**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

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| In the Matter of                 | * | WC Docket No. 05-195         |
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| Comprehensive Review of          | ) | CC Docket No. 96-45          |
| Universal Service Fund           | * |                              |
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| Management, Administration, and  |   |                              |
| Oversight                        | * | WC Docket No. 02-60          |
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| Federal-State Joint Board on     | ) | WC Docket No. 03-109         |
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| Universal Service                | * | CC Docket No. 97-21          |
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+----------------------------------+---+------------------------------+

**NOTICE OF PROPOSED RULEMAKING**

**AND**

**FURTHER NOTICE OF PROPOSED RULEMAKING**

**Adopted: June 9, 2005 Released: June 14, 2005**

**Comment Date: 90 days after publication in the Federal Register**

**Reply Comment Date: 150 days after publication in the Federal
Register**

By the Commission: Chairman Martin and Commissioners Copps and Adelstein
issuing separate statements.

**TABLE OF CONTENTS**

**Paragraph \#**

**I. INTRODUCTION** 1

**II. BACKGROUND** 3

**III. DISCUSSION** 9

A. Management and Administration of the USF 9

1\. Universal Service Fund Administrator 10

a\. Background 10

b\. USF Administrative Structure 11

2\. Performance Measures 24

3\. Program Management 32

a\. Application Process 34

b\. USF Disbursements 60

c\. Contributions Process 65

d\. Period Review of Program Management 66

B. Oversight of the USF 67

1\. Independent Audits 69

2\. Document Retention Requirements 83

3\. Administrative Limitations Period 86

4\. Recovery of Funds 89

5\. Measures to Deter Waste, Fraud, and Abuse 90

6\. Other Actions to Reduce Waste, Fraud, and Abuse 95

**IV. PROCEDURAL MATTERS** 100

A. Initial Regulatory Flexibility Analysis 100

B. Paperwork Reduction Act Analysis 101

C. Ex Parte Presentations 102

D. Comment Filing Procedures 103

**V. ORDERING CLAUSES** 109

Appendix: Initial Regulatory Flexibility Analysis

# Introduction

1.  In this Notice of Proposed Rulemaking and Further Notice of Proposed
    Rulemaking ("NPRM") we initiate a broad inquiry into the management
    and administration of the Universal Service Fund ("USF"), as well as
    the Commission's oversight of the USF and the USF Administrator. In
    particular, we seek comment on ways to improve the management,
    administration, and oversight of the USF, including simplifying the
    process for applying for USF support, speeding the disbursement
    process, simplifying the billing and collection process, addressing
    issues relating to the Universal Service Administrative Company
    ("USAC" or the "Administrator"), and exploring performance measures
    suitable for assessing and managing the USF programs.[^1] In
    addition, we seek comment on ways to further deter waste, fraud, and
    abuse through audits of USF beneficiaries or other measures, and on
    various methods for recovering improperly disbursed funds.

2.  Our goal is to find ways to improve the program, both from the
    perspective of USF beneficiaries and from the perspective of
    safeguarding the fund itself. We recognize that some parties have
    raised concerns ranging from mismanagement to intentionally
    defrauding the program, and we take these concerns seriously. In
    this proceeding, we intend to address these concerns by finding
    constructive ways to continue meeting the needs of those who depend
    on the USF, while at the same time ensuring that the public is
    confident that the funds are used for their intended purpose. To
    accomplish this, we are seeking input from all interested parties,
    including experienced participants in the USF programs, on improving
    the management, administration, and oversight of the four universal
    service programs. We intend to determine whether any rule changes
    are necessary in order to manage and administer the USF programs
    more efficiently and effectively, while deterring waste, fraud, and
    abuse. We are interested in rule changes that can be applied, to the
    greatest extent possible, consistently across all programs.
    Furthermore, to the extent commenters' suggestions can be
    accomplished without rule changes, we may do so after evaluating the
    record in this docket.

# background

3.  A key goal of universal service is to ensure affordable
    telecommunications services to all Americans, including consumers
    living in high-cost areas, low income consumers, eligible schools
    and libraries, and rural health care providers.[^2] Prior to
    adoption of the Telecommunications Act of 1996,[^3] universal
    service was achieved largely through implicit support
    mechanisms.[^4] States kept residential service rates low through
    geographic rate averaging and higher rates for businesses,
    intrastate access, intrastate toll service, and vertical
    features.[^5] In addition, federal access charges provided implicit
    support for the interstate portion of joint and common costs.[^6]
    Section 254 of the Act required explicit federal universal service
    mechanisms and also enlarged the scope of the program.[^7]
    Telecommunications carriers providing interstate telecommunications
    services are required to contribute to the USF.[^8]

4.  Pursuant to prior Commission orders, USAC, a subsidiary of the
    National Exchange Carrier Association ("NECA"),[^9] is the private
    not-for-profit corporation created to serve as the
    Administrator.[^10] USAC administers the universal service support
    mechanisms and is responsible for billing contributors and
    collecting contributions to the universal service support
    mechanisms. USAC administers the USF in accordance with the
    Commission's rules and orders. USAC also engages in frequent
    consultations with the Commission. Currently, one division in the
    Wireline Competition Bureau ("Bureau"), the Telecommunications
    Access Policy Division, works with USAC to implement USF
    administration. Personnel from other Commission bureaus and offices
    such as the Office of the Managing Director ("OMD"), the Enforcement
    Bureau, and the Office of the Inspector General ("OIG"), also assist
    with managing and overseeing the USF and USAC. The Commission
    provides USAC with oral and written guidance, as well as regulation
    through its rulemaking process.

5.  Since 1997, USAC has disbursed approximately \$30.3 billion to
    implement section 254 of the Act.[^11] The USF consists of four
    programs, each administered by USAC: (1) the universal service
    mechanism for high cost areas, providing financial support to
    carriers serving high cost areas; (2) the universal service
    mechanism for schools and libraries (also known as the E-rate
    program), providing for discounted services (local and long distance
    telephone service, Internet access, and internal connections) to
    eligible schools and libraries; (3) the universal service mechanism
    for low income consumers, assisting low income consumers with
    discounted installation and monthly telephone services; and (4) the
    universal service mechanism for rural health care, providing
    discounted services to rural health care providers.

6.  Since the inception of these four explicit universal service
    mechanisms, we have conducted several rulemaking proceedings
    examining policy, administration, management, or oversight
    issues.[^12] In addition, USAC has conducted six annual audits of
    its operations and accounts under the Bureau's oversight.[^13]
    Various entities, including USAC, independent auditors, and the
    Commission's OIG[^14] have conducted more than 222 audits examining
    E-rate beneficiary compliance. Moreover, USAC has conducted three
    audits of High Cost program management and operations, eight audits
    of High Cost program beneficiaries, 67 audits of Low Income
    operations, 56 audits of Rural Health Care beneficiaries, and 42
    audits of contributor compliance.

7.  In addition to the efforts noted above, USAC has performed its own
    reviews of its operations.[^15] For example, USAC coordinated an
    evaluation of possible anti-fraud measures in 2003.[^16] USAC's
    board of directors reviews financial and operating data related to
    program management on a quarterly basis. USAC's board of directors
    also has quarterly meetings that, under the Commission's rules, are
    open to the public.[^17]

8.  Other government organizations have performed investigations and
    reviews of the USF. The United States Government Accountability
    Office ("GAO") has conducted examinations of USF issues, primarily
    the E-rate program.[^18] The Congressional Budget Office ("CBO")
    recently released a study of the USF.[^19] In this proceeding, we
    seek to build on the lessons learned from these prior efforts. If we
    determine, based on the record in this proceeding, that we can
    improve program management and better safeguard the USF, we will
    implement any necessary rule changes or take additional measures
    that may not require rule changes.

# DISCUSSION

## Management and Administration of the USF

9.  In this section, we broadly seek comment on measures the Commission
    can take to improve management and administration of the program.
    The effectiveness and efficiency of our management and
    administration of the USF is influenced by the organizational
    structure used to carry out the missions of the USF, the methods
    used to measure and evaluate program performance, and the program
    operations, including the application process, the contributions
    process, and the disbursement process.[^20] As explained below, we
    encourage parties to comment on the Commission's past practices and
    submit proposals for improving the management and administration of
    the program. We also invite comments and suggestions on any aspect
    of this NPRM from USAC, including its views on its performance as
    Administrator.[^21]

### Universal Service Fund Administrator 

#### Background

10. The Commission's rules provide for the appointment of a permanent
    Administrator of the USF.[^22] In 1998, the Commission appointed
    USAC the permanent Administrator of the federal universal service
    support mechanisms.[^23] Under the Commission's rules, the
    Administrator is responsible for administering each of the USF
    mechanisms.[^24] As part of its duties and subject to Commission
    rules and oversight, the Administrator bills contributors to the
    USF, collects USF contributions, disburses universal service support
    funds, recovers improperly disbursed USF moneys,[^25] submits
    periodic reports to the Commission (including quarterly reports on
    the disbursement of universal service support funds), maintains
    accounting records, conducts audits of contributors and
    beneficiaries, creates and maintains an Internet site, collects
    information, and provides access to information it collects to the
    Commission.[^26] Aggrieved parties may file appeals of actions taken
    by the Administrator.[^27] Under the Commission's rules, USAC is
    required to maintain its books of account in accordance with
    generally accepted accounting principles ("GAAP") and to account for
    the financial transactions of the USF in accordance with government
    generally accepted accounting principles ("GovGAAP").[^28] The
    Administrator must also maintain the accounts of the USF in
    accordance with the U.S. Government Standard General Ledger
    ("USGSGL").[^29] Pursuant to Commission rules, the Administrator is
    prohibited from making policy, interpreting unclear provisions of
    the statute or the Commission's rules, or interpreting the intent of
    Congress, and may only advocate positions before the Commission and
    its staff on administrative matters.[^30]

#### USF Administrative Structure

11. We seek comment on whether modifications to our rules are needed to
    ensure efficient, effective, and competitively neutral
    administration of the USF. The Commission appointed USAC the
    permanent Administrator "subject to a review after one year by \[the
    Commission\] to determine that the Administrator is administrating
    the universal service support mechanisms in an efficient, effective,
    and competitively neutral manner."[^31] The Commission intended to
    review USAC's performance after one year; however, the one-year
    review did not take place.[^32] We therefore seek comment on USAC's
    performance since the inception of the USF program, as well as the
    Commission's management and oversight of USAC. We seek comment on
    whether USAC has administered the USF in an efficient, effective,
    and competitively neutral manner. In addition, we seek comment on
    whether additional rules or amendment of existing rules are needed
    to provide clarity to the scope and content of the Administrator's
    functions. Commenters should address USAC's successes as well as any
    weaknesses in USAC's performance or areas that need
    improvement.[^33]

12. *Administrative Structure.* We take this opportunity to evaluate the
    current administrative structure to determine whether any changes
    are needed in order to enhance management of the USF. Commenters
    should discuss whether their experience in other government programs
    suggests a more effective mechanism for administering a subsidy
    program the size of the USF. We seek comment on whether we should
    replace the permanent, designated Administrator with another type of
    administrative structure or entity. For example, we could retain
    USAC as Administrator pursuant to a contract or subject to a
    Memorandum of Understanding. We could seek competitive bids[^34] for
    another entity to administer the USF, subject to replacement after a
    period of time. Alternatively, we could appoint a different entity
    or organization to permanently administer the USF instead of USAC,
    or we could retain the current structure for USF administration so
    that USAC would continue to administer the USF. If we retain the
    current structure for USF administration, how can we improve the
    Commission's oversight of the USF and management of the program?
    Commenters should address the pros and cons of a permanent
    administrative entity as well as the pros and cons of alternative
    administrative structures and arrangements. Commenters should
    discuss the advantages and disadvantages of competitive procurement
    and of having the same entity administer the USF programs over a
    lengthy period of time.[^35] We seek comment on whether USAC should
    apply, to the extent practicable, the policies and procedures
    embodied in the Federal Acquisition Regulation ("FAR").[^36]
    Commenters should also discuss how Commission oversight would be
    implemented if alternative arrangements were adopted.

13. In addition, we seek comment on whether using a not-for-profit
    corporation as the permanent Administrator of the USF has worked
    successfully. Commenters should address the pros and cons of using a
    not-for-profit entity as the USF Administrator. We note that the
    Commission has experience using contracts to administer certain
    programs. For example, section 251(e) of the Act directs the
    Commission to "create or designate one or more impartial entities to
    administer telecommunications numbering and to make such numbers
    available on an equitable basis."[^37] The Commission concluded that
    it was free to select the National Pooling Administrator on a
    competitive basis, as it did in choosing the North American
    Numbering Plan administrator in 1997.[^38] The entities that
    administer telecommunications numbering and thousands block number
    pooling for the Commission do so pursuant to a contract and we
    believe that such contracts have provided certain cost benefits,
    such as the lower costs that can be achieved through the competitive
    bidding process.

14. Part 54 of the Commission's rules are designed to promote universal
    service in a competitively neutral manner. The Commission's rules
    apply a number of requirements to the USF Administrator to ensure
    effective, efficient, competitively neutral administration.[^39]
    This ensures that support is made available on a technologically
    neutral basis to eligible service providers. The Commission
    concluded, when appointing USAC permanent administrator, that
    "subject to the modifications set forth in this Order, USAC fairly
    represents all interested parties, including a broad range of
    industry, consumer, and beneficiary groups."[^40] We seek comment on
    how any proposals to change the current administrative structure
    would affect the independence and neutrality of the USF program
    administration. The Commission's rules provide for an experienced
    Board of Directors representing a balance of different interests.
    The Commission's rules describe the functions of USAC, which are
    limited to "administering the schools and libraries support
    mechanism, the rural health care support mechanism, the high cost
    support mechanism, the low income support mechanism, the interstate
    access universal service support mechanism . . . and the interstate
    common line support mechanism."[^41] In addition, USAC is
    responsible for "billing contributors, collecting contributions to
    the universal service support mechanisms, and disbursing universal
    service support funds."[^42] The rules also prohibit USAC from
    making policy or interpreting the intent of Congress, and bar USAC
    from lobbying on anything other than administrative issues. We seek
    comment on whether we should modify our rules to more clearly
    delineate USAC's administrative functions.

15. We seek comment on whether we should modify our rules addressing
    meetings of the Administrator's Board of Directors. We seek comment
    on whether the current board composition results in effective,
    efficient, and competitively neutral management of the USF.
    Commenters should provide specific recommendations for modifying the
    composition of the Administrator's Board of Directors and describe
    the benefits of implementing such proposals. Section 54.705 of the
    Commission's rules requires USAC to have three committees: a Schools
    and Libraries Committee, a Rural Health Care Committee, and a High
    Cost and Low Income Committee.[^43] We seek comment on whether
    additional committees or fewer committees would be administratively
    efficient and useful. USAC also has an audit committee, an
    investment committee, and an executive committee, which are not
    required by our rules. We seek comment on whether we should revise
    the rules to clarify or specify the organizational structure of the
    Administrator's committees.

16. We also seek comment on whether we should adopt rules to require the
    Administrator to implement ethics standards and procedures for
    addressing conflicts of interest, or if we should adopt specific
    rules governing the ethics standards and conflicts of interest for
    officers and/or employees of the Administrator.[^44] We seek comment
    on whether to adopt rules addressing the Administrator's procedure
    for handling confidential information, including confidential
    information related to the federal government.[^45] Finally, we seek
    comment on whether the Administrator's Board of Directors should be
    permitted to enter into closed sessions in which the Commission and
    members of the public are excluded.[^46] Although the Commission's
    rules state that all meetings of the Administrator's Board of
    Directors are to be public,[^47] there may be instances where a
    private meeting is warranted. Should we adopt procedures and rules
    to identify appropriate instances of when the Administrator's Board
    of Directors may hold a closed sessions? If so, what should those
    instances be?

17. *Filing and Reporting Requirements.* Under our rules, the
    Administrator must submit periodic reports to the Commission.
    Section 54.702(g) requires USAC to submit an annual audit report.
    Section 54.709(a) requires USAC to submit, 60 days prior to the
    start of the quarter, financial and accounting data, including
    projected administrative expenses and projected program demand
    (*i.e*., amount of moneys USAC expects to disburse in the upcoming
    quarter for each USF mechanism).[^48] Section 54.709(a) also
    requires USAC to submit, 30 days prior to the start of each quarter,
    its estimate of contributor base.[^49] USAC prepares and submits
    additional reports, both to the Commission staff on an ad hoc basis
    and to its Board of Directors on a quarterly basis. We seek comment
    on whether we should revise the content or frequency of the
    Administrator's reports. For example, we could require these reports
    be filed on a monthly, quarterly, or annual basis. We seek
    suggestions from USF stakeholders about the appropriate types of
    publicly available information that we should require from USAC. For
    example, should we require publicly available, periodic performance
    measurement and financial reports?

18. The Bureau calculates the proposed quarterly contribution factor,
    based on USAC's submissions, and announces it in a Public Notice
    fourteen days before the beginning of each quarter.[^50] This
    proposed contribution factor is deemed approved when the
    fourteen-day period ends, if the Commission takes no action to
    change the contribution factor. [^51] USAC uses the contribution
    factor to bill carriers on the sixteenth of each month during the
    quarter. USAC requires carriers to pay their invoices by the
    fifteenth of the following month. We seek comment on whether we
    should revise our rules to change any of these time periods or to
    modify the content of USAC's filings.

19. *Contributor Delinquency.* We also seek comment on whether we should
    revise our rules to address the issue of a carrier's delinquent
    contributions. Should we adopt a rule on how a carrier's payments
    are assigned to current and delinquent amounts due the
    Administrator? The Administrator's practice is to apply partial
    payments to the oldest debt first,[^52] instead of the current
    billed amount. Should we direct USAC to modify this practice? We
    also seek comment on whether we should adopt rules to allow USAC to
    charge interest and assess penalties for a carrier's failure to file
    the FCC Form 499-A, Telecommunications Reporting Worksheet ("Form
    499-A").

20. *Borrowing Funds.* Our rules currently provide that USAC "shall
    request borrowing authority from the Commission to borrow funds
    commercially" if contributions received in a given quarter are
    inadequate to meet the amount of universal service program payments
    and administrative costs for that quarter.[^53] We note that USAC
    has never requested such authority nor has the Commission authorized
    such borrowing. Is this rule, to the extent it authorizes borrowing
    of funds to pay for the USF, inconsistent with federal financial
    accounting rules that apply to the USF? We seek comment on whether
    we should eliminate this rule. We think it is unlikely that the
    Commission would be unable to meet program payment requirements and
    administrative costs in any quarter because we evaluate the program
    demand (including administrative expenses) before we establish the
    contribution factor and we can control to a large extent the amount
    of USF disbursements in a given quarter. Nevertheless, we believe
    that we should consider and account for that contingency.

21. Moreover, we note that to the extent we modify our rules to permit
    other entities to administer the USF, there may be a need to permit
    borrowing under certain circumstances, *e.g.*, for administrative
    expenses or other non-program reasons and without jeopardizing
    program funds. We therefore seek comment on what process to
    establish, in lieu of the existing borrowing authority in section
    54.709(c), to address situations in which the amount of available
    USF is insufficient to accommodate program demand and administrative
    expenses. For example, we could maintain a cash reserve that would
    be used only in that event. At the same time, given the relatively
    low risk of the occurrence, we question whether it would be prudent
    to tie up funds for that purpose. We seek comment on what an
    appropriate reserve level would be. We have no rules regarding
    interfund borrowing. Should we adopt a rule prohibiting or allowing
    interfund borrowing? We seek comment on whether to establish
    limitations or constraints on the Administrator's ability to borrow
    funds in permissible circumstances and in a manner consistent with
    federal law. We seek comment on other ways to ensure that universal
    service funds are sufficient to cover costs and administrative
    expenses. For example, in the event that funds are insufficient to
    cover costs and administrative expenses, should we seek to collect
    additional funds and postpone payments until sufficient funds have
    been received? We also seek comment on the potential impact that any
    such proposal could have on fund beneficiaries. Finally, we seek
    comment on whether the Commission should adopt rules or requirements
    governing the investment practices and policies of the
    Administrator. For example, should we adopt requirements restricting
    USAC investments to non-interest bearing accounts or Treasury bills?

22. *Administrative Procedures.* We seek comment on whether we should
    codify certain USAC administrative procedures in the Commission's
    rules. In the *Schools and Libraries Fifth Report and Order*, we
    directed USAC to identify all Schools and Libraries program
    procedures and we are currently evaluating USAC's list.[^54] As we
    discussed in the *Schools and Libraries Fifth Report and Order*, we
    are concerned about recovery of funds disbursed after applicants
    failed to follow USAC administrative procedures.[^55] Certain USAC
    procedures have since been incorporated into the Commission's rules.
    This issue has not yet been raised in the context of administrative
    procedures related to contributions or in the context of the High
    Cost, Low Income, and Rural Health Care programs. Under the
    Commission's rules, the Administrator may not "make policy,
    interpret unclear provisions of the statute or rules, or interpret
    the intent of Congress."[^56] To assist our analysis, we will
    require USAC to file a list of its administrative procedures for the
    contributions process and the High Cost, Low Income, and Rural
    Health Care programs as an ex parte filing in this proceeding,
    within 60 days of the publishing of this Notice of Proposed
    Rulemaking and Further Notice of Proposed Rulemaking in the Federal
    Register.[^57] USAC's administrative procedures may involve
    collection or disbursement policies and practices that affect
    beneficiaries and service providers.[^58] We believe that there is a
    fundamental difference between ministerial errors and intentional
    fraud, and that greater clarity in USAC's rules and procedures will
    help reduce ministerial errors. We seek comment on how a
    beneficiary's compliance or lack of compliance with USAC
    non-codified administrative procedures should be treated in the
    auditing context. We are seeking proposals from commenters as to
    whether any of USAC's procedures or policies should be codified. We
    anticipate that it will be useful to continue to evaluate whether
    other USAC administrative procedures should be codified into our
    rules. We ask that commenters consider whether any proposal for the
    Commission to codify USAC administrative procedures, or other
    proposals in this NPRM, would facilitate or restrict the ability of
    the administrator to perform its duties in a flexible and responsive
    way.

