PROBLEMS WITH THE E-RATE PROGRAM: WASTE,

FRAUD, AND ABUSE CONCERNS IN THE WIRING

OF OUR NATION’S SCHOOLS TO THE INTERNET

Part 1

HEARING

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

JUNE 17, 2004

Serial No. 108–92

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

PROBLEMS WITH THE E-RATE PROGRAM: WASTE, FRAUD, AND ABUSE CONCERNS IN

THE WIRING OF OUR NATION’S SCHOOLS TO THE INTERNET—Part 1

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PROBLEMS WITH THE E-RATE PROGRAM: WASTE,

FRAUD, AND ABUSE CONCERNS IN THE WIRING

OF OUR NATION’S SCHOOLS TO THE INTERNET

Part 1

HEARING

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

JUNE 17, 2004

Serial No. 108–92

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

2

COMMITTEE ON ENERGY AND COMMERCE

JOE BARTON, Texas, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

RALPH M. HALL, Texas

MICHAEL BILIRAKIS, Florida

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi, Vice Chairman

VITO FOSSELLA, New York

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

DARRELL E. ISSA, California

C.L. ‘‘BUTCH’’ OTTER, Idaho

JOHN SULLIVAN, Oklahoma

JOHN D. DINGELL, Michigan

Ranking Member

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

TOM ALLEN, Maine

JIM DAVIS, Florida

JANICE D. SCHAKOWSKY, Illinois

HILDA L. SOLIS, California

CHARLES A. GONZALEZ, Texas

BUD ALBRIGHT, Staff Director

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

JAMES C. GREENWOOD, Pennsylvania, Chairman

MICHAEL BILIRAKIS, Florida

CLIFF STEARNS, Florida

RICHARD BURR, North Carolina

CHARLES F. BASS, New Hampshire

GREG WALDEN, Oregon

Vice Chairman

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

JOE BARTON, Texas,

(Ex Officio)

PETER DEUTSCH, Florida

Ranking Member

DIANA DEGETTE, Colorado

TOM ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

C O N T E N T S

Page

Testimony of:

Diaz, Santos, President, Data Research Corporation .................................... 67

Feaster H. Walker, III, Inspector General, Federal Communications Commission ........................................................................................................... 11

Lambert, Cristina, President and Chief Executive Officer, Puerto Rico

Telephone Company; accompanied by Arnaldo Diaz, Strategic Business

Officer, Enterprise Services ......................................................................... 63

Mattey, Carol E., Deputy Chief, Wireline Competition Bureau, Federal

Communications Commission, accompanied by Jane E. Mago, Chief,

Office of Strategic Planning and Policy Analysis, Federal Communications Commission .......................................................................................... 90

McDonald, George, Vice President, Schools and Libraries Division, Universal Service Administrative Company ..................................................... 97

Rey, Hon. Cesar A., Secretary, Department of Education, Commonwealth

of Puerto Rico; accompanied by Carlos Vidal Arbona, Chief Technology

Officer, Puerto Rico Department of Education; and Adonay Ramirez,

ARJ Professional and Consulting Service, Inc ........................................... 49

Saldana, Hon. Manuel Diaz, Comptroller, Commonwealth of Puerto Rico . 23

(III)

(1)

PROBLEMS WITH THE E-RATE PROGRAM:

WASTE, FRAUD, AND ABUSE CONCERNS IN

THEWIRING OF OUR NATION’S SCHOOLS TO

THE INTERNET

THURSDAY, JUNE 17, 2004

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,

Washington, DC.

The subcommittee met, pursuant to notice, at 9:30 a.m., in room

2322, Rayburn House Office Building, James C. Greenwood (chairman) presiding.

Members present: Representatives Greenwood, Bass, Walden,

Barton (ex officio), DeGette, and Markey.

Also present: Representatives Green and Rush.

Staff present: Mark Paoletta, majority counsel; Peter Spencer,

majority professional staff; Tom Feddo, majority counsel; Jaylyn

Jensen, legislative analyst; Michael Abraham, legislative clerk;

Gregg Rothschild, minority counsel; and David Nelson, minority investigator and economist.

Mr. GREENWOOD. The hearing will come to order. The Chair recognizes himself for the purpose of making an opening statement.

This morning we begin a series of oversight hearings regarding the

so-called E-Rate Program. E-Rate, which was created by vague and

little notice provision of the Telecommunications Act of 1996, provides poor schools and libraries with discounts for basic telephone

services, Internet access, and much of the internal connection gear

that comprises the telecommunications network.

Nearly 11⁄2 years ago this subcommittee began a careful and methodical examination of the E-Rate Program. From the very beginning of that investigation, the subcommittee has found waste and

abuse in the E-Rate Program and since then our E-Rate oversight

has developed on several major fronts.

These hearings will illustrate several serious program flaws uncovered by that oversight. Unfortunately, these flaws have led to

tragic stories of waste and misuse of E-Rate funds. We have found

that the program’s current structure and administration invite

scams, both simple and sophisticated, and waste serious amount of

money.

Whether it be bid rigging, poor planning, and lack of meaningful

competition, or loopholes in the program’s rules, a common and

tragic theme recurs. Many children, perhaps hundreds of thousands, are deprived of the educational benefits that E-Rate funded

2

infrastructure offered them. While a well-intended idea, the E-Rate

Program as it is currently structured is an invitation for disaster.

Indeed, if one were to design a program to pour money out the window, this would be the way to do it.

E-Rate is financed through a mechanism called the Universal

Service Fund which in turn is funded by mandatory contributions

from interstate telecommunication service providers. Predictably,

most telephone companies have chosen to pass the burden of these

mandatory contributions onto consumers as a universal service fee

on their phone bills. Each year the Universal Service Fund allocates $2.25 billion to the E-Rate Program. That number bears repeating, $2.25 billion.

Who controls this immense pot of money? Many Americans might

be concerned to learn the answer. It is the Universal Service Administrative Company, a wholly owned subsidiary of the National

Exchange Carrier Association which is an alliance of telecommunications service providers. This management structure is troublesome, and at the very minimum its ‘‘fox inside the henhouse’’ appearance is more than a little disconcerting.

What agency is responsible for the program’s rules and regulations, and for supervising USAC? The Federal Communications

Commission. The program’s rules and the process by which the

FCC creates them are, to say the least, complicated and cumbersome. What is more, we have found that the program’s current

rules do little to foster a competitive bidding environment that ensures the E-Rate Program pays the best price for equipment and

services.

In addition, the Inspector General will testify that it took 22

months for the FCC to provide critical policy guidance to USAC

about E-Rate Program administration. I am confident that the

American people do not consider these circumstances to be the hallmarks of an efficient and effective program.

Yet, in a 1998 Report to Congress, the FCC asserted that the administration of the E-Rate Program was ‘‘efficient, innovative, and

effective.’’ That representation is disturbing in light of what our

work has uncovered, what the FCC’s Inspector General has found,

and what the nation’s press has unearthed.

For example, the subcommittee’s scrutiny of E-rate work in Chicago public schools prompted SBC to pay $8.8 million back to the

E-Rate Program for improperly stockpiled switches and equipment.

Our investigation in Puerto Rico found $23 million worth of improperly stockpiled equipment and a $58 million computer network

that remains virtually unused.

Just 2 weeks ago, the FCC IG and a Justice Department task

force secured a plea agreement regarding a multi-million dollar

bid-rigging scheme by NEC and others intended to defraud the ERate Program by preying on San Francisco Unified School District,

as well as schools in Michigan, Arkansas, and South Carolina.

The Justice Department has pursued similar E-rate scams in

Milwaukee and New York City. Meanwhile, the Atlanta JournalConstitution recently reported on serious abuses of tens of millions

of dollars of E-Rate Program money in Atlanta’s public school system. These reports have now taken our investigation to Atlanta. I

fear that we may be only seeing the tip of the iceberg.

3

These instances clearly demonstrate that the FCC’s injudicious

statement 6 years ago that E-rate was an efficient and effective

program falls far short of the mark. The FCC and USAC have a

lot to answer for, and much work to do. However, we should also

acknowledge that Congress must shoulder some responsibility as

well, perhaps more time, and certainly more debate and discussion,

should have been spent in carefully crafting this program to

achieve its admirable goal.

Today’s hearing will focus in detail on Puerto Rico’s use of E-rate

funds, but these specifics will also provide an invaluable opportunity to consider the bigger picture of E-rate’s flaws. In Puerto

Rico, E-rate—that is, the American rate-payer—paid for more than

$100 million of equipment and services. We have discovered that

most of the equipment and services have never been, and will

never be, put to effective use for Puerto Rico’s children. The subcommittee found $23 million in telecommunications

equipment, wireless access cards and related gear, still shrinkwrapped and sitting on storage pallets in a government warehouse.

While the equipment has sat there, E-rate funds were paid out for

this equipment’s purchase and its installation. E-rate paid Puerto

Rico Telephone Company $31 million for high-speed service and

Internet access, yet those services went virtually unused. This is

outrageous. Today, after over $101 million has been spent by the program to

build Puerto Rico’s schools a high speed network for Internet access, schoolchildren access the Internet by slow, dial-up modems on

roughly two computers per school. That is, 50,000 students graduate each year from the largest school system in the Nation without having any of the Internet access and high-tech learning resources that the program is intended to support.

Puerto Rico’s E-rate experience is a story of questionable technology planning; questionable billing for E-rate products and services by the vendors, Puerto Rico Telephone Company and Data Research Corporation; confused efforts to rebuild Puerto Rico’s E-Rate

Program after the current administration assumed office; and, a

critical failure on the part of USAC, and ultimately the FCC, to

recognize the severity of the situation and take charge when more

than $100 million of E-rate investment was at risk.

The delay by FCC and USAC to intervene after the appearance

of evidence of waste and abuse, coupled with contract disputes

among vendors and the administration, have squandered precious

time. Subcommittee staff found E-rate-funded equipment essentially sitting idle in Puerto Rico’s schools, and serious questions

exist regarding network functionality in many schools due to disuse, corrosion, and inadequate maintenance of essential equipment.

Delay may also be hampering legitimate remedial efforts by the

current administration. The Puerto Rico Department of Education

appears to be implementing a number of controls to manage future

E-rate work, and to have a substantive plan to implement technology for educational use and for integrating curricula and teacher

training to ensure the effective use of E-rate infrastructure.

However, the anticipated delay to resolve past funding issues seriously jeopardizes previously implemented E-rate work. Although

the FCC was clearly preparing to work closely with Puerto Rico in

4

the Fall of 2002, the agency made a mid-course correction in the

Spring of 2003, abandoned what it had termed a ‘‘workout plan,’’

and undertook a much more arms-length approach to the school

district. Late last year, the FCC ordered USAC to process Puerto

Rico’s E-rate applications after completing a series of audits. As a

result, the E-rate quagmire in Puerto Rico may not be resolved

until 2005 or later.

Puerto Rico demonstrates that the E-Rate Program’s administration is anything but efficient, innovative, and effective. The program is overly complex and poorly managed. Robust competitive

bidding procedures are virtually absent. There appears to be no

oversight in a program where rigorous oversight should be paramount. And at the end of the day, while there is certainly blame

to go around, the buck has to stop at the agency that is charged

with running this program.

I look forward to discussing these circumstances with the witnesses this morning.

Finally, on a more personal note, I would like to acknowledge our

first lead counsel on this investigation, Michael Geffroy. Mike has

since left to work on the House Select Committee on Homeland Security, and today, as a Major in the United States Marine Corps,

is on a leave of absence while serving as an attorney in Iraq. We

sincerely appreciate his selfless dedication and service to our nation during this war, as well as all of his work for this subcommittee on the E-Rate Program.

I would also like to thank Tom Bennett, the Assistant Inspector

General for USF Oversight, for the valuable assistance he has provided to our staff during this investigation. I thank all the witnesses for attending and now recognize the gentlelady from Colorado, Ms. DeGette, for her opening statement.

Ms. DEGETTE. Thank you, Mr. Chairman. I would also like to

join in welcoming our colleague, The Delegate from Puerto Rico,

Mr. Arcevedo-Vila ́, who is with us today and I know is very, very

concerned and involved in these issues as they relate to Puerto

Rico. Thank you for joining us.

The E-Rate has done a lot of good but it also has some serious

problems as the Chairman noted. I am committed to this program

and I think we as Congress have a responsibility to determine how

some of these glitches that we will be hearing about today will be

fixed.

I think the problems are fixable but only if we increase oversight

and crack down on some of the worst offenders and fraudulent

practices. We need to stop wasting millions of dollars but, most importantly, we need to guarantee that the kids that this innovative

program is intended to serve are not the ultimate victims.

In order for the E-Rate Program to be successful and to do what

it is supposed to do, a pretty tight partnership has got to exist

among the many entities who participate in the process. What we

too often have found is a real breakdown of the partnerships due

to many factors including intentional manipulation, indifference, or

inexperience.

I look forward to exploring what I see as two of the most serious

problems to be addressed in order to ensure that the E-Rate is accomplishing its mission. First, the bad apple vendors who take adVerDate 11-MAY-2000 11:23 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 95443.TXT HCOM1 PsN: HCOM1
5

vantage of school districts and then essentially take the money and

run and, second, the apparent lack of oversight that has allowed

for large amounts of money to go to schools that have no ability to

proceed with actually utilizing the funds and equipment that they

receive.

We have seen numerous examples of unscrupulous vendors and

so-called consultants who have taken advantage of schools with little experience or resources to compete for E-Rate dollars. These

vendors help them successfully apply and in the process are able

to manipulate the situation for their own benefit.

The end result is schools that are left with lots of equipment that

they don’t need or haven’t the foggiest idea of how to use. People

like me who have elementary and secondary-aged children see this

every day. Schools which are just crammed with equipment that no

one has a clue how to turn on. Sometimes it seems to be the over

eagerness and perhaps the naivete of school districts that puts

them in this vulnerable situation to begin with.

It doesn’t take much to convince school districts, particularly

poor ones with little resources to begin with, to try and get the latest and greatest equipment. Then they end up with all sorts of cutting edge technological paraphernalia which is useless to them in

the end because they don’t have the hardware or the personnel expertise to make the use of it. This, too, has been a factor in some

of the failures we have seen.

As we all know, today we will be focusing primarily on what happened in Puerto Rico. I am very interested in hearing our witnesses

discuss how they are both going to fix the mess that was created

by the previous administration and move forward with a system

that will actually serve the children.

In addition, I think the FCC needs to articulate their oversight

process and explain to us how such large amounts of money have

ended up going to schools that clearly have no ability to use the

money effectively. If there isn’t better oversight, these problems

will not be fixed and, frankly, this is a problem that needs to be

fixed right away. It is the kids who are paying for the ineptitude,

fraud, and overall ineffectiveness that has been found so often in

this innovative program that has the ability to give them a technological head start in life.

When you look at the really heartwarming E-Rate success stories

and how some students have benefited from this program, how well

the money was spent, and then you look at the millions of dollars

that have been wasted, it really underscores the problem at hand.

Think of what could have been accomplished and how many kids

would have been touched if these millions of dollars that have literally been thrown away had accomplished what they were supposed to. This has to be fixed, it has to be fixed now. We owe our

kids no less.

Mr. Chairman, I want to thank you for holding this hearing and

I look forward to the testimony and I yield back the balance of my

time.

Mr. GREENWOOD. The Chair thanks the gentlelady. Does the gentleman from Oregon have an opening statement?

6

Mr. WALDEN. Mr. Chairman, I am going to waive on the opening

statement so we can hear from our witnesses and get into the questions.

Mr. GREENWOOD. Very well. The gentleman from Illinois, Mr.

Rush. Do you have an opening statement, sir?

Mr. RUSH. Mr. Chairman, I am not a member of the subcommittee but I want to thank you for allowing me to participate

at this hearing. I am here today because I am concerned about recent revelations of fraud and abuse in certain communities or cities

that have occurred with the E-Rate Program.

Because of this, some have called into question whether the program should exist at all. Mr. Chairman and members of the subcommittee, I am here to tell you that we should not let a few bad

apples spoil the bushel. Again, I am aware of the fraud and misuse

in Puerto Rico.

It is my understanding that the Puerto Rican government led by

its Governor is making sure that all of those culpable are either in

jail or being brought to justice. They are making every effort to retrieve the money that was stolen. I have absolute confidence in the

Puerto Rican government. I have worked with them in the past

and I want to continue to work with them in the future on the ERate Program and similar programs.

In addition, I would be remiss if I did not mention the problems

that the Chicago public schools had with implementing its E-Rate

Program. As you know, $5 million of equipment supplied by

telecom carrier SBC to the Chicago school system sat in a warehouse for years. However, Mr. Chairman, I am confident that both

the Chicago public schools and the Puerto Rican government have

implemented safeguards to prevent this from happening again. I

am certain and assured, particularly in this Chicago public school

system, that this problem has been solved and will never, ever,

ever happen again.

By in large, Mr. Chairman, the E-Rate Program is working and

is fulfilling its mandate. It has now been over 7 years since the ERate Program was created as part of the Telecommunications Act

of 1996. The program is now commencing its sixth year of providing discounts on telecommunication services, Internet access,

and internal connections to libraries and public and private

schools.

This program has transformed America’s schools and libraries

into 21 century institutions opening up opportunities for even the

poorest and most remote rural areas to take advantage of the vast

resources of the Internet and the power of distance learning.

In my district alone we have millions to wire our public schools

and our libraries. It is clear that since the initiation of this program, the impact of providing universal connectivity to schools and

libraries in my district have definitely contributed to bridging the

gap between the haves and the have-nots.

Mr. Chairman, in adopting this program, the Congress acknowledged the importance of providing the nation’s schools and libraries

with telecommunications technology. It is clear that since the initiation of this program, the impact of providing universal

connectivity to our schools and libraries have definitely contributed

to bridging the gap between the haves and the have-nots.

7

Mr. Chairman, I yield back the balance of my time.

Mr. GREENWOOD. The Chair thanks the gentleman and, just for

the record, would share with him that our investigation is intended

neither as an indictment of certainly the current administration of

the Puerto Rican Department of Education nor the Chicago school

district or any other, is but a more necessary look at what is wrong

with the safeguards and oversight in the program that would allow

these problems to have occurred in the first place. Nor do we impugn the noble intention of the program.

The gentleman from Texas is welcome to join us as well and he

is recognized for his opening statement.

Mr. GREEN. Thank you, Mr. Chairman. And, again, not being a

member of the committee like my colleague from Illinois, I appreciate the opportunity to allow me to waive on. Particularly, I appreciate you and our ranking member calling this series of hearings

on the E-Rate Program.

With our recent receipt of over $50 million last year the Houston

school district has received approximately $200 million in Universal Service Funds through the E-Rate. Clearly, there are widespread problems with fraud and abuse under this program in many

areas, including my own, but between 1998 and 2001 Internet access in minority classrooms in Houston jumped from 37 percent to

81 percent. 95 percent of all Houston public school classrooms are

now connected with over 90 percent using high-speed connections.

Teachers are connected to school resources at their homes and

soon students will be connected at home also. Smaller school districts also benefit. Another much smaller district, which is 80 percent economically disadvantaged, has received more than $1.5 million in E-Rate funding. This low-income district is now scoring over

90 percent on all state achievement tests and the school administrators say that could not have happened without the E-Rate.

These are real accomplishments and we are successfully bridging

the digital divide because of the Universal Service Fund and ERate, investments that are paid back many time over when these

children fully enter our society and our work force. We need a massive reform to stop the E-Rate from acting as a cash cow for outlaws who would waste money intended for school children, often

poor and minority school children. I am glad to see the Department

of Justice is now involved. These important hearings will uncover

the extent of the problem and after that we will begin to examine

the legislative solutions for the Universal Service Fund and the ERate Program.

One of the stories we will hear today is about the multi-million

dollar Internet backbone built in Puerto Rico but not utilized because schools do not have the machines for the children to use. We

drafted legislation, the Children’s Access Technology Act, H.R. 94,

to direct unused E-Rate funds for hardware purchases for low-income school districts. Wiring the schools is one thing but we need

computers in the classrooms as well.

In addition to wiring and installing hardware, the other critical

ingredient is teacher training for this equipment. This, too, is an

ineligible use of E-Rate funding, a limitation which is counterproductive. By making E-Rate available but severely limited to

uses, an incentive to install gold-plated server networks have deVerDate 11-MAY-2000 11:23 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 95443.TXT HCOM1 PsN: HCOM1
8

veloped. We must develop serious time and energy in rebuilding

the program by eliminating the waste, fraud, and abuse that is

equal to stealing from our school children. I believe the important

element of reform is to revisit what we use E-Rate funds for and

strongly consider making training and hardware purchases eligible.

Again, Mr. Chairman, I thank you for allowing me to waive on

the subcommittee and I appreciate you allowing me to participate.

Mr. GREENWOOD. The Chair thanks the gentleman and welcomes

him to participate in this hearing.

Before we call the witnesses, I want to share with the members

of the committee and all those present some visual aids to give you

a picture of what we found in our investigation of the Puerto Rican

system.

In February of this year committee staff members went down to

Puerto Rico for a site visit accompanied by Tom Bennett from the

FCC’s Office of Inspector General. While in Puerto Rico they were

shown this warehouse in Bayamon just outside of San Juan. Actually, that is not the picture at all. That is the video tape. I will

queue it up momentarily. There we are. That is the warehouse in

Bayamon. In this warehouse our staff found more than $23 million

worth of computer equipment which has been sitting in storage for

close to 4 years.

Photo two, please. This is a photo from inside the warehouse that

shows boxes of wireless computer cards still shrink wrapped and

stacked floor to ceiling. There were 73,000 cards purchased in 1999

and 2000 that were never installed.

Photo three shows boxes of cabling and wireless card adapters

that cost half a million dollars and also were never installed.

Photo four, more wireless card adapters. These were intended to

be used with the 73,000 wireless cards in computers that never

were purchased.

Photo five, last, a picture of still more wireless cards, all told $23

million worth. At the time each card cost more than $300 to purchase so that is $300 times 73,000 of them. Obviously they were

never installed. Row upon row of computer equipment paid for by

American telephone rate payers going to waste and becoming more

obsolete each day.

Now, we can go to the video. My staff also took video footage during their visit to Puerto Rico in February. The corner of this warehouse is packed floor to ceiling with computer equipment for Puerto

Rican schools. These are the 73,000 wireless computer cards that

I mentioned. $23 million worth bought and paid for with E-Rate

dollars. This video is only about a minute long but it will give the

committee and the public a better understanding of the breadth

and the extent of the equipment improperly stored in this warehouse.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. JOE BARTON, CHAIRMAN, COMMITTEE ON ENERGY

AND COMMERCE

Thank you Chairman Greenwood. This morning we begin a public review of the

E-rate program, a program that offers schools and libraries financial assistance so

they can more ably afford Internet access and other telecom services necessary for

their educational missions.

9

We all recognize that E-rate is a popular program with many success stories—

a program we want to ensure works cost-effectively to achieve the goals Congress

intended it to achieve. We also recognize that, when it comes to popular programs,

stakeholders may resist close scrutiny, for fear the apple cart will be upset.

Mr. Chairman, I agree with you that this program deserves the close bipartisan

scrutiny you have led this past year. Let me assure you, as we go forward, we will

not shy from rocking some apple carts to make sure proper oversight of this program is performed—and the E-rate funds are expended properly.

There are serious questions about the setup and implementation of this program.

There are powerful incentives in the program for waste, fraud, and abuse. Those applying for funds are asking E-rate to spend other people’s money—money consumers

pay every month on their phone bills.

Substantial sums of money are involved here. Since it began funding services in

1998, E-rate’s administrator has approved some $12.9 billion for distribution on behalf of schools and libraries around the nation. The service providers, the phone

companies, equipment makers, network installers have received some $8 billion of

these funds so far for the products and services they sold to the schools. Has it been

well spent? That’s what we intend to determine.

There have been success stories, but, again, at what cost?

We found, and we have read about, equipment worth tens of millions of dollars

laying around in warehouses, and extravagant purchases of equipment that far surpass a school district’s needs. For example, why would it be necessary to install

three network switches, at a cost of up to $100 thousand each, in a single school

when just one of these high-tech switches could run a small school system?!

For the past two years the Inspector General of the Federal Communications

Commission (FCC) has been telling us his office cannot ensure the program is sufficiently protected from waste, fraud, and abuse. Indeed, his concerns, in part,

prompted this Committee to initiate its review almost a year and half ago.

We know the program is not sufficiently protected from waste, fraud, and abuse

from example upon example:

This past December, when Committee staff were about to perform a site visit of

Chicago Public Schools, SBC alerted staff on the eve of their visit to $5 million of

warehoused equipment—paid for by E-rate but never installed by the company.

In Atlanta just a few weeks ago a newspaper investigation reported more than

$4 million of equipment purchased but gathering dust in warehouses, along with

evidence of inappropriate and wasteful purchases—powerful network gear capable

of running whole school districts had been purchased for a single elementary school.

In my own state of Texas, an El Paso school district purchased one year of IBM

network maintenance services that amounted to about $270,000 per every school—

including elementary schools—just to insure a brand-new network was running

properly.

Recently, NEC pleaded guilty to federal charges of bid-rigging and wire fraud

scheme involving San Francisco schools, among other districts across the country.

And there are a number of active law enforcement investigations into activities like

this around the nation.

And, of course, today we are reviewing the case of the Puerto Rico Department

of Education, which is truly a story of lost opportunity for tens of thousands of students who have never had access to a network and broadband services purchased

with more than $100 million in E-rate funds.

I look forward to learning more about Puerto Rico’s experience today. I’d like to

understand the scale and nature of any wasted funding and what has been done

to resolve the situation. I’d also like to understand what this case demonstrates

about broader problems in the E-rate program.

I’m pleased to see that we will hear from the FCC’s Inspector General today, who

can outline and discuss with us his broad concerns with the E-rate program. Let

me also welcome our witnesses, who have come to explain their roles and perspective in Puerto Rico, and on the E-rate program generally.

Finally, let me extend a special welcome to Dr. Cesar Rey, Puerto Rico’s Secretary

of Education. I understand his administration has been working to resolve problems

within his department’s program and I am especially interested in his perspective.

You all should know this Committee will work hard to get to the bottom of the

problems in the program and see that changes are made where necessary. This

work begins with a solid foundation of bipartisan oversight—and I’m optimistic that

the review beginning today will lead to much fruitful work ahead.

Thank you, Mr. Chairman. I yield back the remainder of my time.

10

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

Mr. Chairman, thank you for initiating this investigation and holding this hearing. The waste, fraud, and abuse uncovered in the E-rate program is an outrage.

And the Federal Communications Commission’s (FCC) mishandling of this program

is inexcusable.

We now know significant sums have been wasted, and that the allocation process

is rife with abuse. Some of the corporate scofflaws are being called to account, but

that process has not as yet effectively deterred the rampant fraud associated with

this program. USAC, the private corporation that the FCC established to administer

the E-rate program, has failed to protect the ratepayers’ dollars, thereby shortchanging our children. Critical questions such as the true ability of schools to follow

reasonable technology plans are simply ignored. Schools may apply for funds without any serious showing that the electrical systems in often very old buildings can

support modern telecommunications equipment. Nor do schools need to assure that

the vital hardware, the computers themselves that must be provided locally, is

available for the students. There is not the slightest attempt to determine prior to

the funding whether the school district has both the local funds and the ability to

train teachers in the use of the technology.

Functionally, the FCC has turned this program over to the vendors by refusing

to establish adequate oversight of the 28,000 proposals funded each year. Even

worse, the FCC proposes to check compliance with only a handful of audits, some

128 to date. The FCC Inspector General is only permitted three positions to oversee

the program and those individuals are largely assigned to grand juries around the

country.

Gold-plated equipment paid for by the telephone ratepayers, often at prices that

exceed any charged elsewhere, lies unused and growing obsolete in classrooms

where no teachers have been trained in its potential applications. Worse we have

found millions of dollars worth of these very expensive components aging in warehouses despite vendor and school district ‘‘certifications’’ that they have been installed and are operating as intended.

Today we will hear the tragic story of Puerto Rico, the school district with the

largest number of campuses in the country. We will hear how $100 million was

wasted without a single child benefitting from a single connection to the Internet.

We will hear a story of vendor greed, phone company charges for access despite a

lack of connections, misconduct by previous local officials, and bureaucratic incompetence.

Thanks to local money, each school now has two computers hooked up to the

Internet by dial-up modems. But we have lost valuable time for the children of

Puerto Rico. The administrators of the E-rate program and the administrators of the

Puerto Rico Department of Education must work together to assure that another

year does not go by while this generation of children waits for the opportunity that

the E-rate program is supposed to provide.

We have shining examples of what the E-rate program can provide and I hope

that some of the success stories from schools where it has worked will be exhibited

at future hearings. In those places where local officials have a good plan and the

wherewithal to carry it out, and where vendors do not have effective control of the

fund procuring process, the E-rate funds have been a godsend, opening vistas of

learning and opportunity to students that would not have ever been possible for

most of their parents or even older siblings.

E-rate funds, used properly, can truly improve the future for millions of Americans. I look forward to working with my colleagues on whatever changes are necessary to make that promise a reality.

Mr. GREENWOOD. With that, I call forward our first witnesses

and they are Mr. H. Walker Feaster III, Inspector General for the

Federal Communications Commission. Good morning, sir, and welcome. Have a seat. The Honorable Manuel Diaz Saldana, Comptroller of the Commonwealth of Puerto Rico. Good morning to you,

sir, and welcome.

As you may have been advised, it is the custom of this subcommittee to take testimony under oath. I will have to ask if either

of you object to giving your testimony under oath. Okay. I also need

to advise you that pursuant to the rules of this committee and of

the House, you are entitled to be represented by counsel. Do either

11

of you wish to be represented by counsel? Okay. In that case, if you

would stand and raise your right hands. Do you swear that the testimony you are about to give is the truth, the whole truth, and

nothing but the truth?

[Witnesses sworn.]

Mr. GREENWOOD. Very well. You are under oath and, Mr. Feaster, we will begin with you. You are recognized for 5 minutes for

your opening statement. Make sure your microphone is on.

TESTIMONY OF H. WALKER FEASTER III, INSPECTOR GENERAL, FEDERAL COMMUNICATIONS COMMISSION; AND HON.

MANUEL DIAZ SALDANA, COMPTROLLER, COMMONWEALTH

OF PUERTO RICO

Mr. FEASTER. Good morning again. Mr. Chairman and members

of the subcommittee, I am Walker Feaster, Inspector General of the

Federal Communications Commission. I appreciate the opportunity

to come before you today to discuss oversight of the E-Rate Program and to discuss concerns that my office has with the program

as a result of our involvement in audits and investigations.

In my testimony I will briefly summarize my office’s involvement

in USF Oversight, discuss our specific actions with respect to Puerto Rican Department of Education, our involvement in the E-Rate

Program, and describe in more general terms the concerns that my

office has with the E-Rate Program.

At this point I originally planned to introduce Thomas Bennett,

my Assistant Inspector general for USF Oversight who is responsible for the oversight of the E-Rate Program. However, Mr. Bennett has taken ill today and is unable to be with us.

I believe it is particularly timely that we now discuss waste,

fraud, and abuse of the E-Rate Program given recent events and

media interest. In November 2003 Florida Today and WKMG,

Channel 6, in Orlando, Florida, published a series of reports describing questionable spending of E-Rate funding by Brevard County School District.

In April 2004 five individuals were indicted in connection with

charges of conspiracy, mail fraud, and money laundering involving

the E-Rate Program. The indictment charges that USAC paid these

individuals over $1.2 million for goods and services that were not

provided to schools.

Last month, as the Chairman mentioned, NEC was fined $20.6

million for criminal fines in a civil settlement and restitution relating to charges of collusion and wire fraud in the E-Rate Program.

Also, last month the Atlanta Journal-Constitution ran a series of

articles reported wasteful spending of E-Rate funding by the Atlanta public school system. The Atlanta Journal-Constitution reported that the public school system had bought more equipment

than was needed, routinely overpaid for goods and services, and

stored unused network equipment worth about $4.5 million in the

warehouses.

My office first looked at the USF as part of the audit of the Commission’s fiscal year 1999 financial statement. Since that time our

office has continued to devote considerable resources to oversight of

the USF and the E-Rate Program in particular. However, several

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obstacles have impeded our ability to implement effective independent oversight of the program.

The primary obstacle we have dealt with as been a lack of adequate resources to conduct audit and provide audit support to investigations. We have requested appropriated funding to obtain

contract support for USF oversight activities but those funding requests have yet to be approved.

I am presently able to devote three full-time auditors and two

auditors part-time to the USF. Despite these limited resources, my

office has implemented an independent oversight program that includes audits conducted using both internal resources and other

Federal Office of Inspector General under reimbursable agreements, a review of audit work conducted by USAC, and active participation in Federal investigations of E-Rate fraud. In addition to

other audits of compliance, I believe it would be appropriate to conduct a broad-based review of the program.

Puerto Rican Department of Education. I would like briefly to

discuss allegations that my office received regarding wrongdoing

related to PRDOE’s involvement in the E-Rate Program and programmatic concerns that are highlighted by PRDOE.

In April 2001, my office was contacted by an auditor from the Office of the Comptroller of Puerto Rico who alleged wrongdoing by

PRDOE related to the receipt of E-Rate funding. The allegation

were that PRDOE did not comply with state and local procurement

regulations during the E-Rate vendor selection process and that

PRDOE had not secured access to all the resources such as teacher

training and electrical infrastructure at schools necessary to make

effective use of goods and services being provided.

Based on information we gathered and reviewed in a preliminary

investigation, we referred the matter to Federal law enforcement

on May 31, 2001. That investigation is ongoing and we are continuing to provide support to the investigation as warranted.

The Puerto Rican matter highlights several concerns that my office has had with the program. These concerns are lack of timely

and effective resolution for audit findings from the E-Rate beneficiary audits, inadequacies in the competitive procurement requirements, effective use of purchased goods and services and inadequacies in applicant certifications regarding compliance with program requirements.

Program rules require that applicants use a competitive procurement process to select vendors. We question whether the rules are

adequate to ensure competitive process is followed. In addition,

weak record keeping requirements to support the procurement

process as well as other aspects of E-Rate application offer little

protection to the program.

Site visits to PRDOE facilities have verified that schools had neither the physical infrastructure to support the system that was

planned nor appropriate equipment and training to effectively use

the E-Rate funded system. Additionally, some assets purchased

with the E-Rate funding are yet to be installed in Puerto Rican

schools. These conditions exist despite PRDOE’s certifications that

they were prepared to make effective use of the goods and services

purchased with the E-Rate funds.

13

The E-Rate Program is heavily reliant on applicant certifications

in lieu of independent verification.

In addition to concerns that are highlighted by PRDOE, my office

has identified other concerns as the result of audits and investigations.

USAC has implemented numerous procedures to administer to

the E-Rate Program. The Commission has formally adopted some

but not all of the USAC operating procedures. We believe that this

distinction between program rules and USAC implementing procedures represents a weakness in program design and we believe

that this situation contributes to confusion regarding the rules governing the program.

The differentiation between program rules and USAC procedures

is illustrated in the technology planning area. Program rules require the applicant’s to prepare a technology plan and that the

technology plan be approved. USAC implementing procedures contain detailed requirements for the contents of technology plans

which significantly add to the value and validity of the plan. We

have observed many instances of noncompliance with program

rules and USAC procedures related to the technology and planning

process.

The E-Rate Program allows eligible schools and libraries to receive goods and services based on discount rates with the fund

picking up the portion not paid by the applicant. A number of audits have identified that applicants have not filed program requirements for discount rate calculation or were unable to support the

discount rate calculated.

Applicants are required to pay their portion of the cost for ERate goods and services to their service providers and are required

to bill the applicants for these costs. We have found examples of

applicants not paying their portion or not paying their portion in

a timely manner and service providers not billing for these costs.

The Office of Inspector General remains committed to meeting

our responsibility for providing effective oversight of the USF and

we believe we have made significant progress. However, until resources and funding are available to provide adequate oversight to

the program, I am unable to provide assurance that the program

is protected from waste, fraud, and abuse.

Thank you. I will be happy to try to answer any of your questions.

[The prepared statement of H. Walker Feaster III follows:]

PREPARED STATEMENT OF H. WALKER FEASTER III, INSPECTOR GENERAL, FEDERAL

COMMUNICATIONS COMMISSION

INTRODUCTION

Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity

to appear before the subcommittee today to discuss concerns regarding waste, fraud,

and abuse in the E-rate program. In my comments and written testimony, I will

provide a brief summary of my office’s involvement in USF oversight, discuss our

specific actions with respect to the Puerto Rico Department of Education’s (PRDOE)

involvement in the E-rate program, and describe in more general terms the concerns

that my office has with the E-rate program. I would also like to introduce Thomas

Bennett, the Assistant Inspector General for USF Oversight in the FCC Office of

Inspector General. Mr. Bennett is responsible for USF oversight including oversight

of the E-rate program and is available to answer specific questions you may have

about my office’s oversight of E-rate.

14

HISTORY OF INDEPENDENT OVERSIGHT OF THE UNIVERSAL SERVICE FUND (USF)

My office first looked at the USF in 1999 as part of our audit of the Commission’s

FY 1999 financial statement when the USF was determined to be part of the FCC’s

reporting entity for financial statement reporting. During that audit, we questioned

the Commission regarding the nature of the USF and, specifically, whether it was

subject to the statutory and regulatory requirements for federal funds. Starting with

that inquiry, the Office of Inspector General has continued to devote considerable

resources to oversight of the USF.

Due to materiality and our assessment of audit risk, we have focused much of our

attention on the USF mechanism for funding telecommunications and information

services for schools and libraries, also known as the ‘‘Schools and Libraries Program’’ or the ‘‘E-rate’’ program. Applications for program funding have increased

from 30,675 in funding year 1998 to 43,050 for the current funding year. Applications were received from schools and libraries in each of the 50 states, the District

of Columbia, and most territories and included 15,255 different service providers.

Requested funding has increased from $2,402,291,079 in funding year 1998 to

$4,538,275,093 for the current funding year.

OIG Oversight

During FY 2001, we worked with Commission representatives as well as with the

Defense Contract Audit Agency (DCAA) and the Universal Service Administrative

Company (USAC), to design an audit program that would provide the Commission

with programmatic insight into compliance with rules and requirements on the part

of E-rate program beneficiaries and service providers. Our program was designed

around two corollary and complementary efforts. First, we would conduct reviews

on a statistical sample of beneficiaries large enough to allow us to derive inferences

regarding beneficiary compliance at the program level. Second, we would establish

a process for vigorously investigating allegations of fraud, waste, and abuse in the

program.

Unfortunately, several obstacles have impeded our ability to implement effective,

independent oversight of the program. The primary obstacle has been a lack of adequate resources to conduct audits and provide audit support to investigations. Since

our initial involvement in independent oversight of the USF as part of our conduct

of the FY 1999 financial statement audit, we have demonstrated our commitment

to independent oversight of the USF by adding two (2) staff auditor positions and

by organizing USF oversight activities under an Assistant Inspector General for

USF Oversight. This represents dedication of three (3) of the eight (8) auditors on

the staff of the FCC OIG to USF oversight. In addition to the OIG staff dedicated

to USF oversight, two (2) audit staff members responsible for financial audit are

also involved in USF oversight as part of the financial statement audit process.

We have also requested appropriated funding to obtain contract support for our

USF oversight activities. In our FY 2004 budget submission, we requested $2 million for USF oversight. That request was increased to $3 million in the President’s

budget submission for FY 2004. Unfortunately, this funding was not included in the

Commission’s final budget for FY 2004. We are currently considering alternatives

for obtaining access to contract audit support to implement the USF oversight portions of our FY 2004 audit plan.

Despite limited resources, my office has implemented an aggressive independent

oversight program. My oversight program includes: (1) audits conducted using internal resources; (2) audits conducted by other federal Offices of Inspector General

under reimbursable agreements; (3) review of audit work conducted by USAC; and

(4) active participation in federal investigations of E-rate fraud.

OIG Audits Using Internal Resources

We have completed eleven (11) audits that we initiated during fiscal year 2002

using auditors detailed from the Commission’s Common Carrier Bureau (since reorganized as the Wireline Competition Bureau) and audit reports are being finalized

for the two (2) remaining audits. For the eleven (11) audits that have been completed, we concluded that applicants were compliant with program rules in five (5)

of the audits, that applicants were generally compliant in two (2) of the audits, and

that the applicants were not compliant with program rules in four (4) of the audits.

