PROBLEMS WITH THE E-RATE PROGRAM: WASTE,

FRAUD, AND ABUSE CONCERNS IN THE WIRING

OF OUR NATIONS SCHOOLS TO THE INTERNET
Part 3
HEARING
BEFORE THE

SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE

COMMITTEE ON ENERGY AND

COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION

SEPTEMBER 22, 2004

Serial No. 108124

Printed for the use of the Committee on Energy and Commerce

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

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PROBLEMS WITH THE E-RATE PROGRAM: WASTE, FRAUD, AND ABUSE CONCERNS IN
THE WIRING OF OUR NATIONS SCHOOLS TO THE INTERNETPart 3

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PROBLEMS WITH THE E-RATE PROGRAM: WASTE,

FRAUD, AND ABUSE CONCERNS IN THE WIRING
OF OUR NATIONS SCHOOLS TO THE INTERNET
Part 3
HEARING
BEFORE THE

SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE

COMMITTEE ON ENERGY AND

COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION

SEPTEMBER 22, 2004

Serial No. 108124

Printed for the use of the Committee on Energy and Commerce

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

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON

96098PDF

2005

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 5121800; DC area (202) 5121800
Fax: (202) 5122250 Mail: Stop SSOP, Washington, DC 204020001

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COMMITTEE ON ENERGY AND COMMERCE

JOE BARTON, Texas, Chairman
W.J. BILLY TAUZIN, Louisiana
JOHN D. DINGELL, Michigan
RALPH M. HALL, Texas
Ranking Member
MICHAEL BILIRAKIS, Florida
HENRY A. WAXMAN, California
FRED UPTON, Michigan
EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida
RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio
EDOLPHUS TOWNS, New York
JAMES C. GREENWOOD, Pennsylvania
FRANK PALLONE, Jr., New Jersey
CHRISTOPHER COX, California
SHERROD BROWN, Ohio
NATHAN DEAL, Georgia
BART GORDON, Tennessee
RICHARD BURR, North Carolina
PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky
BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia
ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming
BART STUPAK, Michigan
JOHN SHIMKUS, Illinois
ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico
ALBERT R. WYNN, Maryland
GENE GREEN, Texas
JOHN B. SHADEGG, Arizona
KAREN MCCARTHY, Missouri
CHARLES W. CHIP PICKERING,
TED STRICKLAND, Ohio
Mississippi, Vice Chairman
DIANA DEGETTE, Colorado
VITO FOSSELLA, New York
LOIS CAPPS, California
STEVE BUYER, Indiana
MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California
CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire
TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania
JIM DAVIS, Florida
MARY BONO, California
JANICE D. SCHAKOWSKY, Illinois
GREG WALDEN, Oregon
HILDA L. SOLIS, California
LEE TERRY, Nebraska
CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. BUTCH OTTER, Idaho
JOHN SULLIVAN, Oklahoma
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
PETER DEUTSCH, Florida
CLIFF STEARNS, Florida
Ranking Member
RICHARD BURR, North Carolina
DIANA DEGETTE, Colorado
TOM ALLEN, Maine
CHARLES F. BASS, New Hampshire
JANICE D. SCHAKOWSKY, Illinois
GREG WALDEN, Oregon
HENRY A. WAXMAN, California
Vice Chairman
EDWARD J. MARKEY, Massachusetts
MIKE FERGUSON, New Jersey
JOHN D. DINGELL, Michigan,
MIKE ROGERS, Michigan
(Ex Officio)
JOE BARTON, Texas,
(Ex Officio)

(II)

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CONTENTS
Page

Testimony of:
Bohuchot, Ruben, Chief Technology Officer, Associate Superintendent,
Dallas Independent School District .............................................................
Caine, Christopher G., Vice President, Government Programs, IBM, accompanied by Mike Pratt .............................................................................
Carlisle, Jeffrey, Chief, Wireline Competition Bureau, Federal Communications Commission ...................................................................................
Feaster, Walker, III, Inspector General, Federal Communications Commission; accompanied by Thomas Cline, Assistant Inspector General,
Audits, Federal Communications Commission; ..........................................
Foster, Sharon, Technology Information Systems Director, Ysleta
Independant School District .........................................................................
Glogovac, Paula, former E-Rate Consultant to Sun Microsystems ..............
Green, Judy, former E-Rate Consultant, Video Network Communications;
accompanied by Quentin Lawson, Executive Director, National Alliance
for Black Educators; Carl Muscari, former President and CEO, Video
Network Communications; Robert McCain, Program Manager, NEC
BNS; Emma Epps, Superintendent, Ecorse Public School District;
Douglas Benit, former Facilities Director, Ecorse Public School District;
and William Singleton, Superintendent, Jasper County Schools,
Ridgeland, South Carolina ...........................................................................
Hawthorne, Nathaniel, General Counsel, Alpha Telecommunications, Incorporated ......................................................................................................
McDonald, George, Vice President, Schools and Libraries Division, Universal Service Administration Company .....................................................
Tafoya, Charles, Superintendent, El Paso Independent School District .....

141
245
20
8
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155

51
196
15
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(III)

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PROBLEMS WITH THE E-RATE PROGRAM:

WASTE, FRAUD, AND ABUSE CONCERNS IN
THE WIRING OF OUR NATIONS SCHOOLS
TO THE INTERNETPart 3
WEDNESDAY, SEPTEMBER 22, 2004

HOUSE OF REPRESENTATIVES,
COMMITTEE ON ENERGY AND COMMERCE,
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in room
2123, Rayburn House Office Building, Hon. Joe Barton, (acting
chairman of the subcommittee) presiding.
Members present: Representatives Stearns, Bass, Walden, Rogers, Barton (ex officio), Deutsch, and DeGette.
Also present: Representative Bono.
Staff present: Mark Paoletta, majority counsel; Tom Feddo, majority counsel; Peter Spencer, majority professional staff; Jaylyn
Jensen, majority professional staff; Michael Abraham, legislative
clerk; David Nelson, minority counsel; and Jessica McNiece, minority clerk.
Chairman BARTON. The subcommittee will come to order. Today,
we are continuing a series of hearings by the Oversight and Investigations Subcommittee of the Energy and Commerce Committee
on problems with the E-Rate program, waste, fraud, abuse concerns in the wiring of our Nations schools to the Internet.
We are going to have three panels. The first panel is a panel of
Federal officials responsible for overseeing the program, approving
the program, and monitoring compliance with the regulations for
the program. Our next two panels consist of officials of local school
districts and various private vendors and consultants who have assisted those districts in applying for and using funds within the
program.
This hearing is going to resume our focus on problems with the
front end of the E-Rate process, the critical area of the program
where applicants must take certain required steps to plan and
choose the products and services that they wish E-Rate to support.
Failure to take the right steps at the beginning of the process can
result in wasteful spending, if not fraud and abuse, when the Erate funds begin to flow.
This hearing will also resume the subcommittees examination of
a bid-rigging conspiracy involving a large vendor, NEC BNS, which
affected E-rate applications in a number of school districts around
the country. In late May of this year, the NEC pled guilty to con(1)

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2
spiring to eliminate competition in E-rate projects and also to wire
fraud.
This past July, we examined this conspiracy largely in connection
with the San Francisco Unified School District. We heard about a
fraudulent $50 million application that passed the normal approval
process and was thankfully eventually stopped because one key individual, that districts superintendent, took responsibility and
turned down the questionable funding and launched an internal investigation. In that case, because of that superintendents responsible actions, E-rate funds did not flow into the conspirators hands.
In contrast, we are going to look at a couple of districts where
the superintendents did not stop the questionable funding, where
E-rate funds were expended, and we will examine how the school
districts abdicated their duty to responsibly manage the peoples
money.
Four of the witnesses in connection with the topic today declined
to appear voluntarily. Therefore, this committee had to issue subpoenas last week to command their presence and testimony. Among
those that we had to subpoena that are here today are the superintendent of the Ecorse Michigan Public School District, Dr. Emma
Epps, and the former facilities director for Ecorse, Dr. Douglas
Benit. Both of these school officials can help us, if they will, understand how Ecourse became involved with NEC BNS and how they
developed plans to spend E-rate funds, including spending on goods
and services that were ineligible for E-rate discounts.
We also have Mr. Quentin Lawson, the executive director of the
National Alliance of Black School Educators, NABSE. He can explain how NABSE assisted school districts with their E-rate plans
and how NEC BNS became involved with these plans.
We have also issued a subpoena to Mrs. Judith Green, an E-rate
consultant and former employee of VNCI, a now defunct company
that supplied E-rate gear to school districts through NEC BNS. Although U.S. marshals were not able to serve Mrs. Green to command her appearance at our July hearing, she has been successfully served this time, and we have provided her another opportunity to explain what she knows about the NEC BNS conspiracy.
A well-run E-Rate program requires a high degree of accountability on the part of applicants, vendor participants and the managers of the program, both at the Universal Service Administrative
Company, or USAC, and the Federal Communications Commission,
the FCC. There are many key questions we must address on this
front. For example, how do we ensure that school districts have
done their homework, as the program requires, and have planned
and decided what they need from E-rate before they choose vendors? How do we ensure that the competitive bidding for goods and
services has been conducted properly and truly is competitive? How
do we ensure that vendors and consultants do not insinuate their
advice inappropriately in this process?
To help us answer these questions, another aspect of this hearing
involves a case where about 20 school districts applied for a total
of $500 million in E-rate support but were rejected for the funding
by USAC, the E-rate administrator, because they did not select Erate goods and services competitively. The year before this massive
rejection, the El Paso Independent School District, which is the

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3
seventh largest district in Texas, applied for and received E-rate
discounts using the very same methods later identified by the FCC
as undermining the competitive process.
It is notable that El Paso E-rate support increased by some $64
million in a single year. In other words, it went from around $4
million 1 year to around $67 million, I believe, the next year when
it deployed this strategy to use a single vendor as a so-called strategic technology integrator for the purposes of E-rate work. El
Pasos public request for this integrator made clear that the district
had not yet determined what goods and services it would seek on
E-rate applications, thus suggesting that the winning vendor would
become closely involved in the subsequent E-rate planning process.
The success of El Pasos funding request appears to have influenced school district decisions around the region the very next
year. In other words, the word got out that there was easy money
to be had. Those districts that decided to implement a strategy
similar to El Pasos fortunately, for the taxpayers, were later rejected because the strategy did undermine competition.
We will hear from the vendor that served El Paso as the integrator, IBM, about its role in the process today. We will also hear
from several of the school districts and from other witnesses who
can shed light on how the process unfolded. I am hopeful they can
explain how the public came to be so poorly served.
What happened in El Paso and in the other districts will provide
for this subcommittee a window into the program setup, the quality
of planning by school districts and the impacts on price and eligibility of services when competition is not able to flourish. Throughout this review, I have remained very troubled by the performance
of the FCC and USAC at actually rooting out waste, fraud, and
abuse. They are supposed to be guardians of the public trust. In
many cases, in my opinion, they have failed to adequately discharge their oversight responsibility. These case studies today will
further illuminate problems that we found within their oversight of
the program. The pace and scope of program reforms have been, in
many cases, too little and too late.
Finally, and more fundamentally, I have serious concerns about
why the FCC set up the program this way in the first place. From
the evidence emerging from the series of hearings, this program
needs wholesale restructuring.
With that said, I look forward to hearing from the USAC and the
FCC as well as the numerous other witnesses at this hearing
today. I look forward to getting clear answers so that we can do
our job as the oversight committee to reform the program, so that
the public trust is not squandered. I want to welcome all of our
panelists and, with that, I would recognize the distinguished ranking member of the subcommittee, Mr. Deutsch of Florida, for any
opening statement which he wishes to make.
Mr. DEUTSCH. Thank you, Mr. Chairman, for recognizing me for
the purpose of making an opening statement. As you are aware,
the opportunity to make opening statements, which has long been
recognized in the Committee on Energy and Commerce on a bipartisan basis as a members right, was denied members on Wednesday, September 15. Before proceeding with my initial remarks, let
me note that next Congress, regardless of who is in the majority,

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4
members will have an opportunity to debate and vote on the serious break with committee precedent and tradition. In the interim,
I strongly urge that committee precedent and tradition be respected. Again, I want to thank you for recognizing me for this
opening statement this morning.
Mr. Chairman, I commend you for holding this hearing and the
investigation that has led up to todays inquiry. The E-Rate program has far-reaching consequences and is among those that determine the economic health and security of this Nation for years to
come. Congress enacted the E-Rate program to assure that all of
our children have schools and libraries that connect to the Internet.
Seven years and over $15 billion later, the program has not yet
achieved that goal.
In fairness, there has been some marvelous success stories. In
those instances where competent administrators have combined Erate funds with other funding sources and good planning, they
have produced classrooms where first graders do Powerpoint presentations and third graders forecast weather. Unfortunately, this is
clearly not the norm.
Mr. Chairman, this subcommittee has a history of exposing
waste, fraud and abuse in Federal programs. We have usually been
able to proceed on a bipartisan basis because it is in the interest
of everyone to expose and halt such practices. In this investigation,
the subcommittee has unfortunately hit the trifecta. Our first hearing focused on waste$100 million spent in Puerto Rico for highspeed Internet, yet the two computers per school were connected to
the Internet via dial-up modems provided from local funds. All Erate funds were wasted. Our second hearing focused on fraud. NEC
Corporation paid $20 million in fines and pled guilty to criminal
charges involving bid-rigging of an E-rate contract in San Francisco
and elsewhere. Local officials stopped the fraud from coming to fruition in San Francisco. Two of the school districts where NEC and
its co-conspirators fraudulently obtained funds will be part of todays hearings.
This hearing really focuses on abuse of the program. One of the
premier technology corporations, IBM, devised schemes to appropriate virtually all of the funds available for wiring 30,000 schools
and school districts in the country to a handful of school districts
that agreed to become strategic partners with that company in use
of E-rate funds. In 2002, school districts listing IBM as a primary
vendor submitted applications totaling about $1 billion in costs to
wire the internal connections in a handful of school districts.
The applications were modeled on its, success, in El Paso,
Texas where IBM managed to spend $69 million the year before to
supply those schools with equipment and services that far exceeded
the ability of the district to effectively utilize them. This gold-plate
equipment was installed without the necessary discussions and
teacher trainings. Much of it has gone unused. A prime example is
the $27 million spent on a help desk that the extent that such
funds might have been eligible for E-rate funds largely duplicated
the warranties that should have come with the installed equipment. That desk operated for only a couple of months and provided
no present-day benefit for the school children of El Paso.