23. *Continuity of Operations.* Federal agencies are required to develop
    continuity of operations ("COOP") plans to ensure that essential
    services will be available in emergency situations.[^59] Disruptions
    from a variety of sources, including severe weather conditions, can
    result in interruptions in services. We seek comment on whether we
    should adopt a rule to require USAC to develop and maintain a COOP
    plan for dealing with emergency situations. We also seek comment on
    whether any modifications to our rules are needed to ensure that the
    Administrator can continue to perform its mission-critical functions
    in the event of an incident or emergency situation. Commenters
    should describe the pros and cons of any proposals.

### Performance Measures

24. We recognize that effective program management requires the
    implementation of meaningful performance measures. Clearly
    articulated goals and reliable performance data allow the Commission
    and other stakeholders to assess the effectiveness of the USF
    programs and to determine whether changes are needed.[^60] The
    Commission is in the process of compiling USF performance measures,
    particularly for the Schools and Libraries program and the High Cost
    program, in order to comply with the Office of Management and Budget
    ("OMB") Program Assessment Rating Tool ("PART") requirements. We
    seek comment on additional performance measures and goals that we
    can use to track progress and efficiency for all the universal
    service programs. Proposed performance measures should be highly
    relevant in measuring program value, accomplishments, and results.
    We also seek comment on whether we should establish specific
    performance goals or targets for the Administrator or for
    participants in the USF programs. We must be careful to measure only
    the goals of the program and not stray beyond our jurisdiction.
    Under the Act, universal service is defined as an "evolving level of
    telecommunications services" that includes advanced services.[^61]
    For the various USF programs, we should focus on measuring access to
    an evolving level of telecommunications services in the performance
    measure context.

25. The OMB's PART guidance sets forth three types of performance
    measures: (1) outcome measures, (2) output measures, and (3)
    efficiency measures.[^62] Outcome measures "describe the intended
    result from carrying out a program or activity."[^63] Output
    measures describe the level of activity, such as applications
    processed, number of housing units repaired, or number of
    stakeholders served by a program. Efficiency measures capture a
    program's ability to perform its function and achieve its intended
    results relative to the resources expended.[^64] These performance
    measurements should be intrinsically linked to the purpose of the
    program and the strategic goal to which it contributes.[^65] The GAO
    has also published a number of reports addressing the use of
    performance measures in the management of government programs.[^66]
    We seek comment on establishing the most useful and valid outcome,
    output, and efficiency measures for the USF and each of its
    mechanisms, as well as the administration of the program. Commenters
    should address the objectives of any recommended performance
    measurements and goals. Commenters should also discuss whether we
    should revise our information collection process, including any of
    the forms applicable to the USF mechanisms, in order to collect
    sufficient information to measure the performance of the programs
    and identify potential areas for program improvement.

26. *E-Rate.* We seek comment on suitable outcome, output, and
    efficiency measures for the E-rate program. In the past, the
    Commission used the percentage of public schools connected to the
    Internet as a measure of the impact of the E-rate program and its
    success, and we seek comment on continuing to use connectivity as a
    measurement.[^67] As prescribed in section 254(h), the statutory
    goal of the E-rate program is to provide discounts to eligible
    schools and libraries for educational purposes. The Commission used
    this goal in developing and submitting its prior PART analysis to
    the OMB.[^68] We seek comment on the value of continuing to use this
    goal for the purposes of measuring the impact of the E-rate
    program.[^69] We seek comment on whether we should also measure the
    connectivity of libraries or private schools. We seek comment on
    whether alternative or supplemental goals may be more appropriate
    than connectivity. Universal service is an "evolving level of
    telecommunications services" that includes advanced services.[^70]
    We seek comment on how we can take the evolving level of services
    into account in adopting performance measures. We also seek comment
    on ways to measure the extent to which broadband services have been
    deployed to classrooms, through the E-rate program. One possibility
    for measuring the impact of E-rate moneys on schools and libraries
    would be to collect data on the use of E-rate supported services.
    For example, we could measure the number or percentage of students
    that access the Internet or the number or percentage of teachers
    using supported services in their classrooms. Likewise, we could
    measure the number or percentage of library patrons who use
    supported services during a library visit. We seek comment on
    relevant performance measures for the E-rate program. We note that
    the Department of Education already collects information on the use
    of the Internet in classrooms, but does not collect information on
    broadband. We do not want to expend resources for a repetitious
    inquiry. We therefore seek comment on how we should design
    performance measurements to measure broadband connectivity.
    Commenters should also propose definitions of "broadband" for our
    performance measurements. We also seek comment on how we can be sure
    to measure only schools and libraries that get support from the
    program, rather than measuring all schools and libraries.
    Furthermore, we seek comment on how the Commission can determine
    which schools currently have no connectivity at all so that we can
    improve the program by reaching these unconnected schools.

27. We note that the U.S. Department of Education uses performance
    measures to evaluate the implementation of the Enhancing Education
    Through Technology ("EETT") program.[^71] The EETT program funds
    initiatives that are designed to integrate technology into
    classrooms in ways to improve the academic achievement of students.
    These performance measures allow the Department of Education to
    respond to Government Performance and Results Act ("GPRA") reporting
    requirements. We seek comment on whether these measures are
    instructive for E-rate purposes.

28. We also seek comment on meaningful ways to distinguish the impact of
    E-rate funds from other governmental and non-governmental programs
    that support services or facilities similar to the E-rate
    program.[^72] Is there an effective way to isolate and measure the
    impact of the E-rate program on schools and libraries?

29. We also seek comment on ways to measure the efficiency and
    effectiveness of the E-rate program. For example, we could implement
    a measurement to capture the cost in E-rate funds disbursed per
    student or library patron. We note that the timing of the
    Commission's and USAC's processes may be critical to schools and
    libraries. Lengthy intervals for processing or reviewing
    applications could have a disruptive effect on the budget or
    procurement schedule for schools or libraries. Delay can complicate
    the USAC application process for schools and libraries, leading to
    ministerial errors on subsequent applications, complicating
    auditing, and undermining our ability to combat waste, fraud, and
    abuse. We seek comment on timing issues that need improvement.
    Commenters should discuss particular deadlines that should be
    modified. Should we create new deadlines for Commission or USAC
    action in various phases of the E-rate process? Should we set
    deadlines for progressing from the completion of an application to
    the funding commitment decision letter ("FCDL"), or for completion
    of appeals? In submitting their responses and proposals, commenters
    should focus on the need, if any, to modify our information
    collection processes, and the burden any such modification would
    place on stakeholders in the program, particularly small entities.

30. *High Cost, Rural Health Care, and Low Income.* We also seek comment
    on adopting meaningful outcome, output, and efficiency measures for
    the High Cost, Rural Health Care, and Low Income programs.[^73]
    Because these mechanisms have different goals and purposes than the
    E-rate program, we expect to adopt different performance measures
    and goals for each program. We note that participants in each USF
    mechanism may receive support from other sources (*e.g.*, loans from
    the Department of Agriculture's Rural Utility Service or the
    Department of Education) or may seek USF support for only a portion
    of their telecommunications needs. We seek comment on whether and
    how we should account for these factors in crafting performance
    measurements for each of the mechanisms so we can evaluate the
    impact of each USF dollar disbursed. Commenters should suggest
    measures for each of the statutory goals listed in section
    254(b)(3): "Consumers in all regions of the Nation, including
    low-income consumers and those in rural, insular, and high cost
    areas, should have access to telecommunications and information
    services, including interexchange services and advanced
    telecommunications and information services, that are reasonably
    comparable to those services provided in urban areas and that are
    available at rates that are reasonably comparable to rates charged
    for similar services in urban areas."[^74] We also seek comment on
    ways to measure the efficiency of each support mechanism. How do we
    best determine whether the programs are accomplishing the statutory
    goals in a cost-effective manner? Relevant performance measures for
    the Low Income program may include the percentage of eligible
    households that receive low income support and telephone
    subscribership rates for low income consumers. We seek comment on
    these suggestions and we request commenters to submit alternative
    proposals for performance measures. Suitable performance measures
    for the High Cost program may include telephone subscribership in
    rural areas (and comparing such rates to telephone subscribership in
    urban areas) or the comparability of rural and urban rates. We seek
    comment on these possibilities and request parties to submit
    alternative proposals for performance measures. Relevant performance
    measures for the Rural Health Care program may determine the
    comparability of rural and urban rates, the number or percentage of
    eligible rural health care providers receiving USF support, and the
    number of patients served by rural health care providers
    participating in the program. We seek comment on these possibilities
    and request parties to submit alternative proposals for performance
    measures.

31. *USF Administration.* Finally, we seek comment on establishing
    suitable performance measurements for evaluating the administration
    of the USF program. Under the Commission's rules, the Administrator
    is responsible for performing certain functions under the
    Commission's oversight. In particular, the Administrator bills
    contributors, collects USF contributions, disburses USF moneys, and
    administers the USF's accounts and transactions.[^75] When the
    Commission appointed the permanent Administrator, we noted our
    expectation that the Administrator would perform its duties in an
    efficient, effective, competitively neutral manner.[^76] Although
    the Commission adopted various reporting requirements applicable to
    the Administrator, it did not adopt metrics to measure the
    Administrator's performance of its duties.[^77] Relevant performance
    measures may include the number of applications for USF support
    processed within a particular period of time, the percentage of
    applications rejected by the Administrator for errors or other
    reasons, the average number of days required to process an
    application, the accuracy of bills issued to contributors, or the
    number of errors made in disbursing funds to USF beneficiaries. We
    seek comment on these possibilities and request that commenters
    submit alternative proposals. We also seek comment on ways of
    measuring how cost-effectively the Administrator operates.

### Program Management

32. We seek comment from all interested parties on ways we can improve
    the management, administration, and oversight of the USF programs,
    including the billing and collection process and the process of
    disbursing funds. We welcome input from service providers,
    beneficiaries, and others who have had experience with the USF
    programs. We also seek comment from other agencies and governmental
    entities about their experiences with program administration and
    management that may offer guidance in the context of the USF
    programs. We seek comment on the accessibility of our applications
    and disbursement processes for persons with disabilities. We
    recognize that our efforts to improve USF management may entail an
    administrative burden on USF program participants, and we invite
    comment on ways to achieve more efficient administration and
    management, while continuing our efforts in deterring waste, fraud,
    and abuse.

33. We seek comment on whether the E-rate and Rural Health Care
    distribution processes should more closely track those of the High
    Cost and Low Income programs. For example, we could change our rules
    to use a formula to distribute funds directly to schools and
    libraries according to their size and allow funds to be used in a
    more flexible way, *e.g*., for communications-related services and
    equipment, or training on how best to use such service and
    equipment, rather than requiring applications that identify needed
    services and equipment and their cost. Would such a formulaic
    approach further the goals of the program? Would it create
    substantial additional challenges? We believe that any changes
    should not disadvantage stakeholders, including private, parochial,
    rural, and economically-challenged schools or libraries. We seek
    comment on whether a formulaic approach would disadvantage
    stakeholders of these programs. We also seek comment on whether a
    formulaic approach would make detecting waste, fraud, and abuse more
    difficult.

#### Application Process

##### E-Rate

34. Under the Schools and Libraries program, eligible schools,
    libraries, and consortia that include eligible schools and
    libraries, may receive discounts for telecommunications services,
    Internet access, and internal connections.[^78] The schools and
    libraries support mechanism is capped at \$2.25 billion
    annually;[^79] however, annual requests for funds frequently exceed
    the annual cap.[^80] Applicants may receive discounts ranging from
    20 to 90 percent of the price of eligible services, based on
    indicators of need, *i.e*., percentages of students eligible for
    free or reduced price lunch through the National School Lunch
    Program, or a federally approved alternative mechanism.[^81] In
    addition, rural applicants receive enhanced discounts, ranging from
    25 to 90 percent of the pre-discount price for the eligible
    services.[^82]

35. The application process generally begins with a technology
    assessment and a technology plan.[^83] After developing the
    technology plan, the applicant must file the FCC Form 470 ("Form
    470") to request discounted services such as tariffed
    telecommunications services, month-to-month Internet access,
    cellular services, or paging services, and any services for which
    the applicant is seeking a new contract.[^84] The Form 470 must be
    posted on USAC's schools and libraries division website for at least
    28 days.[^85] The applicant must then comply with the Commission's
    competitive bidding requirements set forth in sections 54.504 and
    54.511(a) of the Commission's rules.[^86] The applicant then files
    the FCC Form 471 ("Form 471"), after entering into agreements for
    eligible services.[^87]

36. After receiving the Form 471, USAC assigns a "funding request
    number" to each request for discounted services. USAC reviews the
    Form 471 and then, if the request is approved, issues funding
    commitment decision letters advising the applicants of the discounts
    that the applicants will receive under the rules. The FCC Form 486,
    Receipt of Service Confirmation Form ("Form 486"), is filed after
    the school or library begins to receive the service from the
    vendor.[^88] The FCC Form 472, Billed Entity Applicant Reimbursement
    ("BEAR") Form may be filed if the school or library needs
    reimbursement of discounts due on approved services for which it has
    paid full price. Alternatively, the applicant can pay only the
    non-discounted portion of the bill and the vendor can seek
    reimbursement from USAC by filing the FCC Form 474, Service Provider
    Invoice Form ("Form 474").[^89]

37. *Application Process.* We seek comment on the application process
    for obtaining support from the schools and libraries mechanism.[^90]
    In particular, we seek proposals on ways to improve the
    administration of the application process while maintaining an
    effective review system to ensure that USF moneys are disbursed
    properly. We invite suggestions for streamlining the application
    process, such as shortening, combining, or eliminating forms.
    Commenters should discuss, for example, whether we should streamline
    applications for priority 1 services, establish a different
    application cycle for applicants with repeat requests, or limit the
    current application form to applicants seeking priority 2 services
    and develop a simpler application process for priority 1 services.
    We seek comment on whether the burden on applicants would be reduced
    by creating a streamlined form for certain circumstances and only
    requiring full applications when changing technology plan criteria
    or ordering new services. It appears, based on the information we
    have at this time, that relatively few instances of waste, fraud,
    and abuse occur in requests for priority 1 services. We tentatively
    conclude that we should adopt a streamlined multi-year application
    for priority one services. Commenters should address whether such a
    streamlined process may create the potential for waste, fraud, and
    abuse, and if so, how we can mitigate such risk. We seek comment on
    whether the complexity of the application process leads some small
    schools and libraries to choose not to participate in the E-rate
    program. In addition, we seek comment on whether the Administrator
    should provide applicants and service providers more, or less,
    information regarding the status of applications and if we should
    establish deadlines or target dates for processing applications. We
    note that there may be practical limitations to establishing firm
    deadlines for processing applications, which are typically submitted
    in batches. We ask commenters to consider these concerns in their
    comments. We also seek comment on suggestions for using technology
    to improve the application process, such as receiving
    electronic-only notifications and status reports. Commenters should
    discuss the costs and benefits of alternative proposals or
    modifications to the current system.

38. As noted above, the timing of various parts of the USAC and
    Commission processes is critical to schools and libraries, many of
    which operate according to strict State or municipal budget and
    procurement schedules. When USAC or the Commission cause delay,
    schools and libraries can be thrown off their mandated budget or
    procurement schedules. This can have a significant negative impact
    on schools' and libraries' ability to achieve connectivity goals.
    Sometimes delay can complicate the USAC application process for
    schools and libraries, leading to ministerial errors on subsequent
    applications, complicating auditing, and undermining our ability to
    combat waste, fraud, and abuse. What are the timing and delay issues
    that the Commission should address in this proceeding? How can we
    improve timing problems and delays? While the dedicated staffs of
    USAC and the Commission work hard, do USAC and the Commission have
    adequate staff resources to combat delay? Should we create new
    deadlines for Commission or USAC action in various phases of the
    E-rate process? Current deadlines for resolution of appeals are
    rarely met. How can we improve? Should we set deadlines for
    particular phases of the USAC and Commission process, such as
    deadlines for progressing from the completion of an application to
    FCDL, or for completion of appeals at the Commission?

39. We seek comment on what guidance, if any, we should provide to
    define a completed application for E-rate money. We note that, since
    the inception of the program, parties have experienced problems with
    meeting the requirement to submit a complete application during the
    filing window. The Administrator has rejected applications that were
    not complete, including applications that were not signed. We seek
    comments on what rules, if any, we should adopt to provide clarity
    to program applicants. In addition, we seek comment on whether to
    establish minimum processing standards with which the Administrator
    must comply (*e.g.*, requiring the Administrator to verify that the
    applicant's technology plan was signed by an authorized entity). We
    note that failure to sign an application may implicate law
    enforcement activity, as well as the enforcement of the Commission's
    governing rules.

40. *Competitive Bidding.* We seek comment on modifying our current
    rules requiring competitive bidding. In particular, we request
    commenters to submit alternative proposals or suggestions for
    improving our competitive bidding rules to ensure that program
    participants obtain the best value for USF support provided. We seek
    comment on whether to limit the obligation to issue a competitive
    bid should apply only to applications above a particular dollar
    value threshold. Would this be an appropriate way to balance
    administrative burdens on applicants with the need for competitive
    bids? We seek comment on the process for establishing and
    administering the eligible services list.[^91] We seek comment on
    the pilot on-line eligible products list that USAC established
    pursuant to a Commission order, and whether this project has
    materially streamlined or simplified the application process.
    Commenters should discuss ways to handle the list of eligible
    services in a more administratively efficient way, while at the same
    time ensuring that USF moneys are provided only for eligible
    services. Commenters should also discuss whether we should publish
    service life, or depreciation, guidelines for equipment.[^92] In
    addition, we seek comment on how the E-rate technology planning
    process can be reviewed in accordance with other federal technology
    planning requirements.[^93] We also seek comment on whether the Good
    Samaritan E-rate program policy is an efficient method of disbursing
    funds.[^94]

41. *Forms.* Commenters should discuss the Forms 470, 471, 472, 473,
    474, 486, and 498 and address whether more or less information
    should be required on these forms, if any of these forms could be
    consolidated or eliminated, and if any other forms would be helpful.
    [^95] We seek comment on whether the Form 470 facilitates the
    competitive bidding process, and whether our rules should continue
    to require this form and its public disclosure. We seek comment on
    whether forms can be combined in an effort to improve the process,
    *e.g*., combining the Form 472 and Form 474. We note that the Bureau
    is proposing revisions to the Forms 472, 473, and 474 in order to
    combat waste, fraud, and abuse.[^96] We seek comment on the
    certification requirements in the E-rate forms. Specifically,
    commenters should discuss whether we should revise the Form 473, so
    that the applicant paying on an installment plan would be required
    to certify that, as of the time of the final invoice payment, all of
    the services covered by the invoice or invoices had been provided.
    In addition, commenters should discuss how we can ensure that the
    certifications by the applicant and the service provider in the Form
    472 are executed independently. Commenters should also discuss
    whether we should add a signature requirement to the Form 474. We
    also seek comment on whether any of these forms should be optional.

42. *Timing of Application Cycle.* Commenters should address whether we
    should better synchronize the application and disbursement process
    with the planning and budget cycles of the schools and libraries
    benefiting from this program. For example, the instructions to the
    Form 471 state: "Provide the number of students eligible for the
    National School Lunch Program ("NSLP") as of the October 1^st^ prior
    to the filing of this form, or use the most current figure
    available."[^97] Commenters should discuss whether this date for
    data, October 1^st^ or the most current, is reasonable, or if a
    different date should be used. We seek comment on whether there are
    inconsistencies between Commission rules (or USAC procedures) and
    state or municipal rules, including state or municipal procurement
    rules. Commenters should discuss ways to reconcile any such
    inconsistencies. We seek comment on whether an annual application
    cycle is necessary or whether it would be more efficient to permit
    multi-year application cycles. Commenters should address the costs
    and benefits of an annual cycle or multi-year cycle.

43. *Service Providers and Consultants.* We seek comment on the process
    as it pertains to service providers and consultants. We specifically
    seek comment on whether we should establish certain criteria, such
    as quality standards or standards of conduct, for participating
    service providers and consultants. Adopting quality standards or
    standards of conduct for service providers and consultants could
    help deter waste, fraud, and abuse by, for example, ensuring program
    participants maintain effective procedures for complying with our
    rules. In addition, we seek comment on whether we should impose
    specific standards or a certification process for consultants for
    E-rate and consultants used by other USF beneficiaries.[^98]
    Commenters should also discuss any other measures we should adopt to
    deter fraudulent actions by service providers or consultants.
    Commenters should discuss the costs and benefits for any proposal
    submitted.

##### High Cost 

44. The High Cost support mechanism provided approximately \$3.4 billion
    in support in fiscal year 2004.[^99] Under the statute and the
    Commission's rules, only Eligible Telecommunications Carriers
    ("ETCs") may receive High Cost support. Under section 214(e) of the
    Act, a state commission can designate a common carrier as an ETC for
    a service area designated by the state commission.[^100] An ETC is
    eligible for universal service support and must offer the services
    supported by universal service support mechanisms using its own
    facilities or a combination of its own facilities and resale of
    another carrier's services.[^101] In addition, the ETC must
    advertise the availability of such services.[^102]

45. The High Cost support mechanism is made up of five components: high
    cost loop support,[^103] local switching support,[^104] interstate
    access support,[^105] forward-looking, or model, support for
    non-rural[^106] carriers, and interstate common line support
    ("ICLS") for rate-of-return carriers.[^107] A telecommunications
    carrier seeking High Cost support for the first time[^108] must do
    the following: (1) obtain a service provider identification number
    ("SPIN") by using Form 498,[^109] (2) obtain ETC status and submit a
    copy of the ETC designation order to USAC, (3) submit line count
    information, (4) have a valid certification on file, and (5) submit
    the Forms 499-A and 499-Q, in which the carrier reports interstate
    and international end user telecommunications revenue.[^110]

46. We seek proposals from stakeholders on ways to improve the High Cost
    program application process and participation by reducing or
    eliminating the administrative burden on carriers. Commenters also
    should discuss whether we should permit High Cost carriers to file
    annual, biannual, or triennial applications for support to provide
    for a more efficient administration of the High Cost program while
    minimizing the burden on carriers. Because support levels may change
    from year to year, a multi-year process, with annual true-ups and
    filing revisions, could cause administrative burdens on the
    Administrator and the carriers. If we adopt a multi-year application
    process, should we make it mandatory? If not, should we require
    carriers that opt for a multi-year process to retain the same level
    of support over the multi-year term, without an opportunity for
    true-up?

