FCC Likely to Permanently Eliminate the Two-in-Five Rule for E-rate Category Two
On February 11, 2019, the FCC's Wireline Competition Bureau released a report concluding that the FCC should permanently eliminate the two-in-five rule that was first effective in 2005, in favor of a budget-based approach for distributing E-rate funding for equipment and services inside school and library buildings that was adopted on a temporary basis in 2014.
E-rate program funding is broadly divided into two types: Category 1, which provides funding for data transmission and broadband internet access services, and Category 2, which provides funding for managed Wi-Fi and equipment for internal connections within school and library buildings. You may recall that, beginning in funding year 2005, the FCC adopted the "two-in-five rule," which limited Category 2 funding for a given E-rate recipient to two out of every five funding years. However, in December 2014 the FCC significantly reformed the E-rate program and established a budget mechanism for Category 2 funding. The new budget approach allocated a per student budget (or per square foot for libraries) that recipients could spend at one time, or spread out over the course of multiple years. For example, schools are allocated a total of $150 per student over a five-year period, and could spread out that budget evenly over each of the five years, or spend it all in the first year.
The FCC had tasked the bureau with analyzing whether this new approach was effective in ensuring greater access to Category 2 funding. After reviewing data over the past five years, the bureau concluded that the new approach resulted in "greater funding is available for internal connections, distributed to more applicants, in a more equitable and predictable manner, giving applicants more flexibility to determine how best to upgrade their systems." In other words, the five-year budget approach was found to be a resounding success when compared to the former two-in-five rule, which most E-rate participants had found inflexible and difficult to administer.
In addition to maintaining the Category 2 budget funding approach, the bureau recommended that the FCC consider targeted changes to the budgets moving forward, such as an increase in the funding floor to encourage rural schools and libraries to participate in the program. In order for the change to become permanent, the full FCC must issue an order acting on the bureau's recommendation. That being said, we expect the Category 2 budget approach to stay in place for at least five more years.