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 Federal  Communications  Commission  FCC  03-  323 
 Before  the  Federal  Communications  Commission 
 Washington,  D.  C.  20554 

 In  the  Matter  of 
 Schools  and  Libraries  Universal  Service  Support  Mechanism 
 )  ) 
 )  ) 
 )  )  CC  Docket  No.  02-  6 

 THIRD  REPORT  AND  ORDER  AND  SECOND  FURTHER  NOTICE  OF  PROPOSED  RULEMAKING 
 Adopted:  December  17,  2003  Released:  December  23,  2003 
 Comment  Date:  30  days  after  publication  in  the  Federal  Register  Reply  Date:  60  days  after  publication  in  the  Federal  Register 

 By  the  Commission:  Chairman  Powell,  Commissioners  Abernathy,  Copps,  and  Adelstein  issuing  separate  statements. 
 TABLE  OF  CONTENTS  Para. 
 I.  INTRODUCTION  AND  SUMMARY......................................................................................  1  II.  PROGRAM  OVERVIEW  AND  BACKGROUND...................................................................  4 
 III.  THIRD  REPORT  AND  ORDER...............................................................................................  9  A.  Limits  on  Use  of  Internal  Connections  ................................................................................  9 
 1.  Background....................................................................................................................  9  2.  Discussion....................................................................................................................  11 
 B.  Eligible  Services.................................................................................................................  31  1.  Background..................................................................................................................  31 
 2.  Discussion....................................................................................................................  35  C.  Carryover  of  Funds  ............................................................................................................  50 
 1.  Background..................................................................................................................  50  2.  Discussion....................................................................................................................  52 
 IV.  SECOND  FURTHER  NOTICE  OF  PROPOSED  RULEMAKING  .......................................  59  A.  Discount  Matrix  .................................................................................................................  59 
 B.  Competitive  Bidding  Process.............................................................................................  63  C.  Definition  of  Rural  Area  ....................................................................................................  67 
 D.  Definition  of  Internet  Access  .............................................................................................  70  E.  Wide  Area  Networks..........................................................................................................  72 
 F.  Recovery  of  Funds  .............................................................................................................  78  G.  Other  Actions  to  Reduce  Waste,  Fraud,  and  Abuse  ..........................................................  86 
 H.  Miscellaneous  ....................................................................................................................  97  V.  PROCEDURAL  MATTERS  ...................................................................................................  99 
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 A.  Paperwork  Reduction  Act  Analysis...................................................................................  99  B.  Final  Regulatory  Flexibility  Analysis..............................................................................  100 
 C.  Initial  Paperwork  Reduction  Act  of  1995  Analysis  .........................................................  120  D.  Initial  Regulatory  Flexibility  Analysis  ............................................................................  121 
 E.  Comment  Filing  Procedures  ............................................................................................  135  F.  Further  Information..........................................................................................................  144 
 VI.  ORDERING  CLAUSES  ........................................................................................................  146 
 APPENDIX  A  --  FINAL  RULES  APPENDIX  B  --  DISCOUNT  MATRIX 
 APPENDIX  C  --  EXAMPLES  OF  TWICE-  EVERY-  FIVE-  YEARS  RULE  APPENDIX  D  --  PARTIES  FILING  COMMENTS  AND  REPLY  COMMENTS 

 I.  INTRODUCTION  AND  SUMMARY 
 1.  In  this  Third  Report  and  Order  and  Second  Further  Notice  of  Proposed  Rulemaking,  we  address  several  matters  related  to  the  administration  of  the  schools  and  libraries  universal 

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

 1  Although  the  schools  and  libraries  support  mechanism  provides  discount  support  for  services,  many  supported 
 services  have  component  parts.  In  this  Order,  references  to  equipment  will  refer,  for  simplicity,  to  equipment  components  of  eligible  internal  connections  services. 
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 2.  In  the  Second  Further  Notice,  we  seek  comment  on  several  issues,  including  whether  we  should  change  (1)  the  discount  matrix  used  to  determine  the  level  of  discounts  for  which 
 applicants  are  eligible,  (2)  the  current  competitive  bidding  process,  (3)  the  definition  of  rural  area  used  in  the  program,  (4)  the  definition  of  Internet  access,  (5)  current  rules  relating  to  wide 
 area  networks,  and  (6)  current  procedures  for  recovery  of  funds.  We  also  seek  comment  on  measures  to  limit  waste,  fraud,  and  abuse  and  improve  the  Commissions  ability  to  enforce  the 
 rules  governing  the  program.  Finally,  we  seek  additional  comment  on  how  to  ensure  the  goals  of  section  254  continue  to  be  met. 

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

 II.  PROGRAM  OVERVIEW  AND  BACKGROUND 
 4.  Under  the  schools  and  libraries  universal  service  support  mechanism,  eligible  schools,  libraries,  and  consortia  that  include  eligible  schools  and  libraries,  may  receive  discounts  for 

 eligible  telecommunications  services,  Internet  access,  and  internal  connections.  5  Prior  to  applying  for  discounted  services,  an  applicant  must  conduct  a  technology  assessment  and  develop 
 a  technology  plan  to  ensure  that  any  services  it  purchases  will  be  used  effectively.  6  The  applicant  then  must  submit  to  the  Administrator  a  completed  FCC  Form  470,  in  which  the  applicant  sets 

 2  Forum  on  Improving  Administration  of  the  Schools  and  Libraries  Universal  Support  Mechanism  (May  8,  2003) 
 (E-  Rate  Public  Forum).  3 
 Semiannual  Report  to  Congress,  April  1-  September  30,  2003,  Office  of  the  Inspector  General,  Federal  Communications  Commission,  at  3-  15;  Semiannual  Report  to  Congress,  October  1,  2002-  March  31,  2003,  Office 

 of  the  Inspector  General,  Federal  Communications  Commission,  at  4-  12;  Semiannual  Report  to  Congress,  April  1-  September  30,  2002,  Office  of  the  Inspector  General,  Federal  Communications  Commission,  at  2-  10  (filed 
 October  31,  2002)  (collectively,  Semi-  Annual  Reports  of  the  Inspector  General).  4 
 See  Task  Force  on  the  Prevention  of  Waste,  Fraud,  and  Abuse,  Universal  Service  Administration  Company  (filed  November  26,  2003)  (Task  Force  Recommendation). 

 5  47  C.  F.  R.    54.502,  54.503. 
 6  Federal-  State  Joint  Board  on  Universal  Service,  CC  Docket  96-  45,  Report  and  Order,  12  FCC  Rcd  8776,  9077- 
 78  paras.  572-  74  (1997)  (Universal  Service  Order).  A  technology  plan  must  meet  five  requirements:  (1)  clear  goals  and  a  realistic  strategy  for  using  telecommunications  and  information  technology  to  improve  education  or 

 library  services;  (2)  a  professional  development  strategy  to  ensure  that  staff  know  how  to  use  these  new  technologies  to  improve  education  or  library  services;  (3)  an  assessment  of  the  telecommunication  services, 
 hardware,  software,  and  other  services  that  will  be  needed  to  improve  education  or  library  services;  (4)  a  sufficient  budget  to  acquire  and  support  the  non-  discounted  elements  of  the  plan:  the  hardware,  software,  professional 
 development,  and  other  services  that  will  be  needed  to  implement  the  strategy;  and  (5)  an  evaluation  process  that  enables  the  school  or  library  to  monitor  progress  toward  the  specified  goals.  See  id. 
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 forth  its  technological  needs  and  the  services  for  which  it  seeks  discounts.  7  Once  the  school  or  library  has  complied  with  the  Commissions  competitive  bidding  requirements  and  entered  into 
 agreements  for  eligible  services,  it  must  file  an  FCC  Form  471  application  to  notify  the  Administrator  of  the  services  that  have  been  ordered,  the  service  providers  with  whom  the 
 applicant  has  entered  into  an  agreement,  and  an  estimate  of  funds  needed  to  cover  the  discounts  to  be  given  for  eligible  services.  8 

 5.  The  Administrator  reviews  the  FCC  Forms  471  that  it  receives  and  issues  funding  commitment  decisions  indicating  discounts  that  the  applicant  may  receive  in  accordance  with  the 
 Commissions  rules.  Subsequently,  the  applicant  either:  (1)  pays  the  bill  in  full,  and  seeks  reimbursement  for  discounts  from  the  Administrator  via  the  service  or  equipment  provider,  or  (2) 
 pays  the  non-  discount  portion  of  the  service  cost  to  the  service  provider,  who,  in  turn,  seeks  reimbursement  from  the  Administrator  for  the  discounted  amount.  9 

 6.  Under  the  Commissions  rules,  eligible  schools  and  libraries  may  receive  discounts  ranging  from  20  percent  to  90  percent  of  the  pre-  discount  price  of  eligible  services,  based  on 
 indicators  of  need.  10  Schools  and  libraries  in  areas  with  higher  percentages  of  students  eligible  for  free  or  reduced-  price  lunch  through  the  National  School  Lunch  Program  (or  a  federally  approved 
 alternative  mechanism)  qualify  for  higher  discounts  for  eligible  services  than  applicants  with  low  levels  of  eligibility  for  such  programs.  Schools  and  libraries  located  in  rural  areas  also  generally 
 receive  greater  discounts.  11 
 7.  The  Commissions  priority  rules  provide  that  requests  for  telecommunications  services  and  Internet  access  for  all  discount  categories  shall  receive  first  priority  for  the  available  funding 

 (Priority  One  services).  The  remaining  funds  are  allocated  to  requests  for  support  for  internal  connections  (Priority  Two  services),  beginning  with  the  most  economically  disadvantaged 
 schools  and  libraries,  as  determined  by  the  schools  and  libraries  discount  matrix.  Currently,  the  most  disadvantaged  schools  and  libraries  are  eligible  for  a  90  percent  discount  on  eligible 
 services,  and  thus  must  pay  only  10  percent  of  the  cost  of  the  service.  To  the  extent  funds  remain  after  discounts  are  awarded  to  entities  eligible  for  a  90  percent  discount,  the  rules  provide  that  the 
 Administrator  shall  continue  to  allocate  funds  for  discounts  to  applicants  at  each  descending  single  discount  percentage.  The  Commission's  rules  also  provide  that  if  sufficient  funds  do  not 
 exist  to  grant  all  requests  within  a  single  discount  percentage,  the  Administrator  shall  allocate  the 

 7  47  C.  F.  R.    54.504(  b)(  1),  (b)(  3). 
 8  47  C.  F.  R.    54.504(  c). 
 9  Schools  and  Libraries  Universal  Service,  Billed  Entity  Applicant  Reimbursement  Form,  OMB  3060-  0856 
 (October  1998)  (FCC  Form  472  or  BEAR  Form);  Schools  and  Libraries  Universal  Service,  Service  Provider  Invoice  Form,  OMB  3060-  0856  (October  2001)  (FCC  Form  474  or  SPI  Form). 

 10  See  47  C.  F.  R.    54.505. 
 11  Id.  See  also  Appendix  B  (discount  matrix). 
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 remaining  support  on  a  pro  rata  basis  over  that  single  discount  percentage  level.  12 
 8.  As  the  program  approached  its  fifth  year  of  operation,  the  Commission  issued  the  Schools  and  Libraries  NPRM  to  seek  comment  on  ideas  raised  by  both  the  applicant  and  service 

 provider  communities  for  improving  the  program.  13  In  particular,  the  Commission  sought  comment  on  ways  to  ensure  that  the  program  funds  are  utilized  in  an  efficient,  effective,  and  fair 
 manner,  while  preventing  waste,  fraud,  and  abuse.  On  June  13,  2002,  the  Commission  released  the  Schools  and  Libraries  Order,  which  adopted  a  framework  for  the  carryover  of  unused  funds 
 from  the  schools  and  libraries  universal  service  support  mechanism.  14  On  April  30,  2003,  the  Commission  released  the  Schools  and  Libraries  Second  Order  and  Further  Notice,  which  adopted 
 a  debarment  rule  and  other  measures  to  ensure  that  program  funds  are  utilized  in  an  efficient,  effective  and  fair  manner,  and  sought  comment  on  additional  matters,  including  the 
 implementation  of  the  carryover  of  unused  funds  to  subsequent  years.  15 
 III.  THIRD  REPORT  AND  ORDER 
 A.  Limits  on  Use  of  Internal  Connections 
 1.  Background 
 9.  Because  demand  for  discounts  from  the  schools  and  libraries  universal  service  support  mechanism  has  exceeded  the  annual  $2.25  billion  cap,  in  recent  funding  years  only  applicants 

 eligible  for  the  highest  discount  percentages  have  received  discounts  for  internal  connections.  16  Thus,  applicants  in  the  highest  discount  percentages  have  been  able  to  repeatedly  apply  for  and 
 receive  discounts  for  Priority  Two  services,  while  applicants  in  the  lower  discount  bands  have  not  received  any  Priority  Two  discounts  because  the  annual  funding  has  been  exhausted.  Moreover, 
 nothing  in  our  current  rules  expressly  preclude  entities  with  90  percent  discounts  from  replacing,  on  a  yearly  or  almost-  yearly  basis,  equipment  obtained  with  universal  service  discounts,  and 

 12  47  C.  F.  R.    54.507(  g)(  1)(  i-  iv);  see  also  Federal-  State  Joint  Board  on  Universal  Service,  CC  Docket  96-  45, 
 Fifth  Order  on  Reconsideration  and  Fourth  Report  and  Order,  13  FCC  Rcd  14915,  14938  para.  36  (1998)  (Fifth  Order  on  Reconsideration). 

 13  Schools  and  Libraries  Universal  Service  Support  Mechanism,  CC  Docket  02-  6,  Notice  of  Proposed 
 Rulemaking,  17  FCC  Rcd  1914  (2002)  (Schools  and  Libraries  NPRM).  14 
 See  Schools  and  Libraries  Universal  Service  Support  Mechanism,  CC  Docket  No.  02-  6,  Report  and  Order,  17  FCC  Rcd  11521  (2002)  (Schools  and  Libraries  Order). 

 15  See  Schools  and  Libraries  Universal  Service  Support  Mechanism,  CC  Docket  No.  02-  6,  Second  Report  and 
 Order  and  Further  Notice  of  Proposed  Rulemaking,  18  FCC  Rcd  9202  (2003)  (Schools  and  Libraries  Second  Order  or  Schools  and  Libraries  Further  Notice). 

 16  For  example,  USAC  estimates  that  the  demand  for  discounts  for  Funding  Year  2003  of  the  schools  and  libraries 
 program  is  $4.718  billion.  See  Letter  from  George  McDonald,  Vice-  President,  Universal  Service  Administrative  Company,  Schools  and  Libraries  Division,  to  William  Maher,  Chief  of  the  Wireline  Competition  Bureau,  Federal 

 Communications  Commission,  April  3,  2003.  Funding  years  are  described  by  the  year  in  which  the  funding  period  starts.  For  example,  the  funding  period  which  begins  on  July  1,  2003  and  ends  on  June  30,  2004,  is  called 
 Funding  Year  2003.  The  funding  period  which  begins  on  July  1,  2004,  and  ends  on  June  30,  2005,  is  called  Funding  Year  2004. 
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 transferring  that  equipment  to  other  entities  with  lower  discount  percentages  that  otherwise  would  not  receive  funding  for  such  equipment  due  to  the  exhaustion  of  the  capped  amount.  17  The  Act 
 and  our  existing  rules  provide  only  that  equipment  purchased  with  universal  service  discounts  shall  not  be  sold,  resold,  or  transferred  in  consideration  for  money  or  any  other  thing  of  value.  18 

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

 2.  Discussion 
 11.  In  this  Order,  we  adopt  a  rule  limiting  each  eligible  entitys  receipt  of  discounts  on  internal  connections  to  twice  every  five  funding  years.  We  exempt  basic  maintenance  services 

 from  this  restriction.  We  also  clarify  the  types  of  maintenance  services  that  are  eligible  for  discounts.  In  addition,  we  adopt  a  rule  that  limits  an  entitys  ability  to  transfer  equipment 

 17  See  47  C.  F.  R.    54.617. 
 18  47  U.  S.  C.    254(  h)(  3);  47  C.  F.  R.    54.513. 

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

 20  Schools  and  Libraries  NPRM,  17  FCC  Rcd  at  1930-  31  para.  39. 
 21  Id.  at  1931  para.  40. 
 22  Some  commenters  supported  limiting  equipment  transfers.  See,  e.  g.,  State  of  Alaska  NPRM  Comments  at  8; 
 American  Library  Association,  BellSouth  Corporation  and  SBC  Communications  NPRM  Comments  at  18;  Colorado  Department  of  Education  NPRM  Comments  at  7;  Council  of  the  Great  City  Schools  NPRM  Comments  at 

 4;  Iowa  Communications  Network  NPRM  Comments  at  2;  Maine  Public  Utilities  Commission  NPRM  Comments  at  4;  New  York  Board  of  Education  NPRM  Comments  at  6;  Seattle  Public  Library  NPRM  Comments  at  2;  TAMSCO 
 Telecommunications  Division  NPRM  Comments  at  3.  Other  commenters  supported  restrictions  on  the  receipt  of  internal  connections  discounts.  See,  e.  g.,  Bakersfield  Schools  District  NPRM  Comments  at  3;  Central  Susquehanna 
 Intermediate  Unit  NPRM  Comments  at  3;  City  of  Boston  NPRM  Comments  at  8;  Illinois  State  Board  of  Education  NPRM  Comments  at  22;  Quaker  Valley  School  District  NPRM  Comments  at  1;  Siemens  Enterprise  Network 
 NPRM  Reply  at  2;  Spectrum  Communications  Cabling  Services  NPRM  Comments  at  3;  York  County  Library  System  NPRM  Comments  at  10. 
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 purchased  with  universal  service  funds. 
 12.  Frequency  of  Discounts.  We  conclude  that  each  eligible  entity  may  receive  commitments  for  discounts  on  Priority  Two  services,  except  as  discussed  below,  no  more  than 

 twice  every  five  funding  years.  23  The  practical  effect  of  this  rule  will  be  to  permit  applicants  to  receive  funding  once  every  three  years  for  internal  connections,  as  supported  by  the  record,  24  but 
 will  allow  applicants  to  obtain  internal  connections  in  two  consecutive  years  as  part  of  a  staged  implementation  of  internal  connections.  25  In  order  to  give  applicants  sufficient  planning  time,  we 
 conclude  that  this  rule  will  become  effective  beginning  with  support  received  in  Funding  Year  2005.  Commitments  for  Priority  Two  services  received  in  years  prior  to  Funding  Year  2005  will 
 not  be  considered  in  determining  an  applicants  eligibility  to  receive  support  for  Priority  Two  services. 

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

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

 24  Several  commenters  suggest  limiting  discounts  on  internal  connections  to  every  two  or  three  years.  See,  e.  g. 
 Central  Susquehanna  Intermediate  Unit  NPRM  Comments  at  3;  Integrity  Networking  Systems,  Inc.  NPRM  Comments  at  3;  Marian  High  School  NPRM  Comments  at  1;  Michigan  Department  of  Information  Technology 

 NPRM  Comments  at  15;  North  Carolina  Department  of  Cultural  Resources  NPRM  Comments  at  1;  Pennsylvania  Department  of  Education  NPRM  Comments  at  7;  Siemens  Enterprise  Networks  NPRM  Reply  at  2.  See  also  E-  rate 
 Public  Forum,  American  Library  Association  Statement  at  3  and  Central  Susquehanna  Intermediate  Statement  at  4.  25 
 For  example,  under  this  new  rule,  a  school  or  library  could  receive  support  for  internal  connections  in  Funding  Year  2005,  Funding  Year  2008,  and  Funding  Year  2011.  Alternately,  a  school  that  receives  support  for  Priority 

 Two  services  in  Funding  Years  2005  and  2006  will  not  be  eligible  to  receive  support  for  Priority  Two  services  until  Funding  Year  2010.  In  another  example,  if  a  school  receives  discounts  in  Funding  Year  2006  and  then  in  Funding 
 Year  2010,  it  would  be  eligible  to  receive  Priority  Two  discounts  again  in  Funding  Year  2011.  Appendix  C  provides,  for  illustrative  purposes,  examples  of  what  would  be  permitted  under  this  rule. 
 26  Applying  the  twice-  every-  five-  years  restriction  to  all  entities  receiving  shared  services  in  this  manner  is 
 necessary  to  prevent  avoidance  of  this  rule  by  applicants  that  might  seek  discounts  more  frequently  than  permitted  by  nominally  identifying  services  as  shared  when  they  are  intended  primarily  to  serve  a  single  entity.  We 

 recognize  that  attributing  shared  services  in  this  way  will  result  in  the  need  for  additional  planning  by  entities  that  receive  support  for  shared  services.  However,  we  find  that  such  planning  is  consistent  with  the  Commissions 
 existing  policies  regarding  plans  for  using  technology.  Moreover,  such  applicants  are  free  to  seek  support  for  non-  shared  services  in  that  same  year,  or  the  other  year  in  the  five-  year  cycle  in  which  they  will  be  permitted  to 
 receive  support  for  Priority  Two  services. 
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 14.  We  find  that,  by  limiting  the  frequency  in  which  applicants  may  receive  Priority  Two  discounts,  funds  will  be  made  available  to  more  eligible  schools  and  libraries  on  a  regular  basis. 
 Specifically,  we  find  that  the  twice-  every-  five-  years  rule  we  adopt  balances  this  goal  with  the  need  to  ensure  that  the  most  disadvantaged  schools  and  libraries  are  able  to  maintain  functioning 
 internal  connections  networks.  Permitting  applicants  to  receive  support  more  often  than  twice  every  five  years  would  not  make  funds  available  to  significantly  more  eligible  schools  and 
 libraries,  while  limiting  applicants  to  support  less  frequently  than  twice  every  five  years  could  prevent  applicants  from  updating  their  internal  connections  as  necessary. 

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

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

 17.  Furthermore,  we  conclude  that,  by  precluding  a  particular  entity  from  receiving  support  for  Priority  Two  discounts  every  year,  our  modified  rule  strengthens  incentives  for 
 applicants  to  fully  use  equipment  purchased  with  universal  service  funds.  Our  current  rules  permit  applicants  in  the  highest  discount  bands  to  upgrade  their  equipment  on  a  yearly  basis,  even 

 27  See,  e.  g.,  Council  of  the  Great  City  Schools  NPRM  Comments  at  4;  Memphis  City  Schools  NPRM  Comments 
 at  2,  Montana  Independent  Telecommunications  Systems  NPRM  Comments  at  7  (  denying  internal  connections  within  a  specified  period  of  years  regardless  of  the  intended  use  creates  a  barrier  for  the  most  disadvantaged 

 schools),  New  York  Public  Library  NPRM  Comments  at  2.  28 
 See,  e.  g.,  Bakersfield  School  District  NPRM  Comments  at  3,  Colorado  Department  of  Education  NPRM  Comments  at  8,  Marian  High  School  NPRM  Comments  at  1. 
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 when  existing  equipment  continues  to  have  a  useful  life.  29  By  limiting  each  eligible  entitys  ability  to  receive  support  for  internal  connections,  recipients  will  have  greater  incentive  not  to 
 waste  program  resources  by  replacing  or  upgrading  equipment  on  an  annual  basis. 
 18.  A  few  commenters  maintain  that  limiting  funding  of  internal  connections  will  disrupt  applicants  planning  and  budgets.  30  We  recognize  that  our  modified  rule  will  limit  applicant 

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

 19.  USAC  also  suggests  that  in  an  effort  to  counter  funding  limitations,  some  applicants  may  request  more  funding  than  they  will  able  to  use  in  a  given  funding  year.  32  We  emphasize  that 
 existing  program  rules  require  applicants  to  examine  their  technology  needs  and  budgetary  resources  before  making  funding  requests  to  ensure  that  applicants  make  effective  use  of  any 
 discounted  services  that  they  receive.  33  Failure  to  have  an  approved  technology  plan  is  a 
 29  A  school  or  library  is  expected  to  use  equipment  purchased  with  universal  service  discounts  for  the  specified 
 purpose  for  a  reasonable  period  of  time.  Although  we  decline  to  adopt  useful  life  criteria  for  such  equipment,  see  infra  para.  30,  we  address  this  issue  by  adopting  a  general  prohibition  on  the  transfer  of  equipment  for  a  period  of 

 three  years  after  purchase.  See  infra  paras.  25-  29.  30 
 See,  e.  g.,  Excalibur  Internet  Corporation  NPRM  Comments  at  5;  Funds  for  Learning  NPRM  Comments  at  13;  Information  Technology  Industry  Council  NPRM  Reply  at  3;  Los  Angeles  Unified  School  District  NPRM 

 Comments  at  7;  National  Education  Association,  International  Society  for  Technology  in  Education  and  the  Consortia  for  School  Networking  NPRM  Comments  at  19;  TAMSCO  Telecommunications  Division  NPRM 
 Comments  at  3.  31 
 We  therefore  reject  commenters  suggestion  that  the  Commission  grant  internal  connection  requests  only  once  every  other  year.  See,  e.  g.,  American  Library  Association  NPRM  Comments  at  42  (ban  equipment  purchases  for 

 the  same  location  two  years  in  a  row);  Council  of  Chief  State  School  Officers  NPRM  Comments  at  45  (limit  to  once  every  other  year);  Council  of  the  Great  City  Schools  NPRM  Comments  at  4;  Illinois  State  Board  of 
 Education  NPRM  Comments  at  22;  Marion  High  School  NPRM  Comments  at  2;  Spectrum  Communications  Cabling  Services  NPRM  Reply  at  2. 