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5
Mr. Chairman, you and your staff have indeed documented how
a program that was enacted to serve such an important goal has
been derailed by incompetent administration, greedy vendors and
in some cases ill-prepared local school officials. The IBM case study
demonstrates once again how this program that is supposed to benefit our children has been captured by vendors whose only interest
is fattening their own pockets. E-rate was designed to close the digital divide, to close the gap between those children whose parents
could afford to provide them with a computer connected to the
Internet at home, whose community schools taught them how to
utilize the unlimited information available on the World Wide Web,
to make a place for themselves in this increasingly technologically
dependent economy and those Americans who are not so advantaged.
It is these children, the children of Americas hardworking families whose jobs have been lost to competition from cheap foreign
labor who must access the new technology if they have any hope
of being part of the economic future of this country. And this country can ill-afford to be a Nation divided between the competitive
and the ill-equipped. Look forward to the testimony.
Chairman BARTON. I thank the distinguished ranking member of
Florida for that opening statement. Before he recognizes the vice
chairman, Id just like to take a point of personal privilege to point
out that the Chair held the start of this hearing for 15 minutes so
that the distinguished ranking member could be here to give that
statement.
Mr. DEUTSCH. I thank you.
Chairman BARTON. And we have honored the tradition of opening statements on both sides in every hearing this committee has
done this year except one when it was the chairmans judgment
that the political implications of that particular subject did not rise
to the requirement that the opening statements tradition should be
honored. So if we can keep the purpose of the hearings and the legislation under consideration to be constructive, there wont be any
restrictions on opening statements.
And with that, the Chair would recognize the distinguished vice
chairman of the subcommittee, Mr. Walden of Oregon, for an opening statement.
Mr. WALDEN. Thank you, Mr. Chairman, and thank you for your
work on this and many other issues. Today, as you said, we will
continue to explore a critical issue with respect to our oversight of
the E-Rate program, and that is how well does the application
process ensure that applicants have taken the appropriate steps to
choose the most cost-effective E-rate goods and services? This is a
central issue with this program. Weaknesses upfront in the application process, be it the planning or the competitive process, to
choose the goods and services for E-rate support paves the way either to effective educational enhancements, as envisioned for the
program, or to the waste and abuse of limited resources.
Incentives really matter. When a program is designed to provide
recipients and applicants access to others money, there is a powerful incentive to buy more than is needed. And when tens of millions
of dollars are at issue, there is a very powerful incentive to spend
wastefully. To prevent such wasteful spending, the program must

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6
deploy measures that enhance the incentives that ensure efficient
and effective spending for schools and libraries.
At todays hearing, we will approach this from several perspectives. We will continue to look at the impact of the NEC BNS conspiracy we heard testimony about this past July and the involvement of certain schools in this mess. We will also focus on the planning and decisions by school districts that pursued a procurement
method advertised as useful for, maximizing, E-rate funding.
And we will hear today about school districts obligations to do
their homework so that what they ask for can be put to use. I am
interested to learn more from our witnesses about the burdens of
planning and also about the ways to plan properly so that districts
dont bite off more than they can chew. I am interested to learn
how we can strengthen the incentives to plan properly. I would also
like to learn if efforts to improve certifications on the applications
are sufficient for this task. Planning is essential. Also essential is
to know the rules and understand what is necessary for a competitive process to flourish.
We will hear today about a case where competition did not flourish and where it appears that school districts really did not fully
plan out what they needed for the program. The result was tens
of millions of dollars of questionable spending in one poor school
district. In another school district, the result was an application
that asked for more than what the district really needed. Fortunately, the district took subsequent steps to scale back the request,
but I am not sure that is what normally happens.
What is the responsibility of the vendor in these situations? Despite a powerful incentive to sell and do business, vendors must
play by the E-rate rules as well. So today we will be able to learn
about the responsibilities of vendors in this process and whether
the requirements and rules are clear and sufficient to ensure that
vendors participate appropriately.
One of the foremost issues we must address is accountability.
Today, we will hear about accountability from all partiesthe
school districts, the vendors, and the agency charged with overseeing the programand I think this is critical for our oversight
of this very important program. So I look forward to welcoming the
witnesses, and I would especially like to thank the efforts made by
Charles Tafoya of El Paso Independent School District who will
join us by video conference link today. We appreciate his efforts, especially given the last minute complications in his plans to attend
the hearing.
Thank you, Mr. Chairman, and I will yield back whatever time
remains.
Chairman BARTON. We thank the gentleman of Oregon for that
opening statement and recognize the gentleman of Michigan, Mr.
Rogers, for any opening statement he wishes to make. The gentleman yields.
The Chair would ask unanimous consent that all members of the
subcommittee not present have the requisite number of days to put
their opening statements formally in the record. Without objection,
so ordered.
[Additional statement submitted for the record follows:]

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7
PREPARED STATEMENT

OF

HON. GREG WALDEN, A REPRESENTATIVE IN

FROM THE STATE OF OREGON

CONGRESS

Thank you, Mr. Chairman. Today we will continue to explore a critical issue with
respect to our oversight of the E-rate program. And that is: how well does the application process ensure that applicants have taken the appropriate steps to choose the
most cost-effective E-rate goods and services?
This is a central issue with this program. Weaknesses up front in the application
processbe it the planning or the competitive process to choose the goods and services for E-rate supportpaves the way either to effective educational enhancements
envisioned for the program or to the waste and abuse of limited resources.
Incentives really matter. When a program is designed to provide recipients and
applicants access to other peoples money, there is a powerful incentive to buy more
than is needed. And when tens of millions of dollars are at issue, there is a powerful
incentive to spend wastefully.
To prevent such wasteful spending, the program must deploy measures that enhance the incentives that ensure efficient and effective spending for schools and libraries.
At todays hearing we will approach this from several perspectives; we will continue to look at the impact of the NEC-BNS conspiracy we heard testimony about
this past July, and the involvement of certain schools in this mess; we will also
focus on the planning and decisions by school districts that pursued a procurement
method advertised as useful for maximizing E-rate funding.
Well hear today about school districts obligations to do their homework, so what
they ask for can be put to use. Im interested to learn more from our witnesses
about the burdens of planning, and also about the ways to plan properly so districts
dont bite off more than they can chew. Im interested to learn how we can
strengthen the incentives to plan properly. I would like to learn if efforts to improve
certifications on the applications are sufficient for this task.
Planning is essential. Also essential is to know the rules and to understand what
is necessary for a competitive process to flourish.
Well hear today about a case where competition did not flourish and where it appears that school districts really did not fully plan out what they needed for the program. The result was tens of millions of dollars of questionable spending in one poor
school district. In another school district, the result was an application that asked
for more than what the district really needed. (Fortunately, the district took subsequent steps to scale the request back; but Im not sure thats what normally happens.)
What is the responsibility of the vendor in these situations? Despite a powerful
incentive to sell and do business, vendors must play by the E-rate rules as well.
Today well be able to learn about the responsibilities of vendors in this process and
whether the requirements and rules are clear and sufficient to ensure vendors participate appropriately.
One of the foremost issues we must address is accountability. Today well hear
about accountability from all partiesthe school districts, the vendors, and the
agency charged with overseeing the program. I think this is a critical hearing for
our oversight of this program.
Let me welcome the witnesses. Id like to thank, especially, the efforts made by
Charles Tafoya of El Paso Independent School District, who will join us via video
link today. We appreciate his efforts given the last minute complications in his
plans to attend the hearing.
Thank you, Mr. Chairman. Ill yield back the remainder of my time.

Chairman BARTON. We would now like our first panel to come

forward. We have Mr. Walker Feaster, III, who is the Inspector
General of the Federal Communications Commission. He is accompanied by Mr. Thomas Cline, the Assistant Inspector General for
Audits. We have Mr. George McDonald, the vice president, Schools
and Libraries Division, the Universal Service Administrative Company. We also have Mr. Jeffrey Carlisle, the Chief of the Wireline
Competition Bureau of the FCC.
Gentlemen, I think each of you understand that it is the tradition of this subcommittee to take all testimony under oath. Do any
of you object to testifying under oath? Let the record show they all
shook their head that they dont object.

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8
It is also the tradition and your right under the United States
Constitution to be advised by counsel during your testimony. Do
any of you so wish to be advised by counsel? Let the record show
they all shook their head that said no.
Would each of you gentlemen please rise and raise your right
hand?
[Witnesses sworn.]
Chairman BARTON. Be seated. We are going to start with you,
Mr. Feaster. Your testimony formally is in the record in its entirety, and we will recognize you for 7 minutes to elaborate on that.
Welcome to the subcommittee.
TESTIMONY OF WALKER FEASTER, III, INSPECTOR GENERAL,
FEDERAL COMMUNICATIONS COMMISSION; ACCOMPANIED
BY THOMAS CLINE, ASSISTANT INSPECTOR GENERAL, AUDITS, FEDERAL COMMUNICATIONS COMMISSION; GEORGE
MCDONALD, VICE PRESIDENT, SCHOOLS AND LIBRARIES DIVISION, UNIVERSAL SERVICE ADMINISTRATION COMPANY;
AND JEFFREY CARLISLE, CHIEF, WIRELINE COMPETITION
BUREAU, FEDERAL COMMUNICATIONS COMMISSION

Mr. FEASTER. Thank you, sir. Good morning, Mr. Chairman and
members of the subcommittee. I appreciate the opportunity to appear before you today to discuss concerns regarding waste, fraud
and abuse in the E-Rate 9rogram. I would like to introduce Tom
Cline. He is my Assistant Inspector General for Audits and has
been heavily involved in our oversight of the E-Rate program.
This is the second opportunity that I have had to testify before
the subcommittee in these matters. In my comments and written
testimony, I will discuss my offices involvement in the investigations of NEC Business Network Solutions and IBM Global Services
and describe in more general terms the programmatic concerns
raised by these investigations.
First, I will briefly discuss my offices involvement in an ongoing
Federal investigation involving NEC BNS. I want to point out that
there are aspects of this case that I am not at liberty to discuss
because of an ongoing nature of this investigation. In fact, the two
audit staff in my office that are involved in this investigation are
prohibited by law from disclosing information that they have been
provided related to this case that was developed through the grand
jury process.
We first received allegations related to NEC BNS in August 2001
and referred the matter to the FBI. In July 2002, we established
a working relationship with the Antitrust Division of the Department of Justice to investigate E-rate fraud and we provided information related to this case. The Antitrust Division opened an investigation and my office have been involved in supporting this ongoing investigation since that time.
Now, I will briefly discuss my offices involvement in an investigation involving participation in the E-Rate program by IBM. In
February 2002, my office was contacted by the general counsel of
USAC regarding an anonymous letter that they had received alleging wrongdoing by IBM related to their involvement in providing
E-rate support to the El Paso Independent School District. The letter was signed, Concerned Taxpayer, and outlined three areas of

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concern involving El Pasos applications: The need for the program
and IBMs role and them driving that need, apparent violations of
Federal and State rules governing the procurement process and a
lack of project information for the El Paso School Board and public.
The letter provided a great deal of detail regarding the project and
IBMs involvement and clearly raised legitimate questions about
whether or not program rules were followed.
As a result of the allegations raised in the concerned taxpayer
letter, USAC initiated a special investigation of IBMs involvement
as a service provider with El Paso for funding years 2001 and 2002
and with the Ysleta Independent School District for funding year
2002. Based on the results of the analysis, USAC concluded that
Ysleta failed to comply with program requirements and that those
Ysleta funding requests associated with IBM should be denied.
USAC further recommended that they deny funding requests associated with IBM when the request fit the pattern of Ysleta and El
Paso.
We referred this matter to the Antitrust Division shortly after
they established an E-Rate Fraud Task Force in July 2002 and
began supporting their work. Antitrust initiated a preliminary inquiry in October 2002. Meanwhile, in September 2002, we received
additional allegations regarding IBMs overinvolvement in the competitive bidding process in numerous E-rate submissions, and we
forwarded this additional information to the Antitrust attorney directing the investigation. In April 2004, we were advised that the
Department of Justice has closed a preliminary inquiry of the IBM
matter. We discussed this case with representatives from the Antitrust Division and were informed that they did not identify any evidence of criminal activity based on the material that they reviewed
as part of the preliminary inquiry. After receiving this information,
my office closed their case on this matter.
The NEC BNS and IBM investigations highlight two general concerns that my office has with the design of the E-Rate program:
One, weaknesses in the rules governing the competitive procurement of goods and services, and, two, overreliance on self-certifications received from beneficiaries and vendors on E-rate funding
applications. It has been frustrating to me and my staff that these
are concerns that were identified in 2002 and the Commission has
yet to fully address these matters. The Commission has only recently started to address recommendations by the Antitrust Division of DOJ for strengthening program certifications. These recommendations are on three tracks: One track, some recommendations have been incorporated into E-rate forms and are at OMB for
approval; two, some recommendations are out for public comment;
and, three, some recommendations are not being implemented at
this time.
For this third group of recommendations, my office, along with
DOJ and the Wireline Competition Bureau, will work together to
see how they can be implemented. We believe all the antitrust recommendations would resort in better management of this program
and in delays in implementing these recommendations or the lack
thereof in some cases represents an ongoing risk to the program.
In view of these and numerous other concerns about the E-Rate

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program, I believe that it would be appropriate to conduct a broadbased review of the program.
We believe we have made significant progress toward our goal of
designing and implementing effective independent oversight of the
USF Program. However, primarily because of the lack of adequate
resources, we have been unable to fully implement an oversight
program. There has been progress made in making resources available to us for conducting E-rate audits, but we believe that direct
access to the USF is the best manner for obtaining the resources
needed or adequate oversight and, as I have stated in the past,
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, and 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. This is the second opportunity that I have had
to testify before the subcommittee on these matters. In my comments and written
testimony, I will discuss my offices involvement in the investigations of NEC-BNS
and IBM and describe in more general terms the programmatic concerns raised by
these investigations.
NEC-BUSINESS NETWORK SOLUTIONS INC. (NEC-BNS)

In this section of my testimony, I will briefly discuss my offices involvement in

an on-going federal investigation involving NEC-BNS. I want to point out that there
are aspects of this case that I am not at liberty to discuss because of the on-going
nature of this investigation. In fact, the two audit staff in my office that are involved in this investigation are prohibited by law from disclosing information that
they have been provided related to this case that was developed through the Grand
Jury process.
In August 2001, my office was contacted by an Associate General Counsel with
the Universal Service Administrative Company (USAC) regarding a request for information from an investigator from the Office of the City Attorney for the City and
County of San Francisco. We obtained a copy of the request for information that was
provided to USAC and a copy of the USAC response. In September 2001, we referred this matter to the Governmental Fraud Unit of the Federal Bureau of Investigation (FBI) in accordance with the process that we had established with the FBI
for centralized management of E-rate fraud cases.
In July 2002, my office established a working relationship with the Antitrust Division of the Department of Justice to investigate E-rate fraud. The Antitrust Division
was interested in E-rate fraud because of the large number of cases that included
allegations of bid rigging and other violations related to the Sherman Act. Information related to this case was provided to the E-rate fraud task force established by
the Antitrust Division and my office has been involved in supporting this on-going
investigation since that time. As part of our support for the investigation, my office
has performed in-depth analyses of E-rate documents, testified before a federal
grand jury, participated in the execution of a search warrant, evaluated seized electronic media, and participated in numerous witness interviews.
As part of the analysis that we performed for federal law enforcement, we examined NEC-BNS participation in the E-rate program with the purpose of identifying
suspect activity. For the universe of NEC-BNS participation in the program from
funding years 1998 through 2004, we identified fifty-three (53) E-rate applications
at twenty (20) schools that we concluded were suspect. These fifty-three (53) applications represented approximately $380 million in requested E-rate funding, over
$40 million in commitments, and $29.7 million in disbursed funding. Although these

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applications represented only 27% of the E-rate applications during this period that
included NEC-BNS, they represented 93% of requested funds and 96% of disbursed
funds. The results of our analysis was shared with federal law enforcement and
served as the basis for the NEC-BNS portion of the overall investigation.
To date, there have been numerous indictments and plea agreements related to
this case. In October 2002, Desmond McQuoid and US Machinery were indicted for
mail fraud in the United States District Court for the Northern District of California. In March 2003, Mr. McQuoid entered into a plea agreement in which he
agreed to plead guilty to mail fraud. In that plea agreement, Mr. McQuoid agreed
to numerous facts regarding the matter including the following facts concerning Erate fraud:
Participating in a scheme to submit false and inflated funding requests to the
USAC and SLD a part of the E-Rate program beginning in 1999 and continuing
until 2000.
Allowing the competitive bid process to be compromised by the consultants he was
working with.
Despite being aware that the contractors had submitted inflated bid price information to the School District and the USAC and SLD, not taking steps to correct the information provided.
Attempting to obtain a 10 million dollar in-kind donation from the main contractor by having them purchase computer workstations from US Machinery
and then donate these servers to the School District.
Attempting to use the excess funds in the inflated bids to pay for these products
even though I knew that the USAC and SLD had disallowed using their funds
for these expenditures.
In March 2003, US Machinery entered into a plea agreement in which they
agreed to plead guilty to mail fraud. In that plea agreement, US Machinery agreed
to numerous facts regarding the matter including the following facts regarding Erate fraud:
US Machinery bid to supply computer servers as part of an E-Rate application
submitted by and on behalf of the San Francisco Unified School District.
US Machinery learned during the process that some of the contractors had submitted inflated bids to the School District and to the USAC and SLD.
US Machinery brought this fact to Dennis McQuoids attention and failed correct
the misstatements in the bid documents.
Dennis McQuoid arranged a meeting with the principal contractorand tried to
obtain a concession from the contractor to purchase computers from US Machine.
As a result, the contractor was then supposed to donate these computers to the
School District.
In May 2004, NEC-BNS entered into a plea agreement as a result of this investigation. In that agreement, NEC-BNS agreed to plead guilty to one count of wire
fraud in violation of 18 U.S.C. 1343 and one count of conspiracy to suppress and
eliminate competition in violation of the Sherman Antitrust Act, 15 U.S.C. 1. As
part of the settlement, NEC-BNS agreed to pay $20,685,263 in criminal fines, civil
settlement, and restitution.
IBM GLOBAL SERVICES

In this section of my testimony, I will briefly discuss my offices involvement in

an investigation involving participation in the E-rate program by IBM Global Services (IBM).
In February 2002, my office was contacted by the General Counsel of the Universal Service Administrative Company (USAC) regarding a letter they had received
alleging wrongdoing by IBM related to their involvement in providing E-rate support to the El Paso Independent School District (EPISD). The letter, signed Concerned Tax Payer, outlined three areas of concern: (1) the need for the program and
IBMs role in driving that need; (2) apparent violations of Federal and state rules
governing the procurement process; and (3) the lack of project information for the
EPISD board and the public. The letter provided a great deal of detail regarding
the project and IBMs involvement and clearly raised legitimate questions about
whether or not program rules were followed.
As a result of the allegations raised in the Concerned Tax Payer letter, USAC
initiated a special investigation of IBMs involvement as a service provider with
EPISD for funding years 2001 and 2002 and with the Ysleta Independent School
District (Ysleta ISD) for funding year 2002. Based on the results of their analysis,
USAC concluded that Ysleta ISD failed to comply with program requirements and
that those Ysleta funding requests associated with IBM should be denied. USAC