We have recommended recovery of $731,494 as shown below:

Report Date Applicant Conclusion

Potential

Fund

Recovery

09/11/02 ............................................. Enoch Pratt Free Library ................................ Compliant ..................... $0

15

Report Date Applicant Conclusion

Potential

Fund

Recovery

02/03/03 ............................................. Robeson County Public Schools ..................... Compliant ..................... 0

02/05/03 ............................................. Wake County Public Schools .......................... Compliant ..................... 0

08/27/03 ............................................. Albemarle Regional Library ............................ Compliant ..................... 0

12/22/03 ............................................. St. Matthews Lutheran School ....................... Not Compliant .............. 136,593

12/22/03 ............................................. Prince William County Schools ....................... Generally Compliant ..... 5,452

12/22/03 ............................................. Arlington Public School District ..................... Generally Compliant ..... 7,556

03/24/04 ............................................. Immaculate Conception School ...................... Not Compliant .............. 68,846

04/06/04 ............................................. Children’s Store Front School ......................... Not Compliant .............. 491,447

05/19/04 ............................................. St. Augustine School ...................................... Not Compliant .............. 21,600

05/25/04 ............................................. Southern Westchester BOCES ......................... Compliant ..................... 0

$731,494

Audits Conducted by Other Federal Offices of Inspector General

On January 29, 2003, we executed a Memorandum of Understanding (MOU) with

the Department of the Interior (DOI) OIG. The MOU is a three-way agreement

among the Commission, DOI OIG, and USAC for reviews of schools and libraries

funded by the Bureau of Indian Affairs and other universal service support beneficiaries under the audit cognizance of DOI OIG. Under the agreement, auditors

from the Department of the Interior perform audits for USAC and the FCC OIG.

In addition to audits of schools and libraries, the agreement allows for the DOI OIG

to consider requests for investigative support on a case-by-case basis. We have

issued two (2) audit reports under this MOU and have completed fieldwork on three

(3) additional audits. For the audit where we determined that the applicant was not

compliant, we have recommended recovery of $2,084,399. A summary of completed

audits is as follows:

Report Date Applicant Conclusion

Potential

Fund

Recovery

11/06/03 ............................................. Santa Fe Indian School .................................. Compliant ..................... $0

01/07/04 ............................................. Navajo Preparatory Academy .......................... Not Compliant .............. 2,084,399

We have also established a working relationship with the Office of Inspector General at the Education Department (Education OIG). In April 2003, Education OIG

initiated an audit of the use of federal education funding to purchase equipment to

make effective use of internal connections and internet connectivity funding by Erate at a large recipient. My office has been providing support to this audit.

In January 2004, Education OIG presented a plan for an audit of telecommunication services at a large E-rate recipient. Because of the significant amount of Erate funding for telecommunication services at this recipient, Education OIG has

proposed that they be reimbursed for this audit under a three-way MOU similar to

the existing MOU with DOI OIG. In April 2004, the Universal Service Board of Directors approved the MOU. We are in the process of finalizing the MOU for execution and initiating the audit.

Review of USAC Audits

We have reviewed work performed by USAC’s Internal Audit Division and performed the procedures necessary under our audit standards to rely on that work.

In December 2002, USAC established a contract with a public accounting firm to

perform agreed-upon procedures at a sample of seventy-nine (79) beneficiaries from

funding year 2000. The sample of beneficiaries was selected by the OIG. In a departure from the two previous large-scale E-rate beneficiary audits conducted by USAC,

the agreed-upon procedures being performed under this contract would be performed

in accordance with both the Attestation Standards established by the American Institute of Certified Public Accountants (AICPA) Standards and Generally Accepted

Government Auditing Standards, issued by the Comptroller General (GAGAS). In

March 2003, we signed a contract with a public accounting firm to provide audit

support services for USF oversight to the OIG. The first task order that we established under this contract was for the performance of those procedures necessary to

determine the degree to which we can rely on the results of that work (i.e., to verify

that the work was performed in accordance with the AICPA and GAGAS standards).

The OIG review team is currently completing this work. Many of the audit findings

16

raised by this body of work are reflected in the section addressing concerns with

the E-rate program.

Support to Investigations

In addition to conducting audits, we are providing audit support to a number of

investigations of E-rate recipients and service providers. To implement the investigative component of our plan, we established a working relationship with the Antitrust Division of the Department of Justice (DOJ). The Antitrust Division has established a task force to conduct USF investigations comprised of attorneys in each of

the Antitrust Division’s seven (7) field offices and the National Criminal Office. We

are also supporting several investigations being conducted by Assistant United

States Attorneys.

We are currently supporting twenty-two (22) investigations and monitoring an additional eighteen (18) investigations. Unfortunately, the increased interest in these

cases has resulted in an increased demand for OIG audit support. In fact, the

amount of audit support has exacerbated our previously stated concern about the

availability of resources and our ability to implement other components of our USF

oversight plan. Allegations being investigated in these cases include the following:

• Procurement irregularities—including lack of a competitive process and bid rigging;

• False Claims—Service Providers billing for goods and services not provided;

• Ineligible items being funded; and

• Beneficiaries are not paying the local portion of the costs resulting in inflated

costs for goods and services to the program and potential kickback issues.

PUERTO RICO DEPARTMENT OF EDUCATION (PRDOE)

In this section of my testimony, I will briefly discuss allegations that my office

received regarding wrongdoing related to PRDOE’s involvement in the E-rate program, describe the preliminary investigation that we conducted of this matter, and

discuss our on-going monitoring of PRDOE’s involvement in the E-rate program as

a result of these allegations. In addition, I will discuss programmatic concerns that

my office has developed as a result of our involvement in audits and investigations

that are highlighted by PRDOE’s participation in the E-rate program.

Allegations from the Office of the Comptroller of Puerto Rico (OCPR)

In April 2001, my office was contacted by an auditor from the Office of the Comptroller of Puerto Rico (OCPR) and advised of allegations of wrongdoing by PRDOE

related to the receipt of E-rate funding. We were advised that PRDOE did not comply with state and local procurement regulations during the vendor selection process

for funding years 1998 and 1999 of the schools and libraries program. In addition,

the auditor stated that two of the bidders argued against the selection decision and

that the appellate process was not followed as required by the regulations governing

PRDOE procurement actions. The auditor explained that the appellate process

would have prevented PRDOE from signing a contract until an administrative review was conducted. Further, the auditor stated that PRDOE may have violated

program rules that require applicants to certify that they have secured access to all

the resources necessary to make effective use of the goods and services being provided. The auditor explained that, as part of the audit process, representatives from

OCPR visited schools and that ‘‘the majority of the schools’’ did not have electrical

connections and secure areas for the equipment. Further, the auditor stated that the

PRDOE has not obtained computers and had not provided training to teachers.

Preliminary Investigation

Based on the allegations, my office conducted a preliminary investigation to determine if the matter should be referred to federal law enforcement for investigation.

After receiving the allegation from the Office of the Comptroller, we contacted the

Universal Service Administrative Company (USAC) and requested documents relevant to this matter. On May 17, 2001, we received the requested documents from

USAC. In their narrative summary, USAC stated that PRDOE has applied for universal service support for schools and libraries in each funding year of the program.

A summary of E-rate commitments and disbursements for funding years 1998,

1999, and 2000 is as follows:

Funding Year Service Provider Commitments Disbursements

1998 ........................................ Data Research Corporation (DRC) .................................... $11,796,599 $11,796,160

Puerto Rico Telephone Company, Inc. (PRTC) .................. 34,426,082 9,933,963

17

Funding Year Service Provider Commitments Disbursements

$46,222,681 $21,730,123

1999 ........................................ Data Research Corporation (DRC) .................................... $42,124,085 $25,204,157

Puerto Rico Telephone Company, Inc. (PRTC) .................. 14,755,694 8,331,894

$56,879,779 $33,536,051

2000 ........................................ Data Research Corporation (DRC) .................................... $37,674,521 $32,565,581

Puerto Rico Telephone Company, Inc. (PRTC) .................. 17,930,567 13,391,113

$55,605,088 $45,956,694

Total ........................................ Data Research Corporation (DRC) .................................... $91,595,205 $69,565,897

Puerto Rico Telephone Company, Inc. (PRTC) .................. 67,112,343 31,656,971

$158,707,548 $101,222,868

On May 29, 2001, we held a teleconference with the auditor from OCPR who had

contacted my office regarding this matter. The objective of the teleconference was

to further discuss the allegations set forth in the referral and to determine if any

additional information was available relevant to this matter. During the teleconference, we discussed the scope of the audit performed by the Office of the Comptroller

and the extent of testing performed during the review. In addition, we made arrangements to obtain additional information including a copy of the regulations governing the PRDOE procurement process. During the teleconference, the auditor stated that fieldwork on the audit was performed from March 2000 through April 2001.

The auditor stated that a draft report had been prepared summarizing the results

of the audit but that the draft report was still going through the review process and

would not be available for approximately two months. During the teleconference, the

auditor provided a detailed description of the work performed to support the allegations contained in referral. With respect to the procurement, the auditor stated that

they reviewed proposals and other documents documenting the evaluation process,

interviewed PRDOE personnel involved in the process, and interviewed a service

provider. To determine whether the PRDOE had the resources available to make effective use of the eligible services, OCPR auditors visited thirty (30) schools and examined the level of implementation.

Included in the documents provided by USAC was a Draft Agreed-Upon Procedures Report Prepared by Arthur Andersen summarizing the results of an agreedupon procedures review they conducted for E-rate recipients in Funding Year 1998.

Arthur Andersen selected the Puerto Rico Department of Education as one of the

recipients where procedures were performed. Arthur Andersen examined the procurement process during Funding Year 1998 as part of that review. In addition, Arthur Andersen visited two schools and a data center as part of the examination to

determine whether the PRDOE had the resources available to make effective use

of the eligible services. In their draft report, Arthur Andersen stated that they had

ascertained ‘‘through discussion with PRDOE management that they had established appropriate (sic) to evaluate and select the most cost-effective bidder based

on the responses to their 470 posting.’’ Arthur Andersen further stated that

‘‘PRDOE management also indicated that all bids received were appropriately evaluated in accordance with state and local requirements.’’ With respect to the availability of resources, Arthur Andersen stated that ‘‘we noted that there were no

(desktop) computers in any of the classrooms visited’’ and that, as a result, ‘‘PRDOE

was not able (as of the date of our site visit) to fully meet the educational objectives

(and training requirements) for which E-Rate funding had been provided.’’ We obtained additional information from USAC regarding the scope of the Arthur Andersen review including working papers documenting the procedures performed to

evaluate the procurement process followed by PRDOE.

Based upon our assessment of this information and our discussion with the auditor from the OCPR, we determined that the audit performed by OCPR was more

comprehensive in nature and included a more detailed examination of both the procurement process and the availability of resources. Further, we determined that

OCPR, given their role in the government of Puerto Rico and their knowledge of the

operations of PRDOE, was better positioned to evaluate the schools and libraries

program in Puerto Rico. Based on the results of our preliminary investigation, we

referred this matter to Federal law enforcement on May 31, 2001. That investigation

18

is on-going and we are continuing to provide support to the investigation as warranted.

On-going Monitoring of PRDOE

In addition to supporting an on-going Federal investigation related to this matter,

my office has continued to monitor efforts by PRDOE to address issues related to

funding years 1998, 1999, and 2000, and to continue to participate in the E-rate program. An auditor from my staff participated as an observer in three (3) meetings

between USAC and PRDOE during 2002. In a meeting in January 2001, representatives from PRDOE presented a plan to address concerns from funding years 1998,

1999, and 2000. In a meeting in April 2002, representatives from PRDOE provided

a status report on activities that they had taken to implement their corrective action

plan. In a meeting in October 2002, representatives from PRDOE, including the Secretary of PRDOE, provided a status on implementation of corrective action and

made an argument for approval of FY 2001 and 2002 funding. In February 2004,

a representative from my office traveled to Puerto Rico to assist professional staff

from the Energy and Commerce Committee during their investigation of PRDOE

participation in the E-rate program.

PROGRAMMATIC CONCERNS HIGHLIGHTED BY PRDOE’S PARTICIPATION IN E-RATE

The Puerto Rico matter highlights several concerns that my office has with the

E-rate program as a result of our involvement in audits and investigations.

Resolution of Audit Findings and Fund Recoveries—Since our involvement in this

program, I have become increasingly concerned about efforts to resolve audit findings and to recover funds resulting from E-rate beneficiary audits. It has been our

observation that audit findings are not being resolved in a timely manner and that,

as a result, actions to recover inappropriately disbursed funds are not being taken

in a timely manner. In some cases, it appears that audit findings are not being resolved because USAC is not taking action in a timely manner. In other cases, findings are not being resolved because USAC is not receiving guidance from the Commission that is necessary to resolve findings. USAC is prohibited under program

rules from making policy, interpreting unclear provisions of the statute or rules, or

interpreting the intent of Congress. As a result of this prohibition, USAC must seek

guidance from the Commission when audit findings are not clearly violations of

Commission rules.

In the case of PRDOE, we have concerns about the manner in which audit findings identified by Arthur Anderson during their audit of PRDOE’s participation in

the E-rate program in funding year 1998 were resolved. Although we were not involved in this audit, we obtained and reviewed the report as part of our preliminary

investigation of the allegations raised by OCPR. In addition, we have continued to

obtain information on the resolution of USAC audits as part of our program oversight activities. In their report, Arthur Anderson identified three (3) findings during

their audit of PRDOE. Two of the audit findings related to services being delivered

after the last date to receive services. The third finding related to inadequate detail

being provided on customer bills. The three findings and resolution of those findings

as identified in the final audit report are as follows:

Finding Finding Detail Resolution

Services delivered after

the last date to receive

services.

6 of 38 cabling projects could not be

verified as complete as testing was not

completed.

No Action Required. Received FCC waiver of rule

violation consistent with the other 1998 (FY1)

rule violations waived in the 10/8/99 order.

Inadequate detail provided

on customer bills.

The contract payment was reduced due to

the contractor failing to install in some

schools by the due date. However, there

was insufficient documentation to verify

the accuracy of the reduction.

No Action Required. This observation has been

classified as a non-material finding, as there

is not evidence of any request for reimbursement for ineligible equipment.

19

Finding Finding Detail Resolution

Services delivered after

the last date to receive

services.

Non e-rate equipment (100,000

workstations) was not installed due to a

legal dispute with a potential bidder.

Action Pending. SLD wrote to the Puerto Rico

Department of Education (PRDOE) about this

observation. PRDOE then asked for a meeting

with the FCC and SLD at which time they

disclosed that there were significant irregularities concerning the application and installation of approved services. PRDOE has

been responsive to the issues raised and has

conducted their own investigation. Commitments and disbursements are on hold pending final resolution with the FCC.

With respect to the first finding, USAC determined that no action was required

because of a Commission rule waiver for funding year 1998. We examined the finding and the rule waiver and questioned the applicability of the waiver to this finding. The finding relates to the delivery of goods and services by the required delivery date. The section of the rule waiver referenced by USAC in response to our inquiries addresses competitive bidding and form 471 filing. USAC explained that

they received confirmation from Commission staff that an installation after the September 30 deadline would qualify under the order. We obtained and examined a

copy of this confirmation and questioned the authority of the staff attorney who provided this confirmation to waive rules that are ‘‘similar’’ to the rules waived in the

rule waiver for funding year 1998. We requested an explanation from the Commission staff and were advised that the interpretation by the staff attorney in this matter was ‘‘overly broad’’ and that waiver order ‘‘did not waive the requirement that

services be installed by a specific date.’’

With respect to the second finding, USAC determined that no action was required

and classified this as a non-material finding at the same time stating in the report

that the ‘‘Audit report did not contain sufficient detail to determine the exposure

amount.’’ We requested additional explanation from USAC and were advised that

‘‘because of a lack of detail within the contract and customer bills the auditors were

unable to verify the accuracy of this reduction’’ and that ‘‘the auditor did not make

a determination as to the potential risk.’’ USAC went on to state that ‘‘(t)he lack

of detail in the contract or the customer bill is not considered a rule violation and

we have not sought recovery in these instances.’’ The issue of violating program

rules versus non-compliance with USAC procedures is a matter of serious concern

that is addressed later in this testimony. The issue of required documentation under

program rules is also an area of concern that I address in more detail later in this

testimony.

The third finding, computers not being installed as a result of a bidder dispute,

is the issue that started the discussion between USAC and PRDOE in which other

irregularities were raised. In response to a letter from USAC regarding this finding,

PRDOE met with USAC in January 2002 and presented the results of an assessment they performed on the status of the school network funded by E-rate. We refer

to this assessment in our discussion of concerns related to applicant certifications

and delivery of goods and services.

Competitive Procurement—Program rules require that applicants use a competitive procurement process to select vendors. In establishing this requirement, the

Commission recognized that ‘‘(c)ompetitive bidding is the most efficient means for

ensuring that eligible schools and libraries are informed about all of the choices

available to them’’ and that ‘‘(a)bsent competitive bidding, prices charged to schools

and libraries may be needlessly high, with the result that fewer eligible schools and

libraries would be able to participate in the program or the demand on universal

service support mechanisms would be needlessly great.’’

Applicants are required to submit a form 470 identifying the products and services needed to implement the technology plan. The form 470 is posted to the USAC

web page to notify service providers that the applicant is seeking the products and

services identified. Applicants must wait at least 28 days after the form 470 is posted to the web site and consider all bids they receive before selecting the service provider to provide the services desired. In addition, applicants must comply with all

applicable state and local procurement rules and regulations and competitive bidding requirements. The form 470 cannot be completed by a service provider who will

participate in the competitive process as a bidder and the applicant is responsible

for ensuring an open, fair competitive process and selecting the most cost-effective

provider of the desired services. Further, although no program rule establishes this

requirement, applicants are encouraged by USAC to save all competing bids for

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services to be able to demonstrate that the bid chosen is the most cost-effective, with

price being the primary consideration.

Although the programs competitive bidding requirements were intended to ensure

that schools and libraries are informed about all of the choices available to them,

we have observed numerous instances in which beneficiaries are not following the

program’s competitive bidding requirements or are not able to demonstrate that

competitive bidding requirements are being followed. In the case of PRDOE, we

have several concerns about whether or not a competitive procurement process was

followed during the selection of service providers.

• OCPR highlighted numerous concerns regarding the competitive process in their

allegations provided in April 2001 and previously discussed in this testimony.

• OCPR reported numerous examples of PRDOE non-compliance with procurement

regulations in Audit Report TI-03-09 summarizing the results of their audit of

the acquisition of equipment and services related to the EDUNET network (i.e.,

PRDOE’s involvement in the E-rate program).

• The United States Department of Education Office of Inspector General (ED OIG)

has issued numerous reports over the last several years highlighting contract

administration issues with PRDOE.

Program rules require that applicants follow a competitive process and that applicants keep the kinds of procurement records that they keep for other purchases.

However, Commission staff have provided guidance stating that ‘‘the mere failure

of the beneficiary to produce documentation relating to the competitive bidding process cannot form the basis for finding a rule violation or seeking recovery of funds.

A rule violation could be established if the audit process secured the beneficiary’s

record retention plan and determined that the beneficiary had failed to comply with

that policy.’’ Commission staff have stated that a rule violation ‘‘could be established

if the audit process secured the beneficiary’s record retention plan and determined

that the beneficiary had failed to comply with that policy.’’ In effect, Commission

staff have taken the position that if no record retention plan exists, there is no requirement for the applicant to maintain records.

Delivery of Goods and Services—Site visits are conducted during most E-rate beneficiary audits. Site visits are conducted for several reasons including to evaluate

the eligibility of facilities where equipment is installed, verify that equipment is installed and operational, and to verify that equipment is being used for its intended

purpose. In the case of PRDOE, we have several concerns about the delivery of

goods and services.

• In their January 2002 presentation to USAC, PRDE reported that:

• the status of each school regarding internal cabling, communication lines,

servers, physical facilities and electricity was unknown because no reliable

documentation was available;

• communication lines from a sample of 100 schools were not installed, were

not activated, or were out of service; and that

• many of the schools have electrical deficiencies and security problems.

• During their audit, Arthur Anderson reported that six (6) of thirty (38) cabling

projects could not be verified as complete as testing was not completed. As I

indicated previously, USAC closed this audit finding because of guidance received from Commission staff regarding the Commission’s rule waiver regarding

funding year 1998. Commission staff have subsequently advised us that the rule

waiver order for funding year 1998 did not address the rule governing delivery

of equipment by the required due date.

• In February 2004, a representative from my office accompanied professional staff

from the Energy and Commerce Committee during a visit to Puerto Rico. During that visit, the OIG representative and House staff were advised that a large

number of wireless cards (approximately 74,000) that were purchased with Erate funding remained on a loading dock in a PRDE warehouse. We visited the

warehouse and confirmed that the wireless cards were in their original packaging on pallets. The E-rate program purchased 74,224 wireless cards during

funding year 1999 at a total cost to the program of approximately $24,123,592,

including installation.

Reliance on Applicant Certifications—The E-rate program is heavily reliant on applicant certifications. On the form 470, applicants certify that the support received

is conditional upon the ability of an applicant to secure access to all of the resources,

including computers, training, software, maintenance, and electrical connections,

necessary to use effectively the services that will be purchased under this mechanism. Other certifications are required on various program forms. In the case of

PRDOE, we have several concerns about whether or not PRDOE was prepared to

make effective use of the goods and services purchased.

21

• In their January 2002 presentation to USAC, PRDOE reported that:

• The server and communications infrastructure required at the central offices

was inappropriate to properly utilize the network; • no network management process had been defined; and • many of the schools had electrical and security problems. • In their April 2003 Audit Report (TI-03-09) summarizing the results of their audit

of the acquisition of equipment and services related to the EDUNET network,

OCPR reported that:

• The communications network infrastructure installed in the school was not

being used; • the Department had not acquired computers for the students;

• the teachers had limited knowledge of computer use; and

• the physical and electrical conditions in the schools did not have the capacity

required to use the communications equipment and computers. With respect

to this issue, OCPR reported that:

• Fifteen of the thirty schools visited did not have adequate electrical installations for connecting the computers they expected to acquire for students;

• twelve of the thirty schools visited did not have grills for the protection of

the installed communications equipment;

• eleven of the thirty schools did not have locked cabinets for the equipment;

and

• four of the thirty schools did not have adequate locks on the doors of the

rooms where the communications equipment was located.

OTHER PROGRAMMATIC CONCERNS

In addition to concerns that are highlighted by the PRDOE’s participation in the

E-rate program, my office has identified other concerns as a result of our participation in E-rate audits and investigations. A brief summary of those concerns is as

follows:

Program Design and Beneficiary Compliance—Under Commission staff oversight,

USAC has implemented numerous policies and procedures to administer the E-rate

program. In some cases, the Commission has adopted these USAC operating procedures, in other cases however, USAC procedures have not been formally adopted by

the FCC. In those cases where USAC implementing procedures have not been formally adopted by the Commission, it is the position of Commission staff that there

is no legal basis for recovery of funds when applicants fail to comply with these procedures.

We are concerned about the distinction that Commission staff makes between program rules and USAC implementing procedures for a number of reasons.

• First, we believe that this distinction represents a weakness in program design.

Within their authority under program rules, USAC has established implementing procedures to ensure that program beneficiaries comply with program

rules and that the objectives of the program are met. In those cases where

USAC has established implementing procedures that are not supported by program rules, USAC and the Commission have no mechanism for enforcing beneficiary compliance.

• Second, we believe that it is critical that participants in the E-rate program have

a clear understanding of the rules governing the program and the consequences

that exist if they fail to comply with those rules. We are concerned that the

Commission has not determined the consequences of beneficiary non-compliance

in many cases and that, in those instances where the Commission has addressed the issue of consequences for non-compliance, the consequences associated with clear violations of program rules do not appear to be consistent.

• Third, a clear understanding of the distinction between program rules and USAC

implementing procedures is necessary for the design and implementation of effective oversight. It is necessary for the timely completion of audits and the

timely resolution of audit findings and implementation of corrective action resulting from audits.

Applicant Technology Planning—As I have discussed above, program rules require

that applicants prepare a technology plan and that the technology plan be approved.

The approved technology plan is supposed to include a sufficient level of information

to justify and validate the purpose of a request for E-rate funding. USAC implementing procedures state that approved technology plans must establish the connections between the information technology and the professional development strategies, curriculum initiatives, and library objectives that will lead to improved education and library services. Although the technology plan is intended to serve as the

basis for an application, we have observed many instances of non-compliance with

22

program rules and USAC procedures related to the technology planning process. Examples of technology planning concerns identified during audits and investigations

are as follows:

• Technology plans are not being reviewed and approved in accordance with program rules. Commission staff have provided guidance failure to prepare a technology plan and have that plan approved in a timely manner is basis for full

recovery of disbursements.

• Technology plans do not address all required plan elements in accordance with

USAC implementing procedures for technology planning. As I have discussed

above, Commission staff have provided guidance that failure to comply with

USAC implementing procedures for technology plans is not a rule violation and

does not warrant recovery of funds.

• Applicants not being able to provide documentation to support the review and approval of technology plan.

USAC guidance on technology planning states that ‘‘(i)n the event of an audit, you

may be required to produce a certification similar to the SLD sample ‘Technology

Plan Certification Form,’ in order to document approval of your technology plan.’’

Numerous audits have included findings beneficiaries were unable to provide documentation to demonstrate the review and approval of technology plans. Although

program rules require that applicants have a technology plan and that the plan be

approved, the rules do not require that the applicant maintain specific documentation regarding the approval process.

Discount Calculation—The E-rate program allows eligible schools and libraries to

receive telecommunications services, Internet access, and internal connections at

discounted rates. Discounts range from 20% to 90% of the costs of eligible services,

depending on the level of poverty and the urban/rural status of the population

served, and are based on the percentage of students eligible for free and reduced

lunches under the National School Lunch Program (NSLP) and other approved alternative methods. A number of audits have identified audit findings that applicants

have not followed program requirements for discount rate calculation or were unable

to support the discount rate calculated.

Payment of the Non-Discount Portion—Applicants are required to pay the non-discount portion of the cost of the goods and services to their service providers and

service providers are required to bill applicants for the non-discount portion. The

discount rate calculation and program requirement for payment of the non-discount

portion are intended to ensure that recipients avoid unnecessary and wasteful expenditures and encourage schools to seek the best pre-discount rate. Examples of

concerns identified during audits and investigations are as follows:

• Applicant not paying the non-discount portion;

• Applicant not paying the non-discount portion in a timely manner; and

• Service providers not billing recipients for the non-discount portion.

CONCLUSION

The Office of Inspector General remains committed to meeting our responsibility

for providing effective independent oversight of the Universal Service Fund program. As I have described in this testimony, we continue to have numerous concerns

about this program. The results of audits that have been performed and the allegations under investigation lead us to believe the program may be subject to unacceptably high risk of fraud, waste and abuse through noncompliance and program weaknesses. We are concerned with efforts to resolve audit findings and to recover funds

resulting from E-rate beneficiary audits and we are concerned with aspects of program design and beneficiary compliance with program rules. In view of these concerns, I believe that it would be appropriate to conduct a broad based review of the

program.

We believe we have made significant progress toward our goal of designing and

implementing an effective, independent oversight program. However, primarily because of a lack of adequate resources, we have been unable to implement our oversight program. As I have stated previously, until resources and funding are available to provide adequate independent oversight for the USF program, we are unable

to give the Chairman, Congress and the public an appropriate level of assurance

that the program is protected from fraud, waste and abuse.

Thank you, Mr. Bennett and I will be happy to answer any of your questions.

Mr. GREENWOOD. Thank you, Mr. Feaster.

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TESTIMONY OF MANUEL DI ́AZ SALDAN ̃ A

Mr. SALDAN ̃ A. Mr. Chairman and members of the Subcommittee

on Oversight and Investigations of the U.S. House of Representatives, good morning. My name is Manuel Dı ́az Saldan ̃ a. I come before this committee in my official capacity as Comptroller of the

Commonwealth of Puerto Rico in response to your invitation of

June 1, 2004. Accompanying me today are Attorney Alfonso

Cristian, Assistant Comptroller, and Ms. Olga Ortez, auditor.

I am pleased to be able to participate in these hearings and

share with you the information obtained during the audit conducted on the E-Rate Program implemented in the Puerto Rico Department of Education regarding the acquisition of equipment and

services for the EDUNET network. In more detail a statement on

this subject has been submitted to this subcommittee. The role of

the Comptroller is to audit all the programs, accounts, and expenditures of the Commonwealth of its agencies and instrumentalities

and of its municipalities in order to determine if they have been

made in accordance with the law. The findings with recommendations to the Government entities are published by me of all these

reports on the Internet also.

The funds assigned to subsidize government programs are treated as if they were, for all intent and purposes, revenues, accounts,

and expenditures of the Commonwealth of Puerto Rico. Violations

of law are referred to the appropriate state, local, or Federal agencies. Complying with the recommendations, this money is covered

by means of a program called the Corrective Action Plan, CAP. The

audit report that we made is TI-03-09 of April 14, 2003. This report

covers the period from March 24, 2000, to April 27, 2001, and focuses on five findings.

Finding 1: Aggressive acquisition of equipment and services for

the EDUNET network without the use of a formal bidding process

and other deficiencies. The first phase consisted of establishing the

infrastructures for the communications network including internal

connections and telecommunications and Internet access for 760

schools. This phase was to be completed by September 30, 1999.

In October 1998 the Education Department awarded three contracts to two companies, Puerto Rico Telephone Company and DRC

Corporation at a cost of $51.3 million for the acquisition of telecommunication equipment and contracting the Internet access

services.

The second phase of the Internet project consisted of establishing

the infrastructure for the communication network including internal connections and telecommunications with wireless technology

and providing Internet access for 780 addition schools. This phase

was to be completed by September 30, 2000. On April 5, 1999, the

Education Department awarded a contract to DRC in the amount

of $51.4 million for work on the second phase of the EDUNET network.

Finding two addresses deficiencies detected in implementation

and use of the telecommunication infrastructure installed for the

EDUNET network in schools. These were detected during a physical inspection of the schools. The telecommunication infrastructure

network installed in schools was not being used. The Education DeVerDate 11-MAY-2000 11:23 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 95443.TXT HCOM1 PsN: HCOM1
24

partment has not acquired computers for the students. The teacher

does not have the knowledge in computer use.

Physical and electrical conditions in the schools do not have the

capacity required for using the communication and computer equipment. In fifteen schools 50 percent of those lack adequate electrical

installation to connect the computers that were to be acquired for

the students. We believe these deficiencies resulted from the poor

planning and inadequate supervision of the contractors by the Education Department.

Finding three addresses the improper use of Federal funds from

a Federal program for expenses incurred by the Education Department on the EDUNET network.

Finding four addresses the absence of important clauses in the

contract that would have been protecting the best interest of the

Education Department. Two of these contracts did not contain

clauses requiring the contractor to supply certain documents required by the Commonwealth regulations regarding compliance

with local tax regulations and filing tax returns.

Finding five addresses the fact that two contracts related to the

EDUNET network were not raised to the Office of the Comptroller

and others were raised late as required by law.

Status of the Findings: All findings were referred to the Secretary of Justice of the Commonwealth. To this day the findings

are still under advisement. The findings were also referred to the

Education Department which has notified us that they have taken

steps to remedy these equations.

Conclusion: Mr. Chairman, the improper use of Commonwealth

and Federal funds, especially in PRDOE programs that are directly

related to the proper education of children is of serious and vital

concern to our office. I thank you for the interest in this important

issue and I would be happy to answer any questions that any member of this committee might have. Thank you.

[The prepared statement of Manuel Dı ́az Saldan ̃ a follows:]

PREPARED STATEMENT OF MANUEL D ́IAZ SALDAN ̃ A, COMPTROLLER, COMMONWELTH OF

PUERTO RICO

In my capacity as Comptroller of the Commonwealth of Puerto Rico (Comptroller),

and as requested by you, I am pleased to offer information regarding the E-rate program in the Puerto Rico Department of Education (PRDOE). This is a federal program designed to subsidize the deployment of telecommunication services to eligible

schools and libraries.

Before going into the Audit Report, I will briefly describe our oversight role regarding the expenditure of public funds within the Commonwealth of Puerto Rico.

This background information may help the Subcommittee understand the nature of

our audits, the reports we issue and our jurisdiction.

Article III, Section 22, of the Constitution of the Commonwealth of Puerto Rico,

created the position of Comptroller in 1952. The Comptroller is appointed by the

Governor with the advice and consent of the majority of the total number of members of the Puerto Rico Legislature. In my case, I was sworn in, on October 2, 1997,

for a period of 10 years, which term is established also by the Constitution. The role

of the Comptroller is set forth in the Constitution: to... audit all the revenues, accounts and expenditures of the Commonwealth, of its agencies and instrumentalities

and of its municipalities, in order to determine if they have been made in accordance

with the law. Because of this constitutional mandate, the audits are conducted with

full independence from the three branches of government.

The findings on every audit are published by means of audit reports prepared

upon completion of the investigation. Before publishing, each report is first sent to

the Governor, the President of the Senate and the Speaker of the House of Representatives. In the reports, we provide recommendations to the audited entities.

25

Concurrently with the adoption of the Constitution of Puerto Rico, our legislature

enacted Law No. 9 on July 24, 1952, which set the framework and further defined

the purpose and scope of the Office of the Comptroller. Among other things, said

law grants authority to the Comptroller to: (a) adopt auditing standards, (b) determine when to publish and whom to notify our reports, (c) delegate any function, except rulemaking, (d)—require other agencies to comply with our requests for financial and other information necessary for a complete understanding of the matter

under investigation, (e) issue subpoenas, and (f) require any public official, except

the Governor of Puerto Rico, to comply with a subpoena issued by the Office of the

Comptroller.

The Office of the Comptroller treats federal funds that are assigned to subsidize

local government programs as if they were, for all intent and purposes, revenues,

accounts and expenditures of the Commonwealth of Puerto Rico. As such, we generally audit them as part of the audit of the local fund allocated to the government

entities’. However, these audits are not done to comply with any federal government

purpose or requirement. They are strictly a local initiative to ascertain the appropriate use of such funds. Nevertheless, it should be pointed out that government

agencies that receive federal funds usually are required to make a commitment to

the federal government to audit the use of such funds, using external auditors, as

part of the qualification process to receive them. Therefore, our audit of federal

funds is an additional control measure that we have voluntarily adopted.

Ours is a post-audit function, generally limited to compliance, not financial auditing. In other words, we audit transactions that have already occurred to make sure

they have been carried out in compliance with applicable laws and regulations. Furthermore, the audit work we carry out is governed by generally accepted auditing

standards adopted by the Comptroller. Pre-audits are beyond our jurisdiction.

Our Mission’s statement conforms to the constitutional mandate: to oversee the

transactions of public funds and property, with independence and objectivity, in

order to ascertain that they have been carried out in accordance with the law, and

to promote the effective and efficient use of government resources for the benefit of

our people. The Vision is to be a world-class model for public office, distinguished

by: the excellence of its highly qualified human resources, dedicated to continuous

improvement, a sophisticated infrastructure and optimum quality services. Included

in our Vision is our obligation to serve Puerto Rico as a true agent of change, integrating the efforts of the public and private sectors, in order to promote the honest

use of the resources entrusted to the government by the People.

We have adopted many personal and professional Values, which are comprehended in the followings Core Values:

Commitment—We are dedicated to our work

Integrity—We work in a responsible manner

Sensibility—We respect the dignity of all human beings

Justice—We watch for the strictest compliance with the law

Excellence—We are constantly improving ourselves

The Mission, Vision and Values define not only what we are as a highly regarded public institution, but also who we are as public servants.

Our Office is not a law-enforcement agency, nor do we have judicial or administrative adjudicating powers. Findings arising out of the audit reports are referred to

the appropriate law enforcement agencies, such as the local Justice Department, the

Office of Government Ethics of Puerto Rico and the Office of the Special Independent Prosecutor’s Panel of Puerto Rico. Our findings can also be referred to the

United States District

Attorney’s Office for the District of Puerto Rico, and other federal agencies that

use our findings to further their investigations, particularly if the audit reveals the

improper use of federal funds.

Once an audit report is published we monitor the agency’s compliance with the

recommendations by means of a follow-up program called the Corrective Action Plan

(CAP). This plan provides all government entities 90 days to submit an initial CAP.

This period begins on the first day of the month following the publication of the

audit report. Complementary reports must be submitted within 90 days from the

initial report or a preceding complementary report.

I will now directly address Audit Report TI-03-09, published by our Office on April

14, 2003. This report was the result of an audit conducted by our Information Technology Audit Division on the Office of Information Systems and School Technology

of PRDOE regarding the acquisition of equipment and services for the EDUNET

network and the contracting and implementation of the network.

The Audit Report covers from March 24, 2000 through April 27, 2001, and focuses

on five major findings. A mayor finding is defined in our report as a deviation from

26

norms regarding the operations of the audited unit that have a material effect, either in quantitative or qualitative terms.

FINDINGS AND RECOMMENDATIONS

Finding 1—Acquisition of equipment and services for the EDUNET network without

the use of a formal bidding process and other deficiencies related to the contracts

awarded

In 1997 the PRDOE embarked on a telecommunications project called EDUNET.

It consisted of a communications network between all schools and administration offices. The purpose of the project was to integrate technology with education. The

project encompassed videoconferencing and Internet access. The program would involve a total of 1,540 schools.

In March 1998 PRDOE submitted a request for federal E-rate funds to begin implementation of the first phase of EDUNET. This phase consisted of establishing the

infrastructures for the communications network, including internal connections and

telecommunications, and providing Internet access for—760 schools. It was estimated the phase would be completed by September—30,—1999.

In October 1998 PRDOE awarded the contracts listed below to two companies at

a cost of $51,353,490 for acquiring the telecommunications equipment and contracting the Internet access services:

CONTRACTS

NUMBER DATE SERVICE COST

1. 081-99-0161 .......................... October 26, 1998 ............................. Telecommunications .................... $31,122,910

2. 081-99-0162 .......................... October 26, 1998 ............................. Transport & Internet ................... 7,123,248

3. 081-99-0164 .......................... October 15, 1998 ............................. Internal Connections ................... 13,107,332

$ 51,353,490

The first two contracts were awarded to Puerto Rico Telephone Company (PRTC)

and the third to DRC Corporation. The first contract was later amended by Contract

081-99-0161A to change the telecommunications equipment. The amendment reduced the contract’s cost to $10,863,557. The contract included recurring costs for

the rent of telecommunication lines.

The second contract was also amended by Contract 081-99-0162A to change the

transport services. This had the effect of increasing the costs to $17,374,754. The

contract included recurring costs for Internet access services.

As of April 27, 2001, the cutoff date of the audit, both companies had submitted

invoices for $40,059,626. Of this amount, $35,854,964 had been paid from Erate

funds and $3,114,638 from Commonwealth funds. Unpaid invoices totaled—

$1,090,024.

Our audit revealed that:

1. Contrary to federal and Commonwealth regulations, formal bid procurement

procedures were not followed to award the three contracts. PRDOE only considered

the proposals submitted by the two companies that were contracted. The first two

contracts were awarded to PRTC and the third one to DRC Corporation.

2. The Director of PRDOE’s Budget Department certified the availability of funds

to pay for the services rendered under the contracts on February 22, 1999. That is,

119 days after the contracts were awarded.

3. Contrary to established rules, there was no evidence that the contracts were

approved by the Commonwealth’s Office of Management and Budget, either before

or after they were awarded.

In March 1999 PRDOE submitted a new request for E-rate funds to the federal

government. These additional funds were considered necessary for the second phase

of the EDUNET network. This phase consisted of establishing the infrastructure for

the communications network, including internal connections and telecommunications, with wireless technology and providing Internet access for 780 schools. Federal funds in the amount of $56,879,778 were approved for this second phase.

PRDOE had to match that assignment with Commonwealth funds in the amount

of $6,373,499. It was estimated the phase would be completed by September 30,

2000.

On April 5, 1999, PRDOE awarded contract 081-99-0423 to DRC, in the amount

of $51,478.221 to work on the second phase. As of April 27, 2001, the cutoff date

of our audit, the company had submitted invoices for $33,849,881. Of this amount

27

$26,834,997 had been paid from E-rate funds and PRDOE had paid $6,885,731 from

Commonwealth funds. Unpaid invoices amounted to $129,153.

The audit also revealed that:

1. Contrary to federal and Commonwealth regulations formal bid procurement

procedures were not followed to award the contract. Instead, PRDOE requested and

evaluated proposals. PRDOE named an Evaluations Committee to evaluate proposals for the E-rate funds. An examination of the request for proposals and the procedure followed by PRDOE in awarding this contract to DRC revealed, furthermore,

the following irregularities:

a. The request for proposals did not specify a final date for their submission. Neither did it specify a date for opening the same.

b. Of the six proposals received only two complied with the requested specifications.

The director of PRDOE’s Office of Information Systems and School Technology

(OISST) evaluated them. There was no evidence indicating that the PRDOE’s

Evaluations Committee considered the proposals. OISST prepared two memos

to the Secretary of Education regarding the proposals but neither contained any

recommendation for awarding the contract or reasons for not considering the

other five proposals.