 32  See  USAC  NPRM  Comments  at  24. 
 33  On  the  FCC  Form  471,  among  other  things,  applicants  must  certify  that  they  have  secured  access  to  all  of  the 
 resources,  including  computers,  training,  software,  maintenance,  and  electrical  connections  necessary  to  make  effective  use  of  the  services  purchased  as  well  as  to  pay  the  discounted  charges  for  eligible  services.  See  FCC 

 (continued.) 
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 violation  of  our  current  rules.  34  We  expect  funding  requests  to  be  based  on  an  applicants  technology  plan,  not  based  on  a  scheme  to  maximize  funding.  A  funding  request  that  is  not 
 reasonably  based  on  a  technology  plan  does  not  constitute  a  bona  fide  request  for  services.  35  Further,  the  Administrators  review  and  enforcement  of  the  necessary  resources  certification  must 
 and  will  continue  to  serve  as  a  safeguard  against  unreasonable  funding  requests.  36 
 20.  Maintenance  Costs.  We  agree  with  commenters  that  maintenance  costs  should  be  exempt  from  the  twice-  every-  five-  years  restriction.  37  The  Universal  Service  Order  provides  that 

 support  for  internal  connections  includes  basic  maintenance.  38  Maintenance  costs  associated  with  internal  connections  services  are  currently  eligible  for  discounts  as  a  Priority  Two  service.  39 
 Proper  maintenance  of  internal  connections  products  ensures  that  equipment  functions  properly,  thereby  limiting  uneconomical  replacement  of  equipment.  We  therefore  continue  to  allow 
 applicants  to  apply  for  discounts  for  maintenance  of  equipment  each  funding  year. 
 21.  We  instruct  USAC  to  revise  Block  5  of  the  FCC  Form  471  to  include  a  separate  category  of  service  for  maintenance  requests,  with  this  form  change  to  take  effect  for  Funding 

 Year  2005.  40  Maintenance  requests  will  continue  to  be  funded  as  Priority  Two  funding.  41  However,  maintenance  requests  will  be  considered  for  funding  separately  from  other  requests  for 
 Priority  Two  funding  and,  therefore,  will  not  be  subject  to  the  twice-  every-  five  years  funding  rule 

 (Continued  from  previous  page)  Form  471,  OMB  No.  3060-  0806  (December  2002).  These  certifications  are  consistent  with  the  requirements  set 
 forth  in  the  Universal  Service  Order.  See  Universal  Service  Order,  12  FCC  Rcd  8776,  9079  para.  577  (applicants  for  schools  and  libraries  discounts  would  be  required  to  certify  in  their  requests  for  services  that  all  of  the 
 necessary  funding  in  the  current  funding  year  has  been  budgeted  and  will  have  been  approved  to  pay  for  the  non-discount  portion  of  requested  connections  and  services  as  well  as  any  necessary  hardware,  software,  and  to 
 undertake  the  necessary  staff  training  required  in  time  to  use  the  services  effectively  .  .  .  .  )  34 
 47  C.  F.  R.    54.504(  b)(  2)(  vii). 
 35  47  U.  S.  C.    254(  h)(  1)(  B). 

 36  Particularly,  where  an  applicant  provides  an  inaccurate  or  inadequate  necessary  resources  certification  in 
 connection  with  its  funding  request,  the  Administrator  will  deny  such  funding  requests. 
 37  See,  e.  g.,  Council  of  Chief  State  School  Officers  NPRM  Comments  at  4,  Illinois  State  Board  of  Education 
 NPRM  Comments  at  22,  Siemens  Enterprise  Networks  NPRM  Reply  at  2.  38 
 Universal  Service  Order,  12  FCC  Rcd  at  9021  para.  460.  39 
 See  SLDs  Eligible  Service  Lists  on  USACs  website,  http://  www.  sl.  universalservice.  org/  data/  pdf/  Eligible%  20Services%  20List%  2010-  18-  02.  pdf. 

 40  USAC  develops  the  forms  used  in  the  schools  and  libraries  mechanism  under  Commission  oversight.  The 
 Commission  obtains  OMB  approval  for  those  forms.  41 
 We  therefore  reject  commenters  suggestion  that  the  Commission  revise  the  priority  for  maintenance.  See,  e.  g.,  Integrity  Networking  Systems,  Inc.  NPRM  Comments  at  3;  Tel/  Logic,  Inc.  NPRM  Comments  at  18  (internal 

 connections  maintenance  would  remain  a  Priority  Two  service,  but  create  a  priority  three  category  for  new  internal  connections  equipment);  but  see  Spectrum  Communications  Cabling  Services  NPRM  Reply  at  6 
 (establishing  a  preference  for  maintenance  is  unnecessary). 
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 we  adopt  in  this  Order.  42  The  revision  of  the  FCC  Form  471  will  allow  efficient  review  of  the  Priority  Two  funding  requests. 
 22.  In  response  to  allegations  of  waste,  fraud,  and  abuse,  we  prospectively  clarify  the  services  eligible  for  Priority  Two  support  as  basic  maintenance  costs  for  internal  connections. 
 Although  the  Universal  Service  Order  allows  support  for  those  internal  connections  services  that  are  "necessary  to  transport  information  all  the  way  to  individual  classrooms"  and  public  areas  of  a 
 library,  and  specifically  authorizes  support  for  basic  maintenance  services  that  are  necessary  to  the  operation  of  the  internal  connections  network,  43  our  rules  do  not  expressly  specify  the  types 
 of  maintenance  costs  that  are  eligible  for  support.  In  light  of  our  concerns  about  allegations  of  waste,  fraud,  and  abuse  in  this  area  and  our  changes  above,  we  conclude  that  we  should  provide 
 further  clarity  on  what  maintenance  services  are  necessary  under  the  terms  of  the  Universal  Service  Order,  and  thus  eligible  for  support  and  exempt  from  the  twice-  every-  five-  years  rule. 

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

 contain  both  eligible  and  ineligible  functions,  USAC,  in  the  past,  has  utilized  cost  allocation  to  determine  what  portion  of  the  product  price  may  receive  discounts.  44  We  generally  endorse  this 
 practice  as  a  reasonable  means  of  addressing  mixed  use  products  and  services.  At  the  same  time,  however,  we  are  concerned  that  it  is  administratively  difficult  and  burdensome  to  derive 
 reasonable  cost  allocations  for  the  eligible  portions  of  services  provided  under  a  technical  support  contract.  In  a  rapidly-  changing  marketplace,  with  vendors  supplying  complex  packages  of 
 services,  it  simply  is  not  administratively  feasible  to  determine  what  portion  of  a  technical  support  contract  is  directed  to  basic  maintenance.  Therefore,  we  hereby  clarify  prospectively  that 
 technical  support,  including  on-  site  Help  Desks,  is  not  eligible  under  our  rules  if  it  provides  any 
 42  Based  on  the  data  entered  in  Block  5,  USAC  will  create  a  database/  record  of  an  entitys  receipt  of  Priority  Two 
 funding,  and  where  appropriate,  deny  an  entitys  request  for  discounts. 
 43  Universal  Service  Order,  12  FCC  Rcd  at  9021-  22  para.  460. 

 44  See  www.  sl.  universalservice.  org/  reference/  costallocationguide.  asp. 
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 ineligible  features  or  functions.  A  Help  Desk  system  typically  goes  beyond  the  level  of  support  authorized  by  the  Commission  in  the  Universal  Service  Order,  which  stated  that  [  s]  upport 
 should  be  available  to  fund  discounts  on  such  items  as  routers,  hubs,  network  file  services,  and  wireless  LANs  and  their  installation  and  basic  maintenance.  45  There  is  no  language  in  the 
 Universal  Service  Order  that  contemplates  the  provision  of  discounts  for  the  comprehensive  level  of  support  typically  provided  by  a  Help  Desk.  On  the  contrary,  the  Universal  Service  Order 
 indicates  that  support  will  be  provided  for  a  product  or  service  only  if  it  is  necessary  to  transport  information  all  the  way  to  individual  classrooms.  That  is,  if  the  service  is  an  essential  element  in 
 the  transmission  of  information  within  the  school  or  library  .  .  .  .    46  We  conclude  that  if  a  technical  support  contract  provides  more  than  basic  maintenance,  it  shall  be  ineligible  for 
 discounts  under  our  modified  rules.  We  instruct  USAC  to  review  and  fund  requests  for  discounts  on  maintenance  services  in  accordance  with  this  clarification,  as  of  the  effective  date  of  this 
 Order.  47 
 25.  Equipment  Transfers.  We  also  find  it  appropriate  to  amend  our  rules  expressly  to  prohibit,  except  as  provided  below,  the  transfer  of  equipment  purchased  with  discounts  from  the 

 schools  and  libraries  universal  service  support  mechanism.  The  Act  prohibits  the  sale  or  transfer  of  equipment  purchased  with  discounts  from  the  universal  service  program  in  consideration  of 
 money  or  anything  else  of  value.  48  Here,  in  order  to  promote  the  goal  of  preventing  waste,  fraud,  and  abuse,  we  extend  that  prohibition  to  all  transfers,  without  regard  to  whether  money  or 
 anything  of  value  has  been  received  in  return  for  a  period  of  three  years  after  purchase.  49 
 26.  Recipients  of  support  are  expected  to  use  all  equipment  purchased  with  universal  service  discounts  at  the  particular  location,  for  the  specified  purpose  for  a  reasonable  period  of 

 time.  Purchasing  equipment  with  universal  service  discounts  and  then  replacing  or  upgrading  that  equipment  annually  or  almost  annually  is  unnecessary  and  not  economically  rational.  50 

 45  Universal  Service  Order,  12  FCC  Rcd  at  9021  para.  460  (emphasis  added). 
 46  Id.  at  9021  para.  459. 
 47  To  the  extent  this  clarification  impacts  existing  contracts,  we  shall  permit  parties  90  days  from  the  effective  date 
 of  this  Order  to  renegotiate  those  contracts,  or  to  provide  the  Administrator  with  an  itemized  breakout  of  the  components  of  the  contract,  clearly  identifying  the  portion  of  the  contract  price  to  be  allocated  to  basic 

 maintenance.  We  will  permit  parties  to  utilize  cost  allocation  for  signed  contracts  in  existence  as  of  the  effective  date  of  this  Order.  The  burden  is  on  the  applicant  to  justify  what  portion  of  a  contract  price  should  be  allocated  to 
 basic  maintenance  services. 
 48  47  U.  S.  C.    254(  h)(  3). 

 49  This  action  is  not  intended  to  prevent  schools  or  libraries  from  trading-  in  equipment  to  a  service  provider  for 
 other  equipment  with  similar  functionalities.  We  note,  however,  that  under  the  twice-  every-  five-  years  rule  we  adopt  today,  an  applicant  may  face  limitations  on  its  ability  to  finance  trade-  ins  using  e-  rate  funding.  The  school 

 or  library  may  not  use  the  credit  for  the  trade-  in  to  pay  for  its  non-  discounted  portion  of  the  services  it  receives  in  return. 

 50  Colorado  Department  of  Education  NPRM  Comments  at  8  (applicants  that  receive  funding  for  internal 
 connections  year  after  year  pose  a  risk  of  abuse  of  the  program);  Delaware  Center  for  Educational  Technology  NPRM  Comments  at  3  (the  idea  that  a  school  district  could  upgrade  the  poorest  schools  in  the  district  yearly  and 

 (continued.) 
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 Unnecessary  replacement  of  equipment  suggests  that  entities  are  not  fully  utilizing  the  equipment  purchased  with  universal  service  discounts.  We  agree  with  commenters  that  such  practices 
 deprive  other  eligible  entities  of  the  full  benefits  of  the  schools  and  libraries  universal  services  program.  51  Moreover,  the  practice  of  purchasing  equipment  with  universal  service  funds,  then 
 transferring  that  equipment  to  other  schools  and  libraries  with  lower  discount  rates  would  undermine  the  intent  of  the  Commissions  priority  rules,  and  is  therefore  prohibited.  We  find, 
 however,  that  it  would  be  wasteful  to  prevent  recipients  from  transferring  equipment  that,  after  a  reasonable  period  of  time,  has  been  replaced  or  upgraded.  We  therefore  permit  recipients  freely  to 
 transfer  equipment  to  other  eligible  entities  three  years  or  more  after  the  purchase  of  such  equipment.  52  Consistent  with  the  Act,  however,  such  transfers  must  not  be  in  consideration  of 
 money  or  anything  else  of  value. 
 27.  We  agree  also  with  commenters  that  argue  that  applicants  may  have  legitimate  reasons  to  transfer  internal  connections  equipment  due  to  the  closing  of  a  school  or  other  eligible 

 facilities.  53  For  example,  due  to  a  natural  disaster,  a  school  district  may  conclude  that  its  needs  are  best  served  by  temporarily  or  permanently  closing  a  particular  school  and  transferring  its 
 students,  as  well  as  any  valuable  equipment  purchased  with  supported  discounts,  to  other  locations.  Similarly,  a  school  district  may  choose  to  close,  remodel,  or  consolidate  a  particular 
 school  to  meet  changing  demographic  needs  or  fiscal  realities,  and  thereby  transfer  the  students  and  useable  school  property  to  a  nearby  school.  Likewise,  a  county  or  municipality  may  choose 
 to  close  a  library  branch  for  financial  reasons.  Under  these  circumstances,  we  find  that  it  would  be  economically  rational  and  consistent  with  the  goals  of  the  schools  and  libraries  program  for  the 
 support  recipient  to  transfer  any  equipment  it  has  purchased  with  universal  service  discounts  to  another  eligible  location  where  the  equipment  may  be  used  effectively.  54  We  therefore  conclude 
 (Continued  from  previous  page)  transfer  the  old  equipment  to  other  schools  is  definitely  abuse  of  the  system);  E-  Rate  Elite  NPRM  Comments  at 
 15  (applicants  transferring  equipment  in  violation  of  program  rules  are  circumventing  the  funding  process,  abusing  the  program,  and  preventing  students  with  a  greater  need  from  receiving  much  needed  assistance); 
 Excaliber  Internet  Corporation  NPRM  Comments  at  5  (continual  transfers  of  equipment  are  wasteful  of  program  funds);  Florida  Public  Service  Commission  at  5  (it  is  necessary  for  the  FCC  to  establish  rules  governing  when 
 equipment  can  be  transferred;  inadequate  incentives  exist  to  prevent  such  wasteful  or  fraudulent  behavior);  Iowa  Communications  Network  NPRM  Comments  at  1  (transfer  of  equipment  yearly  to  ineligible  users  seems  to 
 counter  the  goals  of  the  program);  Montana  Independent  Telecommunication  System  NPRM  Comments  at  6  (applicants  that  transfer  equipment  obtained  with  universal  service  discounts  to  other  schools  and  libraries  that 
 may  not  be  eligible  for  such  equipment  adversely  affect  funding  availability  for  all  applicants). 
 51  See,  e.  g.,  E-  rate  Elite  NPRM  Comments  at  15,  Excaliber  Internet  Corporation  NPRM  Comments  at  5,  Iowa 
 Communications  Network  NPRM  Comments  at  1,  Montana  Independent  Telecommunication  System  NPRM  Comments  at  6-  7,  Software  &  Information  Industry  Association  at  4;  see  also  Task  Force  Recommendation  at  6 

 (recommending  prohibition  on  transfers  within  service  life  of  equipment).  52 
 The  conclusion  that  three  years  is  a  reasonable  period  for  a  recipient  to  retain  equipment  purchased  with  internal  connections  discounts  is  consistent  with  our  conclusion,  above,  that  an  applicant  should  be  limited  to  internal 

 connections  discounts  in  only  two  out  of  every  five  years.  In  effect,  the  twice-  in-  five-  years  rule  will  permit  an  applicant  to  seek  discounts  for  internal  connections  every  three  years.  See  supra  para.  12. 
 53  See,  e.  g.,  Florida  Public  Service  Commission  NPRM  Comments  at  4-  5. 
 54  Consistent  with  the  Act,  such  transfers  may  not  be  in  consideration  of  money  or  anything  of  value.  47  U.  S.  C.   
 254(  h)(  3). 
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 that  a  recipient  may  transfer  equipment  purchased  with  universal  service  discounts  to  other  eligible  entities  if  the  particular  location  where  the  equipment  was  originally  installed  is 
 permanently  or  temporarily  closed.  In  these  limited  circumstances,  we  note  that  it  is  not  necessary  for  the  transferring  and  receiving  entities  to  have  comparable  discount  levels,  as  long  as 
 each  is  eligible  under  the  schools  and  libraries  program. 
 28.  In  the  event  that  a  recipient  is  permanently  or  temporarily  closed  and  equipment  is  transferred,  the  transferring  entity  must  notify  the  Administrator  of  the  transfer,  and  both  the 

 transferring  and  receiving  entities  must  maintain  detailed  records  documenting  the  transfer  and  the  reason  for  the  transfer  for  a  period  of  five  years.  We  instruct  the  Administrator  to  verify 
 compliance  with  this  requirement  as  part  of  its  beneficiary  audit  reviews.  In  order  to  enable  the  Administrator  to  verify  compliance  with  this  transfer  prohibition,  we  require  all  recipients  of 
 internal  connections  support  to  maintain  asset  and  inventory  records  for  a  period  of  five  years  sufficient  to  verify  the  actual  location  of  such  equipment.  55 

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

 30.  We  decline  to  institute  useful  life  criteria  for  equipment  purchased  with  universal  service  funds.  57  Useful  life  criteria  could  provide  a  more  equitable  distribution  of  Priority  Two 
 funding  and  ensure  that  more  applicants  receive  the  full  benefit  of  the  program  by  ensuring  that  applicants  did  not  replace  equipment  components  of  internal  connections  services  more 
 frequently  than  necessary.  We  believe,  however,  that  measures  adopted  above,  including  the  restriction  of  transfers  and  our  revised  policy  governing  the  funding  of  Priority  Two  equipment, 
 will  provide  similar  results  in  achieving  these  goals.  58  We  also  conclude  that  developing  and  enforcing  useful  life  criteria  would  add  a  significant  degree  of  complexity  to  the  program,  which 
 would  result  in  increased  administrative  costs  and  burden  for  both  recipients  and  USAC. 
 B.  Eligible  Services 
 1.  Background 
 31.  Since  the  initial  implementation  of  the  schools  and  libraries  support  mechanism,  USAC  has  developed  various  procedures  and  guidelines,  consistent  with  the  Commissions  rules 

 55  This  recordkeeping  requirement  will  become  effective  upon  receiving  any  approval  required  from  the  Office  of 
 Management  and  Budget  (OMB)  under  the  Paperwork  Reduction  Act.  56 
 FCC  Form  471  already  is  in  use  for  Funding  Year  2004,  so  it  is  not  feasible  to  amend  the  form  to  include  this  certification  for  Funding  Year  2004. 

 57  See,  e.  g.,  Task  Force  Recommendation  at  6;  see  also  Tel/  Logic  Inc.  NPRM  Comments  at  14. 
 58  See  supra  paras.  12-  19,  25-  28. 
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 and  requirements,  for  applicants  to  ensure  that  funding  is  provided  only  for  eligible  services.  These  policies  include  guidelines  for  allocating  costs  between  eligible  and  ineligible  services,  a 
 prohibition  on  the  provision  of  free  services,  the  eligible  services  list  maintained  on  USACs  website,  and  procedures  for  service  substitutions. 

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

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

 59  Universal  Service  Order,  12  FCC  Rcd  at  9022  para.  462. 
 60  See  http://  www.  sl.  universalservice.  org/  reference/  costallocationguide.  asp. 

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

 62  See  http://  www.  sl.  universalservice.  org/  reference/  freeservices.  asp. 
 63  Id. 
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 capture  the  true  cost  of  service.  64 
 34.  Currently,  USAC  updates  on  a  yearly  basis,  and  posts  to  its  website,  a  list  of  services  eligible  for  funding  under  the  categories  of  telecommunications  service,  Internet  access,  and 

 internal  connections.  65  USAC  updates  the  list,  in  consultation  with  the  Wireline  Competition  Bureau,  to  reflect  any  changes  in  rules  that  have  occurred  over  the  last  year  and  to  address  issues 
 that  arise  in  the  application  review  process.  In  the  Schools  and  Libraries  NPRM,  the  Commission  invited  parties  to  submit  proposals  for  rule  changes  that  would  improve  the  operation  of  the 
 eligibility  determination  process  in  terms  of  efficiency,  predictability,  flexibility,  and  administrative  cost.  66  Since  the  issuance  of  the  Schools  and  Libraries  NPRM,  a  number  of  parties 
 have  urged  the  Commission  to  create  a  more  transparent  process  for  updating  the  eligible  services  list.  67 

 2.  Discussion 
 35.  Although  the  current  cost  allocation  approach  used  by  the  Administrator  reasonably  implements  the  Commissions  rules  and  requirement  regarding  eligible  and  ineligible  services,  we 

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

 36.  Cost  Allocation.  We  specifically  amend  our  rules  to  make  clear  how  applicants  and  service  providers  should  allocate  costs  of  a  service  or  product  that,  although  generally  eligible  for 
 universal  service  support,  contains  both  eligible  and  ineligible  components.  In  the  Universal  Service  Order,  the  Commission  concluded  that,  when  a  school  or  library  signs  a  contract  for  both 
 eligible  and  ineligible  services,  the  contract  must  break  out  the  price  of  eligible  services  separately  from  ineligible  services.  68  Since  that  time,  the  marketplace  has  seen  an  evolution  of 
 products  and  services  that  contain  both  eligible  and  ineligible  features  but  which  are  not  commercially  available  on  an  unbundled  basis.  Thus,  the  issue  has  evolved  from  merely 
 separately  listing  eligible  services  and  products  from  ineligible  services  and  products  to  one  of  determining  what  components  or  features  of  an  otherwise  eligible  service  or  product  may  be 

 64  Id. 
 65  See  http://  www.  sl.  universalservice.  org/  reference/  eligible.  asp. 
 66  Schools  and  Libraries  NPRM,  17  FCC  Rcd  at  1921  para.  14. 
 67  See  Alaska  NPRM  Comments  at  2;  Central  Susquehanna  NPRM  Comments  at  2;  Iowa  DOE  Comments  at  3,  7; 
 Greg  Weisiger  NPRM  Comments  at  9;  ITI  NPRM  Reply  at  2;  NASTD  NPRM  Reply  at  1;  E-  rate  Public  Forum,  Funds  for  Learning  Statement  at  5. 

 68  Universal  Service  Order,  12  FCC  Rcd  at  9022  para.  462. 
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 ineligible  when  the  service  or  product  is  not  commercially  available  on  an  unbundled  basis.  Consistent  with  the  Commission's  directive  to  separate  these  costs,  the  Administrator  has 
 generally  required  schools,  libraries,  or  the  service  provider  to  separate  the  costs  of  an  ineligible  component  from  what  generally  would  be  an  eligible  service  or  product.  69  As  explained  above, 
 the  Administrator  has  provided  reasonable  guidance,  consistent  with  Commission  rules  and  requirements,  to  schools,  libraries,  and  service  providers  in  determining  the  allocation  approach.  70 

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

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

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

 70  See  supra  para.  32. 
 71  Schools  and  Libraries  NPRM,  17  FCC  Rcd  at  1921  para.  14. 
 72  Although  there  is  language  in  the  Universal  Service  Order  that  suggests  that  schools  and  libraries  should  not 
 receive  universal  service  support  for  contracts  that  provide  only  one  price  for  a  bundle  of  mixed  eligibility  services,  the  Commissions  intent  was  to  ensure  adequate  cost  allocation  between  eligible  and  ineligible  services 

 (continued.) 
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 39.  The  Commission  recently  addressed  those  circumstances  where  an  applicant  erroneously  identifies  certain  costs  as  eligible  for  support  by  adopting  the  30  percent  rule. 
 Specifically,  we  concluded  in  the  Second  Report  and  Order  that  where  less  than  30  percent  of  a  request  for  support  is  ineligible,  the  Administrator  is  permitted  to  grant  support,  reduced  by  the 
 amount  of  ineligible  services.  73  We  clarify  that  the  Administrator  may  rely  on  the  cost  allocation  methods  we  adopt  today  in  applying  the  30  percent  rule  and  performing  any  resulting 
 adjustments. 
 40.  Eligible  Services  List.  We  now  adopt  a  more  formalized  process  for  updating  the  eligible  services  list,  beginning  with  Funding  Year  2005.  Under  the  new  rule,  USAC  will  be 

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

 41.  Prohibition  of  Free  Services.  We  also  take  this  opportunity  to  clarify  and  amend  our  rules  to  codify  a  prohibition  on  the  provision  of  free  services  to  an  eligible  entity  by  a  service 
 provider  that  is  also  providing  discounted  services  to  the  entity.  75  The  Commission  requires  that  an  entity  must  pay  the  entire  undiscounted  portion  of  the  cost  of  any  services  it  receives  through 

 (Continued  from  previous  page)  and  to  avoid  imposing  an  excessive  burden  on  the  Administrator.  See  Universal  Service  Order,  12  FCC  Rcd  at 
 9022-  23  para.  462.  As  a  practical  matter,  the  application  process  evolved  in  such  a  manner  that  this  concern  could  be  adequately  addressed  by  the  Administrator.  Thus,  in  those  instances  where  the  Administrator  has  been 
 presented  with  mixed  eligibility  services  during  the  application  process,  the  Administrator  has  been  able  to  resolve  the  cost  allocation  with  the  school  or  library  and  service  provider  in  a  reasonable  way,  and  avoid  committing 
 universal  service  support  to  ineligible  services.  73 
 Schools  and  Libraries  Second  Order,  18  FCC  Rcd  at  9215-  16  paras.  40-  41.  We  found  that  this  rule  improves  operation  of  the  schools  and  libraries  program  by  permitting  the  Administrator  to  process  efficiently  requests  for 

 support  for  services  that  inadvertently  include  some  ineligible  components.  74 
 For  instance,  on  June  30,  2004,  USAC  would  submit  its  draft  eligible  services  list  for  Funding  Year  2005.  75 
 http://  www.  sl.  universalservice.  org/  reference/  freeservices.  asp  (Free  Service  Advisory  notes  that  requests  that  do  not  account  for  free  services  will  result  in  a  denial  and  may  result  in  criminal  penalties). 
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 the  schools  and  libraries  program.  76  For  the  purpose  of  this  program,  the  provision  of  unrelated  free  services  by  the  service  provider  to  the  entity  constitutes  a  rebate  of  the  undiscounted  portion 
 of  the  costs,  a  violation  of  the  Commissions  rules.  Codifying  this  existing  restriction  will  clarify  the  obligations  of  schools  and  libraries  that  receive  discounted  services  under  the  schools  and 
 libraries  program  and  improve  the  ability  of  the  Commission  to  take  appropriate  enforcement  action. 

