**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

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**THIRD REPORT AND ORDER AND**

**SECOND FURTHER NOTICE OF PROPOSED RULEMAKING**

**Adopted:** December 17, 2003 **Released:** December 23, 2003

**Comment Date: 30 days after publication in the Federal Register**

**Reply Date: 60 days after publication in the Federal Register**

By the Commission: Chairman Powell, Commissioners Abernathy, Copps, and
Adelstein issuing separate statements.

**[TABLE OF CONTENTS]{.underline}**

[Para.]{.underline}

I. INTRODUCTION AND SUMMARY
[1](#second-further-notice-of-proposed-rulemaking)

II\. PROGRAM OVERVIEW AND BACKGROUND 4

III\. THIRD REPORT AND ORDER 9

A. Limits on Use of Internal Connections 9

1\. Background 9

[2](#introduction-and-summary). Discussion 11

[B. Eligible Services 31](#eligible-services)

[1. Background 31](#background-1)

[2. Discussion 35](#discussion-1)

[C. Carryover of Funds 50](#carryover-of-funds)

[1. Background 50](#background-2)

[2. Discussion 52](#discussion-2)

[IV. Second Further Notice of Proposed Rulemaking
59](#second-further-notice-of-proposed-rulemaking)

[A. Discount Matrix 59](#discount-matrix)

[B. Competitive Bidding Process 63](#competitive-bidding-process)

[C. Definition of Rural Area 67](#definition-of-rural-area)

[D. Definition of Internet Access 70](#definition-of-internet-access)

[E. Wide Area Networks 72](#wide-area-networks)

[F. Recovery of Funds 78](#recovery-of-funds)

[G. Other Actions to Reduce Waste, Fraud, and Abuse
86](#other-actions-to-reduce-waste-fraud-and-abuse)

[H. Miscellaneous 97](#miscellaneous)

[V. PROCEDURAL MATTERS 99](#procedural-matters)

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

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

[C. Initial Paperwork Reduction Act of 1995 Analysis
120](#initial-paperwork-reduction-act-of-1995-analysis)

[D. Initial Regulatory Flexibility Analysis
121](#initial-regulatory-flexibility-analysis)

[E. Comment Filing Procedures 135](#comment-filing-procedures)

[F. Further Information 144](#further-information)

[VI. Ordering Clauses 146](#ordering-clauses)

APPENDIX A \-- FINAL RULES

APPENDIX B \-- DISCOUNT MATRIX

APPENDIX C \-- EXAMPLES OF TWICE-EVERY-FIVE-YEARS RULE

APPENDIX D \-- PARTIES FILING COMMENTS AND REPLY COMMENTS

#  {#section .unnumbered}

# Introduction and Summary

1.  In this Third Report and Order and Second Further Notice of Proposed
    Rulemaking, we address several matters related to the administration
    of the schools and libraries universal service mechanism (also known
    as the e-rate program). First, in the Third Report and Order, we
    adopt rules that will limit the ability of schools and libraries to
    engage in wasteful or fraudulent practices when obtaining internal
    connections. Specifically, we conclude that eligible entities should
    be precluded from upgrading or replacing internal connections on a
    yearly basis. Instead, our rules will permit a particular eligible
    entity to receive support for discounted internal connections
    services no more than twice in every five years. We will permit,
    however, entities to receive discounts on basic maintenance
    associated with internal connections on a yearly basis, but clarify
    our rules regarding permissible maintenance costs to ensure that
    such discounts are appropriately narrow. We also prohibit a school
    or library from transferring equipment purchased with universal
    service discounts, as part of eligible internal connections
    services, for a period of three years except in limited
    circumstances.[^1] These rules will advance the goals of the schools
    and libraries program by making support for internal connections
    regularly available to a larger number of applicants and by
    discouraging waste, fraud, and abuse. We also adopt a rule creating
    a more formal process for updating annually the list of services
    eligible for support. In addition, we codify the Universal Service
    Administrative Company's (USAC or the Administrator) current
    practices for allocating costs of services between eligible and
    ineligible components consistent with Commission rules and
    requirements, codify a prohibition on the provision of free services
    to entities receiving discounts, and codify with one modification
    procedures for service substitutions. We also clarify existing
    requirements for eligibility of certain equipment and services.
    Finally, we adopt rules to implement our prior decision to carry
    forward unused funds from the schools and libraries mechanism for
    use in subsequent funding years. All rule changes and clarifications
    shall be implemented upon the effective date of this Order, unless
    specified otherwise.

2.  In the Second Further Notice, we seek comment on several issues,
    including whether we should change (1) the discount matrix used to
    determine the level of discounts for which applicants are
    eligible, (2) the current competitive bidding process, (3) the
    definition of "rural area" used in the program, (4) the definition
    of Internet access, (5) current rules relating to wide area
    networks, and (6) current procedures for recovery of funds. We also
    seek comment on measures to limit waste, fraud, and abuse and
    improve the Commission's ability to enforce the rules governing the
    program. Finally, we seek additional comment on how to ensure the
    goals of section 254 continue to be met.

3.  This order is one of a series of orders designed to simplify program
    administration, ensure equitable distribution of funds, and protect
    against waste, fraud, and abuse. In taking these additional steps
    today, we draw on information from a number of sources, including
    issues raised in a public forum held in May 2003 on ways to improve
    the schools and libraries support mechanism,[^2] the Office of the
    Inspector General's semi-annual reports,[^3] beneficiary audit
    reports, and the recommendations of USAC's Waste, Fraud, and Abuse
    Task Force.[^4] We remain committed to making ongoing changes to
    ensure that this program continues to benefit school children and
    library patrons across America.

# Program Overview and Background

4.  Under the schools and libraries universal service support mechanism,
    eligible schools, libraries, and consortia that include eligible
    schools and libraries, may receive discounts for eligible
    telecommunications services, Internet access, and internal
    connections.[^5] 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.[^6] The applicant then must submit to the
    Administrator a completed FCC Form 470, in which the applicant sets
    forth its technological needs and the services for which it seeks
    discounts.[^7] 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.[^8]

5.  The Administrator reviews the FCC Forms 471 that it receives and
    issues funding commitment decisions indicating discounts that the
    applicant may receive in accordance with the Commission's rules.
    Subsequently, 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.[^9]

6.  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.[^10] 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.[^11]

7.  The Commission's priority rules provide that requests for
    telecommunications services 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.[^12]

8.  As the program approached its fifth year of operation, the
    Commission issued the *Schools and Libraries NPRM* to seek comment
    on ideas raised by both the applicant and service provider
    communities for improving the program.[^13] 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. On June 13, 2002, the Commission
    released the *Schools and Libraries Order*, which adopted a
    framework for the carryover of unused funds from the schools and
    libraries universal service support mechanism.[^14] On April 30,
    2003, the Commission released the *Schools and Libraries Second
    Order and Further Notice*, which adopted a debarment rule and other
    measures to ensure that program funds are utilized in an efficient,
    effective and fair manner, and sought comment on additional matters,
    including the implementation of the carryover of unused funds to
    subsequent years.[^15]

#  Third report and order

## Limits on Use of Internal Connections

### Background 

9.  Because demand for discounts from the schools and libraries
    universal service support mechanism has exceeded the annual \$2.25
    billion cap, in recent funding years only applicants eligible for
    the highest discount percentages have received discounts for
    internal connections.[^16] Thus, applicants in the highest discount
    percentages have been able to repeatedly apply for and receive
    discounts for Priority Two services, while applicants in the lower
    discount bands have not received any Priority Two discounts because
    the annual funding has been exhausted. Moreover, nothing in our
    current rules expressly preclude entities with 90 percent discounts
    from replacing, on a yearly or almost-yearly basis, equipment
    obtained with universal service discounts, and transferring that
    equipment to other entities with lower discount percentages that
    otherwise would not receive funding for such equipment due to the
    exhaustion of the capped amount.[^17] The Act and our existing rules
    provide only that equipment purchased with universal service
    discounts "shall not be sold, resold, or transferred in
    consideration for money or any other thing of value."[^18]

10. With the goals of promoting equitable distribution of program funds
    and preventing waste, fraud, and abuse, the Commission sought
    comment in the *Schools and Libraries NPRM* on whether to revise
    these rules.[^19] Specifically, it sought comment on whether the
    program's goals would be better achieved by requiring that schools
    and libraries make significant use of the discounted equipment that
    they receive, before seeking to substitute new discounted equipment.
    The Commission proposed two options. The first option would limit
    transfers of equipment for three years from the date of delivery and
    installation of equipment for internal connections other than
    cabling, and ten years in the case of cabling.[^20] The second
    option would deny internal connections discounts to any entity that
    has already received discounts on internal connections within a
    specified period of years, regardless of the intended use of the new
    internal connections.[^21] Virtually all commenters that responded
    to these issues raised in the *Schools and Libraries NPRM* agreed
    that some form of restriction on the use of internal connections was
    appropriate, although parties had differing views on which measures
    would best carry out the Commission's goals.[^22]

### Discussion

11. In this Order, we adopt a rule limiting each eligible entity's
    receipt of discounts on internal connections to twice every five
    funding years. We exempt basic maintenance services from this
    restriction. We also clarify the types of maintenance services that
    are eligible for discounts. In addition, we adopt a rule that limits
    an entity's ability to transfer equipment purchased with universal
    service funds.

12. *Frequency of Discounts.* We conclude that each eligible entity may
    receive commitments for discounts on Priority Two services, except
    as discussed below, no more than twice every five funding
    years.[^23] The practical effect of this rule will be to permit
    applicants to receive funding once every three years for internal
    connections, as supported by the record,[^24] but will allow
    applicants to obtain internal connections in two consecutive years
    as part of a staged implementation of internal connections.[^25] In
    order to give applicants sufficient planning time, we conclude that
    this rule will become effective beginning with support received in
    Funding Year 2005. Commitments for Priority Two services received in
    years prior to Funding Year 2005 will not be considered in
    determining an applicant's eligibility to receive support for
    Priority Two services.

13. For the purpose of determining whether an applicant is eligible to
    receive a funding commitment for Priority Two services under this
    rule, the five-year period begins in any year, starting with Funding
    Year 2005, in which the entity receives discounted Priority Two
    services. The rule is applicable to discounts for services that are
    site-specific to the entity and for services that are shared by the
    entity with other entities. Thus, if an entity receives support only
    for shared services in a particular funding year, that funding will
    be counted as one of the two years out of five that it may receive
    support.[^26] The restriction does not apply to consortium members
    who do not actually receive Priority Two funding when other members
    of the consortium receive discounts in specific funding periods.

14. We find that, by limiting the frequency in which applicants may
    receive Priority Two discounts, funds will be made available to more
    eligible schools and libraries on a regular basis. Specifically, we
    find that the twice-every-five-years rule we adopt balances this
    goal with the need to ensure that the most disadvantaged schools and
    libraries are able to maintain functioning internal connections
    networks. Permitting applicants to receive support more often than
    twice every five years would not make funds available to
    significantly more eligible schools and libraries, while limiting
    applicants to support less frequently than twice every five years
    could prevent applicants from updating their internal connections as
    necessary.

15. We are not persuaded by those commenters that assert that the most
    disadvantaged applicants will suffer from a policy restricting
    receipt of internal connections discounts.[^27] The Commission
    remains committed to ensuring that discounts continue to flow to
    schools and libraries that are economically disadvantaged. Indeed,
    program rules continue to provide greater discounts for the most
    economically disadvantaged schools and libraries. We recognize,
    however, that many applicants below the very highest discount levels
    are also economically disadvantaged and also unable to acquire
    internal connections without universal service support. We also
    recognize that demand for universal service discounts will likely
    continue to exceed the annual funding cap. Thus, we agree with
    commenters that without revising our existing policies, some
    economically disadvantaged applicants will continue to be denied
    Priority Two funding.[^28] We find that the twice-every-five-years
    restriction is appropriate and necessary to make advanced
    technologies more accessible to all schools and libraries. We
    further find that the twice-every-five-years policy will increase
    the mechanism's funding reach to a greater number of economically
    disadvantaged schools and libraries.

16. It is important to note that even with this revised policy on the
    funding of internal connections, funding commitments will continue
    to be made in accordance with the annual funding cap. Thus, it is
    conceivable that an applicant may be eligible to apply for discounts
    on Priority Two services and still be denied funding because demand
    for discounts exceeds available funding. In this instance, we
    encourage applicants to reapply for discounts during the following
    funding year. We further note that it is the receipt of support for
    Priority Two services, rather than the application for support, that
    counts toward the limitation that an entity may receive in only two
    out of five years.

17. Furthermore, we conclude that, by precluding a particular entity
    from receiving support for Priority Two discounts every year, our
    modified rule strengthens incentives for applicants to fully use
    equipment purchased with universal service funds. Our current rules
    permit applicants in the highest discount bands to upgrade their
    equipment on a yearly basis, even when existing equipment continues
    to have a useful life.[^29] By limiting each eligible entity's
    ability to receive support for internal connections, recipients will
    have greater incentive not to waste program resources by replacing
    or upgrading equipment on an annual basis.

18. A few commenters maintain that limiting funding of internal
    connections will disrupt applicants' planning and budgets.[^30] We
    recognize that our modified rule will limit applicant flexibility to
    some extent, particularly for those applicants that wish to make
    modest infrastructure investments on a yearly basis. But, we
    conclude that the benefits of the rule\--namely, making support
    available to more applicants on a regular basis and preventing
    wasteful and abusive practices\--outweigh the potential impact on
    such applicants. We find that the twice-every-five-years restriction
    provides sufficient flexibility for applicants to make efficient use
    of Priority Two funding, and thus is reasonable. In particular, we
    recognize that for a variety of different reasons, an applicant may
    not be able to make efficient use of program discounts in a single
    year. For example, an applicant's annual resources may require the
    applicant to extend its costs over a period of years. Our modified
    rule allows an applicant to seek internal connections discounts in
    two consecutive years, thus, enabling an entity to spread its costs
    over two funding years.[^31] We conclude that providing applicants
    the flexibility to implement internal connections over two
    consecutive years is sufficient to accommodate the differing
    planning and budgetary needs of most applicants. We expect
    applicants to assume the responsibility of adequately planning and
    budgeting to make the most effective use of discounts available to
    them.

19. USAC also suggests that in an effort to counter funding limitations,
    some applicants may request more funding than they will able to use
    in a given funding year.[^32] We emphasize that existing program
    rules require applicants to examine their technology needs and
    budgetary resources before making funding requests to ensure that
    applicants make effective use of any discounted services that they
    receive.[^33] Failure to have an approved technology plan is a
    violation of our current rules.[^34] We expect funding requests to
    be based on an applicant's technology plan, not based on a scheme to
    maximize funding. A funding request that is not reasonably based on
    a technology plan does not constitute a *bona fide* request for
    services.[^35] Further, the Administrator's review and enforcement
    of the necessary resources certification must and will continue to
    serve as a safeguard against unreasonable funding requests.[^36]

20. *Maintenance Costs.* We agree with commenters that maintenance costs
    should be exempt from the twice-every-five-years restriction.[^37]
    The *Universal Service Order* provides that support for internal
    connections includes "basic maintenance."[^38] Maintenance costs
    associated with internal connections services are currently eligible
    for discounts as a Priority Two service.[^39] Proper maintenance of
    internal connections products ensures that equipment functions
    properly, thereby limiting uneconomical replacement of equipment. We
    therefore continue to allow applicants to apply for discounts for
    maintenance of equipment each funding year.

21. We instruct USAC to revise Block 5 of the FCC Form 471 to include a
    separate category of service for maintenance requests, with this
    form change to take effect for Funding Year 2005.[^40] Maintenance
    requests will continue to be funded as Priority Two funding.[^41]
    However, maintenance requests will be considered for funding
    separately from other requests for Priority Two funding and,
    therefore, will not be subject to the twice-every-five years funding
    rule we adopt in this Order.[^42] The revision of the FCC Form 471
    will allow efficient review of the Priority Two funding requests.

22. In response to allegations of waste, fraud, and abuse, we
    prospectively clarify the services eligible for Priority Two support
    as basic maintenance costs for internal connections. Although the
    *Universal Service Order* allows support for those internal
    connections services that are \"necessary to transport information
    all the way to individual classrooms\" and public areas of a
    library, and specifically authorizes support for "basic maintenance
    services" that are "necessary to the operation of the internal
    connections network,"[^43] our rules do not expressly specify the
    types of maintenance costs that are eligible for support. In light
    of our concerns about allegations of waste, fraud, and abuse in this
    area and our changes above, we conclude that we should provide
    further clarity on what maintenance services are "necessary" under
    the terms of the *Universal Service Order*, and thus eligible for
    support and exempt from the twice-every-five-years rule.

23. Basic maintenance services are "necessary" if, but for the
    maintenance at issue, the connection would not function and serve
    its intended purpose with the degree of reliability ordinarily
    provided in the marketplace to entities receiving such services
    without e-rate discounts. Basic maintenance services do not include
    services that maintain equipment that is not supported or that
    enhance the utility of equipment beyond the transport of
    information, or diagnostic services in excess of those necessary to
    maintain the equipment's ability to transport information. For
    example, basic maintenance will include repair and upkeep of
    previously purchased eligible hardware, wire and cable maintenance,
    and basic technical support, including configuration changes.
    On-site technical support is not necessary to the operation of the
    internal connection network when off-site technical support can
    provide basic maintenance on an as-needed basis. Services such as
    24-hour network monitoring and management also do not constitute
    basic maintenance. Such services are therefore ineligible for
    discounts under the schools and libraries universal service
    mechanism.

24. We also provide greater clarity as to how USAC should address
    requests for discounts on technical support for internal
    connections. When confronted with products or services that contain
    both eligible and ineligible functions, USAC, in the past, has
    utilized cost allocation to determine what portion of the product
    price may receive discounts.[^44] We generally endorse this practice
    as a reasonable means of addressing mixed use products and services.
    At the same time, however, we are concerned that it is
    administratively difficult and burdensome to derive reasonable cost
    allocations for the eligible portions of services provided under a
    technical support contract. In a rapidly-changing marketplace, with
    vendors supplying complex packages of services, it simply is not
    administratively feasible to determine what portion of a technical
    support contract is directed to basic maintenance. Therefore, we
    hereby clarify prospectively that technical support, including
    on-site Help Desks, is not eligible under our rules if it provides
    any ineligible features or functions. A Help Desk system typically
    goes beyond the level of support authorized by the Commission in the
    *Universal Service Order*, which stated that "\[s\]upport should be
    available to fund discounts on such items as routers, hubs, network
    file services, and wireless LANs and their installation and *basic*
    maintenance...."[^45] There is no language in the *Universal Service
    Order* that contemplates the provision of discounts for the
    comprehensive level of support typically provided by a Help Desk. On
    the contrary, the *Universal Service Order* indicates that support
    will be provided for a product or service "only if it is necessary
    to transport information all the way to individual classrooms. That
    is, if the service is an essential element in the transmission of
    information within the school or library . . . . "[^46] We conclude
    that if a technical support contract provides more than basic
    maintenance, it shall be ineligible for discounts under our modified
    rules. We instruct USAC to review and fund requests for discounts on
    maintenance services in accordance with this clarification, as of
    the effective date of this Order.[^47]

25. *Equipment Transfers*. We also find it appropriate to amend our
    rules expressly to prohibit, except as provided below, the transfer
    of equipment purchased with discounts from the schools and libraries
    universal service support mechanism. The Act prohibits the sale or
    transfer of equipment purchased with discounts from the universal
    service program in consideration of money or anything else of
    value.[^48] Here, in order to promote the goal of preventing waste,
    fraud, and abuse, we extend that prohibition to all transfers,
    without regard to whether money or anything of value has been
    received in return for a period of three years after purchase.[^49]

26. Recipients of support are expected to use all equipment purchased
    with universal service discounts at the particular location, for the
    specified purpose for a reasonable period of time. Purchasing
    equipment with universal service discounts and then replacing or
    upgrading that equipment annually or almost annually is unnecessary
    and not economically rational.[^50] Unnecessary replacement of
    equipment suggests that entities are not fully utilizing the
    equipment purchased with universal service discounts. We agree with
    commenters that such practices deprive other eligible entities of
    the full benefits of the schools and libraries universal services
    program.[^51] Moreover, the practice of purchasing equipment with
    universal service funds, then transferring that equipment to other
    schools and libraries with lower discount rates would undermine the
    intent of the Commission's priority rules, and is therefore
    prohibited. We find, however, that it would be wasteful to prevent
    recipients from transferring equipment that, after a reasonable
    period of time, has been replaced or upgraded. We therefore permit
    recipients freely to transfer equipment to other eligible entities
    three years or more after the purchase of such equipment.[^52]
    Consistent with the Act, however, such transfers must not be in
    consideration of money or anything else of value.

27. We agree also with commenters that argue that applicants may have
    legitimate reasons to transfer internal connections equipment due to
    the closing of a school or other eligible facilities.[^53] For
    example, due to a natural disaster, a school district may conclude
    that its needs are best served by temporarily or permanently closing
    a particular school and transferring its students, as well as any
    valuable equipment purchased with supported discounts, to other
    locations. Similarly, a school district may choose to close,
    remodel, or consolidate a particular school to meet changing
    demographic needs or fiscal realities, and thereby transfer the
    students and useable school property to a nearby school. Likewise, a
    county or municipality may choose to close a library branch for
    financial reasons. Under these circumstances, we find that it would
    be economically rational and consistent with the goals of the
    schools and libraries program for the support recipient to transfer
    any equipment it has purchased with universal service discounts to
    another eligible location where the equipment may be used
    effectively.[^54] We therefore conclude that a recipient may
    transfer equipment purchased with universal service discounts to
    other eligible entities if the particular location where the
    equipment was originally installed is permanently or temporarily
    closed. In these limited circumstances, we note that it is not
    necessary for the transferring and receiving entities to have
    comparable discount levels, as long as each is eligible under the
    schools and libraries program.

28. In the event that a recipient is permanently or temporarily closed
    and equipment is transferred, the transferring entity must notify
    the Administrator of the transfer, and both the transferring and
    receiving entities must maintain detailed records documenting the
    transfer and the reason for the transfer for a period of five years.
    We instruct the Administrator to verify compliance with this
    requirement as part of its beneficiary audit reviews. In order to
    enable the Administrator to verify compliance with this transfer
    prohibition, we require all recipients of internal connections
    support to maintain asset and inventory records for a period of five
    years sufficient to verify the actual location of such
    equipment.[^55]

29. This rule change shall be implemented upon the effective date of
    this Order. To facilitate enforcement of this rule, we will amend
    the FCC Form 471 for Funding Year 2005 to include a reasonable use
    certification.[^56] In order to receive discounts, applicants must
    certify that they will use all equipment purchased with universal
    service discounts at the particular location for the specified
    purpose. Applicants will thereafter be held accountable for their
    compliance with the reasonable use certification.

