The E-rate program's administrators noted that new concerns about waste, fraud and abuse and increased auditing activities appear to be having an impact on their operations.
The CEO of NECA Services Inc., the entity that currently holds the contract for reviewing E-rate applications, reported to the quarterly meeting of the Schools and Libraries Committee of the Universal Service Administrative Company's Board of Directors that his staff had seen a substantial increase in the volume of service substitution requests that applicants were submitting. "As people understand we're getting serious about COMADs (Commitment Adjustments) and audits," said John Perry, "they are coming forward" so that their service changes can be reviewed.
Perry added that if these requests increase, "it will be a resource issue" for NSI. In the meantime, he said, "it's a positive note from the audits. The applicant community is starting to pay attention."
Meanwhile, it was announced that the next hearing on the E-rate program by the House Energy and Commerce Subcommittee on Oversight and Investigations will be held July 22 at 10:30 a.m. An SLD spokesman said this hearing would focus on "NEC" and a future hearing would focus on "IBM." In May, the U.S. Department of Justice announced that NEC Business Network Solutions Inc. had agreed to plead guilty and to pay $20.6 million to settle charges of collusion and wire fraud in connection with E-rate-related activities in five states. NEC recently petitioned the Federal Communications Commission for a waiver of the FCC's rules regarding debarment from the program.
In the 2002 funding year, the applications of a number of large school districts were rejected because of concerns about inappropriate vendor involvement and potential competitive bidding violations. Many of the funding requests were in the name of IBM, which was acting as the district's strategic technology partner in many of the cases. In December 2003, the FCC permitted districts that had appealed their rejections to reapply in a special filing window after they argued that they had pursued this approach only after the Schools and Libraries Division had approved the 2001 application of the El Paso Independent School District, which had followed a similar procedure.
In reviewing the results of a variety of recent audits of unidentified E-rate beneficiaries, Frank Gumper, board chair of the Universal Service Administrative Company, noted one in which an applicant had "spent $5 million on internal connections," but had not received funding for telecommunications services or Internet access. "What is $5 million being used for if they're not spending anything on telecommunications services or Internet access?" he wondered.
Gumper also pointed to another applicant who had refused to respond to inquiries from KPMG, which has been auditing a sample of 80 program beneficiaries. Gumper noted that funding for the applicant "should be cut off" if the SLD had not already done so. Gumper expressed service providers' continuing concern that service providers are expected to repay the program when program violations are found, even when it is the applicant who is to blame. The FCC is currently reviewing the rules regarding COMADs.
Gumper also noted an audit that found a private school with 158 students for which the SLD had approved funding for 136 network drops, ("or virtually one for every desktop") and questioned why the SLD had provided funding for that.
George McDonald, vice president of USAC for the schools and libraries program, replied that the SLD might have asked to see the school's tech plan, "but if the funding request is supported by the technology plan, we have no basis to deny it." McDonald noted that the program had been wrestling with whether a standard could be set to deter what is sometimes referred to as "gold-plating."
