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Net56, Inc.

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Released: December 19, 2012

Federal Communications Commission

DA 12-2031

Before the

Federal Communications Commission

Washington, DC 20554

In the Matter of
)
)
Requests for Review of
)
Decisions of the
)
Universal Service Administrator by
)
)
Net56, Inc.

)
File No. SLD-678753
Palatine, IL
)
)
Schools and Libraries Universal Service
)
CC Docket No. 02-6
Support Mechanism
)

ORDER

Adopted: December 19, 2012

Released: December 19, 2012
By the Chief, Telecommunications Access Policy Division, Wireline Competition Bureau:
1.
Consistent with precedent,1 we grant a request from Net56, Inc. (Net56) seeking review of a
decision by the Universal Service Administrative Company (USAC) under the E-rate program (more
formally known as the schools and libraries universal service support program) to deny funding for
Country Club Hills School District 160’s (Country Club Hills) application for funding year 2009.2 In this
appeal, we find USAC erred in finding that the applicant violated the Commission’s rules when selecting
Net56 to provide Internet access, wide area network (WAN), firewall, and web and email hosting
services.3


1 See Request for Review of Decisions of the Universal Service Administrator by Net56, Inc., CC Docket No. 02-6,
Order, 27 FCC Rcd 13606 (Wireline Comp. Bur. 2012) (Net56/Harrison) (finding that the applicant cost allocated
E-rate eligible services, paid its non-discounted share for services, and selected cost-effective services, inter alia);
Request for Review of Decisions of the Universal Service Administrator by Net56, Inc., CC Docket No. 02-6, Order,
DA 12-1951 (Wireline Comp. Bur. rel. Dec. 4, 2012) (Net56/Posen-Robbins). See also, e.g., Request for Review by
Ysleta Independent School District of the Decision of the Universal Service Administrator
, CC Docket Nos. 96-45,
97-21, Order, 18 FCC Rcd 26407, 26431, para. 53 (2003) (Ysleta) (“The Commission has determined that seeking
competitive bids for eligible services is the most efficient means for ensuring that eligible schools and libraries are
fully informed of their choices and are most likely to receive cost-effective services”); Request for Review by
Macomb Intermediate School District Technology Consortium of the Decision of the Universal Service
Administrator
, CC Docket No. 02-6, Order, 22 FCC Rcd 8771, 8772, para. 2 (2007) (applicants must select the most
cost-effective service offering).
2 See Request for Review by Net56, Inc. of Decision of the Universal Service Administrator, Country Club Hills
School District, 2009 Funding Year, funding request numbers (FRNs) 1853415, 1853424, 1853437, at 4 (filed Aug.
30, 2010) (Net56 Appeal FY 2009). Section 54.719(c) of the Commission’s rules provides that any person
aggrieved by an action taken by a division of USAC may seek review from the Commission. 47 C.F.R. § 54.719(c)
(2012).
3 See Net56/Harrison, 27 FCC Rcd at 13612, para. 14; Net56/Posen-Robbins at para. 9. See also Letter from USAC,
Schools and Libraries Division, to Net56, Inc. (dated Feb. 23, 2010) (regarding Country Club Hills’s funding year
(FY) 2009 FCC Form 471 application number 678753, FRNs 1853415, 1853424, and 1853437) (Country Club Hills
FY 2009 Funding Commitment Decision Letter (FCDL) (denying funds for FY 2009); Letter from USAC, Schools
(continued…)

Federal Communications Commission

DA 12-2031

2.
As with the two previous appeals involving Net56, we find that USAC erred in its
determination that the applicant, in this case Country Club Hills, violated the Commission’s rules by
failing to cost allocate services in its contract with Net56, failing to pay its discounted share for eligible
services,4 and failing to select cost-effective eligible services.5 In this instance, on appeal, USAC also
found that Country Club Hills failed to retain documentation regarding its competitive bidding process.6
We also grant Net56’s appeal of that determination. As with the two previous appeals involving Net56,
we find USAC incorrectly considered a five-year Master Services Agreement (MSA) between Net56 and
the applicant, rather than the existing one-year contract for E-rate services.7
3.
We find that USAC considered the wrong contract in deciding to deny funding to Country
Club Hills for funding year 2009. The record shows that Country Club Hills did have an E-rate contract
with Net56 which allocated eligible from ineligible services.8 The record also demonstrates that Country
Club Hills paid its share of the non-discounted portion of the eligible services, in accordance with the
one-year E-rate contract.9 As with the other Net56-related appeals, Net56 explains that it used a financial
company, Millennium Leasing & Financial Services, Inc. (“Millennium”), to facilitate payments from
Country Club Hills to Net56 for E-rate eligible services.10 The record shows that Country Club Hills was
required to pay Millennium for eligible and ineligible services and goods. 11 Millennium would then remit
Country Club Hills’s non-discount portion of the cost of the eligible goods and services to Net56 for the
E-rate eligible services.12 Because this payment process was in effect for funding year 2009, we find that
Country Club Hills did pay its share for E-rate supported services in accordance with Commission rules.
4.
USAC also determined that certain services requested by Country Club Hills in its requests
for WAN, firewall, email, and web hosting services were ineligible for funding.13 In its appeals, Net56
(Continued from previous page)


