top discount levels had an incentive to overbuy or use less cost-effective network design. A limit on category two support will encourage more cost-efficient purchasing.

102. In contrast to the approach we adopt here, we find the alternative approaches that commenters suggest as well as those outlined by the Bureau in the

E-rate Modernization Public Notice

—such as maintaining the existing system but temporarily eliminating support for applicants that have recently received support, a rotating schedule of funding for different discount bands, or single-year budgets, implemented with or without the existing discount matrix—would each be less effective at solving the structural problems with how the E-rate program has historically funded internal connections. For instance, as pointed out by commenters, both the rotating eligibility approach and the one-in-five approach outlined by the Bureau in the

E-rate Modernization Public Notice

lack certainty for schools and libraries absent incentives for more cost-efficient purchasing in the highest discount bands, and would likely fail to distribute support more broadly than is the case today. In contrast, providing

applicants with a constant, single-year budget would fail to account for the reality that individual applicants will have different needs in different years, depending on where they are in their upgrade cycle.

c. Other Applicant Budget Issues

103.

Student Count.

We move to a district-wide calculation of applicants' discount rates. In order to determine the budget available each funding year, districts should calculate the number of students per school at the time that they calculate their district-wide discount rate annually. We recognize that there will be some instances, such as the construction of a new school, that will make calculating the number of students more difficult for districts. We will permit schools and school districts to provide a reasonable estimate of the number of students who will be attending a school under construction during a particular funding year and seek support for the estimated number of students. However, if an applicant overestimates the number of students who enroll in that school, it must return to USAC by the end of the next funding year any funding in excess of that to which it was entitled based on the actual number of enrolled students. This means a school at the 80 percent discount level, which estimates that it will have 1,000 students, may request E-rate support of up to $120,000. If, however, enrollment after the school opens is only 750 students, the school will have to return any committed support exceeding $90,000. We note, however, that there may be funding years in which an entity loses students and therefore spent more than its available budget in the prior four funding years. In these instances, we will not require repayment of any E-rate support, but there will be no available funding for that funding year. Students who attend multiple schools, such as those that attend educational service agencies (ESAs) part-time, may be counted by both schools in order to ensure appropriate LAN/WLAN deployment for both buildings.

104.

Cost-Effective Purchasing.

Our goal in setting a per-student limit is to ensure schools and libraries can purchase the internal connections they need while discouraging them from purchasing unnecessary equipment or using an inefficient network design. At the same time, we emphasize that the pre-discount $150 budget per student is not a block grant. Applicants may only request funding for discounts on eligible category two services, and schools must continue to pay the non-discounted portion of the supported services. These requirements remain in place. We will not, however, second guess schools' and libraries' decisions to purchase additional equipment or services with other sources of funding if they determine that it is the most cost-effective service offering for what they have decided they need.

105.

Rural Remote Applicants.

We decline to adopt the request made by some commenters that we provide additional category two funding or a rebuttable presumption allowing USAC or the Bureau to waive the budget for applicants in rural remote areas at this time. As described, we find that LAN/WLAN costs are largely based on the costs of equipment, and therefore tend to have consistent prices nationwide. To the extent there are price variations, it is often the case that internal connections upgrades are less expensive in rural areas because labor costs are lower, permitting is easier, and buildings are newer and/or easier to renovate. Therefore, we conclude that the benefits of additional funding for rural remote areas are outweighed by the added administrative burden and the additional costs to the Fund of providing such additional support.

4. Setting an Annual Funding Target for Internal Connections

106. Based on the five-year school and library budgets we find sufficient above, total category two pre-discount requests over the next five-years will amount to no more than $8.8 billion to deploy LANs and WLANs in schools and libraries throughout the country. After accounting for the non-discounted share paid by applicants, with a 15 percent minimum applicant contribution, we estimate that E-rate discounts will support approximately 67 percent of the total pre-discount cost of $8.8 billion for eligible category two services. In addition, we estimate that there will be schools and libraries that do not seek funding or request less than the full budgeted amount to upgrade and maintain their LANs/WLANs over time. We therefore reduce the five-year budget by approximately 15 percent to avoid over-budgeting and set the five-year budget at $5 billion, plus annual inflation adjustments. We adopt an annual target of $1 billion, plus any annual inflationary changes, for category two services, which is equal to one-fifth of the five-year estimate of E-rate support. In addition to this annual budget, the Bureau may allocate any available carry forward funding to meet category two demand.

5. Focusing Support on Broadband

a. Core Components of Broadband Internal Connections

107. In order to help deploy LANs/WLANs necessary to permit digital learning in schools and libraries throughout the nation, we focus the category two ESL on broadband. With one narrow exception, we limit internal connections support to those broadband distribution services and equipment needed to deliver broadband to students and library patrons: Routers, switches, wireless access points, internal cabling, racks, wireless controller systems, firewall services, uninterruptable power supply, and the software supporting each of these components used to distribute high-speed broadband throughout school buildings and libraries. Some form of each of these services has previously been designated as eligible for E-rate support, and we find they are necessary to ensure delivery of high-speed broadband services to students and library patrons via LANs/WLANs. We do not limit these eligible services by form, and therefore agree that equipment that combines functionality, like routing and switching, is also eligible. Similarly, we recognize that some functionalities can be virtualized in the cloud, such as cloud wireless controllers, and therefore will permit such services to be eligible for purchase by schools and libraries.

108. To focus support on only those internal connections necessary to enable high-speed broadband connectivity, beginning in funding year 2015, we eliminate E-rate support for the priority two components that had been in the following ESL entries: Circuit Cards/Components; Interfaces, Gateways, Antennas; Servers; Software; Storage Devices; Telephone Components, Video Components, as well as voice over IP or video over IP components, and the components, such as virtual private networks, that are listed under Data Protection other than firewalls and uninterruptible power supply/battery backup. In recognition of our need to be a “prudent guardian of the public's resources,” we find that eliminating these priority two components from the ESL ensures that there is more E-rate support available to deploy the LANs/WLANs needed to improve digital learning in schools and libraries. It is also consistent with section 254(h)(2)(A) of the Act, which requires that support to schools and libraries improve access to advanced services in a manner that is “technically feasible” and “economically reasonable.” We direct the Bureau to release for comment a draft ESL for funding year 2015

consistent with this Report and Order, and encourage applicants to carefully review the eligible components included in the modernized category two section in that draft ESL. Some components that had been listed in the ESL as priority two may be relocated or described in updated or more generic terminology.

