FCC Chairman Signals Tougher Enforcement Regime for E-Rate Service Providers while Announcing New Initiative to Close the "Rural Gap”

FCC Chairman Tom Wheeler gave a speech earlier this week stating that “the heart and soul of any further modernization [of the E-rate program]” must be to close what he called the “Rural Fiber Gap.” He stated that “40% of schools in rural areas lack access to fiber networks” and that “of those that could access fiber, only about a third do so, principally because of high costs.” Chairman Wheeler concluded from this data, in his words, that the “net result is shocking: 75% of rural public schools today are unable to achieve the high-speed connectivity goals we have set,” referring to the FCC’s “short-term” goal of 100 mbps per 1,000 students.

It is certainly possible to second-guess the actual extent of the supposed “gap,” or the need for regulatory intervention to address it. Even where fiber does not reach a school building, cable DOCSIS 3 plant may be available that can support 100 mbps service, or fiber may be close enough to readily reach the school if the school placed an order for service. Given that most schools receive an E-rate discount of at least 50% off broadband purchases, it is reasonable to assume that instead of being “unable” to purchase 100 mbps service, many districts that decline to purchase available 100+ mbps services don’t yet demand the level of service that the FCC believes is needed. Further, as demand for high-capacity services increases, service providers will expand the reach of their fiber networks to accommodate it, such that the percentage of rural schools that purchase 100+ mbps service will increase over time even without new regulations or discounts. We also aren’t sure how the FCC computed its estimate that 75% of schools are “unable” to purchase 100 mbps service. The FCC data seems to say that 60% of rural schools currently have access to fiber, and that 20% (one-third of those 60%) of rural schools actually use it. While cost may well be prohibitive for some of the 80% of schools that do not, it appears to be quite a stretch for the FCC to contend that nearly all of them are “unable” to purchase fiber-based services, and even fewer cannot purchase 100 mbps services. Nonetheless, the Chairman's speech makes clear that we should expect the FCC to seek to craft new strategies to try to stimulate the availability and purchase of high-capacity broadband services under the E-rate program.

One of the ways the Commission may try to do this is through stricter scrutiny of E-rate service provider rates for broadband services. While the Chairman acknowledged that some variation is understandable and permissible, he expressed exasperation at wide variation in broadband prices paid by various rural schools. The E-rate modernization order included a direction to the FCC’s Enforcement Bureau to devote additional resources to investigating and enforcing violations of the “lowest corresponding price” rule, which requires that E-rate bids offer the lowest price that a service provider charges to similarly situated, non-residential customers. Adherence to this rule can be challenging when it is difficult to determine which non-E-rate customers are similarly situated to schools and libraries, but at a minimum, the FCC’s new transparency requirements that make E-rate prices public will make it more obvious when a service provider charges higher rates for a service to one apparently similarly-situated E-rate recipient than another.

The FCC also may consider additional subsidies or incentives for initial fiber construction. Some at the FCC favor increased funding for rural areas, on top of the additional discounts that rural applicants already receive. Given the financial limitations on the current program, however, we presume it is unlikely that E-rate will become a vehicle in the foreseeable future for substantial network expansion subsidies.