**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the Matter of                 | *  | CC Docket No. 02-6           |
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| Schools and Libraries Universal  | ** |                              |
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| Support Mechanism                | *) |                              |
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**FIFTH REPORT AND ORDER**

**AND ORDER**

**Adopted: August 4, 2004 Released: August 13, 2004**

By the Commission: Chairman Powell, and Commissioners Abernathy, Copps,
and Adelstein issuing separate statements; Commissioner Martin approving
in part, dissenting in part, and issuing a statement.

**TABLE OF CONTENTS**

**Paragraph**

[I. INTroduction 1](#introduction)

[II. BACKGROUND 2](#background)

[III. fifth report and order 13](#fifth-report-and-order)

[A. Recovery of Funds 15](#recovery-of-funds)

[*1.* *Background* 15](#background-1)

[*2.* *Discussion*](#__RefHeading___Toc79832022) *18*

[a. What to Recover 18](#__RefHeading___Toc79832023)

[b. When to Recover Funds 31](#when-to-recover-funds)

[c. How to Recover](#how-to-recover) 37

[d. Treatment of Applicants Subject to Recovery
Actions](#treatment-of-applicants-subject-to-recovery-actions) 40

[B. Document Retention Requirements](#document-retention-requirements)
45

[*1.* *Background* 45](#background-2)

[*2.* *Discussion*](#discussion-1) *47*

[C. Technology Plans 51](#technology-plans)

[*1.* *Background*](#background-3) *51*

[*2.* *Discussion* 55](#discussion-2)

[D. Certifications 64](#certifications)

[*1.* *Background*](#background-4) *64*

[*2.* *Discussion*](#discussion-3) *65*

[IV. ORDER](#order) 72

[V. PROCEDURAL MATTERS 81](#procedural-matters)

[A. Paperwork Reduction Act Analysis
81](#paperwork-reduction-act-analysis)

[B. Final Regulatory Flexibility Analysis
83](#final-regulatory-flexibility-analysis)

**APPENDIX A -- LIST OF COMMENTERS**

**APPENDIX B -- FINAL RULES**

# INTroduction

1.  In this order, we adopt measures to protect against waste, fraud,
    and abuse in the administration of the schools and libraries
    universal service support mechanism (also known as the E-rate
    program). In particular, we resolve a number of issues that have
    arisen from audit activities conducted as part of ongoing oversight
    over the administration of the universal service fund, and we
    address programmatic concerns raised by our Office of Inspector
    General (OIG).[^1] First, we set forth a framework regarding what
    amounts should be recovered by the Universal Service Administrative
    Company (USAC or Administrator) and the Commission when funds have
    been disbursed in violation of specific statutory provisions and
    Commission rules. Second, we announce our policy regarding the
    timeframe in which USAC and the Commission will conduct audits or
    other investigations relating to use of E-rate funds. Third, we
    eliminate the current option to offset amounts disbursed in
    violation of the statute or a rule against other funding
    commitments. Fourth, we extend our red light rule previously adopted
    pursuant to the Debt Collection Improvement Act (DCIA) to bar
    beneficiaries or service providers from receiving additional
    benefits under the schools and libraries program if they have failed
    to satisfy any outstanding obligation to repay monies into the fund.
    Fifth, we adopt a strengthened document retention requirement to
    enhance our ability to conduct all necessary oversight and provide a
    stronger enforcement tool for detecting statutory and rule
    violations. Sixth, we modify our current requirements regarding the
    timing, content and approval of technology plans. Seventh, we amend
    our beneficiary certification requirements to enhance our oversight
    and enforcement activities. Eighth, we direct USAC to submit a plan
    for timely audit resolution, and we delegate authority to the Chief
    of the Wireline Competition Bureau to resolve audit findings.
    Finally, we direct USAC to submit on an annual basis a list of all
    USAC administrative procedures to the Wireline Competition Bureau
    (Bureau) for review and further action, if necessary, to ensure that
    such procedures effectively serve our objective of preventing waste,
    fraud and abuse.[^2]

# BACKGROUND

2.  USAC administers the schools and libraries universal service support
    program under Commission oversight. Under this program, eligible
    schools, libraries, and consortia that include eligible schools and
    libraries, may receive discounts for eligible telecommunications
    services, voice mail, Internet access, and internal connections.[^3]
    Prior to applying for discounted services, an applicant must conduct
    a technology assessment and develop a technology plan to ensure that
    any services it purchases will be used effectively.[^4] The
    applicant then must submit to the Administrator a completed FCC Form
    470, in which the applicant sets forth, among other things, the
    services for which it seeks discounts.[^5] Once the school or
    library has complied with the Commission's competitive bidding
    requirements and entered into agreements for eligible services, it
    must file an FCC Form 471 application to notify the Administrator of
    the services that have been ordered, the service providers with whom
    the applicant has entered into an agreement, and an estimate of
    funds needed to cover the discounts to be given for eligible
    services.[^6]

3.  The Administrator reviews the FCC Forms 471 that it receives and
    issues funding commitment decision letters indicating discounts that
    the applicant may receive in accordance with the Commission's rules.
    Subsequently, pursuant to our rules, the applicant either: (1) pays
    the bill in full, and seeks reimbursement for discounts from the
    Administrator via the service or equipment provider, or (2) pays the
    non-discount portion of the service cost to the service provider,
    who, in turn, seeks reimbursement from the Administrator for the
    discounted amount.[^7]

4.  Under the Commission's rules, eligible schools and libraries may
    receive discounts ranging from 20 percent to 90 percent of the
    pre-discount price of eligible services, based on indicators of
    need.[^8] Schools and libraries in areas with higher percentages of
    students eligible for free or reduced-price lunch through the
    National School Lunch Program (or a federally approved alternative
    mechanism) qualify for higher discounts for eligible services than
    applicants with low levels of eligibility for such programs. Schools
    and libraries located in rural areas also generally receive greater
    discounts.[^9]

5.  The Commission's priority rules provide that requests for
    telecommunications services, voice mail and Internet access for all
    discount categories shall receive first priority for the available
    funding (Priority One services). The remaining funds are allocated
    to requests for support for internal connections (Priority Two
    services), beginning with the most economically disadvantaged
    schools and libraries, as determined by the schools and libraries
    discount matrix. Currently, the most disadvantaged schools and
    libraries are eligible for a 90 percent discount on eligible
    services, and thus must pay only 10 percent of the cost of the
    service. To the extent funds remain after discounts are awarded to
    entities eligible for a 90 percent discount, the rules provide that
    the Administrator shall continue to allocate funds for discounts to
    applicants at each descending single discount percentage. The
    Commission\'s rules also provide that if sufficient funds do not
    exist to grant all requests within a single discount percentage, the
    Administrator shall allocate the remaining support on a pro rata
    basis over that single discount percentage level.[^10]

6.  Since the program's inception, the Commission sought to ensure the
    use of E-rate funds for their intended purpose. In 1999, the
    Commission adopted the *Commitment Adjustment Order*, which directed
    the Administrator to recover funds that, in the first year of the
    program, were committed to schools and libraries in violation of the
    Telecommunications Act of 1996.[^11] In a companion order issued the
    same day,[^12] the Commission granted a limited waiver of four
    specific Commission rules to first year applicants who had received
    disbursements in violation of those rules and waived enforcement of
    one USAC processing procedure.[^13] Subsequently, in 2000, the
    Commission adopted, with minor modifications, USAC's plan to
    implement the requirements in the *Commitment Adjustment
    Implementation Order*.[^14] In that Order, the Commission emphasized
    that the recovery plan "is not intended to cover the rare cases in
    which the Commission has determined that a school or library has
    engaged in waste, fraud or abuse."[^15] The Commission stated that
    it would address such situations on a case-by-case basis.[^16]

7.  Pursuant to Commission requirements, as part of ongoing oversight
    over the schools and libraries mechanism, USAC and other entities
    have conducted various audits of E-rate beneficiaries to determine
    whether such beneficiaries are in compliance with the statute and
    the Commission's implementing rules.[^17] In particular, in 2000,
    USAC contracted with an independent public accounting firm. That
    firm completed 17 audits of beneficiaries for Funding Year 1998.
    Subsequently, in 2001, USAC contracted with the same firm to conduct
    audits of 25 beneficiaries in Funding Years 1999 and 2000. Late in
    2002, USAC contracted with another independent public accounting
    firm to conduct audits of 79 randomly selected beneficiaries from
    Funding Year 2000; the bulk of the audit work was performed in 2003,
    with final audit reports issued by spring 2004. We currently are
    developing plans to audit a greater number of beneficiaries for
    Funding Years 2001 and 2002 pursuant to a three-way agreement
    between USAC, our Office of Inspector General and an independent
    public accounting firm. In addition, USAC's internal audit division
    has conducted audits of 57 E-rate beneficiaries, as well as two
    internal control audits.

8.  The FCC's OIG also has conducted a number of audits of E-rate
    beneficiaries, both on its own and through cooperative arrangements
    with other federal agencies. In 2002, the FCC's OIG entered into a
    Memorandum of Understanding (MOU) with the Department of Interior
    OIG for audits of schools and libraries that fall under the
    responsibility of the Department of Interior. To date, the FCC's OIG
    has finalized 14 audit reports, two of which were performed by the
    Department of Interior OIG pursuant o the MOU.[^18]

9.  The beneficiary audits conducted by USAC thus far have been "agreed
    upon procedures" audits, in which the auditor has performed
    specified procedures to determine the existence or nonexistence of
    certain facts or events and has reported factual findings. As such,
    the auditor has not opined on whether beneficiaries have complied
    with FCC rules; rather, such determinations are made in the first
    instance by USAC. Because the beneficiary audits conducted to date
    have been designed to examine compliance with FCC rules, certain
    USAC operating procedures, and presumed good business practices, not
    all findings implicate rule violations. In some instances, findings
    have identified areas where additional rules would be beneficial to
    the operation of the program.[^19]

10. To date, USAC has determined amounts to be recovered for specific
    statutory or rule violations pursuant to the recovery plan approved
    in the *Commitment Adjustment Implementation Order* in a manner
    consistent with how it acts on pending applications and requests for
    reimbursement.[^20] Specifically, in situations where USAC would
    normally deny a funding request outright upon discovering a
    particular infirmity in the application review process, because the
    applicant has failed to meet one or more necessary requirements for
    receipt of support, USAC has sought recovery of the full amount of
    the funding request. In situations where USAC normally would adjust
    the commitment amount, because the applicant is eligible for some,
    but not all, of the support, USAC has sought recovery of the
    difference between the amount approved and disbursed and the
    appropriate amount.

11. Early in 2002, the Commission initiated a rulemaking proceeding to
    seek comment on ideas raised by both the applicant and service
    provider communities for improving the program.[^21] In particular,
    the Commission sought comment on ways to ensure that the program
    funds are utilized in an efficient, effective, and fair manner,
    while preventing waste, fraud, and abuse.[^22] Since then, we have
    issued a series of orders in an ongoing effort to simplify program
    administration, ensure equitable distribution of funds, and protect
    against waste, fraud and abuse.[^23]

12. In December 2003, the Commission, among other things, adopted rules
    limiting the ability of schools and libraries to engage in wasteful
    or fraudulent practices when obtaining internal connections,
    established a more formal process to ensure that beneficiaries know
    what services are eligible for support, and codified rules for cost
    allocation and service substitutions.[^24] In addition, the
    Commission sought comment on procedures for recovery of funds and
    several proposals intended to protect against waste, fraud and abuse
    in the schools and libraries universal service program.[^25]

# fifth report and order

13. Since the inception of the schools and libraries support mechanism,
    schools and libraries have been subject to audits to determine
    compliance with the program rules and requirements.[^26] Audits are
    a tool for the Commission and USAC, as directed by the Commission,
    to ensure program integrity and to detect and deter waste, fraud,
    and abuse. Because audits may provide information showing that a
    beneficiary or service provider failed to comply with the statute or
    Commission rules applicable during a particular funding year, audits
    can reveal instances in which universal service funds were
    improperly disbursed or used in a manner inconsistent with the
    statute or the Commission's rules.[^27] As explained below, we adopt
    measures relating to recovery of such funds and other measures to
    strengthen the integrity of the schools and libraries mechanism of
    the universal service program and enhance our ongoing oversight over
    this program.

14. We stress that the measures we adopt herein are not the final steps
    we plan to take for strengthening oversight of the universal service
    program and combating waste, fraud, and abuse. We remain committed
    to deterring inappropriate uses of universal service monies and to
    rapidly detecting and addressing potential misconduct (including
    waste, fraud, and abuse), and we recognize that achieving these
    goals is a continual process. We note that we previously sought
    comment on additional oversight mechanisms, including a requirement
    that beneficiaries obtain and pay for independent audits of their
    compliance with our rules.[^28] We are continuing to work on various
    proposals for improving our oversight of the universal service
    program, and we expect to issue an order adopting additional
    measures in the near future.

## Recovery of Funds

### Background

15. As noted above, the Commission adopted the *Commitment Adjustment
    Order* in 1999, which directed the Administrator to recover funds
    that, in the first year of the program, were committed to schools
    and libraries in violation of the Telecommunications Act of
    1996.[^29] The Commission adopted a companion order on the same day
    granting a limited waiver of certain Commission rules and a USAC
    procedure to first year applicants who had received commitments and
    disbursements in violation of such rules and the procedure.[^30]
    Although the Commission found good cause for granting these limited
    waivers, which resulted in eliminating the potential for recovery of
    funds disbursed in violation of Commission rules, the Commission
    made clear that beneficiaries and service providers would be subject
    to the possibility of recovery of funds disbursed in violation of
    rules in the future.[^31] Subsequently, in 2000, the Commission
    adopted the *Commitment Adjustment Implementation Order,* which set
    up a framework for recovering funds committed or disbursed in
    violation of the statute consistent with the Debt Collection
    Improvement Act (DCIA)[^32] and our implementing rules.[^33] Since
    then, USAC has implemented this process for statutory and rule
    violations. To the extent that we have not clearly done so in the
    past, we reaffirm and adopt this policy and find that it is
    consistent with the requirements of the DCIA and the general intent
    of the *Commitment Adjustment Order*.

16. At the time, USAC had been distributing funds through the schools
    and libraries universal service support mechanism for approximately
    one year. The Commission and USAC then faced a limited range of
    situations in which errors had occurred requiring the recovery of
    funds. Since then, through the audit process, the Commission and
    USAC have become aware of additional scenarios that raise the issue
    of recovery of funds. Recognizing that the Commission has not
    comprehensively addressed the question of what recovery procedures
    would be appropriate in situations where it is determined that funds
    have been disbursed in violation of particular programmatic rules
    that do not implicate statutory requirements, in the December 2003
    *Schools and Libraries Second Further Notice,* we sought comment on
    whether to implement procedures or adopt rules governing fund
    recovery in particular situations and, more generally, whether
    additional safeguards or procedures are needed to address the matter
    of funds disbursed in violation of the statute or a rule.[^34] Among
    other issues, we sought comment on whether to modify our existing
    commitment adjustment procedures, whether to waive certain rules to
    make recovery unnecessary in particular situations, and whether to
    subject beneficiaries that have faced a recovery action to more
    rigorous scrutiny before acting on subsequent funding requests. In
    light of the record developed in our ongoing rulemaking proceeding,
    and our experience with E-rate oversight to date, we refine and
    extend our recovery procedures as set forth below.

17. Accordingly, we revisit the framework previously established and
    modify it to the extent described below. All other aspects of the
    *Commitment Adjustment Order* and *Commitment Adjustment
    Implementation Order* not addressed in this order and the *Fourth
    Schools and Libraries Order* remain in place.[^35] Moreover, any
    claims due to the government remain fully subject to the
    requirements of our rules implementing the Debt Collection
    Improvement Act.[^36]

### Discussion

#### What to Recover

18. It is clear that funds disbursed in violation of the statute or a
    rule that implements the statute or a substantive program goal must
    be recovered.[^37] In this order we identify rules of this type and
    provide advance notice to all stakeholders that violation of these
    rules will result in recovery. In addition, we recognize that other
    rules may be necessary to protect against waste, fraud and abuse,
    and that violation of these types of rules will warrant recovery as
    well, as set forth in this order. [^38]

19. On the other hand, we agree with commenters that recovery may not be
    appropriate for violation of all rules regardless of the reason for
    their codification.[^39] For example, when the administrative costs
    of recovering funds disbursed in violation of a rule exceed the
    improperly disbursed amount, it may be reasonable not to seek
    recovery. Likewise recovery may not be appropriate for violation of
    procedural rules codified to enhance operation of the e-rate
    program. We seek to ensure that the determination is made and
    communicated to applicants in advance. Consistent with this policy,
    as described more fully below, we intend to evaluate whether there
    are USAC procedures that should be codified into the Commission's
    rules and whether violation of each should also be a basis for
    recovery. Applicants will be required to comply with procedural
    rules in applying for support---and applications that do not comply
    will be rejected. If, however, the procedural violation is
    inadvertently overlooked during the application phase and funds are
    disbursed, the Commission will not require that they be recovered,
    except to the extent that such rules are essential to the financial
    integrity of the program, as designated by the agency, or that
    circumstances suggest the possibility of waste, fraud, or abuse,
    which will be evaluated on a case-by-case basis.

20. Amounts disbursed in violation of the statute or a rule that
    implements the statute or a substantive program goal must be
    recovered in full. In situations where disbursement of funds is
    warranted under the statute and rules, but an erroneous amount has
    been disbursed, the amount of funds that should be recovered is the
    difference between what the beneficiary is legitimately allowed
    under our rules and the total amount of funds disbursed to the
    beneficiary or service provider. We set forth below a number of
    examples to illustrate the applications of this principle.