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further recommended that SLD deny funding requests associated with IBM when
those requests fit the pattern of Ysleta ISD and EPISD.
As I discussed earlier in my testimony, we established a working relationship
with the Antitrust Division of the Department of Justice in June 2002. We referred
this matter to the Antitrust Division shortly after they established an E-rate fraud
task force in July 2002. In September 2002, representatives from my office visited
with representatives on the Antitrust task force to review case material. In October
2002, the Antitrust attorney directing the investigation requested authority within
the Antitrust Division to conduct a preliminary inquiry to pursue a possible bid rigging scheme in which competing telecommunication providers may have colluded
with each other, with school districts, or through representatives, on contracts for
communications equipment sold to El Paso ISD in El Paso, Texas, Ysleta ISD in
Ysleta, Texas, and potentially other districts nationwide. Authority to conduct a
preliminary inquiry was granted.
In September 2002, we received additional allegations regarding IBM participation in the E-rate program. These allegations were provided following a Train-theTrainers workshop provided by the Schools and Libraries Division of USAC during
which SLD trainers encouraged participants to provide any information highlighting
serious violations of program rules. The allegations address IBMs over-involvement
in the competitive bidding process. The allegations provided information detailing
a pattern of virtually identical cookie-cutter or laundry list-type form 470s posted by applicants around the country and provided detailed information on a number
of these schools issuing strikingly similar requests for proposals around the same
time as the form 470s were posted seeking essentially the same thinga strategic
technology partnerto assist the district in securing E-rate funds. We forwarded
this additional information to the Antitrust attorney directing the investigation.
In April 2004, we were advised that the Department of Justice had closed their
preliminary inquiry of the IBM matter. We discussed this case with representatives
from the Antitrust Division and were informed that they did not identify any evidence of criminal activity based on the material that they reviewed as part of the
preliminary inquiry. After receiving this information, my office closed their case file
on this matter.
PROGRAMMATIC CONCERNS HIGHLIGHTED BY NEC-BNS AND IBM INVESTIGATIONS

The NEC-BNS and IBM investigations highlight two general concerns that my office has with the design of the E-rate program: (1) weaknesses in the rules governing the competitive procurement of goods and service; and (2) over-reliance on
self certification.
Competitive Procurement
Program rules require that applicants use a competitive procurement process to
select service providers. 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
services to be able to demonstrate that the bid chosen is the most cost-effective, with
price being the primary consideration.
In the case of IBM, it seems clear that the practices followed by several of the
school districts that selected IBM as their service provider for participation in the
E-rate program for the funding years reviewed did not follow program requirements
for the competitive procurement of goods and services. Although the Department of
Justice did not find evidence of criminal activity, USAC denied numerous applications involving IBM as a result of their investigation and the Commission affirmed

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USAC decisions regarding these applications in the order they adopted in December
2003.
On June 5, 2002, USAC prepared a preliminary special investigation report summarizing the results of that review. In that preliminary report, USAC concluded
that both EPISD and Ysleta ISD utilized a Request for Proposal (RFP) format that
did not make price the major factor in the selection of the service provider in violation of program rules. In October 2002, USAC prepared a preliminary draft analysis
of issues identified in the EPISD and Ysleta ISD funding requests, determined that
funding requests for the two school districts followed the same basic pattern, and
presented the results of their legal analysis focusing on the Ysleta ISD funding requests. In that document, USAC concluded that:
Ysleta selected IBM as its service provider by a process other than the FCC Form
470 posting process and without defining the specific services that would be provided;
Ysleta selected IBM as its service provider without complying with the requirements that the applicant select the most cost-effective provider of service with
low cost being the primary factor;
Compliance with FCC Form 470 posting requirement is necessary in addition to
applicable state and local procurement requirements;
IBMs proposal specifies a range of services that it will provide as the Strategic
Technology Partner. Many of these services are not eligible for funding.
IBMs proposal emphasizes developing the technology plan and structuring funding requests in order to maximize funding requests; and
Requests for Proposal contain similar language and raise significant questions as
to whether IBM was improperly involved in the selection process.
In the case of NEC-BNS, wrongdoing rose to the level of criminal activity. In the
plea agreement that NEC-BNS accepted, NEC-BNS admitted to the following facts
regarding this case:
NEC participated in a conspiracy with one or more vendors of equipment and
services related to telecommunications, Internet access, and/or internal connections, a purpose of which was to suppress and eliminate competition for E-Rate
program projects.
In furtherance of the conspiracy, NEC reached an agreement with its co-conspirators to frustrate the competitive process on the E-Rate projects by allocating contracts and submitting fraudulent and non-competitive bids and, to
carry out this conspiracy, NEC discussed with these co-conspirators prospective
bids for the E-Rate projects; agreed with these co-conspirators who would be the
lead contractor on the project and who would participate on the project as subcontractors to the designated lead contractors; submitted fraudulent and noncompetitive bids in accordance with the conspiratorial agreement. Further,
NEC engaged two consultants who took steps to ensure the success of the conspiracy by eliminating and disqualifying bids from non-conspirators and either
directly awarding the contracts or using their best efforts to persuade the school
district officials to award contracts to the designated lead contractors.
Reliance on Applicant Certifications
The E-rate program is heavily reliant on applicant and service provider certifications. For example, 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. On the form 471, applicants make several important certifications. Applicants
certify that they have complied with all applicable state and local laws regarding
procurement of services for which support is being sought and that the services
that the applicant purchaseswill not be sold, resold, or transferred in consideration for money or any other thing of value. Other certifications are required on
various program forms.
Reliance on applicant and service provider certifications has been an area of concern in my office for some time. We have two concerns regarding certifications. The
first concern deals with over-reliance on certifications in lieu of USAC verification
and validation of applicant and service provider assurances as part of USACs normal review processes. The significance of this concern has been diminished somewhat by steps that USAC has taken, and is proposing to take, to strengthen the
Program Integrity Assurance (PIA) process.
The second, and more serious, concern is related to the design of the certifications.
Concerns about the design of program certifications were first brought to our attention by federal law enforcement. Numerous concerns about certification design were
brought to our attention during our first meeting with the E-rate fraud task force

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established by the Antitrust division of the Department of Justice in July 2002. A
representative from the Commissions Wireline Competition Bureau (WCB) was
present during that discussion. At our request, task force members provided written
comments on program certifications in December 2002. Some of the concerns expressed by task force members dealt with applicant certification to future events
(i.e., on the form 470, applicants certify that they recognize that support is conditional upon the schools securing access to all of the resources . . . necessary to use
the services purchased effectively).
In the case of IBM, the pattern that was observed at several applicants shows applicants reporting on the form 470 that they do not have Requests for Proposal for
the specific internal connections being sought and certifying that the request has
been examined and that to the best of my knowledge, information, and belief, all
statements of fact contained herein are true. Shortly after form 470s were posted,
applicants would issue a separate RFP (strikingly similar in many cases) for a
Technology Implementation and Systems Integrator Partner. The RFP for the
Technology Implementation and Systems Integrator Partner states that the selected vendor will serve as the prime contractor for any projects funded through Erate. Effectively, applicants provided assurance to the program that they have not
sought proposals for E-rate projects at the same time that they clearly have.
In the case of NEC-BNS, there are numerous examples of fraudulent representations on program forms. In fact, it may be more challenging to identify certifications
that were not fraudulent representations. Desmond McQuoid certified that he was
authorized to submit requests on behalf of the San Francisco Unified School District
when he was not. He further certified that the state and local procurement regulations were followed and that program rules were followed when neither of these
statements was accurate.
CERTIFICATION WEAKNESSES HAVE NOT BEEN FULLY ADDRESSED

My office started to raise concerns about perceived weaknesses in the competitive

procurement process and over reliance on certifications shortly after we became involved in program oversight. We first became concerned about the competitive procurement process as a result of our involvement in the Metropolitan Regional Education Service Agency (MRESA) investigation. During that investigation we observed how weaknesses in competitive bidding requirements and reliance on self
certification were exploited resulting in, at a minimum, a significant amount of
wasteful spending. We continued to express our concerns as we designed our oversight program, developed a program for auditing beneficiaries, and supported E-rate
fraud investigations. In fact, we established a working relationship with the Antitrust Division of the Department of Justice in a large part because of the number
of investigations that we were supporting that involved allegations regarding the
competitive procurement process.
Our level of concern regarding both the competitive procurement process and reliance on self-certification was heightened as we started to work with the Antitrust
Division. During our discussions with Antitrust, they expressed a general concern
with the lack of information regarding the competitive process and specific concerns
regarding applicant and service provider certifications. Although we started to pursue these issues with Commission staff in the fall of 2002, the Commission has only
recently started to address some of the recommendations from Antitrust, and none
of these recommendations are fully implemented. We have been informed by WCB
that several of the Antitrust suggestions have been incorporated into the appropriate E-rate forms and that those forms are now at the Office of Management and
Budget for approval. Other recommended certifications, particularly regarding the
competitive process, are still in the process of public comment, and we are as yet
uncertain what the FCC may ultimately do with these recommendations. Numerous
of the suggestions from Antitrust involved USAC obtaining and reviewing critical
procurement documents during the application review process. The Commissions response to these suggestions was to include in the 5th Report and Order the requirement that the applicant retain these documents, but providing these documents for
review along with an E-rate application was not required. And lastly, WCB has informed us that at this time they will not incorporate certain recommendations. I believe that the delay in implementing Antitrusts recommendations, and the exclusion of some of the recommendations from implementation, continues to place the
program at risk.
CONCLUSION

The Office of Inspector General remains committed to meeting our responsibility

for providing effective independent oversight of the Universal Service Fund pro-

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gram. 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 an unacceptably high risk of fraud, waste and abuse through noncompliance and program
weaknesses. We are concerned with program rules governing the competitive procurement of goods and service and with the over reliance on certifications. 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. But some progress has been made. We have partnered with USAC
to accomplish approximately 100 audits of E-rate beneficiaries using contracted resources available to them and the Commission has been actively furthering efforts
for us to use the USF to accomplish more audits. But we believe direct access to
the USF is the best manner with which to obtain the necessary resources and, 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 and I will be happy to answer any of your questions.

Chairman BARTON. Thank you, Mr. Feaster. Does Mr. Cline wish
to make a statement?
Mr. CLINE. No. Thank you.
Chairman BARTON. Okay. We now recognize Mr. George McDonald, who is the Vice President of the Schools and Library Division
of USAC, for an opening statement. Your statement is in the record
in its entirety, and we would recognize you for 7 minutes to elaborate.
TESTIMONY OF GEORGE MCDONALD

Mr. MCDONALD. Thank you, Mr. Chairman. Good morning, members of the subcommittee. Thank you for inviting me here today to
discuss USACs administration of the E-Rate program. Previous
hearings have given me the opportunity to outline our procedures
to combat waste, fraud, and abuse. Today, I want to focus on requirements for conducting a fair and open competitive process and
ensuring cost-effective use of E-rate funds. While USAC has responsibility for ensuring applications are properly reviewed, applicants and service providers alike have responsibility for knowing
and following the spirit, intent, and letter of the law and rules of
the program. The FCC, in a series of recent rulemakings, has
stressed that accountability.
We have been concerned from the beginning of the program
about service providers offering and applicants accepting free, ineligible services. Since service providers must cover their costs, these
free services would be paid for through inflated prices on eligible
equipment. Two key program requirements designed to protect the
integrity of the program are that applicants must conduct fair and
open competitive processes to select service providers, and applicants must pay the non-discount share of the cost of eligible goods
and services. These requirements are intended to ensure that the
applicants and E-rate are getting fair value. The rules require competition over the price of eligible services, competitively neutral
RFPs, and that applicants select the cost-effective offer with price
the primary factor.
The rules also require that applicants pay their share of the cost
so that they have a stake in selecting the most cost-effective offer

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and so that they do not request services in excess of their needs.
If service providers offer to waive the non-discount share of the
cost, they remove any incentive for the applicant, who is the one
making the decision, to select the most cost-effective alternative. If
service providers do waive the applicants share, they cover their
costs by inflating the pre-discount costs so that the discount share
to be paid by USAC more than covers their cost and E-rate is the
loser.
The E-Rate program is designed to give applicants discretion in
deciding which technology solutions best meet their educational objectives. USAC generally does not second guess the technology
choices applicants make, but the subcommittee and USAC have
seen instances of goldplating, purchases that are clearly excessive
for the use that will be made of them. The Commission recently directed that applicants certify that the bid selected was, the most
cost-effective means of meeting educational needs and technology
plan goals. If an applicant solely relies on service provider recommendations, this may lead to applications that run afoul of program rules. Therefore, applicants must take the necessary steps to
determine if the recommended solution is in fact what is needed.
As the E-Rate program has matured, E-rate consultants have
played an increasing role. However, applicants remain responsible
for their applications and for ensuring that there is a fair and open
competitive process. USAC has denied millions of dollars in funding requests when we have determined that the consultant who
provided free services to the applicants was associated with the
service provider selected.
Let me now turn to the participation of IBM in the E-Rate program. In January 2002, USAC received an anonymous letter alleging program abuses at the El Paso Independent School District in
Texas, as Mr. Feaster has said. Our Special Investigations Team
began an investigation which led to a concern that the procurement
approach may not have been consistent with program rules. We
identified a number of funding year 2002 applicants who were requesting large amounts of E-rate discounts and funding requests
associated with IBM and who may have used a similar procurement approach. Ultimately, we concluded that the procurement approach was not consistent with the rules, and we denied requests
for over $500 million.
The rules require applicants to identify the specific eligible services for which they will seek funding based on the applicants technology plan, to solicit bids from competing service providers and
then to choose the most cost-effective alternative with price the primary factor. These applicants and IBM participated in a two-step
approach which consisted first of choosing a strategic technology
partner and then, with the help of that partner, deciding which eligible services to seek funding for. At the first step, each applicant
used the Generic Form 470 and a similar RFP indicating that they
had not decided which specific services they needed and sought a
partner to help them make those decisions. Since the applicants
did not identify the specific services they were seeking, the proposals did not state the cost of the services. Consequently, the applicants did not make the selection of the service provider based on
which was the most cost-effective alternative.

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After IBM was selected, the second step began. At this step, IBM
worked with the applicants to identify the specific services for
which funding would be sought. This meant that at the time the
decisions were made about what specific services to request E-rate
discounts for and how much to request, there was only one service
provider at the table. Consequently, the price competition for eligible services that the FCC rules envisioned never took place. IBM
and the applicants appealed USACs denials; the FCC affirmed
USACs decisions to deny funding in all but one instance.
We funded El Paso in funding year 2001 even though El Paso
used the two-step approach that we determined was inconsistent
with program rules in the next year. This occurred because our review procedures did not flag the El Paso application for a particular kind of heightened scrutiny. We review almost 40,000 applications for funding every year, and we use a staff of some 150 people to conduct those reviews. With a process of that magnitude, we
appropriately rely on written procedures to guide the reviews to ensure consistency and equity for all applicants. Our procedures did
not contemplate the two-step procurement approach in 2001 and
therefore we did not identify this application as one requiring
heightened scrutiny. We have learned much more about the services IBM was offering through our intense review of the 2002 applications and concluded based on that analysis and on review of
statements of work for El Paso for 2001 that our 2001 funding commitments for El Paso may have included a substantial amount of
ineligible services. We have asked IBM to respond to our tentative
conclusions. Depending on that response, we may seek recovery of
a substantial portion of the funds we dispersed to IBM for work in
El Paso in 2001.
Mr. Chairman, thank you for providing me with the opportunity
to address the subcommittee. I would be happy to respond to any
questions.
[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. I am George
McDonald, Vice President of the Universal Service Administrative Company
(USAC) with responsibility for the Schools and Libraries Division. Thank you for
inviting me here today to discuss USACs administration of the E-rate program.
Protecting Against Pre-Commitment Program Abuse
Previous hearings held by this Subcommittee about E-rate have given me the opportunity to outline our procedures to combat those who would try to circumvent
program rules, which can lead to waste, fraud or abuse. Today, I will focus on requirements for conducting a fair and open competitive process and ensuring costeffective use of E-rate funds. These are the responsibilities of the applicant and
areas that the applicant must take responsibility for prior to submitting an application. While USAC has responsibility for ensuring applications are properly reviewed,
applicants and service providers alike have responsibility for knowing and following
the spirit, intent, and letter of the law and rules of the program. The Federal Communications Commission (FCC), in a series of recent rulemakings, has stressed that
accountability.
Free, Ineligible ServicesWe have been concerned from the beginning of the
program about service providers offering and applicants accepting free, ineligible
services and have taken steps to address this potential for abuse. Since service providers must cover their costs, these free services would not be free to E-rate; they
would be paid for through inflated prices on eligible equipment. For example, NECBusiness Network Solutions Inc. (NEC) admitted in its recent plea agreement that

