E-rate Update - Cost Allocation Guidelines Released
Message Posted March 18, 1998
Today the Schools and Libraries Corporation released the much awaited Cost Allocation Guidelines. These documents are designed to assist schools, libraries, and service providers determine the pre-discounted price of a component that contains eligible and ineligible functions, or a component that is being shared by eligible and ineligible entities. Please review this document closely before submitting your Form 471, as it will be used by the Program Integrity Staff at the Schools and Libraries Corporation to be sure that you are only applying for discounts on E-rate eligible items.
Using these guidelines to be sure you are only requesting discounts on eligible items or portions of items is extremely important because the SLC will be approving or disapproving discount requests at the services ordered level (i.e., the separate rows of Items 15 and 16). If the SLC determines that the pre-discount costs in any services ordered line item includes costs for ineligible services or for services to be provided to ineligible entities or for ineligible purposes, IT WILL DISAPPROVE FUNDING FOR THAT ENTIRE SERVICES ORDERED LINE ITEM (row of Item 15 or 16) even though the services ordered line item may also include support for eligible services to be provided to eligible entities.
If you have questions about using these guidelines or want to be sure your Form 471 is accurately completed, contact the SLC Client Service Bureau at 1-888-203-8100.
-- Julie
COST ALLOCATION GUIDELINES FOR ELIGIBLE AND INELIGIBLE ENTITIES
The following cost allocation guidelines will be used by SLC to review, analyze and process applications. Schools and libraries as well as service providers should consider these guidelines when:
schools and libraries and service providers negotiate their contracts;
schools and libraries fill in and submit their 471 applications;
service providers prepare their bills for services to eligible schools and libraries;
service providers submit their invoices to SLC for payment.
According to the form 471 instructions, when eligible and ineligible entities share services, the service provider may only receive support for that portion of the service that eligible entities are receiving. To help auditors confirm that this rule is being observed, the applicant must keep and retain careful records on some reasonable basis, consistent with any measures that may be established by the commission, the administrator or state commissions. [Form 471 instructions, Block 5, Item (15, column 3-5), p. 12].
The following guidelines should be followed:
A. Service Where Usage is Tracked Service providers and customers must itemize in their contracts the services for which the customers plan to apply for discounts. Where usage of eligible services is tracked by the service provider, the service provider should itemize the bill so that costs attributable to eligible schools and libraries are separately identified and the discount for each eligible school or library is specified on the bill. The bill submitted by the service provider must identify the pre-discount price of eligible services.
B. Service or Connections Where Usage Is Not Tracked Eligible entities can receive discounts for eligible services that could be shared with ineligible entities where it may not be feasible to track usage in order to allocate costs among these entities. In those cases, the consortium members cooperating to purchase the common service or connections have to agree in advance among themselves on how to allocate costs, based on their estimated relative use of the resulting service.
The allocation methodology must be based on a usage measure. Examples of such measures are:
(1) number of connections (trunks or lines or wireless connections) operated by each consortium member;
(2) number of connections (trunks or lines or wireless connections) operated by each consortium member and times of operation of the trunks or lines or wireless connections (a proxy for minutes of use) The allocation methodology should be set forth in the contract for services executed with the service provider. If there is no contract for services (in the case of tariff services), the customer should provide the service provider with a copy of its allocation methodology. The allocation methodology for allocating costs may be established permanently, or it may be reviewed periodically. This methodology must be documented as part of the record keeping responsibilities of the Form 471 applicant. The entity actually paying bills to the service provider (the Form 471 applicant) must maintain records of how the costs of services shared with ineligible entities are allocated. In those situations where the service provider remits one bill to the consortium for all the services rendered to all members of the consortium (which may include ineligible entities) then the allocation methodology among eligible and ineligible entities must be provided by the lead consortium member to the service provider in advance, so that the service provider may compute the discounted portion of the bill.
Examples of Allocation Methodologies
Number of Lines
A consortium comprising both eligible and ineligible entities may choose to allocate the pre-discount price among each member according to the number of lines used by each member. If there are five entities comprising the consortium, and the service provider issues one bill to the lead consortium member, and there are five lines used by each consortium member, each member would be allocated 1/5 or 20% of the bill. The pre-discount price would be the sum of the pre-discount price allocated to each eligible school or library. This allocation would serve to compute the pre-discount price for the service. For example, if all five entities are eligible for the discounts, the price billed by the service provider constitutes the pre-discount price. If four of the five entities are eligible for discounts, then the discounts would be applied to 80% of the price billed by the service provider.
Number of Lines and Hours of Operation
The consortium may also decide to allocate the pre-discount price among each member according to the number of lines and the period of time each line is used by each member. In the above example, assume further that there are five entities comprising a consortium of eligible and ineligible entities, and there are five lines used by each consortium member.
Assume further that one member of the consortium operates 24 hours per day and the other entities use their lines 10 hours per day. The consortium could agree to weight the allocation methodology according to both the number of lines and the hours of use by each school or library as follows:
Consortium No. of Lines Hours of Use Total Member
1 5 10/day 50 hours
2 5 10/day 50 hours
3 5 10/day 50 hours
4 5 10/day 50 hours
5 5 24/day 120 hours
Total hours: 320
Each of the first four consortium members would be allocated 50/320 or 15.625% of the bill from the service provider. The fifth consortium member would be allocated 120/320 or 37.5% of the bill from the service provider. COST ALLOCATION GUIDELINES FOR A SERVICE THAT CONTAINS ELIGIBLE AND INELIGIBLE COMPONENTS
General Principle: Discounts may be applied to contracts which cover both eligible and ineligible services or components, provided that the pre-discount price reflects only the costs of the eligible services or components, reduced by any applicable price reduction. Note, however, that as discussed below, this general principle does not govern the calculation of discounts for Internet access.