30. We decline to institute useful life criteria for equipment purchased
    with universal service funds.[^57] Useful life criteria could
    provide a more equitable distribution of Priority Two funding and
    ensure that more applicants receive the full benefit of the program
    by ensuring that applicants did not replace equipment components of
    internal connections services more frequently than necessary. We
    believe, however, that measures adopted above, including the
    restriction of transfers and our revised policy governing the
    funding of Priority Two equipment, will provide similar results in
    achieving these goals.[^58] We also conclude that developing and
    enforcing useful life criteria would add a significant degree of
    complexity to the program, which would result in increased
    administrative costs and burden for both recipients and USAC.

## Eligible Services

### Background

31. Since the initial implementation of the schools and libraries
    support mechanism, USAC has developed various procedures and
    guidelines, consistent with the Commission's rules and requirements,
    for applicants to ensure that funding is provided only for eligible
    services. These policies include guidelines for allocating costs
    between eligible and ineligible services, a prohibition on the
    provision of free services, the eligible services list maintained on
    USAC's website, and procedures for service substitutions.

32. In the *Universal Service Order*, the Commission concluded that,
    when a school or library signs a contract for both eligible services
    and ineligible services, the contract must break out the price of
    eligible services separately.[^59] This rule cannot be easily
    applied, however, in those circumstances when a single product or
    service contains both eligible and ineligible elements. For example,
    a particular service may be eligible or ineligible depending on how
    it is used, or internal connections may provide functionality that
    is ineligible for support. For that reason, the Administrator
    developed guidelines to aid service providers and applicants in
    determining how costs of a single service or product should be
    allocated between eligible and ineligible functions.[^60] These
    guidelines distinguish between products and services that have a
    significant element that is ineligible for support, and products and
    services with ineligible components that are merely ancillary to the
    eligible components. Cost allocation may be used for products and
    services with mixed eligibility, including significant ineligible
    components, only when a clear delineation can be made between the
    eligible and ineligible component parts. There must be some tangible
    basis for this delineation, even if the basis is not strictly based
    on cost.[^61] The price for the eligible portion must represent the
    most cost-effective means of receiving the eligible services. For
    products or services that contain an ineligible functionality on an
    ancillary basis, the Administrator does not require the allocation
    of any portion of the cost to the ineligible use. However, the price
    for the service or product must be the most cost-effective means of
    receiving the eligible component of the service, without regard to
    the value of the ineligible component.

33. USAC advises the public, consistent with Commission rules and
    requirements, that applicants and service providers are prohibited
    from using the schools and libraries support mechanism to subsidize
    the procurement of ineligible or unrequested products and
    services.[^62] Applicants and services providers are further
    cautioned that any such promotions or discounts must be accounted
    for in the e-rate funding request to reveal the true cost the
    applicant would incur vis-à-vis the service provider proposed
    contract.[^63] Price reduction, free goods or services, and trade-in
    values are among the promotions that require accounting and proper
    allocation to capture the true cost of service.[^64]

34. Currently, USAC updates on a yearly basis, and posts to its website,
    a list of services eligible for funding under the categories of
    telecommunications service, Internet access, and internal
    connections.[^65] USAC updates the list, in consultation with the
    Wireline Competition Bureau, to reflect any changes in rules that
    have occurred over the last year and to address issues that arise in
    the application review process. In the *Schools and Libraries NPRM*,
    the Commission invited parties to submit proposals for rule changes
    that would improve the operation of the eligibility determination
    process in terms of efficiency, predictability, flexibility, and
    administrative cost.[^66] Since the issuance of the *Schools and
    Libraries NPRM*, a number of parties have urged the Commission to
    create a more transparent process for updating the eligible services
    list.[^67]

### Discussion

35. Although the current cost allocation approach used by the
    Administrator reasonably implements the Commission's rules and
    requirement regarding eligible and ineligible services, we conclude
    that administration of the schools and libraries support mechanism
    would benefit from an explicit rule regarding the cost allocation
    for services with mixed eligibility. We also conclude that the
    eligibility process would be improved by adopting a rule for the
    yearly updating of the eligible services list. Additionally, we
    codify rules prohibiting the provision of "free" services to
    recipient schools and libraries by service providers that also
    provide supported services to those schools and libraries and codify
    procedures for applicants to modify funding requests that have been
    granted but not yet funded. Finally, we provide additional guidance
    on the provision of discounts on services that include the lease of
    on-premises equipment.

36. *[Cost Allocation.]{.underline}* We specifically amend our rules to
    make clear how applicants and service providers should allocate
    costs of a service or product that, although generally eligible for
    universal service support, contains both eligible and ineligible
    components. In the *Universal Service Order*, the Commission
    concluded that, when a school or library signs a contract for both
    eligible and ineligible services, the contract must break out the
    price of eligible services separately from ineligible services.[^68]
    Since that time, the marketplace has seen an evolution of products
    and services that contain both eligible and ineligible features but
    which are not commercially available on an unbundled basis. Thus,
    the issue has evolved from merely separately listing eligible
    services and products from ineligible services and products to one
    of determining what components or features of an otherwise eligible
    service or product may be ineligible when the service or product is
    not commercially available on an unbundled basis. Consistent with
    the Commission\'s directive to separate these costs, the
    Administrator has generally required schools, libraries, or the
    service provider to separate the costs of an ineligible component
    from what generally would be an eligible service or product.[^69] As
    explained above, the Administrator has provided reasonable guidance,
    consistent with Commission rules and requirements, to schools,
    libraries, and service providers in determining the allocation
    approach.[^70]

37. As part of our efforts to improve the operation of the eligibility
    determination process,[^71] we explicitly amend our rules to include
    cost allocation rules for services and products that contain mixed
    eligible and ineligible components, features, or functions to
    provide greater clarity in this area. Under these rules, if a
    product or service contains ineligible components, costs should be
    allocated to the extent that a clear delineation can be made between
    the eligible and ineligible components. The clear delineation must
    have a tangible basis and the price for the eligible portion must be
    the most cost-effective means of receiving the eligible service. If
    the ineligible functionality is ancillary, the costs need not be
    allocated to the ineligible functionality. An ineligible
    functionality may be considered "ancillary" if (1) a price for the
    ineligible component that is separate and independent from the price
    of the eligible components cannot be determined, and (2) the
    specific package remains the most cost-effective means of receiving
    the eligible services, without regard to the value of the ineligible
    functionality.

38. These cost allocation rules address the widespread availability of
    products and services with mixed eligibility and are fully
    consistent with the overriding requirement that support be provided
    for eligible services, while preventing support for ineligible
    services. By providing service providers and applicants a means of
    allocating costs between eligible and ineligible components,
    features or functions of what would otherwise be an eligible
    service, the cost allocation method increases the variety of service
    options available to schools and libraries, improving each school or
    library's ability to purchase the most useful and cost-effective
    service possible. Without this cost allocation approach, applicants
    may fail to pursue the purchase of certain advanced
    telecommunications and information services, contrary to the intent
    of section 254. Our E-rate rules should not drive the development of
    communications services and technologies, but rather should permit
    the marketplace to flourish and innovate in ways that meet consumer
    needs and facilitate access to these innovations. Schools and
    libraries should continue to allocate eligible and ineligible costs
    in their contracts with service providers. In the interests of
    ensuring that support be provided only for eligible services, the
    Administrator also should continue to employ the use of the cost
    allocation method when necessary.[^72]

39. The Commission recently addressed those circumstances where an
    applicant erroneously identifies certain costs as eligible for
    support by adopting the 30 percent rule. Specifically, we concluded
    in the *Second Report and Order* that where less than 30 percent of
    a request for support is ineligible, the Administrator is permitted
    to grant support, reduced by the amount of ineligible services.[^73]
    We clarify that the Administrator may rely on the cost allocation
    methods we adopt today in applying the 30 percent rule and
    performing any resulting adjustments.

40. *[Eligible Services List.]{.underline}* We now adopt a more
    formalized process for updating the eligible services list,
    beginning with Funding Year 2005. Under the new rule, USAC will be
    required to submit by June 30 of each year a draft of its updated
    eligible services list for the following funding year.[^74] The
    Commission will issue a Public Notice seeking comment on USAC's
    proposed eligible services list. At least sixty days prior to the
    opening of the window for the following funding year, the Commission
    will then issue a public notice attaching the final eligible
    services list for the upcoming funding year. The Commission
    anticipates that this public notice will be released on or before
    September 15 of each year. This process will provide greater
    transparency to the development of the eligible services list. The
    yearly updated list will interpret what may be funded under current
    rules, and will represent a safe harbor that all applicants can rely
    on in preparing their applications for the coming funding year. It
    will provide interested parties, both recipients and service
    providers, an opportunity to bring to the Commission's attention
    areas of ambiguity in the application of current rules in a rapidly
    changing marketplace. Currently, the only way an applicant can
    determine whether a particular service or product is eligible under
    our current rules is to seek funding for that service or product,
    and then seek review of the Administrator's decision to deny
    discounts. The rule we adopt today will simplify program
    administration and facilitate the ability of both vendors and
    applicants to determine what services are eligible for discounts.

41. *[Prohibition of "Free" Services.]{.underline}* We also take this
    opportunity to clarify and amend our rules to codify a prohibition
    on the provision of free services to an eligible entity by a service
    provider that is also providing discounted services to the
    entity.[^75] The Commission requires that an entity must pay the
    entire undiscounted portion of the cost of any services it receives
    through the schools and libraries program.[^76] For the purpose of
    this program, the provision of unrelated free services by the
    service provider to the entity constitutes a rebate of the
    undiscounted portion of the costs, a violation of the Commission's
    rules. Codifying this existing restriction will clarify the
    obligations of schools and libraries that receive discounted
    services under the schools and libraries program and improve the
    ability of the Commission to take appropriate enforcement action.

42. *[Service Substitution]{.underline}*. Again, as part of our efforts
    to improve the operation of the schools and libraries support
    mechanism, we also formally adopt and codify the Administrator's
    current procedures relating to requests for service or equipment
    changes.[^77] These procedures provide flexibility to applicants
    where it has become necessary to make a minor modification to their
    original funding request.[^78] We find that the Administrator's
    service substitution procedures are consistent with the Commission's
    goal of affording schools and libraries maximum flexibility to
    choose the offering that meets their needs most effectively and
    efficiently.[^79] We conclude that codifying these existing
    procedures in our rules will facilitate USAC's administration of the
    schools and libraries support mechanism. In codifying USAC's
    procedures in our rules, we make one modification, however. USAC's
    current procedures permit a service substitution only if the
    substitution does not result in an increase in the pre-discount
    price of the eligible service. We will permit applicants to
    substitute an eligible service with a higher pre-discount price, but
    will provide support based on the lower, original price, rather than
    the higher price for the substituted service.[^80] We agree with
    commenters that this will further maximize flexibility for schools
    and libraries to meet their needs effectively and efficiently,
    without additional cost to the E-rate program.[^81]

43. Accordingly, we amend our rules to specify that service change
    requests will be granted for a substitute service or product
    where (1) that service or product has the same
    functionality;[^82] (2) the substitution does not violate any
    contract provisions or state or local procurement laws; (3) the
    substitution does not result in an increase in the percentage of
    ineligible services or functions, but (4) support shall be provided
    based on the lesser of the pre-discount price of the original
    service or the substitute service. In order to ensure the integrity
    of the competitive bidding process, we require the applicant's
    request for a service change to include a certification that the
    requested change in service is within the scope of the controlling
    Form 470, including any associated Requests for Proposal (RFP), for
    the original services. We also require that support not be provided
    in excess of the amount the applicant originally would have been
    eligible for. By adopting these procedures as rules, we recognize
    that events may occur between the time of the original funding
    request and the time when commitments are made that make the
    original funding request impractical or even impossible to fulfill.

44. *[Eligibility of On-Premises Equipment as Part of Priority One
    Service]{.underline}.* In the *Schools and Libraries NPRM*, the
    Commission sought comment on whether to modify its policies
    regarding the funding of Priority One services (telecommunications
    service and Internet access) that include service provider charges
    for capital investments for wide area networks*.* Those policies
    were established in the *1999 Tennessee Order* and the *Brooklyn
    Order.*[^83]

45. We decline at this time to modify our existing policies in this
    area, and in the attached Further Notice of Proposed Rulemaking seek
    more focused comment on specific rule changes that would limit the
    availability of discounts for service provider charges that recoup
    the cost of significant infrastructure investment. We do, however,
    clarify the scope of the existing requirements in this area to
    facilitate USAC's processing of applications.

46. In the *1999* *Tennessee Order*, the Commission addressed the issue
    of whether certain facilities located on the applicant's premises
    (namely, routers and hubs) are part of an end-to-end Internet access
    service or part of internal connections.[^84] The Commission
    determined that facilities located on an applicant's premises should
    be presumed to be internal connections, but that an applicant may
    rebut that presumption.[^85] In analyzing the facts presented in the
    *1999 Tennessee Order*, the Commission concluded that this
    presumption had been rebutted. In support of the rebuttal, the
    Commission noted that the hub sites at issue constituted the
    Internet access provider's points of presence and that the
    applicant's internal connections networks would continue to function
    without the hub sites, indicating that the hub sites were not
    necessary to transport information within the schools' instructional
    buildings on a single campus.[^86] Further, the Commission found
    that other indicia\--the ownership of the facility, the lack of a
    lease-purchase arrangement, the lack of an exclusivity arrangement,
    and the fact that the service provider was responsible for its
    maintenance\--supported its conclusion that, on balance, the
    facilities should be deemed part of an end-to-end service.[^87] The
    Commission found that these factors weighed against a finding of
    internal connections, even though the cost of leasing those
    facilities represented nearly 67 percent of the total funding
    request. The decision was based on the facts presented; the
    Commission did not establish a per se requirement that an applicant
    must meet all factors in order to receive discounts on service
    provider charges for the cost of leasing on-premises equipment.

47. We conclude it is administratively efficient for USAC to use the
    factors relied upon in the *1999 Tennessee Order* as a processing
    standard. USAC has posted an advisory on its website providing
    guidance to help applicants and service providers understand how it
    has implemented the *1999 Tennessee Order*.[^88]  Specifically, USAC
    has provided guidance that a private branch exchange (PBX) that
    routes calls within a school or library is not eligible for support
    as Priority One on-premises equipment.  This guidance is consistent
    with our *1999 Tennessee Order* because a PBX, like most on-premises
    equipment, is presumed to be Priority Two internal connections.
    Moreover, it is unlikely that an applicant would be able to
    establish a rebuttal to that presumption, because the PBX functions
    to transmit information from and between multiple locations within a
    local network. If the PBX were removed from a school, the school
    would lose its ability to route phone calls within the building or
    campus, but could maintain its access to the public switched
    telephone network. In other words, the PBX is necessary to maintain
    the internal communications network, but not its end-to-end access
    to telecommunications services.[^89]

48. We now clarify that the *1999 Tennessee Order* does not preclude the
    provision of support for on-premises equipment that constitutes
    basic termination equipment. Accordingly, an applicant may receive a
    discount for the lease of a cable modem as part of Priority One
    Internet access. A cable modem is a type of basic terminating
    component. It is analogous to a channel service unit/data service
    unit (CSU/DSU) or a network interface device (NID) in that it
    functions as the termination point for a Priority One service.[^90]
    The language in the *1999 Tennessee Order* stating that facilities
    located on the school premises are presumed to be internal
    connections was enunciated in the context of considering the status
    of network hubs and routers, and should not be read to encompass
    basic termination equipment. A basic terminating component, though
    normally located on a customer's premises, is necessary to receive
    the end-to-end Internet access service because it provides
    translation of the digital transmission using the appropriate
    protocols. In the case of a cable modem, it would not be possible to
    receive the Internet access service in question without the cable
    modem on the customer's premises. Conversely, the internal
    connections on the site would continue to function without the cable
    modem. Moreover, while customers may obtain cable modems from other
    sources, providers of cable modem service typically offer customers
    the opportunity to lease a cable modem in conjunction with the
    provision of cable modem service. We also note that the cost of
    leasing a cable modem is a relatively low proportion of the yearly
    cost of the service. The fact that technical limitations would, as a
    practical matter, preclude the service provider from using the cable
    modem to deliver service to other customers, creating a de facto
    exclusivity arrangement, in our view does not support a finding that
    such equipment must be viewed as internal connections. Rather, we
    conclude that it is appropriate to provide discounts on the lease of
    a single basic terminating component used at a site as a Priority
    One service.[^91]

49. We also clarify that it is appropriate to provide Priority One
    discounts on service provider charges to recoup the cost of leasing
    optical equipment to light fiber, when that optical equipment is the
    single basic terminating component of an end-to-end network and it
    is necessary to provide an end-to-end telecommunications or Internet
    access service. We reach that conclusion even though the optical
    equipment on the customers' end, as a technical matter, is dedicated
    to the customer's sole use.

## Carryover of Funds

### Background

50. In the *Schools and Libraries NPRM*, the Commission sought comment
    on whether to carry forward unused funding to subsequent funding
    years.[^92] Subsequently in the *Schools and Libraries Order*, the
    Commission concluded that, beginning with the second quarter of
    2003, any unused funds from the schools and libraries support
    mechanism would, consistent with the public interest, be carried
    forward for disbursement in subsequent funding years of the schools
    and libraries support mechanism. [^93]

51. In the *Schools and Libraries Further Notice*, the Commission
    proposed specific rules and procedures for implementing the carrying
    over of unused funds to subsequent funding years of the schools and
    libraries mechanism.[^94] In particular, the Commission proposed to
    amend the rules to require USAC to provide quarterly estimates to
    the Commission regarding the amount of unused funds that will be
    available to carry forward.[^95] The Commission also proposed to
    amend the rules so that the Commission would carry forward available
    unused funds from prior years on an annual basis for use in the
    following full year of the schools and libraries program.[^96] Most
    comments on this issue supported the proposed rules and procedures.
    In its last quarterly filing, USAC reported \$420 million in unused
    funds.[^97]

### Discussion

52. We adopt the procedures for carrying forward unused funds for the
    schools and libraries program proposed in the *Schools and Libraries
    Further Notice*. Specifically, we amend our rules to require the
    Administrator to provide quarterly estimates to the Commission
    regarding the amount of unused funds that will be available for
    carryover in the subsequent full funding year. We further amend our
    rules so that the Commission will carry forward available unused
    funds from prior years on an annual basis. We find that, in light of
    the high demand for discounts, such action is consistent with
    section 254 and the public interest, as well as the framework
    established in the *Schools and Libraries Order*. Accordingly, we
    amend section 54.507(a) of our rules, as provided in Appendix
    A.[^98]

53. The Administrator shall continue to estimate unused funds as the
    difference between the amount of funds collected, or made available
    for that particular funding year, and the amount of funds disbursed
    or to be disbursed.[^99] We note that the Administrator already
    considers the remaining appeals for a funding year when identifying
    unused funds. [^100] Therefore, we do not believe that the carryover
    of unused funds will detract from the funding of outstanding
    appeals. [^101]

54. Consistent with the proposed rules in the *Schools and Libraries
    Further Notice*, we also amend the rules to require the
    Administrator to file with the Commission quarterly estimates of
    unused funds from prior years of the schools and libraries support
    mechanism when it submits its projection of schools and libraries
    program demand for the upcoming quarter.[^102] This amendment
    codifies the Administrator's existing reporting practice and
    reporting cycle.[^103] The quarterly estimate serves to prepare the
    Administrator for the annual release of carryover funds and provides
    schools and libraries with general notice regarding the amount of
    unused funds that may be made available in the subsequent
    year.[^104] We disagree with NAIS that the quarterly reporting
    procedure would become too cumbersome and hinder the "overall
    integrity of the program."[^105] We do not believe that the
    Administrator will be overburdened by this requirement because it
    has been reporting quarterly estimates of unused funds for six
    quarters without a problem.

55. We further amend the rules to make unused funds available annually
    in the second quarter of each calendar year for use in the next full
    funding year of the schools and libraries mechanism. Based on the
    estimates provided by the Administrator, the Commission will
    announce a specific amount of unused funds from prior funding years
    to be carried forward in accordance with the public interest to
    increase funds for the next full funding year in excess of the
    annual funding cap. For example, the Commission will carry forward
    the unused funds as of second quarter 2004 for use in the Schools
    and Libraries Funding Year 2004, thereby increasing the available
    funds in Funding Year 2004 above the annual funding cap of \$2.25
    billion.[^106] The Wireline Competition Bureau will announce the
    availability of carryover funds during the second quarter of the
    calendar year, when it announces the universal service contribution
    factor for the third quarter of each year.[^107] The amount of
    unused funds to be carried forward will be deemed approved by the
    Commission if it takes no action within 14 days of release of the
    public notice announcing the contribution factor and the amount of
    unused funds.

56. We determine that it is in the public interest to carry forward
    unused funds for disbursement on an annual basis in the second
    quarter of the calendar year. Distribution of unused funds on an
    annual basis allows the Administrator to refine its calculation of
    available funds over four reporting quarters as the funding year
    progresses starting with the third quarter of the calendar year. The
    annual carryover of funds during the second quarter of the calendar
    year also coincides with the time of year the Administrator begins
    making funding commitment decisions for the upcoming funding
    year.[^108] We believe that the timing of this process provides
    certainty regarding when unused funds will be carried forward for
    use in the schools and libraries program with minimal disruption to
    the administration of the program.[^109]

57. In order to implement the Commission's prior decision to carry over
    funds beginning April 1, 2003, we modify the schedule for this year
    only in order to implement the process for Funding Year 2003. We
    direct the Administrator to carry forward unused funds as projected
    for the first quarter of 2004 for use during the remainder of
    Funding Year 2003.[^110] While there will be an increase in the
    amount of funds available in Funding Year 2003, we note that no
    decisions previously made by USAC concerning the distribution of
    funds for Funding Year 2003 will be reversed or revisited. Only
    funding requests that are currently pending will be considered for
    the Funding Year 2003 carryover funding. Henceforth, starting with
    the second quarter of 2004, funds will be carried over on an annual
    basis as described in the previous paragraph.

