As the Federal Communications Commission (FCC) prepares to make key changes to the eRate–such as increasing the minimum amount the neediest applicants are required to contribute, and possibly eliminating the Form 470 used to seek competitive bids–stakeholders in the $2.25 billion-a-year federal program remain sharply divided as to what these changes should entail.

About 45 applicants, consultants, and vendors responded to the FCC’s “Third Report and Order and Further Notice of Proposed Rulemaking” by the March deadline. The notice continued the agency’s effort to explore ways of improving the program’s application process and reducing waste, fraud, and abuse.

The eRate provides discounts of up to 90 percent on the cost of telecommunications services, internet access, and internal connections for eligible schools and libraries. Year after year, demand for the eRate has exceeded what’s available.

For the 2004 funding year, the agency that oversees the program, the Schools and Libraries Division (SLD) of the Universal Service Administrative Co., reported that 39,785 applicants requested more than $4.278 billion in discounts. Although that amount is some $440 million (9 percent) less than last year, school and libraries still have asked for nearly double the amount available.

Despite the high level of participation, eRate stakeholders say the program needs a makeover because the application process is complicated and burdensome–and, increasingly, instances of program abuse have become widely publicized.

New House Energy and Commerce Committee Chairman Joe Barton, R-Texas, who says he supports the goals of the eRate, recently announced that he intends to step up focus on the eRate by reviewing the way the program is funded in conjunction with an analysis of several telecommunications issues.

Barton declined to comment on whether such a review might lead to a reduction in annual eRate funding. The eRate is also still under investigation by a House oversight and investigations subcommittee. On April 5, the Justice Department indicted five more individuals for eRate fraud, alleging they falsely claimed to have provided telecommunications services to three schools in order to receive funding.

Eliminating the Form 470

As one possible remedy, the FCC’s Notice asked whether the eRate would be improved if the Form 470 process–which ensures that applicants seek competitive bids–were to be simplified or even eliminated.

Many who submitted comments applauded the idea of eliminating the form altogether and creating a system whereby applicants certify their own procurement policy and procedures.

“School districts are already bound by procurement rules designed to ensure favorable pricing, encourage competition, and prevent fraud,” said the New York City Department of Education (NYCDOE). “Imposing another set of vaguely defined rules only complicates an already time-consuming process.”

“Every state has a procurement law,” agreed the Arkansas eRate Work Group. “The majority of applicants are good fiscal agents for their entity and the eRate program.”

Alternatively, the Pennsylvania Department of Education, which described the Form 470 as a “meaningless administrative burden,” suggested that the FCC should require applicants to seek a minimum of three bids before selecting an internal connections provider.

“Six years’ experience has proven that very few, if any, entities receive viable bids as a result of their Form 470 postings,” officials wrote.

As another option, the FCC could set acceptable price ranges for various products and services to keep applicants’ expenditures in line, said Greg Weisiger, Virginia’s state eRate coordinator.

For example, “experience indicates an adequate local area network, including hardware for a 900-student, 50-classroom, single-building school, can be done for approximately $300,000. Internal connections requests in excess of this total amount should be scrutinized for potential waste, fraud, and abuse, particularly if the same building was funded for internal connection within the past two years,” Weisiger wrote.

Instead of completely eliminating the Form 470 process, many said it should be radically reduced.

The Consortium for School Networking (CoSN) and the International Society for Technology in Education (ISTE) suggested eliminating the Form 470 for telephone and internet service but keeping it for internal connections.

E-Rate Complete LLC, an eRate consulting firm in Iowa, disagreed with the proposal to eliminate the Form 470. “Even if there is no other available vendor, it isn’t a hardship to complete the Form 470. It forces the applicant to consider adding new services or eliminating those that are not utilized,” the firm wrote.

Adjusting or revising the discount matrix

Additionally, the FCC asked whether it should adjust its discount matrix for internal connections to distribute funds to more applicants and deter waste, fraud, and abuse. Currently, the poorest schools and libraries receive a 90-percent discount to wire their buildings, leaving them responsible for only 10 percent of the cost.

Many who submitted comments said applicants should bear more of the costs for wiring their buildings. The Pennsylvania Department of Education, the Virginia Department of Education, the Arkansas E-Rate Work Group, BellSouth, and Sprint Corp. suggested lowering discounts to 70 or 80 percent.

“I believe a 10-percent match does not provide a sufficient incentive for applicants to limit internal connection funding requests,” said Virginia’s Weisiger.

The benefits would be threefold, he explained. First, the increased cost to applicants would prevent them from purchasing expensive, unnecessary products. Second, giving applicants 70-percent discounts instead of 90-percent discounts will free up funds to be distributed among more applicants. Lastly, it would stop vendors who inflate prices or offer applicants “grants” to cover their 10 percent.

