Another wasteful debarment

The FCC announced another debarment. It seems a manager at a wiring company pled guilty to and was convicted of scheming with a couple of SBC employees to scam the E-Rate program for over $400,000. He got $16,917 for his part in the scheme. Now he's looking at up to 40 years in prison and $500,000 in fines. But I'm sure what's really keeping him up at night is the knowledge that eventually he will be debarred from the E-Rate program for 3 years.

Really, these debarments just seem like a silly use of the FCC's time. It seems likely that the individual involved will still be in jail long after his debarment ends. And in this case, since the individual involved worked for a sub-contractor, I don't think a debarment would prevent him from playing the same role in a future scam.

But rules are rules, I guess.

BEAR rumblings

I was just perusing the recent USAC letter responding to an FCC request for info. I'm always looking through them for tidbits of info. Section I is a list of outreach efforts, section II a list of all the standard letters that USAC sends out.

Section III, the shortest, is the most interesting. The FCC asked how many disbursements USAC would send out if BEAR payments went directly to applicants, and how many BEAR disbursements are sent out now. The answers: currently, USAC sends out 16,055 payments as a result of BEARs, and estimates it would have to send out 104,000 disbursements if payments were sent directly to applicants.

Interesting for two reasons:
First, I never thought about making BEAR reimbursements through service providers as a way to keep down USAC costs by pushing the cost of cutting individual checks onto service providers.

Second, it shows that the FCC is seriously considering having USAC send checks directly to applicants. Oh happy day!

$650 million unfairly distributed

I saw an interesting speculation from E-Rate Central this weekend: it is possible that there will be enough money to fund all Priority Two requests. Now, E-Rate Central is clearly not making an actual prediction, just musing about a possibility, but just the possibility that it might be true is appalling.

Appalling because increasing the funding cap by 29% after the application window has closed (by rolling over $650 million in unused funds) just blindsides applicants.

A Priority Two application is not something applicants can do lightly. In general, internal connections projects which go through the E-Rate process are less cost-effective than projects which do not go through the E-Rate process. Having to select a vendor and a solution 18 months before the start of a project does not get you the best solution or the best price. And with the 2-in-5 rule, applicants are forced to enlarge the project to include everything that might be required for the next 3 years, which is not cost-effective nor good program management.

So it is a bad idea to put your project through the E-Rate process unless you have a good chance of getting funding. But applicants will not be able to guess what their chances of getting funding are if the size of the fund can vary by 30% after the application deadline.

As I've said before, rollovers should take place before the opening of the filing window. Even better, use a large surplus to pre-fund Priority Two.

2-in-5 Tool even better

Man, whoever made the 2-in-5 Tool should handle all new applications for USAC. It just feels more polished and better designed than anything else on the USAC site. But what has USAC got against the Back button? At least the cookie-crumb navbar at the top makes it less painful not to be able to use the browser's Back button.

Too bad this tool supports a rule that should be abolished.

We'll have to wait a while to see it go. My bet is that it will be June 2008. I figure the first 2-in-5 rule denials will take place in, say, November. So around December, the FCC will start getting appeals from confused applicants who never heard of the 2-in-5 rule, or didn't really realize how it applied to their application, and find out too late they're screwed. By March, enough appeals will have piled up that the FCC will take notice. By June, they'll realize it's an unjust rule that confuses people and disadvantages small applicants, and more importantly, will increase their own workload processing appeals, and will abolish the rule.

And then I wake up.

Audit creep in the Site Visits

The Extended Outreach Site Visits were created: "in order to see Universal Service Fund support in use, assess USAC's outreach and education efforts, observe best practices in the field, and ensure that program funds are being used in compliance with regulatory requirements." Which of course, every applicant reads as: "Blah blah blah blah blah blah compliance with regulatory requirements."

This site visits have provided a feedback mechanism, and it's nice for the tech directors whose districts make it into the quarterly Hall of Fame (I forget what they really call it), but everyone outside of USAC and BearingPoint just sees them as mini-audits.

And now they are suffering from "audit creep." The first thing I noticed was the demand that equipment be photographed. I don't know how useful those photos are, but they did ensure that the reviewer actually physically visited the equipment and photographed it.

The latest one is a much bigger expansion of the audit. One of the items listed on the latest letter I received is: ''Asset Registers with make, model, serial numbers and location." I assumed that this applied to any equipment purchased under that particular FRN (Site Visits always focus on a single FRN). However, the clarification I received from USAC is that the register should include all equipment purchased using E-Rate funds from any funding year.

These Site Visits just get more and more tedious.

And I'd like to see some info from them. Over 1,000 have been conducted. How many of those resulted in COMADs or audits? (I'll bet very little wrongdoing was found; that would be a good message to get out.) What are the top 10 applicant complaints about the program? The top 10 requests? Has the nature of the complaints/suggestions changed since the early visits?

