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Cost Allocation of Bundled Services in E-rate Program

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Released: May 23, 2014
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Federal Communications Commission

DA 14-712

Before the

Federal Communications Commission

Washington, D.C. 20554

In the Matter of

)

)

Schools and Libraries Universal Service

)

CC Docket No. 02-6

Support Mechanism

)

)

A National Broadband Plan

)

GN Docket No. 09-51

For Our Future

)

)

ORDER

Adopted: May 23, 2014

Released:

May 23, 2014

By the Chief, Wireline Competition Bureau:

I.

INTRODUCTION

1.

In this Order, the Wireline Competition Bureau (Bureau) revises our guidance for the E-

rate program (more formally known as the schools and libraries universal service support program) with

respect to the requirement that applicants deduct from their E-rate funding requests the value of ineligible

services bundled with services eligible for E-rate support, a process referred to in the E-rate program as

cost allocation. The 2010 Clarification Order permitted, under limited circumstances, E-rate applicants

to seek E-rate support for purchases of eligible services bundled with ineligible components without

providing a cost allocation separating out the value of the ineligible components.1 Beginning in funding

year 2015, we once again require E-rate recipients to cost allocate ineligible components that are bundled

with eligible products or services, even under the limited circumstances allowed for by the 2010

Clarification Order. Based on our review of the record, we find that allowing E-rate applicants to

purchase bundles of eligible products or services and ineligible components without deducting the value

of the ineligible components risks having the federal universal service fund (Fund) overpay for services,

and resulted in applicant and service provider confusion.2 We therefore determine that E-rate applicants

must deduct the value of ineligible components bundled with eligible services unless those ineligible

components qualify as “ancillary” to the eligible services under the Commission’s rules.3 This revised

interpretation of our rules shall be effective beginning in funding year 2015.

1 See Schools and Libraries Universal Service Support Mechanism, A National Broadband Plan for Our Future, CC

Docket No. 02-6, GN Docket No. 09-51, Order, 25 FCC Rcd 17324 (Wireline Comp. Bur. 2010) (2010 Clarification

Order).

2 We frequently refer to bundles of eligible services with ineligible components in this Order. By eligible service,

we mean any service or product that is eligible for E-rate support. By ineligible component, we mean any service,

product, equipment, device or other functionality that is ineligible for E-rate support. See USAC, Eligible Services

List, http://www.usac.org/sl/applicants/beforeyoubegin/eligible-services-list.aspx (last visited May 12, 2014)

(providing links to the ESLs for funding years 2010-2014 and a link to archived ESLs for funding years 1998-2009);

see also 47 C.F.R. § 54.504(e) (2011) (requiring that a request for discounts for a product or service that includes

both eligible and ineligible components must allocate the cost of the contract to eligible and ineligible components).

3 The Commission rules state that “[i]f a product or service contains ineligible components that are ancillary to the

eligible components, and the product or service is the most cost-effective means of receiving the eligible component

(continued…)

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Federal Communications Commission

DA 14-712

II.

BACKGROUND

2.

The E-rate program provides eligible schools and libraries with discounts for

telecommunications services, telecommunications, Internet access, internal connections, and basic

maintenance of internal connections.4 The Commission releases an ESL, which identifies those products

and services eligible for E-rate support.5 If an applicant submits a request for E-rate support for a product

or service that includes both eligible and ineligible components, the E-rate rules require an applicant to

determine the cost of the ineligible components, and the applicant may not seek support for the cost of

those components.6 Applicants and service providers may not use E-rate support to subsidize their

procurement of ineligible or unrequested products and services, and may not participate in arrangements

that have the effect of providing a discount level to applicants greater than that to which the applicants are

entitled.7 Instead, applicants must deduct the value of all price reductions, promotional offers, and “free”

products or services from the pre-discount cost of services indicated in their funding requests.8

3.

Among other things, the 2010 Schools and Libraries Sixth Report and Order adopted gift

rules for the E-rate program modeled on the gift rules applicable to federal agencies, with the goal of

prohibiting gifts that might have undue or improper influence on a procurement decision.9 In the 2010

Clarification Order, the Bureau addressed questions it received about these rules.10 In particular, the

Bureau addressed the treatment of charitable donations, explaining that even if a charitable donation

furthers educational programs and purposes, it will violate the E-rate program gift rule if it is provided for

the specific purpose of influencing the E-rate competitive bidding process.11 So, for example, the gift

rules prohibit gifts of equipment that increase the demand for a donor’s services, because the underlying

purpose of such gifts is likely to influence the purchasing patterns of the recipient school or library under

(Continued from previous page)

functionality, without regard to the value of the ineligible component, costs need not be allocated between the

eligible and ineligible components. Discounts shall be provided on the full cost of the product or service. An

ineligible component is ‘ancillary’ if a price for the ineligible component cannot be determined separately and

independently from the price of the eligible components, and the specific package remains the most cost-effective

means of receiving the eligible services, without regard to the value of the ineligible functionality.” 47 C.F.R. §

54.504(e)(2). See also Schools and Libraries Universal Service Support Mechanism, CC Docket No. 02-6, Third

Report and Order, 18 FCC Rcd 26912, 26927, para. 37 (2003) (Schools and Libraries Third Report and Order).

4 See 47 C.F.R. § 54.502(a). The Commission has sought comment on the services that should be eligible for E-rate

discounts in the pending E-rate Modernization NPRM. See Modernizing the E-rate Program for Schools and

Libraries, WC Docket No. 13-184, Notice of Proposed Rulemaking, 28 FCC Rcd 11304 (2013).

5 See 47 C.F.R. § 54.502(b); see also USAC, Eligible Services List,

http://www.usac.org/sl/applicants/beforeyoubegin/eligible-services-list.aspx.

6 See 47 C.F.R. § 54.504(e) (2011); Schools and Libraries Third Report and Order, 18 FCC Rcd at 26927, para. 37;

Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Report and Order, 12 FCC Rcd 8776, 9022-

23, para. 462 (1997) (subsequent history omitted).

7 See 2010 Clarification Order, 28 FCC Rcd at 17328, para. 11; see also USAC, USAC Free Services Advisory,

http://www.usac.org/sl/applicants/step02/free-services-advisory.aspx (last visited May 12, 2014).

8 Request for Review of the Decision of the Universal Service Administrator by Ysleta Independent School District et

al., Federal-State Joint Board on Universal Service, CC Docket Nos. 96-45 and 97-21, Order, 18 FCC Rcd 26407,

26434, para. 60 (2003).

9 Schools and Libraries Universal Service Support Mechanism; A National Broadband Plan for our Future, CC

Docket No. 02-6, GN Docket No. 09-51, Sixth Report and Order, 25 FCC Rcd 18762, 18800-02, paras. 86-90

(2010) (Schools and Libraries Sixth Report and Order).

10 2010 Clarification Order, 25 FCC Rcd 17324.