21. *[Competitive Bidding Requirements]{.underline}*. We conclude that
    we should recover the full amount disbursed for any funding requests
    in which the beneficiary failed to comply with the Commission's
    competitive bidding requirements as set forth in section 54.504 and
    54.511 of our rules and amplified in related Commission orders.[^40]
    For instance, it is appropriate to recover the full amount of funds
    disbursed for a funding request when the beneficiary signs a
    contract before the end of the 28-day posting period. Likewise, it
    is appropriate to recover the full amount disbursed in a situation
    where the beneficiary failed to consider price as the primary factor
    when evaluating among competing bids.[^41] This conclusion is based
    on our position that the competitive bidding process is a key
    component of the schools and libraries program, ensuring that funds
    support services that satisfy the precise needs of an applicant and
    that services are provided at the lowest possible rates.[^42]

22. *[Necessary Resources Certification]{.underline}*. We conclude that
    a lack of necessary resources to use the supported services warrants
    full recovery of funds disbursed for all relevant funding requests.
    The requirements that beneficiaries have sufficient computer
    equipment, software, staff training, internal connections,
    maintenance and electrical capacity to make use of the supported
    services are integral to ensuring that these monies are used for
    their intended purposes, without waste, fraud or abuse.[^43]

23. *[Service Substitution]{.underline}*. Parties have the opportunity
    to make legitimate changes to requested services when events occur
    that make the original funding request impractical or even
    impossible to fulfill.[^44] Last December, we codified rules to
    address requests for service or equipment changes, concluding that
    allowing parties to make such substitutions is consistent with our
    goal of affording schools and libraries maximum flexibility to
    choose the offering that meets their needs more effectively and
    efficiently.[^45] We conclude that in situations where a service
    substitution would meet the criteria now established in our rules,
    the appropriate amount to recover is the difference between what was
    originally approved for disbursement and what would have been
    approved, had the entity requested and obtained authorization for a
    service substitution. In situations where the service substitution
    would not meet the criteria established in our rules, the
    appropriate amount to recover is the full amount associated with the
    service in question.

24. *[Failure to Pay Non-discounted Share]{.underline}*. We conclude
    that all funds disbursed should be recovered for any funding
    requests in which the beneficiary failed to pay its non-discounted
    share. While our rules do not set forth a specific timeframe for
    determining when a beneficiary has failed to pay its non-discounted
    share, we conclude that a reasonable timeframe is 90 days after
    delivery of service. Allowing schools and libraries to delay for an
    extended time their payment for services would subvert the intent of
    our rule that the beneficiary must pay, at a minimum, ten percent of
    the cost of supported services. We believe, based on USAC\'s
    experience to date as Administrator, that a relatively short period
    -- comparable to what occurs in commercial settings -- should be
    established in which beneficiaries are expected to pay their
    non-discounted share after completion of delivery of service. In
    other contexts, companies refer payment matters to collection
    agencies if a customer fails to pay after several requests for
    payment. Accordingly, we clarify prospectively that a failure to pay
    more than 90 days after completion of service (which is roughly
    equivalent to three monthly billing cycles) presumptively violates
    our rule that the beneficiary must pay its share. For purposes of
    resolving any outstanding issues relating to audits conducted prior
    to the issuance of this clarification, we direct USAC to determine
    whether full payment had been made as of the time the audit report
    was finalized. If any amounts remained outstanding at the conclusion
    of the audit work, that constitutes a rule violation warranting
    recovery of all amounts disbursed. Information on payment of the
    non-discounted share shall be sought from the beneficiary.

25. *[Duplicative Services]{.underline}*. As noted in the *Schools and
    Libraries Second Order*, our rules prohibit the funding of
    duplicative services, defined as services that provide the same
    functionality to the same population in the same location during the
    same period of time.[^46] In such circumstances, we ordinarily will
    recover the amount associated with the more expensive of the
    duplicative services, except in situations where there are
    indications of fraud, where we may recover the full amount of the
    funding request.

26. *[Failure to Complete Service within the Funding Year]{.underline}*.
    We conclude that the failure to complete delivery of services by the
    relevant deadline for a particular funding year is a rule violation
    that warrants recovery of all funds disbursed for services installed
    or delivered after the close of the funding year. We note that
    parties are always free to seek an extension of time to install
    non-recurring services from USAC, consistent with the conditions set
    by the Commission for such an extension. Such extensions have been
    granted in situations where installation cannot be completed for
    reasons outside the control of the beneficiary.[^47] Generally,
    however, the Commission requires service to be completed within one
    Funding Year, in order to promote equity among applicants and to
    avoid waste.[^48]

27. *[Discount Calculation Violation]{.underline}*. When applicants fail
    to calculate properly their appropriate discount rate, the amount
    disbursed in violation of this rule is the difference between the
    amount of support to which the beneficiary is legitimately allowed
    and the amount requested or provided. For instance, in a situation
    in which the beneficiary made a clerical error in calculating the
    level of participation in the school lunch program, or failed to use
    an approved methodology for calculating the level of school lunch
    participation, the beneficiary may legitimately receive support
    under a recalculated discount rate. In these circumstances, the
    amount to recover is the difference between the incorrectly
    calculated amount and the amount recalculated with the appropriate
    discount.[^49] We emphasize, however, that in the narrow
    circumstance where there is evidence that an applicant has
    manipulated its discount rate in a deliberate attempt to defraud the
    government, full recovery may be appropriate. Moreover, in
    situations where the applicant would not have qualified for any
    support for internal connections had it properly applied the
    discount, the recovery would be the entire amount disbursed.

28. *[Service Not Provided for Full Funding Year]{.underline}*.
    Similarly, if an applicant requested and received funding for a full
    year, and the service provider billed for the full year, but
    provided services for less than the full year, we believe it would
    be appropriate to pro-rate support and recover the excess. Such
    adjustments are ordinarily made prior to disbursement when
    discovered by USAC through normal review processes.

29. *[Recovery Only for Waste, Fraud and Abuse]{.underline}*. We reject
    the argument some commenters make that applicants should not be
    required to repay the fund unless waste, fraud or abuse is
    established.[^50] We believe that there may be instances in which
    rule violations undermine statutory requirements or substantive
    policy goals of the program, but may not rise to the level of waste,
    fraud or abuse. For example, a request for an ineligible service
    might not entail waste, fraud or abuse, but it is still a violation
    for which recovery is necessary. While we appreciate that it may
    impose some hardship to make repayment in some situations, a
    statutory or rule violation cannot be absolved merely because the
    nature of the violation does not implicate waste, fraud or abuse.
    Moreover, to limit recovery to situations involving waste, fraud or
    abuse would place us in the position of condoning violation of the
    program's rules Further, it would provide no incentives to
    applicants or service providers to take the necessary steps to
    familiarize themselves with our rules and put controls in place to
    ensure rule compliance. Nor do we believe it appropriate for a
    beneficiary to retain an overpayment if, for some reason, USAC has
    mistakenly disbursed an amount in excess of that which the entity is
    allowed under our rules. If there are unique reasons why a
    particular entity believes recovery for a rule violation is
    inappropriate, that party is always free to present such information
    in seeking review of USAC's decision to recover monies, pursuant to
    section 54.722.[^51] We note, however, that we are without authority
    to waive statutory violations.

30. While we have not, to date, enunciated a bright line standard for
    determining whether a particular funding request or activities
    related to it depart from this standard to a degree that constitutes
    waste, fraud or abuse, we emphasize that we, and USAC in the first
    instance, retain the discretion to make such determinations on a
    case-by-case basis in the course of examining specific factual
    circumstances. For example, section 254(h)(1)(B) of the Act requires
    that applicants make a bona fide request for services to be used for
    educational purposes.[^52] A funding request may not be bona fide in
    a situation in which a service provider has charged the beneficiary
    an inflated price. Thus, it would be appropriate to recover amounts
    disbursed in excess of what similarly situated customers are
    normally charged in the marketplace.[^53] Similarly, in a situation
    in which the beneficiary has requested a clearly excessive level of
    support -- which necessarily must be judged in the context of the
    specific circumstances of the school or library -- it would also be
    appropriate to recover the full amount of the funding request,
    because the beneficiary has not made a bona fide request based on
    its reasonable needs.[^54] In addition, in specific cases where
    there is evidence of fraudulent conduct, it would be appropriate to
    refer such matters to law enforcement officials.

#### When to Recover Funds

31. In this section, we establish an administrative limitations period
    in which the Commission or USAC will determine that a violation has
    occurred. We believe that announcing a general policy in this area
    is in the public interest because it provides applicants and service
    providers with some certainty of the timing by which an audit or
    further review of e-rate funding may occur. We also conclude that a
    *de minimis* exception is in the public interest and direct USAC
    generally not to seek recovery when the administrative cost is
    greater than the recovery amount. Finally, we decline to implement a
    rule generally requiring full recovery when a pattern of violations
    is discovered, recognizing the punitive nature of such a rule.
    Rather, we direct USAC to conduct more rigorous scrutiny of
    applications in subsequent funding years when systematic
    noncompliance of FCC rules is suspected, and we direct USAC to refer
    such situations to the Bureau, as appropriate, for further
    consideration.

32. *[Administrative Limitations Period for Audits or Other
    Investigations by the Commission or USAC.]{.underline}*  We believe
    that some limitation on the timeframe for audits or other
    investigations is desirable in order to provide beneficiaries with
    certainty and closure in the E-rate applications and funding
    processes. For administrative efficiency, the time frame for such
    inquiry should match the record retention requirements and,
    similarly, should go into effect for Funding Year 2004. Accordingly,
    we announce our policy that we will initiate and complete any
    inquiries to determine whether or not statutory or rule violations
    exist within a five year period after final delivery of service for
    a specific funding year. We note that USAC and the Commission have
    several means of determining whether a violation has occurred,
    including reviewing the application, post application year auditing,
    invoice review and investigations. Under the policy we adopt today,
    USAC and the Commission shall carry out any audit or investigation
    that may lead to discovery of any violation of the statute or a rule
    within five years of the final delivery of service for a specific
    funding year.[^55]

33. In the E-rate context, disbursements often occur for a period up to
    two years beyond the funding year. Moreover, audit work typically is
    not performed until after the disbursement cycle has been completed.
    For consistency, our policy for audits and other investigations
    mirrors the time that beneficiaries are required to retain documents
    pursuant to the rule adopted in this order.[^56] We believe that
    conducting inquiries within five years strikes an appropriate
    balance between preserving the Commission's fiduciary duty to
    protect the fund against waste, fraud and abuse and the
    beneficiaries' need for certainty and closure in their E-rate
    application processes.

34. One commenter argues that fund recovery actions should be subject to
    a one year statute of limitations, comparable to the limitation for
    imposition of forfeitures,[^57] while others argue that a two year
    timeframe, beginning the date of the funding commitment decision
    letter, is appropriate.[^58] We emphasize that our policy regarding
    initiation of audits or other investigations does not affect the
    statutes of limitations applicable under the DCIA for collection of
    debts established by the Commission.[^59]

35. *[Recovery for De Minimis Amounts]{.underline}*. We conclude that it
    does not serve the public interest to seek to recover funds
    associated with statutory or rule violations when the administrative
    costs of seeking recovery outweigh the dollars subject to
    recovery.[^60] Accordingly, we direct USAC not to seek recovery of
    such *de minimis* amounts. We direct USAC to provide the Wireline
    Competition Bureau and the Office of Managing Director sufficient
    information regarding the administrative costs of seeking recovery
    of improperly disbursed funds so that a *de minimis* amount can be
    determined.[^61]

36. *[Recovery for Pattern of Rule Violations]{.underline}*. We decline
    at this time to adopt a rule requiring recovery of the full amount
    disbursed in situations in which there is a pattern of rule or
    statutory violations, but the specific individual violations
    collectively do not require recovery of all disbursed amounts. We
    believe it would be difficult to establish a workable bright line
    standard that USAC could apply in such cases, and therefore decline
    to adopt such a rule at this time. We direct the Wireline
    Competition Bureau to consider such situations on a case-by-case
    basis in the course of resolving audit findings.[^62] Moreover, we
    emphasize that USAC should subject any school or library that
    exhibits systematic noncompliance with governing FCC rules to more
    rigorous scrutiny in the subsequent funding years. We direct USAC to
    implement this practice and to refer such situations to the Bureau,
    as appropriate, for further consideration.

#### How to Recover

37. [*Elimination of the Offset Options*.]{.underline} In the
    *Commitment Adjustment Implementation Order*, the Commission
    authorized USAC to offer service providers two offset methods for
    repayment of funds disbursed in violation of the statute or a
    rule.[^63] One offset method allowed a service provider to offset
    the debt by "reductions in the amounts owed to the service provider
    from other existing valid commitments involving the same applicant
    and service provider in the same funding year."[^64] The other
    offset method permitted a service provider to offset commitments
    involving the same applicant and service provider in subsequent
    funding years.[^65]

38. Based on our experience with implementation of the *Commitment
    Adjustment Implementation Order*, we now conclude that it would
    better serve our interest in protecting universal service funds to
    eliminate the offset methods adopted in that order as options for
    recovery of funds in the schools and libraries universal service
    mechanism. We have observed that, when used, such offset methods can
    result in a lengthy process that imposes a significant
    administrative burden on USAC.[^66] We note that although a service
    provider may fully intend to repay the outstanding debt in a timely
    manner when choosing the offset options adopted in the *Commitment
    Adjustment Implementation Order*, events may occur during the
    current or subsequent funding year which may delay or prevent
    payment. For example, the offset option was made available when
    there were sufficient pending funding requests to pay for the
    outstanding debt during the subsequent funding year, but if actual
    disbursements requested during that funding year do not satisfy the
    outstanding debt, the debt may continue during later funding years,
    or indefinitely if there remains an unsatisfied commitment. Even
    within the current funding year, such an offset may prove to be an
    attenuated, lengthy process, given that the beneficiary may have
    more than a full year after the close of the funding year to
    complete installation of non-recurring services, and may obtain
    extensions beyond that in specified circumstances. The potential for
    carrying the outstanding debt over several funding years, or
    non-payment altogether, hinders the ability of USAC to fully collect
    funds as necessary. To avoid this, and to promote administrative
    efficiency, we eliminate the offset options adopted in the
    *Commitment Adjustment Implementation Order* from the fund recovery
    plan.[^67]

39. *[Booking of Recovery Amounts]{.underline}*. The Commission is
    committed to meeting its obligations under federal laws by
    maintaining complete and accurate financial reporting. As we have
    noted in other orders, universal service monies are reflected on the
    Commission's financial statements.[^68] To ensure the Commission
    meets its goals with respect to accounting for universal service
    funds on its financial statements, the Commission previously has
    directed USAC as Administrator of the Universal Service Fund to
    prepare financial statements for the Universal Service Fund
    consistent with generally accepted principles for federal agencies.
    In accordance with the Commission's rules, recovery amounts should
    be recorded in the accounting records for the Universal Service Fund
    consistent with Federal Generally Accepted Accounting Principles
    (GAAP).

#### Treatment of Applicants Subject to Recovery Actions 

40. Some commenters stress that an opportunity to contest recovery
    should be afforded to applicants and service providers, and one
    commenter argues that applicants and service providers should
    receive a full administrative hearing before recovery of funds is
    sought.[^69] We decline to adopt a rule providing for an
    administrative hearing before the issuance of a letter demanding
    recovery of funds. Parties are already free today to challenge any
    action of USAC -- including the issuance of a demand for recovery of
    funds -- by filing a request for review with this Commission
    pursuant to section 54.722 of our rules.[^70] We believe that this
    opportunity sufficiently addresses beneficiaries' needs. We see no
    significant additional public benefit to justify the creation of
    another layer of administrative process and the associated
    administrative costs for all involved.

41. Earlier this year we amended our rules to implement the Debt
    Collection Improvement Act of 1996, which generally governs the
    collection of claims owed to the United States.[^71] Among other
    things, we adopted a rule, section 1.1910, providing that the
    Commission shall withhold action on any application or request for
    benefits made by an entity that is delinquent in its non-tax debts
    owed to the Commission, and shall dismiss such applications or
    requests if the delinquent debt is not resolved. This rule (which we
    refer to as the "red light rule") applies to any application that is
    subject to the FCC Registration Number requirement set forth in Part
    1, subpart W, of our rules. The new DCIA rules specify that the term
    "Commission" includes the Universal Service Fund.[^72]

42. In response to the *Schools and Libraries Second Notice*, several
    commenters suggested that we should bar or limit participation in
    the program when entities have some particular forms of outstanding
    claims.[^73] At present, applicants and some service providers under
    the schools and libraries mechanism are not required to obtain an
    FCC Registration Number, and as such, are not subject to the literal
    terms of section 1.1910 of our rules. We believe adopting analogous
    requirements for the schools and libraries program would be
    beneficial to the administration of the program in the prevention of
    waste, fraud and abuse, however, as it would strengthen incentives
    for beneficiaries and service providers to comply with the statute
    and our rules.[^74] We therefore amend our rules to bring all E-rate
    beneficiaries and service providers within the ambit of the red
    light rule. Accordingly, we amend our rules at 47 C.F.R. §§ 1.8002
    and 1.8003 to require all entities that participate in the schools
    and libraries universal service support mechanism to obtain an FCC
    Registration Number. This rule change shall go into effect pursuant
    to the *DCIA Order*, and shall apply to all applications and
    recovery actions pending at that time.[^75] Thereafter, USAC shall
    dismiss any outstanding requests for funding commitments if a school
    or library, or service provider, as applicable, has not paid the
    outstanding debt, or made otherwise satisfactory arrangements,
    within 30 days of the date of the notice provided for in our
    commitment adjustment procedures. In this regard, we expressly
    recognize that a school or library's ability to pay outstanding
    debts may be dependent on action by state or local officials on
    budgetary requests, and the timing of such budgetary action may be
    considered in determining satisfactory repayment options. We direct
    USAC to work with the Wireline Competition Bureau and Office of
    Managing Director to resolve any implementation issues associated
    with this rule.