47. We seek comment on whether any rule changes are needed to permit the
    High Cost support mechanism to operate in a more efficient and
    effective manner while ensuring that USF moneys are used for their
    intended purpose. Should we adopt forms in lieu of the "Line Count
    Sample Letters" available on USAC's website?[^111] Is there
    additional information we should collect from carriers to prevent
    waste, fraud, and abuse? We also seek comment on whether the
    Commission should adopt additional standards or deadlines
    (applicable either to carriers or the Administrator) to ensure more
    efficient management of this program. Commenters should discuss the
    costs and benefits of alternative proposals or suggestions. We note
    that our rules pertaining to the High Cost support mechanism are
    contained in both Part 36 and Part 54. We seek comment on whether we
    should modify our rules to consolidate all High Cost program rules
    in a single section.

48. *High Cost Loop Support.* We seek comment on whether we should
    modify the administrative process for participating in the High Cost
    Loop support mechanism. Specifically, we seek comment on whether we
    should modify the timing and the content of the reporting
    requirements imposed on High Cost companies for the purpose of
    administering the High Cost loop support mechanism. Local exchange
    carriers ("LECs") receiving this support are required to submit
    certain investment and expense data, including line count
    information, to NECA on July 31 of each year for participation in
    the High Cost loop support mechanism.[^112] Non-rural High Cost
    carriers must submit updated data quarterly.[^113] Rural High Cost
    carriers may voluntarily submit updated data.[^114] Currently, NECA
    processes the information and performs the necessary calculations,
    but does not provide the supporting documentation to USAC.[^115]
    Does this lack of supporting information impede auditing efforts? We
    seek comment on whether investment and expense information should be
    submitted to USAC in addition to or instead of NECA.[^116] We also
    seek comment on whether we should revise or clarify the calculation
    of line count information; for example, should we use an average
    annual line count instead of an end-of-year line count? In addition,
    we seek comment on whether we should make the voluntary update
    filings requirement mandatory, or eliminate this requirement
    altogether.[^117] We also seek comment on whether we should
    harmonize the filing dates and requirements so that rural and
    non-rural companies are subject to the same deadlines and billing
    requirements.

49. High Cost loop support and local switching support are based on an
    incumbent LEC's costs at the study area level.[^118] Rural carriers
    submit line count information at the study area level.[^119] We also
    seek comment on whether we should revise section 36.611 of our
    rules, which describes the data collection requirements applicable
    to High Cost carriers.[^120] Commenters should discuss whether
    revisions to NECA's data collection form are needed in order to
    accomplish the goals of the program. Finally, we seek comment on
    whether we should modify the quarterly reporting requirement for
    rural High Cost LECs in whose service area a competitive ETC has
    initiated service and reported line count data. These LECs must
    update their line count data quarterly (but not the investment and
    expense data).[^121] We invite comments and proposals on what
    measures we can implement to balance the filing burden on High Cost
    companies with our need for information to run the program.

50. *Local Switching Support*. We seek comment on the administrative
    process pertaining to the Local Switching Support mechanism,
    including the timing of and scope of the information submitted by
    program beneficiaries to administer this program. A cost company
    serving fewer than 50,000 lines must submit the Form LSSc, an
    average schedule company serving fewer than 50,000 lines must submit
    the Form LSSa.[^122] We seek comment on these forms. We seek comment
    on whether we should shorten, combine, revise, or eliminate these
    forms. Commenters should discuss whether we should revise section
    54.301 to limit projected growth in accounts based on actual past
    performance.[^123] In addition, commenters should discuss any other
    revisions to the LSS data collection form and whether the quantity
    and timing of information requested is appropriate. The Commission's
    rules require incumbent LECs receiving Local Switching Support to
    provide data to the Administrator by October 1^st^ of each
    year.[^124] We seek comment on this process and specifically on the
    deadlines for submitting Local Switching Support data. We seek
    comment on whether carriers should receive a pro-rated portion of
    LSS, if the LSS information is filed late. We also seek comment on
    whether we should adopt rules to ensure the accuracy and reliability
    of these data. We seek suggestions for improving the process while
    at the same time promoting measures to ensure that Local Switching
    Support is used for appropriate purposes.

51. *Interstate Access Support*. Only price cap carriers[^125] or
    competitive LECs serving in the area of a price cap carrier are
    eligible for Interstate Access Support. Price cap carriers must
    submit information on line counts, revenue information, UNE zone
    rates and UNE zone maps, and carrier certification.[^126] Line
    counts are the number of lines served within each price cap LEC
    study area in which it serves.[^127] We seek comment on the
    application process, the timing and scope of the information
    carriers must file, and whether we should impose greater or lesser
    reporting requirements on participants. We seek comment on whether
    we can administer Interstate Access Support with less information
    than we currently collect and still ensure that funds are used
    appropriately.

52. *Forms.* Applicants for funds from each of the universal service
    support mechanisms must comply with various certification
    requirements. Generally, these consist of statements certifying that
    information provided on the forms themselves are accurate and
    complete, and that funds received will be used for their intended
    purpose. We invite comment on whether the certification language in
    existing forms that must be submitted by applicants are sufficient
    to ensure that funds are used in their intended manner, in the
    absence of waste, fraud, and abuse.[^128] Would additional forms or
    modified language in existing forms further protect the high-cost
    universal service support mechanisms against waste, fraud, and
    abuse? We request that commenters propose specific additional
    certification language they believe would further these goals, along
    with an explanation why the current certification language is
    insufficient. We also seek comment on the administrative burden
    (particularly on rural and small entities) of any proposed new forms
    and certifications.

##### Low Income

53. The Low Income program provided approximately \$800 million to
    carriers in fiscal year 2004 in order to promote subscribership
    among people of limited means.[^129] Only ETCs are eligible to
    receive Low Income support.[^130] In our *Lifeline/Link-Up Report
    and Order*, we observed that only one-third of the households
    currently eligible for Lifeline/Link-Up assistance actually
    subscribe to this program.[^131] In that proceeding, we expanded the
    eligibility criteria and adopted federal certification and
    verification procedures to minimize potential abuse of these
    programs.[^132] We also adopted outreach guidelines to target low
    income consumers more effectively.

54. The Lifeline program reimburses carriers for discounting low income
    consumers' monthly telephone bills. This program allows low income
    consumers to save up to \$10.00 per month on their telephone
    bills.[^133] Low income consumers living on tribal lands may qualify
    for additional monthly discounts ranging from \$30.25 to
    \$35.00.[^134] The Link-Up program reimburses carriers for providing
    discounted connection charges to eligible low income consumers.
    Qualifying consumers are eligible to save up to 50 percent on
    installation fees (not to exceed \$30).[^135] Low income consumers
    living on tribal lands may qualify for a discount of up to an
    additional \$70.[^136]

55. We seek comment on the process for participating in the Low Income
    support mechanism.[^137] In particular, we seek comment on whether
    we should revise the information requested and the frequency of
    carrier submissions. Carriers must submit the FCC Form 497, Lifeline
    and Link-Up Worksheet ("Form 497"), for reimbursement. In the Form
    497, carriers report the number of Lifeline and Link-Up customers
    served, for each tier of support. This form must be submitted
    quarterly, by April 15th, July 15th, October 15th, and January
    15^th^ of each year. Commenters should discuss whether we should
    simplify the application process to require annual or semi-annual
    reporting instead of quarterly reporting. Low income rules appear in
    both Part 54 and Part 36 of our rules. We also seek comment on
    whether we should consolidate the Low Income rules. In addition, we
    invite comments and proposals on what measures we can implement to
    balance the filing and advertising burdens on companies with low
    income end users with our need for information to run the program
    effectively.

56. *Forms.* Applicants for funds from each of the universal service
    support mechanisms must comply with various certification
    requirements. Generally, these consist of statements certifying that
    information provided on the forms themselves are accurate and
    complete, and that funds received will be used for their intended
    purpose. We invite comment on whether the certification language in
    existing forms that must be submitted by applicants for funds from
    the low income support mechanism are sufficient to ensure that funds
    are used in their intended manner, in the absence of waste, fraud,
    and abuse.[^138] Would additional forms or modified language in
    existing forms further protect the low income universal service
    support mechanisms against waste, fraud, and abuse? We request that
    commenters propose specific additional certification language they
    believe would further these goals, along with an explanation why the
    current certification language is insufficient. We also seek comment
    on the administrative burden (particularly on rural and small
    entities) of new forms and certifications.

##### Rural Health Care

57. In the Rural Health Care program, eligible health care providers
    apply for discounts on telecommunications services, in a procedure
    similar to that for the schools and libraries.[^139] The Rural
    Health Care support mechanism provided approximately \$18 million
    thus far to carriers in fiscal year 2003.[^140] The program
    reimburses carriers that "provide telecommunications services which
    are necessary for the provision of health care services in a State,
    including instruction relating to such services, to any public or
    nonprofit health care provider that service persons who reside in
    rural areas in that State at rates that are reasonably comparable to
    rates charged for similar services in urban areas in that
    State."[^141] This design ensures that health care providers in
    rural areas obtain the benefits of the Internet and
    telecommunications through universal service support. Rural health
    care providers often use rural health care support to implement
    telemedicine programs, *i.e*., medical treatment supported by
    advanced telecommunications services and information services.
    Telemedicine programs allow rural health care providers to consult
    with specialists in an effective manner. Carriers are not required
    to be ETCs to participate in this program; all Internet service
    providers and common carriers may participate, including
    interexchange carriers. This program is capped at \$400 million per
    year.[^142]

58. We seek comment on ways to improve and streamline the application
    process.[^143] Currently, health care providers must file the FCC
    Form 465, Description of Services Requested and Certification Form
    and the FCC Form 466, Funding Request and Certificate Form. We seek
    comment generally on these forms. Commenters should address whether
    more or less information should be required on these forms and
    whether any of the forms could be consolidated or eliminated, and
    whether any other forms would be helpful. We tentatively conclude
    that we should adopt a streamlined multi-year application for rural
    health care providers. Our experience suggests that few problems of
    waste, fraud, and abuse exist in the Rural Health Care program.
    Commenters should discuss whether adopting multi-year applications
    would raise significant waste, fraud, and abuse concerns in this
    program. We seek comment on whether the current application process
    deters participation, particularly by small health care
    providers.[^144] In addition, commenters should discuss the
    feasibility of using additional automation in the administrative
    process; for example, requiring the Administrator to e-mail
    commitment letters instead of using traditional methods such as the
    U.S. Postal Service to notify applicants of funding decisions.

59. *Forms.* Applicants for funds from each of the universal service
    support mechanisms must comply with various certification
    requirements. Generally, these consist of statements certifying that
    information provided on the forms themselves is accurate and
    complete, and that funds received will be used for their intended
    purpose. We invite comment on whether the certification language in
    existing forms that must be submitted by applicants for funds from
    the rural health care support mechanism are sufficient to ensure
    that funds are used in their intended manner, in the absence of
    waste, fraud, and abuse.[^145] Would additional forms or modified
    language in existing forms further protect the rural health care
    universal service support mechanisms against waste, fraud, and
    abuse? We request that commenters propose specific additional
    certification language they believe would further these goals, along
    with an explanation why the current certification language is
    insufficient. We also seek comment on the administrative burden
    (particularly on rural and small entities) of new forms and
    certifications.

#### USF Disbursements

60. We seek comment on whether we should adopt rules to better ensure
    that the disbursement process is administered in an efficient,
    effective, and competitively neutral manner. Commenters should
    discuss whether experience has shown that the Administrator
    disburses the correct amount of funds in a timely manner. We seek
    any suggestions for improving the disbursement process.
    Specifically, we seek comment on whether we should establish
    deadlines or performance targets to ensure that beneficiaries get
    the support for which they qualify in a timely manner. USAC's
    disbursement process varies slightly depending on the mechanism: for
    High Cost and Low Income, USAC disburses one amount to each carrier
    participating in the program each month; for the Schools and
    Libraries and Rural Health Care programs, USAC disburses amounts
    based on invoices received from the program participants. We seek
    comment on whether we should establish a single uniform system for
    disbursing USF, and whether such a single disbursement method is
    feasible, given the many differences among the USF programs. We seek
    comment on whether we need to modify our rules to address
    program-specific disbursement issues, such as strengthened
    procedures to help effectuate the E-rate carry-over rule. For
    example, are there rules we should adopt to ensure full use of the
    \$2.25 billion annual cap for the E-rate program? [^146] Commenters
    should discuss whether the current system results in efficient,
    effective, competitively neutral administration of the programs. We
    seek comment on whether experience shows that the amounts disbursed
    are accurate, and if not, suggestions for ways to improve such
    accuracy. We seek comment on whether we should adopt criteria or
    provide guidance for the Administrator's review of invoices for the
    E-rate and Rural Health Care programs. We understand that some
    beneficiaries have asserted that the Administrator sometimes denies
    payment on submitted invoices even though the original application
    had been approved. Would specific criteria or guidance help the
    invoice review process?

61. We seek comment on whether the existing disbursement process for the
    High Cost program should be revised. The High Cost support mechanism
    provided approximately \$3.4 billion in support in fiscal year
    2004.[^147] As currently structured, the High Cost program disburses
    approximately \$300 to \$325 million per month. USAC issues one
    payment, generally by electronic transfer, for each carrier for all
    universal service payments for which it is eligible.[^148] The
    disbursement amount is posted on USAC's website approximately five
    days before disbursement, which is the carrier's notification of the
    disbursement amount. USAC sends a remittance statement to the
    carriers on the last day of each month. Commenters should discuss
    whether the Administrator should provide additional notification to
    the carriers. We seek comment on whether we should adopt rules to
    provide for true-ups of amounts disbursed. Amounts paid to carriers
    under Local Switching Support[^149] and Interstate Common Line
    Support[^150] components of High Cost are based on forecasts and are
    subject to true-up. USAC compares the actual costs, submitted by
    carriers twelve months after the end of the year, to the projected
    costs. Currently, we have no rules limiting the level of a carrier's
    projections and carriers can overestimate or underestimate their
    accounts. We seek comment on whether we should require that data be
    submitted earlier in order to facilitate the true-ups. Commenters
    should also address whether, as part of the true-up process,
    carriers should pay interest on the difference between projected and
    actual amounts if the projected amounts exceed actual amounts.

62. USAC issues one monthly payment, generally by electronic transfer,
    for all Low Income universal service discounts provided two months
    earlier. The disbursement amount is posted on USAC's website
    approximately five days before disbursement, which is the carrier's
    notification of the disbursement amount. USAC bills companies that
    receive Low Income support (Lifeline, Link-Up, and Toll Limitation
    Service) and have a negative disbursement amount for any given
    month. So-called "negative disbursement" amounts can occur when USAC
    conducts a true-up between a company's projected support amount and
    the actual support claimed, or when a company revises its previous
    support claims, resulting in adjustments to a carriers support
    payments. We seek comment on whether our Form 497 should be revised
    in order to reduce the likelihood of negative disbursement amounts,
    which are, in effect, an interest free loan to the carrier.[^151] We
    seek comment on whether carriers should be charged interest on the
    negative disbursement amount. USAC estimates Low Income payments on
    a quarterly basis, based on the percentage growth in total support
    claimed by all carriers over the previous quarters, and applies this
    factor to the amount of support the carrier received in the most
    recent quarter. The disbursements are based on a rolling average of
    the payments made to that carrier over the previous twelve months.
    The carrier data submission, filed fifteen days after the end of a
    quarter, is used to true-up payments. We seek comment on whether we
    should revise this disbursement procedure and if so, how.

63. We seek comment on whether we should simplify or streamline the
    four-level discount process for Lifeline and Link-Up, or if
    additional levels would be appropriate. Tier 1 is equal to the
    incumbent ETC's federal tariffed SLC. Tier 2 is an additional
    \$1.75. Tier 3 is equal to one-half the amount of state-mandated
    Lifeline support or one-half of any Lifeline support provided by the
    carrier, up to \$1.75 per month. Tier 4 is additional federal
    Lifeline support of up to \$25 per month for eligible residents of
    tribal lands. There are additional discounts for low income
    residents on tribal lands; Enhanced Lifeline, Link-Up, and other
    universal service-related programs that are targeted specifically
    toward tribal lands. [^152]

64. We also seek comment on whether we should revise the current Rural
    Health Care disbursement process. The disbursement process for the
    Rural Health Care program is similar to the process for the E-rate
    program. We seek comment on whether we should adopt rules to better
    ensure that the disbursement process is administered in an efficient
    manner.

#### Contributions Process

65. We seek comment on whether to adopt any rules clarifying or
    improving the contributions process to ensure the Administrator
    collects sufficient funds. The Form 499-A sets forth the information
    that carriers must submit so that the Administrators of the USF and
    other funds can calculate and assess contributions.[^153] Beginning
    March 14, 2001, the Commission modified its reporting requirements
    to require carriers to file not only the annual Form 499-A, but also
    a quarterly worksheet, FCC Form 499-Q, with the interstate and
    international revenues from the previous period.[^154] Currently,
    USAC bases a carrier's universal service obligation on the carrier's
    projected collected revenue rather than its historical gross-billed
    revenue.[^155] USAC uses the revenue information provided on the
    Quarterly Worksheets to determine each carrier's universal service
    contribution on a quarterly basis, with a yearly true-up using the
    Annual Worksheet. [^156] USAC then bills carriers each month, based
    on their quarterly contribution amount. Carriers must pay their
    contribution by the date shown on the invoices.[^157] A carrier's
    failure to file the worksheets or submission of inaccurate or
    untruthful information "may subject the contributor to the
    enforcement provisions of the Act and any other applicable
    law."[^158] We seek comment on whether we should modify or
    streamline the current contribution process. We seek comment on
    whether to adopt criteria for the Administrator to follow for making
    projections or forecasts, and if so, what criteria would be
    appropriate. Commenters should address the pros and cons of any
    proposals.

##### d. Periodic Review of Program Management {#d.-periodic-review-of-program-management .unnumbered}

66. We seek comment on whether we should adopt rules requiring periodic
    review of the administration and management of the USF. Commenters
    should discuss whether a triennial review, such as we have for the
    Local Competition rules, would be useful or whether such reviews
    should occur at different time intervals.

## Oversight of the USF

67. In this proceeding, we are not trying to find problems after they
    occur (and thus, seek to recover improperly disbursed funds in some
    cases years after disbursement), but we are trying to prevent
    problems from occurring in the first place. We recognize, however,
    that strong oversight procedures are needed because the application
    review process can never be perfect. In moving forward to strengthen
    audits and oversight over the program, we are informed by the
    lessons of prior review efforts and investigations. We are
    particularly focused on preventing a recurrence of past problems.

68. In this section of the NPRM, we consider whether to strengthen our
    oversight of the high cost, low income, schools and libraries, and
    rural health care universal service support mechanisms. In
    particular, we seek comment on adopting a targeted audit requirement
    to ensure program integrity and to detect and deter waste, fraud,
    and abuse. We generally seek comment on ways in which our oversight
    goals may be achieved through specific changes to various stages of
    the application and funding process. We invite parties to address
    whether and how our specific goals can be met by the changes
    discussed and to suggest other ways to further these goals. We note
    that many of these issues were addressed in the context of the
    schools and libraries universal service support mechanism.[^159] As
    a result, we specifically invite parties to comment on the ways our
    goals and methods for protecting the high cost, low income, and
    rural health care fund mechanisms from waste, fraud, and abuse
    should replicate or differ from those previously adopted with regard
    to the schools and libraries universal service support mechanism.

### Independent Audits

69. Since the inception of the E-rate program, schools and libraries
    have been subject to audits to determine compliance with the program
    rules and requirements.[^160] The Commission's rules authorize the
    Administrator to conduct audits of all beneficiaries, as well as
    contributors to the USF. Audits are a tool for the Commission and
    USAC, as directed by the Commission, to ensure program integrity and
    to detect and deter waste, fraud, and abuse.[^161] Because audits
    may provide information showing that a beneficiary or service
    provider failed to comply with the statute or Commission rules
    applicable during a particular funding year, audits can reveal
    instances in which universal service funds were improperly disbursed
    or used in a manner inconsistent with the statute or the
    Commission's rules.[^162]

70. Audits and investigations have uncovered issues ranging from poor
    program design (*e.g.*, problems with technology plans and problems
    with program rules) to improper use of funds, including intentional
    efforts to defraud the program by some unscrupulous actors. In each
    case in which fraud has occurred, the Commission has debarred or
    proposed debarment based on Department of Justice convictions.[^163]
    In these cases, the parties pled guilty or were convicted of a
    variety of offenses, such as imposing the entire cost of the goods
    and services on USAC,[^164] submitting materially false and
    fraudulent invoices to USAC,[^165] and trying to persuade school
    officials not to reveal evidence to Commission auditors.[^166] The
    Commission's OIG has identified instances of rule violations and has
    recommended recovery of universal service moneys.[^167] Likewise,
    USAC has, at our direction, maintained an audit program that has
    involved more than 201 audits of participants in the E-rate program
    and USAC audits of more than 100 participants in the other USF
    support mechanisms. In some cases, beneficiaries have
    self-identified compliance problems and proactively disclosed these
    to USAC or the Commission. For the E-rate program, approximately
    \$1.14 billion in funds provided to beneficiaries have been
    subjected to an audit. To date, USAC has recovered a total of
    approximately \$7.6 million for all violations of Commission rules.
    Recovery of \$4.5 million is subject to pending appeals and recovery
    of \$19.5 million is still under review. We have not yet determined
    whether program rules were or were not violated and whether recovery
    is warranted for these funds. These efforts have also led to
    recommended recovery of \$6,243,223 for the High Cost support
    mechanism, \$392,536 for the Low Income support mechanism, and
    \$49,348 for the Rural Health Care support mechanism. The
    recommended recovery amounts are small in comparison to the more
    than \$31 billion in funds disbursed since 1997, demonstrating that
    the great majority of E-rate, High Cost, Low Income, and Rural
    Health Care program recipients follow our rules and have not engaged
    in fraud. Nonetheless, even a situation that results in 0.67 percent
    of our funds being recovered as improperly disbursed represents a
    weakness in the operation of the programs, which needs to be
    corrected. We will be aggressive in correcting this problem.
    Conversely, we believe that USAC, OIG, and independent auditing
    processes may waste government money if they are unnecessarily
    repetitious, or inefficiently designed or executed.

