FCC Fully Funds FY2019 E-rate; USAC Estimates Demand at $2.597 Billion

The Wireline Competition Bureau (Bureau) announced today that there is sufficient funding available to fully meet the Universal Service Administrative Company's (USAC) estimated demand for category one and category two requests for E-rate supported services for funding year 2019.

USAC estimates the total demand for funding year 2019 will be $2.597 billion.  USAC had initially estimated demand at $2.896 billion, which included estimated demand for category one services of $1.91 billion and of $985 million for category two services. 

The Bureau directed USAC to fully fund eligible category one and category two requests, using the $1 billion in E-rate funds carried forward from previous years, and any additional funds needed under the current cap to fully meet demand for such services.

See the full Public Notice here.

Commission Releases Category 2 NPRM

The Commission released the Category 2 Notice of Proposed Rulemaking today. 

In the NPRM, the Commission proposes (1) amending its rules to make permanent the category two budget approach for all applicants; (2) proposes and seeks comment on ways to improve the category two budget approach; and (3) seeks comment on how best to transition from the five-year test period to a permanent extension of this approach.

Specifically, the Commission seeks comment on other potential ways to improve the budget approach, including moving to district-wide budgets and simplifying the budget calculations.  It also seeks general comment on ways to decrease the burden of applying for category two services and improve administration of category two budgets for both applicants and USAC.

In 2014, the Commission adopted rules establishing budgets for Category 2 services.  For schools, those budgets are based on student head count, and for libraries, the budgets are based on the size of the library.  Applicants had five years to use their budget, which was set for each separate building.

Commissioners O’Rielly, Rosenworcel and Starks issued statements; O’Rielly dissented in part, noting that the Commission missed an opportunity to take “corrective steps” on what he called the "overbuilding" of fiber facilities, that is, funding the construction of new fiber facilities with E-rate funds when fiber already exists in the area. Commissioner O'Rielly also objected to the rule that set a library's budget based on its size.

USF Cap NPRM Comment Cycle and 3Q Contribution Factor Released

The USF Cap Notice of Proposed Rulemaking has been published in the Federal Register. Comments are due July 15 and replies are due August 12.  The NPRM seeks comment on setting a $11.42 billion cap on the Fund and seeks comment on combining the cap for the rural care and E-rate programs.

The Commission today also released a Public Notice increasing the contribution factor to 24.4% for the third quarter 2019.  Last quarter, the factor was 18.8%.  The biggest driver of the increase was a $300 increase from 2nd Q in the revenues needed for the high-cost programs.

Texas Carriers Propose Rule to Prevent E-rate Fiber Overbuild

On May 22, 2019, a coalition of Texas Carriers (Central Texas Telephone Cooperative, Inc., Peoples Telephone Cooperative, Inc., and Totelcom Communications, LLC) called on the FCC to act against what they called the “overbuilding” of USF-supported fiber networks.  The coalition’s primary concern is that E-rate funds are being used to overbuild or duplicate existing USF-supported networks.  The Texas Carriers petitioned the FCC to initiate a rulemaking to address this omission.

To address their concerns, the Texas Carriers propose amending the rules to prohibit the use of USF funds for the construction of fiber networks that overbuild existing fiber networks.  Under the Texas Carriers’ proposed rule, special construction applicants would be subject to a 60-day challenge period, during which time service providers would have the opportunity to demonstrate that existing networks could provide the required fiber connection.  Applicants would then be eligible for USF support if, after the challenge period, they could affirm that no existing fiber facilities existed for their proposed fiber network.  The proposed rule would also prohibit the use of USF funds to construct new fiber for any portion of the proposed network where it is demonstrated that fiber already exists.  The Texas Carriers believe the proposed rule will reduce wasteful and inefficient use of E-rate program funds and free up more funding for schools and libraries that need fiber broadband connections.

When a party submits a request for a rulemaking, as these carriers have done so here, Commission rules require it to seek comment on whether it should initiate a rulemaking.  Then the Commission would decide whether to grant the petition and seek comment on the adoption of the proposed rule or a revised version of the proposed rule. 

RHC Multi-year Application Order Should Mean Release of More RHC Funding

The Commission on Monday released an order granting relief for multi-year/upfront applicants that otherwise would have had their funding requests reduced by one-third.  The order only affects HCF applicants that applied for multi-year or upfront funding for FY 2018.

Until the Commission made this decision, however, USAC was holding most of the funding requests for FY 2018. Now that the order is released, all HCPs might see more FCLs.

Multi-year/upfront HCF funding requests (FRNs) are capped at $150 million a year.  Due to demand this year, funding commitments for those applications would have been reduced by a third.  That cap does not affect single-year HCF or telecom funding requests.  To avoid that result, the Commission suspended the multi-year commitment rule and allowed USAC to process all funding requests as if they were filed for a single year of funding.  Multi-year requests allow HCPs to receive commitments for multiple years in the first year of the application but the entire request is counted against the cap in the first year.

The Commission also told USAC to designate the underlying contracts as “evergreen;” long-term contracts designated by the administrator as “evergreen” are not required to conduct competitive rebidding during the life of the contract.  If USAC had issued funding commitments earlier in the year with the evergreen designation, those HCPs would have known they did not have to conduct another competitive bidding process.  The Commission also extended the FY 2019 filing window until June 30 but ONLY for those (1) multi-year/upfront applicants that (2) had not yet received funding commitments for FY 2018.