43. Applications will not be dismissed pursuant to our red light rule if
    the applicant has timely filed a challenge through administrative
    appeal or a contested judicial proceeding to either the existence or
    amount of the debt owed to the Commission. Our recent *DCIA Order*
    expressly notes that appeals made to USAC shall be deemed
    administrative appeals.[^76] Our rules thus provide the opportunity
    to contest any finding that monies are owed to the fund, and thereby
    toll the potentially harsh consequences of the red light rule. This
    addresses the concerns raised by some parties that deferring action
    on pending requests when there is an outstanding commitment
    adjustment action would unfairly dissuade parties from pursuing
    their legitimate appeal rights.[^77]

44. Moreover, even if outstanding debts to the universal service fund
    have been repaid, we think it appropriate to subject subsequent
    applications from beneficiaries that have been found to have
    violated the statute or rules in the past to greater review. We
    believe it prudent to subject any pending applications to more
    rigorous scrutiny if USAC has determined, based on audit work or
    other means, that the applicant violated the statute or a Commission
    rule in the past.[^78] Such action is consistent with the framework
    previously enunciated in our *Puerto Rico Department of Education
    Order* for situations in which one or more entities is under
    investigation, or there is other evidence of potential program
    violations.[^79] Such heightened scrutiny could entail, for
    instance, requiring additional documentary evidence to demonstrate
    current compliance with all applicable requirements, or submission
    of a corrective plan of action to address past errors. It may also
    include site visits or other investigatory activities. Such
    heightened scrutiny could continue as long as necessary. We
    envision, however, that in most instances, such heightened scrutiny
    would no longer be necessary in subsequent years, after USAC
    determines that a pending application is compliant with the statute
    and Commission requirements.

## Document Retention Requirements

### Background

45. Currently, the Commission's rules require each entity to maintain
    "for their purchases of telecommunications and other supported
    services at discounted rates the kind of procurement records that
    they maintain for other purchases."[^80] Service providers also are
    required to retain records of rates charged to and discounts allowed
    for entities receiving supported services.[^81] The Commission's
    rules do not specify how long such records should be maintained nor
    do they require entities or service providers to maintain records to
    demonstrate compliance with all program rules.

46. In the *Schools and Libraries Second Further Notice*, we sought
    comment on whether to amend our rules governing the retention of
    records related to the receipt of universal service discounts.[^82]
    Specifically, we invited comment on whether all records related to
    the receipt or delivery of discounted services should be maintained
    by the beneficiary and/or service provider for a period of five
    years after the last day of delivery of the discounted
    services.[^83] We also sought comment on the types of documents that
    would be sufficient to demonstrate compliance with program
    rules.[^84] In addition, we sought comment on whether service
    providers should be required to comply with periodic program audits
    or reviews to assure program compliance, including identifying the
    portions of bills that represent the costs of services provided to
    eligible entities.[^85] Commenters were also asked to discuss ways
    to limit waste, fraud and abuse and improve the Commission's ability
    to enforce the rules governing the schools and libraries
    program.[^86]

### Discussion

47. Most commenters addressing this issue support the adoption of a
    five-year record retention rule, but suggest that the Commission
    should provide clear guidance on what information needs to be
    retained for possible audits and/or reviews.[^87] We agree.
    Therefore, in this Order, we amend section 54.516 of our rules to
    require both applicants and service providers to retain all records
    related to the application for, receipt and delivery of discounted
    services for a period of five years after the last day of service
    delivered for a particular Funding Year.[^88] This rule change shall
    go into effect when this order becomes effective and, as such, will
    apply to Funding Year 2004 and thereafter. We conclude that the
    adoption of a five-year record retention requirement will facilitate
    improved information collection during the auditing process and will
    enhance the ability of auditors to determine whether applicants and
    service providers have complied with program rules.[^89] Further, we
    believe that specific recordkeeping requirements not only prevent
    waste, fraud and abuse, but also protect applicants and/or service
    providers in the event of vendor disputes.

48. Although we agree with commenters that an explicit list of documents
    that must be retained in the recordkeeping requirement would be most
    useful for service providers and program beneficiaries,[^90] we do
    not believe that an exhaustive list of such documents is possible.
    We base this conclusion on our knowledge that due to the diversity
    that exists among service providers and program beneficiaries, the
    descriptive titles or names of relevant documents will vary from
    entity to entity. To address commenters' concerns, however, we
    provide for illustrative purposes the following description of
    documents that service providers and program beneficiaries must
    retain pursuant to this recordkeeping requirement, as applicable:

-   *[Pre-bidding Process]{.underline}*. Beneficiaries must retain the
    technology plan and technology plan approval letter. If consultants
    are involved, beneficiaries must retain signed copies of all written
    agreements with E-rate consultants.

-   *[Bidding Process]{.underline}*. All documents used during the
    competitive bidding process must be retained. Beneficiaries must
    retain documents such as: Request(s) for Proposal (RFP(s)) including
    evidence of the publication date; documents describing the bid
    evaluation criteria and weighting, as well as the bid evaluation
    worksheets; all written correspondence between the beneficiary and
    prospective bidders regarding the products and service sought; all
    bids submitted, winning and losing; and documents related to the
    selection of service provider(s). Service providers must retain any
    of the relevant documents described above; in particular, a copy of
    the winning bid submitted to the applicant and any correspondence
    with the applicant. Service providers participating in the bidding
    process that do not win the bid need not retain any documents.

-   *[Contracts]{.underline}*. Both beneficiaries and service providers
    must retain executed contracts, signed and dated by both parties.
    All amendments and addendums to the contracts must be retained, as
    well as other agreements relating to E-rate between the beneficiary
    and service provider, such as up-front payment arrangements.

-   *[Application Process]{.underline}*. The beneficiary must retain all
    documents relied upon to submit the Form 471, including National
    School Lunch Program eligibility documentation supporting the
    discount percentage sought; documents to support the necessary
    resources certification pursuant to section 54.505 of the
    Commission's rules, including budgets;[^91] and documents used to
    prepare the Item 21 description of services attachment.

-   *[Purchase and Delivery of Services]{.underline}*. Beneficiaries and
    service providers should retain all documents related to the
    purchase and delivery of E-rate eligible services and equipment.
    Beneficiaries must retain purchase requisitions, purchase orders,
    packing slips, delivery and installation records showing where
    equipment was delivered and installed or where services were
    provided. Service providers must retain all applicable documents
    listed above.

-   *[Invoicing]{.underline}*. Both service providers and beneficiaries
    must retain all invoices. Beneficiaries must retain records proving
    payment of the invoice, such as accounts payable records, service
    provider statement, beneficiary check, bank statement or ACH
    transaction record. Beneficiaries must also be able to show proof of
    service provider payment to the beneficiary of the BEAR, if
    applicable. Service providers must retain similar records showing
    invoice payment by beneficiary to the service provider, USAC payment
    to the service provider, payment of the BEAR to the beneficiary,
    through receipt or deposit records, bank statements, beneficiary
    check or automated clearing house (ACH) transaction record, as
    applicable.

-   *[Inventory]{.underline}*. Beneficiaries must retain asset and
    inventory records of equipment purchased and components of supported
    internal connections services sufficient to verify the location of
    such equipment. Beneficiaries must also retain detailed records
    documenting any transfer of equipment within three years after
    purchase and the reasons for such a transfer.

-   *[Forms and Rule Compliance]{.underline}*. All program forms,
    attachments and documents submitted to USAC must be retained.
    Beneficiaries and service providers must retain all official
    notification letters from USAC, as applicable. Beneficiaries must
    retain FCC Form 470 certification pages (if not certified
    electronically), FCC Form 471 and certification pages (if not
    certified electronically), FCC Form 471 Item 21 attachments, FCC
    Form 479, FCC Form 486, FCC Form 500, FCC Form 472. Beneficiaries
    must also retain any documents submitted to USAC during program
    integrity assurance (PIA) review, Selective Review and Invoicing
    Review, or for SPIN change or other requests. Service providers must
    retain FCC Form 473, FCC Form 474 and FCC Form 498, as well as
    service check documents. In addition, beneficiaries must retain
    documents to provide compliance with other program rules, such as
    records relevant to show compliance with CIPA.[^92]

49. We emphasize that the rule we adopt here requires that program
    participants retain [all]{.underline} documents necessary to
    demonstrate compliance with the statute and Commission rules
    regarding the application for, receipt, and delivery of services
    receiving schools and libraries discounts. Thus, the descriptive
    list above is provided as a guideline but cannot be considered
    exhaustive. For example, service providers must provide
    beneficiaries' billing records, if requested, and will be held
    accountable for properly billing those applicants for discounted
    services and for complying with other rules specifically applicable
    to service providers. Service providers are responsible for
    maintaining records only with respect to the services they actually
    provide, not records for applicants on whose contracts they may have
    bid, but not won.[^93]

50. We make additional clarifications to our rules providing for audits
    of program beneficiaries and service providers participating in the
    program. In particular, we clarify that schools, libraries, and
    service providers remain subject to both random audits and to other
    audits (or investigations) to examine an entity's compliance with
    the statute and the Commission's rules initiated at the discretion
    of the Commission, USAC, or another authorized governmental
    oversight body. We also conclude that failing to comply with an
    authorized audit or other investigation conducted pursuant to
    section 54.516 of the Commission's rules (*e.g.*, failing to retain
    records or failing to make available required documentation) is a
    rule violation that may warrant recovery of universal service
    support monies that were previously disbursed for the time period
    for which such information is being sought.[^94]

## Technology Plans

### Background

51. To ensure that applicants make appropriate decisions regarding the
    services for which they seek discount, the Commission requires
    applicants to base their request for services on an approved
    technology plan.[^95] The Commission specifically required that
    technology plans be independently approved, to ensure the plans are
    based on the "reasonable needs . . . of the applicants and are
    consistent with the goals of the program."[^96]

52. In the *Schools and Libraries Further Notice* and *Schools and
    Libraries* *Second Further Notice,* we sought comment on whether the
    Commission should revise its rules regarding two aspects of
    technology plans, the timing of their approval and their
    content.[^97] With regard to the timing of plan approval, section
    54.504(b)(2)(vii) of the Commission's rules states that the
    applicant must certify in its FCC Form 470 that it has a technology
    plan that has been certified by its state, the Administrator, or an
    independent entity approved by the Commission.[^98] We also noted
    that the instructions for FCC Form 470 permit applicants to certify
    that their technology plan will be approved by the relevant body no
    later than when service commences.[^99]

53. With regard to plan content, we note that the Commission adopted
    specific requirements for information that must be included in the
    technology assessment in the FCC Form 470,[^100] but did not adopt
    specific rules addressing the required content of the technology
    plan. In the *Universal Service Order*, however, the Commission
    indicated that applicants should provide certain information prior
    to placing an order for supported services.[^101] We sought comment
    on whether we should codify USAC's current guidelines regarding
    technology plans.[^102]

54. We also sought comment on whether the Commission should require
    that, as part of the technology plan process, applicants analyze the
    cost of leasing versus purchasing E-rate eligible products and
    services or consider the most cost-effective way to meet its
    educational objectives. In addition, we sought comment on whether
    the Commission's technology planning requirements should be amended
    to be made more consistent with the technology planning goals and
    requirements of the U.S. Department of Education and the U.S.
    Institute for Museum and Library Services.[^103] We also sought
    comment on whether the Commission's technology planning requirements
    could be strengthened through additional or different qualifications
    for entities, including states, which approve technology plans.

### Discussion

55. To ensure transparency and consistency in the application of our
    rules we now modify our requirements regarding technology plan
    timing and content. Our revised rules require applicants to have an
    approved technology plan in place before the start of services and
    to certify at the time that they apply for discounts that their
    receipt of e-rate support is contingent upon timely approval of the
    technology plan. Our revised rules also largely adopt the United
    States Department of Education guidelines for technology plan
    content, and, in cases where applicants do not fall under the ambit
    of the Department of Education technology planning requirement, we
    adopt requirements consistent with USAC's guidelines. Because we
    continue to believe that the focus of technology planning should be
    research and planning for technology needs, we decline at this time
    to adopt rules to require technology plans to include an analysis of
    the cost of leasing versus purchasing E-rate eligible products and
    services or a showing that the applicant has considered the most
    cost-effective way to meet its educational objectives. We see no
    need, at this time, to address the question of what specific
    qualifications technology plan approvers should have. We note that
    the technology plans of libraries and public schools are already
    reviewed by individual states, and that USAC certifies reviewers for
    non-public schools.[^104] As we describe below, the state is the
    certified technology plan approver for libraries and public schools,
    and we codify this practice in this order. We modify our rules so
    that non-public schools and entities that cannot or do not choose to
    secure approval of their technology plan from their states may
    obtain technology plan approval from USAC-certified entities.

56. *[Technology Plan Timing]{.underline}.* We revise section
    54.504(b)(2)(vii) so that applicants with technology plans that have
    not yet been approved when they file FCC Form 470 must certify that
    they understand their technology plans must be approved prior to the
    commencement of service. In making this change, we recognize that
    the timing of technology plan approval in particular states and
    localities may not coincide perfectly with the application cycle of
    the schools and libraries support mechanism. At the same time, we
    emphasize that applicants still are expected to develop a technology
    plan prior to requesting bids on services in FCC Form 470; all that
    we are deferring is the timing of the approval of such plan by the
    state or other approved certifying body. Second, we amend our rules
    to require that applicants formally certify, in FCC Form 486, that
    the technology plans on which they based their purchases were
    approved before they began to receive service. This revision
    conforms our rules to the current instructions for filing FCC Form
    470 and is consistent with the views of commenters.[^105] The
    revision permits applicants to meet our technology plan requirements
    as long as their technology plans will be approved before they begin
    receiving service. It also ensures that applicants formally confirm
    that their technology plans were approved when service begins.

57. In light of the current inconsistency between our rules and the
    instructions to FCC Form 470, we conclude that it is appropriate to
    waive the rule for the limited purpose of extinguishing liability
    for recovery of funds in the narrow circumstance in which a
    beneficiary obtained approval of its technology plan after the
    filing of FCC Form 470, but before service commenced. We hereby
    grant a waiver of section 54.504(b)(2)(vii) of our rules to all
    applicants that failed to have a technology plan approved at the
    time they filed their FCC Form 470 or that had obtained approval of
    a technology plan that covered only part of the funding year, but
    that obtained approval of a plan that covered the entire funding
    year before the commencement of service in the relevant funding
    year. We conclude that in this situation, it would not serve the
    public interest to enforce the terms of section 54.504(b)(2)(vii) in
    light of the ambiguity created by the phrasing of the certification
    contained in the current FCC Form 470. We emphasize, however, that
    this limited waiver does not extend to instances where the applicant
    failed to obtain an approval of a technology plan at all. Such
    failure to obtain any approval is inconsistent with our rules and
    warrants recovery of all funds disbursed under the relevant funding
    requests.

58. *[Technology Plan Content]{.underline}.* We conclude that technology
    plans should continue to focus on ensuring that technologies are
    used effectively to achieve educational goals rather than assuming a
    greater role in monitoring the procurement process. We reiterate our
    conclusion that the technology plan should focus on "research and
    planning for technology needs "[^106] rather than act as preliminary
    RFPs.[^107] Thus, while we expect that applicants will compare
    purchase and leasing options and the cost-effectiveness of different
    technologies as part of their procurement processes, we decline,
    consistent with the views of most commenters, to add a requirement
    that these matters be addressed in technology plans.[^108]

59. We agree with the virtually unanimous view of commenters that the
    Commission's technology plan requirements should be harmonized with
    the technology planning goals and requirements of the U.S.
    Department of Education and the U.S. Institute for Museum and
    Library Services.[^109] In fact, USAC has already been treating
    technology plans approved under the Department of Education's
    Enhancing Education Through Technology (EETT) as acceptable
    technology plans subject to one qualification. Consistent with the
    Commission requirement that program applicants demonstrate that they
    have the necessary resources required to utilize e-rate discounts,
    USAC has required that the EETT technology plans be supplemented by
    an analysis that indicates that the applicant is aware of and will
    be able to secure the financial resources it will need to achieve
    its technology aims, including technology training, software, and
    other elements outside the coverage of the Commission's support
    program. We adopt this existing policy in recognition of the
    Department of Education's expertise and USAC's attention to our
    requirement that applicants show that they have done the necessary
    planning and are able to secure the required resources to
    effectively employ the services they desire to purchase.
    Accordingly, we adopt a rule that codifies this method of compliance
    with the technology plan requirement.

60. We also adopt a rule that applicants that do not have EETT
    technology plans, must demonstrate that their plans contain the
    following elements:

> \(1\) establish clear goals and a realistic strategy for using
> telecommunications and information technology to improve education or
> library services;
>
> \(2\) have a professional development strategy to ensure that the
> staff understands how to use these new technologies to improve
> education or library services;
>
> \(3\) include an assessment of the telecommunication services,
> hardware, software, and other services that will be needed to improve
> education or library services;
>
> \(4\) provide for a sufficient budget to acquire and support the
> non-discounted elements of the plan: the hardware, software,
> professional development, and other services that will be needed to
> implement the strategy; and
>
> \(5\) include an evaluation process that enables the school or library
> to monitor progress toward the specified goals and make mid-course
> corrections in response to new developments and opportunities as they
> arise.[^110]

With these elements included in technology plans, applicants will be
demonstrating at an early stage of the application process that they are
or are preparing to be in compliance with the Commission's rules.

61. Consistent with this rule, the ability of an entity whose technology
    plan complies with the criteria in the preceding paragraphs to order
    services is only limited by the scope of its technology plan's
    strategy for using telecommunications services and information
    technology to meet its educational goals.[^111] Commenters should
    not fear that strengthened technology plan requirements will lock
    them into specific services. [^112] In fact, applicants are free to
    switch from wireline to wireless technologies, from high to even
    higher speed transmission speeds, and to make other similar changes
    in the services they order as long as those services are designed to
    deliver the educational applications they have prepared to
    provide.[^113] Only if an applicant desires to order services beyond
    the scope of its existing technology plan does it need to prepare
    and seek timely approval of an appropriately revised technology
    plan.

62. We also decline at this time to take any of the other actions
    regarding technology plans suggested by commenters. We decline to
    adopt ALA's suggestion that we require separate filings of proposals
    to provide service and prices,[^114] since we find that it would be
    much more costly for USAC to process such filings separately, given
    the redundancy. We decline to require USAC to provide examples of
    acceptable technology plans[^115] given that applicants can already
    approach their states or other entities from which they must gain
    certification for such examples. Although we do not require
    technology plans from those seeking only "POTS" local and long
    distance telecommunications services, or cellular service, we
    decline to eliminate the requirement for those seeking internet
    access,[^116] because we believe that certified plans are important
    to ensuring that applicants have carefully considered how to employ
    the service. For administrative efficiency, we also decline to
    require all applicants to submit their technology plans as
    attachments to current forms,[^117] but note that USAC may request
    submission of a technology plan for any applicant as part of the
    application review process and that such plans are subject to the
    document retention rules adopted in this order. As such, a violation
    of the technology plan rules we adopt herein will be subject to
    recovery on a prospective basis.

