The E-Rate Program: Universal Service Fund Telecommunications Discounts for Schools

The E-Rate Program: Universal Service Fund Telecommunications Discounts for Schools

Order Code RL32018
CRS Report for Congress
Received through the CRS Web
The E-Rate Program: Universal Service Fund
Telecommunications Discounts for Schools
Updated January 27, 2006
Gail McCallion
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

The E-Rate Program: Universal Service Fund
Telecommunications Discounts for Schools
Summary
Under language enacted in the Telecommunications Act of 1996 (P.L. 104-104),
a discount on telecommunications services was implemented for schools and libraries
as part of the universal service framework. Universal service seeks to ensure the
availability of telecommunications services for all consumers, including low-income
consumers as well as those in rural and high-cost areas.
The universal service discount for schools and libraries, known as the E-rate
program, is now in its sixth award cycle. The E-rate program has an annual budget
cap of $2.25 billion — although the FCC has recently ruled that unused funds can be
carried over for usage in subsequent years. Although the future of E-rate is not as
questionable as in its earlier years, some Members of Congress continue to question
the utility of the program, and instances of fraud and abuse in the program have been
reported.
This report provides background information on the E-rate program, focusing
specifically on its support of schools. It will be revised to reflect any substantive
changes in the program. For legislative activity, see CRS Issue Brief IB98040,
Telecommunications Discounts for Schools and Libraries: The “E-Rate” Program
and Controversies.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
E-Rate Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
E-Rate and Schools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Program Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Application Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Funding and Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Selected Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Fraud and Abuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Universal Service Fund and the Anti-Deficiency Act . . . . . . . . . . . . . . 7
List of Tables
Table 1. E-Rate Discount on Eligible Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

The E-Rate Program: Universal Service
Fund Telecommunications
Discounts for Schools
Introduction
The universal service concept was created to ensure the availability of
telecommunications services for all consumers, including low-income consumers as
well as those in rural and high-cost areas. The Telecommunications Act of 1996
(P.L. 104-104) codified universal service principles in a new section (Section 254)
added to the Communications Act of 1934. Within the broad framework of universal
service, the Telecommunications Act newly included elementary and secondary
schools and libraries as beneficiaries of universal service for telecommunications
services. This specific support, in the form of discounts on telecommunications
services provided to schools and libraries under the universal service program, has
become known as the education rate or E-rate program.
This report provides an overview of the E-rate program, including background
information, current status of participation and funding information. It also considers
selected issues involving the program. The report focuses solely on the participation
of schools in the E-rate program. It does not address the participation of libraries or
universal service in general.
E-Rate Provisions
Section 254 of the Communications Act of 1934 contains statutory provisions
codifying universal service principles in general. As has been noted, under the
provisions of Section 254, schools and libraries are designated as beneficiaries of the
universal service program. Section 254 requires that, upon a legitimate request, any
telecommunications carrier serving a geographic area is required to make any of its
services that are within the definition of universal service available at reduced rates
to elementary and secondary schools and libraries for educational purposes [Section
254(h)(1)(B)].
Among seven principles for universal service, the legislation also provides that
“[e]lementary and secondary schools and classrooms, health care providers, and
libraries should have access to advanced telecommunications services” [Section
254(b)(6)]. In describing the telecommunications services that are to be provided,
the legislation states that the Federal Communications Commission (FCC) is to
establish competitively neutral rules “to enhance, to the extent technically feasible
and economically reasonable, access to advanced telecommunications and