58. Finally, we take this opportunity to revise section 54.509(b) of the
    Commission's rules to conform to the *Fifth Order on
    Reconsideration*.[^111] Section 54.509(b) provides that, if the
    estimates of future funding needs of schools and libraries lead to a
    prediction by the Administrator that total funding requests will
    exceed available funding for a funding year, the Administrator shall
    adjust the discount matrix by calculating a percentage reduction of
    support to all schools and libraries, except those in the two most
    disadvantaged categories, in order to permit all requests in the
    next funding year to be fully funded. The technical correction we
    make to section 54.509(b) clarifies that the reduction in percentage
    discounts explained in section 54.509(b) does not apply within a
    filing window or period, as described in section 54.507(c). Priority
    within a filing window is determined in accordance with section
    54.507(g)(1) of the rules. Thus, section 54.509(b) applies only
    during a funding year in which the Administrator is acting in
    accordance with section 54.507(g)(2). We find that the rule change
    is exempt from the notice and comment requirements of the
    Administrative Procedure Act because it concerns a non-substantive
    technical change to the existing rules.[^112]

#  Second Further Notice of Proposed Rulemaking

## Discount Matrix

59. 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.[^113] We seek comment on the effectiveness and efficiency of
    the discount matrix used to determine support payments for eligible
    applicants. In particular, we seek comment on changing the matrix to
    adjust the levels of discounts received by schools and libraries for
    supported services. We also particularly seek comment from the State
    members of the Federal-State Joint Board on Universal Service, and
    commit to ongoing informal consultations on these issues.

60. Interested parties have indicated that an altered discount matrix
    may better serve the schools and libraries program. In response to
    the *Schools and Libraries* *NPRM*, several commenters asserted that
    reducing the discount rate would make applicants more accountable
    for their funding requests[^114] and dissuade vendors from
    improperly offering to forgive or refund the 10 percent contribution
    required of applicants in the highest discount band.[^115] In
    addition, commenters stated that altering the discount rate would be
    an effective way to increase the availability of funds for eligible
    applicants outside the highest discount band.[^116] While the
    *Universal Service* *Order* prioritized support for entities with
    the greatest level of economic disadvantage,[^117] some interested
    parties have suggested that greater emphasis should be given to the
    equitable distribution of E-rate funds to eligible applicants from
    all discount bands, to ensure that they have comparable access to
    advanced telecommunications and information services.[^118]
    Participants in the Commission's Public Forum on the E-rate program
    in May 2003 also suggested that the Commission amend its discount
    matrix, and USAC's Task Force on Waste, Fraud, and Abuse has
    recommended that the discount level for internal connections be
    lowered from 90 percent to 80 percent.[^119]

61. For these reasons, we seek comment on whether the Commission should
    amend the discount matrix to reduce the discounts available in some
    or all of the discount bands, including the current 90 percent
    discount band. We propose that such a change, if adopted, become
    effective in Funding Year 2005. We seek comment on whether the
    current discount matrix provides sufficient incentives for schools
    and libraries to limit funding requests to services that can be
    efficiently used and for vendors to competitively price their
    services. We also seek comment on whether it would be appropriate to
    adjust the discount matrix in order to expand the reach of funding
    to lower discount bands. We note that the rules we adopt in the
    foregoing Order, limiting the availability of support for internal
    connections to twice every five years, is intended to make support
    available to more applicants on a regular basis. How does this
    action affect the need to adjust the discount matrix? We further
    seek comment on which discount rates in the matrix, if any, other
    than the highest discount rate band, should be reduced.
    Additionally, we seek comment on whether developing a separate
    discount matrix for Priority Two funding would effectively address
    issues of waste, fraud, and abuse and expand the reach of funds to a
    larger number of schools and libraries.[^120] Many parties have
    suggested that, at a minimum, the maximum discount level for
    internal connections be lowered to 70 percent.[^121] What would be
    the effect of such a change? While we seek comment generally on
    revisions to the discount matrix, we note that we are not seeking
    comment on whether to combine the existing Priority One and Priority
    Two funding categories.

62. We ask that commenters address implementation issues surrounding a
    change in the discount matrix. Currently, in the event that there
    are not sufficient funds remaining under the annual cap to support
    all requests for discounts at a particular discount level, funds are
    allocated on a pro rata basis among applicants at that discount
    level.[^122] Should funds continue to be allocated among all
    applicants at the discount level on a pro rata basis, or is there
    some other means of allocating the remaining funds? We seek comment
    on how changes to the discount matrix should be implemented across
    all levels of need. Should certain existing discount levels be
    combined? For example, should the 90 and 80 percent discount levels
    be combined? In the alternative, should each discount level be
    reduced by a fixed amount? For example, should each discount level
    be reduced by 10 percent? Is there some other method of re-setting
    other discount levels below the highest discount level? Finally, we
    seek comment on how the transition to a new discount matrix, if
    adopted, should be implemented in order to minimize burdens on
    applicants and disruptions to the program.

## Competitive Bidding Process

63. We seek comment on the current process of applying for discounted
    services. Pursuant to competitive bidding requirements, eligible
    schools and libraries that wish to receive support for discounted
    services must submit FCC Form 470 to the Administrator.[^123] The
    FCC Form 470 describes the applicant's telecommunication needs and
    notifies service providers of the applicant's intent to contract for
    eligible services. After the FCC Form 470 has been posted to the
    Administrator's website for 28 days, the applicant may contract for
    the provision of services and file an FCC Form 471, requesting
    discounts for the services.[^124] We seek comment on whether this
    process typically results in competitive bids, and ask commenters to
    elaborate on the characteristics of recipients that do not
    ordinarily receive multiple bids.[^125] We seek comment on whether
    this process continues to suit the needs of the schools and
    libraries program, or if a different application process would
    better suit the program's needs.[^126] We specifically request that
    commenters discuss how the current process and any proposed
    processes address the Commission's goal of minimizing waste, fraud,
    and abuse in the program, while encouraging the benefits of
    competition as set out in the *Universal Service Order*.[^127]

64. A number of parties have suggested that the current Form 470 posting
    process should be modified for certain types of services. For
    instance, one participant in the Commission's public forum on the
    ways to improve the administration of the schools and libraries
    mechanism suggested that the Form 470 process be eliminated for
    requests for funding local telephone service.[^128] Others suggest
    that the FCC simplify the application process for applications that
    only seek funding for local and long distance service (including
    cell phone service), or that seek to continue an existing
    telecommunications service or Internet access service.[^129] We seek
    comment on whether it would serve our goals to simplify or eliminate
    the current FCC Form 470 posting process in such situations. What
    other mechanisms would ensure that our objective of ensuring that
    applicants are aware of potential service providers and select
    reasonably priced services is met? What would be the costs and
    benefits of such a change?

65. We also seek comment on how we can ensure that applicants select
    cost effective services in situations in which no entity, or only
    one entity, responds to a Form 470 posting. In some situations,
    there may be only one service provider capable of, or willing to,
    provide the requested service. How can we ensure that the prices for
    such services are reasonable, and do not waste scarce universal
    service funds? Should we adopt bright line rules that would impose
    limits on the amount of discounts that could be available in such
    situations?

66. We further seek comment on whether the Commission, as a condition of
    support, should require that each service provider certify that the
    prices in its bid have been independently developed. Such a
    certification could be modeled after the certificate of independent
    price determination required under federal acquisition
    regulations.[^130] A fair and open competitive bidding process is
    critical to preventing waste, fraud, and abuse of program
    resources.[^131] Adopting a certification requirement would ensure
    that service providers are fully aware that they may not communicate
    with other service providers in a way that subverts the competitive
    bidding process. Moreover, service providers that violate a
    non-collusion certification will, in many instances, also violate
    federal antitrust laws.[^132] Requiring certifications of
    independent pricing would better enable the Commission or other
    government agencies to enforce the Commission's rules and to seek
    criminal sanctions where appropriate. We also seek comment on
    whether the Commission's rules should specifically require that
    records related to the competitive bidding process for services must
    be maintained by both the recipient and the service provider for a
    period of five years.

## Definition of Rural Area

67. We seek comment on modifications to the definition of "rural area"
    for the schools and libraries mechanism.[^133] Currently, an area
    qualifies as rural under our rules for the schools and libraries
    support mechanism if it is located in a non-metropolitan county as
    defined by the Office of Management and Budget or is specifically
    identified in the Goldsmith Modification to 1990 Census data
    published by the Office of Rural Health Care Policy (ORHP).[^134] We
    understand, however, that OHRP no longer utilizes the definition
    adopted by the Commission in 1997, and that there will be no
    Goldsmith Modification to the most recent 2000 Census data.[^135]

68. We seek comment on whether we should adopt a new definition of rural
    area for the schools and libraries program, and, if so, what that
    new definition should be.[^136] We seek comment on whether there are
    there any definitions for rural areas used by other government
    agencies that would be appropriate for the schools and libraries
    program. In addition to describing any proposed new definitions, we
    ask commenters to address the specific proposals that have already
    been raised in the rural health care proceeding. In particular,
    several commenters in the rural health care proceeding suggest that
    the Commission adopt the rural designation system currently utilized
    by ORHP, the Rural Urban Commuting Area (RUCA) system.[^137] Others
    propose to define rural as non-urbanized areas, as specified by the
    Census Bureau.[^138] We also recently sought comment on the
    definition of "rural area" in the context of increasing flexibility
    and the deployment of spectrum-based services in rural areas.[^139]
    There we identified and sought comment on the following potential
    definitions of "rural area," in addition to the ones already
    identified above: (1) counties with a population density of 100
    persons or fewer per square mile; (2) Rural Service Areas; (3)
    non-nodal counties within an Economic Area; (4) the definition of
    "rural" used by the Rural Utility Service for its broadband
    program; (5) the definition of "rural" based on census tracts as
    outlined by the Economic Research Service of the USDA; and (6) any
    census tract that is not within ten miles of any incorporated or
    census-designated place containing more than 2,500 people, and is
    not within a county or county equivalent which has an overall
    population density of more than 500 persons per square mile of
    land.[^140] Finally, some commenters in that proceeding assert that
    if the Commission adopts a new definition of rural, it should
    grandfather existing areas that currently qualify as rural area, if
    they would no longer qualify under the new definition.[^141]

69. Commenters are encouraged to describe the effects of any new
    definition on the reach of the schools and libraries program,
    *e.g.*, how many existing rural areas would become non-rural and
    vice versa, and whether and how the Commission should consider any
    such changes in adopting a new definition for "rural area." We also
    seek comment on whether it is necessary or desirable to use the same
    definition of "rural" for both the schools and libraries program and
    rural health care program.

## Definition of Internet Access

70. In the *Schools and Libraries NPRM*, the Commission sought comment
    on whether modifying our rules governing the funding of Internet
    content would improve program operation consistent with our other
    goals of ensuring a fair and equitable distribution of benefits and
    preventing waste, fraud, and abuse. In particular, the Commission
    sought comment on whether to permit funding for an Internet access
    package that includes content if that package is the most cost
    effective form of Internet access.[^142] Comments we received in
    response to the *Schools and Libraries NPRM* indicated that parties
    had widely varying views of what should be viewed as
    "content,"[^143] although many parties expressed concern about
    providing funding for Internet access bundled with subject matter
    content.[^144] The record developed on this issue, in conjunction
    with recent changes made in the rural health care program, leads us
    to seek more focused comment on whether we should alter the
    definition of Internet access used for the schools and libraries
    program. Support for Internet access under the schools and libraries
    program is provided only for "basic conduit access to the
    Internet."[^145] Support in the Internet access category has not
    been provided for virtual private networks,[^146] nor has it been
    provided for Internet access services that enable communications
    through private networks. In our recent *Rural Health Care Order*,
    we concluded that the definition currently used in the schools and
    libraries context was too limited for the rural health care program,
    because it precludes support for features that provide the
    capability to generate or alter the content of information.[^147] We
    concluded that adopting such a limitation in the rural health care
    context would significantly undercut the utility of providing
    support for Internet access to rural health care providers, because
    the ability to alter and interact with information over the Internet
    is a functionality that could facilitate improved medical care in
    rural areas.[^148]

71. We now seek comment on whether we should amend our definition of
    Internet access in the schools context to conform to the definition
    recently adopted for the rural health care mechanism. The
    Administrator has utilized cost allocation to ensure that support is
    not provided for features deemed ineligible under the Commission's
    definition of Internet access in the schools context, and also has
    provided discounts on services that provide ineligible features when
    that ineligible portion is provided on an ancillary basis.[^149]
    While we conclude that this has been a reasonable way to implement
    our rules in a administratively workable fashion, we are concerned
    that the definition adopted in 1997 may unintentionally preclude
    support for features of Internet access that would provide
    substantial benefits to school children and library patrons in the
    United States. We are concerned that the rule adopted six years ago
    may not adequately address the full ranges of features and
    functionalities in Internet access services that are available in
    the marketplace today. Moreover, we seek comment on whether amending
    the current definition of Internet access would simplify and
    streamline program administration. We also seek comment on how
    broadening the definition of Internet access (a Priority One
    service) will impact the availability of funds for Priority Two
    services. To the extent commenters argue that the definition of
    Internet access should differ for the schools and libraries program,
    and the rural health care program, they should provide specific
    arguments outlining the legal, policy, or technical reasons for that
    position.

## Wide Area Networks

72. In the *Schools and Libraries NPRM*, the Commission sought comment
    on whether to modify its policies regarding the funding of Priority
    One services (telecommunications service and Internet access) that
    include service provider charges for capital investments for wide
    area networks.[^150] The record we received demonstrated a wide
    range of views on what changes, if any, should be made in this
    area.[^151]

73. In light of our decision above to impose limitations on funding of
    internal connections, we recognize that there may be even greater
    incentives than before for service providers to characterize charges
    for facilities that also could be viewed as internal connections as
    Priority One services. We believe it desirable, therefore, to seek
    more focused comment on specific proposals in this area to ensure
    that funds are distributed in a fair and equitable fashion. If we
    adopt rules in this area, we anticipate that those rules would be
    effective no earlier than Funding Year 2005. We seek comment on the
    advantages and disadvantages of the proposals set forth below.

74. We seek comment on whether to refine a standard for determining
    whether expenditures that subsidize infrastructure investment,
    either on-premises or off-premises, may properly be viewed as
    Priority One services. In particular, we seek comment on whether we
    should adopt a rule that would limit recipients from receiving
    discounts for service provider upfront capital investments to the
    extent those capital investments exceed 25 percent of the funding
    request for the service in question. Such a rule could serve to
    spread funding for Priority One services more evenly across all
    recipients, and could limit the extent to which the universal
    service fund is used to finance significant service provider
    infrastructure investment.

75. In the *Brooklyn Order*, the Commission determined that recipients
    may receive discounts on non-recurring charges associated with
    capital investment made by a service provider in an amount equal to
    the investment prorated equally over a term of at least three
    years.[^152] We now seek focused comment on whether we should adopt
    a rule that discounts for any service provider charges for capital
    investment of \$500,000 or more must be prorated over a period of at
    least five years.[^153] Like the other proposal, such a rule could
    serve to spread funding for Priority One services more evenly across
    all recipients, and could limit the extent to which the universal
    service fund is used to finance significant service provider
    infrastructure investment.

76. We also take this opportunity to address other issues related to the
    provision of service over wide area networks. Under our current
    rules, schools and libraries may receive support to obtain
    telecommunications services using lit fiber. Schools and libraries
    may also receive discounts when they obtain Internet access that
    uses lit fiber.[^154] In order to receive support for services using
    lit fiber as a Priority One service, the school or library must
    purchase a functioning service from either a telecommunications
    service provider or internet access provider, which in turn is
    responsible for ensuring that both the fiber and the equipment to
    light the fiber are provided.[^155] If a school or library enters a
    contract to lease unlit fiber, and obtain telecommunications service
    or Internet access using lit fiber, it must segregate the cost of
    the unsupported unlit fiber from the cost of the supported lit fiber
    service in its application for support.

77. We seek comment on the provision of funding for unlit (dark) fiber
    under the schools and libraries support mechanism.[^156] We note
    that the Commission has addressed dark fiber in several different
    contexts.[^157] We seek comment on whether we should permit funding
    for dark fiber, pursuant to section 254(h), to provide additional
    flexibility to applicants in meeting their communications needs. We
    also seek comment on whether any limitations should be adopted to
    preclude discounts on the full cost of dark fiber network buildout
    when the applicant will not be utilizing the full capacity of that
    network.

## Recovery of Funds 

78. In 1999, the Commission adopted the *Commitment Adjustment Order*,
    which directed the Administrator to recover funding erroneously
    committed to schools and libraries in violation of the
    Telecommunications Act of 1996.[^158] The Commission adopted a
    companion order on the same day granting a limited waiver of four
    Commission rules to first year applicants who had received
    commitments and disbursements in violation of Commission
    rules.[^159] Shortly thereafter, pursuant to the *Commitment
    Adjustment Order*, USAC submitted to the Commission its plan to
    collect universal service funds that were erroneously disbursed in
    the first year of the program in violation of the statute.[^160]
    Subsequently, in 2000, the Commission adopted with minor
    modifications USAC's plan to implement the requirements of the
    *Commitment Adjustment Order*.[^161] In that Order, the Commission
    also 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."[^162] The Commission
    stated that it would address such situations on a case-by-case
    basis.[^163]

79. At the time the Commission adopted the *Commitment Adjustment
    Order*, 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.[^164] Since then, through the audit process, the Commission
    and USAC have become aware of additional scenarios that may require
    recovery of funds due to errors made by applicants and/or service
    providers. While the *Commitment Adjustment Implementation Order*
    implemented procedures, consistent with the Commission's debt
    collection rules,[^165] for recovery of funds that were disbursed in
    violation of *statutory* requirements, 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.[^166] Likewise, the
    Commission has not addressed the question of what procedures are
    needed to govern the recovery of funds that have been committed or
    disbursed in situations later determined to involve waste, fraud or
    abuse.

80. In administering the schools and libraries program, we have become
    aware of instances in which funds were disbursed erroneously, and,
    depending upon the circumstances surrounding the particular error as
    well as the procedure or rule implicated, we determined whether
    recovery was appropriate. In light of these experiences, we now
    consider whether we should implement procedures or adopt rules
    governing fund recovery across particular situations and, more
    generally, whether additional safeguards or procedures are needed to
    address the matter of erroneously disbursed funds.

81. In particular, we ask whether we should adopt specific recovery
    rules for funds that are disbursed in violation of statutory
    requirements. We also seek comment on whether the Commission should
    implement procedures or adopt rules for funds that are disbursed in
    violation of one or more programmatic rules or procedures under the
    schools and libraries program or in situations involving waste,
    fraud or abuse. If so, we ask whether we should adopt for all
    instances of improperly disbursed funds, procedures comparable to
    those adopted in the *Commitment Adjustment Implementation Order*,
    or whether we should modify any of those procedures. We note that,
    through petitions for reconsideration of the *Commitment Adjustment
    Order* and in comments filed in support of those petitions,
    particular service providers have argued that the Commission should
    recover erroneously disbursed funds from the party that received the
    benefit of the disbursement, specifically the school or
    library.[^167] Although the Commission continues to believe that
    there are valid reasons for seeking recovery only from service
    providers, we ask whether there are any circumstances under which
    recovery would be more appropriately sought from a school or library
    applicant. At this time we do not resolve the specific issues raised
    in the pending petitions for reconsideration. Instead, we seek to
    further develop the record in this area in light of particular
    issues that have come to our attention and as to which we seek
    comment in this notice.

82. We note that in some circumstances, there may be a series of rule
    violations that neither collectively nor individually implicate the
    full amount of the funding commitment. In the event that the full
    amount of the funding commitment has been disbursed under such
    circumstances, we seek comment on what circumstances would make
    recovery of the full amount of the funding commitment appropriate or
    inappropriate. We seek comment specifically on whether a pattern of
    systematic noncompliance with Commission rules warrants recovery of
    the full amount disbursed, irrespective of the dollars associated
    with specific audit findings. We note that, unlike errors resulting
    in statutory violations, the Commission may waive non-compliance
    with regulations in appropriate circumstances.[^168] We recognize
    that some errors made by applicants and/or service providers may not
    violate the statute, may be minor in nature and may not affect the
    integrity of or otherwise undermine policies central to
    administration of the program. We invite comment on whether there
    are situations in which such errors would warrant a Commission
    decision not requiring the recovery of funds. For example, should we
    waive recovery if the dollars at issue are *de minimis*, either on
    absolute dollar or percentage of disbursement basis, and if so, what
    dollar level or percentage would be an appropriate threshold for
    deeming a violation to be *de minimis*? Parties advocating such a
    position should describe what mechanism the Commission should use to
    reach such a result, such as waiving the rules that are not
    statutory, are minor and do not affect program integrity, focusing
    particularly on how such a result could be achieved with
    administrative ease.

83. In addressing the issues above, we also invite commenters to explain
    whether any additional policies or rules directed at circumstances
    involving waste, fraud and abuse would be necessary, or whether
    procedures we may adopt in response to our questions above will be
    sufficient in correcting waste, fraud and abuse. In doing so,
    parties should consider whether certain violations are more critical
    in our attempts to control waste, fraud and abuse than others. Are
    the circumstances where waste, fraud and abuse are found the type
    that should result in recovery of funds from the entity that is
    responsible for the waste, fraud and abuse? How should we proceed if
    both the applicant and the service provider are culpable for such
    misconduct? We seek proposals that include detailed procedures for
    dealing with waste, fraud and abuse cases.

84. We also seek comment on whether we should implement other measures
    to ensure service provider and applicant accountability. In
    particular, we seek comment on whether we should implement
    procedures or adopt rules to defer action on any additional funding
    request involving a beneficiary for whom there is an outstanding
    commitment adjustment proceeding.[^169] Under such a policy, no
    discounts would flow to the beneficiary in subsequent years until
    there was full satisfaction of the outstanding commitment
    adjustment. We also seek comment on whether any applicant that has
    previously been subject to a commitment adjustment proceeding should
    be subjected to more rigorous scrutiny before receiving commitments
    in the future. If we were to implement such a policy, what
    additional showing should be required of the applicant in subsequent
    years, and how long should the entity be subjected to such enhanced
    scrutiny?

85. Commenters should provide discrete proposals with examples or data
    to support their suggestions.

## Other Actions to Reduce Waste, Fraud, and Abuse

86. We seek comment on a number of proposals intended to improve the
    abilities of the Commission and the Administrator to identify and
    enforce violations of the Commission's rules and, thereby, to reduce
    waste, fraud, and abuse in the schools and libraries universal
    service mechanism.

87. *Cost-Effective Funding Requests.* We seek comment on whether we
    should codify additional rules to ensure that applicants make
    informed and reasonable decisions in deciding for which services
    they will seek discounts. Currently, our rules specify that, in
    selecting a service provider, a recipient must carefully consider
    all bids submitted and must select the most cost-effective service
    offering.[^170] Moreover, the *Universal Service Order* makes clear
    that applicants must request services based on an assessment of
    their reasonable needs.[^171] Our rules do not expressly require,
    however, that the applicant consider whether a particular package of
    services are the most cost effective means of meeting its technology
    needs. Nor do our rules expressly establish a bright line test for
    what is a "cost effective" service. Would it be beneficial and
    administratively feasible to develop such a test, or, for example, a
    benchmark or formula for "cost-effective" funding requests, such as
    a specified dollar amount per student or per library patron for
    specified types of service?[^172] Should we adopt a ceiling on the
    total amount of annual funding that an applicant can request?[^173]
    If so, how would such a ceiling is calculated? Are there other rule
    changes that would ensure applicants are not requesting discounts
    for services beyond their reasonable needs?