Sprint Corp. agreed that revising the current discount matrix would improve the effectiveness of the eRate. Asking applicants to pay only 10 percent of the cost leaves “little incentive to select the most cost-effective configuration,” Sprint wrote.

Sprint recommends lowering the maximum discount for internal connections to 80 percent, but leaving the maximum discount for maintenance on internal connections at 90 percent.

“It makes little sense to install equipment and facilities, but then have those facilities operate below par because of lack of maintenance,” the company wrote.

Though changing the discount matrix might create a financial hardship for some applicants, Sprint noted that the eRate has been operating for seven years already, and many of the neediest applicants should have been served.

On the other hand, several entities strongly opposed the idea of changing the discount matrix–including the American Association of School Administrators (AASA), NYCDOE, CoSN, and ISTE.

First, they said, the FCC should evaluate the effect of its new rule that restricts applicants from applying for internal connections more than twice within a five-year period. This rule will take effect in the 2005 funding year.

Limiting applications for internal connections to twice in five years will already reduce waste, fraud, and abuse, AASA said. Plus, increasing an applicant’s contribution from 10 to 20 percent would double what it would have to pay out.

“In a time of record state funding shortfalls and tight budgets, this could restrain applicants from participating–especially in high-poverty and rural areas,” AASA wrote.

United Utilities Inc., which serves rural schools and libraries in Alaska, concurs. “The neediest applicants do not have the means to pay more than they are already paying,” United Utilities wrote. “If these applicants are required to pay more than 10 percent of the service costs, many applicants will probably be precluded from even applying.”

By waiting to see the effect of the “twice in five years” rule, CoSN and ISTE added, the FCC would reduce the burden on applicants.

“From an applicant’s perspective, frequent rule changes, no matter how necessary or warranted, serve only to further complicate an already complex program,” they wrote. “Applicants must have sufficient time to adjust to these rule changes without the additional burden of coping with discount matrix alterations.”

Recovering funds from vendors or applicants

The FCC also asked for comments on a range of issues related to the recovery of funds that were wrongly disbursed.

The NYCDOE currently is requesting a waiver from the FCC concerning its recovery of funds. Several years ago, the district proactively hired companies to audit telephone charges for more than 23,000 circuits in more than 1,600 school buildings. As a result of these audits, the telephone companies reimbursed millions of dollars to the district. The district’s contract with its auditors said that for every $1,000 recovered, the auditors would be paid $250 and the remaining $750 would be disbursed according to the district’s discount rate–78 percent to the SLD and 22 percent to the district.

However, the SLD insisted that the district pick up the cost for the audit and return the original amount of the discount to the SLD.

“This is illogical, unfair, and a disincentive for applicants to monitor expenditures,” NYCDOE said. “It creates a situation where the only injured party is the applicant who made the good-faith effort to prevent waste.”

In instances where rule violations or abuses are discovered, Weisiger recommends, the FCC should not allow the SLD to take back funds after they were committed. Instead, he wrote, if the SLD wrongfully promises funds to an applicant, the agency should repay the money itself. And if an applicant or vendor conducts wrongdoing, the matter should be turned over to objective law enforcement officials.

Sprint recommends that “financial liability for & repayments should be assigned to the party responsible for the violation.” In cases of minor errors that do not affect program integrity, the FCC should waive the recovery of funds, Sprint said. Also, determining the need to recover funds should be based on the rules that were in effect at the time of disbursement, not the time of the audit.

Both Verizon Communications and Cox Communiations suggested that a statute of limitations should be set for the recovery of funds. In the case of the Norfolk, Va., Public Schools, the FCC sought to recover funds three years after they were disbursed and used, Cox explained.

“We can conceive of nothing more destabilizing to the eRate program than applicants living in fear that the SLD or the [FCC] may decide [to] recollect from them discounts,” the company wrote.

Defining ‘internet access’

The FCC also asked whether the definition of eRate-eligible internet access should be expanded from “basic access to the internet” to something more in line with the definition recently approved for rural health-care providers. The agency defines internet access for these entities as “an information service that enables rural health-care providers to post their own data, interact with stored data, generate new data, or communicate over the World Wide Web.”

Sprint opposes expanding the definition of internet access for the eRate program, citing that “the circumstances surrounding the eRate and rural health-care programs are very different.”

For example, the new definition would stimulate even more demand for the eRate. Plus, new internet technologies would “further blur the line between pure internet access services and telecommunications services. This is of critical importance, as not all providers of internet access services are eligible to provide telecommunications services under the eRate program.”

WiscNet, Wisconsin’s state education network, said the definition should be expanded to match the one for rural health-care providers. “The current schools and libraries definition, with its narrow, obsolete focus on ‘basic conduit access,’ penalizes internet service providers who are not simultaneously telecommunications services providers,” WiscNet wrote.


Federal Communications Commission

Schools and Libraries Division