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information services for all public and nonprofit elementary and secondary school
classrooms, health care providers, and libraries” (Section 254(h)(2)(A)).
E-Rate and Schools
Program Administration
In its May 7, 1997 order addressing the universal service provisions enacted
under the Communications Act, the FCC stated that up to $2.25 billion a year would
be made available to support universal service discounts for schools and libraries.1
The funds are to be used to subsidize discounts on services provided to schools and
libraries. Although E-rate is a federal program, it is funded by providers of
telecommunications services. All interstate telecommunications providers are
required to contribute to the program. Funds for E-rate2 come from contributions that
are based on a percentage of the telecommunications providers’ interstate and
international revenues.3 Many telecommunications service providers have elected
to transfer the cost of their universal service contribution to their subscribers, thereby
shifting the costs of the program to the consumer.
The E-rate program is administered by the Schools and Libraries Division
(SLD),4 of the Universal Service Administrative Company (USAC). The USAC is
a nonprofit corporation appointed by the Federal Communications Commission
(FCC). The SLD provides discounts to assist schools and libraries in the U.S. with
obtaining affordable telecommunications services and Internet access. The SLD
provides discounts for connectivity, the means to communicate using
telecommunications services and the Internet. Schools are expected to provide the
requisite equipment and additional resources to support the connectivity.
Eligibility. To qualify for funding under the E-rate program, a school must
meet the definition of an elementary or secondary school as delineated in the
Elementary and Secondary Education Act of 1965 (ESEA), as amended by the No
Child Left Behind Act of 2001 [(NCLBA), P.L. 107-110]. Eligible schools can
include either public or nonprofit institutional day or residential schools, as well as
1 Federal Communications Commission, Report and Order, FCC 97-157, May 7, 1997.
2 The contributions from telecommunications providers are to support universal service
goals in general not just the schools and libraries component of universal service.
3 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. As of the date of this report, the monthly contribution factor is 8.9%.
4 In 1996, the FCC created a nonprofit corporation, known as the Schools and Library
Corporation (SLC) to manage E-rate. However, amid congressional criticisms and a
General Accounting Office determination that the FCC exceeded its authority when it
directed the creation of the SLC, on Jan. 1, 1999, the SLC was merged into the Universal
Service Administrative Company, which currently administers other portions of the
universal service system, and changed its name to the Schools and Libraries Division.

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public charter schools. Schools that operate as for-profit schools or that have an
endowment in excess of $50 million are not eligible.
Discounts. The discounts for the services are divided into four categories:
telecommunications services, Internet access, internal connections, and basic
maintenance of internal connections. Telecommunications services are those
recurring services that are used to communicate information between two parties,
such as the telephone. The second area, Internet access, applies to basic access to
the Internet, including e-mail. Internal connections consist of the wiring and other
components that expand access throughout the school, such as wiring classrooms for
computer and Internet access. The final category, basic maintenance of internal
connections, is limited to maintenance of existing connections. Under FCC rules,
requests for telecommunications services and Internet access are considered top
priority (Priority 1) and are funded first. Any remaining funds are for schools
seeking discounts for internal connections (Priority 2).5 Priority is given to schools
that are the most economically disadvantaged; this applies to both priority areas.
The discounts for these services range from 20% to 90% depending upon the
school’s percentage of pupils from low-income families and the urban/rural location
of the school (see Table 1 for a breakdown of the discounts).6 Generally, the service
provider seeks reimbursement from USAC for the discounted portion of the services
provided; schools and libraries are responsible for paying service providers the non-
discount portions of eligible service costs. Schools can also pay the service provider
in full and then seek reimbursement from USAC.
Table 1. E-Rate Discount on Eligible Services
Income measured by % of
students eligible for National
Urban location
Rural location
School Lunch program
discount
discount
If the % of students in the school
...and you are in an
... and you are in an
who qualify for free or reduced
URBAN area, your
RURAL area, your
price lunch is ...*
discount is ...
discount is.
Less than 1%
20%
25%
1% to 19%
40%
50%
20% to 34%
50%
60%
35% to 49%
60%
70%
50% to 74%
80%
80%
5 In 2005, the “two in five” year rule was implemented. The rule essentially prohibits
applicants from applying for funding for internal connections more than twice in a five-year
period.
6 This matrix of discounts is also used for libraries. The discount for libraries is based on
the percentages of students eligible for free or reduced price meals in the school district in
which the library is located.