4. The Director of OISST requested from the Director of PRDOE’s Budget Office

a certification on the availability of funds to pay for the services rendered under the

contract on October 19, 1999. That is, 197 days after the contract was awarded.

5. Contrary to established rules, there was no evidence the contract was approved

by the Commonwealth’s Office of Management and Budget, either before or after it

was awarded.

RECOMMENDATIONS

Four recommendations were made on this finding. The first was directed to the

Secretary of Justice of the Commonwealth requesting her to consider the finding

and take any action that may be deemed appropriate (Recommendation 1). The

other three recommendations were directed to PRDOE’s Secretary: the first was to

comply, in the future, with the regulations on awarding contracts that require a formal bid process (Recommendation 2); the second was to make sure that they obtain,

before awarding any contract, a certification from PRDOE’s Budget Office on the

availability of funds to pay for the services required (Recommendation 3); and the

third was to make sure that they submit to the Commonwealth’s Office of Management and Budget any contract regarding computer related products or services before awarding them (Recommendation 4).

Finding 2—Deficiencies in the implementation and the use of the telecommunications infrastructure installed for the EDUNET network

In a physical inspection of 30 schools which took place from October 11 to November 21, 2000 (18 schools corresponding to the first phase, whose work was supposed

to have been completed by September 30, 1999, and 12 schools corresponding to the

second phase, whose work was supposed to have been completed by September 30,

2000) we discovered various deficiencies in the implementation of the EDUNET network as follows:

a. The telecommunications infrastructure network installed in the schools was not

used.

b. PRDOE had not acquired the computers for the students.

c. The teachers had limited knowledge on computer use.

d. Physical and electrical conditions in the schools didn’t have the capacity required

for using the communication and computer equipment, as follows:

1. Fifteen schools (50%) lacked adequate electrical installations to connect the

computers that were to be bought for the students.

2. Twelve of the schools (40%) lacked bars to protect the communication equipment installed.

3. Eleven of the schools (37%) didn’t have their communication equipment cabinets under lock and key.

4. Four of the schools (13%) didn’t have adequate locks in the doors of the rooms

where the communication equipment was installed.

5. Two of the schools (7%) had broken connection ports.

6. One of the schools (3%) maintained open the security covers on the antennas.

7. One of the schools under reconstruction maintained the antennas exposed to

water and dust.

8. The person in charge of maintenance in one of the schools had to patch some

holes in a wall because the contractors omitted to do it.

28

9. One of the schools maintained two connection boxes without covers and with

the cables exposed.

10. One of the schools had the communication cable tubing broken and separated from the wall.

In our opinion poor planning and the absence of adequate continuous supervision

of the work done by the contractors caused these deficiencies. Because of our findings, up to April 27, 2001, we believe PRDOE did not obtain any benefit from the

investment of $73,614,511 in internal connections and telecommunications, and

$294,996 in services from lines connected to the Internet of the EDUNET network

that correspond to the amounts billed by the contractors.

RECOMMENDATIONS

On this second finding we made two recommendations. The first, once again, directed to the Secretary of Justice of the Commonwealth requesting her to consider

the finding and take any action that may be deemed appropriate (Recommendation

1). The other to PRDOE’s Secretary requesting that for any project similar to the

one discussed in this second finding the following have to be done: before acquiring

computer related equipment and awarding contracts for such services, make a study

to determine what else is necessary (Recommendation 5.a.); an efficient working

plan must be established to improve the infrastructure of all the schools and to complete the implementation of the EDUNET network (Recommendation 5.b.); and

PRDOE must supervise all contractors adequately in order to attain the project’s objectives (Recommendation 5. c.).

Finding 3—The improper use of funds from a federal program for expenses

incurred by the Department [of Education] on the EDUNET network,

and the absence of participation of the Office of External Resources [of

the Department] in the evaluation and assignment of funds for said

project

On December 15, 1998 and August 25 1999 PRDOE awarded to a company contracts amounting to $142,850. These were contracts 081-99-0286 ($44,850) and

ORE-081-00-070 ($98,000). The contracted services consisted of assessing the work

done by PRTC and DRC in the implementation of the EDUNET network. Part of

the money that was earmarked to pay for the services rendered, amounting to

$92,850 came from another federal program known as Title III Funds and $50,000

from the Goals 2000 Program, which were granted by the federal government for

other educational purposes not compatible with this contract.

As of April 10, 2001 PRDOE had improperly paid $44,850 using Title III Funds

for costs related to the first contract for work done between May and September

1999.

The process of assessing and assigning funds to pay for the contracts was done

in an irregular manner. PRDOE’s Director of the Office of External Resources approved the use of said federal funds without first determining if the contracts complied with the conditions of the federal programs that supplied the funds.

RECOMMENDATIONS

On the third finding we made three recommendations. The first, once again, was

directed to the Secretary of Justice of the Commonwealth requesting her to consider

the finding and take any action that may be deemed appropriate (Recommendation

1). The other two were directed to PRDOE’s Secretary requesting that he take steps

to ensure that Title III Funds are only used for the purposes for which they were

authorized by law (Recommendation 6), to make sure all proposals for using federal

funds be processed in PRDOE’s Office of Federal Affairs and that the transactions

involved comply with all applicable laws and regulations (Recommendation 7).

Finding 4—Absence of important clauses and certifications by the contractors in the contracts for services related to the EDUNET network

An evaluation of contracts 081-99-0161, 081-99-0162, 081-99-0164, and 081-99-

0423 and their respective amendments revealed the following mistakes:

1. Omission of important clauses and information that would have protected the

best interests of PRDOE:

a. Regarding conflicts of interest by the contracting companies’ personnel.

b. A stipulation to the effect that any changes in the services provided had to be

approved by PRDOE.

c. A stipulation to the effect that subcontractors had to be approved by PRDOE.

d. On contract 081-99-0423 the account from which the services rendered would be

paid was not identified.

29

e. Contracts 081-99-0164 and 081-99-0423 did not include the employers’ social security number and the incorporation registration number.

f. Contract 081-99-0164 did not include an enclosure with a list of the schools, which

would be receiving services under the contract. The auditors obtained the list

from PRDOE’s Request of Funds Form prepared on March 11, 1998.

g. In the amendments to the contracts (Nos. 081-99-0161A and 081-99-0162A), the

exhibits were not included as part of the contracts. They were also not available

for examination.

2. Contracts 081-99-0164 and 081-99-0423 did not contain clauses requiring the

contractors to supply certain documents required by Commonwealth regulations.

The following documents were not included in the contract files, nor were they available for examination:

a. Tax Debt Certifications and Income Tax Return Filing Certifications from the

Commonwealth Treasury Department

b. Personal and Real Estate Property Debt Certifications

c. Unemployment, disability and social security for drivers (as applicable) Debt Certifications

RECOMMENDATIONS

On this fourth finding we made three recommendations. The first one once again

directed to the Secretary of Justice of the Commonwealth requesting her to consider

the finding and take any actions that might be deemed appropriate (Recommendation 1). The other two were directed to PRDOE’s Secretary requesting that he take

steps to ensure that all contracts contain the appropriate clauses to protect the interests of PRDOE (Recommendation 8) and to make sure the contractors provide the

certifications required by laws or regulations (Recommendation 9).

Finding 5—Absence of registration or late registration of the contracts related to the

EDUNET network in the Office of the Comptroller of Puerto—Rico

According to Commonwealth Law No. 18, approved on October 30, 1975, as

amended, all government entities must maintain a register of all the contracts they

award, and their amendments. Additionally, they must submit a copy of the contracts and amendments to the Office of the Comptroller within 15 days after the

contracts are signed.

As of March 12, 2001, PRDOE had not submitted contracts 081-99-0161, 081-99-

0162, and 081-99-0423, awarded in October 1998 and August 1999, or their respective amendments in the amount of $76,149,672.

There were also other contracts, identified in the Audit Report that were submitted late to our Office. The tardiness fluctuated between 175 and 397 days.

RECOMMENDATIONS

On this fifth finding we made two recommendations. The first one once again directed to the Secretary of Justice of the Commonwealth requesting her to consider

the finding and take any actions that may be deemed appropriate (Recommendation

1) and the second to PRDOE’s Secretary requesting compliance with Law No. 18

(Recommendation 10).

As of the date of this letter, according to our evaluation of the CAP, and a complementary report submitted by PRDOE, the status of the nine audit recommendations directed at them is as follows:

1. Recommendation 2, regarding PRDOE’s compliance with regulations on awarding

contracts that require a formal bid process, is considered as having been complied with. PRDOE has informed us that formal bidding procedures are being

followed.

2. Recommendation 3, regarding obtaining a certification from PRDOE’s Budget Office on the availability of funds to pay for the services required before awarding

any contract, is considered as having been complied with. PRDOE has informed

us that they are obtaining the certifications at the appropriate time.

3. Recommendation 4, regarding submission for approval to the Commonwealth’s

Office of Management and Budget any contract regarding computer related

products or services before awarding the same, will be followed-up on our next

audit of PRDOE.

4. Recommendation 5.a, regarding that a study must be made to determine what

is necessary before acquiring computer related equipment and awarding contracts for such services similar to those discussed in Finding 2, will be followedup on our next audit of PRDOE.

5. Recommendation 5.b, regarding that in any project similar to the one discussed

in Finding 2, an efficient working plan must be established to improve the inVerDate 11-MAY-2000 11:23 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6621 95443.TXT HCOM1 PsN: HCOM1
30

frastructure of all the schools and to complete the implementation of the

EDUNET network, is considered partially completed. PRDOE was asked to submit a working plan contemplating the status of every school and the completion

date for the EDUNET network by school. PRDOE has indicated that they plan

to have the EDUNET operating by December 2004.

6. Recommendation 5.c, regarding that in any project similar to the one discussed

in Finding 2, PRDOE must supervise all contractors adequately in order to attain the project’s objectives, is considered as having been complied with.

PRDOE has informed us that the projects are being supervised adequately.

7. Recommendation 6, regarding using Title III federal funds only for the purposes

for which they were authorized by law, will be followed-up on our next audit

of PRDOE.

8. Recommendation 7, regarding processing in PRDOE’s Office of Federal Affairs all

proposals requesting federal funds and that the transactions involved comply

with all applicable laws and regulations, is considered as complied with.

PRDOE has informed us that the required processing is being done.

9. Recommendation 8, regarding the inclusion in all contracts of the appropriate

clauses to protect the interests of PRDOE, is considered as complied with.

PRDOE has informed us that the appropriate clauses are being included.

10. Recommendation 9, regarding contractors providing all the certifications required by laws or regulations, is considered as having been complied with.

PRDOE has informed us the certifications are being supplied.

11. Recommendation 10, regarding compliance with Law 18 which requires copies

of all contracts to be filed in the Office of the Comptroller, is considered as having been complied with. PRDOE has informed us they are in compliance with

said—law.

As of today, the recommendations made to the Secretary of Justice of the Commonwealth regarding each of the five findings are under advisement by said Secretary.

As a normal working procedure we have accepted PRDOE’s allegations of compliance with our recommendations based on the allegations they have included in their

CAP. In the next audit of the unit we will verify said compliance.

The proper use of Commonwealth and federal funds, especially in PRDOE programs that are directly related to the proper education of children, is matter of serious and vital concern to our Office. Mr. Chairman and all the other members of this

Committee, I thank you for your interest in this critical issue. If you, or your staff,

have any questions regarding this presentation, please call me at (787) 250-3300 or

call Mr. Alfonso M. Christian, Esq., Assistant Comptroller, at (787) 250-3305, or

Mrs. Lourdes Dı ́az at (787) 294-0286.

Mr. GREENWOOD. Three seconds to spare, Mr. Saldan ̃ a. Well

done.

The Chair recognizes himself for 10 minutes for questions.

Let me start with you, Mr. Feaster, and let me just ask you the

most basic question. In your opinion, who is at fault for the E-Rate

funding that wasted money in Puerto Rico?

Mr. FEASTER. Well, obviously, I think, we have to point to the

PRDOE, Puerto Rican Department of Education, as the primary

problem here. Their failure to plan for effective use of the equipment at one stage.

Mr. GREENWOOD. Is this a case of malfeasance or mis-feasance

or non-feasance?

Mr. FEASTER. I would sort of have to wait until the investigation

is completed to come to that conclusion but, certainly from the

standpoint of failure to plan for effective use of the equipment and

having the facilities and the equipment ready to use, the telecommunication aspects need to be a major concern.

Mr. GREENWOOD. In your view, what drove the nature and the

magnitude of this program? This program that was clearly overly

ambitious providing equipment to hook up computers to the Internet when they didn’t have the computers to do it, the lack of training, the lack of preparedness, the lack of planning. In your view,

was this overly ambitious program, did it result from vendors’ moVerDate 11-MAY-2000 11:23 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 95443.TXT HCOM1 PsN: HCOM1
31

tivation to sell more goods and services than the school could use?

Was that a motivating factor or do you think the size and scope of

their program was driven by the Department of Education?

Mr. FEASTER. I am sure a little bit of each of those. In other

areas we found the vendors are trying to stimulate business and

make money off these things. It is hard for us to say since we

haven’t done any work there and we are waiting for the outcome

of the investigations.

Mr. GREENWOOD. Okay. You talked about the auditing function

and you talked specifically about your auditing function. As we look

at this program and try to figure out what sort of structural reforms may be necessary, one of the questions that I have is where

is the best place or best places for the auditing to occur? That is

a clear common theme as we look at all of these school districts

there just seems to be a lack of auditing going on. Should that be

the function?

Should there be a more strenuous requirement that the school

district receiving these funds should hire, independent accounts to

audit the program and report both to the school district and to

USAC? Is that where part of it should lie? Should USAC itself have

more personnel dedicated to auditing or should that be an FCC

function that has more vigorous auditing, or should it be your shop,

the IG, or some combination?

Mr. FEASTER. Several years ago I was asked the question of how

many audits should we do and my answer was more. I think the

answer is a combination of all those people. Somebody is going to

have to provide the money to do these.

Mr. GREENWOOD. Excuse me for interrupting you but you can

ask for more Federal resources for your shop.

Mr. FEASTER. Yes, sir.

Mr. GREENWOOD. We can ask for more Federal resources for the

FCC but the program is bringing in $2.25 billion a year. It seems

to me there ought to be a way to use those funds for the auditing

function and to do it as part of the contract with the schools. If you

are going to give a school district $100 million or $50 million, that

seems like plenty of money to have a requirement that they hire,

the school district does, an outside auditor to monitor this in ways

perhaps the school district isn’t prepared or equipped to do.

Mr. FEASTER. I would agree with that. I think that all the parties

in there should be doing audits. The school district under a single

audit concept. USAC, we work closely with their internal auditing

staff. We do believe that our independent oversight, the FCC IG’s

independent oversight, is probably the best way of doing it. As I

said before, we invite all types of audits.

Mr. GREENWOOD. This isn’t the first time that the Federal Government has overseen the giving away of grant money to localities.

It happens hundreds of different ways in the Federal Government

every day. Why are we reinventing the wheel here? Isn’t there a

stand operating—aren’t there standard operating procedures? Isn’t

there a state-of-the-art if you are going to move money through the

Federal Government?

I know this is unique in that the money never really lands in the

hands of the Federal Government per se but, nonetheless, it seems

to me that the FCC rules that govern how you audit a program like

32

this ought to be modeled on some state-of-the-art. We have been

doing this for a couple of hundred years.

Mr. FEASTER. There is a grant model in existence and we would

recommend at least evaluating the program against those standards.

Mr. GREENWOOD. And what is that grant money?

Mr. FEASTER. It basically calls for a single audit of these facilities

financed by the beneficiary or state or local government doing the

audit. It provides for better record keeping than the current program.

Mr. GREENWOOD. How could this program exist for this number

of years without somebody at the FCC or somebody at USAC figuring that out? You go to a standard model and to have the grantees do the single audit.

Mr. FEASTER. I don’t have the answer to that question but we

had a lot of telecommunications attorneys trying to do grant work

and I think——

Mr. GREENWOOD. There is your problem. Elaborate if you would

on this business with the USAC procedures and the FCC rules. Do

I understand that one of the problems here is that if USAC, or anyone else, discovers something that is consistently not going well

and USAC wants to change its procedures to tighten up the accountability that they then have to go to FCC and go through a formal rulemaking procedure before they can do that?

Mr. FEASTER. That is the approach to it. Now, what USAC has

done to fill in the gaps is come up with their own what we call implementing procedures. Their status is really less than full-blown

rules and the primary difference between those is that we can

make recoveries based on violations of USAC procedures but cannot make recoveries, financial recoveries, based on rules passed by

the Commission. That was a determination made by our General

Counsel’s Office.

Mr. GREENWOOD. Is there a phenomena here where the program

can be seen to be potentially hemorrhaging money because of some

frailty in the way the program is organized and you can’t stop that

hemorrhaging until you go through the USAC procedure, the FCC

procedure.

Mr. FEASTER. Yes. A very timely process. Our office would advocate a codification of the implementing procedures by USAC to

make one set of rules for the public to deal with. The implementing

procedures really put meat on the FCC rules and we think there

are very valuable things in those procedures to improve the program.

Mr. GREENWOOD. Do you think you know how much money has

been wasted in Puerto Rico?

Mr. FEASTER. No, sir. Well, I would start with $101 million from

what I have heard.

Mr. GREENWOOD. That is probably about the right number.

Mr. FEASTER. I am not sure.

Mr. GREENWOOD. What is your sense of USAC’s progress in fixing its programmatic weaknesses?

Mr. FEASTER. They are moving in the right direction. I think we

would have to include USAC and the Wireline Competition Bureau.

They are moving in the right direction. We think they are moving

33

too slowly. We have in the past made suggestions that haven’t been

fully implemented yet. We will be making additional suggestions

after this hearing to improve the structure of the program to make

it more difficult to take advantage of it. But they are heading in

the right direction, just slowly.

Mr. GREENWOOD. Do you have a personal opinion as to whether

this whole USAC concept makes any sense of whether the notion

that we have is nonprofit, nonFederal entity responsible for a

charge that goes to all the rate payers is essentially a tax imposed

by the Congress indirectly on phone service and, yet, dispensed by

nonFederal and, in many ways, nonaccountable organizations?

Mr. FEASTER. We would like to see a more contract-oriented relationship between USAC and the Commission. That is my personal

opinion.

Mr. GREENWOOD. What do you mean by that?

Mr. FEASTER. A formalized contract just like we do with any

other contractor.

Mr. GREENWOOD. And what advantage would we gain by that

model?

Mr. FEASTER. I think better control.

Mr. GREENWOOD. Are there limits to the degree to which the

FCC can tell USAC what to do?

Mr. FEASTER. The Bureau can tell USAC what to do. I don’t

think there are any limits. We turn over new turf on almost a daily

basis.

Mr. GREENWOOD. My time has expired. The gentlelady from Colorado.

Ms. DEGETTE. Thank you, Mr. Chairman. Mr. Feaster, you told

the chairman that you believe that the primary fault of the failure

in Puerto Rico was the fault of the PRDOE for failure to plan for

the use of the equipment. Correct?

Mr. FEASTER. Yes.

Ms. DEGETTE. Do you think the vendors bear any burden to educate the schools and the educators in the Department have to use

the equipment? Do you think that is part of the blame?

Mr. FEASTER. I think that they are certainly capable of doing

that and I would think as a way to treat a good customer to help

them plan the program where possible.

Ms. DEGETTE. That they should educate them how to use it?

Mr. FEASTER. I don’t think an organization the size of PRDOE

should rely upon a vendor to do that. I think they are large enough

to have their own experts, CIO or something like that to plan this

operation.

Ms. DEGETTE. Certainly they are large enough and sophisticated

enough to contract with the vendors to educate them to make that

part of the——

Mr. FEASTER. Certainly, yes, if they are not like a little school

with a very small population or a very limited technical staff.

Ms. DEGETTE. In your opening statement you testified that you

have requested funding for additional resources since you only have

three IGs for the whole country of that funding. Right?

Mr. FEASTER. It was in our 2004 budget.

Ms. DEGETTE. And how much did you request?

Mr. FEASTER. $3 million.

34

Ms. DEGETTE. And was that for additional inspectors?

Mr. FEASTER. No, it is for contract, resources to hire contractors.

Ms. DEGETTE. And do you expect that will be funded?

Mr. FEASTER. It has been rejected by the Congress of the United

States.

Ms. DEGETTE. So you are just left with what you have got.

Mr. FEASTER. Right.

Ms. DEGETTE. Let me ask you this. The chairman was asking

you, or he was opining about all the money that we have in the

fund and wondering why we couldn’t use that for oversight. My

question is under the current statutory scheme, do you believe that

we could use money from the fund for your program for outside auditing?

Mr. FEASTER. The FCC does not have, I am told by General

Counsel’s Office, the direct authority to use the fund.

Ms. DEGETTE. Would that require statutory change, if you know?

Mr. FEASTER. I believe so.

Ms. DEGETTE. Thank you. Now, you testified and in your written

testimony you talked about instances of bid rigging, lack of competitive process, service providers billing for goods and services not

provided, ineligible items being funded, and beneficiaries not paying the local portion of their cost. How prevalent, in your view, are

these types of abuses and similar instances of malfeasance within

the overall administration of the E-Rate Program?

Mr. FEASTER. In the past year through a combination of audits

by USAC, the FCC IG’s office, done 122 audits and 32 percent of

those audits were found to be noncompliant with program rules.

The remaining portions of the 122, or 83 of them, were found to

have some findings related to USAC implementing procedures. At

least one-third of the audits that we conducted in the past year

have been found noncompliant.

Ms. DEGETTE. So that is a pretty substantial number I would

say. Wouldn’t you agree?

Mr. FEASTER. Yes, ma’am.

Ms. DEGETTE. Now, your testimony touches upon recovery of lost

or misused E-Rate money. Are there any institutional guidelines

whereby the FCC can recover lost money?

Mr. FEASTER. Yes, they can do that.

Ms. DEGETTE. How do they do that?

Mr. FEASTER. By basically notifying the applicant. They have

been in violation and they recover the money.

Ms. DEGETTE. And how often has that been done?

Mr. FEASTER. I don’t know specifically. It has occurred.

Ms. DEGETTE. Has it occurred often, do you know? I mean, I am

just wondering.

Mr. FEASTER. I don’t have the details. They have recovered $20.8

million.

Ms. DEGETTE. Over what period of time?

Mr. FEASTER. Maybe a better USAC question.

Ms. DEGETTE. Okay. If you could just state your name. Thank

you. Since the inception of the program that is the total?

Mr. FEASTER. Yes.

Ms. DEGETTE. Who in the FCC is charted trying to recover the

lost money? Is it the Wireline Competition Bureau, WCB?

35

Mr. FEASTER. WCB and our Chief Financial Officer.

Ms. DEGETTE. Okay. Do they go after service providers?

Mr. FEASTER. They now currently are able to go after service providers.

Ms. DEGETTE. Do they go after them, do you know?

Mr. FEASTER. Yes, I think they do.

Ms. DEGETTE. Okay. What happens when the FCC goes after a

service provider?

Mr. FEASTER. I am not sure.

Ms. DEGETTE. Oh, you don’t understand?

Mr. FEASTER. No, I am sorry.

Ms. DEGETTE. Okay. I mean, are they able to effectively recover

the money? Did they sue them or what did they do?

Mr. FEASTER. I think they contacted them directly. I am not sure

of that, whether they were sued or not.

Ms. DEGETTE. Okay. That is not your purview? Do you have an

opinion as to whether we need programmatic or statutory changes

to ensure the efficient and complete recovery of funds?

Mr. FEASTER. I think we have enough rules to do that and I

think there is some work going on to expand who we can get the

money from Ms. DEGETTE. Okay. Now, in your written testimony

you talked about the fact that in addition to conducting audits the

FCC Inspector General’s Office is providing audit support to a

number of investigations of E-Rate recipients and service providers.

You state that the IG is currently supporting 22 investigations and

monitoring an additional 18 investigations. Can you explain to me

the difference between supporting and monitoring E-Rate investigations?

Mr. FEASTER. Yes, ma’am. We are just monitoring. We are just

keeping in touch with them and not providing any resource support

like doing additional audit work. We are just keeping track of the

investigation, how it is going, what they are doing. We are talking

about the FBI and the U.S. Attorney’s Office. When we provide direct support, we are sending our auditors out to do audits in support of the investigative activities.

Ms. DEGETTE. In your opinion, would additional resources for

your office assist you in better monitoring those investigations?

Mr. FEASTER. Yes, ma’am.

Ms. DEGETTE. Why?

Mr. FEASTER. We just don’t have enough staff here. These two

people right here are two-thirds of my staff.

Ms. DEGETTE. And the other one is sick, right?

Mr. FEASTER. And the other one is sick. They are constantly on

the road and these investigations are spread throughout the country and we need either additional resources to hire contractors or

additional staff. We prefer to do it through contractors if at all possible.

Ms. DEGETTE. And why is that?

Mr. FEASTER. It is more efficient. Right now we have a high

workload. If that workload would drop, we would have excess people and we don’t like to be in that position.

Ms. DEGETTE. That is very efficient, Mr. Chairman. I am going

to yield back the balance of my time. If we have a second round,

I have some questions specific to Puerto Rico.

36

Mr. GREENWOOD. The Chair thanks the gentlelady and welcomes

the chairman of the full committee, the gentleman from Texas, Mr.

Barton, and recognizes him for 10 minutes.

Chairman BARTON. Thank you, Mr. Chairman. I want to complement you and the Oversight Investigation staff for holding this

hearing and starting this process. This is not the only hearing that

we are going to do on this. It is important that we start the process

correctly.

I am at a little bit of a loss, Mr. Inspector General, on how to

question you because it appears to me that you want to do the

right thing but you just don’t simply have the resources. I guess

my first question, what do you view your role to be given that you

only have a handful of people and are expected to be the Inspector

General for a vast Federal agency that literally touches all aspects

of the American economy?

Mr. FEASTER. We keep pushing. I think right now we are in the

process of trying to develop a three-way memorandum of understanding between USAC and a contractor and our office to use the

Universal Service Fund to obtain contract resources.

Chairman BARTON. You are appointed by the President. Is that

not correct?

Mr. FEASTER. No, sir. I am appointed by the agency head.

Chairman BARTON. By the agency.

Mr. FEASTER. Yes, sir.

Chairman BARTON. Do you ever meet with other Inspector Generals of the Federal agencies? Is there a monthly meeting?

Mr. FEASTER. Yes, sir.

Chairman BARTON. Is it allowed to discuss pending cases when

you have those meetings? Can you all talk about what you are

doing?

Mr. FEASTER. That generally is not the format. It is a more formal setting basically dealing with community wide issues. We are

sort of unique in that community, though.

Chairman BARTON. I don’t know but would it be ever appropriate

for you to ask the other Inspector Generals to share staff or resources, at least on a temporary basis?

Mr. FEASTER. Most of the Inspector Generals are very tight in

their staff limitations. We have basically had one agreement with

the Department of Interior IG’s Office. They are providing staff on

a reimbursable basis to us. We have currently are involved in developing a memorandum of understanding with the Department of

Education who are doing some audits for us in New York.

Chairman BARTON. Let me get a little more specific about the

pending issue. This E-Rate Program that has been in effect since

the mid to late 1990’s, it is ministered by something called the Universal Service Administration, I think, what is your view of them?

Mr. FEASTER. They are a very capable organization that try to

do the right thing.

Chairman BARTON. You honestly believe that given the fact that

every time we look under a rock we see misuse and grants that

should not have been granted and equipment that sits in warehouses? You really think they are capable?

Mr. FEASTER. I think they need to do more work and different

type of work. We keep pushing, urging.

37

Chairman BARTON. Who appoints the head of that organization?

Mr. FEASTER. The Chairman of the FCC.

Chairman BARTON. The Chairman of the FCC. And once appointed, does that individual serve at the pleasure of the chairman

or is there a specific timeframe?

Mr. FEASTER. I don’t believe. There is a term I think they serve

at the pleasure of the chairman.

Chairman BARTON. Okay. Do you think it would be a good idea

if we had them come in and sit where you are sitting?

Mr. FEASTER. I think they are here.

Chairman BARTON. They are going to be on the next panel?

Mr. FEASTER. Yes, sir.

Chairman BARTON. That is a very good idea.

Mr. FEASTER. I think so. I do want to make a point. One of the

solutions to our resource program is getting access to the Universal

Service Fund from my office and I do think we need congressional

legislation to do that or some way of getting legal access to that

fund. That would solve my resource problem and let me hire contractors to conduct independent audits.

Chairman BARTON. We have collected about $13 billion in this

fund and my opinion based on the summaries I read, a lot of that

money has not been spent very wisely. If I were to give you three

choices about the E-Rate Program, one would be to eliminate it.

Second would be to continue it as it is and give them a bonus for

the way it has been operated. The other would be to restructure

or reform it. Which of those options would you choose?

Mr. FEASTER. I think I may take the third option, sir. We are trying to do that right now.

Chairman BARTON. Do you think the Congress needs to legislatively direct that restructuring?

Mr. FEASTER. As my chairman likes to say, that is above my pay

grade. I will leave that up to you to make that decision.

Chairman BARTON. You are entitled to an opinion.

Mr. FEASTER. I don’t know if we really need that or not. I think

some maybe direction and guidance from Congress may be a solution.

Chairman BARTON. In the audits and investigations that your

staff has conducted, would it be their view that the recipients or

the applicants for these funds viewed the program as a big candy

jar? Kind of free money or something that they didn’t have to really

put too much attention into how money was going to be spent because it wasn’t their money?

Mr. FEASTER. I would agree to that. I think if they treated it

more like their money rather than free money, I think it would be

a lot different.

Chairman BARTON. Would it be appropriate, if we were to have

a legislative solution, that we would seek some sort of a codification

of situations in which we could request or require refunds of monies that have already been spent?

Mr. FEASTER. Yes, sir.

Chairman BARTON. Okay. Would it be appropriate if we were to

pass legislation in this area to put specific penalties perspectively

in place up to and including not only fines but perhaps criminal

38

penalties for misuse and abuse of funds appropriated through this

program?

Mr. FEASTER. Yes, sir.

Chairman BARTON. I have got 3 more minutes. I think I am

going to yield back because there are some other questions but they

are really more directed to the other panels. I do want to ask the

gentleman from Puerto Rico. My understanding is the problems

that we have discovered at Puerto Rico are because of a change in

the Governor of that commonwealth and the fact that investigations were begun that showed that the prior administration had

not been responsible. Is that a fair statement?

Mr. SALDAN ̃ A. Well, I would say, sir, as I mentioned in the other

report, the whole problem arises because of a lack of proper planning from the Education Department. I insist, and that is something you may consider here, is that you may request or administer

regulations that whenever funds are assigned to the states, there

should be a review agency.

Like in Puerto Rico we have the Office of Management and

Budget, the local Puerto Rico Office of Management and Budget

that should be as the control for the recipient which is in this case

the Education Department. For me that would be very critical. And

then itself I will also say that schools by themself should submit

proposals to the Education Department that should be evaluated in

detail as which of them will be ready to receive the funds.

Then after that those schools are evaluated, a certain number of

schools which could be no more than 10 or 20 percent of the total

that should be considered for the compilation or summation for the

request of funds to the Federal agency. That could be a way that

you can establish some kind of control to avoid situations like this

because Puerto Rico applied for the whole funds that we are assigning total but then we didn’t have adequate control so this

shouldn’t happen. But I think in view of other cases that you are

discussing here this morning, you can establish that kind of regulation.

Chairman BARTON. Well, I want you to know that, I mean, we

ask that you come and you have come and cooperated and we appreciate that. We are not picking on Puerto Rico. We could have

almost picked a school district or a community out of the hat. We

chose Puerto Rico because of the size of the situation and the fact

that when our staff went down to conduct an onsite investigation,

we found quite a bit of equipment that was just sitting around in

warehouses.

It is not an indication. Do not take this indication that you are

the only part of this program that has a problem. I think it is systemic and endemic and the point of these hearings are to outline

that and then to try to find a remedy to correct it so we can continue the program in the future.

With that, Mr. Chairman, I would yield back.

Mr. GREENWOOD. The Chair thanks the gentleman. The Chair

welcomes the gentleman from Massachusetts, Mr. Markey, who has

agreed to yield while he prepares his question to Mr. Walden who

has a time constraint problem. The Chair recognizes Mr. Walden

for 10 minutes.

39

Mr. WALDEN. Thank you, Mr. Chairman. Thank you, Mr. Markey. Mr. Feaster, I want to make sure I understand this. There

have been, what, 142 audits done?

Mr. FEASTER. 122.

Mr. WALDEN. 122 over 6 years in this program?

Mr. FEASTER. No. That was this past year, sir.

Mr. WALDEN. I am sorry.

Mr. FEASTER. Over the past year.

Mr. WALDEN. So 1 year?

Mr. FEASTER. Yes.

Mr. WALDEN. How many audits in total have been done over the

length of the program?

Mr. FEASTER. Probably close to 200.

Mr. WALDEN. Okay. So a total of 200 audits over 6 years. Is that

pretty close?

Mr. FEASTER. I am sorry?

Mr. WALDEN. 200 audits over 6 years?

Mr. FEASTER. That is an estimate just off the top of my head.

Mr. WALDEN. And how many grants are issued each year?

Mr. FEASTER. There are over 30,000 beneficiaries.

Mr. WALDEN. Beneficiaries. Each year?

Mr. FEASTER. Each year.

Mr. WALDEN. It has been active for 6 years?

Mr. FEASTER. Yes, sir.

Mr. WALDEN. Is that pretty much an average, 30,000 a year over

6 years?

Mr. FEASTER. I think it has been increasing.

Mr. WALDEN. Okay. And we have looked at basically 200 of

those? Am I looking at this correctly?

Mr. FEASTER. That or less.

Mr. WALDEN. So less than 200.

Mr. FEASTER. Right. I don’t have the numbers in front of me.

Mr. WALDEN. Less than 200 beneficiaries have been audited over

6 years and there are roughly 30,000 beneficiaries.

Mr. FEASTER. Yes. A very limited program of audits.

Mr. WALDEN. And we have spent $8 billion out of this fund?

Mr. FEASTER. I thought the number was $13 billion.

Mr. WALDEN. I think that is how much has come in.

Mr. FEASTER. I don’t have those numbers. I am sorry.

Mr. WALDEN. But it is somewhere between $8 and $13 billion.

Mr. FEASTER. The annual rate is $2.5 billion.

Mr. WALDEN. The money that is collected comes from rate payers’ phone bills. Can you tell me the track that it goes on then? I

pay it, it goes to the phone company.

Mr. FEASTER. The phone company gives it to the FCC.

Mr. WALDEN. It goes to the FCC. Goes to the Universal Service

Fund.

Mr. FEASTER. And then the Universal Service Fund sends the

money out to the beneficiaries.

Mr. WALDEN. To the beneficiaries. Does it ever go through the

hands of the FCC? Does it ever come through the Congress?

Mr. FEASTER. No, sir.

Mr. WALDEN. And the USAC itself is made up of whom?

Mr. FEASTER. Private nonprofit company.

40

Mr. WALDEN. Comprised of?

Mr. FEASTER. People hired.

Mr. WALDEN. By who?

Mr. FEASTER. By USAC.

Mr. WALDEN. So the National Exchange Carrier Association? It

leaves the phone companies then?

Mr. FEASTER. They represent the phone companies but USAC is

private independent.

Mr. WALDEN. Right. I am trying to figure out who owns USAC. How do you become a USAC that gets $2.5 billion a year? That is

a pretty good deal and nobody looks at you.

Mr. FEASTER. I am not exactly sure, sir.

Mr. WALDEN. All right. Of your audits that you’ve done, what is

the percent of those that are noncompliant?

Mr. FEASTER. Of the 122, 32 percent are noncompliant.

Mr. WALDEN. And what does noncompliant mean?

Mr. FEASTER. There were substantial violations of Commission

rules involved.

Mr. WALDEN. And then there’s another group that has been noncompliant with procedures. Correct? Isn’t there a difference between procedures used and——

Mr. FEASTER. Right. If they are noncompliant with procedures,

we call those findings but they are non-cost recoverable.

Mr. WALDEN. And that is because the statute doesn’t allow

for——

Mr. FEASTER. That is because our General Counsel has said we

have to have a formal Commission rule to recover the funds related

to those violations.

Mr. WALDEN. And has anyone sought a formal Commission rule

to do that, to change that so we can recover it?

Mr. FEASTER. We have suggested that and I think the Bureau is

thinking about it. We have suggested that they codify the USAC

procedures in order to make them, in effect, rules and recoverable.

Mr. WALDEN. How much do you think is out there that could be

recoverable if the rules were changed by the FCC to allow recovery

of violation of the procedures?

Mr. FEASTER. Well, I don’t have the exact numbers but there

were findings. Even in the audit, the 122 we’ve audited, the ones

that were found generally compliant there were findings of violations of USAC procedures in those so I think there is a substantial

sum of money in addition to the ones that are recoverable under

the noncompliant ones.

Mr. WALDEN. And the amount of the noncompliant recoverable?

Mr. FEASTER. I don’t have that number in front of me.

Mr. WALDEN. Can you give me an estimate?

Mr. FEASTER. I would have to check on that number. I am not

trusting what I am seeing there.

Mr. WALDEN. Okay. Can you give me a ballpark number?

Mr. FEASTER. Well, I believe the recoverables under the noncompliant ones are $3 million so I think we are probably talking

substantially above that number. At least double that number.

Mr. WALDEN. Okay. That you could go after if the rules were

changed.

Mr. FEASTER. Yes, sir.

41

Mr. WALDEN. And then when it comes to auditing, how many

auditors do you really think you need to oversee this program effectively and what would the cost of that be?

Mr. FEASTER. To just do the E-Rate Program we estimate that we will need approximately $12 million to hire contractors to do

that and some additional staff on my staff to review the work of

contractors that would do about 240 audits.

Mr. WALDEN. Per year?

Mr. FEASTER. Per year. Yes, sir.

Mr. WALDEN. And you think that would be an adequate number

of audits?

Mr. FEASTER. That would give us a statistically valid sample of

the community that we could draw conclusions from to see how bad

the problem actually is.

Mr. WALDEN. Because what you are really finding now is at least

half of these beneficiaries are either not compliant with the rules

or the procedures. Right?

Mr. FEASTER. Yes, sir. Yes.

Mr. WALDEN. I mean, is this an astonishing finding?

Mr. FEASTER. To me it is. Yes, sir.

Mr. WALDEN. Do you find this anywhere else where you audit?

Mr. FEASTER. No.

Mr. WALDEN. How long has this been going on? Six years?

Mr. FEASTER. Six years.

Mr. WALDEN. Then I want to go to another point. I mean, I spent

a few years on a community bank audit board before I came here

on the Audit Committee. I asked this in the Ag Committee and the

IG there said, ‘‘Can’t audit the books of the Forest Service.’’ They

have eventually done that. I said, ‘‘Anybody held accountable for

the lack of ability to audit for how this thing is run?’’

What about here? Are people being held accountable when you

go in? I know in Puerto Rico, I guess, one of the gentlemen actually

has a free lunch program in a Florida prison now but what are you

finding? Are people who engage in these fraudulent acts being held

accountable? Are the people in the Government? I am a local government supporter with as few Federal strings as possible but this

is outrageous.

Mr. FEASTER. What we’ve seen so far other than the people that

have violated criminal statutes and being prosecuted by the U.S.

Attorney’s Office. There is very little holding the schools accountable for these actions. In many instances at least they have to be

turning a closed eye to what is going on.

Mr. WALDEN. So people aren’t getting reprimanded or fired or

their incompetence?

Mr. FEASTER. We have seen no indications of that. The Commission certainly doesn’t do it to the schools. I assume that our Chairman would hold the Bureau accountable if he didn’t think they

were doing a good job.

Mr. WALDEN. What would be the most important change we

could make to clean up this mess?

Mr. FEASTER. I think rather than one of a series of things that

we need to do. Strengthen the competitive bidding process.

Strengthen the certification process. Strengthen record keeping.

Rules to codify implementing procedures of the USAC. Increasing

42

the oversight of tech plans. That is a short list of things we need

to do.

Mr. WALDEN. Thank you. I appreciate the work you and your

folks have done, and the same for you, sir.

Mr. Chairman, I have to go chair another hearing. I will try to

get back for more of this. Thank you.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentleman from Massachusetts for 10 minutes for inquiry.

Mr. MARKEY. I thank the gentleman very much. Back in 1992 I

cast a vote for NAFTA and NAFTA was going to speed up the rate

at which American jobs would be churned. It was a very difficult

vote for me. In 1993 as Chairman of the Telecommunications Subcommittee when I was putting together the Telecommunications

Act, I built in a provision that called for discounted rates for

schools, for kids, that telephone companies would have to provide

as part of the Universal Service Fund. The bill was ultimately filibustered in the Senate in 1994. It died.