11 Id. at 17328, para. 11

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the E-rate program.12 The Bureau further explained that “service providers cannot offer special

equipment discounts or equipment with service arrangements to E-rate recipients that are not currently

available to some other class of subscribers or segment of the public.”13 In a footnote, the Bureau stated

that because “many cell phones are free or available to the general public at a discounted price with the

purchase of a two-year service contract…[s]chools and libraries are free to take advantage of these deals,

without cost allocation.”14 By way of example, the footnote also explained that “a service provider may

not offer free iPads to a school with the purchase of telecommunications or Internet access services

eligible under E-rate, if such an arrangement is not currently available to the public or a designated class

of subscribers.”15

4.

In response to this guidance, beginning in funding year 2011 some service providers

began offering – or started contemplating to offer – bundles of free or heavily-discounted ineligible

components with eligible services.16 This prompted the applicant and service provider community to seek

clarity on the scope of the guidance.17 The State E-rate Coordinators Alliance (SECA) filed a petition

seeking clarification on whether certain end-user devices could be purchased in bundles without cost

allocation, and proposing standards for purchasing bundled ineligible components without cost

allocation.18 On August 10, 2012, the Bureau issued a Public Notice seeking comment on the SECA

Petition.19

12 Id.

13 Id.

14 Id. at 17328, para. 11 n.25. The order did not elaborate on why in that instance no cost allocation would be

required.

15 Id.

16 See, e.g., Reply Comments of Jive Communications, Inc. on the E-rate Bundled Components Public Notice, CC

Docket No. 02-6, at 2-3 (dated June 7, 2013) (Jive Reply Comments) (stating that after careful examination of the

Schools and Libraries Sixth Report and Order, the 2010 Clarification Order, and a Client Services Bureau response

to its inquiry, Jive began offering free handsets to E-rate and other customers that purchase voice over Internet

protocol (VoIP) service).

17 See, e.g., Comments of E-rate Provider Services, LLC on the FY 2013 Draft Eligible Services List of the Schools

and Libraries Universal Service Mechanism, CC Docket No. 02-6, (dated Aug. 6, 2012) (seeking clarification on the

2010 Clarification Order and stating that for many months, service providers have been seeking clarification of the

scope of the guidance as well as contemplating how to best craft customer offerings to best take advantage of the

guidance); Notice of Ex Parte Communication from Philip B. Gieseler, Philip B. Gieseler Consulting, to Marlene H.

Dortch, Secretary, Federal Communications Commission, CC Docket 02-6 (dated Feb. 21, 2012) (stating that there

is currently confusion about the scope of the 2010 Clarification Order guidance); Notice of Ex Parte

Communication from Glenn S. Richards, Counsel for Broadcore, Inc., to Marlene H. Dortch, Secretary, Federal

Communications Commission, CC Docket 02-6 (dated Feb. 13, 2013) (discussing confusion over whether VoIP

handset bundles fall under the 2010 Clarification Order guidance).

18 SECA Petition for Clarification Pertaining to the Eligibility of Free VoIP Handsets and Other End-User

Equipment, CC Docket No. 02-6, GN Docket No. 09-51 (filed July 27, 2012) (SECA Petition). Comments filed in

response to that petition are incorporated into this proceeding. See Wireline Competition Bureau Seeks Comment on

the Eligibility of Bundled Components Under the Schools and Libraries Program, CC Docket No. 02-6, GN Docket

No. 09-51, Public Notice, 28 FCC Rcd 4212 (Wireline Comp. Bur. 2013) (E-rate Bundled Components Public

Notice).

19 Wireline Competition Bureau Seeks Comment on a Petition Filed by the State E-rate Coordinators’ Alliance

Seeking Clarification Regarding the Eligibility of Bundled End User Equipment Under the Schools and Libraries

Program, CC Docket No. 02-6, Public Notice, 27 FCC Rcd 9360 (Wireline Comp. Bur. 2012) (SECA Petition

Public Notice).

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5.

After considering the record developed in response to the SECA Petition Public Notice,

the Bureau issued the E-rate Bundled Components Public Notice seeking comment on requiring ineligible

components to be cost allocated, even if bundled with E-rate eligible services and offered to the public or

some class of users, and highlighting the prospect of the Bureau modifying the bundled services guidance

provided in the 2010 Clarification Order, rather than adopting the proposals made in the SECA Petition

Public Notice to clarify this guidance.20

III.

DISCUSSION

6.

Based on our review of the record, we now adopt the proposal made in the E-rate

Bundled Components Public Notice, and revise our guidance regarding cost allocation for bundles of

eligible services and ineligible components to more properly align with the Commission’s cost allocation

rules for the E-rate program, the best interests of the Fund, and the best interests of applicants for E-rate

support. As a result, beginning with funding year 2015, E-rate recipients must cost allocate non-

ancillary21 ineligible components that are bundled with eligible products or services, including those

components that previously would have fallen within the scope of components not requiring cost

allocation as described in the 2010 Clarification Order. Applicants may continue to seek E-rate funding

for the eligible components of any bundled service offering but now must cost allocate non-ancillary

ineligible components including, but not limited to, end user devices such as telephone handsets, VoIP

handsets, computers, cell phones, and other components that are not eligible for E-rate discounts. We

make no other changes to the gift guidance in the 2010 Clarification Order. If a gift was prohibited prior

to today’s Order, it remains prohibited by our rules.

7.

The record persuades us that the 2010 Clarification Order guidance, which was focused

on providing a further explanation of the Commission’s E-rate program gift rules, is not the best reading

of the Commission’s rules because it did not fully consider the interplay between the gift rules and cost

allocation requirements. As a result, the guidance in that order created substantial uncertainty for

applicants and service providers about which ineligible components were required to be cost allocated.22

Moreover, because the 2010 Clarification Order did not impose limitations on what types of equipment

or services could be bundled, we have become increasingly concerned that it unintentionally created risk

that bundled offerings could result in expenditures for ineligible equipment or services that could drain

the resources available for eligible equipment or services.23

20 See E-rate Bundled Components Public Notice.

21 For information on what constitutes an ancillary component, see supra note 3 and infra para. 13.

22 See SECA Reply Comments on the SECA Petition Public Notice, CC Docket No. 02-6, at 6-7 (dated Sept. 24,

2012) (stating that uncertainty creates confusion, causing unnecessary risk for applicants); Reply Comments of

Philip B. Gieseler on the SECA Petition Public Notice, CC Docket No. 02-6, at 2-3 (dated Sept. 24, 2012) (Gieseler

SECA Petition Public Notice Comments) (discussing the benefits of certainty for E-rate recipients).

