Lawyer Article

In its recent Academy of Excellence decision, the Federal Communications Commission reversed and remanded 56 Universal Service Administrative Company ("USAC") funding denials. USAC had denied the applications based on the applicants’ failure to demonstrate access to the resources required to effectively use the requested eligible services or to pay their non-discounted share for the services. The 56 cases fell into four different categories addressed separately by the Commission.

The Commission first addressed two requests denied for failure to provide sufficient documentation to demonstrate access to the necessary resources to effectively use the requested eligible services. Here, the Commission simply disagreed with USAC’s finding. With respect to the first request, it found that the applicant included the total expenses for the eligible services within three separate entries in its budget and also showed that the combination of its other revenues and E-rate contribution would not only cover its total expenses, but leave a surplus of approximately $18,000.

Accordingly, the Commission found that the applicant sufficiently documented its ability to finance the discounted portion of the price of the requested eligible services. Regarding the second request, the Commission found that the applicant’s submission of invoices supporting a request for $260 per month for one funding request and $150.25 per month for another provided USAC with timely and complete documentation to support the full amount of those funding requests.

Second, the Commission addressed 13 appeals by applicants who received funding or reasonably expected to receive funds by the time they would need to pay for the services provided under the E-rate program. These applicants fell into three different groups:

• Some had a specific, reasonable expectation that they would receive grants or donations, even if they did not have a formal written commitment of such funds when they filed their FCC Form 471. 
• Some had the expectation that they would secure the funds by increasing revenues, i.e., raising taxes or issuing bonds. 
• A third group either had the funding in reserve or demonstrated that they had the funding by actually paying for and using the services prior to USAC’s review.

The Commission held that there was no violation of its rules on necessary resources because these applicants had a specific, reasonable expectation that they would have the funding. Finding it unnecessary to require schools to have final, written commitments of funding so far in advance of the time that it is needed, the Commission iterated a three part test by which compliance may be established. Under the test, the necessary resource requirements are satisfied as long as:

(i) when filing their FCC Form 471 applications, applicants must have specific, reasonable expectations of obtaining the funding needed to ensure availability of the necessary resources;

(ii) applicants do not authorize USAC to pay support to the service provider for the eligible services until the applicant has received the funding and thus has the necessary resources to pay the applicants' share of the costs; and (iii) applicants provide sufficient documentation of such funding and resources availability, as USAC may request.

Third, the Commission addressed 21 requests by applicants who did not provide documentation to USAC by USAC’s given deadline. The Commission found the applicants’ errors were procedural rather than substantive, e.g., some submitted the required documentation but in an untimely manner, others made good faith efforts to provide the requested documentation and may have been able to do so if they had been provided additional time. Consistent with the Bishop Perry line of cases, the Commission held that errors such as these should not result in complete rejection of the applications and that the applicants should have an additional opportunity to provide information regarding their ability to pay for their non-discount share and for any other resources necessary to use E-rate funds effectively.

Fourth, the Commission addressed 20 requests by applicants who did not appear to have the necessary funding at the time of certification. The Commission noted that, because the certification must be signed when the applicant files its FCC Form 471 by the filing window deadline, applicants are often required to file the FCC Form 471 months before their budgets are finalized and months before the E-rate funding year begins. Further recognizing that financial circumstances can sometimes change, the Commission granted a waiver of Section 54.504(c)(1)(iii) of the rules enabling the applicants to modify their funding requests and to demonstrate that they have the necessary resources to effectively use the services requested.

The Commission also adopted processing directives applicable to cases where USAC has reason to believe that an applicant lacks the necessary resources for its funding request or that the documentation provided by the applicant is deficient. Under these directives, USAC must: (1) inform the applicant promptly in writing of any and all deficiencies, along with a clear and specific explanation of how the applicant can remedy those deficiencies; and (2) permit the applicant to submit additional documentation, if any, within 15 calendar days from the date of receipt of notice in writing by USAC.

The Commission further directed USAC to permit applicants to consider the likelihood of the receipt of donations or specific grants for which the applicants have applied. In cases where an applicant is unable to provide documentation of sufficient resources to use all the E-rate services it seeks within the 15-day period, the Commission directed USAC to work with the applicant to establish which eligible services it will be able to use effectively and to reduce the applicant’s funding request to that level for those eligible services. This will enable applicants to remove funding requests so that they are receiving funds only for the services and equipment for which they can pay the non-discount portion and the other resources necessary to use those E-rate services effectively.

The Commission emphasized however, that this was an option to be used only in the limited number of situations where applicants’ financial circumstances truly change from when they filed their funding requests. The Commission’s intent here is not to permit applicants to use this process to request more services than they can effectively use or to request services for which they cannot pay their non-discount share. It further emphasized that the ultimate burden of proof remains on the applicants and that it expects USAC to deny funds or seek reimbursement of funds already allocated upon discovery that an applicant has purchased approved, discounted eligible services that it is unable to use effectively due to a lack of necessary resources.

This directive is applicable to applications beginning in Funding Year 2007 and to all appeals pending as of the effective date of this Order.

Please contact Mark Palchick (202/857-4411) or Howard Barr if you have any questions regarding this advisory.

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