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Income measured by % of
students eligible for National
Urban location
Rural location
School Lunch program
discount
discount
75% to 100%
90%
90%
* The income threshold is 185% of the relevant poverty income level.
Application Process. To apply for E-rate, interested schools must annually
submit a technology plan specifying how technology will be integrated into the
curriculum and professional development to improve education. Although the
technology plan should be long term, due to technology’s rapidly changing status
with new developments in software and hardware, the technology plan should not
cover more than three years. The technology plan must contain the following
components:
! Clear goals and a realistic strategy for utilizing technology to
improve education;
! Professional development that indicate staff are able to use
technology to improve education;
! An assessment of the telecommunications services, hardware, and
software, that are necessary to improve education;
! A budget illustrating the school’s ability to acquire the non-
discounted components of the technology plan; and
! An evaluation that enables the school to monitor progress and
achievement of specified goals.
Technology plans must be independently approved by a state agency overseeing
schools or libraries or another SLD certified technology plan approver. Applicants
who seek discounts only for basic local and/or long distance telephone services do
not need to prepare a technology plan.
After the applicant has identified the requisite products and services necessary
to support the technology plan, Form 470 — Description of Services Requested and
Certification Form — must be submitted either online or as a paper application. The
SLD posts all Form 470s on their website to notify interested service providers of the
needed products and services. Form 470 is posted on the SLD website for a
competitive bidding period of 28 days during which time potential service providers
submit bids for the requested services to applicants. At the conclusion of this period,
an applicant is required to select the most cost effective provider.
Form 471 — Services Ordered and Certification Form — enables the applicant
to request funding for what was submitted in the technology plan. Because funding
for E-rate is capped each year at $2.25 billion, and the actual requests for funding
have annually exceeded the cap, FCC rules allow all form 471s to be submitted
during a window period, whereby all applications are treated as though they were
received simultaneously. The 2006 window is open for 73 days (December 6, 2005
through February 16, 2006).

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SLD informs applicants of its decisions through “waves.” The waves are
actually groups of Funding Commitment Decision Letters (FCDL) — notifying
applicants of SLD’s decision — which are sent to applicants as decisions are made,
rather than waiting for all applications to be processed. Waves are based on the FCC
rules of priority (as detailed above).
Funding and Participation
The year 2006 marks the eighth funding year of E-rate’s existence (January 1998
through January 2006). In its inaugural funding year, which was 18 months (January
1998 to June 1999),7 the Commission supported approximately 25,000 programs and
provided close to $1.7 billion in funding discounts. In the second grant cycle, the
program experienced a significant increase, providing more than $2.1 billion to
applicants. Subsequent years have witnessed similar numbers of applicants and each
year funding has been provided up to the program’s maximum cap of $2.25 billion.
During the seventh funding year, E-rate provided funding discounts to
approximately 26,000 applicants.8 For the first seven years of the program, $15.3
billion in funds have been committed. The total committed as of January 2006 is
$1.16 billion, with an average discount of $44,500. Nearly 27% of the applicants
awarded received the maximum discount available. Of the funded applicants,
approximately 25% were from schools, 58% from school districts, 14% from
libraries or library consortia, and approximately 2% from school/library consortia.
The percentage distribution of the dollar value of the discounts awarded was 7% for
schools, 84% for school districts, 6% for libraries and library consortia, and 4% for
school/library consortia.9
Selected Issues
The defining legislation for the E-rate program (Telecommunications Act of
1996) did not explicitly state how the E-rate program was to be administered, which
has subsequently raised some issues for the how the program operates. For example,
does the FCC have the authority to use USF funds for oversight of the E-rate
program? The E-rate program is both highly regarded for its ability to bring
telecommunications to rural and poor schools and libraries, but it is also highly
criticized because of the increasing incidents of fraud, waste and abuse. This section
presents a brief discussion of selected program and policy issues.
7 The FCC issued an order in June 1998 (CC docket No. 96-45) making several
modifications to the program, one of which revised the funding year from a calendar year
to a fiscal year cycle. The first year was extended by six months to allow subsequent grant
cycles to correspond to the fiscal year, thereby synchronizing the program with the
budgetary cycles of schools and libraries.
8 Data retrieved from the USAC’s website at [http://www.sl.universalservice.org/
funding/y2005/national.asp].
9 Percentages do not sum to 100% due to rounding.