109. Also, despite support from some commenters, we decline at this time to designate further network security services and other proposed services in order to ensure internal connections support is targeted efficiently at the equipment that is necessary for LANs/WLANs. Many commenters agreed that a limited list of eligible services would help ensure available funds are targeted and therefore available to more applicants. As we noted, we leave the record open on these services to allow for further comment as we evaluate the changes in the first funding year.

b. Basic Maintenance, Managed Wi-Fi, and Caching

110.

Basic Maintenance.

For funding years 2015 and 2016, we will continue to provide support for basic maintenance services subject to each school or library's overall budget on E-rate eligible category two services. In the

E-rate Modernization NPRM,

the Commission proposed phasing out support for basic maintenance because the same high-discount school districts received ample funding, while most school districts received none. Commenters point out however, that basic maintenance is needed to ensure networks operate properly, particularly as networks become more complicated. We believe that we can achieve the stated goal of broader funding distribution through other means, including a reasonable and equitable limit on the total amount of E-rate support available per student and per square foot which will discipline districts and libraries in basic maintenance purchasing decisions. In particular, applicants are unlikely to seek support for unnecessary basic maintenance given these limits on the total amount available, but providing support to ensure these networks function effectively may aid those districts with limited resources. Support will only be available for maintenance on equipment and services on the ESL and not for any of the legacy services phased out in this Report and Order.

111.

Managed Wi-Fi.

In light of the applicant budgets for funding years 2015 and 2016, we are persuaded by commenters who argue that managed Wi-Fi, which we call managed internal broadband services in the rules to cover the operation, management, or monitoring of a LAN or WLAN, should be eligible for internal connections support. In the past, applicants could seek internal connections support only for the purchase of internal connections and basic maintenance. Unlike the traditional approach to internal connections, for managed Wi-Fi service contracts, schools and libraries obtain LANs/WLANs as a service for a period of three to five years from a third party who manages the entire system, providing operations and maintenance for the life of the contract. In other cases, the school or library may own the equipment, but have a third party manage it for them.

112. The record demonstrates that applicants would benefit from greater flexibility to choose among managed Wi-Fi options. In particular, the variations of managed Wi-Fi services can provide substantial benefits and cost savings to many schools and libraries, particularly small districts and libraries without a dedicated technology director available to deploy and manage advanced LANs/WLANs quickly and efficiently. Therefore, pursuant to our authority under section 254 of the Act, we find that providing support for managed internal broadband services, including managed Wi-Fi, will “enhance . . . access to advanced telecommunications and information services” for schools and libraries, and we direct the Bureau to include managed internal broadband services on the ESL for funding years 2015 and 2016.

113. Under the five-year applicant budget approach we adopt, a district, school, or library will be able to seek annual support for a managed Wi-Fi service, up to an average pre-discount rate cost of $30 per student per year or one-fifth of the budget available to libraries based on floor area. This is consistent with the price of managed Wi-Fi services in the market today and limits the likelihood of waste or abuse in these managed Wi-Fi contracts. As noted below, we will allow districts and libraries to sign multi-year contracts, but we will not make multi-year commitments. Our short-term budget will be sufficient to fund these smaller multi-year contracts and we will continue to evaluate whether additional changes are needed in the long-term, but emphasize that there is no guarantee of funding.

114. We disagree with commenters who argue that managed Wi-Fi should be a category one service. Despite our recognition that virtualization and management may send some amount of information beyond the walls of the school or library building in order to manage the internal networks, we find that services used to distribute bandwidth throughout the school are internal connections services. We therefore remove the presumption in our rules that such a service is not an internal connection.

115. Competitive bidding rules still apply to procurement of managed Wi-Fi services. We encourage districts to request bids in technologically neutral ways and compare the cost-effectiveness of bids for self-provisioned networks with those for managed Wi-Fi contracts. We also encourage schools and libraries considering managed Wi-Fi to evaluate the value of joining a consortium of schools and libraries to increase their buying power and drive down costs.

116. We also clarify that E-rate support for managed Wi-Fi is limited to those expenses or portions of expenses that directly support and are necessary for the broadband connectivity within schools and libraries. Eligible managed Wi-Fi expenses include the management and operation of the LAN/WLAN, including installation, activation, and initial configuration of eligible components, and on-site training on the use of eligible equipment. Eligible managed Wi-Fi expenses do not include a managed voice service, for example. For bundled pricing that includes eligible and ineligible expenses, applicants are required to cost allocate eligible from ineligible services to ensure only eligible services are supported.

117. Finally, we delegate to the Bureau the authority to determine how best to interpret managed services for the purposes of the ESL as we gain experience with funding of these services through the E-rate program. Wireless access as a managed service is a market that is still being developed, and we believe it will facilitate the efficient and effective support of these services to provide the Bureau flexibility to adjust our approach as this market develops. As always, parties may appeal any Bureau decision to the full Commission.

118.

Caching.

Due in part to the applicant budgets for funding years 2015 and 2016 limiting waste or abuse, we agree with commenters who argue that caching functionality should be eligible for internal connections support. Caching functionality enables the local storage of information so that the information is accessible more quickly than if it is transmitted across a network from a distant server. By placing previously requested information in temporary storage, caching functionality can, in certain

circumstances, optimize network performance, and potentially result in more efficient use of E-rate funding. The record indicates that caching functionality can be an integral component of some LANs and WLANs. As commenters point out, caching can provide a more affordable way to achieve bandwidth goals. This is consistent with the goal we adopt in this Report and Order, as well as the Commission's authority to ensure affordable access to E-rate supported services. As such, we disagree with commenters who argue that caching functionality should not be supported by E-rate funds. Instead, we designate caching functionality as an eligible service that “enhance(s), to the extent technically feasible and economically reasonable, access to advanced telecommunications and information services” for schools and libraries. As with the core components of broadband internal connections, we agree that equipment that combines caching functionality with other functionalities is also eligible. However, equipment that combines caching functionality with an ineligible functionality must be cost allocated. We therefore delegate to the Bureau the authority to define caching functionality, as well as the necessary software or equipment, such as caching servers, for the purposes of the funding years 2015 and 2016 Eligible Services List. As always, parties may appeal any Bureau decision to the full Commission.