88. *Recordkeeping Requirements.* We seek comment on whether to amend
    our rules governing the maintenance of records related to the
    receipt of universal service discounts. Currently, the Commission
    rules require each entity receiving supported services to keep
    records related to the receipt of discounted services similar to
    those that the entity maintains for other purchases, but do not
    specify how long such records should be maintained.[^174] Nor do our
    rules expressly require all entities to maintain records to
    demonstrate compliance with all rules. Recent beneficiary audits
    conducted by USAC's independent auditor identify a number of
    instances in which the independent auditor was unable to perform
    certain procedures due to lack of documentation. We seek comment on
    whether to amend our rules to require that all records related to
    the receipt of or delivery of discounted services, sufficient to
    demonstrate compliance with the Commission's rules governing the
    schools and libraries mechanism, be maintained by the beneficiary
    for a period of five years after the last day of the delivery of the
    discounted services. We also seek comment on what types of documents
    would be sufficient to demonstrate compliance.[^175]

89. In addition, the Commission's rules require service providers to
    keep and retain records of rates charged to and discounts allowed
    for entities receiving supported services.[^176] We seek comment on
    requiring that service providers retain all records related to the
    delivery of discounted services for a period of five years after the
    completion of the discounted services. Further, we seek comment on a
    requirement that service providers comply with random audits or
    reviews that the Commission or USAC may undertake periodically to
    assure program compliance, including identifying the portions of
    applicant's bills that represent the costs of services provided to
    eligible entities for eligible purposes.[^177] In accordance with
    this proposed requirement, we also seek comment on requiring
    beneficiaries to authorize the release of such information.

90. Commenters are specifically requested to address the impact that
    these rule changes would have on the Commission's ability to enforce
    its substantive rules and reduce waste, fraud, and abuse in the
    schools and libraries universal service program. Commenters are also
    requested to identify with particularity any additional
    recordkeeping requirements that would improve the Commission's
    ability to enforce its rules in the schools and libraries program.

91. *Consultants and Outside Experts*. We seek comment on whether
    applicants should be required to identify any consultants or other
    outside experts, whether paid or unpaid, that aid in the preparation
    of the applicant's technology plan or in the applicant's procurement
    process.[^178] Additionally, we seek comment on whether consultants
    and other outside experts offering their services to applicants
    should be required to register with USAC and to disclose any
    potential conflicts of interests derived from relationships with
    service providers.[^179] Identifying these consultants and outside
    experts could facilitate the ability of the Commission, and law
    enforcement officials, to identify and prosecute individuals that
    may seek to manipulate the competitive bidding process or engage in
    other illegal acts. We also seek comment on whether we should adopt
    a rule that would prohibit an entity that seeks to become a service
    provider from providing any form of technology planning or
    procurement management assistance to applicants. Under such a rule,
    any entity that provides management support services, technical
    assistance, consulting services, assistance in technical
    evaluations, or systems engineering services to a particular
    recipient would be barred from competing for the contracts for
    eligible services with that recipient.

92. *Distribution of Support Payments*. We seek comment on whether the
    Commission should amend its rules to codify certain existing
    administrative procedures related to the payment of support for
    discounted services.[^180] There are two methods by which support
    for discounts is distributed. One method is for the service provider
    to submit an invoice to the Administrator, seeking payment for the
    discounted portion of the supported service using FCC Form 474. The
    other method is for the recipient of the discounted services to pay
    the service provider and then seek reimbursement from the
    Administrator using FCC Form 473. Under either method, the
    Administrator requires that a completed Service Provider Annual
    Certification (or FCC Form 473) must be filed in order for payment
    to be made. We seek comment on whether this procedure should be
    codified in the Commission's rules. We also seek comment on whether
    the Commission should codify rules regarding the establishment of
    deadlines for service providers to file invoices with the
    Administrator.[^181] The timely receipt and payment of invoices is
    extremely important to the administration of the program in
    accordance with the Commission's rules. Accordingly, we seek comment
    on whether to codify the Administrator's existing policy not to
    provide support for untimely filed invoices.

93. USAC provides an extension of the deadline to file invoices under
    certain conditions. Under current USAC procedures, these
    circumstances include: (1) authorized service provider changes; (2)
    authorized service substitutions; (3) no timely notice to USAC
    (e.g., the service providers' Form 486 Notification Letter is
    returned to USAC as undeliverable); (4) USAC errors that result in a
    late invoice; (5) USAC delays in data entering a form that
    ultimately result in a late invoice; (6) documentation requirements
    that necessitate third party contact or certification; (7) natural
    or man-made disasters that prevent timely filing of invoices; (8)
    good Samaritan BEARs; and (9) circumstances beyond the service
    providers control. [^182] We seek comment on whether to codify the
    above-described procedures providing for an extension of the
    deadline to file invoices.

94. *Technology Plans*. We seek comment on whether the Commission should
    revise its rules regarding technology plans.[^183] To ensure
    applicants make a *bona fide* request for services, the Commission
    requires applicants to undertake a technology assessment before
    making a request for services.[^184] Section 54.504(b)(vii) states
    that in its FCC Form 470 the applicant must certify that it has a
    technology plan that has been certified by its state, the
    Administrator, or an independent entity approved by the
    Commission.[^185] The instructions for FCC Form 470 permit
    applicants to certify that their technology plan will be approved by
    the relevant body no later than the time when service
    commences.[^186] The Commission adopted specific requirements for
    information that must be included in the FCC Form 470,[^187] but did
    not adopt specific rules addressing what should be included in a
    technology plan. In the *Universal Service Order*, however, the
    Commission set forth what applicants should address in their
    technology plans,[^188] which USAC implemented in its guidelines for
    technology plans. We seek comment on whether we should codify USAC's
    current guidelines regarding technology plans.[^189] Should we
    require that, as part of the technology plan process, applicants
    analyze the cost of leasing versus purchasing E-rate eligible
    products and services? Should we require the applicant to consider
    the most cost-effective way to meet its educational objectives? In
    addition, we seek 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.[^190] We also seek 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.

95. *Prevention of Unauthorized Applications by Subunits*. We seek
    comment on whether the Commission should adopt rules to prevent
    subunits, such as individual schools or library branches, from
    filing applications without the authorization of the central
    authorities over those subunits, such as school districts and
    library systems.[^191] We also seek comment on how such restrictions
    should be implemented, if adopted. For example, should an applicant
    be required to certify that it has the appropriate authorization
    from its central authority, or should a central authority be
    permitted to request the Administrator to reject any application
    filed by one of its subunits?

96. *Use of Surveys to Determine School Lunch Eligibility*. The
    *Universal Service Order* stated that a school may use
    federally-approved alternative mechanisms which rely on actual
    counts of low-income children to determine the level of poverty for
    purposes of the schools and libraries universal service discount
    mechanism.[^192] USAC implemented this provision by permitting
    schools to collect this information from surveys.[^193] Currently,
    USAC procedures require a response rate of at least 50 percent to
    ensure a statistically valid sample to project the percentage of
    eligibility for all students in the school.[^194] We seek comment on
    whether to codify this procedure, and if so, should we alter the
    required response rate? Is a 50 percent response rate higher than
    necessary to ensure a statistically valid sample? We seek to
    streamline program administration in this area while protecting
    against any potential abuse. Should the required response rate
    depend on the size of the population being surveyed?

## Miscellaneous

97. *Determining Whether Rates Are Affordable.* We seek comment
    generally on how we can ensure that we continue to meet the
    requirements of section 254 in an efficient and equitable manner.
    Congress mandated that schools and libraries across the United
    States have access to advanced telecommunications and information
    services at affordable rates. As the expert agency charged with this
    critical task, we believe it important to consider periodically how
    we should determine what funding is necessary to ensure access at
    "affordable" rates. Give the myriad of service offerings in today's
    marketplace, how can we measure our progress in ensuring
    "affordable" access?

98. *Priority for Applicants that Have Not Achieved Connectivity*. We
    note that, in 1996, prior to implementation of the E-rate program,
    14 percent of public school instructional rooms (*i.e.*, classrooms)
    were connected to the Internet.[^195] According to the most recently
    available data, in 2002, 92 percent of public school classrooms were
    connected to the Internet.[^196] While considerable progress has
    been made in achieving the congressional goal of enhancing access of
    school classrooms and libraries to advanced telecommunications and
    information services,[^197] we are concerned that our rules as
    currently structured may preclude full attainment of that goal. As
    noted above, a number of commenters in this proceeding have
    suggested that altering the discount rate would be an effective way
    to increase the availability of funds for eligible applicants
    outside the highest discount band.[^198] We seek comment on whether
    other measures should be adopted to further the objectives set forth
    in section 254(h)(2)(A). In particular, we seek comment on whether
    we should provide priority for internal connections to those
    applicants that have not yet achieved Internet connectivity in their
    classrooms or libraries. If we were to adopt such a proposal, should
    the priority for funding be targeted to those entities where 50
    percent or more of students are eligible for the school lunch
    program? Under such a proposal, any entity in an area where 50
    percent or more of students are eligible for free school lunch that
    certifies it has not yet implemented internal connections to achieve
    Internet connectivity in any classrooms or in the library would
    receive funding for internal connections in advance of all
    applicants seeking funding for internal connections that certify
    that they have implemented internal connections to achieve Internet
    connectivity in multiple classrooms or locations. Are there other
    rule changes that would ensure that all entities are able to provide
    access to the Internet from individual classrooms or the library?

# PROCEDURAL MATTERS

## Paperwork Reduction Act Analysis

99. The action contained herein has been analyzed with respect to the
    Paperwork Reduction Act of 1995 (PRA) and found to impose new or
    modified reporting and/or recordkeeping requirements or burdens on
    the public. Implementation of these new or modified reporting and/or
    recordkeeping requirements will be subject to approval by the Office
    of Management and Budget (OMB) as prescribed by the PRA.
    Specifically, section 54.513(c) will go into effect upon
    announcement in the Federal Register of OMB approval, to the extent
    OMB approval is required.

## Final Regulatory Flexibility Analysis

100. As required by the Regulatory Flexibility Act of 1980, as amended
     (RFA),[^199] an Initial Regulatory Flexibility Analysis (IRFA) was
     incorporated in the *Schools and Libraries NPRM*.[^200] The
     Commission sought written public comment on the proposals in the
     *Schools and Libraries NPRM*, including comment on the IRFA. This
     present Final Regulatory Flexibility Analysis (FRFA) conforms to
     the RFA.[^201]

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

101. In this *Third Report and Order*, we adopt rules whereby eligible
     entities may receive discount rates for internal connections
     services, except for certain basic maintenance services, twice
     every five years and that prohibit a school or library from
     transferring equipment purchased with universal service discounts,
     except in limited circumstances. These rules will advance the goals
     of the schools and libraries program by making support for internal
     connections regularly available to a larger number of applicants
     and by reducing the likelihood of waste, fraud, and abuse.

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

102. 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.[^202] 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.[^203]

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

103. 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.[^204] The RFA generally
     defines the term "small entity" as having the same meaning as the
     terms "small business," "small organization," and "small
     governmental jurisdiction."[^205] In addition, the term "small
     business" has the same meaning as the term "small business concern"
     under the Small Business Act.[^206] 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.[^207] A small organization is
     generally "any not-for-profit enterprise which is independently
     owned and operated and is not dominant in its field."[^208]
     Nationwide, as of 1992, there were approximately 275,801 small
     organizations.[^209] 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."[^210] As of 1997, there were about 87,453
     governmental jurisdictions in the United States.[^211] 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.

104. 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.[^212] 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[^213] and does not constitute
     a significant economic impact on that entity.

#### Schools and Libraries

105. 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."[^214] 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.[^215] 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.[^216] Certain other statutory
     definitions apply as well.[^217] The SBA has defined for-profit,
     elementary and secondary schools and libraries having \$6 million
     or less in annual receipts as small entities.[^218] 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

106. 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.\"[^219] 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.[^220] 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.

107. *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.[^221]
     According to Commission data,[^222] 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.

108. *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.[^223] According to Commission data,[^224] 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.[^225] 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.[^226] 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.

109. *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.[^227] According to the Commission's most recent
     data,[^228] 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.[^229]
     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.

110. *Wireless Service Providers.* The SBA has developed a small
     business size standard for wireless small businesses within the two
     separate categories of *Paging*[^230] and *Cellular and Other
     Wireless Telecommunications*.[^231] 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,[^232] 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.[^233] Consequently, the Commission estimates that most
     wireless service providers are small entities that may be affected
     by the rules and policies adopted herein.

111. *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.[^234] 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.[^235] 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.[^236] Of those, the Commission estimates
     that 457 are small, under the SBA approved small business size
     standard.[^237]

#### Internet Service Providers

112. *Internet Service Providers.* The SBA has developed a small
     business size standard for "On-Line Information Services," NAICS
     code 514191.[^238] This category comprises establishments
     "primarily engaged in providing direct access through
     telecommunications networks to computer-held information compiled
     or published by others."[^239] Under this small business size
     standard, a small business is one having annual receipts of \$18
     million or less.[^240] 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.[^241] 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

113. 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."[^242] 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.[^243] 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.[^244]
     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

114. *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.[^245] Census Bureau data for 1997 indicate that,
     for that year, there were a total of 1,215 establishments[^246] in
     this category.[^247] 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%,[^248] 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

115. In this *Third Report and Order*, we adopt a rule that prohibits
     the transfer of equipment purchased with universal service
     discount, except in limited circumstances. Further, we provide that
     the excepted, limited circumstances consist of a discount recipient
     temporarily or permanently closing its operations where the
     original equipment was installed. In that instance, we require a
     recipient, who closes permanently or temporarily and transfers
     equipment to another eligible entity, to notify the Administrator
     of a transfer and require the transferring and receiving entities
     to maintain detailed records of the transfer consistent with the
     Commission's recordkeeping requirements for five years. We do not
     believe that these reporting and recordkeeping requirements will
     result in a significant economic impact.

116. The rule adopted today, limiting the frequency of receiving
     discount rates for internal connections, does not involve
     additional reporting, recordkeeping, or compliance requirements for
     small entities. Similarly, the rule adopted in this *Third Report
     and Order*, creating a more formal process for annually updating
     the list of services eligible for support, does not involve
     additional reporting, recordkeeping, or compliance requirements for
     small entities. The rules adopted governing cost allocation between
     eligible and ineligible services, provision of free services, and
     service substitution do not impose additional reporting,
     recordkeeping, or compliance requirements for small entities.
     Finally, the rules regarding carryover of unused funds do not
     require additional reporting or recordkeeping for small entities
     participating in the schools and libraries universal support
     mechanism.

### Steps Taken to Minimize the Significant Economic Impact on Small Entities, and Significant Alternatives Considered

117. 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."[^249]

118. Although we received no IRFA comments, we considered alternatives
     to the proposed recordkeeping requirements for small entities. In
     creating the narrow exception to the equipment transfer policy
     adopted in this *Third Report and Order*, we recognize the
     Commission's need to protect the integrity of the schools and
     libraries support mechanism by curbing waste, fraud, and abuse
     while acknowledging circumstances that justify permitting the
     transfer of discounted equipment received by a program beneficiary,
     small or large. We recognize that we must require certain
     recordkeeping to verify the appropriate use of universal service
     funds. Consideration was afforded to having the recipient file
     equipment transfer records with USAC and having USAC maintain the
     records. However, we conclude that requiring a filing with USAC
     would be more burdensome for the recipient than having the
     recipient collect and maintain its equipment transfer records.
     Complying with the processes promulgated by USAC would be more
     burdensome than requiring each beneficiary to retain its own files
     because the beneficiary would have to do more than send the
     documents to USAC. The beneficiary would have to comply with the
     procedural scheme devised by USAC for compiling, and mailing or
     delivering the records, and quality control measures for assuring
     that the records submitted were properly identified with the
     correct beneficiary. In the RFA, an exemption of small entities
     from the recordkeeping requirements is listed as a possible
     alternative. In this instance, exemption from the recordkeeping
     requirement would impede the Commission's ability to account for
     funds distributed through the schools and libraries program and
     would undermine the Commission's efforts to prevent waste, fraud,
     and abuse.

119. **[Report to Congress:]{.underline}** The Commission will send a
     copy of the Order, including this FRFA, in a report to be sent to
     Congress 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. A copy of the Order and FRFA (or
     summaries thereof) will also be published in the Federal
     Register.[^250]

## Initial Paperwork Reduction Act of 1995 Analysis

120. This Second Further Notice of Proposed Rulemaking (*Second FNPRM*)
     contains either a proposed or modified information collection. As
     part of a continuing effort to reduce paperwork burdens, we invite
     the general public and the Office of Management and Budget (OMB) to
     take this opportunity to comment on the information collections
     contained in this Further Notice, as required by the Paperwork
     Reduction Act of 1995, Public Law 104-13. Public and agency
     comments are due at the same time as other comments on this Further
     Notice; OMB comments are due 60 days from the date of publication
     of this Further Notice in the Federal Register. Comments should
     address: (a) whether the proposed collection of information is
     necessary for the proper performance of the functions of the
     Commission, including whether the information shall have practical
     utility; (b) the accuracy of the Commission's burden estimates; (c)
     ways to enhance the quality, utility, and clarity of the
     information collected; and (d) ways to minimize the burden of the
     collection of information on the respondents, including the use of
     automated collection techniques or other forms of information
     technology.

## Initial Regulatory Flexibility Analysis 

121. As required by the Regulatory Flexibility Act (RFA),[^251] the
     Commission has prepared this Initial Regulatory Flexibility
     Analysis (IRFA) of the possible significant economic impact on
     small entities by the policies and rules proposed in the *Second
     FNPRM*. Written public comments are requested on this IRFA.
     Comments must be identified as responses to the IRFA and must be
     filed by the deadlines for comments on the *Second FNPRM* provided
     below in section IV.C. The Commission will send a copy of this
     *Second FNPRM*, including this IRFA, to the Chief Counsel for
     Advocacy of the Small Business Administration (SBA).[^252] In
     addition, the *Second FNPRM* and IRFA (or summaries thereof) will
     be published in the Federal Register.[^253]

### Need for, and Objectives of, the Proposed Rules

122. In the *Second FNPRM*, we seek comment on whether the current
     discount matrix provides sufficient incentives for schools and
     libraries to limit funding requests to services that can be
     efficiently used and whether modifying the discount matrix would
     make funds available to a greater number of schools and libraries.
     Further, we ask whether the Commission should adopt rules adjusting
     the discount matrix for certain supported services.[^254] To the
     extent that commenters support creating a separate discount matrix
     for priority two services, we seek comment on the structure and
     implementation issues associated with a new discount matrix.[^255]
     In light of the limitations placed on applications for internal
     connection discounts, which are Priority Two services, we seek
     comment on measures to deter the mischaracterization of internal
     connections as Priority One services.[^256]

123. In addition, we seek comment on whether the current process for
     applying for discounted services sufficiently addresses the
     Commission's goals of minimizing waste, fraud, and abuse in the
     program, while encouraging the benefits of competition as set out
     in the *Universal Service Order*.[^257] In that regard, we solicit
     comment on the current competitive bidding process and the
     efficiency and effectiveness of using Form 470 and requested
     comment regarding any means by which the Commission could ensure
     that applicants select cost-effective services.[^258] Also, we seek
     further comment whether the Commission, as a condition of support,
     should require that each service provider certify that the prices
     in its bid have been independently developed.[^259] Further, we
     request comment on whether the Commission's rules should
     specifically require that records related to the competitive
     bidding process for services be maintained by both the recipient
     and service provider for a period of five years.

124. Next, we seek comment on modifications to the definition of "rural
     area" for the schools and libraries mechanism and ask whether it
     would be necessary or desirable to use the same definition of
     "rural" for both the schools and libraries program and rural health
     care program.[^260] Similarly, we seek comment whether the
     definition of Internet access in the schools context should be
     changed to mirror the definition of Internet access recently
     adopted in the *Rural Health Care Order*.[^261]

125. In light of the restrictions imposed on receiving discounts for
     internal connections, we seek comment asking whether any measures
     should be taken to evaluate service provider charges for capital
     investments for wide area networks, a Priority One service.[^262]
     In that regard, we seek comment whether expenditures that subsidize
     infrastructure investment, either on-premises or off-premises, may
     properly be viewed as Priority One services.[^263] We also seek
     comment on funding for unlit (dark) fiber under the E-rate program.
     In addition, we ask whether we should adopt specific recovery rules
     for funds -- entire or partial commitments -- that are disbursed in
     violation of the statute or programmatic rules or procedures.[^264]
     In that connection, we seek comment regarding measures to prevent
     waste, fraud, and abuse associated with improper disbursement of
     E-rate funds.[^265]

126. We seek comment on various measures to abate waste, fraud and abuse
     in the schools and libraries universal service mechanism, including
     whether a rule should be adopted requiring that all records related
     to the receipt of or delivery of discounted services be maintained
     by beneficiaries and service providers for a period of five years
     after the completion of the discounted services.[^266] In addition,
     we solicit comment whether rules defining "cost-effective" service
     should be adopted.[^267] Also, we seek comment whether applicants
     should be required to identify any consultants or other outside
     experts, whether paid or unpaid, that aid in the preparation of the
     applicant's technology plan or in the applicant's procurement
     process.[^268] In addition, we solicit comment on the adoption of a
     rule requiring the filing of a Service Provider Annual
     Certification (or FCC Form 473) with the Administrator for
     remittance of payment.[^269] We also seek comment as to whether the
     Commission should codify rules establishing deadlines for service
     providers to file invoices with the Administrator and whether the
     Administrator's existing policy to deny support for untimely filed
     invoices, except in limited circumstances, should be
     codified.[^270] In an effort to further reduce waste, fraud and
     abuse in the E-rate program, we request comment whether current
     guidelines from the *Universal Service Order* and USAC regarding
     the content of the applicants' technology plans should be adopted
     as Commission rules. We also ask for comments whether the
     Commission's technology planning goals should be consistent with
     the requirements of the U.S. Department of Education and the U.S.
     Institute for Museum and Library Services. In addition, we seek
     comment whether the Commission should adopt rules to prevent
     individual schools and libraries from submitting applications
     without coordination with or authorization from the central
     authorities, namely school districts and library systems. We
     solicit comment on whether USAC's policy of accepting surveys to
     determine National School Lunch eligibility should be codified.