Then in 1995 and 1996 on the Senate side Senator Rockefeller

and Snowe did an excellent job of refining the idea and turning it

into this program. At the time what I did was I gave a name to

the program at the time. I called it the E-Rate or Education Rate.

That was the title I gave to it so that it would be a program that

dealt with the need that our country had if we were going to engage the global community to ensure that the kids in our country

had access to the skill set they would need in order to compete for

jobs in a global economy.

That would be technology based jobs. We were going to give up

the low-end jobs in order to compete for the high-end jobs. That

was the trade and that was how I saw the Telecommunications

Act. That is why I moved to make the discounted rates in there

and why the Senate ultimately framed it.

So the E-Rate is something that I am obviously very proud of.

As I am sitting here listening, Mr. Chairman, to what is going on,

I was thinking over the Boston Public Library the inscription is,

‘‘The education of its people is the best defense of a country.’’

Just think if in the Defense budget we purchased all the tanks,

all the planes, but we didn’t educate the people to use them but

we had all the hardware. What kind of defense would that be?

Well, the education of the people is the best defense for a country

so that was the thought here. Put it in every library. Put it in

every school. Give a discount, especially to the kids who are in the

poorer schools because the kids in the poorer schools are less likely

to have the computers at home. That was the whole idea. It would

be in the school. It would be the substitute. Wealth won’t be a barrier.

When I was a kid growing up you took your books home, you

competed with the school’s superintendent’s kid. If you don’t have

a computer at home, you had better have it in the classroom, and

you better have a teacher who knows how to use it and knows how

to train the kid. Then the kids can compete. That was the whole

idea. It was a simple idea in a world in which we were going to

have more and more information-based jobs. That was what it was

all about.

43

It was about the poorest kids because we really don’t have to

worry about the wealthiest kids because those kids already have—

they have already mastered nine different technologies by the time

they are 17 and it is on their resume as they apply to Ivy League

schools all across the country. That is not the problem.

It is the lower end kids who are just as smart but they just can’t

take the books home and compete any longer. They need the technology. That is why this is such a crime against the children. All

those companies and all those public officials who turned a blind

eye are turning a blind eye to the destruction of opportunities for

children to gain the skill set they would need in order to compete

in a global economy.

That is the real scandal here. That is the real scandal because

we had a deal. The Congress had a deal. The American people had

a deal. We will speed up trade but we will also speed up access to

the skill set for the families and the kids in those families who are

going to be most vulnerable. Just an absolute scandal that this has

happened.

So we obviously can’t allow this to continue any longer because

it just makes my blood boil that in one territory, one part of our

country $100 million can be taken from the children because there

is no substitute for it in those families for the most part and they

just don’t have an alternative. If it wasn’t going to be done in the

classroom, it wasn’t going to be done and it just dooms that whole

generation of kids to yet another cycle waiting for the next generation to be given the same opportunities. That is the real tragedy

of what we’re hearing.

Thank you both for the work you have done. I appreciate it. I

know you feel the same way and it means the world what you do.

Thank you, Mr. Chairman, for this hearing.

You only have three inspectors, Mr. Feaster? Is that what I

heard?

Mr. FEASTER. Yes, sir.

Mr. MARKEY. Three inspectors for the entire United States of

America?

Mr. FEASTER. And the Commonwealth of Puerto Rico.

Mr. MARKEY. And the Commonwealth of Puerto Rico. What percentage of the total fraud do you believe you have touched so far?

Are you at the tip of the iceberg? Have you hit the iceberg or the

tip of the iceberg?

Mr. FEASTER. At the very tip.

Mr. MARKEY. The very tip of the iceberg.

Mr. FEASTER. Everything we have looked at, every rock we turn

over we find stuff.

Mr. MARKEY. And do you find that it is the biggest companies as

well as the smallest contractors? Do you find it in all aspects of the

vending community?

Mr. FEASTER. Yes. As I mentioned in my earlier statement, NEC,

a very large contractor agreed to a payment of $20 million. One or

two-person scam units in New York were convicted also. A full

range of possibilities there.

Mr. MARKEY. How many inspectors do you need, Mr. Feaster?

44

Mr. FEASTER. In order to do 240 audits which would be a statistically valid sample, I need about $12 million and 3 or 4 additional

staff.

Mr. MARKEY. Well, I think that we on a bipartisan basis should

make sure that you get that money if for no other reason that you

would save us basically 99 cents on the dollar.

Mr. FEASTER. I will give you every dollar back in recoveries for

everything I spend.

Mr. MARKEY. No, I think you will give us back far more.

Mr. FEASTER. Yes, sir.

Mr. MARKEY. I think you would give us back 99 cents for every

cent we spend. That is my appealing. Just because there will be a

cop on the beat tapping the sidewalk letting people know there is

a much higher percentage that they are going to be—I hope somebody does jail time for this. I mean, I really do. I hope somebody

goes to prison. I really do. It just boils my blood. This is so much

bigger.

We don’t have a celebrity here. You know what the problem is?

The people we are talking about, the victims are some 7-year-old

kids some place so it is never going to make the front sections of

the newspapers. It is not going to be above the fold and collar of

some famous inside trading person. We are talking about $65,000

or $100,000 which just obsesses every single magazine. That is

nothing.

That is the tragedy of our system, that we don’t focus on this.

Inside traders steal children’s future. That is a scandal worth covering above the fold of the front page every single day and I know

it is not going to but it is true.

How many inspectors do you have, Mr. Saldan ̃ a?

Mr. SALDAN ̃ A. We have 435.

Mr. MARKEY. Inspectors?

Mr. SALDAN ̃ A. Auditors. Yes, sir.

Mr. MARKEY. Auditors. Yeah.

Mr. SALDAN ̃ A. But we have to cover the whole Commonwealth.

We have more than 2,400 units. But we don’t have enough funds

also.

Mr. MARKEY. You do not have enough funds. Now, is most of

this, do you think, in the phone bills? Are the phone bills a relatively small part of the scandal and the wiring and the rest of it

is where the real problem occurred?

Mr. FEASTER. It is the internal connections.

Mr. MARKEY. So two-thirds of the fund is pretty much the phone

bills so there may be some scamming on phone bills but for the

most part that is not where the real scandal is. It is over here with

all the work these contractors are doing. Uh?

Mr. FEASTER. Yes, sir. My staff reminds me we haven’t done

enough work to draw that conclusion yet.

Mr. MARKEY. The conclusion on the phone bills?

Mr. FEASTER. Yes. We are just not sure because we haven’t done

enough work.

Mr. MARKEY. So the phone bills themselves might be a scandal

but you just don’t know yet. That is just because you are limited

to three people?

Mr. FEASTER. Yes, sir.

45

Mr. MARKEY. That is unbelievable. That is unbelievable. So has

there ever been any evidence of phone scandals? Are there any

grand juries going on around the country on the phone bill issues

that you know of? You don’t know of any?

Mr. FEASTER. No.

Mr. MARKEY. Okay. How many grand juries are going on with regard to the other side of it, the wiring and all that contracting?

How many, to your knowledge, is going on?

Mr. FEASTER. There were 40 cases that were monitored. I think

there are two.

Mr. MARKEY. Two.

Mr. FEASTER. And there are some ongoing investigations that I

don’t think reached that grand jury stage.

Mr. MARKEY. And are there scandals the size of Puerto Rico out

there in the United States, the 50 states?

Mr. FEASTER. I don’t think so. I am not sure.

Mr. MARKEY. Not sure.

Mr. FEASTER. It is hard to tell how much of the funds are at risk

to draw that conclusion.

Mr. GREENWOOD. The time of the gentleman has expired.

Mr. MARKEY. Okay. I thank the gentleman.

Mr. GREENWOOD. The Chair thanks the gentleman and we will

do a brief second round. Just a couple points. The story was above

the fold, first page of USA Today last week so we are getting some

attention. We are getting some attention.

Mr. MARKEY. I mean everyday.

Mr. GREENWOOD. I understand.

Mr. MARKEY. A relatively small insider trading case can be——

Mr. GREENWOOD. That was her fault. That was her fault.

Mr. MARKEY. In terms of the news coverage it is just the proportionality.

Mr. GREENWOOD. I don’t disagree with the gentleman. I don’t disagree with the gentleman. I always thought Ed-Rate stood for Ed

Markey. I didn’t realize it was education. I am delighted to learn

that.

The $12 million that you have suggested, Mr. Feaster, according

to my calculations, will be .05 percent of the budget so it is a tiny

little portion. Our staff will do some work. I still think probably the

most efficient way to audit this thing is to have every program audited out of the funds at every school district. That way you get

100 percent instead of a statistically important. We may need to do

both.

Let me turn to Mr. Saldan ̃ a. Your testimony describes a number

of irregularities and failures in the bidding process. You note that

the Puerto Rico Department of Education has complied with your

recommendations. How are you going to ensure that the Department’s assertions are accurate?

Mr. SALDAN ̃ A. We are going to perform another audit the next

coming year. As soon as we have resources available we will be

there verifying everything they are doing.

Mr. GREENWOOD. Are you certain you are going to have the resources available to do that?

Mr. SALDAN ̃ A. At least we will try with the resources we already

have. We have that in our plan for the coming year. Yes, sir. We

46

will visit several schools on a random basis and verify it ourself

that everything should be the proper set up.

Mr. GREENWOOD. And what would be the consequences for the

school district if it failed to follow your recommendations?

Mr. SALDAN ̃ A. Well, we will be directly on the Education Department because they are the ones that are responsible for that. That

is what I was saying before is that you may consider establishing

some kind of a relation that whether funds are going to be assigned

for this program should be based on a quota and should be based

on applications directly by the different schools and those that comply with the requirements before.

They make the petition of funds to the Federal agency and they

should be verified and should be evaluated and given some kind of

rating. Those within that level should be considered for the application of funds but never in excess of a certain amount of percent of

the total needs. That way when they come next year, you can verify

that if they comply with the previous program, then you can assign.

Mr. GREENWOOD. That is way too sensible an approach for the

U.S. Government but it makes a lot of sense to me. What are you

able to say about the Department’s abilities, the Puerto Rican Department of Education’s ability to administer and plan for spending

E-Rate funds at present? Have they changed their capability?

Mr. SALDAN ̃ A. Yes, they are improving. We have regular meetings with the secretary and his staff. They have created some kind

of controls. They have established an audit committee that includes

persons from other agencies which is very commendable and we

recognize that. We will be very fine when we perform this next

year.

Mr. GREENWOOD. Okay. I don’t need the balance of my time.

Would the gentlelady from Colorado like another 5 minutes?

Ms. DEGETTE. Thank you, Mr. Chairman. Before I ask my questions, I would ask unanimous consent to submit Mr. Dingell’s opening statement for the record.

Mr. GREENWOOD. Without objection.

Ms. DEGETTE. Thank you. Mr. Saldan ̃ a, I had some questions for

you which I think would help us in figuring out how exactly this

abuse is occurring in other places as well as in Puerto Rico. You

noted that the audits of the PRDOE contract with the DRC revealed that counter to Federal and Commonwealth regulations, formal bid procurement procedures were not followed to award the

contract. Instead, PRDOE requested and evaluated proposals. Do

you know who was responsible for instituting those bid procedures?

Mr. SALDAN ̃ A. The secretary himself.

Ms. DEGETTE. The secretary. And were those procedures illegal?

Mr. SALDAN ̃ A. No. The procedures were properly established. The

fact is that they didn’t follow the established procedure.

Ms. DEGETTE. Oh, I see. They had procedures. And who was it

that didn’t follow the procedures?

Mr. SALDAN ̃ A. The secretary with a committee that he had designated for that purpose. All the agencies in the island had strict

regulations about the process and they have a board for adjudicating the different big processes. They didn’t comply with those requirements.

47

Ms. DEGETTE. Was that the fact they didn’t comply with the

process illegal?

Mr. SALDAN ̃ A. Yes, that is illegal.

Ms. DEGETTE. And other criminal prosecutions going on?

Mr. SALDAN ̃ A. Well, we have referred that to the Justice Department, to the Commonwealth Justice Department, and they are

awaiting that at this time. We also had referred that to the Federal

district attorneys there in Puerto Rico.

Ms. DEGETTE. And were any civil remedies pursued against

those individuals?

Mr. SALDAN ̃ A. They have those two options. Either criminal or

civil or both.

Ms. DEGETTE. Okay. Now, you testified that a physical inspection of 30 schools between October 11 and November 21, 2000,

yielded a number of disturbing discoveries. Among the deficiencies

you noted that a telecommunications infrastructure network installed in the schools was not used, that PRDOE had not acquired

the computers for the students, that the teachers had limited

knowledge on computer use, and that physical and electrical conditions in the schools did not have the capacity required for the communication and computer equipment. Right?

Mr. SALDAN ̃ A. Yes.

Ms. DEGETTE. Who was responsible for those failings?

Mr. SALDAN ̃ A. Well, the committee that should have evaluated all

that and to have the approval of the Office of Management and

Budget of the Commonwealth because they have a committee that

evaluates all the information technology proposals that they didn’t

follow those regulations.

Ms. DEGETTE. Do you have any evidence of—I mean, was this

just slip-shod management or was there actually monetary compensation under the table? Do we know why they did this?

Mr. SALDAN ̃ A. We don’t have that evidence at this time.

Ms. DEGETTE. Okay. So you don’t really know?

Mr. SALDAN ̃ A. If the Justice Department and the Commonwealth

had that, that is something I don’t know.

Ms. DEGETTE. Exactly. Okay. Now, your findings led you to say that PRDOE did not attain any benefit from the investment of $73

million, in internal connections and telecommunications and almost

300,000 in services from lines connected to the Internet of the

EDUNET network that corresponded to the amounts billed to the

contractors. Who is to blame for that misuse? That is almost $74

million.

Mr. SALDAN ̃ A. The management of the Department at that time

should be held accountable and obviously they have to establish a

claim to the contractors in that process also. That is something

that has to be evaluated in accordance with the contract that was

signed with those companies.

Ms. DEGETTE. How did you find out about these problems? How

did they come to your Department’s attention?

Mr. SALDAN ̃ A. Well, we go there. We have a schedule of audits

that we perform. We also receive complaints. We have a system

whereby any citizen or public employee may call our office and report any kind of condition. That may be like an improper situation

or fraud situation they can refer to us.

48

Ms. DEGETTE. And how did you find out about it in this case?

Mr. SALDAN ̃ A. In this case was regular audit that we have.

Ms. DEGETTE. I am sorry. What?

Mr. SALDAN ̃ A. Regular audit that we go there and then we start

making the evaluations of different aspects. We have issued several

reports that are indicated in this report that are related with other

matters that we reported that were not being followed in accordance with regulations also.

Ms. DEGETTE. And once you discovered these abuses during your

regular audit, did you then report that to the IG’s Office? Did they

get involved in this then?

Mr. SALDAN ̃ A. At some time they attained the information from

us. We sent them the information.

Ms. DEGETTE. Mr. Feaster, I want to ask you of the number of

investigations that you conduct, how many of them occur as the result and alert a local official or someone like Mr. Saldan ̃a’s office

contacting you with this information?

Mr. FEASTER. It is a wide range of inputs. Concerned citizens,

service providers who didn’t get contracts, local officials, U.S. officials.

Ms. DEGETTE. Would you say the bulk of your investigations

occur because of complaints from all this variety of groups or are

they because of regular audits like Mr. Saldan ̃ a’s Department was

conducting?

Mr. FEASTER. I would say about 50/50.

Ms. DEGETTE. Would it help you to do independent audits if you

had the additional staff?

Mr. FEASTER. Yes. I wouldn’t want to be totally dependent upon

outside sources or a hotline or things like that.

Ms. DEGETTE. All right. Thank you.

Thank you, Mr. Chairman.

Mr. GREENWOOD. The Chair thanks the gentlelady. Did the gentleman from Texas want to question the second round? Okay. In

that case, Mr. Feaster, Mr. Saldan ̃a, thank you very much for your

help this morning. We appreciate it. You are excused.

Mr. FEASTER. Thank you.

Mr. GREENWOOD. The Chair would call forward our second panel

consisting of the Honorable Cesar A. Rey, Ph.D., Secretary of the

Department of Education for the Commonwealth of Puerto Rico

who is accompanied by Mr. Carlos Vidal Arbona, Chief Technology

Officer at the Puerto Rico Department of Education, and by Mr.

Adonay Ramirez, ARJ Professional and Consulting Service, Inc.

Also Ms. Cristina Lambert, President and Chief Executive Officer

of the Puerto Rico Telephone Company, accompanied by Arnaldo

Diaz, Strategic Business Officer, Enterprise Services, and Mr.

Santos Diaz, President of Data Research Corporation.

Good morning to you all and welcome. We thank you for being

here. I think all of you were here when I advised the previous

panel that pursuant to the custom of this committee we take our

testimony under oath and so I need to ask if any of the witnesses

today object to providing your testimony under oath? Seeing no

such objection, I will also advise you that pursuant to the rules of

this committee and the House, you are entitled to be represented

49

by counsel. Do any of the witnesses wish to be represented by counsel this morning?

Ms. LAMBERT. My counsel is here. If he can participate, that

would be fine.

Mr. GREENWOOD. Well, he may or may not participate but if he

is representing you, then you need to identify him by name, please.

Ms. LAMBERT. Jim Slattery.

Mr. GREENWOOD. Jim Slattery. We have heard of him and we

know who he is. Anyone else wish to be represented by counsel?

Mr. Diaz, do you?

Mr. SANTOS DIAZ. Yes. Good morning. My name is Santos Diaz.

I also have with me Mr. John Nevares who is my legal counsel.

Mr. GREENWOOD. Okay. Welcome to you as well, sir.

Mr. REY. My legal adviser is here.

Mr. GREENWOOD. Your legal adviser is here. And his name is?

Mr. REY. Adonay Ramirez Jimenez.

Mr. GREENWOOD. Welcome. Thank you, sir.

Okay. If the witnesses would then stand and raise your right

hand, please.

[Witnesses sworn.]

Mr. GREENWOOD. You are under oath and we will begin, I believe, with Mr. Rey. Welcome, sir, and you are recognized to give

your opening statement.

TESTIMONY OF HON. CESAR A. REY, SECRETARY, DEPARTMENT OF EDUCATION, COMMONWEALTH OF PUERTO RICO;

ACCOMPANIED BY CARLOS VIDAL ARBONA, CHIEF TECHNOLOGY OFFICER, PUERTO RICO DEPARTMENT OF EDUCATION; AND ADONAY RAMIREZ, ARJ PROFESSIONAL AND

CONSULTING SERVICE, INC.; CRISTINA LAMBERT, PRESIDENT AND CHIEF EXECUTIVE OFFICER, PUERTO RICO TELEPHONE COMPANY; ACCOMPANIED BY ARNALDO DIAZ, STRATEGIC BUSINESS OFFICER, ENTERPRISE SERVICES; AND

SANTOS DIAZ, PRESIDENT, DATA RESEARCH CORPORATION

Mr. REY. Good morning, Mr. Chairman. I am very proud and

very honored to be here.

Mr. GREENWOOD. Let me just suggest you pull a microphone a

little closer to you. They are very directional and speak directly

into it.

Mr. REY. Is this better?

Mr. GREENWOOD. That is better. Thank you.

Mr. REY. Again, my name is Cesar Hernandez. I am a Sociologist

and the Secretary of education for the Commonwealth of Puerto

Rico since January 7, 2001. This is the first time that I hold a public office. I have been a Dean of Academic Affairs and this is my

first time with this type of experience. Prior to accepting this responsibility, I dedicated all my life to research and to higher education in Puerto Rico.

We proudly accepted the invitation of this subcommittee to share

with you some of our experiences in the ongoing efforts to provide

the school children of Puerto Rico with advanced telecommunication services, as well as to incorporate Puerto Rico to the E-Rate

Program. I submitted a written presentation with an attachment

50

consistent of the sequence of relevant events related to our Department and the university.

Previously we submitted to this committee’s professional staff

our petition on January 30, 2003, to the Federal Communications

Commission, FCC, plus exhibits which we request that it also be

become part of the public record of these hearings.

The public school system of Puerto Rico is one of the largest

under the jurisdiction of the United States. We have more than

610,000 students attending 1,540 schools scattered over an area of

3,500 square miles. Our Department has close to 80,000 employees

who are represented by four different labor unions and has a yearly

budget of approximately $3 billion, the largest in the Commonwealth.

You are aware that all Puerto Ricans with business, residential,

or several telephones contribute daily to the Universal Fund, also

commonly known as the E-Rate Fund. Puerto Ricans have continued to pay into the fund even though our Department has received

no funds at all from the FCC since the year 2000.

Under my administration our Department is committed to developing a state-of-the-art, efficient island-wide network to provide a

uniform communications and Internet service covering all municipalities in the main island of Puerto Rico and the two adjacent island-municipalities, Vieques and Culebra, with or with E-Rate assistance. This is the program that we inherited upon taking office

in July 2001.

Network design. We did not find any document with the design

of the network nor documentation regarding how it was going to

be developed, data volumes, cost estimates, management systems

and support. Simple observation showed an awkward structure

with one half of the schools fitted with a wireless system connected

to the supplier’s facilities, and the other half with a wired—terrestrial—system serviced by a different supplier connected to the Department’s central offices in San Juan. The two systems did not

interface.

Infrastructure at PRDE central offices. The server and communications infrastructure at the Department’s central offices was totally inappropriate.

Computer purchases. A bid to purchase about 100,000 computers

had been conducted by the previous administration, before 2001, of

course. This bid was successfully protested in court by some vendors and the bid was canceled with IBM among others.

Status of the project. Of the 1,500 schools in the system, only a

handful—less than 10—were regularly connecting to the Internet.

The project was simply not operating.

We hired a private consultant who made a preliminary evaluation with a sample of 100 schools. We discovered that, first, more

than 50 percent of the communications lines were out of service,

not activated nor installed. Second, communications equipment was

installed in inappropriate areas that were too small, too hot, or got

wet when it rained. Third, central office infrastructure necessary to

support the network was not appropriate. Fourth, no prior evaluation of vendor performance was found.

Between the summer of 2001 and the summer of 2003 we took

a series of steps in an attempt to rescue the inherited project with

51

a three-prong approach, on the school side, in the middle, and the

Department’s central offices. We adopted a turnkey approach for

technology acquisition which proved to be successful. This includes

hardware, software, communications, electricity, security and furniture—when applicable. We developed the standard for uniformity

in laboratory acquisitions and developed two types of laboratories:

mobile and fixed.

Mobile laboratories consist of a cart with 26 printers and a server with very low electrical requirements. They can be moved to any

room during academic hours and when not in use can be stored in

a secure place. The fixed laboratories have 26 desktop computers,

two printers and a server. Since 2001 we have installed more than

340 labs at the investment of $28.5 million in Commonwealth

funds.

We performed a survey to identify training needs among teachers. Questionnaires were distributed to 46,000 teachers and we received 44,000 responses which represents 95 percent which is extremely high, 95 percent response rate. Some of the findings were:

First, 75 percent of the teachers indicated little knowledge about

computers. Second, 84 percent admitted very little knowledge about

software packages like Word, PowerPoint, and Excel. Third, 83 percent indicated that they used computers in their classes very few

times, among other findings.

Obviously, the training efforts conducted in the past have not

been effective. As a result, we designed and implemented a training program tailored to these specific needs and oriented toward

deliverables or products usually needed by the teacher to do his/her

job. We started the trainings during the summer of 2001 and

through March 2004 have had 48,000 enrollments. As a result, our

teachers have been trained and supervised to use computers as a

classroom tool.

An aggressive school repair project was implemented to upgrade infrastructure and more than $80 million were spent during the

first 2 years repairing physical and electrical facilities of the 1,000

schools. Upon discontinuation of terrestrial services on June 30,

2003, we connected approximately 400 schools via dial-up telephony. Conscious that this is not a final solution we proceeded to

identify available offerings and evaluated alternative technical solutions.

In November 2003 we decided to discard terrestrial connections

and ultimately chose a satellite broadband connection as a cost effective and efficient solution—$12.4 million per year versus $36

million per year for the former solution.

Let us now talk about our experience with the FCC and USAC.

During the calendar year 2000 at the request of FCC and USAC

Arthur Andersen conducted an independent review of 17 beneficiaries of the USAC support mechanism financed by E-Rate funds

for the first funding year, 1998-1999. Our Department was one of

the beneficiaries subject of the review.

The Andersen auditors visited Puerto Rico in August 2000 prior

to the general elections of that year. Andersen’s report to USAC

was not issued until October 17, 2001, that is, more than a year

after their site visit to Puerto Rico. The only finding of this audit

that was adverse to PRDE relates to the absence of desktop comVerDate 11-MAY-2000 11:23 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6602 95443.TXT HCOM1 PsN: HCOM1
52

puters in any of the classrooms of the only two schools visited out

of the total 1,540 schools in the system.

Based upon this finding concerning year 1, USAC wrote a letter

to PRDOE dated December 5, 2001, citing the Andersen finding in

the context of being ‘‘very concerned’’ and demanded that our Department provide additional information concerning our ability to

use schools and libraries support mechanism funding before USAC

will commit any additional funding. That was 2001. Thus, Puerto

Rico was effectively cutoff from the E-Rate Funds Program before

allowing our Department to reach to the Andersen report.

We immediately responded and explicitly addressed each and

every one of the issues raised in the December 5, 2001, letter, both

in writing and through a personal presentation to FCC/USAC,

where our compliance with their requests were amply documented.

this presentation occurred on January 15, 2002, followed by my letter of January 23, 2002, to Mr. George McDonald, USAC Vice

President for the Schools and Libraries Division.

This letter and its exhibits, as well as subsequent submissions to

FCC/USAC provide the detailed information about acquisition of

computers, lists of schools where equipment had been installed,

specific information about our investments in the project, information on teacher’s training and not just evaluations, but detailed reports on significant infrastructure repairs and upgrades. To date,

USAC has never responded in writing to our letter of January 23,

2002.

As a matter of fact, neither the FCC nor USAC ever provided our

Department with any procedural guidelines, a timetable nor any

specific steps that we could have or should have taken to immediately regain access to the R-Rate Program. The information and

documents provided in our January 23, 2002 letter were supplemented during personal visits of high-ranking delegations of the

PRDOE to FCC/USAC on April 26 and October 1, 2002.

During these visits, USAC personnel made general comments

complimenting our efforts, but did not produce any official pronouncement regarding the process by which FCC/USAC was evaluating our Department’s ability to use the schools and libraries support mechanism, nor when would a decision be rendered.

On September 27, 2002, I formally demanded in writing from

USAC the immediate availability of funding for years 4 and 5. I

personally hand delivered said letter to Attorney Jane Mago, then

General Counsel to the FCC during a meeting of October 1, 2002.

To date, the letter as well remains unanswered.

Another 3 months elapsed without any action on the part of

FCC/USAC. Again, at our request, on January 23, 2003, another

delegation of the PRDE visited both USAC and the FCC. At that

meeting, Attorney Mago, who was still the General counsel for

FCC, requested that we submit yet another request in writing to

the FCC fully documented. She promised that upon receipt of such

document by the FCC she would see to it that a decision would be

made by the FCC within 10 days. We again complied and filed on

January 30, 2003, a seven-page letter with 12 exhibits to which I

made reference at the beginning of this presentation.

Several months again passed without any response and, again,

at our insistence another meeting with FCC/USAC was scheduled

53

for late May 2003. A few days earlier, on May 16, 2003, the FCC

issued a public notice requesting any interested parties to submit

comments on our January 30 letter. All comments received by the

FCC supported our Department’s petition. Again, nothing happened throughout the summer of 2003.

In August 2003 we decided to approach the Energy and Commerce Committee of the U.S. House of Representatives in an effort

to obtain support for our requests for the release of the funding.

Following that meeting, we later received in Puerto Rico the visit

of several staff member of this committee.

In November 2003 at the request and insistence of the PRDE, a

delegation from our Department accompanied by Puerto Rico Resident Commissioner, the Honorable Anibal Acevedo Vila, visited the

FCC and met with Commissioners Kevin J. Martin and Michael

Copps, and with senior legal advisors to the other three Commissioners, to again insist on a resolution.

Finally, on November 23, 2003, the FCC issued a resolution and

order (FCC-03-294) instructing the USAC to process the Puerto

Rico Department of Education’s application for E-Rate funding for

years 4, 5, and 6, subject to prior completion of an external audit.

Almost 6 months later, on April 28, 2004, USAC formally advised

the PRDE that it had retained the services of KPMG, LLP to perform the audit, which finally commenced on May 24, 2004.

In summary, our Department has made aggregate investments

beyond $300 million of non-E-Rate funds and has been working

very hard to take necessary corrective action to offer our students

a project that works without the support of the FCC and USAC.

The recovery plan we have undertaken has produced tangible results and benefits for the students and teachers of Puerto Rico.

However, with E-Rate funding we can do much more.

Conclusion. In the past our Department has been bogged down

by unending litigation and vendor-driven development plans. As a

result we inherited an alarmingly expensive, over-engineered system that did not work.

Recommendations. Whatever agency of the U.S. Government is

ultimately entrusted with administering the E-Rate Program must

ensure that the service recipient certifies invoices and services received prior to disbursing payments to the vendors. Second, the ERate support mechanism should allow districts to acquire with ERate funds service validation software to corroborate services and

facilitate invoice certification.

Third, the agency administering the E-Rate fund should have a

technical advisory team available for school districts to consult

openly on technical matters or doubtful supplier practices.

Fourth, current policy does not allow the use of the network for

administrative purposes. This forces schools to acquire and sustain

a second network, or to engage in complex procedures to account

for a network utilization between academic and administrative

tasks. Administrative use of the E-Rate funded network by schools

should be allowed given that schools increasingly are required to

collect data to comply with existing Federal laws and programs

such as No Child Left Behind, Carl D. Perkins, Special Education,

and other programs.

54

Fifth, if access to the Internet for educational purposes is the primary object of the Universal Fund, then a government agency more

knowledgeable of the process of education and more sensitive to the

needs of the school system should be in charge of administering the

distribution of the funds. For example, the U.S. Department of

Education which, by the way, would also be far less involved with

the priorities and aspirations of the telecommunications companies.

We commend this committee’s initiative to take a hard look at

the E-Rate Program and it will support any congressional action to

restructure the E-Rate Program so that it better serves its intended educational purposes. On behalf of the more than 600,000

students in Puerto Rico, we encourage you to do so. Thank you very

much.

[The prepared statement of Cesar Rey follows:]

PREPARED STATEMENT OF CE ́SAR A. REY HERNA ́ NDEZ, SECRETARY, DEPARTMENT OF

EDUCATION, COMMONWEALTH OF PUERTO RICO

Good Morning Mr. Chairman and members of the Subcommittee on Oversight and

Investigations of the Energy and Commerce Committee of the U.S. House of Representatives. My name is Ce ́sar Augusto Rey Herna ́ndez. I am a Sociologist and the

Secretary of Education for the Commonwealth of Puerto Rico. I have been the Secretary of Education since January 7, 2001 when I was appointed by a new government administration elected on November 7th 2000. This is the first time that I

hold a public office. Prior to accepting this responsibility, I dedicated my whole life

to higher education and to the Academia, at the Universidad del Sagrado Corazo ́n

in San Juan, and other institutions.

Perhaps you are aware that the public school system of the Commonwealth of

Puerto Rico is one of the largest under the jurisdiction of the United States, with

more than 610,000 students attending 1540 schools scattered over an area of 3,500

square miles. The Puerto Rico Department of Education (PRDE) has close to 80

thousand employees who are represented by 4 different labor organizations, and has

a yearly budget of approximately $3 billion. Every year, close to 30,000 young men

and women graduate from our public school system. These students need to be capable of mastering the tools of the information age. We cannot allow them to lag behind in the digital arena because their socioeconomic profile may have limited their

access to computing devices and the Internet.

As you know, Puerto Ricans with business, residential, or cellular telephones contribute daily to the Universal Fund administered by the Federal Communications

Commission (FCC) through the Universal Service Administrative Company (USAC).

Puerto Ricans have continued to pay into the Universal Fund even when Puerto

Rico has received no funding at all from the FCC/USAC since 2000, despite the fact

that since early 2002 we documented to the FCC/USAC the measures taken to overcome the shortcomings and deficiencies of the technology project inherited from the

past. My administration and the team of people that have worked with me from day

one have invested their best efforts to produce a lasting contribution in all areas

of the educational endeavor, including the development of an effective and useful

technology program.

Our Department is committed to developing a state-of-the-art, efficient islandwide network to provide a uniform communications and Internet service to about

1540 public schoo1s in Puerto Rico, covering all municipalities in the main island

of Puerto Rico and two adjacent island-municipalities, Vieques and Culebra, with or

without E-Rate assistance.

We have proudly accepted the invitation of this Subcommittee on Oversight and

Investigations to share with you some of our experiences in the ongoing effort to

provide our schoolchildren with advanced telecommunications services as well as

our efforts to reincorporate Puerto Rico into the E-Rate program.

BACKGROUND

The technological project to connect the Puerto Rico public school system to the

Internet with E-Rate funds started in 1998-99 (year 1) with 760 schools, when ERate funds were provided by FCC/USAC for communication lines, communications

equipment and internal connections. In 1999-00 (year 2) funds were provided for

communication lines, communications equipment and internal connections for 780

55

additional schools, including two servers for each of those schools, for a total of 1560

servers. In 2000-01 (year 3) funds were approved for about 100 additional schools

not completed in previous phases, and 4600 additional servers. For 2001-02 (year

4, first year under our administration) PRDE applied for completing the installation

of communication facilities for about 200 schools pending from previous years.

One of the first challenges we faced upon taking office was filing the E-Rate funding application (form 471) for year 4 (July 2001 thru June 2002), which was due

on January 18, 2001. We only had ten calendar days to file the application. The previous administration had filed Form 470 in late 2000 and had received and evaluated the corresponding vendor proposals, based on their technology project.

Due to the short period of time available to review proposals, much less to evaluate the project as a whole, we used the following criteria to file the application:

• We should seek to complete tasks already started; • Provide maintenance to the already installed equipment; • Pay rent for communication lines already installed; • Seek E-Rate discounts for internal connections and internet access already contracted.

We avoided initiating new tasks or attempting to change the technological approaches of the project until the pending tasks were completed, the entire project

was evaluated, tests were performed and the real status and effectiveness of the

program was determined.

Preliminary evaluation

Early in 2001 we realized that evaluating the inherited project in detail was going

to require a long time, due among other reasons, to its huge magnitude and its overengineered design. Therefore, we decided to divide the process in two parts: a preliminary evaluation and a detailed evaluation. The preliminary evaluation produced

the following findings:

1. Network design. We did not find any document with the design of the network

nor documentation regarding how it was going to be developed, data volumes,

cost estimates, management systems and support. Simple observation showed

a rather awkward structure with one half of the schools fitted with a wireless

system connected to the supplier’s facilities, and the other half with a wired

(terrestrial) system serviced by a different supplier connected to the Department’s central offices in San Juan. The two systems did not interface.

2. Management. No established procedures to manage network security, installing

new versions of programs, troubleshooting or updating drivers or similar network management tasks were found. Neither were the tools and people to be

used for this work identified. Properly managing the network is very important,

both because of the number of schools relying on it and because of its wide geographical extension. It is impossible to provide reasonable service turnaround

if technicians have to travel to each school in order to fix problems or provide

support. On the other hand, the capacity of the servers was too low to implement centralized management and support functions.

3. Electrical and security infrastructure. Many schools had electrical deficiencies and security problems. In others, electricity was not enough to properly

power computers and many did not have security bars to protect the equipment

from theft, abuse or vandalism.

4. Infrastructure at PRDE central offices. The server and communications infrastructure at the Department’s central offices was totally inappropriate. We

inherited a jumbled mishmash of cables strung in a haphazard manner without

any systematic organization or observance of industry standards for servicing.

The PRDE internal local area network (LAN) needed to be completely rebuilt

so as to provide the maintenance and remote support services essential to properly use the school network

5. Multiyear contracts and procurement process. One of the contracts inherited from the previous administration for Internet service for year 3 (2000-2001)

was amended in December of 2000 to extend its term until 2004. Besides, local

bidding procedures did not appear to have been followed when choosing suppliers.

6. Computer Purchases. A bid to purchase about 100,000 computers had been

conducted by the previous administration. This bid was successfully protested

by some vendors. The final ruling issued by the Puerto Rico Court of Appeals

notified on March 2001 upheld the protest, and the bid was cancelled.

7. Status of the project. The condition of each school regarding internal cabling,

communication lines, servers, physical facilities and electricity was unknown.

No reliable documentation was available regarding the status of the project in

each school and overall. Of the 1540 schools in the system, only a handful (less

56

than 10) were regularly connecting to the Internet. The project was simply not

operating.

ACTION STEPS

Main Strategies

After the preliminary evaluation in early 2001, and pending further analysis, we

attempted to rescue the inherited project with a three pronged approach:

• On the school side. Provide computers to schools by developing computer laboratories; design and implement a teacher training program; implement a school

repair program; design and implement a program to begin using technology in

the classroom. Allocate funds for computer software. • At the center. Requested a detailed evaluation of the network from an independent, private consultant. Design and test a methodology to provide administration and support to the network. Review of the legal, regulatory and financial

aspects of the project vis-a`-vis E-Rate funding.

• At the central office side. Design and implement a new LAN infrastructure,

and a new server infrastructure for the central office buildings. Establish a

Help Desk unit to provide support to regional offices and schools.

By following this approach we attacked the project’s deficiencies in an integrated

way, taking all important aspects into consideration, not just the installation of computer and communications equipment. Also, this approach allowed us to pilot test

several additional technology projects which were necessary complements to the

school network project.

Detailed evaluation

We decided to carry out a more thorough evaluation, which included visiting

schools and performing communication tests. In order to execute the evaluation we

contracted a private consultant. On July 2001 the consultant was hired and the

evaluation process commenced.

In September 2001, the consultant presented his report on the status of the school

network. Some of the salient findings were:

1. More than 50% of the communication lines from a sample of 100 schools were

not installed, were not activated or were out of service.

2. Servers and communication equipment were installed in inappropriate areas that

were too small or got wet when it rained. Electrical installations for servers and

communications equipment were not adequate or did not exist.

3. Central office infrastructure necessary to support the network was not appropriate.

4. No project plans were prepared, nor was any evaluation of vendor performance

done.

5. No Requests for Proposals had been prepared to guide vendors in submitting proposals.

6. Multiyear contracts were signed during the last days of the previous administration, without documented justification.

7. Ineffective technical trainings were provided (i.e.: 12 weeks in a row of continuous

Microsoft trainings to non-technical people).

8. Many school directors did not know about the project, therefore their commitment

level with the project was very low or inexistent.

Based on these findings we stepped up our efforts to demand accountability from

the existing vendors through a series of measures, including weekly meetings. We

also decided to extend the detailed tests to the remaining 1400 schools. The Office

of Management and Budget of the Commonwealth government cooperated by providing us with resources to perform these tests in a short period of time.

When we started the evaluation not more than 9 schools out of 1540 were effectively connected to the Internet.

We designed a methodology to provide administration and support to the

school network

An approach to manage servers and workstations from PRDE central offices using

Microsoft Active Directory was designed and tested. Test results supported the implementation of this method. Many administrative tasks such as software distribution, configuration, problem troubleshooting and security implementation could now

be performed remotely. Travel time to provide these services to schools could be recovered and used towards additional service requests. The current network management tools based on a simpler design requiring no network support functions from

staff at the school level, is less people dependent, has lower operational costs and

makes uniform administration less complex.

57

Provide computers to schools

We adopted a fully ‘‘turnkey’’ solution approach for technology acquisition which

has proved to be consistently successful. This includes hardware, software, communications, electricity, security and furniture (when applicable). This approach has

set the standard for uniformity in laboratory acquisitions.

Two different types of school laboratories were designed: mobile and fixed. Mobile

laboratories consist of a cart with 26 laptops, a printer and a server. The cart has

very low electrical requirements. It can be moved to any room during academic

hours and, when not in use can be stored in a secure place. The fixed ones have

26 desktop computers, two printers and a server. They also include all electrical requirements, as well as air conditioning and security bars (for windows and doors).

Both types of laboratories also include complementary audiovisual equipment for

the purpose of leveraging and extending the educational potential of the computers

that make up the laboratory.

The choice of equipment is made individually by each school in accordance with

guidelines developed by the Office of Information Systems. The choice takes into

consideration the condition of the electrical infrastructure, the security exposure of

the school and the suitability of classrooms to be dedicated as laboratories. Three

bids have been successfully conducted since 2001 for mobile and fixed laboratories. We have already installed 343 of these laboratories, an investment of $28.5 million in Commonwealth funds.