119.

Eligibility After Funding Years 2015 and 2016.

We make these determinations about eligibility in light of the applicant budgets we set out that mitigate some of our concerns about waste or abuse. We therefore direct the Bureau to include basic maintenance, managed internal broadband services, and caching functionality on the ESL for funding years 2015 and 2016. The Commission will evaluate the benefits and drawbacks of these eligibility determinations in future funding years as it continues its work modernizing the program. Absent Commission action, in funding year 2017 and in subsequent funding years, support for basic maintenance, managed internal broadband services, and caching functionality, as an internal connection, will be available only to those applicants that received support in funding years 2015 and 2016 and are operating under a five-year applicant budget.

6. Other Issues

120.

Category Two Installation Can Begin on April 1.

We also amend our rules for category two non-recurring services to permit applicants to seek support for category two eligible services purchased on or after April 1, three months prior to the start of funding year on July 1. This will provide schools with the flexibility to purchase equipment in preparation for the summer recess and provide the maximum amount of time during the summer to install these critical networks. We agree with commenters who note that the last day of school is often in May or June and schools need to be able to use the entire summer recess to ensure the networks are ready when students return to school. This is consistent with our previous decision to allow advance installation and construction under certain conditions.

121.

Administration.

In accordance with this section, we make necessary changes to §§ 54.500, 54.502, 54.505, and 54.507 of our rules. We recognize that these represent major changes to the structure and distribution of support for internal connections. Because unanticipated technical or operational issues may arise that require prompt action, we reaffirm the delegation of authority to the Bureau to interpret our rules “as necessary to ensure that support for services provided to schools and libraries . . . operate to further our universal service goals.”

C. Phasing Down and Ending Support for Legacy and Other Non-Broadband Services

122. In funding year 2013, approximately 50 percent of priority one E-rate funding was committed to high-speed broadband services, while approximately one third went to fixed voice and mobile services. Phasing down support for voice services and eliminating support for certain legacy services will allow us to focus E-rate program funding on the high-speed broadband needed by schools to enable digital learning and by all libraries to meet the broadband needs of their patrons. After the first two years of the phase down, the Bureau will issue a report evaluating the impact of the reduction in support for voice services. If the Commission takes no further action, the voice services phase down will continue.

1. Phasing Down Support for Voice Services

123. Many commenters support reducing E-rate support for voice services to focus the E-rate program on broadband. We agree that voice services, while important for schools and libraries, are not as essential as high-speed broadband is for meeting the educational needs of students and library patrons. Instead of immediately eliminating support for voice services, we will reduce voice support each funding year by subtracting the discount rate applicants receive for voice services by 20 percentage points every funding year. In funding year 2015, the discounts applicants receive for voice services will be reduced by 20 percentage points from their discount rates for other eligible services, and in funding year 2016, the discounts applicants receive for voice services will be 40 percentage points lower than their discount rates for other eligible services. In each subsequent funding year, the discounts applicants receive for voice services will be reduced by an additional 20 percentage points. Over the first two years of the phase down for voice services support, we direct the Bureau to evaluate the impact of the phase down on eligible schools and libraries and study the transition of eligible schools and libraries to VoIP services and issue a report to the Commission as we continue to reduce voice support by 20 percentage points each year. If, by the opening of the funding year window for funding year 2018, the Commission takes no further action, the voice phase down will continue.

124. Voice services have been eligible for E-rate program funding since the Commission determined that the E-rate program should support all commercially available telecommunications services in the

Universal Service First Report and Order.

When the Commission established the E-rate program in 1997, the goal was to provide schools and libraries discounts on the broadest class of telecommunications services and advanced services available at that time, and to provide schools and libraries the flexibility to purchase new technologies as they became available. However, the options for Internet access then were generally limited to dial up modem services offered over POTS lines, and the data links provided by T-1 and T-3 lines.

125. Today, a much broader array of high-speed broadband services are available to and needed by schools and libraries to support modern digital learning initiatives. Moreover, support for voice services today consumes approximately one third of E-rate commitments while many schools and libraries are unable to access the funding they need for internal connections to provide high-speed broadband throughout schools and libraries. In order to meet our goal of funding high-speed broadband services to support digital learning in schools

and robust connectivity for all libraries, we conclude that we can no longer continue to fund voice services at the same discounts rates as applied to other eligible services that provide broadband access. Instead, we will gradually reduce E-rate funding for voice services and shift these funds to support those services that provide high-speed broadband. Accordingly, we remove the reference to E-rate supporting “all commercially available telecommunications services” in § 54.502(a) of our rules so that it is clear to applicants that the telecommunications services that are supported by E-rate are listed in the ESL, rather than potentially sending a confusing message that any telecommunications service available on the market is eligible for E-rate discounts. This is important now that we are phasing down support for voice services and eliminating support for some of the services associated with telephone service as explained herein. We also add to the rules our schedule for phasing down support for voice services.