71. *E-Rate Beneficiary Audits.* With this in mind, we seek comment on
    whether the Commission should institute a targeted independent audit
    requirement to further safeguard the E-rate program against
    potential misconduct, including waste, fraud, and abuse.
    Specifically, we seek comment on whether the Commission should
    require some recipients of E-rate funding to obtain an annual
    independent audit evaluating compliance with the statute and the
    Commission's rules. Many schools and libraries already obtain annual
    independent audits to comply with the Single Audit Act. Commenters
    should address whether, or under what conditions, the anticipated
    costs associated with targeted audits of program beneficiaries would
    outweigh the benefits of enhanced oversight of the universal service
    fund.[^168] For example, are post-disbursement audits even
    appropriate where the cost of the audit would approach or exceed the
    amount of universal service support disbursement?

72. We specifically seek comment on the costs and burdens that an
    independent audit requirement would have on smaller beneficiaries.
    For example, would an independent audit requirement deter the
    smaller schools and libraries from applying for discounts from the
    fund? Moreover, because the cost of such an audit could exceed the
    total discounts received by some applicants, any benefit of the
    E-rate program may be erased quickly by a burdensome audit
    requirement. We seek comment on whether the audit requirement should
    apply only to recipients that receive a relatively large amount of
    support or benefits from the program. What should the threshold be?
    For example, we could impose a requirement that any school or
    library that receives \$3 million or more in discounts in any
    funding year, or a total of \$3 million or more over a consecutive
    three-year period, must undergo an annual audit. We note that, based
    on data from Funding Year 2002, an annual \$3 million threshold
    would ensure independent audit coverage of at least 25 percent of
    E-rate funds disbursed; combining an annual \$3 million threshold
    with a \$3 million triennial threshold would ensure independent
    audit coverage of more than 50 percent of E-rate funds disbursed.
    Should the same threshold apply to both schools and libraries, and
    service providers?

73. In addition, we seek comment how such audits should be funded.
    Should schools, libraries, and service providers that are subject to
    an annual independent audit pay the costs for an auditor to evaluate
    their compliance with Commission rules and the Act? Alternatively,
    we could require USAC to procure the services of an independent
    auditor to perform the audits in accordance with generally accepted
    government auditing standards ("GAGAS"). In such a scenario, the
    costs of the independent audits would be borne by the USF itself,
    and therefore recovered through the collections process. We note
    that many participants in the USF may have internal auditors on
    staff who could perform these audits. The Commission's rules require
    audits of USF beneficiaries to comply with GAGAS. These standards
    allow for entities to hire independent auditors to perform audit
    work, but they also allow (with certain safeguards) employees of the
    entity to perform independent audits. We seek comment on whether
    allowing internal auditors and other staff to perform reviews or
    audits would satisfy the need for strong oversight.

74. We seek comment on the scope and methodology of an annual
    independent audit. We note that our efforts to combat waste, fraud,
    and abuse must distinguish between intentional fraud and ministerial
    error. Our audits, penalties, and application process must recognize
    the fundamental difference between intentional fraud and ministerial
    error. While minimizing ministerial error is important, such errors
    are far different from fraud. In fact, the complicated nature of our
    applications and the presence of USAC rules that are not published
    contribute to ministerial errors. Should the auditor evaluate
    compliance with Commission rules in order to determine potential
    noncompliance? Should USAC and the Commission recover improperly
    disbursed funds? Should our audits try to distinguish between
    intentional fraud, negligence, and unintentional ministerial errors?
    Parties recommending such an approach should offer a definition of
    "ministerial error" and provide examples. Commenters recommending
    this approach should also discuss whether compliance with certain
    administrative procedures, such as filing or application deadlines
    and requirements, provide a degree of certainty to all parties,
    including the fund Administrator. We seek comment on whether our
    audits should be limited to compliance with Commission rules or
    whether and under what circumstances the audits should include
    compliance with USAC administrative policies and practices.
    Commenters should discuss whether compliance with unpublished USAC
    administrative policies and practices should be included in the
    audit. In addition, we seek comment on whether government auditing
    standards, which require, *inter alia*, that independent auditors
    obtain a sufficient understanding of internal controls that the
    entity uses to ensure compliance with Commission rules that are
    material to the subject matter to plan the engagement, should be
    applied during the audit. Are auditors properly trained or have
    beneficiaries experienced auditors who do not properly understand
    the program rules? Have auditors wasted time or resources because
    the audit is improperly designed, improperly accomplished, or
    because auditors do not adequately understand the program rules? How
    much does it cost a school or library in terms of money and staff
    hours to comply with various types of audits? We seek comment on
    whether we should limit auditing so that one entity is not audited
    more than once for a given program year, so that one entity is not
    audited by USAC, and independent auditor, and/or the OIG for the
    same application. Should the auditor evaluate the sufficiency of the
    audited entity's internal controls that the entity uses to ensure
    compliance with Commission rules as part of its examination into the
    audited entity's compliance? We generally seek comment on other
    standards that should be imposed for carrying out such audits. For
    example, because the primary purpose of the audit is to evaluate
    compliance with the statute and program rules, should auditors be
    required to perform a "compliance attestation" in accordance with
    government auditing standards? Why or why not? We invite proposals
    on the mechanics of administering an independent audit program.
    Commenters should discuss ways to avoid repetitious or inefficient
    audits. In addition, we seek comment on whether USAC should provide
    audit reports to audited entities, and, if so, whether USAC should
    be required to provide the audit report within a particular period
    of time, after the audit is concluded.

75. We seek comment on whether the current structure of E-rate audits is
    appropriate to the program. Some schools indicate that E-rate audits
    are more intense and require them to expend more resources than do
    audits for the federal Title I educational program, which is a
    substantially larger program involving far more government money.
    How can we improve the process?

76. *Rural Health Care, Low Income, and High Cost Beneficiary Audits*.
    We seek comment on whether the current audit structure for the Rural
    Health Care, Low Income, and High Cost programs is appropriate to
    the programs. How can we improve the auditing process for these
    programs? As we note above in the E-rate context, our efforts to
    combat waste, fraud, and abuse must distinguish between intentional
    fraud and ministerial error. Our audits, penalties, and application
    process must recognize the fundamental difference between
    intentional fraud and ministerial error. Should the auditor evaluate
    compliance with Commission rules in order to determine potential
    noncompliance? Should USAC and the Commission recover improperly
    disbursed funds? Should our audits try to distinguish between
    intentional fraud, negligence, and unintentional ministerial errors?
    Parties recommending such an approach should offer a definition of
    "ministerial error" and provide examples. Commenters recommending
    this approach should also discuss whether compliance with certain
    administrative procedures, such as filing or application deadlines
    and requirements, provide a degree of certainty to all parties,
    including the fund Administrator. We seek comment on whether our
    audits should be limited to compliance with Commission rules or
    whether and under what circumstances the audits should include
    compliance with USAC administrative policies and practices.
    Commenters should discuss whether compliance with unpublished USAC
    administrative policies and practices should be included in the
    audit. We seek comment on whether we should limit auditing so that
    one entity is not audited more than once for a given program year,
    so that one entity is not audited by USAC, an independent auditor,
    and/or the OIG for the same application. Should the auditor evaluate
    the sufficiency of the audited entity's internal controls that the
    entity uses to ensure compliance with Commission rules as part of
    its examination into the audited entity's compliance? We generally
    seek comment on other standards that should be imposed for carrying
    out such audits. For example, because the primary purpose of the
    audit is to evaluate compliance with the statute and program rules,
    should auditors be required to perform a "compliance attestation" in
    accordance with government auditing standards? Why or why not? We
    invite proposals on the mechanics of administering an independent
    audit program. Commenters should discuss ways to avoid repetitious
    or inefficient audits. In addition, we seek comment on whether USAC
    should provide audit reports to audited entities, and, if so,
    whether USAC should be required to provide the audit report within a
    particular period of time, after the audit is concluded.

77. We seek comment on whether, in order to improve our oversight
    capacity to guard against waste, fraud, and abuse, and ensure funds
    are used for appropriate purposes, our rules should require
    independent audits of recipients of funds (*i.e.*, service
    providers) from the High Cost, Low Income, and Rural Health Care
    programs. We specifically seek comment on whether recipients of
    funds from any or all of these support mechanisms should be required
    to undergo an independent audit requirement, and, if so, whether
    only recipients above a particular threshold should be subject to
    this requirement. For example, we could require independent audits
    for any entity obtaining more than \$3 million in USF support in a
    particular fiscal year. We note that for the High Cost program,
    approximately 15 percent of the study areas, *i.e*., 292 study
    areas, received \$3 million or more in High Cost support for fiscal
    year 2004. Establishing an audit requirement at this threshold would
    ensure coverage for about 69 percent of the High Cost fund for 2004.
    With respect to Rural Health Care, only two service providers have
    received \$3 million or more in a given year since the inception of
    the program. We recognize that the cost of independent audits could
    outweigh the benefits in cases where USF recipients only receive a
    small amount of support. We seek comment on the costs and benefits
    of any independent audit program, particularly the potential
    paperwork and other costs imposed on rural carriers and small
    entities. We seek comment on the scope and methodology of these
    audits. Similar to the E-rate context, we seek comment on whether
    the auditor should evaluate compliance with Commission rules in
    order to determine potential noncompliance (and whether USAC and the
    Commission should recover improperly disbursed funds). Do the costs
    of an audit outweigh the benefits of enhanced oversight of the
    universal service fund? Should such audits be performed at the
    recipients' expense? If not, we seek comment on whether recipients
    should be required to reimburse USAC or the Commission for the cost
    of the audit, or to pay other penalties, in the event that waste,
    fraud, and abuse are discovered.

78. We seek comment on the estimated costs of audits of these other
    mechanisms. Should we impose identical audit requirements for each
    USF program? If not, what audit requirements, if any, should we
    impose on each program? For example, the Rural Health Care program
    has historically disbursed a fraction of the amount of the Schools
    and Libraries and High Cost mechanisms. Should we require rural
    health care providers to get audits only if the total disbursements
    to a particular provider reach a certain level? What should the
    audit threshold be for beneficiaries of each fund mechanism? Should
    there be different independent audit requirements or thresholds for
    fund recipients (*e.g.*, rural health care participants) and
    participating service providers? We seek comment on the impact of
    any rule on small entities. We also seek comment on alternatives
    that might provide assurances of program integrity consistent with
    the goals of improving program operation, ensuring a fair and
    equitable distribution of benefits, and preventing waste, fraud, and
    abuse.

79. We seek comment on whether we should automatically sunset any
    independent audit requirement we may ultimately adopt. For example,
    we could sunset any measures automatically after a three-year period
    or we could review any independent audit requirement after a
    specific period of time.

80. *Contributor Audits.* In addition to considering whether we should
    require audits of USF program beneficiaries, we seek comment on
    whether our rules should require independent audits of contributors
    to the universal service fund. Pursuant to section 54.707 of the
    Commission's rules, USAC has the authority to audit contributors and
    carriers reporting data.[^169] In addition to such audits, our
    Enforcement Bureau regularly investigates contributor filings to
    ensure compliance with our rules. In addition to these existing
    procedures, we seek comment on whether we should establish an
    independent audit program for contributors modeled on the Single
    Audit Act or some other independent audit program (*e.g.*,
    independent audits used for the securities industry). Would the
    benefits of ensuring that contributors pay their full amount of USF
    support justify the costs of such a program? Should we establish a
    threshold for triggering a contributor audit (*e.g.*, require
    independent audits only for carriers contributing \$100 million or
    more in a particular fiscal year)? A \$100 million threshold for
    auditing contributors would ensure audit coverage for about 60
    percent of the total contributions to the fund. If the Commission
    were to adopt an independent audit requirement for contributors to
    the Universal Service Fund, what additional rules or requirements
    (if any) should be adopted to ensure rigorous but fair audits?
    Finally, should we require contributors to pay for the audits on
    their own, or would using USF moneys be more appropriate?

81. We seek comment as to whether we should model any independent audit
    requirement we apply to participants in the USF on the requirements
    contained in the Single Audit Act and the OMB's implementing
    guidance.[^170] We seek comment on whether we should prohibit
    parties who fail to comply with any independent audit requirement
    from receiving any USF moneys until such audit is satisfactorily
    completed. We seek comment on whether we should adopt rules
    requiring audited entities to prepare and submit a plan for
    corrective action addressing all audit findings.[^171]

82. We seek comment on whether any independent audit requirement we
    adopt for beneficiaries or contributors should include an audit
    opinion concerning the sufficiency of an audited entity's internal
    controls over compliance and other areas of concern to us in our
    policy making role. We seek comment on whether we should adopt
    additional criteria beyond those established in government auditing
    standards for selecting an auditor, *e.g.,* competitive bids.

### Document Retention Requirements for Recipients of Funds from the High Cost, Low Income, and Rural Health Care Mechanisms 

83. In the *Schools and Libraries Fifth Report and Order*, we concluded
    that specific recordkeeping requirements not only prevent waste,
    fraud and abuse, but also protect applicants and service providers
    in the event of vendor disputes.[^172] In that order, we adopted a
    requirement that applicants and service providers retain all records
    related to the application for, receipt and delivery of discounted
    services for a period of five years after the last day of service
    delivered for a particular funding year.[^173] We found that a
    five-year record retention requirement would facilitate improved
    information collection during the auditing process and will enhance
    the ability of auditors to determine whether applicants and service
    providers have complied with program rules.[^174]

84. We seek comment on whether we should adopt document retention rules
    for all of the USF mechanisms that are consistent with the amended
    schools and libraries rule adopted in the *Schools and Libraries
    Fifth Report and Order*.[^175] We recognize that, because the high
    cost and low income programs do not precisely mirror the application
    and competitive bidding process in the schools and libraries
    program, different document retention requirements might be needed
    for each support mechanism. For the high cost and low income support
    mechanisms, we invite comment on the length of time that records
    relating to the receipt or delivery of services should be maintained
    by the beneficiary and/or service provider. We are not proposing
    document retention requirements for individual participants in the
    Low Income program. We solicit comment on the types of documents
    that would be sufficient to demonstrate compliance with the rules
    pertaining to the high cost and low income programs. For example, we
    seek comment on the types of records (such as billing and
    engineering) used to develop year end counts of total working loops
    and total working USF loops, as required for High Cost Loop support.
    We seek comment on a reasonable record retention period for such
    documents. We also seek comment on whether we should revise the
    document retention rules for the rural health care mechanism.[^176]
    Should we specify minimum document retention requirements?

85. In the *Schools and Libraries Fifth Report and Order*, we clarified
    that schools, libraries, and service providers remain subject to
    both random audits and to other audits and or investigations to
    examine an entity's compliance with the statute and the Commission's
    rules. These audits and investigations may be initiated at the
    discretion of the Commission, the Commission's OIG, USAC, or another
    authorized governmental oversight body.[^177] Similarly, section
    54.619(c) of the Commission's rules subjects health care providers
    to random compliance audits.[^178] The *Schools and Libraries Fifth
    Report and Order* also concluded that failing to comply with an
    authorized audit or other investigation, such as failing to retain
    records or failing to make available required documentation, would
    constitute a rule violation that may warrant recovery of universal
    service moneys that were previously disbursed for the time period
    for which such information is being sought.[^179] We invite comment
    on whether recipients of funds from the High Cost, Low Income, and
    Rural Health Care universal service support mechanisms (*i.e.*,
    service providers and carriers) should be subject to comparable
    requirements.

### Administrative Limitations Period for Audits or Other Investigations by the Commission or USAC of Recipients of Funds from the High Cost, Low Income, and Rural Health Care Support Mechanisms

86. In this section, we seek comment on the establishment of an
    administrative limitations period in which the Commission or USAC
    will determine that a violation has occurred among recipients of
    funds from the high cost, low income, and rural health care
    universal service support mechanisms. We believe that establishing a
    general policy in this area is in the public interest because it
    would provide these USF support mechanism participants with some
    certainty of the time within which an audit or further review of
    funding may occur.

87. In the *Schools and Libraries Fifth Report and Order*, we indicated
    our preference for a limitation on the timeframe for audits or other
    investigations "in order to provide beneficiaries with certainty and
    closure in the E-rate applications and funding processes."[^180] We
    established a policy that, for administrative efficiency, the time
    frame for such inquiry should match the record retention
    requirements, and accordingly, we announced that any inquiries to
    determine whether or not statutory or rule violations exist with be
    initiated and completed within a five-year period after final
    delivery of service for a specific funding year.[^181] We stated
    that conducting inquiries within five years struck an "appropriate
    balance between preserving the Commission's fiduciary duty to
    protect the fund against waste, fraud and abuse and the
    beneficiaries' need for certainty and closure in their E-rate
    application processes."[^182]

88. We seek comment on whether a similar five-year standard for
    initiating and concluding audits and investigations is appropriate
    for recipients of funds from the high cost, low income, and rural
    health care universal service support mechanisms. Similarly, we seek
    comment on whether a five-year period is appropriate for seeking
    adjustment of a contribution obligation to make the correct
    contribution amount to the USF. Many E-rate beneficiaries are public
    institutions. In these cases, the money needed to comply with audits
    and to maintain services when funds are unexpectedly delayed or
    denied comes from taxpayers and is part of a lengthy and complex
    budgeting process. If schools and libraries must account for the
    fact that an unintentional clerical error many years in the past may
    require them to disgorge E-rate funds, the system will work very
    inefficiently. For this reason we believe that we must balance our
    duty to investigate fraud with E-rate beneficiaries' legitimate need
    for finality, which they have with other government programs. In the
    *Schools and Libraries Fifth Report and Order*, we found that the
    public interest ordinarily is not served by seeking to recover funds
    associated with statutory or rule violations when the administrative
    costs of seeking recovery outweigh the dollars subject to
    recovery.[^183] We seek comment on this conclusion, and whether and
    in what circumstances pursuit of recovery of funds might be in the
    public interest even where the potential recovery amounts are small
    in relation to the audit or investigation costs. We also seek
    comment on whether to adopt a rule for the high cost, low income,
    and rural health care support mechanisms that requires recovery of
    the full amount disbursed in situations in which there is a pattern
    of rule or statutory violations, but the specific individual
    violations collectively do not require recovery of all disbursed
    amounts.

### Recovery of Funds

89. We seek comment on whether to establish specific rules or criteria
    to address instances in which a USF beneficiary may not have used
    moneys in accordance with program rules.[^184] We seek comment on
    whether, consistent with the conclusions in the *Schools and
    Libraries Fifth Report and Order*, amounts disbursed from the High
    Cost, Low Income, and Rural Health Care support mechanisms in
    violation of the statute or Commission rule must be recovered in
    full. In addition, we seek comment on whether additional rules or
    criteria are necessary to ensure a fair, transparent fund recovery
    process for all USF mechanisms. Are there instances in which
    violations of Commission rules undermine statutory requirements or
    substantive policy goals of the USF programs, but may not rise to
    the level of waste, fraud, or abuse? Should funds be recovered for
    ministerial or clerical errors? In addition, we seek comment on
    whether and under what circumstances a beneficiary may retain an
    overpayment if, for some reason, USAC has either mistakenly
    disbursed an amount in excess of that which the entity is allowed
    under our rules, or has disbursed an erroneous amount as a result of
    violations of administrative procedures. Where disbursement of funds
    is warranted under the statute and rules, but an erroneous amount
    has been disbursed, should the amount of funds that may be recovered
    be limited to the difference between what the beneficiary is
    legitimately allowed under the statute and our rules and the total
    amount of funds disbursed to the beneficiary or service provider?
    Finally, we seek comment on whether we should adopt a rule providing
    for an administrative hearing before the issuance of a letter
    seeking recovery of funds from the High Cost, Low Income and Rural
    Health Care support mechanisms.

### Measures to Deter Waste, Fraud, and Abuse

90. The Schools and Libraries program is capped at \$2.25 billion;
    however, requests for funds have historically far exceeded the
    annual cap.[^185] Thus, waste, fraud, or abuse of this program harms
    those schools and libraries who cannot receive their discount
    requests due to insufficient resources. In 2003, the Task Force on
    the Prevention of Waste, Fraud, and Abuse suggested a ceiling on the
    total amount of funding that an applicant can request.[^186] We seek
    comment on whether such a cap would be an effective measure of
    deterring waste, fraud, and abuse. If so, parties should explain how
    and describe the costs and benefits of any such approach. We seek
    comment on whether the concern raised by the USAC Task Force could
    be addressed through some measure other than an additional cap. We
    also seek comment on whether USAC should publicize "best practices"
    for E-rate program applicants.[^187] In addition, we seek comment on
    whether modifying the competitive bidding rules (*e.g.*, by
    requiring a minimum of three bids)[^188] would be an effective
    measure for deterring waste, fraud, and abuse. For example, where an
    applicant received only one bid, would additional review be
    warranted to ensure that the bid is not inflated, and if so, what
    level of review would be appropriate? We are concerned that
    obtaining three or more bids may be particularly difficult in rural
    areas. We are also concerned that obtaining three bids for small
    projects or for Priority One telecommunications services may be
    impractical in many cases, even for urban and suburban schools and
    libraries. If we require a minimum of three bids we may therefore
    exclude many rural schools and libraries, and many small projects
    and telecommunications services from the program. In order to avoid
    such an outcome, we ask commenters to address how a multiple bid
    requirement would be an effective deterrent against waste, fraud,
    and abuse and whether the costs of imposing additional rules in this
    regard would outweigh the benefits. We also seek comment on what
    rules should be adopted, if any, to ensure that USF moneys are used
    efficiently and are not wanted by, for example, applicants seeking
    to "gold plate" their supported services or seeking services or
    equipment beyond what they reasonably need or can use.[^189] Should
    we establish more detailed guidance about what is or is not
    supported under the E-rate program?[^190] Should we establish
    maximum prices for particular services or equipment?

