OK, so maybe I was a little pessimistic. My pre-window estimate was that Category Two (C2) funding would run out somewhere between 70% and 50% applicants. Well, last week USAC released the official Demand Estimate, and the total demand is just over the $3.9 billion cap. Then 2 days later, the FCC issues an order directing USAC to cover it all.
Now it's official: everybody who applied correctly will get C2 funding in 2015-2016. That is very good news for the stability of the fund.
If demand was higher than the cap, how did they fund everyone? The rollover, of course. Because the FCC has chosen to violate their own rule and deny all C2 funding for the past 2 years, USAC is sitting on $1.6 billion in unused funds. So they can cover the $0.019 billion over the cap.
But the way they've chosen to cover it is bad for the stability of the fund. To maximize the safety of the fund, the FCC should have raised the contribution factor to pull in the cap, $3.9 billion, and then used just a smidgen from the $1.6 billion unused funds war chest. Because it is possible that demand next year will be way over $3.9 billion, and the FCC will be wishing it still had that unused slush fund.
OK, that seems extreme, but I think they should have left some of the money in the unused pile. For example, they could have said, "OK, here's that extra $1 billion that the Chairman promised for FY 2015," and left $600 million in the unused pile for next year.
What did the FCC do? They said: "We ... direct USAC to fully fund eligible category one services under the new cap. We also direct USAC to fully fund eligible category two services, first using as much as $1.575 billion in E-rate funds unused from previous years, and then using any additional funds needed under the new cap to fully meet demand."
Seems reasonable, right? No, it's actually a mistake. Maybe a big one. Walk with me as we go through what will happen.
First, USAC will fund Category One (C1). Total C1 requests are $2.25 billion. USAC usually ends up denying/reducing a little over 10% of the total requested amount. So USAC will probably approve something like $2 billion in C1 funding.
Next, USAC will start using the $1.6 billion in unused rollover funds to cover P2. Total C2 requests are almost $1.7 billion. Applying a 10% denial factor, we get to about $1.5 billion in approvals. Hey, we didn't eat up the whole rollover!
Did you notice the problem? The amount that E-Rate pulled from the Universal Service Fund (USF) for FY 2014-2015 was just over $2.4 billion, the program cap. But in 2015-2016, the E-Rate is only going to pull enough to cover C1, which is going to be something like $2 billion. Now normally, I would say it's a good thing that the E-Rate program will be reducing the contribution factor. But does anyone believe that demand is going to decrease next year? Does anyone believe that the FCC is going to find another $1.6 billion for FY 2016-2017? Remember that the big reserve is the result of no C2 funding for 2 straight years, and by leveraging the fund. Neither of those options is available in the future.
So next year, it is possible that the E-Rate will need to pull $3.9 billion from the USF. Since we're only taking $2 billion this year, that almost doubles the E-Rate's demand on the USF, which means the contribution factor is going to spike. This year's "yippee! we cut spending" party will give us an "oh my aching contribution factor" hangover next year.
And the spike will hit in July 2016, just a few months before the elections. If I were Hillary Clinton (or any Democratic candidate for Congress), I would be on the phone to Chairman Wheeler right now. And I would be saying, "Take $3 billion or so from the fund this year, and let's have the 'yippee! we cut spending' party at this time next year."
Meanwhile, Commissioners Pai and O'Rielly should start resting their voices now, so they'll be ready to give a proper outcry at this time next year.
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