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it planned to donate millions of dollars worth of ineligible computer workstations
to the San Francisco Unified School District (SFUSD) and that NEC actually
planned to use E-rate funds to cover the costs of these donated workstations. NEC
also admitted that the funding requests that were submitted to us for SFUSD contained inflated prices.
An applicant can, however, accept free, ineligible services, along with eligible services, request discounts, and satisfy the rules if the applicant complies with the following requirement. The applicant must reduce the prediscount cost of the eligible
services by the fair market value of the ineligible services it will be provided at no
cost. When we review applications, we look for free, ineligible services so that we
may take appropriate action.
USAC is authorized to provide funding for eligible services only. This prohibits
applicants and service providers from using discounts to subsidize the procurement
of ineligible or unrequested services. The value of all price reductions, promotional
offers, and free services must be deducted from the pre-discount cost of services.
In this manner, universal service funds are not used to subsidize ineligible services.
Similarly, since applicants are required to choose the most cost-effective bid with
the price of eligible services being the primary factor, applicants cannot base their
decisions on free, ineligible offerings by service providers.
Competitive Process to Select Service Provider and Payment of the NonDiscount Share of the Cost of Eligible Goods and ServicesTwo key program
requirements designed to prevent waste, fraud, and abuse, and to protect the integrity of the program are that applicants must conduct fair and open competitive processes to select service providers and applicants must pay the non-discount share of
the cost of eligible goods and services. If applicants do not comply with these requirements, their applications will be denied. These requirements are intended to
ensure that the applicants and E-rate are getting fair value. The rules require competition over the price of eligible services, competitively neutral RFPs, and that applicants select the most cost-effective offer with price the primary factor. Applicants
must remain in control of the procurement process and cannot abdicate their responsibilities to a service provider who is competing for their business, or to a consultant.
The rules also require that applicants pay their share of the cost so that they
have a stake in selecting the most cost-effective offer and so that they do not request
services in excess of their needs. If service providers offer to waive the non-discount
share of the cost, they remove any incentive for the applicant, who is the one making the decision, to select the most cost-effective alternative. This undermines the
goal of preventing waste, fraud, and abuse. If service providers waive the non-discount share of the cost, they must still cover their costs. They do this by inflating
the prediscount cost so that the discount share to be paid by USAC more than covers their costs, and E-rate is the loser.
GoldplatingThe E-rate program is designed to give applicants discretion in deciding which technology solutions best meet their educational objectives. Some applicants seek discounts only for basic phone service and dial-up Internet access. Others
seek assistance in building sophisticated networks with broadband connections for
Internet access and distance learning. USAC generally does not second guess the
choices applicants make, but the Subcommittee and USAC have seen instances of
goldplating purchases that are clearly excessive for the use that will be made
of them. Applicants are responsible for the reasonableness of their choices. To emphasize this responsibility, the Commission recently directed that applicants explicitly certify that the selection of services and service providers is based on the most
cost effective means of meeting educational needs and technology plan goals. We
can and do deny requests when the applicant did not select the most cost-effective
offering with price the primary factor, when applications include a substantial
amount of ineligible services, or when requested services clearly go well beyond the
requirements set out in the applicants technology plan. Applicants are responsible
for their requeststhey must do the planning for technology solutions tied to their
educational objectives, they make the certifications on the forms, they are to share
the cost. If an applicant solely relies on service provider recommendations, this may
lead to applications that run afoul of program rules. Therefore, applicants must take
the necessary steps to be in a position to determine if the recommended solution
is in fact what is needed.
ConsultantsAs the E-rate program has matured, E-rate consultants have
played an increasing role. Consultants offer a variety of services to applicants, from
providing advice with respect to the available technologies, to submitting program
forms, to overseeing the competitive process underlying the application. As with deciding which technology solutions best meet their educational objectives, applicants
have discretion to choose a consultant. However, applicants remain responsible for

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their applications and for ensuring that there is a fair and open competitive process.
USAC has denied millions of dollars in funding requests when we have determined
that the consultant who provided free services to the applicant was associated
with the service provider selected.
Participation of IBM in the E-rate Program
Let me now turn to the participation of IBM in the E-rate program. IBM has been
participating as a provider of internal connections since the inception of the program. It has been paid over $760 million from 1998 until todaymore than any
other single E-rate service provider. In January 2002, USAC received an anonymous
letter alleging program abuses at the El Paso Independent School District in Texas
(El Paso). Our Special Investigations team began an investigation, which included
a site visit. As we came to understand the procurement approach that had been
used by El Paso to select IBM for Funding Year 2001, we became concerned that
it may not have been consistent with program rules. We identified a number of
Funding Year 2002 applicants who were requesting large amounts of E-rate discounts in funding requests associated with IBM and who may have used a similar
procurement approach. We extended the investigation to cover these Funding Year
2002 applicants, which included El Paso. Ultimately, we concluded that the procurement approach was not consistent with the rules and denied requests for over $500
million because of that approach. Several of the applicants associated with IBM in
Funding Year 2002 would have been selected for heightened scrutiny of their applications even if USAC had not received the whistleblower call. I believe that its likely that would have resulted in USAC identifying these program rule violations independently of the whistleblower letter, but certainly the letter was helpful in the
process.
As I have discussed, the FCC rules are designed to ensure prudent use of E-rate
funds by requiring applicants to conduct a fair and open competition for obtaining
the eligible services the applicant has decided it needs. The rules require applicants
to identify the specific eligible services for which they will seek funding based upon
the applicants technology plan, to solicit bids from competing service providers, and
then to choose the most cost-effective alternative with price being the primary factor.
These applicants and IBM participated in a two-step approach, involving a Strategic Technology Partner. Generally, the Strategic Technology Partner is a consultant to help customers determine what their technology needs are, and a general
contractor overseeing the implementation of the different projects. The two-step approach consisted of first choosing the Strategic Technology Partner, and then, with
the help of that partner, deciding which eligible services to seek funding for.
At the first step, each applicant used a generic Form 470 and a similar RFP indicating that they had not decided which specific services they needed and sought a
partner to help them make those decisions. Since the applicants did not identify the
specific services they were seeking, the bids that the service providers submitted did
not state the cost of the services. Consequently, when the applicants selected the
winning service provider, they did not make that selection based on which was the
most cost-effective alternative with price the primary factor.
After IBM was selected, the second step began. At this step, IBM worked with
the applicants to develop detailed statements of work that identified the specific
services for which funding would be sought on the applications submitted to USAC.
This meant that, at the time decisions were made about what specific services to
request E-rate discounts for and how much to request, there was only one service
provider at the table. Consequently, the price competition for eligible services that
the FCC rules envision never took place.
IBM and the applicants appealed USACs denials to the FCC, and in some cases
to USAC. The FCC affirmed USACs decisions to deny funding in all but one instance. USAC reversed one of its denials on appeal. The FCC decision affected two
other appeals pending with USAC.
We funded El Paso in Funding Year 2001 even though El Paso used the two-step
approach that we determined was inconsistent with program rules in the next year.
This occurred because our review procedures did not flag the El Paso application
for a particular kind of heightened scrutiny. We review almost 40,000 applications
for funding every year, and we use a staff of some 150 people to conduct those reviews. With a process of that magnitude, we appropriately rely on written procedures to guide the reviews to ensure consistency and equity for all applicants. Our
procedures did not contemplate the strategic technology partner procurement approach in 2001 and, therefore, we did not identify this application as one requiring
heightened scrutiny.

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We have learned much more about the services IBM was offering through our intense review of the Funding Year 2002 applications and concluded based on that
analysis and review of Statements of Work for El Paso for Funding Year 2001 that
our Funding Year 2001 funding commitments for El Paso may have included a substantial amount of ineligible services. We have asked IBM to respond to our tentative conclusions. Depending on that response, we may seek recovery of a substantial portion of the funds we disbursed to IBM for work in El Paso for Funding Year
2001.
Conclusion
Mr. Chairman, thank you for providing me with the opportunity to address the
Subcommittee. I would be happy to respond to any questions you may have.

Chairman BARTON. We thank you. Now I want to welcome Mr.

Jeffrey Carlisle who is the Chief of the Wireline Competition Bureau of the FCC. Mr. Carlisle, your statement is in the record in
its entirety, and we welcome you to elaborate on it for 7 minutes.
Welcome to the subcommittee.
TESTIMONY OF JEFFREY CARLISLE

Mr. CARLISLE. Thank you. Good morning, Mr. Chairman and distinguished members of the subcommittee. I was named Chief of the
Wireline Competition Bureau on August 4, 2004. As such, many of
the incidents that are the subject of this hearing occurred before
my tenure, and I do not have firsthand knowledge of them. I am
here, however, to relate to you the facts as I have ascertained
them. I am also here to communicate to you that with respect to
the E-Rate program, I am working hard to achieve three main
goals: First, to acquaint myself with the program and learn about
its functioning in detail; second, to get up to speed with the current
status of proceedings and pending audits and enforcement actions,
including the IBM case which the Commission concluded at the end
of last year; and, third, to continue work already started to improve
functioning and oversight of the program.
With the 2002 launch of the schools and libraries rulemaking
proceeding, the Commission has sought to improve the effectiveness, fairness and efficiency of the E-Rate program and taken significant steps to prevent waste, fraud and abuse. In April 2003, the
Commission adopted debarment rules. In December 2003, the Commission established limits on the use of the internal connections,
restrictions on funding for duplicative services and clarified eligible
services.
We have adopted rules to revise our approach to recovery of
funds for violations, strengthened our audit and investigation processes and will make recommendations to adjust the discount matrix and also to require recipients of funding to conduct their own
independent audits.
Competitive bidding is a cornerstone of the E-Rate program because it limits waste, ensures program integrity and assist applicants in receiving the best value for their limited funds. The potential weaknesses in the competitive bidding system were highlighted
by the facts in the various 2002 IBM applications. Under the ERate program rules for competitive bidding, after developing a
technology plan, applicants are required to seek competitive bids
on goods and services eligible for E-rate discounts by completing
and posting an FCC Form 470 on the USAC web site.

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In the IBM cases, the applicants submitted a broad generic
version of the Form 470 indicating they were seeking virtually
every product and service eligible for E-rate discounts rather than
developing a list of services actually desired based on their technology plans with sufficient specificity to enable bidders to submit
realistic bids with prices for specified services.
This was coupled with the applicants posting an RFP for a systems integrator, something they did not disclose on Form 470 even
though Form 470 asks for such disclosure. IBM, in responding to
these RFPs, did not provide specific prices for specific facilities and
services, nor were such responses requested. Rather, the RFPs
sought general information and prices for acting as a systems integrator, and IBM responded with hourly rates. Subsequently, the
school districts selected IBM and then negotiated a contract for Erate-eligible products and services.
After receiving a whistleblowers anonymous letter in January
2002, USAC investigated and ultimately denied Ysletas request for
funding on December 3, 2002, then denied eight other applications
that selected IBM as a systems integrator. On December 8, 2003,
after de novo review of the facts in these multiple cases, the Commission upheld USACs denial of 8 of the 9 funding requests, totaling over $250 million. The Commission found in general that the
two-step bidding process, that is procurement of a systems integrator followed by private negotiation with that integrator for
goods and services eligible for E-rate support, violated the Commissions competitive bidding requirements.
The Commission permitted the applicants denied funding to have
a second chance to receive funding for funding year 2002 and allowed them to seek further bona fide competitive bids. The eight
school districts denied funding resubmitted funding requests seeking a total of $40 million in services, an amount substantially less
than the prior requests. IBM was permitted to bid again but bid
on only one of these applications and was not successful.
The Commission acted unanimously in just over a year after
USAC initially denied funding in the IBM cases, even as it was addressing numerous other cases and was engaged in general
rulemakings to improve the E-Rate program. In the course of the
IBM cases, USAC denied a quarter of a billion dollars of support
and also denied an additional quarter billion dollars of support for
funding year 2002 to nine applicants in similar circumstances involving IBM. Thus, in the IBM cases, no funding was distributed
and no dollars had to be recovered.
I believe there is more that we can and should be doing. As I indicated at the beginning of my testimony, since the IBM case was
concluded, the Commission has implemented further oversight requirements, and the Bureau has recommended changes to certification requirements to the Office of Management and Budget for
approval. We believe these steps will continue to improve our oversight over the program, and we will continue to use adjudications,
rulemakings and audits to help us identify areas of E-rate program
administration that are vulnerable to fraud or to confusion that
leads to waste and abuse.

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Thank you, Mr. Chairman, for the opportunity to participate in
your review of the E-Rate program. I look forward to your questions.
[The prepared statement of Jeffrey Carlisle follows:]
PREPARED STATEMENT OF JEFFREY CARLISLE, CHIEF, WIRELINE COMPETITION
BUREAU, FEDERAL COMMUNICATIONS COMMISSION
Good morning, Mr. Chairman and distinguished members of the Subcommittee.
I was named Chief of the Wireline Competition Bureau on August 4, 2004. As such,
many of the incidents that are the subject of this hearing occurred before my tenure
and I do not have first-hand knowledge of them. I am here, however, to relate the
facts to you as I have ascertained them. More importantly, I am here to communicate to the Subcommittee that, with respect to the E-rate Program, I am working
hard to achieve three main goals: first, to acquaint myself with the program and
learn about its functioning in detail; second, to get up to speed with the current status of pending audits and enforcement actions, including the IBM case which the
Commission concluded at the end of last year; and third to continue and advance
the work already started to improve functioning and oversight of the program, and
thereby eliminate waste, fraud and abuse.
I. THE COMMISSION IS IMPROVING PROGRAM OVERSIGHT

As a program that benefits the public, the E-rate program has matured to such
a level that it has attracted bad actors that bend and violate the public trust. We
began to detect these individuals and entities, in some cases schools or libraries, as
early as 2001, in reviewing audits completed in the year 2000. These individuals
and entities have either gamed the system and exploited loopholes in our rules, or
they have committed outright fraud, and engaged in deceptive practices in an effort
to thwart our system of internal checks and audits. Some turn out to be honest mistakes, but some have also resulted in civil and criminal prosecutions. The sheer gall
of some of these deceptionsbid rigging, failure to deliver services already paid for,
falsified forms and kickbacksis disappointing, given that this is a program to benefit children and library patrons, but it is not surprising. We are dealing with elements in some instances that acknowledge no moral limits, regardless of the purposes of the program.
Understanding this, the Commission has redoubled its efforts to deter and detect
all forms of waste, fraud and abuse in the E-rate program, and we believe we can
demonstrate good progress toward this goal.
Since the programs inception, and more recently with the 2002 launch of the
Schools and Libraries Universal Support Mechanism rulemaking, the Commission
has sought to improve the effectiveness, fairness, and efficiency of the E-rate program, while preventing waste, fraud and abuse.
In April 2003, the Commission adopted rules to bar participation in the program
of any individuals and companies that have been found criminally or civilly liable
for actions that violate our rules. We already have applied these procedures in three
instances, and we have sought comment on whether to expand the reach of our debarment rules.
In December 2003, the Commission emphasized that our rules have always prohibited funding of duplicative equipment and services. To prevent entities from exploiting discounts on internal connections, the Commission adopted rules to prevent
program applicants from making repeated, uneconomical upgrades or transferring
their purchases to other entities, except in special circumstances. The Commission
also endorsed an initiative to publicize specific lists of services and equipment that
are eligible for E-rate discounts, both to help applicants more easily avoid ineligible
ones and to clarify the scope of the program.
In July of this year, the Commission adopted rules to revise our recovery approach such that recovery actions are no longer limited to instances in which service
providers have violated our rules, but instead recovery is directed against any party
or parties (including service providers and E-rate applicants) that have committed
rule or statutory violations.
Last month, the Commission adopted the Schools and Libraries Fifth Report and
Order, in which it addressed a number of issues that have surfaced as a result of
audits conducted during the Commissions oversight of the E-rate program. The
Schools and Libraries Fifth Report and Order strengthens the Commissions current
process for conducting audits and investigations of the E-rate program in a timely
and efficient fashion. Specifically, the order establishes a framework for determining
the appropriate amount to be recovered when funds are disbursed in violation of the