23 Not a single commenter offered evidence demonstrating that providing support for bundles of eligible and

ineligible components imposes no additional cost to the Fund, and we are not persuaded by arguments that it would

be inappropriate to rescind the cost allocation guidance provided in the 2010 Clarification Order because we have

not quantified its cost to the Fund. See Comments of Funds for Learning, LLC on the E-rate Bundled Components

Public Notice, CC Docket No. 02-6, at 7-8 (dated May 23, 2013) (Funds for Learning Comments) (“[F]ree ‘stuff’

might be costing the program something, and in some cases it probably is, but that is a very weak foundation upon

which to support a rule change….”) (emphasis and quotation marks in the original); Reply Comments of Verizon

and Verizon Wireless on the E-rate Bundled Components Public Notice, CC Docket No. 02-6, at 2 (dated June 7,

2013) (“[I]t is not apparent—and the [E-rate Bundled Components Public Notice] does not substantively address—

whether the common wireless industry practice of offering free or discounted devices to customers actually has had

a material impact on the demand for E-rate subsidies.”); Comments of Sprint Nextel Corporation on the E-rate

Bundled Components Public Notice, CC Docket No. 02-6, at 2 (dated May 23, 2013) (Sprint Comments) (“[I]nsofar

(continued…)

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8.

The 2010 Clarification Order guidance has proven to be incompatible with the

Commission’s E-rate rules regarding eligible services and cost allocation, which serve to prevent the E-

rate program from paying for more than just eligible services. Permitting E-rate support for bundled

ineligible components without requiring cost allocation creates the risk that E-rate funds will pay for

ineligible services, leaving less money for eligible services.24 The Commission’s ongoing commitment to

strong stewardship of the Fund and to combatting waste, fraud and abuse in the E-rate program requires

us to strive to ensure that E-rate support is not diverted to ineligible services, and the interpretation of our

rules adopted here helps guard against that risk.25

9.

In addition, we have found that the 2010 Clarification Order has caused confusion over

the interplay between that order and the Commission’s cost allocation rules. The Commission’s cost

allocation rules require that “[a] request for discounts for a product or service that includes both eligible

and ineligible components must allocate the cost of the contract to eligible and ineligible components.”26

By exempting some bundled offerings from those general cost allocation rules, the cost allocation

guidance in the 2010 Clarification Order inadvertently created substantial tension between the guidance

provided by the Bureau and the Commission’s rules. Moreover, commenters expressed frustration that

the 2010 Clarification Order cost allocation guidance did not make clear what products or services, other

than cell phones, did not require cost allocation.27 Rescinding the cost allocation guidance of the 2010

Clarification Order and once again requiring cost allocation of all non-ancillary ineligible components of

a bundle reflects the best reading of Commission rules and will make it easier for applicants to determine

what must be cost allocated.28 We agree with the commenter who stated that the longstanding cost

allocation requirement is “a simple and conceptually sound approach.”29

(Continued from previous page)

as Sprint is aware, there is no data to support this supposition [that requiring cost allocation for ineligible bundled

devices will result in more funds being available for E-rate eligible services]”); Reply Comments of T-Mobile USA,

Inc. on the E-rate Bundled Components Public Notice, CC Docket No. 02-6, at 2 (dated June 7, 2013) (T-Mobile

Reply Comments) (“Neither the [E-rate Bundled Components Public Notice] nor the record in this proceeding

presents evidence, however, that the bundling rule has in fact increased reimbursements from the fund or placed the

fund under any strain”). One commenter argued that there is data showing the cost of permitting ineligible bundled

devices to not be cost allocated to the Fund, but did not provide the data. See Comments of E-rate Central to the E-

rate Bundled Components Public Notice, CC Docket No. 02-6, at 1 (dated May 17, 2013) (E-rate Central

Comments).

24 See e.g. Comments of E-rate Provider Services, LLC on the E-rate Bundled Components Public Notice, CC

Docket No. 02-6, at 2 (dated May 21, 2013) (E-rate Provider Services Comments); Comments of Broadcore, Inc. on

the E-rate Bundled Components Public Notice, CC Docket No. 02-6, at 2 (dated May 21, 2013) (Broadcore

Comments) (both stating that there is significant pressure on E-rate services and that allowing ineligible services to

be bundled without cost allocation is not cost efficient for the E-rate fund).

25 See Schools and Libraries Universal Service Support Mechanism, CC Docket No. 02-6, Fifth Report and Order,

19 FCC Rcd 15808, 15813, para. 14 (2004) (discussing ongoing efforts to combat waste, fraud and abuse).

26 47 C.F.R. § 54.504(e).

27 See Comments of SECA on the E-rate Bundled Components Public Notice, CC Docket No. 02-6, at 2 (dated June

7, 2013) (SECA Comments) (stating that confusion exists because of the “other equipment” language in the 2010

Clarification Order guidance); Comments of NetDiverse, LLC on the SECA Petition Public Notice, CC Docket No.

02-6, at 2 (dated Sept. 10, 2012) (stating that further clarification is needed because there is confusion among

applicants and service providers); Gieseler SECA Petition Public Notice Comments at 3 (arguing that “[a]ll

beneficiaries deserve clear, bright line information about what can be a part of an eligible funding request”).

28 In its petition, SECA proposed that the Commission adopt a four-part test for determining which bundled

offerings should qualify for an exemption from cost allocation: (1) the cost of any end-user equipment provided as a

part of a bundled service must be considered “ancillary” relative to the cost of the bundle as a whole; (2) the bundled

service offering must be deemed a commercially common practice within the industry, not a unique offering of an

(continued…)

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10.

Some commenters recommended that the Bureau reaffirm the cost allocation language in

the 2010 Clarification Order, but limit its reach to bundles of cell phone handsets and service.30 Having a

separate cost allocation policy for cell phones might be a practical approach to address the difficulties in

assessing equipment price,31 but allowing bundling without cost allocation, even in relatively narrow

circumstances, is in tension with the Commission’s rules.32

Moreover, treating bundles of cell phones and

cell phone service differently than other bundles of eligible services and ineligible components is

inconsistent with the Commission’s general commitment to technological neutrality, and risks having the

E-rate program funds overpay for cell phone service.33 Requiring cost allocation for all bundled ineligible

components, including cell phones, comports more fully with Commission rules.34

11.

Some commenters argue that we should maintain the guidance in the 2010 Clarification

Order because bundling eligible and ineligible services is often the most economical way for E-rate

recipients to receive services.35 But under today’s decision, E-rate applicants may continue to achieve

those economies by purchasing bundles containing eligible products or services and ineligible

components. They are merely required to deduct the value of these ineligible components from their

funding requests when they seek discounts for purchases of bundled services. In practical terms, this

means that when applicants submit requests for funding on an FCC Form 471, they must identify which

costs in the bundle are eligible and which costs are ineligible.

(Continued from previous page)

individual service provider; (3) the arrangement must be currently available to the public and not just to a designated

class of subscribers (e.g., a special bundle available only to the K-12 market, that is not available to all other

customers, should not qualify for the cost allocation exemption); and (4) the service provider is not permitted to

offer a package or packages of equivalent eligible services, without bundled end-user equipment, at a lower price.