91. Recently, the Commission adopted measures to protect against waste,
    fraud, and abuse in the administration of the E-rate program.[^191]
    In the *Schools and Libraries Fifth Report and Order*, the
    Commission stated that subsequent applications from beneficiaries
    that have violated the statute or rules in the past will be subject
    to greater review, such as enhanced obligations to provide
    additional documentary evidence demonstrating current compliance
    with all applicable requirements.[^192] We seek comment on whether
    we should adopt specific rules governing higher scrutiny for
    previous rule violators; for example, should we require specific
    reports or set performance goals for these beneficiaries? We seek
    comment on requirements, if any, that we should apply to the
    Administrator's conduct of heightened review of E-rate program
    participants. Commenters should discuss whether we should adopt
    criteria for service providers[^193] or require additional
    information from applicants. Commenters should discuss whether we
    should adopt rules or guidelines for when USAC should stop payments
    or processing applications as a result of suspected program
    violations. What threshold would be appropriate to trigger such an
    action?[^194] What would be the appropriate point for USAC to resume
    payments or processing applications?

92. *Measures to Prevent Waste, Fraud, and Abuse in the High Cost, Low
    Income, and Rural Health Care Programs.* We seek comment on whether
    we should adopt specific rules governing higher scrutiny for
    previous rule violators in these three programs. Should we require
    specific reports or set performance goals for these beneficiaries?
    We also seek comment on whether USAC should publicize "best
    practices" for these program participants. We specifically seek
    comment on ways to improve our oversight of the High Cost program.
    Commenters should discuss ways we can improve carriers' incentives
    for efficiency. Commenters should also address the state
    certification process and our oversight of costs not directly
    related to providing telecommunications services. Commenters should
    discuss whether we should require additional information from High
    Cost program participants in order to prevent waste, fraud, and
    abuse.

93. Additionally, we seek comment on ways we can deter waste, fraud, and
    abuse in the Low Income program. Commenters should discuss whether
    we should revise our rules to require carriers to provide additional
    documentation, showing the number of Lifeline subscribers for which
    they claim reimbursement. We also seek comment on whether we should
    revise our rules to require carriers seeking Low Income or High Cost
    support for serving tribal members residing on a reservation to
    provide additional information to demonstrate that each customer is
    a tribal member and resides on tribal lands.

94. Finally, we seek comment on ways to deter waste, fraud, and abuse in
    the Rural Health Care program. We also seek to ensure USF moneys are
    used efficiently and not in a wasteful manner in the Rural Health
    Care program by, for example, requesting goods or services that are
    not reasonably needed. Commenters should discuss whether we should
    establish a cap on Rural Health Care support. Commenters should
    address how we can verify whether the program beneficiary is
    providing rural health care that is eligible for reimbursement under
    program rules. Commenters are encouraged to propose specific
    language or rules (including possible enforcement mechanisms) that
    would further our goal of ensuring that funds received from the high
    cost, low income, schools and libraries, and rural health care
    programs are used in an appropriate manner.

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

95. We seek comment on whether we should further protect the schools and
    libraries, high cost, low income, and rural health care universal
    service support mechanisms by adopting a rule specifically
    prohibiting recipients from using funds in a wasteful, fraudulent,
    or abusive manner. It is important that these proposed rules have
    sufficient specificity for beneficiaries and contributors to
    understand their obligations. If we adopt a general rule, applicants
    may not have adequate notice of what behavior is prohibited by our
    rules. Would such a rule enhance the effectiveness of any future
    enforcement efforts relating to the discovery of waste, fraud, and
    abuse? Commenters should discuss the necessity and appropriate scope
    of such of rule. Should it apply only to intentional acts of fraud,
    waste, and abuse, or should it incorporate instances when applicants
    or recipients recklessly or negligently use funds in an
    inappropriate manner? In addition, we seek comment on whether we
    should define waste, fraud, and abuse in our rules.[^195]

96. USAC has implemented controls for the Schools and Libraries support
    mechanism to ensure application validity and prevent inaccurate data
    entry. USAC also has data validation procedures for the High Cost,
    Low Income, and Rural Health Care programs. We seek comment on
    whether we should adopt specific rules to require USAC to implement
    application validity controls for all USF programs. Under our rules,
    USAC has the authority to conduct compliance audits of beneficiaries
    of the schools and libraries fund.[^196] USAC conducts audits of
    schools and libraries with its own staff and also retains
    independent auditors to conduct these audits. Under USAC's
    procedures, if the audit indicates a rule violation, USAC attempts
    to recover the funds from E-rate beneficiaries or service providers,
    as required in the *Schools and Libraries Fifth Report and Order.*
    We seek comment on ways that USAC can better facilitate this process
    and transfer the matter to the Commission for enforcement action in
    a timely manner.[^197] USAC also conducts audits of High Cost, Low
    Income, and Rural Health Care beneficiaries and contributors.

97. We seek comment on whether we should revise the debarment rule to
    make it more effective against individuals and other entities, such
    as corporations.[^198] The current debarment rules apply only to the
    E-rate program. The Commission's rules provide for automatic
    suspension and initiation of debarment proceedings against persons
    convicted of, or held civilly liable for, the commission or
    attempted commission of fraud and other similar offenses "arising
    out of activities associated with or related to the schools and
    libraries support mechanism."[^199] To date, the Commission has
    debarred four parties for defrauding the schools and libraries
    program.[^200] We seek comment on ways to inform schools and
    libraries of the list of debarred parties. Commenters should discuss
    ways schools and libraries can reduce their vulnerability to
    predatory contractors. We also believe that the Commission should
    establish a more aggressive way to inform schools and libraries when
    contractors are debarred. Many schools and libraries find it very
    difficult to find the debarment list today. How should we improve
    the situation? Should we also inform schools and libraries when a
    contractor is under investigation? How do we allow schools and
    libraries to take steps to reduce their vulnerability to predatory
    contractors without violating the rights or prejudging parties under
    investigation? We seek comment on whether as part of our
    registration process we should require contractors to waive any
    right to confidentiality they may have during an investigation.
    Should the Commission or USAC draft a list of best and worst
    practices to assist beneficiaries in reducing fraud? We seek comment
    on whether we should adopt debarment rules applicable to the High
    Cost, Low Income, and Rural Health Care mechanisms. If so, should
    the debarment rules be modeled on the debarment rule applicable to
    the E-rate program, should we adopt mechanism-specific debarment
    rules, or should we model our debarment rules for any or all of the
    programs, including the E-rate program, on the government-wide
    non-procurement debarment regulations?[^201] We note that we have
    initiated a proceeding to consider, among other things, changes to
    our E-rate program debarment rules.[^202] We incorporate that record
    into this proceeding and ask parties to refresh the record to
    account for their experience since that time. In the *Second Report
    and Order*, we asked whether we should adopt the proposed
    government-wide debarment rules then pending. Final government-wide
    rules were subsequently adopted in 2003.[^203] Commenters discussing
    the government-wide debarment rules should ensure their comments
    address these final rules. We also seek comment on whether we should
    broaden the scope of our debarment rules to encompass entities that
    have been found guilty of civil and criminal violations beyond those
    associated with our universal service programs or entities that have
    shown to have engaged in a clear pattern of abuse of our rules. We
    also seek comment on whether we should adopt sanctions other than
    debarment for violations in all USF programs. Commenters should
    discuss what type of sanctions would be appropriate, and identify
    any appropriate distinctions among the universal service programs.
    For example, should we reduce an E-rate beneficiary's discount level
    for a limited number of years for repeated violations?

98. We tentatively conclude that we should establish more aggressive
    sanctions and debarment procedures and disclosures in all USAC
    programs. There should be a range of sanctions available to us for
    violations in all USAC programs. What types of sanctions should we
    employ? We also believe that sanctions should be appropriate to the
    violation. Sanctions should reflect the fundamental difference
    between isolated incidents of unintentional ministerial error and
    committing criminal fraud. What sanctions should we apply to
    clerical mistakes versus intentional fraud? One specific idea we
    seek comment on is whether we should be able to reduce an E-rate
    beneficiary's discount level for a limited number of years as a
    sanction for repeated violations rather than imposing a fine,
    especially for public institutions. We seek comment on whether the
    Commission or USAC should create a list of best and worst practices
    to assist beneficiaries to reduce fraud. This list would give
    examples to schools and libraries that would help them identify a
    good contractor and a good application, and to avoid predatory
    contractors and risky application practices.

99. We continue to remain committed to rapidly detecting and addressing
    potential misconduct, and ensuring that universal service funds are
    used in the absence of waste, fraud, and abuse. We seek comment
    generally on other measures that would further these goals by
    deterring the inappropriate use of funds received from the various
    universal service support mechanisms. We invite commenters to
    propose mechanism-specific measures as well as measures that would
    apply to applicants or recipients of any of the various support
    mechanisms. Commenters should specify the manner in which their
    proposals would further protect the universal service support
    mechanisms from waste, fraud, and abuse.

# PROCEDURAL MATTERS

## Initial Regulatory Flexibility Analysis

100. As required by the Regulatory Flexibility Act of 1980, as amended,
     5 U.S.C. § 604, the Commission has prepared an Initial Regulatory
     Flexibility Analysis ("IRFA") for this NPRM, of the possible
     significant economic impact on a substantial number of small
     entities by the policies and rules proposed in this NPRM. The IRFA
     is in Appendix A. 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 NPRM. The Commission
     will send a copy of the NPRM, including this IRFA, to the Chief
     Counsel for Advocacy of the Small Business Administration.[^204] In
     addition, the NPRM and IRFA (or summaries thereof) will be
     published in the Federal Register.[^205]

## Paperwork Reduction Act Analysis

101. This Notice of Proposed Rulemaking and Further Notice of Proposed
     Rulemaking does not contain information collection requirements
     subject to the Paperwork Reduction Act of 1995 ("PRA"), Public Law
     104-13. In addition, therefore, it does not contain any new or
     modified "information collection burden for small business concerns
     with fewer than 25 employees," pursuant to the Small Business
     Paperwork Relief Act of 2002, Public Law 107-198, *see* 44 U.S.C. §
     3506(c)(4).

## Ex Parte Presentations

102. These matters shall be treated as a "permit-but-disclose"
     proceeding in accordance with the Commission's *ex parte*
     rules.[^206] Persons making oral *ex parte* presentations are
     reminded that memoranda summarizing the presentations must contain
     summaries of the substance of the presentations and not merely a
     listing of the subjects discussed. More than a one or two sentence
     description of the views and arguments presented in generally
     required.[^207] Other requirements pertaining to oral and written
     presentations are set forth in section 1.1206(b) of the
     Commission's rules.[^208]

## Comment Filing Procedures

103. Pursuant to sections 1.415 and 1.419 of the Commission\'s
     rules,[^209] interested parties may file comments on this NPRM
     within 90 days after publication in the Federal Register and may
     file reply comments within 150 days after publication in the
     Federal Register. All filings must be addressed to the Commission's
     Secretary, Marlene H. Dortch, Office of the Secretary, Federal
     Communications Commission, 445 12th Street, S.W., Washington,
     D.C. 20554. One (1) courtesy copy must be delivered to Warren
     Firschein at Federal Communications Commission, Telecommunications
     Access Policy Division, Wireline Competition Bureau , 445 12th
     Street, S.W., Room 5-B442, Washington, D.C. 20554; e-mail:
     [warren.firschein@fcc.gov]{.underline}; one (1) courtesy copy must
     be delivered to Mika Savir at Federal Communications Commission,
     Telecommunications Access Policy Division, Wireline Competition
     Bureau , 445 12th Street, S.W., Room 5-B448, Washington, D.C.
     20554; e-mail: <mika.savir@fcc.gov>; and one (1) copy to Best Copy
     and Printing, Inc. ("BCPI"), 445 12th Street, S.W., Room CY-B402,
     Washington, D.C. 20554. Customers may contact BCPI through its
     website: [www.bcpiweb.com](http://www.bcpiweb.com/), by e-mail at
     <fcc@bcpiweb.com>, by telephone at (202) 488-5300 or (800)
     378-3160, or by facsimile at (202) 488-5563.

104. Comments may be filed using the Commission\'s Electronic Comment
     Filing System ("ECFS") or by filing paper copies.[^210] Comments
     filed through the ECFS can be sent as an electronic file via the
     Internet to [http://www.fcc.gov/e-file/ecfs.html]{.underline}. If
     multiple docket or rulemaking numbers appear in the caption of this
     proceeding, 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 get filing
     instructions for e-mail comments, commenters should send an e-mail
     to [ecfs@fcc.gov]{.underline}, and should include the following
     words in the body of the message, "get form \<your e-mail
     address\>." A sample form and directions will be sent in reply.

105. 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. All filings must contain the docket or rulemaking number
     that appears in the caption of this proceeding.

-   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). 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, M.D. 20743.

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

106. Filings and comments are also available for public inspection and
     copying during regular business hours at the FCC Reference
     Information Center, Portals II, 445 12th Street, S.W., Room
     CY-A257, Washington, D.C., 20554. Copies may also be purchased from
     the Commission\'s duplicating contractor, BCPI, 445 12th Street,
     S.W., Room CY-B402, Washington, D.C. 20554. Customers may contact
     BCPI through its website:
     [www.bcpiweb.com](http://www.bcpiweb.com/), by e-mail at
     <fcc@bcpiweb.com>, by telephone at (202) 488-5300 or (800)
     378-3160, or by facsimile at (202) 488-5563.

107. For further information regarding this proceeding, contact Warren
     Firschein, Attorney Advisor, Telecommunications Access Policy
     Division, Wireline Competition Bureau at (202) 418-0844, or
     <warren.firschein@fcc.gov> or Mika Savir, Attorney Advisor,
     Telecommunications Access Policy Division, Wireline Competition
     Bureau, (202) 418-0384, e-mail: [mika.savir@fcc.gov]{.underline}.

108. In addition to filing comments with the Secretary, a copy of any
     Paperwork Reduction Act ("PRA") comments on the information
     collection(s) contained herein should be submitted to Judith B.
     Herman, Federal Communications Commission, Room 1-C804, 445 12th
     Street, S.W., Washington, D.C. 20554, or via the Internet to
     [Judith-B.Herman@fcc.gov]{.underline}, and to Kristy L. LaLonde,
     OMB Desk Officer, Room 10234 NEOB, 725 17th Street, N.W.,
     Washington, D.C. 20503 via the Internet to
     [Kristy_L.\_LaLonde@omb.eop.gov]{.underline} or by fax to (202)
     395-5167.

# ORDERING CLAUSES

109. Accordingly, IT IS ORDERED that, pursuant to the authority
     contained in sections 1, 4(i), 201-205, 214, 254, and 403 of the
     Communications Act of 1934, as amended, 47 U.S.C. §§ 151, 154(i),
     201-205, 214, 254, and 403, this Notice of Proposed Rulemaking IS
     ADOPTED.

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

     FEDERAL COMMUNICATIONS COMMISSION

Marlene H. Dortch

Secretary

**APPENDIX**

**Initial Regulatory Flexibility Analysis**

1.  As required by the Regulatory Flexibility Act ("RFA"),[^211] 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 Notice of
    Proposed Rulemaking and Further Notice of Proposed Rulemaking
    (*"NPRM"*). 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 *NPRM*. The Commission
    will send a copy of this *NPRM*, including this IRFA, to the Chief
    Counsel for Advocacy of the Small Business Administration
    ("SBA").[^212] In addition, the *NPRM* and IRFA (or summaries
    thereof) will be published in the Federal Register.[^213]

###  {#section .unnumbered}

### 1. Need for, and Objectives of, the Proposed Rules {#need-for-and-objectives-of-the-proposed-rules .unnumbered}

2.  In the *NPRM*, we seek comment on ways to further protect the high
    cost, low income, schools and libraries, and rural health care
    universal service support mechanisms from waste, fraud, and abuse.
    Specifically, we seek comment on whether, so as to improve our
    oversight capacity to guard against waste, fraud, and abuse, our
    rules should require audits of recipients of funds from the high
    cost, low income, schools and libraries, and rural health care
    programs, and audits of contributors to the universal service fund.
    We also seek comment on whether to adopt document retention rules
    for all of the universal service fund mechanisms that are consistent
    with the rules pertaining to participants in the schools and
    libraries support mechanism. In addition, the *NPRM* seeks comment
    on whether to establish an administrative limitations period in
    which the Commission or USAC will determine that a violation has
    occurred among recipients of funds from the high cost, low income,
    and rural health care universal service support mechanisms that is
    consistent with the rules pertaining to participants in the schools
    and libraries support mechanism.

3.  Additionally, we seek comment on ways to improve the management,
    administration, and oversight of the universal service fund,
    including the process for applying of universal service support, the
    disbursement process, the billing and collection process, issues
    relating to the Universal Service Administrative Company ("USAC"),
    and performance measures and goals for assessing and managing the
    universal service programs.

###  {#section-1 .unnumbered}

###  2. Legal Basis {#legal-basis .unnumbered}

4.  The legal basis for the *NPRM* is contained in sections 1, 4, 201
    through 205, 214, 254, 303(r), and 403 of the Communications Act of
    1934, as amended, 47 U.S.C. §§ 151, 154, 201-205, 214, 254, 303(r),
    and 403, and section 1.411 of the Commission's rules, 47 C.F.R. §
    1.411.

###  3. Description and Estimate of the Number of Small Entities to Which Rules May Apply {#description-and-estimate-of-the-number-of-small-entities-to-which-rules-may-apply .unnumbered}

5.  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.[^214] The RFA generally
    defines the term "small entity" as having the same meaning as the
    terms "small business," "small organization," and "small
    governmental jurisdiction."[^215] In addition, the term "small
    business" has the same meaning as the term "small business concern"
    under the Small Business Act.[^216] 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.[^217] A small organization is generally "any
    not-for-profit enterprise which is independently owned and operated
    and is not dominant in its field."[^218] Nationwide, there are
    approximately 1.6 small organizations.[^219] 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."[^220] As of 1997,
    there were about 87,453 governmental jurisdictions in the United
    States.[^221] This number includes 39,044 county governments,
    municipalities, and townships, of which 37,546 (approximately 96.2
    percent) 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.

6.  The Commission has determined that the group of small entities
    possibly directly affected by the proposed rules herein, if adopted,
    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.[^222] Further
    descriptions of these entities are provided below. In addition, the
    Universal Service Administrative Company is a small organization
    (non-profit) under the RFA, it does not constitute a substantial
    number of such entities,[^223] and we believe that circumstances
    triggering the new reporting requirement will be limited and that
    the requirement does not constitute a significant economic impact on
    that entity.

####  {#section-2 .unnumbered}

####  a. Schools and Libraries {#a.-schools-and-libraries .unnumbered}

7.  As noted, "small entity" includes non-profit and small governmental
    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."[^224] 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.[^225] 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.[^226]
    Certain other statutory definitions apply as well.[^227] The SBA has
    defined for-profit, elementary and secondary schools and libraries
    having \$6 million or less in annual receipts as small
    entities.[^228] 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.

####  {#section-3 .unnumbered}

#### b. Telecommunications Service Providers {#b.-telecommunications-service-providers .unnumbered}

8.  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."[^229] 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.[^230] 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.

9.  *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.[^231]
    According to Commission data,[^232] 1,310 incumbent carriers
    reported that they were engaged in the provision of local exchange
    services. Of these 1,310 carriers, an estimated 1,025 have 1,500 or
    fewer employees and 285 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.

10. *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.[^233] According to Commission data,[^234] 563 companies
    reported that they were engaged in the provision of either
    competitive access provider services or competitive local exchange
    carrier services. Of these 563 companies, an estimated 472 have
    1,500 or fewer employees and 91 have more than 1,500
    employees.[^235] In addition, 35 carriers reported that they were
    "Other Local Exchange Carriers." Of the 37 "Other Local Exchange
    Carriers," an estimated 36 have 1,500 or fewer employees and one has
    more than 1,500 employees.[^236] 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.

11. *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.[^237] According to the Commission data,[^238]
    281 companies reported that their primary telecommunications service
    activity was the provision of payphone services. Of these 281
    companies, an estimated 254 have 1,500 or fewer employees and 27
    have more than 1,500 employees.[^239] Consequently, the Commission
    estimates that the majority of IXCs are small entities that may be
    affected by the rules and policies adopted herein.

12. *Wireless Service Providers.* The SBA has developed a small business
    size standard for wireless small businesses within the two separate
    categories of *Paging*[^240] and *Cellular and Other Wireless
    Telecommunications*.[^241] Under both SBA categories, a wireless
    business is small if it has 1,500 or fewer employees. According to
    the Commission data,[^242] 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.[^243] Consequently, the Commission
    estimates that most wireless service providers are small entities
    that may be affected by the rules and policies adopted herein.