and Libraries Division, to Denise Peeks, Country Club Hills School District 160 (dated March 26, 2010) (FY 2009
Further Explanation of Administrator’s Funding Decision). Subsequently, USAC also denied Net56’s appeal of
Country Club Hills’s funding year 2009 denials. See Letter from USAC, Schools and Libraries Division, to Paul B.
Hudson, Counsel to Net56, Inc. (dated Jun. 29, 2010) (Administrator’s Decision on Appeal – Funding Year 2009-
2010).
4 See FY 2009 Further Explanation of Administrator’s Funding Decision at 4-7.
5 See id at 3.
6 See Administrator’s Decision on Appeal – Funding Year 2009-2010 at 2.
7 See FY 2009 Further Explanation of Administrator’s Funding Decision at 4-7. Because it considered the MSA to
be the contract for E-rate services between Country Club Hills and Net56, it also found that Country Club Hills and
Net56 failed to allocate costs between eligible and ineligible services and that Country Club Hills did not pay its
share of the E-rate supported services.
8 See Net56 Appeal FY 2009 at 7 and Ex. C at Attachments 2-4.
9 See id. at Attachments 2-3.
10 See id. at 7 and Ex. C at Attachment 3.
11 See Net56 Appeal FY 2009 at Ex. C at Attachment 3.
12 See id.
13 See FY 2009 Further Explanation of Administrator’s Funding Decision at 4 (listing the following services as
ineligible for funding: “maintenance and repair of school owned equipment located in the Net56 datacenter (co-
located equipment), backup of hard drives of co-located equipment, providing anti-virus services on co-located
equipment, providing environmentally controlled atmosphere and generated backup power for co-located
equipment”). USAC found that a DNS/DHCP server that Country Club Hills included in its priority 1 funding
request should have been requested in a priority 2 funding request. Id. at 2. USAC also found that Country Club
Hills asked for a firewall at the Net56 data center, an ineligible location, and for e-mail and web retention and
journaling, which were also ineligible for funding. Id. at 1-3.
2

Federal Communications Commission

DA 12-2031

does not appeal USAC’s eligibility determinations about certain of the services at issue.14 Because Net56
does not contest USAC’s determinations with respect to eligibility of these services, we will not address
them here.
5.
Next we address USAC’s determination that Country Club Hills’s funding requests for
email and web hosting services were not cost effective.15 Applicants are required to request discounts
based on their reasonable needs and resources and their bids for services should be evaluated based on
cost-effectiveness.16 In the instant matter, as in the other Net56-related appeals, USAC determined that
Net56’s services for email and web hosting services “exceed[ed] twice the cost of a commercially
available solution” and were therefore not cost effective.17 As we have previously explained, the
Commission has not established a bright line test for determining when costs for services are excessive.18
The Commission has, however, noted that there may be instances where costs for prices or services are so
exorbitant that they cannot be cost effective and gave the example of a router that is sold for two to three
times the commercial market price.19 Here, we are not persuaded that USAC took into account all the
relevant costs when estimating the cost of a premises-based solution compared to Net56’s leased solution
for Country Club Hills. Based on the record before us, we conclude that the services requested by
Country Club Hills were not two to three times the estimated commercial market price.
6.
Moreover, as with the previous Net56 related cases, we find that the record supports a
determination that Country Club Hills followed the Commission’s rules in conducting its bidding and
selection process.20 The record also reflects that Net56 complied with the Commission’s rules regarding
lowest corresponding price, which requires service providers to provide applicants with prices no higher
than the lowest price that it charges to similarly-situated non-residential customers for similar services. 21
Net56 provided examples of prices for its commercial customers for web and email hosting services and