SECA Petition at 3. However, we find that the implementation of these proposals would create substantial tensions

with the Commission’s cost allocation rules, and we agree with commenters that the test would pose administrative

difficulties for applicants and USAC. See Reply Comments of Jive Communications, Inc. on the SECA Petition

Public Notice, CC Docket No. 02-6, at 11-12 (dated Sept. 10, 2012) (explaining the administrative difficulties

applicants would face in determining whether a bundled component would comply with the SECA test); E-rate

Central Comments at 2 (stating that the SECA proposal would be “somewhat difficult to administer”).

29 E-rate Central Comments at 2.

30 See SECA Comments at 2-3 (proposing cell phones only be exempt from cost allocation rules); Funds for

Learning Comments at 11 (requesting that E-rate recipients not be required to cost allocate cell phones even if they

are required to cost allocate other end-user devices).

31 See SECA Comments at 2 (arguing that that there is no confusion regarding applying the 2010 Clarification

Order guidance to cell phones); Funds for Learning Comments at 11 (discussing the difficulty of and expenses

related to cost allocating cell phones).

32 See supra para 9.

33 See E-rate Provider Services Comments at 3 (arguing that not requiring cost allocation for bundled ineligible cell

phones only would provide the cell phone industry with an unfair advantage over competing industries); Jive Reply

Comments at 11 (stating that the 2010 Clarification Order guidance should be administered in a technologically-

neutral manner); Broadcore Comments at 2 (also discussing pressure on E-rate funds resulting from funding

ineligible components).

34 See supra paras. 7-9.

35 See Sprint Comments at 1-2 (stating that it is unaware of instances in which a bundled package is more expensive

than a package containing only E-rate eligible services); Jive Reply Comments at 3 (arguing that the price of

bundled services is often no more than stand-alone prices);

T-Mobile Reply Comments at 3-4 (arguing that mobile

devices generally have high stand-alone prices when compared to bundles that are a part of long-term contracts).

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12.

Several commenters have asked for guidance on the Commission’s cost allocation

requirements.36 We recognize that, as explained above, cost allocation requires some administrative

effort, but compliance with the requirement is relatively simple. Under the Commission’s rules, if a

product or service contains ineligible components, costs should be allocated to the extent that a clear

delineation can be made between the eligible and ineligible components. The clear delineation must have

a tangible basis and the price for the eligible portion must be the most cost-effective means of receiving

the eligible service.37

13.

Finally, as explained above, cost allocation is not required for ineligible ancillary

components as defined by the Commission’s rules.38 Although some commenters recommend amending

the definition of “ancillary”,39 a substantive change to the Commission’s rule on ancillary components is

beyond the scope of this proceeding.40 We remind applicants that the definition of ancillary requires that

the price for the otherwise ineligible component cannot be determined separately and independently from

the price of the eligible components, and that the specific service which contains the ineligible ancillary

component remains the most cost-effective way for the applicant to receive that service.41 USAC reviews

requests for E-rate funding to ensure that any ineligible components deemed as ancillary to eligible

services are truly ancillary under the Commission’s definition.

IV.

PROCEDURAL MATTERS

A.

Final Regulatory Flexibility Analysis

14.

As required by the Regulatory Flexibility Act of 1980 (RFA),42 the Bureau has prepared a

Final Regulatory Flexibility Analysis relating to this Order. The FRFA is set forth in the Appendix.

B.

Paperwork Reduction Act Analysis

15.

This document contains revised information collection requirements subject to the

Paperwork Reduction Act of 1995 (PRA), Public Law 104-13. It will be submitted to the Office of

Management and Budget (OMB) for review under section 3507 of the PRA. We note that pursuant to the

36 See E-rate Central Comments at 2-4 (seeking guidance regarding amortization and determining standalone prices

but recognizing that the longstanding cost allocation requirement is “a simple and conceptually sound approach”);

Funds for Learning Comments at 2-3 (suggesting various options for cost allocation); SECA Comments at 5

(requesting additional guidance on cost allocation). Some commenters questioned whether our solution would

increase administrative efficiency because cost allocation is administratively cumbersome. See Funds for Learning

Comments at 2-3 (discussing the time and effort involved in cost allocation); Jive Reply Comments at 5 (stating that

cost allocation is not straightforward); T-Mobile Reply Comments at 7 (arguing that the negative consequences of

cost allocation would outweigh the benefits of requiring it).

37 Schools and Libraries Third Report and Order, 18 FCC Rcd at 26927, para. 37; 47 C.F.R. § 54.504(e)(1).

38 See Schools and Libraries Third Report and Order, 18 FCC Rcd at 26927, para. 37; see also 47 C.F.R. §

54.504(e)(2).

39 See Comments of Donna Rea on the E-rate Bundled Components Public Notice, at 1 (dated Apr. 13, 2013)

(arguing that some cellular devices should fall under the definition of “ancillary”); E-Rate Provider Services

Comments at 6 (asking that the definition of “ancillary” be broadened to include small features in software

packages).

40 See 47 C.F.R. § 0.91 (allowing the Bureau to act on requests for interpretation of Commission rules).

41 47 C.F.R. § 54.504(e)(2).

42 See 5 U.S.C. § 604. The RFA, see 5 U.S.C. §§ 601-612, has been amended by the Small Business Regulatory

Enforcement Fairness Act of 1996 (SBREFA), Pub. L. No. 104-121, Title II, Stat. 857 (1996). The SBREFA was

enacted as Title II of the Contract with America Advancement Act of 1996.

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Small Business Paperwork Relief Act of 2002, Public Law 107-198,43 the Commission previously sought

specific comment on how it might further reduce the information collection burden on small business

concerns with fewer than 25 employees.

16.

In the present document, we rescind the guidance in the 2010 Clarification Order44

regarding cost allocation requirements in the E-rate program (more formally known as the schools and

libraries universal service support program). We have determined that it is in the best interest of the E-

rate program and its participants to require E-rate recipients to cost allocate ineligible components that are

bundled with eligible services and that may have been subject to the limited exemption provided by the

guidance in the 2010 Clarification Order. Any information collected from applicants is limited to

information explaining the cost allocation.

C.

Congressional Review Act

17.

The Bureau will include a copy of this Order in a report to be sent to Congress and the

Government Accountability Office pursuant to the Congressional Review Act.45

V.

ORDERING CLAUSE

18.

Accordingly, IT IS ORDERED, that pursuant to the authority contained in sections 1

through 4, 254, and 303(r) of the Communications Act of 1934, as amended, 47 U.S.C. §§ 151 – 154,

254, and 303(r), and authority delegated in Federal-State Joint Board on Universal Service, CC Docket

No. 96-45, Third Report and Order, 12 FCC Rcd 22485, 22488-89, para. 6 (1997), this Order IS

ADOPTED, effective thirty (30) days after publication of the text or summary thereof in the Federal

Register.

FEDERAL COMMUNICATIONS COMMISSION

Julie A. Veach

Chief

Wireline Competition Bureau

43 See 44 U.S.C. § 3506(c)(4).

44 See 2010 Clarification Order, 25 FCC Rcd 17324.

45 See 5 U.S.C. § 801(a)(1)(A).

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APPENDIX

Final Regulatory Flexibility Analysis

1.