126. We recognize that many schools and libraries consider E-rate support for voice services an important part of their overall budgets. However, several factors should help ameliorate the impacts of gradually phasing down support for these services. First, voice is now a competitive offering in many areas, and the availability of VoIP services, particularly for those with broadband, provides a cost-effective option for many schools and libraries. This expansion of competition, particularly from VoIP offerings, represents a substantial shift since the E-rate program was created in 1997. Whereas changes in the voice market are reducing the costs of voice service over time, the shortage of funding for broadband services has increasingly become an impediment to balancing all of the Commission's requirements under section 254(h). Second, because we will initially reduce the maximum discount available for voice services to 70 percent in 2015, and 50 percent in 2016, our approach strikes a balance between those commenters supporting elimination of discounts for voice services with those school and library commenters that stressed the importance of retaining some level of support over a defined period of time. Third, as a result of the other measures we take in this Report and Order, the applicants affected by this change will have opportunities to seek funding for broadband infrastructure that may not have been available to them previously. To some degree, this may offset changes in their overall budgets. Finally, our decision does not alter the Commission's requirement that providers of eligible services must provide supported services at a lowest corresponding price (LCP). While voice service remains a supported service, the Commission's LCP rule serves as a safeguard for affordability because service providers cannot submit bids for or charge E-rate applicants a price above the LCP for E-rate services; E-rate discounts are then applied to a service provider's LCP.

127. Several stakeholders suggest that in lieu of gradual transition, we give schools one or two years more of full support for voice service, but then eliminate support for voice altogether in funding years 2016 or 2017. While that approach might benefit recipients seeking voice support for the next one or two funding years, it would eliminate funding for voice services altogether before the Commission has had a chance to study the impact of the gradual phase down of support for voice services on eligible schools and libraries. The approach we take today is more gradual while allowing us to begin redirecting E-rate funding to broadband next year. We agree that our revised interpretation of section 254 requires us to redefine eligible services and shift support away from voice services and towards broadband services, but eliminating support in 2016 or 2017 would cause a more abrupt change in schools and library budgets in those funding years, which we believe many applicants would find difficult to absorb—particularly those serving the highest poverty communities. Phasing down support for voice services over several funding years preserves some funding for applicants at least for the next several funding years, with the most economically disadvantaged schools and libraries receiving the highest discounts as they consider alternatives in the marketplace.

128. In the

E-rate Modernization Public Notice,

the Bureau sought comment on phasing out support for voice services by 15 percentage points per funding year. We now conclude that a per-year reduction of 20 percentage points is appropriate because we find a more straightforward percentage point decrease should be easier for applicants to calculate, and will help ensure that sufficient funding for is available for supported services. Beginning in funding year 2015, when the maximum discount rate for category one services will be 90 percent, eligible applicants shall receive a maximum discount rate of 70 percent for voice services. We disagree with those commenters who argue that reductions will be difficult for applicants to understand and for USAC to administer. The discount rate for voice services will be based on an applicant's already established discount rate and will require only a simple 20 percentage point subtraction from the discount rate any applicant would otherwise be required to calculate to receive support from the program. We change the FCC Form 471 to enable applicants to seek support for voice services using a separate funding request number (FRN) from other eligible services starting in funding year 2015. Combining voice and non-voice services in a single FRN would cause delays in processing if USAC had to separate out the services during the application review process.

129. The reduced discount rates for voice services will apply to all applicants and all costs incurred for the provision of telephone services and circuit capacity dedicated to providing voice services including: Local phone service, long distance service, plain old telephone service (POTS), radio loop, 800 service, satellite telephone, shared telephone service, Centrex, wireless telephone service such as cellular, and interconnected VoIP. Although there was some support in the record for excluding VoIP from the voice services phase down, we agree with those commenters that assert that retaining a higher level of funding for VoIP services while reducing the discount rate only for non-IP voice services would provide VoIP providers a competitive advantage in serving schools and libraries. Because the marginal cost of delivering VoIP services should be lower once schools and libraries have robust broadband, we expect the price of these services to continue to drop over the coming years, alleviating the need to retain higher discounts for VoIP funding. Similarly, a few commenters argue that we should retain support for wireless telephone services, while others support eliminating wireless telephone services in funding year 2015. As with VoIP services, eliminating support for wireless telephone service in 2015, or subjecting wireless telephone services to a separate phase out track, would provide non-wireless providers a competitive advantage over wireless providers in serving schools and libraries.

130. Some commenters argue that, because the

USF/ICC Transformation Order,

76 FR 76623, December 8, 2011, included voice telephony service in the definition of universal service, we are compelled to include voice telephony as an eligible service for E-rate support

under sections 254(c)(3) and 254(h)(1)(B) of the Act. However, as explained, nothing in section 254(c)(1) bars the Commission from establishing different supported services for different elements of the overall Universal Service Fund, and in this Report and Order, consistent with the purpose of the E-rate program, we find that it is necessary and appropriate to phase down voice services.

131. During the initial two years of the phase down of support for voice services, we direct the Bureau to study the impact of these discount reductions for voice support on E-rate recipients and to study the transition of eligible schools and libraries to VoIP services. The Bureau shall report its findings to the Commission by October 1, 2017, after completion of funding year 2016. If, at the conclusion of this study, no further action is pursued by the Commission before the application filing window opens for funding year 2018, the phase down will continue.

2. Eliminating Support for Telephone Features, Outdated Services, and Non-Broadband Services That Do Not Facilitate High-Speed Broadband

132. Pursuant to sections 254(c)(1), (c)(3), (h)(1)(B), and (h)(2) of the Act, we eliminate support for other legacy and non-broadband services effective for funding year 2015. Our decision to stop supporting these services reverses prior Commission and USAC decisions, however, we find many of these services to be important, but not essential to education, and E-rate funding is not sufficient to support these services at the risk of not being able to fund the services identified herein that advance our program goals. Within the Commission's authority under section 254 of the Communications Act to designate telecommunications and additional services rests our equal authority to withdraw services from eligibility, especially as the needs of schools and libraries evolve. The record supports our decision.

133. Beginning in funding year 2015, we will no longer provide E-rate support for components of telephone service, outdated services such as paging and directory assistance, and services that may use broadband but do not provide it, including email, voice mail, and web hosting. Applicants may continue to seek support for individual data plans and air cards, but only when they can demonstrate, consistent with our current rules, that the purchase of such services is the most cost-effective way to connect students on school premises or library locations to the Internet.

a. Telephone Features and Outdated Telephone Services

134. The record supports eliminating E-rate support for paging, and telephone service components such as text messaging and directory assistance beginning in funding year 2015. There is widespread agreement among commenters that paging service is largely outdated and can be retired from funding. Similarly, there is agreement that the features listed as “Telephone Service Components” should no longer receive E-rate support. The Telephone Service Components to be removed from the ESL are directory assistance charges, text messaging, custom calling services, direct inward dialing, 900/976 call blocking, and inside wire maintenance plans.

