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Policy Battles Leave E-Rate Funds on Hold

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Washington

Jose Alvarado turned in an application for the federal E-rate program in April, and he expected that his district would receive aid by summer to wire some of its schools.

Now, summer has come and gone, and the district--which spent $500,000 planning $13 million worth of technology projects connected with the special rate on telecommunications services--still hasn't received a penny.

"We've been waiting and waiting and waiting some more," said Mr. Alvarado, the telecommunications supervisor for the 7,700-student Fresno, Calif., school district.

Unlike Mr. Alvarado, Washington insiders aren't surprised that education-rate discounts aren't available yet. That's because, despite its seemingly noncontroversial goal of helping schools and libraries connect to the Internet, the E-rate has raised major funding and policy hackles. The Schools and Libraries Corp., the organization set up by the Federal Communications Commission to administer the program, now predicts that the money will start to flow this fall.

"There are enormous stakes involved with very large players," said Robert Crandall, an economist at the Washington-based Brookings Institution who studies telecommunications issues.

The players are the telecommunications companies required to pay into a "universal service" fund to finance E-rate discounts for schools and libraries on telecommunications services and equipment.

"There's a great amount of positioning by all the players because everyone wants to see the best advantage that they can," said Christopher McLean, who worked as a staff aide for then-Sen. Jim Exon, D-Neb., on the Telecommunications Act of 1996, which laid the groundwork for the E-rate. Mr. McLean now monitors E-rate issues as the deputy administrator of the rural-utilities service of the Department of Agriculture.

The E-rate program was created as an FCC entity under a new definition of universal service authorized in the Telecommunications Act of 1996. The universal-service provision contained in federal law for more than 60 years mandates that phone rates in areas where telephone installation is cheap subsidize the cost of phone installation in areas where the costs are higher.

Today, while schools wait for their discounts, long-distance companies argue that they wrongly bear the brunt of the new program's cost. Local phone companies can pass their E-rate obligations on to long-distance carriers through their access charges for completing calls locally. And Internet-service providers and network-software manufacturers don't have to pay into the fund at all.

"We don't have any problem with the goals of the [E-rate] program," said Claire Hassett, a spokeswoman for Washington-based MCI Communications Corp., a leading provider of long-distance service. "But this program hasn't been set up to be fair and equitable to all the people involved."



A Tax or Not?

At least two bills have been introduced in Congress--one written by a Democrat and one by Republicans--that propose using a portion of an existing federal telephone excise tax to pay for the E-rate instead of money collected from telecommunications companies. The Clinton administration opposes any such plan.

Telecommunications companies and state regulatory commissions are challenging the FCC's new implementation of universal service in the U.S. Court of Appeals for the 5th Circuit. A critical issue is whether the FCC's collection of money for the universal-service fund is an illegal tax since the U.S. Constitution gives only Congress the power to tax. A hearing date has not yet been set for the case.

James Carr, a lawyer in the office of the general counsel of the FCC, said the tax claim is without merit. In fact, in 1988, a federal court ruled that the universal-service fund is not a tax.

The FCC argues that, in implementing the Telecommunications Act, it provided long-distance carriers with reductions in access charges for local networks that more than offset any new costs from the E-rate. But some observers say the view that universal service--and thus the E-rate--is a tax could hold up in court.

"In one respect, this is very different. We don't have a tax on all blackboard manufacturers or pencil manufacturers," Mr. Crandall said. "We're going to tax one group of users [telecommunications companies] to provide another group of users, called schools, with services."

The at&T Corp. and MCI, the nation's two biggest long-distance companies, raised the stakes on the E-rate controversy when they announced in May that they would put new charges on residential phone bills for universal service. In July, AT&T put a charge of 93 cents on every residential phone bill, and MCI put a charge of 5 percent on its bills. Sprint Corp., the third largest long-distance provider, put a charge of 4.5 percent on its bills. The FCC estimates that only 19 cents of AT&T's 93-cent charge will go to the E-rate.

"There was supposed to be no change in customers' bills," said Kevin Taglang, a telecommunications-policy analyst for the Washington-based Benton Foundation, which promotes federal communications policy in the public interest. Now, "it looks as if the [telecommunications companies] are asking parents to decide between their phone bills and their children's education," he added. "The choice never should have been forced upon them."



Politicized Debate

Soon after long-distance companies announced their new line-item charges, some Republicans--including House Speaker Newt Gingrich of Georgia and Rep. Thomas J. Bliley Jr., the Virginian who chairs the House Commerce Committee--began referring to the E-rate publicly as the "Gore tax," linking the program to Vice President Al Gore's goal of connecting all the nation's schools to the Internet by 2000.

Rep. Bliley, Sen. John McCain, R-Ariz., Rep. John D. Dingell, D-Mich., and Sen. Ernest F. Hollings, D-S.C., also wrote to the FCC asking it to suspend the program.

Instead, the FCC scaled it back in June--promising to give out $1.9 billion over 18 months instead of $2.3 billion over 12 months. And the debate over the E-rate program became more partisan.

"I don't know how [the E-rate] got tied to Al Gore," said Sandy Zimmet, a legislative assistant for Rep. Constance A. Morella, R-Md., who sponsored the E-rate provision initially in the House. "It's a problem because we've lost support from a lot of Republicans who supported this amendment. Everybody's lying low."

E-rate proponents point out that if Republicans wanted to kill the program, they could have backed Rep. Joe Scarborough, R-Fla., in his bid to amend the appropriations bill for the departments of Commerce, Justice, and State to bar FCC collections for the E-rate. But no amendment was attached to the appropriations bill when the House passed it last month.

The E-rate's best hope may hinge on its ability to start delivering discounts soon, said Bruce Hunter, the director of government relations for the American Association of School Administrators.

"Disrupting a program that's operating is much more difficult than disrupting a program that's waiting to be," he noted.

An E-Rate Timeline

1996

February:
President Clinton signs the Telecommunications Act of 1996, which includes support to schools and libraries for "advanced telecommunications and information services'' under universal service.

1997

September:
The Federal Communications Commission creates the Schools and Libraries Corp. to administer up to $2.3 billion annually in federal "E-rate'' discounts, to be financed by the telecommunications industry.

1998

January 30:
The SLC begins accepting applications from schools and libraries for the education rate. By April 15, the SLC has received 30,000 such applications. Applicants expect to receive discounts on telecommunications services by summer.

February: The General Accounting Office, after an investigation requested by Sen. Ted Stevens, R-Alaska, finds that the FCC exceeded its authority in creating the SLC. The FCC agrees to restructure the program.

May: AT&T Corp. and MCI Communications Corp. announce that they will institute line-item charges, effective July 1, for universal service.

June 4: Leaders of the House and Senate Commerce committees tell the FCC to suspend the E-rate program.

June 17: The FCC scales back discounts under the program to $1.9 billion over 18 months, rather than $2.3 billion over 12 months.

July 16: The GAO advises the Senate Commerce Committee that the SLC should improve its procedures for preventing waste, fraud, and abuse in E-rate projects.

July and August: Two bills are introduced in Congress that propose using part of an existing excise tax on telephone service to pay for the E-rate instead of fees collected from telecommunications companies.

August 28: Ira Fishman steps down as the chief executive officer of the SLC and is replaced by acting CEO Kate Moore. School and library applicants now expect to receive E-rate discounts this fall.



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