14 See Net56 Appeal FY 2009 at 7-9. See also Letter from Paul B. Hudson, Counsel to Net56, Inc., to Marlene H.
Dortch, Secretary, Federal Communications Commission at 2 (dated Jul. 31, 2012) (Net56 July 31, 2012 Letter)
15 See FY 2009 Further Explanation of Administrator’s Funding Decision at 3 (concluding that Net56’s web hosting
and email solution cost $480,000 over the course of a five-year contract, whereas USAC’s theoretical premises-
based solution would cost $57,000). USAC did not undertake a cost-effectiveness review for Net56’s prices for
Internet access or firewall services. Id at 2.
16 See supra n.1.
17 See FY 2009 Further Explanation of Administrator’s Funding Decision at 3.
18 See Ysleta, 18 FCC Rcd at 26432, para. 54 (“The Commission has not, to date, enunciated bright-line standards
for determining when particular services are priced so high as to be considered not cost-effective under our rules”).
19 See id.
20 See 47 C.F.R. § 54.503 (2012) (requiring applicants to seek competitive bids to procure E-rate services and
providing instruction on the protocol for the bidding process). See also 47 C.F.R. § 54.504 (2009). See, e.g., FCC
Form 470, Country Club Hills School District 160 (posted Dec. 15, 2008); Letter from Denise O. Peeks, Business
Manager, Country Club Hills School District 160 to Marlene H. Dortch, Secretary, Federal Communications
Commission at 1 (dated Mar. 2, 2011).
21 See 47 C.F.R. § 54.511(b) (2012). See also 47 C.F.R. § 54.511(b) (2009) (“Providers of eligible services shall not
charge schools, school districts, libraries, library consortia, or consortia including any of these entities a price above
the lowest corresponding price for supported services, unless the Commission, with respect to interstate services or
the state commission with respect to intrastate services, finds that the lowest corresponding price is not
compensatory. Promotional rates offered by a service provider for a period of more than 90 days must be included
among the comparable rates upon which the lowest corresponding price is determined.”). See also Federal-State
Joint Board on Universal Service
, CC Docket No. 96-45, Fourth Order on Reconsideration, 13 FCC Rcd 5318,
5398, para. 133 (1997).
3

Federal Communications Commission

DA 12-2031

compared them to the comparable prices that it charged to Country Club Hills.22 Based on these factors
and the record before us, we conclude that USAC erred in finding that the services Country Club Hills
purchased were not cost effective.23
7.
Finally, we address USAC’s allegation that Country Club Hills failed to retain required
competitive bidding documents. Here, it is undisputed that Net56 was the only bidder, and the record
demonstrates that Country Club Hills retained all necessary documents relating to Net56’s bid.
Therefore, we find that USAC erred in finding that Country Club Hills failed to retain required
documentation.
8.
Lastly, on our own motion, we waive section 54.507(d) of the Commission’s rules and
direct USAC to waive any procedural deadline, such as the invoicing deadline, that might be necessary to
effectuate our ruling.24 We find good cause to waive section 54.507(d) because filing an appeal of a
denial is likely to cause the applicant to miss the program’s subsequent procedural deadlines in that
funding year.
9.
Therefore based on our review of the record, we grant the request of Net56 with respect to
Country Club Hills’s funding year 2009 E-rate application. On remand, we direct USAC to process the
grant using the services and pricing found in Country Club Hills’s E-rate contract dated January 20, 2009,
and reduce the funding request by the amount of any ineligible charges consistent with this order. To
ensure that the underlying applications are resolved expeditiously, we direct USAC to complete its review
of each application listed in the appendix and issue an award or a denial based on a complete review and
analysis no later than 90 calendar days from the release date of this order. In remanding these
applications to USAC, we make no finding as to the ultimate eligibility of the services or the underlying
applications. We direct USAC to discontinue recovery actions relating to requests for review that are
addressed herein. At this time, we also find that there is no evidence of waste, fraud or abuse in the
record.
10.
ACCORDINGLY, IT IS ORDERED, pursuant to the authority contained in sections 1-4
and 254 of the Communications Act of 1934, as amended, 47 U.S.C. §§ 151-154 and 254, and sections
0.91, 0.291, 1.3 and 54.722(a) of the Commission’s rules, 47 C.F.R. §§ 0.91, 0.291, 1.3 and 54.722(a),
that the request for review filed by Net56, Inc. IS GRANTED and the underlying application IS
REMANDED to USAC for further consideration in accordance with the terms of this order.


22 See Net56 July 31, 2012 Letter at 4-5.
23 See, e.g., Net56/Harrison, 27 FCC Rcd at 13612, para. 14 (explaining how Net56 demonstrated that its costs for
products and services were not unreasonable based on the needs and circumstances of Harrison School District 36
and that USAC erred in finding that the services were not cost-effective).
24 47 C.F.R. § 54.507(d) (2012) (requiring non-recurring services to be implemented by September 30 following the
close of the funding year).
4

Federal Communications Commission

DA 12-2031

11.
IT IS FURTHER ORDERED, pursuant to the authority contained in sections 1-4 and 254
of the Communications Act of 1934, as amended, 47 U.S.C. §§ 151-154 and 254, and sections 0.91,
0.291, 1.3 and 54.722(a) of the Commission’s rules, 47 C.F.R. §§ 0.91, 0.291, 1.3 and 54.722(a), that
section 54.507(d) of the Commission’s rules, 47 C.F.R. § 54.507(d), IS WAIVED for the parties to the
limited extent provided herein.
FEDERAL COMMUNICATIONS COMMISSION
Trent B. Harkrader
Chief
Telecommunications Access Policy Division
Wireline Competition Bureau
5

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