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statute and our rules. In addition, the order sets forth a framework for heightened
scrutiny for applicants and service providers that have violated our rules in the
past. The order also extends the red light rule of the FCCs existing Debt Collection rules to bar fund recipients from receiving additional program benefits if they
have yet to repay the fund for past erroneous disbursements. Our red light rule
provides that the Commission shall withhold action on any application or request
for benefits made by an entity that is delinquent in its non-tax debts owed to the
Commission, and dismiss all such applications or requests if the delinquent debt is
not resolved. The Fifth Report and Order also responds to recommendations made
by the Commissions Office of Inspector General (OIG), including codifying USAC
procedures into our rules and strengthening the programs document retention requirements, so that any misdeeds can be more easily detected and prosecuted. Consistent with the OIGs recommendations, the order also modifies technology plan requirements to require applicants to have an approved plan that follows the U.S. Department of Education technology plan guidelines, subject to an additional requirement that an applicant show that it has the necessary resources to achieve its technology aims.
In response to recommendations from the U.S. Department of Justice, the Fifth
Report and Order also requires applicants to make important new certifications as
a prerequisite to funding. For example, applicants must now certify that price will
be the primary factor in bid selection, and, as a guard against gold-plating, that
they will select the most cost-effective means to achieve goals of their technology
plans. Finally, the order establishes a process to codify USAC procedures and update those requirements as necessary to protect against waste, fraud and abuse.
This Fall, we will make recommendations to the Commission on revising the
schedule of discounts schools and libraries are accorded under the program, as they
purchase equipment and services. We believe that adjusting the discounts so that
applicants are required to increase their contribution to those purchases will encourage schools and libraries to make better economic choices, and further minimize the
opportunities for abuse. We also continue to tighten and monitor the competitive
bidding process to minimize opportunities for waste, fraud and abuse. The potential
weaknesses in a competitive bidding system were highlighted by the facts in the
various 2002 IBM applications.
II. THE IBM CASES ILLUSTRATE THE NEED FOR CONTINUING REFORM AND VIGILANCE

Under the E-rate program rules for competitive bidding, after developing a technology plan, applicants are required to seek competitive bids on goods and services
eligible for E-rate discounts by completing and posting an FCC Form 470 on the
USAC website. Applicants also must satisfy applicable state procurement rules, wait
at least 28 days after posting before committing to a contract, and in selecting their
service providers, make price the primary consideration. Competitive bidding is a
cornerstone of the E-rate program because it limits waste, ensures program integrity, and assists applicants in receiving the best value for their limited funds.
In the IBM cases, the applicants submitted a broad, generic version of the Form
470 indicating that they were seeking virtually every product and service eligible
for E-rate discounts, rather than developing a list of services actually desired, based
on their technology plans, with sufficient specificity to enable bidders to submit realistic bids with prices for specified services. While the Form 470 offered applicants
the chance to inform potential bidders if there was a more specific request for proposal (RFP) that they could consult, the applicants in the IBM cases generally indicated that one was not available, even though they posted such an RFP only five
days after filing their respective Form 470s with USAC.
In the principal IBM case, involving Ysleta Schools District (Ysleta), the applicant
indicated that it was seeking a Technology Implementation and Systems Implementation Partner to assist the District in preparing applications on the Districts
behalf for E-rate funding . . . Five firms responded to Ysletas RFP. IBM submitted
a 147-page response that addressed each category in the RFP. In that response, the
only prices that IBM quoted were hourly rates for Systems Integration, ranging
from $394 per hour for a Project Executive to $49 per hour for a Project Administrator. A systems integrator operates in the role of a prime contractor for coordinating services actually delivered by subcontractors. Our rules, however, contemplate a direct relationship between the applicants and the service providers, not
an indirect relationship through an intermediary subcontracting unit.
In its response to the RFP, IBM did not place bids on the specific products and
services that were eligible for E-rate discounts, as required by our rules. Ysleta selected IBM subject to the condition that a satisfactory contract could be negotiated
between IBM and Ysleta over the scope of work and the prices of E-rate-eligible

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products and services. IBM and Ysleta engaged in those negotiations and completed
them on January 17, 2002. The final contract included five statements of work,
ranging from just under $1 million to more than $12 million, each with detailed
specifications, prices, and terms.
Triggered by a whistleblowers anonymous letter in May 2002, USAC sent a special investigator to do a site visit and collect documentation from Ysleta concerning
whether it had the resources to effectively use the services it had purchased. After
reviewing Ysletas application and supporting documents, USAC denied Ysletas request for funding on December 3, 2002, based on violations of the Commissions
competitive bidding rules, and provided Ysleta and IBM with a detailed explanation
for that denial. Soon thereafter, USAC also denied eight other applications that selected IBM as system integrator. On January 30, 2003, Ysleta and IBM sought Commission review of USACs decision, and the eight other applicants associated with
IBM filed similar appeals.
On December 8, 2003, after a de novo review of the facts of Ysleta and similar
cases, the Commission upheld USACs denial of eight of the nine funding requests
totaling over $250 million, for Ysleta, Donna, El Paso, and Galena Park in Texas;
the Navajo Education Technology Consortium and Albuquerque in New Mexico;
Oklahoma City, Oklahoma; and Memphis, Tennessee. The Commission found, in
general, that the so-called two-step bidding process (i.e., procurement of a system
integrator followed by private negotiation with that integrator for the goods and
services eligible for E-rate support) that IBM had participated in with Ysleta and
others had violated the Commissions competitive bidding requirements.
Specifically, the Commission found in Ysleta that:
1. Ysleta did not attempt to select the products and services that represented the
most cost-effective offerings, with price as the primary consideration. The only
prices that IBM presented were hourly rates for systems integration. No bids
were for prices for any E-rate supported offerings. Ysleta did not request or obtain sufficient data about the prices of IBMs competitors for E-rate services to
know if IBMs prices represented the most cost-effective option. Ysletas internal
assessment of cost-effectiveness was not sufficient;
2. The manner in which Ysleta and other schools used Form 470 had the effect of
eliminating competitive bidding for the products and services eligible for discounts under the E-rate program, because Ysletas form failed to describe the
services that it sought to purchase in sufficient detail to enable potential providers to formulate bids. Specifically, the structure and content of the RFP
meant that potential vendors of specific services would be unlikely to respond
in a meaningful way to the all-inclusive FCC Form 470;
3. Because Ysletas two-step system integration approach was inconsistent with our
competitive bidding requirements and Ysleta failed to demonstrate that it selected IBM with price as the primary factor, it failed to submit a bona fide request for service, contrary to section 254(h)(1)(B) of the Communications Act;
and
4. Compliance with state and local procurement processes did not exempt Ysleta
from complying with the Commissions competitive bidding rules.
The Commission found it in the public interest, however, to permit the applicants
that were denied funding to have a second chance to receive Funding Year 2002
support for services that they sought by seeking bona fide competitive bids. In particular, the Commission found that there was substantial and widespread reliance
on USACs prior approval of applications that utilized two-step bidding. USAC could
reasonably have been construed as sanctioning the improper two-step bidding process by approving a 2001 application by El Paso, which involved IBM. The processing
window for these rebid applications closed on June 9, 2004.
The eight school districts denied funding by the IBM decision have resubmitted
funding requests seeking a total of $40 million in services, an amount that is substantially less than the prior requests. IBM was permitted to bid again because, as
stated in the order, the Commission believes that its rules were not as clear as we
would have liked, and that IBM may not have realized that its aggressive interpretation of the rules actually crossed the line. As it turns out, IBM bid on only one
of these applications, and it was not successful. As directed by the Commission,
USAC is carefully scrutinizing these requests to ensure that they are consistent
with the Commission rules as clarified in the Order. USAC is also investigating the
circumstances surrounding El Pasos 2001 application.

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III. THE LESSONS LEARNED FROM THIS CASE

The IBM case illustrates the importance of a robust competitive bidding mechanism in the E-rate program. It also shows the importance of having clear rules. We
continue to be vigilant in pursuing both goals.
The Commission acted unanimously in just over a year after USAC initially denied funding in the IBM cases. The Commission acted decisively and quickly, even
as it was addressing numerous other cases and was engaged in general rulemakings
to improve the E-rate program. In the course of the IBM cases, USAC denied a
quarter of a billion dollars in support, and also denied an additional quarter billion
dollars of support for Funding Year 2002 to nine applicants in similar circumstances
involving IBM. Thus, in the IBM cases, no funding was distributed, and no dollars
had to be recovered.
Competitive bidding is critical to the success of the E-rate program. As long as
vendors and suppliers are subject to competition from others who are also eager to
gain a customer, they have a strong incentive to offer a competitive, cost-based price
for E-rate eligible goods and services. Absent competitive pressures, service providers and applicants may inflate prices to maximize their gains.
Clear rules are also crucial. Private firms and E-rate applicants have incentives
to interpret unclear rules to their benefit, even at the expense of the nations students, library patrons, and all Americansthe true beneficiaries of the E-rate program. The Commission is committed to enforcing, explaining, and, when necessary,
changing its rules to minimize potential for their abuse. Through the ongoing rulemaking process, we are revising and adjusting the program rules to minimize abuse,
as we have done in the recent Fifth Schools Order, while we continue to grant support to those in need.
Finally, the IBM decisions are an example of the system working. The inquiry
into Ysleta began with an anonymous letter alleging rule violations by IBM. Pursuant to its normal practices, USAC sent a special investigator to do a site visit and
collect documentation, and USAC denied the funding request consistent with our
rules. The Commission followed its normal process by reviewing the record de novo,
and it largely affirmed USACs decision, seizing the opportunity to clarify its rules.
We at the Commission are proud of this result. But I believe there is more we
can and should be doing. As I indicated at the beginning of my testimony, since the
IBM case was concluded, the Commission has implemented further oversight requirements, and the Bureau has recommended changes to certification requirements
to the Office of Management and Budget for approval. We are considering further
steps. We believe these steps will continue to improve our oversight of the program,
and we will continue to use adjudications, rulemakings, and audits to help us identify areas of E-rate program administration that are vulnerable to fraud or to confusion that leads to waste or abuse.
The Commission and its staff remain absolutely committed to making necessary
improvements in the E-rate program. We are 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 funds schools and libraries support mechanism,
and I look forward to your questions on these issues.

Chairman BARTON. We thank you, Mr. Carlisle. The Chair would

recognize himself for the first round of questions, and the staff
would put the clock at 10 minutes.
Mr. McDonald, I am going to ask you just some general questions
to set the parameters. Do you know approximately how much
money is being spent each year on the E-Rate program nationally?
Mr. MCDONALD. We have a cap on dispursements and collections
of $2.25 billion annually. We commit up to about that level and we
disperse about 80 percent of that. We actually send checks out for
about 80 percent.
Chairman BARTON. So about $2.25 billion. And has that amount
changed since the program was implemented in the late 1990s?
Has it been about $2 billion each year?
Mr. MCDONALD. That was the cap, as originally set, and then in
1998 the Commission changed the first fund year from a 12-month
to 18 months and lowered the cap to $1.925. Since then it has been

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$2.25 billion a year, and the Commission has recently provided for
rollover of unused funds for prior year.
Chairman BARTON. Okay. So in the history of the program, we
have expended somewhere around $12 billion; is that just a ball
park figure?
Mr. MCDONALD. I think it is about $8 billion in actual money out
the door.
Chairman BARTON. $8 billion out of the door. As we speak, how
many requests are pending for funding, either for this year or the
next year; do you know, in terms of dollars?
Mr. MCDONALD. We have committed $740 million for the funding
year we are in now, and the cap for this year is $2.4 billion.
Chairman BARTON. So you have expended about a third of the
money that is allocated for this year.
Mr. MCDONALD. We have committed, sir. We send letters out to
commit funds, and then as applicants do the work, applicants or
service providers can bill us for that. Our actual expenditures are
much less than $740 million.
Chairman BARTON. Okay. Now, my first questionI just kind of
want to get that in the record so we know what we are talking
aboutI believe this is our third hearing on this program, it may
be the fourth hearing, but every hearing it is one horror story after
another. Is this a program that we should suspend any funding
until we can get it right, just stop spending the money until we can
get the program rules right? Mr. Feaster, do you want to take a
shot at that?
Mr. FEASTER. We agree that there has been a series of horror
stories. I think the movement has been in the right direction. From
our perspective, it hasnt been fast enough. I think it would be a
real major decision for somebody to make to suspend the program.
I think the schools are very dependent upon the money to maintain
connections to the Internet and get new connections. I think that
would be a very radical decision. I think tightening up the procedures, as happened in the past and will hopefully happen in the
future, you will see less horror stories. And we also are instigating
a broad-based audit program using USF funds to check up on more
applicants than we have been doing in the past where we are looking at a program of 250 audits over the next 18 months to identify
major problems.
Chairman BARTON. Mr. McDonald, do you have an opinion
whether we should suspend the program?
Mr. MCDONALD. Sir, I think you would have to weigh it against
disruption to schools and libraries across this country. We have focused on particular instances that are very troubling. One of the
ones we are here to talk about today, as Mr. Carlisle said, except
for the 2001 money in El Paso, the money did not go out the door;
we stopped it. As I have told the committee before, we are initiating a new program of 1,000 site visits to complement the application and invoice reviews we do and the audits we do.
The audits that we have done, and we have worked very closely
with Mr. Feaster and his team on these audits, they have identified
issues but they havent identified very many instances of fraud. I
think that the subcommittee staff has done a good job of focusing
on the worst cases. I dont think that the public should come away

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from these hearings thinking what they are hearing in these
hearings
Chairman BARTON. By the testimony of one of you gentlemen,
there are 150 program reviewers and you admit that most of it is
self certification. You assume that what they are telling you is the
truth because you just dont have the staff to really investigate it.
Was that your testimony, Mr. McDonald?
Mr. MCDONALD. I believe Mr. Feaster spoke about the self certification.
Chairman BARTON. So we are basically on an honor system here.
We have spent $8 billion and there is a real question about how
much of that has been effectively utilized. Mr. Carlisle, do you have
a view on whether we should suspend the program?
Mr. CARLISLE. I would largely agree with Mr. Feaster on this. I
think it would be a radical decision. And if I could provide a little
specificity about why, my understanding is is that it is not as if in
every funding year you are funding schools and libraries from the
ground up to build new systems and establish new connections. A
good deal of the funding is sent out in order to maintain connections that are already there.
Chairman BARTON. Well, one of my questions is where are we in
wiring our schools? What percent of the eligible schools and libraries have been wired effectively? Do we have any statistics on that?
Are we 90 percent there or 80 percent there?
Mr. CARLISLE. In our recent 706 report, we identifiedI cant
speak to the percent that are eligible for funding, but in the 706
report, we stated that 94 percent of the schools in the country have
broadband access, and somewhere between 94 and 95 percent of libraries, I believe, do.
Chairman BARTON. So we are over the 90 percent level. That
would indicate that there is really not a need to continue to fund
at the $2 billion plus year level.
Mr. CARLISLE. Well, a review of that level may be in order, although I would say that, again, you have recurring costs for the
connections that are already there. There are monthly payments
that you have to make to keep a broadband line up or a telephone
line up.
Chairman BARTON. Well, I guarantee you, as long as money is
available, people are going to ask for it. We could double the program to $4 billion a year and there would be requests for $4 billion.
We could double that to $8 billion and there would be requests for
$8 billion. If we cut it to $1 billion, if it is really 100 percentas
we get closer to 100 percent, change the rules a little bit, the user
community will adapt to that and do that effectively.
Well, one of my next questions, since nobody said we ought to
suspend the program, I was hoping somebody would say we should,
but I have to be honest and our expert witnesses here that are in
charge of the program say we shouldnt, should we restructure the
program so that the local communities that are requesting the
funding have to put more of their local tax dollars upfront to participate? In other words, instead of requesting Federal dollars and
you go out and use them, should we set it up so that you go out
and we set out the program requirements. The local school district,
the local library goes out and puts in a system that meets those

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requirements and then gets reimbursed for it. Obviously, if the
local taxpayers are on the hook, the school board members and the
administrators are going to make sure or I would think they would
make sure that those monies are actually effectively used because
it is coming out of their local tax base. Mr. Feaster, do you have
a comment on that?
Mr. FEASTER. I think that would be an excellent idea. From the
standpoint of oversight, the more local money that goes into a system, I think the better it is going to be. I would have to defer to
the program operators in terms of the impact on whether the
schools that dont have that money how that would affect them in
the operation of the program.
Chairman BARTON. Mr. McDonald, do you have an opinion on
that? Just the general concept. I understand that we would have
to do a lot of work to work it out.
Mr. MCDONALD. I think you would see a much lower participation by the poorer schools who would have to come up with that
money upfront. The poorer schools frequently wait for our commitment letters to initiate service because they dont have that money,
and when they are assured
Chairman BARTON. Well, but now 94 percent have gotten some
connection established, if Mr. Carlisles statistics are relevant. So
we are not starting from ground zero. You could set up some sort
of a loan program that a low-income school district could apply for
a loan, and once they show that they are actually spending the
money for what it is supposed to be, they could be reimbursed. I
understand there is a difference between El Paso Independent
School District in far west Texas, it is low income, and in Highland
Park School District in urban Dallas that is one of the higher income districts in the country. I understand that.
So you could have some special provisions for low income participation based on some sort of a loan program. But unless we force
accountability or at least incentivize accountability at the local
level, if you have got a pile of Federal dollars that are just out
there, people are going to grab at it. It is free money, it is found
money, it is somebody elses money. So you have got to figureI
think we have to figure out a way to make sure that there is a real
incentive at the local level to use the money for which it is intended.
Mr. Carlisle, do you have a comment on some sort of a system
where the local dollars go upfront?
Mr. CARLISLE. Well, I think your proposal would certainly create
that incentive. I would have the same concern, although what you
point out about much of the facilities already being in place would
be a countervailing consideration. We are taking steps and will
make a recommendation to the Commission in the next month or
so to lower the discount rate that is currently applied, which would
have the effect of requiring school districts to have more skin in the
game, to put more of their money upfront in order to qualify for
funding. That coupled with a requirement that certain of those recipients would have to do independent audits would also be a control on the program, an alternative one to what you have suggested
but a control.

