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Published in Print: April 9, 2003, as E-Rate Program Put Under Numerous Microscopes

E-Rate Program Put Under Numerous Microscopes

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Reacting to a rash of criticism, the federal officials who manage the E-rate formed an outside task force last week to advise them on preventing waste, fraud, and abuse in the $2 billion program, which helps schools and libraries afford telecommunications services.

Officials of the Universal Services Administrative Co., or USAC, the federally created nonprofit organization that administers the program, said they acted in the wake of a December report by a watchdog group, the Center for Public Integrity. The report alleged the 5-year-old education-rate initiative was rife with wrongdoing and was inadequately supervised.

E-rate officials and other experts have called the report exaggerated, but the E-rate agency and the Federal Communications Commission, which oversees the program, have their own, ongoing study of problems in the program. And some members of Congress are putting the popular program under new scrutiny.

Rep. Billy Tauzin, R-La., the chairman of the House Energy and Commerce Committee and a past E-rate critic, announced last month he was investigating misuse of E-rate money and might hold a public hearing later this year.

At about the same time, Rep. Tom Tancredo, R-Colo., cited the same concerns in introducing a bill to "terminate the E-rate program," essentially a rerun of legislation he introduced in 1999.

The E-rate has wide support in Congress, but the recent attention was enough to rouse from dormancy the Education and Library Networks Coalition, a Washington-based group active in the program's earliest years. EdLiNC blasted an e-mail trumpet to rally its supporters last month.

At the same time, another discussion heating up here may have even greater importance to the future of the E-rate.

Conrad Burns

Federal officials and some members of Congress are concerned that the revenue stream that pays for the program—from a toll on long-distance and international phone service—is dwindling. Sen. Conrad Burns, R-Mont., highlighted that issue in a hearing of the Senate Commerce Committee last week.

"Wherever there is a sizable pool of government money, there are always those who will find ways to manipulate the system," said Kathleen Q. Abernathy, an FCC commissioner, after testifying before Mr. Burns, the only senator present at the time.

She noted that concerns about the program's potential for abuse have been piqued by the recent filing of criminal charges against one E-rate vendor and by the program administrators' denial of a multimillion-dollar E-rate project primarily because the school district involved allegedly had worked with a vendor too closely in preparing its application. ("E-Rate Audits Expose Abuses in the Program," Feb. 12, 2003.)

The FCC is considering a range of proposals to toughen the penalties for wrongdoing in the E-rate application process, including disqualifying applicants and vendors that commit serious or multiple infractions.

Agenda for Task Force

Officials of USAC say their application-review process led to denials of applicants' requests totaling $1.7 billion this year for all reasons, including waste, fraud, and abuse.

The new task force will examine the E-rate's "support mechanism, outreach, and training" and will recommend steps against misuse of the program by both applicants and vendors. The 14 members, not yet identified, include representatives of schools, libraries, state telecommunications networks, and companies that provide telecommunications services, officials said. The panel is to issue a report this summer and then be disbanded.

But for now, many in Washington are focusing on the revenue side of the E-rate: the money the FCC collects to pay for it and for several other telecommunications subsidies that are collectively known as "universal service."

The E-rate and three other programs, which subsidize telephone and some other services in rural and poor communities, are financed through a federal toll on phone companies' revenues from long-distance, interstate, and international calls. Customers often see the toll broken out as a "universal service" charge on their phone bills.

Falling Revenue

But long-distance and international revenues are dropping because of current trends in pricing and in the bundling of services. As those revenues have dropped, the FCC has responded by raising the toll—from about 3 percent in 1998 to 9.1 percent now.

At the same time, higher universal-service charges are helping drive users toward e-mail and Internet telephony, which provide no universal-service revenue, and to wireless-telephone service, which the FCC has granted a so-called "safe harbor" that limits the toll to only a fraction of revenues. The FCC considers another huge slice of phone revenues—local phone service within a given state—to be outside its regulatory jurisdiction.

Regulators are considering various methods for broadening the base for contributions to the universal-service fund, including scrapping the safe harbor for wireless service and basing fees on the number of phone lines customers have and on the speed of those connections. Congress could also act to tap revenues from local phone calls or Internet services.

At his hearing last week, Sen. Burns said the FCC, Congress, and other groups should convene a summit to work out a new funding mechanism. Ms. Abernathy, in her testimony, replied that whatever method the FCC works out is sure to be challenged in court by one segment or other of the telecommunications industry.

Vol. 22, Issue 30, Pages 27,31

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