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

 43.  Accordingly,  we  amend  our  rules  to  specify  that  service  change  requests  will  be  granted  for  a  substitute  service  or  product  where  (1)  that  service  or  product  has  the  same 

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

 77  See  http://  www.  sl.  universalservice.  org/  reference/  ServiceSub.  asp. 
 78  A  minor  contract  modification  is  defined  as  a  change  to  a  universal  service  contract  that  is  within  the  scope 
 of  the  original  contract  and  has  no  effect  or  merely  a  negligible  effect  on  price,  quantity,  quality,  or  delivery  under  the  original  contract.  See  47  C.  F.  R.  54.500(  g). 

 79  In  the  Matter  of  Request  for  Review  of  the  Decision  of  the  Universal  Service  Administrator  by  Copan  Public 
 Schools,  Copan  Oklahoma,  Federal-  State  Joint  Board  on  Universal  Service,  Changes  to  the  Board  of  Directors  of  the  National  Exchange  Carrier  Association,  Inc.,  CC  Docket  Nos.  96-  45  and  97-  21,  15  FCC  Rcd  5498,  5502  para. 

 7  (2000)  (Copan  Order).  80 
 In  other  words,  if  an  applicant  requests  support  for  an  eligible  service  with  a  pre-  discount  price  of  $100,  the  applicant  may  substitute  a  comparable  eligible  service  with  a  pre-  discount  price  of  $120,  but  will  receive  support 

 based  on  the  $100  pre-  discount  price  requested,  rather  than  the  $120  pre-  discount  price  ultimately  received.  81 
 See,  e.  g.,  Funds  for  Learning  NPRM  Comments  at  27;  NYPL  NPRM  Comments  at  7;  Tel/  Logic  NPRM  Comments  at  15;  see  also  Task  Force  Recommendation  at  11. 
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 functionality;  82  (2)  the  substitution  does  not  violate  any  contract  provisions  or  state  or  local  procurement  laws;  (3)  the  substitution  does  not  result  in  an  increase  in  the  percentage  of  ineligible 
 services  or  functions,  but  (4)  support  shall  be  provided  based  on  the  lesser  of  the  pre-  discount  price  of  the  original  service  or  the  substitute  service.  In  order  to  ensure  the  integrity  of  the 
 competitive  bidding  process,  we  require  the  applicants  request  for  a  service  change  to  include  a  certification  that  the  requested  change  in  service  is  within  the  scope  of  the  controlling  Form  470, 
 including  any  associated  Requests  for  Proposal  (RFP),  for  the  original  services.  We  also  require  that  support  not  be  provided  in  excess  of  the  amount  the  applicant  originally  would  have  been 
 eligible  for.  By  adopting  these  procedures  as  rules,  we  recognize  that  events  may  occur  between  the  time  of  the  original  funding  request  and  the  time  when  commitments  are  made  that  make  the 
 original  funding  request  impractical  or  even  impossible  to  fulfill. 
 44.  Eligibility  of  On-  Premises  Equipment  as  Part  of  Priority  One  Service.  In  the  Schools  and  Libraries  NPRM,  the  Commission  sought  comment  on  whether  to  modify  its  policies 

 regarding  the  funding  of  Priority  One  services  (telecommunications  service  and  Internet  access)  that  include  service  provider  charges  for  capital  investments  for  wide  area  networks.  Those 
 policies  were  established  in  the  1999  Tennessee  Order  and  the  Brooklyn  Order.  83 
 45.  We  decline  at  this  time  to  modify  our  existing  policies  in  this  area,  and  in  the  attached  Further  Notice  of  Proposed  Rulemaking  seek  more  focused  comment  on  specific  rule  changes  that 

 would  limit  the  availability  of  discounts  for  service  provider  charges  that  recoup  the  cost  of  significant  infrastructure  investment.  We  do,  however,  clarify  the  scope  of  the  existing 
 requirements  in  this  area  to  facilitate  USACs  processing  of  applications. 
 46.  In  the  1999  Tennessee  Order,  the  Commission  addressed  the  issue  of  whether  certain  facilities  located  on  the  applicants  premises  (namely,  routers  and  hubs)  are  part  of  an  end-  to-  end 

 Internet  access  service  or  part  of  internal  connections.  84  The  Commission  determined  that  facilities  located  on  an  applicants  premises  should  be  presumed  to  be  internal  connections,  but 
 that  an  applicant  may  rebut  that  presumption.  85  In  analyzing  the  facts  presented  in  the  1999 
 82  We  clarify  that  a  service  or  equipment  change  request  would  not  meet  this  test  if  it  changes  the  type  of  service 
 requested  pursuant  to  the  original  funding  request  from  one  category  to  another  (e.  g.,  a  change  from  telecommunications  service  to  internal  connections,  or  a  change  from  Internet  access  to  telecommunications 

 service).  We  further  clarify  that  a  substitution  that  constitutes  a  minor  contract  modification  under  our  rules  will  not  automatically  meet  the  requirements  of  our  service  substitution  rule. 
 83  Request  for  Review  by  Brooklyn  Public  Library,  Federal-  State  Joint  Board  on  Universal  Service,  Changes  to 
 the  Board  of  Directors  of  the  National  Exchange  Carrier  Association,  Inc.,  File  No.  SLD-  149423,  CC  Dockets  No.  96-  45  and  97-  21,  Order,  15  FCC  Rcd  18598  (2000)  (Brooklyn  Order);  Request  for  Review  by  the  Department 

 of  Education  of  the  State  of  Tennessee  of  the  Decision  of  the  Universal  Service  Administrator,  Request  for  Review  by  Integrated  Systems  and  Internet  Solutions,  Inc.,  of  the  Decision  of  the  Universal  Service  Administrator,  Request 
 for  Review  by  Education  Networks  of  America  of  the  Decision  of  the  Universal  Service  Administrator,  Federal-State  Joint  Board  on  Universal  Service,  Changes  to  the  Board  of  Directors  of  the  National  Exchange  Carrier 
 Association,  Inc.,  CC  Docket  Nos.  96-  45  and  97-  21,  Order,  14  FCC  Rcd  13734  (1999)  (1999  Tennessee  Order). 
 84  1999  Tennessee  Order,  14  FCC  Rcd  13734. 

 85  Id.  at  13753-  54  paras.  37-  38. 
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 Tennessee  Order,  the  Commission  concluded  that  this  presumption  had  been  rebutted.  In  support  of  the  rebuttal,  the  Commission  noted  that  the  hub  sites  at  issue  constituted  the  Internet  access 
 providers  points  of  presence  and  that  the  applicants  internal  connections  networks  would  continue  to  function  without  the  hub  sites,  indicating  that  the  hub  sites  were  not  necessary  to 
 transport  information  within  the  schools  instructional  buildings  on  a  single  campus.  86  Further,  the  Commission  found  that  other  indicia--  the  ownership  of  the  facility,  the  lack  of  a  lease-purchase 
 arrangement,  the  lack  of  an  exclusivity  arrangement,  and  the  fact  that  the  service  provider  was  responsible  for  its  maintenance--  supported  its  conclusion  that,  on  balance,  the 
 facilities  should  be  deemed  part  of  an  end-  to-  end  service.  87  The  Commission  found  that  these  factors  weighed  against  a  finding  of  internal  connections,  even  though  the  cost  of  leasing  those 
 facilities  represented  nearly  67  percent  of  the  total  funding  request.  The  decision  was  based  on  the  facts  presented;  the  Commission  did  not  establish  a  per  se  requirement  that  an  applicant  must 
 meet  all  factors  in  order  to  receive  discounts  on  service  provider  charges  for  the  cost  of  leasing  on-  premises  equipment. 

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

 applicant  may  receive  a  discount  for  the  lease  of  a  cable  modem  as  part  of  Priority  One  Internet  access.  A  cable  modem  is  a  type  of  basic  terminating  component.  It  is  analogous  to  a  channel 
 service  unit/  data  service  unit  (CSU/  DSU)  or  a  network  interface  device  (NID)  in  that  it  functions  as  the  termination  point  for  a  Priority  One  service.  90  The  language  in  the  1999  Tennessee  Order 

 86  Id.  at  13753-  54  para.  38. 
 87  Id.  at  13754-  55  paras.  39-  40. 
 88  See  http://  www.  sl.  universalservice.  org/  reference/  OnPremP1.  asp. 
 89  We  note  that  an  applicant  will  still  be  able  to  receive  discounts  for  Centrex  service,  which  telecommunications 
 carriers  provide  without  the  use  of  on-  premises  equipment,  as  a  Priority  One  service. 
 90  USAC  provides  discounts  on  the  cost  of  leasing  a  single  CSU/  DSU,  as  well  as  the  cost  of  installing  a  NID,  as 
 part  of  a  Priority  One  service. 
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 stating  that  facilities  located  on  the  school  premises  are  presumed  to  be  internal  connections  was  enunciated  in  the  context  of  considering  the  status  of  network  hubs  and  routers,  and  should  not  be 
 read  to  encompass  basic  termination  equipment.  A  basic  terminating  component,  though  normally  located  on  a  customers  premises,  is  necessary  to  receive  the  end-  to-  end  Internet  access 
 service  because  it  provides  translation  of  the  digital  transmission  using  the  appropriate  protocols.  In  the  case  of  a  cable  modem,  it  would  not  be  possible  to  receive  the  Internet  access  service  in 
 question  without  the  cable  modem  on  the  customers  premises.  Conversely,  the  internal  connections  on  the  site  would  continue  to  function  without  the  cable  modem.  Moreover,  while 
 customers  may  obtain  cable  modems  from  other  sources,  providers  of  cable  modem  service  typically  offer  customers  the  opportunity  to  lease  a  cable  modem  in  conjunction  with  the 
 provision  of  cable  modem  service.  We  also  note  that  the  cost  of  leasing  a  cable  modem  is  a  relatively  low  proportion  of  the  yearly  cost  of  the  service.  The  fact  that  technical  limitations 
 would,  as  a  practical  matter,  preclude  the  service  provider  from  using  the  cable  modem  to  deliver  service  to  other  customers,  creating  a  de  facto  exclusivity  arrangement,  in  our  view  does  not 
 support  a  finding  that  such  equipment  must  be  viewed  as  internal  connections.  Rather,  we  conclude  that  it  is  appropriate  to  provide  discounts  on  the  lease  of  a  single  basic  terminating 
 component  used  at  a  site  as  a  Priority  One  service.  91 
 49.  We  also  clarify  that  it  is  appropriate  to  provide  Priority  One  discounts  on  service  provider  charges  to  recoup  the  cost  of  leasing  optical  equipment  to  light  fiber,  when  that  optical 

 equipment  is  the  single  basic  terminating  component  of  an  end-  to-  end  network  and  it  is  necessary  to  provide  an  end-  to-  end  telecommunications  or  Internet  access  service.  We  reach  that  conclusion 
 even  though  the  optical  equipment  on  the  customers  end,  as  a  technical  matter,  is  dedicated  to  the  customers  sole  use. 

 C.  Carryover  of  Funds 
 1.  Background 
 50.  In  the  Schools  and  Libraries  NPRM,  the  Commission  sought  comment  on  whether  to  carry  forward  unused  funding  to  subsequent  funding  years.  92  Subsequently  in  the  Schools  and 

 Libraries  Order,  the  Commission  concluded  that,  beginning  with  the  second  quarter  of  2003,  any  unused  funds  from  the  schools  and  libraries  support  mechanism  would,  consistent  with  the  public 
 interest,  be  carried  forward  for  disbursement  in  subsequent  funding  years  of  the  schools  and  libraries  support  mechanism.  93 

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

 a  discount  only  as  Priority  Two  internal  connections. 
 92  Schools  and  Libraries  NPRM,  17  FCC  Rcd  at  1940-  41  para.  70. 

 93  See  Schools  and  Libraries  Order,  17  FCC  Rcd  at  11523-  24  para.  3.  In  the  Schools  and  Libraries  Order,  the 
 Commission  decided  that  it  was  in  the  public  interest  to  take  immediate  action  to  stabilize  the  contribution  factor  while  the  Commission  considered  whether  and  how  to  reform  the  way  in  which  contributions  to  the  universal 

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

 our  rules  to  require  the  Administrator  to  provide  quarterly  estimates  to  the  Commission  regarding  the  amount  of  unused  funds  that  will  be  available  for  carryover  in  the  subsequent  full  funding 
 year.  We  further  amend  our  rules  so  that  the  Commission  will  carry  forward  available  unused  funds  from  prior  years  on  an  annual  basis.  We  find  that,  in  light  of  the  high  demand  for 
 discounts,  such  action  is  consistent  with  section  254  and  the  public  interest,  as  well  as  the  framework  established  in  the  Schools  and  Libraries  Order.  Accordingly,  we  amend  section 
 54.507(  a)  of  our  rules,  as  provided  in  Appendix  A.  98 
 53.  The  Administrator  shall  continue  to  estimate  unused  funds  as  the  difference  between  the  amount  of  funds  collected,  or  made  available  for  that  particular  funding  year,  and  the  amount 

 of  funds  disbursed  or  to  be  disbursed.  99  We  note  that  the  Administrator  already  considers  the  remaining  appeals  for  a  funding  year  when  identifying  unused  funds.  100  Therefore,  we  do  not 
 believe  that  the  carryover  of  unused  funds  will  detract  from  the  funding  of  outstanding  appeals.  101 

 (Continued  from  previous  page)  service  mechanism  were  assessed.  The  Commission  determined  that  unused  funds  would  be  applied  to  reduce  the 
 contribution  factors  for  the  third  and  fourth  quarters  of  2002  and  the  first  quarter  of  2003.  Starting  with  the  second  quarter  of  2003,  any  unused  funds  from  the  schools  and  libraries  fund  would  be  carried  forward  for 
 disbursement  in  the  schools  and  libraries  support  mechanism.  94 
 Schools  and  Libraries  Further  Notice,  18  FCC  Rcd  at  9233-  34  paras.  93-  98.  95 
 Id.  at  9233  para.  94.  96 
 Id.  97 
 See  Federal  Universal  Service  Support  Mechanisms  Fund  Size  Projections  for  the  First  Quarter  2004,  available  at  http://  www.  universalservice.  org/  overview/  filings  (filed  October  31,  2003)  (USAC  Filing  for  First  Quarter 

 2004  Projections). 
 98  See  Appendix  A. 

 99  See  Schools  and  Libraries  Further  Notice,  18  FCC  Rcd  at  9234  para.  96  . 
 100  See,  e.  g.,  USAC  Filing  for  First  Quarter  2004  Projections  at  30-  32. 
 101  See  CoSN  and  ISTE  FNPRM  Comments  at  3;  EdLiNC  FNPRM  Comments  at  1. 
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 54.  Consistent  with  the  proposed  rules  in  the  Schools  and  Libraries  Further  Notice,  we  also  amend  the  rules  to  require  the  Administrator  to  file  with  the  Commission  quarterly  estimates 
 of  unused  funds  from  prior  years  of  the  schools  and  libraries  support  mechanism  when  it  submits  its  projection  of  schools  and  libraries  program  demand  for  the  upcoming  quarter.  102  This 
 amendment  codifies  the  Administrators  existing  reporting  practice  and  reporting  cycle.  103  The  quarterly  estimate  serves  to  prepare  the  Administrator  for  the  annual  release  of  carryover  funds 
 and  provides  schools  and  libraries  with  general  notice  regarding  the  amount  of  unused  funds  that  may  be  made  available  in  the  subsequent  year.  104  We  disagree  with  NAIS  that  the  quarterly 
 reporting  procedure  would  become  too  cumbersome  and  hinder  the  overall  integrity  of  the  program.  105  We  do  not  believe  that  the  Administrator  will  be  overburdened  by  this  requirement 
 because  it  has  been  reporting  quarterly  estimates  of  unused  funds  for  six  quarters  without  a  problem. 

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

 unused  funds  on  an  annual  basis  allows  the  Administrator  to  refine  its  calculation  of  available  funds  over  four  reporting  quarters  as  the  funding  year  progresses  starting  with  the  third  quarter  of 
 the  calendar  year.  The  annual  carryover  of  funds  during  the  second  quarter  of  the  calendar  year  also  coincides  with  the  time  of  year  the  Administrator  begins  making  funding  commitment 

 102  See  47  C.  F.  R.  54.709. 
 103  See  Wireline  Competition  Bureau  Announces  No  Change  in  Third  Quarter  2002  Universal  Service 
 Contribution  Factor,  CC  Docket  No.  96-  45,  Public  Notice,  17  FCC  Rcd  11128,  11129  (2002).  104 
 See  Schools  and  Libraries  Further  Notice,  18  FCC  Rcd  at  9233  para  94.  105 
 See  NAIS  FNPRM  Comments  at  1.  106 
 Consistent  with  the  Schools  and  Libraries  Order,  all  unused  funds  as  of  second  quarter  of  2003,  i.  e.,  any  remaining  unused  funds  from  all  funding  years,  will  be  carried  forward  into  Funding  Year  2004  in  accordance 

 with  the  public  interest.  Schools  and  Libraries  Order,  17  FCC  Rcd  at  11530-  31  para.  19.  107 
 47  C.  F.  R.  54.709(  a)(  3). 
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 decisions  for  the  upcoming  funding  year.  108  We  believe  that  the  timing  of  this  process  provides  certainty  regarding  when  unused  funds  will  be  carried  forward  for  use  in  the  schools  and  libraries 
 program  with  minimal  disruption  to  the  administration  of  the  program.  109 
 57.  In  order  to  implement  the  Commissions  prior  decision  to  carry  over  funds  beginning  April  1,  2003,  we  modify  the  schedule  for  this  year  only  in  order  to  implement  the  process  for 

 Funding  Year  2003.  We  direct  the  Administrator  to  carry  forward  unused  funds  as  projected  for  the  first  quarter  of  2004  for  use  during  the  remainder  of  Funding  Year  2003.  110  While  there  will 
 be  an  increase  in  the  amount  of  funds  available  in  Funding  Year  2003,  we  note  that  no  decisions  previously  made  by  USAC  concerning  the  distribution  of  funds  for  Funding  Year  2003  will  be 
 reversed  or  revisited.  Only  funding  requests  that  are  currently  pending  will  be  considered  for  the  Funding  Year  2003  carryover  funding.  Henceforth,  starting  with  the  second  quarter  of  2004, 
 funds  will  be  carried  over  on  an  annual  basis  as  described  in  the  previous  paragraph. 
 58.  Finally,  we  take  this  opportunity  to  revise  section  54.509(  b)  of  the  Commissions  rules  to  conform  to  the  Fifth  Order  on  Reconsideration.  111  Section  54.509(  b)  provides  that,  if  the 

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

 IV.  SECOND  FURTHER  NOTICE  OF  PROPOSED  RULEMAKING 
 A.  Discount  Matrix 
 59.  Under  the  Commissions  rules,  eligible  schools  and  libraries  may  receive  discounts  ranging  from  20  percent  to  90  percent  of  the  pre-  discount  price  of  eligible  services,  based  on 

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

 109  Schools  and  Libraries  Further  Notice,  18  FCC  Rcd  at  9234  para.  97. 
 110  See  USAC  Filing  for  First  Quarter  2004  Projections  at  30-  32. 

 111  Fifth  Order  on  Reconsideration,  13  FCC  Rcd  at  14936-  40  para.  34-  38. 
 112  5  U.  S.  C.    553(  b)(  3)(  A). 
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 indicators  of  need.  113  We  seek  comment  on  the  effectiveness  and  efficiency  of  the  discount  matrix  used  to  determine  support  payments  for  eligible  applicants.  In  particular,  we  seek 
 comment  on  changing  the  matrix  to  adjust  the  levels  of  discounts  received  by  schools  and  libraries  for  supported  services.  We  also  particularly  seek  comment  from  the  State  members  of 
 the  Federal-  State  Joint  Board  on  Universal  Service,  and  commit  to  ongoing  informal  consultations  on  these  issues. 

 60.  Interested  parties  have  indicated  that  an  altered  discount  matrix  may  better  serve  the  schools  and  libraries  program.  In  response  to  the  Schools  and  Libraries  NPRM,  several 
 commenters  asserted  that  reducing  the  discount  rate  would  make  applicants  more  accountable  for  their  funding  requests  114  and  dissuade  vendors  from  improperly  offering  to  forgive  or  refund  the 
 10  percent  contribution  required  of  applicants  in  the  highest  discount  band.  115  In  addition,  commenters  stated  that  altering  the  discount  rate  would  be  an  effective  way  to  increase  the 
 availability  of  funds  for  eligible  applicants  outside  the  highest  discount  band.  116  While  the  Universal  Service  Order  prioritized  support  for  entities  with  the  greatest  level  of  economic 
 disadvantage,  117  some  interested  parties  have  suggested  that  greater  emphasis  should  be  given  to  the  equitable  distribution  of  E-  rate  funds  to  eligible  applicants  from  all  discount  bands,  to  ensure 
 that  they  have  comparable  access  to  advanced  telecommunications  and  information  services.  118  Participants  in  the  Commissions  Public  Forum  on  the  E-  rate  program  in  May  2003  also 
 suggested  that  the  Commission  amend  its  discount  matrix,  and  USACs  Task  Force  on  Waste, 
 113  See  47  C.  F.  R.    54.505.  Schools  and  libraries  in  areas  with  higher  percentages  of  students  eligible  for  free  or 
 reduced-  price  lunch  through  the  National  School  Lunch  Program  or  a  federally  approved  alternative  mechanism  qualify  for  higher  discounts  for  eligible  services  than  applicants  with  low  levels  of  eligibility  for  such  programs. 

 Schools  and  libraries  located  in  rural  areas  also  generally  receive  greater  discounts.  Id.  114 
 See,  e.  g.,  Iowa  DOE  NPRM  Comments  at  3-  4;  Pennsylvania  Board  of  Education  NPRM  Comments  at  7.  Some  interested  parties  have  claimed  that  the  minimal  financial  contribution  required  of  applicants  in  the  highest 

 discount  band  allows  applicants  to  request  funds  without  regard  to  need  or  cost-  effectiveness  and  allows  vendors  to  exploit  the  system.  See,  e.  g.,  Iowa  DOE  NPRM  Comments  at  3-  4;  Pennsylvania  Board  of  Education  NPRM 
 Comments  at  7.  Some  parties  assert  that  90  percent  applicants  periodically  request  funding  for  services  and  equipment  that  they  cannot  practically  utilize.  Letter  from  Greg  Weisiger,  Virginia  Department  of  Education,  on 
 behalf  of  CCSSO  (filed  Mar.  18,  2003).  115 
 See,  e.  g.,  Funds  for  Learning,  LLC  NPRM  Comments  at  15;  Tel/  Logic  NPRM  Comments  at  18  &  n.  5.  Specifically,  some  commenters  suggested  that  vendors  offer  grants  or  extra  services,  in  the  amount  equivalent  to 

 the  applicants  contribution  to  those  applicants  that  must  pay  10  percent  of  the  costs  as  consideration  for  accepting  a  vendors  bid.  See,  e.  g.,  Iowa  DOE  NPRM  Comments  at  3-  4;  Pennsylvania  Board  of  Education  NPRM 
 Comments  at  7;  see  also  Letter  from  Greg  Weisiger,  Virginia  Department  of  Education,  on  behalf  of  CCSSO  (filed  Mar.  18,  2003)  and  Semiannual  Reports  of  the  Office  of  the  Inspector  General. 
 116  See  e.  g.,  Illinois  State  Board  of  Education  NPRM  Comments  at  10;  Pennsylvania  Department  of  Education 
 NPRM  Comments  at  7;  Council  of  Chief  State  School  Officers  NPRM  Comments  at  47-  48.  Several  parties  reiterated  these  suggestions  at  a  May  8,  2003,  public  forum  held  by  the  Commission.  See  E-  rate  Public  Forum, 

 BellSouth  Statement  at  10;  Funds  for  Learning,  LLC  Statement  at  12,  and  American  Library  Association  Statement  at  4-  5. 
 117  See  Universal  Service  Order,  12  FCC  Rcd.  at  9038  paras.  497-  499. 
 118  See,  e.  g.,  Illinois  State  Board  of  Education  NPRM  Comments  at  10;  Pennsylvania  Department  of  Education 
 NPRM  Comments  at  7;  CCSSO  NPRM  Comments  at  47-  48;  E-  Rate  Public  Forum,  BellSouth  Statement  at  10-  11. 
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 Fraud,  and  Abuse  has  recommended  that  the  discount  level  for  internal  connections  be  lowered  from  90  percent  to  80  percent.  119 
 61.  For  these  reasons,  we  seek  comment  on  whether  the  Commission  should  amend  the  discount  matrix  to  reduce  the  discounts  available  in  some  or  all  of  the  discount  bands,  including 
 the  current  90  percent  discount  band.  We  propose  that  such  a  change,  if  adopted,  become  effective  in  Funding  Year  2005.  We  seek  comment  on  whether  the  current  discount  matrix 
 provides  sufficient  incentives  for  schools  and  libraries  to  limit  funding  requests  to  services  that  can  be  efficiently  used  and  for  vendors  to  competitively  price  their  services.  We  also  seek 
 comment  on  whether  it  would  be  appropriate  to  adjust  the  discount  matrix  in  order  to  expand  the  reach  of  funding  to  lower  discount  bands.  We  note  that  the  rules  we  adopt  in  the  foregoing  Order, 
 limiting  the  availability  of  support  for  internal  connections  to  twice  every  five  years,  is  intended  to  make  support  available  to  more  applicants  on  a  regular  basis.  How  does  this  action  affect  the 
 need  to  adjust  the  discount  matrix?  We  further  seek  comment  on  which  discount  rates  in  the  matrix,  if  any,  other  than  the  highest  discount  rate  band,  should  be  reduced.  Additionally,  we 
 seek  comment  on  whether  developing  a  separate  discount  matrix  for  Priority  Two  funding  would  effectively  address  issues  of  waste,  fraud,  and  abuse  and  expand  the  reach  of  funds  to  a  larger 
 number  of  schools  and  libraries.  120  Many  parties  have  suggested  that,  at  a  minimum,  the  maximum  discount  level  for  internal  connections  be  lowered  to  70  percent.  121  What  would  be  the 
 effect  of  such  a  change?  While  we  seek  comment  generally  on  revisions  to  the  discount  matrix,  we  note  that  we  are  not  seeking  comment  on  whether  to  combine  the  existing  Priority  One  and 
 Priority  Two  funding  categories. 
 62.  We  ask  that  commenters  address  implementation  issues  surrounding  a  change  in  the  discount  matrix.  Currently,  in  the  event  that  there  are  not  sufficient  funds  remaining  under  the 

 annual  cap  to  support  all  requests  for  discounts  at  a  particular  discount  level,  funds  are  allocated  on  a  pro  rata  basis  among  applicants  at  that  discount  level.  122  Should  funds  continue  to  be 
 allocated  among  all  applicants  at  the  discount  level  on  a  pro  rata  basis,  or  is  there  some  other  means  of  allocating  the  remaining  funds?  We  seek  comment  on  how  changes  to  the  discount 
 matrix  should  be  implemented  across  all  levels  of  need.  Should  certain  existing  discount  levels  be  combined?  For  example,  should  the  90  and  80  percent  discount  levels  be  combined?  In  the 

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

 120  Since  inception  of  E-  rate  program,  all  eligible  requests  for  Priority  One  services  have  been  funded,  but  there 
 have  been  funds  available  for  only  a  portion  of  eligible  requests  for  Priority  Two  services.  Further,  concerns  have  been  expressed  that  a  comparatively  higher  occurrence  of  waste,  fraud  and  abuse  problems  exists  among  Priority 

 Two  services.  Update  on  USAC  Task  Force  on  the  Prevention  of  Waste,  Fraud  and  Abuse:  Meeting  #3,  at  http://  www.  sl.  universalservice.  org/  taskforce/  update3.  asp;  see  also  CCSSO  NPRM  Comments  at  47-  48; 
 Pennsylvania  Board  of  Education  NPRM  Comments  at  7;  State  of  Alaska  Department  of  Education  and  Early  Development  NPRM  Reply  at  6;  Iowa  DOE  NPRM  Comments  at  9. 
 121  See,  e.  g.,  Greg  Weisiger  NPRM  Comments  at  6;  ISBE  NPRM  Comments  at  26;  SECA  NPRM  Comments  at 
 16-  18;  Tel/  Logic  NPRM  Comments  at  9-  10;  Wisconsin  NPRM  Comments  at  2-  3.  122 
 47  C.  F.  R.    54.507(  g)(  1)(  iv). 
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 alternative,  should  each  discount  level  be  reduced  by  a  fixed  amount?  For  example,  should  each  discount  level  be  reduced  by  10  percent?  Is  there  some  other  method  of  re-  setting  other  discount 
 levels  below  the  highest  discount  level?  Finally,  we  seek  comment  on  how  the  transition  to  a  new  discount  matrix,  if  adopted,  should  be  implemented  in  order  to  minimize  burdens  on  applicants 
 and  disruptions  to  the  program. 
 B.  Competitive  Bidding  Process 
 63.  We  seek  comment  on  the  current  process  of  applying  for  discounted  services.  Pursuant  to  competitive  bidding  requirements,  eligible  schools  and  libraries  that  wish  to  receive 

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

 64.  A  number  of  parties  have  suggested  that  the  current  Form  470  posting  process  should  be  modified  for  certain  types  of  services.  For  instance,  one  participant  in  the  Commissions 
 public  forum  on  the  ways  to  improve  the  administration  of  the  schools  and  libraries  mechanism  suggested  that  the  Form  470  process  be  eliminated  for  requests  for  funding  local  telephone 
 service.  128  Others  suggest  that  the  FCC  simplify  the  application  process  for  applications  that  only  seek  funding  for  local  and  long  distance  service  (including  cell  phone  service),  or  that  seek  to 
 continue  an  existing  telecommunications  service  or  Internet  access  service.  129  We  seek  comment  on  whether  it  would  serve  our  goals  to  simplify  or  eliminate  the  current  FCC  Form  470  posting 

 123  47  C.  F.  R.    54.504  (b). 
 124  47  C.  F.  R.    54.504  (b),  (c). 
 125  See,  e.  g.,  E-  Rate  Public  Forum,  EdLink  Statement  at  2  (applicants  indicate  that  posting  rarely  yields  multiple 
 vendor  bids)  and  Seattle  Public  Schools  Statement  at  2  (Form  470  posting  process  results  in  competitive  bids  in  only  a  few  instances). 