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Fraud and Abuse. There has been much written lately about fraud and abuse
within the E-rate program. The Center for Public Integrity authored a report entitled
Phone Fund for Schools, Libraries Riddled with Fraud, in which E-rate was
described as being “... honeycombed with fraud and financial shenanigans.”10 The
Inspector General (IG) for the FCC conducted an investigation in which they noted
errors ranging from regulatory non-compliance to computational errors, all of which
resulted in approximately $8 million being erroneously disbursed (Federal
Communications Commission, Office of Inspector General, Semiannual Report,
October 31, 2002).
The year 2002 marked the first time that federal prosecutors filed criminal
charges against a telecommunications provider that participated in the E-rate
program. The complaint alleged that the owner and three employees of Connect2
Internet Networks, Inc. (hereinafter Connect2) conspired to defraud the program of
several million dollars by persuading administrators from schools with the highest
need (those that qualify for a 90% telecommunications services discount) to purchase
expensive equipment that they did not need. Connect2 further informed the
administrators that they would not be financially responsible for the requisite
percentage due because a foundation would pay the balance. As a result, several
administrators reportedly purchased equipment that was significantly more expensive
than what they would have purchased if they had to pay a portion of the bill. By
doing this, it was charged that Connect2 was able to sell large quantities of
equipment and services to schools with little to no restriction on the amount
charged.11 The owner of Connect2 and the employees who were charged
subsequently pleaded guilty and are barred from participating in the E-rate program
for three years.12
The SLD created both a Task Force and a Whistle Blower hotline to deal with
fraud, waste, and abuse. The Task Force initially reported13 that the structure of the
E-rate program and the ambiguity of certain policies and procedures likely
contributed to wasteful program management. They recommended that the SLD
develop and publicize a list of products and services and reasonable prices for the
products and services. In 2005, a web-based database of eligible services was added
to the SLD website to enable applicants to search a list of eligible products and
services. It is expected that the list will help limit ambiguity and wasteful practices.
10 [http://www.publicintegrity.org].
11 See David McGuire, Fraud Issue Could Undermine E-Rate Program,
[http://www.washingtonpost.com/ac2/wp-dyn?pagename=article&node=&contentId=A4
333-2003Jul17&notFound=true].
12 See Notice of Debarment, File No. EB-04-IH-0460 [http://hraunfoss.fcc.gov/
edocs_public/attachmatch/DA-04-3828A1.pdf].
13 The full report is available at
[http://www.sl.universalservice.org/taskforce/
update2.asp].