63. *[Technology Plan Approval]{.underline}*. We also modify our rules
    to address non-public schools that are not eligible to secure
    approval of their technology plan from their states. USAC has been
    handling this matter by permitting such schools to obtain approval
    of their plans from entities that USAC has certified as qualified to
    provide such evaluations and approval. We now amend our rules to
    codify this practice.

## Certifications 

### Background

64. Applicants must comply with several certification requirements when
    requesting discounts on eligible services. Some of these
    certifications appear on the FCC Form 470, Description of Services
    Requested and Certification Form, and the FCC Form 471, Services
    Ordered and Certification Form.[^118] Currently, the certification
    criteria listed on the FCC Forms 470 and 471 do not mirror the
    specific language in the certifications provided for in the
    Commission's rules.[^119] Because the certification language in the
    forms is consistent with the intent of our rules and more closely
    resembles the real world experience, we take this opportunity to
    revise the Commission's rules to make clear that the certification
    language on the FCC Forms 470 and 471 conforms to the rules.[^120]
    In addition, we add a service provider certification to FCC Form 473
    to further our goal of preventing waste, fraud and abuse.

### Discussion

65. *[Form 470]{.underline}.* Section 54.504 of the Commission's rules
    governs applicants' requests for services and provides specific
    requirements for completing the FCC Form 470.[^121] Pursuant to
    section 54.504(b)(2), there are several requirements to which
    applicants must certify compliance before submitting their FCC Form
    470 applications. Most of these certification requirements are also
    listed in Block 5 of the FCC Form 470. However, as noted above, the
    language in the form does not mirror the precise language in the
    rule. In particular, section 54.504(b)(2)(v) of the Commission's
    rules states that applicants certify that "all of the necessary
    funding in the current funding year has been budgeted and approved
    to pay for the 'non-discount' portion of requested connections and
    services, as well as any necessary hardware or software, and to
    undertake the necessary staff training required to use the services
    effectively."[^122] The form states more generally, however, that
    applicants must certify that "support under the support mechanism is
    conditional upon the school(s) and library(ies) securing access to
    all of the resources, including computers, training, software,
    maintenance, and electrical connections necessary to use the
    services purchased effectively."[^123]

66. As explained above, the certification language on the FCC Form 470
    is consistent with the intent of the rule and more closely resembles
    the real-world experience. Therefore, we revise the current language
    of section 54.504(b)(2)(v) to require applicants to certify that
    support under the support mechanism is conditional. We replace the
    current language of section 54.504(b)(2)(v) with the following
    sentence: "Support under this support mechanism is conditional upon
    the school(s) and library(ies) securing access to all of the
    resources, including computers, training, software, maintenance,
    internal connections, and electrical connections necessary to use
    the services purchased effectively. "[^124] In addition, we
    re-designate the current section number 54.504(b)(2)(v) as new
    section number 54.504(b)(2)(vi). We believe these revisions will
    facilitate the ability of applicants to determine what
    certifications are necessary for proper completion of the
    application and will facilitate our enforcement and oversight
    activities.

67. Furthermore, to emphasize that applicants must make cost effective
    service selections consistent with the *Ysleta Order*, we will
    require applicants to certify on the Form 470 that the services for
    which bids are being sought are the most cost effective means for
    meeting their educational needs and technology plan goals.
    Therefore, we modify section 54.504(b)(2) to add a new
    certification, section 54.504(b)(2)(vii), which states the
    following: "All bids submitted will be carefully considered and the
    bid selected will be for the most cost-effective service or
    equipment offering, with price being the primary factor, and will be
    the most cost-effective means of meeting educational needs and
    technology plan goals."

68. *[Form 471]{.underline}*. Under section 54.504(c) of the
    Commission's rules, applicants are required to submit a completed
    FCC Form 471 after signing a contract for eligible services. Like
    the FCC Form 470, the FCC Form 471 lists several matters to which
    applicants must certify in order to have their applications
    considered.[^125] Currently, however, these requirements are not
    expressly addressed in Part 54 of the Commission's rules. We
    therefore find it appropriate to amend section 54.504(c) of the
    Commission's rules by adding a new subsection (1) which will state
    that the FCC Form 471 shall be signed by the person authorized to
    order telecommunications and other supported services for the
    eligible school, library, or consortium and shall include that
    person's certification that the entity(ies) is/are eligible to
    receive support and has/have secured access to all of the resources
    necessary to make effective use of the service purchased; the
    entity(ies) is/are covered by technology plans that have been or
    will be approved by a state or other authorized body; the
    entity(ies) has/have complied with program rules as well as all
    state and local laws regarding procurement of services; the services
    will be used solely for educational purposes and will not be sold,
    resold, or transferred; the applicant understands that the discount
    level used for shared services is conditional; and the applicant
    recognizes that its application may be audited.[^126] We conclude
    that codifying these existing certification requirements in the
    Commission's rules will diminish confusion regarding the criteria to
    which applicants must certify when completing their FCC Forms 471
    while enhancing our enforcement and oversight activities.

69. Consistent with the requirement imposed on the Form 470, we will
    require applicants to certify on the Form 471 that the selection of
    services and service providers is based on the most cost effective
    means of meeting educational needs and technology plan goals.
    Therefore, we modify section 54.504(c)(1) to add a new
    certification, section 54.504(c)(1)(xi), which states the following:
    "All bids submitted were carefully considered and the most
    cost-effective bid for services or equipment was selected, with
    price being the primary factor considered, and is the most
    cost-effective means of meeting educational needs and technology
    plan goals."

70. *[Form 473]{.underline}*. In the *Schools and Libraries Second
    Further Notice*, we sought comment on whether the Commission, as a
    condition of support, should require each service provider to make
    certifications that it has not sought to subvert the effectiveness
    of the E-rate program's competitive bidding process.[^127] Although
    the Commission recognized that many of those subversive actions are
    already prohibited by the federal antitrust laws, if not other state
    or federal statutes or rules, it observed that requiring such
    certifications would better enable the Commission or other
    government agencies to enforce the Commission's rules and to seek
    criminal sanctions where appropriate.[^128]

71. We now adopt three certification requirements modeled after the
    certificate of independent price determination required under
    federal acquisition regulations, as referenced in the *Schools and
    Libraries Second Further Notice*.[^129] These certifications will
    serve to emphasize to potential service providers that any practices
    that thwart the competitive bidding process will not be tolerated,
    and will facilitate the ability of government agencies to prosecute
    any misdeeds in this area. Service providers receiving funds through
    the E-rate program accordingly now must make the following
    certifications with respect to their participation in the
    competitive bidding process of the E-rate program in the Service
    Provider Annual Certification Form, FCC Form 473:

> 1\. I certify that the prices in any offer that this service provider
> makes pursuant to the schools and libraries universal service support
> program have been arrived at independently, without, for the purpose
> of restricting competition, any consultation, communication, or
> agreement with any other offeror or competitor relating to (i) those
> prices, (ii) the intention to submit an offer, or (iii) the methods or
> factors used to calculate the prices offered;
>
> 2\. I certify that the prices in any offer that this service provider
> makes pursuant to the schools and libraries universal service support
> program will not be knowingly disclosed by this service provider,
> directly or indirectly, to any other offeror or competitor before bid
> opening (in the case of a sealed bid solicitation) or contract award
> (in the case of a negotiated solicitation) unless otherwise required
> by law; and
>
> 3\. I certify that no attempt will be made by this service provider to
> induce any other concern to submit or not to submit an offer for the
> purpose of restricting competition.

# ORDER

72. In this order, we set forth how audit findings related to the
    schools and libraries support mechanism shall be resolved. This
    discussion applies to audits conducted by USAC's own internal audit
    division, as well as audits conducted by independent public
    accounting firms under contract to USAC.

73. As modified above, USAC shall continue to recover funds whenever it
    discovers a statutory or rule violation, as described above.[^130]
    The standard for determining such a violation is the same standard
    that we use in our enforcement actions: specifically, whether a
    party has willfully or repeatedly failed to comply with any
    provision of the Act or any rule, regulation, or order issued by the
    Commission,[^131] based on a preponderance of the evidence.[^132] To
    the extent audit findings raise matters outside the scope of our
    orders or existing rules, we expect USAC to clearly identify such
    findings to the agency.

74. We conclude that a standardized, uniform process for resolving audit
    findings is necessary, and we direct USAC to submit, no later than
    45 days from the publication in the Federal Register, a proposed
    plan for resolving audit findings. USAC's audit resolution plan
    should detail USAC's proposed procedures for resolving all findings
    arising from audits conducted by USAC's internal audit department,
    independent public accounting firms under contract with USAC, or
    government audit organizations.[^133] In addition, USAC's audit
    resolution plan should specify deadlines to ensure audit findings
    are resolved in a timely manner.

75. We have set forth in the accompanying Fifth Report and Order a
    general framework for what amounts should be recovered in specific
    situations, and we expect future audits to be resolved consistent
    with that framework. To the extent audits in the future raise issues
    not addressed herein, we provide a limited delegation to the
    Wireline Competition Bureau to address such matters. In particular,
    we direct the Chief of the Wireline Competition Bureau to address
    audit findings and to act on requests for waiver of rules warranting
    recovery of funds. [^134] We hereby amend sections 0.91 and 0.291 to
    reflect such delegation of authority in this limited instance. We
    emphasize the limited nature of this delegation which we adopt
    because of the importance of providing rapid responses to audit
    findings and requests for waiver of rules warranting recovery of
    funds.[^135] We also emphasize that any party aggrieved by any
    action by the Bureau is, of course, free to seek review by this
    Commission, pursuant to section 1.115 and commit that we will
    address any such appeal within six months. [^136] Moreover, any
    action by USAC implementing direction from the Bureau is subject to
    full Commission review pursuant to section 54.723(b). [^137]

76. The Managing Director is the agency' designated follow-up official.
    [^138] Pursuant to the Commission's Audit Follow-up Directive, that
    office ensures that systems for audit follow-up and resolution are
    documented and in place, that timely responses are made to all audit
    reports, and that corrective actions are taken.[^139] We clarify
    that the Office of Managing Director remains the agency's audit
    follow-up official, and that all actions taken by the Wireline
    Competition Bureau relating to E-rate fund audits shall be
    consistent with the agency's general framework for audit resolution
    and follow-up.

77. USAC shall maintain records of the status of all audit reports and
    any recommendations made therein, and make such records available to
    the Commission upon request.[^140] USAC also shall submit a report
    to the Commission on a semi-annual basis summarizing the status of
    all outstanding audit findings. To the extent findings cannot be
    resolved within six months, USAC shall describe the status of its
    efforts, and provide a projected timeframe for completion. We also
    note that USAC's determination concerning the resolution of audit
    findings does not limit the Enforcement Bureau's ability to take
    enforcement action for any statutory or rule violation pursuant to
    section 503 of the Act.

78. We recognize that, to date, a number of audit reports have contained
    findings that indicate noncompliance with USAC administrative
    procedures. Consistent with its obligation to administer this
    support mechanism without waste, fraud and abuse,[^141] we expect
    USAC to identify for Commission consideration on at least an annual
    basis all findings raising management concerns that are not
    addressed by the Commission's existing rules and precedent, and, as
    appropriate, identify any USAC administrative procedures that should
    be codified in our rules to facilitate program oversight. [^142]

79. Recently, issues have been raised regarding recovery of funds
    disbursed in instances when applicants failed to follow certain USAC
    administrative procedures.[^143] As discussed above, a number of
    these procedures, such as guidelines for the content of technology
    plans and specific guidance on document retention, are being
    incorporated into the Commission's rules, and their violation may
    warrant recovery of universal service monies on a prospective basis.
    We believe that it will be particularly useful to continue to
    evaluate, on an ongoing basis, whether other procedures adopted by
    USAC should also be incorporated into the rules and whether their
    violation should also warrant recovery of previously disbursed
    monies.

80. We believe that USAC's experience in processing tens of thousands of
    these applications provides it with insightful information regarding
    ways in which waste, fraud and abuse may occur in that process. 
    Based on that information, we believe that USAC's development of
    procedures to serve our objective to prevent waste, fraud and abuse
    is invaluable.  We direct USAC to submit to the Commission within 45
    days from publication in the Federal Register, and annually
    thereafter, a list summarizing all current USAC administrative
    procedures identifying, where appropriate, the specific rules or
    statutory requirements that such procedures further, and those
    procedures that serve to protect against waste, fraud and abuse.  We
    shall review those procedures to determine whether action is needed
    to ensure appropriate recovery, and shall determine whether such
    procedures should be adopted as binding rules.  Thereafter, USAC and
    the Commission will generally seek recovery of funds disbursed in
    violation of the statute or a rule that implements the statute or
    substantive program goal or that serves to protect against waste,
    fraud and abuse.  USAC and the Commission will not seek recovery of
    funds disbursed in violation of other rules, except to the extent
    that such rules are important to ensuring the financial integrity of
    the program, as designated by the agency.[^144]

# PROCEDURAL MATTERS

## Paperwork Reduction Act Analysis

81. This document contains modified information collection requirements
    subject to the Paperwork Reduction Act of 1995 (PRA), Public Law
    104-13. It will be submitted to the Office of Management and Budget
    (OMB) for review under Section 3507(d) of the PRA. OMB, the general
    public, and other Federal agencies are invited to comment on the new
    or modified information collection requirements contained in this
    proceeding. In addition, we note that pursuant to the Small Business
    Paperwork Relief Act of 2002, Public Law 107-198,
    *[see]{.underline}* 44 U.S.C. 3506(c)(4), we previously sought
    specific comment on how the Commission might "further reduce the
    information collection burden for small business concerns with fewer
    than 25 employees."

82. In this present document, we have assessed the effects of the
    measures adopted to protect against waste, fraud and abuse in the
    administration of the schools and libraries universal service
    support mechanism, and find that the added certification
    requirements in various FCC Forms will not be unduly burdensome on
    small businesses.

## Final Regulatory Flexibility Analysis

83. As required by the Regulatory Flexibility Act of 1980, as amended
    (RFA),[^145] an Initial Regulatory Flexibility Analysis (IRFA) was
    incorporated in the *Schools and Libraries Second Further
    Notice*.[^146] The Commission sought written public comment on the
    proposals in the *Schools and Libraries Second Further Notice*,
    including comment on the IRFA. This present Final Regulatory
    Flexibility Analysis (FRFA) conforms to the RFA.[^147]

### Need for, and Objectives of, the Fifth Report and Order

84. In this *Fifth Report and Order*, we adopt measures to protect
    against waste, fraud and abuse in the administration of the schools
    and libraries universal service support mechanism, particularly with
    regard to audit requirements and how to respond to audit findings.
    We set forth a framework for how much USAC should seek recovery when
    violations are found and set a five year administrative limitations
    period for such recovery actions as well as a corresponding five
    year document retention rule. We also eliminate the option of
    allowing parties to offset current debts to USAC against expected
    future payments, and we bar those with outstanding debts to the fund
    from receiving additional amounts. We also conform our rules
    concerning the content of and timing of certifications regarding
    technology plans to current practices. These rules will advance the
    goals of the schools and libraries program by deterring waste, fraud
    and abuse, leaving more support available applicants.

### Summary of Significant Issues Raised by Public Comments in Response to the IRFA

85. There were no comments filed specifically in response to the IRFA.
    Nevertheless, the agency has considered the potential impact of the
    rules proposed in the IRFA on small entities. Based on analysis of
    the relevant data, the Commission concludes the new rules limit the
    burdens on small entities and result in a de minimis recordkeeping
    requirement. The Commission also concludes that the new rules will
    positively impact schools and libraries, including small ones,
    seeking universal service support.

### Description and Estimate of the Number of Small Entities To Which Rules Will Apply

86. The RFA directs agencies to provide a description of and, where
    feasible, an estimate of the number of small entities that may be
    affected by the proposed rules, if adopted.[^148] The RFA generally
    defines the term "small entity" as having the same meaning as the
    terms "small business," "small organization," and "small
    governmental jurisdiction."[^149] In addition, the term "small
    business" has the same meaning as the term "small business concern"
    under the Small Business Act.[^150] A small business concern is one
    which: (1) is independently owned and operated; (2) is not dominant
    in its field of operation; and (3) satisfies any additional criteria
    established by the SBA.[^151] A small organization is generally "any
    not-for-profit enterprise which is independently owned and operated
    and is not dominant in its field."[^152] Nationwide, as of 1992,
    there were approximately 275,801 small organizations.[^153] The term
    "small governmental jurisdiction" is defined as "governments of
    cities, towns, townships, villages, school districts, or special
    districts, with a population of less than fifty thousand."[^154] As
    of 1997, there were about 87,453 governmental jurisdictions in the
    United States.[^155] This number includes 39,044 county governments,
    municipalities, and townships, of which 37,546 (approximately 96.2%)
    have populations of fewer than 50,000, and of which 1,498 have
    populations of 50,000 or more. Thus we estimate the number of small
    governmental jurisdictions overall to be 84,098 or fewer.

87. The Commission has determined that the group of small entities
    directly affected by the rules herein includes eligible schools and
    libraries and the eligible service providers offering them
    discounted services, including telecommunications service providers,
    Internet Service Providers (ISPs) and vendors of internal
    connections.[^156] Further descriptions of these entities are
    provided below. In addition, the Universal Service Administrative
    Company is a small organization (non-profit) under the RFA, and we
    believe that circumstances triggering the new reporting requirement
    will be limited[^157] and does not constitute a significant economic
    impact on that entity.

