March 7, 2019 – FCC Commissioner Michael O’Rielly has asked the Universal Service Administrative Company (USAC) to provide detailed information on the extent to which E-Rate program participants have applied for or used E-Rate funding to overbuild existing fiber networks that are supported by the universal service fund (USF).[1] Commissioner O’Rielly wants USAC to provide answers to seven specific questions covering the issue no later than April 1, 2019.

The E-Rate program – aka the schools and libraries universal support mechanism – provides funding for connectivity to and within schools and libraries. Most of the time, E-Rate funding helps schools and libraries purchase discounted broadband connections and other services from their local communications service providers. Currently, the FCC’s E-Rate rules allow schools, libraries, and consortia to use E-Rate funding to construct their own broadband networks when self-construction is the most cost-effective solution to obtaining high-speed Internet access. These rules were adopted in 2014.[2]

In his letter to USAC, Commissioner O’Rielly states that he became concerned about overbuilding after learning about E-Rate proposals made by three regional-based educational consortia to construct wide area networks that would provide Internet access to certain school regions in Texas. Commissioner O’Rielly met with representatives from three rural broadband providers in Texas – Totelcom Communications, LLC, Peoples Telephone Cooperative, Inc., and Central Texas Telephone Cooperative, Inc. – in November 2018 about that issue.[3] All three of those Texas broadband providers receive USF support and have deployed fiber in their networks.

The Texas broadband providers said the regional-based educational consortia projects will result in fiber overbuilds. There are apparently multiple fiber-based providers capable of serving the same schools the consortia proposes to serve. The Texas broadband providers also said that “a recent report from the Texas Governor’s office shows that 97% of schools are already connected to fiber.”[4]

According to Commissioner O’Rielly’s letter, the three regional-based educational consortia have applied for over $100 million in E-Rate support and have been approved for most of that amount. This means those E-Rate self-construction projects have been approved for funding even though there are multiple fiber-based broadband providers capable of serving individual schools within each region.

All of this – overbuilding in the E-Rate program – should not come as a shock. About four years ago when the FCC changed the E-Rate rules to fund self-constructed networks, Chairman Pai and Commissioner O’Rielly warned us that this would happen. In fact, nearly every rural broadband provider said the same thing.

The FCC adopted the self-construction provision in the Second E-Rate Modernization Order, in 2014. It was one of many reforms intended to close a perceived “connectivity gap” in the nation’s schools and libraries. At the same time, the FCC also increased the E-Rate budget, making more funding available to purchase high-speed broadband Internet access services, and, depending on the circumstances, for E-Rate applicants to build their own broadband networks.

Commissioner O’Rielly and Chairman Pai, who at the time was Commissioner Pai, both dissented from the Second E-Rate Modernization Order for numerous reasons, one of which was the decision to allow schools and libraries to construct their own or portions of their own networks when self-construction is the most cost-effective solution to obtaining high-speed Internet access. Pai and O’Rielly expressed serious concern that there were not enough safeguards built into the self-construction provisions to prevent overbuilding from occurring. They were right.

There are two supposed safeguards for preventing E-Rate self-constructed networks from resulting in overbuilds. The first is the requirement that self-construction be the most cost-effective solution for getting a broadband connection. The other safeguard to prevent overbuilds is the requirement that recipients of high-cost support must offer broadband service to requesting eligible schools and libraries. Specifically, recipients of high-cost universal service support must offer broadband service in response to a posted FCC Form 470 to eligible schools and libraries at rates reasonably comparable to rates charged to schools and libraries in urban areas for similar services.[5] 

These two safeguards apparently did not work. Generally, here is what could have happened. The E-Rate program uses competitive bidding for services. A school, library, or consortia (E-Rate applicant) must fill out an FCC Form 470 (Description of Services Requested and Certification Form) and then post it online for the world to see. An E-Rate applicant can also include a request for proposal. Posting the Form 470 kicks off the competitive bidding process. Next, broadband providers review the Form 470 and submit bids.

So what happened with the three regional-based educational consortia in Texas? Each would have had to indicate on their Form 470 that it was seeking to construct network facilities that it would own.[6] When the responses weren’t attractive, each consortia decided the lowest-cost option was to build, own, and operate the fiber network itself.

How many bids were placed on each FCC Form 470? Did the Texas broadband providers place bids? How many bids did each consortia receive? What made the responses to the FCC Forms 470 and associated requests for proposals insufficient? Is each consortia using this an opportunity to make money? These questions cannot be answered without digging into the Forms 470 and their corresponding bids.

The bigger question is whether this is happening or has happened elsewhere. Commissioner O’Rielly’s letter to USAC asks for answers to those questions and more –

1. Does USAC understand the E-Rate rules to permit funding for special construction projects, whether self-provisioned networks or networks owned by a commercial provider, that would duplicate, in whole or in part, fiber networks that have been built using federal funds?

2. Does USAC understand the E-Rate rules to permit a consortium to receive funding for the construction of a WAN to provide Internet access to the entire consortium, even where existing fiber-based providers are already capable of serving individual consortium members?

3. Since the 2014 E-Rate Orders, how many applicants have requested E-Rate funding for special construction of consortium-wide WANs, and how much funding was requested by these applicants?

4. How many requests for consortium-wide WAN projects have received funding commitments, and what is the total amount of funding committed for such requests? How many of those WAN projects would result in overbuilding another provider’s network, in whole or in part? How many of those WAN projects would result in overbuilding, in whole or in part, providers that receive funds from the High Cost or Rural Health Care programs?

5. How many consortium-wide WAN projects have been denied on cost-effective grounds?

6. How many consortium-wide WAN projects are currently awaiting funding decisions by USAC?

7. To the extent that USAC has approved funding requests for the construction of consortium-wide WANs that partially or fully overbuild existing fiber providers, and consider such projects, whether self-provisioned or owned by a commercial provider, to be eligible for funding under the current E-Rate rules, has USAC alerted the FCC of the overbuilding risk created by such projects? Has USAC alerted the FCC of an apparent gap in current program rules that permits USAC approval of such projects?

Commissioner O’Rielly wants USAC to provide answers to these questions no later than April 1, 2019. USAC’s response should be made publicly available at some point.

***** Footnotes *****

[1] Letter From Michael O’Rielly, FCC Commissioner, To Ms. Radha Sekar, CEO, USAC (dated March 7, 2019), available at https://www.fcc.gov/document/comm-orielly-letter-radha-sekar-ceo-usac.

[2] Modernizing The E-Rate Program For Schools And Libraries, WC Docket No. 13-18, Connect America Fund, WC Docket No. 10-90, Second Report and Order and Order On Reconsideration, FCC 14-189, ¶¶43-54 (rel. Dec. 19, 2014) (Second E-Rate Modernization Order). The E-Rate applicant also must use the facilities it constructs.

[3] See e.g., Letter From Donald L. Herman, Jr. and Clare C. Liedquist, Counsel to Central Texas Telephone Cooperative, Inc., Peoples Telephone Cooperative, Inc. and Totelcom Communications, LLC, To Ms. Marlene H. Dortch, Secretary, Federal Communications Commission, WC Docket 13-184 (Nov. 18, 2018), available at https://www.fcc.gov/ecfs/filing/11201464516255.

[4] Id.

[5] Second E-Rate Modernization Order at ¶¶60-76.

[6] See 47 C.F.R. § 54.503(c)(1)(iii)(A).