Vendors have been required to provide the electrical and security infrastructure,

together with the necessary hardware, software and communications products. Vendors were also required to connect the laboratories to the school (E-Rate funded)

network. As you can see, in this way we have not only been taking care of the need

for computers, but also the electrical and the security requirements to reduce outage

or system unavailability.

Train teachers in the use of technology

A basic premise in adopting the use of technology is that the obstacles to widespread use must be understood prior to committing large investments. The prior administration’s efforts to promote computer use by distributing 37,000 laptops to

teachers only achieved instant gratification as demonstrated by a teacher survey of

literacy levels administered in 2001. We performed a survey to identify training

needs among school teachers. Questionnaires were distributed to 46,311 teachers.

We received 44,311 responses, which represents a 95.7% response rate. Some of the

findings were:

1. 75% indicated their knowledge about computers was low.

2. 84% indicated their knowledge about software packages like Word, Power Point

and Excel was very low.

3. 83% indicated their use of computers in administrative tasks was very low.

4. 80% indicated they used computers in their classes very few times.

5. 82% indicated their use of computers to produce materials for their classes was

very little.

6. 79% indicated they do not use computers regularly to search for supporting material (Internet, encyclopedias, dictionaries).

7. 83% indicated their use of the computer in an integrated way in the classroom

is very little.

8. 78% indicated they do not consider the computer a tool for their professional development.

The training efforts conducted in the past apparently were not effective. As a result, we designed and implemented a training program tailored to these specific

needs and oriented towards deliverables or products usually needed by the teacher

to do his/her job. We started the trainings during the summer of 2001 and through

March of 2004 have had 48,627 enrollments.

Initiate academic projects using computers

In order to obtain optimal educational benefit from the use of computers it is not

enough to install computers in schools and to train teachers. We have to integrate

their use to specific academic projects. Initially we began to apply this principle

through a project ca1Ied ‘‘Escuelas de Iniciativa’’. In it, teachers were trained, coordinated and supervised to use computers as a classroom tool. This was a complete

academic project that included training, support from expert professionals and assessment. Subsequently we developed a network of centers ‘‘CITEDs’’ (Centros de

Innovacio ́n Tecnolo ́gica para la Docencia) staffed with a teacher who is a Specialist

in Educational Technology and whose main mission is to train teachers in the use

of technology in the classroom. Specialists are available in more than 60 CITEDs

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around the island to assist a particular teacher with a project or a group of teachers

requiring training.

Implement a school repair project

A school repair project was implemented in order to prepare schools for the August 2002 semester (‘‘Proyecto 1000’’). More than $80 million were spent repairing

physical and electrical facilities in that project alone. Other projects to repair electrical facilities and install window bars were financed with non E/Rate funds.

Allocate funds for computer software

The previous administration signed a $25 million dollar four-year agreement with

Microsoft to acquire 60,000 license sets of several software packages that included

the Windows operating system, the Microsoft Office Productivity Suite, Encarta,

Atlas, and Publisher. The contract included training and consulting services. Teacher training offerings included basic, intermediate and advance usage of the Microsoft tools, graphic software for education material development and Internet integration into to the curriculum.

Additionally, most technology integration projects implemented since 2001 provided funds for purchasing content software to be used by students and teachers.

Improve central office infrastructure

When we analyzed the computer and communications infrastructure at PRDE’s

central office, we realized that it was far away from the infrastructure required to

support the academic and administrative projects being conducted. The cabling had

been installed by non-qualified personnel, without being certified nor following any

industry standards. Almost daily a segment of the network was down. The capacity

of the servers was too low and system response time was measured in minutes instead of seconds. A varied assortment of communications devices were used (hubs,

switches, bridges) causing data traffic bottlenecks and a generally unreliable network. A $1.2 million project to redesign and install a standards compliant network

was carried out with Commonwealth funds and now provides reliable service to the

central and regional offices. To complete the infrastructure upgrade a server farm

project totaling $1.9 million was installed in replacement of a mainframe system,

to house academic as well as administrative support systems serving the Department and its schools.

Help Desk support

Between 2001 and 2004 we have recruited 48 persons to staff and improve Help

Desk services. They have been trained to certify laboratory installations and also

to provide technical support to stand alone PCs. Thirteen of these technicians serve

the Central offices, while thirty five serve the regional offices and schools.

Project Reconceptualization

Upon the discontinuation of terrestrial services on June 30, 2003, we proceeded

to connect as many schools as we could—400 to be exact—via dial up telephony.

Conscious that this is not a final solution on which to operate an educational technology program we proceeded to identify available offerings in the marketplace and

evaluated during five months alternative technical solutions. We decided to discard

terrestrial connections and ultimately decided upon satellite broadband connections

as a cost effective and efficient solution ($12.4 million per year vs. $36 million per

year).

INTERACTION WITH FCC/USAC

Up to now we have been outlining the efforts made by our administration to provide the public school system of Puerto Rico with a reliable and useful wide area

computer network to serve both the academic and administrative functions of the

Department of Education. The network will also allow our teachers and students to

be connected to and learn to benefit from access to the world wide web, commonly

known as the ‘‘Internet’’. You have also noted that all of these efforts have been undertaken during a period when Puerto Rico has been cut off from the E-Rate Funding Program entirely. It is now appropriate to inform this Committee on the experience our Department has had with the agencies of the U.S. Government entrusted

with administering and distributing the Universal Service Fund; that is, the Federal

Communications Commission (FCC) and the Universal Service Administrative Company (USAC).

During the calendar year 2000, at the request of FCC/USAC Arthur Andersen,

LLP was hired to conduct an independent review of 17 beneficiaries of the USAC

support mechanism financed by E-Rate Funds for the first funding year (98-99). The

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Puerto Rico Department of Education (PRDE) was one of the beneficiaries subject

of the review.

The Andersen auditors visited Puerto Rico between August 23 and September 1,

2000. They inspected the Central Data Center of the PRDOE and physically verified

that the equipment funded by the E-Rate Program existed and had been installed

for the purpose of supporting Internet connectivity for 780 Schools which then had

T-1 lines. They also verified that teachers had been provided with laptop computers

which enable them to access the Internet.

Andersen’s report to USAC was not issued until October 17, 2001, that is, more than a year after their site visit to Puerto Rico. The only finding of this audit that

was adverse to PRDE relates to the absence of desktop computers in any of the

classrooms of the only two (2) schools visited out of the total 1,540 schools in the

system.

Based upon this finding concerning Year 1, USAC wrote a letter to PRDOE dated

December 5, 2001 citing the Andersen finding in the context of being ‘‘very concerned’’ and demanded that our Department ‘‘must provide additional information

concerning its ability to use Schools and Libraries Support Mechanism funding’’.

Specifically, we were requested to produce ‘‘before USAC will commit any additional

funding’’ the following:

1. Detailed information about the acquisition of computers to make use of the connections.

2. A list of the schools where equipment had been installed.

3. Specific information about PRDE’s investments in productivity and curriculum

software.

4. The PRDE progress in delivering professional development (teacher training).

5. PRDE’s evaluation of any necessary upgrades to the electrical systems in the

schools.

The letter concluded that USAC would not commit nor disburse any additional

funding to Puerto Rico (irrespective of the program year) until it had received and

evaluated our Department’s response to the above letter, which was received in my

office during the last few days of 2001, between Christmas and New Years Day.

Of course, by then we already had the benefit of the report of our independent

consultant which had been rendered in September, 2001 and had spent long months

and substantial resources in evaluating and working to rescue the program. By then

we were also well aware of the magnitude of the problem that we had inherited

which did not necessarily become apparent from the Andersen findings. Long before

then we had already started to implement corrective measures based on the recovery strategy we designed. But, the fact remains that FCC/USAC, without first allowing PRDE to react to the Andersen report, had effectively cut-off Puerto Rico from

the E-Rate Funds Program.

We immediately responded and explicitly addressed each and every one of the

issues raised in the December 5, 2001 letter, both in writing and through a personal

presentation to FCC/USAC, where our compliance with their requests were amply

documented. This presentation occurred on January 15, 2002, followed by my

letter of January 23, 2002 to Mr. George McDonald, USAC Vice President for the

Schools and Libraries Division. This letter and its exhibits, as well as subsequent

submissions to FCC/USAC, provide the detailed information about acquisition of

computers, lists of schools where the equipment had been installed, specific information about our investments in the project, which to date far exceed the funds ever

disbursed by FCC/USAC, information on teacher’s training and not just evaluations,

but detailed reports on significant infrastructure repairs and upgrades. To date,

USAC has never responded in writing to our letter of January 23, 2002.

As a matter of fact, neither the FCC nor USAC ever provided our Department

with any procedural guidelines, a timetable nor any specific steps that we could

have or should have taken to immediately regain access to the E-Rate Program. It

should be noted that FCC/USAC took the unilateral decision to stop E-Rate Funding

for Puerto Rico 15 months after the Andersen site review, without any prior consultation with the PRDOE and without an opportunity for our Department to react to the

Andersen report prior to the drastic action that was taken.

The information provided to FCC/USAC on January 23, 2002 was supplemented

during personal visits of high-ranking delegations of the PRDOE to FCC/USAC on

April 26 and October 1, 2002. During these visits, USAC personnel made general

comments complimenting our efforts, but did not produce any official pronouncement regarding the process by which it was evaluating our Department’s ‘‘ability

to use the schools and libraries support mechanism’’, nor when would a decision be

rendered.

Since time continued to pass without any decision from FCC/USAC regarding access by Puerto Rico to the E-Rate program on September 27, 2002 our Department

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formally demanded in writing from USAC the immediate availability of funding for

Years 4 and 5 after having more than fully complied with all of the requests contained in USAC’s letter of December of 2001. I personally hand-delivered a copy of

said letter to Atty. Jane Mago, then General Counsel to the FCC during a meeting

at the FCC on October 1, 2002. Again, nothing happened. Today my letter of

September 27, 2002 also remains unanswered.

After another three months elapsed without any action on the part of FCC/USAC,

again at our request, on January 23, 2003 another high ranking delegation of the

PRDE visited both USAC and the FCC. At that meeting, Atty. Mago, who was still

the General Counsel, requested that the PRDE submit yet another request in writing to the FCC, fully documented, again requesting the release of E-Rate Funding

for Puerto Rico. She stated that upon receipt of such document by the FCC she

would see to it that the document reach the desks of the Commissioners, and that

the PRDE would receive a decision within ten days. Naturally, we again complied

and filed on January 30, 2003 a 7-page letter with 12 exhibits to once more formally

request the immediate availability to Puerto Rico of E-Rate Funding for Years 4 and

5. The exhibits, consisted of prior correspondence and printed summaries of the personal presentations that had been made to FCC/USAC on January, April and October of 2002 and January 23, 2003. Following the January 30 submission, we began

to receive occasional verbal requests for documents or information, and verbal inquiries from FCC/USAC staff, primarily on our procurement procedures.

Since several months again passed without any response from FCC/USAC, at the

request of PRDE another meeting with FCC/USAC was scheduled for late May

2003. A few days earlier, on May 16, the FCC issued a public notice requesting any

interested parties to submit comments on our January 30 letter. All comments received by the FCC supported our Department’s petition. Again, nothing happened

throughout the Summer of 2003.

In August, 2003, we decided to approach the Commerce and Energy Committee

of the U.S. House of Representatives in an effort to obtain support for our requests

for the release of the funding. Following that meeting, we later (Feb/04) received

in Puerto Rico the visit of several staff members of this Committee.

In November of 2003, and at the request and insistence of the PRDE, a delegation

from our Department, accompanied by Puerto Rico Resident Commissioner, the

Honorable Anφbal Acevedo Vilμ, visited the FCC and met with Commissioners

Kevin J. Martin and Michael J. Copps and with senior legal advisors to the other

three Commissioners, to again insist on a resolution.

Finally, on November 25, 2003 the FCC issued a resolution and order (FCC-03-

294) instructing USAC to process the Puerto Rico Department of Education’s applications for E-Rate Funding for Years 4, 5 and 6, subject to prior completion of an

external audit. Almost 6 months later, on April 28, 2004 USAC formally advised the

PRDE that it had retained the services of KPMG, LLP to perform the audit, which

finally commenced on May 24, 2004.

CLOSING REMARKS

Our Department has made aggregate investments beyond $300 million of non

ERATE funds and has been working very hard in a planned and reasoned manner

to analyze what was done by the previous administration and to take the necessary

corrective action to offer our students a project that works. We believe that we have

focused every important aspect of the project, including policy setting, technology

planning, network development, administration, support and maintenance, school

equipment, school infrastructure, central office infrastructure, teacher training, academic projects and Help Desk support. We are committed to continue developing our program by installing computers at the schools, training teachers, designing new academic projects and making sure vendors do their

corresponding part.

The recovery plan we have undertaken without any E-Rate support has produced

tangible results and benefits for the student and teachers of Puerto Rico. But we

definitely can use E-Rate funding and E-Rate support to continue. Every additional

delay in proceeding with funds disbursements will make the catch-up cycle longer

and more difficult. Worse of all, it will allow more students to graduate without necessary skills. Any further delays or worse yet, continued inaction, will have

even more Puerto Ricans wondering why they are contributing to the Universal Service Fund.

Lastly, we would like to share a few thoughts that in our estimation may assist

the US Congress in enacting legislation that will result in an E-Rate program more

beneficial to the educational process.

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1. The PRDE in the past has been bogged down with unending litigation and vendor-driven development plans. As a result we inherited an alarmingly expensive,

over-engineered system that did not work. When our participation in the E-Rate

program was abruptly shut-off and we were obliged to seek alternatives, we were

able to identify viable options at much lower costs. The huge cost of installing terrestrial networks makes E-Rate an attractive subsidy source for telecom companies

wanting to extend their network into the rural areas where the customer density

is low.

2. Whatever agency of the US government is ultimately entrusted with administering the E-Rate program, must ensure that the service recipient certifies invoices

and services received prior to disbursing payments to the vendors. Also, the E-Rate

support mechanism should allow districts to acquire with E-Rate funds service validation software to corroborate services and facilitate invoice certification.

3. Telecommunications equipment connection is only half of the equation—inconsistent service availability is the recurrent loss/waste gap with a potential to drain

resources that could be used to service more schools. The agency administering the

E-Rate fund should have a technical advisory team available for school districts to

consult openly on technical matters or doubtful supplier practices. The cost of providing this service will be insignificant compared to the potential savings.

4. Current FCC/USAC policy does not allow the use of the network for administrative purposes. This forces schools to acquire and sustain a second network, or to engage in complex procedures to account for network utilization between academic and

administrative tasks. Administrative use of the E-Rate funded network by schools

should be allowed given that schools increasingly are required to collect data to comply with existing federal laws and programs (i.e. No Child Left Behind, Carl D. Perkins, Special Education, and other programs.)

5. If access to the Internet for educational purposes is the primary object of the

Universal Fund, then a government agency more knowledgeable of the process of

education and more sensitive to the needs of the school system should be in charge

of administering the distribution of the funds. For example, the US Department of

Education, which by the way, would also be far less involved with the priorities and

aspirations of the telecommunications companies.

We commend this Committee’s initiative to take a hard look at the E-Rate program and will support any congressional action to restructure the E-Rate program

so that it better serves its intended educational purposes. On behalf of the more

than 600 thousand school children of Puerto Rico we encourage you to do so. Thank

you very much.

TIMELINE

Sequence of relevant events related to PRDOE ERATE project

Date Event

1998 ............................................... USAC approves $46,222,680 in E-Rate funds to PRDOE

1999 ............................................... USAC approves $56,879,778 in E-Rate funds to PRDOE

2000 ............................................... USAC approves $55,605,088 in E-Rate fund to PRDOE

Augusta 23-September 1, 2000 .... Arthur Andersen audit for first funding year (1998)

October 17, 2001 ........................... Arthur Andersen presents audit report to USAC.

2001

January 7, 2001 ............................. Dr. Ce ́sar Rey Herna ́ ndez takes office

January 8, 2001 ............................. Dr. Ce ́sar Rey Herna ́ ndez names an advisory committee of professionals to address the

telecommunications and Internet supplier selection process and meet the January

18th E-Rate funds request deadline. The evaluation committee fulfilled the request

in the absence of the Systems Department Director who had resigned as of December 31st. Proposals had already been requested and received by the previous administration.

January 18, 2001 ........................... E-Rate funding application due date for year 4 (2001).

January 18, 2001 ........................... Advisory committee recommends avoiding initiating new tasks or changing the technological approaches of the project until the pending tasks were completed, the whole

project was evaluated, and tests were performed to determine the real status of the

project.

February 2001 ................................ Dr. Rey issues letter instructing school directors to stop any local activities involving

E-Rate funding.

March-April 2001 ........................... PRDOE designs a three-pronged strategy to recover the project (the Center (network),

the schools and the Central Office)

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Sequence of relevant events related to PRDOE ERATE project—Continued

Date Event

July 2001 ........................................ PRDOE hires ARJ Professional and Consulting Services to assess current situation and

uses this information to seek responsibility from vendors

September 18, 2001 ...................... ARJ Consulting and Consulting Services publishes ReEducATe network assessment.

October 30, 2001 ........................... PRTC letter to PRDOE serving as basis for recovery plan to correct installation deficiencies identified by PRDOE.

September 4, 2001 ......................... First laboratory bid awarded (100 laboratories)

December 5, 2001 .......................... USAC requests PRDOE to provide additional information concerning its capability to

use the E-Rate funding mechanism. The letter infonns PRDOE that USAC withholds

from making commitments or disbursements to PRDOE vendors until evaluation of

response to its letter.

2002

January 15, 2002 ........................... PRDOE makes first personal presentation to USAC, OIG and FCC on progress readiness

to participate in E-Rate program

January 23, 2002 ........................... Dr. Ce ́sar Rey Herna ́ ndez letter to George McDonald at USAC. Letter also indicates that

contractors have been advised to provide services and repair installations which

were not made adequately or face legal actions for noncompliance. No response

from USAC.

January 23, 2002 ........................... PRDOE cancels DRC contract.

February 26, 2002 .......................... DRC discontinues Internet and telecommunications service to schools serviced.

March 2002 .................................... Bid 2002-030 was awarded. Bid authorized the acquisition of 3,362 Desktop Computers. Computers were installed in school libraries.

April 26, 2002 ................................ Second presentation to USAC/FCC on efforts made by PRDOE to meet E-Rate program

requirements.

September 27, 2002 ...................... Dr. Ce ́sar Rey letter to USAC formally requesting immediate release of funds for years

4 (2001) and 5 (2002).

October 1, 2002 ............................. Hand delivery to FCC General Counsel of formal letter requesting USAC the release of

years 4 and 5 funds.

October 1, 2002 ............................. Third presentation to USAC on efforts made by PRDOE to meet E-Rate program requirements.

2003

January 23, 2003 ........................... Fourth presentation from PRDOE to USAC/FCC.

January 30, 2003 ........................... PRDOE provides FCC with information requested in January 23rd meeting.

May 16, 2003 ................................. FCC issues public notice requesting any interested party to submit comments on

PRDOE’s petition. All comments received supported PRDOE’s petition.

June 30, 2003 ................................ PRTC discontinues Internet and telecommunications service to schools serviced

June 30, 2003 ................................ PRTC files a civil suit against the PRDOE before the Superior Court of Puerto Rico

August 21, 2003 ............................ Meeting with Energy and Commerce Committee Staff to describe PRDE efforts to obtain approval and release of funding.

September 19, 2003 ...................... Dr. Carmen Collazo Rivera letter to Thomas Dilenge, Energy and Commerce Committee

requesting participation in the E-Rate fund to provide Internet access to public

school students.

November 2003 .............................. PRTC drops the civil suit against the PRDOE.

November 25, 2003 ........................ FCC Order instructing USAC to carry out two audits of the E-Rate program: 1998-2000

and 2001-2003.

February 2, 2004 ............................ Commerce and Energy staff members visit Puerto Rico through February 5th to perform fact finding activities.

February 13, 2004 .......................... PRDOE meets with USAC (McDonald and staff) to inquire status of FCC ordered E-Rate

audit, provide background documents for audit and request prompt start

April 30, 2004 ................................ Alternate Telecommunications and Internet provider ReEducATe Contract signed using

a satellite based alternative.

May 24, 2004 ................................. USAC E-Rate Audit by KPMG begins.

Mr. GREENWOOD. Thank you, Mr. Secretary. That was very well

done and very constructive. We appreciate it.

We will move to you next, Ms. Lambert.

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TESTIMONY OF CRISTINA LAMBERT

Ms. LAMBERT. Good morning. Thank you for allowing me the opportunity to be here with you this morning. I have submitted my

testimony in writing. What I would like to do is just take this time

to share with you the highlights of that testimony. I have chosen

not to read the testimony at this time. I also promise not to make

this a technology session but I have a chart here that I will be referring to as I speak.

Let me give you a little background about me. I am Cristina

Lambert and I am currently the President and CEO of Puerto Rico

Telephone. I have been in the telecommunications industry for 30

years previously with Continental Telephone and then with GTE.

I went to Puerto Rico after the privatization in August 1999.

Let me begin by sharing that I am committed to supporting education in Puerto Rico for the people of Puerto Rico, for the children

of Puerto Rico. My interest here today is to see that we move forward with funding for Puerto Rico.

About Puerto Telephone Company, it has been around for 90

years and I have to say that Arnaldo Diaz, who is here with me

today, has been involved in the E-Rate project since it started in

1998. Puerto Telephone is a very advanced telephone company. 100

percent digital network, fiber optic around the island, fully redundant network. Most of all, to this panel, it is committed to quality.

When I say it is committed to quality, I mean that we, Puerto

Rico Telephone, have made an investment of $1.2 billion in infrastructure improvement over the last 5 years. That improvement

was made in the network to serve 1.6 million wireline and wireless

customers.

We understand that telecommunications is important not only

for education but for the economic well being of Puerto Rico. For

economic growth, quality of life, a job placement, a solid telecommunications network is required. PRT contributes to the local

Universal Fund, the major contributor on the island to that fund.

In addition to that contribution, we offer scholarships to students

of Puerto Rico annually, internships to the students of Puerto Rico

to work in the telephone company, and we have 30 digital centers

around the island and the very poorest neighborhoods in Puerto

Rico because we understand that it is important to cross the digital

divide. Again, I state that we fully support E-Rate and the vision

that this body of Government had when E-Rate was established.

If you would allow me to move to the chart, I would like to share

with you what Puerto Rico Telephone’s involvement has been over

the past 5 years in the E-Rate Program. For color coordination,

Puerto Rico Telephone is in orange and what you’ll see there is

that we are responsible for providing broadband access to the

schools. When you see a piece of equipment there it’s a router. That

router was to be housed in the cabinet that you see in blue. Beyond

the entrance of the school building, Puerto Rico Telephone’s responsibility was to ensure that router was functional within the school.

Beyond that, PRT did not have responsibility inside of the school

for internal wiring, for placement of the cabinet, for education,

training, or any other of those functions that you see listed on that

chart. I won’t bore you with the details of all the color coordination,

64

but as we refer and as we talk to this process, you can see that

what this demonstrates it was not an end-to-end solution.

Each vendor had responsibility and what you have been hearing

today may have been a lack of coordination or administration or

project management of this process. It was by far complicated and

complex to deliver service. Again, we were responsible for the installation, the configuration, and the maintenance of that network.

In order for PRT to deliver telephone service to the schools of

Puerto Rico, and I need to back up to say that the implementation

of EDUNET in Puerto Rico was in phases. In Phase I Puerto Rico

Telephone had responsibility directly to the Department of Education to provide service. The Department of Education was our

customer.

In Phase II we provided transport service as a vendor to DRC.

Again, in all the 1,500 schools we were responsible for providing

access. To do that, Puerto Rico Telephone in 1998 purchased an

ATM network, an ATM frame relay network, to deliver that service, purchased a significant amount of central office equipment to

deliver that service and, in some cases, had to construct facilities

to the schools because there were, in fact, no facilities at those

schools.

In all cases we paid our vendors to deliver those services because

many of the vendors in Puerto Rico that deliver services are small

companies and they would not be able to extend credit for such a

network for extended period of time.

I want to add much more to this discussion but, again, I promise

not to make it a technical solution or technical discussion so I

would only say that all of the audits that you have heard talked

about today, the FCC audit, the USAC audit, the controller’s audit,

all point to a number of issues but the focus has not necessarily

been on the transport.

We can talk briefly about the project that was implemented in

2002. To demonstrate, Puerto Rico Telephone worked with the Department of Education to create model schools, 400 model school.

In those model schools we invested $1.3 million of funds that we

never intended to recuperate to demonstrate that with an end-toend provider we could, in fact, make this project work. That was

a very successful process.

Mr. GREENWOOD. Let me interrupt you for a second. What you

heard there is we are about to have some votes and what I would

like to try to do is have you wrap up very quickly. We will have

lots of questions for you.

Ms. LAMBERT. Okay.

Mr. GREENWOOD. We will try to get Mr. Diaz’ testimony in before

we have to break.

Ms. LAMBERT. I’ll do it in 2 seconds.

Mr. GREENWOOD. Excellent.

Ms. LAMBERT. I talked about the 400 school project. It was very

successful and we demonstrated there that this project could work.

Let me just end by saying that Puerto Rico Telephone delivers telecommunication service to the Department of Education and a number of other national and local companies. We have 35,000 circuits

in service every given day and of those only 100 customers at most

are out of service at any given time. We know that we are very caVerDate 11-MAY-2000 11:23 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00072 Fmt 6633 Sfmt 6602 95443.TXT HCOM1 PsN: HCOM1
65

pable of delivering high-bandwidth service to our customers. We

want to support the Department of Education and continue to do

so on an everyday basis by providing telecom service. Thank you

very much.

PREPARED STATEMENT OF CRISTINA LAMBERT, PUERTO RICO TELEPHONE COMPANY

INTRODUCTION

My name is Cristina Lambert and I am President and Chief Executive Officer of

Puerto Rico Telephone. I assumed my current position in November 2003. I originally joined PRT in August of 1999. My responsibilities at that time included managing the company’s sales, marketing and network operations functions. I have been

in the telecommunications industry for 30 years serving in various capacities at

Contel and GTE.

I want to thank you for inviting me to appear today at this hearing regarding the

E-Rate program. I am pleased to have the opportunity to address these issues that

are critically important to me, Puerto Ricans and to this nation.

PRT is a diversified telecommunications company operating in the Commonwealth

of Puerto Rico. Puerto Rico Telephone has been committed to providing modern,

quality telecommunications services to as many Puerto Ricans as possible. PRT is

the most technologically advanced and most reliable telecommunications company

in Puerto Rico and the Caribbean. PRT’s network is 100 percent digital with over

75,000 miles of fiber optic cable serving approximately 1.6 million wireline and wireless customers and we continue to invest in our infrastructure. Over the past five

years we have invested over $1.2 billion in our network.

PRT places tremendous emphasis on providing modern telecommunications as a

means of improving the economic welfare of Puerto Ricans and the overall business

environment in the Commonwealth. In particular, PRT is committed to improving

and enhancing educational programs on the island. Beyond the company’s direct

contributions to the universal service fund, PRT has earmarked millions of dollars

to scholarships, internships, work-study programs, research grants and Internet

community centers for the people of Puerto Rico.

From its inception, PRT has fully supported the E-rate program and its objective

of ensuring Internet access to public and private schools in Puerto Rico. This project

has been a focal point of the company’s mission of ‘‘building the foundation of the

new Puerto Rico.’’

PRT’S PARTICIPATION IN THE DOE’S INTERNET ACCESS PROJECTS

In 1998 the Puerto Rico Department of Education began an Internet Access

project for Puerto Rico’s public school system, originally called EDUNET but later

named RE-EDUCATE. The plan originally called for the provision of Internet access

to approximately 750 public schools in Puerto Rico (later denoted as the Phase I

schools) and ultimately for access to over 1500 schools (the new schools being denoted as the Phase II schools). From 1998 to 2003 PRT was a vendor for the DOE

in what has been termed Years 1 through 5 of the E-rate program. Our duties as

a vendor were specified by the DOE in accordance with the Department’s procurement process and as approved by USAC’s Schools and Libraries Division. I have attached a chart, which sets forth the responsibilities of PRT, another vendor, DRC,

and DOE for years 1 through 5.

During those years, under the terms of the contracts, PRT provided broadband

access (T-1, ATM), to connect each of the Phase I schools to a central ATM node

located at the DOE’s premises. PRT also sold and provided maintenance to communications premises equipment (CPEs)—routers, not computers—for all Phase I

schools. It is important for this body to understand that PRT was not in charge of

this project. It was a vendor who was contractually obligated to provide services

pursuant to DOE or, in some years, to DRC as a subcontractor.

In each year, DOE was responsible for the overall project management and for

providing an adequate electrical infrastructure and environmental conditions for the

reliable operation of the telecommunications equipment. Indeed, DOE had certified

in each of the 470 forms it submitted to SLD during the life of the program that

the Department was able to provide such oversight and infrastructure. In addition,

DOE was responsible for training teachers, having computer equipment available

and installed, and for providing ‘‘help desk’’ assistance. Necessary telecommunications equipment storage and inside wiring was the responsibility of other DOE

vendors. Therefore, during this five-year period of this E-Rate project PRT was contractually responsible for:

66

1. A broadband connection to each of the Phase I schools to the central ATM node

located at DOE central offices providing the PRT-installed routers access to the

Internet.

2. Broadband connections to each of the Phase II schools (the other half of the 1500

schools), as a subcontractor to DRC. In each case, before billing could begin this

vendor accepted the connection.

3. The installation, configuration, and maintenance of routers in approximately half

of the over 1500 public schools in Puerto Rico, the Phase I schools, and at the

central site at the DOE main office.

PRT’S PERFORMANCE IN THE RE-EDUCATE PROJECT

In each year of the Program, PRT met and exceeded its obligations as set out

above. Underscoring PRT’s continued dedication to the E-Rate program and the ultimate successful operation of the RE-EDUCATE network, PRT also performed a

number of additional tasks beyond those for which it was contractually obligated.

For example, when equipment was damaged due to problems attributable to the

school’s power deficiencies and cabinet placement and design—even though PRT had

previously pointed out the placement and design problems—PRT routinely replaced

equipment that was outside of the scope of the maintenance contract and did so free

of charge. In all years, PRT routinely met with DOE personnel to highlight areas

of potential improvement and to work towards solving problems with the network

and specific schools.

During Year Four of the project a new administration took office in Puerto Rico.

PRT worked hand-in-hand with the current DOE administration to demonstrate

that, under the proper environmental conditions, the RE-EDUCATE network could

provide consistent high bandwidth Internet service to the schools. To that end, PRT

volunteered to invest over $1.2 million of its own time and resources to ‘‘Project

400.’’ This project’s objective was a top-to-bottom evaluation of end-user Internet Access capabilities of 400 specific Phase I schools. In each of these schools, PRT performed electrical and internal wiring infrastructure recovery work, provided Uninterrupted Power Supplies (UPS) to protect PRT’s provided equipment and installed

larger cabinets in appropriate locations. In addition, during 2002, PRT loaned the

DOE approximately 300 personal computers to enhance the ability of the Project

400 schools to make use of Internet access.

In Year 5, the DOE announced that PRT had been awarded a ‘‘turn key solution’’

contract. Shortly thereafter, the DOE and PRT demonstrated that: the whole Reeducate network could be stabilized. Specifically, PRT installed a network operations center staffed with PRT personnel on DOE’s premises to monitor network

performance and dispatch personnel to remedy any problems. In addition, PRT

trained over 30 newly hired DOE technical support personnel to assist schools in

internal troubleshooting, greatly expanding available support services.

Thanks to the substantial effort put forth by PRT, by the end of 2002 PRT had

firmly established that Phase I schools had reliable Internet service. At the same

time, the DOE asked PRT to determine if Phase II schools could be cost-effectively

integrated into the overall RE-EDUCATE network. To that end, PRT established

that integration was feasible through the successful completion of a pilot program

at three schools in May 2002. We have a video, which we will be pleased to provide

you, exploring these efforts at one of the schools, the University Gardens School,

that highlights the accomplishments achieved in meeting the DOE’s challenge.

During Years 4 and 5 (2001-2003), the DOE awarded contracts to continue its REEDUCATE network but the SLD did not fund the DOE. PRT, as a contractually obligated service provider, could not unilaterally terminate services to the DOE. Importantly, the DOE never requested that we terminate the services. On the contrary, the DOE asked us to continue to provide service even though we were not

being paid. PRT continued to provide service, in good faith, throughout the term of

the contract. But with no assurance of payment we were forced to terminate services

to the DOE on June 30, 2003 when the Year 5 contract expired.

CONCLUDING REMARKS

In conclusion, PRT has met and exceeded all of its contractual obligations in providing equipment and services to the Puerto Rico public schools and in many cases

went well beyond those obligations, demonstrating our clear commitment to the educational and social goals of E-Rate. Admittedly this project was not an unqualified

success; I believe that Project 400 proved that the RE-EDUCATE network as conceived by DOE and Congress and implemented by DOE selected vendors could provide high speed Internet access to the schoolchildren of Puerto Rico.

67

Indeed, PRT has seen first hand, as an E-Rate vendor in a different, non-Reeducate, project at over 100 private schools in Puerto Rico, that reliable Internet access

can be successfully utilized by the educational system—more than 60,000 students

and over 4,000 teachers at private schools have benefited from this program.

The facilities in place in Puerto Rico’s public schools today are key building blocks

for providing the students in the Puerto Rico public school system with reliable high

speed Internet access in the future. We are eager to assist the DOE in completing

this project, assuming we can agree on terms, which meet both parties’ needs and

ensure timely payment of PRT’s contractual charges.

I would be happy to answer any of your questions.

Mr. GREENWOOD. Thank you.

Mr. Santos Diaz, you are recognized for 5 minutes and then we

will break probably until about 12:30.

TESTIMONY OF SANTOS DIAZ

Mr. SANTOS DIAZ. Good morning everybody. I am very happy to

be here. Is this okay?

Mr. GREENWOOD. Yes, it is. Good morning, sir.

Mr. SANTOS DIAZ. Good morning to you. Good morning, Mr.

Chairman, Congressmen, ladies. My name is Santos Diaz. I am

very pleased to inform and testify today before the Oversight and

Investigations Subcommittee of the Committee on Energy and

Commerce of the U.S. House of Representatives as President of

DRC, regarding my knowledge of the advance Telecommunications

Services provided to the public schools in Puerto Rico by DRC

under the E-Rate program.

On April 8, 1998, DRC presented a proposal to the Puerto Rico

Department of Education to provide services covered under the

School and Libraries Division of Universal Service Administrative

Corporation E-Rate funding program. Our proposal came in response to a request for proposal, USAC form 470, posted by the

PRDE on the USAC website as required by the E-Rate program

regulations. The request for proposal posted by the PRDE required

three categories of services:

(1) Internal Connections, (2) Internet Access, and (3) Telecommunications Services for 760 public schools in PR.

The PRDE decided to implement the E-Rate program in two

phases consisting of two blocks of schools. In its first year, 1998-

1999, PRDE’s E-rate program covered and requested funding and

services for approximately half of all public schools in PR.

DRC’s proposal included the offering of services only for the Internal Connections part of the RFP since DRC at that moment was

only a systems integration operation and not an Internet Service

Provider.

DRC was evaluated by the PRDE as the best alternative for the

Internal Connection services and was awarded the installation of

the communications infrastructure—wiring—for the first block of

760 schools. Puerto Rico Telephone Company was awarded the

Telecommunications and Internet Access services part of the RFP.

It is my understanding that the only company to present a proposal that year for the Internet Access and Telecommunications requested was PRTC. For the Internal Connections services both

PRTC and DRC presented offers. DRC, which possessed ample previous experience and expertise in the installation of cable infrastructures, was nevertheless the lowest bidder and was thus acVerDate 11-MAY-2000 11:23 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00075 Fmt 6633 Sfmt 6602 95443.TXT HCOM1 PsN: HCOM1
68

cordingly selected. The contract so awarded totaled some

$13,107,332.

DRC’s implementation of the project begun on January 1999,

when funds were officially approved by USAC, and ended around

September 1999. During that time period, DRC installed and tested

91,000 drops of UTP Cat5 wiring at 745 schools, invoicing 86,640

drops as contracted with PRDE and funded by E-Rate.

During this implementation phase, some infrastructure deficiencies issues such as lack of adequate electrical facilities and vandalism were encountered. To that effect a letter was sent to Mr.

Kivio Peguero, Information Systems Director for the PRDE, informing him of these complications and presenting the PRDE with our

recommendations.

An average of 12 classrooms per school were cabled with 8-12

wiring drops per classroom. All wiring drops installed were tested

and accepted by PRDE. The external auditing company contracted

by the PRDE for such purposes, Software Designers, performed the

certification and acceptance processes at every school.

Namely, Software Designers would issue a cabling certification

report to PRDE certifying the installation as complete and functional. After receiving such completion certification for any specific

school, DRC would proceed to invoice, as required, both USAC and

the PRDE for their respective share of the services rendered.

On March 8, 1999 DRC presented a proposal in response to a

USAC form 470 request for proposal published by the PRDE on the

USAC site requesting services and offers from eligible service providers for year 2 of E-Rate, 1999-2000. The PRDE requested new

services for the second block of public schools, consisting of some

780 schools, and the continuation of services for the first block of

schools performed in year 1 of E-Rate. This time around DRC’s proposal included the provision of all services requested: Internal Connections, Internet Access and Telecommunications.

DRC was evaluated as the best alternative for the new block of

schools, awarded the bid, and contracted to perform various services. Other services were awarded to other eligible service providers, including PRTC.

DRC’s awarded contract, which totaled $51,478,221, provided for

the installation of wireless communications infrastructure and the

provision of the telecommunications and Internet access at each of

the 780 schools comprising PRDE’s E-Rate implementation phase

2.

The project was implemented between October 1999—when

USAC officially approved the funding commitment—and May 2000.

During that period DRC provided equipment, installed the wireless

communications infrastructure at 762 schools, and initiated the installation of T1 telecommunication lines and the Internet access

services to the schools.

DRC subcontracted PRTC, the incumbent Local Exchange Carrier, to install the T1 telecommunication lines. By the end of the

fiscal year, June 30, 2000, PRTC had installed 392 T1 lines and

thus those 392 schools were connected with access to the Internet.

Accordingly, DRC invoiced both USAC and the PRDE.

The acceptance criteria——

69

Mr. GREENWOOD. Mr. Diaz, I hate to do this to you. You are

about halfway through your testimony and about 120 percent

through your time. That is okay but I do have to get down to the

floor and vote so I’ll give you a choice. We can come back at 12:30

and you can resume your testimony or, if you would like, you can

sort of get to the bottom line.

Mr. SANTOS DIAZ. I would like to continue with my testimony.

Mr. GREENWOOD. In that case, the committee will recess until

12:30. I would note for the witnesses that on the B level of this

building there are two restaurants, so to speak, where you can get

something to eat. Thank you.

[Whereupon, at 11:53 a.m., the subcommittee recessed, to reconvene at 12:34 p.m. the same day.]

Mr. GREENWOOD. The meeting will come to order. I would ask

the witnesses to return to the table, please.

Mr. Diaz, would you like to complete your testimony now, please?

Mr. SANTOS DIAZ. Yes. Thank you. I guess I was a little—when

I was told 5 minutes, I think everybody was saying I was going a

little too fast so I was just trying to cover all the material in that

time slot.

I think I am talking about year 2000 now and I’ll just continue

reading what I was presenting. During that period DRC provided

equipment, installed the wireless communications infrastructure at

762 schools, and initiated the installation of T1 telecommunication

lines and the Internet access services to the schools.

DRC subcontracted PRTC, the incumbent Local Exchange Carrier, to install the T1 telecommunication lines. By the end of the

fiscal year, June 30, 2000, PRTC had installed 392 T1 lines and

thus those 392 schools were connected with access to the Internet.

By the way, the documentation that I have with me, what it documents is the installation of all these schools whereby between DRC,

the Department of Education, in this case the schools, and Puerto

Rico Telephone Company.

The process that we followed was basically we had two forms

which we call the preinstallation form and a post-installation form

where we were getting the signatures of not only Puerto Telephone

Company, but also the representative of the schools who would see

the connectivity or the installation. In other words, the access to

the Internet. This evidence we brought with us. This we did for

each and every school.

Mr. GREENWOOD. We will enter that into the record.

Mr. SANTOS DIAZ. We did submit copies of all this evidence.

Mr. GREENWOOD. Thank you.

Mr. SANTOS DIAZ. Okay. Again, the acceptance process was as

follows: First, DRC would issue a pre-acceptance installation document which included the school information, the date of the T1 installation, and the service order number.

PRTC would then issue its own T1 installation certification document signed both by the local carrier installer and the DRC project

manager, certifying that the T1 had been installed and was functioning properly.