A. Computing the Pre-Discount Amount for Bundled Services. Schools and libraries may only apply discounts to eligible services. Both the service provider and school or library must know which services are eligible for discounts. A list of eligible services is identified on the NECA Web Site at www.neca.org at the Schools and Libraries Corporation page. An updated list will be available at the SLCFUND Web Site <www.slcfund.org>. Paper copies are available by contacting the Client Service Bureau at 1-888-203-8100. The school or library may only receive support if any contract covering eligible services specifically prices those services separately from ineligible services.
B. Special Price Reduction Rule. Whether the parties sign a contract or rely on monthly bills issued pursuant to tariff terms and conditions, the price for telecommunications services must be separately identified from the price of non-telecommunications services.
The stand-alone price of the eligible service or facility is the price from which the discount must be taken. The applicant must obtain this information from the service provider. This information must be set forth in the contract for services and/or facilities executed with the service provider. Discounts will not be applied to the price of bundled services and/or facilities that contain both ineligible and eligible components. The applicant and service provider must base the allocations on commercially available pricing for the eligible and ineligible components. Records must be maintained to enable the applicant and service provider to demonstrate and document the price of the eligible component(s).
Internal Connections
The eligible components of internal connections are those which are necessary to transmit information to the classroom and to the libraries' non-administrative buildings. When a particular service or facility performs both transmission and non-transmission functions, only the price associated with the transmission features is eligible for discounts.
Internal Connections Example
For example, a network file server which is necessary to operate a local area network is eligible for discounts as a component of internal connections. Some network file servers may also store content-based information. As non-transmission based internal connections are not eligible for discounts, the pre-discount price of the server must be confined to the stand-alone price of a network file server which features exclude the content storage capability. The price of a network file server that also stores content-based information must be reduced to the price of the network file server the features of which are limited to the operation of the local area network. The applicant and service provider must document in their contract the stand-alone price of the network file server the features of which exclude the content storage capability, in order for the applicant to establish the "pre-discount" price for the network file server that would be used to compute the discounts available from the Schools and Libraries Universal Service Program.
Telecommunications Services
Telecommunications services may comprise both transmission and other non-transmission related features. When a particular telecommunications service comprises both transmission and non-transmission related features, only the price relating to the transmission feature is eligible for discounts.
Telecommunications Services Example
For example, telecommunications service providers may offer a telecommunications service which also includes non-telecommunications related charges which are not eligible for discounts. This may occur when a service includes the transmission component and an equipment component. The equipment component may be a station set or telephone that is included in the price of the service. The price of the telecommunications service must be separately identified from the price of the station set or telephone in the documentation between the customer and the service provider. The price for the station set or telephone must be deducted from the price of the telecommunications service in order to compute the "prediscount" price or price eligible for discounts.
Only the telecommunications-related charges are eligible for discounts. Where the service provider indicates separately what the prices of the eligible and ineligible services would be if offered on an unbundled basis, the service provider must indicate the "price reduction" that would apply, if any, if the services are purchased together. This amount should be itemized in the contract between the billed entity and the service provider. The provider should then apply the appropriate discount to the price for the eligible services after reducing the price to reflect a proportional amount of the "price reduction" the provider applied. [FCC Report and Order, CC Docket No. 96-45, issued May 8, 1997, para. 462].
Example
A service provider leases commercially available telecommunications services for distance learning and the cameras necessary to implement distance learning to a customer. The monthly lease price for this package is $1000. If the customer leased only telecommunications services, the price would be $800 per month, and if the customer leased only the cameras, the price would be $500 per month. As the customer saves $300 by leasing the services on a combined basis ($1000 compared to $1300 [$800 + $500]), the $300 savings must be allocated between the telecommunications service and the cameras. The proportional reduction is computed by determining the percentage of the reduction attributable to the eligible services and to the ineligible services and prorating the savings based on those percentages. (800/1300) * $300 = $184.62. This amount, $184.62, must be deducted from the $800 stand-alone cost of telecommunications services to establish the appropriate "pre-discount" price for telecommunications services.
Cost Allocation Principles Governing Internet Access
The cost of Internet access must be unbundled from the cost of content-based Internet charges, unless the price of the Internet content cannot be determined readily. In that case, the school or library must affirmatively show that the price of the Internet access package is still the most cost-effective manner to obtain access to the Internet. [FCC Report and Order, CC Docket No. 96-45, issued May 8, 1997, para. 447].
Internet Access Example
Assume the price of monthly Internet access is $10.00 per month which includes both access and some content, and the price of monthly Internet access without any content based services is $7.50. The pre-discount price for access is $7.50.
Assume that there is only one monthly flat price of $10.00 per month for access and content, and there is no "stand-alone" price for access. Under that scenario, the applicant must affirmatively show that the price of the Internet access package is still the most cost-effective manner to obtain access to the Internet. This showing can be documented by seeking competitive bids for Internet access, and following the bidding process, the applicant selects the bundled Internet access service as the most cost-effective. Under the FCC's rules, the "cost effective" standard does not necessarily mean lowest price, but price is required to be a primary determinant. The "cost effective" standard also enables applicants to consider comparability of service; for example, whether the Internet access would be a dial-up connection or direct (dedicated) connection.
Assume further that there is no Internet access other than the bundled access/content price. The applicant may document this situation by contacting its local area Chamber of Commerce and state regulatory commission to inquire about the potential identification of ISPs which serve the area in which the applicant is located. The applicant should record the date of the inquiry and the person with whom the applicant spoke.
-- SLC
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