Order Code IB98040
CRS Issue Brief for Congress
Received through the CRS Web
Telecommunications Discounts for
Schools and Libraries: The “E-Rate”
Program and Controversies
Updated December 22, 1999
Angele A. Gilroy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Administrative Structure
Restructuring — from SLC to SLD
Scope and Funding
FCC Funding Modifications
Restructuring and Funding Alternatives
Need for the Program
Eligible Services and Application Integrity
Program Status
Industry Billing Practices
Congressional Activity - 106th Congress
Legislation — 104th Congress
Legislation — 105th Congress
LEGISLATION
FOR ADDITIONAL READING


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Telecommunications Discounts for Schools and Libraries: The “E-Rate”
Program and Controversies
SUMMARY
Passage of the Telecommunications Act
decision by various telecommunications ser-
of 1996 (P.L. 104-104) codified the long
vice providers to pass through and itemize
standing policy commitment to ensure univer-
universal service contributions on subscribers’
sal service in the provision of telecommunica-
bills has focused further attention on this issue.
tions services. The 1996 Act also expanded
Concerns focus on : the administrative struc-
the concept to include, among other principles,
ture designed to implement the program; the
that elementary schools and classrooms, and
scope and funding level of the program; and
libraries should have access to telecommunica-
the potential for application fraud, waste and
tions services for educational purposes at
abuse. One additional issue — industry billing
discounted rates. The Federal Communications
practices — has also had an impact on the
Commission (FCC) was tasked with imple-
program.
menting the universal provisions of the Act
and on May 7, 1997, adopted its order detail-
Oversight of the program by the 105th
ing its guidelines.
Congress was intense, but no legislative mea-
sures were enacted. Numerous bills were
Included within that order was the estab-
introduced to address issues of concern and
lishment of the schools and libraries, or E-rate,
the program was the subject of hearings in
program. Under this program telecommunica-
both the House and Senate. Legislation alter-
tions services, Internet access, and internal
natives introduced in the 106th Congress in-
connections will be provided at discounts
clude those that seek the program’s elimina-
ranging from 20% to 90 % to eligible schools
tion, develop a new funding source, change its
and libraries. The FCC established the Schools
administrative structure or call for an in depth
and Libraries Corporation (SLC), an independ-
GAO study of the program.
ent, not-for-profit corporation to administer

the program. As the result of a January 1,
In response to congressional concerns the
1999 reorganization, however, the SLC
FCC reduced the program’s funding level and
became the Schools and Libraries Division of
approved, effective January 1, 1999, a pro-
the Universal Service Administrative Company
posal to restructure the administrative aspects
and ceased to exist as a separate corporate
of the program. The May 27, 1999 decision by
entity. The program receives no federal funds
the FCC to increase the second year funding
but is funded by mandatory contributions from
level for the program to its $2.25 billion cap
interstate telecommunications service provid-
has prompted Congress to revisit the issues
ers. Many of these providers have chosen to
debated in the previous Congress. For the first
pass through universal service charges directly
two years of the program $3.7 billion has been
to consumers and earmark a universal service
committed. The filing window for the third
charge on subscribers’ bills.
year of the program opened November 10,
1999 and will close January 19, 2000.
Although most support the concept, the
FCC’s implementation of the schools and
libraries provisions of the 1996 Act has gener-
ated significant and diverse controversy. The
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
FCC implementation of the schools and libraries, or E-rate program, has come under
significant congressional scrutiny. A decision by major telecommunications service
providers to place a line-item charge on subscribers’ bills to cover universal service
obligations, including those covered in this program, has given further impetus to this
review.

In response to congressional concerns, expressed in the last Congress, the FCC
modified the program’s administrative structure and lowered the funding level for year one.
However, based on application demand the FCC, in a May 27, 1999 action, increased the
second year funding level of the program to the program cap of $2.25 billion. Over the first
two years of the program $3.7 billion has been disbursed. The filing window for the third
year of the program opened November 10, 1999 and will close on January 19,2000.

The FCC decision to significantly increase the second year funding level of the
program has generated some Congressional concern. To date, four measures seeking to
change the program have been introduced in the 106th Congress. One measure, calls for the
elimination of the program. The other three measures focus on the establishment of an
alternative funding source and/or administrative structure for the program. No action has
been taken on these measures.

BACKGROUND AND ANALYSIS
Passage of the Telecommunications Act of 1996 (P.L.104-104) codified the long-
standing commitment by U.S. policymakers to ensure universal service in the provision of
telecommunications services. The universal service concept, as originally designed, called for
the establishment of policies to ensure that local telephone service is available to all
Americans by ensuring that rates for residential consumers as well as consumers in high cost
areas were kept reasonable. Congress, through the 1996 Act, not only codified this concept,
but also expanded the concept of universal service to include, among other principles, that
elementary and secondary schools and classrooms, and libraries should have access to
telecommunications services for educational purposes at discounted rates. (See Sections
254(b)(6) and 254(h)of the 1996 Telecommunications Act.)
Consistent with provisions contained in the 1996 Act the FCC, guided by the
recommendations of a federal-state joint board, was assigned the responsibility for
implementing these universal service guidelines. On May 7,1997, the FCC adopted its order
implementing the universal service provisions and principles set forth in the Act. Included
within that order was the establishment of the schools and libraries, or E(education) - rate,
program. Under this program telecommunications services, Internet access, and internal
connections are to be provided at discounts ranging from 20% to 90 % to eligible schools and
libraries. Therefore schools and libraries do not receive direct funding from the program but
monies from the fund are used to reimburse the vendors who supply the services to the
program’s participants.
