Report Documents Millions Wasted by E-Rate, Offers Reform Recommendations

Barton, Upton to Pursue Fundamental Changes to the Program

WASHINGTON - Capping a year-long investigation, the House Energy and Commerce Committee's Oversight and Investigations Subcommittee today approved a bipartisan staff report chronicling the E-rate program's waste, fraud and abuse and identifying reforms needed to repair a broken system.

"The government mismanagement of the E-rate program seems to know few bounds," said U.S. Rep. Joe Barton, R-Texas, chairman of the committee. "Unscrupulous vendors also fleeced the program while underserved communities and telephone customers pay the price. The Federal Communications Commission, these merchants and certain schools all must share in the blame for this disgrace."

"It is clear to me, as I consider the work laid out in this staff report, that many E-rate program weaknesses must be addressed legislatively to avoid waste and misuse," said U.S. Rep. Ed Whitfield, R-Kentucky, the Oversight and Investigations Subcommittee Chairman. "I will transmit this report both to the Telecommunications and Internet Subcommittee as well as the full Committee, so that our work can assist the Committee in crafting the appropriate legislative proposals."

Barton and Subcommittee on Telecommunications and the Internet Chairman Fred Upton, R-Mich., said they plan to craft legislation fundamentally reforming the e-rate program.

The Telecommunications Act of 1996 expanded the Universal Service Fund to assist schools and libraries in acquiring telecommunications and Internet services - an initiative that became known as the "education rate" program, funded through fees on telephone customers and capped at $2.25 billion annually. To administer the effort, the Federal Communications Commission established the private, not-for-profit Universal Service Administrative Company (USAC).

According to the report, the Oversight and Investigations Subcommittee's work reveals "a well-intentioned program that nonetheless is extremely vulnerable to waste, fraud, and abuse, is poorly managed by the FCC, and completely lacks tangible measures of either effectiveness or impact." Findings of the report include:

• The FCC's three key oversight mechanisms for the E-rate program - rulemaking procedures, beneficiary audits, and reviews of USAC decisions (i.e., appeals decisions) - are not sufficient to manage the program.
• Some school districts have acquired goods and services through the E-rate program without using a formal bidding process, contrary to both the program's rules and local regulations.
• There is no real protection from "gold-plating" or procuring technology goods and services far beyond reasonable school district needs and resources.
• Weak competition requirements and inadequate oversight allowed a group of vendors to completely manipulate the competitive process for E-rate program goods and services, without USAC detecting the fraud.
• Recently established guidelines for debarment of vendors and applicants set standards of program abuse too high, requiring first a civil judgment or criminal conviction against the participant before a suspension may occur and debarment can be considered.
• The E-rate program's ambiguous rules and procedures, and extensive delay in the distribution of funding, create significant confusion among applicants and vendors, contributing to program waste.

Principles that should guide program reform include:

• More rigorous oversight by the FCC and USAC, which may require additional personnel resources. Auditing must be undertaken immediately and accomplished before the end of this Congress, so that the FCC can promptly provide to Congress, some tangible measure of the extent and scope of program waste, fraud, and abuse.
• Concrete and achievable goals and measures of effectiveness.
• A mechanism to root out "gold-plating."
• Apply federal accountability requirements to E-rate.
• Reduce the backlog of appeals, which can take years to resolve.
• Require school districts to take a greater financial stake in their E-rate applications.
• Implement a robust, transparent competitive bidding structure.

Since last year, the committee has held five hearings examining E-rate waste, fraud, and abuse. In one of the most infamous cases, the USAC disbursed $101.2 million from 1998 to 2001 to equip Puerto Rico's 1,540 schools with high-speed Internet access but a later review found very few computers actually connected to the Internet and $23 million in equipment sitting in unopened boxes in a warehouse.

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