Whither P2?

USAC has released the Demand Estimate for 2014-2015, which gives me another opportunity to speculate on the denial threshold for Priority Two funding.  The important demand figures, in billions:

		Denial rate
	Demand	10%	20%
P1 total	$2.60	$2.34	$2.08
P1 plus 90% P2	$4.30	$3.87	$3.44
P1 plus 80-90% P2	$4.75	$4.28	$3.80

The funding cap is set at $2.41 billion.  So P1 is covered.  However, even if USAC denies 20% of applications, which would be an unusually high percentage of denials, we'd need over $1 billion to cover P2 for 90% applicants, and $1.4 billion to reach 80%.

Chairman Wheeler promised an extra $2 billion in funding over the next two years, probably by trimming reserves to give a bigger rollover.  So there's our billion.  Except I have to think that the Chairman wants to save most of that $2 billion for 2015-2016, when the new rules will mean none of that money gets spent on old voice systems.

On the other hand, I have speculated that the FCC may stretch the ADA exemption to allow them to oversubscribe the fund.  Because approvals are always significantly higher than disbursements, the FCC could direct USAC to approve more funding than it expects to have, knowing that actual disbursements will be lower.  That would probably let the FCC cover all P2 requests (once you've paid for 80% it takes almost no funding to run the table).  But doing so would be pulling money from future years to pay for P2 in 2014-2015, and I just don't see the FCC doing that.

So in my analysis, it basically comes down to what kind of mood the FCC is in.  Since they denied all P2 funding in 2013-2014, I'm betting they'll do the same in 2014-2015.  But I'm not putting much money on it.

2-in-5 is 0-10

Another year, another failure of the 2-in-5 Rule.  Or should I call it the Two-in-Fail Rule?  This year, I'm going to have to go a little further into the data to show it's failure, so strap in.  I've been on an anti-2-in-5-Rule campaign since 2007.

The main purpose of the 2-in-5 Rule is to reign in Internal Connections funding requests among applicants with a 90% discount.  Anyone below 80% is subject to the 0-in-5 Rule, and those between 80-89% get the ?-in-? Rule, since they can't tell when they'll get funded.  (Well, they can be pretty assured they won't ever be funded again unless the rules change, but that's a recent development.)

According to USAC's Demand Estimate for FY 2014-2015, Internal Connections funding requests are down 2%.  But Basic Maintenance requests from 90%ers plummeted by 24%, which is only the second time since 2008 that the number's been negative.  So the part of Priority Two demand not covered by 2-in-5 plummets, while the part affected by 2-in-5 basically holds steady.

A drop in the P2 demand from 90%ers is not surprising.  Going into the 2014-2015 filing season, the conventional wisdom was that Priority Two was not likely to be funded even for 90% applicants, so some applicants decided it wasn't worth applying, since the Form 470 process increases costs.  The 0-in-5 Rule is now suppressing P2 demand from 90% applicants.

I had high hopes when the big NPRM came out last July: the FCC sought "comment on whether we should revise or rescind the two-in-five rule...." (paragraph 144)  (Of course, then they went on to suggest the 2-in-5 Rule might be replaced by the Dinner Table Rule, so it wasn't all rosy.)  And the latest Request for Comment acknowledges that "Commenters generally agree that the rule that the Commission adopted limiting any school or library to two years of priority two support in every five year period (the two-in-five rule) does not appear to have achieved its intended goal of substantially spreading the available funds."(paragraph 9).  But a mere 5 paragraphs later, the Commission suggests doubling down and instituting a 1-in-5 Rule.  All the reasons I gave for not liking the 2-in-5 rule apply to 1-in-5, only more so.  But the 1-in-5 Rule is better than the Dinner Table Rule, which is the next idea in the RFQ.

Practical considerations aside, why is Internal Connections in the E-Rate program?  The idea is to provide an incentive for schools and libraries to purchase the equipment necessary to use the Priority One services they purchased, right?  The thinking is that left to their own devices, applicants would underfund their network, leading to insufficient and aging equipment.  So by subsidizing the equipment, the E-Rate provides an incentive to keep the network well-equipped and up-to-date.  That's good.  However, the Commission seems to feel that some 90% schools were taking it too far, constantly replacing perfectly serviceable equipment with the latest and greatest.  So think about it: if you provide an incentive to encourage a certain behavior, and you find that you have been too effective, what do you do?  Reduce your incentive, right?  In this case, cut the top discount level.  It makes no sense to give applicants such a huge discount that equipment is essentially free, then dream up all kinds of rules (2-in-5, Cost Effectiveness Review, equipment transfers, etc.) to keep applicants from over-buying.  The problem is the 90% discount, so the solution should be to change the 90% discount.