This issue brief does not attempt to explain the specifics of the E-rate program. It solely
addresses the controversial issues surrounding the program’s implementation and subsequent
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legislative measures introduced to address these issues. For additional information on the E-
rate program focusing specifically on schools and educational issues, see CRS Report 98-604
EPW, E-Rate for Schools: Background on Telecommunications Discounts Through the
Universal Service Fund
, by James B. Stedman and Patricia Osoroi-O’Dea. For background
on technology in elementary and secondary education , see CRS Report 96-178, Information
Technology and Elementary Education: Current Status and Federal Support
, by James B.
Stedman. An additional issue, concern that minors may gain access to “inappropriate”
material through the Internet has also had an impact on the E-rate program. This issue and
its subsequent legislative initiatives goes beyond the scope of this issue brief, but is addressed
in CRS Report RS20036, Internet-Protecting Children from Unsuitable Material and Sexual
Predators: Overview and Pending Legislation,
by Marcia Smith.
Although most policymakers support the universal service concept, the FCC’s
implementation of the schools and libraries provisions of the 1996 Act has generated
significant controversy. The decision by various telecommunications service providers to pass
through and itemize universal service contributions on subscribers’ bills has focused further
attention on this issue. Oversight of the schools and libraries program by the 105th Congress
became intense with congressional comments ranging from those who called for the
abolishment of the program, to those who supported of the program but felt it needed major
revisions, to those who continued to support the program as funded and designed. Concerns
regarding the schools and libraries program focus on: the administrative structure designed
to implement the program; the scope and funding level of the program; and the potential for
fraud, waste, and abuse. An additional related issue — industry billing practices has also had
an impact on the schools and libraries program.
Administrative Structure
The FCC established the Schools and Libraries Corporation (SLC), an independent not-
for- profit corporation, to administer the universal service program for schools and libraries.
Since its inception, however, the SLC became the focus of a wide range of concerns which
eventually led to the reorganization of the administrative structure of the E-rate program.
(See Restructuring — from SLC to SLD, below.) Some questioned the need for the SLC
and expressed concern that it only adds “new levels of bureaucracy” and siphons away
money that could be used to fund universal service objectives. Concerns have also been
expressed over the size of the SLC’s first year operating budget ($18.8 million) as well as
employee compensation levels. Of greater significance was the debate over whether the FCC
had exceeded its authority when it directed the establishment of the corporation.
The General Accounting Office (GAO) in response to a November 1997 request from
Senator Stevens, reviewed the FCC’s action establishing the SLC. The GAO concluded, in
its February 10, 1998 response, that the FCC had exceeded its authority when it directed the
creation of the SLC, in violation of the Government Corporation Control Act (P.L. 97-258).
FCC Chairman Kennard disagreed with the GAO’s conclusion and stated that the FCC was
within its authority, based on its general authority under Section 4(i) of the Communications
Act, to establish this corporation. However, continued controversy over the legality of and
the need for the SLC led to congressional action to modify the administrative structure of the
E-rate program.
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An amendment added to the Senate’s 1998 supplemental appropriations bill (S. 1768),
by Senator Stevens, addressed the administration of the schools and libraries and rural health
care portion of the universal service fund. This amendment, which was approved by the
Senate by voice vote on March 24, 1998, would have required the FCC to abolish the SLC
and its rural health care counterpart, consolidate them into a single entity, and cap the
compensation given to its officers and employees. The FCC was required to submit to
Congress by May 8, 1998, a report detailing the revised structure for this entity, and
additional information on the contributions to, and requests for funding from the schools and
libraries program. These provisions were not included in the text of the final bill (H.R. 3579),
which was signed into law on May 1, 1998 (P.L.105-174). However, the conference
committee’s “joint explanatory statement” did make mention of these provisions and stated
that “while the conference agreement does not include” the provisions relating to universal
service contained in S. 1768 the conferees “expect that the FCC will comply with the
reporting requirements in the Senate bill, respond to inquiries regarding the universal service
contribution mechanisms, access charges, and cost data, and propose a new structure for the
implementation of the universal service programs.” The joint statement also concurs with the
provisions relating to a compensation cap for employees administering the program. The FCC
complied with the provisions contained in S. 1768 and submitted its report to Congress on
May 8, 1998.
Restructuring — from SLC to SLD
In its May 8 Report to Congress (FCC 98-85), and a subsequent action of June 12, 1998
(CC Docket No. 96-45), the FCC: proposed the elimination of the SLC as a separate entity;
lowered the compensation level of officers and employees of the SLC; and requested that
Congress grant specific statutory authority for the newly proposed restructuring. The FCC
requested that the administrative entities affected by this proposal submit a reorganization
plan to implement these changes for FCC approval.
The restructuring plan was submitted to the FCC on July 1, 1998 and after receiving
public comment was approved, with modifications, by the FCC on November 19, 1998. The
approved plan, which went into effect on January 1, 1999, calls for the administration of all
forms of federal universal service support to be consolidated in a single entity, the Universal
Service Administrative Company (USAC). The USAC, the entity that among other duties
currently administers the high cost and low income portions of the universal service program,
was to become the permanent, sole administrator of all universal service programs, subject
to FCC determination, after one year, that the USAC is administering support in an “efficient,
effective, and competitively neutral manner.” The SLC would become the the Schools and
Libraries Division (SLD), one of three divisions within the USAC. The USAC CEO would
manage all three divisions. The USAC will continue to function as a subsidiary of the National
Exchange Carrier Association (NECA), and the FCC will review, after one year, whether the
USAC should be divested from the NECA. This reorganization plan, became effective as of
January 1, 1999 and the independent SLC ceased to exist. (A copy of the approved
reorganization plan can be found on the FCC’s web page at
[www.fcc.gov/ccb/universal_service_/welcome.html])
As a result of the reorganization a single entity, the USAC, is now responsible for
administering all the telecommunications universal service programs for the FCC, including
the schools and libraries or E-rate program. The USAC, a not-for-profit subsidiary of the
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National Exchange Carrier Association, is governed by a Board of Directors composed of a
broad range of industry and non-industry interests. Committees of the USAC Board govern
each division and each committee of the USAC Board oversees the budget of its respective
Division and reports to the overall USAC Board. The USAC Board has the authority to
review any action taken by a committee. The SLC no longer exists and has become one of
three divisions of the USAC known as the Schools and Libraries Division (SLD). Although
no longer a separate entity , the SLD essentially carries out the same functions as the former
SLC.