### Schools and Libraries

88. As noted, "small entity" includes non-profit and small government
    entities. Under the schools and libraries universal service support
    mechanism, which provides support for elementary and secondary
    schools and libraries, an elementary school is generally "a
    non-profit institutional day or residential school that provides
    elementary education, as determined under state law."[^158] A
    secondary school is generally defined as "a non-profit institutional
    day or residential school that provides secondary education, as
    determined under state law," and not offering education beyond grade
    12.[^159] For-profit schools and libraries, and schools and
    libraries with endowments in excess of \$50,000,000, are not
    eligible to receive discounts under the program, nor are libraries
    whose budgets are not completely separate from any schools.[^160]
    Certain other statutory definitions apply as well.[^161] The SBA has
    defined for-profit, elementary and secondary schools and libraries
    having \$6 million or less in annual receipts as small
    entities.[^162] In Funding Year 2 (July 1, 1999 to June 20, 2000)
    approximately 83,700 schools and 9,000 libraries received funding
    under the schools and libraries universal service mechanism.
    Although we are unable to estimate with precision the number of
    these entities that would qualify as small entities under SBA's size
    standard, we estimate that fewer than 83,700 schools and 9,000
    libraries might be affected annually by our action, under current
    operation of the program.

### Telecommunications Service Providers

89. We have included small incumbent local exchange carriers in this RFA
    analysis. A "small business" under the RFA is one that, *inter
    alia*, meets the pertinent small business size standard (*e.g.*, a
    telephone communications business having 1,500 or fewer employees),
    and \"is not dominant in its field of operation.\"[^163] The SBA\'s
    Office of Advocacy contends that, for RFA purposes, small incumbent
    local exchange carriers are not dominant in their field of operation
    because any such dominance is not \"national\" in scope.[^164] We
    have therefore included small incumbent carriers in this RFA
    analysis, although we emphasize that this RFA action has no effect
    on the Commission's analyses and determinations in other, non-RFA
    contexts.

90. *Incumbent Local Exchange Carriers (LECs).* Neither the Commission
    nor the SBA has developed a size standard for small incumbent local
    exchange services. The closest size standard under SBA rules is for
    Wired Telecommunications Carriers. Under that size standard, such a
    business is small if it has 1,500 or fewer employees.[^165]
    According to Commission data,[^166] 1,337 incumbent carriers
    reported that they were engaged in the provision of local exchange
    services. Of these 1,337 carriers, an estimated 1,032 have 1,500 or
    fewer employees and 305 have more than 1,500 employees.
    Consequently, the Commission estimates that most providers of
    incumbent local exchange service are small businesses that may be
    affected by the rules and policies adopted herein.

91. *Competitive Local Exchange Carriers (CLECs), Competitive Access
    Providers (CAPs) and "Other Local Exchange Carriers."* Neither the
    Commission nor the SBA has developed a size standard for small
    businesses specifically applicable to providers of competitive
    exchange services or to competitive access providers or to "Other
    Local Exchange Carriers." The closest applicable size standard under
    SBA rules is for Wired Telecommunications Carriers. Under that size
    standard, such a business is small if it has 1,500 or fewer
    employees.[^167] According to Commission data,[^168] 609 companies
    reported that they were engaged in the provision of either
    competitive access provider services or competitive local exchange
    carrier services. Of these 609 companies, an estimated 458 have
    1,500 or fewer employees and 151 have more than 1,500
    employees.[^169] In addition, 35 carriers reported that they were
    "Other Local Exchange Carriers." Of the 35 "Other Local Exchange
    Carriers," an estimated 34 have 1,500 or fewer employees and one has
    more than 1,500 employees.[^170] Consequently, the Commission
    estimates that most providers of competitive local exchange service,
    competitive access providers, and "Other Local Exchange Carriers"
    are small entities that may be affected by the rules and policies
    adopted herein.

92. *Interexchange Carriers (IXCs).* Neither the Commission nor the SBA
    has developed a size standard for small businesses specifically
    applicable to interexchange services. The closest applicable size
    standard under SBA rules is for Wired Telecommunications Carriers.
    Under that size standard, such a business is small if it has 1,500
    or fewer employees.[^171] According to the Commission's most recent
    data,[^172] 261 companies reported that their primary
    telecommunications service activity was the provision of payphone
    services. Of these 261 companies, an estimated 223 have 1,500 or
    fewer employees and 48 have more than 1,500 employees.[^173]
    Consequently, the Commission estimates that the majority of payphone
    service providers are small entities that may be affected by the
    rules and policies adopted herein.

93. *Wireless Service Providers.* The SBA has developed a small business
    size standard for wireless small businesses within the two separate
    categories of *Paging*[^174] and *Cellular and Other Wireless
    Telecommunications*.[^175] Under both SBA categories, a wireless
    business is small if it has 1,500 or fewer employees. According to
    the Commission's most recent data,[^176] 1,761 companies reported
    that they were engaged in the provision of wireless service. Of
    these 1,761 companies, an estimated 1,175 have 1,500 or fewer
    employees and 586 have more than 1,500 employees.[^177]
    Consequently, the Commission estimates that most wireless service
    providers are small entities that may be affected by the rules and
    policies adopted herein.

94. *Private and Common Carrier Paging.* In the Paging *Third Report and
    Order*, we developed a small business size standard for "small
    businesses" and "very small businesses" for purposes of determining
    their eligibility for special provisions such as bidding credits and
    installment payments.[^178] A "small business" is an entity that,
    together with its affiliates and controlling principals, has average
    gross revenues not exceeding \$15 million for the preceding three
    years. Additionally, a "very small business" is an entity that,
    together with its affiliates and controlling principals, has average
    gross revenues that are not more than \$3 million for the preceding
    three years. An auction of Metropolitan Economic Area licenses
    commenced on February 24, 2000, and closed on March 2, 2000.[^179]
    Of the 985 licenses auctioned, 440 were sold. Fifty-seven companies
    claiming small business status won. At present, there are
    approximately 24,000 Private-Paging site-specific licenses and
    74,000 Common Carrier Paging licenses. According to Commission data,
    474 carriers reported that they were engaged in the provision of
    either paging and messaging services or other mobile services.[^180]
    Of those, the Commission estimates that 457 are small, under the SBA
    approved small business size standard.[^181]

### Internet Service Providers

95. *Internet Service Providers.* The SBA has developed a small business
    size standard for "On-Line Information Services," NAICS code
    514191.[^182] This category comprises establishments "primarily
    engaged in providing direct access through telecommunications
    networks to computer-held information compiled or published by
    others."[^183] Under this small business size standard, a small
    business is one having annual receipts of \$18 million or
    less.[^184] Based on firm size data provided by the Bureau of the
    Census, 3,123 firms are small under SBA's \$18 million size standard
    for this category code.[^185] Although some of these Internet
    Service Providers (ISPs) might not be independently owned and
    operated, we are unable at this time to estimate with greater
    precision the number of ISPs that would qualify as small business
    concerns under SBA's small business size standard. Consequently, we
    estimate that there are 3,123 or fewer small entity ISPs that may be
    affected by this analysis.

### Vendors of Internal Connections

96. The Commission has not developed a small business size standard
    specifically directed toward manufacturers of internal network
    connections. The closest applicable definitions of a small entity
    are the size standards under the SBA rules applicable to
    manufacturers of "Radio and Television Broadcasting and
    Communications Equipment" (RTB) and "Other Communications
    Equipment."[^186] According to the SBA's regulations, manufacturers
    of RTB or other communications equipment must have 750 or fewer
    employees in order to qualify as a small business.[^187] The most
    recent available Census Bureau data indicates that there are 1,187
    establishments with fewer than 1,000 employees in the United States
    that manufacture radio and television broadcasting and
    communications equipment, and 271 companies with less than 1,000
    employees that manufacture other communications equipment.[^188]
    Some of these manufacturers might not be independently owned and
    operated. Consequently, we estimate that the majority of the 1,458
    internal connections manufacturers are small.

### Miscellaneous Entities

97. *Wireless Communications Equipment Manufacturers*. The SBA has
    established a small business size standard for radio and television
    broadcasting and wireless communications equipment manufacturing.
    Under this standard, firms are considered small if they have 750 or
    fewer employees.[^189] Census Bureau data for 1997 indicate that,
    for that year, there were a total of 1,215 establishments[^190] in
    this category.[^191] Of those, there were 1,150 that had employment
    under 500, and an additional 37 that had employment of 500 to 999.
    The percentage of wireless equipment manufacturers in this category
    is approximately 61.35%,[^192] so the Commission estimates that the
    number of wireless equipment manufacturers with employment under 500
    was actually closer to 706, with and additional 23 establishments
    having employment of between 500 and 999. Given the above, the
    Commission estimates that the majority of wireless communications
    equipment manufacturers are small businesses.

### Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements for Small Entities

98. In this *Fifth Report and Order*, we eliminate the option that
    entities formerly had with respect to funds they had received from
    the program in error. Instead of requiring them to immediately repay
    such funds, the program rules allowed them to offset the amounts
    they owed against future payments that they were due. Unfortunately,
    as discussed above,[^193] the administrative costs of tracking such
    debts appears to outweigh the benefits of the option and so it has
    been eliminated.

99. In our continuing effort to crack down on waste, fraud, and abuse by
    those who owe funds to the program, we also modify our rules to
    bring all E-rate program beneficiaries and service providers within
    the ambit of the program's "red light" rule: denying future funding
    to any party with outstanding debts to the program. To achieve this,
    we amend sections 1.8002 and 1.8003 of the Commission's rules to
    require all entities that participate in the schools and libraries
    universal service support program to obtain an FCC Registration
    Number. The agency has already certified that this process imposes
    only a de minimis burden.[^194]

100. While we adopt a 5-year document retention rule, this rule should
     actually reduce, not increase, the burden on small businesses.
     After all, section 54.516 of the Commission rules previously
     required relevant documents to be retained by parties indefinitely.
     Those parties are no longer required to do so. Meanwhile, as
     discussed above, these record retention rules are required to
     ensure that program auditors can make full audits where and when
     they see fit,[^195] thereby maximizing the amount of program funds
     available for legitimate uses. In particular such funds can help
     finance funding requests that are now approved but left unfunded
     due to a lack of funds.

101. Although the Commission has formalized its rules concerning the
     substance and timing of technology plans, the modified rules do not
     impose any additional, non-trivial burdens; they merely provide
     further guidance on the requirements of the current technology
     plan. Schools and libraries must now certify on FCC Form 486 that
     their technology plans had been approved before they started to
     receive any E-rate supported services based on them, but schools
     and libraries have always been required to prepare a technology
     plan on which to base their E-rate program product and service
     requests and to get that plan approved. The action of signing an
     additional time on a form that they already have to file to certify
     that they have complied with existing rules represents no more than
     a trivial burden.

102. The framework adopted today, setting forth what amounts should be
     recovered by USAC when specific statutory and Commission rule
     requirements are violated, does not involve additional reporting,
     recordkeeping, or compliance requirements for small entities.
     Similarly, the rule adopted in this *Fifth Report and Order*,
     adopting a five year administrative limitations period for
     initiation of fund recovery actions, does not involve additional
     reporting, recordkeeping, or compliance requirements for small
     entities. Rather, it reduces their recordkeeping requirements. The
     rules adopted, barring entities from receiving additional benefits
     under the schools and libraries program if they have failed to
     repay an outstanding debt to the fund, do not impose additional
     reporting, recordkeeping, or compliance requirements for small
     entities. Finally, other rules we adopt regarding the certification
     requirements made on FCC Forms do not require additional reporting
     or recordkeeping for small entities, as they merely conform our
     rules to current practices.

### 10. Steps Taken to Minimize the Significant Economic Impact on Small Entities, and Significant Alternatives Considered {#steps-taken-to-minimize-the-significant-economic-impact-on-small-entities-and-significant-alternatives-considered .unnumbered}

103. The RFA requires an agency to describe any significant alternatives
     that it has considered in developing its approach, which may
     include the following four alternatives (among others): "(1)
     establishment of differing compliance or reporting requirements or
     timetables that take into account the resources available to small
     entities; (2) the clarification, consolidation, or simplification
     of compliance and reporting requirements under the rule for such
     small entities; (3) the use of performance rather than design
     standards; and (4) an exemption from coverage of the rule, or any
     part thereof, for such small entities."[^196]

104. Although we received no IRFA comments, we considered alternatives
     to the proposed recordkeeping requirements for small entities.
     Although we eliminated the options that schools and libraries had
     to offset amounts they owed to the fund due to rule violations
     against expected future payments, we did so only after giving the
     options a reasonable trial. We only eliminated them after
     concluding that they can involve a lengthy process resulting in a
     significant administrative burden on USAC, as discussed in more
     detail above.[^197]

105. Although the Commission adopts the standards currently used by SLD,
     the rules clearly enable schools and libraries to minimize any
     duplicative administrative actions by permitting the technology
     plans that schools must prepare in response to the recent "No Child
     Left Behind" initiative to serve double duty to the extent that
     that is appropriate. Thus, schools whose plans have already been
     approved through the Department of Education's EETT need only meet
     the single additional standard of showing that they have sufficient
     resources to finance their portion of the cost of the entire
     implementation of using telecommunications to advance educational
     goals. Furthermore, we formally authorize USAC to certify entities
     that are qualified to approve the technology plans of non-public
     schools, among others.

106. The new requirement that schools and libraries certify -- on FCC
     Form 486 -- that their technology plans were already approved
     before they began receiving any E-rate supported also relaxes the
     former rule that required applicants to certify that their plans
     had been approved before they filed their FCC Form 470.

107. A copy of the Order and FRFA (or summaries thereof) will also be
     published in the Federal Register.[^198] In addition, the
     Commission will send a copy of this order in a report to be sent to
     Congress and the General Accounting Office pursuant to the
     Congressional Review Act pursuant to 5 U.S.C. 801(a)(1)(A).

     **VI. ORDERING CLAUSES**

108. Accordingly, IT IS ORDERED that, pursuant to the authority
     contained in sections 1, 4(i), 4(j), 201-205, 214, 254, and 403 of
     the Communications Act of 1934, as amended, this Fifth Report and
     Order and Order IS ADOPTED.

109. IT IS FURTHER ORDERED that the Commission's rules, 47 C.F.R. Parts
     0, 1 and 54 ARE AMENDED as set forth in the attached Appendix B,
     effective thirty (30) days after the publication of this Fifth
     Report and Order and Order in the Federal Register, except that the
     requirements subject to PRA are not effective until approved by
     OMB. The Commission will publish a document in the Federal Register
     announcing the effective date of the requirements.

110. IT IS FURTHER ORDERED that the Commission will send a copy of this
     Fifth Report and Order and Order, including the FRFA, in a report
     to be sent to Congress and the General Accounting Office pursuant
     to the Congressional Review Act, *see* 5 U.S.C. § 801(a)(1)(A). In
     addition, the Commission will send a copy of the Order, including
     the FRFA, to the Chief Counsel for Advocacy of the Small Business
     Administration.

     FEDERAL COMMUNICATIONS COMMISSION

     Marlene H. Dortch

     Secretary

**APPENDIX A**

**LIST OF COMMENTERS**

**Commenter Abbreviation**

**[Comments]{.underline}**

Alaska Department of Education and Early Development and State Library
Alaska EED

American Association of School Administrators AASA

Association of Educational Service Agencies AESA

American Library Association ALA

Arkansas E-rate Work Group AEWG

Tim Aumann Aumann

Avaya, Inc. Avaya

BellSouth Corporation BellSouth

Central Susquehanna Intermediate Unit

Consortium for School Networking CoSN

International Society for Technology in Education ISTE

Council of the Great City Schools

Cox Communications, Inc. Cox

Eau Claire Area Schools Eau Claire

Education and Libraries Networks Coalition EdLiNC

E-Rate Central

E-Rate Complete, LLC

Fibertech Networks, LLC Fibertech

Funds For Learning, LLC

General Communication, Inc. GCI

Illinois State Board of Education ISBE

International Business Machines Corporation IBM

Kellogg & Sovereign Consulting, LLC K&S

Louisiana eRate Filers Organization LaErate

National Association of State Utility Consumer Advocates NASUCA

National Telecommunications Cooperative Association NTCA

New York City Department of Education NYCDOE

Northern Sierra Rural Health Network NSRHN

Ohio SchoolNet Commission OSNC

On-Tech

Otsego Schools Cost Containment Committee

Pennsylvania Department of Education Pennsylvania DOE

Qwest Communications International Inc. Qwest

Rural School and Community Trust

SBC Communications Inc. SBC

Shingletown Medical Center

Sprint Corporation Sprint

State E-Rate Coordinators' Alliance SECA

Sunesys, Inc. Sunesys

Turkal, John L.

United Utilities, Inc. United

Verizon Communications, Inc. Verizon

Weisiger, Greg Weisiger

WiscNet

Wisconsin Department of Public Instruction

WorldCom, Inc. WorldCom

**Commenter Abbreviation**

**[Reply Comments]{.underline}**

Alaska Department of Education and Early Development and State Library
Alaska EED

BellSouth Corporation BellSouth

California Public Utilities Commission and the

People of the State of California California

Consortium for School Networking CoSN

International Society for Technology in Education ISTE

Council of the Great City Schools

Cox Communications, Inc. Cox

Fibertech Networks, LLC Fibertech

Funds for Learning, LLC

General Communication, Inc. GCI

Hayes E-Government Resources, Inc. Hayes

International Business Machines Corporation IBM

Montana Independent Telecommunications Systems MITS

MOREnet

Nextel Communications, Inc. Nextel

SBC Communications Inc. SBC

Sprint Corporation Sprint

State E-rate Coordinators Alliance SECA

Sunesys, Inc. Sunesys

Verizon Communications, Inc. Verizon

Weisiger, Greg

Wisconsin Department of Public Instruction WIDPI

**APPENDIX B**

**FINAL RULES**

Part 0 of the Commission's Rule and Regulations, Chapter 1 of Title 47
of the Code of Federal Regulations, is amended as follows:

1\. Part 0, Subpart A is amended by adding section 0.91(n) to read as
follows:

\(n\) Address audit findings relating to the schools and libraries
support mechanism, subject to the overall authority of the Managing
Director as the Commission\'s audit follow-up official.

2\. Part 0, Subpart B is amending by adding 0.291(i) to read as follows:

\(i\) *Authority concerning schools and libraries support mechanism
audits.* The Chief, Wireline Competition Bureau, shall have authority to
address audit findings relating to the schools and libraries support
mechanism. This authority is not subject to the limitation set forth in
paragraph (a)(2) of this section.

Part 1 of the Commission's Rules and Regulations, Chapter 1 of Title 47
of the Code of Federal Regulations, is amended as follows:

1\. Part 1, Subpart W is amended by adding section 1.8002(a)(6) to read
as follows:

> \(6\) Any applicant or service provider participating in the Schools
> and Libraries Universal Service Support Program, part 54, subpart F,
> of this chapter.