As required by the Regulatory Flexibility Act of 1980, as amended (RFA),1 the Wireline

Competition Bureau (Bureau) included an Initial Regulatory Flexibility Analysis (IRFA) of the possible

significant economic impact on a substantial number of small entities by the policies and rules proposed

in the E-rate Bundled Components Public Notice in CC Docket No. 02-6 and GN Docket No 09-51.2 The

Bureau sought written public comment on the proposals in the E-rate Bundled Components Public Notice,

including comment on the IRFA. This Final Regulatory Flexibility Analysis (FRFA) conforms to the

RFA.

A.

Need for, and Objectives of, the Proposed Rule

2.

This Order continues the Bureau’s efforts to simplify the E-rate program and encourage

the prudent use of limited E-rate funds. In it, we clarify that beginning with applications seeking

discounts for E-rate funding year 2015, any ineligible components must be cost allocated, even if bundled

with E-rate eligible services and offered to the public or some class of users. The prudent use of limited

E-rate funding and clarity about E-rate rules are important to the long-term efficacy of the federal

universal service fund (Fund). This clarification will help to achieve the Commission’s goal of

maintaining Fund solvency and providing clear rules for E-rate recipients.

B.

Summary of Significant Issues Raised by Public Comments to the IRFA

3.

No comments specifically addressed the IRFA.

C.

Description and Estimate of the Number of Small Entities to Which the Proposed

Rules May Apply

4.

The RFA directs agencies to provide a description of and, where feasible, an estimate of

the number of small entities that may be affected by the proposed rules, if adopted.3 The RFA generally

defines the term “small entity” as having the same meaning as the terms “small business,” “small

organization,” and “small governmental jurisdiction.”4 In addition, the term “small business” has the

same meaning as the term “small business concern” under the Small Business Act.5 A small business

concern is one that: (1) is independently owned and operated; (2) is not dominant in its field of operation;

and (3) satisfies any additional criteria established by the Small Business Administration (SBA).6

1 See 5 U.S.C. § 603. The RFA, see 5 U.S.C. §§ 601–612, has been amended by the Small Business Regulatory

Enforcement Fairness Act of 1996 (SBREFA), Pub. L. No. 104-121, Title II, 110 Stat. 847 (1996).

2 Wireline Competition Bureau Seeks Comment on the Eligibility of Bundled Components Under the Schools and

Libraries Program, CC Docket No. 02-6, GN Docket No. 09-51, Public Notice, 28 FCC Rcd 4212 (Wireline Comp.

Bur. 2013) (E-rate Bundled Components Public Notice).

3 5 U.S.C. § 603(b)(3).

4 5 U.S.C. § 601(6).

5 5 U.S.C. § 601(3) (incorporating by reference the definition of “small business concern” in 15 U.S.C. § 632).

Pursuant to the RFA, the statutory definition of a small business applies “unless an agency, after consultation with

the Office of Advocacy of the Small Business Administration and after opportunity for public comment, establishes

one or more definitions of such term which are appropriate to the activities of the agency and publishes such

definition(s) in the Federal Register.” 5 U.S.C. § 601(3).

6 Small Business Act, 15 U.S.C. § 632.

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Nationwide, there are a total of approximately 28.2 million small businesses, according to the SBA.7 A

“small organization” is generally “any not-for-profit enterprise which is independently owned and

operated and is not dominant in its field.”8

5.

Nationwide, as of 2002, there were approximately 1.6 million small organizations.9 The

term “small governmental jurisdiction” is defined generally as “governments of cities, towns, townships,

villages, school districts, or special districts, with a population of less than fifty thousand.”10 Census

Bureau data for 2002 indicate that there were 87,525 local governmental jurisdictions in the United

States.11 We estimate that, of this total, 84,377 entities were “small governmental jurisdictions.”12 Thus,

we estimate that most governmental jurisdictions are small.

6.

Small entities potentially affected by the proposals herein include eligible schools and

libraries and the eligible service providers offering them discounted services.13

7.

Schools and Libraries. As noted, “small entity” includes non-profit and small

government entities. Under the schools and libraries universal service support mechanism, which

provides support for elementary and secondary schools and libraries, an elementary school is generally “a

non-profit institutional day or residential school that provides elementary education, as determined under

state law.”14 A secondary school is generally defined as “a non-profit institutional day or residential

school that provides secondary education, as determined under state law,” and not offering education

beyond grade 12.15 For-profit schools and libraries, and schools and libraries with endowments in excess

of $50,000,000, are not eligible to receive discounts under the program, nor are libraries whose budgets

are not completely separate from any schools.16 Certain other statutory definitions apply as well.17 The

SBA has defined for-profit, elementary and secondary schools and libraries having $6 million or less in

annual receipts as small entities.18 In funding year 2007, approximately 105,500 schools and 10,950

libraries received funding under the schools and libraries universal service mechanism. Although we are

unable to estimate with precision the number of these entities that would qualify as small entities under

SBA’s size standard, we estimate that fewer than 105,500 schools and 10,950 libraries might be affected

annually by our action, under current operation of the program.

7 See SBA, Office of Advocacy, “Frequently Asked Questions,”

http://www.sba.gov/sites/default/files/FAQ_March_2014_0.pdf (last visited May 12, 2014).

8 5 U.S.C. § 601(4).

9 Independent Sector, The New Nonprofit Almanac & Desk Reference (2002).

10 5 U.S.C. § 601(5).

11 U.S. Census Bureau, Statistical Abstract of the United States: 2006, Section 8, page 272, Table 415.

12 We assume that the villages, school districts, and special districts are small, and total 48,558. See U.S. Census

Bureau, Statistical Abstract of the United States: 2006, section 8, page 273, Table 417. For 2002, Census Bureau

data indicate that the total number of county, municipal, and township governments nationwide was 38,967, of

which 35,819 were small. Id.

13 47 C.F.R. §§ 54.501-54.502, 54.504.

14 47 C.F.R. § 54.500(c).

15 47 C.F.R. § 54.500(k).

16 47 C.F.R. § 54.501.

17 Id.

18 13 C.F.R. § 121.201, North American Industry Classification System (NAICS) codes 611110 and 519120

(NAICS code 519120 was previously 514120).

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8.