While continuing to uphold its legal right to create a separate entity to administer the
schools and libraries fund, a position contrary to a February 10, 1998 GAO opinion, the
FCC has requested that the Congress provide specific statutory authority for the
restructuring to eliminate any question concerning the USAC’s legal status and authority.
The FCC also directed that effective July 1, 1998 the level of compensation be lowered
for the officers and employees of the SLC. Compensation cannot exceed the rate of basic pay
for level I of the Federal Executive schedule which is currently $151, 800 a year. (The May
8, 1998 Report to Congress, and the subsequent June 12, 1998 order are available at the
FCC’s web site at [www.fcc.gov].)
Scope and Funding
Although federally mandated, the E-rate program, as designed by Congress, is funded
by telecommunications service providers. All interstate telecommunications providers, as
defined by the FCC, are required to contribute to the program. Contributions are based on
a percentage of both interstate and intrenational revenues. This percentage or “contribution
factor” is calculated by the FCC’s Common Carrier Bureau on a quarterly basis and varies
depending on the anticipated funding needs for the program. Many telecommunications
service providers have chosen to pass through these costs directly to their subscribers
ultimately making consumers of telecommunications services bare the costs of the program.
(See Industry Billing Practices.)
Congressional concerns regarding funding rest on both the scope of the services included
in the program and the funding level established to meet the program’s needs. The $2.25
billion per year funding ceiling established by the FCC to implement the schools and libraries
discount and the range of services included in the program have generated significant concern.
While most support the basic concept of the program, many have questioned the need
for a multi-billion dollar funding level and have expressed concern that the range of services
included in the program goes beyond congressional intent. Critics feel that the program, as
implemented by the FCC, is too extensive and will result in the funding of “gold plated”
systems. Coverage of sophisticated equipment such as routers, hubs, and network file
servers, as well as the inclusion of internal connections ( i.e., wiring to connect classrooms
within a school), has been criticized. Opponents claim that the extensive scope of the
program goes beyond the program’s intent and has resulted in an unnecessarily high funding
level. Those critical of the program as implemented support a more modest approach.
Opinions have also been expressed that the FCC’s time frame for accomplishing the program
is too short and overly ambitious and should be lengthened, thereby reducing the amount of
funding needed yearly.
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On the other hand, many supporters of the E-rate program feel that the range of services
covered and the funding level should remain or, if anything, be expanded. A decrease in
funding levels or scope is viewed as a retreat to the commitment Congress made to schools
and children. Furthermore, the $2.25 billion funding ceiling is not considered unreasonable,
they state, given the revenue stream of the industry. The inclusion of internal wiring they note
is consistent with the intent of Congress and critical to the program’s success. They cite
specific reference in the universal service provisions to access by “school classrooms” to
advanced telecommunications services to bolster their claim. Some also support expansion
of the program to include funding for time of use on the Internet. This they feel is particularly
critical for economically disadvantaged schools since connection is of little value, they claim,
if there is no funding for usage time.
Concern has also been expressed that the FCC has given priority to the schools and
libraries facet of the program at the expense of other, more primary aspects of the universal
service mandate, such as the “high cost” fund. The primary cornerstone of universal service
has been to ensure that telephone rates remain reasonable by assisting telephone providers in
high cost, typically rural, areas. The emphasis on the schools and libraries some claim, has
skewed the intent of Congress and diverted attention away from high cost concerns. The
“high cost” program could suffer, they state, if contributors are forced to shift resources to
the E-rate program. Some favor suspending the E-rate program and addressing all aspects of
universal service simultaneously in an integrated proceeding.

FCC Funding Modifications
Concerns over the direction the FCC is taking in implementing and funding the universal
service provisions of the 1996 Act in general, and the schools and libraries program in
particular, prompted the FCC to reconsider its actions regarding universal service support
for schools and libraries. The FCC released a public notice (CC Docket No. 96-45) on May
13, 1998, seeking comment on a proposal to phase-in funding for the schools and libraries
portion of the Universal Service Fund. After examination of the comments, the FCC adopted
an order on June 12, 1998, that modified funding aspects of the E- rate program. Among
other actions the FCC adjusted downward the amounts that would be collected to fund the
E-rate program through June 30, 1999.
More specifically the FCC, in its June 12, 1998 order (CC docket No. 96-45), made the
following modifications to the funding level and disbursement rules of the E- rate program:

! revised the funding year from a calendar year (January 1 - December 31) to
a fiscal year (July 1 - June 30) cycle. This is accomplished by extending the
first year funding cycle by six months through June 30, 1999. This
modification, according to the FCC, will synchronize the program with the
budgetary and planning cycles of most schools and libraries as well as align
changes in universal service contribution levels with local exchange carrier
annual access tariff filing schedules.
! froze the amount of funding at current rates. Program administrators were
directed to collect and disperse no more than $325 million per quarter for the
third and fourth quarters of 1998 and the first and second quarters of 1999.