135. Although a few commenters argue that paging serves an educational purpose because sometimes it is the only way to reach a key staff member in an emergency, other commenters asserted that paging is not really critical, and has been replaced by other services. Similarly, a few commenters argue that we should continue to support text messaging because students prefer it for quick communication, and it is used for a variety of work related tasks for administrators and teachers in way that does not disrupt the classroom. These are all valid assertions and while we recognize that these services are worthy to certain applicants, we conclude that continuing to fund them diverts funding away from the high-speed broadband services that have become essential to schools and libraries.

136. Notably, those commenters recommending a longer adjustment period for the phase down of funding for voice services did not request a commensurate phase down timeline for telephone components, or assert that a transition period would be critical for schools and libraries. This is consistent with our view that a protracted phase out for telephone components is not necessary, and that these services should be eliminated from the list of those that are eligible for E-rate support beginning in funding year 2015. Funding commitment data is not available for several of the telephone features we will eliminate, however, funding year 2012 commitments totaled approximately $898,045.00 for paging and text messaging. Some commenters point out that removing these services will not result in sizable cost savings for the Fund. However, we agree with other commenters who argue that we should eliminate support for these features and services because it will allow us to direct some additional funds towards meeting our high-speed connectivity targets without imposing undue hardship on applicants.

137. We recognize that removing telephone components from the ESL in funding year 2015 will require some providers to change their billing practices or require some applicants to cost allocate the cost of those services from their requests for support. However, because these services are typically provided as an add-on or enhanced services for an extra fee, they are often presented as separate line items on telephone bills. Accordingly, it should not be overly burdensome for applicants to seek funding for the voice component of the telephone service only, and provide a cost allocation for any telephone features we remove from the ESL. Under the Commission's rules, if a product or service contains ineligible components, costs should be allocated to the extent that a clear delineation can be made between the eligible and ineligible components. The clear delineation must have a tangible basis and the price for the eligible portion must be the most cost-effective means of receiving the eligible service. For telephone feature costs that are bundled with the cost of voice services, one way to determine the cost of the feature is for an applicant to seek an appropriate cost allocation from its service provider. We find that the benefits of streamlining support for voice services by removing funding for these services to enable that support to be used for essential educational purposes outweigh any burdens applicants may face in the next few funding years as they adjust to these changes, which the record leads us to predict generally should be minimal.

b. Email, Web Hosting, Voicemail

138. We eliminate E-rate support for email, web hosting, and voicemail beginning in funding year 2015 and delete the reference to “electronic mail services.” As many commenters recognize, these services are applications delivered over broadband service, and do not themselves deliver high-speed broadband. There is also evidence in the record that applicants seeking E-rate support for these services may not be getting the most cost-effective solutions, and that some service providers package web hosting and email service offerings to E-rate customers in a way that has created a risk that E-rate funds will pay for ineligible services. We recognize that email, web hosting and voicemail services may be important services for the day-to-day operations of many schools and libraries and that some of

them have come to rely on E-rate support for those services. However, continuing to fund these services diverts E-rate funding away from essential high-speed broadband services. Therefore, removing E-rate support for email, web hosting, and voicemail services aligns with our restructuring of the E-rate program under section 254.

c. Data Plans and Air Cards for Mobile Devices

139. Data plans and air cards for mobile devices will continue to be eligible for E-rate support only in instances when the school or library seeking support demonstrates that individual data plans are the most cost-effective option for providing internal broadband access for portable mobile devices at schools and libraries. We agree with commenters that it is generally not cost effective for applicants to purchase on-campus use individual data plans that provide service on a one plan per-device basis when a school or library has robust internal wireless networks that provide Internet connectivity to multiple devices within a school or library. Some commenters also contend that these individual data plan services generally do not provide users with enough high-speed connectivity to access certain educational and informational materials.

140. Some schools and libraries already have wireless networks that support one-to-one device initiatives. Moreover, with the increased availability of E-rate funds as a result of our decisions in this Report and Order, many more will be able to install high-speed internal broadband networks to support one-to-one learning programs in schools and reliable public Internet access in libraries. We consider funding for individual data plans or air cards for individual users to be not cost effective when those users can already access the Internet through internal wireless broadband networks on wireless-enabled devices without the help of stand-alone data plans or air cards. In general (i.e., assuming no showing of cost effectiveness), for applicants that receive data plans bundled with voice, only the voice services in the plan will remain eligible for funding in accordance with the phase down reductions we implement; the applicant must remove from its funding request the costs associated with all other services in a bundled plan that are ineligible.

141. We recognize that there are a few locales where WLANs are impracticable or difficult to install, such as library bookmobiles. There may also be some schools or libraries where installation of a wireless network is possible but would be more costly than using individual data plans because the school or library location serves a very small number of students or patrons. Therefore, we will allow applicants to seek funding for individual data plans where the applicant is able to demonstrate that individual data plans are the most cost-effective option for providing internal broadband access for mobile devices. In order to ensure that individual data plans are the most cost-effective option, applicants that seek funding for individual data plans must be able to demonstrate either that installing a WLAN is not physically possible, or must provide a comparison of the costs to implement an individual data plan solution versus a wireless local area network solution. The cost comparison may be established through the competitive bidding process by seeking and comparing bids on both internal wireless networks and individual data plans. Applicants should be prepared to demonstrate to the Commission and USAC that individual data plans are the most cost-effective option for their situation by submitting the cost comparison information upon request.

3. Impact on Multiyear Contracts

142. In response to commenters asking that we permit funding for phased-out services until multi-year contracts expire for those services, we decline to provide exceptions or allow “grandfathering” for multi-year contracts. This decision will simplify the elimination of funding for these components and services for applicants and for USAC, and is consistent with our need to transition funding in the program to high-speed broadband without undue delay. Although the Commission permits applicants to enter into multi-year contracts for eligible services, the Commission has never adopted a rule insulating applicants and service providers from changes in program rules simply because a multi-year contract was utilized.

