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Published in Print: October 1, 1998, as Put On Hold

Put On Hold

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When Jose Alvarado turned in an application for the federal E-rate program last April, he expected to receive the aid by summer, in time for his district to link some schools to the Internet for the new school year.

But summer has come and gone, and the district-which spent $500,000 planning some $13 million worth of technology projects that are tied to the E-rate discount for telecommunications services-hasn't received one penny. "We've been waiting and waiting and waiting some more," says Alvarado, who is the telecommunications supervisor for California's 7,700-student Fresno school district.

Fresno is hardly alone. As of early September, no district had received the promised aid, which many schools nationwide are counting on to subsidize Internet connections.

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.

Unlike Alvarado and his counterparts elsewhere, Washington insiders aren't surprised that E-rate discounts aren't available yet. Despite its seemingly noncontroversial goal of ensuring that schools and libraries have access to the Internet, the E-rate has proved contentious within the telecommunications industry and among policymakers. "There are enormous stakes involved with very large players," says Robert Crandall, an economist and telecommunications expert at the Washington, D.C.-based Brookings Institution.

The E-rate program was established under the Telecommunications Act of 1996. The act expanded provisions written into federal law more than 60 years ago to guarantee all Americans affordable telephone service. Under this universal-service provision, Americans who lived in areas where telephone installation was cheap subsidized installation for those in areas where it was expensive.

In 1996, Congress expanded this universal-service concept to ensure that all schools and libraries would be able to afford "advanced telecommunications and information services." Under the act, schools and libraries will be able to purchase all commercially available telecommunications services, Internet access, and internal connections at discounted rates. Congress ordered the nation's telecommunications companies to pay for the discounts through fees.

In September 1997, the Federal Communications Commission created the Schools and Library Corp. to administer up to $2.3 billion annually through the E-rate program. The Commission established a matrix that will provide discounts ranging from 20 percent to 90 percent, depending on the economic situation of a school or library. So far, the SLC has received more than 30,000 applications.

Not surprisingly, long-distance companies are resisting, asking why they should bear the brunt of the new program's costs. Internet-service providers and network-software manufacturers, they complain, aren't required to contribute at all. "We don't have any problem with the goals of the E-rate program," says Claire Hassett, a spokeswoman for 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."

At least two bills have been introduced in Congress-one by a Democrat, one by Republicans-that propose using a portion of a federal telephone excise tax to pay for the E-rate instead of the fees collected from telecommunications companies. But the Clinton administration opposes such plans.

Telecommunications companies, meanwhile, are fighting the new FCC regulations in the federal courts. A critical issue is whether the FCC fee for universal service is an illegal tax in disguise. The U.S. Constitution gives only Congress the power to tax.

James Carr, a lawyer for the FCC, says the tax claim is without merit. In fact, he says, a federal court ruled in 1988 that the universal-service fee is not a tax.

What's more, the FCC reduced other charges long-distance carriers pay when it implemented the Telecommunications Act. Those savings, the FCC argues, more than offset any new costs from the E-rate.

But some observers believe the telecommunications companies could prevail in court. "In one respect, this is very different," says Crandall of the Brookings Institution. "We don't have a tax on all blackboard manufacturers or pencil manufacturers." Why then, he asks, should telecommunications companies have to pay for school services.

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

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

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

This perplexed some. "I don't know how the E-rate got tied to Al Gore," says Sandy Zimmet, a legislative assistant for Representative Constance Morella of Maryland. Morella, a Republican, was the initial sponsor of the E-rate provision in the House. "It's a problem," Zimmet adds, "because we've lost support from a lot of Republicans who supported this amendment. Everybody's lying low."

In early June, leaders of the House and Senate commerce committees wrote to the FCC asking it to suspend the E-rate program. Instead, the FCC scaled it back-promising to give out $1.9 billion over 18 months instead of $2.3 billion over 12 months. The Schools and Libraries Corp. now predicts the money will start to flow to districts some time this fall.

Bruce Hunter, director of government relations for the American Association of School Administrators, believes the E-rate's best hope for survival at this point is for the SLC to start delivering the promised discounts to districts like Jose Alvarado's in California. "Disrupting a program that's operating," he says, "is much more difficult than disrupting a program that's waiting to be."

-Mary Ann Zehr



Vol. 10, Issue 2, Pages 14,16

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