2-in-5 silver lining

The 2-in-5 rule is an ill wind, but it has blown a little bit of good. The rule used to be "applicants should have reasonable plans to use all of the network drops within two years of installation." (I found that in some old training materials.) I guess that someone at USAC noticed that Catch-22 that applicants were in: you need to make all Internal Connections purchases on a 3-year cycle, but you can only purchase cabling if you'll use it in the next 2 years.

So now the rule is that applicants must be able to show that "sufficient resources are on hand, or planned and budgeted over the next few years." [Emphasis added.] I generally don't like it when the rules get more vague, but since 2 years was too short (I usually advise people to look at least 5 years out when deciding how many network drops to pull), it's an improvement in this case.

So at least the 2-in-5 rule has done one small good thing. But it's still got to go.

2-in-5 is 0-2

So the 2-signature/2-date rule has been killed, the 30% rule has been eviscerated. It's time to turn to another bad rule: the 2-in-5 rule. This rule has to go for 4 reasons:
1) it adds complexity
2) it isn't fair
3) it isn't working
4) it encourages waste

The complexity issue is obvious. Priority Two funding has always been tricky, because if you wanted to do a phone system upgrade in say, August 2008, the right time to apply would be for the 2007-2008 funding year. That way you might have approval before installation. If your district is not all 90% schools, you also have to get into guessing where the denial threshold will be and decide whether to include 80% schools in your request. Now along comes the 2-in-5 rule, which means you really should think about doing a data network upgrade at the same time and keep track of any upgrades that were done in any of the buildings in the last 5 years.

The rule is unfair to small applicants. You know who really gets killed? Charter schools. Generally, they only have one building, their budgets are very stretched, and they're generally starting with buildings that have no infrastructure. It's not easy for them to come up with even the 10% to cover their costs (plus training, support, etc.). So the best thing for them would be to buy a cheap wireless data network the fist year, then a phone system the second year, then wired data the next, then maybe video distribution, etc. But because of the 2-in-5 rule, they have to do everything at once. The effect is to decrease the availability of E-Rate funding.

The 2-in-5 rule was supposed to restrain to buying of the 90% applicants and spread the money around, allowing applicants with lower discount levels to get equipment funding. It's been a failure. For 2006-2007, only applicants with discounts at 86% or above got Priority Two funding. That's the highest since 2001, and second highest ever. The demand numbers for Internal Connections have not dropped, and 2007-2008 looks just as high. It isn't working.

Why isn't it working? Because applicants have adjusted their cost-benefit analyses. Normally, the prudent approach for an applicant would be to install/upgrade/repair systems as needed. There is not much point in future-proofing data or voice systems (except cabling), because the same equipment will be less expensive in the future when you actually need it. But because of the 2-in-5 rule, applicants are now thinking: "Since I'm putting in a PBX in this building this year, it is prudent to think of everything that might need to be replaced in the next 3 years, and buy it now." Rather than thinking about what they need now, applicants are thinking about what they might need 3 years from now.

The 2-in-5 rule encourages applicants to install or replace systems before it's really necessary. A district trying to be prudent might have had a 4-year replacement cycle on their email server, and a 5-year replacement cycle on data network switches. The 2-in-5 rule forces them to choose between a 3-year or a 6-year replacement cycle. Six years is too long, so they have to go down to a 3-year cycle.

The 2-in-5 rule needs to go. Which is too bad, because the SLD had made such a nice little tool for calculating 2-in-5 issues.

Sweet relief

So I was enduring another Adobe Reader crash, because I have been forced to use Adobe Reader version 6.0.1, when I suddenly realized: I'm free! Since the SLD is removing the online 486 PDF, I can now upgrade to version 8.1.

Every cloud has a silver lining.

Not too little, but too late

So much for my idea of using leftover E-Rate funds to fund the following year's Priority Two requests. Today the FCC sent USAC a letter instructing them to rollover $650 million in unused funds into 2007-2008.

While that's certainly a better decision than rolling it into 2006-2007, I would rather have seen it go into 2008-2009. An even better idea would be to have these rollover decisions made in, say, August or September, before the application season heats up.

If your discount percentage is below 90% and above 70%, then Priority Two funding is a crapshoot. There is nothing the FCC can do about the vagaries on the demand side, but they could at least set the supply side before the beginning of the application cycle. Making these rollover decisions after the application cycle has closed adds another unknown to an already murky calculation that applicants in the 70%-89% range must make each year.

Take a hypothetical small low-income school district with 10 schools. 7 of the schools are at 80%, 3 are at 90%, and the district discount is 83%. Going into the application cycle, the district has to decide whether to break the district-wide maintenance contracts into one group for the 90% schools and another group for the 80% schools, or go with all the schools together in the hopes that Priority Two will be funded down to 83%. Or they could get clever and make a contract covering the 90% schools and, say, 4 of the 80% schools to get an 88% discount.

And when it comes to a district-wide equipment upgrade, they also have to think about the 2-in-5 rule.

And the poor district also has to make a guess as to whether the FCC is going to roll some funds over.

So let's take at least one variable out of the equation: decisions about rolling over funds should be made at the same time the Eligible Services List is announced, so that districts can have that information as they start the application process.