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The whistle blower hotline allows interested persons to report waste, fraud or
abuse, and to remain anonymous if they so choose. Each call received is referred to
USAC’s General Counsel for assessment and investigation.
Oversight. The E-rate program has very few resources dedicated to oversight
of the program. A recent report14 by the FCC’s IG, noted that lack of funds was a
significant problem for independent program oversight. The report states that
additional funds have been requested for staff to provide independent oversight for
FY2006 and FY2007. With respect to the E-rate program, the IG stated that a “lack
of adequate resources has made it difficult for the OIG to provide an adequate level
of support to federal law enforcement as they investigate fraudulent activity in the E-
rate program.”
In October 2002, the IG issued a report stating that the FCC was unclear
whether the funds could be utilized for oversight (Federal Communications
Commission, Office of Inspector General, Semiannual Report, October 31, 2002).
The most recent IG report (2005) appears to suggest that this issue has not been
resolved:
These budget requests reflect our inability to use the USF itself to provide
funding for the cost of oversight. Report language in the Commission’s
FY2004 final budget indicated that the monies for USF audits should come
from the Fund itself. However, neither the Senate nor the House of
Representatives has included language to permit the FCC to use USF funds
in the draft funding bills to date for FY2006 (Federal Communications
Commission, Office of the Inspector General, Semiannual Report to
Congress, April 1, 2005-September 30, 2005).
Universal Service Fund and the Anti-Deficiency Act. The question of
how to treat the funds used to support the E-rate program is a perennial and
contentious issue. According to the Government Accountability Office (GAO), “the
fund has been listed in the budget of the United States and since FY2004, has been
subject to annual apportionment from the Office of Management and Budget
(OMB)”15, thereby making the USF federal funds. However, in a Senate hearing
regarding exempting the USF from portions of the Anti-Deficiency Act (ADA),
Acting General Counsel for the FCC, Austin Schlick, stated that the FCC has
operated the USF according to OMB’s interpretation that the USF is a special fund,
14 See Federal Communications Commission, Office of the Inspector General, Semiannual
Report to Congress. April 1, 2005-September 30, 2005. The full report is available
at:[http://www.fcc.gov/oig/SAR35_10-31-05.pdf].
15 Government Accountability Office, Testimony Before the Subcommittee on Oversight and
Investigations, Committee on Energy and Commerce, House of Representatives.
Telecommunications Concerns Regarding the Structure and FCC’s Management of the E-
Rate Program. GAO-05-439T.

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and does not constitute public money.16 To date, this issue has not been completely
resolved.
The issue presented itself again in late 2003, when the FCC ordered USAC to
prepare financial statements for the USF. During this period, it was determined that
the FCDLs (previously discussed) that were sent to grantees constituted obligations.
Because the ADA does not allow an agency or program to make financial obligations
in excess of the amount that is available, it was determined that the E-rate program
was in violation of the ADA. As a result of this discovery, in August 2004, the
USAC suspended the mailing of additional FCDLs for funding year 2004, and was
ordered to liquidate investments to comply with the Anti-Deficiency Act requirement
for the FCDLs that were previously issued. It was reported that the liquidation,
which occurred over a two-day period, cost the Fund approximately $4.6 million in
immediate losses and possibly more in future interests.17
During the suspended funding period, it was reported that many schools were
unable to continue programs that depended upon financial support from the E-rate
program.18 The decision received a significant amount of attention from the media
and the Congress. The suspended funding and lack of clarity regarding the ADA
resulted in the passage of the Universal Service Anti-Deficiency Temporary
Suspension Act (P.L. 108-494), which exempted the USF from the Anti-Deficiency
Act until December 31, 2005. In November 2005, it was extended by one year in the
annual appropriations bill for Science, State, Justice, Commerce and Related
Agencies for 2006 (P.L. 109-108).
16 U.S. Congress, Senate Committee on Commerce, Science and Transportation, S. 241,
Permanently Exempting the Universal Service Fund from Portions of the Anti-Deficiency
Act, hearing on S. 241, 109th Cong., 1st sess., April 11, 2005 (Washington: GPO, 2005).
17 Government Accountability Office, Testimony Before the Subcommittee on Oversight and
Investigations, Committee on Energy and Commerce, House of Representatives.
Telecommunications Concerns Regarding the Structure and FCC’s Management of the E-
Rate Program. GAO-05-439T.
18 See Katherine Shek, Schools Suffer as E-rate Suspension Affects Services, Education
Daily, p. 3, October 8, 2004. Cara Branigan, eRate flows again; ‘04 apps still pending. Full
article available at:[http://www.eschoolnews.com/news/PFshowstory.cfm?ArticleID=5376].