IV. Maximizing the Cost-Effectiveness of Spending for E-Rate Supported Purchases

143. To maximize the cost-effectiveness of spending for E-rate supported services, we focus in this section on driving down costs for the services and equipment needed to deliver high-speed broadband connectivity to and within schools and libraries. There is widespread agreement in the record about the importance of encouraging cost-effective purchasing in the E-rate program. Every dollar spent inefficiently for E-rate supported services is one less dollar available to meet schools' and libraries' broadband connectivity needs.

144. Moreover, there appears to be substantial room for improvement in E-rate-supported purchasing. Although E-rate applicants are required to seek competitive bids for E-rate supported services and to select the most cost-effective bid they receive, there remain large variations in the amount of money spent on similar services. Some variation is to be expected due to differences in local needs and conditions, such as between large urban schools and small rural schools. However, pre-discount prices also vary in ways that are unexpected. For instance, prices paid for telecommunications and Internet access in urban areas are often higher than those in rural areas. This is the opposite of what we would generally expect, given that the economies of scale and distance should generally make broadband deployment more expensive to smaller districts in rural America. In major metropolitan areas, the quartile of schools paying the most for 100 Mbps of Internet access services pays nearly three times more than the quartile paying the least and the quartile paying the most for 1 Gbps WAN connections pays nearly four times more than the quartile paying the least. Even in the same state, prices for rural broadband services can vary widely. For example, the Idaho Commission for Libraries explains that prices range from $3.33/Mbps/month to $397.56/Mbps/month in its state's rural libraries, while ALA notes that the cost for a T1 line can vary from a few hundred dollars to more than two thousand dollars per month in Pennsylvania.

145. This variation suggests there is more we can do to drive down prices for E-rate services. It also suggests that applicants need more information about purchasing decisions. Therefore, in this section, we adopt changes to increase pricing transparency, encourage consortium purchasing and amend our LCP rule to clarify that potential service providers must offer eligible schools, libraries and consortia the LCP.

A. Increasing Pricing Transparency

146. To assist schools and libraries in finding the best prices for E-rate supported services, we adopt transparency requirements for E-rate recipients and vendors beginning in funding year 2015. We agree with those commenters who argue that transparency is an essential tool to help applicants make educated buying

decisions. Transparent pricing will give schools and libraries greater visibility into pricing and technology choices for their peers, which we expect will help applicants in negotiations with equipment and service providers.

147. Shining a light on prices paid for E-rate supported services will help the Commission and third parties ensure that variations in prices paid are in accordance with the program rules and that schools and libraries are purchasing E-rate supported services cost effectively. As several commenters explain, the public should have a simple method to ensure that their students are getting the high-speed connectivity needed for digital learning at the lowest price. Making the pricing data publicly available will also improve analyses performed by the Commission, state coordinators, and third parties regarding the program's effectiveness and whether more needs to be done to improve cost-efficient purchasing by schools and libraries. Finally, pricing transparency will help third parties identify best practices for purchasing and reduce waste across the program.

148. Therefore, to increase pricing transparency in the E-rate program, we will make information regarding the specific services and equipment purchased by schools and libraries, as well as their line item costs, publicly available on USAC's Web site for funding year 2015 and beyond. This information is currently collected on FCC Form 471, Block 5, Item 21 (“Item 21s”). In addition, we agree with commenters that the information contained in the Item 21s should be standardized to provide meaningful information that is easy to compare across applications. We delegate authority to the Bureau to revise and oversee form standardization, while directing the Bureau to be mindful of the need to keep all forms as simple as possible in light of our goal of streamlining administration of the program. Because pricing and purchasing information will be of greatest benefit if it is available in electronic, searchable forms, we also direct OMD to work with USAC to ensure ready availability of the information in these forms, such as through publicly available APIs and/or bulk data files posted on USAC's Web site.

149. A few commenters express concern that a state law, local rule, or an existing long-term contract may explicitly prohibit pricing disclosure. In light of these concerns, we will allow applicants to opt out of making pricing data public where such applicants can certify and cite to a specific statute, rule, or other restriction barring publication of the purchasing price data, such as a court order or a contract in existence prior to adoption of this order. Applicants making this certification shall retain necessary documentation to demonstrate the restriction in the event of a Program Integrity Assurance (PIA) review or audit. Contracts executed after the effective date of this Report and Order, however, may not contain such restrictions, and any such restrictions will have no effect.

150. We recognize the arguments of some commenters that price transparency increases the risk of anti-competitive behavior by service providers. It is true that in certain market conditions, publication of prices can raise the risk of collusion or price harmonization. But given the level of public scrutiny of the E-rate program, we think price transparency will shine a light on any anti-competitive behavior. Moreover, the benefits to applicants from better pricing information are likely to outweigh any increased risks of collusion or price harmonization among providers. As many commenters note, some pricing information is already publicly available through state master contracts and state public records laws in a piecemeal fashion—a state of affairs that carries most of the collusion risks of broader publication with many fewer benefits. Sophisticated vendors interested in their competitors' pricing are most likely to be able to avail themselves of public records laws, while individual school and library applicants are less likely to have the practical ability to navigate these processes. In contrast, centralized, easily accessible data about pricing for purchased services will be more useful for applicants and program oversight, while doing little to increase the risk of collusion. For all these reasons, on balance, we conclude that increasing pricing transparency is likely to increase competition and drive down prices.

151. Some commenters also argue that transparency will reduce the number of vendors competing to provide E-rate supported services because vendors will leave the program rather than allow their prices to be made public. Again, we are not persuaded. As described, in many states pricing information is already publicly available in some fashion, and there is no evidence in the record that this has lowered participation in those states. Moreover, schools and libraries, like all community anchor institutions, are valuable customers. Indeed, greater pricing transparency should help those vendors offering the best prices attract market interest in their services and equipment, which should help foster a competitive marketplace.

