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Monday, January 30, 2012

Throw Competition out of the Window

It's official: the FCC does not want E-Rate applicants to lower their telecommunications costs.  Well, at least USAC believes that's so.

In the latest News Brief, USAC talks about the heinous new rules for changing service providers (called an "Operational SPIN change").  Mostly, it just restates the bad news from the Sixth Report and Order: 1) you can only change service providers for a legitimate reason, and 2) you have to switch to the second-place finisher in the bidding from the original 470.

But then comes a new clarification of the rule: "Changing service providers because the services are available at a lower cost from another provider ... [is] not considered [a] legitimate reason for change...."  Crap.

This means that applicants are locked into prices for no good reason.  Let's take this example: I post a 470 which includes local and long distance for 20 POTS lines, get no bids (not unusual), stick with my existing service provider and file a Form 471 in March.  In April, along comes a new service provider with lower prices.  Sorry, I can't take advantage of the lower prices until the following July, 15 months later. What a waste of local tax money and E-Rate funding.

The problem is the filing window.  The FCC wants to maintain the fiction that the Form 470 process increases fair and open competition.  I don't agree, but fine, let them have their fig leaf.  But there is a solution that gives applicants the flexibility to switch to a more cost-effective service at any time, while preserving the 470 sacred cow.  The crux of the solution is that the procurement process should be decoupled from the filing window.  Three changes are required:

  1. Unhinge the 470 from Funding Years.  I already suggested here this should be done, and SECA made it part of a formal filing with the FCC.
  2. Allow applicants to choose a new service provider at any time, as long as they post a Form 470 for 28 days.
  3. Do not require that contracts used to justify pre-discount amounts on the Form 471 cover the entire funding year.  Actually, don't require that the contracts cover any part of the funding year. Actually, don't require any contract.
I had you until that last one, right?  I know it seems whacked, but hear me out.  Why do contracts need to be signed in the window?  It's not like you're getting any actual funding when you file a Form 471.  (As SECA has noted, you're not even getting a real commitment.) You're just setting a cap on the funding you'll receive later when SPIs or BEARs are filed.  So while applicants should have some justification for how they arrived at the pre-discount amount on the Form 471, let's allow them to use the cost of existing service, an existing contract or a quote for new service.

The Form 471 as a Description of Services Ordered only made sense before the invention of the filing window.  Now it makes no sense to require fictitious contracts months before the start of service.  (The contracts are fictitious because actual contracts would be illegal.)  The name of the form should be changed to Description of Services to be Ordered Later When We Have an Approved Budget and We're Ready to Start Using the Services.

If I were king, every year applicants would file a Form 471 in March (actually, King Dan would make it May) with estimates on spending, and after application review, funding caps are set.  Then whenever applicants want, they post a Form 470, collect bids for 28 days, then select a service provider.  Move the "I ran a fair and open competition to select this service provider" certification to the BEAR (or the Form 486, if you must).  I guess, actually, it makes sense to move SPIN selection to the 486, so that USAC doesn't make itself crazy with SPIN changes.

If you end up with a higher price after posting a 470, tough luck.  But I don't think that would happen often, given the direction of telecommunications and network equipment trends.

Free the competition!

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