Telecommunications Service Providers. First, neither the Commission nor the SBA has

developed a size standard for small incumbent local exchange services. The closest size standard under

SBA rules is for Wired Telecommunications Carriers. Under that size standard, such a business is small

if it has 1,500 or fewer employees.19 According to Commission data, 1,307 incumbent carriers reported

that they were engaged in the provision of local exchange services.20 Of these 1,307 carriers, an

estimated 1,006 have 1,500 or fewer employees and 301 have more than 1,500 employees.21 Thus, under

this category and associated small business size standard, we estimate that the majority of entities are

small. We have included small incumbent local exchange carriers in this RFA analysis. A “small

business” under the RFA is one that, inter alia, meets the pertinent small business size standard (e.g., a

telephone communications business having 1,500 or fewer employees), and “is not dominant in its field

of operation.”22 The SBA’s Office of Advocacy contends that, for RFA purposes, small incumbent local

exchange carriers are not dominant in their field of operation because any such dominance is not

“national” in scope.23 We have therefore included small incumbent carriers in this RFA analysis,

although we emphasize that this RFA action has no effect on the Commission’s analyses and

determinations in other, non-RFA contexts.

9.

Second, neither the Commission nor the SBA has developed a definition of small entities

specifically applicable to providers of interexchange services (IXCs). The closest applicable definition

under the SBA rules is for wired telecommunications carriers.24 This provides that a wired

telecommunications carrier is a small entity if it employs no more than 1,500 employees.25 According to

the Commission’s 2010 Trends Report, 359 companies reported that they were engaged in the provision

of interexchange services.26 Of these 300 IXCs, an estimated 317 have 1,500 or few employees and 42

have more than 1,500 employees.27 Consequently, the Commission estimates that most providers of

interexchange services are small businesses.

10.

Third, neither the Commission nor the SBA has developed a definition of small entities

specifically applicable to competitive access services providers (CAPs). The closest applicable definition

under the SBA rules is for wired telecommunications carriers.28 This provides that a wired

telecommunications carrier is a small entity if it employs no more than 1,500 employees.29 According to

the 2010 Trends Report, 1,442 CAPs and competitive local exchange carriers (competitive LECs)

19 13 C.F.R. § 121.201, NAICS code 517110.

20 FCC, Wireline Competition Bureau, Industry Analysis and Technology Division, “Trends in Telephone Service”

at Table 5.3, Page 5-5 (September 2010) (2010 Trends Report) (using data that is current as of Oct. 13, 2008).

21 Id.

22 5 U.S.C. § 601(3).

23 See Letter from Jere W. Glover, Chief Counsel for Advocacy, SBA, to William E. Kennard, Chairman, FCC,

dated May 27, 1999. The Small Business Act contains a definition of “small business concern,” which the RFA

incorporates into its own definition of “small business.” See 15 U.S.C. § 632(a) (Small Business Act); 5 U.S.C. §

601(3) (RFA). SBA regulations interpret “small business concern” to include the concept of dominance on a

national basis. 13 C.F.R. § 121.102(b).

24 13 C.F.R. § 121.201, NAICS code 517110.

25 Id.

26 2010 Trends Report, Table 5.3, page 5-5.

27 Id.

28 13 C.F.R. § 121.201, NAICS code 517110.

29 Id.

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reported that they were engaged in the provision of competitive local exchange services.30 Of these 1,442

CAPs and competitive LECs, an estimated 1,256 have 1,500 or fewer employees and 186 have more than

1,500 employees.31 Consequently, the Commission estimates that most providers of competitive

exchange services are small businesses.

11.

Wireless Telecommunications Carriers (except Satellite). Since 2007, the Census Bureau

has placed wireless firms within this new, broad, economic census category.32 Prior to that time, such

firms were within the now-superseded categories of “Paging” and “Cellular and Other Wireless

Telecommunications.”33 Under the present and prior categories, the SBA has deemed a wireless business

to be small if it has 1,500 or fewer employees.34 Because Census Bureau data are not yet available for the

new category, we will estimate small business prevalence using the prior categories and associated data.

For the category of Paging, data for 2002 show that there were 807 firms that operated for the entire

year.35 Of this total, 804 firms had employment of 999 or fewer employees, and three firms had

employment of 1,000 employees or more.36 For the category of Cellular and Other Wireless

Telecommunications, data for 2002 show that there were 1,397 firms that operated for the entire year.37

Of this total, 1,378 firms had employment of 999 or fewer employees, and 19 firms had employment of

1,000 employees or more.38 Thus, we estimate that the majority of wireless firms are small.

12.

Wireless telephony includes cellular, personal communications services, and specialized

mobile radio telephony carriers. As noted, the SBA has developed a small business size standard for

Wireless Telecommunications Carriers (except Satellite).39 Under the SBA small business size standard,

a business is small if it has 1,500 or fewer employees.40 According to the 2010 Trends Report, 413

carriers reported that they were engaged in wireless telephony.41 Of these, an estimated 261 have 1,500

30 2010 Trends Report, Table 5.3, page 5-5.

31 Id.

32 U.S. Census Bureau, 2007 NAICS Definitions, “517210 Wireless Telecommunications Categories (Except

Satellite)”; http://www.census.gov/naics/2007/def/ND517210.HTM#N517210.

33 U.S. Census Bureau, 2002 NAICS Definitions, “517211 Paging”;

http://www.census.gov/epcd/naics02/def/NDEF517.HTM; U.S. Census Bureau, 2002 NAICS Definitions, “517212

Cellular and Other Wireless Telecommunications”; http://www.census.gov/epcd/naics02/def/NDEF517.HTM.

34 13 C.F.R. § 121.201, NAICS code 517210 (2007 NAICS). The now-superseded, pre-2007 C.F.R. citations were

13 C.F.R. § 121.201, NAICS codes 517211 and 517212 (referring to the 2002 NAICS).

35 U.S. Census Bureau, 2002 Economic Census, Subject Series: Information, “Establishment and Firm Size

(Including Legal Form of Organization),” Table 5, NAICS code 517211 (issued Nov. 2005).

36 Id. The census data do not provide a more precise estimate of the number of firms that have employment of 1,500

or fewer employees; the largest category provided is for firms with “1000 employees or more.”

37 U.S. Census Bureau, 2002 Economic Census, Subject Series: Information, “Establishment and Firm Size

(Including Legal Form of Organization),” Table 5, NAICS code 517212 (issued Nov. 2005).

38 Id. The census data do not provide a more precise estimate of the number of firms that have employment of 1,500

or fewer employees; the largest category provided is for firms with “1000 employees or more.”

39 13 C.F.R. § 121.201, NAICS code 517210.

40 Id.

41 2010 Trends Report at Table 5.3, page 5-5.

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or fewer employees and 152 have more than 1,500 employees.42 We have estimated that 261 of these are

small under the SBA small business size standard.

13.

Common Carrier Paging. As noted, since 2007 the Census Bureau has placed paging

providers within the broad economic census category of Wireless Telecommunications Carriers (except

Satellite).43 Prior to that time, such firms were within the now-superseded category of “Paging.”44 Under

the present and prior categories, the SBA has deemed a wireless business to be small if it has 1,500 or

fewer employees.45 Because Census Bureau data are not yet available for the new category, we will

estimate small business prevalence using the prior category and associated data. The data for 2002 show

that there were 807 firms that operated for the entire year.46 Of this total, 804 firms had employment of

999 or fewer employees, and three firms had employment of 1,000 employees or more.47 Thus, we

estimate that the majority of paging firms are small.