127. Finally, we seek comment whether our rules should be modified to
     ensure a funding priority for applicants that have not yet achieved
     internet connectivity in their classrooms or libraries. We also
     seek comment generally on whether any rules should be adopted to
     ensure affordable rates for eligible services and ensure access to
     eligible services.

### Legal Basis

128. The legal basis for the *Second FNPRM* is contained in sections 1
     through 4, 201 through 205, 254, 303(r), and 403 of the
     Communications Act of 1934, as amended, 47 U.S.C. §§ 151 - 154,
     201 - 205, 254, 303(r), and 403, and section 1.411 of the
     Commission's rules, 47 C.F.R. § 1.411.

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

129. We have described in detail in the Final Regulatory Flexibility
     Analysis in this proceeding, *supra*, the categories of entities
     that may be directly affected by our proposals. For this Initial
     Regulatory Flexibility Analysis, we hereby incorporate those entity
     descriptions by reference.[^271]

### Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements

130. With one exception, the specific proposals under consideration in
     this *Second FNPRM* would not, if adopted, result in additional
     recordkeeping requirements for small businesses. With regard to the
     one exception, we propose adoption of a rule that requires each
     entity receiving supported services to keep all records related to
     the receipt of or delivery of discounted services for a period of
     five years after implementation of the discounted services. This
     proposal includes additional recordkeeping because the current
     Commission rule requires each entity receiving supported services
     to keep records related to receipt of discounted services similar
     to those that the entity maintains for other purchases and does not
     specify the time period for which such records must be maintained.
     Thus, the revised rule means that the records need not be kept
     beyond the five year period.

131. We have sought comments regarding the other proposed rules;
     however, new recordkeeping requirements are not involved.

### Steps Taken to Minimize Significant Economic Impact on Small Entities, and Significant Alternatives Considered

132. The RFA requires an agency to describe any significant alternatives
     that it has considered in reaching its proposed approach, which may
     include the following four alternatives (among others): (1) the
     establishment of differing compliance and reporting requirements or
     timetables that take into account the resources available to small
     entities; (2) the clarification, consolidation, or simplification
     of compliance or reporting requirements under the rule for small
     entities; (3) the use of performance, rather than design,
     standards; and (4) an exemption from coverage of the rule, or part
     thereof, for small entities.[^272]

133. In the *Second FNPRM*, we seek comment regarding the adoption of
     rules requiring addition recordkeeping for each entity receiving
     discounted services. Moreover, we seek comments asking for
     identification of any recordkeeping measures that would improve the
     Commission's ability to enforce its rules governing waste, fraud,
     and abuse in the schools and libraries program. In that regard, we
     note the findings by recent beneficiary audits conducted by KPMG,
     which indicate that better documentation would improve the ability
     to audit beneficiaries. Since abatement of waste, fraud, and abuse
     in the schools and libraries program is the objective, excluding
     small entities from such a requirement would contravene that
     objective and present a loophole that could damage the integrity of
     the program. Decreasing the likelihood of waste, fraud, and abuse
     preserves program funding for discounts to all eligible schools and
     libraries. We invite comment on this recordkeeping requirement and
     ask that those parties who object to the proposed requirement offer
     an alternative and explain the merits of their alternative.

### Federal Rules that may Duplicate, Overlap, or Conflict with the Proposed Rules

134. None.

## Comment Filing Procedures

135. We invite comment on the issues and questions set forth in the
     *Second FNPRM* and Initial Regulatory Flexibility Analysis
     contained herein. Pursuant to applicable procedures set forth in
     sections 1.415 and 1.419 of the Commission's rules,[^273]
     interested parties may file comments on or before **30** days after
     publication in the Federal Register of this *Second FNPRM*, and
     reply comments on or before **60** days after publication in the
     Federal Register of this *Second FNPRM*. All filings should refer
     to CC Docket No. 02-6. Comments may be filed using the Commission's
     Electronic Comment Filing System (ECFS) or by filing paper
     copies.[^274]

136. Comments filed through the ECFS can be sent as an electronic file
     via the Internet to <http://www.fcc.gov/cgb/ecfs/>. Generally, only
     one copy of an electronic submission must be filed. If multiple
     docket or rulemaking numbers appear in the caption of this
     proceeding, however, commenters must transmit one electronic copy
     of the comments to each docket or rulemaking number referenced in
     the caption. In completing the transmittal screen, commenters
     should include their full name, U.S. Postal Service mailing
     address, and the applicable docket or rulemaking number. Parties
     may also submit an electronic comment by Internet e-mail. To
     receive filing instructions for e-mail comments, commenters should
     send an e-mail to <ecfs@fcc.gov>, and should include the following
     words in the body of the message, \"get form .\" A sample form and
     directions will be sent in reply.

137. Parties who choose to file by paper must file an original and four
     copies of each filing. If more than one docket or rulemaking number
     appears in the caption of this proceeding, commenters must submit
     two additional copies for each additional docket or rulemaking
     number.

138. Filings can be sent by hand or messenger delivery, by commercial
     overnight courier, or by first-class or overnight U.S. Postal
     Service mail (although we continue to experience delays in
     receiving U.S. Postal Service mail).

139. The Commission\'s contractor, Natek, Inc., will receive
     hand-delivered or messenger-delivered paper filings for the
     Commission\'s Secretary at 236 Massachusetts Avenue, N.E., Suite
     110, Washington, D.C. 20002.

     -The filing hours at this location are 8:00 a.m. to 7:00 p.m.

     -All hand deliveries must be held together with rubber bands or
     fasteners.

     -Any envelopes must be disposed of before entering the building.

     -Commercial overnight mail (other than U.S. Postal Service Express
     Mail and Priority Mail) must be sent to 9300 East Hampton Drive,
     Capitol Heights, MD 20743.

     -U.S. Postal Service first-class mail, Express Mail, and Priority
     Mail should be addressed to 445 12th Street, SW, Washington, D.C.
     20554.

     -All filings must be addressed to the Commission\'s Secretary,
     Office of the Secretary, Federal Communications Commission.

140. Parties filing electronic media should be advised that the
     Commission released a public notice on August 22, 2003 providing
     new guidance for mailing electronic media.[^275] In brief,
     electronic media should NOT be sent through USPS because of the
     eradiation process USPS mail must undergo to complete delivery.
     Hand or messenger delivered electronic media for the Commission's
     Secretary should be addressed for delivery to 236 Massachusetts
     Avenue, N.E., Suite 110, Washington, D.C. 20002, and other
     messenger-delivered electronic media should be addressed for
     delivery to 9300 East Hampton Drive, Capitol Heights, MD 20743.

141. Parties who choose to file by paper should also submit their
     comments on diskette to Sheryl Todd, Telecommunications Access
     Policy Division, Wireline Competition Bureau, Federal
     Communications Commission, 445 12th Street, SW, Room 5-B540,
     Washington, DC, 20554. Such a submission should be on a 3.5 inch
     diskette formatted in an IBM compatible format using Microsoft Word
     or compatible software. The diskette should be accompanied by a
     cover letter and should be submitted in "read only" mode. The
     diskette should be clearly labeled with the commenter's name,
     proceeding (including the docket number, in this case, CC Docket
     No. 02-6), type of pleading (comment or reply comment), date of
     submission, and the name of the electronic file on the diskette.
     The label should also include the following phrase "Disk Copy - Not
     an Original." Each diskette should contain only one party's
     pleading, preferably in a single electronic file. In addition,
     commenters must send diskette copies to the Commission's copy
     contractor, Natek, Inc., Portals II, 445 12th Street, SW, Room
     CY-B402, Washington, DC, 20554.

142. Regardless of whether parties choose to file electronically or by
     paper, parties should also file one copy of any documents filed in
     this docket with the Commission's copy contractor, Qualex,
     International Inc., Portals II, 445 12th Street, SW, Room CY-B402,
     Washington, DC, 20554. Comments and reply comments will be
     available for public inspection during regular business hours in
     the FCC Reference Center, Room CY-A257, 445 12th Street, SW,
     Washington, DC, 20554. In addition, the full text of this document
     is available for public inspection and copying during regular
     business hours at the FCC Reference Information Center, Portals II,
     445 12th Street, SW, Room CY-A257, Washington, DC, 20554. This
     document may also be purchased from the Commission's duplicating
     contractor, Qualex International, Inc., Portals II, 445 12th
     Street, SW, Room CY-B402, Washington, DC, 20554, telephone
     202-863-2893, facsimile 202-863-2898, or via e-mail
     **qualexint@aol.com**.

143. Comments and reply comments must include a short and concise
     summary of the substantive arguments raised in the pleading.
     Comments and reply comments must also comply with section 1.49 and
     all other applicable sections of the Commission's rules.[^276] We
     direct all interested parties to include the name of the filing
     party and the date of the filing on each page of their comments and
     reply comments. All parties are encouraged to utilize a table of
     contents, regardless of the length of their submission. We also
     strongly encourage parties to track the organization set forth in
     the FNPRM in order to facilitate our internal review process.

## Further Information

144. Alternative formats (computer diskette, large print, audio
     recording, and Braille) are available to persons with disabilities
     by contacting Brian Millin at (202) 418-7426 voice, (202) 418-7365
     TTY, or <bmillin@fcc.gov>. This Third Report and Order and Second
     FNPRM can also be downloaded in Microsoft Word and ASCII formats at
     <http://www.fcc.gov/wcb/universal_service/schoolsandlibs.html>.

145. For further information, contact Kathy Tofigh at (202) 418-1553,
     Karen Franklin at (202) 418-7706, or Jennifer Schneider at (202)
     418-0425 in the Telecommunications Access Policy Division, Wireline
     Competition Bureau.

#  Ordering Clauses

146. 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 Third Report and
     Order IS ADOPTED.

147. IT IS FURTHER ORDERED that Part 54 of the Commission's rules, 47
     C.F.R. Part 54, IS AMENDED as set forth in Appendix A attached
     hereto, effective thirty (30) days after the publication of this
     Third Report and Order in the Federal Register.

148. IT IS FURTHER 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 Second Further Notice
     of Proposed Rulemaking IS ADOPTED.

149. IT IS FURTHER ORDERED that the Commission's Consumer and
     Governmental Affairs Bureau, Reference Information Center, SHALL
     SEND a copy of this Third Report and Order and Second Further
     Notice of Proposed Rulemaking, including the Final Regulatory
     Flexibility Analysis and Initial Regulatory Flexibility Analysis,
     to the Chief Counsel for Advocacy of the Small Business
     Administration.

> FEDERAL COMMUNICATIONS COMMISSION

Marlene H. Dortch Secretary

**APPENDIX A \-- FINAL RULES**

Part 54 of the Code of Federal Regulations is amended as follows:

**PART 54 \-- UNIVERSAL SERVICE**

1\. The authority citation continues to read as follows:

Authority: 47 U.S.C. § 1, 4(i), 201, 205, 214, and 254 unless otherwise
noted.

**Subpart F \-- Universal Service Support for Schools and Libraries**

2\. Section 54.504 is amended by revising subparagraph (b)(2)(iii) and
adding paragraphs (f) and (g) as follows:

**54.504 Requests for services.**

\(a\) \* \* \*

\(b\) \* \* \*

\(2\) \* \* \*

\(iii\) The services will not be sold, resold, or transferred in
consideration for money or any other thing of value, and will not be
transferred, with or without consideration for money or any other thing
of value, except as permitted by the Commission's rules;

\* \* \*

\(e\) \* \* \*

\(f\) *Service Substitution*.

\(1\) The Administrator shall grant a request by an applicant to
substitute a service or product for one identified on its FCC Form 471
where:

\(A\) the service or product has the same functionality;

\(B\) the substitution does not violate any contract provisions or state
or local procurement laws;

\(C\) the substitution does not result in an increase in the percentage
of ineligible services or functions; and

\(D\) the applicant certifies that the requested change is within the
scope of the controlling FCC Form 470, including any associated Requests
for Proposal, for the original services.

\(2\) In the event that a service substitution results in a change in
the pre-discount price for the supported service, support shall be based
on the lower of either the pre-discount price of the service for which
support was originally requested or the pre-discount price of the new,
substituted service.

\(3\) For purposes of this rule, the broad categories of eligible
services (telecommunications service, Internet access, and internal
connections) are not deemed to have the same functionality with one
another.

\(g\) *Mixed eligibility services*. A request for discounts for a
product or service that includes both eligible and ineligible components
must allocate the cost of the contract to eligible and ineligible
components.

\(1\) *Ineligible components*. If a product or service contains
ineligible components, costs must be allocated to the extent that a
clear delineation can be made between the eligible and ineligible
components. The delineation must have a tangible basis, and the price
for the eligible portion must be the most cost-effective means of
receiving the eligible service.

\(2\) *Ancillary ineligible components*. If a product or service
contains ineligible components that are ancillary to the eligible
components, and the product or service is the most cost-effective means
of receiving the eligible component functionality, without regard to the
value of the ineligible component, costs need not be allocated between
the eligible and ineligible components. Discounts shall be provided on
the full cost of the product or service. An ineligible component is
"ancillary" if (1) a price for the ineligible component cannot be
determined separately and independently from the price of the eligible
components, and (2) the specific package remains the most cost-effective
means of receiving the eligible services, without regard to the value of
the ineligible functionality.

\(3\) The Administrator shall utilize the cost allocation requirements
of this subparagraph in evaluating mixed eligibility requests under
section 54.504(d)(1).

3\. Section 54.506 is amended to place the existing text in subparagraph
(a), and to add subparagraphs (b) and (c) as follows:

**54.506 Internal Connections**

\(a\) A service is eligible for support as a component of an
institution's internal connections if such service is necessary to
transport information within one or more instructional buildings of a
single school campus or within one or more non-administrative buildings
that comprise a single library branch. Discounts are not available for
internal connections in non-instructional buildings of a school or
school district, or in administrative buildings of a library, to the
extent that a library system has separate administrative buildings,
unless those internal connections are essential for the effective
transport of information to an instructional building of a school or to
a non-administrative building of a library. Internal connections do not
include connections that extend beyond a single school campus or single
library branch. There is a rebuttable presumption that a connection does
not constitute an internal connection if it crosses a public
right-of-way.

\(b\) *Basic maintenance services*. Basic maintenance services shall be
eligible as an internal connections service if, but for the maintenance
at issue, the internal connection would not function and serve its
intended purpose with the degree of reliability ordinarily provided in
the marketplace to entities receiving such services. Basic maintenance
services do not include services that maintain equipment that is not
supported or that enhance the utility of equipment beyond the transport
of information, or diagnostic services in excess of those necessary to
maintain the equipment's ability to transport information.

\(c\) *Frequency of Discounts for Internal Connections Services*. Each
eligible school or library shall be eligible for support for internal
connections services, except basic maintenance services, no more than
twice every five funding years. For the purpose of determining
eligibility, the five-year period begins in any funding year, starting
with Funding Year 2005, in which the school or library receives
discounted internal connections services other than basic maintenance
services. If a school or library receives internal connections services
other than basic maintenance services that are shared with other schools
or libraries (for example, as part of a consortium), the shared services
will be attributed the school or library in determining whether it is
eligible for support.

4\. Section 54.507 is amended by adding paragraphs (a)(1) and (a)(2) to
read as follows:

**§ 54.507 Cap.**

\(a\) \*\*\*\*\*\*

\(1\) *Amount of Unused Funds.* The Administrator shall report to the
Commission, on a quarterly basis, funding that is unused from prior
years of the schools and libraries support mechanism.

\(2\) *Application of Unused Funds*. On an annual basis, in the second
quarter of each calendar year, all funds that are collected and that are
unused from prior years shall be available for use in the next full
funding year of the schools and libraries mechanism in accordance with
the public interest and notwithstanding the annual cap, as described in
paragraph (a) of this section.

5\. Section 54.509(b) is revised to read as follows:

**§ 54.509 Adjustments to the discount matrix.**

\(b\) *Reduction in percentage discounts.* At all times other than
within a filing period described in § 54.507(c), if the estimates
schools and libraries make of their future funding needs lead the
Administrator to predict that total funding request for a funding year
will exceed the available funding, the Administrator shall calculate the
percentage reduction to all schools and libraries, except those in the
two most disadvantaged categories, necessary to permit all requests in
the next funding year to be fully funded.

6\. Section 54.513 is amended by revising the title of the section and
adding paragraph (c) as follows:

**54.513 Resale and transfer of services.**

\(a\) \* \* \*

\(b\) \* \* \*

\(c\) Eligible services and equipment components of eligible services
purchased at a discount under this subpart shall not be transferred,
with or without consideration of money or any other thing of value, for
a period of three years after purchase, except that eligible services
and equipment components of eligible services may be transferred to
another eligible school or library in the event that the particular
location where the service originally was received is permanently or
temporarily closed. If an eligible service or equipment component of a
service is transferred due to the permanent or temporary closure of a
school or library, the transferor must notify the Administrator of the
transfer, and both the transferor and recipient must maintain detailed
records documenting the transfer and the reason for the transfer for a
period of five years.

7\. Section 54.516 is amended by adding a sentence to paragraph (b) as
follows:

**54.516 Auditing.**

\(a\) \* \* \* Schools and libraries shall be required to 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.

8\. Section 54.522 is added as follows:

**54.522 Eligible services list.**

The Administrator shall submit by June 30 of each year a draft list of
services eligible for support, based on the Commission's rules, in the
following funding year. The Commission will issue a Public Notice
seeking comment on the Administrator's proposed eligible services list.
At least 60 days prior to the opening of the window for the following
funding year, the Commission shall release a Public Notice attaching the
final eligible services list for the upcoming funding year.

9\. Section 54.523 is added as follows:

**54.523 Payment for the non-discount portion of supported services.**

An eligible school, library, or consortium must pay the non-discount
portion of services or products purchased with universal service
discounts. An eligible school, library, or consortium may not receive
rebates for services or products purchased with universal service
discounts. For the purpose of this rule, the provision, by the provider
of a supported service, of free services or products unrelated to the
supported service or product constitutes a rebate of the non-discount
portion of the supported services.

APPENDIX B

DISCOUNT MATRIX

47 C.F.R. § 54.505(c)

+--------------------------------+------------------+------------------+
| Percentage of Students         | Urban Discount   | Rural Discount   |
| Eligible for School Lunch      |                  |                  |
| Program                        | Level            | Level            |
+--------------------------------+------------------+------------------+
| \<1                            | 20%              | 25%              |
+--------------------------------+------------------+------------------+
| 1-19                           | 40%              | 50%              |
+--------------------------------+------------------+------------------+
| 20-34                          | 50%              | 60%              |
+--------------------------------+------------------+------------------+
| 35-49                          | 60%              | 70%              |
+--------------------------------+------------------+------------------+
| 50-74                          | 80%              | 80%              |
+--------------------------------+------------------+------------------+
| 75-100                         | 90%              | 90%              |
+--------------------------------+------------------+------------------+

APPENDIX C

Examples of Permissible Funding Under Twice-Every-Five-Years Rule for
Internal Connections

  ------ ------------ --------------- --------------- --------------- --------------- ---------------
         Example 1    Example 2       Example 3       Example 4       Example 5       Example 6

  2005   **Funding    **Funding       Funding         Funding         **Eligible**,   Funding
         Received**   Received**      Received        Received        but no Funding  Received
                                                                      Received        

  2006   **Funding    **Eligible**,   **Eligible**,   **Eligible**,   **Eligible**,   **Eligible**,
         Received**   but no Funding  but no Funding  but no Funding  but no Funding  but no Funding
                      Received        Received        Received        Received        Received

  2007   Not Eligible **Eligible**,   Funding         **Eligible**,   **Eligible**,   **Eligible**,
         for Funding  but no Funding  Received        but no Funding  but no Funding  but no Funding
                      Received                        Received        Received        Received

  2008   Not Eligible **Funding       Not Eligible    Funding         **Eligible**,   **Eligible**,
         for Funding  Received**      for Funding     Received        but no Funding  but no Funding
                                                                      Received        Received

  2009   Not Eligible Not Eligible    Not Eligible    Not Eligible    Funding         Funding
         for Funding  for Funding     for Funding     for Funding     Received        Received

  2010   **Funding    **Eligible**,   Funding         Funding         Funding         Funding
         Received**   but no Funding  Received        Received        Received        Received
                      Received                                                        

  2011   **Funding    Funding         Not Eligible    Not Eligible    Not Eligible    Not Eligible
         Received**   Received        for Funding     for Funding     for Funding     for Funding

  2012   Not Eligible Not Eligible    Funding         Not Eligible    Not Eligible    Not Eligible
         for Funding  for Funding     Received        for Funding     for Funding     for Funding

  2013   Not Eligible **Eligible**,   Not Eligible    Funding         Not Eligible    Not Eligible
         for Funding  but no Funding  for Funding     Received        for Funding     for Funding
                      Received                                                        

  2014   Not Eligible Funding         Not Eligible    Not Eligible    Funding         Funding
         for Funding  Received        for Funding     for Funding     Received        Received
  ------ ------------ --------------- --------------- --------------- --------------- ---------------

APPENDIX D

**List of Parties Filing Comments in response to Schools and Libraries
Notice of Proposed Rulemaking**

**CC Docket No. 02-6**

**(filed July 1, 2002)**

#  {#section-1 .unnumbered}

**[Commenter]{.underline} [Abbreviation]{.underline}**

Access Living of Metropolitan Chicago AL

Airoldi, Joan

Alaska, State of (Department of Education

and Early Development) Alaska

Alaska Telephone Association, The ATA

American Association of School Administrators AASA

American Library Association ALA

Arkansas E-rate Workgroup, The State of Arkansas E-rate

AT&T Corp. AT&T

AT&T Wireless Services, Inc. AWS

Avella Area School District Avella

Bakersfield School District Bakersfield

BellSouth and SBC Comm., Inc. BellSouth/SBC

Benton Foundation

Bibbey, David

Boston, City of Boston

Bowe, Marty

California Department of Education, The California DOE

Carnegie Library of Pittsburgh Carnegie Library

Cellular Telecommunications & Internet Association CTIA

Central Susquehanna Intermediate Unit Central Susquehanna

Cleveland Municipal School District Cleveland MSD

Coalition for E-rate Reform E-rate Reform

Colorado Department of Education Colorado DOE

Community Technology Centers' Network, The Benton

Foundation, Association for Community Networking,

California Community Technology Policy Group,

Santa Barbara College, Casa Foundation CTCNet

Council of Chief State School Officers CCSSO

Council of the Great City Schools, The Great City

Delaware Center for Educational Technology

Dell Computer Corporation Dell

eChalk LLC eChalk

Edison Schools, Inc. Edison Schools

Educational Services District 101 Edu. Service D. 101

Education and Library Networks Coalition EdLINC

Emilienburg, Steven

E-Rate Elite Services, Inc. E-Rate Elite

Excaliber Internet Corp. Excaliber

Florida Division of Library and Information Services

Florida Public Service Commission Florida PSC

Florida State of Dept. of Ed. Florida DOE

Funds For Learning, LLC

General Communications, Inc. GCI

Gibson, Jeffrey

Grainger, Kathleen Bond

Gregory, James D.