13. *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.[^244] 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.[^245]
    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. Also, according to Commission
    data, 379 carriers reported that they were engaged in the provision
    of either paging or messaging services or other mobile
    services.[^246] Of those, the Commission estimates that 373 are
    small, under the SBA-approved small business size standard.[^247]

####   {#section-4 .unnumbered}

#### c. Internet Service Providers {#c.-internet-service-providers .unnumbered}

14. *Internet Service Providers.* The SBA has developed a small business
    size standard for Internet Service Providers (ISPs). ISPs "provide
    clients access to the Internet and generally provide related
    services such as web hosting, web page designing, and hardware or
    software consulting related to Internet connectivity."[^248] Under
    the SBA size standard, such a business is small if it has average
    annual receipts of \$21 million or less.[^249] According to Census
    Bureau data for 1997, there were 2,751 firms in this category that
    operated for the entire year. [^250] Of these, 2,659 firms had
    annual receipts of under \$10 million, and an additional 67 firms
    had receipts of between \$10 million and \$24, 999,999.
    Consequently, we estimate that the majority of these firms are small
    entities that may be affected by our action. In addition, limited
    preliminary census data for 2002 indicate that the total number of
    internet service providers increased approximately five percent from
    1997 to 2002.[^251]

####  d. Vendors of Internal Connections {#d.-vendors-of-internal-connections .unnumbered}

15. 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."[^252] 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.[^253] 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.[^254]
    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.

####   {#section-5 .unnumbered}

#### e. Miscellaneous Entities {#e.-miscellaneous-entities .unnumbered}

16. *Wireless Communications Equipment Manufacturers*. The equipment
    manufacturers described in this section are merely indirectly
    affected by our current action, and therefore are not formally a
    part of this RFA analysis. We have included them, however, to
    broaden the record in this proceeding and to alert them to our
    decisions. 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.[^255] Census Bureau data
    for 1997 indicate that, for that year, there were a total of 1,215
    establishments[^256] in this category.[^257] 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 percent,[^258]
    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.

###   {#section-6 .unnumbered}

###  4. Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements {#description-of-projected-reporting-recordkeeping-and-other-compliance-requirements .unnumbered}

17. The *NPRM* seeks comment on whether, so as to improve our oversight
    capacity to guard against waste, fraud, and abuse, our rules should
    require audits of recipients of funds from the high cost, low
    income, schools and libraries, and rural health care programs, and
    audits of contributors to the universal service fund.[^259] We have
    no audit cost estimate at this time. In addition, the *NPRM* seeks
    comment on whether to adopt document retention rules for all of the
    universal service fund mechanisms that are consistent with the rules
    pertaining to participants in the schools and libraries support
    mechanism.[^260]

18. The *NPRM* also seeks comment on ways to improve the management,
    oversight, and administration of the universal service fund and the
    universal service mechanisms.[^261] The *NPRM* also seeks comment on
    improvements to the application and disbursement process, which may
    include changes in the universal service forms, adoption of a
    multi-year application, or changes in other reporting
    requirements.[^262]

####  {#section-7 .unnumbered}

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

19. 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.[^263]

20. In the *NPRM*, 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 high
    cost, low income, schools and libraries, and rural health care
    programs. Decreasing the likelihood of waste, fraud, and abuse
    preserves program funding for all eligible entities. The *NPRM*
    seeks comment on whether the audit requirement should apply only to
    recipients that receive a relatively large amount of support or
    benefit from the program. Similarly, with regard to potential audits
    of contributors to the fund, the *NPRM* seeks comment on whether we
    should establish a threshold for triggering an audit (*e.g.*,
    require independent audits only for carriers contributing \$100
    million or more in a particular fiscal year). In addition, the
    *NPRM* seeks comment on adopting a multi-year application form for
    Universal Service Fund beneficiaries, which could, if adopted,
    reduce the filing burden on small entities.

### 6. Federal Rules that may Duplicate, Overlap, or Conflict with the Proposed Rules {#federal-rules-that-may-duplicate-overlap-or-conflict-with-the-proposed-rules .unnumbered}

21. None.

**STATEMENT OF\
CHAIRMAN KEVIN J. MARTIN**

*Re: Comprehensive Review of Universal Service Fund Management,
Administration, and Oversight, WC Docket No. 05-195*

Today's decision reaffirms the Commission's commitment to improve the
management, administration, and oversight of the Universal Service Fund
(USF).

I fully support the universal service program and the critical function
it serves to ensure access for consumers in rural and high-cost areas,
and to promote access to advanced services for schools, libraries, and
health care service providers in rural areas.

Managing the USF in an efficient, effective manner is one of the
Commission's core functions. It is incumbent upon us to take the steps
necessary to improve the operational efficiency of the program while
providing greater certainty to the recipients. We can thus achieve our
mutual goal of protecting the continuing health and sustainability of
the universal service fund.

This NPRM provides an opportunity for the Commission to explore the
lessons learned through the operations of the High Cost and Low Income
programs. In these programs, the Commission's rules specify formulae
that are used to distribute universal service support. This type of
formulaic approach may hold promise for improving the administration of
the E-rate and Rural Healthcare programs. By using a formulaic approach
to distribute support directly to schools, libraries, and rural
healthcare providers, the Commission may be able to address the concerns
raised by beneficiaries about the growing complexity of the application
process while still ensuring that the programs' funds are used
appropriately.

STATEMENT OF

COMMISSIONER MICHAEL J. COPPS

*RE: Federal-State Joint Board on Universal Service, Rural Health Care
Support Mechanism, Lifeline and Link-Up, Changes to the Board of
Directors of the National Exchange Carrier Association, Inc.,
Comprehensive Review of Universal Service Fund Management,
Administration, and Oversight, CC Docket Nos. 96-45, 02-6, 02-60, 03-109
and 97-21, Notice of Proposed Rulemaking.*

Today's NPRM is about keeping the Universal Service Fund on good footing
and being good stewards of our programs. Let me focus on one of those
programs. No doubt about it, the E-Rate is one of the nation's great
success stories. Thanks to this program, schools and libraries across
the country, including those in rural areas and in our inner cities,
have access to telecommunications services and to the Internet. The
critical importance of this program means that it needs regular review
and care. We continue that process today. I want to commend the Chairman
for recognizing the importance of application simplification to
improving the program, saving scarce resources, and reducing too common
ministerial and clerical errors. I am particularly pleased that we make
a tentative conclusion to move to a multi-year application process for
Priority One services. This is a real step forward and I look forward to
seeing it instituted soon. We must also always be mindful of protecting
the program from those few who would abuse it. While instances of
intentional fraud are infrequent, our goal must be to eliminate them
altogether. I therefore support the NPRM's conclusion that we will
strengthen our debarment rules and take new steps to identify and punish
predatory contractors.

I am concerned about one aspect of the NPRM. It asks if we should
replace the application process and distribute E-Rate funds directly to
schools and libraries according to their size. Such a change could also
allow funds to be used for unspecified communications-related services
and equipment, rather than requiring applications that specify services
and equipment. So many questions about this approach remain unaddressed.
Distributing funds directly to schools could conceivably exclude
Catholic and other private and parochial schools from the E-Rate
program. Tying funds to school size could conceivably result in our
rural and insular schools being denied the funds they need for the
extraordinary cost of services in these areas, just because they have
fewer students. And if schools are given a sum of money to be used for
unspecified purposes rather than for specified and verifiable services
and equipment, it could be much more difficult to identify fraud.
Without assurances that parochial schools and rural schools would not be
disadvantaged, and fraud detection would not be undermined, I must
express my concern with this aspect of a generally very sound item. I
urge all those who share this concern to respond to this notice so that
our record leaves no doubt about the effects, including those always
pernicious unintended effects, of proposals that would so dramatically
affect this very successful program.

**STATEMENT OF**

**COMMISSIONER JONATHAN S. ADELSTEIN**

*Re: Comprehensive Review of Universal Service Fund Management,
Administration, and Oversight; Federal-State Joint Board on Universal
Service; Schools and Libraries Universal Service Support Mechanism;
Rural Health Care Support Mechanism; Lifeline and Link-Up; Changes to
the Board of Directors for the National Exchange Carrier Association,
Inc.,* Notice of Proposed Rulemaking and Further Notice of Proposed
Rulemaking, WC Docket No. 05-195, CC Docket No. 96-45, CC Docket No.
02-6, WC Docket No. 02-60, WC Docket No. 03-109, CC Docket No. 97-21,
FCC 05-124.

My commitment to universal service is based on the fundamental belief
that a chain is only as strong as its weakest link. Our universal
service programs strengthen the links in our communications network and,
today, we open an important inquiry about how to reinforce and improve
those programs. Although this Notice focuses on administrative,
management and oversight issues, it touches on almost every operational
detail of our universal service programs. Some of the wide-ranging
proposals here give me pause, but the comprehensive nature of this item
should demonstrate our commitment to the effectiveness and integrity of
this already outstanding program.

Universal service has been the bedrock telecommunications of the past
seventy years. Congress and the Commission recognized early on that the
economic, social, and public health benefits of the telecommunications
network are increased for all subscribers by the addition of each new
subscriber. Universal service has played an important role in
stimulating and maintaining the high levels of penetration that our
country now enjoys, with benefits for all users of the network, no
matter where they live.

Given these benefits, it is not surprising that Congress enshrined the
principles of keeping our communities connected and ensuring that the
latest advanced communications services reach all Americans in the
Telecommunications Act of 1996. In the 1996 Act, Congress reaffirmed its
commitment to connectivity for rural America and for low income
consumers, but also made important additions to our universal service
framework. Since its inception, the Schools and Libraries program has
opened a world of new learning and opportunity for millions of school
children and library patrons. The funding made possible through our
Rural Health Care program has been crucial to the sustainability of many
telemedicine programs and this program holds enormous potential to
improve the quality of life in rural America.

To ensure continued success, we must remain committed to monitoring,
auditing, reviewing and reinforcing this program. Part of that process
is being responsive to criticisms of the Commission's management, and
this item seeks comment on a wide-ranging set of proposals, some of
which I find more attractive than others. It also means building on the
many successes and positive improvements that the Commission and the
universal service community have already made. Indeed, I appreciate very
much the dedication of the service providers, contributors,
beneficiaries, USAC employees, and dedicated Commission staff who have
worked hard to make this program a success.

Among the more promising options here are the proposals to safeguard
against waste, fraud, and abuse by expanding the scope of our disbarment
rule, which prohibits bad actors from participating in the program. I'm
glad that this item seeks comment on whether we should broaden the scope
of our debarment rule to encompass entities that have been found guilty
of civil and criminal violations beyond those associated with our
universal service programs or entities that are shown to have engaged in
clear patterns of abuse of our rules. I am also glad that the item seeks
comment on applying different levels of sanctions for different
violations.

While it is important that we strive to consistently improve our
performance, we must also ensure that even well-intentioned reform
efforts do not undermine the effectiveness of our universal service
programs. So I am concerned about proposals to adopt overly formulaic
approaches for our universal service programs. Allocating support based
on formulas, like school size, may ignore critical differences in the
cost to obtain services in rural parts of the country and may work
against smaller or private schools that cannot achieve economies of
scale. I'm particularly concerned that such approaches, or proposals to
adopt multiple bid requirements or per-application caps for funding,
would not provide sufficient support, as required by the Act, for
schools, libraries, and consumers in rural areas.

As we seek to bolster our efforts to prevent waste and fraud, this
Notice also provides an important opportunity for the Commission to
clarify and improve our administrative processes for the benefit of all
participants. In particular, I have heard considerable support for the
proposal to adopt a streamlined application process for "priority one"
services through our Schools and Libraries program. This Notice
recognizes that there have been fewer problems with priority one
services, in our experience. It's axiomatic that if we can target our
efforts to prevent waste, fraud, and abuse more closely to high risk
applications, we should be able to simplify our processes for those low
risk areas. We should not engage in one-way ratcheting of our process or
leave in place unnecessary obstacles for deserving applicants.

I would like to commend Chairman Martin and my colleagues for the
collaborative process and efforts on this item. For this process to be
successful, we must continue to draw on the cumulative expertise of all
program participants. With the help of this intertwined community, we
can further strengthen the program and ensure that it continues the
positive strides that it has already made.

[^1]: There are four USF support mechanisms: Schools and Libraries, Low
    Income, High Cost, and Rural Health Care. Throughout this NPRM we
    refer to these four mechanisms as "programs" or "mechanisms."

[^2]: *See* 47 U.S.C. § 254(b).

[^3]: The Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat
    56 ("1996 Act"), amended the Communications Act of 1934 ("the Act").

[^4]: *See Federal-State Joint Board on Universal Service,* CC Docket
    No. 96-45, Report and Order, 12 FCC Rcd 8776, 8784-85, ¶¶ 10-12
    (1997) ("*First Report and Order*").

[^5]: *See First Report and Order,* 12 FCC Rcd at 8784-85, ¶¶ 10-12.

[^6]: *See id.*

[^7]: 47 U.S.C. § 254.

[^8]: Under section 254(d), the Commission can exempt carriers from
    universal service contribution requirements if the contributions
    would be *de minimis*. 47 U.S.C. § 254(d). The *de minimis*
    threshold is currently \$10,000. *See Federal-State Joint Board on
    Universal* Service, CC Docket No. 96-45, Fourth Order on
    Reconsideration in CC Docket No. 96-45, Report and Order in CC
    Docket Nos. 96-45, 96-262, 94-1, 91-213, 95-72, 13 FCC Rcd 5318,
    5482, ¶ 297 (1997) ("*Fourth Reconsideration Order*"); 47 C.F.R. §
    54.708.

[^9]: NECA is an association of incumbent local exchange carriers
    ("LECs") established by the Commission to administer interstate
    access tariffs for companies that do not file separate tariffs and
    to collect and distribute access charge revenues for those
    companies. *See* 47 C.F.R. §§ 69.601, 69.603. The NECA Board of
    Directors is "prohibited from participating in the functions of the
    \[universal service fund\] Administrator." 47 C.F.R. § 54.703(a).

[^10]: *See* *Changes to the Board of Directors of the National Exchange
    Carrier Association*, Third Report and Order in CC Docket No. 97-21,
    Fourth Order on Reconsideration in CC Docket No. 97-21 and Eighth
    Order on Reconsideration in CC Docket No. 96-45, 13 FCC Rcd 25058,
    25063-66, ¶¶ 10-14 (1998) ("*USAC Appointment Order*"); 47 C.F.R. §
    54.701(a).

[^11]: This amount was disbursed as of April 30, 2005.

[^12]: *See, e.g*., *Schools and Libraries Universal Service Support
    Mechanism*, CC Docket No. 02-6, Third Report and Order and Second
    Further Notice of Proposed Rulemaking, 18 FCC Rcd 26912 (2003)
    ("*Third Report and Order*"); *Lifeline and Link Up*, WC Docket No.
    03-109, Report and Order and Further Notice of Proposed Rulemaking,
    19 FCC Rcd 8302 (2004) ("*Lifeline/Link-Up Report and Order*");
    *Rural Health Care Support Mechanism*, WC Docket No. 02-60, Second
    Report and Order, Order on Reconsideration, and Further Notice of
    Proposed Rulemaking, 19 FCC Rcd 24613 (2005); *Federal-State Joint
    Board on Universal Service*, CC Docket No. 96-45, Report and Order,
    FCC 05-46 (rel. Mar. 17, 2005).

[^13]: *See, e.g.*, Deloitte & Touche LLP, [Independent Accountants'
    Report on Applying Agreed-Upon Procedures]{.smallcaps}, Exhibit
    XXXXV (Jun. 23, 2004) ("[D&T 2004 Part 54 AUP Report"]{.smallcaps})
    (providing AUP engagement program); Deloitte & Touche LLP,
    [Universal Service Administrative Company (USAC) Audited Financial
    Statements for the Years Ended December 31, 2003 and 2002 and
    Independent Auditor's Report]{.smallcaps} (Jun. 23, 2004); *see
    also* Letter from Lisa M. Zaina, Chief Executive Officer, Universal
    Service Administrative Company to Barbara Guiltinan, Deloitte &
    Touche, LLP (Jul. 19, 2004) (responding to audit findings).

[^14]: *See, e.g*., OIG audit reports: "Report on Audit of E-rate
    Program at Annunciation Elementary School," Aug. 12, 2004; "Report
    on Audit of E-rate Program at United Talmudical Academy," June 7,
    2004; "Report on Audit of E-rate Program at Children's Storefront
    School," Apr. 5, 2004; "Report on Audit of E-rate Program at St.
    Augustine School," May 19, 2004; "Report on Audit of E-rate Program
    at Southern Westchester Board of Cooperative Educational Services
    (SWBOCES)," May 25, 2004. OIG audit reports are available on the
    Commission's website at
    [http://www.fcc.gov/oig/oigreportsaudit/html]{.underline}.

[^15]: *See* USAC 2003 Annual Report, posted on USAC's website,
    <http://www.universalservice.org/Reports>. For example, USAC
    established an Internal Audit Division and the USAC Board of
    Directors has an audit committee to provide additional oversight.

[^16]: *See* "USAC -- Schools and Libraries Support Mechanism Interim
    Response to the Recommendations of the Task Force on the Prevention
    of Waste, Fraud, and Abuse," CC Docket No. 02-6, Nov. 26, 2003
    ("Response to Task Force").

[^17]: 47 C.F.R. § 54.703(e).

[^18]: *See* GAO, Telecommunications, Greater Involvement Needed by FCC
    in the Management and Oversight of the E-Rate Program, GAO-05-151
    (Washington, D.C.: Feb. 9, 2005) ("GAO 2005 E-Rate Report"); GAO,
    Schools and Libraries Program: Update on State-Level Funding by
    Category of Service, GAO-01-673 (Washington, D.C.: May 11, 2001);
    GAO, Schools and Libraries Program: Application and Invoice Review
    Procedures Need Strengthening, GAO-01-105 (Washington, D.C.: Dec.
    15, 2000); GAO, Schools and Libraries Program: Actions Taken to
    Improve Operational Procedures Prior to Committing Funds,
    GAO/RCED-99-51 (Washington, D.C.: Mar. 5, 1999); GAO,
    Telecommunications and Information Technology: Federal Programs That
    Can Be Used to Fund Technology for Schools and Libraries,
    GAO/T-HEHS-98-246 (Washington, D.C.: Sept., 16, 1998); GAO, Schools
    and Libraries Corporation: Actions Needed to Strengthen Program
    Integrity Operations Before Committing Funds, GAO/T-RCED-98-243
    (Washington, D.C.: Jul. 16, 1998); GAO, Telecommunications: Court
    Challenges to FCC's Universal Service Order and Federal Support for
    Telecommunications for Schools and Libraries, GAO/RCED/OGC-98-172R
    (Washington, D.C.: May 7, 1998); GAO, Telecommunications: FCC Lacked
    Authority to Create Corporations to Administer Universal Service
    Programs, GAO/T-RCED/OGC-98-84 (Washington, D.C.: Mar. 31, 1998). In
    addition, the GAO touched on the E-rate program in GAO,
    Telecommunications Technology: Federal Funding for Schools and
    Libraries, GAO/HEHS-99-133 (Washington, D.C.: Aug. 20, 1999). *See
    also* GAO, Telecommunications: Application of the Antideficiency Act
    and Other Fiscal Controls to FCC's E-Rate Program, Testimony before
    the Committee on Commerce, Science, and Transportation, U.S. Senate,
    GAO-05-546T (Washington D.C., Apr. 11, 2005).

[^19]: Congressional Budget Office, "Financing Universal Telephone
    Service" (Mar. 2005).

[^20]: We stress that through this proceeding we do *not* intend to
    evaluate the underlying USF policy considerations. Instead, we plan
    to focus our attention and efforts on the mechanics of the
    program---that is, how well the Commission performs its duties and
    what steps the Commission can take to ensure that the program runs
    well.

[^21]: Under section 54.702(d), USAC "may advocate positions before the
    Commission and its staff only on administrative matters relating to
    the universal service support mechanisms." 47 C.F.R. § 54.702(d).

[^22]: 47 C.F.R. § 54.701(a); *see* *USAC Appointment Order*, 13 FCC Rcd
    at 25069-70, ¶ 20.

[^23]: 47 C.F.R. 54.701(a); *USAC Appointment Order*, 13 FCC Rcd at
    25069-70, ¶ 20. *See* H.R. Conf. Rep. 105-504 (stating Congressional
    expectation that the Commission would comply with the reporting
    requirements of an unadopted Senate bill (S. 1768), directing the
    Commission to submit a report to Congress proposing a revised
    structure for the USF and providing that "\[T\]he revised structure
    shall consist of a single entity.")

[^24]: 47 C.F.R. § 54.702(a).

[^25]: *See Changes to the Board of Directors to the National Exchange
    Carrier Association, Inc., Federal-State Joint Board on Universal
    Service, Schools and Libraries Universal Service Support Mechanism*,
    CC Docket Nos. 97-21, 96-45, 02-6, Order on Reconsideration and
    Fourth Report and Order, 19 FCC Rcd 15252, 15259, ¶ 22 (2004)
    (stating that if USAC allows funds to be disbursed in violation of
    the Act or a rule, it is within its administration and disbursement
    duties to seek recoupment in the first instance); *Changes to the
    Board of Directors to the National Exchange Carrier Association,
    Inc., Federal-State Joint Board on Universal Service*, CC Docket
    Nos. 97-21, 96-45, Order, 15 FCC Rcd 22975, 22979-981, ¶¶ 9-15
    (2000); *Changes to the Board of Directors to the National Exchange
    Carrier Association, Inc., Federal-State Joint Board on Universal
    Service*, CC Docket Nos. 97-21, 96-45, Order, FCC 99-291 (rel. Oct.
    8, 1999).

[^26]: *See* 47 C.F.R. §§ 54.702(b)-(m), 54.711, 54.715.

[^27]: 47 C.F.R. § 54.719.

[^28]: *See* 47 C.F.R. § 54.702(n); *Application of Generally Accepted
    Accounting Principles for Federal Agencies and Generally Accepted
    Government Auditing Standards to the Universal Service Fund*, CC
    Docket No. 96-45, Order, 18 FCC Rcd 19911, 19912-13, ¶¶ 4-6 (2003)
    ("*GovGAAP Order*").

[^29]: *GovGAAP Order*, 18 FCC Rcd at 19912-13, ¶¶ 4-6.

[^30]: 47 C.F.R. §§ 54.702(c)-(d).

[^31]: 47 C.F.R. § 54.701(a).