14.

In addition, in the Paging Second Report and Order, the Commission adopted a size

standard for “small businesses” for purposes of determining their eligibility for special provisions such as

bidding credits and installment payments.48 A small business is an entity that, together with its affiliates

and controlling principals, has average gross revenues not exceeding $15 million for the preceding three

years.49 The SBA has approved this definition.50 An initial auction of Metropolitan Economic Area

(“MEA”) licenses was conducted in the year 2000. Of the 2,499 licenses auctioned, 985 were sold.51

Fifty-seven companies claiming small business status won 440 licenses.52 A subsequent auction of MEA

and Economic Area (“EA”) licenses was held in the year 2001. Of the 15,514 licenses auctioned, 5,323

were sold.53 One hundred thirty-two companies claiming small business status purchased 3,724 licenses.

A third auction, consisting of 8,874 licenses in each of 175 EAs and 1,328 licenses in all but three of the

42 Id.

43 U.S. Census Bureau, 2007 NAICS Definitions, “517210 Wireless Telecommunications Categories (Except

Satellite)”; http://www.census.gov/naics/2007/def/ND517210.HTM#N517210.

44 U.S. Census Bureau, 2002 NAICS Definitions, “517211 Paging”;

http://www.census.gov/epcd/naics02/def/NDEF517.HTM.

45 13 C.F.R. § 121.201, NAICS code 517210 (2007 NAICS). The now-superseded, pre-2007 C.F.R. citations were

13 C.F.R. § 121.201, NAICS codes 517211 and 517212 (referring to the 2002 NAICS).

46 U.S. Census Bureau, 2002 Economic Census, Subject Series: Information, “Establishment and Firm Size

(Including Legal Form of Organization),” Table 5, NAICS code 517211 (issued Nov. 2005).

47 Id. The census data do not provide a more precise estimate of the number of firms that have employment of 1,500

or fewer employees; the largest category provided is for firms with “1000 employees or more.”

48 Revision of Part 22 and Part 90 of the Commission’s Rules to Facilitate Future Development of Paging Systems et

al., WT Docket No. 96-18 et al., Second Report and Order and Further Notice of Proposed Rulemaking, 12 FCC

Rcd 2732, 2811-12, paras. 178-81 (1997) (Paging Second Report and Order); Memorandum Opinion and Order on

Reconsideration and Third Report and Order, 14 FCC Rcd 10030, 10085-88, paras. 98-107 (1999).

49 Paging Second Report and Order, 12 FCC Rcd at 2811, para. 179.

50 See Letter from Aida Alvarez, Administrator, SBA, to Amy Zoslov, Chief, Auctions and Industry Analysis

Division, Wireless Telecommunications Bureau (WTB), FCC (dated Dec. 2, 1998).

51 See 929 and 931 MHz Paging Auction Closes, Public Notice, 15 FCC Rcd 4858 (WTB 2000).

52 See id.

53 See Lower and Upper Paging Bands Auction Closes, Public Notice, 16 FCC Rcd 21821 (WTB 2001).

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51 MEAs, was held in 2003. Seventy-seven bidders claiming small or very small business status won

2,093 licenses.54

15.

Currently, there are approximately 74,000 Common Carrier Paging licenses. According

to the most recent Trends in Telephone Service, 291 carriers reported that they were engaged in the

provision of “paging and messaging” services.55 Of these, an estimated 289 have 1,500 or fewer

employees and two have more than 1,500 employees.56 We estimate that the majority of common carrier

paging providers would qualify as small entities under the SBA definition.

16.

Internet Service Providers. The 2007 Economic Census places these firms, whose

services might include voice over Internet protocol (VoIP), in either of two categories, depending on

whether the service is provided over the provider’s own telecommunications facilities (e.g., cable and

DSL ISPs), or over client-supplied telecommunications connections (e.g., dial-up ISPs). The former are

within the category of Wired Telecommunications Carriers,57 which has an SBA small business size

standard of 1,500 or fewer employees.58 The latter are within the category of All Other

Telecommunications,59 which has a size standard of annual receipts of $25 million or less.60 The most

current Census Bureau data for all such firms, however, are the 2002 data for the previous census

category called Internet Service Providers.61 That category had a small business size standard of $21

million or less in annual receipts, which was revised in late 2005 to $23 million. The 2002 data show that

there were 2,529 such firms that operated for the entire year.62 Of those, 2,437 firms had annual receipts

of under $10 million, and an additional 47 firms had receipts of between $10 million and $24, 999,999.63

Consequently, we estimate that the majority of ISP firms are small entities.

17.

Vendors of Internal Connections: Telephone Apparatus Manufacturing. The Census

Bureau defines this category as follows: “This industry comprises establishments primarily engaged in

manufacturing wire telephone and data communications equipment. These products may be standalone or

board-level components of a larger system. Examples of products made by these establishments are

central office switching equipment, cordless telephones (except cellular), PBX equipment, telephones,

telephone answering machines, LAN modems, multi-user modems, and other data communications

54 See Lower and Upper Paging Bands Auction Closes, Public Notice, 18 FCC Rcd 11154 (WTB 2003). The current

number of small or very small business entities that hold wireless licenses may differ significantly from the number

of such entities that won in spectrum auctions due to assignments and transfers of licenses in the secondary market

over time. In addition, some of the same small business entities may have won licenses in more than one auction.

55 2010 Trends Report at Table 5.3, page 5-5.

56 Id.

57 U.S. Census Bureau, 2007 NAICS Definitions, “517110 Wired Telecommunications Carriers”;

http://www.census.gov/naics/2007/def/ND517110.HTM#N517110.

58 13 C.F.R. § 121.201, NAICS code 517110 (updated for inflation in 2008).

59 U.S. Census Bureau, 2007 NAICS Definitions, “517919 All Other Telecommunications”;

http://www.census.gov/naics/2007/def/ND517919.HTM#N517919.

60 13 C.F.R. § 121.201, NAICS code 517919 (updated for inflation in 2008).

61 U.S. Census Bureau, “2002 NAICS Definitions: 518111 Internet Service Providers”;

http://www.census.gov/epcd/naics02/def/NDEF518.HTM.

62 U.S. Census Bureau, 2002 Economic Census, Subject Series: Information, “Establishment and Firm Size

(Including Legal Form of Organization),” Table 4, NAICS code 518111 (issued Nov. 2005).

63 An additional 45 firms had receipts of $25 million or more.

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equipment, such as bridges, routers, and gateways.”64 The SBA has developed a small business size

standard for Telephone Apparatus Manufacturing, which is: all such firms having 1,000 or fewer

employees.65 According to Census Bureau data for 2002, there were a total of 518 establishments in this

category that operated for the entire year.66 Of this total, 511 had employment of under 1,000, and an

additional seven had employment of 1,000 to 2,499.67 Thus, under this size standard, the majority of

firms can be considered small.

18.