And really, I don't think the excessive spending by 90% applicants was mostly the result of them buying equipment too frequently.  Replacing equipment is a major disruption for the applicants and a lot of extra work for district staff, so I doubt there are many cases of applicants replacing equipment more quickly than every 3 years.  The problem is that when those applicants do upgrade, they overpurchase.  The 2-in-5 Rule does nothing to prevent overpurchasing.  In fact, it contributes to that overpurchasing by forcing applicants to buy everything they might need for the next 3 years.  The 1-in-5 Rule will increase overpurchasing even more.

90% is too close to free.  Cut the discount.  The 2-in-5 Rule will be unnecessary.

Big Wheeler keeps on turnin'

Chairman Wheeler spoke yesterday at the Institute for Museum and Library Studies "Broadband in Libraries" public hearing.  Most of it was a restatement of ideas he has given before, but here is something new: I heard him suggest "establishing a system of reference pricing, so people know what is a fair price."  It sounds like a baby-step towards Lowest Corresponding Price, or towards freeing up the information currently buried in the Item 21 Attachments.  Good news for the program.

Libraries-to-libraries not apples-to-apples

What's the participation rate among libraries?  I estimated 40% of libraries get funding.  Now comes the Institute of Museum and Library Sciences (IMLS) and says: More than 90% of U.S. Public Libraries Have Used E-rate.

OK, you know what my first complaint is going to be: the small "r" in "E-Rate."  I have found librarians to be generally very precise, especially when it comes to words, so it's especially disheartening to have them in the opposing camp in my campaign for the Big R.

How did we arrive at such different numbers?  At least part of it can be explained by semantics.

First, we used different definitions of "library."  When I calculated 40% of libraries, I used the ALA's number of administrative units, while the IMLS used the number of library buildings.  It's analogous to the mess we're in because "entity" has more than one meaning.  In Form 471 terms, I based my calculations on Block 1 data, while the IMLS used Block 4 data.  So I based my calculations on 9,000 library administrative units, while the IMLS based their calculations on 16,000 library buildings.

Second, I looked at how many libraries are using the E-Rate, while the IMLS looked at how many have used the E-Rate.  The IMLS is saying that 90% of buildings appeared in Block 4 on at least one application from Funding Year 2002 to FY 2012.  I said 40% of library organizations appeared in Block 1 in FY 2009.

Fortunately, we can remove the effect of the second semantic difference, because the precise folks at IMLS supplied a graph showing participation each year.  So looking at just FY2009, I said that 3,672 of 9,225 library administrative units were in Block 1 of a Form 471, while the IMLS says 11,181 of 16,392 library buildings were in Block 4 of a Form 471.

If we assume that all the libraries that didn't apply were libraries with only one location, we're almost in agreement: I say 5,553 "libraries" (meaning administrative units) weren't on an application, while the IMLS says 5,211 "libraries" (meaning buildings) weren't on an application.  Of course, that assumption is overstated.  While I would think that libraries with multiple branches are much more likely to apply than one-building libraries (because multi-site libraries probably have higher phone and Internet costs, so it's worth the hassle of filling out the forms or the expense of hiring a consultant), I am certain that there are multi-location libraries that do not apply for E-Rate.

Our numbers also differ because of likely miscounting:

1. I didn't count libraries in consortium applications, so I probably missed some libraries.  Those applications would have only the consortium lead in Block 1, but could theoretically have hundreds of libraries in Block 4.  There were 439 consortium applications, but a consortium made up of only libraries files as a library, so I missed only libraries which were in a consortium with non-libraries.
2. IMLS is probably counting locations that are not libraries.  I used one definition of "library," the IMLS used a different one, but USAC has a slightly different definition.  In Block 4, a bookmobile is a "library."  So is a location that is strictly administrative.  The IMLS blog was just an "initial investigation," I doubt they dug into the 11,181 locations on those forms to ensure they were included in their list of 16,392 libraries.  So they might be overcounting a little.