 126  See,  e.  g.,  Task  Force  Recommendation  at  5  (recommending  that  the  complexity  of  the  application  process 
 should  better  match  the  complexity  of  individual  applicant  situations).  127 
 Universal  Service  Order,  12  FCC  Rcd  at  9029  para.  480  (noting  that  the  competitive  bidding  process  ensures  that  the  eligible  entity  receives  information  about  all  telecommunication  choices  and  receives  varying,  competitive 

 bids,  which  preserves  the  fund  for  other  eligible  entities).  128 
 E-  Rate  Public  Forum,  Central  Susquehanna  Intermediate  Unit  Statement  at  3.  129 
 E-  Rate  Public  Forum,  American  Library  Association  Statement  at  2-  3. 
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 process  in  such  situations.  What  other  mechanisms  would  ensure  that  our  objective  of  ensuring  that  applicants  are  aware  of  potential  service  providers  and  select  reasonably  priced  services  is 
 met?  What  would  be  the  costs  and  benefits  of  such  a  change? 
 65.  We  also  seek  comment  on  how  we  can  ensure  that  applicants  select  cost  effective  services  in  situations  in  which  no  entity,  or  only  one  entity,  responds  to  a  Form  470  posting.  In 

 some  situations,  there  may  be  only  one  service  provider  capable  of,  or  willing  to,  provide  the  requested  service.  How  can  we  ensure  that  the  prices  for  such  services  are  reasonable,  and  do  not 
 waste  scarce  universal  service  funds?  Should  we  adopt  bright  line  rules  that  would  impose  limits  on  the  amount  of  discounts  that  could  be  available  in  such  situations? 

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

 C.  Definition  of  Rural  Area 
 67.  We  seek  comment  on  modifications  to  the  definition  of  rural  area  for  the  schools  and  libraries  mechanism.  133  Currently,  an  area  qualifies  as  rural  under  our  rules  for  the  schools 

 and  libraries  support  mechanism  if  it  is  located  in  a  non-  metropolitan  county  as  defined  by  the  Office  of  Management  and  Budget  or  is  specifically  identified  in  the  Goldsmith  Modification  to 
 1990  Census  data  published  by  the  Office  of  Rural  Health  Care  Policy  (ORHP).  134  We  understand,  however,  that  OHRP  no  longer  utilizes  the  definition  adopted  by  the  Commission  in 

 130  See  48  C.  F.  R.    52.203-  2. 
 131  Universal  Service  Order,  12  FCC  Rcd  at  9029  para.  480;  see  also  id.  at  8950  n.  819  (asking,  inter  alia,  whether 
 safeguards  were  needed  to  prevent  a  bidder  from  driving  out  competitors). 
 132  Sherman  Act,  15  U.  S.  C.    1. 

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

 134  See  47  C.  F.  R.    54.5,  54.505(  b)(  3)(  ii). 
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 1997,  and  that  there  will  be  no  Goldsmith  Modification  to  the  most  recent  2000  Census  data.  135 
 68.  We  seek  comment  on  whether  we  should  adopt  a  new  definition  of  rural  area  for  the  schools  and  libraries  program,  and,  if  so,  what  that  new  definition  should  be.  136  We  seek 

 comment  on  whether  there  are  there  any  definitions  for  rural  areas  used  by  other  government  agencies  that  would  be  appropriate  for  the  schools  and  libraries  program.  In  addition  to 
 describing  any  proposed  new  definitions,  we  ask  commenters  to  address  the  specific  proposals  that  have  already  been  raised  in  the  rural  health  care  proceeding.  In  particular,  several 
 commenters  in  the  rural  health  care  proceeding  suggest  that  the  Commission  adopt  the  rural  designation  system  currently  utilized  by  ORHP,  the  Rural  Urban  Commuting  Area  (RUCA) 
 system.  137  Others  propose  to  define  rural  as  non-  urbanized  areas,  as  specified  by  the  Census  Bureau.  138  We  also  recently  sought  comment  on  the  definition  of  rural  area  in  the  context  of 
 increasing  flexibility  and  the  deployment  of  spectrum-  based  services  in  rural  areas.  139  There  we  identified  and  sought  comment  on  the  following  potential  definitions  of  rural  area,  in  addition 
 to  the  ones  already  identified  above:  (1)  counties  with  a  population  density  of  100  persons  or  fewer  per  square  mile;  (2)  Rural  Service  Areas;  (3)  non-  nodal  counties  within  an  Economic  Area; 
 (4)  the  definition  of  rural  used  by  the  Rural  Utility  Service  for  its  broadband  program;  (5)  the  definition  of  rural  based  on  census  tracts  as  outlined  by  the  Economic  Research  Service  of  the 
 USDA;  and  (6)  any  census  tract  that  is  not  within  ten  miles  of  any  incorporated  or  census-designated  place  containing  more  than  2,500  people,  and  is  not  within  a  county  or  county 
 equivalent  which  has  an  overall  population  density  of  more  than  500  persons  per  square  mile  of  land.  140  Finally,  some  commenters  in  that  proceeding  assert  that  if  the  Commission  adopts  a  new 
 definition  of  rural,  it  should  grandfather  existing  areas  that  currently  qualify  as  rural  area,  if  they 

 135  See  Rural  Health  Care  Support  Mechanism,  WC  Docket  No.  02-  60,  Notice  of  Proposed  Rulemaking,  17  FCC 
 Rcd  7806  (2002);  see  also  Kansas  Department  of  Health  NPRM  Comments  at  3  (WC  Docket  02-  60).  136 
 We  note  that  the  rural  health  care  support  mechanism  uses  the  same  definition  of  rural  area.  Recently,  we  sought  comment  on  possible  changes  to  the  rural  area  definition  in  the  context  of  the  rural  health  care  program  in  a 

 separate  notice  of  proposed  rulemaking.  Rural  Health  Care  Support  Mechanism,  WC  Docket  No.  02-  60,  Report  and  Order,  Order  on  Reconsideration,  and  Further  Notice  of  Proposed  Rulemaking,  FCC  03-  288,  at  paras.  63-  64 
 (rel.  Nov.  17,  2003)  (Rural  Health  Care  Order).  137 
 See,  e.  g.,  Center  for  Rural  Health  Comments  at  3  (WC  Docket  02-  60);  New  Mexico  Health  Comments  at  3  (WC  Docket  02-  60);  University  of  American  Health  Sciences  Center  Comments  at  2  (WC  Docket  02-  60). 

 138  See,  e.  g.,  American  Telemedicine  Comments  at  5  (WC  Docket  02-  60);  Blue  Cross  Comments  at  4  (WC  Docket 
 02-  60);  Northern  Sierra  Comments  at  7-  8  (WC  Docket  02-  60).  139 
 Facilitating  the  Provision  of  Spectrum-  Based  Services  to  Rural  Areas  and  Promoting  Opportunities  for  Rural  Telephone  Companies  To  Provide  Spectrum-  Based  Services,  WT  Docket  No.  02-  381,  2000  Biennial  Regulatory 

 Review  Spectrum  Aggregation  Limits  For  Commercial  Mobile  Radio  Services,  WT  Docket  No.  01-  14,  Increasing  Flexibility  To  Promote  Access  to  and  the  Efficient  and  Intensive  Use  of  Spectrum  and  the  Widespread  Deployment 
 of  Wireless  Services,  and  To  Facilitate  Capital  Formation,  WT  Docket  No.  03-  202,  Notice  of  Proposed  Rulemaking,  FCC  03-  222,  at  paras.  10-  12,  (rel.  October  6,  2003). 
 140  Id.  at  para.  12. 
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 would  no  longer  qualify  under  the  new  definition.  141 
 69.  Commenters  are  encouraged  to  describe  the  effects  of  any  new  definition  on  the  reach  of  the  schools  and  libraries  program,  e.  g.,  how  many  existing  rural  areas  would  become  non-  rural 

 and  vice  versa,  and  whether  and  how  the  Commission  should  consider  any  such  changes  in  adopting  a  new  definition  for  rural  area.  We  also  seek  comment  on  whether  it  is  necessary  or 
 desirable  to  use  the  same  definition  of  rural  for  both  the  schools  and  libraries  program  and  rural  health  care  program. 

 D.  Definition  of  Internet  Access 
 70.  In  the  Schools  and  Libraries  NPRM,  the  Commission  sought  comment  on  whether  modifying  our  rules  governing  the  funding  of  Internet  content  would  improve  program  operation 

 consistent  with  our  other  goals  of  ensuring  a  fair  and  equitable  distribution  of  benefits  and  preventing  waste,  fraud,  and  abuse.  In  particular,  the  Commission  sought  comment  on  whether 
 to  permit  funding  for  an  Internet  access  package  that  includes  content  if  that  package  is  the  most  cost  effective  form  of  Internet  access.  142  Comments  we  received  in  response  to  the  Schools  and 
 Libraries  NPRM  indicated  that  parties  had  widely  varying  views  of  what  should  be  viewed  as  content,  143  although  many  parties  expressed  concern  about  providing  funding  for  Internet 
 access  bundled  with  subject  matter  content.  144  The  record  developed  on  this  issue,  in  conjunction  with  recent  changes  made  in  the  rural  health  care  program,  leads  us  to  seek  more  focused 
 comment  on  whether  we  should  alter  the  definition  of  Internet  access  used  for  the  schools  and  libraries  program.  Support  for  Internet  access  under  the  schools  and  libraries  program  is  provided 
 only  for  basic  conduit  access  to  the  Internet.  145  Support  in  the  Internet  access  category  has  not  been  provided  for  virtual  private  networks,  146  nor  has  it  been  provided  for  Internet  access  services 
 that  enable  communications  through  private  networks.  In  our  recent  Rural  Health  Care  Order,  we  concluded  that  the  definition  currently  used  in  the  schools  and  libraries  context  was  too 
 limited  for  the  rural  health  care  program,  because  it  precludes  support  for  features  that  provide  the 

 141  See  Midwest  Comments  at  4  (WC  Docket  02-  60).  For  the  2000  Census,  urban  territories  include  urbanized 
 areas  (UA)  and  urban  clusters  (UC),  which  consist  of  core  census  block  groups  or  blocks  that  have  a  population  density  of  at  least  1,000  people  per  square  mile  and  surrounding  census  blocks  that  have  an  overall  density  of  at 

 least  500  people  per  square  mile.  Rural  territories  include  areas  located  outside  of  UAs  and  UCs.  See  http://  www.  census.  gov/  geo/  www/  ua/  ua_  2k.  html  (visited  Sept.  11,  2003). 
 142  Schools  and  Libraries  NPRM,  17  FCC  Rcd  at  1925  para.  25. 
 143  In  response  to  this  question,  several  commenters  urged  the  Commission  to  permit  funding  for  virus  protection, 
 firewalls,  and  filtering.  See  Coalition  for  E-  Rate  Reform  NPRM  Comments  at  7;  Funds  for  Learning  NPRM  Comments  at  7-  8;  Illinois  BoE  NPRM  Comments  at  14-  15;  and  TAMSCO  NPRM  Comments  at  2. 

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

 145  Universal  Service  Order,  12  FCC  Rcd  at  9008-  09  para.  436. 
 146  Support  has  been  available  for  virtual  private  networks,  however,  to  the  extent  offered  as  a  telecommunications 
 service. 
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 capability  to  generate  or  alter  the  content  of  information.  147  We  concluded  that  adopting  such  a  limitation  in  the  rural  health  care  context  would  significantly  undercut  the  utility  of  providing 
 support  for  Internet  access  to  rural  health  care  providers,  because  the  ability  to  alter  and  interact  with  information  over  the  Internet  is  a  functionality  that  could  facilitate  improved  medical  care  in 
 rural  areas.  148 
 71.  We  now  seek  comment  on  whether  we  should  amend  our  definition  of  Internet  access  in  the  schools  context  to  conform  to  the  definition  recently  adopted  for  the  rural  health  care 

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

 E.  Wide  Area  Networks 
 72.  In  the  Schools  and  Libraries  NPRM,  the  Commission  sought  comment  on  whether  to  modify  its  policies  regarding  the  funding  of  Priority  One  services  (telecommunications  service 

 and  Internet  access)  that  include  service  provider  charges  for  capital  investments  for  wide  area  networks.  150  The  record  we  received  demonstrated  a  wide  range  of  views  on  what  changes,  if 

 147  Section  54.5  of  our  rules  states: 
 Internet  Access  includes  the  following  elements:  .  .  . 
 (2)  The  transmission  of  information  as  part  of  a  gateway  to  an  information  service,  when  that  transmission  does  not  involve  the  generation  or  alteration  of  the  content  of  information,  but  may 
 include  data  transmission,  address  translation,  protocol  conversion,  billing  management,  introductory  information  content,  and  navigational  systems  that  enable  users  to  access  information  services,  and  that  do 
 not  affect  the  presentation  of  such  information  to  users  .  .  .. 
 47  C.  F.  R.    54.5.  148 
 Rural  Health  Care  Order  and  Further  Notice,  FCC  03-  288,  at  paras.  18-  29.  149 
 See  www.  sl.  universalservice.  org/  reference/  costallocationguide.  asp.  150 
 Schools  and  Libraries  NPRM,  17  FCC  Rcd  at  1922-  23  paras.  16-  20.  The  Commission  noted  that  in  the  1999  (continued.) 
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 any,  should  be  made  in  this  area.  151 
 73.  In  light  of  our  decision  above  to  impose  limitations  on  funding  of  internal  connections,  we  recognize  that  there  may  be  even  greater  incentives  than  before  for  service  providers  to 

 characterize  charges  for  facilities  that  also  could  be  viewed  as  internal  connections  as  Priority  One  services.  We  believe  it  desirable,  therefore,  to  seek  more  focused  comment  on  specific 
 proposals  in  this  area  to  ensure  that  funds  are  distributed  in  a  fair  and  equitable  fashion.  If  we  adopt  rules  in  this  area,  we  anticipate  that  those  rules  would  be  effective  no  earlier  than  Funding 
 Year  2005.  We  seek  comment  on  the  advantages  and  disadvantages  of  the  proposals  set  forth  below. 

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

 75.  In  the  Brooklyn  Order,  the  Commission  determined  that  recipients  may  receive  discounts  on  non-  recurring  charges  associated  with  capital  investment  made  by  a  service  provider 
 in  an  amount  equal  to  the  investment  prorated  equally  over  a  term  of  at  least  three  years.  152  We  now  seek  focused  comment  on  whether  we  should  adopt  a  rule  that  discounts  for  any  service 
 provider  charges  for  capital  investment  of  $500,000  or  more  must  be  prorated  over  a  period  of  at  least  five  years.  153  Like  the  other  proposal,  such  a  rule  could  serve  to  spread  funding  for  Priority 
 (Continued  from  previous  page)  Tennessee  Order,  it  had  established  that  universal  service  funds  may  be  used  to  fund  equipment  and  infrastructure 
 build-  out  associated  with  the  provision  of  eligible  services,  and  that  in  the  Brooklyn  Order,  it  required  that  discounts  on  non-  recurring  charges  associated  with  capital  investment  be  prorated  equally  over  a  term  of  at  least  three  years. 
 USAC  has  implemented  these  decisions  through  guidelines  posted  on  its  website.  See  http://  www.  sl.  universalservice.  org/  reference/  OnPremP1.  asp,  http://  www.  sl.  universalservice.  org/  reference/  wan.  asp. 
 151  See,  e.  g.,  Alaska  NPRM  Comments  at  4  (permitting  the  lease  of  WANs  is  the  most  efficient  way  to  deliver 
 service  to  rural  schools);  BellSouth/  SBC  NPRM  Comments  at  9-  12  (should  be  viewed  as  provision  of  service,  not  a  lease  of  a  WAN);  Boston  at  3-  4  (Priority  One  funding  should  be  available  only  for  leasing  of  CSU/  DSUs  and 

 routers;  leasing  of  servers,  filters,  switches,  hubs,  content  caches  and  all  other  on-  premise  equipment  should  only  be  allowed  under  Internal  Connections);  NOBLE  at  1  (basic  connectivity  equipment,  such  as  routers,  CSU/  DSU  should 
 be  treated  as  Priority  One;  hubs,  switches  and  cabling  should  be  treated  as  Priority  Two  internal  connections);  Sprint  at  4-  5  (consider  what  percentage  of  Priority  One  funds  support  the  leasing  of  WANs  before  removing  leased 
 WANs  from  Priority  One);  Worldcom  NPRM  Comments  at  8;  Worldcom  NPRM  Reply  at  7  (look  at  economic  depreciation  lives  of  any  funded  asset;  should  only  fund  the  depreciable  amount  in  a  given  year). 
 152  Brooklyn  Order,  15  FCC  Rcd  at  18606-  07  para.  20. 
 153  See  New  York  Board  of  Education  NPRM  Comments  at  3  (at  a  minimum,  amortize  costs  of  leasing  equipment 
 for  WANs  over  five  years  to  lessen  drain  on  fund);  Erate  Elite  NPRM  Comments  at  4  (extend  cost  recovery  to  five  years);  Great  City  NPRM  Comments  at  2  (extend  cost  recovery  to  five  years);  but  see  Arkansas  NPRM 

 Comments  at  3-  4  (lease  expenses  should  be  spread  over  three  years);  Cox  NPRM  Comments  at  7-  8  (three  years);  Excaliber  NPRM  Comments  at  4  (three  years). 
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 One  services  more  evenly  across  all  recipients,  and  could  limit  the  extent  to  which  the  universal  service  fund  is  used  to  finance  significant  service  provider  infrastructure  investment. 
 76.  We  also  take  this  opportunity  to  address  other  issues  related  to  the  provision  of  service  over  wide  area  networks.  Under  our  current  rules,  schools  and  libraries  may  receive  support  to 
 obtain  telecommunications  services  using  lit  fiber.  Schools  and  libraries  may  also  receive  discounts  when  they  obtain  Internet  access  that  uses  lit  fiber.  154  In  order  to  receive  support  for 
 services  using  lit  fiber  as  a  Priority  One  service,  the  school  or  library  must  purchase  a  functioning  service  from  either  a  telecommunications  service  provider  or  internet  access  provider,  which  in 
 turn  is  responsible  for  ensuring  that  both  the  fiber  and  the  equipment  to  light  the  fiber  are  provided.  155  If  a  school  or  library  enters  a  contract  to  lease  unlit  fiber,  and  obtain 
 telecommunications  service  or  Internet  access  using  lit  fiber,  it  must  segregate  the  cost  of  the  unsupported  unlit  fiber  from  the  cost  of  the  supported  lit  fiber  service  in  its  application  for 
 support. 
 77.  We  seek  comment  on  the  provision  of  funding  for  unlit  (dark)  fiber  under  the  schools  and  libraries  support  mechanism.  156  We  note  that  the  Commission  has  addressed  dark  fiber  in 

 several  different  contexts.  157  We  seek  comment  on  whether  we  should  permit  funding  for  dark 
 154  Consistent  with  our  current  definition  of  Internet  access,  the  lit  fiber  may  only  be  used  by  the  school  or  library 
 to  access  the  Internet,  and  may  not  be  used  for  communications  between  multiple  locations,  i.  e.,  inter-  school  communications  such  as  video  conferencing. 

 155  In  cases  in  which  a  school  or  library  has  previously  purchased  equipment  to  light  fiber,  such  equipment  may  be 
 traded-  in  to  the  service  provider  and  leased  back  by  the  applicant.  The  applicant  may  not  use  the  credit  for  the  trade-  in  to  pay  its  non-  discounted  portion  of  the  services.  Such  a  contract  modification  would  be  deemed  a  minor 

 contract  modification  under  section  54.500(  g)  of  the  Commissions  rules  if  this  was  within  the  scope  of  the  original  contract  and  the  change  has  no  effect  or  negligible  effect  on  price,  quantity,  quality,  or  delivery  under  the 
 original  contract.  For  instance,  such  a  change  could  fit  within  the  minor  contract  modification  rule  if  the  original  contract  was  for  the  provision  of  high  bandwidth  transmission  capability. 

 156  USAC's  2003  Eligible  Services  list  states,  The  FCC  has  not  resolved  whether  unlit  dark  fiber  is  a 
 telecommunications  service.  Pending  resolution  of  this  issue,  it  is  not  eligible  for  funding.  See  http://  www.  sl.  universalservice.  org/  data/  pdf/  EligibleServicesList101003.  pdf  (dated  October  10,  2003).  Prior  to 

 2003,  USAC  provided  funding  for  dark  fiber  as  set  forth  on  its  Eligible  Services  List:  Service  providers  can  lease  fiber  capacity  that  does  not  include  modulating  electronics  to  schools  and  libraries,  if  the  applicant  provides 
 the  electronics  to  modulate  the  fiber.  The  lease  of  such  fiber  cable  for  obtaining  Telecommunications  Services  or  Internet  access  is  eligible,  if  the  applicant's  electronics  are  located  solely  at  the  eligible  school  or  library  sites,  and 
 if  the  conditions  apply  that  are  described  under  the  heading  Wide  Area  Network  in  the  relevant  section  (Telecommunications  Services  or  Internet  Access).  See  2002  Eligible  Services  List  (issued  October  17,  2001); 
 2001  Eligible  Services  List  (issued  December  19,  2000);  2000  Eligible  Services  List  (issued  November  23,  1999) 
 157  See  Southwestern  Bell  Tel.  Co.  v.  FCC,  19  F.  3d  1475  (D.  C.  Cir.  1994)  (finding  that  the  Commission  had  failed 
 to  provide  a  sufficient  analysis  for  concluding  that  unlit  (dark)  fiber  service  was  a  common  carrier  service  and  suspending  the  Commission  order  pending  proceedings  on  remand);  Instructions  to  the  Telecommunications 

 Reporting  Worksheet,  FCC  Form  499-  A,  February  2003,  at  22  (instructing  universal  service  contributors  not  to  include  revenues  for  dark  fiber  services  as  telecommunications  revenues);  but  see  Deployment  of  Wireline 
 Services  Offering  Advanced  Telecommunications  Capability,  Fourth  Report  and  Order,  16  FCC  Rcd  15435,  15473-  74  paras.  74-  75  and  n.  189  (2001)  (declaring  that  a  dark  fiber  service  with  respect  to  cross-  connects  is  a 
 common  carrier  service  under  the  second  prong  of  NARUC  II). 
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 fiber,  pursuant  to  section  254(  h),  to  provide  additional  flexibility  to  applicants  in  meeting  their  communications  needs.  We  also  seek  comment  on  whether  any  limitations  should  be  adopted  to 
 preclude  discounts  on  the  full  cost  of  dark  fiber  network  buildout  when  the  applicant  will  not  be  utilizing  the  full  capacity  of  that  network. 