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Chairman BARTON. Let the record show that skin in the game
is a technical term used at the FCC for the local community to put
more of their dollars at risk in the beginning of the program.
Mr. McDonald, before my timemy time has expired. You wrote
a letter to Mr. Bob Richter who is with IBM Corporation, in charge
of their national E-Rate program. This letter was dated September
16. It is directed toward the El Paso Independent School District
funding for the year 2001, and the amount of money that was dispersed under that was a little over $55 million. The thrust of this
letter appears to be that a fair amount of that money may have to
be reimbursed. Do you care to comment of what percentage of that
$55 million this letter indicates might need to be reimbursed?
Mr. MCDONALD. Potentially a significant amount of that, and we
have invited IBM to come back to us and help clarify which of
these services that they delivered an invoice for are eligible and
which are not.
Chairman BARTON. But do you think it is going to be in the
neighborhood of $40 million or half of it?
Mr. MCDONALD. I dont think it would be that high. The analysis
attached to the letter walked through the individual pieces of it,
and a portion of the issue is what schools got the services? Were
they schools that qualified for the 90 percent discount rate or was
it the entire school district? And the answer to that question could
be a significant piece, and we just dont know.
Chairman BARTON. The Chair would ask unanimous consent that
the letter with the attachments be included in the record. I am told
that the minority staff has seen this letter? Is there any objection?
With hearing no objection, this letter is included in the record.
My final question before I turn it over to Ms. DeGette, in the El
Paso case, they were being funded in the $2 million to $4 million
range and then the funding request jumped up to over $60 million.
Is there no protocol within USAC, when you have such a huge increase from a prior year, that that is not automatically red-flagged?
We had the same case in the Dallas Independent School District
where they were going along at an amount of money and then
there was a significant jump in a single year. Does that not raise
some internal flag that needs to be investigated?
Mr. MCDONALD. It does since these hearings have begun, sir. I
think after the last hearing we realized that that should have been
an additional flag for us, and we have made that an automatic step
now.
Chairman BARTON. Okay. The Chair would recognize Ms.
DeGette of Colorado for 10 minutes.
Ms. DEGETTE. Thank you, Mr. Chairman. I agree with the chairman that one of the reasons this money has been so grossly misused is because of lack of oversight and local accountability, but my
concern is one that Mr. McDonald articulated, which is that some
of these school districts are so poor, I mean after all the whole program is to target poor districts, that they may not have the financial wherewithal to even come up with an initial amount of money.
And what I would like to explore is I was just telling staff my
daughter in the Denver Public Schools, which does receive this
money, they quit watering the lawn at her high school because
they dont have enough money to maintain the grass. So I was try-

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ing to think about how they would come up with enough money to
make a major investment in computer wiring, and I think that is
a concern we all share.
But my concern is how do we find alternative ways to ensure
that this money is well spent? And I wanted to ask you a couple
of questions, Mr. Feaster. You testified in your opening statement
that it would take additional enforcement resources to really do the
job that you need to do; is that correct?
Mr. FEASTER. That is correct; yes, maam.
Ms. DEGETTE. You have, I think, three folks investigating these
complaints right now; is that right?
Mr. FEASTER. Yes, maam.
Ms. DEGETTE. How many staff do you think you would need to
adequately investigate and do this oversight?
Mr. FEASTER. Approximately 16 additional staff. We are in the
process of developing a request for proposals to conduct approximately 250 audits of the program over the next 18 months. For us
to do that many reviews of the audits, we would need additional
resources.
Ms. DEGETTE. Do you have a ball park sense of the kind of resources you are talking about, a dollar amount?
Mr. FEASTER. For the 250 audits, about $10 million.
Ms. DEGETTE. Ten million? And do you have any estimate about
how much fraud and waste and abuse is going on out there, roughly?
Mr. FEASTER. Based on 135 audits that have been done over the
past couple of years, we found about 36 percent of those people
were not following the rules.
Ms. DEGETTE. Do you have any sense about how much money we
are talking about with that 36 percent, roughly?
Mr. FEASTER. No, I dont.
Ms. DEGETTE. What do you thinkdo you have advocate independent audits of these applications?
Mr. FEASTER. Yes, I do.
Ms. DEGETTE. Tell me how that would work, and are there additional rules that can be put into place to beef up independent audits?
Mr. FEASTER. When you say independent audit, I think that the
audits done by my organization or by contractors under my authority is the way to go. USAC also does internal auditusing an internal audit staff, they also do audits. I think that adds to the number
of audits we do. The concept I think you are talking about is independent audits by the school district.
Ms. DEGETTE. That would be helpful too, I would think.
Mr. FEASTER. We would have to review that to ensure that they
are truly independent. If the school district is paying somebody to
do something, they tend to get the results they like. That is always
a possibility.
Ms. DEGETTE. But there is a mechanism that can be put into
place as part of the application process to ensure independent audits by school districts, I would assume.
Mr. FEASTER. We could develop something in coordination with
USAC and the Wireline Bureau.

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Ms. DEGETTE. Now, can USAC funds be used for independent
audits?
Mr. FEASTER. We are going to try to do that with my office and
USAC partnering in some audits.
Ms. DEGETTE. Mr. Carlisle, in your testimony, you said that the
Wireline Competition Bureau is making a recommendation to the
Commission on revising the schedule of discounts that schools libraries are quoted under the program. And what this recommendation would do, as you testified, it would increase applicants to increase their contribution to purchases. And this is what I am concerned about: I am wondering if you are concerned whether these
disadvantaged school districts will have a difficult time paying for
the equipment as a result of the increased costs of the schools, and
has your agency done any research on this issue?
Mr. CARLISLE. My staff is looking into it as part of the process
of making a recommendation. Obviously, any recommendation that
we make to the Commission is going to take that into account.
Ms. DEGETTE. So you dont have any firm proposal to increase
the cost to the schools of the equipment and services, correct?
Mr. CARLISLE. I have not read the recommendation yet, so I dont
exactly know what
Ms. DEGETTE. I am sorry, is there a recommendation already?
Mr. CARLISLE. Not before the Commission yet. My staff is in the
process of writing that, which would be a recommended order to
the Commission.
Ms. DEGETTE. And what kind of research is your staff doing to
take into account the financial ability of these poor school districts
to pay?
Mr. CARLISLE. Well, typically, what we do in any rulemaking proceeding is review the record that we have got on hand, the comments and replies filed, which will include comments and replies
filed by the school districts and advocates on their behalf, and also
have meetings with them to find out what the scope of that issue
is.
Ms. DEGETTE. And what is thatis that comment period open
now?
Mr. CARLISLE. I am not sureI am sure it is
Ms. DEGETTE. Someone is shaking her head no behind you.
Mr. CARLISLE. I am sure it is closed at this point, but I am not
sure exactly
Ms. DEGETTE. I mean was there notice to these school districts?
Mr. CARLISLE. It would have been the same public notice that
anyone receives of any rulemaking that we have. So it is publication in the Federal Register. I dont know that specific notice was
sent. We have had ex parte meetings with a number of schools already, schools and libraries already, that would be affected by
changing the discount rate. But in terms of when the initial notice
of proposed rulemaking went out, it would have been the same
publication that the rest of the public received about it.
Ms. DEGETTE. And do you know whethersince the comment period is closed, do you know how many comments that you have received and from what types of schools and so on?
Mr. CARLISLE. Off the top of my head, no, but I would be happy
to work with your staff to give you that information.

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Ms. DEGETTE. That would be great. Mr. Chairman, I would ask
unanimous consent that Mr. Carlisle be allowed to submit in writing the kinds of responses to my questions.
Mr. WALDEN [presiding]. Absolutely. Without objection.
Ms. DEGETTE. Thank you. Now, I am wondering, Mr. McDonald,
I think you testified a minute ago in response to the chairmans
question that you had some concerns about these schools, the
needy schools being able to pay a higher percentage. I am wondering if you can elaborate on that answer and tell me why you do
have that concern?
Mr. MCDONALD. At a 90 percent discount rate, the schools are
paying 10 percent. If the discount rate were lowered to 80 percent,
the schools would pay 20. That is a doubling of the share they have
to come up with, so from their perspective, that isnt a trivial impact on them. I am not taking a position about should the rate be
changed or not, just that from that perspective, every 10 percent
decrease in the maximum discount rate is a doubling or tripling of
what the schools have to pay today.
Ms. DEGETTE. Do you know if anybody has done any research on
whether reducing the E-rate contribution from 90 percent to 80
percent would have any effect on the wrongdoers? I mean it still
seems to me that if you have a 20 percent match, there is going
to be an incentive on some peoples part because there is still 80
percent.
Mr. MCDONALD. You mean
Ms. DEGETTE. Where is the tipping point where it would really
create more accountability?
Mr. MCDONALD. You may be aware that USAC formed a Task
Force on Prevention of Waste, Fraud and Abuse last year, and the
task force spent a lot of time on this question. And there were advocatesthe composition of the task force included representatives
of schools, rural schools, urban schools, libraries, service providers,
and there was extensive discussion about this, some people pushing
for maximum 70 percent rate. The task force ended up at 80 percent, very much the kind of issues you were just going through
there. Is the non-discount share large enough to stop the wrongdoing?
Ms. DEGETTE. Right.
Mr. MCDONALD. Was it still possible for the service provider to
inflate the price and get that money back? That is where they came
out. I have learned more about what is really going on in some of
what the committee has seen, because documents that have come
to your attention have not come to ours. Obviously, they arent
sharing these documents with us.
Ms. DEGETTE. And this task force, as I understand it, was primarily composed of vendors, while there were others on the task
force; is that right?
Mr. MCDONALD. No, I think it is primarily applicants that
werevendors and applicants. We tried to get a cross section of all
the stakeholders in the program. So there were a number of school
applicants, a number of library applicants, rural schools, Catholic
schools.

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Ms. DEGETTE. It would be helpful to me, Mr. Cline, if you
couldI am sorry, Mr. McDonald, if you couldthe name tags are
overMr. Cline says, Oh, no.
If you could supplement your testimony with the list of who was
on that task force, that would be very helpful.
Mr. MCDONALD. Be happy to do that.
Ms. DEGETTE. Thank you.
[The information referred to follows:]

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Mr. WALDEN. Mr. McDonald, I want to go to you. Could you turn
to tab 65 in our notebook of information? You will find there a
memo from Mr. Quentin R. Lawson of the National Alliance of
Black School Educators to Mr. Bob Emery, John Colvin and Don
Parker. And attached thereto is a November 2, 2000 letter from
NEC to Mr. Lawson in which you will seeare you on the same?
Okay. In which you will see right off the top he says, Dear Mr.
Lawson, I am pleased to respond to your letter on behalf of the
VNCI, NEC and IBM, quote, unquote, the team.
And then later on page 2 of that letter he says, on sub 6, The
teaming agreement related to the team members participation with
one another is in negotiation and will remain the confidential information of each member of the team. The team, while fully committed to supporting NABSE and NABSEs membership, believes
that any contractual arrangement between NABSE and the team
could be construed inappropriately by third parties.
And on the third page, he writesor these people write, Mr.
Colvin, Mr. Emery and Mr. Parker, As an offset to the costs that
NABSE will incur in support of this partnership, NABSE will receive an annual payment of 1.5 percent of the cumulative business
generated by the team members in sales to NABSE member
schools.
Is this some sort of kickback we are dealing with here? How
would you describe this 1.5 percent payment back to NABSE and
this reference to how this might be misconstrued by third parties?
Mr. MCDONALD. My understanding is that NABSE was presenting itself as a disinterested consultant to these school districts,
helping them participate in E-rate. As I mentioned in my testimony, we have denied millions of dollars where that consultant
who is controlling the process of selection of vendor is associated
with those vendors.
Mr. WALDEN. Do you think that is the case here, that NABSE
was associated with the vendors?
Mr. MCDONALD. NABSE certainly has an interest in making sure
the work goes to these vendors, because they make money if it
does. Presumably, they dont if it does not.
Mr. WALDEN. And what qualifications, from your experience, did
the NABSE people bring to the process as technical qualifications?
Mr. MCDONALD. I dont know, sir.
Mr. WALDEN. Are you familiar with other such agreements where
there is a percentage that goes back based on sales to a third
party?
Mr. MCDONALD. I recall the incident of Total Com and there was
an FCC decision on this where we found Total Com was the consultant where whenever they were involved with an applicant, the
applicant chose an outfit called SiteLink to provide internal connections. We got hold, in that case, of a contract that the applicant
and Site Link would sign that named Total Com a beneficiary of
the contract. It didnt specify the percentage, as I recall, but presumably there was some money going back to Total Com based on
getting business for SiteLink. We denied those applications; the
FCC upheld that decision.
Mr. WALDEN. But that is a similar sort of scheme to what we are
reading about here?

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Mr. MCDONALD. I would think that is similar; yes, sir.
Mr. WALDEN. And so would this be in violation of your rules
then?
Mr. MCDONALD. If this document had come to our attention, we
would have denied these applications.
Mr. WALDEN. Now that this document has come to your attention, is there a mechanism for recovery if this is in violation of your
rules?
Mr. MCDONALD. Yes, sir.
Mr. WALDEN. And is that something you are pursuing?
Mr. MCDONALD. Yes, sir.
Mr. WALDEN. All right. Mr. Feaster, from your perspective as the
IG, what is your reaction to this?
Mr. FEASTER. It would be something we would look into. It may
be part of a wider investigation that is ongoing at the present time.
I dont know that for a fact, though.
Mr. WALDEN. All right. Mr. McDonald, your testimony indicates
that your investigations of El Paso in funding year 2001 have
shown, as you said, there were substantial amounts of ineligible
services funded. Walk me through this process of going back and
recovering on those that you determine are ineligible. Is that happening? Will that happen in 2001?
Mr. MCDONALD. Let me just amend my answer to that last question. NEC reached a settlement agreement with the Justice Department and we wont seek, as I understand it, additional money
from NEC. They settled all their issues with E-rate. So as we go
back to look at the NABSE stuff, as I understand it, we wouldnt
be looking to taketo recover
Mr. WALDEN. From NEC. But what about the other participants
in that?
Mr. MCDONALD. Yes. Yes. In 1999, we discovered that we had
made some errors in making commitments in the first year. We
were in the middle of an audit, disclosed that to the auditor. That
led to discussions with the Commission and led to issuance of an
order in 1999, the Commitment Adjustment Order, where the Commission directed how do we do this when we discover after the fact
that we have committed money and dispursed money in violation
of the rules? So the process was established back then, and they
have recently amended that process in the fifth report and order
so that previously we could only seek money from the service provider, now the guidance is to seek it from whoever the guilty party
is, whoever violated the rules. In the old days, there was an opportunity for the service provider to offset the money owed back to us
from additional invoices that would be otherwise properly paid.
They have eliminated the offset option, so
Mr. WALDEN. They have to pay you back.
Mr. MCDONALD. [continuing] it has to be paid. And they have
moved it under the Debt Collection Improvement Act so that there
is much more teeth in getting the money back and applied the socalled red light rule to that, that we wont make any other payments and we will deny other requests if they are delinquent in
making those payments. The Commission has moved strongly to
tighten up recovery for rule violations.