April 2019 Recap

On April 27, 2019, USAC released its first wave of FY2019 Funding Commitment Decision Letters.  This wave contains funding decisions on more than 18,500 applications and more than 24,000 of the Funding Request Numbers (FRNs) featured in those applications.  More than half of the applications that were filed in the window received a funding commitment decision from USAC within 30 days of the window close.  As of April 27, the FY2019 commitments total more than $530 million.

USAC is required to file an annual report with Congress and the FCC by March 31, to provide a summary of USAC’s operations, activities, and accomplishments of the prior year.  Highlights from the 2018 Annual Report include:

Disbursements for USF programs increased in 2018:  USAC collected more than $8 billion from contributions to support the four USF sub-programs in FY2018.  The increase in disbursements resulted from:
  • The High Cost Program increased disbursements to support hurricane relief efforts in Puerto Rico and U.S. Virgin Islands.
  • FCC’s March 2018 high cost order provided $180 million in one-time funding.  The high cost programs disbursed a total of $4.8 billion in 2018.
  • The RHC Program funding cap increased from $400 million to $571 million. 
E-rate and Lifeline program disbursements did not experience significant changes in FY2018.

Rural Health Care Program 2018 Highlights:

  • Total gross demand increased 17.4 percent from FY2017.
  • USAC cleared four times more appeals in 2018 compared to 2017 but did not say how many appeals were cleared. 
  • USAC implemented program changes from the FCC’s 2018 Funding Cap Order.  The Order increased the funding cap to $571 million and added annual adjustments for inflation. The increased funding was applied and distributed to previously prorated FY2017 commitments.  Additionally, the Order allowed unused funds to be carried-forward for use in future funding years.  

E-rate Program 2018 Highlights:

  • Received 35,000 applications for $2.77 billion.  Issued decisions for 43 percent of applications within 30 days of the filing window closing.  USAC also noted it had committed $1 billion for 18,000 applications by the beginning of June.  
  • Average review time for appeals is currently under 75 days.
  • New vendor took over call center operations on June 1, 2018.  USAC’s move to two consolidated program call centers resulted in $2 million in cost savings annually.
  • The transition of Business Processing Operations vendors, from Solix to Maximus, resulted in $65 million in savings over the next 5 years.

Read the USAC 2018 Annual Report here.  Annual reports for prior years are available here.

On April 1, 2019, USAC estimated the demand for E-rate services at $2.896 billion for Funding Year 2019.  This estimate includes $1.91 billion for Category 1 services and $985 million for Category 2 services.  USAC calcuated this estimate based on the total amount of funding requested in Form 471 applications received by the close of the FY2019 filing window.  Nearly 36,000 applications were submitted in window.  Applications filed within two weeks of the deadline but that will likely be granted a waiver were not included in the report.

A table showing estimated demand by service type and discount band is available here.  Nearly 46 percent of the C1 requests were made by applicants in the 90% and higher discount category. 

USAC filed its Semi-Annual Audit Report with the Commission on April 1, 2019.  The report summarized outstanding audit findings as of February 28, 2019.  The report noted that there were:
  • 21 beneficiary audits older than six months with a potential recovery of $15.6 million.  The recovery process is underway, but notification letters have not been issued for these audits.
  • 14 beneficiary audits held in abeyance because an appeal of USAC’s recovery determination is pending with USAC.  The potential recovery is $6.5 million.
  • 73 beneficiary audits held in abeyance because an appeal or waiver of USAC’s recovery determination is pending with the FCC.  The potential recovery is $19.6 million.
  • 39 audits without payment or a satisfactory arrangement for payment of debt.  To date, USAC has transferred $10.3 million to the Treasury Department related to these audits.

On March 26, 2019, Chairman Pai circulated an NPRM seeking comment on a funding cap for the entire USF program.  It has been reported that the NPRM does not propose any cuts or reach a tentative conclusion in favor of a USF cap but is simply seeking comment on such a proposal.  The NPRM is not public because it is not scheduled to be considered at a Commission agenda meeting.

Commissioner O’Rielly wrote a blog post on April 2 in support of an overall cap on the USF. O’Rielly asserted a cap is crucial because the Commission has repeatedly raised the budgets of the four USF sub-programs without offsetting spending elsewhere.  A cap would force the Commission to carefully consider the cost-effectiveness and consequences of raising a USF program’s budget on the entire USF, he said.  O’Rielly argued that adopting a cap would not preclude the Commission from voting to raise the cap in the future, but it would force the Commission to carefully consider such increases.  O’Rielly also pointed out that the NPRM’s proposed budgetary cap of $11.42 billion is well-above current disbursement levels, leaving a $2 billion cushion for future increases. 

In response, opponents criticized the proposed USF cap arguing it will increase the digital divide and harm consumers.   

At this point, the NPRM has not been made public.  A public draft will be released if the NPRM is placed on the Commission’s monthly agenda for a vote.  The NPRM must receive three votes to be approved and released.  Even after the NPRM’s adoption, any process to establish a cap would take time.  The Commission is required to solicit and accept public comments on the proposed rule before adopting a final, new rule.

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