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Tennessee Consortium Wins E-Rate Appeals Involving Complex Interpretations of the “Most Cost-Effective” and “Legally Binding Agreement” Rules

Jim Smith Posted in USAC

TennesseeIn an Order released December 30, 2016, the FCC’s Wireline Competition Bureau granted appeals of a 2015 USAC decision that denied E-rate funding to the Sweetwater consortium of Tennessee school districts for funding years 2013-2015, where USAC found that Sweetwater violated the E-rate program’s “most cost-effective bid” and “legally binding agreement” requirements (47 CFR §§ 54.504(a), 54.511).  The Bureau reversed that decision and granted E-rate funding for those years and  also granted waivers of former rule 54.504, which until funding year 2015 required that E-rate services be supported by a signed contract.  The appeals were filed in May 2016 by the Sweetwater City Schools on behalf of the Sweetwater Consortium, representing 76 Tennessee schools and school districts, and its E-rate service provider, Education Networks of America (ENA).

In 2013 Sweetwater sought bids for a three-year contract for E-rate supported managed Internet access, VoIP and videoconferencing services.  Because of uncertainty over which consortium members would actually elect to take services under the contract, Sweetwater’s FCC Form 470 and RFP requested pricing for three hypothetical school districts with 10, 80 and 150 sites.  ENA and AT&T submitted bids.  The price of eligible services was the most significant factor in Sweetwater’s bid evaluation criteria, with a value of 25 out of 100 total points.  The criteria also included several non-price factors comprising the other 75 possible points.  ENA’s total bid price was $9.3 million and AT&T’s was $6 million, and accordingly assigned AT&T the full 25 points for the pricing factor, while assigning ENA 16.2 points.  Nevertheless, Sweetwater awarded more points to ENA with respect to the six non-price bid factors, and ENA won the bid.  ENA then provided pricing worksheets incorporating the terms of its bid response to the consortium members.  A total of 45 of the members ordered services from ENA beginning in funding year 2013, most of which also executed a letter of intent.

After initially issuing E-rate disbursements to the consortium members during funding year 2013, USAC commenced an “extensive special compliance review” and eventually issued commitment adjustments (COMADs) denying funding for funding years 2013 through 2015.  It denied funding on grounds that (i) Sweetwater had failed to select the most cost-effective service offering because the two bids were “similar” yet  ENA’s pricing was over $3 million higher, and (ii) no valid contract existed between ENA and Sweetwater.  After USAC denied appeals, Sweetwater and ENA appealed to the FCC’s Wireline Bureau.

In granting the appeals and reversing USAC, the Bureau noted that this is the first instance where it has addressed an E-rate applicant’s use of hypothetical districts to evaluate pricing.   It declared for the first time that:

if a consortium chooses to use hypothetical or sample districts in order to compare multiple bids, [it] must compare pricing that reasonably represents the pricing for the services that the entities listed on the FCC Form 470 anticipate they are likely to request in order to comply with the requirement that price is the most important factor in selecting a bid.

Although the Bureau commented that Sweetwater’s evaluation process was “far from precise and not reflecting a best practice in price evaluation,” it ultimately found that its methodology was reasonable “particularly given the lack of guidance by the Commission on this matter.”  Citing the FCC’s 2003 decision in Ysleta Independent School District, the Bureau also found that Sweetwater complied with the price-as-primary-factor rule because it “gave price more weight than any other single factor as the Commission’s rules require,” even though AT&T had submitted a lower priced bid than ENA.  While acknowledging that “[s]electing a bid that is 50 percent more than the lowest-cost bid raises concerns,” the Bureau found that “the Commission has not established a bright-line test for determining when a particular service offering is not cost-effective.”

With regard to the lack of a signed contract, the Bureau noted that the FCC’s 2014 E-rate Modernization Order revised that former requirement for funding years starting in 2015 to require instead a “legally binding agreement.”  It concluded that Sweetwater members had such “legally binding agreements” with ENA at the time they requested E-rate support, in the form of pricing worksheets provided by ENA that “contained definite pricing to each consortium member before the member filed its E-rate application,” for which “[d]istricts typically signed letters of intent indicating interest in purchasing the services listed on the pricing worksheet.”  Again, the Bureau admonished that this was not an example of best practices, and that having a signed contract removes the ambiguities raised in this case.  Finally, the Bureau also granted a waiver for funding years 2013 and 2014, when there was a requirement to have a signed contract.

The Bureau’s Order should be closely examined by E-rate participants, and especially consortium applicants, inasmuch as it includes both new interpretations of the E-rate program rules and guidance on best practices going forward.  If you have questions, please contact the author or another member of the DWT E-rate team.