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Mr. WALDEN. What is your take on the fact that IBM bundled
its consulting services, valued at 7 percent of the cost of each Erate project, under the fees charged to the district and El Paso?
Mr. MCDONALD. I would say they were bundling ineligible services and seeking recovery of payments for ineligible services.
Mr. WALDEN. You testified that your investigation of El Paso concluded that the procurement approach was not consistent with the
rules. Is this because of their strategic technology partnership with
IBM? And how else was the procurement approach in violation of
the rules?
Mr. MCDONALD. In my testimony, I talked about the two-step approach, and I think that is the fundamental issue, that they avoided the competition over prices of goods and services, but there were
a number of other flaws in the processes. As my colleagues have
pointed out, the Form 470 listed virtually every possible product
and services
Mr. WALDEN. Right. That is sort of like saying here is the catalog. I want everything in it but I dont know exactly when or what.
Mr. MCDONALD. Yes, sir.
Mr. WALDEN. But make it all available to me at the discount.
Mr. MCDONALD. So that doesnt provide any guidance to wouldbe vendors about what do you really want, what should I bid on?
Mr. WALDEN. And have they thought through what they need.
Mr. MCDONALD. Correct.
Mr. WALDEN. Isnt that the underlying issue here?
Mr. MCDONALD. Yes, sir. The 470 said there was no RFP. There
was an RFP, and it was very different from the Form 470, as Mr.
Carlisle, I believe, testified. So there were a number of issues in
addition to ineligible services in the statements of work.
Mr. WALDEN. I want to go back just briefly to a comment you
made about where USAC had made some errors in approving funds
and then you later told your auditor. What happens in that case
or in future cases if USAC makes the mistake? Does the district
still have to pay it back or howI mean where does this equal out?
Mr. MCDONALD. In the commitment adjustment order, the commission addressed that and said in a number of instances the mistakes we made were rule violations, and for that first year they
waived those. The others were statutory violations that we were
paying for ineligible services or paying for telecommunications
services to be provided by an ineligible telecommunications provider. They concluded those were statutory violations, and they had
no authority to waive those, so we had to seek recovery. Folks
who
Mr. WALDEN. How do you end up with rule and statutory violations when you are administering this program? How did that happen?
Mr. MCDONALD. Well, the statute is not very detailed, and
the
Mr. WALDEN. I see.
Mr. MCDONALD. [continuing] Commission has obviously done a
lot to flesh this program out in rules.
Mr. WALDEN. All right. Mr. Feaster, you mentioned steps the
Commission has taken to address the programmatic weaknesses
and expressed frustration, though, with the pace of the Commis-

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sion. We have a new gentleman who has just taken over with the
Commission. Can you elaborate on what bothers you with the process, what Mr. Carlisle can do or has done since taking over and
what remains?
Mr. FEASTER. I think the full implementation of the DOJ recommendations on certifications is one positive step. We have had
discussions about that and we have both agreed that our staffs
should work together with DOJ to see how far we can go with those
certification changes. Also, they have some items out for comment
which would tighten up the competitive process aspects of the program that we wouldwe would like to see the requirement for
three bids as a minimum requirement. We think that would help
the process be more competitive and lower the prices for the equipment. The Bureau has awe know they have a lot to do but we
think that they need to expedite, and I think Mr. Carlisle has committed to that process.
Mr. WALDEN. Mr. Carlisle, would you like to comment on that?
Mr. CARLISLE. I have committed to that process. I think one of
the first public statements I made after I took the Office of Bureau
Chief was that I had four primary things that we had to get done,
and E-rate was right on there, improving oversight of them. We obviously have many, many things that we have to get done in the
Bureau, but in terms of the things we absolutely have to get done
as top priorities, that is right up there at the top.
My sense is that we are continuing the work that was started
with the 2002 notice of proposed rulemaking. We have already released three orders at this point, typing up aspects of the program
on our fifth report and order, and we are moving into our sixth report and order, which is the recommendations that we will be making in the next month or so. So we are doing the best we can with
what we have got, and we will continue to do so. And I am also
committed to working with Mr. Feaster and also Mr. Fishel at the
Office of the Managing Director and our general counsel.
Mr. WALDEN. We appreciate that. Obviously, you have got a
bucket with a lot of money in it, and a lot of people have been drilling holes in the bottom of it.
Mr. FEASTER. That is true.
Mr. WALDEN. And it is time to plug those holes. Thank you. The
Chair recognizes the gentleman from New Hampshire, Mr. Bass,
for questions.
Mr. BASS. I will pass, Mr. Chairman.
Mr. WALDEN. Chair recognizes the gentlewoman from Colorado,
Ms. DeGette, for further questions.
Ms. DEGETTE. Are we going to do two rounds?
Mr. WALDEN. If you have any further questions you want to ask.
Ms. DEGETTE. Thank you very much, Mr. Chairman. Thank you,
Mr. Chairman. I have actually never known Mr. Bass to pass on
questions, so I wasnt quite prepared.
Mr. Feaster, I just wanted to ask you, your written testimony indicated that the FCC IG established a working relationship with
the Antitrust Division of the DOJ, in large part because of the
number of investigations that you were supporting involved allegations regarding the competitive procurement process. About how

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many competitive procurement process investigations are you currently supporting the Antitrust Division with?
Mr. FEASTER. I believe there are about 35. I dont know if they
are all antitrust related. We work with two groups, actually, the
FBI and the Antitrust people, and I am not sure how that 35
breaks down. Maybe Tom knows.
Mr. CLINE. I am not certain exactly of the active investigations
that are in process how many of them specifically relate to competitive procurement problems. Some of them relate to items such as
paying for goods and services that were not received. But we do
know that we have 35 that are active at the moment, and our office
is actively supporting 18 of those with audit support and work like
that. The others we are monitoring, we are aware of them, and we
respond to requests when we receive them.
Ms. DEGETTE. And that is in addition to the existing work that
you folks have.
Mr. FEASTER. Yes.
Ms. DEGETTE. And that is with the three agents that you have?
Mr. FEASTER. Yes, maam.
Mr. CLINE. They are auditors, though, maam.
Ms. DEGETTE. Oh, they are auditors. I have just got to say on
behalf of the committee, and I think we would all agree, you folks
have been doing a heck of a job with very limited resources, so
hopefully we can get you some more resources to continue your fine
work.
Mr. FEASTER. Thank you.
Ms. DEGETTE. Now, Mr. Carlisle, I want to come back to you for
a minute because you testified that USAC denied a quarter of a billion dollars in support to the IBM cases and that no dollars have
to be recovered because funding was never distributed. And Mr.
McDonald talked in his testimony about how USAC was concerned
about funding year 2001 and the ineligible services from IBM. So
I guess my question is if it turns out that El Paso was guilty of
receiving money for ineligible products and services, is the FCC
going to make every appropriate effort to recover those monies?
Mr. CARLISLE. Yes.
Ms. DEGETTE. Okay. My other question, and I dont know if you
can answer this or someone else, do you all think that if there
hadnt been this whistleblower letter, that the El Paso case would
have come to light? Would we have found that? Mr. McDonald?
Mr. MCDONALD. In my longer statement, I think it may have not
got into my oral statement, I do believe we would have uncovered
the 2002 pattern. There were so many applicants doing the same
thing, seeking so much money that I believe we would have conducted intensive reviews of those, sought the competitive bidding
documents and learned what the approach was. And I think that
would have led us to look back to El Paso 2001.
Ms. DEGETTE. Do you think it would have happened as quickly
as it did or would it have happened after monies were already dispersed?
Mr. MCDONALD. I am glad we got the letter.
Ms. DEGETTE. How many cases do you think are out there like
that that havent had whistleblower letters? Mr. McDonald?

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Mr. MCDONALD. One, the whistleblower hotline is a very effective
tool for us. It does bring our attention to a lot of issues, and we
have a special investigations team that follows up on every complaint we gettelephone calls, letters, whatever. In addition to
that, we have our own pretty intensive review of applications. We
look for similarities across applications that would suggest service
provider involvement in those applications. So we have our own
means at this and we catch a lot of this ourselves without whistleblower complaints, but that is a very valuable tool.
Ms. DEGETTE. Well, I understand you have mechanisms in place,
but, as we heard in the last hearing and as we have seen ample
evidence, there are just these gross examples of fraud going on
throughout the country, and I am wondering if there are procedures other than the ones you have in place that can be put into
place so that we can catch these systems like El Paso early on.
Mr. MCDONALD. We are in funding year 2004, and the committee
is focused on Puerto Rico was 1998 and 1999; San Francisco I think
was 1999 or 2000. We have gotten a lot more sophisticated from
those early years as we have learned about the abuses of the program. After these hearings, we go back and think about the issues
that you have raised and what could we do to literally improve our
procedures to address them. We want to get this right, and we are
looking for every means we can to improve to make sure we get it.
Ms. DEGETTE. So it is your view that since 2000-2001 these gross
abuses are not occurring at the rates they were before then?
Mr. MCDONALD. I believe they are not occurring in the rates they
were before then. We have hired certified fraud examiners to look
at these applications, to look for patterns. One of the first things
we do when we get the applications data entered is look for patterns across, look for very large requests from smaller school districts, is there a pattern, and then we go look for those.
Ms. DEGETTE. Okay. So then here is my question: If we have
adequate enforcement in place now, why are we talking about lowering the E-rate contribution or the formula to 80 percent?
Mr. MCDONALD. Are you asking me that?
Ms. DEGETTE. Yes.
Mr. MCDONALD. Well, I am saying we are getting better. I think
that we are catching this much better than we used to. I dont
want to represent that there is no fraudulent activity in E-rate
today.
Ms. DEGETTE. What do you think about that, Mr. Feaster?
Mr. FEASTER. It goes back to the fact that we havent done
enough work in the audit area to make that statement positively,
but we have indications that waste and fraud is widespread.
Ms. DEGETTE. Do you think it has decreased dramatically since
these new controls have been put into place?
Mr. FEASTER. I dont know if it decreased dramatically. I think
it has taken a bite out of it. The review process has been strengthened. We are doing more audits. We are finding more problems.
The more audits we do, the more problems we find, so I dont know
whether it is decreasing or we are just finding more or finding less.
Ms. DEGETTE. We dont really have a way to know right now how
much fraud and abuse is out there, do we?

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Mr. FEASTER. No, we dont. Hopefully, once I get 250 audits
under our belt, we will be able to tell you.
Ms. DEGETTE. Mr. Carlisle, I want to ask you, many vendors and
school districts have been found guiltyand I recognize that you
are new, so the information you have will be based on what your
agency has been doingbut many of the vendors and school districts have been found guilty of violating E-Rate program rules, either accidentally or maliciously. Some of the repeat offenders like
IBM have been allowed to continue operating with the E-Rate program, and I am wondering why that is.
Mr. CARLISLE. Well, our debarment rules, which were adopted in
April 2003, debar participation in the program of anybody who has
been convicted of a criminal offense related to the program or of
civil fraud or like civil charges related to actions within the program.
Ms. DEGETTE. I am sorry, I am confused. Civil actions, you mean
a judgment, a court judgment? Okay. Because people dont
Mr. CARLISLE. If they are sued for fraud or there is a DOJ civil
action against them for fraud, yes, exactly.
Ms. DEGETTE. Which isokay. I am confused, because I thought
that it required a criminal conviction.
Mr. CARLISLE. No.
Ms. DEGETTE. No?
Mr. CARLISLE. In April 2003, we made clear that if there are
civilif they have been found liable for civil judgments related to
the program, things like fraud, et cetera, they can also be debarred
from the program.
Ms. DEGETTE. Okay. And can these vendors avoid that kind of
finding by entering into a settlement agreement which specifically
doesnt have a finding of fraud and thereby be eligible for continued
participation in the E-Rate program?
Mr. CARLISLE. Theoretically, they would not have received a conviction and also not a civil judgment against them, so, theoretically,
yes. However, my understanding is is that applications submitted
for funding by such vendors would be subjected to a higher level
of scrutiny.
Ms. DEGETTE. Since April 2003, when you folks promulgated
these standards, has there been a civil judgment that would debar
somebody from eligibility under the E-Rate program?
Mr. CARLISLE. Not to my knowledge, although we have debarred
individuals on the basis of criminal convictions.
Ms. DEGETTE. Right. And how many have been debarred on that
basis?
Mr. CARLISLE. Three, and we have pending action on several others.
Ms. DEGETTE. And who was that?
Mr. CARLISLE. Oscar Alvarez, John Angelitis and Duane Maynard.
Ms. DEGETTE. So those were three individuals who were convicted. What about some of these big companies? Has any company,
has any corporation been debarred?
Mr. CARLISLE. I believe the Enforcement Bureau currently has
under consideration debarment of NEC, but they have not yet completed that proceeding.

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Ms. DEGETTE. And that has been a criminal proceeding as well,
NEC, right?
Mr. CARLISLE. I believe so, yes.
Ms. DEGETTE. Thank you.
Mr. BASS [presiding]. The Chair recognizes himself for 10 minutes. Mr. Feaster, did you agree with the Commissions order regarding the IBM matter?
Mr. FEASTER. Yes and no. First, we agreed with the Commission
agreeing with USAC in denying the applications. The no is that we
thought they werethat the schools played a role in the misdeeds,
that there should have been action taken against the schools and
also against IBM. Basically, the order let them redo it, and we
think that IBM shouldnt have had the opportunity to rebid, and
the schools should have lost the money.
Mr. BASS. What are your specific concerns regarding the programs competitive bidding requirements? What do you believe is
the effect of weakness in this area of program design?
Mr. FEASTER. The effect is basically to cost the Universal Service
Fund more money. The lack of competition means higher prices
paid for equipment. The long-range effect is that the schools that
are the neediest end up losing money because the fund is capped.
Mr. CLINE. Sir, if I could expand on that as well.
Mr. BASS. Sure.
Mr. CLINE. We believe that the current competitive process that
is utilized for E-rate funding decisionsor applications, excuse me,
is based upon some faulty assumptions. There is an assumption
that the posting by the applicant of the 470 on USACs web site
for 28 days is going to generate a cycle of competitive activities,
that there will be vendors looking at these 470s and there will be
this activity of phone calls and discussions. And we could certainly
not say anything to the extent that that may or may not be true,
but our audits indicate that that frequently does not happen. The
posting of the 470the 470 is too general for vendors to be able
to generate good and competitive and sort of point-on bids that
meet the schools needs, and frequently that just does not generate
the level of competition that was originally envisioned by this process.
Mr. BASS. Mr. Feaster, what are your specific concerns regarding
the programs reliance on self certification? What do you believe is
the effect of weaknesses in this area on the program design?
Mr. FEASTER. Well, the conclusion we have reached regarding
certification is that the bad guys will certify anything, and we recommended that the Bureau take the DOJ recommendations and
implement them on their forms to strengthen the language on the
forms and let the antitrust people when they do find misconduct
to take the appropriate legal action. That has partly been done,
and we were working with the Bureau to implement the other
ones, other recommendations that hadnt been fully implemented
yet.
Mr. BASS. What do you think it isthe weakness in this area,
what effect do you think it has on program design, in general? How
does it affect the rest of the process?
Mr. FEASTER. Well, the certification process is a major foundation
of the program, and if people are certifying to things that they

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havent done, we allow funding to occur for when it shouldnt occur.
So, again, it goes back to money being misused by the applicants
of the program. That means less money for the truly needy applicants.
Mr. CLINE. If I could expand
Mr. BASS. Yes.
Mr. CLINE. [continuing] another thought on that matter. What
we frequently run into in discussions with the certifications, again
with the Antitrust Division, is the lack of strength that the certifications as they currently are is sort of ignoring the impact of some
of the actions the Commission has taken recently to improve the
certifications and forms. Discussions we have had with numerous
antitrust attorneys indicate that these certifications provide no
strength, they have no basis by which they can make charges.
An interesting fallout of some of the charges and some of the
charges that are being worked on in active investigations under the
E-Rate program is they, to our knowledge, never include a charge
of false statements. Now, in government contracting, in grants, in
numerous other activities involving the transfer of Federal funds,
false statements is kind of one of those bread and butter charges.
Typically, if you have committed a crime, you have made a false
statement. I think it is telling that we have no charges of false
statements in this program, and it goes back to the weakness with
the certifications.
Mr. BASS. Mr. Feaster, in testimony today, we hear that El Paso
Independent School Districts $27 million maintenance operation
was, consistent, with its technology plan. Do you believe rules regarding technology plans are sufficient to prevent wasteful spending?
Mr. FEASTER. No, we dont. One of the findings that we have
come up in our audits is the difference between program rules and
implementing procedures established by USAC, and we have been
recommending that those implementing procedures be codified by
the Commission in order to bring them up to the status of rules
where we could take money back for violation of those. One of
those areas is the tech plan, that there are a lot of implementing
procedures that we would like to see codified.
Mr. BASS. Mr. McDonald, if you would be good enough to turn
to tab 38 and 39.
Mr. MCDONALD. Yes, sir.
Mr. BASS. Mr. McDonald, tab 38 and 39. One issue with the strategic partnership approach is the vendor gettingan example of
the vendor getting too involved in the application process. These emails used the term, verbal commit. What do you make of that?
What does that imply to you about the integrity of the competitive
process?
Mr. MCDONALD. It appears that the verbal commit is occurring
before the Form 470 is even posted, which is a violation of the
rules. The Form 470 is to be posted, wait 28 days, consider all the
bids you got and choose the most cost effective. It appears that
wasnt followed in this instance.
Mr. BASS. And, obviously, thewell I am not going to answer the
question for youwhat does it imply about the integrity of the
competitive process? It is pretty self evident.