 F.  Recovery  of  Funds 
 78.  In  1999,  the  Commission  adopted  the  Commitment  Adjustment  Order,  which  directed  the  Administrator  to  recover  funding  erroneously  committed  to  schools  and  libraries  in  violation 

 of  the  Telecommunications  Act  of  1996.  158  The  Commission  adopted  a  companion  order  on  the  same  day  granting  a  limited  waiver  of  four  Commission  rules  to  first  year  applicants  who  had 
 received  commitments  and  disbursements  in  violation  of  Commission  rules.  159  Shortly  thereafter,  pursuant  to  the  Commitment  Adjustment  Order,  USAC  submitted  to  the  Commission  its  plan  to 
 collect  universal  service  funds  that  were  erroneously  disbursed  in  the  first  year  of  the  program  in  violation  of  the  statute.  160  Subsequently,  in  2000,  the  Commission  adopted  with  minor 
 modifications  USACs  plan  to  implement  the  requirements  of  the  Commitment  Adjustment  Order.  161  In  that  Order,  the  Commission  also  emphasized  that  the  recovery  plan  is  not  intended 
 to  cover  the  rare  cases  in  which  the  Commission  has  determined  that  a  school  or  library  has  engaged  in  waste,  fraud  or  abuse.  162  The  Commission  stated  that  it  would  address  such 
 situations  on  a  case-  by-  case  basis.  163 
 79.  At  the  time  the  Commission  adopted  the  Commitment  Adjustment  Order,  USAC  had  been  distributing  funds  through  the  schools  and  libraries  universal  service  support  mechanism  for 

 approximately  one  year.  The  Commission  and  USAC  then  faced  a  limited  range  of  situations  in 

 158  Changes  to  the  Board  of  Directors  of  the  National  Exchange  Carrier  Association,  Inc.,  Federal-  State  Joint 
 Board  on  Universal  Service,  CC  Docket  Nos.  97-  21  and  96-  45,  Order,  FCC  99-  291  (rel.  October  8,  1999)  (Commitment  Adjustment  Order),  petitions  for  reconsideration  pending,  petition  for  review  pending  sub.  nom. 

 United  States  Telecom  Assn  v.  FCC,  Case  Nos.  00-  1500,  00-  1501(  D.  C.  Cir.  Filed  Nov.  27,  2000).  Petitions  for  Reconsideration  were  filed  by  MCI  WorldCom,  Inc.  (WorldCom),  Sprint  Corporation  (Sprint),  and  the  United 
 States  Telecom  Association  (USTA).  Additional  comments  in  support  of  the  Petitions  for  Reconsideration  were  filed  by  Nextel  Communications,  Inc.  (Nextel)  and  AT&  T  Corp.  (AT&  T). 

 159  Changes  to  the  Board  of  Directors  of  the  National  Exchange  Carrier  Association,  Inc.,  Federal-  State  Joint 
 Board  on  Universal  Service,  CC  Docket  Nos.  97-  21  and  96-  45,  Order,  15  FCC  Rcd  7197  (1999)  (Waiver  Order).  The  Order  also  directed  USAC  to  waive  one  of  its  procedural  requirements. 

 160  See  Letter  from  D.  Scott  Barash,  Vice  President  and  General  Counsel,  USAC,  to  Magalie  Roman  Salas, 
 Secretary,  Federal  Communications  Commission,  dated  October  22,  1999. 
 161  Changes  to  the  Board  of  Directors  of  the  National  Exchange  Carrier  Association,  Inc.,  Federal-  State  Joint 
 Board  on  Universal  Service,  CC  Docket  Nos.  97-  21  and  96-  45,  Order,  15  FCC  Rcd  22975  (2000)  (Commitment  Adjustment  Implementation  Order). 

 162  See  Commitment  Adjustment  Implementation  Order,  15  FCC  Rcd  at  22980  para.  13. 
 163  Id. 
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 which  errors  had  occurred  requiring  the  recovery  of  funds.  164  Since  then,  through  the  audit  process,  the  Commission  and  USAC  have  become  aware  of  additional  scenarios  that  may  require 
 recovery  of  funds  due  to  errors  made  by  applicants  and/  or  service  providers.  While  the  Commitment  Adjustment  Implementation  Order  implemented  procedures,  consistent  with  the 
 Commissions  debt  collection  rules,  165  for  recovery  of  funds  that  were  disbursed  in  violation  of  statutory  requirements,  the  Commission  has  not  comprehensively  addressed  the  question  of  what 
 recovery  procedures  would  be  appropriate  in  situations  where  it  is  determined  that  funds  have  been  disbursed  in  violation  of  particular  programmatic  rules  that  do  not  implicate  statutory 
 requirements.  166  Likewise,  the  Commission  has  not  addressed  the  question  of  what  procedures  are  needed  to  govern  the  recovery  of  funds  that  have  been  committed  or  disbursed  in  situations 
 later  determined  to  involve  waste,  fraud  or  abuse. 
 80.  In  administering  the  schools  and  libraries  program,  we  have  become  aware  of  instances  in  which  funds  were  disbursed  erroneously,  and,  depending  upon  the  circumstances 

 surrounding  the  particular  error  as  well  as  the  procedure  or  rule  implicated,  we  determined  whether  recovery  was  appropriate.  In  light  of  these  experiences,  we  now  consider  whether  we 
 should  implement  procedures  or  adopt  rules  governing  fund  recovery  across  particular  situations  and,  more  generally,  whether  additional  safeguards  or  procedures  are  needed  to  address  the  matter 
 of  erroneously  disbursed  funds. 
 81.  In  particular,  we  ask  whether  we  should  adopt  specific  recovery  rules  for  funds  that  are  disbursed  in  violation  of  statutory  requirements.  We  also  seek  comment  on  whether  the 

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

 164  The  Commitment  Adjustment  Implementation  Order  provides  two  examples  of  errors  resulting  in  statutory 
 violation  requiring  recovery:  (1)  funding  committed  for  ineligible  services;  and  (2)  funding  for  telecommunications  services  provided  by  non-  telecommunications  carriers.  Commitment  Adjustment 

 Implementation  Order,  15  FCC  Rcd  at  22976-  77  para.  3. 
 165  See  47  U.  S.  C.    1.901  et  seq. 

 166  USAC  has  utilized  procedures  consistent  with  the  Commitment  Adjustment  Implementation  Order  for 
 situations  involving  rule  violations  that  do  not  implicate  statutory  requirements. 
 167  See  USTA  Petition  at  5-  8;  Sprint  Petition  at  2-  3. 
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 pending  petitions  for  reconsideration.  Instead,  we  seek  to  further  develop  the  record  in  this  area  in  light  of  particular  issues  that  have  come  to  our  attention  and  as  to  which  we  seek  comment  in 
 this  notice. 
 82.  We  note  that  in  some  circumstances,  there  may  be  a  series  of  rule  violations  that  neither  collectively  nor  individually  implicate  the  full  amount  of  the  funding  commitment.  In  the 

 event  that  the  full  amount  of  the  funding  commitment  has  been  disbursed  under  such  circumstances,  we  seek  comment  on  what  circumstances  would  make  recovery  of  the  full  amount 
 of  the  funding  commitment  appropriate  or  inappropriate.  We  seek  comment  specifically  on  whether  a  pattern  of  systematic  noncompliance  with  Commission  rules  warrants  recovery  of  the 
 full  amount  disbursed,  irrespective  of  the  dollars  associated  with  specific  audit  findings.  We  note  that,  unlike  errors  resulting  in  statutory  violations,  the  Commission  may  waive  non-  compliance 
 with  regulations  in  appropriate  circumstances.  168  We  recognize  that  some  errors  made  by  applicants  and/  or  service  providers  may  not  violate  the  statute,  may  be  minor  in  nature  and  may 
 not  affect  the  integrity  of  or  otherwise  undermine  policies  central  to  administration  of  the  program.  We  invite  comment  on  whether  there  are  situations  in  which  such  errors  would  warrant 
 a  Commission  decision  not  requiring  the  recovery  of  funds.  For  example,  should  we  waive  recovery  if  the  dollars  at  issue  are  de  minimis,  either  on  absolute  dollar  or  percentage  of 
 disbursement  basis,  and  if  so,  what  dollar  level  or  percentage  would  be  an  appropriate  threshold  for  deeming  a  violation  to  be  de  minimis?  Parties  advocating  such  a  position  should  describe 
 what  mechanism  the  Commission  should  use  to  reach  such  a  result,  such  as  waiving  the  rules  that  are  not  statutory,  are  minor  and  do  not  affect  program  integrity,  focusing  particularly  on  how  such 
 a  result  could  be  achieved  with  administrative  ease. 
 83.  In  addressing  the  issues  above,  we  also  invite  commenters  to  explain  whether  any  additional  policies  or  rules  directed  at  circumstances  involving  waste,  fraud  and  abuse  would  be 

 necessary,  or  whether  procedures  we  may  adopt  in  response  to  our  questions  above  will  be  sufficient  in  correcting  waste,  fraud  and  abuse.  In  doing  so,  parties  should  consider  whether 
 certain  violations  are  more  critical  in  our  attempts  to  control  waste,  fraud  and  abuse  than  others.  Are  the  circumstances  where  waste,  fraud  and  abuse  are  found  the  type  that  should  result  in 
 recovery  of  funds  from  the  entity  that  is  responsible  for  the  waste,  fraud  and  abuse?  How  should  we  proceed  if  both  the  applicant  and  the  service  provider  are  culpable  for  such  misconduct?  We 
 seek  proposals  that  include  detailed  procedures  for  dealing  with  waste,  fraud  and  abuse  cases. 
 84.  We  also  seek  comment  on  whether  we  should  implement  other  measures  to  ensure  service  provider  and  applicant  accountability.  In  particular,  we  seek  comment  on  whether  we 

 should  implement  procedures  or  adopt  rules  to  defer  action  on  any  additional  funding  request  involving  a  beneficiary  for  whom  there  is  an  outstanding  commitment  adjustment  proceeding.  169 

 168  See  Waiver  Order,  15  FCC  Rcd  at  7199  para.  6. 
 169  In  the  Schools  and  Libraries  Second  Order  and  Further  Notice,  the  Commission  implemented  rules  for 
 debarment  of  anyone  convicted  of  a  criminal  violation  or  found  civilly  liable  for  actions  relating  to  the  schools  and  libraries  program.  The  Commission  also  sought  further  comment  on  whether  other  circumstances  not  culminating 

 in  a  criminal  conviction  or  civil  judgment  warrant  debarment.  Schools  and  Libraries  Second  Order  and  Further  Notice,  18  FCC  Rcd  at  9225-  28  paras.  66-  77,  9235-  39  paras.  102-  115. 
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 Under  such  a  policy,  no  discounts  would  flow  to  the  beneficiary  in  subsequent  years  until  there  was  full  satisfaction  of  the  outstanding  commitment  adjustment.  We  also  seek  comment  on 
 whether  any  applicant  that  has  previously  been  subject  to  a  commitment  adjustment  proceeding  should  be  subjected  to  more  rigorous  scrutiny  before  receiving  commitments  in  the  future.  If  we 
 were  to  implement  such  a  policy,  what  additional  showing  should  be  required  of  the  applicant  in  subsequent  years,  and  how  long  should  the  entity  be  subjected  to  such  enhanced  scrutiny? 

 85.  Commenters  should  provide  discrete  proposals  with  examples  or  data  to  support  their  suggestions. 
 G.  Other  Actions  to  Reduce  Waste,  Fraud,  and  Abuse 
 86.  We  seek  comment  on  a  number  of  proposals  intended  to  improve  the  abilities  of  the  Commission  and  the  Administrator  to  identify  and  enforce  violations  of  the  Commissions  rules 

 and,  thereby,  to  reduce  waste,  fraud,  and  abuse  in  the  schools  and  libraries  universal  service  mechanism. 

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

 170  47  C.  F.  R.    54.511(  a);  see  also  Request  for  Review  of  the  Decision  of  the  Universal  Service  Administrator  by 
 Ysleta  Independent  School  District  et  al.,  SLD  No.  312479,  Federal-  State  Joint  Board  on  Universal  Service,  CC  Docket  No.  96-  45,  Changes  to  the  Board  of  Directors  of  the  National  Exchange  Carrier  Association,  Inc.,  CC 

 Docket  No.  97-  21,  Order,  FCC  03-  313,  paras.  47-  55  (rel.  Dec.  8,  2003).  171 
 Universal  Service  Order,  12  FCC  Rcd  at  9077-  78  paras.  572-  74.  172 
 See  E-  rate  Public  Forum,  Funds  for  Learning  Statement  at  15  and  Sprint  Statement  at  1;  see  also  Funds  for  Learning  NPRM  Comments  at  14;  State  of  Alaska  NPRM  Reply  at  2;  NEA,  ISTE  and  CoSN  Joint.  NPRM  Reply 

 at  7-  8;  and  Siemens  Enterprise  Networks  NPRM  Reply  at  3.  173 
 See  Task  Force  Recommendation  at  4  (supporting  imposition  of  a  funding  ceiling). 
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 Currently,  the  Commission  rules  require  each  entity  receiving  supported  services  to  keep  records  related  to  the  receipt  of  discounted  services  similar  to  those  that  the  entity  maintains  for  other 
 purchases,  but  do  not  specify  how  long  such  records  should  be  maintained.  174  Nor  do  our  rules  expressly  require  all  entities  to  maintain  records  to  demonstrate  compliance  with  all  rules.  Recent 
 beneficiary  audits  conducted  by  USACs  independent  auditor  identify  a  number  of  instances  in  which  the  independent  auditor  was  unable  to  perform  certain  procedures  due  to  lack  of 
 documentation.  We  seek  comment  on  whether  to  amend  our  rules  to  require  that  all  records  related  to  the  receipt  of  or  delivery  of  discounted  services,  sufficient  to  demonstrate  compliance 
 with  the  Commissions  rules  governing  the  schools  and  libraries  mechanism,  be  maintained  by  the  beneficiary  for  a  period  of  five  years  after  the  last  day  of  the  delivery  of  the  discounted 
 services.  We  also  seek  comment  on  what  types  of  documents  would  be  sufficient  to  demonstrate  compliance.  175 

 89.  In  addition,  the  Commissions  rules  require  service  providers  to  keep  and  retain  records  of  rates  charged  to  and  discounts  allowed  for  entities  receiving  supported  services.  176  We 
 seek  comment  on  requiring  that  service  providers  retain  all  records  related  to  the  delivery  of  discounted  services  for  a  period  of  five  years  after  the  completion  of  the  discounted  services. 
 Further,  we  seek  comment  on  a  requirement  that  service  providers  comply  with  random  audits  or  reviews  that  the  Commission  or  USAC  may  undertake  periodically  to  assure  program  compliance, 
 including  identifying  the  portions  of  applicants  bills  that  represent  the  costs  of  services  provided  to  eligible  entities  for  eligible  purposes.  177  In  accordance  with  this  proposed  requirement,  we  also 
 seek  comment  on  requiring  beneficiaries  to  authorize  the  release  of  such  information. 
 90.  Commenters  are  specifically  requested  to  address  the  impact  that  these  rule  changes  would  have  on  the  Commissions  ability  to  enforce  its  substantive  rules  and  reduce  waste,  fraud, 

 and  abuse  in  the  schools  and  libraries  universal  service  program.  Commenters  are  also  requested  to  identify  with  particularity  any  additional  recordkeeping  requirements  that  would  improve  the 
 Commissions  ability  to  enforce  its  rules  in  the  schools  and  libraries  program. 
 91.  Consultants  and  Outside  Experts.  We  seek  comment  on  whether  applicants  should  be  required  to  identify  any  consultants  or  other  outside  experts,  whether  paid  or  unpaid,  that  aid  in 

 the  preparation  of  the  applicants  technology  plan  or  in  the  applicants  procurement  process.  178 

 174  47  C.  F.  R.    54.516(  a). 
 175  We  note  that  we  recently  adopted  such  a  rule  for  the  rural  health  care  support  mechanism.  See  47  C.  F.  R.   
 54.619. 
 176  47  C.  F.  R.    54.501(  d)(  3). 

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

 178  Above,  we  adopt  rules  that  prohibit  a  school  or  library  from  receiving  free  services,  including  consulting 
 services,  from  a  service  provider  that  also  provides  services  for  which  the  school  or  library  receives  a  discount  under  the  E-  rate  program.  See  supra  para.  41. 
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 Additionally,  we  seek  comment  on  whether  consultants  and  other  outside  experts  offering  their  services  to  applicants  should  be  required  to  register  with  USAC  and  to  disclose  any  potential 
 conflicts  of  interests  derived  from  relationships  with  service  providers.  179  Identifying  these  consultants  and  outside  experts  could  facilitate  the  ability  of  the  Commission,  and  law 
 enforcement  officials,  to  identify  and  prosecute  individuals  that  may  seek  to  manipulate  the  competitive  bidding  process  or  engage  in  other  illegal  acts.  We  also  seek  comment  on  whether 
 we  should  adopt  a  rule  that  would  prohibit  an  entity  that  seeks  to  become  a  service  provider  from  providing  any  form  of  technology  planning  or  procurement  management  assistance  to  applicants. 
 Under  such  a  rule,  any  entity  that  provides  management  support  services,  technical  assistance,  consulting  services,  assistance  in  technical  evaluations,  or  systems  engineering  services  to  a 
 particular  recipient  would  be  barred  from  competing  for  the  contracts  for  eligible  services  with  that  recipient. 

 92.  Distribution  of  Support  Payments.  We  seek  comment  on  whether  the  Commission  should  amend  its  rules  to  codify  certain  existing  administrative  procedures  related  to  the  payment 
 of  support  for  discounted  services.  180  There  are  two  methods  by  which  support  for  discounts  is  distributed.  One  method  is  for  the  service  provider  to  submit  an  invoice  to  the  Administrator, 
 seeking  payment  for  the  discounted  portion  of  the  supported  service  using  FCC  Form  474.  The  other  method  is  for  the  recipient  of  the  discounted  services  to  pay  the  service  provider  and  then 
 seek  reimbursement  from  the  Administrator  using  FCC  Form  473.  Under  either  method,  the  Administrator  requires  that  a  completed  Service  Provider  Annual  Certification  (or  FCC  Form 
 473)  must  be  filed  in  order  for  payment  to  be  made.  We  seek  comment  on  whether  this  procedure  should  be  codified  in  the  Commissions  rules.  We  also  seek  comment  on  whether  the 
 Commission  should  codify  rules  regarding  the  establishment  of  deadlines  for  service  providers  to  file  invoices  with  the  Administrator.  181  The  timely  receipt  and  payment  of  invoices  is  extremely 
 important  to  the  administration  of  the  program  in  accordance  with  the  Commissions  rules.  Accordingly,  we  seek  comment  on  whether  to  codify  the  Administrators  existing  policy  not  to 
 provide  support  for  untimely  filed  invoices. 
 93.  USAC  provides  an  extension  of  the  deadline  to  file  invoices  under  certain  conditions.  Under  current  USAC  procedures,  these  circumstances  include:  (1)  authorized  service  provider 

 changes;  (2)  authorized  service  substitutions;  (3)  no  timely  notice  to  USAC  (e.  g.,  the  service  providers  Form  486  Notification  Letter  is  returned  to  USAC  as  undeliverable);  (4)  USAC  errors 
 that  result  in  a  late  invoice;  (5)  USAC  delays  in  data  entering  a  form  that  ultimately  result  in  a  late 
 179  Task  Force  Recommendation  at  9  (recommending  consultant  disclosure  and  registration  practices);  see,  e.  g.,  E-rate 
 Public  Forum  Sprint  Statement  at  2  (consultants  should  be  competitively  neutral,  not  affiliated  with  service  providers). 

 180  See  http://  www.  sl.  universalservice.  org/  applicants/  sld_  flowchart.  pdf  describes  the  application  process  including 
 payment  of  supported  services. 
 181  Currently,  USACs  procedures  requires  that,  in  order  to  receive  support,  an  invoice  must  be  submitted  with 
 Form  473  or  Form  474  by  the  later  of  (a)  120  calendar  days  after  the  last  date  of  service,  or  (b)  120  calendar  days  after  the  receipt  of  Form  486,  notifying  the  applicant  of  the  decision  to  provide  support  for  discounts.  See 

 http://  www.  sl.  universalservice.  org/  reference/  InvoicingDeadlines.  asp. 
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 invoice;  (6)  documentation  requirements  that  necessitate  third  party  contact  or  certification;  (7)  natural  or  man-  made  disasters  that  prevent  timely  filing  of  invoices;  (8)  good  Samaritan  BEARs; 
 and  (9)  circumstances  beyond  the  service  providers  control.  182  We  seek  comment  on  whether  to  codify  the  above-  described  procedures  providing  for  an  extension  of  the  deadline  to  file  invoices. 

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

 182  See  http://  www.  sl.  universalservice.  org/  reference/  InvoicingDeadlines.  asp. 
 183  See,  e.  g.,  E-  rate  Public  Forum,  BellSouth  Statement  at  12  (Commission  could  require  more  rigorous  needs 
 assessment  and  compliance  with  technology  plans  to  ensure  applicants  are  ready  to  fully  utilize  supported  products  and  services). 

 184  See  47  U.  S.  C.    254(  h)(  1)(  B);  Universal  Service  Order,  12  FCC  Rcd  at  9077-  78  paras.  572-  574. 
 185  47  C.  F.  R.    54.505(  b)(  vii);  see  also  Universal  Service  Order,  12  FCC  Rcd  at  9078  para.  574. 
 186  FCC  Form  470  Instructions. 
 187  47  C.  F.  R.    54.504(  b). 
 188  Universal  Service  Order,  12  FCC  Rcd  at  9077  para.  572. 
 189  See  http://  www.  sl.  universalservice.  org/  apply/  step2.  asp.  Under  USACs  guidelines,  a  technology  plan  should 
 address  the  following  areas.  The  plan  must  establish  clear  goals  and  a  realistic  strategy  for  using  telecommunications  and  information  technology  to  improve  education  or  library  services.  The  plan  must  have  a 

 professional  development  strategy  to  ensure  that  the  staff  understands  how  to  use  these  new  technologies  to  improve  education  or  library  services.  The  plan  must  include  an  assessment  of  the  telecommunication  services,  hardware, 
 software,  and  other  services  that  will  be  needed  to  improve  education  or  library  services.  The  plan  must  provide  for  a  sufficient  budget  to  acquire  and  support  the  non-  discounted  elements  of  the  plan:  the  hardware,  software, 
 professional  development,  and  other  services  that  will  be  needed  to  implement  the  strategy.  Finally,  the  plan  must  include  an  evaluation  process  that  enables  the  school  or  library  to  monitor  progress  toward  the  specified  goals  and 
 make  mid-  course  corrections  in  response  to  new  developments  and  opportunities  as  they  arise. 
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 Education  and  the  U.  S.  Institute  for  Museum  and  Library  Services.  190  We  also  seek  comment  on  whether  the  Commissions  technology  planning  requirements  could  be  strengthened  through 
 additional  or  different  qualifications  for  entities,  including  states,  which  approve  technology  plans. 