Harris, Jim Harris (Alabama DOE)

Harvey ESD Harney

Hawaii State Public Library Hawaii

Illinois State Board of Education Illinois BOE

Inclusive Technologies

Information Institute

Information Renaissance

Integrity Networking Systems, Inc. Integrity

Intelenet Commission, Indiana Department of

Education and Indiana State Library Intelenet

Iowa Communications Network

Iowa Department of Education Iowa DOE

Iversen, Sarah L.

Johnson, Jack

Jones Public Schools

Kellogg Consulting, LLC Kellogg Consulting

Kentucky Department for Libraries and Archives

Kentucky Department of Education

Kila School District #20 Kila

Lawton-Bronson Community School,

Norman Washburn

Lebanon School District

Los Angeles Unified School District LA USD

Madison School District

Maine Public Utilities Commission Maine PUC

Marian High School

Megdad, Diane

Memphis City Schools

Michigan Information Network, The Michigan

Missouri Office of the Public Counsel Missouri OPC

Missouri Research and Education Network MOREnet

Montana Independent Telecommunications Systems MTIS

Montana Public Service Commission Montana PSC

Montgomery, Ruth Ann

Nassau-Suffolk School Boards Association N-SSBA

National Council on Disability NCD

National Education Association, the International

Society for Technology in Education and

The Consortium for School Networking NEA et al

New Jersey Library Association, The

New York City Board of Education, The NYCBOE

New York Public Library, The NYPL

New York State Education Department, The

Nextel Communications, Inc. Nextel

North Attleborough Public Schools

North Carolina State Library NCL

North of Boston Library Exchange NOBLE

Northwood School District

O'Donnell, Tracey

Office of Information Technology Services OIT NC

of North Carolina, The

Office of the Public Counsel

Ogden, Jeffrey C.

Pennsylvania Department of Education Pennsylvania DOE

Philadelphia School District

Pisano, Vivian M.

Plummer, Jamie

Quaker Valley School District

Queens Borough Public Library

Richardson Associates Electronics

Rural School and Community Trust

Scranton Public Library Scranton PL

Lackawanna County Library System

Seattle Public Library Seattle PL

Segalman and Nixon

Sharer, Judy

Skiatook Public Schools

Software & Information Industry Association Software & Info

Sorenson, Doug

Spectrum Communications Cabling Services, Inc. Spectrum

Sprint Corporation Sprint

Sterling, Jack

St. Louis Public Library

Southwest Virginia Education and Training Network SVETV

TAMSCO Telecommunications Division TAMSCO

Tel/Logic Inc. Tel/Logic

Telecommunications for the Deaf, Inc. TDI

Three Rivers

Trillion Digital Communications, Inc. Trillion

United Cerebal Palsy of Michigan/Pam Schuster

Universal Service Administrative Company USAC

Verizon Telephone Companies Verizon

Warwick Communications, Inc. Warwick

Weisiger, Greg Weisiger

West Virginia Department of Education West Virginia DOE

WiscNet

Wisconsin Department of Public Instruction, The WDPI

WorldCom, Inc. WorldCom

York County Library System York County Library

Martin Library Association

**List of Parties Filing Reply Comments in response to Schools and
Libraries Notice of Proposed Rulemaking**

**CC Docket No. 02-6**

**(filed July 31, 2002)**

**[Commenter]{.underline} [Abbreviation]{.underline}**

Alaska, State of (Department of Education

and Early Development) Alaska

American Association of School Administrators AASA

American Library Association ALA (late)

Arkansas E-rate Workgroup, State of AEWG

AT&T Wireless Services, Inc. AWS

Council of Chief State School Officers CCSSO

Cox Communications, Inc. COX

Dell Computer Corporation Dell

Education and Library Networks Coalition EdLiNC

Florida Public Service Commission FPSC

Funds For Learning, LLC

Information Technology Industry Council ITI

Iowa, State Library

Merit Network, Inc. Merit

National Association of State Telecommunications

Directors NASTD

National Education Association,

The International Society for Technology in

Education, and the Consortium for School

Networking NEA et al

New York State Education Department New York

Nextel Communications, Inc. Nextel

Qwest Communications International Inc. Qwest

Siemens Enterprise Networks Siemens

Spectrum Communications Cabling Services, Inc. Spectrum

Sprint Corporation Sprint

Verizon Verizon

Weisiger, Greg

WorldCom, Inc. WorldCom

**List of Parties Filing Comments in response to Schools and Libraries
Further Notice of Proposed Rulemaking**

**CC Docket No. 02-6**

**(filed July 21, 2003)**

**[Commenter]{.underline} [Abbreviation]{.underline}**

Alaska State Library and Department of Education

and Early Development EED

American Library Association ALA

Arkansas E-rate Work Group AEWG

Association for Telecommunications and

Technology Professionals Serving State Government NASTD

AT&T Corp. AT&T

BellSouth Corporation BellSouth

Comtec Business Systems, Inc. Comtec

Consortium for School Networking CoSN

Dell Computer Corporation Dell

Education and Library Networks Coalition EdLiNC

Fibertech Networks, LLC Fibertech

Florida Public Service Commission FPSC

Funds For Learning, LLC

Greg Weisiger Weisiger

Illinois State Board of Education ISBE

Information Technology Group of the

New York Public Library NYPL

National Association of State Utility Consumer

Advocates NASUCA

New York City Department of Education NYCDOE

Sprint Corporation Sprint

State E-Rate Coordinators' Alliance Alliance

StateNets StateNets

Tel/Logic Inc. d/b/a E-Rate Central

Verizon telephone companies Verizon

Wisconsin Department of Public Instruction Wisconsin DPI

WorldCom, Inc. d/b/a MCI

**List of Parties Filing Reply Comments in response to Schools and
Libraries Further Notice of Proposed Rulemaking**

**CC Docket No. 02-6**

**(filed August 19, 2003)**

**[Commenter]{.underline} [Abbreviation]{.underline}**

Consortium on School Networking CoSN

International Society of Technology in

Education ISTE

Council of the Great City Schools Council

Education and Library Networks Coalition EdLiNC

Funds For Learning, LLC

National Association of Independent Schools NAIS

National Education Knowledge Industry Association NEKIA

Nextel Communications, Inc. Nextel

Pennsylvania Department of Education

State of Alaska Department of Education and

Early Development

Alaska State Library EED

State E-rate Coordinators Alliance SECA

Verizon

Weisiger, Greg

**SEPARATE STATEMENT OF**

**CHAIRMAN MICHAEL K. POWELL**

> *Re: In the Matter of Schools and Libraries Universal Service Support
> Mechanism*
>
> *CC Docket No. 02-6*

Today marks another milestone in our ongoing and systematic efforts to
improve the effectiveness of the schools and libraries fund. Today, we
adopt a variety of measures designed to simplify fund administration,
ensure the equitable distribution of monetary support, and to protect
against waste, fraud, and abuse. The rules we adopt today should
increase the accuracy and effectiveness of disbursements by, for
example, precluding eligible entities from upgrading or replacing
internal connections with universal service funds on a yearly basis,
clarifying what constitutes permissible maintenance costs, and limiting
the transfer of equipment purchased with universal service discounts.

Many of the actions we take today draw from previous events, including
the May 2003 public forum on universal service reform and the activities
of the Universal Service Administrative Company's Waste, Fraud, and
Abuse Task Force. Taken together, these measures advance our mission of
ensuring efficient, accurate and timely fund disbursements to promote
the nation's universal service objectives. Yet our task is not yet
complete. As indicated in our *Further Notice*, the agency seeks comment
on how to further enhance the ability of limited funds to do the most
good for the most Americans.

**SEPARATE STATEMENT OF**

**COMMISSIONER KATHLEEN Q. ABERNATHY**

> *Re: In the Matter of Schools and Libraries Universal Service Support
> Mechanism*
>
> *CC Docket No. 02-6*

I am extremely pleased to support this Order and Further Notice. Today
we make real progress in improving the efficiency and effectiveness of
the Schools and Libraries program. In April of this year, the Commission
took an initial step to bolster our defenses against waste, fraud, and
abuse in the program by adopting a debarment rule for bad actors. At
that time, we solicited comment on additional measures to prevent waste,
fraud, and abuse, and in May, I organized a public forum to develop more
concrete recommendations. On the heels of the public forum, the
Universal Service Administrative Company formed a task force to provide
additional proposals.

This item represents the initial fruit of those efforts. Many
participants in the public forum argued that the Commission should limit
the frequency of discounts for internal connections and also restrict
transfers of equipment among schools. The USAC task force made similar
recommendations. The Commission has appropriately responded ― quite
promptly ― by limiting funding for internal connections to twice every
five years and barring most equipment transfers. These new rules will
give applicants flexibility to spread expenditures over two years, but
will prevent the same applicants from being funded year after year.
Given the scarcity of priority two funds in recent years, the changes
will result in extending discounts to schools and libraries in lower
discount bands that have yet to receive any funding for internal
connections. While we have effectively authorized applicants to upgrade
their internal connections every three years, I want to stress that this
is a *minimum* period of time that must elapse; in most circumstances, I
would expect applicants to recognize that cables, routers, and the like
will have significantly longer useful lives.

I am also encouraged by the recommendation of the USAC task force, among
others, to lower the maximum discount percentage for internal
connections. Common sense suggests that once schools and libraries have
been wired, they should not need significant funding again for many
years. In practice, however, many applicants in the 80-90 percent
discount range have sought increasing funding every year. This pattern
suggests that a "copay" of only 10-20 percent may be insufficient to
ensure cost-effective expenditures. I look forward to further developing
the record on this issue and hopefully making additional rule changes
next year.

Finally, I am pleased that the Order continue our search for additional
ways to simplify the application process. Although our primary focus has
appropriately been ensuring program integrity, we should remain mindful
of the need to make it easier for deserving applicants to obtain access
to funding. The April Order and today's Order made several improvements,
but we should continue to work on minimizing red tape in the next phase
of this rulemaking.

**SEPARATE STATEMENT OF\
COMMSSIONER MICHAEL J. COPPS**

> *Re: In the Matter of Schools and Libraries Universal Service Support
> Mechanism*
>
> *CC Docket No. 02-6*

Great programs like E-Rate do not thrive without regular review and
care. With justifiable pride we can now say that 92 percent of public
school classrooms are connected to the Internet. Only 14 percent of
these classrooms were connected when Congress passed the
Telecommunications Act in 1996. Yet the gains we have made will
evaporate without our continued vigilance. This leads me to support
today's decision. It is one in a series of positive steps we are taking
at the Commission to ensure that the E-Rate program functions with the
integrity it must have.

I am particularly pleased that today we finally formalize the process
for making available carryover funds from prior years. This is a major
step forward. I also think our new rule limiting support for internal
connections to two times within a five-year period strikes the right
balance between applicant needs and efficient use of program support.
These are but two of numerous positive steps contained in this item.

We don't solve all problems today, however. An abrupt change in the
eligible services list has left applications from rural schools and
libraries in North Dakota and elsewhere high and dry. These rural
schools and libraries have built cost-effective networks based on the
use of dark fiber. Now the signals have changed and dark fiber is no
longer eligible. We need to reverse this recent action and get our
policy regarding support for dark fiber straight once and for all. I see
nothing in Section 254(h) that compels the exclusion of dark fiber
facilities from E-Rate program support. I hope we can correct this
mistake as soon as possible.

Finally, I think all supporters of the E-rate should frequently caution
themselves that we not add to the growing complexity of the application
process. As we tighten procedures and take necessary steps to weed out
waste and fraud in the program, we could unwittingly make the
application process so daunting as to discourage needy schools and
libraries from even applying. As we strive to improve accountability, so
also should we commit ourselves to ensuring that as the program evolves,
it continues to serve the needs of students and patrons of our schools
and libraries---the real beneficiaries of support.

**SEPARATE STATEMENT OF**

**COMMISSIONER JONATHAN S. ADELSTEIN**

> *Re: In the Matter of Schools and Libraries Universal Service Support
> Mechanism*
>
> *CC Docket No. 02-6*

In 1996, prior to the implementation of the E-rate program, only 14
percent of public classrooms were connected to the Internet. According
to the most recently available data, in 2002, 92 percent of public
school classrooms were connected to the Internet. In addition, 85
percent of the public schools that are connected to the Internet
reported in 2001 that they had a broadband connection.

In 1997, only 60 percent of library systems provided public access in
one of their outlets. While in 2002, 95 percent of public library
outlets provided public access. The E-rate program has become a
necessary tool to facilitate access to the myriad of opportunities that
the Internet offers to students and library patrons alike.

Clearly, this has been a very successful program. But even successful
programs can be improved.

Today we adopt an item which is just one in a series of steps we are
taking to improve the Schools and Libraries Program. Over the years,
this Commission has addressed matters related to the administration of
this program to make it more user-friendly and help prevent waste, fraud
and abuse. In this last year, this Commission has made a more concerted
effort to address these issues.

In April, we issued a Second Order and Further Notice which adopted a
debarment rule and other measures to ensure that this program is
utilized in the best manner possible. We also sought comment on other
issues, some of which we address in this item. In May of this year, we
held a Forum on "Improving Administration of the Schools and Libraries
Support Mechanisms" and had the opportunity to learn more about the use
of this program from a number of different sources.

In addition, we have benefited from the recommendations of USAC's Waste,
Fraud and Abuse Task Force and have had the opportunity to review
beneficiary audit reports and the Office of Inspector General's
semi-annual report. Today's decision draws upon a great deal of
information from a number of knowledgeable sources. As I had anticipated
in my Separate Statement in April, we have taken more steps forward with
this latest addition in our efforts to reform the program and ensure
that it inures to the benefit of those schools and libraries across the
nation that participate

When private companies make decisions about their telecommunications
investments, particularly when it comes to investments in equipment,
they generally do not expect to replace their equipment year after
year.   Our rules in the Schools and Libraries program have permitted
schools and libraries to do just that.  But today we change that. And I
support that change.

In April, I said that perhaps we should apply a service life to the
equipment. USAC's Waste Fraud and Abuse Task Force recommended the same.
This program-specific service life would require program participants to
keep the equipment for a particular period of time rather than applying
annually for discounts for duplicative equipment. 

Although we did not adopt such a "service life" for equipment, we may
have addressed my concern about ensuring the fair and even distribution
among requesting users by adoption of two different measures. As a
caution, however, we may need to address the issue of service specific
lives in the event that the rule we adopt today does not go far enough
to prevent waste, fraud and abuse.

We have addressed my concerns by limiting the frequency of requests from
entities for Priority Two discounts, and restricting the transfer of
equipment purchased with discounts from the schools and libraries
support mechanism. Implementation of the "twice-every-five-years" rule
will facilitate the availability of funds to more eligible schools and
libraries on a regular basis. The fact that we include in that the
opportunity to have those two years be consecutive addresses concerns
that some schools may need two successive years to complete their
projects by spreading the costs over that time. I am also pleased that
we exempt maintenance costs from the twice-every-five-years restriction.
We clearly define what basic maintenance services are in order to avoid
future confusion about what is, and what is not exempt from the basic
rule. Clarity is imperative to making this program more user-friendly,
as requested by so many of the Forum participants.

Today we extend the Act's prohibition on sale or transfer of equipment
purchased with discounts from the universal service program in
consideration of money or anything else of value. In order to help
prevent waste, fraud and abuse, we prohibit transfer of equipment,
without regard to whether money or anything else of value has been
received in return, for a period of three years after purchase. We do
recognize, however, that applicants may have legitimate reasons to
transfer internal connections equipment due to the closing of a school
or other eligible entity. I believe that this provides the necessary
flexibility to our new rule.

The Waste Fraud and Abuse Task Force has recommended a reconfiguration
of our discount matrix. In April, I stated that it was important for us
to address the possibility of changing the discount levels for this
program. Many have suggested that the 90% discount level is too high
because it does not require enough of an investment by the school or
library.  Reducing the discount levels can introduce more
accountability, and better control the costs of the program.   At the
same time, I realize that there may very well be some schools and
libraries that could not afford the benefits of this program if we
reduced the discounts.  Today, we ask those questions, and others, in
order to explore the efficacy of these changes.

I support this item as another continuing opportunity to improve an
already outstanding program.  We cannot afford to let any abusive
practices overshadow the enormous success of this program. I look
forward to working with my colleagues, USAC, the service providers, and
the schools and libraries as we undertake this endeavor. 

[^1]: Although the schools and libraries support mechanism provides
    discount support for services, many supported services have
    component parts. In this Order, references to "equipment" will
    refer, for simplicity, to equipment components of eligible internal
    connections services.

[^2]: Forum on Improving Administration of the Schools and Libraries
    Universal Support Mechanism (May 8, 2003) (*E-Rate Public Forum*).

[^3]: Semiannual Report to Congress, April 1-September 30, 2003, Office
    of the Inspector General, Federal Communications Commission, at
    3-15; Semiannual Report to Congress, October 1, 2002-March 31, 2003,
    Office of the Inspector General, Federal Communications Commission,
    at 4-12; Semiannual Report to Congress, April 1-September 30, 2002,
    Office of the Inspector General, Federal Communications Commission,
    at 2-10 (filed October 31, 2002) (collectively, Semi-Annual Reports
    of the Inspector General).

[^4]: *See* Task Force on the Prevention of Waste, Fraud, and Abuse,
    Universal Service Administration Company (filed November 26, 2003)
    (*Task Force Recommendation*).

[^5]: 47 C.F.R. §§ 54.502, 54.503.

[^6]: *Federal-State Joint Board on Universal Service*, CC Docket 96-45,
    Report and Order, 12 FCC Rcd 8776, 9077-78 paras. 572-74 (1997)
    (*Universal Service Order*). A technology plan must meet five
    requirements: (1) clear goals and a realistic strategy for using
    telecommunications and information technology to improve education
    or library services; (2) a professional development strategy to
    ensure that staff know how to use these new technologies to improve
    education or library services; (3) an assessment of the
    telecommunication services, hardware, software, and other services
    that will be needed to improve education or library services; (4) 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) an evaluation process that enables the school or library to
    monitor progress toward the specified goals. *See id.*

[^7]: 47 C.F.R. § 54.504(b)(1), (b)(3).

[^8]: 47 C.F.R. § 54.504(c).

[^9]: 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).

[^10]: *See* 47 C.F.R. § 54.505.

[^11]: *Id.* *See also* Appendix B (discount matrix).

[^12]: 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*).

[^13]: *Schools and Libraries Universal Service Support Mechanism*, CC
    Docket 02-6, Notice of Proposed Rulemaking, 17 FCC Rcd 1914 (2002)
    (*Schools and Libraries NPRM*).

[^14]: *See* *Schools and Libraries Universal Service Support
    Mechanism*, CC Docket No. 02-6, Report and Order, 17 FCC Rcd 11521
    (2002) (*Schools and Libraries Order*).

[^15]: *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*).

[^16]: For example, USAC estimates that the demand for discounts for
    Funding Year 2003 of the schools and libraries program is \$4.718
    billion. *See* Letter from George McDonald, Vice-President,
    Universal Service Administrative Company, Schools and Libraries
    Division, to William Maher, Chief of the Wireline Competition
    Bureau, Federal Communications Commission, April 3, 2003. Funding
    years are described by the year in which the funding period starts.
    For example, the funding period which begins on July 1, 2003 and
    ends on June 30, 2004, is called Funding Year 2003. The funding
    period which begins on July 1, 2004, and ends on June 30, 2005, is
    called Funding Year 2004.

[^17]: *See* 47 C.F.R. § 54.617.

[^18]: 47 U.S.C. § 254(h)(3); 47 C.F.R. § 54.513.

[^19]: *Schools and Libraries NPRM*, 17 FCC Rcd 1914. A list of the
    parties that filed comments and/or replies in response to the
    *Schools and Libraries NPRM* and the *Schools and Libraries Further
    Notice* is provided in Appendix D.

[^20]: *Schools and Libraries NPRM*, 17 FCC Rcd at 1930-31 para. 39.

[^21]: *Id.* at 1931 para. 40.

[^22]: Some commenters supported limiting equipment transfers. *See,
    e.g*., State of Alaska NPRM Comments at 8; American Library
    Association, BellSouth Corporation and SBC Communications NPRM
    Comments at 18; Colorado Department of Education NPRM Comments at 7;
    Council of the Great City Schools NPRM Comments at 4; Iowa
    Communications Network NPRM Comments at 2; Maine Public Utilities
    Commission NPRM Comments at 4; New York Board of Education NPRM
    Comments at 6; Seattle Public Library NPRM Comments at 2; TAMSCO
    Telecommunications Division NPRM Comments at 3. Other commenters
    supported restrictions on the receipt of internal connections
    discounts. *See, e.g*., Bakersfield Schools District NPRM Comments
    at 3; Central Susquehanna Intermediate Unit NPRM Comments at 3; City
    of Boston NPRM Comments at 8; Illinois State Board of Education NPRM
    Comments at 22; Quaker Valley School District NPRM Comments at 1;
    Siemens Enterprise Network NPRM Reply at 2; Spectrum Communications
    Cabling Services NPRM Comments at 3; York County Library System NPRM
    Comments at 10.

[^23]: For the purpose of implementing this rule, an entity is an
    individual eligible school or library as defined in our rules. See
    47 C.F.R § 54.501(b), (c). We note that each individual school or
    library is currently given an "entity number" to facilitate
    processing of the FCC Form 471.

[^24]: Several commenters suggest limiting discounts on internal
    connections to every two or three years. *See*, *e.g*. Central
    Susquehanna Intermediate Unit NPRM Comments at 3; Integrity
    Networking Systems, Inc. NPRM Comments at 3; Marian High School NPRM
    Comments at 1; Michigan Department of Information Technology NPRM
    Comments at 15; North Carolina Department of Cultural Resources NPRM
    Comments at 1; Pennsylvania Department of Education NPRM Comments at
    7; Siemens Enterprise Networks NPRM Reply at 2. *See also* *E-rate
    Public Forum*, American Library Association Statement at 3 and
    Central Susquehanna Intermediate Statement at 4.