Following the issuance of these certifications, DRC would proceed

to invoice USAC and the PRDE. All other products and services

contracted and provided during year 2 of E-Rate were similarly acVerDate 11-MAY-2000 11:23 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00077 Fmt 6633 Sfmt 6602 95443.TXT HCOM1 PsN: HCOM1
70

cepted by PRDE and documented accordingly before DRC proceeded to invoice USAC and the PRDE.

The problems with vandalism and the inadequate school electrical infrastructure persisted throughout the program’s second

year. Yet, once the installation process was finished and so certified

at each school, it was the PRDE’s responsibility to maintain and

safe keep the installed equipment, to provide adequate electricity,

to provide the personal computers and software for the students

and teachers—end users—and to train the teachers on proper techniques and ways of using the Internet as a teaching tool.

If any equipment was not function properly or not being used at

all after acceptance by the PRDE due to the above-mentioned

issues, that is a situation out of the control and responsibility of

DRC.

On January 5, 2000, DRC and PRTC partnered and presented a

joint proposal to the PRDE in response to the 470 request for proposal published by the PRDE at the USAC site for the third year

of E-Rate funding. On January 18, the PRDE awarded DRC, PRTC,

and four other eligible service providers a series of different services contracts. Another seven bidders were not awarded any services. DRC was awarded the Internal Connections, Internet Access,

and Telecommunications services contracts, totaling $45,570,800

dollars, and it was approved for funding by USAC with an 87 percent discount.

During this third year of E-Rate, DRC continued with the installation of T1 telecommunication lines to the schools not yet connected, provided the Internet access to these schools, and provided

additional equipment such as servers, tape drives and UPS protection for the equipment. By the end of the fiscal year, June 30, 2001,

PRTC had installed and connected 709 T1 telecommunication lines

and DRC was providing Internet access services to these schools.

Accordingly, DRC proceeded to invoice both USAC and the PRDE

after any service and/or equipment was accepted by the PRDE.

Sadly, the problems with vandalism and the inadequate school

electrical infrastructure similarly persisted throughout the program’s third year. PRDE’s failure to avert and/or correct the threat

of vandalism, to provide adequate electrical facilities, and to supply

end users—students and teachers—with computers and software

failed.

This situation was and continues to be a detriment for the most

effective use of the installed equipment, communications infrastructure and Internet access services by the end users. School vandalism, lack of adequate facilities, and personal computers, and absence of proper teacher training on using the Internet as a teaching

tool are definitely the biggest liabilities the PRDE still faces today.

On December 26, 2000, DRC presented a proposal to the PRDE

in response to the 470 request for proposal published by the PRDE

at the USAC site, requesting services from eligible providers for

year 4 of E-Rate funding. On January 17, 2001 the PRDE awarded

DRC the Internal Connections services contract for establishing the

wiring backbone between the different buildings in those schools

having more than one structure as well as the contract for the continuation of the Internet Access and Telecommunications for the

block of schools DRC was servicing at that moment.

71

PRDE similarly awarded PRTC the contract for the continuation

of the Internet Access and Telecommunications to the block of

schools PRTC was servicing at that moment. Another nine bidders

were not awarded any services. DRC was awarded Internal Connections, Internet Access and Telecommunications services contracts totaling $22,841,714 dollars. Nevertheless, the funding request was never officially approved for funding by USAC for reasons unknown to us.

Notwithstanding, DRC and its subcontractor PRTC continued installing T1 telecommunications lines to those schools not yet connected based on the expectation of a later approval of the funds as

had happened on the previous E-Rate years.

On January 23, 2002 the PRDE unilaterally and without any

contractually valid or supportable reason canceled the existing contract with DRC, simultaneously requesting it to formally shut down

the Internet Access and Telecommunications services being provided. DRC requested the PRDE’s reconsideration of its decision,

but the PRDE did not do so, forcing DRC to shut down its service.

At present, this unilateral decision is being contested in the U.S.

Federal Court of Puerto Rico, where DRC has filed suit against the

PRDE, the Government of the Commonwealth of Puerto Rico, and

USAC. The service provided by DRC up to the point of shutdown

had been invoiced but no payment has been received even though

USAC apparently approved the requested funding in 2003. A total

of 736 public schools were connected with T1 lines and Internet access service by the date that service was reluctantly stopped.

On December 20, 2001, DRC presented a proposal to the PRDE

in response to the 470 RFP published at the USAC site, requesting

services from eligible providers for year 5 of E-Rate funding. PRDE

awarded the bid to PRTC even though DRC’s proposal was some

$9,209,015 lower in cost than the PRTC offer. DRC contested this

decision to the PRDE’s Bidding Committee, but PRDE’s appeals

board decided to uphold the previous award to PRTC.

As far as I know the funding for year 5 of E-Rate was never approved by USAC and the Internet access and telecommunication

services for the first block of schools were also discontinued by

PRTC sometime during the fiscal year.

DRC was forced to close down operations and did not participate

in the bidding process in year 6 of E-Rate, July 2003 to June 2004.

It is my understanding that the bid was awarded to Centennial of

Puerto Rico but that the money for funding was not approved at

all or in time for them to implement a new infrastructure.

As far as I know and understand, the E-Rate program as a

whole, including the equipment and telecommunications infrastructure created with E-Rate funds in the PRDE, is for all practical

purposes defunct and all the money and efforts invested for nearly

4 years in building a solid and robust communications infrastructure, both locally and in the wide area network, has gone awry.

One of the things I want to stress is that if during the last 31⁄2

years the——

[The prepared statement of Santos Diaz follows:]

72

PREPARED STATEMENT OF SANTOS DIAZ, PRESIDENT, DATA RESEARCH CORPORATION

My name is Santos Dı ́az Dı ́az, President of Data Research Corporation (DRC). I

am very pleased to inform and testify today before the Oversight and Investigations

Subcommittee of the Committee on Energy and Commerce of the U.S. House of Representatives, in my capacity as President of DRC, regarding my knowledge of the

advance Telecommunications Services provided to the public schools in Puerto Rico

by DRC under the E-Rate program.

On April 8, 1998, DRC presented a proposal to the Puerto Rico Department of

Education (PRDE) to provide services covered under the School and Libraries Division of Universal Service Administrative Corporation (USAC) E-Rate funding program. Our proposal came in response to a request for proposal (RFP), USAC form

470, posted by the PRDE on the USAC website as required by the E-Rate program

regulations. The request for proposal posted by the PRDE required three (3) categories of services:

(1) Internal Connections,

(2) Internet Access, and

(3) Telecommunications Services

for 760 public schools in PR.

The PRDE decided to implement the E-Rate program in two (2) phases consisting

of two blocks of schools. In its first year, 1998-1999, PRDE’s E-rate program covered

and requested funding and services for approximately half of all public schools in

PR.

DRC’s proposal included the offering of services only for the Internal Connections

part of the RFP since DRC at that moment was only a systems integration operation and not an Internet Service Provider (ISP).

DRC was evaluated by the PRDE as the best alternative for the Internal Connection services and was awarded the installation of the communications infrastructure

(wiring) for the first block of 760 schools. Puerto Rico Telephone Company (PRTC)

was awarded the Telecommunications and Internet Access services part of the RFP.

It is my understanding that the only company to present a proposal that year for

the Internet Access and Telecommunications requested was PRTC. For the Internal

Connections services both PRTC and DRC presented offers. DRC, which possessed

ample previous experience and expertise in the installation of cable infrastructures,

was nevertheless the lowest bidder and was thus accordingly selected. The contract

so awarded totaled some $ 13,107,332.

DRC’s implementation of the project begun on January 1999, when funds were

officially approved by USAC, and ended around September of 1999. During that

time period, DRC installed and tested 91,000 drops of UTP Cat5 wiring at 745

schools, invoicing 86,640 drops as contracted with PRDE and funded by E-Rate.

During this implementation phase, some infrastructure deficiencies issues’ such

as lack of adequate electrical facilities and vandalism—were encountered. To that

effect a letter was sent to Mr. Kivio Peguero, Information Systems Director for the

PRDE, informing him of these complications and presenting the PRDE with our recommendations.

An average of twelve (12) classrooms per school were cabled with 8-12 wiring

drops per classroom. All wiring drops installed were tested and accepted by PRDE.

The external auditing company contracted by the PRDE for such purposes, Software

Designers, performed the certification and acceptance processes at every school.

Namely, Software Designers would issue a cabling certification report to PRDE certifying the installation as complete and functional. After receiving such completeion

certification for any specific school, DRC would proceed to invoice, as required, both

USAC and the PRDE for their respective share of the services rendered.

On March 8, 1999 DRC presented a proposal in response to a USAC form 470

request for proposal published by the PRDE on the USAC site requesting services

and offers from eligible service providers for year 2 of E-Rate, 1999-2000. The PRDE

requested new services for the second block of public schools, consisting of some 780

schools, and the continuation of services for the first block of schools performed in

year 1 of E-Rate. This time around DRC’s proposal included the provision of all

services requested: Internal Connections, Internet Access and Telecommunications.

DRC was evaluated as the best alternative for the new block of schools, awarded

the bid, and contracted to perform various services. Other services were awarded

to other eligible service providers, including PRTC.

DRC’s awarded contract, which totaled $ 51,478,221, provided for the installation

of wireless communications infrastructure and the provision of the telecommunications and Internet access at each of the 780 schools comprising PRDE’s E-Rate

implantation phase 2.

73

The project was implemented between October 1999—when USAC officially approved the funding commitment—and May 2000. During that period DRC provided

equipment, installed the wireless communications infrastructure at 762 schools, and

initiated the installation of T1 telecommunication lines and the Internet access services to the schools.

DRC subcontracted PRTC, the incumbent Local Exchange Carrier, to install the

T1 telecommunication lines. By the end of the fiscal year, June 30, 2000, PRTC had

installed 392 T1 lines and thus those 392 schools were connected with access to the

Internet. Accordingly, DRC invoiced both USAC and the PRDE.

The acceptance criteria and process for the T1 installation at the schools was defined based on telecommunication industry standards. Such was undertaken as follows. First, DRC would issue a pre-acceptance installation document which included

the school information, the date of the T1 installation, and the service order number.

PRTC would then issue its own T1 installation certification document signed both

by the local carrier installer and the DRC project manager, certifying that the T1

had been installed and was functioning properly.

Following the issuance of these certifications, DRC would proceed to invoice USAC

and the PRDE.

All other products and services contracted and provided during year 2 of E-Rate

were similarly accepted by PRDE and documented accordingly before DRC proceeded to invoice USAC and the PRDE.

The problems with vandalism and the inadequate school electrical infrastructure

persisted throughout the program’s second year. Yet, once the installation process

was finished and so certified at each school, it was the PRDE’s responsibility to

maintain and safe keep the installed equipment, to provide adequate electricity, to

provide the personal computers and software for the students and teachers (end

users), and to train the teachers on proper techniques and ways of using the Internet as a teaching tool. After acceptance by the PRDE, any equipment malfunction

as well as PRDE’s consequent inability to utilize the services and equipment provided by DRC due to the abovementioned vandalism is a circumstance beyond

DRC’s control and contractual responsibility.

The PRDE was not effective in preventing vandalism, educating its students

about the importance of safekeeping and protecting the new equipment and infrastructure, and in updating and improving its utilities infrastructure.

On January 5, 2000, DRC and PRTC partnered and presented a joint proposal to

the PRDE in response to the 470 request for proposal published by the PRDE at

the USAC site for the 3rd year of E-Rate funding.

On the 18th of January, the PRDE awarded DRC, PRTC, and four other eligible

service providers a series of different services contracts. Another seven (7) bidders

were not awarded any services.

DRC was awarded the Internal Connections, Internet Access, and Telecommunications services contracts, totaling $ 45,570,800 dollars, and it was approved for

funding by USAC with an 87% discount.

During this third year of E-Rate, DRC continued with the installation of T1 telecommunication lines to the schools not yet connected, provided the Internet access

to these schools, and provided additional equipment such as servers, tape drives and

UPS protection for the equipment. By the end of the fiscal year, June 30, 2001,

PRTC had installed and connected 709 T1 telecommunication lines and DRC was

providing Internet access services to these schools. Accordingly, DRC proceeded to

invoice both USAC and the PRDE after any service and/or equipment was accepted

by the PRDE.

Sadly, the problems with vandalism and the inadequate school electrical infrastructure similarly persisted throughout the program’s third year. PRDE’s failure to

avert and/or correct the threat of vandalism, to provide adequate electrical facilities,

and to supply end users (students and teachers) with computers and software failed.

This situation was and continues to be a detriment for the most effective use of the

installed equipment, communications infrastructure and Internet access services by

the end users. School vandalism, lack of adequate facilities, and personal computers,

and absence of proper teacher training on using the Internet as a teaching tool are

definitely the biggest liabilities the PRDE still faces today.

On December 26, 2000, DRC presented a proposal to the PRDE in response to the

470 request for proposal published by the PRDE at the USAC site, requesting services from eligible providers for year 4 of E-Rate funding. On the 17th of January,

2001 the PRDE awarded DRC the Internal Connections services contract for establishing the wiring backbone between the different buildings in those schools having

more than one structure as well as the contract for the continuation of the Internet

Access and Telecommunications for the block of schools DRC was servicing at that

74

moment. PRDE similarly awarded PRTC the contract for the continuation of the

Internet Access and Telecommunications to the block of schools PRTC was servicing

at that moment. Another nine (9) bidders were not awarded any services. DRC was

awarded Internal Connections, Internet Access and Telecommunications services

contracts totaling $ 22,841,714 dollars. Nevertheless, the funding request was never

officially approved for funding by USAC for reasons unknown to us.

Notwithstanding, DRC and its subcontractor PRTC continued installing T1 telecommunications lines to those schools not yet connected based on the expectation

of a later approval of the funds as had happened on the previous E-rate years.

On January 23, 2002 the PRDE unilaterally and without any contractually valid

or supportable reason cancelled the existing contract with DRC, simultaneously requesting it to formally shut down the Internet Access and Telecommunications services being provided. DRC requested the PRDE’s reconsideration of its decision, but

the PRDE did not do so, forcing DRC to shut down its service.

At present, this unilateral decision is being contested in the U.S. Federal Court

of Puerto Rico, where DRC has filed suit against the PRDE, the Government of the

Commonwealth of Puerto Rico, and USAC. The service provided by DRC up to the

point of shutdown had been invoiced but no payment has been received even though

USAC apparently approved the requested funding in 2003. A total of 736 public

schools were connected with T1 lines and Internet access service by the date that

service was reluctantly stopped.

On December 20, 2001, DRC presented a proposal to the PRDE in response to the

470 RFP published at the USAC site, requesting services from eligible providers for

year 5 of E-Rate funding. PRDE awarded the bid to PRTC even though DRC’s proposal was some $ 9,209,015 lower in cost than the PRTC offer. DRC contested this

decision to the PRDE’s Bidding Committee, but PRDE’s appeals board decided to

uphold the previous award to PRTC.

As far as I know the funding for year 5 of E-Rate was never approved by USAC

and the Internet access and telecommunication services for the first block of schools

were also discontinued by PRTC sometime during the fiscal year.

DRC was forced to close down operations and did not participate in the bidding

process in year 6 of E-Rate, July 2003-June 2004. It is my understanding that the

bid was awarded to Centennial of Puerto Rico but that the money for funding was

not approved at all or in time for them to implement a new infrastructure.

As far as I know and understand, the E-Rate program as a whole, including the

equipment and telecommunications infrastructure created with E-Rate funds in the

PRDE, is for all practical purposes defunct and all the money and efforts invested

for nearly four years in building a solid and robust communications infrastructure,

both locally and in the wide area network, has gone awry.

Mr. GREENWOOD. Tell you what, Mr. Diaz. You’ve taken 15 minutes of a 5-minute allotment so we will get to the other things you

would like to stress hopefully in the questions.

The Chair recognizes himself for 10 minutes for the purpose of

inquiry.

Dr. Rey, you state in your testimony that your initial evaluation

found only nine schools out of 1,540 were effectively connected to

the Internet. Given this and the related facts you report such as

the limited computer literacy of the teachers, how much of the $100

million dispersed in E-Rate funds has been wasted?

Mr. REY. That will be very difficult to calculate but, to my understanding, most of that money was a waste as the letter from the

FCC that I received on November 27 stated. It will be very difficult

to calculate that to be precise.

Mr. GREENWOOD. And how much of that do you think is going

to be able to be recovered? Is it all down the drain? Is the equipment that is in the warehouses, the $23 million worth of equipment?

Mr. REY. The warehouse that you saw is not functional at this

point because it is outdating. We are investing in new equipment

that brings the wireless so we are investing more than $90 million

and we are bidding for $90 million that we might get liberated

from the R-Rate fund for the last 3 years, 4, 5, and 6 year.

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Mr. GREENWOOD. What is going to happen to the $23 million of

equipment in the warehouses? Is it going to be thrown away?

Mr. REY. I would like Mr. Vidal to answer that, please.

Mr. GREENWOOD. Well, Mr. Vidal, did I swear you in?

Mr. VIDAL. Yes.

Mr. GREENWOOD. Okay. In that case, you can respond.

Mr. VIDAL. The equipment that is in the warehouse is equipment

that through time has become obsolete. You can go into a computer

store now and buy equipment with four times that capacity for

probably a third of the cost of what that cost. The question we

would ask ourselves is if we are going to invest in installing equipment and we were to use similar type of equipment, would we invest in putting in equipment that has a future life of 3 years or

would we invest in installing equipment that has become obsolete

over the past 3 years?

Mr. GREENWOOD. Dr. Rey, your administration found what appears to be wholly inadequate infrastructure in planning for the ERate network. What responsibility does the Puerto Rico Department of Education have as an institution for the waste of these

funds? I was surprised to hear you say that you never found any

documentation that there was even a plan.

Mr. REY. That is true.

Mr. GREENWOOD. That is incredible to me.

Mr. REY. That is true. I guess the Department by that time had

the obligation to coordinate and establish a plan. They didn’t. And

to claim that plan for the vendors also. We don’t have any evidence

to date to show that they did that. It was misplanning and misleading funds.

Mr. GREENWOOD. And has there been any effort to interview

those who should have been responsible?

Mr. REY. Of course, and we have a case in court now that is taking care of that.

Mr. GREENWOOD. This is a case where through greed, incompetence, and maybe criminal activity not only was $100 million of

rate payer’s money squandered, but worse than that the educational opportunity of hundreds of thousands of children was

squandered. When are we going to find out who is responsible?

Mr. REY. That is in the Justice Department of Puerto Rico at this

point We have been collaborating since day 1 with the U.S. Department of Education, with the FBI, and with the Justice Department

in Puerto Rico. We made an audit in our first 3 months of incumbency. As the Secretary for Education we made an audit of all the

things that were misplaced and we established an ongoing process

that is still going on regarding auditing process in the Department.

Not only the technology but the rest of the administration.

Mr. GREENWOOD. Do you expect that there will be criminal

charges filed in this case?

Mr. REY. I hope so.

Mr. GREENWOOD. And do you have any evidence that would suggest criminal behavior at this point?

Mr. REY. I think I am not allowed to say that publicly at this

point but the Department Secretary of Education is in jail as we

speak.

76

Mr. GREENWOOD. What responsibility do you think the vendors

have for all of this waste?

Mr. REY. I guess they have a responsibility to educate and coordinate and to establish a process of coordination of that investment that USAC and FCC is doing. As a matter of fact, we don’t

manage the money. The money goes directly through USAC to the

vendors so they have the obligation to establish an order and a

educational process of that investment.

Mr. GREENWOOD. Does it seem to you that since there is no documentation of a plan here, does it look to you like the vendors created a gold-plated system that was far more than the capacity of

the school district to absorb just so they could sell the maximum

amount of equipment and make the most money?

Mr. REY. Probably they did.

Mr. GREENWOOD. Mr. Vidal, you are nodding your head. Take a

microphone and tell us what you think.

Mr. VIDAL. Our evaluation of this is that the system design was

over-engineered.

Mr. GREENWOOD. By whom? Who is responsible for that over-engineering?

Mr. VIDAL. When the Secretary and his team came into office

and they found what was already installed there, they found that

there were multiple pieces of equipment, each of them consuming

electricity, of course, and demanding of the electrical infrastructure

of the school. On top of that, there were two servers. There was

a——

Mr. GREENWOOD. You say two servers. You mean in each school?

Mr. VIDAL. Yes. Four servers in each school. I am being corrected. And there was also——

Mr. GREENWOOD. Where one would have sufficed?

Mr. VIDAL. Yes. Yes. Two additional——

Mr. GREENWOOD. That wasn’t an accident, was it?

Mr. VIDAL. I think that——

Mr. GREENWOOD. You think that was stupidity or do you think

that was somebody figuring I would rather sell you four servers per

school than one?

Mr. VIDAL. I cannot speak to the motives but one would say that

you tend to start small and grow from there as you see results.

Here this was sort of a grandiose solution to what——

Mr. GREENWOOD. I am still not getting who did the over-engineering. Was it school district officials? Was it somebody who was

selling the equipment driving this process and telling the school officials that, ‘‘This is what you need. You need four servers in every

school.’’

Mr. VIDAL. I think that may point to the fact of some of the limitations we are finding with the E-Rate Program earlier.

Mr. GREENWOOD. Say that again, please?

Mr. VIDAL. That point perhaps to one of the limitations you were

pointing earlier in which the doctor also mentioned when he said

vendor driven. On one side the technical depth that a vendor has

and all the possibilities they can sell and jiggle in front of people’s

eyes, plus perhaps the lower literacy that some of the districts may

have may create the right conditions for this to happen.

77

Mr. GREENWOOD. Are you aware of any evidence that the vendors

were wining and dining school officials in order to carry their

favor?

Mr. REY. I don’t have any evidence of that. However, what is evident is that they didn’t have control and USAC was not executing

any controls over the process that was going on. I mean, we’re talking about more than $100 million without any controlled supervision or auditing. That is risky to say the least.

Mr. GREENWOOD. It is grotesque is what it is. Why did you terminate the contract with DRC?

Mr. REY. Because we weren’t satisfied with the performance. Of

course, that was not a good investment as we saw it at that time.

Mr. GREENWOOD. Do you differ with Mr. Diaz’ testimony?

Mr. REY. Of course.

Mr. GREENWOOD. Tell us how. In what way?

Mr. REY. Because they have a different problem. They see this

in a different manner. We audit our processes. We know the investment that USAC and FCC made. We calculate the investment that

they made and the performance was extremely low, extremely poor.

Nine schools connected to the Internet after $100 million of investment paying $36 million per year. That is quite eloquent, I guess.

Mr. GREENWOOD. What is your understanding for why funding

was withheld in 2001 and 2002?

Mr. REY. Because of the chaos that the former secretary had in

place.

Mr. GREENWOOD. Do you think that USAC is responding appropriately to your new plans now or do you think they are dragging

their feet?

Mr. REY. Dragging their feet, I guess, because after 31⁄2 years

now is when we get a letter to continue our process and there will

be auditing now but it took them too long to answer that letter and

to answer that petition. As a matter of fact, we invested more than

$300 million in the whole process in order to keep on track the

process of E-Rate and connect to the Internet.

Mr. GREENWOOD. The gentlelady from Colorado is recognized for

10 minutes.

Ms. DEGETTE. Thank you, Mr. Chairman. Mr. Diaz, how much

money did your company receive as a result of these contracts with

the PRDOE?

Mr. SANTOS DIAZ. Around $90 million, I believe.

Ms. DEGETTE. $90 million.

Mr. SANTOS DIAZ. In 4 years.

Ms. DEGETTE. And, Ms. Lambert, how much did your company

receive as a result of these contracts?

Ms. LAMBERT. If you will give me just a second, I’ll put my glasses on.

Ms. DEGETTE. I would be happy to.

Ms. LAMBERT. Okay. If I am reading this correctly, in year one

the company was awarded $10 million and billed $9.9 million. In

year two the amount invoiced was $8 million. In year three the

amount invoiced was $13 million. Those are the three.

Ms. DEGETTE. That adds up to about $31 million.

Ms. LAMBERT. For the 3 years, yes.

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Ms. DEGETTE. Right, $31 million over 3 years. Now, you testified,

I believe, Ms. Lambert, that the job of PRT was to take the wires

up to the school buildings. Correct?

Ms. LAMBERT. Yes.

Ms. DEGETTE. Into the router?

Ms. LAMBERT. Into the router.

Ms. DEGETTE. And then you testified, Mr. Diaz, that your company’s job was the internal connections.

Mr. SANTOS DIAZ. That is correct.

Ms. DEGETTE. Now, listening to the two of you testify today, I

don’t hear either one of you saying that your companies had any

responsibility to work with the Department of Education to see

that these systems actually went into place and worked. Do you

think you had any responsibility to do that?

Mr. SANTOS DIAZ. Ms. Congressman, we did have meetings. As

a matter of fact, we had weekly meetings and there are minutes

of meetings where we would bring in our issues. When I say we,

Puerto Telephone Company and DRC where we stressed what were

our concerns. We address them the way we needed to up to the

point of our responsibility which was very well dictated by E-Rate.

Ms. DEGETTE. So your answer, sir, is yes, you do think you had

some responsibility rather than just collecting $90 million to see

that students actually had this available.

Mr. SANTOS DIAZ. That is correct.

Ms. DEGETTE. What about you, Ms. Lambert?

Ms. LAMBERT. Okay. Well, what you see depicted there is the

contractual responsibility.

Ms. DEGETTE. You know what? I used to be a lawyer. I understand reading contracts.

Ms. LAMBERT. Sure.

Ms. DEGETTE. But your company collected $31 million over a 3-

year period. Do you think you had a responsibility to work with the

other vendor and the Department of Education?

Ms. LAMBERT. Yes, we did.

Ms. DEGETTE. And what did you do to try to achieve that end?

Ms. LAMBERT. Well, in the case of the 400 schools we used ratepayer’s money to——

Ms. DEGETTE. I am sorry?

Ms. LAMBERT. We used rate-payer’s money to conduct internal

wiring where it was needed.

Ms. DEGETTE. And when was that, Ms. Lambert?

Ms. LAMBERT. In 2002.

Ms. DEGETTE. That was well after——

Ms. LAMBERT. Yes.

Ms. DEGETTE. [continuing] all the events we are talking to.

Right?

Ms. LAMBERT. We began to raise the issues and we have records

that we have submitted to this body indicating that we were raising the issues since 1999 and working with the Department of Education to correct those issues. I share your concern and would state

for the record that this administration has provided the resources

to coordinate this process much more effectively than the previous

administration did. What I believe is lacking was an implementaVerDate 11-MAY-2000 11:23 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00086 Fmt 6633 Sfmt 6602 95443.TXT HCOM1 PsN: HCOM1
79

tion team, someone who coordinated this effort effectively and understood the technology enough to coordinate it.

Ms. DEGETTE. But with all due respect, you folks are the ones

with the technical expertise to do that.

Ms. LAMBERT. Yes.

Ms. DEGETTE. And in experiences that I have had with other

providers who deal with customers. If the customers don’t have—

I am not saying they are not to blame because there is plenty of

blame to go around here, but what people do especially when they

are collecting fees of this staggering size is they hire people to come

in and help execute that. Did you do any of that?

Mr. SANTOS DIAZ. Yes, we——

Ms. DEGETTE. Okay. Mr. Diaz.

Mr. SANTOS DIAZ. Yes, we went beyond our responsibility.

Ms. DEGETTE. What did you do?

Mr. SANTOS DIAZ. As a matter of fact, we even established a

monitoring system which we have in our own facilities where we

had people assigned looking at screens all day just to make sure

that the lines were up and running.

Ms. DEGETTE. But they weren’t, were they?

Mr. SANTOS DIAZ. Yes, they were. We had 740 lines up and running.

Ms. DEGETTE. But how many schools were up and running?

Mr. SANTOS DIAZ. That is 740 schools.

Ms. DEGETTE. 740 schools. Is that true, Dr. Rey? Could you

please give me your side of the story?

Mr. REY. Yes, indeed. We made an audit as soon as we got to

the office and we established day-to-day basis checking on schools,

evening sending people to check on the connection and the finding

was the one that I told you. That is why we have a difference, a

radical difference.

Ms. DEGETTE. You told us nine schools.

Mr. REY. Nine schools.

Ms. DEGETTE. Out of how many schools?

Mr. REY. 1,500.

Ms. DEGETTE. 1,500.

Mr. SANTOS DIAZ. May I add?

Ms. DEGETTE. Go ahead.

Mr. SANTOS DIAZ. When we came in the rule of the games were

totally changed. Let me just stress on this. The telecommunications

standards for connectivity, this is the evidence that we bring in.

Basically our responsibility through the E-Rate program is to make

sure that all the way up to the wall drop there was communications.

In other words, E-Rate specifically says that you cannot on eligible items such as providing computers, such as training teachers,

such as providing additional software was construed as eligible

and, if provided by the service provider, it would be understood as

a kickback. The Department of Education wanted us to do that. In

many instances we have minutes of meetings whereby they would

say, ‘‘If you do not provide these computers, if you do not do these

other things, you will not get paid.’’ We have evidence of all this.

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Ms. DEGETTE. Your view is that E-Rate—let me just get clear on

this. Your view is the E-Rate specifically prohibits you from going

in for no cost——

Mr. SANTOS DIAZ. That is correct.

Ms. DEGETTE. [continuing] and identifying problems and working

with them to——

Mr. SANTOS DIAZ. No. Identify problems we did.

Ms. DEGETTE. I mean, I am not——

Mr. SANTOS DIAZ. We had meetings every week and——

Ms. DEGETTE. Sir, I understand you had meetings. Are you saying, though—what you’re saying is you could not be reimbursed for

training teachers and I understand that the law prohibits you from

paying for electricity, for example. But, aside from the meetings,

what did you do to try to make this system work together? Did you

work, for example, with PRT to make sure the connections worked?

Mr. SANTOS DIAZ. Yes. As a matter of fact, we had people from

PRTC in our offices weekly. We hired also a third party consultant

just to make sure that the communications were established between the schools through DRC and, again, through the Department of Education. We did go beyond and we tried. I am the product of a public school. I studied all my life in public schools and

I really wanted to see this work also. We did everything within out

responsibilities to make this work. However, there was another

agenda that didn’t make it. If they would have acquired——

Ms. DEGETTE. Let us do this.

Mr. SANTOS DIAZ. Can I just add this? If they would have acquired in the last 31⁄2 years 100,000 computers, this would have

been working. They don’t have any computers. They expect the

service provider to give them out for free. That is totally illegal.

Ms. DEGETTE. Here is the problem. They don’t have computers

because there has just been all this money spent and for no result

and now they can’t get any money from anybody. I would say that

is probably pretty accurate. Wouldn’t it be?

Mr. SANTOS DIAZ. That is true.

Ms. DEGETTE. Mr. Vidal.

Mr. VIDAL. I would like to just make a comment and also give

the opportunity to Professor Ramirez who was the project manager

for that project. I will translate for him when he speaks.

Mr. RAMIREZ. I just want to comment that during the summer

of 2001 a special project was conducted with the vendors to provide

access to 100 schools from Phases I and II meaning those that were

wired and also used the wireless connections internally.

After 3 months of efforts, only 63 of those 100 were finally connected. Based on these results, we requested from the vendors a

plan to recover the schools under their responsibility. As a result,

one vendor presented what we have called Proyecto 400.

The other vendor also presented a recovery plan and the sole fact

that they agreed on the recovery plan without any complaint is an

acknowledgement of the critical status of the project.

Ms. DEGETTE. I think Mr. Ramirez wanted to speak.

Mr. VIDAL. When he came in as a project manager for the network project in July 2001, because he didn’t have any documentation which to go on and get started, he called the suppliers to come

in for a meeting to then set the stage. He said everything that is

81

passed is behind us. Let’s get going. Let’s get started. Let’s have

a fresh start. Let’s concentrate on getting 100 schools up. Demonstrate that you can get 100 schools up and running.

They put a modest goal in front of them. Let’s get at least one

computer to be able to reach the Internet at each one of those 100

schools and let’s get it done by the end of July. So 3 months afterwards they had 63. They were not able to achieve the full 100 in

1 month or in 3 months.

Ms. DEGETTE. Gracias. Mr. Diaz, I just have one more question.

You testified that you were concerned and brought this up during

regular meetings. I wanted to ask you during what period of time

was the equipment that we saw in the photographs and videotape

sold to the Department of Education?

Mr. SANTOS DIAZ. I believe it was 1999/2000.

Ms. DEGETTE. And during that same period did anyone at your

company have concerns that the program was not going well, that

the third category on that chart was not happening?

Mr. SANTOS DIAZ. We have plenty of documentation sent to the

Department of Education where we were setting up the awareness

of the things that were going on. The same problems.

Ms. DEGETTE. I understand. You know, I don’t mean to be short

with you. I have a limited amount of time as does every other

member. My question is this $23 million of equipment that was

sold through the E-Rate and is now sitting in a warehouse, did you

ever say or did anybody at your company ever say, ‘‘Let’s stop

doing this. Let’s stop getting this money in and putting this equipment in the warehouse until we start wiring up some schools.’’

Mr. SANTOS DIAZ. Specifically, the wiring was done. The infrastructure was in place and those cards were for a bid of 100,000

computers which was out, was awarded, and then contested as——

Ms. DEGETTE. But you never said, ‘‘This isn’t going to happen.

I think we had better put a halt to this until it starts getting——

Mr. SANTOS DIAZ. How are we going to know that the bid was

going to be contested to this vendor and the 100,000 computers

were not going to be in?

Ms. DEGETTE. Let me ask you this. You heard Mr. Vidal testify

that now because of technological changes this equipment is three,

4 years out of date at a minimum. Are you willing to do anything

to work with them to try to——

Mr. SANTOS DIAZ. We have always been willing and I do not

agree in terms that this equipment cannot be used. We all know

here in this room——

Ms. DEGETTE. He never said it can’t be used. He said——

Mr. SANTOS DIAZ. It was obsolete.

Ms. DEGETTE. Do you agree with that or not?

Mr. SANTOS DIAZ. Sure, I agree. I mean, technology changes

every 6 months and we know that. There are faster computers,

faster equipment, and so on, but that doesn’t mean that you can’t

use what you have. If that’s what you have and that’s what you

paid for, why not use it? That I do not agree with.

Ms. DEGETTE. That is a great attitude toward the school children

of Puerto Rico.

Mr. GREENWOOD. The Chair recognizes himself for 10 minutes.

Did you want to say something, Ms. Lambert?

82

Ms. LAMBERT. Yes. I just have a comment in regard to Project

400. PRT participated with the vendor on the project—I am sorry,

with the Department of Education on the Project 400 because we

believed that an end-to-end provider such as us would enable this

project to work.

When the comment was made that it was in acknowledgement

of an error, it was more in acknowledgement to demonstrate that

the equipment that was purchased is usable and that we could provide Internet access to the schools and working together as a team

we would be successful in that effort.

We even did so on some of the Phase II schools to demonstrate

that, in fact, the Phase II school’s technology could also be integrated. When we came up to see Jane Mago we, in fact, showed her

a video of one of the Phase II schools in which the technology was

integrated to be functional. I just wanted to share that with you.

Mr. GREENWOOD. Let me ask this question and then we will get

back to you, Mr. Diaz. My understanding of the way this program

works is that the E-Rate funds cannot be used to actually buy the

computers. It can’t buy PCs and it can’t buy lap tops so the school

district is required to certify before it is eligible for these funds

that, in fact, it has the computers and it has the software. It has

that stuff to justify all of the infrastructure to hook it up to the

Internet. Is that right?

Mr. SANTOS DIAZ. That is correct.

Mr. GREENWOOD. Okay. Now, you just mentioned the fact that

they had put out an RFP and a bid to buy 100,000 computers.

Were you clear and are you clear today on whether, in fact, that

met the letter of the law? In other words, they weren’t able to certify that they had those computers. They may have been able to

certify that they were in the process of trying to acquire them but

what is your understanding of what the law requires or the rules

require in terms of actually having them in their custody in place

in their schools out to bid?

Mr. SANTOS DIAZ. My understand is that every year the Department of Education had to present a plan whereby they would justify the acquisition of the equipment. That was the first thing that

had to happen. I never saw the plan but they had mentioned to us

that they were in the process of acquiring 100,000 computers.

Mr. GREENWOOD. I understand that but I am asking you this. Is

that sufficient? We can ask the USAC people when they get up

next but is it your understanding that having put out a bid is sufficient to meet the requirement that they had the computers available to them to justify the connection?

Mr. SANTOS DIAZ. I don’t have any knowledge of that.

Mr. GREENWOOD. You don’t know one way or the other whether

it is or not?

Mr. SANTOS DIAZ. No.

Mr. GREENWOOD. Now, you ordered 73,000 wireless cards for

Puerto Rico’s schools. Is that right?

Mr. SANTOS DIAZ. Based on what they requested from us.

Mr. GREENWOOD. The Department lacked the computers to install them, as we just said. You unsuccessfully attempted to return

20,000 of those to Lucent. Is that correct?

Mr. SANTOS DIAZ. That is correct.

83

Mr. GREENWOOD. Nonetheless, DRC submitted invoices for payment by E-Rate for the purchase and the installation while they

sat, and while they continue to sit, wrapped and uninstalled. Why

did DRC violate program rules and improperly seek payment for

this equipment?

Mr. SANTOS DIAZ. As a matter of fact, that issue was addressed

by the vice president, the lady who was in charge, where she called

E-Rate Public Schools and Library Division stating that in our proposal we had included these cards and it was all bundled as a price

the configuration of the card. What was the procedure?

He said, ‘‘Well, if you have to install them and configure them

and the computers will be acquired later on, sure, you don’t have

to unbundle the configuration side of it. You can bill for it and then

subsequently configure these cards when installed.’’ Those were the

procedures that we followed.

Mr. GREENWOOD. Did you retain all the payment for the installation?

Mr. SANTOS DIAZ. Did I retain?

Mr. GREENWOOD. I mean, you got paid for that?

Mr. SANTOS DIAZ. I got paid for part of it, not all of it. Again,

we still have pending payments from E-Rate.

Mr. GREENWOOD. But would you want to be paid for installing

something that you didn’t install?

Mr. SANTOS DIAZ. No, no, if it is not going to happen.

Mr. GREENWOOD. It sounds like it is not going to happen.

Mr. SANTOS DIAZ. It looks like it is not going to happen because

they haven’t acquired the 100,000 computers which that would be

the solution for all this. If they would have acquired 100,000 computers, this would have been up and running as it should Mr.

GREENWOOD. And whose idea was it to try to take the leap all the

way to a wireless system? In other words, not being——

Mr. SANTOS DIAZ. The Department of Education. When the RPF,

what is says is the infrastructure using the latest technology. That

is what it specifically said.

Mr. GREENWOOD. Using the latest technology. And so who interpreted that phrase to mean wireless?

Mr. SANTOS DIAZ. Well, about three companies that went

through the bidding process offered wireless alternatives.

Mr. GREENWOOD. Including yours?

Mr. SANTOS DIAZ. Including ours.

Mr. GREENWOOD. How did DRC first learn about the E-Rate program?

Mr. SANTOS DIAZ. As we specifically state, it was through the

USAC publication of the 470 where they request bidding for Puerto

Rico and other States.

Mr. GREENWOOD. What happened to DRC when the current administration was elected?

Mr. SANTOS DIAZ. First thing is we went through all this political

persecution. Not only myself but all entrepreneurs with the previous administration.

Mr. GREENWOOD. What does that mean?

Mr. SANTOS DIAZ. That means that we are prostatehooders and

anything that smells prostatehood. All the entrepreneurs canceled

their contracts and we were just part of them. I was very attached

84

to a previous Governor and previous commissioner in resident. It

is very well known that I am a prostatehooder.

Mr. GREENWOOD. Let me be clear. Do you believe the Department of Education canceled the contract with DRC because of your

politics and not because of the services of your company?

Mr. SANTOS DIAZ. That is correct.

Mr. GREENWOOD. What do you have to say to that, Mr. Secretary?

Mr. REY. Mr. Chairman——

Mr. SANTOS DIAZ. Honestly. We evaluated all the companies that

were working for us and after a year we canceled the contract because of the lack of performance. That is the type of thing that we

have to avoid.

Mr. GREENWOOD. How many contracts like Mr. Diaz’, like DRC’s,

were canceled by the Puerto Rican Department of Education?

Mr. SANTOS DIAZ. I don’t recall the number exactly.

Mr. GREENWOOD. Give me an order of magnitude.

Mr. SANTOS DIAZ. All the vendors or all the outsourcing that was

justified within the budget of the Department was canceled.

Mr. GREENWOOD. Would you say this is in the order of magnitude of 10 or 100 or 1,000?

Mr. SANTOS DIAZ. We kept some of them. I don’t know. Maybe

10. I am not sure.

Mr. GREENWOOD. You think maybe the entire Department of

Education canceled 10 contracts?