Although the cap for the program remains unchanged, at $2.25 billion, when
added to the $625 million collected in the first half of 1998, the available
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funding for the first 18 months of the program will total no more than $1.925
billion.
! revised disbursement rules to insure that the most disadvantaged schools and
libraries get priority for support. Based on a preliminary review of pending
applications demand for discounts is estimated at $2.02 billion, an amount
exceeding the ceiling of $1.925 billion for disbursements. Since funding will
be less than demand, the FCC has adopted rules to prioritize distributions.
When demand exceeds the level of funding all eligible schools and libraries
will receive support for recurring services such as telecommunications
services and Internet access, but only the most economically disadvantaged
applicants will receive support for internal connections.
! changed the second year application cycle to begin no later than October 1,
1998, rather than July 1, 1998. Note, the application window for the second
funding year (July 1, 1999 - June 30, 2000) was delayed. It opened on
December 1, 1998 and will close on April 6, 1999.
The FCC’s May 27, 1999 decision to fully fund the second year of program at the $2.25
billion cap has generated significant controversy. In a 3-2 split decision the FCC
Commissioners decided that, given the level of demand as determined by a review of pending
applications, the second year of the program should be funded at its maximum level. This
is in contrast to the annual funding level of $1.3 billion for the first year of the program.
According to the FCC despite this increase the program will not meet its estimated second
year demand of $2.435 billion. This significant increase has reignited the debate which
occurred in the 105th Congress regarding the need for, the administration of and the funding
source and level of, the program.

Restructuring and Funding Alternatives
Changes in the administrative structure of the program, while welcomed by many, have
not satisfied a number of critics. An alternative administrative structure has been offered in
legislative initiatives (H.R. 1746 and S. 1004) introduced by Representative Tauzin and
Senator Burns. These bills, (which also contain provisions addressing funding) call for the
elimination of the E-rate program and the transfer of authority for the program from the FCC.
The E-rate program would be replaced by a Telecommunications Technology Trust Fund and
would be designed as a state block grant program. The Department of Commerce’s National
Telecommunications and Information Administration (NTIA) would become its administrative
entity. (See Congressional Activity, Action in the 106th Congress, for a detailed discussion
of the specific provision contained in these measures.)
This approach, according to its supporters, would alleviate the present legal questions
regarding FCC authority to establish entities and would give the program to an agency
familiar with the process of administrating grant programs. Supporters of the presently
designed E-rate program have expressed concerns that this approach would remove the goals
of the schools and libraries program from the universal service concept. Furthermore, they
claim, it would have a severe disruptive impact on the existing program, would result in a
more burdensome application process, and would make the program dependent on
appropriated funds.
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Debate over funding issues has also focused on what the appropriate funding mechanism
for the E-rate program should be. One suggested source for funding for the E-rate program
is the revenues collected from the 3% federal telephone excise tax. The federal telephone
excise tax, which is currently assessed on consumers’ local and long distance telephone
service, generates approximately $5 billion in yearly revenues. The revenue, while collected
from consumers by telephone companies, is forwarded to the U.S. Treasury and added to
general revenues. Three measures, H.R. 727, S. 1004 and H.R. 1746 all seek to use revenues
generated from that tax to address the funding issue. ( See Congressional Activity, Action
in the 106th Congress
, for a detailed discussion of the specific provision contained in these
measures.)
This approach, sponsors claim, would eliminate concerns over the legality of the present
funding mechanism and would result in funding for the program without adding new upward
pressures on consumers’ telephone bills. Furthermore, sponsors state, expenditures for the
program would be made explicit through a capped tax that is currently listed on telephone
bills. While interest has been expressed in examining this proposal, a number of questions
and concerns regarding the funding aspects of the measures remain. Included among these
are: concern that it would, at a minimum, cause disruption of a presently functioning
program; concern that the funding source for the program is not permanent; questions
whether money generated by taxes can be used to support private or parochial schools; and
the potential negative impact of use of general funds on other government outlays.
Need for the Program
Despite the changes made to funding levels and administrative structure a more
fundamental question rests with the debate over whether the E-rate program, as implemented,
is needed. Those who question the need for such a program claim that voluntary private
sector initiatives such as “Net Days” as well as other federal programs alleviate the need for
the E-rate program as designed. Some also question whether the alleged benefits that such
access to technology has on education can be substantiated. However, supporters of the E-
rate program cite its high level of demand (30,000 applications in Year 1 and 32,000
applications in Year 2) as proof that existing federal programs and private sector initiatives
are not meeting the needs of schools and libraries. Citing statistics contained in a recently
released Commerce Department study, Falling Through the Net: Defining the Digital Divide,
that show a significant disparity in access to computers and online services by race and
income, supporters also claim that this program is needed to help bridge the divide between
information “haves and have nots” and ensure access to communities that may otherwise be
left behind. Access to computers and on line services is vital, they claim, to ensure that the
upcoming generation is prepared to fill the growing number of computer-related jobs. (For
background on technology in education see CRS Report 96-178.)
Some question whether the E-rate program as designed duplicates or overlaps existing
federal programs. In an attempt to address this concern House Commerce Committee
Chairman Bliley and House Education Committee Chairman Goodling asked the General
Accounting Office (GAO) to undertake an examination of federal programs, previously
identified by the GAO at the request of Senator Stevens, that may in some way be
duplicative. The report was directed to examine a number of areas including the potential for
duplication and potential problems associated with fraud, waste, and abuse. The GAO report
(Telecommunications Technology: Federal Funding for Schools and Libraries), which was
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released in August 1999, identified 35 federal programs that could be used as a source of
support for telecommunications and information technology by libraries or elementary or
secondary schools in fiscal year 1998; ten programs specifically targeted technology while
the remaining 25 included technology as a possible use of funds. Based on the GAO’s review
it found that their are “similarities” among the programs, but the GAO “... did not identify
instances where two programs were designed to provide identical services to identical
recipients.” Furthermore, the GAO did not “identify information that indicates that fraud,
waste, and abuse are systemic or widespread problems” but did find instances of such
problems with individual guarantees. The GAO noted that action was taken against these
individual guarantees and to prevent reoccurrence of such problems. The GAO did not
examine the implementation of each program or conduct its own audits but relied on
interviews, agency program documents, and reports to reach its conclusions.