152. We also disagree with the argument that school districts and libraries will find pricing information too confusing to be useful. As many commenters note, individual school districts or libraries often have unique characteristics that make the prices available to them lower or higher than national or regional averages. For example, small rural schools may legitimately face higher prices for broadband connectivity than large urban schools because of their distance from the nearest fiber, the dearth of other broadband customers in their immediate vicinity, and lack of competitive options. But E-rate applicants are already required to make judgments regarding the costs of proposed services. To the extent a school or library arms itself with price information from its peers and requests a price that a vendor believes is unreasonably low for some equipment or service, we are confident that the vendor will be appropriately incented to explain any unique circumstances that justify its higher price. In sum, even acknowledging that applicants will face varying circumstances that affect the prices available to them, we find that transparency will aid applicants in making smarter spending judgments in accordance with their obligation to select cost-effective services.

153. Although we require publication of prices for goods and services purchased by applicants, we decline at this time to require public disclosure of other pricing information, including available pricing from service providers or bid responses. Many commenters argue that submitting bid information is burdensome, and the goods and services selected by applicants should represent the most cost-effective solution for their needs following a competitive bidding process, with price as the primary factor. Therefore, we are persuaded that the current burden to applicants of submitting comprehensive bid information to USAC outweighs any incremental benefit to the public from the publication of prices for non-winning bids, which, by definition, were not the most cost-effective choice. At the same time, we take this opportunity to remind applicants and vendors that they are responsible for the retention of all documents related to their applications, including bids submitted in response to a solicitation, in accordance with our rules. Applicants still may be required to provide all bid responses during PIA

review of an application or during an audit.

154. We also decline to require disclosure of pricing information for past funding years. Pricing information on Item 21s has not been published in the past, and the Commission has redacted pricing information from Freedom of Information Act responses at the request of service providers claiming it was proprietary information. Given stakeholders' expectations when prior-year applications were submitted, we will continue to treat recent Item 21 information as potentially sensitive for funding year 2014 and before. However, this Report and Order serves as notice to all service providers that the receipt of E-rate support will be conditioned on disclosure of this pricing information beginning in funding year 2015.

155. Finally, we terminate the program the Commission created in the

Second Report and Order,

68 FR 36931, June 20, 2003, testing an online list of internal connections equipment eligible for discounts. USAC no longer updates the database in part because of the burdens it placed on USAC and vendors. Meanwhile, the publication of pricing data as provided will provide a less burdensome and more accurate representation of the goods and services being purchased by applicants with E-rate support, as well as the prices paid. We received no comments objecting to termination of the eligible products database.

B. Encouraging Consortia and Bulk Purchasing

156. Consortium purchasing can drive down the prices paid by schools and libraries for E-rate supported services. In this section, we reduce or eliminate some of the existing barriers to applicants' participation in consortia. As an initial matter, we direct Commission staff to work with USAC to prioritize review of consortia applications. We also adopt rules to make it easier for applicants to take advantage of consortium bidding and clarify some apparent misconceptions about consortia participation. In response to concerns raised by E-rate applicants about the current method for allocating E-rate support among members of an E-rate consortium, in the accompanying

FNPRM,

we propose to amend the way consortia determine the amount of support to be received by their members to ensure that E-rate applicants that choose to join a consortium do not risk receiving less support, and seek comment on other ways to encourage consortium purchasing.

1. Speeding Review of Consortium Applications

157. In order to address applicants' complaints that consortia applications have historically received reviews late in the application review process, we direct OMD and the Bureau, working with USAC, to prioritize application review for state and regional consortia applicants. OMD and USAC have already undertaken an initiative to speed review of all E-rate applications, with a particular focus on broadband applications. We applaud that work and want to build on the positive results, particularly with respect to state and regional consortia applications. We expect that the improved processing times for consortia applications will result in more funding commitments flowing faster to schools and libraries, which will motivate more applicants to join consortia in future funding years.

2. Preferred Master Contracts

158. To further encourage applicants to take advantage of bulk buying opportunities, we delegate authority to the Bureau to designate preferred master contracts for category two equipment. The Bureau may make such a designation for the purpose of (a) exempting the preferred master contract from the FCC Form 470 filing requirement and (b) requiring applicants to include the preferred master contract in their bid evaluations even if the master contract is not submitted as a bid in response to the applicant's FCC Form 470. The Bureau has authority to institute either one or both of these exceptions for a preferred master contract and must re-evaluate its decision to designate a contract as a preferred master contract every two funding years.

159. We authorize the Bureau to designate a master contract as a preferred master contract if it offers eligible entities nationwide the opportunity to obtain excellent pricing for category two services as reported on FCC Form 471. National availability of the equipment offered on a preferred master contract will ensure that all E-rate applicants have the opportunity to take advantage of its pricing.

160. We limit preferred master contracts to equipment used in category two internal connections at this time. Commodities such as the equipment used in internal connections lend themselves to bulk purchasing arrangements, and can be shipped nationwide. The more varied nature of services, such as broadband services and internal connection installation services, makes implementing bulk purchase arrangements more complicated. We therefore choose not to authorize the designation of preferred master contracts for such services at this time.

161. We agree with commenters who support national bulk buying opportunities because of the unmatched economy of scale national purchasing allows. In order to help ensure such scale (and thus maximize the benefit to applicants and the E-rate program), we authorize the Bureau to limit the number of master contracts it designates as preferred. Recognizing, however, that E-rate applicants may still be able to negotiate better pricing from vendors not associated with a preferred master contract, we decline to require applicants to purchase services from a preferred master contract at this time.

a. FCC Form 470 Exception

162. Allowing applicants to take internal connections equipment from a preferred master contract without filing an FCC Form 470 will ease the administrative burden on applicants without compromising cost-effectiveness. Several commenters encouraged us to eliminate the FCC Form 470 filing requirement for certain master contracts because of the administrative burdens associated with competitive bidding. Although competitive bidding is vital to limiting waste and ensuring that services are provided at the lowest possible rates, in the limited case of equipment available on a preferred master contract, we find that it is not necessary for applicants to file an FCC Form 470 because the terms of the preferred master contract assure us that applicants will receive the best possible pricing on the services they order. We cannot at this time exempt master contracts that are not preferred master contracts from any competitive bidding requirements because we do not have the same assurances with respect to pricing for all master contracts.