2\. Part 1, Subpart W is amended by modifying 1.8003 to read as follows:

The FRN must be provided with any filings requiring the payment of
statutory charges under subpart G of this part, anyone applying for a
license (whether or not a fee is required), including someone who is
exempt from paying statutory charges under subpart G of this part,
anyone participating in a spectrum auction, making up-front payments or
deposits in a spectrum auction, anyone making a payment on an auction
loan, anyone making a contribution to the Universal Service Fund, any
applicant or service provider participating in the Schools and Libraries
Universal Service Support Program, and anyone paying a forfeiture or
other payment. A list of applications and other instances where the FRN
is required will be posted on our Internet site and linked to the CORES
page.

Part 54 of the Commission's Rules and Regulations, Chapter 1 of Title 47
of the Code of Federal Regulations, is amended as follows:

1\. Part 54, Subpart F is amended by modifying section 54.504(b)(2) to
read as follows:

> \(2\) FCC Form 470 shall be signed by the person authorized to order
> telecommunications and other supported services for the eligible
> school, library, or consortium and shall include that person's
> certification under oath that:
>
> \(i\) The schools meet the statutory definition of elementary and
> secondary schools found under section 254(h) of the Act, as amended in
> the No Child Left Behind Act of 2001, 20 U.S.C. §§ 7801(18) and (38),
> do not operate as for-profit businesses, and do not have endowments
> exceeding \$50 million;
>
> \(ii\) The libraries or library consortia eligible for assistance from
> a State library administrative agency under the Library Services and
> Technology Act of 1996 do not operate as for-profit businesses and
> whose budgets are completely separate from any school (including, but
> not limited to, elementary and secondary schools, colleges, and
> universities).
>
> \(iii\) All of the individual schools, libraries, and library
> consortia receiving services are covered by:

a)  individual technology plans for using the services requested in the
    application; and/or

b)  higher-level technology plans for using the services requested in
    the application; or

c)  no technology plan needed because application requests basic local
    and/or long distance service and/or voicemail only.

> \(iv\) The technology plan(s) has/have been approved by a state or
> other authorized body; the technology plan(s) will be approved by a
> state or other authorized body; or no technology plan needed because
> applicant is applying for basic local, cellular, PCS, and/or long
> distance telephone service and/or voicemail only.
>
> \(v\) The services the applicant purchases at discounts will be used
> solely for educational purposes and will not be sold, resold, or
> transferred in consideration for money or any other thing of value.
>
> \(vi\) Support under this support mechanism is conditional upon the
> school(s) and library(ies) securing access to all of the resources,
> including computers, training, software, maintenance, internal
> connections, and electrical connections necessary to use the services
> purchased effectively.
>
> \(vii\) All bids submitted will be carefully considered and the bid
> selected will be for the most cost-effective service or equipment
> offering, with price being the primary factor, and will be the most
> cost-effective means of meeting educational needs and technology plan
> goals.

2\. Part 54, Subpart F is further amended by adding new section
54.504(c)(1) to read as follows:

(1) FCC Form 471 shall be signed by the person authorized to order
    telecommunications and other supported services for the eligible
    school, library, or consortium and shall include that person's
    certification under oath that:

> \(i\) The schools meet the statutory definition of elementary and
> secondary schools found under section 254(h) of the Act, as amended in
> the No Child Left Behind Act of 2001, 20 U.S.C. §§ 7801(18) and (38),
> do not operate as for-profit businesses, and do not have endowments
> exceeding \$50 million.
>
> \(ii\) The libraries or library consortia eligible for assistance from
> a State library administrative agency under the Library Services and
> Technology Act of 1996 do not operate as for-profit businesses and
> whose budgets are completely separate from any school (including, but
> not limited to, elementary and secondary schools, colleges, and
> universities).
>
> \(iii\) The entities listed on the FCC Form 471 application have
> secured access to all of the resources, including computers, training,
> software, maintenance, internal connections, and electrical
> connections, necessary to make effective use of the services
> purchased, as well as to pay the discounted charges for eligible
> services from funds to which access has been secured in the current
> funding year. The billed entity will pay the non-discount portion of
> the cost of the goods and services to the service provider(s).
>
> \(iv\) All of the schools and libraries listed on the FCC Form 471
> application are covered by:
>
> \(a\) an individual technology plan for using the services requested
> in the application; and/or
>
> \(b\) higher-level technology plan(s) for using the services requested
> in the FCC Form 471 application; or
>
> \(c\) no technology plan needed; applying for basic local and long
> distance telephone service only.
>
> \(v\) Status of technology plan(s) has/have been approved; will be
> approved by a state or other authorized body; or no technology plan is
> needed because applicant is applying for basic local, cellular, PCS,
> and/or long distance telephone service and/or voicemail only.
>
> \(vi\) The entities listed on the FCC Form 471 application have
> complied with all applicable state and local laws regarding
> procurement of services for which support is being sought.
>
> \(vii\) The services the applicant purchases at discounts will be used
> solely for educational purposes and will not be sold, resold, or
> transferred in consideration for money or any other thing of value.
>
> \(viii\) The entities listed in the application have complied with all
> program rules and acknowledge that failure to do so may result in
> denial of discount funding and/or recovery of funding.
>
> \(ix\) The applicant understands that the discount level used for
> shared services is conditional, for future years, upon ensuring that
> the most disadvantaged schools and libraries that are treated as
> sharing in the service, receive an appropriate share of benefits from
> those services.
>
> \(x\) The applicant recognizes that it may be audited pursuant to its
> application, that it will retain for five years any and all worksheets
> and other records relied upon to fill out its application, and that,
> if audited, it will make such records available to the Administrator.
>
> \(xi\) All bids submitted were carefully considered and the most
> cost-effective bid for services or equipment was selected, with price
> being the primary factor considered, and is the most cost-effective
> means of meeting educational needs and technology plan goals.

3\. Part 54, Subpart F is further amended by adding section 54.504(h) to
read as follows:

\(h\) *Filing of FCC Form 473*. All service providers eligible to
provide telecommunications and other supported services under this
subpart shall submit annually a completed FCC Form 473 to the
Administrator. FCC Form 473 shall be signed by an authorized person and
shall include that person's certification under oath that:

> \(1\) The prices in any offer that this service provider makes
> pursuant to the schools and libraries universal service support
> program have been arrived at independently, without, for the purpose
> of restricting competition, any consultation, communication, or
> agreement with any other offeror or competitor relating to (i) those
> prices, (ii) the intention to submit an offer, or (iii) the methods or
> factors used to calculate the prices offered;
>
> \(2\) The prices in any offer that this service provider makes
> pursuant to the schools and libraries universal service support
> program will not be knowingly disclosed by this service provider,
> directly or indirectly, to any other offeror or competitor before bid
> opening (in the case of a sealed bid solicitation) or contract award
> (in the case of a negotiated solicitation) unless otherwise required
> by law; and
>
> \(3\) No attempt will be made by this service provider to induce any
> other concern to submit or not to submit an offer for the purpose of
> restricting competition.

4\. Part 54, Subpart F is further amended by adding new section 54.508
to read as follows:

54.508 Technology plans

\(a\) *Contents.* The technology plans referred to in this subpart must
include the following five elements:

> \(i\) A clear statement of goals and a realistic strategy for using
> telecommunications and information technology to improve education or
> library services;
>
> \(ii\) A professional development strategy to ensure that the staff
> understands how to use these new technologies to improve education or
> library services;
>
> \(iii\) An assessment of the telecommunication services, hardware,
> software, and other services that will be needed to improve education
> or library services;
>
> \(iv\) A budget sufficient to acquire and support the non-discounted
> elements of the plan: the hardware, software, professional
> development, and other services that will be needed to implement the
> strategy; and
>
> \(v\) An evaluation process that enables the school or library to
> monitor progress toward the specified goals and make mid-course
> corrections in response to new developments and opportunities as they
> arise.

\(b\) *Relevance of approval under Enhancing Education through
Technology.* Technology plans that meet the standards of the Department
of Education's Enhancing Education Through Technology (EETT), 20 U.S.C.
6764, are sufficient for satisfying elements (a)(i),(ii),(iii) and (v),
but applicants must supplement such plans with an analysis demonstrating
that they meet the budgetary requirement described in (a) (iv) of this
section. Furthermore, to the extent that the Department of Education
adopts future technology plan requirements that require one or more of
the five elements described in (a) of this section, such plans will be
acceptable for satisfying those elements of (a). Applicants with such
plans will only need to supplement such plans with the analysis needed
to satisfy those elements of subsection (a) of this section not covered
by the future Department of Education technology plan requirements.

\(c\) *Timing of certification.* As required under 54.504(b)(2)(vii) and
(c)(1)(v), applicants must certify that they have prepared any required
technology plans. They must also confirm, in FCC Form 486, that their
plan was approved before they began receiving services pursuant to it.

\(d\) *Parties qualified to approve technology plans required in this
subpart.* Applicants required to prepare and obtain approval of
technology plans under this subpart must obtain such approval from
either their state, the Administrator, or an independent entity approved
by the Commission or certified by the Administrator as qualified to
provide such approval. All parties who will provide such approval must
apply the standards set forth above in subsections (a) and (b).

5\. Part 54, Subpart F is further amended by modifying section 54.516 to
read as follows:

54.516 Auditing

\(a\) *Recordkeeping Requirements*.

(1) *Schools and libraries*. Schools and libraries shall retain all
    documents related to the application for, receipt, and delivery of
    discounted telecommunications and other supported services for at
    least 5 years after the last day of service delivered in a
    particular Funding Year. Any other document that demonstrates
    compliance with the statutory or regulatory requirements for the
    schools and libraries mechanism shall be retained as well. Schools
    and libraries shall maintain asset and inventory records of
    equipment purchased as components of supported internal connections
    services sufficient to verify the actual location of such equipment
    for a period of five years after purchase.

(2) *Service providers*. Service providers shall retain documents
    related to the delivery of discounted telecommunications and other
    supported services for at least 5 years after the last day of the
    delivery of discounted services. Any other document that
    demonstrates compliance with the statutory or regulatory
    requirements for the schools and libraries mechanism shall be
    retained as well.

\(b\) *Production of records*. Schools, libraries, and service providers
shall produce such records at the request of any representative
(including any auditor) appointed by a state education department, the
Administrator, the FCC, or any local, state or federal agency with
jurisdiction over the entity.

\(c\) *Audits*. Schools, libraries, and service providers shall be
subject to audits and other investigations to evaluate their compliance
with the statutory and regulatory requirements for the schools and
libraries universal service support mechanism, including those
requirements pertaining to what services and products are purchased,
what services and products are delivered, and how services and products
are being used. Schools and libraries receiving discounted services must
provide consent before a service provider releases confidential
information to the auditor, reviewer, or other representative.

**STATEMENT OF**

**CHAIRMAN MICHAEL K. POWELL**

*In the matter of Schools and Libraries Universal Service Support
Mechanism, CC Docket No. 02-6*

Today, we adopt measures to protect against waste, fraud, and abuse in
the administration of the E-rate program. In particular, we resolve a
number of issues that have arisen from audit activities conducted as
part of our expanded oversight over the administration of the universal
service fund, and we address programmatic concerns raised by our Office
of Inspector General.

To deter bad actors, E-rate applicants will be held accountable for the
contents of their applications and other filings. Continuing strong
review and auditing programs serve as a long-term deterrent to waste,
fraud, and abuse. I am particularly pleased that my colleagues have
accepted a delegation of authority to the Bureau Chief of the Wireline
Competition Bureau to quickly resolve audits that uncover instances of
waste fraud and abuse. The measures we adopt herein are not the final
steps we plan to take for strengthening oversight of the universal
service program and combating waste, fraud, and abuse. My fellow
Commissioners and I remain committed to deterring inappropriate uses of
universal service monies and to rapidly detecting and addressing
potential misconduct (including waste, fraud, and abuse), and we
recognize that achieving these goals is a continual process. While we
recognize that this item does not address the discount matrix issue, we
are continuing to work on various proposals for improving our oversight
of the universal service program, and we expect to issue an order
adopting additional measures in the near future.

We at the FCC are proud of the schools and libraries support program,
but we will never be satisfied with the status quo. We will continue to
use all tools at our disposal to help us identify areas of E-rate
program administration that are vulnerable to fraud, waste, or abuse,
and E-rate applicants will be subject to a zero-tolerance policy. At the
same time, we will continue to encourage participation in the program so
that those that the program's true beneficiaries -- the nation's
students, library patrons, and all Americans -- receive the support they
need

**STATEMENT OF\
COMMISSIONER KATHLEEN Q. ABERNATHY\
**

*In the matter of Schools and Libraries Universal Service Support
Mechanism, CC Docket No. 02-6*

The measures we adopt in this item underscore the Commission's ongoing
commitment to ensuring the integrity and effectiveness of the schools
and libraries universal service support mechanism (E-Rate). I have been
a stalwart supporter of the E-Rate program, but I have also emphasized
the need to be steadfast in our efforts to eliminate waste, fraud, and
abuse.

Over the last two years, the Commission has made a number of key
improvements to the E-Rate mechanism. In April 2003, the Commission
adopted a debarment rule to prevent bad actors from receiving continued
support, and we also implemented other safeguards. And in May 2003, I
organized a public forum to learn more about potential abuses of the
program. USAC subsequently established a task force devoted to waste,
fraud, and abuse. Based in large part on recommendations from public
forum participants and the task force, the Commission adopted other
measures to improve the program, including new rules that limit the
frequency of discounts for internal connections and restrict equipment
transfers among schools.

This Order builds on these earlier efforts by strengthening the
Commission's and USAC's audit programs. By providing further guidance on
when and how funds will be recovered in the wake of rule violations, by
strengthening document-retention requirements, and by clarifying related
rules, we will both deter misconduct and enable more effective and
timely responses by USAC and the Commission. While these are important
steps, we must continue to explore additional programmatic changes; most
notably, I look forward to completing our rulemaking regarding possible
changes in the discount levels available to schools and libraries. Our
continuing oversight is critical to the E-Rate program's survival, and I
applaud USAC, our staff, and my colleagues for their commitment to
shoring up any remaining deficiencies.

**STATEMENT OF\
COMMISSIONER MICHAEL J. COPPS**

*In the matter of Schools and Libraries Universal Service Support
Mechanism, CC Docket No. 02-6*

Here we have a program that has been absolutely front-and-center in
ushering children around this country into the Internet age. But we
understand that the great progress we have made with schools and
libraries can fade without constant attention and care. This item sets
forth a needed framework that provides guidance for the recovery of
funds from applicants that have failed to comply with the statute or
with our rules. It establishes a timeframe for audits and
investigations. And to enhance oversight and enforcement, it provides
standards for document retention by program beneficiaries. These are
good and helpful steps that enhance the integrity of the program and
also bring some clarity to program applicants.

This new process provides more Commission oversight. It encourages
closer oversight by the five of us and the more expeditious handling of
disputes over applications. The underlying goal here is speedy
resolution of any problems that audits turn up. I think we have found a
balanced and efficient way to handle this. In our decision, we instruct
the Bureau to take the first crack at reviewing audit findings relating
to the schools and libraries support mechanism. But Bureau findings are
subject to Commission review, and we commit here to rendering decisions
on appeals within the very tight time-frame of six months. I expect this
division of resources will serve our goals of reducing waste, fraud and
abuse better than tying every finding up in a cumbersome and protracted
full Commission process. If it does not, however, I stand willing to
revisit this aspect of today's decision.

A large part of the challenge we face here is crafting a balanced
approach. Vigilant oversight and procedures adequate to forestalling
abuse are, of course, essential. But it would also be possible to go
overboard by multiplying the complexity of the E-Rate program and making
the process so cumbersome as to discourage applicants from taking
advantage of it. If needy schools and libraries lack the resources to
navigate a growing minefield of rules and requirements, we could wind up
deterring the very applicants this program was designed to benefit and,
worse, denying thousands of children access to the communications
services they need to grow into fully productive citizens. So we must
always keep the beneficiaries in mind as we work to resolve problems in
the program. I think we head in that direction today, and I am pleased
to support the item.

**STATEMENT OF**

**COMMISSIONER KEVIN J. MARTIN**

**APPROVING IN PART AND DISSENTING IN PART**

*In the matter of Schools and Libraries Universal Service Support
Mechanism, CC Docket No. 02-6*

I commend Chairman Powell's efforts to prevent waste, fraud and abuse in
the universal service schools and libraries program. The universal
service schools and libraries program has been instrumental in
facilitating access to advanced services for our nation's students.
Strong fiscal and administrative oversight of the schools and libraries
program is essential to ensure that schools and libraries will be able
to use the funding available under the existing \$2.25 billion annual
cap. I support the Chairman's efforts to protect the program and the
critical educational opportunities it continues to provide for our
nation's schoolchildren.

Today's decision adopts additional measures to protect against waste,
fraud and abuse in the administration of the schools and libraries
universal service support program. Today's action sets forth a policy on
the recovery of improperly disbursed funds, strengthens existing
safeguards to enhance the Commission's oversight and enforcement
activities, and provides greater guidance for a more vigorous audit
program to protect the financial integrity of the schools and libraries
program. While I am pleased that the Commission is moving forward today
on specific measures to strengthen its ongoing oversight of the schools
and libraries program, I do not join in the decision to abdicate some of
the Commission's critical policymaking and fiscal oversight
responsibilities to the Bureau. Accordingly, I approve in part and
dissent in part from the order.

**STATEMENT OF**

**COMMISSIONER JONATHAN S. ADELSTEIN**

*In the matter of Schools and Libraries Universal Service Support
Mechanism, CC Docket No. 02-6*

Since its inception in 1996, the universal service support mechanism for
schools and libraries (commonly referred to as the E-rate program) has
opened up a new world of learning and opportunity for millions of school
children and library patrons. It has proven an enormously successful
educational initiative. The E-Rate program has allowed us to achieve
remarkable results in connecting classrooms and libraries in rural and
urban areas to the Internet and connecting America's schoolchildren to
the Information Age. By strengthening our schools and libraries, we have
given our children access to the tools that they need -- that we, as a
nation, need \-- to compete and succeed in an increasingly global
economy.