[^25]: For example, under this new rule, a school or library could
    receive support for internal connections in Funding Year 2005,
    Funding Year 2008, and Funding Year 2011. Alternately, a school that
    receives support for Priority Two services in Funding Years 2005 and
    2006 will not be eligible to receive support for Priority Two
    services until Funding Year 2010. In another example, if a school
    receives discounts in Funding Year 2006 and then in Funding Year
    2010, it would be eligible to receive Priority Two discounts again
    in Funding Year 2011. Appendix C provides, for illustrative
    purposes, examples of what would be permitted under this rule.

[^26]: Applying the twice-every-five-years restriction to all entities
    receiving shared services in this manner is necessary to prevent
    avoidance of this rule by applicants that might seek discounts more
    frequently than permitted by nominally identifying services as
    shared when they are intended primarily to serve a single entity. We
    recognize that attributing shared services in this way will result
    in the need for additional planning by entities that receive support
    for shared services. However, we find that such planning is
    consistent with the Commission's existing policies regarding plans
    for using technology. Moreover, such applicants are free to seek
    support for non-shared services in that same year, or the other year
    in the five-year cycle in which they will be permitted to receive
    support for Priority Two services.

[^27]: *See, e.g.*, Council of the Great City Schools NPRM Comments at
    4; Memphis City Schools NPRM Comments at 2, Montana Independent
    Telecommunications Systems NPRM Comments at 7 ("denying internal
    connections within a specified period of years regardless of the
    intended use...creates a barrier for the most disadvantaged
    schools..."), New York Public Library NPRM Comments at 2.

[^28]: *See, e.g.,* Bakersfield School District NPRM Comments at 3,
    Colorado Department of Education NPRM Comments at 8, Marian High
    School NPRM Comments at 1.

[^29]: A school or library is expected to use equipment purchased with
    universal service discounts for the specified purpose for a
    reasonable period of time. Although we decline to adopt useful life
    criteria for such equipment, *see infra* para. 30, we address this
    issue by adopting a general prohibition on the transfer of equipment
    for a period of three years after purchase. *See infra* paras.
    25-29.

[^30]: *See, e.g.,* Excalibur Internet Corporation NPRM Comments at 5;
    Funds for Learning NPRM Comments at 13; Information Technology
    Industry Council NPRM Reply at 3; Los Angeles Unified School
    District NPRM Comments at 7; National Education Association,
    International Society for Technology in Education and the Consortia
    for School Networking NPRM Comments at 19; TAMSCO Telecommunications
    Division NPRM Comments at 3.

[^31]: We therefore reject commenters' suggestion that the Commission
    grant internal connection requests only once every other year. *See,
    e.g.*, American Library Association NPRM Comments at 42 (ban
    equipment purchases for the same location two years in a row);
    Council of Chief State School Officers NPRM Comments at 45 (limit to
    once every other year); Council of the Great City Schools NPRM
    Comments at 4; Illinois State Board of Education NPRM Comments at
    22; Marion High School NPRM Comments at 2; Spectrum Communications
    Cabling Services NPRM Reply at 2.

[^32]: *See* USAC NPRM Comments at 24.

[^33]: On the FCC Form 471, among other things, applicants must certify
    that they have secured access to "all of the resources, including
    computers, training, software, maintenance, and electrical
    connections necessary to make effective use of the services
    purchased as well as to pay the discounted charges for eligible
    services." *See* FCC Form 471, OMB No. 3060-0806 (December 2002).
    These certifications are consistent with the requirements set forth
    in the *Universal Service Order*. *See Universal Service Order*, 12
    FCC Rcd 8776, 9079 para. 577 (applicants for schools and libraries
    discounts would be required to certify in their requests for
    services that "all of the necessary funding in the current funding
    year has been budgeted and will have been approved to pay for the
    'non-discount' portion of requested connections and services as well
    as any necessary hardware, software, and to undertake the necessary
    staff training required in time to use the services effectively . .
    . . ")

[^34]: 47 C.F.R. § 54.504(b)(2)(vii).

[^35]: 47 U.S.C. § 254(h)(1)(B).

[^36]: Particularly, where an applicant provides an inaccurate or
    inadequate necessary resources certification in connection with its
    funding request, the Administrator will deny such funding requests.

[^37]: *See, e.g.,* Council of Chief State School Officers NPRM Comments
    at 4, Illinois State Board of Education NPRM Comments at 22, Siemens
    Enterprise Networks NPRM Reply at 2.

[^38]: *Universal Service Order*, 12 FCC Rcd at 9021 para. 460.

[^39]: *See* SLD's Eligible Service Lists on USAC's website,
    http://www.sl.universalservice.org/data/pdf/Eligible%20Services%20List%2010-18-02.pdf.

[^40]: USAC develops the forms used in the schools and libraries
    mechanism under Commission oversight. The Commission obtains OMB
    approval for those forms.

[^41]: We therefore reject commenters' suggestion that the Commission
    revise the priority for maintenance. *See, e.g.*, Integrity
    Networking Systems, Inc. NPRM Comments at 3; Tel/Logic, Inc. NPRM
    Comments at 18 (internal connections maintenance would remain a
    Priority Two service, but create a priority three category for new
    internal connections equipment); *but see* Spectrum Communications
    Cabling Services NPRM Reply at 6 (establishing a preference for
    maintenance is unnecessary).

[^42]: Based on the data entered in Block 5, USAC will create a
    database/record of an entity's receipt of Priority Two funding, and
    where appropriate, deny an entity's request for discounts.

[^43]: *Universal Service Order*, 12 FCC Rcd at 9021-22 para. 460.

[^44]: *See*
    [www.sl.universalservice.org/reference/costallocationguide.asp](http://www.sl.universalservice.org/reference/costallocationguide.asp).

[^45]: *Universal Service Order*, 12 FCC Rcd at 9021 para. 460 (emphasis
    added).

[^46]: *Id.* at 9021 para. 459.

[^47]: To the extent this clarification impacts existing contracts, we
    shall permit parties 90 days from the effective date of this Order
    to renegotiate those contracts, or to provide the Administrator with
    an itemized breakout of the components of the contract, clearly
    identifying the portion of the contract price to be allocated to
    basic maintenance. We will permit parties to utilize cost allocation
    for signed contracts in existence as of the effective date of this
    Order. The burden is on the applicant to justify what portion of a
    contract price should be allocated to basic maintenance services.

[^48]: 47 U.S.C. § 254(h)(3).

[^49]: This action is not intended to prevent schools or libraries from
    trading-in equipment to a service provider for other equipment with
    similar functionalities. We note, however, that under the
    twice-every-five-years rule we adopt today, an applicant may face
    limitations on its ability to finance trade-ins using e-rate
    funding. The school or library may not use the credit for the
    trade-in to pay for its non-discounted portion of the services it
    receives in return.

[^50]: Colorado Department of Education NPRM Comments at 8 (applicants
    that receive funding for internal connections year after year pose a
    risk of abuse of the program); Delaware Center for Educational
    Technology NPRM Comments at 3 (the idea that a school district could
    upgrade the poorest schools in the district yearly and transfer the
    'old' equipment to other schools is definitely abuse of the system);
    E-Rate Elite NPRM Comments at 15 (applicants transferring equipment
    in violation of program rules are circumventing the funding process,
    abusing the program, and preventing students with a greater need
    from receiving much needed assistance); Excaliber Internet
    Corporation NPRM Comments at 5 (continual transfers of equipment are
    wasteful of program funds); Florida Public Service Commission at 5
    (it is necessary for the FCC to establish rules governing when
    equipment can be transferred; inadequate incentives exist to prevent
    such wasteful or fraudulent behavior); Iowa Communications Network
    NPRM Comments at 1 (transfer of equipment yearly to ineligible users
    seems to counter the goals of the program); Montana Independent
    Telecommunication System NPRM Comments at 6 (applicants that
    transfer equipment obtained with universal service discounts to
    other schools and libraries that may not be eligible for such
    equipment adversely affect funding availability for all applicants).

[^51]: *See, e.g.*, E-rate Elite NPRM Comments at 15, Excaliber Internet
    Corporation NPRM Comments at 5, Iowa Communications Network NPRM
    Comments at 1, Montana Independent Telecommunication System NPRM
    Comments at 6-7, Software & Information Industry Association at 4;
    *see also Task Force Recommendation* at 6 (recommending prohibition
    on transfers within service life of equipment).

[^52]: The conclusion that three years is a reasonable period for a
    recipient to retain equipment purchased with internal connections
    discounts is consistent with our conclusion, above, that an
    applicant should be limited to internal connections discounts in
    only two out of every five years. In effect, the twice-in-five-years
    rule will permit an applicant to seek discounts for internal
    connections every three years. *See supra* para. 12.

[^53]: *See*, *e.g.*, Florida Public Service Commission NPRM Comments at
    4-5.

[^54]: Consistent with the Act, such transfers may not be in
    consideration of money or anything of value. 47 U.S.C. § 254(h)(3).

[^55]: This recordkeeping requirement will become effective upon
    receiving any approval required from the Office of Management and
    Budget (OMB) under the Paperwork Reduction Act.

[^56]: FCC Form 471 already is in use for Funding Year 2004, so it is
    not feasible to amend the form to include this certification for
    Funding Year 2004.

[^57]: *See, e.g., Task Force Recommendation* at 6; *see also* Tel/Logic
    Inc. NPRM Comments at 14.

[^58]: *See supra* paras. 12-19, 25-28.

[^59]: *Universal Service Order*, 12 FCC Rcd at 9022 para. 462.

[^60]: *See*
    <http://www.sl.universalservice.org/reference/costallocationguide.asp>.

[^61]: For example, the cost allocation may be based on the added cost
    or added market value of the ineligible functions. In circumstances
    where there is purely economic basis for separating the costs, the
    cost allocation may be based on data demonstrating how the product's
    use will be divided between eligible and ineligible services.

[^62]: *See*
    <http://www.sl.universalservice.org/reference/freeservices.asp>.

[^63]: *Id*.

[^64]: *Id*.

[^65]: *See*
    <http://www.sl.universalservice.org/reference/eligible.asp>.

[^66]: *Schools and Libraries NPRM*, 17 FCC Rcd at 1921 para. 14.

[^67]: *See* Alaska NPRM Comments at 2; Central Susquehanna NPRM
    Comments at 2; Iowa DOE Comments at 3, 7; Greg Weisiger NPRM
    Comments at 9; ITI NPRM Reply at 2; NASTD NPRM Reply at 1; *E-rate
    Public Forum*, Funds for Learning Statement at 5.

[^68]: *Universal Service Order*, 12 FCC Rcd at 9022 para. 462.

[^69]: *See*
    <http://www.sl.universalservice.org/reference/eligible.asp>. In
    addition, in those instances where a school requests support for a
    service or product with mixed use components, the Administrator has
    only provided support for the eligible component. *Id.*

[^70]: *See supra* para. 32.

[^71]: *Schools and Libraries NPRM*, 17 FCC Rcd at 1921 para. 14.

[^72]: Although there is language in the *Universal Service Order* that
    suggests that schools and libraries should not receive universal
    service support for contracts that provide only one price for a
    bundle of mixed eligibility services, the Commission's intent was to
    ensure adequate cost allocation between eligible and ineligible
    services and to avoid imposing an excessive burden on the
    Administrator. *See Universal Service Order*, 12 FCC Rcd at 9022-23
    para. 462. As a practical matter, the application process evolved in
    such a manner that this concern could be adequately addressed by the
    Administrator. Thus, in those instances where the Administrator has
    been presented with mixed eligibility services during the
    application process, the Administrator has been able to resolve the
    cost allocation with the school or library and service provider in a
    reasonable way, and avoid committing universal service support to
    ineligible services.

[^73]: *Schools and Libraries Second Order*, 18 FCC Rcd at 9215-16
    paras. 40-41. We found that this rule improves operation of the
    schools and libraries program by permitting the Administrator to
    process efficiently requests for support for services that
    inadvertently include some ineligible components.

[^74]: For instance, on June 30, 2004, USAC would submit its draft
    eligible services list for Funding Year 2005.

[^75]: <http://www.sl.universalservice.org/reference/freeservices.asp>
    (Free Service Advisory notes that requests that do not account for
    free services will result in a denial and may result in criminal
    penalties).

[^76]: *Universal Service Order*, 12 FCC Rcd at 9035-36 para. 493
    (*citing* *Federal-State Joint Board on Universal Service*, CC
    Docket 96-45, Recommended Decision, 12 FCC Rcd 87, 367 para. 549
    (1996)); *see also*
    <http://www.sl.universalservice.org/reference/obligation.asp>.

[^77]: *See*
    [http://www.sl.universalservice.org/reference/ServiceSub.asp.](http://www.sl.universalservice.org/reference/ServiceSub.asp)

[^78]: A "minor contract modification" is defined as "a change to a
    universal service contract that is within the scope of the original
    contract and has no effect or merely a negligible effect on price,
    quantity, quality, or delivery under the original contract." *See*
    47 C.F.R. §54.500(g).

[^79]: *In the Matter of Request for Review of the Decision of the
    Universal Service Administrator by Copan Public Schools, Copan
    Oklahoma, 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, 15 FCC Rcd 5498, 5502 para. 7
    (2000) (*Copan Order*).

[^80]: In other words, if an applicant requests support for an eligible
    service with a pre-discount price of \$100, the applicant may
    substitute a comparable eligible service with a pre-discount price
    of \$120, but will receive support based on the \$100 pre-discount
    price requested, rather than the \$120 pre-discount price ultimately
    received.

[^81]: *See*, *e.g.*, Funds for Learning NPRM Comments at 27; NYPL NPRM
    Comments at 7; Tel/Logic NPRM Comments at 15; *see also Task Force
    Recommendation* at 11.

[^82]: We clarify that a service or equipment change request would not
    meet this test if it changes the type of service requested pursuant
    to the original funding request from one category to another
    (*e.g*., a change from telecommunications service to internal
    connections, or a change from Internet access to telecommunications
    service). We further clarify that a substitution that constitutes a
    minor contract modification under our rules will not automatically
    meet the requirements of our service substitution rule.

[^83]: *Request for Review by Brooklyn Public Library*, *Federal-State
    Joint Board on Universal Service, Changes to the Board of Directors
    of the National Exchange Carrier Association, Inc*., File No.
    SLD-149423, CC Dockets No. 96-45 and 97-21, Order, 15 FCC Rcd 18598
    (2000) (*Brooklyn Order*); *Request for Review by the Department of
    Education of the State of Tennessee of the Decision of the Universal
    Service Administrator, Request for Review by Integrated Systems and
    Internet Solutions, Inc., of the Decision of the Universal Service
    Administrator, Request for Review by Education Networks of America
    of the Decision of the Universal Service Administrator,
    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, 14 FCC Rcd 13734
    (1999) (*1999 Tennessee Order*).

[^84]: *1999 Tennessee Order*, 14 FCC Rcd 13734.

[^85]: *Id.* at 13753-54 paras. 37-38.

[^86]: *Id.* at 13753-54 para. 38.

[^87]: *Id.* at 13754-55 paras. 39-40.

[^88]: *See*
    <http://www.sl.universalservice.org/reference/OnPremP1.asp>[.]{.underline}

[^89]: We note that an applicant will still be able to receive discounts
    for Centrex service, which telecommunications carriers provide
    without the use of on-premises equipment, as a Priority One service.

[^90]: USAC provides discounts on the cost of leasing a single CSU/DSU,
    as well as the cost of installing a NID, as part of a Priority One
    service.

[^91]: To the extent an applicant seeks to lease multiple terminating
    components, one would be deemed eligible for funding as a Priority
    One service and the remainder would be eligible for funding as
    Priority Two internal connections. Further, if an applicant seeks to
    purchase a single basic terminating component, it will be eligible
    for a discount only as Priority Two internal connections.

[^92]: *Schools and Libraries NPRM*, 17 FCC Rcd at 1940-41 para. 70.

[^93]: *See* *Schools and Libraries Order*, 17 FCC Rcd at 11523-24 para.
    3. In the *Schools and Libraries Order*, the Commission decided that
    it was in the public interest to take immediate action to stabilize
    the contribution factor while the Commission considered whether and
    how to reform the way in which contributions to the universal
    service mechanism were assessed. The Commission determined that
    unused funds would be applied to reduce the contribution factors for
    the third and fourth quarters of 2002 and the first quarter of 2003.
    Starting with the second quarter of 2003, any unused funds from the
    schools and libraries fund would be carried forward for disbursement
    in the schools and libraries support mechanism.

[^94]: *Schools and Libraries Further Notice*, 18 FCC Rcd at 9233-34
    paras. 93-98.

[^95]: *Id.* at 9233 para. 94.

[^96]: *Id.*

[^97]: *See* Federal Universal Service Support Mechanisms Fund Size
    Projections for the First Quarter 2004, available at
    http://www.universalservice.org/overview/ filings (filed October 31,
    2003) (*USAC Filing for First Quarter 2004 Projections*).

[^98]: *See* Appendix A.

[^99]: *See Schools and Libraries Further Notice*, 18 FCC Rcd at 9234
    para. 96 .

[^100]: *See, e.g., USAC Filing for First Quarter 2004 Projections* at
    30-32.

[^101]: *See* CoSN and ISTE FNPRM Comments at 3; EdLiNC FNPRM Comments
    at 1.

[^102]: *See* 47 C.F.R. §54.709.

[^103]: *See Wireline Competition Bureau Announces No Change in Third
    Quarter 2002 Universal Service Contribution Factor*, CC Docket No.
    96-45, Public Notice, 17 FCC Rcd 11128, 11129 (2002).

[^104]: *See Schools and Libraries Further Notice*, 18 FCC Rcd at 9233
    para 94.

[^105]: *See* NAIS FNPRM Comments at 1.

[^106]: Consistent with the *Schools and Libraries Order*, all unused
    funds as of second quarter of 2003, *i.e.*, any remaining unused
    funds from all funding years, will be carried forward into Funding
    Year 2004 in accordance with the public interest. *Schools and
    Libraries Order,* 17 FCC Rcd at 11530-31 para. 19.

[^107]: 47 C.F.R. §54.709(a)(3).

[^108]: Applicants learn about their funding commitments via a Funding
    Commitment Decision Letter (FCDL). The Administrator releases FCDLs
    in waves every other week. For Funding Year 2003, the first wave of
    letters was released April 28, 2003.

[^109]: *Schools and Libraries Further Notice*, 18 FCC Rcd at 9234 para.
    97.

[^110]: See *USAC Filing for First Quarter 2004 Projections* at 30-32.

[^111]: *Fifth Order on Reconsideration*, 13 FCC Rcd at 14936-40 para.
    34-38.

[^112]: 5 U.S.C. § 553(b)(3)(A).

[^113]: *See* 47 C.F.R. § 54.505. 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. *Id*.

[^114]: *See, e.g.,* Iowa DOE NPRM Comments at 3-4; Pennsylvania Board
    of Education NPRM Comments at 7. Some interested parties have
    claimed that the minimal financial contribution required of
    applicants in the highest discount band allows applicants to request
    funds without regard to need or cost-effectiveness and allows
    vendors to exploit the system. *See, e.g.,* Iowa DOE NPRM Comments
    at 3-4; Pennsylvania Board of Education NPRM Comments at 7. Some
    parties assert that 90 percent applicants periodically request
    funding for services and equipment that they cannot practically
    utilize. Letter from Greg Weisiger, Virginia Department of
    Education, on behalf of CCSSO (filed Mar. 18, 2003).

[^115]: *See, e.g.*, Funds for Learning, LLC NPRM Comments at 15;
    Tel/Logic NPRM Comments at 18 & n.5. Specifically, some commenters
    suggested that vendors offer "grants" or extra services, in the
    amount equivalent to the applicants' contribution to those
    applicants that must pay 10 percent of the costs as consideration
    for accepting a vendor's bid. *See, e.g.,* Iowa DOE NPRM Comments at
    3-4; Pennsylvania Board of Education NPRM Comments at 7; *see also*
    Letter from Greg Weisiger, Virginia Department of Education, on
    behalf of CCSSO (filed Mar. 18, 2003) and Semiannual Reports of the
    Office of the Inspector General.

[^116]: *See e.g.,* Illinois State Board of Education NPRM Comments at
    10; Pennsylvania Department of Education NPRM Comments at 7; Council
    of Chief State School Officers NPRM Comments at 47-48. Several
    parties reiterated these suggestions at a May 8, 2003, public forum
    held by the Commission. *See E-rate Public Forum*, BellSouth
    Statement at 10; Funds for Learning, LLC Statement at 12, and
    American Library Association Statement at 4-5.

[^117]: *See Universal Service Order*, 12 FCC Rcd. at 9038 paras.
    497-499.

[^118]: *See, e.g.,* Illinois State Board of Education NPRM Comments at
    10; Pennsylvania Department of Education NPRM Comments at 7; CCSSO
    NPRM Comments at 47-48; *E-Rate Public Forum*, BellSouth Statement
    at 10-11.

[^119]: *See, e.g.*, *E-Rate Public Forum*, Funds for Learning Statement
    at 13 (matrix should be revised so that all schools with 50 percent
    or more students eligible for free lunch receive equal discounts)
    and StateNets Statement at 3; *Task Force Recommendation* at 3-4.

[^120]: Since inception of E-rate program, all eligible requests for
    Priority One services have been funded, but there have been funds
    available for only a portion of eligible requests for Priority Two
    services. Further, concerns have been expressed that a comparatively
    higher occurrence of waste, fraud and abuse problems exists among
    Priority Two services. Update on USAC Task Force on the Prevention
    of Waste, Fraud and Abuse: Meeting #3, *at*
    http://www.sl.universalservice.org/taskforce/update3.asp; *see also*
    CCSSO NPRM Comments at 47-48; Pennsylvania Board of Education NPRM
    Comments at 7; State of Alaska Department of Education and Early
    Development NPRM Reply at 6; Iowa DOE NPRM Comments at 9.

[^121]: *See*, *e.g.*, Greg Weisiger NPRM Comments at 6; ISBE NPRM
    Comments at 26; SECA NPRM Comments at 16-18; Tel/Logic NPRM Comments
    at 9-10; Wisconsin NPRM Comments at 2-3.

[^122]: 47 C.F.R. § 54.507(g)(1)(iv).

[^123]: 47 C.F.R. § 54.504 (b).

[^124]: 47 C.F.R. § 54.504 (b), (c).

[^125]: *See*, *e.g.*, *E-Rate Public Forum*, EdLink Statement at 2
    (applicants indicate that posting rarely yields multiple vendor
    bids) and Seattle Public Schools Statement at 2 (Form 470 posting
    process results in competitive bids in only a few instances).

[^126]: *See*, *e.g.*, *Task Force Recommendation* at 5 (recommending
    that the complexity of the application process should better match
    the complexity of individual applicant situations).