Eligible Services and Application Integrity
Directly related to the funding issue are concerns over the potential for possible fraud,
waste, or abuse of the program. The ability to ensure that only eligible services are funded
and that funding is dispersed at the proper level of discount has been questioned.

One concern has focused on possible confusion by applicants over the range of services
considered eligible for the program and the fear expressed by some that pending applications
contain requests for ineligible services. Confusion over what services and related expenses
are covered by the program prompted the FCC to issue a public notice clarifying this issue.
The FCC, in a June 11, 1998 order (CC Docket No. 96-45), stated that services eligible for
discounts include “...All telecommunications services, Internet access, and internal
connections provided by telecommunications carriers, as well as Internet access and internal
connects provided by non-telecommunications carriers.” The FCC also clarified what services
are not eligible for discounts. Services not eligible for discounts include: purchases of
personal computers, fax machines, modems, telephone handsets, as well as teacher training,
and expenses related to the installation of wiring (such as removing asbestos, tearing down
walls, repairing carpets, or repainting). The FCC reiterated that schools and libraries are
required to select “the most cost effective bid” when examining competing bids and that
“price should be the primary factor.” However other relevant factors that can be considered
include: “prior experience; personnel qualifications, including technical excellence;
management capability, including schedule compliance; and environmental objectives.”
Concern that only eligible services be funded also brought up issues relating to
application integrity. Critics of the program, as well as some supporters, questioned whether
the necessary mechanisms are in place to ensure that only eligible services receive funding
and that such funding is given at the proper level of discount. Although the FCC’s
clarification order has helped to resolve confusion over eligibility criteria, critics said it had
come too late for the 30,000 application that had already been filed. Concern was also
expressed that the FCC’s decision to allow other “relevant factors” to be considered in the
selection process, not solely cost, could result in inflated costs for the program as the lowest
bidder may not necessarily be chosen. These other factors are ambiguous at best, critics
claim, and could be used to manipulate the selection process.
Concerns about fraud and abuse are shared by both critics and supporters of the
program. Some critics of the program claim that the program as devised is fraught with
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problems and at a minimum should be suspended until additional safeguards are in place.
Supporters also want to ensure integrity of the program since the funding of ineligible
services or unreasonable administrative costs will only decrease available funding to meet the
program’s goals. Many supporters, however, do not view this as a major problem and feel
that the program as devised is basically sound. They point to the willingness of the SLD and
the FCC to take further steps to ensure program integrity such as the establishment of a
program integrity hotline (888-203-8100) to report potential instances of waste, fraud, or
abuse of program rules as well as the creation of a Year 3 Task Force to evaluate and make
recommendations to improve the program. (See: www.ala.org/oitp/year3.html for an
executive summary of the task force’s recommendations.)
In an attempt to ensure the integrity of the E-rate program and assess the ability to
properly audit applications Senator McCain requested that the GAO initiate a formal
investigation and audit of the Schools and Libraries program. Results of the GAO assessment
were released at a Senate Commerce Committee hearing held on July 16, 1998. Based on its
review the GAO recommended that prior to making any funding commitments, the SLC
should: conduct a statistically valid random sample of applications to assess the effectiveness
of its procedures, and if needed take corrective action; finalize procedures, automated
systems, and internal controls for the post-commitment phase of the program’s funding cycle;
obtain a report from its independent auditor verifying that the SLC has developed an
appropriate set of internal controls to mitigate against waste, fraud, and abuse; and conduct
a review of the technology plans of applications identified as “high risk” to determine
whether applicants have the resources to effectively use the services requested and are in
compliance with eligibility criteria.
The E-rate program administrator announced that it would comply with all of the GAO’s
recommendations prior to the commitment of any funds and incorporate other
recommendations based on an FCC-required independent audit of its procedures conducted
by an independent accounting firm. A follow-up report, conducted by the GAO at the request
of Sen. McCain, assessing the program’s progress in implementing the GAO’s
recommendations was released in March 1999 (Schools and Libraries Program: Actions
Taken to Improve Operational Procedures Prior to Committing Funds)
. According to the
GAO assessment the SLD “...has taken actions to implement the key recommendations that
we believe are needed to be completed prior to issuing any funding commitment letters to
applicants.” However, the GAO did express concern over the adequacy of the procedures
used to ensure applicants’ self certified discount levels are accurate. It also noted that “... the
program still faces major challenges as it moves into new operational areas” and
recommended that “... close oversight by the FCC will be especially important...” In addition
the GAO noted that the FCC has yet to implement the earlier GAO recommendation “... to
develop adequate goals, performance targets, and measures for the program.” The president
of the SLD stated that based on the experienced gained after the first year of the program and
in response to the FCC Chairman’s direction the SLD “ ...will implement new, tighter
procedures for evaluating discounts.” Furthermore, the FCC, according to the GAO report,
acknowledged the importance of and intent to address the recommendation to establish
adequate performance goals and measures for the program, but did not indicate a time frame
for such action.