To ensure the continued success of the E-Rate program, we must remain
committed to monitoring, auditing, reviewing and reinforcing the
program. This Order demonstrates our commitment to the program and to
its integrity. We take important steps here to further our ongoing
effort to safeguard against waste, fraud, and abuse. The measures we
adopt bolster our audit processes, which are essential to the oversight
of the universal service fund, and they respond to programmatic concerns
raised by our Office of Inspector General. The Order also sets into
motion a process for reviewing USAC administrative procedures, which
will afford the Commission the opportunity to ensure the transparency,
effectiveness, and efficiency of the program's administration. The item
also provides useful guidance on the content and approval of Technology
Plans, which are used by applicants to assess and plan for their
telecommunications needs.

This Order represents one important part of a larger effort to ensure
the integrity and success of the E-Rate program. Through this Order and
our previous Orders adopted in the past two years, we are working to
safeguard against waste, fraud, and abuse, and, at the same time, to
simplify and clarify the application process, so that we don't set up
unnecessary obstacles for deserving applicants. As this item recognizes,
our job is not done. Nevertheless, we take important steps forward in
this Order. I appreciate the commitment of my colleagues, USAC, the
service providers, and the schools and libraries, as we continue to
advance these intertwined goals.

[^1]: Semiannual Report to Congress, October 1, 2003-March 31, 2004,
    Office of the Inspector General, Federal Communications Commission
    at 3-19.

[^2]: We intend to address additional issues relating to competitive
    bidding and the discount matrix in one or more forthcoming orders.

[^3]: 47 C.F.R. §§ 54.502, 54.503.

[^4]: *Federal-State Joint Board on Universal Service*, CC Docket 96-45,
    Report and Order, 12 FCC Rcd 8776, 9077-78 (1997) (*Universal
    Service Order*).

[^5]: 47 C.F.R. § 54.504(b).

[^6]: 47 C.F.R. § 54.504(c). During this process, USAC assigns a
    "Funding Request Number" to each individual request for discounted
    services submitted by a school or library. USAC, schools and
    libraries, and the service providers who provide the discounted
    services all use the Funding Request Number to track these
    individual funding requests. Service providers are also required to
    reference specific USAC Funding Request Numbers when submitting
    invoices to USAC for reimbursement of the discounted portion of the
    services they provide to schools and libraries.

[^7]: Schools and Libraries Universal Service, Billed Entity Applicant
    Reimbursement Form, OMB 3060-0856 (October 1998) (FCC Form 472 or
    BEAR Form); Schools and Libraries Universal Service, Service
    Provider Invoice Form, OMB 3060-0856 (October 2001) (FCC Form 474 or
    SPI Form). *See also* 47 C.F.R. § 54.514.

[^8]: *See* 47 C.F.R. § 54.505.

[^9]: *Id.* The Commission recently sought comment on altering the
    discount mechanism. *See Schools and Libraries Universal Service
    Support Mechanism*, CC Docket No. 02-6, Third Report and Order and
    Second Further Notice of Proposed Rulemaking, 18 FCC Rcd 26912, at
    26936-39 (2003) (*Schools and Libraries Third Order* or *Schools and
    Libraries Second Further Notice*).

[^10]: 47 C.F.R. § 54.507(g)(1)(i-iv); *see also Federal-State Joint
    Board on Universal Service*, CC Docket 96-45, Fifth Order on
    Reconsideration and Fourth Report and Order, 13 FCC Rcd 14915, 14938
    para. 36 (1998) (*Fifth Order on Reconsideration*).

[^11]: *Changes to the Board of Directors of the National Exchange
    Carrier Association, Inc., Federal-State Joint Board on Universal
    Service*, CC Docket Nos. 97-21 and 96-45, Order, FCC 99-291 (rel.
    Oct. 8, 1999) (*Commitment Adjustment Order*) *on reconsideration*
    *Federal-State Joint Board on Universal Service, Changes to the
    Board of Directors for the National Exchange Carrier Association,
    Inc., Schools and Libraries Universal Service Support Mechanism*, CC
    Docket Nos. 96-45, 97-21 and 02-6, Order on Reconsideration and
    Fourth Report and Order, FCC 04-181 (rel. July 30, 2004)(*Schools
    and Libraries Fourth Order*).

[^12]: *Changes to the Board of Directors of the National Exchange
    Carrier Association, Inc., Federal-State Joint Board on Universal
    Service*, CC Docket Nos. 97-21 and 96-45, Order, 15 FCC Rcd 7197
    (1999) (*Waiver Order).*

[^13]: *Id.*

[^14]: *Changes to the Board of Directors of the National Exchange
    Carrier Association, Inc., Federal-State Joint Board on Universal
    Service,* 15 FCC Rcd 22975 (2000) (*Commitment Adjustment
    Implementation Order)*, *petition for review pending sub. nom.
    United States Telecom Ass'n v. FCC,* Case No. 00-1501 (D.C. Cir.
    filed Nov. 27, 2000).

[^15]: *Id*. at 22980 para. 13.

[^16]: *Id.*

[^17]: Collectively, USAC and other entities have audited over \$1.1
    billion in total disbursements out of \$4.7 billion disbursed in the
    first three years of the program, representing 23.55% of funds
    disbursed. USAC has sought recovery of \$18 million, based on these
    audit findings.

[^18]: See Report on Audit of the E-rate Program at Enoch Pratt Free
    Library, Report No. 02-AUD-02-04-010 (Sept. 11, 2002); Report on
    Audit of the E-rate Program at Robeson County Public School System,
    Report No. 02-AUD-02-04-13 (Feb. 3, 2003); Report on Audit of the
    E-rate Program at Wake County Public School System, Report No.
    02-AUD-02-04-14, (Feb. 3, 2003); Report on Audit of the E-rate
    Program at Albermarle Regional Library, Report No. 02-AUD-02-04-16,
    (Aug. 27, 2003); Report on Audit of the E-rate Program at Santa Fe
    Indian School, Inc., Report No. R-GR-FCC-0006-2003. (Nov. 6, 2003);
    Report on Audit of the E-rate Program at Prince William County
    Schools, Report No. 02-AUD-02-04-11 (Dec. 22, 2003); Report on Audit
    of the E-rate Program at the Arlington Public Schools, Report No.
    02-AUD-02-04-12 (Dec. 22, 2003); Report on Audit of the E-rate
    Program at St. Matthew Lutheran School, Report No. 02-AUD-02-04-07
    (Dec. 22, 2003); Final Report on Audit of the E-rate Program at
    Navajo Preparatory School, Inc., Report No. R-GR-FCC-0005-2003 (Jan.
    7, 2004); Report on Audit of the E-rate Program at Immaculate
    Conception School, Report No. 02-AUD-02-04-20 (Mar. 24, 2004);
    Report on Audit of the E-rate Program at Children's Storefront
    School, Report No. 02-AUD-02-04-025 (Apr. 5, 2004); Report on Audit
    of the E-rate Program at St. Augustine School, Report No.
    02-AUD-02-04-017 (May 19, 2004); Report on Audit of the E-rate
    Program at Southern Westchester Board of Cooperative Educational
    Services, Report No. 02-AUD-02-04-003 (May 25, 2004); Report on
    Audit of the E-rate Program at United Talmudical Academy, Report No.
    02-AUD-02-04-006 (June 7, 2004).

[^19]: For instance, recent audit findings regarding beneficiaries' lack
    of documentation have informed our decision today to strengthen our
    document retention requirements.

[^20]: *Commitment Adjustment Implementation Order,* 15 FCC Rcd at
    22977.

[^21]: *Schools and Libraries Universal Service Support Mechanism*, CC
    Docket 02-6, Notice of Proposed Rulemaking, 17 FCC Rcd 1914 (2002)
    (*Schools and Libraries Notice*).

[^22]: Among other things, the Commission sought general comment on the
    use of independent audits as an oversight tool to provide assurance
    of program integrity. *See* *Schools and Libraries Notice,* 17 FCC
    Rcd at 1937 para. 59.

[^23]: For example, in April 2003, the Commission adopted a debarment
    rule and other measures to ensure that program funds are utilized in
    an efficient, effective and fair manner. *See* *Schools and
    Libraries Universal Service Support Mechanism*, CC Docket No. 02-6,
    Second Report and Order and Further Notice of Proposed Rulemaking,
    18 FCC Rcd 9202 (2003) (*Schools and Libraries Second Order* or
    *Schools and Libraries Further Notice*)

[^24]: *See Schools and Libraries Third Order*.

[^25]: *See id.* at 26945-53.

[^26]: 47 C.F.R. § 54.516.

[^27]: We will use the term "improperly disbursed funds" throughout this
    order to refer to an amount of money disbursed inconsistently with
    the statute or Commission rules. This amount may be all or part of a
    disbursement, depending upon the circumstances.

[^28]: *Schools and Libraries Support Mechanism*, Notice of Proposed
    Rulemaking and Order, 17 FCC Rcd 1914 (2002).

[^29]: *See Commitment Adjustment Order.*

[^30]: *See Waiver Order.*

[^31]: *See Waiver Order*, 15 FCC Rcd at 7200-01 para. 8, 7202 para. 12.

[^32]: Debt Collection Improvement Act of 1996, Pub. L. No. 104-134, 110
    Stat. 1321, 1358 (1996).

[^33]: *Commitment Adjustment Implementation Order*.

[^34]: *See* *Schools and Libraries Second Further Notice,* 18 FCC Rcd
    at 26947-49.

[^35]: *See Schools and Libraries Fourth Order*.

[^36]: *See* 47 C.F.R. § 1.901 *et. seq. See also, Amendment of Parts 0
    and 1 of the Commission's Rules, Implementation of the Debt
    Collection Improvement Act of 1996 and Adoption of Rules Governing
    Applications or Requests for Benefits by Delinquent Debtors*, MD
    Docket No. 02-239, Report and Order, 19 FCC Rcd 6540 (2004) (*DCIA
    Order*).

[^37]: We note that USAC, through its duties as administrator of the
    fund, initially seeks recovery of erroneously disbursed funds.

[^38]: We retain discretion to depart from these general standards when
    application would be contrary to the public interest. Any
    determination concerning the recovery of funds does not limit the
    Enforcement Bureau's ability to take enforcement action for any
    statutory or rule violation pursuant to section 503 of the Act

[^39]: GCI Comments at 6; Pennsylvania DOE Comments at 33 (not all
    violations should be treated the same); SECA Comments at 9 (same);
    *see also* BellSouth Comments at 3 (standard rule may not fit all
    circumstances).

[^40]: *Request for Review of the Decision of the Universal Service
    Administrator by Mastermind Internet Services, Inc.*,
    SPIN-143006149, CC Docket No. 96-45, Order, 16 FCC Rcd 4028 (2000);
    *Request for Review of the Decision of the Universal Service
    Administrator by Ysleta Independent School District,* CC Docket Nos.
    96-45 and 97-21, Order, 18 FCC Rcd 26407 (2003) (*Ysleta Order*).
    *See also Federal-State Joint Board on Universal Service*, CC Docket
    Nos. 96-45 and 97-21, Fourth Order on Reconsideration, 13 FCC Rcd
    5318 (1997) (*Fourth Order on Reconsideration*).

[^41]: We note that our rules do not require applicants to affirmatively
    seek out price quotes from multiple sources if no service provider
    responds to a Form 470 posting. *See* *Request for Review of the
    Decision of the Universal Service Administrator by Winston-Salem
    County School District*, CC Docket Nos. 96-45 and 97-21, Order, 18
    FCC Rcd 26457, 26462 (2003) ("our rules require applicants to seek
    competitive bids; they do not require an applicant to have competing
    bidders where none appear").

[^42]: *See Fourth Order on Reconsideration*, 13 FCC Rcd at 5426 para.
    185.

[^43]: 47 C.F.R. § 54.504(b).

[^44]: 47 C.F.R. § 54.504(f).

[^45]: *Schools and Libraries Third Order,* 18 FCC Rcd at 26930 para.
    43.

[^46]: *Schools and Libraries Second Order*, 18 FCC Rcd at 9209.

[^47]: In the *Non-Recurring Services Order*, the Commission specified
    the circumstances under which a school or library could receive
    supported services after the conclusion of the normal funding year.
    *Federal-State Joint Board on Universal Service*, CC Docket 96-45,
    Report and Order, 16 FCC Rcd 13510 (2001) (*Non-Recurring Services
    Order*).

[^48]: *See Universal Service Order*, 12 FCC Rcd at 9062 para. 544.

[^49]: This is analogous to the manner in which USAC addresses such
    situations if it discovers during the application review process
    that the applicant has made an arithmetic error.

[^50]: *See*, *e.g.,* ALA Comments at 21*;* On-Tech Comments at 12-13;
    Pennsylvania DOE Comments at 34; SBC Comments at 5 (proposing no
    recovery for rule violations; recovery would occur for statutory
    violations); Weisinger Comments at 15, 25; Cox Reply Comments at 9;
    GCI Reply Comments at 2 (funds spent in good faith to promote
    objectives of program should not be recovered for technical
    violations).

[^51]: 47 C.F.R. § 54.722.

[^52]: 47 U.S.C. § 254(h)(1)(B); *Universal Service Order*, 12 FCC Rcd
    at 9076 para 570.

[^53]: An example of waste, fraud and abuse would be when the price for
    the service in question is in excess of what the service provider
    charges other customers in the marketplace. *See Universal Service
    Order*, 12 FCC Rcd at 9031-35 (providers shall offer services to
    schools and libraries at cost-based rates that are no higher than
    prices charged to similarly situated non-residential customers,
    codified at 47 C.F.R. § 54.511(b)). We recognize, however, there may
    be cases where the service provider could demonstrate that a small
    difference in price is due to a clerical error, which may not
    warrant full recovery.

[^54]: While we have not specifically addressed this situation in the
    past, we clarify prospectively that an example of such a situation
    would be where the school requests support for a number of data
    lines far in excess of the number of students in a school, or
    support for servers that will provide capacity in excess of the
    needs of the intended population.

[^55]: We note that this administrative limitation period is distinct
    from the DCIA statute of limitations. The limitation period we
    establish here relates to the time period within which we must bring
    action to establish a debt due to a violation of E-rate program
    rules or the statutory provisions. In contrast, the DCIA statute of
    limitations relates to the time period within which we must act to
    collect the debt once established. *See generally* 47 C.F.R. §
    1.1901 *et. seq. See also, DCIA Order*.

[^56]: *See infra* para. 47.

[^57]: *See* Verizon Comments at 9.

[^58]: *See* CoSN Comments at 8; EdLiNC Comments at 8; Hayes Reply
    Comments at 5-6.

[^59]: See 28 U.S.C. §§ 2415(a), 3201(c), and 31 U.S.C. § 3716(e)(1).

[^60]: The Federal Claims Collection Standards provide that agencies may
    terminate collection activity when the "costs of collection are
    anticipated to exceed the amount recoverable." 31 C.F.R. § 903.3;
    *see* 47 C.F.R. § 1.1916 (adopting by reference 31 C.F.R. § 903).

[^61]: *See* BellSouth Comments at 6 (no recovery for amounts under
    \$500); E-rate Central Comments at 6 (no recovery for amounts under
    \$250); IBM Reply Comments at 7; On-Tech Comments at 14 (no recovery
    for amounts less than 1% of total commitment, or \$25,000, whichever
    is greater); SBC Comments at 5, 7 (no recovery if administrative
    cost greater than amount to be recovered); Sprint Comments at 9
    (same); Verizon Comments at 7-8 (no recovery for minor, technical
    violations such as late filed applications, data entry errors, and
    failures to check a box correctly).

[^62]: *See infra* para. 75.

[^63]: *See Commitment Adjustment Implementation Order*, 15 FCC Rcd at
    22979-80.

[^64]: *See id.* at 22979.

[^65]: *See id.* at 22979-80.

[^66]: According to USAC, of the 1155 instances where recovery of
    funding commitments and/or disbursements has been sought, there have
    been only 25 instances in which the service provider elected to use
    the offset option. *See infra* paras. 41-44.

[^67]: We eliminate the offset options adopted in the *Commitment
    Adjustment Implementation Order* specifically to avoid extension of
    offset to commitments. This action does not affect, however,
    administrative offset under our DCIA rules. *See* 47 C.F.R. §§
    1.1901, 1.1912. Under that definition, offset applies only to
    payables. In the schools and libraries program, funding becomes a
    payable after the service is provided and the service provider
    submits a valid invoice to USAC.

[^68]: *Application of Generally Accepted Accounting Principles for
    Federal Agencies and Generally Accepted Government Auditing
    Standards to the Universal Service Fund, Application of Generally
    Accepted Accounting Principles for Federal Agencies and Generally
    Accepted Government Auditing Standards to the Telecommunications
    Relay Services Fund*, CC Docket Nos. 96-45 and 03-123, Order, 18 FCC
    Rcd 19911, 19912-13, para. 4 (2003).

[^69]: IBM Comments at 6; SBC Comments at 8.

[^70]: 47 C.F.R. § 54.722.

[^71]: *DCIA Order*.

[^72]: 47 C.F.R. § 1.1901(b).

[^73]: CPUC Reply Comments at 7-8; K&S Comments at 12; SBC Comments at
    9.

[^74]: *See* California Reply Comments at 7-8 (arguing service provider
    should be barred from participating until it has satisfactorily
    settled the matter; applicant should be barred from participating
    for one funding cycle); K&S Comments at 12 (defer action on funding
    request for any beneficiary and associated service provider for
    which there is an outstanding commitment adjustment action); SBC
    Comments at 9 (withhold action on funding requests from applicant to
    facilitate collection of outstanding debt and protect the fund).

[^75]: *See DCIA Order*.

[^76]: *Id.* at 6542-43 para. 6 n.20.

[^77]: *See* CoSN Comments at 8; Council of Great City Schools Comments
    at 8; EdLiNC Comments at 7.

[^78]: *See* K&S Comments at 12-13 (heightened scrutiny for one funding
    cycle); *but see* LaErate Comments (objecting to more rigorous
    scrutiny).