Mr. SANTOS DIAZ. We are talking about $3 billion. I don’t recall

honestly. It probably could be 10 of different types of contracts.

Mr. GREENWOOD. So it wasn’t just contracts that had to do with

the E-Rate Program?

Mr. SANTOS DIAZ. Of course no. Lawyers and public relations

agencies.

Mr. GREENWOOD. And over what period of time from the time

that your administration took over, how long did it take for those

contracts to be canceled?

Mr. SANTOS DIAZ. First of all, we evaluate them and we get the

change for them to prove that they were useful to the Department

and that they could attain and achieve their performance as they

promised to after an evaluation, after a legal consultation.

Mr. GREENWOOD. So are we talking that this happened in a matter of days, weeks, months, or years?

Mr. SANTOS DIAZ. By any means months.

Mr. GREENWOOD. Months.

Mr. SANTOS DIAZ. Even a year.

Mr. GREENWOOD. Do you happen to know anything about the political affiliation of any of those contracts, the companies or the individuals of all those contracts?

Mr. SANTOS DIAZ. That is not a criteria and, again, I have been

20 years of my life during research. I come from economics. I don’t

come from a political party and that is the mentality that this government has.

Mr. GREENWOOD. We have quite different testimony here. Don’t

we? We have the Secretary of Education under oath saying there

was no political consideration in the dismissal of any of these contracts. We have Mr. Diaz under oath saying that there was wholeVerDate 11-MAY-2000 11:23 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00092 Fmt 6633 Sfmt 6602 95443.TXT HCOM1 PsN: HCOM1
85

sale cancellation of contracts for political reasons including your

own. Is that right?

Mr. SANTOS DIAZ. Yes. As a matter of fact, I can add that all our

contracts with all agencies were canceled during the same period

of time so this obviously was a political thing.

Mr. GREENWOOD. Are you aware of other companies that shared

your political affiliation that had their contracts canceled by the

Department of Education?

Mr. SANTOS DIAZ. I would say nearly 100 percent of all entrepreneurs with the previous administration have canceled their contracts. 100 percent.

Mr. GREENWOOD. And do you differ with the Secretary’s estimate

that as far as the Department of Education was concerned, the

order of magnitude was something like 10 contracts?

Mr. SANTOS DIAZ. I do not have that kind of information.

Mr. GREENWOOD. You don’t know?

Mr. SANTOS DIAZ. No.

Mr. REY. Mr. Chairman, can I add that several of the contractors

that were working for the Department of Education are in jail

today just for the record.

Mr. GREENWOOD. Okay. Back to you, Mr. Secretary. Why are you

shifting to a satellite system which will use little if any of the currently installed infrastructure?

Mr. REY. I will ask Mr. Vidal to answer that question. To start

with, it is cheaper, it is faster, and in terms of connectivity brings

us a better option to our schools but the details Mr. Vidal will take

of.

Mr. VIDAL. The key reason is the price and functionality, a very,

very attractive ratio for the Department. When the last bid for year

6 was awarded to Centennial, Puerto Rico, that decision eventually

was challenged by the Puerto Telephone Company. That challenge

consumed about 7 months of one of our entire years to try to get

this system up and running.

On June 30 when the service was discontinued, we were faced

now with 7 months delayed in having service to the schools, no

connectivity to the Internet, and having to do something quick

about it because school was starting in August.

We devised then an emergency plan utilizing traditional telephones, just dial-up telephones, to at least provide access to two

computers that prior to that had been installed in every library of

all the schools. In parallel with that we evaluated alternatives and

alternatives that were of a size or of the depth of the pocket that

the Department could afford. As a result of that, we found that satellite technology was available and could work. We tested not only

satellite technology but we tested different vendors, satellite vendors, and also we tested other technologies.

The test showed us under real circumstances actually putting

into a school that had a laboratory with 26 computers that it could

withstand and provide that level of service. Then we made the decision to settle ourselves on this technology and proceed with all necessary steps to begin installation.

Mr. GREENWOOD. Let me finally ask this question. You may have

testified to this, Secretary Rey, but I don’t recall. Tell me about

your expectations to purchase computers, what your time line is

86

and when you expect to have enough computers, whether it is

100,000 or whatever it is, to be adequate to the task of educating

the children.

Mr. REY. We have 12,000 computers already in. By the end of the

year my aim is to connect all the schools of Puerto Rico to the

Internet and to have the proper equipment in place in all schools

in Puerto Rico.

Mr. GREENWOOD. By the end of this year?

Mr. REY. Yes, indeed.

Mr. GREENWOOD. I may have you back.

Mr. REY. Sure. We would be glad to be back.

Mr. GREENWOOD. Does the gentlelady from Colorado wish to inquire further?

Ms. DEGETTE. Thank you, Mr. Chairman. Now, Ms. Lambert, I

wanted to follow up a little bit with you. You testified I believe that

your company received about $31 million dollars. Correct?

Ms. LAMBERT. For years 1, 2, and 3.

Ms. DEGETTE. For years 1, 2, and 3. Most of that was for T1

service to the schools. Correct?

Ms. LAMBERT. That is correct.

Ms. DEGETTE. I understand that you were charging $1,500 per

school per month for the T1 line service. Is that right? You charged

it for 5 years, I think. You were paid for the first 3 years. Right?

Ms. LAMBERT. That is correct. May I answer in terms of——

Ms. DEGETTE. Sure. Go ahead.

Ms. LAMBERT. The $1,500 is a tariff rate and the service that was

requested was an ATM T1 line. It is very different from a framed

relay or fractional T1. The request was for an ATM T1 connectivity

with a vision to provide video and distance learning on those lines.

Ms. DEGETTE. Tragically few, if any, of the schools were actually

able to utilize those lines. Correct?

Ms. LAMBERT. I think the vision was not met.

Ms. DEGETTE. Anywhere. Right?

Ms. LAMBERT. In the schools, yes.

Ms. DEGETTE. Right. Now, I would like to know for those lines

you just described how much does it actually cost for out-of-pocket

cost, marginal cost, etc., for an idle T1 line?

Ms. LAMBERT. We do not measure our margins based on a particular product so I can’t answer for you what my margin would be

on an ATM line. But if I may answer generally speaking, the investment was made in the ATM network. The investment was

made in the transmission equipment and all of those facilities

could not be used for another customer when they were dedicated

to the school.

Ms. DEGETTE. So does that come up to a loss or a lost opportunity cost then of $1,500 per month per school?

Ms. LAMBERT. Well, I am not sure I understand.

Ms. DEGETTE. If you don’t know, you don’t know.

Ms. LAMBERT. I am not sure I understand your question.

Ms. DEGETTE. Well, I mean, here is my question. For 5 years you

had these ATM lines to the schools for which you were billing

$1,500 per school. You were paid most of the $31 million for the

first 3 years for these lines which were not usable. Right? And

then, as I understand it, you billed for the next 2 years for those

87

lines and now you are in litigation over being paid for that even

thought they weren’t used then. Correct?

Ms. LAMBERT. Well, first——

Ms. DEGETTE. No, is that right?

Ms. LAMBERT. No, that is not right.

Ms. DEGETTE. Okay. Tell me where I am wrong.

Ms. LAMBERT. Okay. First of all, we are not in litigation.

Ms. DEGETTE. Okay.

Ms. LAMBERT. The Secretary and I have come to an agreement

that we are going to work through our differences on this issue so

we are not in litigation.

Ms. DEGETTE. That is the best news I have heard all day.

Ms. LAMBERT. Second, we made the investment and the network

purchase primarily to provide schools. Again, I was not in Puerto

Rico at the time but I know at the time that this service was requested, PRT did not have an ATM network so the company made

an investment in purchasing the capability to provide an ATM

capability——

Ms. DEGETTE. And how much did the company pay for that?

Ms. LAMBERT. I can’t answer that question.

Ms. DEGETTE. See, you can see why we are frustrated because what we are seeing is you guys being paid $31 million to hook up

these ATM lines which were never used and still aren’t being used

to this day. We see DRC being paid almost $90 million and there

is $23 million of stuff sitting in warehouses that is now obsolete

which they are saying we should use anyway and still only very

few schools are wired. I don’t have much time left but you get my

drift. I am not going to sit here and argue with you, both of you,

and everybody. You know, this is about kids.

Ms. LAMBERT. I understand.

Ms. DEGETTE. I don’t care how you cost it out or the lost opportunity costs or the investment. You have made a profit from this

and you cannot—I mean, you have. One reason we instituted the

E-Rate is so that school children could benefit from increased competition. I know you get that.

I have a couple more questions for Secretary Rey. Is it your understanding that the E-Rate rules mandate that bids be awarded

to whichever vendor is able to provide all the services in the

schools, RFP, at the lowest price?

Mr. REY. That is my understanding, of course.

Ms. DEGETTE. I want to know if you have any idea how the previous administration’s award to the 5-year E-Rate contract to

PRTC, even though DRC’s proposal was $9.2 million lower in cost

than the PRTC offer?

Mr. REY. I don’t have any answer.

Ms. DEGETTE. Okay. Now, I think you testified in your opening

statement that your schools have received no E-Rate funding since

2001. Is that correct?

Mr. REY. That is correct.

Ms. DEGETTE. What effect has that had on Puerto Rico schools

and school children?

Mr. REY. It took us 3 years to be here doing some testimony trying to recover some money and with a lot of struggle trying to connect 400 schools that we have connected today. I mean, it took us

88

31⁄2 years to struggle with the E-Rate funding in order to construct

the connectivity of the children of Puerto Rico to the world through

the Internet. However, again, I have to say that our Government

has invested more than $300 million trying to reconstruct whatever

was left out by the former administration.

Ms. DEGETTE. What effect has this had on the kids?

Mr. REY. Detrimental effects for now and for the future because

perhaps we are dragging our feet in terms of the knowledge that

they should have at this point in Puerto Rico.

Ms. DEGETTE. Now, in your opening statement you also testified

about your frustration with the FCC and the USAC for their failure to help Puerto Rico rectify these problems in a timely manner.

Even today do you have any indication when Puerto Rico might receive E-Rate funds?

Mr. REY. Not at all.

Ms. DEGETTE. And I just want to ask——

Mr. REY. Even though I am very optimistic about it.

Ms. DEGETTE. There is always an optimist in every crowd.

Mr. REY. That is why I am Secretary for Education. Otherwise,

I wouldn’t be here.

Ms. DEGETTE. And we admire your efforts.

Mr. REY. Thank you.

Ms. DEGETTE. I have no further questions.

Mr. NEVARES. Mr. Chairman, if I may be heard just very briefly.

Mr. GREENWOOD. Were you sworn in with the rest? Did you take

the oath?

Mr. NEVARES. No, but I can take the oath.

Mr. GREENWOOD. All right. Then you will have to stand and raise

your right hand.

[Witness sworn.]

Mr. GREENWOOD. Please restate your name again for the record.

Mr. NEVARES. My name is John Nevares.

Mr. GREENWOOD. Speak right directly into the microphone Mr.

NEVARES. Going back to the bid for 100,000 computers that was

challenged in the courts in Puerto and canceled by the court, if this

new administration in the year 2001 had come out with a bid for

100,000 computers, we wouldn’t be here today because the children

of Puerto would have a computer to work with but they waited

until now, 31⁄2 years later, to acquire, I just heard, 12,000 computers which I know are not even connected to the Internet because in a press conference given by the Secretary on May 6, which

I can provide to the committee, he stated that they still had—and

this is May 6, 2004—that they still at the Department of Education

public school system only 3,000 computers for the children.

Mr. GREENWOOD. Do you presume to know why it is that the

school district did not order the 100,000 computers 3 years ago?

Mr. NEVARES. I have no idea why they didn’t——

Mr. GREENWOOD. Let us ask Mr. Rey.

Mr. NEVARES. [continuing] bid 100,000 computers and that would

have solved one part of the problem. The other problem would have

been the electrical problems in some schools which could have also

been fixed and we wouldn’t be here today.

Mr. GREENWOOD. Okay. Mr. Rey, you want to quickly respond to

that?

89

Mr. REY. Our priority was to connect the schools to the Internet.

As a matter of fact, we reviewed the whole process when we arrived to the Department because it was not a matter of buying

things and gadgets, state-of-the-art, to satisfy the vendors. It was

to connect the people of Puerto Rico, the students of Puerto Rico

to the Internet.

Mr. GREENWOOD. What the gentleman just testified I think

would argue is you had the phone company up and running. You

had the lines dropped at the schools. You had the equipment in the

warehouse. The missing component was the computers. That is his

argument.

Mr. REY. We audit all the process, Mr. Chairman, and that is not

the reality that we found.

Mr. GREENWOOD. Okay. Well, you can understand our frustration. The picture that we have here now is $30 million worth of

phone service that was never utilized down the drain. We have

something like $58 million worth of lines run to schools which will

now rot for the next century because they are not going to be used.

And we have got $23 million worth of equipment in warehouses

that will probably be bulldozed into a landfill in Puerto Rico somewhere and that is all money paid by grandmothers trying to call

their kids to wish them a happy birthday somewhere in the United

States. This a grotesque waste of public dollars and we are going

to put an end to it in this committee.

All right. We thank you all for your testimony and for traveling

to Washington.

Mr. REY. Mr. Chairman, I commend you for this initiative and

congratulations and thank you for the invitation.

Mr. GREENWOOD. Thank you, sir. Thank you.

Okay. I would ask the third panel consisting of Ms. Carol

Mattey, Deputy Chief of Wireline Competition Bureau for the Federal Communications Commission, and Ms. Jane E. Mago, Chief,

Office of Strategic Planning and Policy Analysis at the Federal

Communications Commission, and Mr. George McDonald, Vice

President, Schools and Libraries Division, Universal Service Administrative Company.

Okay. Good afternoon. We thank you for your patience and we

look forward to your testimony. It is the custom of this subcommittee to take testimony under oath and so I begin by asking

if any of you object to giving your testimony under oath this afternoon.

Ms. MATTEY. No.

Mr. GREENWOOD. I also need to inform you that pursuant to the

rules of this committee and the House that you are entitled to be

represented by counsel as you give your testimony. Do any of you

wish to be represented by counsel?

Ms. MATTEY. No.

Mr. MCDONALD. No.

Mr. GREENWOOD. Okay. In that case, would you please rise and

raise your right hands.

[Witnesses sworn.]

Mr. GREENWOOD. You are under oath. Is it Mattey?

Ms. MATTEY. Mattey.

90

Mr. GREENWOOD. Okay. You are recognized for your opening

statement. Make sure the microphone is turned on. If it has a

green light, it is on. Pull it as close to your mouth as possible so

everyone can hear you. Thank you.

TESTIMONY OF CAROL E. MATTEY, DEPUTY CHIEF, WIRELINE

COMPETITION BUREAU, FEDERAL COMMUNICATIONS COMMISSION; ACCOMPANIED BY JANE E. MAGO, CHIEF, OFFICE

OF STRATEGIC PLANNING AND POLICY ANALYSIS, FEDERAL

COMMUNICATIONS COMMISSION; AND GEORGE McDONALD,

VICE PRESIDENT, SCHOOLS AND LIBRARIES DIVISION, UNIVERSAL SERVICE ADMINISTRATIVE COMPANY

Ms. MATTEY. Good morning Chairman Greenwood and distinguished members of the subcommittee. I am Carol Mattey, Deputy

Bureau Chief of the Wireline Competition Bureau and joining me

today is Jane Mago, Chief of the Office of Strategic Planning and

Policy Analysis at the FCC.

We appreciate the opportunity to appear before you to discuss

the E-Rate Program which provides critical support enabling

schools and libraries to access the vast resources of the Internet.

E-Rate has provided over $11 billion in discounts enabling literally

millions of school children and library patrons including those in

many of the nation’s poorest and most isolated communities to obtain access to modern telecommunications and information services

for educational purposes.

Communities in every state in the Nation have benefited from ERate. Ninety-nine percent of public schools now have Internet access and 94 percent of them have broadband connections in large

part due to the discounts available from the E-Rate.

USAC administers the E-Rate Program on a day-to-day basis

subject to FCC oversight. Our oversight through rulemaking, factspecific adjudicatory decisions, and auditing is fundamental to

maintaining an effective E-Rate Program that is free of waste,

fraud, and abuse.

Despite the existence of bad actors that have taken advantage of

certain aspects of the program design, we believe that this program

is an overall success. There will always be those who try to game

the system, but the Commission is committed to closing the loopholes where abuse can occur.

The Commission has already made a number of changes through

rulemaking to deter waste, fraud, and abuse. For instance, we have

adopted rules to debar bad actors from the program and limits on

repeated requests for internal connections. We are also using the

rulemaking process to address the issues of program design raised

by the Office of Inspector General. We will be addressing recovery

issues and strengthening our document retention requirements. We

also are working to synchronize our rules and USAC’s procedures

to ensure effective enforcement.

Today’s hearing is focusing on one matter, the special case of the

E-Rate applications of Puerto Rico Department of Education. Puerto Rico is a case where there was admitted misconduct in the first

years of the E-Rate funding. That misconduct led USAC to suspend

processing of any PRDOE funding requests. After several meetings

91

with FCC staff, Puerto Rico formally requested in early 2003 action

on its pending request.

By that time the Commission was aware that there were a number of cases in which either a service provider or a beneficiary were

under some form of investigation that had caused them to be suspended from the E-Rate Program. Puerto Rico was only one such

situation and the Commission concluded that it was imperative to

develop a framework that would protect the E-Rate fund in such

situations while remaining sensitive to the interest of parties that

may ultimately be cleared of any wrongdoing.

The Commission stated and applied this frame work in the Puerto Rico order issued in November 2003. The Commission unanimously held that USAC generally should defer action on any application upon receiving evidence of potential program violations until

there is sufficient reason to believe that those violations are no

longer implicated In concise terms, the Puerto Rico order lays out

a trust but verify policy. The Commission’s trust is based on Puerto

Rico’s current administration’s assertion that it has complied with

the Commission’s rules and has implemented a plan to correct the

fundamental deficiencies in the infrastructure of Puerto Rico’s

schools.

The required audits are the means by which the Commission

verifies the assertions of the current Puerto Rico administration.

The Puerto Rico experience provides a good lesson on how the FCC

can enhance program integrity. Irregularities were uncovered

through routine program audits and self-disclosure. USAC responded with a measured response that demanded correction of

program violations before risking further E-Rate dollars.

The Commission used its review of this matter to craft a general

policy framework to deal with entities subject to investigation for

failure to comply with our rules. This policy allows Puerto Rico to

move forward as a program participant if it can pass the rigors of

a targeted audit designed to test the areas that have been identified as weaknesses.

As the Puerto Rico situation illustrates, we oversee the operation

of E-Rate through a system of audits that measure day-to-day compliance with our rules. In 2004 the Commission is implementing an

even more extensive audit program. We intend to use statistical

sampling techniques so that the audit results can provide a basis

for forming conclusions about overall program compliance and also

provide us with needed information to comply with the Improper

Payments Act of 2002.

To conclude, we are committed to making ongoing improvements

in the E-Rate Program and welcome questions on these issues.

Thank you, Mr. Chairman and committee members for the opportunity to participate in this review.

Mr. GREENWOOD. Thank you.

Ms. Mago, do you have testimony?

Ms. MAGO. My testimony was covered by Ms. Mattey.

Mr. GREENWOOD. All right. That is what I thought might be the

case.

[The prepared statement of Jane E. Mago follows:]

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PREPARED STATEMENT OF JANE E. MAGO, CHIEF, OFFICE OF STRATEGIC PLANNING

AND POLICY ANALYSIS, AND CAROL E. MATTEY, DEPUTY CHIEF, WIRELINE COMPETI- TION BUREAU, FEDERAL COMMUNICATIONS COMMISSION

Good morning, Chairman Greenwood, Representative Deutsch, and distinguished

members of the Subcommittee. We appreciate the opportunity to appear before you

to discuss the FCC’s efforts to continue to improve the E-rate program and provide

critical support enabling schools and libraries to access the vast resources of the

Internet. The Commission is proud to be implementing this important aspect of universal service support.

INTRODUCTION

The schools and libraries mechanism of the FCC’s universal service program,

often called the E-rate program, has provided discounts enabling literally millions

of school children and library patrons, including those in many of the nation’s poorest and most isolated communities, to obtain access to modern telecommunications

and information services for educational purposes. Our nation has benefited significantly from the E-rate program, which the FCC created to fulfill Congress’s direction in section 254(h) of the Communications Act.

Over the course of the first six years of its existence, the E-rate program has com- mitted over $11 billion in funds to schools and libraries in every state in the nation.

This support has benefited communities across the country, large and small, urban

and rural. According to the U.S. Department of Education, ninety-two percent of

classrooms in public schools were connected to the Internet in 2002, while only fiftyone percent were connected in 1998, the first year of the program. Ninety-nine percent of public schools now have Internet access, and ninety-four percent of them

have broadband connections. This tremendous progress is due in significant part to

the discounts available from the E-rate program.

As an ongoing matter, the E-rate program enables schools and libraries to pay

discounted rates to keep this access affordable. Once the schools and libraries are

wired, they still face monthly recurring service charges for telecommunications service and Internet access. These service charges are sizeable. Indeed, in the 2004 filing window schools and libraries sought support for $1.6 billion in telecommunications services and Internet access.

The Universal Service Administrative Company (USAC) administers the E-rate

program on a day-to-day basis. USAC is a public non-profit company that administers all four universal service programs. Among other things, USAC currently

processes nearly 40,000 E-rate applications a year and disburses funds for approved

applications. USAC operates within the rules established by the FCC for the E-rate

and other universal service programs, and the Commission and its staff exercise

oversight over USAC.

As the E-rate program approaches its seventh birthday, the Commission is actively assessing where we are and how we can improve the E-rate program going

forward. This is very much a team effort within the FCC, with regular interactions

between the Wireline Competition Bureau, the Enforcement Bureau, the Office of

Managing Director, the Office of General Counsel, the Office of Strategic Planning

and Policy Analysis, and the Office of Inspector General.

Despite the existence of bad actors that have taken advantage of certain aspects

of the program design, we believe that this program has been an overall success.

There will always be those who try to game the system, but the Commission is committed to closing the avenues where abuse can occur and eradicating all waste,

fraud and abuse in the E-rate program. We recognize that it is our job, as it has

been from day one, to maintain oversight over the E-rate program. And while there

have been aberrations, by and large, we have enabled implementation of the statutory goals with a minimum of waste, fraud and abuse.

• The Commission’s oversight program has had three chief components—rulemaking, fact-specific adjudicatory decisions, and auditing—and these three components continue to reinforce each other as the program enters its seventh year.

• We will be expanding the scope of our auditing work in the coming year substantially, in order to meet our obligations under the Improper Payments Information Act of 2002 (IPIA). Although the audit work conducted to date suggests that

the level of rule noncompliance is relatively low, our goal is eradication. Let us emphasize: waste, fraud and abuse is never acceptable. We will work vigorously to protect these dollars from misuse.

• Finally, the systems we have in place have successfully detected situations, like

the Puerto Rico Department of Education, where program participants have run

afoul of our rules. We learn from our experiences: corrective measures have been

launched to rectify past problems, and prevent them from recurring in the future.

93

And through these efforts, we seek to ensure that the school children and library

patrons across America continue to enjoy the benefits of affordable access to advanced telecommunications and information services.

OVERSIGHT THROUGH RULEMAKINGS

In 2002, the E-rate program’s fifth year, the Commission began an ongoing review

process, which continues to this day, to consider ways to improve the E-rate program. The Commission issued a Notice of Proposed Rulemaking (NPRM) to seek

comment on ways to ensure that E-rate program funds are utilized in an efficient,

effective, and fair manner, while preventing waste, fraud and abuse. Since then, the

Commission has issued a series of orders that have brought us further down the

road to improve the E-rate program, and the Commission continues to pursue these

reform goals today. Through our rulemaking process, we seek to make the Commission’s requirements more transparent for all and to eliminate confusion as to what

the FCC expects of participants in this program.

In the last year, the Commission’s rulemaking activities have focused on tightening our rules to prevent waste of the limited E-rate dollars by bad actors who

seek to take advantage of certain aspects of the program’s design. For example, in

April 2003, the Commission adopted rules to debar individuals and companies that

have proved to be bad actors. We have procedures to expel from the program anyone

convicted of a criminal violation or found civilly liable for actions relating to this

program. We already have applied these procedures to several companies, and we

have sought comment on what other situations may warrant debarment.

In December 2003, the Commission emphasized that our rules have always prohibited funding of duplicative equipment and service. The Commission also adopted

new rules limiting the transfer of E-rate funded equipment and limiting repeated

requests for internal connections. The Commission clarified the types of maintenance services that are eligible for support, and adopted a more transparent process

for updating the list of eligible services in future years. In addition, the Commission

directed USAC to develop a pilot program to test a computerized online list of eligible internal connections equipment, a measure expected to enable USAC and the

Commission to better track the types of equipment the program is supporting.

The Commission’s rulemaking efforts to improve the E-rate program are ongoing.

In December 2003, the Commission requested comment on additional proposals designed to curb the occurrence of waste, fraud and abuse. For instance, the Commission asked for public comment on whether to adopt bright line rules for determining

‘‘cost effective’’ funding requests, such as a specified dollar amount per student or

library patron for specific types of service; whether to codify additional requirements

for technology plans; and whether to require that beneficiaries disclose their use of

outside consultants. The Commission also sought comment on whether to lower the

highest discount rates, in response to suggestions that the current discount levels

may not provide sufficient incentives to make prudent funding requests. The comment cycle on this Further Notice of Proposed Rulemaking closed in April, and we

expect to make further recommendations in two or more orders, one to be presented

this quarter and the other to be presented next quarter.

We also are using the rulemaking process to address issues of program design

raised by the Office of Inspector General. For instance, the Wireline Competition

Bureau is recommending that the Commission refine its rules for recovery of funds

committed in violation of statutory or FCC requirements, and strengthen its document retention requirements to enhance our oversight activities, as recommended

by the FCC’s Office of Inspector General. We believe that such measures, if adopted,

would greatly reduce the occurrence of waste, fraud an abuse by those who seek to

unjustly enrich their own fortunes to the detriment of the E-rate program.

In addition, we are working to synchronize our rules and USAC’s procedures.

USAC has established numerous operating procedures to administer the e-rate program on a day-to-day basis. USAC needs the flexibility to act swiftly in response

to specific inquiries and situations. The Commission has codified a number of USAC

procedures through the rulemaking process in the last year, and the Wireline Competition Bureau has directed USAC to prepare a list of all USAC procedures a violation of which should form the basis for recovery of funds. We are working to establish ‘‘bright lines’’ for beneficiary compliance, where possible, and to make clear to

beneficiaries the consequences of noncompliance.

To sum up, as the program has matured, the measures taken by the Commission

to improve the E-rate program through our rulemaking oversight have evolved beyond tightening ‘‘nuts and bolts,’’ to refining the application and disbursement processes, to addressing broader policy issues, such as creating incentives for beneVerDate 11-MAY-2000 11:23 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00101 Fmt 6633 Sfmt 6621 95443.TXT HCOM1 PsN: HCOM1
94

ficiaries to reduce waste and promote more equitable consumption of the program’s

resources.

OVERSIGHT THROUGH ADJUDICATIONS

The second oversight tool the Commission uses is adjudication, deciding specific

factual cases under our rules.

Section 54.702(c) of the Commission’s rules expressly states that USAC ‘‘may not

make policy, interpret unclear provisions of the statute or rules, or interpret the intent of Congress. Where the Act or the Commission’s rules are unclear, or do not

address a particular situation, the Administrator shall seek guidance from the Commission.’’ Our rules also expressly provide that any party may seek Commission review of any action taken by USAC. Through our review of appeals of specific decisions made on E-rate applications, as well as our examination of broader questions

that necessarily arise in the course of administering a $2.25 billion per year funding

program, we exercise oversight over the universal service fund and implement measures to reduce the occurrence of waste, fraud and abuse.

By 2003, the Commission was aware that there were a number of cases in which

either a service provider, a beneficiary, or both, were under some form of investigation that implicated their involvement in the E-rate program. The Commission concluded that it was imperative to address some specific problem situations. In doing

so, it developed a general framework for how to protect the E-rate fund in situations

in which one or more parties is under investigation for potential waste, fraud and

abuse, while remaining sensitive to the interests of parties that ultimately may be

cleared of any wrongdoing.

The Commission stated and applied its general framework in the Puerto Rico Department of Education (PRDOE) Order issued in November 2003. The Commission

unanimously held that USAC generally should defer action on any application upon

receiving evidence, including evidence from an active law enforcement investigation,

of potential program violations, until such time as questions raised by the evidence

can be resolved, or until there is sufficient reason to believe that potential program

violations are no longer implicated. The Commission expressly recognized that it

may be appropriate to fund applications, notwithstanding the pendency of an ongoing law enforcement investigation, after subjecting such applications to an especially

probing and cautious review. This minimizes inadvertent harm to innocent parties,

such as a school and its students, or a library and its patrons, who may have no

involvement in any of the alleged wrongdoing.

Today’s hearing is focusing on the special case of the E-rate applications of the

Puerto Rico Department of Education (PRDOE). We are pleased to work with the

subcommittee and its staff in looking at these transactions. PRDOE, in fact, is a

case-in-point of how the Commission’s sequential process of rulemaking, adjudication, and audit is effective.

In 2000, PRDOE was included in a randomly selected audit of seventeen program

beneficiaries conducted for the first program year performed by outside auditors engaged by USAC, and field work commenced later that year. In April 2001, the Office

of the Comptroller General of Puerto Rico informed the FCC’s Office of Inspector

General that the Comptroller had found evidence that PRDOE had not complied

with state and local procurement regulations during years one and two of the

schools and libraries program. The IG referred the matter to the Federal Bureau

of Investigations in May 2001. Meanwhile, USAC concluded its audit process in October 2001 and, in December 2001, issued a letter to PRDOE suspending all pending

disbursements and placing further application processing on hold, pending receipt

of further information.

Over the course of 2002, PRDOE provided additional information to USAC and

Commission staff. The new PRDOE administration admitted to USAC and to Commission staff that things were amiss under the prior administration in the expenditure of E-rate funds. The new PRDOE administration said that it would take corrective action, including making major personnel and structural changes to mitigate

and correct the problems of the prior administration. In numerous meetings and discussions FCC staff and PRDOE officials focused on ways to permit PRDOE to participate in the E-rate program, while ensuring appropriate protections against

waste, fraud and abuse. In addition, over this time, FCC staff coordinated with officials at the Department of Education and Department of Justice regarding investigations relating to PRDOE and proposals to ensure appropriate handling of funds

in the future.

Ultimately, and in recognition that the need to revalidate the eligibility of E-rate

applicants might not be unique to PRDOE, Commission staff concluded that a public

comment process would provide the best way for the agency to move forward. While

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admittedly more time consuming than what the parties had hoped, this process was

transparent and fair. Early in 2003, the new PRDOE administration requested in

writing that the Commission direct USAC to process its applications and disburse

funds for program years 2001 and 2002. This commenced the adjudicatory process,

and Commission staff sought public comment on that request, received filings from

three parties, and prepared recommendations for the Commission.

On November 25, 2003 the Commission issued the PRDOE Order, concluding that

it would be appropriate for USAC to resume processing of PRDOE’s pending applications for funding years 2001 and 2002 upon completion of a targeted, independent

audit designed to provide assurances of PRDOE’s compliance with the FCC’s rules.

The Commission maintained USAC’s suspension of PRDOE’s first three years of

participation in the program, pending completion of a separate independent audit

and further action by the Commission.

In concise terms, the PRDOE Order lays out a ‘‘trust but verify’’ policy towards

the current Puerto Rican situation. The Commission’s trust is based on the current

Puerto Rican administration’s assertion that it has complied with the Commission’s

rules and has implemented a plan to correct fundamental deficiencies in the infrastructure of PRDOE’s schools and offices. The required audits are the means by

which the Commission verifies the assertions of the new PRDOE administration.

The PRDOE experience provides a good lesson on how the FCC can enhance program integrity through routine detection, intervention and responsive policymaking.

Irregularities with PRDOE were uncovered through routine program audits and

self-disclosure by a subsequent administration. USAC responded with the measured

response that demanded resolution of program violations before risking further Erate dollars. The Commission used its review of PRDOE to craft a general policy

framework to deal with entities subject to investigation for failure to comply with

our rules. This newly enunciated policy allows PRDOE to move forward as a program participant if it can pass the rigors of a targeted audit designed to test the

areas that routine audits identified as weaknesses under the prior administration.

The Puerto Rico story is not over. The targeted audits called for in the FCC’s November order have begun. We hope that PRDOE can demonstrate that it was in

compliance with our rules when it submitted its applications in 2001 and 2002.

Meanwhile, we are reviewing our rules and audit procedures to learn from this experience. We all come away wiser, and the E-rate program will be stronger as a result of this experience. The lessons we have learned here and the process we have

in place hopefully will make the E-rate program work better in the future. We are

hard at work to avoid a ‘‘next time.’’

Even while devoting significant staff resources to addressing the PRDOE case, the

Commission ruled in two other major E-rate adjudications in 2003. The Commission

issued a major order that closely examined procurement practices in a number of

school districts, not in Puerto Rico, that collectively sought over $250 million in Erate funding. The Commission concluded that those practices thwarted the Commission’s competitive bidding requirements and clarified what applicants need to do to

comply with our rules. Also in 2003, the Commission addressed a case where a key

individual associated with a service provider that provided state-wide internet access service was under law enforcement investigation. In that case, the Commission

concluded it was appropriate not to provide any support to that service provider

pending resolution of the investigation. At the same time, the Commission made

provisions to ensure that subcontractors that were not in any way implicated by the

investigation would receive payments for services rendered. We note as well that the

Commission decided each of these adjudications unanimously.

OVERSIGHT THROUGH AUDITS

As the PRDOE situation illustrates, we oversee the operation of E-rate through

a system of audits that is a measure of day-to-day compliance with our rules. We

are expanding that system, to ensure that we detect the bad actors we know will

try to take advantage of the program.

The Commission is strongly committed to maintaining a robust audit program for

the E-rate, and is working closely with USAC on all audits. Audits of the E-rate

program provide important information to the Commission in assessing program

compliance, and also in helping the Commission identify steps that it may take to

help reduce the likelihood of waste, fraud and abuse.

We have an active E-rate audit program. Since the E-rate program’s inception,

USAC has conducted beneficiary audits. USAC now has twelve full-time staff that

conducts internal audits of the program, and also engages external independent

auditors to do more extensive audit work. The Wireline Competition Bureau has two

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full-time audit staff dedicated to universal service oversight, as well as two audit

staff that perform that function on a part time basis.

In addition, our Office of Inspector General dedicates three of its eight auditors

to Universal Service Fund oversight. In October 2001, we detailed another four

auditors from the Wireline Competition Bureau (then known as the Common Carrier Bureau) to assist in auditing the E-rate program. In January 2003, we entered

into a Memorandum of Understanding with the Department of Interior and USAC

to conduct additional E-rate audits. Two audits have been completed under this arrangement and fieldwork has been completed in three more.

The audit program is a cooperative effort. In December 2002, for example, USAC

engaged in an independent auditor to conduct 79 beneficiary audits from funding

year 2000. At our request, these audits were conducted according to government approved standards so that our Inspector General could more easily use the data from

those audits for our purposes.

Early audits of the E-rate program were directed at a discrete number of high dollar beneficiaries. More recently, the audit program has expanded in terms of sheer

numbers of beneficiaries audited and the random selection of such beneficiaries. The

annual number of audits has grown from about two dozen in the early years to over

one hundred in 2003. These audits are conducted by professional auditors, both internal USAC audit staff, and independent auditors with whom USAC contracts. To

date, audits have been conducted of beneficiaries that collectively have received over

$1.1 billion in disbursements.

In 2003, audits were finalized for 106 randomly selected beneficiaries, with the

work performed by USAC’s audit staff, USAC’s outside auditor, and the FCC’s Office of Inspector General. Collectively, those audits covered $263 million in disbursements and the audit findings required only $3 million in recoveries. That is: professional auditors found an error rate of less than 1.2 percent in the audits completed

last year. We want to lower that already low percentage, but this recent work provides some comfort that waste, fraud and abuse is not endemic to the program and

that improvement should continue.

In 2004, the Commission is implementing an even more intensive audit program.

We intend to use statistical sampling techniques, so that the audit results can provide a basis for forming conclusions about overall program compliance and provide

needed information so that we can comply with the IPIA. These efforts will provide

the Commission with more and better information on program and participant performance.

Funding this expanded audit program has been challenging. Last year, for example, the FCC unsuccessfully sought an appropriation to enable our Inspector General to conduct independent audits of the Universal Service Program. In the interim,

we have drafted a new three-way agreement among the FCC, the FCC’s Inspector

General, and USAC to enable us to move forward with necessary audits. Under this

agreement, USAC will contract with independent auditors, applying government auditing standards to conduct audits of a statistically significant number of E-rate recipients. We anticipate that the results from these audits will enable us to gauge

vulnerabilities in the program so that we can act to correct them.

Finally, we are committed to seeking a legislative clarification of the Commission’s authority to permit the FCC to transfer funds from the Universal Service

Fund to pay for necessary audits, implementation and recovery actions. This will

enable the FCC to contract directly with auditors. We are working with OMB to propose specific legislation to authorize the transfer.

In sum, audits are critical to the oversight package. Audits confirm and close the

loop. They provide us with information to assess the wisdom of our rules. They inform future rulemakings; many of the rule changes made in the last year or currently under consideration have been sparked by what the audits have revealed to

be weaknesses in the current program design.

And finally, audits are the vehicle by which we determine if monies need to be

recovered from particular beneficiaries, so that the benefits of the E-rate program

go only to those who comply with our rules. The agency is working to ensure timely

resolution of all audit findings, whether those audits are conducted by USAC internal audit staff, independent outside auditors hired by USAC, or the FCC’s Office

of Inspector General. We are also working to ensure timely recovery of erroneously

disbursed funds identified by these audits. We agree that we all need to do better

in this area, so that audit and recovery work is completed more expeditiously. We

expect that this quarter, the Commission will act on several recommendations related to these issues made by the Wireline Competition Bureau. We also are supportive of USAC’s plans to step up its outreach efforts to better educate beneficiaries

by scheduling 1,000 site visits a year.

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CONCLUSION

We are committed to making ongoing improvements in the e-rate program, and

we look forward to your questions on these issues. We would be happy to provide

any assistance to the Subcommittee and stand ready to offer our technical and subject area expertise as you move forward. Thank you, Mr. Chairman, for the opportunity to participate in your review of the universal service fund’s schools and libraries support mechanism.

Mr. GREENWOOD. Mr. McDonald, you are recognized for your

opening statement.

TESTIMONY OF GEORGE McDONALD

Mr. MCDONALD. Good morning, Mr. Chairman and members of

the subcommittee. My name is George McDonald. I am the Vice

President of the Universal Service Administrative Company responsible for the Schools and Libraries Division. It is my privilege

to be here today to speak to you about USAC and its administration of the Schools and Libraries Universal Service Support Mechanism, commonly referred to as the E-Rate program.

USAC is the not-for-profit corporation designated by the Federal

Communications Commission to administer the E-rate program

based on the Telecommunications Act of 1996 and FCC regulations

adopted pursuant to the Act. In order to accomplish our mission,

we work closely with the FCC, consulting almost daily on issues of

implementation.

We are committed to helping prevent waste, fraud, and abuse in

the universal service support mechanisms, and we devote substantial resources toward that goal so that the benefits of the discounts

go only to eligible recipients for eligible uses.

Before we began making funding commitments in 1998, we hired

an independent consultant to advise us on our internal controls

and attest to the adequacy of those controls. Our internal controls

are designed to ensure that commitment and disbursement of ERate funds are consistent with FCC rules relating, for example, to

the eligibility of entities, of services, and appropriate discount

rates. Also, in 1998 staff of the U.S. General Accounting Office reviewed our draft procedures and recommended changes which we

implemented.

We employ many tools to help assure compliance with program

rules. These include detailed application and invoice review procedures, denials of funding commitments when appropriate, rejection

of incorrect invoices, audits of program beneficiaries and service

providers, recovery of funds where rule violations are found, investigations of whistleblower hotline complaints, support to law enforcement investigations, and referral of matters involving suspected program abuse to law enforcement authorities.

USAC’s application and invoicing review procedures have greatly

evolved over the past 6 years, becoming more detailed and comprehensive, as we have gained experience with the program. For

example, as we saw instances of service providers not making applicants pay the nondiscount share—a key rule of the program—

we initiated verification of payment of that share into our invoice

review process. USAC’s internal controls have prevented the unlawful disbursement of hundreds of millions of dollars.