[^32]: *USAC Appointment Order*, 13 FCC Rcd at 25069-70, ¶ 20 (stating
    that we "adopt the proposal set forth in the Commission's Report to
    Congress to review USAC's performance after one year to ensure that
    it is administering universal service in an efficient, effective,
    and competitively neutral manner.") *See* GAO 2005 E-Rate Report at
    12, note 21.

[^33]: *See* GAO 2005 E-Rate Report at 11-18 (criticizing E-rate program
    structure and the extent to which the Commission has delegated
    program functions to USAC).

[^34]: Commenters advocating competitive procurement should also discuss
    the minimum qualifications for potential bidders and the advantages
    or disadvantages of including a renewal provision in the contract.

[^35]: We note that in the *USAC Appointment Order*, the Commission
    found that "\[p\]roviding permanence to the revised structure will
    ensure USAC's ability to continue to attract and maintain qualified
    personnel and to prevent unnecessary disruption to contributors and
    beneficiaries." *USAC Appointment Order*, 13 FCC Rcd at 25069-70, ¶
    20.

[^36]: The FAR is Chapter 48 of the C.F.R. The FAR governs the
    contractual acquisition of supplies and services for use by the
    federal government. This does not suggest that FAR applies as a
    matter of law; we seek comment on whether we could apply rules based
    on FAR as a matter of policy in arrangements between the Commission
    and USAC.

[^37]: 47 U.S.C. § 251(e). *See also Numbering Resource Optimization*,
    CC Docket No. 99-200, Report and Order and Further Notice of
    Proposed Rulemaking, 15 FCC Rcd 7574, 7639-643, ¶¶ 148-155
    (2000)("*Numbering First Report and Order*").

[^38]: *Numbering First Report and Order*, 15 FCC Rcd at 7640-41, ¶ 150.

[^39]: 47 C.F.R. § 54.701(b).

[^40]: *USAC Appointment Order*, 13 FCC Rcd at 25069-70, ¶ 20.

[^41]: 47 C.F.R. § 54.702(a).

[^42]: 47 C.F.R. § 54.701(b).

[^43]: 47 C.F.R. § 54.705.

[^44]: USAC has ethics standards and procedures in the USAC employee
    handbook.

[^45]: We note that USAC provides support to law enforcement agencies
    and special procedures pertaining to investigations may be
    necessary.

[^46]: Section 54.703(e) provides that "\[a\]ll meetings of the
    Administrator's Board of Directors shall be open to the public and
    held in Washington, D.C." 47 C.F.R. § 54.703(e).

[^47]: 47 C.F.R. § 54.703(e).

[^48]: 47 C.F.R. § 54.709(a)(3).

[^49]: *Id.*

[^50]: *See, e.g.*, "*Proposed First Quarter 2005 Universal Service
    Contribution Factor*," CC Docket No. 96-45, Public Notice, 19 FCC
    Rcd 24045 (2004).

[^51]: *See* 47 C.F.R § 54.709(a)(3).

[^52]: *See North American Telephone Network*, *LLC*, Forfeiture Order,
    16 FCC Rcd 4836, 4838, ¶ 8 & n.12 (2001); *Intellicall Operator
    Services*, Forfeiture Order, 15 FCC Rcd 21771, 21772, ¶ 6 & n.8
    (2000).

[^53]: 47 C.F.R. § 54.709(c).

[^54]: *See Schools and Libraries Universal Service Support Mechanism,*
    CC Docket No. 02-6, Fifth Report and Order and Order, 19 FCC Rcd
    15808, 15835, ¶ 80 (2004) ("*Schools and Libraries Fifth Report and
    Order*").

[^55]: *Schools and Libraries Fifth Report and Order*, 19 FCC Rcd at
    15834-35, ¶ 79.

[^56]: 47 C.F.R. § 54.702(c).

[^57]: To the extent that USAC's administrative procedures contain any
    confidential or sensitive information, USAC should seek confidential
    treatment pursuant to the Commission's rules.

[^58]: *See* GAO 2005 E-Rate Report at 27-30 (observing that some USAC
    procedures arguably rise to the level of policy decisions and that
    enforcement problems could arise when audits uncover violations of
    USAC procedures).

[^59]: *See, e.g*., GAO, Continuity of Operations Improved Planning
    Needed to Ensure Delivery of Essential Government Services,
    GAO-04-160 (Washington, D.C. Feb. 27, 2004).

[^60]: *See* GAO 2005 E-Rate Report at 19-26 (criticizing the Commission
    for failing to develop useful performance goals and measures for the
    E-rate program).

[^61]: 47 U.S.C. § 254(c).

[^62]: *See* Memorandum from Clay Johnson III, Deputy Director for
    Management, Office of Management and Budget, to Program Associate
    Directors, Budget Data Request No. 04-31 (Mar. 22, 2003) ("*OMB PART
    Guidance Memorandum"*);
    <http://www.whitehouse.gov/omb/part/index.html>. The most current
    PART guidance, referred to herein as "2005 PART Guidance," is:
    http://www.whitehouse.gov/omb/part/fy2005/2005_guidance.doc.

[^63]: *See* 2005 PART Guidance at 9.

[^64]: The 2005 PART Guidance states that "\[m\]eaningful efficiency
    measures consider the benefit to the customer and serve as
    indicators of how well the program performs." *Id.* at 10.

[^65]: *Id.* at 8-9.

[^66]: *See, e.g.*, Government Accountability Office, *Effectively
    Implementing the Government Performance and Results Act* (Jun.
    1996).

[^67]: *See* Office of Management and Budget, Program Assessment Rating
    Tool: Schools and Libraries -- Universal Service Fund, §§ 2.1-2.4
    (2003) ("*FCC E-Rate PART Report"*). The connectivity measurement
    was of limited usefulness; however, because it did not apply to all
    program participants, such as libraries and private schools. In
    addition, once a significant number of public schools achieved
    Internet connectivity, the value of using this measurement to assess
    the on-going impact of the E-rate program diminished. As a result,
    the Commission stopped measuring the impact of the E-rate program in
    this way. *See* GAO 2005 E-Rate Report at 20-22.

[^68]: *FCC E-Rate PART Report* at § 1.1.

[^69]: *See* GAO 2005 E-Rate Report at 20-22.

[^70]: 47 U.S.C. § 254(c).

[^71]: The National Educational Technology Trends Study will examine the
    implementation of the EETT program. For a description of the issues,
    *see* <http://ctl.sri.com/projects/displayProject.jsp?Nick=netts.>

[^72]: While there is no other federal program that provides similar
    discounted access to advanced telecommunications and information
    services for schools and libraries, other programs provide funding
    for equipment and/or training that builds upon availability of
    advanced telecommunications services. Thirteen states and, possibly,
    a few local governments, as well as private organizations, also fund
    similar or complementary efforts to provide information technology
    hardware and software once access to advanced telecommunications and
    information services is established through the E-rate program.
    *See* GAO, Federal and State Universal Service Programs and
    Challenges to Funding (GAO-02-187) (Feb. 2002). This report is found
    at: <http://www.gao.gov/new.items/d02187.pdf>.

[^73]: These programs are codified in Part 54 of the Commission's rules.
    The High Cost program is in Subpart D, the Low Income program is in
    Subpart E, the Schools and Libraries program is in Subpart F, and
    the Rural Health Care program is in Subpart G.

[^74]: 47 U.S.C. § 254(b)(3).

[^75]: 47 C.F.R. § 54.702(b).

[^76]: *See* *USAC Appointment Order*, 13 FCC Rcd at 25069-70, ¶ 20.

[^77]: As a matter of practice, USAC has adopted a number of performance
    measures for its own managerial purposes, and it regularly prepares
    reports that are disclosed publicly at quarterly meetings of the
    board of directors.

[^78]: 47 C.F.R. § 54.505. To promote greater transparency in what is
    eligible for support under the schools and libraries support
    mechanism, on December 23, 2003, the Commission adopted a rule that
    formalizes the process for updating the eligible services list,
    beginning with Funding Year 2005. Under this rule, USAC is required
    to submit annually a draft of its updated eligible services list for
    the following year. *See* 47 C.F.R. § 54.522. Pursuant to section
    54.522 of the Commission's rules, the Commission released a Public
    Notice on August 13, 2004, seeking comment on USAC\'s proposed
    eligible services list for Funding Year 2005. *Pleading Cycle
    Established For Eligible Services List For Universal Service
    Mechanism For Schools And Libraries*, Public Notice, CC Docket No.
    02-6, 19 FCC Rcd 16013 (2004). After review of the record, the
    Commission released the final Funding Year 2005 Eligible Services
    List for Funding Year 2005. *See Release of Funding Year 2005
    Eligible Services List for Schools and Libraries Universal Service
    Support Mechanism*, Public Notice, CC Docket No. 02-6, 19 FCC Rcd
    20221 (2004) ("*Eligible Services PN*").

[^79]: 47 C.F.R. § 54.507(a).

[^80]: *See, e.g*., Letter from George McDonald, Vice President, Schools
    and Libraries Division, USAC to Lisa Gelb, Deputy Chief, Wireline
    Competition Bureau, FCC (Apr. 15, 2005) (stating that USAC's
    estimate of demand for Schools and Libraries support mechanism for
    funding year 2005 is \$3.65 billion).

[^81]: 47 C.F.R. § 54.505(b).

[^82]: 47 C.F.R. § 54.505(c).

[^83]: 47 U.S.C. § 254(h)(1)(B); 47 C.F.R. § 54.504. Applicants seeking
    discounts only for telecommunications services do not need to
    develop a technology plan. *See Request for Review of the Decision
    of the Universal Service Administrator by United Talmudical Academy,
    Federal-State Joint Board on Universal Service, Changes to the Board
    of Directors of the National Exchange Carrier Association*, CC
    Docket Nos. 96-45, 97-21, Order, 16 FCC Rcd 18812, 18816, ¶ 11
    (2001). In August, 2004, the Commission revised its rules concerning
    technology plans. *See Schools and Libraries Fifth Report and
    Order,* 19 FCC Rcd at 15826-830, ¶¶ 51-63.

[^84]: If the technology plan has not been approved when the applicant
    files the Form 470, the applicant must certify that it understands
    that the technology plan must be approved prior to commencement of
    service. 47 C.F.R. § 54.504(b)(2)(vii).

[^85]: 47 C.F.R. § 54.504(b)(4).

[^86]: 47 C.F.R. §§ 54.504, 54.511(a).

[^87]: This form is to request discounts on those services and it
    contains the discount calculation worksheet and the discount funding
    request. The Form 471 must be filed each time a school or library
    orders telecommunications services, Internet access, or internal
    connections.

[^88]: In the Form 486, the applicant must certify that the technology
    plans on which purchases were based were approved before receiving
    service. *See Schools and Libraries Fifth Report and Order*, 19 FCC
    Rcd at 15827-28, ¶ 56.

[^89]: *See* 47 C.F.R. § 54.514 (allowing billed entity to choose
    payment method).

[^90]: The Commission has previously sought comment on ways to
    streamline the application process. *See, e.g., Third Report and
    Order*, 18 FCC Rcd at 26938-39, ¶¶ 63-66; *Schools and Libraries
    Universal Service Support Mechanism*, CC Docket No. 02-6, Notice of
    Proposed Rulemaking and Order, 17 FCC Rcd 1914, 1920-1928, ¶¶ 12-32
    (2002). We encourage parties who have filed comments in response to
    E-rate Notices of Proposed Rulemaking to refresh their comments on
    these issues in this proceeding.

[^91]: *See* "*Eligible Services PN.*"

[^92]: *See* Response to Task Force at 3.

[^93]: *See* *id.* at 2. The Task Force recommended reviewing the E-rate
    technology planning process in accordance with the technology goals
    and planning requirements of the U.S. Department of Education and
    the U.S. Institute for Museum and Library Services. *Id.*

[^94]: If the BEAR Form cannot be processed because the service provider
    is no longer in business, USAC permits the applicant to obtain BEAR
    payments through a substitute service provider, known as a Good
    Samaritan. The Good Samaritan policy is a procedure that USAC has
    implemented to address specific situations in which the services
    have been rendered and paid for by the applicant at the undiscounted
    rate and the original service provider is out of business or in
    bankruptcy. The Good Samaritan obtains the BEAR payment from USAC
    and passes the reimbursement to the applicant. The Good Samaritan
    does not receive any payment for its services. *See BellSouth
    Corporation Petition for Clarification of Request for Immediate
    Relief Filed by the State of Tennessee, Federal-State Joint Board on
    Universal Service*, CC Docket No. 96-45, Order, 18 FCC Rcd 24688,
    24689 & note 7 (2003).

[^95]: In addition to the Schools and Libraries forms discussed above,
    service providers must submit forms for reimbursement: the Form 473,
    Annual Service Provider Certification Form, which confirms that the
    service provider's invoice forms are completed in accordance with
    Commission rules and the Form 474, Service Provider Invoice Form,
    which informs the fund administrator of the amount of discounts for
    which the service provider seeks universal service support. The
    service provider must have performed the service and submitted a
    discounted bill to the applicant prior to submitting the Service
    Provider Invoice Form. In addition, the applicant must have already
    filed a Form 486, Receipt of Services Confirmation Form.

[^96]: *See* "*Wireline Competition Bureau Seeks Comment on Proposed
    Revisions to FCC Forms 472, 473, and 474*," CC Docket 02-6, Public
    Notice, 20 FCC Rcd 4172 (2005).

[^97]: Instructions for Completing the Schools and Libraries Universal
    Service Services Ordered and Certification Form (FCC Form 471) p. 16
    (Nov. 2004).

[^98]: *See* Response to Task Force at 6*.*

[^99]: In fiscal year 1999, this mechanism provided approximately \$1.7
    billion; in 2000, \$1.9 billion; in 2001, \$2.6 billion; in 2002,
    \$2.8 billion; in 2003, \$3.3 billion. *See* CBO, "Financing
    Universal Telephone Service" (Mar. 2005) at table 1.1.

[^100]: 47 U.S.C. § 214(e).

[^101]: 47 U.S.C. § 214 (e)(1)(A).

[^102]: 47 U.S.C. § 214(e)(1)(B).

[^103]: High cost loop support provides support for the "last mile" of
    connection for rural companies in service areas where the reported
    average cost per loop exceeds 115 percent of the national average
    cost per line. *See* 47 C.F.R. §§ 36.601-36.631. High cost loop
    support for non-rural carriers is "interim hold harmless support."
    Interim hold harmless support is the greater of the amount that a
    carrier would receive under the embedded mechanism or the amount
    provided in the forward looking mechanism

[^104]: Local Switching Support provides interstate assistance designed
    to reduce the high fixed switching costs for companies serving fewer
    than 50,000 lines.

[^105]: Interstate Access Support helps to offset interstate access
    charges for price cap carriers.

[^106]: Any carrier that does not meet the definition of a rural carrier
    is a non-rural carrier. Section 3 of the Act defines a rural
    carrier. *See* 47 U.S.C. § 153(37).

[^107]: High cost loop support also includes two subcategories: safety
    valve support and safety net additive support. *See* 47 C.F.R. §§
    36.605, 54.305. In addition, High Cost support included Long Term
    support ("LTS"), until July 1, 2004, after which LTS was
    incorporated into ICLS. *See Multi-Association Group (MAG) Plan for
    Regulation of Interstate Services of Non-Price Cap Incumbent Local
    Exchange Carriers and Interexchange Carriers*, CC Docket No. 00-256,
    *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Report and Order and Second Further Notice of Proposed
    Rulemaking, 19 FCC Rcd 4122, 4150, ¶ 61 (2004).

[^108]: In most cases, this will be a competitive ETC, not the incumbent
    LEC.

[^109]: This form also requires carriers to provide specific remittance
    information so that USAC will know where to send payments.

[^110]: All carriers providing interstate telecommunications services
    file these forms, not just those seeking High Cost support. The
    499-Q is due on February 1, May 1, August 1, and November 1. The
    499-A is due on April 1.

[^111]: *See* http://www.universalservice.org/hc/forms.

[^112]: 47 C.F.R. § 36.611.

[^113]: Line count data must be submitted as follows: July 31 filing for
    line counts as of December 31 of the previous year; September 30
    filing for line counts as of March 30; December 30 filing for line
    counts as of June 30; March 30 filing for line counts as of
    September 30 of the previous year.

[^114]: 47 C.F.R. § 36.612(a). If these carriers have a competitive ETC
    serving in their study areas, the rural carriers must file line
    counts on a quarterly basis. *Id.*

[^115]: In the context of annual access tariff filings, the Commission
    found that NECA failed to provide company-specific Part 32
    accounting information specified in a Designation Order. *See July
    1, 2004 Annual Access Charge Tariff Filings*, WC Docket No. 04-373,
    Memorandum Opinion and Order, 19 FCC Rcd 23877 (2004) ("*2004 Annual
    Access Order*"). In the *2004 Annual Access Order*, the Commission
    observed that NECA had asserted that the requested disaggregated
    accounting data were not available because NECA did not maintain
    these data itself but only stored certain information in its
    computer systems for a limited period of time. *2004 Annual Access
    Order*, 19 FCC Rcd at 23883-84, ¶ 17.

[^116]: NECA collects line count and cost data from incumbent LECs; USAC
    collects data from competitive LECs and other data for
    rate-of-return carriers. *See* 47 C.F.R. §§ 36.611, 36.612, 54.307,
    54.903. In 1999, USAC proposed, *inter alia*, that the Commission
    assign USAC the Part 36 data collection function, which would enable
    USAC to exercise appropriate oversight responsibility. *See* Letter
    from D. Scott Barash, Vice President and General Counsel, USAC to
    Irene Flannery, Chief, Accounting Policy Division, Common Carrier
    Bureau, FCC (Dec. 10, 1999). We seek comment on USAC's proposal.

[^117]: Under section 36.612, 47 C.F.R. § 36.612, rural High Cost
    companies are allowed to make up to three update filings to NECA
    each year. Whereas the initial filing reports audited account
    balances for the previous calendar year, these update filings
    reflect unaudited account balances on a rolling year basis (*i.e*.,
    treating March 31, June 30, and September 30 respectively as the end
    of the year). These update filings are voluntary. In theory,
    companies can file such updates only to the extent that the filing
    improves their support. In addition, NECA implements the update
    filings retroactively. The initial filing due to NECA on July 31
    each year is mandatory and is the basis for providing support to
    companies with higher than average loop costs. The high cost fund is
    capped; therefore, companies that improve their support through
    update filings are doing so at the expense of other companies that
    do not file updates. The additional filings also require NECA to
    recalculate the National Average Cost per Loop and resulting support
    flows to all carriers each quarter.

[^118]: A study area is a geographic segment of an incumbent LEC's
    telephone operations and generally corresponds to the entire service
    territory within a state. The Commission froze study area boundaries
    effective November 15, 1984. In some cases, a holding company may
    have multiple study areas within a state if it had the multiple
    study areas before the effective date of the freeze or if it
    acquired a new study area.

[^119]: 47 C.F.R. § 36.611(h).

[^120]: 47 C.F.R. § 36.611.

[^121]: 47 C.F.R. § 36.612(a). This quarterly reporting requirement is
    to prevent overpayment of support if an incumbent carrier's market
    share has decreased due to competition.

[^122]: Cost companies receive pool revenues from NECA revenue pools for
    interstate access services based on their actual interstate
    investment and expenses, calculated each year from cost studies. 47
    C.F.R. § 69.605. The pool revenues of average schedule companies are
    determined on the basis of a series of formulas. 47 C.F.R. § 69.606.
    For qualifying small companies, the average schedule option avoids
    the expense of preparing cost studies.

[^123]: 47 C.F.R. § 54.301.

[^124]: 47 C.F.R. § 54.301(b).

[^125]: Price cap regulation is a method of regulation of dominant
    carriers, *i.e*., carriers with power to control prices, provided in
    sections 61.41 through 61.49 of the Commission's rules.

[^126]: 47 C.F.R. § 54.802. Price cap LECs and competitive LECs serving
    lines in the service area of a price cap LEC must file a
    certification with the Commission and USAC stating that all
    interstate access universal service support will be used for the
    provision, maintenance, and upgrading of facilities and services for
    which the support is intended. The certificate, which may be in the
    form of a letter, must be filed annually. 47 C.F.R. § 54.809.

[^127]: The March 30 filing must have the number of lines served for
    October through December of the previous year. The June 30 filing
    must show the number of lines served for January through March of
    the current year. The September 30 filing must have the number of
    lines served for April through June of the current year. The
    December 30 filing has the number of lines served for July through
    September of the current year.

[^128]: The high cost and low income programs generally do not have the
    number and type of forms used in the schools and libraries and rural
    health care programs. *See* Worksheets LSSc and LSSa, and FCC Forms
    507, 508, and 508 (high cost); FCC Form 497 (low income); FCC Forms
    465, 466, 466-A, and 467 (rural health care); FCC Forms 470, 471,
    479, 486, 500, and 472 BEAR (schools and libraries). These forms are
    available on USAC's internet site. *See*
    [http://www.universalservice.org/forms/.]{.underline}

[^129]: In fiscal year 1999, this mechanism provided approximately \$500
    million; in 2000, \$500 million; in 2001, \$600 million; in 2002,
    \$700 million; in 2003, \$700 million. *See* CBO, "Financing
    Universal Telephone Service" (Mar. 2005) at table 1.1.

[^130]: 47 U.S.C. § 254(e).

[^131]: *Lifeline/Link-Up Report and Order*, 19 FCC Rcd 8302, ¶ 1.