Program Status
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The first year funding cycle of the program(January 1998 through June 1999) has been
completed. According to the SLD $1.66 billion of funds were committed to 25,785
applicants. ( The $220 million difference between the amount committed and the authorized
$1.925 billion includes reserves needed in case of successful appeals of rejections or pending
reconsiderations as well as $45 million in administrative costs covering the first 20 months
of the program.) Of total funds allocated 54% ($897 million) were committed for internal
connection subsidies, 40% ($661.2 million)for telecommunications services, and 6% ($101.8
million) for Internet access. Funding received for the first year cycle is to be spent through
September 30, 1999. Schools and mixed consortia (schools and libraries) received
approximately 96% of the allocated funding with library and library consortium applicants
receiving the remaining 4%. (For more detailed statistics on the breakdown of funding,
including data by state, see the program’s web site [http://www.sl.universalservice.org].
Once you access the site go to the sidebar and click on cumulative national funding statistics
and data.)
The application period, or window, for the second year of the program covering July 1,
1999, through June 30, 2000, closed on April 6, 1999. Based on estimated demand the FCC,
in a split decision, decided to fully fund Year 2 of the program at $2.25 billion. According
to program administrators more than $1.92 billion in funding has been committed and all
qualifying requests filed during the application window were filled. Administrative expenses
of $31 million were incurred. Additional funds have also been set aside to cover possible
successful appeals of funding rejections. The filing window for the third year of the program
opened November 10, 1999 and will close January 19, 2000.
Industry Billing Practices
The decision by selected telecommunications service providers to pass through universal
service charges directly to consumers and earmark universal service charges on subscribers’
long distance bills has led to further scrutiny of the universal service program in general, but
the schools and libraries program in particular. Effective January 1, 1998 for business
subscribers and July 1, 1998, for residential subscribers, many telecommunications providers
have chosen to assess a line-item universal service fee to cover universal service obligations.
The direct itemization and recovery of such charges is a departure from past industry
practices. Prior to this, universal service obligations were included in the long distance rate
structure and while paid for by subscribers based on their minutes of use, were not explicit.
Telecommunications service providers defend this change in billing practices stating that they
have no control over fees levied by the FCC to cover increases in mandated universal service
obligations, and consumers have the right to know what they are paying for. Furthermore,
they state, charges should be made explicit, particularly in light of increasing competition, to
enable consumers to make educated decisions regarding service providers.
The notation on subscribers’ bills of explicit charges to support statutorily required
universal service objectives has led to complaints by consumers and subsequent congressional
criticism. Although in most cases this charge is intended to recover contributions for all
aspects of universal service, including funding for high cost areas and low income subscribers,
the levying of this charge has led to further criticism regarding both the funding level and
scope of the schools and libraries program. Critics claim that the manner in which the FCC
has implemented the E-rate program has contributed to the levying of such charges and that
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the intent of the 1996 Telecommunications Act was to lower consumers’ telephone bills, not
raise them. Although most telecommunications service providers have been recovering
universal service contributions from business customers since January 1998, the levying of
such charges on residential customers effective July 1998 has heightened congressional
criticism.
Supporters of the schools and libraries program have also questioned billing practices
but have taken a different approach. They have called for greater disclosure of decreases as
well as increases on long distance billing and support action to modify billing practices.
The FCC has also expressed concern regarding consumer confusion caused by industry
billing practices. Chairman Kennard called for “truth in billing” and stated that while there
are some changes in the way telecommunications carriers are recovering universal service
charges, overall rates are continuing to go down. While he stated that no one at the FCC
supports a “hidden tax” on telephone bills, he also called on companies to commit to pass on
access charge reductions and to disclose these reductions as well as any new charges incurred
as a result of universal service obligations. He asked the FCC’s Common Carrier Bureau to
“gather information about industry billing practices so the commission can consider whether
the industry needs to undertake more consumer education initiatives.” Based on the
information gathered, the FCC in a September 17, 1999 action, initiated a rulemaking (CC
Docket No. 98-170) to address telephone billing. The rulemaking’s purpose, according to
the FCC, is not to attempt to remove line items from consumer’s bills but to stem
telecommunications fraud and provide consumers with clearer information about
telecommunications fees. According to the FCC “... clear, informative telephone bills are
increasingly important as bills include charges for a growing number of services and service
providers.” In an April 15, 1999 decision (CC Docket No. 98-170) the FCC adopted its truth-
in-billing principles and guidelines. (See: Federal Register, June 25, 1999, Vol. 64, No. 122,
pp. 34488-34498.) Included among the guidelines adopted are those that require carriers that
chose to place line items relating to federal regulatory action on subscribers’ bills to use
standard labels to identify these charges. These rules, with two exceptions, went into effect
November 12, 1999. The requirements that carriers highlight new service providers and
identify deniable and undeniable charges become effective April 1, 2000. (See: Federal
Register
, October 12, 1999, Vol. 64, No. 196, pp. 55163-55164.) The FCC is currently
seeking public comment, in a further notice of proposed rulemaking, as to the specific
standardized labels to be used and as to whether these rules should be applied to wireless
service providers. ( See: Federal Register, June 25, 1999, Vol. 64, No. 122, pp. 34499-
34501.)
The FCC has also sought input regarding the means by which telecommunications
providers should be permitted to recover their universal support obligations. In a July 13,
1998 action (CC Docket No. 96-45; FCC 98-160) the FCC has referred a number of issues
regarding universal service implementation to the Joint Board for recommendation. Included
among the issues referred is “To what extent, and in what manner, is it reasonable for
providers to recover universal service contributions through rates, surcharges, or other means
of service.” Joint Board recommendations which were released on November 23, 1998,
suggested that the FCC ensure that consumers are not misled regarding universal service
charges. The Board recommended that the FCC provide guidance to telecommunications
carriers regarding universal service cost recovery including considering prohibitions on
describing such charges as being “mandatory or federally-approved” and prohibiting the
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establishment of line item charges to consumers that are greater than the carrier’s own
universal service assessment rate. Final action of this docket is still pending.