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

 96.  Use  of  Surveys  to  Determine  School  Lunch  Eligibility.  The  Universal  Service  Order  stated  that  a  school  may  use  federally-  approved  alternative  mechanisms  which  rely  on  actual 
 counts  of  low-  income  children  to  determine  the  level  of  poverty  for  purposes  of  the  schools  and  libraries  universal  service  discount  mechanism.  192  USAC  implemented  this  provision  by 
 permitting  schools  to  collect  this  information  from  surveys.  193  Currently,  USAC  procedures  require  a  response  rate  of  at  least  50  percent  to  ensure  a  statistically  valid  sample  to  project  the 
 percentage  of  eligibility  for  all  students  in  the  school.  194  We  seek  comment  on  whether  to  codify  this  procedure,  and  if  so,  should  we  alter  the  required  response  rate?  Is  a  50  percent  response  rate 
 higher  than  necessary  to  ensure  a  statistically  valid  sample?  We  seek  to  streamline  program  administration  in  this  area  while  protecting  against  any  potential  abuse.  Should  the  required 
 response  rate  depend  on  the  size  of  the  population  being  surveyed? 
 H.  Miscellaneous 
 97.  Determining  Whether  Rates  Are  Affordable.  We  seek  comment  generally  on  how  we  can  ensure  that  we  continue  to  meet  the  requirements  of  section  254  in  an  efficient  and  equitable 

 manner.  Congress  mandated  that  schools  and  libraries  across  the  United  States  have  access  to 
 190  See  Task  Force  Recommendation  at  5;  see  also  http://  www.  nationaledtechplan.  org/  (seeking  comment  developing 
 the  nations  third  National  Education  Technology  Plan).  191 
 See  Task  Force  Recommendation  at  10.  192 
 See  Universal  Service  Order,  12  FCC  Rcd  at  9045  para.  510. 
 193  Id.  The  Universal  Service  Order  stated  that  a  school  relying  on  one  of  these  alternative  mechanisms  could,  for 
 example,  conduct  a  survey  of  income  levels  in  order  to  obtain  this  information. 
 194  For  example,  a  school  with  100  students  sends  a  questionnaire  to  100  households  of  those  students,  and  75  of 
 those  households  return  the  questionnaire.  The  school  finds  that  the  incomes  of  25  of  those  75  households  are  at  or  below  the  income  eligibility  for  the  National  School  Lunch  Program  (NSLP).  Consequently,  33  percent  of  the 

 students  from  those  households  can  be  counted  as  eligible  for  NSLP.  The  school  may  then  project  from  that  sample  that  33  percent  of  the  total  enrollment,  or  33  of  the  100  students  in  the  school,  can  be  counted  as  eligible 
 for  NSLP.  See  http://  www.  sl.  universalservice.  org/  reference/  alt.  asp. 
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 advanced  telecommunications  and  information  services  at  affordable  rates.  As  the  expert  agency  charged  with  this  critical  task,  we  believe  it  important  to  consider  periodically  how  we  should 
 determine  what  funding  is  necessary  to  ensure  access  at  affordable  rates.  Give  the  myriad  of  service  offerings  in  todays  marketplace,  how  can  we  measure  our  progress  in  ensuring 
 affordable  access? 
 98.  Priority  for  Applicants  that  Have  Not  Achieved  Connectivity.  We  note  that,  in  1996,  prior  to  implementation  of  the  E-  rate  program,  14  percent  of  public  school  instructional  rooms 

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

 V.  PROCEDURAL  MATTERS 
 A.  Paperwork  Reduction  Act  Analysis 
 99.  The  action  contained  herein  has  been  analyzed  with  respect  to  the  Paperwork  Reduction  Act  of  1995  (PRA)  and  found  to  impose  new  or  modified  reporting  and/  or 

 recordkeeping  requirements  or  burdens  on  the  public.  Implementation  of  these  new  or  modified  reporting  and/  or  recordkeeping  requirements  will  be  subject  to  approval  by  the  Office  of 

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

 197  47  C.  F.  R.    254(  h)(  2)(  A). 
 198  See  supra  para.  60  and  note  116. 
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 Management  and  Budget  (OMB)  as  prescribed  by  the  PRA.  Specifically,  section  54.513(  c)  will  go  into  effect  upon  announcement  in  the  Federal  Register  of  OMB  approval,  to  the  extent  OMB 
 approval  is  required. 
 B.  Final  Regulatory  Flexibility  Analysis 
 100.  As  required  by  the  Regulatory  Flexibility  Act  of  1980,  as  amended  (RFA),  199  an  Initial  Regulatory  Flexibility  Analysis  (IRFA)  was  incorporated  in  the  Schools  and  Libraries 

 NPRM.  200  The  Commission  sought  written  public  comment  on  the  proposals  in  the  Schools  and  Libraries  NPRM,  including  comment  on  the  IRFA.  This  present  Final  Regulatory  Flexibility 
 Analysis  (FRFA)  conforms  to  the  RFA.  201 
 1.  Need  for,  and  Objectives  of,  the  Third  Report  and  Order 
 101.  In  this  Third  Report  and  Order,  we  adopt  rules  whereby  eligible  entities  may  receive  discount  rates  for  internal  connections  services,  except  for  certain  basic  maintenance 

 services,  twice  every  five  years  and  that  prohibit  a  school  or  library  from  transferring  equipment  purchased  with  universal  service  discounts,  except  in  limited  circumstances.  These  rules  will 
 advance  the  goals  of  the  schools  and  libraries  program  by  making  support  for  internal  connections  regularly  available  to  a  larger  number  of  applicants  and  by  reducing  the  likelihood  of  waste, 
 fraud,  and  abuse. 
 2.  Summary  of  Significant  Issues  Raised  by  Public  Comments  in  Response  to  the  IRFA 

 102.  There  were  no  comments  filed  specifically  in  response  to  the  IRFA.  Nevertheless,  the  agency  has  considered  the  potential  impact  of  the  rules  proposed  in  the  IRFA  on 
 small  entities.  202  Based  on  analysis  of  the  relevant  data,  the  Commission  concludes  the  new  rules  limit  the  burdens  on  small  entities  and  result  in  a  de  minimis  recordkeeping  requirement.  The 
 Commission  also  concludes  that  the  new  rules  will  positively  impact  schools  and  libraries,  including  small  ones,  seeking  universal  service  support.  203 

 3.  Description  and  Estimate  of  the  Number  of  Small  Entities  To  Which  Rules  Will  Apply 
 103.  The  RFA  directs  agencies  to  provide  a  description  of  and,  where  feasible,  an 
 199  See  5  U.  S.  C.    603.  The  RFA,  see  5  U.  S.  C.    601    612,  has  been  amended  by  the  Small  Business 
 Regulatory  Enforcement  Fairness  Act  of  1996  (SBREFA),  Pub.  L.  No.  104-  121,  Title  II,  110  Stat.  857  (1996). 
 200  Schools  and  Libraries  NPRM,  17  FCC  Rcd  at  1946  paras.  83-  106. 

 201  See  5  U.  S.  C.    604. 
 202  See  infra  paras.  106-  107. 
 203  Id;  see  supra  paras.  14,  26,  38,  40,  42,  and  52. 
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 estimate  of  the  number  of  small  entities  that  may  be  affected  by  the  proposed  rules,  if  adopted.  204  The  RFA  generally  defines  the  term  small  entity  as  having  the  same  meaning  as  the  terms 
 small  business,  small  organization,  and  small  governmental  jurisdiction.  205  In  addition,  the  term  small  business  has  the  same  meaning  as  the  term  small  business  concern  under  the 
 Small  Business  Act.  206  A  small  business  concern  is  one  which:  (1)  is  independently  owned  and  operated;  (2)  is  not  dominant  in  its  field  of  operation;  and  (3)  satisfies  any  additional  criteria 
 established  by  the  SBA.  207  A  small  organization  is  generally  any  not-  for-  profit  enterprise  which  is  independently  owned  and  operated  and  is  not  dominant  in  its  field.  208  Nationwide,  as  of  1992, 
 there  were  approximately  275,801  small  organizations.  209  The  term  "small  governmental  jurisdiction"  is  defined  as  governments  of  cities,  towns,  townships,  villages,  school  districts,  or 
 special  districts,  with  a  population  of  less  than  fifty  thousand.  210  As  of  1997,  there  were  about  87,453  governmental  jurisdictions  in  the  United  States.  211  This  number  includes  39,044  county 
 governments,  municipalities,  and  townships,  of  which  37,546  (approximately  96.2%)  have  populations  of  fewer  than  50,000,  and  of  which  1,498  have  populations  of  50,000  or  more.  Thus 
 we  estimate  the  number  of  small  governmental  jurisdictions  overall  to  be  84,098  or  fewer. 
 104.  The  Commission  has  determined  that  the  group  of  small  entities  directly  affected  by  the  rules  herein  includes  eligible  schools  and  libraries  and  the  eligible  service  providers 

 offering  them  discounted  services,  including  telecommunications  service  providers,  Internet  Service  Providers  (ISPs)  and  vendors  of  internal  connections.  212  Further  descriptions  of  these 
 entities  are  provided  below.  In  addition,  the  Universal  Service  Administrative  Company  is  a  small  organization  (non-  profit)  under  the  RFA,  and  we  believe  that  circumstances  triggering  the 
 new  reporting  requirement  will  be  limited  213  and  does  not  constitute  a  significant  economic  impact  on  that  entity. 

 204  5  U.  S.  C.    603(  b)(  3). 
 205  5  U.  S.  C.    601(  6). 
 206  5  U.  S.  C.    601(  3)  (incorporating  by  reference  the  definition  of  small  business  concern  in  15  U.  S.  C.    632). 
 Pursuant  to  5  U.  S.  C.    601(  3),  the  statutory  definition  of  a  small  business  applies  unless  an  agency,  after  consultation  with  the  Office  of  Advocacy  of  the  Small  Business  Administration  and  after  opportunity  for  public  comment, 

 establishes  one  or  more  definitions  of  such  term  which  are  appropriate  to  the  activities  of  the  agency  and  publishes  such  definition(  s)  in  the  Federal  Register. 

 207  Small  Business  Act,  15  U.  S.  C.    632. 
 208  5  U.  S.  C.    601(  4). 
 209  U.  S.  Census  Bureau,  1992  Economic  Census,  Table  6  (special  tabulation  of  data  under  contract  to  the  Office  of 
 Advocacy  of  the  U.  S.  Small  Business  Administration). 
 210  5  U.  S.  C.  601(  5). 

 211  U.  S.  Census  Bureau,  Statistical  Abstract  of  the  United  States:  2000,  Section  9,  pages  299-  300,  Tables  490  and  492. 
 212  47  C.  F.  R.    54.502,  54.503,  54.517(  b). 
 213  See  supra  para.  27. 
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 a.  Schools  and  Libraries 
 105.  As  noted,  small  entity  includes  non-  profit  and  small  government  entities.  Under  the  schools  and  libraries  universal  service  support  mechanism,  which  provides  support  for 

 elementary  and  secondary  schools  and  libraries,  an  elementary  school  is  generally  a  non-  profit  institutional  day  or  residential  school  that  provides  elementary  education,  as  determined  under 
 state  law.  214  A  secondary  school  is  generally  defined  as  a  non-  profit  institutional  day  or  residential  school  that  provides  secondary  education,  as  determined  under  state  law,  and  not 
 offering  education  beyond  grade  12.  215  For-  profit  schools  and  libraries,  and  schools  and  libraries  with  endowments  in  excess  of  $50,000,000,  are  not  eligible  to  receive  discounts  under  the 
 program,  nor  are  libraries  whose  budgets  are  not  completely  separate  from  any  schools.  216  Certain  other  statutory  definitions  apply  as  well.  217  The  SBA  has  defined  for-  profit,  elementary 
 and  secondary  schools  and  libraries  having  $6  million  or  less  in  annual  receipts  as  small  entities.  218  In  Funding  Year  2  (July  1,  1999  to  June  20,  2000)  approximately  83,700  schools  and 
 9,000  libraries  received  funding  under  the  schools  and  libraries  universal  service  mechanism.  Although  we  are  unable  to  estimate  with  precision  the  number  of  these  entities  that  would  qualify 
 as  small  entities  under  SBAs  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. 

 b.  Telecommunications  Service  Providers 
 106.  We  have  included  small  incumbent  local  exchange  carriers  in  this  RFA  analysis.  A  "small  business"  under  the  RFA  is  one  that,  inter  alia,  meets  the  pertinent  small  business  size 

 standard  (e.  g.,  a  telephone  communications  business  having  1,500  or  fewer  employees),  and  "is  not  dominant  in  its  field  of  operation."  219  The  SBA's  Office  of  Advocacy  contends  that,  for  RFA 
 purposes,  small  incumbent  local  exchange  carriers  are  not  dominant  in  their  field  of  operation  because  any  such  dominance  is  not  "national"  in  scope.  220  We  have  therefore  included  small 
 incumbent  carriers  in  this  RFA  analysis,  although  we  emphasize  that  this  RFA  action  has  no  effect  on  the  Commissions  analyses  and  determinations  in  other,  non-  RFA  contexts. 

 214  47  C.  F.  R.    54.500(  b). 
 215  47  C.  F.  R.    54.500(  j). 
 216  47  C.  F.  R.    54.501. 
 217  See  id. 
 218  13  C.  F.  R.    121.201,  North  American  Industry  Classification  System  (NAICS)  codes  611110  and  519120 
 (NAICS  2002  code  519120  was  previously  514120). 
 219  5  U.  S.  C.    601(  3). 

 220  See  Letter  from  Jere  W.  Glover,  Chief  Counsel  for  Advocacy,  SBA,  to  William  E.  Kennard,  Chairman,  FCC, 
 dated  May  27,  1999.  The  Small  Business  Act  contains  a  definition  of  "small  business  concern,"  which  the  RFA  incorporates  into  its  own  definition  of  "small  business."  See  U.  S.  C.    632(  a)  (Small  Business  Act);  5  U.  S.  C.   

 601(  3)  (RFA).  SBA  regulations  interpret  "small  business  concern"  to  include  the  concept  of  dominance  on  a  national  basis.  13  C.  F.  R.    121.102(  b). 
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 107.  Incumbent  Local  Exchange  Carriers  (LECs).  Neither  the  Commission  nor  the  SBA  has  developed  a  size  standard  for  small  incumbent  local  exchange  services.  The  closest  size 
 standard  under  SBA  rules  is  for  Wired  Telecommunications  Carriers.  Under  that  size  standard,  such  a  business  is  small  if  it  has  1,500  or  fewer  employees.  221  According  to  Commission  data,  222 
 1,337  incumbent  carriers  reported  that  they  were  engaged  in  the  provision  of  local  exchange  services.  Of  these  1,337  carriers,  an  estimated  1,032  have  1,500  or  fewer  employees  and  305 
 have  more  than  1,500  employees.  Consequently,  the  Commission  estimates  that  most  providers  of  incumbent  local  exchange  service  are  small  businesses  that  may  be  affected  by  the  rules  and 
 policies  adopted  herein. 
 108.  Competitive  Local  Exchange  Carriers  (CLECs),  Competitive  Access  Providers  (CAPs)  and  Other  Local  Exchange  Carriers.  Neither  the  Commission  nor  the  SBA  has 

 developed  a  size  standard  for  small  businesses  specifically  applicable  to  providers  of  competitive  exchange  services  or  to  competitive  access  providers  or  to  Other  Local  Exchange  Carriers.  The 
 closest  applicable  size  standard  under  SBA  rules  is  for  Wired  Telecommunications  Carriers.  Under  that  size  standard,  such  a  business  is  small  if  it  has  1,500  or  fewer  employees.  223 
 According  to  Commission  data,  224  609  companies  reported  that  they  were  engaged  in  the  provision  of  either  competitive  access  provider  services  or  competitive  local  exchange  carrier 
 services.  Of  these  609  companies,  an  estimated  458  have  1,500  or  fewer  employees  and  151  have  more  than  1,500  employees.  225  In  addition,  35  carriers  reported  that  they  were  Other  Local 
 Exchange  Carriers.  Of  the  35  Other  Local  Exchange  Carriers,  an  estimated  34  have  1,500  or  fewer  employees  and  one  has  more  than  1,500  employees.  226  Consequently,  the  Commission 
 estimates  that  most  providers  of  competitive  local  exchange  service,  competitive  access  providers,  and  Other  Local  Exchange  Carriers  are  small  entities  that  may  be  affected  by  the 
 rules  and  policies  adopted  herein. 
 109.  Interexchange  Carriers  (IXCs).  Neither  the  Commission  nor  the  SBA  has  developed  a  size  standard  for  small  businesses  specifically  applicable  to  interexchange  services. 

 The  closest  applicable  size  standard  under  SBA  rules  is  for  Wired  Telecommunications  Carriers.  Under  that  size  standard,  such  a  business  is  small  if  it  has  1,500  or  fewer  employees.  227 

 221  13  CFR    121.201,  NAICS  code  513310  (changed  to  517110  in  Oct.  2002). 
 222  FCC,  Wireline  Competition  Bureau,  Industry  Analysis  and  Technology  Division,  Trends  in  Telephone 
 Service  at  Table  5.3,  Page  5-  5  (Aug.  2003).  This  source  uses  data  that  are  current  as  of  December  31,  2001. 
 223  13  CFR    121.201,  NAICS  code  513310  (changed  to  517110  in  Oct.  2002). 

 224  FCC,  Wireline  Competition  Bureau,  Industry  Analysis  and  Technology  Division,  Trends  in  Telephone 
 Service  at  Table  5.3,  Page  5-  5  (Aug.  2003). 
 225  Id. 

 226  Id. 
 227  13  C.  F.  R.    121.201,  NAICS  code  513310  (changed  to  517110  in  Oct.  2002). 
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 According  to  the  Commissions  most  recent  data,  228  261  companies  reported  that  their  primary  telecommunications  service  activity  was  the  provision  of  payphone  services.  Of  these  261 
 companies,  an  estimated  223  have  1,500  or  fewer  employees  and  48  have  more  than  1,500  employees.  229  Consequently,  the  Commission  estimates  that  the  majority  of  payphone  service 
 providers  are  small  entities  that  may  be  affected  by  the  rules  and  policies  adopted  herein. 
 110.  Wireless  Service  Providers.  The  SBA  has  developed  a  small  business  size  standard  for  wireless  small  businesses  within  the  two  separate  categories  of  Paging  230  and 

 Cellular  and  Other  Wireless  Telecommunications.  231  Under  both  SBA  categories,  a  wireless  business  is  small  if  it  has  1,500  or  fewer  employees.  According  to  the  Commissions  most  recent 
 data,  232  1,761  companies  reported  that  they  were  engaged  in  the  provision  of  wireless  service.  Of  these  1,761  companies,  an  estimated  1,175  have  1,500  or  fewer  employees  and  586  have  more 
 than  1,500  employees.  233  Consequently,  the  Commission  estimates  that  most  wireless  service  providers  are  small  entities  that  may  be  affected  by  the  rules  and  policies  adopted  herein. 

 111.  Private  and  Common  Carrier  Paging.  In  the  Paging  Third  Report  and  Order,  we  developed  a  small  business  size  standard  for  small  businesses  and  very  small  businesses  for 
 purposes  of  determining  their  eligibility  for  special  provisions  such  as  bidding  credits  and  installment  payments.  234  A  small  business  is  an  entity  that,  together  with  its  affiliates  and 
 controlling  principals,  has  average  gross  revenues  not  exceeding  $15  million  for  the  preceding  three  years.  Additionally,  a  very  small  business  is  an  entity  that,  together  with  its  affiliates  and 
 controlling  principals,  has  average  gross  revenues  that  are  not  more  than  $3  million  for  the  preceding  three  years.  An  auction  of  Metropolitan  Economic  Area  licenses  commenced  on 
 February  24,  2000,  and  closed  on  March  2,  2000.  235  Of  the  985  licenses  auctioned,  440  were  sold.  Fifty-  seven  companies  claiming  small  business  status  won.  At  present,  there  are 

 228  FCC,  Wireline  Competition  Bureau,  Industry  Analysis  and  Technology  Division,  Trends  in  Telephone 
 Service  at  Table  5.3,  Page  5-  5  (Aug.  2003). 
 229  Id. 

 230  13  CFR    121.201,  North  American  Industry  Classification  System  (NAICS)  code  513321  (changed  to  517211 
 in  October  2002). 
 231  13  CFR    121.201,  North  American  Industry  Classification  System  (NAICS)  code  513322  (changed  to  517212 
 in  October  2002). 
 232  FCC,  Wireline  Competition  Bureau,  Industry  Analysis  and  Technology  Division,  Trends  in  Telephone  Service, 
 Table  5.3,  (May  2002). 
 233  Id. 

 234  220  MHz  Third  Report  and  Order,  12  FCC  Rcd  10943,  11068-  70  paras.  291-  295  (1997),  62  FR  16004  (Apr.  3, 
 1997),  at  paras  291-  295. 
 235  Revision  of  Part  22  and  Part  90  of  the  Commissions  Rules  to  Facilitate  Future  Development  of  Paging 
 Systems,  Memorandum  Opinion  and  Order  on  Reconsideration  and  Third  Report  and  Order,  14  FCC  Rcd  10030,  at  paras  98  (1999). 
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 approximately  24,000  Private-  Paging  site-  specific  licenses  and  74,000  Common  Carrier  Paging  licenses.  According  to  Commission  data,  474  carriers  reported  that  they  were  engaged  in  the 
 provision  of  either  paging  and  messaging  services  or  other  mobile  services.  236  Of  those,  the  Commission  estimates  that  457  are  small,  under  the  SBA  approved  small  business  size 
 standard.  237 
 c.  Internet  Service  Providers 
 112.  Internet  Service  Providers.  The  SBA  has  developed  a  small  business  size  standard  for  On-  Line  Information  Services,  NAICS  code  514191.  238  This  category  comprises 

 establishments  primarily  engaged  in  providing  direct  access  through  telecommunications  networks  to  computer-  held  information  compiled  or  published  by  others.  239  Under  this  small 
 business  size  standard,  a  small  business  is  one  having  annual  receipts  of  $18  million  or  less.  240  Based  on  firm  size  data  provided  by  the  Bureau  of  the  Census,  3,123  firms  are  small  under  SBAs 
 $18  million  size  standard  for  this  category  code.  241  Although  some  of  these  Internet  Service  Providers  (ISPs)  might  not  be  independently  owned  and  operated,  we  are  unable  at  this  time  to 
 estimate  with  greater  precision  the  number  of  ISPs  that  would  qualify  as  small  business  concerns  under  SBAs  small  business  size  standard.  Consequently,  we  estimate  that  there  are  3,123  or 
 fewer  small  entity  ISPs  that  may  be  affected  by  this  analysis. 
 d.  Vendors  of  Internal  Connections 
 113.  The  Commission  has  not  developed  a  small  business  size  standard  specifically  directed  toward  manufacturers  of  internal  network  connections.  The  closest  applicable  definitions 

 of  a  small  entity  are  the  size  standards  under  the  SBA  rules  applicable  to  manufacturers  of  Radio  and  Television  Broadcasting  and  Communications  Equipment  (RTB)  and  Other 
 Communications  Equipment.  242  According  to  the  SBAs  regulations,  manufacturers  of  RTB  or  other  communications  equipment  must  have  750  or  fewer  employees  in  order  to  qualify  as  a  small 
 business.  243  The  most  recent  available  Census  Bureau  data  indicates  that  there  are  1,187  establishments  with  fewer  than  1,000  employees  in  the  United  States  that  manufacture  radio  and 
 television  broadcasting  and  communications  equipment,  and  271  companies  with  less  than  1,000 
 236  FCC,  Wireline  Competition  Bureau,  Industry  Analysis  and  Technology  Division,  Trends  in  Telephone  Service, 
 Table  5.3,  p.  5-  5  (Aug.  2003). 
 237  Id. 

 238  See  generally  North  American  Industry  Classification  System    United  States  (1997),  NAICS  code  514191. 
 239  See  generally  North  American  Industry  Classification  System    United  States  (1997),  NAICS  code  514191. 
 240  13  CFR    121.201,  NAICS  code  514191. 
 241  Office  of  Advocacy,  U.  S.  Small  Business  Administration,  Firm  Size  Data  by  Industry  and  Location. 
 242  13  C.  F.  R.    121.201,  NAICS  Code  334220,  334290. 
 243  Id. 
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 employees  that  manufacture  other  communications  equipment.  244  Some  of  these  manufacturers  might  not  be  independently  owned  and  operated.  Consequently,  we  estimate  that  the  majority  of 
 the  1,458  internal  connections  manufacturers  are  small. 
 e.  Miscellaneous  Entities 
 114.  Wireless  Communications  Equipment  Manufacturers.  The  SBA  has  established  a  small  business  size  standard  for  radio  and  television  broadcasting  and  wireless  communications 

 equipment  manufacturing.  Under  this  standard,  firms  are  considered  small  if  they  have  750  or  fewer  employees.  245  Census  Bureau  data  for  1997  indicate  that,  for  that  year,  there  were  a  total  of 
 1,215  establishments  246  in  this  category.  247  Of  those,  there  were  1,150  that  had  employment  under  500,  and  an  additional  37  that  had  employment  of  500  to  999.  The  percentage  of  wireless 
 equipment  manufacturers  in  this  category  is  approximately  61.35%,  248  so  the  Commission  estimates  that  the  number  of  wireless  equipment  manufacturers  with  employment  under  500  was 
 actually  closer  to  706,  with  and  additional  23  establishments  having  employment  of  between  500  and  999.  Given  the  above,  the  Commission  estimates  that  the  majority  of  wireless 
 communications  equipment  manufacturers  are  small  businesses. 
 4.  Description  of  Projected  Reporting,  Recordkeeping,  and  Other  Compliance  Requirements  for  Small  Entities 

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

 244  1997  Economic  Census,  Manufacturing,  Industry  Series,  Radio  and  Television  Broadcasting  and  Wireless 
 Communications  Equipment  Manufacturing,  Document  No.  E97M-  3342B  (August  1999),  at  9;  1997  Economic  Census,  Manufacturing,  Industry  Series,  Other  Communications  Equipment  Manufacturing,  Document  No. 

 EC97M-  3342C  (September  1999),  at  9  (both  available  at  http://  www.  census.  gov/  prod/  www/  abs/  97ecmani.  html). 
 245  Id. 

