January 27, 2020 – The Federal Communications Commission (FCC) has eliminated an E-Rate Program rule requiring schools and libraries to amortize over three years upfront, non-recurring charges of $500,000 or more for category one services, including charges for special construction projects.[1] The decision is expected to help increase the deployment of fiber and other broadband infrastructure to the nation’s schools and libraries.

The schools and libraries universal service support mechanism – the E-Rate Program – provides funding to America’s schools and libraries for communications connectivity. Funding is divided into category one and category two services. Category one supports connections to schools and libraries, such as Internet access. Category one also provides funding for special construction – the upfront, non-recurring costs for the deployment of new or upgraded facilities (construction of network facilities, design and engineering, and project management.)[2]

Category two supports connectivity within schools, such as wi-fi, and basic maintenance of internal connections. Funding is based on demand, subject to an annual cap, with support first allocated to category one services, and remaining funds to category two services.

E-Rate Amortization Requirement

The E-Rate amortization requirement, put in place in 2000, required E-Rate schools and libraries to amortize over three years upfront, non-recurring charges of $500,000 or more, including charges for special construction projects.[3] Special construction costs eligible for E-Rate discounts include costs for design and engineering, project management, digging trenches, and laying fiber.

The thought was that large upfront charges for non-recurring services – often charges for the construction of new or upgraded network infrastructure – could drain available E-Rate funding by diverting large sums to a limited number of applicants. The E-Rate amortization rule was created to address this concern.

In the 2014 Second E-Rate Modernization Order, however, the FCC suspended the requirement that E-Rate applicants amortize upfront, non-recurring category one charges of $500,000 or more for funding year 2015 through funding year 2018.[4] The purpose of the suspension was to lower barriers to infrastructure investment, including fiber deployment.

As explained by the FCC, suspending the rule will give applicants the flexibility to plan large construction projects knowing they can recover the E-rate supported portion of any non-recurring costs upfront, thus providing greater certainty regarding funding.[5] The amortization requirement had resulted in increased costs for E-Rate supported network construction and also created uncertainty for E-Rate applicants about the availability of E-Rate funding for the second and third years of the amortization cycle. The FCC also concluded “the concerns about draining E-Rate funding raised in 2000 had not proven to be well-founded.”[6]

The suspension was then extended through funding year 2019, while the FCC initiated a rulemaking aimed at repealing the rule. Based largely on E-Rate participants’ experiences during the time the rule was suspended, the rulemaking proceeding ultimately ended with the FCC’s decision to eliminate the amortization requirement.

Report & Order – Elimination Of The E-Rate Amortization Requirement

The FCC’s Order permanently repeals the E-Rate amortization rule. The Order cites the experiences of two New Mexico school systems which were able to reduce the costs of upgrading their networks to 10 Gbps and 1 Gbps connections while the amortization rule was temporarily suspended. Here’s what the FCC said:

Albuquerque Public Schools – With a one-time investment of $14.3 million for special construction, Albuquerque Public Schools in New Mexico upgraded their 156 locations from a 300–500 Mbps connection costing a total of $4.46 million per year, to a 10 Gbps lit fiber connection costing a total of $458,000 per year. Before these upgrades, it would have cost a total of over $18 million per year for each location to meet the long-term needs of 10 Gbps per site.[7]

Gallup McKinley County Schools – Similarly, with a one-time investment of $1.76 million for special construction, Gallup McKinley County Schools in New Mexico upgraded three remote locations from a 100 Mbps microwave connection costing a total of $672,000 per year, to a 1 Gbps fiber connection costing a total of $97,000 per year. Not only is the school district saving money, but the upgrade from microwave to fiber connectivity has increased the quality and reliability of service, as the microwave connectivity was frequently impacted by inclement weather. New Mexico Public School Facilities Authority commented that suspending the amortization requirement directly led to these infrastructure investments, which have helped connect students in some of the country’s most rural areas.[8]

Efficient Use Of E-Rate Funds – For instance, in the example described above, Albuquerque Public Schools was able to upgrade to a superior 10 Gbps lit fiber connection that required a one-time investment of $14.3 million, and cost $458,000 per year. The savings from the lower monthly rate will be fully recovered in less than four years, and in five years, Albuquerque Public Schools will be paying 25% less for higher quality services than the school district was paying prior to the upgrade. Similarly, Gallup McKinley was able to upgrade to a superior 1,000 Mbps (fully scalable to 10 Gbps) fiber connection for $97,000 per year, and $1.76 million in special construction costs. Gallup McKinley will fully recover its $1.76 million initial investment in less than three years, and will save the USF over one million dollars after five years. These applicants and the USF will pay less over time for better quality services.[9]

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[1] E-Rate Program Amortization Requirement, WC Docket No. 19-2, Modernizing the E-Rate Program for Schools and Libraries, WC Docket No. 13-184, Report And Order, FCC 20-3 (rel. Jan. 27, 2020) (Order), https://www.fcc.gov/document/fcc-eliminates-e-rate-amortization-requirement.

[2] See Eligible Services List for Funding Year 2020 Schools and Libraries Universal Service Support Mechanism, WC Docket No. 13-184, https://docs.fcc.gov/public/attachments/DA-19-1249A1.pdf.

[3] Request for Review Request for Review of the Decision of the Universal Service Administrator by Brooklyn Public Library, File No. SLD-149423, Federal-State Joint Board on Universal Service, CC Docket No.  96-45, Changes to the Board of Directors of the National Exchange Carrier Association, Inc., CC Docket No. 97-21, Order, FCC 00-354, ¶ 19 (2000).

[4] Modernizing the E-rate Program for Schools and Libraries, WC Docket No. 13-184, Connect America Fund, WC Docket No. 10-90, Second Report and Order and Order on Reconsideration, FCC 14-189, ¶¶ 17-21 (2014) (Second E-Rate Modernization Order).

[5] Second E-Rate Modernization Order at ¶ 17.

[6] Second E-Rate Modernization Order at ¶ 18.

[7] Order at ¶ 10.

[8] Order at ¶ 11.

[9] Order at ¶ 16.