So while our numbers seem wildly disparate at first glance, we really aren't that far apart.  So choose whichever number suits your purposes.  If you want to show that libraries are underserved by the E-Rate, use my 40% number.  If you are more interested in showing how great a benefit the E-Rate has been to libraries, use the IMLS 90% number.

Advice from Committee to Commission

The FCC's Consumer Advisory Committee has issued some recommendations on E-Rate reform.  I'd never heard of them, so I looked them up: "The purpose of the Committee is to make recommendations to the Commission regarding consumer issues within the jurisdiction of the Commission and to facilitate the participation of all consumers in proceedings before the Commission."  Who's on the committee?  I count 27 consumer (or at least consumerish) groups, 3 carriers and 2 carrier lobby groups.

The recommendations are not earth-shattering, and in many cases, it's hard to figure out what they're really saying.  I guess that's what you get when you try to get 32 people to agree on the wording.

Item 2 in the first list states: "E-rate funding should be distributed in a way that promotes fair and equitable service and adequate speeds to schools and libraries of various sizes and in various locations."  Well, I haven't heard anyone support unfair or inequitable service, or inadequate speeds, but I have no idea what the committee actually thinks the FCC should do.

My favorite juxtaposition:

3. The E-rate program must ensure that schools and libraries are not only connected to the internet, but also assist in the purchase of essential equipment to spread that connectivity throughout the schools and libraries and beyond.
4. The FCC should consider whether Priority 2 funding adequately addresses the unique needs of rural communities and smaller schools, as well as the changing educational environment, where learning does not stop at the end of the school day or when the student leaves the campus.

#3 seems to be saying that the Commission should be providing Internal Connections funding to all applicants, but #4 calls into question whether Priority Two funding addresses the learning needs of students after they leave campus at the end of the school day.  Do they want more funding for P2 or no P2 funding?

Do they support increasing the size of the fund?  "...the FCC should closely monitor and determine the appropriate level of funding to the E-rate program necessary to bring schools and libraries into the 21st century...."  It sounds like they want to increase the size of the fund, but didn't want to appear to take sides.

Their process suggestions were much more concrete, and I agree with all of them.

A keyhole view of Item 21

EducationSuperHighway released an analysis based on the data from Item 21 Attachments.  I thought it was a quick turnaround of data from their Item 21 Portal, but no, it's from 2013-2014 Item 21 Attachments.  Apparently, they got Item 21 Attachments from 1,044 school districts, representing over $350 million in funding requests.  That's about 3% of applicants, and about 7% of funding requested.

That's more Item 21 data than anyone else has.  (Well, the New York City Board of Ed requested $605 million in funding, so technically they have access to a higher dollar amount of Item 21 attachments.)  But it's a pretty small sample, and I have no idea how representative it is, so I can't say whether the data is any good.

The data is being used to support a point of view.  Let's take a look at the "insights" and supporting data in the executive summary:

1. We face an urgent challenge to ensure that our students do not fall further behind.    
1. The wealthiest districts are more likely to have met ConnectED goals, the poorest less likely.
2. Rural districts are less likely to have high-speed fiber.
3. It will take 7 years to reach today's goals.
4. In 7 years, our schools will need 10 times the bandwidth.
2. Schools are not meeting the ConnectED goals because high-speed broadband is not affordable.  
1. Schools that are meeting the goals pay on average 1/3 the price for broadband vs. those that are not meeting the goals. 
2. Schools that are meeting the current ConnectED goals also have Internet access budgets that are on average 450% larger than those that do not.
3. Schools that are able to afford high-speed broadband provide an actionable roadmap to enable every school to meet the ConnectED goals.
1. Districts with fiber connections have approximately nine times more bandwidth and 75% lower cost per Mbps compared to districts without fiber.
2. At higher speeds, which might be accomplished by aggregating purchases across multiple schools and districts, schools can reduce their costs to as little as $2/Mbps.
3. Schools with access to competitive options pay 2 - 3 times less for their WAN connections compared to schools that are only served by incumbent telephone and cable companies.
4. schools that have the option to take the initiative to lease fiber, self-provision a fiber network, or access an existing city network, pay the lowest prices for high-speed broadband.
4. 96% of schools could meet today’s Internet access and WAN standards , if the FCC focused the E-rate program on broadband, but meeting the five-year ConnectED goals will likely require a combination of lower prices and more resources.
1. Re-investing the $1.1 billion per year of E-rate funds that are spent on non-broadband services (telephony, mobile, web hosting, and email) would provide enough funding to enable 96% of schools to have a gigabit WAN connection and 100 kbps/student of Internet access.
2. without improving the affordability of broadband, the $1.1 billion per year increase in support for broadband will still leave 80% of schools with too little bandwidth in five years