[^127]: *Universal Service Order*, 12 FCC Rcd at 9029 para. 480 (noting
    that the competitive bidding process ensures that the eligible
    entity receives information about all telecommunication choices and
    receives varying, competitive bids, which preserves the fund for
    other eligible entities).

[^128]: *E-Rate Public Forum*, Central Susquehanna Intermediate Unit
    Statement at 3.

[^129]: *E-Rate Public Forum*, American Library Association Statement at
    2-3.

[^130]: *See* 48 C.F.R. § 52.203-2.

[^131]: *Universal Service Order*, 12 FCC Rcd at 9029 para. 480; *see
    also* *id.* at 8950 n. 819 (asking, *inter alia*, whether safeguards
    were needed to prevent a bidder from driving out competitors).

[^132]: Sherman Act, 15 U.S.C. § 1.

[^133]: The Commission defines "rural" for the purposes of the schools
    and libraries program in section 54.505(b)(3)(ii). This definition
    is the same as the definition of "rural area" in section 54.5 of the
    Commission's rules, which is used by other universal service
    programs.

[^134]: *See* 47 C.F.R. §§ 54.5, 54.505(b)(3)(ii).

[^135]: *See* Rural Health Care Support Mechanism, WC Docket No. 02-60,
    Notice of Proposed Rulemaking, 17 FCC Rcd 7806 (2002); *see also*
    Kansas Department of Health NPRM Comments at 3 (WC Docket 02-60).

[^136]: We note that the rural health care support mechanism uses the
    same definition of rural area. Recently, we sought comment on
    possible changes to the rural area definition in the context of the
    rural health care program in a separate notice of proposed
    rulemaking. Rural Health Care Support Mechanism, WC Docket No.
    02-60, Report and Order, Order on Reconsideration, and Further
    Notice of Proposed Rulemaking, FCC 03-288, at paras. 63-64 (rel.
    Nov. 17, 2003) (*Rural Health Care Order*).

[^137]: *See, e.g.*, Center for Rural Health Comments at 3 (WC Docket
    02-60); New Mexico Health Comments at 3 (WC Docket 02-60);
    University of American Health Sciences Center Comments at 2 (WC
    Docket 02-60).

[^138]: *See, e.g.*, American Telemedicine Comments at 5 (WC Docket
    02-60); Blue Cross Comments at 4 (WC Docket 02-60); Northern Sierra
    Comments at 7-8 (WC Docket 02-60).

[^139]: *Facilitating the Provision of Spectrum-Based Services to Rural
    Areas and Promoting Opportunities for Rural Telephone Companies To
    Provide Spectrum-Based Services*, WT Docket No. 02-381, *2000
    Biennial Regulatory Review Spectrum Aggregation Limits For
    Commercial Mobile Radio Services*, WT Docket No. 01-14, *Increasing
    Flexibility To Promote Access to and the Efficient and Intensive Use
    of Spectrum and the Widespread Deployment of Wireless Services, and
    To Facilitate Capital Formation*, WT Docket No. 03-202, Notice of
    Proposed Rulemaking, FCC 03-222, at paras. 10-12, (rel. October 6,
    2003).

[^140]: *Id.* at para. 12.

[^141]: *See* Midwest Comments at 4 (WC Docket 02-60). For the 2000
    Census, urban territories include urbanized areas (UA) and urban
    clusters (UC), which consist of core census block groups or blocks
    that have a population density of at least 1,000 people per square
    mile and surrounding census blocks that have an overall density of
    at least 500 people per square mile. Rural territories include areas
    located outside of UAs and UCs. *See*
    <http://www.census.gov/geo/www/ua/ua_2k.html> (visited Sept. 11,
    2003).

[^142]: *Schools and Libraries NPRM*, 17 FCC Rcd at 1925 para. 25.

[^143]: In response to this question, several commenters urged the
    Commission to permit funding for virus protection, firewalls, and
    filtering. *See* Coalition for E-Rate Reform NPRM Comments at 7;
    Funds for Learning NPRM Comments at 7-8; Illinois BoE NPRM Comments
    at 14-15; and TAMSCO NPRM Comments at 2.

[^144]: *See e.g.* Alaska DoE NPRM Reply at 6; Arkansas NPRM Reply at 4;
    ALA NPRM Comments at 28; CCSSO NPRM Comments at 26; EdLINC NPRM
    Comments at 6; Memphis NPRM Comments at 2; NEA NPRM Comments at 10;
    Weisiger NPRM Comments at 24.

[^145]: *Universal Service Order*, 12 FCC Rcd at 9008-09 para. 436.

[^146]: Support has been available for virtual private networks,
    however, to the extent offered as a telecommunications service.

[^147]: Section 54.5 of our rules states:

    Internet Access" includes the following elements:

    . . .

    \(2\) The transmission of information as part of a gateway to an
    information service, when that transmission does not involve the
    generation or alteration of the content of information, but may

    include data transmission, address translation, protocol conversion,
    billing management, introductory information content, and
    navigational systems that enable users to access information
    services, and that do not affect the presentation of such
    information to users . . ..

    47 C.F.R. § 54.5.

[^148]: *Rural Health Care Order and Further Notice*, FCC 03-288, at
    paras. 18-29.

[^149]: *See*
    [www.sl.universalservice.org/reference/costallocationguide.asp](http://www.sl.universalservice.org/reference/costallocationguide.asp).

[^150]: *Schools and Libraries NPRM*, 17 FCC Rcd at 1922-23 paras.
    16-20. The Commission noted that in the *1999 Tennessee Order*, it
    had established that universal service funds may be used to fund
    equipment and infrastructure build-out associated with the provision
    of eligible services, and that in the *Brooklyn Order*, it required
    that discounts on non-recurring charges associated with capital
    investment be prorated equally over a term of at least three years.
    USAC has implemented these decisions through guidelines posted on
    its website. *See*
    <http://www.sl.universalservice.org/reference/OnPremP1.asp>,
    <http://www.sl.universalservice.org/reference/wan.asp>.

[^151]: *See*, *e.g.*, Alaska NPRM Comments at 4 (permitting the lease
    of WANs is the most efficient way to deliver service to rural
    schools); BellSouth/SBC NPRM Comments at 9-12 (should be viewed as
    provision of service, not a lease of a WAN); Boston at 3-4 (Priority
    One funding should be available only for leasing of CSU/DSUs and
    routers; leasing of servers, filters, switches, hubs, content caches
    and all other on-premise equipment should only be allowed under
    Internal Connections); NOBLE at 1 (basic connectivity equipment,
    such as routers, CSU/DSU should be treated as Priority One; hubs,
    switches and cabling should be treated as Priority Two internal
    connections); Sprint at 4-5 (consider what percentage of Priority
    One funds support the leasing of WANs before removing leased WANs
    from Priority One); Worldcom NPRM Comments at 8; Worldcom NPRM Reply
    at 7 (look at economic depreciation lives of any funded asset;
    should only fund the depreciable amount in a given year).

[^152]: *Brooklyn Order*, 15 FCC Rcd at 18606-07 para. 20.

[^153]: *See* New York Board of Education NPRM Comments at 3 (at a
    minimum, amortize costs of leasing equipment for WANs over five
    years to lessen drain on fund); Erate Elite NPRM Comments at 4
    (extend cost recovery to five years); Great City NPRM Comments at 2
    (extend cost recovery to five years); *but see* Arkansas NPRM
    Comments at 3-4 (lease expenses should be spread over three years);
    Cox NPRM Comments at 7-8 (three years); Excaliber NPRM Comments at 4
    (three years).

[^154]: Consistent with our current definition of Internet access, the
    lit fiber may only be used by the school or library to access the
    Internet, and may not be used for communications between multiple
    locations, *i.e.*, inter-school communications such as video
    conferencing.

[^155]: In cases in which a school or library has previously purchased
    equipment to light fiber, such equipment may be traded-in to the
    service provider and leased back by the applicant. The applicant may
    not use the credit for the trade-in to pay its non-discounted
    portion of the services. Such a contract modification would be
    deemed a minor contract modification under section 54.500(g) of the
    Commission's rules if this was within the scope of the original
    contract and the change has no effect or negligible effect on price,
    quantity, quality, or delivery under the original contract. For
    instance, such a change could fit within the minor contract
    modification rule if the original contract was for the provision of
    high bandwidth transmission capability.

[^156]: USAC\'s 2003 Eligible Services list states, "The FCC has not
    resolved whether unlit dark fiber is a telecommunications service.
    Pending resolution of this issue, it is not eligible for funding."
    *See*
    <http://www.sl.universalservice.org/data/pdf/EligibleServicesList101003.pdf>
    (dated October 10, 2003). Prior to 2003, USAC provided funding for
    dark fiber as set forth on its Eligible Services List: "Service
    providers can lease fiber capacity that does not include modulating
    electronics to schools and libraries, if the applicant provides the
    electronics to modulate the fiber. The lease of such fiber cable for
    obtaining Telecommunications Services or Internet access is
    eligible, if the applicant\'s electronics are located solely at the
    eligible school or library sites, and if the conditions apply that
    are described under the heading 'Wide Area Network' in the relevant
    section (Telecommunications Services or Internet Access)." *See*
    2002 Eligible Services List (issued October 17, 2001); 2001 Eligible
    Services List (issued December 19, 2000); 2000 Eligible Services
    List (issued November 23, 1999)

[^157]: *See Southwestern Bell Tel. Co. v. FCC*, 19 F.3d 1475 (D.C. Cir.
    1994) (finding that the Commission had failed to provide a
    sufficient analysis for concluding that unlit (dark) fiber service
    was a common carrier service and suspending the Commission order
    pending proceedings on remand); Instructions to the
    Telecommunications Reporting Worksheet, FCC Form 499-A, February
    2003, at 22 (instructing universal service contributors not to
    include revenues for dark fiber services as telecommunications
    revenues); *but see* Deployment of Wireline Services Offering
    Advanced Telecommunications Capability, *Fourth Report and Order*,
    16 FCC Rcd 15435, 15473-74 paras. 74-75 and n. 189 (2001) (declaring
    that a dark fiber service with respect to cross-connects is a common
    carrier service under the second prong of *NARUC II*).

[^158]: *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.
    October 8, 1999) (*Commitment Adjustment Order*), *petitions for
    reconsideration pending, petition for review pending sub. nom.
    United States Telecom Ass'n v. FCC*, Case Nos. 00-1500, 00-1501(D.C.
    Cir. Filed Nov. 27, 2000). Petitions for Reconsideration were filed
    by MCI WorldCom, Inc. (WorldCom), Sprint Corporation (Sprint), and
    the United States Telecom Association (USTA). Additional comments in
    support of the Petitions for Reconsideration were filed by Nextel
    Communications, Inc. (Nextel) and AT&T Corp. (AT&T).

[^159]: *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*). The Order also directed USAC to waive one
    of its procedural requirements.

[^160]: *See* Letter from D. Scott Barash, Vice President and General
    Counsel, USAC, to Magalie Roman Salas, Secretary, Federal
    Communications Commission, dated October 22, 1999.

[^161]: *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 22975
    (2000) (*Commitment Adjustment Implementation Order*).

[^162]: *See Commitment Adjustment Implementation Order*, 15 FCC Rcd at
    22980 para. 13.

[^163]: *Id.*

[^164]: The *Commitment Adjustment Implementation Order* provides two
    examples of errors resulting in statutory violation requiring
    recovery: (1) funding committed for ineligible services; and (2)
    funding for telecommunications services provided by
    non-telecommunications carriers. *Commitment Adjustment
    Implementation Order*, 15 FCC Rcd at 22976-77 para. 3.

[^165]: *See* 47 U.S.C. §§ 1.901 *et seq*.

[^166]: USAC has utilized procedures consistent with the *Commitment
    Adjustment Implementation Order* for situations involving rule
    violations that do not implicate statutory requirements.

[^167]: *See* USTA Petition at 5-8; Sprint Petition at 2-3.

[^168]: *See Waiver Order,* 15 FCC Rcd at 7199 para. 6.

[^169]: In the *Schools and Libraries Second Order and Further Notice*,
    the Commission implemented rules for debarment of anyone convicted
    of a criminal violation or found civilly liable for actions relating
    to the schools and libraries program. The Commission also sought
    further comment on whether other circumstances not culminating in a
    criminal conviction or civil judgment warrant debarment. *Schools
    and Libraries Second Order and Further Notice*, 18 FCC Rcd at
    9225-28 paras. 66-77, 9235-39 paras. 102-115.

[^170]: 47 C.F.R. § 54.511(a); *see also Request for Review of the
    Decision of the Universal Service Administrator by Ysleta
    Independent School District et al.*, SLD No. 312479, *Federal-State
    Joint Board on Universal Service*, CC Docket No. 96-45, *Changes to
    the Board of Directors of the National Exchange Carrier Association,
    Inc.*, CC Docket No. 97-21, Order, FCC 03-313, paras. 47-55 (rel.
    Dec. 8, 2003).

[^171]: *Universal Service Order*, 12 FCC Rcd at 9077-78 paras. 572-74.

[^172]: *See* *E-rate Public Forum*, Funds for Learning Statement at 15
    and Sprint Statement at 1; *see also* Funds for Learning NPRM
    Comments at 14; State of Alaska NPRM Reply at 2; NEA, ISTE and CoSN
    Joint. NPRM Reply at 7-8; and Siemens Enterprise Networks NPRM Reply
    at 3.

[^173]: *See* *Task Force Recommendation* at 4 (supporting imposition of
    a funding ceiling).

[^174]: 47 C.F.R. § 54.516(a).

[^175]: We note that we recently adopted such a rule for the rural
    health care support mechanism. *See* 47 C.F.R. § 54.619.

[^176]: 47 C.F.R. § 54.501(d)(3).

[^177]: *Universal Service Order*, 12 FCC Rcd at 9081 para. 581 ("We
    agree with the Joint Board recommendation that schools and
    libraries, as well as carriers, be required to maintain appropriate
    records necessary to assist in future audits.").

[^178]: Above, we adopt rules that prohibit a school or library from
    receiving free services, including consulting services, from a
    service provider that also provides services for which the school or
    library receives a discount under the E-rate program. *See supra*
    para. 41.

[^179]: *Task Force Recommendation* at 9 (recommending consultant
    disclosure and registration practices); *see*, *e.g.*, *E-rate
    Public Forum*¸ Sprint Statement at 2 (consultants should be
    competitively neutral, not affiliated with service providers).

[^180]: *See*
    <http://www.sl.universalservice.org/applicants/sld_flowchart.pdf>
    describes the application process including payment of supported
    services.

[^181]: Currently, USAC's procedures requires that, in order to receive
    support, an invoice must be submitted with Form 473 or Form 474 by
    the later of (a) 120 calendar days after the last date of service,
    or (b) 120 calendar days after the receipt of Form 486, notifying
    the applicant of the decision to provide support for discounts.
    *See*
    [http://www.sl.universalservice.org/reference/InvoicingDeadlines.asp]{.underline}.

[^182]: *See*
    [http://www.sl.universalservice.org/reference/InvoicingDeadlines.asp]{.underline}.

[^183]: *See*, *e.g.*, *E-rate Public Forum*, BellSouth Statement at 12
    (Commission could require more rigorous needs assessment and
    compliance with technology plans to ensure applicants are ready to
    fully utilize supported products and services).

[^184]: *See* 47 U.S.C. § 254(h)(1)(B); *Universal Service Order*, 12
    FCC Rcd at 9077-78 paras. 572-574.

[^185]: 47 C.F.R. § 54.505(b)(vii); *see also Universal Service Order*,
    12 FCC Rcd at 9078 para. 574.

[^186]: FCC Form 470 Instructions.

[^187]: 47 C.F.R. § 54.504(b).

[^188]: *Universal Service Order*, 12 FCC Rcd at 9077 para. 572.

[^189]: *See* <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.

[^190]: *See* *Task Force Recommendation* at 5; *see also*
    <http://www.nationaledtechplan.org/> (seeking comment developing the
    nation's third National Education Technology Plan).

[^191]: *See* *Task Force Recommendation* at 10.

[^192]: *See Universal Service Order*, 12 FCC Rcd at 9045 para. 510.

[^193]: *Id*. The *Universal Service Order* stated that a school relying
    on one of these alternative mechanisms could, for example, conduct a
    survey of income levels in order to obtain this information.

[^194]: For example, a school with 100 students sends a questionnaire to
    100 households of those students, and 75 of those households return
    the questionnaire. The school finds that the incomes of 25 of those
    75 households are at or below the income eligibility for the
    National School Lunch Program (NSLP). Consequently, 33 percent of
    the students from those households can be counted as eligible for
    NSLP. The school may then project from that sample that 33 percent
    of the total enrollment, or 33 of the 100 students in the school,
    can be counted as eligible for NSLP. *See*
    <http://www.sl.universalservice.org/reference/alt.asp>.

[^195]: National Center for Education Statistics, U.S. Department of
    Education, Internet Access in U.S. Public Schools and Classrooms:
    1994-2002 (October 2003), at Table 2.

[^196]: *Id.*

[^197]: 47 C.F.R. § 254(h)(2)(A).

[^198]: *See supra* para. 60 and note Error: Reference source not found.

[^199]: *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).

[^200]: *Schools and Libraries NPRM*, 17 FCC Rcd at 1946 paras. 83-106.

[^201]: *See* 5 U.S.C. § 604.

[^202]: *See* *infra* paras. 106-107.

[^203]: *Id; see supra* paras. 14, 26, 38, 40, 42, and 52.

[^204]: 5 U.S.C. § 603(b)(3).

[^205]: 5 U.S.C. § 601(6).

[^206]: 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."

[^207]: Small Business Act, 15 U.S.C. § 632.

[^208]: 5 U.S.C. § 601(4).

[^209]: 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).

[^210]: 5 U.S.C. 601(5).

[^211]: U.S. Census Bureau, Statistical Abstract of the United States:
    2000, Section 9, pages 299-300, Tables 490 and 492.

[^212]: 47 C.F.R. §§ 54.502, 54.503, 54.517(b).

[^213]: *See supra* para. 27.

[^214]: 47 C.F.R. § 54.500(b).

[^215]: 47 C.F.R. § 54.500(j).

[^216]: 47 C.F.R. § 54.501.

[^217]: *See* *id.*

[^218]: 13 C.F.R. § 121.201, North American Industry Classification
    System (NAICS) codes 611110 and 519120 (NAICS 2002 code 519120 was
    previously 514120).

[^219]: 5 U.S.C. § 601(3).

[^220]: *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).

[^221]: 13 CFR § 121.201, NAICS code 513310 (changed to 517110 in Oct.
    2002).

[^222]: 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.

[^223]: 13 CFR § 121.201, NAICS code 513310 (changed to 517110 in Oct.
    2002).

[^224]: FCC, Wireline Competition Bureau, Industry Analysis and
    Technology Division, "Trends in Telephone Service" at Table 5.3,
    Page 5-5 (Aug. 2003).

[^225]: *Id*.

[^226]: *Id*.

[^227]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    Oct. 2002).

[^228]: FCC, Wireline Competition Bureau, Industry Analysis and
    Technology Division, "Trends in Telephone Service" at Table 5.3,
    Page 5-5 (Aug. 2003).

[^229]: Id.

[^230]: 13 CFR § 121.201, North American Industry Classification System
    (NAICS) code 513321 (changed to 517211 in October 2002).

[^231]: 13 CFR § 121.201, North American Industry Classification System
    (NAICS) code 513322 (changed to 517212 in October 2002).

[^232]: FCC, Wireline Competition Bureau, Industry Analysis and
    Technology Division, Trends in Telephone Service, Table 5.3, (May
    2002).

[^233]: *Id*.

[^234]: *220 MHz Third Report and Order*, 12 FCC Rcd 10943, 11068-70
    paras. 291-295 (1997), 62 FR 16004 (Apr. 3, 1997), at paras 291-295.

[^235]: "Revision of Part 22 and Part 90 of the Commission's Rules to
    Facilitate Future Development of Paging Systems," *Memorandum
    Opinion and Order on Reconsideration and Third Report and Order*, 14
    FCC Rcd 10030, at paras 98 (1999).

[^236]: FCC, Wireline Competition Bureau, Industry Analysis and
    Technology Division, Trends in Telephone Service, Table 5.3, p. 5-5
    (Aug. 2003).

[^237]: *Id*.

[^238]: *See generally* North American Industry Classification System --
    United States (1997), NAICS code 514191.

[^239]: *See generally* North American Industry Classification System --
    United States (1997), NAICS code 514191.

[^240]: 13 CFR § 121.201, NAICS code 514191.

[^241]: Office of Advocacy, U.S. Small Business Administration, Firm
    Size Data by Industry and Location.

[^242]: 13 C.F.R. § 121.201, NAICS Code 334220, 334290.

[^243]: *Id.*

[^244]: 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}).

[^245]: *Id*.

[^246]: 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.

[^247]: U.S. Census Bureau, 1997 Economic Census, Industry Series:
    Manufacturing, "Industry Statistics by Employment Size," Table 4,
    NAICS code 334220 (issued August 1999).

[^248]: *Id*. Table 5, "Industry Statistics by Industry and Primary
    Product Class Specialization: 1997."

[^249]: 5 U.S.C. § 603(c)(1)-(4).

[^250]: *See* 5 U.S.C. § 604(b).

[^251]: *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).

[^252]: *See* 5 U.S.C. § 603(a).

[^253]: *See id.*

[^254]: *See supra* para. 59.

[^255]: *See supra*. paras. 61-62.

[^256]: *See supra* para. 61.

[^257]: *See supra* paras. 63-66.

[^258]: *Id*.

[^259]: *See supra* para. 66.

[^260]: *See supra* paras. 67-69.

[^261]: *See supra* paras. 70-71.

[^262]: *See supra* paras. 72-73.

[^263]: *See supra* paras. 73-74.

[^264]: *See supra* paras. 81-82.

[^265]: *See supra* paras. 83-84.

[^266]: *See supra* paras. 88-90.

[^267]: *See supra* para. 87.

[^268]: *See supra* para. 91.

[^269]: *See supra* para. 92. We also noted that current administrative
    procedures require the filing a FCC Form 473 to receive payment.

[^270]: *See* *supra* para 93.

[^271]: *See* *supra* para. 102.

[^272]: *See* 5 U.S.C. § 603(c).

[^273]: 47 C.F.R. §§ 1.415, 1.419.

[^274]: *See* Electronic Filing of Documents in Rulemaking Proceedings,
    63 FR 24121 (1998).

[^275]: *Reminder -- Filing Locations for Paper Documents and
    Instructions for Mailing Electronic Media*, Public Notice, DA
    03-2730 (rel. Aug. 22, 2003).

[^276]: *See* 47 C.F.R. § 1.49.