We receive approximately 35,000 E-Rate applications per year. In

addition, we process an average 80,000 individual requests for payVerDate 11-MAY-2000 11:23 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00105 Fmt 6633 Sfmt 6602 95443.TXT HCOM1 PsN: HCOM1
98

ment annually. Our fundamental responsibility is to make wellfounded decisions to approve or deny these requests. Each of these

documents is individually processed using detailed Program Integrity Assurance, or PIA, review procedures to arrive at an appropriate decision consistent with program rules.

We also conduct audits of beneficiaries to assess applicant program compliance. As a result of audit findings, we have modified

and strengthened our internal controls, improved our outreach, and

better educated applicants and service providers regarding program

rules.

In order to provide the public with a means of reporting activities

that may be in violation of E-Rate program rules, USAC maintains

a whistleblower hotline. USAC’s Special Investigations Team investigates every call to determine if further action is required. We receive and follow up on over 100 calls per year.

Comprehensive applicant and service provider training in program requirements are vital components of program integrity.

USAC’s training of applicants and service providers emphasize the

importance of compliance with program rules and the consequences

of non-compliance.

One of the key lessons we have learned from our experience in

administering the program and from the audits we have conducted,

as well as from law enforcement investigations and media reports,

is that USAC needs a larger oversight presence in the field. Site

visits will allow us to assess more fully, in real-time, how E-Rate

funds are being used, to learn about and publicize best practices in

education technology and program compliance, and to help ensure

that products and services have in fact been delivered and are

being used effectively. We have issued a Request for Proposals soliciting bids to conduct some 1,000 site visits a year. This step will

further enhance program integrity.

Finally, let me turn to the participation of the Puerto Rico Department of Education in the E-Rate program. For the first 3 funding years of the program, 1998-2000, PRDOE applied for and received a substantial amount of funding from USAC. As a part of

our initial set of audits of beneficiaries in 2000, we selected

PRDOE for an audit of the first funding year. The audit was completed in October 2001.

We were particularly concerned about findings that 100,000 computers that were to be installed in classrooms had not by then been

purchased and installed and that there were no computers in the

two schools the auditors had visited. So we advised PRDOE in December 2001 that we would make no further commitments or disbursements of E-rate funds until we received and evaluated its response to our inquiries concerning the availability of computers

and other resources required to make effective use of the discounted services.

Since that time, USAC and the FCC have worked with PRDOE

as it has sought to come into compliance with program rules. In

November 2003, the FCC issued an order directing USAC to conduct an audit of PRDOE prior to disbursing any additional E-Rate

funds. That audit has begun.

Mr. Chairman, thank you for providing me with the opportunity

to address the subcommittee. We look forward to continuing to

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work with Congress to improve the Schools and Libraries Support

Mechanism. I would be happy to respond to any questions you may

have.

[The prepared statement of George McDonald follows:]

PREPARED STATEMENT OF GEORGE MCDONALD, UNIVERSAL SERVICE ADMINISTRATIVE

COMPANY VICE PRESIDENT, SCHOOLS AND LIBRARIES DIVISION

Good morning, Mr. Chairman and Members of the Subcommittee. My name is

George McDonald. I am the Vice President of the Universal Service Administrative

Company (‘‘USAC’’) responsible for the Schools and Libraries Division. It is my

privilege to be here today to speak to you about USAC and its administration of

the Schools and Libraries Universal Service Support Mechanism, commonly referred

to as the ‘‘E-rate’’ program.

Overview

USAC is the not-for-profit corporation designated by the Federal Communications

Commission (‘‘FCC’’) to administer the E-rate program based on the Telecommunications Act of 1996 and FCC regulations adopted pursuant to the Act. In order to

accomplish our mission, we work closely with the FCC, consulting almost daily on

issues of implementation.

We are committed to helping prevent waste, fraud, and abuse in the universal

service support mechanisms, and we devote substantial resources towards that goal

so that the benefits of the discounts go only to eligible recipients for eligible uses.

I would like to describe some of the administrative procedures we use to help ensure

program integrity. I will also outline a new initiative designed to further improve

compliance with program rules. Finally, I will briefly describe USAC’s activities concerning the Puerto Rico Department of Education’s participation in the E-rate program.

Before we began making funding commitments in 1998, we hired an independent

consultant, Coopers and Lybrand—which later became PricewaterhouseCoopers—to

advise us on our internal controls and attest to the adequacy of those controls. Our

internal controls are designed to ensure that commitment and disbursement of Erate funds are consistent with FCC rules relating, for example, to the eligibility of

entities, of services, and appropriate discount rates. At the request of Senator

McCain, staff of the U.S. General Accounting Office reviewed our draft procedures

and recommended changes, which we implemented. For example, we moved a procedure to scrutinize the resources applicants have to use the discounted services from

after commitment of funds to before.

We employ many tools to help assure compliance with program rules. These include detailed application and invoice review procedures, denials of funding commitments when appropriate, rejection of incorrect invoices, audits of program beneficiaries and service providers, recovery of funds where rule violations are found, investigations of whistleblower hotline complaints, support to law enforcement investigations, and referral of matters involving suspected program abuse to law enforcement authorities.

USAC’s application and invoicing review procedures have greatly evolved over the

past six years, becoming more detailed and comprehensive, as we have gained experience with the program. For example, as we saw instances of service providers not

making applicants pay the nondiscount share (a key rule of the program), we initiated verification of payment of that share into our invoice review process. USAC’s

internal controls have prevented the unlawful disbursement of hundreds of millions

of dollars, either as a result of denials based on failure to comply with program

rules or cancellation of funding requests by the applicant as a result of USAC inquiries.

Application and Invoice Volumes

We receive approximately 35,000 E-rate applications per year. In addition, we

process an average 80,000 individual requests for payment annually. Our fundamental responsibility is to make well-founded decisions to approve or deny these requests. Each of these documents is individually processed using detailed Program

Integrity Assurance, or PIA, review procedures to arrive at an appropriate decision

consistent with program rules.

Audits

We also conduct audits of beneficiaries to assess applicant program compliance.

As a result of audit findings, we have modified and strengthened our internal conVerDate 11-MAY-2000 11:23 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00107 Fmt 6633 Sfmt 6621 95443.TXT HCOM1 PsN: HCOM1
100

trols, improved our outreach, and better educated applicants and service providers

regarding program rules.

Whistleblower Hotline and Special Investigations Team

In order to provide the public with a means of reporting activities that may be

in violation of E-rate program rules, USAC maintains a whistleblower hotline.

USAC’s Special Investigations Team investigates every call to determine if further

action is required. We receive and follow up on over 100 calls per year.

Education Regarding Program Requirements

Comprehensive applicant and service provider training in program requirements

are vital components of program integrity. USAC’s applicant training—an annual

conference of state E-rate coordinators and regional meetings throughout the year—

emphasize the importance of compliance with program rules and the consequences

of non-compliance. USAC also provides training and education opportunities to service provider participants in the program

New Site Visit Initiative

One of the key lessons we have learned from our experience in administering the

program and from the audits we have conducted, as well as from law enforcement

investigations and media reports, is that USAC needs a larger oversight presence

in the field. Site visits will allow us to assess more fully, in real-time, how E-rate

funds are being used, to learn about and publicize best practices in education technology and program compliance, and to help ensure that products and services have

in fact been delivered and are being used effectively. We have issued a Request for

Proposals soliciting bids to conduct some 1,000 site visits a year. This step will further enhance program integrity.

Puerto Rico Department of Education

Finally, let me turn to the participation of the Puerto Rico Department of Education (‘‘PRDOE’’) in the E-rate program. For the first three funding years of the

program, 1998-2000, PRDOE applied for and received a substantial amount of funding from USAC. As a part of our initial set of audits of beneficiaries in 2000, we

selected PRDOE for an audit of the first funding year. The audit was completed in

October 2001. We were particularly concerned about findings that 100,000 computers that were to be installed in classrooms had not by then been purchased and

installed and that there were no computers in the two schools the auditors had visited. So we advised PRDOE in December 2001 that we would make no further commitments or disbursements of E-rate funds until we received and evaluated its response to our inquiries concerning the availability of computers and other resources

required to make effective use of the discounted services. Since that time, USAC

and the FCC have worked with PRDOE as it has sought to come into compliance

with program rules. In November 2003, the FCC issued an order directing USAC

to conduct an audit of PRDOE prior to disbursing any additional E-rate funds. That

audit has begun.

Conclusion

Mr. Chairman, thank you for providing me with the opportunity to address the

Subcommittee. We look forward to continuing to work with Congress to improve the

Schools and Libraries Support Mechanism. I would be happy to respond to any

questions you may have.

Mr. GREENWOOD. Thank you very much.

The Chair recognizes himself for 10 minutes for inquiry. Let me

start with you, Mr. McDonald. How many people work at USAC?

Mr. MCDONALD. There are 15 people in the Schools and Libraries

Division, a little over 100 in all of USAC. USAC administers all the

universal service support mechanisms.

Mr. GREENWOOD. So 15 for the Schools and Libraries Program?

Mr. MCDONALD. We out-source the day-to-day operations of the

program. Our contractors work force is between 200 and 300 depending on the time of year.

Mr. GREENWOOD. So you have 200 to 300 people under contract.

What do they do?

Mr. MCDONALD. They review applications, review appeals, review invoices, conduct special investigations.

101

Mr. GREENWOOD. Why have you chosen that method as opposed

to having all internal employees?

Mr. MCDONALD. When we were beginning we weren’t sure exactly how this was going to work, what the volume of work was

going to be and we figured that outsourcing was the best way.

Mr. GREENWOOD. Do you still think it is?

Mr. MCDONALD. We competitively bid the award several years

ago. We anticipate competitively bidding it again. I think it does

provide the best opportunity to get the most efficient productive

work force.

Mr. GREENWOOD. Well, you have a lot of problems at USAC and

it seems to me that if the contractors are—I am trying to figure

out what responsibility the contractors have here. We have got this

very diffuse responsibility. You have got FCC, you have got USAC,

now we have got contractors, we have got school districts. Let me

be specific. With regard to the 100,000 computers for Puerto Rico,

had they certified that they weren’t in possession of those as part

of their application?

Mr. MCDONALD. They certified in their application for 1998 that

they had secured access to the resources. We did evaluate whether

that was true in Puerto Rico’s case and we did decide that it was

true. If they had the budget for the 100,000 computers, we would

have regarded that as having secured access.

Mr. GREENWOOD. Have you rethought that?

Mr. MCDONALD. I have not today. Maybe we will, sir. The

application——

Mr. GREENWOOD. It seems pretty fundamental. If you are going to spend $100 million to hook up 100,000 computers, that having

gone through this experience where the computers evaporated in a

withdrawn and contested bid, that you want to make sure in the

future that certifying that you have access to the computers means

they are actually in your buildings. Wouldn’t you?

Mr. MCDONALD. One consideration is applicants apply for these

funds 5 months before the funding year starts. Then the internal

connections to actually link up the computers can take months. The

funding year is available for 15 months. Before they would actually

be able to hook them up could be 20 months from when they apply

for the funds.

Mr. GREENWOOD. Have you been here all day?

Mr. MCDONALD. Yes, sir.

Mr. GREENWOOD. Okay. When we had the first panel we had the

IG here. I asked him about auditing. The thing that sort of surprised me about this, and you may have heard me say to him, this

is not the first instance in which the Federal Government has tried

to figure out how to take money and grant it out to entities like

schools and to do it in a way that minimizes waste, fraud, and

abuse. Yet, it seems that in the case of USAC here, and I wasn’t

paying attention at the birth of USAC—have you been there since

the beginning?

Mr. MCDONALD. I started with the Schools and Libraries Corporation in December 1997 before we were merged into USAC.

Mr. GREENWOOD. Okay. So when this whole process was invented because admittedly you got precious little guidance from the

Congress as to what to do, but it seems to me if it were my job

102

to set up USAC and I knew I was going to be bringing $2.5, $2.25

billion in the front door and putting it out the back door every

year, that I would want to look around and say: what is the stateof-the-art of doing that to prevent waste, fraud, and abuse? Somebody must have invented the best way to make sure that in those

instances you have got a maximum number of fiscal controls in

place. Did that happen?

Mr. MCDONALD. What we did, sir, was under the direction of the

Chairman of the FCC we engaged Coopers & Lybrand who later

became PriceWaterhouseCoopers to work with us to design the procedures that we would follow. Senator McCain directed the General

Accounting Office to come in and review those procedures as well.

As I mentioned, we accommodated both the auditors and the GAO

in what those procedures were. We felt like——

Mr. GREENWOOD. What was the essence of Coopers’ recommendation? Because apparently what you do, I think, you have got—what

did you say? Well, describe again your auditing process. You audit

how many of these applications?

Mr. MCDONALD. We review all the applications when they come

in.

Mr. GREENWOOD. Right.

Mr. MCDONALD. Do you mean literally the audits after the fact?

Mr. GREENWOOD. Yes.

Mr. MCDONALD. In the first year we audited 17, next year 25,

last year 102.

Mr. GREENWOOD. Is that pursuant to what Coopers’ recommended to you? If it is an order of magnitude of 30,000 applications and grants that you audit and the order of magnitude of 10,

20, 30?

Mr. MCDONALD. The procedures that Coopers attested to and the

GAO was commenting on did not involve audits. They were application invoice review procedures and fund management. We developed that later, the beneficiary audit concept.

Mr. GREENWOOD. What is the state of the thinking at USAC?

You have got some egg on your face here. You have got Puerto

Rico. You have got Chicago. You have got Atlanta. You have got

El Paso, etc. What is the state-of-the-art of your thinking with regard to what is the best way to get this egg off your face and make

this program work efficiently?

Mr. MCDONALD. The two lessons that I think we have learned

immediately, and this committee may help us learn more, are that

we need a larger physical presence. The audits, even the 122 that

the Inspector General talked about, is such a small piece of 30,000

so we think we need to get to a much larger number and that is

why——

Mr. GREENWOOD. All right. In terms of who does the auditing,

you can have the FCC in charge of auditing. You could have USAC

in charge of auditing. You could have the IG in charge of auditing.

You could have the individual grantee in charge of auditing. You

could have contractors do that. There is a variety of ways. The

thought that occurred to me is that if I am a school district and

I am getting $100 million of free money, it doesn’t seem like an

awful lot to say, ‘‘And part of your deal, individual grantee, is you

must contract with an independent accounting firm to do an audit

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and provide statements to USAC that demonstrates the fact that

you are in compliance with all the guidelines.’’

Why wouldn’t that be the most perfect way to do it because then

you will have 30,000 audits? Of course, there is an expenditure of

money involved but it would have to be a small fraction of the

$2.25 billion and it would seem to me even if you required auditing

in the case of every single grantee, you would still be way ahead

because you would reduce dramatically the likelihood that you are

going to have these boondoggles.

Mr. MCDONALD. That would require a rule change and as USAC

we are prohibited from advocating policy. It certainly is a

model——

Mr. GREENWOOD. Whoa. Is that right? You are prohibited from

advocating policy?

Mr. MCDONALD. Yes, sir. We are the neutral administrator. We

are to follow the FCC rules.

Mr. GREENWOOD. Since you guys are up to your hips in this process, how does the FCC benefit from your knowledge if you can’t recommend policy?

Mr. MCDONALD. They know all the issues we confront, sir. We

take the issues to them, seek guidance from them. They review

hundreds of appeals every year. They see the issues that we face.

Mr. GREENWOOD. Let me turn to you, Ms. Mattey.

Ms. DEGETTE. Will the gentleman yield real quick? Actually, Mr.

McDonald, while you can’t advocate policies, I understand the

rules, if Chairman Greenwood asked you your opinion on a policy

he is thinking of, I think the rules allow you to give your opinion

on that.

Mr. MCDONALD. I was about to go on and say that other Federal

agencies do do that. The IG talked about the A133 audits and it

seems to me an effective way to proceed.

Mr. GREENWOOD. I am surprised that it would take you until this

point in your career to decide that might be a good way to proceed

but I am not in your shoes.

Ms. Mattey, how would you respond to my questioning of Mr.

McDonald, the line of questioning I had there about what is the

best way to audit these programs and would it, in fact, make sense

to require that every grantee contract out for an independent audit

so that we are not simply taking 1/1000th of the contracts and having spot audits.

Ms. MATTEY. Is your proposal that the school pay for the audit

or would the payment come out of the Universal Service Fund?

Mr. GREENWOOD. I think it could go either way because the

school has a matching part. Maybe this could be considered part

of its match. You have got a lot of money here and it is buying a

lot of gold-plated hardware which is fine, I suppose, as long as it

is not over-engineered. But it seems like for a relatively small fraction of the cost of all of this hardware that is going in these installations, somebody onsite—this is the way it is done for highway

projects. This is the way it is done for a lot of Department of Defense projects. A lot of grantees are required to go out and make

sure they have an independent single, I think, audit, they refer to

it as, to make sure they are in compliance.

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Ms. MATTEY. As a general matter I think the agency agrees that

more audits should be done. To that end we have been having conversations with USAC and with the Inspector General, and the

agency is working to develop what is called a three-way agreement

under which there would be audit work done with the FCC, an outside audit firm, and the schools and libraries.

Mr. GREENWOOD. But that is not what I am proposing. What do

you think about what I am proposing?

Ms. MATTEY. One thing that does occur to me is there are some

schools and libraries that receive a very small amount of support

and the cost of auditing a school that, for instance, is maybe only

getting $10,000 worth of dial-up telephone funds.

Mr. GREENWOOD. That is a good point.

Ms. MATTEY. But as a general proposition I think that any school

that is getting a sizable amount of support, it would be a good idea

to have a more robust audit of the schools.

Mr. GREENWOOD. I am going to yield after this question but particularly for this reason—the way this program works is—the reason I think this program is so easily ripped off is because, first off,

it is not even a tax dollar. It is an invisible sort of tax that people

don’t really understand on their phone bill. When you get your

phone bill and this Universal Service Charge is on there, you don’t

really even know who to complain to.

There is no public pressure applied to the expenditure of these

dollars because nobody knows where this money goes except us in

this room practically. Then you have this sort of neither fish nor

foul USAC entity, nonprofit corporation, which isn’t elected, isn’t

really responsible to answer to political pressure when they screw

up.

Then you have school districts out there who are getting 80, 90

percent match. No big deal to them. They have not much at stake

in making sure that the money is spent well. They are going to

look good to the people who elected them as school board directors

getting all this free money and if they foul up, they are not as politically at risk as if they had taken this money out of the taxes

of their local people.

All this in combination and then the tendency of the vendors to

drive the architecture to be as big and as expensive as possible because the more they do, the more money they make and the

happier the school district is because it is all free money anyway.

It seems to me for all those reasons we need to have not only more

robust but we have to have a complete transformation of the way

we think about how to audit these funds.

We have a series of three votes and it will probably take us until

2:30 to accomplish that and return here so can you all be here at

2:30 and then we will, therefore, recess until 2:30.

[Whereupon, at 1:59 p.m. the subcommittee recessed, to reconvene the same day at 2:43.]

Mr. GREENWOOD. The meeting will come to order. The Chair recognizes the gentlewoman from Colorado for 10 minutes for inquiry.

Ms. DEGETTE. Thank you, Mr. Chairman.

Ms. Mattey, the Inspector General testified that, ‘‘Every rock

that we turn over we find stuff.’’ That is a quote. In your statement

you said that the audit work today suggest that the level of rule

105

noncompliance is relatively low. I am wondering how you can

square those two statements.

Ms. MATTEY. The statement in my testimony is based on looking

at the dollars that have been dispersed and the comparison of the

dollars that need to be recovered based on that audit work. There

are two ways you can look at this. One is to say I am auditing a

beneficiary and that beneficiary has violated a rule. But in some

cases the rule violation in question may only require that you recover a fraction of the dollars that were provided to that entity,

maybe 5 percent or 2 percent. The testimony we presented was

looking at it in terms of the dollars dispersed and the dollars that

need to be recovered.

Ms. DEGETTE. Well, if I may just beg to differ for a minute, the

problem is, as the Inspector General said, because of lack of resources in the IG’s Office they don’t even have enough audits going

on every year to do a reliable sample size to see what dollars need

to be recovered. Do they?

Ms. MATTEY. I can’t comment on what he said. As I said before,

the agency thinks that the number of audits need to be increased

and that is something that we are all working together to make

happen.

Ms. DEGETTE. And until the audits are increased, I think it

would probably be fair to say that we don’t really know the magnitude of the problem of dollars that need to be recovered. Isn’t

that fair to say?

Ms. MATTEY. I think that is——

Ms. DEGETTE. If you don’t know what is out there, you don’t

know what you are losing. All you can base your data on is what

has been done so far.

Ms. MATTEY. That is correct.

Ms. DEGETTE. Now, in your testimony you said that the systems

that the FCC has in place have, ‘‘successfully detected situations

like the Puerto Rico Department of Education where program participants have run afoul of our rules.’’ I wonder what you would

view how much money was wasted in Puerto Rico before the FCC

successfully detected the situation?

Ms. MATTEY. I think that is a question that has to await the

completion of the audit looking at what was received by Puerto

Rico during the first 3 years.

Ms. DEGETTE. Well, there was over $100 million spent in Puerto

Rico. Correct?

Ms. MATTEY. That is my understanding.

Ms. DEGETTE. Do you have any opinion as to how much of that

money was wasted and how much was not wasted?

Ms. MATTEY. I don’t have enough information to have an opinion

on that. As I said, that is something the audit will determine ultimately.

Ms. DEGETTE. And who is conducting that audit?

Ms. MATTEY. That audit is being conducted by KPMG under contract with USAC.

Ms. DEGETTE. And when will that audit be completed?

Ms. MATTEY. I would defer to USAC on that. That is the audit

that the Commission ordered should happen.

Ms. DEGETTE. Mr. McDonald, when will that audit be completed?

106

Mr. MCDONALD. They are onsite now. We expect site visits to go

into July and then I am not sure how long. I think a month or 2

after that to resolve audit issues and give PRDOE to respond, etc.

Ms. DEGETTE. Okay. Do either one of you, Mr. McDonald, or Ms.

Mattey, do you consider that the pace at which the Puerto Rico situation was detected to be a success of the detection systems of the

FCC?

Ms. MATTEY. My understanding of the situation is that USAC informed Puerto Rico that no further disbursements would be made

less than 2 months after receiving that final audit report in 2001.

Ms. DEGETTE. So you do think it was a success even though——

Ms. MATTEY. I think in this situation it was important to stop

further money flowing to Puerto Rico.

Ms. DEGETTE. I cannot agree with you more. I really cannot

agree with you more but my question to you is that payment was

not stopped until over $100 million was paid out to Puerto Rico. Do

you think there is anything that can be done to stop? I mean, you

have been here—I think all of you have been here all day.

You have heard about the terrible situation we have there where

we have how many schools? Six schools wired? Nine. Excuse me.

Nine schools wired? I hate to exaggerate in either direction. I

mean, nine schools are wired out of their many, many schools and,

yet, $100 million plus was spent. Do any of you see a problem with

the lack of detection earlier? Mr. McDonald.

Mr. MCDONALD. As I mentioned in my statement, I think we

have all concluded that we need to be present in the field much

more than we are. It was an audit that caught that for us and led

to the stopping of the money but that is why we are going to initiate these 1,000 site visits to get out there quickly after we have

been invoiced so the equipment and services should have been delivered are they there.

Ms. DEGETTE. And in the Puerto Rico situation, as we heard in

the last panel, there were not even invoices. Correct?

Mr. MCDONALD. I am not sure what you mean, Congressman.

Ms. DEGETTE. Well, some of the testimony as I heard it was that

payments were being made without invoices to support those payments. Were you aware of that?

Mr. MCDONALD. For many of the invoices we checked and there

were customer bills to support the invoices. In fact, in 2001 before

we cutoff the disbursements we continued to verify with PRDOE

that the services were being received and installed and we got that

certification from PRDOE.

Ms. DEGETTE. Right. But you just said that the new plan is to

make sure that the invoices are accurate to send people out into

the field. Before 2001 the testimony I believe as I heard it was that

there were not even invoices when dispersements were made.

Mr. MCDONALD. We don’t make a disbursement without getting

an invoice from the service provider and in many of those cases we

would check to see is there a customer bill to support this.

Ms. DEGETTE. Well, in the Puerto Rico situation, is it your testimony to the best of your recollection that all of the payments that

were made were supported by invoices because that is not what we

heard before.

107

Mr. MCDONALD. Eighty-eight percent of the funds that we disbursed to PRDOE there was some manual verification. That doesn’t

mean we verified a customer bill in all those cases but I——

Ms. DEGETTE. Do you think that would be a good practice in the

future?

Mr. MCDONALD. This goes back to 1999 making disbursements

and we certainly increased our invoice checks, the number, and the

quality of those checks a lot.

Ms. DEGETTE. Is it the practice of your agency to only make disbursements when supported by invoices or some other paper documentation or electronic documentation?

Mr. MCDONALD. Today we don’t verify 100 percent of the invoices

that come into us. They all go through automated checks.

Ms. DEGETTE. Okay. That is not what I am asking you. I am

sorry. What I am asking you is do you make disbursements without invoices?

Mr. MCDONALD. We don’t make disbursements without invoices

from the service provider to us.

Ms. DEGETTE. That is my question. That is my question. Thank

you very much. Now, back before 2001, 1999/2000 when all of this

was going on in Puerto Rico, was that also the policy?

Mr. MCDONALD. That has always been the case.

Ms. DEGETTE. So have you gone back on this part of the audit

that is going on right now to see if there were payments made

without invoices during that period of time?

Mr. MCDONALD. There is no way in our system that a payment

would be made without either service provider invoice which everything in Puerto Rico is a service provider invoice. There is no way

we would make a disbursement without a service provider invoice.

Ms. DEGETTE. Okay. So the testimony we heard earlier then was

inaccurate?

Mr. MCDONALD. I don’t remember what was said. Customer bills

would be different from invoices to us.

Ms. DEGETTE. Yeah, I understand. We are getting caught up in

semantics. Now, Mr. Greenwood’s proposal, which I think has some

eloquence to it, that school districts pay for their own audits, I

guess I would just say, Mr. Greenwood, I think particularly for the

schools that are receiving funds with No Child Left Behind and

many state requirements, I think it may be difficult for many of

those schools to pay for these audits out of their own separate resources.

But I definitely think it is a great idea to have them pay for

them out of a percentage of the E-Rate funds that they receive. It

would be part of the match. My question is do any of you have an

opinion as to what level of grant participation you would want to

have to have some kind of audit system come into place. I think

Ms. Mattey was right, you don’t want people getting $10,000 to

have to——

Ms. MATTEY. I don’t know the specifics, but I would think you

would want to look at—I understand there is an existing requirement that applies in other Federal programs and depending on the

number of Federal dollars received you get audited every year or

every 3 years so that, to me, just from a conceptual level would

seem to make sense.

108

There is a dollar threshold: if you get $50,000 or more, maybe

you get audited every 3 years. If you are getting a million dollars,

then maybe it is every year. Something like that. I don’t have specific figures, but something conceptually like that.

Ms. DEGETTE. Great. Thank you.

Thank you, Mr. Chairman.

Mr. GREENWOOD. The Chair thanks the gentlelady. I want to go

back briefly to the question of what is considered waste and what

is isn’t considered waste. The problem that I have is the metric

that you used in your testimony was what percentage of the total

dollars outlayed were actually recovered. The problem that I have

with that as a metric for waste is that the less money you recover,

the better you look.

Ms. MATTEY. Actually, the metric I was talking about is the dollars that need to be recovered compared to the total dollars audited.

Mr. GREENWOOD. Right. I understand that. But here is the problem I have with that. When you look at some of these cases like

at the Atlanta School District where they were putting servers in

top-of-the-line—let me read this. ‘‘Atlanta installed Cisco’s top-ofthe-line electronics, the equipment that moves Internet traffic

through cyberspace in every school rather than in a limited number

of regional hubs. Just two of the components could run an entire

network. Atlanta ultimately bought more than 200 of them at

$50,000 to $100,000 each.’’ Assuming that is correct, they bought

198 extra servers. Are you aware of that allegation from the——

Ms. MATTEY. I have read the trade press reports about that.

Mr. GREENWOOD. Pardon me?

Ms. MATTEY. I have read trade press reports.

Mr. GREENWOOD. Right. Okay. That certainly seems to me to be

something that one should count as waste even if it was never recovered and even if there was never a decision made to recover. Do

you follow me?

Ms. MATTEY. Yes.

Mr. GREENWOOD. Okay. And let us look at these kind of issues.

What sort of standards does either the FCC or USAC have to make

sure that we don’t get over-engineered gold-plated systems that

would be the natural proclivity of a contractor trying to maximize

its profit? Anyone.

Ms. MATTEY. Well, as a general matter, the Commission’s rules

prohibit the funding of duplicative services. In a situation where an

entity is getting duplicative services, that would be a violation of

our rules.

Mr. GREENWOOD. How do you make sure that doesn’t happen?

Ms. MATTEY. Well, from a processing standpoint I would defer to

USAC.

Mr. MCDONALD. If we think the services that are being requested

are unreasonable, we look to the technology plan to see if they are

supported by the technology plan.

Mr. GREENWOOD. How did you respond to Secretary of Education

Rey’s comment that they never found any document that there

even was a plan?

Mr. MCDONALD. They would have certified to us that they had

a plan approved by the U.S. Department of Education.

109

Mr. GREENWOOD. All right. So the Department of Education has

to approve their plan and USAC doesn’t?

Mr. MCDONALD. Under FCC rules state agencies in this case for

Puerto Rico, the U.S. Department of Education, are approvers of

technology plans for school districts in their state. We don’t approve them but State Departments of Education do.

Mr. GREENWOOD. So State Departments of Education do. I didn’t

even know that. That is an entirely new wrinkle. So now you have

not only is the money collected by phone bills and it is not in taxes

and the school district doesn’t really care about how much is wasted because it is mostly not their money, but you have got this state

Department of Education which has essentially no stake in this

business certifying their plan. Is that the way it works?

Mr. MCDONALD. As it does for the U.S. Department of Education.

Mr. GREENWOOD. I understand that. Neither FCC nor the USAC

reviews these applications to see as to their adequacy. They allow

the State Departments of Education to do that?

Mr. MCDONALD. We don’t review the technology plans. We may

review them if we have questions about the services being sought

in an application.

Mr. GREENWOOD. In other words, if you are not reviewing them,

how would questions arise?

Mr. MCDONALD. Because the services may look extraordinary. In

some cases, I recall once where we saw very expensive PBXs and

we verified that the price was legitimate for the PBX that it was

but it had a lot of functionality beyond what most schools and libraries would acquire. We went to the technology plan to see if

that functionality was called for in the technology plan and it was.

Mr. GREENWOOD. What motivation would a state Department of

Education have to tell one of its school districts that its technology

plan was excessive?

Mr. MCDONALD. Good government, sir. I don’t have an answer

beyond that.

Mr. GREENWOOD. Um. Let me ask a question of you, Ms. Mago.

Secretary Rey states that you requested during a January 2003

meeting that he submit another request in writing for the release

of the funds and that the PRDOE would receive a decision within

10 days. Is that true?

Ms. MAGO. That is not true to the best of my recollection, sir. I

have been trying to figure out what I could have said that could

have been misinterpreted that way. My objective here was to try

to be as helpful as I could in the course of trying to resolve a problem in a way that would preserve the integrity of the E-Rate Program, not interfere with investigations that were ongoing in other

parts of the Government and the Department of Justice and Department of Education and try to figure out if there was some way

that we could get to a point where we could make a break between

bad events of the past and good events of the future.

Mr. GREENWOOD. You say in your testimony—I guess this is directed to Ms. Mattey—that you intend to use statistical sampling

techniques so that audit results can provide a basis for forming

conclusions about overall program compliance. To date have you

conducted a systematic audit using such statistical sampling techniques?

110

Ms. MATTEY. Well, the last audit work that was done in the last

calendar year, my understanding is that the sample was determined in consultation with the Office of Inspector General so I

would defer to Mr. Feaster as to whether that was a statistically

valid sample or was it a random sample. The intent on a going-forward basis is to have the agency ensure that a sample is a large

enough size so that program conclusions can be drawn from the

audit work that is being done in the coming year.

Mr. GREENWOOD. You state in your testimony that you are reviewing your rules and audit procedures to learn from this experience. What lessons do you derive from the fact that PRDOE has

been operating since December 2001 without an answer to its funding requests?

Ms. MATTEY. I think the bottom line here is that we want to

make sure that Puerto Rico is in compliance with the Commission’s

rules before money flows to Puerto Rico. Sometimes things take

time but we have got to make sure we get it right.

Mr. GREENWOOD. Do you have a time table? Do you have an estimate as to how long you think it will take?

Ms. MATTEY. I would defer again to USAC. I believe he testified

about the timing of the audit and the audit process.

Mr. GREENWOOD. Would you repeat what you said about that,

Mr. McDonald?

Mr. MCDONALD. The site visits are currently underway. We expect them to continue into July and then I think it will probably

take another few months to resolve any issues coming out of that

and give PRDOE an opportunity to respond to them.

Mr. GREENWOOD. Ms. Mattey, how many appeals are pending at

the FCC?

Ms. MATTEY. I don’t know that number off the top of my head.

Mr. GREENWOOD. My staff tells me that the USAC tells them it

is 453.

Ms. MATTEY. I don’t know if that is the precise number but that

sounds right.

Mr. GREENWOOD. How many at the Bureau are working on

them?

Ms. MATTEY. Overall in the Bureau I believe we have about

seven people working on E-Rate related matters, but I would want

to supplement if I don’t have the right figure.

Mr. GREENWOOD. Do you know how long it would take seven people to get through 453 appeals? It just seems——

Ms. MATTEY. We do several hundred every year and have since

the beginning of the program.

Mr. GREENWOOD. Okay. I want to go back to this issue, Mr.

McDonald, of the State Education Departments signing off on the

technology plans. Do you know how frequently State Departments

of Education do not sign off on them, that reject them as being excessive or unrealistic or too ambitious or too expensive?

Mr. MCDONALD. I don’t know that, sir. We wouldn’t know that.

If they were back and forth to get a plan to an approvable state,

we wouldn’t know that. We would just know that the state finally

had signed off on it.

Mr. GREENWOOD. So am I accurate when I say that neither

USAC nor the FCC assumes responsibility for whether the techVerDate 11-MAY-2000 11:23 Sep 01, 2004 Jkt 000000 PO 00000 Frm 00118 Fmt 6633 Sfmt 6602 95443.TXT HCOM1 PsN: HCOM1
111

nology plan is rational or not? You leave that entirely to the Departments of Education?

Mr. MCDONALD. Pursuant to FCC rules the states are permitted

to be approvers of technology plans.

Mr. GREENWOOD. Do you agree with that, Ms. Mattey?

Ms. MATTEY. He is accurately stating the Commission’s rules.

Mr. GREENWOOD. All right. Thinking about that, do you see

where that could cause some concern? It seems to me that when

we see some of this—when you have this motivation that I think

exist’s in the place of the contractors and the vendors to try to encourage the school districts to use what is—they only have to pay

10 or 20 cents on the dollar—the incentive is to overcapitalize the

system, to build in a way that suits the interest of the contractor,

not necessarily the rate payer who is paying for this, or even the

taxpayers paying the 10 to 20 percent. I am uncomfortable with the

notion that State Departments of Education who have nothing at

stake. It is not state money. There is not a penny of state money.

Ms. MATTEY. It is actually possible that the state is providing the

school’s match. It may be coming out of state budgets. It would depend on whether it is from the local school district or the state, but

my understanding is many school districts do receive funding from

the state and that would be——

Mr. GREENWOOD. Specifically for this program?

Ms. MATTEY. I don’t know for sure but my understanding is

states do provide the funding to the school districts.

Mr. GREENWOOD. In Pennsylvania we spend a lot of money on

state education. It goes in the form of student subsidy formulae

and so forth. The problem I have is that the bureaucrats in the Department of Education in Harrisburg, Pennsylvania, I don’t see

that they have a lot invested in whether a school district in Philadelphia or Pittsburgh or Scranton or Harrisburg or anywhere else

overdoes their system. I just really have a hard time imagining

having spent 24 years in Government that there are people sitting

at desks in all these state capitals saying, ‘‘What do you mean two

servers in the school?’’ I just find that hard to believe.

My time has expired. Does the gentlelady wish to inquire further?

Ms. DEGETTE. I just wanted to ask Mr. McDonald. I think you

testified this audit is ongoing, that they are in the field right now,

that they should have some results within the next 2 months. Is

that accurate?

Mr. MCDONALD. The site visits should be done in July. This is

information I have from our Director of Internal Audit who is down

there as we speak. He expects the site visits to be completed in

July and then I am anticipating that it would take several months

to resolve issues as they come out of the field.

Ms. DEGETTE. Is the intention then that the E-Rate funding

would be restored at that point to Puerto Rico?

Mr. MCDONALD. We will take the results of that audit and see

if we think that it documents any rule violations and come to our

recommendation about what to do with respect to the 2001/2002

applications.

Ms. DEGETTE. I know it is always dangerous when I do this but

I think I can speak for the Chairman. It seems to me that the new

112

administration in Puerto Rico is really making a yeoman’s effort

and has been since 2001 to rectify a very, very bad situation that

resulted in $100 million being basically, in my view, thrown to the

winds. I know that the new administration in Puerto Rico has been

trying to work with USAC and with the FCC to get the funding restored since 2001.

I am pleased to see you have the audit in the field now and I

support that. I think it is necessary after what has transpired. I

mean, the Puerto Rican school system is one of the five largest in

the country and all these school children are sitting here without

the kinds of services that they should be entitled to and that Congress intended. When they testified I heard their frustration in

their voices.

I understand the need for an audit for resolving situations but

what I would say to all of you, and particularly you, Mr. McDonald,

is I really think that USAC and the FCC need to do everything

once this audit is completed to expedite funds back to Puerto Rico

so that we can get this program back on track. I see you are nodding. I don’t think you would disagree with that in any way.

Mr. MCDONALD. I believe that the Bureau, the Office of Inspector

General, and USAC all share that feeling.

Ms. DEGETTE. I would further say, Mr. Chairman, I would hope

we would continue to use our oversight authority to ensure that

this happens in a timely fashion because what often happens is

these processes get bogged down and while we all want to see a

thorough investigation, we really don’t want it to get bogged down.

We want that money to start going back.

Mr. MCDONALD. No FCC action is required if the audit is clean

and we have no issues. USAC can act on those applications.

Ms. DEGETTE. Thank you.

Mr. GREENWOOD. The gentlelady yields the balance of her time

to me to just wrap up here. Let me just be clear, Ms. Mattey. Why

has it taken 21⁄2 years to start the audit in Puerto Rico when they

came up to you as soon as they took office and said—they came up

to Washington and said, ‘‘We have a problem. Our predecessors

really fouled this thing up. They broke the rules. We have got to

start from scratch.’’ Why has all of this been necessary for so much

time to elapse?

Ms. MATTEY. I think I will defer to Ms. Mago on this because she

was the person who was in contact with them.

Mr. GREENWOOD. Okay.

Ms. MAGO. The answer quite simply is that we tried to work with

the Puerto Rico Department of Education. We had to go through

a number of different steps with outside parties working with the

Justice Department to ensure that we weren’t going to foul up any

ongoing investigation, working with the Department of Education

to make sure that we were consistent with their investigations and

where they were going.

By the time we got to roughly January 2003 we were at a point

where we needed to—we said we are ready to try to go forward.

At that point we considered what was the proper approach to have

a framework because it was clear to us that Puerto Rico was not

the only situation where there might need to be a work-out plan,

if you will, to be able to go forward. The process that we developed

113

was to put the matter out for public comment to get information

in that way. The Commission issued it’s order by November 2003

and then we proceeded from there.

Mr. GREENWOOD. Final question and I will ask each of you to respond if you care to. Do you think this system needs to be restructured based on these experiences?

Ms. MATTEY. I would say there is always room for improvement.

Mr. GREENWOOD. I thought you might say that.

Ms. MAGO. And we have taken steps. We are moving forward.

We recognize that there is need for improvement and that is

why——

Mr. GREENWOOD. The distinction I am trying to make is the distinction between incremental improvement where you propose

some rule changes as opposed to saying, ‘‘Look at the way this

thing appears on the chart. The money flows here and then it goes

to FCC and then USAC and State Board of Education over here.’’

It seems to me, and it is probably not for you to say, but it seems

to me that, what is occurring to me is that, it needs more than the

kind of thinking that says there is always room for improvement.

That is not necessarily your function. It seems to me we need to

get out of the box and we sort of think this thing from scratch.

Any other comments on that point? Without objection, the binder

will be made part of the official record and the record will stay

open for 30 days so that we can receive some other responses we

have requested from the witnesses. Thank you all again for your

testimony and the committee is adjourned.

[Whereupon, at 3:12 p.m., the subcommittee adjourned subject to

the call of the Chair.]

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Æ