My thoughts on their insights:

1. So vague, it's indisputable.  "Further behind" whom?  Behind in what?  The evidence presented indicates a disparity in access based on location and income level, and that we won't reach artificial goals quickly.  There is no evidence on how the disparity or failure to meet targets will cause our students to fall further behind.  Also, that "7 years to reach today's goal" figure is extrapolated from the fact that 28% of schools had 100 Kbps/student in the spring of 2013, and 37% did by the fall of 2013.  That increase of 9% (over six months) was assumed to be the annual increase for the next 7 years.
2. Probably true in a lot of cases, but I know schools with 90% discounts, for whom money is no object, that don't meet the ConnectED goals because the network admin is competent enough to know that the schools don't need that much bandwidth.  The factoids don't support the hypothesis very well.  The first factoid results from the fact that cost/Mbps always drops drastically as the Mbps increase.  (If a 100 Mbps link cost a school $1,000/month, a Gbps link is probably going to cost less than $3,000/month.)  And the second factoid just says that schools that spend more on Internet have higher speeds.
3. Of course schools that have fiber have more bandwidth and cheaper prices.  Factoids 1, 3 and 4 basically just say, "Applicants that have more options generally pay less."  Factoid 2 claims that aggregating purchases can reduce costs.  I agree that if 10 districts share a 1 Gbps Internet port, that will be cheaper than each of them having a 100 Mbps port.  But only the Internet port costs would go down; circuit costs would probably go up, as all the districts would have to connect to a single hub site, rather than connecting to the nearest POP.  The full report has a very interesting graph showing that applicants with over 100 WAN nodes have a per-Mbps cost that's a third of what other applicants pay.  But there are only 2 applicants in that category, which is such a small sample that it seems irresponsible to make that a category.  Hmm, interesting, the graph shows only 180 applicants with WANs.  Only 17% of applicants in their sample have WANs?
4. I think their small sample skewed these results.  Here is what those services cost for FY2011, according to USAC: Telephony=$428 million ($452 million if you include VoIP). Mobile=$176 million. Web hosting=$27 million. Email=$10 million.  The total saved would be $669 million.  ESH's estimate, based on their sample of 3% of 2013 FRNs, is 65% higher.  The biggest discrepancy: their web hosting cost is 4 times greater than USAC's.  The fact that only 17% of their applicants had WANs would also drive down the proportion of spending on broadband.

The report is certainly worth a read, and there is some good information in there, and they do make an effort to provide clear and objective information, but some of the information is spun pretty hard.  The Executive Summary in particular is almost misleading.

E-Economics 101

I'm a bit behind on E-Rate news, so here's a little catch-up on supply and demand.  The FCC set the cap on the fund at $2,413,817,693, an increase of 1.4%.  USAC released a preliminary demand estimate: $2.643 billion in Priority One requests, $2.225 billion for Priority Two.  The demand estimate will go up a little once paper 471s, and forms filed-late-but-not-too-late are added in, but then actual commitments will be lower as PIA pares some of the requests.

On the supply side, a 1.4% increase is just a rounding error.  Chairman Wheeler has promised an extra billion, so let's assume it's not just accounting sleight of hand and tack that on.  So we're up to $3.4 billion.  I'll bet the Chairman included potential rollover funds in his $1 billion, so I won't add that in.

On the demand side, it looks like it might not be higher this year.  Last year P1 demand was $2.7 billion, and P2 was $2.3 billion, so unless NYC filed on paper, I don't expect to see the double-digit increases of recent years.  Let's assume that, like last year, about 45% of P2 demand is from 90% applicants.  That means that P1 demand for all applicants plus P2 demand for 90% applicants will be $3.7 billion.

Supply = $3.4 billion.  Demand = $3.7 billion.  So we're close to P2 for 90% applicants.  But will the FCC want to scrape together an extra $300 million to cover requests that will include services the Chairman doesn't want to fund, or just let P2 go down again to ensure a nice fat rollover to grease the transition to E-Rate 2.0 next year?  The wheel is spinning, no more bets.