[^132]: Eligible consumers establish their qualification for
    Lifeline/Link-Up through certification and verification. States with
    their own Lifeline/Link-Up program have their own certification
    requirements. Some states have automatic enrollment. Federal default
    states, which are states or territories that have elected to use the
    federal criteria as their default standard, require an individual to
    self-certify to his or her carrier, under penalty of perjury, that
    he or she is enrolled in a qualifying assistance program. 47 C.F.R.
    § 54.409(b). Lifeline subscribers in default states are also
    required to notify their carriers when they cease to participate in
    a qualifying program. In the *Lifeline/Link-Up Report and Order*,
    the Commission imposed a requirement that all states, including
    federal default states, adopt certification requirements to document
    income-based eligibility for Lifeline/Link-Up enrollment.
    *Lifeline/Link-Up Report and Order*, 19 FCC Rcd at 8319-320, ¶ 28.
    Federal default states must also have an officer of the ETC certify,
    under penalty of perjury, that the ETC has procedures in place to
    review income documentation and that the presented documentation
    showed that the consumer's income was at or below 135 percent of the
    Federal Poverty Guidelines. *Id.* at 8321, ¶ 31. The Commission also
    adopted a verification requirement for all states, including federal
    default states. *Id.* at 8322, ¶ 33. ETCs must, for federal default
    states, verify annually the eligibility of a statistically valid
    sample of their Lifeline subscribers. *Id.* at 8323, ¶ 35.

[^133]: 47 C.F.R. § 54.401(a)(2).

[^134]: 47 C.F.R. § 54.403(a)(4).

[^135]: 47 C.F.R. § 54.411(a)(1).

[^136]: 47 C.F.R. § 54.411(a)(3).

[^137]: We have already sought comment on increasing participation in
    the Lifeline/Link-Up programs. *See Lifeline/Link-Up Report and
    Order*, 19 FCC Rcd at 8331-33, ¶¶ 56-58. We encourage parties to
    refresh the record in this proceeding.

[^138]: The high cost and low income programs generally do not have the
    number and type of forms used in the schools and libraries and rural
    health care programs. *See* Worksheets LSSc and LSSa, and FCC Forms
    507, 508, and 508 (high cost); FCC Form 497 (low income); FCC Forms
    465, 466, 466-A, and 467 (rural health care); FCC Forms 470, 471,
    479, 486, 500, and 472 BEAR (schools and libraries). These forms are
    available on USAC's internet site. *See*
    [http://www.universalservice.org/forms/]{.underline}.

[^139]: Under the Rural Health Care support mechanism, universal service
    support is provided for Internet access, as long as it is reasonably
    related to the health care needs of the facility and is the most
    cost-effective method of meeting those needs, but it does not
    provide support for the purchase of internal connections, computer
    equipment, or other telecommunications equipment.

[^140]: In fiscal year 1998, this mechanism provided approximately \$3.3
    million; in 1999, \$4.3 million; in 2000, \$10.3 million; in 2001,
    \$18.6 million; in 2002, \$21.3 million. As of May 12, 2005,
    approximately \$.9 million more in disbursements are expected for
    fiscal year 2002. Disbursements for fiscal year 2003 are expected to
    reach \$24.4 million. USAC has just begun disbursing funds for
    fiscal year 2004.

[^141]: 47 U.S.C. § 254(h)(1)(A).

[^142]: 47 C.F.R. § 54.623(a).

[^143]: We note that we have previously sought comment on ways to
    streamline the application process. *See* *Rural Health Care Support
    Mechanism*, WC Docket 02-60, Report and Order, Order on
    Reconsideration, and Further Notice of Proposed Rulemaking, 18 FCC
    Rcd 24546, 24580, ¶ 69 (2003).

[^144]: To date, discounts requested under the Rural Health Care program
    have never exceeded the annual cap.

[^145]: The high cost and low income programs generally do not have the
    number and type of forms used in the schools and libraries and rural
    health care programs. *See* Worksheets LSSc and LSSa, and FCC Forms
    507, 508, and 508 (high cost); FCC Form 497 (low income); FCC Forms
    465, 466, 466-A, and 467 (rural health care); FCC Forms 470, 471,
    479, 486, 500, and 472 BEAR (schools and libraries). These forms are
    available on USAC's internet site. *See*
    [http://www.universalservice.org/forms/]{.underline}.

[^146]: *See Schools and Libraries Universal Service Support Mechanism*,
    CC Docket, No. 02-6, Third Report and Order and Second Further
    Notice of Proposed Rulemaking, 18 FCC Rcd 26912, 26933-935, ¶¶ 52-58
    (2003); "*Carryover of Unused Funds for Funding Year 2004*," Public
    Notice, CC Docket No. 02-6, 19 FCC Rcd 20420 (WCB, 2004); 47 C.F.R.
    § 54.507(a).

[^147]: *See supra* note 99.

[^148]: The disbursement, which is for High Cost services provided in
    the past month, is made on the next to the last day of the month.

[^149]: Under section 54.301(b), each incumbent LEC that has been
    designated an ETC and that serves a study area with 50,000 or fewer
    lines shall provide USAC by October 1, for each study area, the
    projected total unseparated dollar amount assigned to certain
    accounts listed in section 54.301(b) for the following calendar
    year. 47 C.F.R. § 54.301(b). Under section 54.301(e), each incumbent
    LEC that has been designated an ETC and that serves a study area
    with 50,000 or fewer lines shall, for each study area, provide USAC
    with the historical total unseparated dollar amount assigned to
    those accounts for each calendar year, no later than 12 months after
    the end of the calendar year. 47 C.F.R. § 54.301(e).

[^150]: Under section 54.903(a)(3), each rate-of-return carrier submits
    to USAC on March 31 projected data necessary to calculate
    prospective Interstate Common Line Support, including common line
    cost and revenue data for each study area for the upcoming funding
    year. 47 C.F.R. § 54.903(a)(3). Under section 54.903(4), carriers
    submit to USAC, on December 31 of each year, the data necessary to
    calculate the Interstate Common Line Support, including common line
    cost and revenue data for the prior year. 47 C.F.R. § 54.903(a)(4).

[^151]: In some cases, because of the true-up mechanism, the opposite
    result occurs and the carrier is under-reimbursed until the true-up
    is completed.

[^152]: The Commission also has an open rulemaking proceeding on
    extending Enhanced Lifeline and Link-Up to areas near reservations
    in order to target such assistance to the most underserved areas of
    the Nation. *See Federal-State Joint Board on Universal Service;
    Promoting Deployment and Subscribership in Unserved and Underserved
    Areas, Including Tribal and Insular Areas,* CC Docket No. 96-45,
    Twenty-Fifth Order on Reconsideration, Report and Order, Order, and
    Further Notice of Proposed Rulemaking, 18 FCC Rcd 10958 (2003).

[^153]: *NECA Changes Order*, 12 FCC Rcd at 18442, ¶ 80.

[^154]: *See Federal-State Joint Board on Universal Service, Petition
    for Reconsideration filed by AT&T*, Report and Order and Order on
    Reconsideration, 16 FCC Rcd 5748 (2001). *See FCC Form 499-Q
    Telecommunications Reporting Worksheet \-- Quarterly Filing for
    Universal Service Contributors*,
    <http://www.fcc.gov/Forms/Form499-Q/499q.pdf> (April 2003)*.*

[^155]: *See Federal-State Joint Board on Universal Service, 1998
    Biennial Regulatory Review − Streamlined Contributor Reporting
    Requirements Associated with Administration of Telecommunications
    Relay Services, North American Numbering Plan, Local Number
    Portability, and Universal Service Support Mechanisms*, Report and
    Order and Second Further Notice of Proposed Rulemaking, 17 FCC Rcd
    24952 (2002).

[^156]: *See* 47 C.F.R. § 54.709(a).

[^157]: 47 C.F.R. § 54.711(a) ("The Commission shall announce by Public
    Notice published in the Federal Register and on its website the
    manner of payment and the dates by which payments must be made.")

[^158]: 47 C.F.R. § 54.713. *See also NECA Changes Order,* 12 FCC Rcd at
    18442 n.165 (citing 47 U.S.C. §§ 206-209, 312, 403, 503).

[^159]: *Schools and Libraries Fifth Report and Order*, 19 FCC Rcd
    15808.

[^160]: 47 C.F.R. § 54.516. *See* *Schools and Libraries Fifth Report
    and Order*, 19 FCC Rcd at 15813, ¶ 13.

[^161]: *Schools and Libraries Fifth Report and Order*, 19 FCC Rcd at
    15813, ¶ 13.

[^162]: *Id*. As in previous orders, we use the term "improperly
    disbursed funds" to refer to an amount of money disbursed
    inconsistently with the statute or Commission rules. This amount may
    be all or part of a disbursement, depending upon the circumstances.

[^163]: *See, e.g.,* Letter from Maureen F. DelDuca, Deputy Chief,
    Investigations and Hearings Division, Enforcement Bureau, Federal
    Communications Commission, to Duane Maynard, *Notice of Debarment*,
    18 FCC Rcd 26729 (2003).

[^164]: *See* Letter from Maureen F. DelDuca, Deputy Chief,
    Investigations and Hearings Division, Enforcement Bureau, Federal
    Communications Commission, to John Angelides, *Notice of Debarment*,
    18 FCC Rcd 26722 (2003); Letter from William H. Davenport, Chief,
    Investigations and Hearings Division, Enforcement Bureau, Federal
    Communications Commission, to John Dotson, *Notice of Debarment*, 19
    FCC Rcd 23636 (2004); Letter from William H. Davenport, Chief,
    Investigations and Hearings Division, Enforcement Bureau, Federal
    Communications Commission, to Haider Bokhari, *Notice of Suspension
    and of Proposed Debarment*, DA 05-421 (rel. Feb. 16, 2005) ("Haider
    Bokhari Notice of Suspension"); Letter from William H. Davenport,
    Chief, Investigations and Hearings Division, Enforcement Bureau,
    Federal Communications Commission, to Qasim Bokhari, *Notice of
    Suspension and of Proposed Debarment*, DA 05-422 (rel. Feb. 16,
    2005) ("Qasim Bokhari Notice of Suspension").

[^165]: *See* Haider Bokhari Notice of Suspension.; Qasir Bokhari Notice
    of Suspension.

[^166]: *See* Letter from Maureen F. DelDuca, Deputy Chief,
    Investigations and Hearings Division, Enforcement Bureau, Federal
    Communications Commission, to Oscar Alvarez, *Notice of Debarment*,
    18 FCC Rcd 26716 (2003).

[^167]: *See* *Federal Communications Commission, Office of the
    Inspector General Semiannual Report to Congress, October 1,
    2003-March 31, 2004*; *Federal Communications Commission, Office of
    the Inspector General Semiannual Report to Congress, April
    1-September 30, 2003*; *See also Problems with the E-Rate Program:
    Waste, Fraud, and Abuse Concerns in the Wiring of our Nation's
    Schools to the Internet, Part 1: Hearing Before the Subcommittee on
    Oversight and Investigations of the House Committee on Energy and
    Commerce*, 108^th^ Cong. 49 (2004) (statement of H. Walker Feaster
    III, Inspector General, Federal Communications Commission). ). OIG
    audit reports are available on the Commission's website at
    [http://www.fcc.gov/oig/oigreportsaudit/html]{.underline}.

[^168]: In addition to detecting specific instances of waste, fraud, and
    abuse, the results of a targeted audit requirement may be used to
    inform the Commission about the overall state of compliance
    throughout the E-rate program community. By providing us with facts
    and information concerning compliance with our rules, these audits
    can assist the Commission in making policy determinations, such as
    whether rule changes are necessary and whether USF moneys are being
    used for their intended purpose. In addition, because these audits
    will be evaluating compliance with our rules, they may be used as a
    basis for seeking recovery of any improperly disbursed funds.

[^169]: 47 C.F.R. § 54.707.

[^170]: *See* Office of Management and Budget (OMB) Circular A-133,
    "Audits of States, Local Governments and Non-Profit Organizations."
    The OMB implementing requirements specify in detail the
    responsibilities of audited entities to (1) maintain internal
    controls over their operations that provide reasonable assurance of
    compliance with applicable laws and rules; (2) comply with laws,
    regulations, and provisions of contracts or grant agreements related
    to the program; (3) ensure audits are properly reformed and
    submitted when due; and (4) take follow-up and corrective action
    based on audit findings (*e.g*., prepare a summary of audit findings
    and a corrective action plan). *See id.* at § .300. In particular,
    the OMB's implementing guidance applies sanctions to parties who
    fail to comply with the audit requirements, *e.g*., withholding some
    or all of the moneys committed until the audit is completed. *Id*.
    at § .225.

[^171]: We note that this does not suggest that the Single Audit Act
    applies to the USF.

[^172]: *Schools and Libraries Fifth Report and Order*, 19 FCC Rcd at
    15823-24, ¶ 47.

[^173]: *Id.*

[^174]: *Id.*

[^175]: *Id.* at 15823-26, ¶¶ 47-50.

[^176]: *See* 47 C.F.R. § 54.619(a)(1).

[^177]: *Schools and Libraries Fifth Report and Order*, 19 FCC Rcd at
    15825-26, ¶ 50.

[^178]: 47 C.F.R. § 54.619(c).

[^179]: *Schools and Libraries Fifth Report and Order*, 19 FCC Rcd at
    15825-26, ¶ 50

[^180]: *Id*. at 15818-19, ¶ 32.

[^181]: *Id*.

[^182]: *Id*. at 15819, ¶ 33.

[^183]: *Id*. at 15819-20, ¶ 35.

[^184]: In the *Schools and Libraries Fifth Report and Order*, the
    Commission stated that it is clear that funds disbursed in violation
    of the statute or a rule that implements the statute or a
    substantive program goal must be recovered. *Schools and Libraries
    Fifth Report and Order*, 19 FCC Rcd at 15814-15, ¶ 18. We noted that
    USAC, through its duties as administrator of the fund, initially
    seeks recovery of erroneously disbursed funds. *Id*. at 15814, n.37.
    The *Schools and Libraries Fifth Report and Order* identified rules
    of this type and provided notice to all stakeholders that violation
    of these rules will result in recovery. *Id*. at 15814-15, ¶ 18. In
    addition, the Commission recognized that recovery may not be
    appropriate for violation of some USF procedural rules implemented
    to enhance operation of the E-rate program. *Id.* at 15815, ¶ 19.

[^185]: *See* *supra* para. 34*.*

[^186]: *See* Response to Task Force at 1.

[^187]: *See* Response to Task Force at 5-6.

[^188]: *See Third Report and Order*, 18 FCC Rcd at 26938-39, ¶ 65
    (seeking comment on situation where only one entity responds to a
    Form 470 posting).

[^189]: "Gold plating" refers to investment in unnecessary or excessive
    facilities when other facilities would be more economically
    efficient.

[^190]: *See Third Report and Order*, 18 FCC Rcd at 26947-48, ¶ 87
    (seeking comment on codifying rules to establish a bright line test
    for a "cost effective" service).

[^191]: In the *Schools and Libraries Fifth Report and Order*, the
    Commission stated that funds disbursed in violation of statute or
    rule (other than *de minimis* amounts) must be recovered in full.
    The Commission established a policy to initiate and complete any
    audit or investigation to determine statutory or rule violations
    within five years of final delivery of service for a specific
    funding year. *Schools and Libraries Fifth Report and Order*, 19 FCC
    Rcd at 15819, ¶ 32.

[^192]: *Id.* at 15822-23, ¶ 44.

[^193]: *See* Response to Task Force at 6.

[^194]: *See Third Report and Order*, 18 FCC Rcd at 26947, ¶ 84.

[^195]: *See, e.g.*, [GAGAS Handbook]{.smallcaps}.

[^196]: 47 C.F.R. § 54.516(c).

[^197]: For most enforcement actions, our statute of limitations is one
    year from the date of the occurrence. 47 U.S.C. § 503(b)(6).

[^198]: A debarred person is prohibited from involvement in the E-rate
    program for three years. 47 C.F.R. § 54.521(g). The Commission may
    set a longer period of debarment or extend the existing period of
    debarment. *Id.*

[^199]: *See* 47 C.F.R. § 54.521.

[^200]: *See, e.g.,* Letter from Maureen F. DelDuca, Deputy Chief,
    Investigations and Hearings Division, Enforcement Bureau, Federal
    Communications Commission, to Oscar Alvarez, *Notice of Debarment*,
    18 FCC Rcd 26716 (2003); Letter from Maureen F. DelDuca, Deputy
    Chief, Investigations and Hearings Division, Enforcement Bureau,
    Federal Communications Commission, to John Angelides, *Notice of
    Debarment*, 18 FCC Rcd 26722 (2003); Letter from Maureen F. DelDuca,
    Deputy Chief, Investigations and Hearings Division, Enforcement
    Bureau, Federal Communications Commission, to Duane Maynard, *Notice
    of Debarment*, 18 FCC Rcd 26729 (2003); Letter from William H.
    Davenport, Chief, Investigations and Hearings Division, Enforcement
    Bureau, Federal Communications Commission, to John Dotson, *Notice
    of Debarment*, 19 FCC Rcd 23636 (2004).

[^201]: *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, 9225, ¶ 67 (2003) ("*Second
    Report and Order*") citing 28 C.F.R. § 67.100 *et seq*.

[^202]: *See Second Report and Order*, 18 FCC Rcd 9202, 9235-39, ¶¶
    102-115.

[^203]: *See* 68 Fed. Reg. 66534-01 (Nov. 26, 2003).

[^204]: *See* 5 U.S.C. § 603(a).

[^205]: *Id.*

[^206]: 47 C.F.R. §§ 1.1200-1.1216.

[^207]: 47 C.F.R. § 1.1206(b)(2).

[^208]: 47 C.F.R. § 1.1206(b).

[^209]: 47 C.F.R. §§ 1.415, 1.419.

[^210]: *See Electronic Filing of Documents in Rulemaking Proceedings*,
    63 Fed. Reg. 24121 (1998).

[^211]: *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).

[^212]: *See* 5 U.S.C. § 603(a).

[^213]: *See id.*

[^214]: 5 U.S.C. § 603(b)(3).

[^215]: 5 U.S.C. § 601(6).

[^216]: 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."

[^217]: Small Business Act, 15 U.S.C. § 632.

[^218]: 5 U.S.C. § 601(4).

[^219]: Independent Sector, The New Nonprofit Almanac & Desk Reference
    (2002).

[^220]: 5 U.S.C. § 601(5).

[^221]: U.S. Census Bureau, Statistical Abstract of the United States:
    2000, Section 9, pages 299-300, Tables 490 and 492.

[^222]: 47 C.F.R. §§ 54.502, 54.503, 54.517(b).

[^223]: *See NPRM*, *supra*, at ¶ 4; *see generally* 5 U.S.C. § 605.

[^224]: 47 C.F.R. § 54.500(b).

[^225]: 47 C.F.R. § 54.500(j).

[^226]: 47 C.F.R. § 54.501.

[^227]: *See* *id.*

[^228]: 13 C.F.R. § 121.201, North American Industry Classification
    System (NAICS) codes 611110 and 519120 (NAICS 2002 code 519120 was
    previously 514120).

[^229]: 5 U.S.C. § 601(3).

[^230]: *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).

[^231]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    Oct. 2002).

[^232]: FCC, Wireline Competition Bureau, Industry Analysis and
    Technology Division, "Trends in Telephone Service" at Table 5.3,
    Page 5-5 (May 2004). This source uses data that are current as of
    October 22, 2003 (Trends in Telephone Service).

[^233]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    Oct. 2002).

[^234]: Trends in Telephone Service at Table 5.3.

[^235]: *Id*.

[^236]: *Id*.

[^237]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    Oct. 2002).

[^238]: Trends in Telephone Service at Table 5.3.

[^239]: *Id*.

[^240]: 13 C.F.R. § 121.201, North American Industry Classification
    System (NAICS) code 513321 (changed to 517211 in October 2002).

[^241]: 13 C.F.R. § 121.201, North American Industry Classification
    System (NAICS) code 513322 (changed to 517212 in October 2002). This
    category includes Personal Communications Service (PCS) and SMR
    Telephony Carriers.

[^242]: Trends in Telephone Service at Table 5.3.

[^243]: *Id*.

[^244]: *220 MHz Third Report and Order*, 12 FCC Rcd 10943, 11068-70 ¶¶
    291-295 (1997), 62 FR 16004 (Apr. 3, 1997), at ¶¶ 291-295.

[^245]: 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, 10085, ¶ 98 (1999).

[^246]: FCC, Wireline Competition Bureau, Industry Analysis and
    Technology Division, Trends in Telephone Service, Table 5.3, p. 5-5
    (Aug. 2003).

[^247]: *Id*.

[^248]: U.S. Census Bureau, "2002 NAICS Definitions: 518111 Internet
    Service Providers" (Feb. 2004) \<www.census.gov\>.

[^249]: 13 C.F.R. § 121.201, NAICS code 518111 (changed from previous
    code 514191, "On-Line Information Services," in Oct. 2002).

[^250]: U.S. Census Bureau, 1997 Economic Census, Subject Series:
    Information, \"Establishment and Firm Size (Including Legal Form of
    Organization),\" Table 4, NAICS code 514191 (issued Oct. 2000).

[^251]: *See* U.S. Census Bureau, 2002 Economic Census, Industry Series:
    "Information," Table 2, Comparative Statistics for the United States
    (1997 NAICS Basis): 2002 and 1997, NAICS code 514191 (issued Nov.
    2004). The preliminary data indicate that the total number of
    "establishments" increased from 4,165 to 4,394. In this context, the
    number of establishments is a less helpful indicator of small
    business prevalence than is the number of "firms," because the
    latter number takes into account the concept of common ownership or
    control. The more helpful 2002 census data on firms, including
    employment and receipts numbers, will be issued in late 2005.

[^252]: 13 C.F.R. § 121.201, NAICS Code 334220, 334290.

[^253]: *Id.*

[^254]: 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).

[^255]: *Id*.

[^256]: 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 location
    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.

[^257]: U.S. Census Bureau, 1997 Economic Census, Industry Series:
    Manufacturing, "Industry Statistics by Employment Size," Table 4,
    NAICS code 334220 (issued August 1999).

[^258]: *Id*. Table 5, "Industry Statistics by Industry and Primary
    Product Class Specialization: 1997."

[^259]: *See NPRM*, *supra*, at ¶¶ 69-82.

[^260]: *See NPRM*, *supra*, at ¶¶ 83-85.

[^261]: *See NPRM*, *supra*, at ¶¶ 11-23, 32-33.

[^262]: *See NPRM*, *supra*, at ¶¶ 34-59.

[^263]: *See* 5 U.S.C. § 603(c).