Vendors of Internal Connections: Radio and Television Broadcasting and Wireless

Communications Equipment Manufacturing. The Census Bureau defines this category as follows: “This

industry comprises establishments primarily engaged in manufacturing radio and television broadcast and

wireless communications equipment. Examples of products made by these establishments are:

transmitting and receiving antennas, cable television equipment, GPS equipment, pagers, cellular phones,

mobile communications equipment, and radio and television studio and broadcasting equipment.”68 The

SBA has developed a small business size standard for firms in this category, which is: all such firms

having 750 or fewer employees.69 According to Census Bureau data for 2002, there were a total of 1,041

establishments in this category that operated for the entire year.70 Of this total, 1,010 had employment of

under 500, and an additional 13 had employment of 500 to 999.71 Thus, under this size standard, the

majority of firms can be considered small.

19.

Vendors of Internal Connections: Other Communications Equipment Manufacturing.

The Census Bureau defines this category as follows: “This industry comprises establishments primarily

engaged in manufacturing communications equipment (except telephone apparatus, and radio and

64 U.S. Census Bureau, 2002 NAICS Definitions, “334210 Telephone Apparatus Manufacturing”;

http://www.census.gov/epcd/naics02/def/NDEF334.HTM#N3342.

65 13 C.F.R. § 121.201, NAICS code 334210.

66 U.S. Census Bureau, American FactFinder, 2002 Economic Census, Industry Series, Industry Statistics by

Employment Size, NAICS code 334210 (rel. May 26, 2005); http://factfinder.census.gov. The number of

“establishments” is a less helpful indicator of small business prevalence in this context than would be the number of

“firms” or “companies,” because the latter take into account the concept of common ownership or control. Any

single physical location for an entity is an establishment, even though that location may be owned by a different

establishment. Thus, the numbers given may reflect inflated numbers of businesses in this category, including the

numbers of small businesses. In this category, the Census breaks out data for firms or companies only to give the

total number of such entities for 2002, which were 450.

67 Id. An additional 4 establishments had employment of 2,500 or more.

68 U.S. Census Bureau, 2007 NAICS Definitions, “334220 Radio and Television Broadcasting and Wireless

Communications Equipment Manufacturing”; http://www.census.gov/naics/2007/def/ND334220.HTM#N334220.

69 13 C.F.R. § 121.201, NAICS code 334220.

70 U.S. Census Bureau, American FactFinder, 2002 Economic Census, Industry Series, Industry Statistics by

Employment Size, NAICS code 334220 (rel. May 26, 2005); http://factfinder.census.gov. The number of

“establishments” is a less helpful indicator of small business prevalence in this context than would be the number of

“firms” or “companies,” because the latter take into account the concept of common ownership or control. Any

single physical location for an entity is an establishment, even though that location may be owned by a different

establishment. Thus, the numbers given may reflect inflated numbers of businesses in this category, including the

numbers of small businesses. In this category, the Census breaks out data for firms or companies only to give the

total number of such entities for 2002, which were 929.

71 Id. An additional 18 establishments had employment of 1,000 or more.

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television broadcast, and wireless communications equipment).”72 The SBA has developed a small

business size standard for Other Communications Equipment Manufacturing, which is having 750 or

fewer employees.73 According to Census Bureau data for 2002, there were a total of 503 establishments

in this category that operated for the entire year.74 Of this total, 493 had employment of under 500, and

an additional 7 had employment of 500 to 999.75 Thus, under this size standard, the majority of firms can

be considered small.

D.

Description of Projected Reporting, Recordkeeping, and Other Compliance

Requirements for Small Entities

20.

This Order reinstates the requirement that E-rate applicants cost allocate all bundled

ineligible components other than those that fall under the Commission’s definition of “ancillary.”76 Cost

allocation requirements are already part of section 54.504(e) of the Commission’s rules, which requires a

clear delineation of eligible and ineligible services that are included on an application requesting E-rate

discounts. The rulemaking results in minimal additional reporting requirements.

21.

The result of this rulemaking is that small entities that had not been cost allocating certain

bundled ineligible components will again be required to comply with section 54.504(e) requirements for

cost allocating these components. Small entities that are service providers and vendors in the E-rate

program will also be required to reexamine offerings in accordance to any changed requirements.

E.

Steps Taken to Minimize the Significant Economic Impact on Small Entities, and

Significant Alternatives Considered

22.

The RFA requires an agency to describe any significant, specifically small business,

alternatives that it has considered in reaching its proposed approach, which may include the following

four alternatives (among others): “(1) the establishment of differing compliance or reporting requirements

or timetables that take into account the resources available to small entities; (2) the clarification,

consolidation, or simplification of compliance and reporting requirements under the rule for such small

entities; (3) the use of performance rather than design standards; and (4) an exemption from coverage of

the rule, or any part thereof, for such small entities.”77

23.

This rulemaking could impose minimal additional burdens on small entities. The only

additional administrative burden the rulemaking could impose on small entities, however, would be

requiring them to cost allocate ineligible components that they may have presumed were exempted from

the cost allocation requirements by the 2010 Clarification Order. Cost allocation requires determining

72 U.S. Census Bureau, 2002 NAICS Definitions, “334290 Other Communications Equipment Manufacturing”;

http://www.census.gov/epcd/naics02/def/NDEF334.HTM#N3342.

73 13 C.F.R. § 121.201, NAICS code 334290.

74 U.S. Census Bureau, American FactFinder, 2002 Economic Census, Industry Series, Industry Statistics by

Employment Size, NAICS code 334290 (rel. May 26, 2005); http://factfinder.census.gov. The number of

“establishments” is a less helpful indicator of small business prevalence in this context than would be the number of

“firms” or “companies,” because the latter take into account the concept of common ownership or control. Any

single physical location for an entity is an establishment, even though that location may be owned by a different

establishment. Thus, the numbers given may reflect inflated numbers of businesses in this category, including the

numbers of small businesses. In this category, the Census breaks out data for firms or companies only to give the

total number of such entities for 2002, which were 471.

75 Id. An additional 3 establishments had employment of 1,000 or more.

76 See 47 C.F.R. § 54.504(d)(2).

77 5 U.S.C. § 603(c)(1) – (c)(4).

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the costs of eligible and ineligible components and reporting the delineation of those costs in a request for

E-rate discounts on the FCC Form 471. E-rate recipients had been required to cost allocate ineligible

components bundled with eligible services prior to the 2010 Clarification Order, and are already

generally required to cost allocate all ineligible components.

F.

Report to Congress

24.

The Commission will send a copy of this Order, including this FRFA, in a report to be

sent to Congress pursuant to the SBREFA.78 In addition, the Commission will send a copy of the Order,

including the FRFA, to the Chief Counsel for Advocacy of the SBA. A copy of the Order and the FRFA

(or summaries thereof) will also be published in the Federal Register.79

78 See 5 U.S.C. § 801(a)(1)(A).

79 See 5 U.S.C. § 604(b).

17

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