Concern over billing practices is also being addressed by Congress. Three measures,
H.R. 3011, H.R. 3022, and S. 1825 all seek to identify and clarify charges on consumers’
monthly telephone bills. ( See Congressional Activity -- 106th Congress, for a discussion of
the specific provision contained in these measures.)
Congressional Activity -- 106th Congress
The decision by the FCC to significantly increase the funding level of Year 2 of the E-
rate program has prompted Congress to revisit the program. Legislation alternatives
introduced in the 106th Congress that address the program include those that: seek its
elimination; develop a new funding source; change its administrative structure; or call for an
in depth GAO study of the program. H.R. 692, introduced by Rep. Tancredo seeks to
terminate the E-rate program. This is largely accomplished by removing those universal
service provisions contained in the 1996 Telecommunications Act (P.L. 104-104), and
subsequently incorporated as Section 254 of the Communications Act of 1934, which provide
for discounts for schools and libraries for telecommunications services. The E-rate program
is not needed according to the bill’s supporters because of existing Department of Education
funding. H.R. 692 was referred to the House Committee on Commerce where it awaits
further action.
Three measures (H.R. 727, H.R. 1746, S. 1004) address funding aspects of the program.
All three bills call for a new funding source for the program, the revenues collected from the
3% federal telephone excise tax. The federal telephone excise tax, which is currently assessed
on consumers’ local and long distance telephone service, generates approximately $5 billion
in yearly revenues. The revenue, while collected from consumers by telephone companies,
is forwarded to the U.S. Treasury and added to general revenues. H.R. 727, a measure
introduced on February 11,1999, by Representative Klink, calls for all facets of federal
universal service support, including the E-rate program, to be funded by the revenues
collected from the federal telephone excise tax. A Telecommunications Trust Fund would
be established from the collected revenue and funds would be made available for FY1999 and
each of the 5 succeeding fiscal years. Funds are allowed to be made available on a school
year versus a fiscal year basis. The present funding mechanism would be terminated and any
remaining funds collected under that mechanism would be distributed by the FCC. H.R. 727
was referred to both the Committee on Commerce and the Committee on Ways and Means.
The measure was subsequently referred to the Subcommittee on Telecommunications.
The two other measures (S. 1004 and H.R. 1746) introduced by Senator Burns and
Representative Tauzin, respectively, also include provisions that call for federal telephone
excise tax revenues to fund the E-rate program. However, both bills propose to use only part
of the revenues generated by the existing 3% tax as a funding source and use that revenue for
funding the E-rate program. The two bills call for one third of the revenue collected to be
designated for the funding of the E-rate program; the remaining two thirds of the tax would
be repealed. The funding level would be authorized for approximately a 5 year period
(January 1, 1999 to October 1, 2004)with the first year funding level capped at $1.7 billion.
Appropriations for the following 4 years would be “such funds as necessary” limited to
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amounts collected by the tax. Effective fiscal year 2005, the 1% tax would be eliminated and
up to $500 million a year would be appropriated from the Treasury to fund the program.
S. 1004 and H.R. 1746 also contain provisions that would restructure the administration
of the program. Oversight of the program would be removed from the FCC and given to the
Department of Commerce’s National Telecommunications and Information Administration
(NTIA). The E-rate program would be replaced by a Telecommunications Technology Trust
Fund administered by the NTIA. The program would be a state block grant program,
authorized for 5 years, that would award grants based on state plans to assist in acquiring
telecommunications and related services for elementary and secondary schools and libraries
for educational purposes. The Commerce Department would be given authority to determine
what services would be covered by the grants. S. 1004 was referred to the Senate Finance
Committee. H.R. 1746 was referred to the Committee on Commerce, and House Ways and
Means. Hearings were held on the measure by the House Telecommunications Subcommittee
in September 1999.
The notation of specific charges on subscribers’ telephone bills has led to the
introduction of legislative measures addressing billing practices. Three bills (S. 1825, H.R.
3011, and H.R. 3022) have been introduced to date that attempt to address concerns over and
clarify industry billing. S. 1825, introduced by Senator Rockefeller strengthens the FCC’s
authority to investigate and prosecute carriers for unfair billing practices. Specific billing
requirements are imposed on telecommunications carriers to assure that telecommunications
bills are “both accurate and comprehensible.” Carriers are also required to submit to the
FCC, on a yearly basis, total contributions to the universal service fund and total customer
receipts. S. 1825 also directs the FCC and Federal Trade Commission (FTC) to jointly
investigate and submit a report to Congress, no later than one year after the law’s enactment,
on carriers’ billing practices.
H.R. 3011, introduced by Representative Bliley, addresses the disclosure of information
relating to charges on subscriber’s bills. It requires telecommunications carriers to list on
subscriber’s monthly bills as a separate line item, any amount being “attributed to or collected
from subscribers for [any] government mechanism, fund, tax, or program.” Like H.R. 3011,
Representative Markey’s bill, H.R. 3022, requires that telephone bills identify the government
program or tax the carrier is contributing to, but it also requires that the identity of any
government program the subscriber has received a subsidy from and the average monthly
amount of that subsidy be listed.
Legislation — 104th Congress
P.L. 104-104 provides for a pro-competitive, de-regulatory national policy framework
designed to accelerate rapidly private sector deployment of advanced telecommunications and
information technologies and services to all Americans by opening up all telecommunications
markets to competition; the measure also contains provisions for other purposes. The
measure was reported (S.Rept. 104-23) as an original bill by the Committee on Commerce
on March 20, 1995. Hearings were held May 3, 1995 by the Senate Judiciary Antitrust
Subcommittee. The bill passed the Senate, as amended, June 15, 1995. The conference
report (H.Rept. 104-458) was filed January 31, 1996. The bill passed the House and Senate
February 1, 1996. It was signed into law February 8, 1996.