 246  The  number  of  establishments  is  a  less  helpful  indicator  of  small  business  prevalence  in  this  context  than 
 would  be  the  number  of  firms  or  companies,  because  the  latter  take  into  account  the  concept  of  common  ownership  or  control.  Any  single  physical  locations  for  an  entity  is  an  establishment,  even  though  that  location 

 may  be  owned  by  a  different  establishment.  Thus,  the  numbers  given  may  reflect  inflated  numbers  of  businesses  in  this  category,  including  the  numbers  of  small  businesses.  In  this  category,  the  Census  breaks-  out  data  for  firms 
 or  companies  only  to  give  the  total  number  of  such  entities  for  1997,  which  was  1,089. 
 247  U.  S.  Census  Bureau,  1997  Economic  Census,  Industry  Series:  Manufacturing,  Industry  Statistics  by 
 Employment  Size,  Table  4,  NAICS  code  334220  (issued  August  1999). 
 248  Id.  Table  5,  Industry  Statistics  by  Industry  and  Primary  Product  Class  Specialization:  1997. 
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 recordkeeping  requirements  will  result  in  a  significant  economic  impact. 
 116.  The  rule  adopted  today,  limiting  the  frequency  of  receiving  discount  rates  for  internal  connections,  does  not  involve  additional  reporting,  recordkeeping,  or  compliance 

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

 5.  Steps  Taken  to  Minimize  the  Significant  Economic  Impact  on  Small  Entities,  and  Significant  Alternatives  Considered 
 117.  The  RFA  requires  an  agency  to  describe  any  significant  alternatives  that  it  has  considered  in  developing  its  approach,  which  may  include  the  following  four  alternatives  (among 
 others):  (  1)  establishment  of  differing  compliance  or  reporting  requirements  or  timetables  that  take  into  account  the  resources  available  to  small  entities;  (2)  the  clarification,  consolidation,  or 
 simplification  of  compliance  and  reporting  requirements  under  the  rule  for  such  small  entities;  (3)  the  use  of  performance  rather  than  design  standards;  and  (4)  an  exemption  from  coverage  of  the 
 rule,  or  any  part  thereof,  for  such  small  entities.  249 
 118.  Although  we  received  no  IRFA  comments,  we  considered  alternatives  to  the  proposed  recordkeeping  requirements  for  small  entities.  In  creating  the  narrow  exception  to  the 

 equipment  transfer  policy  adopted  in  this  Third  Report  and  Order,  we  recognize  the  Commissions  need  to  protect  the  integrity  of  the  schools  and  libraries  support  mechanism  by 
 curbing  waste,  fraud,  and  abuse  while  acknowledging  circumstances  that  justify  permitting  the  transfer  of  discounted  equipment  received  by  a  program  beneficiary,  small  or  large.  We 
 recognize  that  we  must  require  certain  recordkeeping  to  verify  the  appropriate  use  of  universal  service  funds.  Consideration  was  afforded  to  having  the  recipient  file  equipment  transfer  records 
 with  USAC  and  having  USAC  maintain  the  records.  However,  we  conclude  that  requiring  a  filing  with  USAC  would  be  more  burdensome  for  the  recipient  than  having  the  recipient  collect 
 and  maintain  its  equipment  transfer  records.  Complying  with  the  processes  promulgated  by  USAC  would  be  more  burdensome  than  requiring  each  beneficiary  to  retain  its  own  files  because 
 the  beneficiary  would  have  to  do  more  than  send  the  documents  to  USAC.  The  beneficiary  would  have  to  comply  with  the  procedural  scheme  devised  by  USAC  for  compiling,  and  mailing  or 
 delivering  the  records,  and  quality  control  measures  for  assuring  that  the  records  submitted  were  properly  identified  with  the  correct  beneficiary.  In  the  RFA,  an  exemption  of  small  entities  from 
 the  recordkeeping  requirements  is  listed  as  a  possible  alternative.  In  this  instance,  exemption  from  the  recordkeeping  requirement  would  impede  the  Commissions  ability  to  account  for  funds 
 distributed  through  the  schools  and  libraries  program  and  would  undermine  the  Commissions 
 249  5  U.  S.  C.    603(  c)(  1)-(  4). 
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 efforts  to  prevent  waste,  fraud,  and  abuse. 
 119.  Report  to  Congress:  The  Commission  will  send  a  copy  of  the  Order,  including  this  FRFA,  in  a  report  to  be  sent  to  Congress  pursuant  to  the  Congressional  Review  Act,  see  5 

 U.  S.  C.    801(  a)(  1)(  A).  In  addition,  the  Commission  will  send  a  copy  of  the  Order,  including  the  FRFA,  to  the  Chief  Counsel  for  Advocacy  of  the  Small  Business  Administration.  A  copy  of  the 
 Order  and  FRFA  (or  summaries  thereof)  will  also  be  published  in  the  Federal  Register.  250 
 C.  Initial  Paperwork  Reduction  Act  of  1995  Analysis 
 120.  This  Second  Further  Notice  of  Proposed  Rulemaking  (Second  FNPRM)  contains  either  a  proposed  or  modified  information  collection.  As  part  of  a  continuing  effort  to  reduce 

 paperwork  burdens,  we  invite  the  general  public  and  the  Office  of  Management  and  Budget  (OMB)  to  take  this  opportunity  to  comment  on  the  information  collections  contained  in  this 
 Further  Notice,  as  required  by  the  Paperwork  Reduction  Act  of  1995,  Public  Law  104-  13.  Public  and  agency  comments  are  due  at  the  same  time  as  other  comments  on  this  Further  Notice;  OMB 
 comments  are  due  60  days  from  the  date  of  publication  of  this  Further  Notice  in  the  Federal  Register.  Comments  should  address:  (a)  whether  the  proposed  collection  of  information  is 
 necessary  for  the  proper  performance  of  the  functions  of  the  Commission,  including  whether  the  information  shall  have  practical  utility;  (b)  the  accuracy  of  the  Commissions  burden  estimates; 
 (c)  ways  to  enhance  the  quality,  utility,  and  clarity  of  the  information  collected;  and  (d)  ways  to  minimize  the  burden  of  the  collection  of  information  on  the  respondents,  including  the  use  of 
 automated  collection  techniques  or  other  forms  of  information  technology. 
 D.  Initial  Regulatory  Flexibility  Analysis 
 121.  As  required  by  the  Regulatory  Flexibility  Act  (RFA),  251  the  Commission  has  prepared  this  Initial  Regulatory  Flexibility  Analysis  (IRFA)  of  the  possible  significant  economic 

 impact  on  small  entities  by  the  policies  and  rules  proposed  in  the  Second  FNPRM.  Written  public  comments  are  requested  on  this  IRFA.  Comments  must  be  identified  as  responses  to  the  IRFA 
 and  must  be  filed  by  the  deadlines  for  comments  on  the  Second  FNPRM  provided  below  in  section  IV.  C.  The  Commission  will  send  a  copy  of  this  Second  FNPRM,  including  this  IRFA,  to 
 the  Chief  Counsel  for  Advocacy  of  the  Small  Business  Administration  (SBA).  252  In  addition,  the  Second  FNPRM  and  IRFA  (or  summaries  thereof)  will  be  published  in  the  Federal  Register.  253 

 1.  Need  for,  and  Objectives  of,  the  Proposed  Rules 
 122.  In  the  Second  FNPRM,  we  seek  comment  on  whether  the  current  discount  matrix 
 250  See  5  U.  S.  C.    604(  b). 
 251  See  5  U.  S.  C.    603.  The  RFA,  see  5  U.  S.  C.    601    612,  has  been  amended  by  the  Small  Business 
 Regulatory  Enforcement  Fairness  Act  of  1996  (SBREFA),  Pub.  L.  No.  104-  121,  Title  II,  110  Stat.  857  (1996). 
 252  See  5  U.  S.  C.    603(  a). 

 253  See  id. 
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 provides  sufficient  incentives  for  schools  and  libraries  to  limit  funding  requests  to  services  that  can  be  efficiently  used  and  whether  modifying  the  discount  matrix  would  make  funds  available  to 
 a  greater  number  of  schools  and  libraries.  Further,  we  ask  whether  the  Commission  should  adopt  rules  adjusting  the  discount  matrix  for  certain  supported  services.  254  To  the  extent  that 
 commenters  support  creating  a  separate  discount  matrix  for  priority  two  services,  we  seek  comment  on  the  structure  and  implementation  issues  associated  with  a  new  discount  matrix.  255  In 
 light  of  the  limitations  placed  on  applications  for  internal  connection  discounts,  which  are  Priority  Two  services,  we  seek  comment  on  measures  to  deter  the  mischaracterization  of  internal 
 connections  as  Priority  One  services.  256 
 123.  In  addition,  we  seek  comment  on  whether  the  current  process  for  applying  for  discounted  services  sufficiently  addresses  the  Commissions  goals  of  minimizing  waste,  fraud, 

 and  abuse  in  the  program,  while  encouraging  the  benefits  of  competition  as  set  out  in  the  Universal  Service  Order.  257  In  that  regard,  we  solicit  comment  on  the  current  competitive 
 bidding  process  and  the  efficiency  and  effectiveness  of  using  Form  470  and  requested  comment  regarding  any  means  by  which  the  Commission  could  ensure  that  applicants  select  cost-  effective 
 services.  258  Also,  we  seek  further  comment  whether  the  Commission,  as  a  condition  of  support,  should  require  that  each  service  provider  certify  that  the  prices  in  its  bid  have  been  independently 
 developed.  259  Further,  we  request  comment  on  whether  the  Commissions  rules  should  specifically  require  that  records  related  to  the  competitive  bidding  process  for  services  be 
 maintained  by  both  the  recipient  and  service  provider  for  a  period  of  five  years. 
 124.  Next,  we  seek  comment  on  modifications  to  the  definition  of  rural  area  for  the  schools  and  libraries  mechanism  and  ask  whether  it  would  be  necessary  or  desirable  to  use  the 

 same  definition  of  rural  for  both  the  schools  and  libraries  program  and  rural  health  care  program.  260  Similarly,  we  seek  comment  whether  the  definition  of  Internet  access  in  the  schools 
 context  should  be  changed  to  mirror  the  definition  of  Internet  access  recently  adopted  in  the  Rural  Health  Care  Order.  261 

 125.  In  light  of  the  restrictions  imposed  on  receiving  discounts  for  internal  connections,  we  seek  comment  asking  whether  any  measures  should  be  taken  to  evaluate  service 

 254  See  supra  para.  59. 
 255  See  supra.  paras.  61-  62. 
 256  See  supra  para.  61. 
 257  See  supra  paras.  63-  66. 
 258  Id. 
 259  See  supra  para.  66. 
 260  See  supra  paras.  67-  69. 
 261  See  supra  paras.  70-  71. 
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 provider  charges  for  capital  investments  for  wide  area  networks,  a  Priority  One  service.  262  In  that  regard,  we  seek  comment  whether  expenditures  that  subsidize  infrastructure  investment,  either 
 on-  premises  or  off-  premises,  may  properly  be  viewed  as  Priority  One  services.  263  We  also  seek  comment  on  funding  for  unlit  (dark)  fiber  under  the  E-  rate  program.  In  addition,  we  ask  whether 
 we  should  adopt  specific  recovery  rules  for  funds    entire  or  partial  commitments    that  are  disbursed  in  violation  of  the  statute  or  programmatic  rules  or  procedures.  264  In  that  connection, 
 we  seek  comment  regarding  measures  to  prevent  waste,  fraud,  and  abuse  associated  with  improper  disbursement  of  E-  rate  funds.  265 

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

 262  See  supra  paras.  72-  73. 
 263  See  supra  paras.  73-  74. 
 264  See  supra  paras.  81-  82. 
 265  See  supra  paras.  83-  84. 
 266  See  supra  paras.  88-  90. 
 267  See  supra  para.  87. 
 268  See  supra  para.  91. 
 269  See  supra  para.  92.  We  also  noted  that  current  administrative  procedures  require  the  filing  a  FCC  Form  473  to 
 receive  payment. 
 270  See  supra  para  93. 
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 coordination  with  or  authorization  from  the  central  authorities,  namely  school  districts  and  library  systems.  We  solicit  comment  on  whether  USACs  policy  of  accepting  surveys  to  determine 
 National  School  Lunch  eligibility  should  be  codified. 
 127.  Finally,  we  seek  comment  whether  our  rules  should  be  modified  to  ensure  a  funding  priority  for  applicants  that  have  not  yet  achieved  internet  connectivity  in  their  classrooms 

 or  libraries.  We  also  seek  comment  generally  on  whether  any  rules  should  be  adopted  to  ensure  affordable  rates  for  eligible  services  and  ensure  access  to  eligible  services. 

 2.  Legal  Basis 
 128.  The  legal  basis  for  the  Second  FNPRM  is  contained  in  sections  1  through  4,  201  through  205,  254,  303(  r),  and  403  of  the  Communications  Act  of  1934,  as  amended,  47  U.  S.  C.   

 151  -  154,  201  -  205,  254,  303(  r),  and  403,  and  section  1.411  of  the  Commissions  rules,  47  C.  F.  R.    1.411. 

 3.  Description  and  Estimate  of  the  Number  of  Small  Entities  to  Which  Rules  Will  Apply 
 129.  We  have  described  in  detail  in  the  Final  Regulatory  Flexibility  Analysis  in  this  proceeding,  supra,  the  categories  of  entities  that  may  be  directly  affected  by  our  proposals.  For 
 this  Initial  Regulatory  Flexibility  Analysis,  we  hereby  incorporate  those  entity  descriptions  by  reference.  271 

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

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

 271  See  supra  para.  102. 
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 5.  Steps  Taken  to  Minimize  Significant  Economic  Impact  on  Small  Entities,  and  Significant  Alternatives  Considered 
 132.  The  RFA  requires  an  agency  to  describe  any  significant  alternatives  that  it  has  considered  in  reaching  its  proposed  approach,  which  may  include  the  following  four  alternatives 
 (among  others):  (1)  the  establishment  of  differing  compliance  and  reporting  requirements  or  timetables  that  take  into  account  the  resources  available  to  small  entities;  (2)  the  clarification, 
 consolidation,  or  simplification  of  compliance  or  reporting  requirements  under  the  rule  for  small  entities;  (3)  the  use  of  performance,  rather  than  design,  standards;  and  (4)  an  exemption  from 
 coverage  of  the  rule,  or  part  thereof,  for  small  entities.  272 
 133.  In  the  Second  FNPRM,  we  seek  comment  regarding  the  adoption  of  rules  requiring  addition  recordkeeping  for  each  entity  receiving  discounted  services.  Moreover,  we 

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

 6.  Federal  Rules  that  may  Duplicate,  Overlap,  or  Conflict  with  the  Proposed  Rules 
 134.  None. 
 E.  Comment  Filing  Procedures 
 135.  We  invite  comment  on  the  issues  and  questions  set  forth  in  the  Second  FNPRM  and  Initial  Regulatory  Flexibility  Analysis  contained  herein.  Pursuant  to  applicable  procedures 

 set  forth  in  sections  1.415  and  1.419  of  the  Commissions  rules,  273  interested  parties  may  file  comments  on  or  before  30  days  after  publication  in  the  Federal  Register  of  this  Second  FNPRM, 
 and  reply  comments  on  or  before  60  days  after  publication  in  the  Federal  Register  of  this  Second  FNPRM.  All  filings  should  refer  to  CC  Docket  No.  02-  6.  Comments  may  be  filed  using  the 
 Commissions  Electronic  Comment  Filing  System  (ECFS)  or  by  filing  paper  copies.  274 
 136.  Comments  filed  through  the  ECFS  can  be  sent  as  an  electronic  file  via  the  Internet 

 272  See  5  U.  S.  C.    603(  c). 
 273  47  C.  F.  R.    1.415,  1.419. 
 274  See  Electronic  Filing  of  Documents  in  Rulemaking  Proceedings,  63  FR  24121  (1998). 
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 to  http://  www.  fcc.  gov/  cgb/  ecfs/.  Generally,  only  one  copy  of  an  electronic  submission  must  be  filed.  If  multiple  docket  or  rulemaking  numbers  appear  in  the  caption  of  this  proceeding, 
 however,  commenters  must  transmit  one  electronic  copy  of  the  comments  to  each  docket  or  rulemaking  number  referenced  in  the  caption.  In  completing  the  transmittal  screen,  commenters 
 should  include  their  full  name,  U.  S.  Postal  Service  mailing  address,  and  the  applicable  docket  or  rulemaking  number.  Parties  may  also  submit  an  electronic  comment  by  Internet  e-  mail.  To 
 receive  filing  instructions  for  e-  mail  comments,  commenters  should  send  an  e-  mail  to  ecfs@  fcc.  gov,  and  should  include  the  following  words  in  the  body  of  the  message,  "get  form  ."  A 
 sample  form  and  directions  will  be  sent  in  reply. 
 137.  Parties  who  choose  to  file  by  paper  must  file  an  original  and  four  copies  of  each  filing.  If  more  than  one  docket  or  rulemaking  number  appears  in  the  caption  of  this  proceeding, 

 commenters  must  submit  two  additional  copies  for  each  additional  docket  or  rulemaking  number. 
 138.  Filings  can  be  sent  by  hand  or  messenger  delivery,  by  commercial  overnight  courier,  or  by  first-  class  or  overnight  U.  S.  Postal  Service  mail  (although  we  continue  to 

 experience  delays  in  receiving  U.  S.  Postal  Service  mail). 
 139.  The  Commission's  contractor,  Natek,  Inc.,  will  receive  hand-  delivered  or  messenger-  delivered  paper  filings  for  the  Commission's  Secretary  at  236  Massachusetts  Avenue, 

 N.  E.,  Suite  110,  Washington,  D.  C.  20002. 
 -The  filing  hours  at  this  location  are  8:  00  a.  m.  to  7:  00  p.  m. 
 -All  hand  deliveries  must  be  held  together  with  rubber  bands  or  fasteners. 
 -Any  envelopes  must  be  disposed  of  before  entering  the  building. 
 -Commercial  overnight  mail  (other  than  U.  S.  Postal  Service  Express  Mail  and  Priority  Mail)  must  be  sent  to  9300  East  Hampton  Drive,  Capitol  Heights,  MD  20743. 

 -U.  S.  Postal  Service  first-  class  mail,  Express  Mail,  and  Priority  Mail  should  be  addressed  to  445  12th  Street,  SW,  Washington,  D.  C.  20554. 
 -All  filings  must  be  addressed  to  the  Commission's  Secretary,  Office  of  the  Secretary,  Federal  Communications  Commission. 
 140.  Parties  filing  electronic  media  should  be  advised  that  the  Commission  released  a  public  notice  on  August  22,  2003  providing  new  guidance  for  mailing  electronic  media.  275  In 
 brief,  electronic  media  should  NOT  be  sent  through  USPS  because  of  the  eradiation  process  USPS  mail  must  undergo  to  complete  delivery.  Hand  or  messenger  delivered  electronic  media  for 
 the  Commissions  Secretary  should  be  addressed  for  delivery  to  236  Massachusetts  Avenue,  N.  E.,  Suite  110,  Washington,  D.  C.  20002,  and  other  messenger-  delivered  electronic  media  should  be 

 275  Reminder    Filing  Locations  for  Paper  Documents  and  Instructions  for  Mailing  Electronic  Media,  Public 
 Notice,  DA  03-  2730  (rel.  Aug.  22,  2003). 
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 addressed  for  delivery  to  9300  East  Hampton  Drive,  Capitol  Heights,  MD  20743. 
 141.  Parties  who  choose  to  file  by  paper  should  also  submit  their  comments  on  diskette  to  Sheryl  Todd,  Telecommunications  Access  Policy  Division,  Wireline  Competition  Bureau, 

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

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

 with  section  1.49  and  all  other  applicable  sections  of  the  Commissions  rules.  276  We  direct  all  interested  parties  to  include  the  name  of  the  filing  party  and  the  date  of  the  filing  on  each  page  of 
 their  comments  and  reply  comments.  All  parties  are  encouraged  to  utilize  a  table  of  contents,  regardless  of  the  length  of  their  submission.  We  also  strongly  encourage  parties  to  track  the 
 organization  set  forth  in  the  FNPRM  in  order  to  facilitate  our  internal  review  process. 
 F.  Further  Information 
 144.  Alternative  formats  (computer  diskette,  large  print,  audio  recording,  and  Braille)  are  available  to  persons  with  disabilities  by  contacting  Brian  Millin  at  (202)  418-  7426  voice, 

 (202)  418-  7365  TTY,  or  bmillin@  fcc.  gov.  This  Third  Report  and  Order  and  Second  FNPRM  can  also  be  downloaded  in  Microsoft  Word  and  ASCII  formats  at 
 http://  www.  fcc.  gov/  wcb/  universal_  service/  schoolsandlibs.  html. 

 276  See  47  C.  F.  R.    1.49. 
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 145.  For  further  information,  contact  Kathy  Tofigh  at  (202)  418-  1553,  Karen  Franklin  at  (202)  418-  7706,  or  Jennifer  Schneider  at  (202)  418-  0425  in  the  Telecommunications  Access 
 Policy  Division,  Wireline  Competition  Bureau. 
 VI.  ORDERING  CLAUSES 
 146.  Accordingly,  IT  IS  ORDERED  that,  pursuant  to  the  authority  contained  in  sections  1,  4(  i),  4(  j),  201-  205,  214,  254,  and  403  of  the  Communications  Act  of  1934,  as 

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

 the  publication  of  this  Third  Report  and  Order  in  the  Federal  Register. 
 148.  IT  IS  FURTHER  ORDERED  that,  pursuant  to  the  authority  contained  in  sections  1,  4(  i),  4(  j),  201-  205,  214,  254,  and  403  of  the  Communications  Act  of  1934,  as  amended,  this 

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

 Marlene  H.  Dortch  Secretary 
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 APPENDIX  A  --  FINAL  RULES 
 Part  54  of  the  Code  of  Federal  Regulations  is  amended  as  follows: 
 PART  54  --  UNIVERSAL  SERVICE 
 1.  The  authority  citation  continues  to  read  as  follows: 
 Authority:  47  U.  S.  C.    1,  4(  i),  201,  205,  214,  and  254  unless  otherwise  noted. 
 Subpart  F  --  Universal  Service  Support  for  Schools  and  Libraries 
 2.  Section  54.504  is  amended  by  revising  subparagraph  (b)(  2)(  iii)  and  adding  paragraphs  (f)  and  (g)  as  follows: 

 54.504  Requests  for  services. 
 (a)  *  *  *  (b)  *  *  * 
 (2)  *  *  *  (iii)  The  services  will  not  be  sold,  resold,  or  transferred  in  consideration  for  money  or  any  other 
 thing  of  value,  and  will  not  be  transferred,  with  or  without  consideration  for  money  or  any  other  thing  of  value,  except  as  permitted  by  the  Commissions  rules; 
 *  *  *  (e)  *  *  * 
 (f)  Service  Substitution.  (1)  The  Administrator  shall  grant  a  request  by  an  applicant  to  substitute  a  service  or  product  for 
 one  identified  on  its  FCC  Form  471  where:  (A)  the  service  or  product  has  the  same  functionality; 
 (B)  the  substitution  does  not  violate  any  contract  provisions  or  state  or  local  procurement  laws;  (C)  the  substitution  does  not  result  in  an  increase  in  the  percentage  of  ineligible  services  or 
 functions;  and  (D)  the  applicant  certifies  that  the  requested  change  is  within  the  scope  of  the  controlling  FCC 
 Form  470,  including  any  associated  Requests  for  Proposal,  for  the  original  services.  (2)  In  the  event  that  a  service  substitution  results  in  a  change  in  the  pre-  discount  price  for  the 
 supported  service,  support  shall  be  based  on  the  lower  of  either  the  pre-  discount  price  of  the  service  for  which  support  was  originally  requested  or  the  pre-  discount  price  of  the  new, 
 substituted  service.  (3)  For  purposes  of  this  rule,  the  broad  categories  of  eligible  services  (telecommunications 
 service,  Internet  access,  and  internal  connections)  are  not  deemed  to  have  the  same  functionality  with  one  another. 
 (g)  Mixed  eligibility  services.  A  request  for  discounts  for  a  product  or  service  that  includes  both  eligible  and  ineligible  components  must  allocate  the  cost  of  the  contract  to  eligible  and  ineligible 
 components.  (1)  Ineligible  components.  If  a  product  or  service  contains  ineligible  components,  costs  must  be 
 allocated  to  the  extent  that  a  clear  delineation  can  be  made  between  the  eligible  and  ineligible  components.  The  delineation  must  have  a  tangible  basis,  and  the  price  for  the  eligible  portion 
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 must  be  the  most  cost-  effective  means  of  receiving  the  eligible  service.  (2)  Ancillary  ineligible  components.  If  a  product  or  service  contains  ineligible  components  that 
 are  ancillary  to  the  eligible  components,  and  the  product  or  service  is  the  most  cost-  effective  means  of  receiving  the  eligible  component  functionality,  without  regard  to  the  value  of  the 
 ineligible  component,  costs  need  not  be  allocated  between  the  eligible  and  ineligible  components.  Discounts  shall  be  provided  on  the  full  cost  of  the  product  or  service.  An 
 ineligible  component  is  ancillary  if  (1)  a  price  for  the  ineligible  component  cannot  be  determined  separately  and  independently  from  the  price  of  the  eligible  components,  and  (2)  the 
 specific  package  remains  the  most  cost-  effective  means  of  receiving  the  eligible  services,  without  regard  to  the  value  of  the  ineligible  functionality. 
 (3)  The  Administrator  shall  utilize  the  cost  allocation  requirements  of  this  subparagraph  in  evaluating  mixed  eligibility  requests  under  section  54.504(  d)(  1). 

 3.  Section  54.506  is  amended  to  place  the  existing  text  in  subparagraph  (a),  and  to  add  subparagraphs  (b)  and  (c)  as  follows: 
 54.506  Internal  Connections 
 (a)  A  service  is  eligible  for  support  as  a  component  of  an  institutions  internal  connections  if  such  service  is  necessary  to  transport  information  within  one  or  more  instructional  buildings  of  a 
 single  school  campus  or  within  one  or  more  non-  administrative  buildings  that  comprise  a  single  library  branch.  Discounts  are  not  available  for  internal  connections  in  non-  instructional 
 buildings  of  a  school  or  school  district,  or  in  administrative  buildings  of  a  library,  to  the  extent  that  a  library  system  has  separate  administrative  buildings,  unless  those  internal  connections  are 
 essential  for  the  effective  transport  of  information  to  an  instructional  building  of  a  school  or  to  a  non-  administrative  building  of  a  library.  Internal  connections  do  not  include  connections  that 
 extend  beyond  a  single  school  campus  or  single  library  branch.  There  is  a  rebuttable  presumption  that  a  connection  does  not  constitute  an  internal  connection  if  it  crosses  a  public 
 right-  of-  way.  (b)  Basic  maintenance  services.  Basic  maintenance  services  shall  be  eligible  as  an  internal 
 connections  service  if,  but  for  the  maintenance  at  issue,  the  internal  connection  would  not  function  and  serve  its  intended  purpose  with  the  degree  of  reliability  ordinarily  provided  in  the 
 marketplace  to  entities  receiving  such  services.  Basic  maintenance  services  do  not  include  services  that  maintain  equipment  that  is  not  supported  or  that  enhance  the  utility  of  equipment 
 beyond  the  transport  of  information,  or  diagnostic  services  in  excess  of  those  necessary  to  maintain  the  equipments  ability  to  transport  information. 
 (c)  Frequency  of  Discounts  for  Internal  Connections  Services.  Each  eligible  school  or  library  shall  be  eligible  for  support  for  internal  connections  services,  except  basic  maintenance  services, 
 no  more  than  twice  every  five  funding  years.  For  the  purpose  of  determining  eligibility,  the  five-year  period  begins  in  any  funding  year,  starting  with  Funding  Year  2005,  in  which  the  school  or 
 library  receives  discounted  internal  connections  services  other  than  basic  maintenance  services.  If  a  school  or  library  receives  internal  connections  services  other  than  basic  maintenance  services 
 that  are  shared  with  other  schools  or  libraries  (for  example,  as  part  of  a  consortium),  the  shared  services  will  be  attributed  the  school  or  library  in  determining  whether  it  is  eligible  for  support. 
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 4.  Section  54.507  is  amended  by  adding  paragraphs  (a)(  1)  and  (a)(  2)  to  read  as  follows: 
   54.507  Cap. 
 (a)  ******  (1)  Amount  of  Unused  Funds.  The  Administrator  shall  report  to  the  Commission,  on  a  quarterly 
 basis,  funding  that  is  unused  from  prior  years  of  the  schools  and  libraries  support  mechanism.  (2)  Application  of  Unused  Funds.  On  an  annual  basis,  in  the  second  quarter  of  each  calendar 
 year,  all  funds  that  are  collected  and  that  are  unused  from  prior  years  shall  be  available  for  use  in  the  next  full  funding  year  of  the  schools  and  libraries  mechanism  in  accordance  with  the  public 
 interest  and  notwithstanding  the  annual  cap,  as  described  in  paragraph  (a)  of  this  section. 
 5.  Section  54.509(  b)  is  revised  to  read  as  follows: 
   54.509  Adjustments  to  the  discount  matrix. 
 (b)  Reduction  in  percentage  discounts.  At  all  times  other  than  within  a  filing  period  described  in    54.507(  c),  if  the  estimates  schools  and  libraries  make  of  their  future  funding  needs  lead  the 
 Administrator  to  predict  that  total  funding  request  for  a  funding  year  will  exceed  the  available  funding,  the  Administrator  shall  calculate  the  percentage  reduction  to  all  schools  and  libraries, 
 except  those  in  the  two  most  disadvantaged  categories,  necessary  to  permit  all  requests  in  the  next  funding  year  to  be  fully  funded. 