[^79]: *Federal-State Joint Board on Universal Service, Petition of the
    Puerto Rico Department of Education to Release Funds Associated with
    the Schools and Libraries Universal Service Support Mechanisms for
    Years 2001 and 2002*, CC Docket No. 02-6, Order, 18 FCC Rcd 25417,
    25422 (2003) (*Puerto Rico Department of Education Order*) (when
    USAC obtains information relating to potential program violation, it
    is appropriate to subject funding requests to a more intensive
    review, tailored to the nature of the allegations that have been
    raised).

[^80]: 47 C.F.R. § 54.516.

[^81]: 47 C.F.R. § 54.501(d)(3).

[^82]: *Schools and Libraries Second Further Notice*, 18 FCC Rcd at
    26948 para. 88.

[^83]: *Id.* at 26948-49 paras. 88-89.

[^84]: *Id.* at 26948 para. 88.

[^85]: *Id.* at 26948-49 para. 89.

[^86]: *Id.* at 26949 para. 90.

[^87]: *See, e.g.,* BellSouth Comments at 9-10; California Reply
    Comments at 9; CoSN Comments at 6.

[^88]: *See infra* Appendix B.

[^89]: *See* Council of the Great City Schools Comments at 7.

[^90]: *See, e.g.,* Council of the Great City Schools Comments at 7.

[^91]: *See* 47 C.F.R. § 54.505.

[^92]: See 47 C.F.R. § 54.520.

[^93]: *See* BellSouth Comments at 9-10; California Reply Comments at 9.

[^94]: *See also Universal Service Order*, 12 FCC Rcd at 9081, para. 581
    (eligibility for support is conditioned on schools' and libraries'
    consent to cooperate in future random compliance audits to ensure
    that services are being used appropriately).

[^95]: *See* 47 U.S.C. § 254(h)(1)(B); *Universal Service Order,* 12 FCC
    Rcd at 9078 para. 574. The Commission does not require applicants to
    develop technology plans, however, for local and long distance
    service and cellular service. *See Request for Review of the
    Decision of the Universal Service Administrator by United Talmudical
    Academy, Federal-State Joint Board on Universal Service, Changes to
    the Board of Directors of the National Exchange Carrier Association,
    Inc.*, CC Docket Nos. 96-45 and 97-21, Order, 16 FCC Rcd 18812
    (2001).

[^96]: *Universal Service Order*, 12 FCC Rcd at 9078 para. 574.

[^97]: *See Further Notice,* 18 FCC Rcd at 9235 paras. 99-100; *Schools
    and Libraries Second Further Notice*, 18 FCC Rcd at 26950-51 para
    94.

[^98]: 47 C.F.R. § 54.505(b)(2)(vii); *see also Universal Service
    Order*, 12 FCC Rcd at 9078 para. 574.

[^99]: FCC Form 470 Instructions.

[^100]: 47 C.F.R. § 54.504(b).

[^101]: *Universal Service Order*, 12 FCC Rcd at 9077 para. 572.

[^102]: *See Schools and Libraries Second Further Notice* at para 94 ;
    *see also* http://www.sl.universalservice.org/apply/step2.asp. Under
    USAC's guidelines, a technology plan should address the following
    areas. The plan must establish clear goals and a realistic strategy
    for using telecommunications and information technology to improve
    education or library services. The plan must have a professional
    development strategy to ensure that the staff understands how to use
    these new technologies to improve education or library services. The
    plan must include an assessment of the telecommunication services,
    hardware, software, and other services that will be needed to
    improve education or library services. The plan must provide for a
    sufficient budget to acquire and support the non-discounted elements
    of the plan: the hardware, software, professional development, and
    other services that will be needed to implement the strategy.
    Finally, the plan must include an evaluation process that enables
    the school or library to monitor progress toward the specified goals
    and make mid-course corrections in response to new developments and
    opportunities as they arise.

[^103]: *See* *Task Force Recommendation* at 5; *see also*
    http://www.nationaledtechplan.org/ (seeking comment developing the
    nation's third National Education Technology Plan).

[^104]: For the District of Columbia and the United States territories,
    the federal Department of Education is the certified approver of
    technology plans.

[^105]: ALA Comments at 8; BellSouth Comments at 10; E-rate Complete,
    LLC Comments at 9.

[^106]: *Ysleta Order*.

[^107]: AASA/AESA Comments at 6; ALA Comments at 10-12; BellSouth
    Comments at 4-5; CoSN Comments at 11; ISBE Comments at 16, 17.

[^108]: AASA/AESA Comments of 6; AEWG Comments of 6; Alaska EED Comments
    at 9; Aumann Comments of 3-4; CoSN Comments at 11; EdLiNC Comments
    of 11; E-rate Central Comments of 9; Funds for Learning, LLC
    Comments at 4, 12; ISBE Comments of 16; MOREnet Reply Comments at 3;
    WIDPI Reply Comments at 2-3.

[^109]: AASA/AESA Comments at 6; AEWG Comments at 6; Alaska EED Comments
    at 3; Aumann Comments at 4; California Reply Comments at 10; E-rate
    Central Comments at 9; ISBE Comments at 16 all support this. None
    oppose it.

[^110]: These requirements are consistent with the USAC guidelines for
    technology plan content.

[^111]: *See also Ysleta Order*, 18 FCC Rcd at 26419-20 para 28.

[^112]: *See* ISBE Comments at 17.

[^113]: *See* Alaska EED Comments at 10; ISBE Comments at 17; LaErate
    Reply Comments at 8.

[^114]: ALA Comments at 9.

[^115]: Aumann Comments at 3-4.

[^116]: *Id.* at 3.

[^117]: AEWG Comments at 6.

[^118]: *See* Schools and Libraries Universal Service, Description of
    Services Requested and Certification Form, OMB 3060-0806, Item 23
    (May 2003) (FCC Form 470); Schools and Libraries Universal Service,
    Services Ordered and Certification Form, OMB 3060-0806, Item 25
    (November 2003) (FCC Form 471).

[^119]: *See* 47 C.F.R. § 54.504(b)(2).

[^120]: We conclude that these changes are exempt from the notice and
    comment requirements of the Administrative Procedure Act because
    they concern non-substantive technical changes to the existing
    rules. *See* 5 U.S.C. § 553(b)(3).

[^121]: 47 C.F.R. § 54.504.

[^122]: 47 C.F.R. § 54.504(b)(2)(v).

[^123]: *See* FCC Form 470, Item 23; *but see,* 47 C.F.R. §
    54.504(b)(2)(v).

[^124]: *See* FCC Form 471, Item 23.

[^125]: FCC Form 471, Block 6.

[^126]: *See* *infra* Appendix B*. See also* FCC Form 471, Block 6.

[^127]: *See Schools and Libraries Second Further Notice,* 18 FCC Rcd at
    26939 para. 66.

[^128]: *Id. See* Sherman Act, 15 U.S.C. § 1.

[^129]: *Id. See* 48 C.F.R. § 52.203-2.

[^130]: *See supra* part III.A.2.

[^131]: 47 U.S.C. §503(b); 47 C.F.R. § 1.80(a)(1). Under the
    Communications Act, a party "willfully" violates the Communications
    Act or a Commission rule or order when it knows it is taking the
    action in question, irrespective of any intention to violate the
    Commission's rules. *See, e.g., SBC Communications, Inc., Apparent
    Liability for Forfeiture*, Forfeiture Order, 17 FCC Rcd 7589, 7591
    para. 4 and n.14 (2002) (citing, among other things, 47 U.S.C.
    312(f); Southern *California Broadcasting Co., Licensee, Radio
    Station KIEV(AM) Glendale, California*, Memorandum Opinion and
    Order, 6 FCC Rcd 4387, 4387-88 para. 5 (1991)). "Repeated" means
    that the act was committed or omitted more than once, or lasts more
    than one day. *Southern California Broadcasting*, 6 FCC Rcd at 4388;
    *Callais Cablevision, Inc., Grand Isle, Louisiana*, Notice of
    Apparent Liability for Monetary Forfeiture, 16 FCC Rcd 1359, 1362
    (2001).

[^132]: *See, e.g., Tuscola Broadcasting Co.*, Memorandum Opinion and
    Order, 76 FCC 2d 367, 371 (1980) (applying preponderance of evidence
    standard in reviewing Bureau level forfeiture order). *Cf.* 47
    U.S.C. § 312(d) (assigning burden of proof in hearings to
    Commission).

[^133]: We note that the Commission's rules require audits of universal
    service programs and funds to be conducted in accordance with
    government auditing standards. USAC's audit resolution plan should
    be consistent with government auditing standards by, for example,
    providing a formal process for informing audited beneficiaries of
    the audit results (*e.g.*, submitting a draft audit report to the
    audited beneficiary for comment, affording an opportunity to provide
    formal written comments to the final audit report, etc). *See*
    General Accounting Office, [Government Auditing Standards: 2003
    Revision]{.smallcaps}, GAO-03-673G, §§ 6.01, 6.05 (Jun. 2003)
    ("[GAGAS Handbook]{.smallcaps}") (specifying differences between
    government auditing standards and private sector auditing standards
    for certain audits).

[^134]: In this regard, we recognize that there may be mitigating
    circumstances which warrant waiver of a rule. The Commission's rules
    may be waived when good cause is demonstrated. 47 C.F.R. § 1.3; *see
    also WAIT Radio v. FCC*, 418 F.2d 1153, 1159 (D.C. Cir. 1969),
    *cert. denied*, 409 U.S. 1027 (1972). The Commission may exercise
    its discretion to waive a rule where the particular facts make
    strict compliance inconsistent with the public interest. *Northeast
    Cellular Telephone Co. v. FCC*, 897 F.2d 1164, 1166 (1990). In doing
    so, we may take into account, on a case-specific basis,
    considerations of hardship, equity, or more effective implementation
    of overall policy. Waiver is appropriate only if special
    circumstances warrant deviation from the general rule, and such a
    deviation will serve the public interest. Such determinations
    necessarily are fact specific, and each must be judged individually.
    Any waiver of a rule would necessarily absolve any obligation to
    recover funds for the rule violation. As previously noted, we lack
    the authority to waive statutory violations.

[^135]: *See* Semiannual Report to Congress, October 1, 2003-March 31,
    2004, Office of the Inspector General, Federal Communications
    Commission at 8-9.

[^136]: 47 C.F.R. § 1.115.

[^137]: 47 C.F.R. § 54.723(b).

[^138]: FCC Directive FCCINST 1013.lC, Audit Follow-up, at §5(b) (July
    2002) (Audit Follow-up Directive).

[^139]: *Id .*at § 5(b). Pursuant to the Commission's Audit Follow-up
    Directive, WCB reviews audit reports, prepares responses to audit
    reports, informs the Audit Follow-up Official of significant
    disagreements, accomplishes and initiates all appropriate corrective
    action, directs and monitors implementation of promised corrective
    action, and maintains appropriate records. Id. at §5(a).

[^140]: 47 C.F.R. § 54.702(j).

[^141]: 47 C.F.R. § 54.717.

[^142]: Such recommendations would be within the scope of USAC's
    authorization to advocate positions before this Commission on
    administrative matters. 47 C.F.R. § 54.702(d).

[^143]: Semiannual Report to Congress, October 1, 2003-March 31, 2004,
    Office of the Inspector General, Federal Communications Commission.

[^144]: Examples are minimum processing standards and deadlines for
    submission of invoices.

[^145]: *See* 5 U.S.C. § 603. The RFA, *see* 5 U.S.C. §§ 601 -- 612, has
    been amended by the Small Business Regulatory Enforcement Fairness
    Act of 1996 (SBREFA), Pub. L. No. 104-121, Title II, 110 Stat. 857
    (1996).

[^146]: *Schools and Libraries Second Further Notice*, 18 FCC Rcd at
    26963-67.

[^147]: *See* 5 U.S.C. § 604.

[^148]: 5 U.S.C. § 603(b)(3).

[^149]: 5 U.S.C. § 601(6).

[^150]: 5 U.S.C. § 601(3) (incorporating by reference the definition of
    "small business concern" in 15 U.S.C. § 632). Pursuant to 5 U.S.C. §
    601(3), the statutory definition of a small business applies "unless
    an agency, after consultation with the Office of Advocacy of the
    Small Business Administration and after opportunity for public
    comment, establishes one or more definitions of such term which are
    appropriate to the activities of the agency and publishes such
    definition(s) in the Federal Register."

[^151]: Small Business Act, 15 U.S.C. § 632.

[^152]: 5 U.S.C. § 601(4).

[^153]: U.S. Census Bureau, 1992 Economic Census, Table 6 (special
    tabulation of data under contract to the Office of Advocacy of the
    U.S. Small Business Administration).

[^154]: 5 U.S.C. 601(5).

[^155]: U.S. Census Bureau, Statistical Abstract of the United States:
    2000, Section 9, pages 299-300, Tables 490 and 492.

[^156]: 47 C.F.R. §§ 54.502, 54.503, 54.517(b).

[^157]: *See supra* para. 27.

[^158]: 47 C.F.R. § 54.500(b).

[^159]: 47 C.F.R. § 54.500(j).

[^160]: 47 C.F.R. § 54.501.

[^161]: *See* *id.*

[^162]: 13 C.F.R. § 121.201, North American Industry Classification
    System (NAICS) codes 611110 and 519120 (NAICS 2002 code 519120 was
    previously 514120).

[^163]: 5 U.S.C. § 601(3).

[^164]: *See* Letter from Jere W. Glover, Chief Counsel for Advocacy,
    SBA, to William E. Kennard, Chairman, FCC, dated May 27, 1999. The
    Small Business Act contains a definition of \"small business
    concern,\" which the RFA incorporates into its own definition of
    \"small business.\" *See* U.S.C. § 632(a) (Small Business Act); 5
    U.S.C. § 601(3) (RFA). SBA regulations interpret \"small business
    concern\" to include the concept of dominance on a national basis.
    13 C.F.R. § 121.102(b).

[^165]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    Oct. 2002).

[^166]: FCC, Wireline Competition Bureau, Industry Analysis and
    Technology Division, "Trends in Telephone Service" at Table 5.3,
    Page 5-5 (Aug. 2003). This source uses data that are current as of
    December 31, 2001.

[^167]: 13 CFR § 121.201, NAICS code 513310 (changed to 517110 in Oct.
    2002).

[^168]: FCC, Wireline Competition Bureau, Industry Analysis and
    Technology Division, "Trends in Telephone Service" at Table 5.3,
    Page 5-5 (Aug. 2003).

[^169]: *Id*.

[^170]: *Id*.

[^171]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    Oct. 2002).

[^172]: FCC, Wireline Competition Bureau, Industry Analysis and
    Technology Division, "Trends in Telephone Service" at Table 5.3,
    Page 5-5 (Aug. 2003).

[^173]: *Id.*

[^174]: 13 C.F.R. § 121.201, North American Industry Classification
    System (NAICS) code 513321 (changed to 517211 in October 2002).

[^175]: 13 C.F.R. § 121.201, North American Industry Classification
    System (NAICS) code 513322 (changed to 517212 in October 2002).

[^176]: FCC, Wireline Competition Bureau, Industry Analysis and
    Technology Division, Trends in Telephone Service, Table 5.3, (May
    2002).

[^177]: *Id*.

[^178]: *In the Matter of Amendment of Part 90 of the Commission's Rules
    to Provide for the Use of the 220 MHz Band by the Private Land
    Mobile Radio Service*, PR Docket No. 89-552, Third Report and Order,
    Fifth Notice of Proposed Rulemaking, 12 FCC Rcd 10943, 11068-70
    paras. 291-295 (1997).

[^179]: *In the Matter of Revision of Part 22 and Part 90 of the
    Commission's Rules to Facilitate Future Development of Paging
    Systems*, WT Docket No. 96-18, Memorandum Opinion and Order on
    Reconsideration and Third Report and Order, 14 FCC Rcd 10030, 10085
    para. 98 (1999).

[^180]: FCC, Wireline Competition Bureau, Industry Analysis and
    Technology Division, Trends in Telephone Service, Table 5.3, p. 5-5
    (Aug. 2003).

[^181]: *Id*.

[^182]: *See generally* North American Industry Classification System --
    United States (1997), NAICS code 514191.

[^183]: *See generally* North American Industry Classification System --
    United States (1997), NAICS code 514191.

[^184]: 13 C.F.R. § 121.201, NAICS code 514191.

[^185]: Office of Advocacy, U.S. Small Business Administration, Firm
    Size Data by Industry and Location.

[^186]: 13 C.F.R. § 121.201, NAICS Code 334220, 334290.

[^187]: *Id.*

[^188]: 1997 Economic Census, Manufacturing, Industry Series, Radio and
    Television Broadcasting and Wireless Communications Equipment
    Manufacturing, Document No. E97M-3342B (August 1999), at 9; 1997
    Economic Census, Manufacturing, Industry Series, Other
    Communications Equipment Manufacturing, Document No. EC97M-3342C
    (September 1999), at 9 (both available at
    [http://www.census.gov/prod/www/abs/97ecmani.html]{.underline}).

[^189]: *Id*.

[^190]: The number of "establishments" is a less helpful indicator of
    small business prevalence in this context than would be the number
    of "firms" or "companies," because the latter take into account the
    concept of common ownership or control. Any single physical
    locations for an entity is an establishment, even though that
    location may be owned by a different establishment. Thus, the
    numbers given may reflect inflated numbers of businesses in this
    category, including the numbers of small businesses. In this
    category, the Census breaks out data for firms or companies only to
    give the total number of such entities for 1997, which was 1,089.

[^191]: U.S. Census Bureau, 1997 Economic Census, Industry Series:
    Manufacturing, "Industry Statistics by Employment Size," Table 4,
    NAICS code 334220 (issued August 1999).

[^192]: *Id*. Table 5, "Industry Statistics by Industry and Primary
    Product Class Specialization: 1997."

[^193]: *See* *supra* para. 37.

[^194]: *See* In re Amendments of Parts 1, 21, 61, 73, 74, and 76 of the
    Commission's Rules, Adoption of a Mandatory FCC Registration Number,
    MD Docket No. 00-205, Report and Order, 16 FCC Rcd 16138 (2001).

[^195]: *See* *supra* para. 47.

[^196]: 5 U.S.C. § 603(c)(1)-(4).

[^197]: *See* *supra* para. 38.

[^198]: *See* 5 U.S.C. § 604(b).