163. Applicants who wish to take services from a preferred master contract without filing an FCC Form 470 would indicate on their FCC Form 471 that they are purchasing services from a preferred master contract instead of citing to an FCC Form 470.

b. Bid Evaluation Requirement

164. Requiring applicants to include preferred master contracts in bid evaluations helps ensure that applicants make cost-effective purchases while enabling them to select the services that best suit their needs. Applicants will only be required to include equipment available on a preferred master contract in their bid evaluations if it is the same

equipment the applicant sought on its FCC Form 470. Applicants would still have the ability to select bids submitted by service providers in response to the FCC Forms 470, as long as the applicants' evaluation treats the price of eligible equipment as the primary factor in bid selection and the selected bid is the most cost-effective.

3. Authority To Seek Consortium Bids

165. To further increase cost-effective purchasing by applicants, we next amend our rules to permit a consortium lead to identify on its consortium's FCC Form 470 the schools, school districts and libraries for which it has authority to seek competitive bids for E-rate eligible services even if it does not have authority to order services for those entities. Our rules currently require the FCC Forms 470 and FCC Forms 471 be signed by a person authorized to order eligible services for the applicants and do not distinguish between authority for E-rate consortium leads to seek bids and authority for consortium leads to purchase the services. As a result, consortium members who are unwilling to cede authority to purchase E-rate eligible services to the consortium lead release their own FCC Form 470 and likely do not attract the number of competitively priced bids, if any, from competitive vendors. By aggregating potential demand in the bidding process, and using the FCC Form 470 process to attract bidders, a consortium can drive down the price of eligible services even for its members who wish to order services on their own. This rule change will take effect for funding year 2015. Our rules will continue to permit consortium leads to purchase services on behalf of some or all of their members and we encourage consortium leads to seek both forms of authorization, as appropriate.

4. Correcting Misconceptions

166. We also take this opportunity to correct misconceptions about consortia applications that appear to have prevented some applicants from joining consortia, and to remind applicants and service providers about already-existing rules that should work to encourage participation in consortia. We remind applicants that E-rate rules do not require a consortium to solicit or select a single vendor to provide service to all consortium members and that applicants can authorize a consortium lead to act on their behalf for multiple years.

167.

Consortia selection of multiple service providers.

Some commenters argue that consortia purchasing may actually increase prices by excluding smaller service providers who are not able to serve the full needs of a consortium. In light of these comments, we remind all stakeholders that consortia do not need to solicit or select a single vendor able to provide service to all members of a consortium. Rather, a consortium may invite vendors to bid on services to a subset of consortia members, and may find that a combination of different service providers offer the most cost-effective solution for consortium members. Even though a larger service provider may enjoy economies of scale and scope, it will not necessarily be able to provide competitively priced service in every area in which a consortium's members are located. Therefore, consortia applicants should make clear in their FCC Forms 470 and any associated RFPs that they are not required to select a single provider that can meet the needs of all members. While some consortia select a single service provider, many others select a combination of service providers to meet the needs of their consortium members. In light of the apparent confusion on this issue, we direct USAC to remind applicants and vendors, during USAC training and other outreach, that consortia can solicit bids from service providers to cover a portion of the services sought by the consortia.

168.

Multi-year authorization.

We also clarify that applicants can authorize a consortium lead to act on their behalf for multiple years, and need not reaffirm that authorization every funding year. In order to ensure that a consortium lead is not seeking bids or applying for support on behalf of schools and libraries without their knowledge or consent, our rules have required and continue to require FCC Forms 470 and FCC Forms 471 to be signed by a person authorized to seek or order services for the applicants. To show that it is authorized to seek or order eligible services for the applicants, a consortium lead may provide copies of relevant state statutes or regulations requiring members to participate in the consortium or some other proof that each consortium member is aware that it is represented in the application.

169. Another common way for a consortium lead to demonstrate its authority to seek or order eligible services on behalf of its members is to solicit letters of agency (LOAs) from consortium members. Some commenters ask us to ease consortia's administrative burdens by reducing the frequency with which applicants provide LOAs or eliminate the practice of applicants providing LOAs to consortium leads. We decline to eliminate the LOA practice altogether because, in many circumstances, an LOA could be the only means a consortium lead has to demonstrate its authority to seek or order services on behalf of a specific consortium member. We can, however, clarify that applicants may provide consortia leads with LOAs that cover multiple funding years as long as those years are specified in the LOA and as long as the authorization includes the type of services covered by the LOA.

5. Other Rules Changes

170. We also add a definition of “consortium” in our rules that is based on the definition of “library consortium” that has long been a part of our rules. In the definition, we also make it clear that consortia may include health care providers eligible under the Rural Health Care program and public sector (governmental) entities, including, but not limited to, state colleges and state universities, state educational broadcasters, counties, and municipalities. This change does not alter requirements for applicants and service providers.

C. Offering the Lowest Corresponding Price

171. In order to help ensure that E-rate applicants make cost-effective purchasing decisions, we remind service providers that they not only must charge eligible schools, libraries, and consortia the LCP when providing E-rate services, but also must offer eligible entities the LCP when submitting competitive bids to provide E-rate supported services.

172. The LCP rule prohibits an E-rate provider from “charg[ing]” E-rate applicants a price higher than the lowest price that provider charges to non-residential customers who are similarly situated to a particular school, library, rural health care provider or consortium that purchase directly from the service provider. In authorizing the creation of the E-rate program, Congress imposed an obligation on telecommunications carriers to provide services to schools and libraries at rates less than the amounts charged for similar services to other parties. To ensure that schools, libraries and consortia participating in the E-rate program receive all services at the lowest rates available, the Commission extended this requirement to apply to all providers of E-rate supported services. The LCP rule b

This text is long and has been trimmed here. Open the source document for the complete record.