 6.  Section  54.513  is  amended  by  revising  the  title  of  the  section  and  adding  paragraph  (c)  as  follows: 
 54.513  Resale  and  transfer  of  services. 
 (a)  *  *  *  (b)  *  *  * 
 (c)  Eligible  services  and  equipment  components  of  eligible  services  purchased  at  a  discount  under  this  subpart  shall  not  be  transferred,  with  or  without  consideration  of  money  or  any  other 
 thing  of  value,  for  a  period  of  three  years  after  purchase,  except  that  eligible  services  and  equipment  components  of  eligible  services  may  be  transferred  to  another  eligible  school  or 
 library  in  the  event  that  the  particular  location  where  the  service  originally  was  received  is  permanently  or  temporarily  closed.  If  an  eligible  service  or  equipment  component  of  a  service  is 
 transferred  due  to  the  permanent  or  temporary  closure  of  a  school  or  library,  the  transferor  must  notify  the  Administrator  of  the  transfer,  and  both  the  transferor  and  recipient  must  maintain 
 detailed  records  documenting  the  transfer  and  the  reason  for  the  transfer  for  a  period  of  five  years. 
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 7.  Section  54.516  is  amended  by  adding  a  sentence  to  paragraph  (b)  as  follows: 
 54.516  Auditing. 
 (a)  *  *  *  Schools  and  libraries  shall  be  required  to  maintain  asset  and  inventory  records  of  equipment  purchased  as  components  of  supported  internal  connections  services  sufficient  to 
 verify  the  actual  location  of  such  equipment  for  a  period  of  five  years  after  purchase. 
 8.  Section  54.522  is  added  as  follows: 
 54.522  Eligible  services  list. 
 The  Administrator  shall  submit  by  June  30  of  each  year  a  draft  list  of  services  eligible  for  support,  based  on  the  Commissions  rules,  in  the  following  funding  year.  The  Commission  will 
 issue  a  Public  Notice  seeking  comment  on  the  Administrators  proposed  eligible  services  list.  At  least  60  days  prior  to  the  opening  of  the  window  for  the  following  funding  year,  the  Commission 
 shall  release  a  Public  Notice  attaching  the  final  eligible  services  list  for  the  upcoming  funding  year. 

 9.  Section  54.523  is  added  as  follows: 
 54.523  Payment  for  the  non-  discount  portion  of  supported  services. 
 An  eligible  school,  library,  or  consortium  must  pay  the  non-  discount  portion  of  services  or  products  purchased  with  universal  service  discounts.  An  eligible  school,  library,  or  consortium 
 may  not  receive  rebates  for  services  or  products  purchased  with  universal  service  discounts.  For  the  purpose  of  this  rule,  the  provision,  by  the  provider  of  a  supported  service,  of  free  services  or 
 products  unrelated  to  the  supported  service  or  product  constitutes  a  rebate  of  the  non-  discount  portion  of  the  supported  services. 
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 APPENDIX  B  DISCOUNT  MATRIX 
 47  C.  F.  R.    54.505(  c) 
 Percentage  of  Students  Eligible  for  School 
 Lunch  Program 
 Urban  Discount 
 Level 
 Rural  Discount 
 Level  <1  20%  25% 
 1-  19  40%  50%  20-  34  50%  60% 
 35-  49  60%  70%  50-  74  80%  80% 
 75-  100  90%  90% 
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 APPENDIX  C  Examples  of  Permissible  Funding  Under  Twice-  Every-  Five-  Years  Rule  for  Internal  Connections 
 Example  1  Example  2  Example  3  Example  4  Example  5  Example  6 
 2005  Funding  Received  Funding  Received  Funding  Received  Funding  Received  Eligible,  but  no  Funding 

 Received 
 Funding  Received 

 2006  Funding  Received  Eligible,  but  no  Funding 
 Received 
 Eligible,  but  no  Funding 
 Received 
 Eligible,  but  no  Funding 
 Received 
 Eligible,  but  no  Funding 
 Received 
 Eligible,  but  no  Funding 
 Received 
 2007  Not  Eligible  for  Funding  Eligible,  but  no  Funding 

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

 Received 
 Eligible,  but  no  Funding 
 Received 
 2009  Not  Eligible  for  Funding  Not  Eligible  for  Funding  Not  Eligible  for  Funding  Not  Eligible  for  Funding  Funding  Received  Funding  Received 

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

 2011  Funding  Received  Funding  Received  Not  Eligible  for  Funding  Not  Eligible  for  Funding  Not  Eligible  for  Funding  Not  Eligible  for  Funding 
 2012  Not  Eligible  for  Funding  Not  Eligible  for  Funding  Funding  Received  Not  Eligible  for  Funding  Not  Eligible  for  Funding  Not  Eligible  for  Funding 
 2013  Not  Eligible  for  Funding  Eligible,  but  no  Funding 
 Received 
 Not  Eligible  for  Funding  Funding  Received  Not  Eligible  for  Funding  Not  Eligible  for  Funding 

 2014  Not  Eligible  for  Funding  Funding  Received  Not  Eligible  for  Funding  Not  Eligible  for  Funding  Funding  Received  Funding  Received 
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 APPENDIX  D 
 List  of  Parties  Filing  Comments  in  response  to  Schools  and  Libraries  Notice  of  Proposed  Rulemaking 
 CC  Docket  No.  02-  6  (filed  July  1,  2002) 

 Commenter  Abbreviation 
 Access  Living  of  Metropolitan  Chicago  AL  Airoldi,  Joan 
 Alaska,  State  of  (Department  of  Education  and  Early  Development)  Alaska 
 Alaska  Telephone  Association,  The  ATA  American  Association  of  School  Administrators  AASA 
 American  Library  Association  ALA  Arkansas  E-  rate  Workgroup,  The  State  of  Arkansas  E-  rate 
 AT&  T  Corp.  AT&  T  AT&  T  Wireless  Services,  Inc.  AWS 
 Avella  Area  School  District  Avella  Bakersfield  School  District  Bakersfield 
 BellSouth  and  SBC  Comm.,  Inc.  BellSouth/  SBC  Benton  Foundation 
 Bibbey,  David  Boston,  City  of  Boston 
 Bowe,  Marty  California  Department  of  Education,  The  California  DOE 
 Carnegie  Library  of  Pittsburgh  Carnegie  Library  Cellular  Telecommunications  &  Internet  Association  CTIA 
 Central  Susquehanna  Intermediate  Unit  Central  Susquehanna  Cleveland  Municipal  School  District  Cleveland  MSD 
 Coalition  for  E-  rate  Reform  E-  rate  Reform  Colorado  Department  of  Education  Colorado  DOE 
 Community  Technology  Centers  Network,  The  Benton  Foundation,  Association  for  Community  Networking, 
 California  Community  Technology  Policy  Group,  Santa  Barbara  College,  Casa  Foundation  CTCNet 
 Council  of  Chief  State  School  Officers  CCSSO  Council  of  the  Great  City  Schools,  The  Great  City 
 Delaware  Center  for  Educational  Technology  Dell  Computer  Corporation  Dell 
 eChalk  LLC  eChalk  Edison  Schools,  Inc.  Edison  Schools 
 Educational  Services  District  101  Edu.  Service  D.  101  Education  and  Library  Networks  Coalition  EdLINC 
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 Emilienburg,  Steven  E-  Rate  Elite  Services,  Inc.  E-  Rate  Elite 
 Excaliber  Internet  Corp.  Excaliber  Florida  Division  of  Library  and  Information  Services 
 Florida  Public  Service  Commission  Florida  PSC  Florida  State  of  Dept.  of  Ed.  Florida  DOE 
 Funds  For  Learning,  LLC  General  Communications,  Inc.  GCI 
 Gibson,  Jeffrey  Grainger,  Kathleen  Bond 
 Gregory,  James  D.  Harris,  Jim  Harris  (Alabama  DOE) 
 Harvey  ESD  Harney  Hawaii  State  Public  Library  Hawaii 
 Illinois  State  Board  of  Education  Illinois  BOE  Inclusive  Technologies 
 Information  Institute  Information  Renaissance 
 Integrity  Networking  Systems,  Inc.  Integrity  Intelenet  Commission,  Indiana  Department  of 
 Education  and  Indiana  State  Library  Intelenet  Iowa  Communications  Network 
 Iowa  Department  of  Education  Iowa  DOE  Iversen,  Sarah  L. 
 Johnson,  Jack  Jones  Public  Schools 
 Kellogg  Consulting,  LLC  Kellogg  Consulting  Kentucky  Department  for  Libraries  and  Archives 
 Kentucky  Department  of  Education  Kila  School  District  #20  Kila 
 Lawton-  Bronson  Community  School,  Norman  Washburn 
 Lebanon  School  District  Los  Angeles  Unified  School  District  LA  USD 
 Madison  School  District  Maine  Public  Utilities  Commission  Maine  PUC 
 Marian  High  School  Megdad,  Diane 
 Memphis  City  Schools  Michigan  Information  Network,  The  Michigan 
 Missouri  Office  of  the  Public  Counsel  Missouri  OPC  Missouri  Research  and  Education  Network  MOREnet 
 Montana  Independent  Telecommunications  Systems  MTIS  Montana  Public  Service  Commission  Montana  PSC 
 Montgomery,  Ruth  Ann 
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 Nassau-  Suffolk  School  Boards  Association  N-  SSBA  National  Council  on  Disability  NCD 
 National  Education  Association,  the  International  Society  for  Technology  in  Education  and 
 The  Consortium  for  School  Networking  NEA  et  al  New  Jersey  Library  Association,  The 
 New  York  City  Board  of  Education,  The  NYCBOE  New  York  Public  Library,  The  NYPL 
 New  York  State  Education  Department,  The  Nextel  Communications,  Inc.  Nextel 
 North  Attleborough  Public  Schools  North  Carolina  State  Library  NCL 
 North  of  Boston  Library  Exchange  NOBLE  Northwood  School  District 
 ODonnell,  Tracey  Office  of  Information  Technology  Services  OIT  NC 
 of  North  Carolina,  The  Office  of  the  Public  Counsel 
 Ogden,  Jeffrey  C.  Pennsylvania  Department  of  Education  Pennsylvania  DOE 
 Philadelphia  School  District  Pisano,  Vivian  M. 
 Plummer,  Jamie  Quaker  Valley  School  District 
 Queens  Borough  Public  Library  Richardson  Associates  Electronics 
 Rural  School  and  Community  Trust  Scranton  Public  Library  Scranton  PL 
 Lackawanna  County  Library  System  Seattle  Public  Library  Seattle  PL 
 Segalman  and  Nixon  Sharer,  Judy 
 Skiatook  Public  Schools  Software  &  Information  Industry  Association  Software  &  Info 
 Sorenson,  Doug  Spectrum  Communications  Cabling  Services,  Inc.  Spectrum 
 Sprint  Corporation  Sprint  Sterling,  Jack 
 St.  Louis  Public  Library  Southwest  Virginia  Education  and  Training  Network  SVETV 
 TAMSCO  Telecommunications  Division  TAMSCO  Tel/  Logic  Inc.  Tel/  Logic 
 Telecommunications  for  the  Deaf,  Inc.  TDI  Three  Rivers 
 Trillion  Digital  Communications,  Inc.  Trillion 
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 United  Cerebal  Palsy  of  Michigan/  Pam  Schuster  Universal  Service  Administrative  Company  USAC 
 Verizon  Telephone  Companies  Verizon  Warwick  Communications,  Inc.  Warwick 
 Weisiger,  Greg  Weisiger  West  Virginia  Department  of  Education  West  Virginia  DOE 
 WiscNet  Wisconsin  Department  of  Public  Instruction,  The  WDPI 
 WorldCom,  Inc.  WorldCom  York  County  Library  System  York  County  Library 
 Martin  Library  Association 
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 List  of  Parties  Filing  Reply  Comments  in  response  to  Schools  and  Libraries  Notice  of  Proposed  Rulemaking 
 CC  Docket  No.  02-  6  (filed  July  31,  2002) 

 Commenter  Abbreviation 
 Alaska,  State  of  (Department  of  Education  and  Early  Development)  Alaska 
 American  Association  of  School  Administrators  AASA  American  Library  Association  ALA  (late) 
 Arkansas  E-  rate  Workgroup,  State  of  AEWG  AT&  T  Wireless  Services,  Inc.  AWS 
 Council  of  Chief  State  School  Officers  CCSSO  Cox  Communications,  Inc.  COX 
 Dell  Computer  Corporation  Dell  Education  and  Library  Networks  Coalition  EdLiNC 
 Florida  Public  Service  Commission  FPSC  Funds  For  Learning,  LLC 
 Information  Technology  Industry  Council  ITI  Iowa,  State  Library 
 Merit  Network,  Inc.  Merit  National  Association  of  State  Telecommunications 
 Directors  NASTD  National  Education  Association, 
 The  International  Society  for  Technology  in  Education,  and  the  Consortium  for  School 
 Networking  NEA  et  al  New  York  State  Education  Department  New  York 
 Nextel  Communications,  Inc.  Nextel  Qwest  Communications  International  Inc.  Qwest 
 Siemens  Enterprise  Networks  Siemens  Spectrum  Communications  Cabling  Services,  Inc.  Spectrum 
 Sprint  Corporation  Sprint  Verizon  Verizon 
 Weisiger,  Greg  WorldCom,  Inc.  WorldCom 
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 List  of  Parties  Filing  Comments  in  response  to  Schools  and  Libraries  Further  Notice  of  Proposed  Rulemaking 
 CC  Docket  No.  02-  6  (filed  July  21,  2003) 

 Commenter  Abbreviation 
 Alaska  State  Library  and  Department  of  Education  and  Early  Development  EED 
 American  Library  Association  ALA  Arkansas  E-  rate  Work  Group  AEWG 
 Association  for  Telecommunications  and  Technology  Professionals  Serving  State  Government  NASTD 
 AT&  T  Corp.  AT&  T  BellSouth  Corporation  BellSouth 
 Comtec  Business  Systems,  Inc.  Comtec  Consortium  for  School  Networking  CoSN 
 Dell  Computer  Corporation  Dell  Education  and  Library  Networks  Coalition  EdLiNC 
 Fibertech  Networks,  LLC  Fibertech  Florida  Public  Service  Commission  FPSC 
 Funds  For  Learning,  LLC  Greg  Weisiger  Weisiger 
 Illinois  State  Board  of  Education  ISBE  Information  Technology  Group  of  the 
 New  York  Public  Library  NYPL  National  Association  of  State  Utility  Consumer 
 Advocates  NASUCA  New  York  City  Department  of  Education  NYCDOE 
 Sprint  Corporation  Sprint  State  E-  Rate  Coordinators  Alliance  Alliance 
 StateNets  StateNets  Tel/  Logic  Inc.  d/  b/  a  E-  Rate  Central 
 Verizon  telephone  companies  Verizon  Wisconsin  Department  of  Public  Instruction  Wisconsin  DPI 
 WorldCom,  Inc.  d/  b/  a  MCI 
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 List  of  Parties  Filing  Reply  Comments  in  response  to  Schools  and  Libraries  Further  Notice  of  Proposed  Rulemaking 
 CC  Docket  No.  02-  6  (filed  August  19,  2003) 

 Commenter  Abbreviation 
 Consortium  on  School  Networking  CoSN  International  Society  of  Technology  in 
 Education  ISTE  Council  of  the  Great  City  Schools  Council 
 Education  and  Library  Networks  Coalition  EdLiNC  Funds  For  Learning,  LLC 
 National  Association  of  Independent  Schools  NAIS  National  Education  Knowledge  Industry  Association  NEKIA 
 Nextel  Communications,  Inc.  Nextel  Pennsylvania  Department  of  Education 
 State  of  Alaska  Department  of  Education  and  Early  Development 
 Alaska  State  Library  EED  State  E-  rate  Coordinators  Alliance  SECA 
 Verizon  Weisiger,  Greg 
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 SEPARATE  STATEMENT  OF  CHAIRMAN  MICHAEL  K.  POWELL 
 Re:  In  the  Matter  of  Schools  and  Libraries  Universal  Service  Support  Mechanism  CC  Docket  No.  02-  6 
 Today  marks  another  milestone  in  our  ongoing  and  systematic  efforts  to  improve  the  effectiveness  of  the  schools  and  libraries  fund.  Today,  we  adopt  a  variety  of  measures  designed 
 to  simplify  fund  administration,  ensure  the  equitable  distribution  of  monetary  support,  and  to  protect  against  waste,  fraud,  and  abuse.  The  rules  we  adopt  today  should  increase  the  accuracy 
 and  effectiveness  of  disbursements  by,  for  example,  precluding  eligible  entities  from  upgrading  or  replacing  internal  connections  with  universal  service  funds  on  a  yearly  basis,  clarifying  what 
 constitutes  permissible  maintenance  costs,  and  limiting  the  transfer  of  equipment  purchased  with  universal  service  discounts. 

 Many  of  the  actions  we  take  today  draw  from  previous  events,  including  the  May  2003  public  forum  on  universal  service  reform  and  the  activities  of  the  Universal  Service 
 Administrative  Companys  Waste,  Fraud,  and  Abuse  Task  Force.  Taken  together,  these  measures  advance  our  mission  of  ensuring  efficient,  accurate  and  timely  fund  disbursements  to 
 promote  the  nations  universal  service  objectives.  Yet  our  task  is  not  yet  complete.  As  indicated  in  our  Further  Notice,  the  agency  seeks  comment  on  how  to  further  enhance  the  ability  of  limited 
 funds  to  do  the  most  good  for  the  most  Americans. 
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 SEPARATE  STATEMENT  OF  COMMSSIONER  MICHAEL  J.  COPPS 
 Re:  In  the  Matter  of  Schools  and  Libraries  Universal  Service  Support  Mechanism  CC  Docket  No.  02-  6 
 Great  programs  like  E-  Rate  do  not  thrive  without  regular  review  and  care.  With  justifiable  pride  we  can  now  say  that  92  percent  of  public  school  classrooms  are  connected  to  the 
 Internet.  Only  14  percent  of  these  classrooms  were  connected  when  Congress  passed  the  Telecommunications  Act  in  1996.  Yet  the  gains  we  have  made  will  evaporate  without  our 
 continued  vigilance.  This  leads  me  to  support  todays  decision.  It  is  one  in  a  series  of  positive  steps  we  are  taking  at  the  Commission  to  ensure  that  the  E-  Rate  program  functions  with  the 
 integrity  it  must  have. 
 I  am  particularly  pleased  that  today  we  finally  formalize  the  process  for  making  available  carryover  funds  from  prior  years.  This  is  a  major  step  forward.  I  also  think  our  new  rule 
 limiting  support  for  internal  connections  to  two  times  within  a  five-  year  period  strikes  the  right  balance  between  applicant  needs  and  efficient  use  of  program  support.  These  are  but  two  of 
 numerous  positive  steps  contained  in  this  item. 
 We  dont  solve  all  problems  today,  however.  An  abrupt  change  in  the  eligible  services  list  has  left  applications  from  rural  schools  and  libraries  in  North  Dakota  and  elsewhere  high  and 
 dry.  These  rural  schools  and  libraries  have  built  cost-  effective  networks  based  on  the  use  of  dark  fiber.  Now  the  signals  have  changed  and  dark  fiber  is  no  longer  eligible.  We  need  to  reverse 
 this  recent  action  and  get  our  policy  regarding  support  for  dark  fiber  straight  once  and  for  all.  I  see  nothing  in  Section  254(  h)  that  compels  the  exclusion  of  dark  fiber  facilities  from  E-  Rate 
 program  support.  I  hope  we  can  correct  this  mistake  as  soon  as  possible. 
 Finally,  I  think  all  supporters  of  the  E-  rate  should  frequently  caution  themselves  that  we  not  add  to  the  growing  complexity  of  the  application  process.  As  we  tighten  procedures  and  take 
 necessary  steps  to  weed  out  waste  and  fraud  in  the  program,  we  could  unwittingly  make  the  application  process  so  daunting  as  to  discourage  needy  schools  and  libraries  from  even  applying. 
 As  we  strive  to  improve  accountability,  so  also  should  we  commit  ourselves  to  ensuring  that  as  the  program  evolves,  it  continues  to  serve  the  needs  of  students  and  patrons  of  our  schools  and 
 libraries  the  real  beneficiaries  of  support. 
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 SEPARATE  STATEMENT  OF  COMMISSIONER  JONATHAN  S.  ADELSTEIN 
 Re:  In  the  Matter  of  Schools  and  Libraries  Universal  Service  Support  Mechanism  CC  Docket  No.  02-  6 
 In  1996,  prior  to  the  implementation  of  the  E-  rate  program,  only  14  percent  of  public  classrooms  were  connected  to  the  Internet.  According  to  the  most  recently  available  data,  in 
 2002,  92  percent  of  public  school  classrooms  were  connected  to  the  Internet.  In  addition,  85  percent  of  the  public  schools  that  are  connected  to  the  Internet  reported  in  2001  that  they  had  a 
 broadband  connection. 
 In  1997,  only  60  percent  of  library  systems  provided  public  access  in  one  of  their  outlets.  While  in  2002,  95  percent  of  public  library  outlets  provided  public  access.  The  E-  rate  program 
 has  become  a  necessary  tool  to  facilitate  access  to  the  myriad  of  opportunities  that  the  Internet  offers  to  students  and  library  patrons  alike. 

 Clearly,  this  has  been  a  very  successful  program.  But  even  successful  programs  can  be  improved. 
 Today  we  adopt  an  item  which  is  just  one  in  a  series  of  steps  we  are  taking  to  improve  the  Schools  and  Libraries  Program.  Over  the  years,  this  Commission  has  addressed  matters  related 
 to  the  administration  of  this  program  to  make  it  more  user-  friendly  and  help  prevent  waste,  fraud  and  abuse.  In  this  last  year,  this  Commission  has  made  a  more  concerted  effort  to  address  these 
 issues. 
 In  April,  we  issued  a  Second  Order  and  Further  Notice  which  adopted  a  debarment  rule  and  other  measures  to  ensure  that  this  program  is  utilized  in  the  best  manner  possible.  We  also 
 sought  comment  on  other  issues,  some  of  which  we  address  in  this  item.  In  May  of  this  year,  we  held  a  Forum  on  Improving  Administration  of  the  Schools  and  Libraries  Support  Mechanisms 
 and  had  the  opportunity  to  learn  more  about  the  use  of  this  program  from  a  number  of  different  sources. 

 In  addition,  we  have  benefited  from  the  recommendations  of  USACs  Waste,  Fraud  and  Abuse  Task  Force  and  have  had  the  opportunity  to  review  beneficiary  audit  reports  and  the 
 Office  of  Inspector  Generals  semi-  annual  report.  Todays  decision  draws  upon  a  great  deal  of  information  from  a  number  of  knowledgeable  sources.  As  I  had  anticipated  in  my  Separate 
 Statement  in  April,  we  have  taken  more  steps  forward  with  this  latest  addition  in  our  efforts  to  reform  the  program  and  ensure  that  it  inures  to  the  benefit  of  those  schools  and  libraries  across 
 the  nation  that  participate 
 When  private  companies  make  decisions  about  their  telecommunications  investments,  particularly  when  it  comes  to  investments  in  equipment,  they  generally  do  not  expect  to  replace 
 their  equipment  year  after  year.  Our  rules  in  the  Schools  and  Libraries  program  have  permitted  schools  and  libraries  to  do  just  that.  But  today  we  change  that.  And  I  support  that  change. 
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 In  April,  I  said  that  perhaps  we  should  apply  a  service  life  to  the  equipment.  USACs  Waste  Fraud  and  Abuse  Task  Force  recommended  the  same.  This  program-  specific  service  life  would 
 require  program  participants  to  keep  the  equipment  for  a  particular  period  of  time  rather  than  applying  annually  for  discounts  for  duplicative  equipment. 

 Although  we  did  not  adopt  such  a  service  life  for  equipment,  we  may  have  addressed  my  concern  about  ensuring  the  fair  and  even  distribution  among  requesting  users  by  adoption  of 
 two  different  measures.  As  a  caution,  however,  we  may  need  to  address  the  issue  of  service  specific  lives  in  the  event  that  the  rule  we  adopt  today  does  not  go  far  enough  to  prevent  waste, 
 fraud  and  abuse. 
 We  have  addressed  my  concerns  by  limiting  the  frequency  of  requests  from  entities  for  Priority  Two  discounts,  and  restricting  the  transfer  of  equipment  purchased  with  discounts  from 

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

 value.  In  order  to  help  prevent  waste,  fraud  and  abuse,  we  prohibit  transfer  of  equipment,  without  regard  to  whether  money  or  anything  else  of  value  has  been  received  in  return,  for  a 
 period  of  three  years  after  purchase.  We  do  recognize,  however,  that  applicants  may  have  legitimate  reasons  to  transfer  internal  connections  equipment  due  to  the  closing  of  a  school  or 
 other  eligible  entity.  I  believe  that  this  provides  the  necessary  flexibility  to  our  new  rule. 
 The  Waste  Fraud  and  Abuse  Task  Force  has  recommended  a  reconfiguration  of  our  discount  matrix.  In  April,  I  stated  that  it  was  important  for  us  to  address  the  possibility  of 

 changing  the  discount  levels  for  this  program.  Many  have  suggested  that  the  90%  discount  level  is  too  high  because  it  does  not  require  enough  of  an  investment  by  the  school  or  library. 
 Reducing  the  discount  levels  can  introduce  more  accountability,  and  better  control  the  costs  of  the  program.  At  the  same  time,  I  realize  that  there  may  very  well  be  some  schools  and  libraries 
 that  could  not  afford  the  benefits  of  this  program  if  we  reduced  the  discounts.  Today,  we  ask  those  questions,  and  others,  in  order  to  explore  the  efficacy  of  these  changes. 

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