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Legislation — 105th Congress
P.L. 105-119. The 1998 appropriations legislation for the Departments of Commerce,
Justice, and State. Contains provisions that require the FCC to undertake a review of the
implementation of the provisions in the 1996 Telecommunications Act pertaining to universal
service and to submit a report to Congress no later than April 10, 1998. Signed into law
November 26, 1997.
P.L. 105-174. Emergency supplemental appropriations for the fiscal year ending
September 30, 1998. Contains within the conference committee’s “joint explanatory
statement” language that the conferees “expect that the FCC will comply with reporting
requirements” contained in S. 1768, regarding universal service. Signed into law May 1, 1998.
LEGISLATION
H.R. 692 (Tancredo)
A bill to terminate the E-rate program of the Federal Communications Commission that
requires providers of telecommunications and information services to provide such services
for schools and libraries at a discounted rate. Introduced February 10, 1999; referred to
Committee on Commerce.
H.R. 727 (Klink)
A bill to amend the Communications Act of 1934 to provide for explicit and stable
funding for Federal support of universal telecommunications services through the creation of
a Telecommunications Trust Fund. Introduced February 11, 1999; referred to Committees
on Commerce and on Ways and Means. Referred to Telecommunications Subcommittee
March 1, 1999.
H.R. 1746 (Tauzin)
A bill to amend the Communications Act of 1934 to reduce telephone rates, provide
advanced telecommunications services to schools, libraries, and certain health care facilities,
and for other purposes. Introduced May 11, 1999; referred to Committees on Commerce and
on Ways and Means. Hearings held September 30, 1999, by Telecommunications
Subcommittee.
H.R. 2677 (Rivers)
A bill to amend the Communications Act of 1934 to require telephone carriers to
completely and accurately itemize charges and taxes collected with telephone bills.
Introduced August 2, 1999; referred to Committee on Commerce.
H.R. 3011(Bliley)
A bill to amend the Communications Act of 1934 to improve the disclosure of
information concerning telephone charges, and for other purposes. Introduced October 5,
1999; referred to Committee on Commerce. Referred to Subcommittee on
Telecommunications October 20, 1999.
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H.R. 3022 (Markey)
A bill to amend the Communications Act of 1934 to improve the disclosure of
information concerning telephone charges, and for other purposes. Introduced October 5,
1999; referred to Committee on Commerce. Referred to Subcommittee on
Telecommunications October 20, 1999.
S. 1004 (Burns)
A bill to amend the Communications Act of 1934 to reduce telephone rates, provide
advanced telecommunications services to schools, libraries, and certain health care facilities,
and for other purposes. Introduced May 11, 1999; referred to Committee on Finance.
S. 1217 (Gregg)
An original bill making appropriations for the Departments of Commerce, Justice, and
State, the Judiciary, and related agencies for the fiscal year ending September 30, 2000, and
for other purposes. This measure contains a provision requiring the GAO to do an extensive
review of E- rate program. Introduced June 14, 1999. Reported to Senate from Committee
on Appropriations June 14, 1999 (S.Rept. 106-76). Passed Senate, by voice vote, July 22,
1999.
S. 1825 (Rockefeller)
A bill to empower telephone consumers, and for other purposes. Introduced October
28, 1999; referred to Commerce, Science, and Transportation.
FOR ADDITIONAL READING
Federal Communications Commission education web site: [http://www.fcc.gov/learnnet]
Schools and Libraries Division web site: [http://www.sl.universalservice.org]
United States Department of Commerce. National Telecommunications and Information
Administration. Falling Through the Net : Defining the Digital Divide. July 1999.
Washington, DC. [http://www.ntia.doc.gov]
United States General Accounting Office. Schools and Libraries Corporation: Actions
Needed to Strengthen Program Integrity Operations Before Committing Funds.
GAO/T-RCED-98-243. July 1998. Washington, DC. Can be ordered via the GAO’s
web site: [http://www.gao.gov]
United States General Accounting Office. Schools and Libraries Program: Actions Taken
to Improve Operational Procedures Prior to Committing Funds. GAO/RCED-99-51.
March 1999. Washington D.C. Can be ordered via the GAO’s web site:
[http://www.gao.gov]
United States General Accounting Office. Telecommunications: FCC Lacked Authority to
Create Corporations to Administer Universal Service Programs. GAO/T-RCED/OGC-
98-84. March 1998. Washington, DC. Can be ordered via the GAO’s web site:
[http://www.gao.gov]
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United States General Accounting Office. Telecommunications and Information Technology:
Federal Programs That Can Be Used to Fund Technology for Schools and Libraries.
GAO/T-HEHS-98-246. September 1998. Washington, DC. Can be ordered via the
GAO’s web site: [http://www.gao.gov]
United States General Accounting Office. Telecommunications Technology: Federal
Funding Schools and Libraries. GAO/HEHS-99-133. August 1999. Washington, DC.
Can be ordered via the GAO’s web site: [http://www.gao.gov]
CRS Reports
CRS Report 98-604. E-Rate for Schools: Background on Telecommunications Discounts
Through the Universal Service Fund, by James B. Stedman and Patricia Osorio-O’Dea.
CRS Report 96-178. Information Technology and Elementary and Secondary Education:
Current Status and Federal Support, by James B. Stedman.
CRS Report RS20036. Internet- Protecting Children from Unsuitable Material and Sexual
Predators: Overview and Pending Legislation, by Marcia S. Smith.
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