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Mr. MCDONALD. Yes. The commitment was made before it was
even begun.
Mr. BASS. Right. You state that you would probably have caught
the El Paso-IBM patterns absent the anonymous letter; is that correct?
Mr. MCDONALD. Yes, sir.
Mr. BASS. Do you think your processes would have captured the
full pattern of activity?
Mr. MCDONALD. We didnt see these documents. I think your
powers to get documents are better than ours.
Mr. BASS. Well, have you changed your procedures since then to
make sure you can catch such an activity?
Mr. MCDONALD. We have certainly broadened our scrutiny of the
competitive process and soughtmuch more than we used towe
are seeking the RFPs, all bids that were received, evaluation worksheets to see how the winning vendor was selected. We are doing
much, much more of that than we used to.
Mr. BASS. Later we will hear from Charles Tafoya, the superintendent of the El Paso Independent District who alleges in his
written testimony that USAC unexpectedly denied their year 6
funding request. It might be a form of retaliation. What can you
tell us about this application and why it was denied?
Mr. MCDONALD. We did subject El Paso to heightened scrutiny
in funding year 2003 based on denying its application in 2002. Part
of the review was whether they had secured access to the necessary
resources to make effective use of the discounts, and we were not
able to get clear documentation that they had budgeted for the
non-discount share for all the services they were requesting. So we
denied on that basis. If they think that is incorrect, that they did
present that documentation to us, they can appeal to the FCC if
they do that timely.
Mr. BASS. One last question, Mr. McDonald. What is the appropriate role for a consultant in the E-Rate program, and what is
your understanding of Judy Greens role in the NEC BNS case? In
your opinion, do you think it was appropriate?
Mr. MCDONALD. A consultant ought to not have any ties to service providers. If the consultant is going to control the process, have
any influence on the process to select the service provider, that consultant needs to be an arms length from everybody, just as the applicant needs to ensure a fair and open process, selection of the
most cost-effective provider. If I understand Ms. Greens relationship, she had a relationship to the vendors that were selected to
do the work.
Mr. BASS. Which, obviously, was not appropriate.
Mr. MCDONALD. Not appropriate.
Mr. BASS. All right. Thank you, Mr. McDonald. My time has expired. The committee has completed questioning of this panel. We
have no further questions to submit at this time. We are about to
have votes called on the floor of the House, so what the Chair
would like to do is to call a recess of the subcommittee until such
time as the votes are complete, at which time we will swear in the
second panel. With that, the Chair will declare a recess.
[Brief recess.]

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Chairman BARTON The subcommittee will come back to order.
We are now ready to call the second panel forward, but before we
do that, we are going to show a brief video regarding the E-Rate
program, which has been produced by committee staff during the
course of this investigation. So could we dim the lights and show
the video? Produced to the committee staff, not produced by the
committee staff. Do we have sound on this?
[Video plays.]
The MODERATOR. The expanded use of computers in schools is
leading to important transformations tied to the use of multimedia
applications, broadband width communication pipes and widely distributed connectivity to the Internet, exposing students and teachers to an exciting world of synchronous distance learning, streaming audio and video and a host of other digital advances.
For many schools, however, especially those in high poverty and
geographically isolated communities, a lack of access to this new
technology is a serious problem. They are caught in the digital divide. The National Alliance of Black School Educators, known as
NABSE, stands ready to help schools bridge that divide through
the federally funded E-Rate program. Recently, NABSE has put together a program designed to help schools achieve the funding they
deserve from the often complicated E-rate process. This program
utilizes NABSEs considerable experience in the application process, combined with the technical expertise of NABSEs world-class
technology partners, NEC, IBM and VNCI, among others.
Video SPEAKER 1. Certainly one of NABSEs major goals is to
bring the latest state-of-the-art equipment, methodologies and best
practices to its members. And with the advent of the E-Rate program, NABSE is very pleased that we have entered a partnership
with our three or four hybrid organizations, and these are technology firms who are making it much easier for the NABSE schools
to apply for E-rate funds, providing technical assistance in completing the application, conducting the research. So we are appealing to NABSE superintendents, to the principals, that when you
hear about this program that you will call us right away and request, at no cost to you, assistance from the support group so we
can assure that, one, you are getting the maximum amount of the
E-rate funds that is allowable for your school district.
Video SPEAKER 2. Our children are video learners. We have a
multimedia generation of children in our public schools today, but
yet we have an educational system that is designed to teach them
in a black and white format. That is probably the easiest way to
say it. Chalk and erasers, that is not the way our children are
learning.
The MODERATOR. The E-Rate program was authorized by Congress as a part of the Telecommunications Act of 1996. The E-Rate
program provides all public and private schools and libraries access
to affordable telecommunications and advanced digital technologies.
Video SPEAKER 3. NABSE was able to partner with the Jasper
County School District, partner with VNCI and we began the process of developing our needs and desires for the Jasper County
School District. And so it was notI cant say that it was extremely easy because it wasnt, but it wasnt quite as difficult as

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49
it could have been if we did not have the partnership, and that was
the key factor.
Video SPEAKER 4. NABSE has really in its mission, if you look
at our mission, one of our goals speaks to partnering with individuals, organizations, institutions and entities of all forms. We welcome the partnerships, and more importantly we welcome the spirit in which the partners have come forth.
Video SPEAKER 5. If a small school district thinks that they can
develop all of the technology that is needed by their students for
the future, if they think they can do that alone, then they are sadly
mistaken. And when we were able to get all of the help and the
assistance from NABSE, then the amount of money that we received went through the ceiling. Ten and a half million dollars for
a district this size is basically unheard of. A million dollars versus
$10 million, big difference. A million dollars, you can put in a few
wires; $10 million, you can do video conferencing, and that is even
better.
The MODERATOR. Most rural schools, due to their locations, do
not have access to the world-class technology that NABSEs partners provide. These partnerships give both the rural and urban
schools the ability to do the accurate technology needs assessments
required for E-rate applications. To aid school districts in acquiring
the technology they need, NABSE has developed consulting services which partner with several world-class companies: NEC, IBM
and VNCI, among others. These partnerships, combined with
NABSEs assistance throughout the application process, have made
the E-Rate program a success for districts large and small.
Video SPEAKER 6. In terms of a very small school district like I
have, yes, it was very important to have NABSEs assistance. I do
not have the time nor the staff, and NABSE has been able to assist
our school district in obtaining over $88 million in funds. My school
districts received approximately $9.8 million apiece.
Video SPEAKER 7. NABSE, NEC Business Relations and VNCI for
Jasper County School District have proven to be perfect partners.
The technical people from VNCI and NEC, as a matter of fact, they
came in so quickly it almost scared me.
Video SPEAKER 8. Why this team is so important is that they do
this every day. They have people on their staff who are trained and
who will be able to answer the technical questions, who will be able
to research information. They know how other school districts have
done it, so they are able to bring that knowledge and information
to bear to be sure that the NABSE school district gets the maximum amount of funds available.
The MODERATOR. To bridge the digital divide, todays schools
need technology solutions that span the entire range of products
and services required in the field of education. NABSEs technology
partners offer a wide range of desktops, laptops and high-quality
monitors. With todays trends toward optimal speeds, it is essential
to be on the cutting edge of PC processing. Video solutions are beginning to be developed in progressive districts and campuses. Distance learning has allowed the K through 12 and campus educators
to expand beyond the walls of their facilities. Classroom content is
boundless.

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50
Video SPEAKER 9. Students will be able to see resources, they will
be able to see things around the world in real time that they have
never been able to see before.
Video SPEAKER 10. They love, they want it, and we must bring
that technology to the students. They deserve it, and we owe them
our very best.
The MODERATOR. NABSE and its partners are well versed in the
E-rate application process. NABSE personnel can help school districts fill out the application, while the technology partners can
help in the needs assessment criteria. For assistance in E-rate applications, technology planning and needs assessment, school districts should contact NABSE before the window of opportunity is
gone.
Video SPEAKER 11. We appeal to the superintendents, to principals, to the technology directors to pursue this project with vigor.
As we have stated before, it certainly isnt going to last forever.
Some corporate member of the school district must come to us, let
us know that they are interested, because otherwise the funds will
go to other school districts. When their program ends, then we will
find that once again many of the older schools in central city that
will be operating for the next 30 or 40 years will not be wired. The
students will be deprived of this, and therefore the digital divide
will become broader and wider and wider as the years go.
[Video ends.]
Chairman BARTON. All right. At this time, the Chair is going to
use an unusual procedure. The second panel consists of seven individuals: Ms. Judy Green, a former E-rate consultant for Video Network Communications; Mr. Quentin Lawson, the executive director
of the National Alliance of Black School Educators; Mr. Carl
Muscari, former president and CEO of Video Network Communications; Mr. Robert McCain, program manager for NEC BNS; Dr.
Emma Epps who is superintendent of the Ecorse Public School District; Dr. Douglas Benit, former facilities director for the Ecorse
Public School District; and Dr. William Singleton who is the superintendent of the Jasper County Schools in Ridgeland, South Carolina.
Some of you have indicated that you are going to refuse to answer questions and use your constitutional guarantee to plead the
Fifth Amendment. So we are going to call the individuals who we
believe are going to exercise that right forward first. So at this
time, we are going to call forward the following witnesses: Ms.
Judy Green, Mr. Quentin Lawson and Mr. Carl Muscari. If you individuals would please come forward. And you can be seated at the
table.
We do need to indicate for the record that Ms. Green and Mr.
Lawson declined to come forward voluntarily and were subpoenaed
and they did answer their subpoena. Ms. Green was subpoenaed to
attend our July 22 hearing, but U.S. marshals were unable to find
her to serve the subpoena. Ironically, on the very day that we held
that hearing, Ms. Greens attorney notified the committee staff that
he had actually been retained.
During the last hearing then, I explained how serious this committee takes its need to get testimony and how serious we are
about our subpoenas being honored. I indicated that we would

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51
again subpoena Ms. Green. We have done that and to her credit
she has answered that subpoena. But we will take every action
under the law in doing our oversight responsibility for the people
of the United States to compel attendance when we deem that it
is necessary to get the facts of the issues that are under investigation.
I think each of you individuals know that it is the practice of this
subcommittee to take testimony under oath. Does anybody here oppose testifying under oath? Let the record show that two of the
three shook their head. Mr. Muscari, you havent indicated. Do you
have a problem with testifying under oath? Okay. You also know
that you have the right to be advised by counsel. Do you all have
counsel here? Could each of you bring your counsels forward and
speak into the microphone and let us know who those individuals
are. Ms. Green? You have got to push that button. There is a little
button you have to push to turn the microphone on.
Mr. LINCENBERG. My name is Gary Lincenberg, counsel for Ms.
Green.
Chairman BARTON. Okay. Mr. Lawson?
Mr. LAWSON. Pete Harrison.
Chairman BARTON. And he is your counsel?
Mr. LAWSON. He is my counsel.
Chairman BARTON. Okay. Mr. Muscari?
Mr. SAVAGE. It is Joseph F. Savage, Jr. for Mr. Muscari.
Chairman BARTON. Okay. Will each of you individuals please
rise, raise your right hand?
[Witnesses sworn.]
Chairman BARTON. Be seated.
The Chair will now recognize Ms. Green for the purposes of making an opening statement if you so desire. Do you wish to make an
opening statement?
TESTIMONY OF JUDY GREEN, FORMER E-RATE CONSULTANT,
VIDEO NETWORK COMMUNICATIONS; ACCOMPANIED BY
QUENTIN LAWSON, EXECUTIVE DIRECTOR, NATIONAL ALLIANCE FOR BLACK EDUCATORS; CARL MUSCARI, FORMER
PRESIDENT AND CEO, VIDEO NETWORK COMMUNICATIONS;
ROBERT MCCAIN, PROGRAM MANAGER, NEC BNS; EMMA
EPPS, SUPERINTENDENT, ECORSE PUBLIC SCHOOL DISTRICT; DOUGLAS BENIT, FORMER FACILITIES DIRECTOR,
ECORSE PUBLIC SCHOOL DISTRICT; AND WILLIAM SINGLETON, SUPERINTENDENT, JASPER COUNTY SCHOOLS,
RIDGELAND, SOUTH CAROLINA

Ms. GREEN. No.

Chairman BARTON. Okay. Let the record indicate that Ms. Green
declined to make an opening statement. The Chair would now recognize Mr. Lawson for purposes of making an opening statement
if you so desire.
Mr. LAWSON. No.
Chairman BARTON. Mr. Lawson declines to make an opening
statement. The Chair will now recognize Mr. Muscari to make an
opening statement if he wishes.
Mr. MUSCARI. I have no opening statement. Thank you.

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Chairman BARTON. Mr. Muscari also declines to make an opening statement. The Chair will then recognize himself for 10 minutes for questions.
Ms. Green, on July 22, 2004, we heard from the San Francisco
City Attorneys Office about an elaborate conspiracy between individuals at NEC BNS and VNCI, including you, George Marchelos
and others in which the co-conspirators eliminated competitive bidding and inflated prices on contracts related to the E-Rate program. As you know, NEC BNS ultimately pleaded guilty to conspiracy to suppress and eliminate competition for the E-Rate program projects and to wire fraud. As a former employee of VNCI,
were you part of the conspiracy by NEC BNS, VNCI and others to
defraud the E-Rate program by rigging bids, inflating contract
prices, forging the signatures of school district officials and lying to
USAC officials during their review of that process?
Ms. GREEN. On advice of counsel, I respectfully decline to answer
that question based on my Fifth Amendment constitutional right.
Chairman BARTON. Ms. Green, are you refusing to answer all of
this committees questions on the right against self-incrimination
which is afforded to you under the Fifth Amendment of the United
States Constitution?
Ms. GREEN. Yes, sir.
Chairman BARTON. And is it your intention to assert such right
in response to all further questions from the subcommittee today?
Ms. GREEN. Yes, sir.
Chairman BARTON. Given that, I will dismiss you at this time,
but I want to make it perfectly clear that you are still subject to
being recalled by this subcommittee if we deem it necessary. Do
you understand that?
Ms. GREEN. Yes.
Chairman BARTON. If you dont, now is the time to
Ms. GREEN. No. Can I just
Chairman BARTON. If you say anything, you are going to have to
answer every question.
Ms. GREEN. All right.
Chairman BARTON. I am not going to play games with you. You
have got the right to take the Fifth Amendment, which you have
done, but once you answer one question, then you have waived that
right, and we could ask you many questions. So at this time, I am
going to excuse you subject to recall if necessary.
We are now going to go to you, Mr. Lawson. We have just seen
a video that NABSE, of which you are affiliated with, produced,
marketing their E-Rate program. You appear in that program. The
video refers to an E-rate-related partnership between NABSE,
VNCI, NEC BNS and others. As the executive director of NABSE,
were you aware of the conspiracy by NEC BNS, VNCI, Judy Green,
George Marchelos and others to defraud the E-Rate program by
rigging bids and inflating contract prices?
Mr. LAWSON. Mr. Chairman, as you know, there are ongoing Federal criminal investigations into the same events that are the subject of this hearing. I have fully cooperated with the officials conducting these criminal investigations; however, in view of the openended Federal criminal investigations that are currently ongoing, I
reluctantly, and contrary to my desire to testify, will follow the ad-

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53
vice of my legal counsel and respectfully decline to testify based
upon my rights under the Fifth Amendment to the United States
Constitution. I hope that the subcommittee will not draw a negative inference from my assertion of this basic constitutional right
guaranteed by the Bill of Rights. I respectfully request that the letter prepared and submitted by my counsel, dated September 17,
2004, be considered part of the record of this hearing.
Chairman BARTON. Are you refusing to answer the question
based on your constitutional rights under the Fifth Amendment?
Mr. LAWSON. Yes.
Chairman BARTON. Then we cannot accept the letter that you
just asked that we put into the record. Ms. DeGette has already
indicated that she would object, I would object, Mr. Walden will object. You cant have it both ways. You cant honor your rights under
the Fifth Amendment and then, I wont say sneak into the record,
but put into the record something that is to your benefit, so to
speak.
Mr. Lawson, are you refusing to answer all of the questions on
the rights against self-incrimination afforded to you under the
Fifth Amendment of the U.S. Constitution?
Mr. LAWSON. Yes.
Chairman BARTON. And is it your intention to assert such right
in response to all further questions from the subcommittee today?
Mr. LAWSON. Yes.
Chairman BARTON. Given that, with the understanding, as we
just explained to Ms. Green, that there may be further requests for
you to come before this subcommittee, I am going to dismiss you
at this time, subject to the right of recall if necessary. Do you understand that?
Mr. LAWSON. Yes.
Chairman BARTON. Okay. Then at this time, you are excused
also.
Mr. LAWSON. Thank you.
Chairman BARTON. Mr. Muscari, on July 22, 2004, we heard testimony about an elaborate conspiracy between individuals at NEC
BNS and VNCI, including Judy Green, George Marchelos and others, in which the co-conspirators eliminated competitive bidding
and inflated prices on contracts related to the E-Rate program. As
you know, NEC BNS later pleaded guilty to conspiracy to suppress
and eliminate competition for the E-Rate program projects and to
wire fraud. As a former president and CEO of NEC BNS, were you
aware of this conspiracy by your company, or your former company,
VNCI, Judy Green, George Marchelos and others to defraud the ERate program by rigging bids, inflating contract prices, forging signatures of school district officials and lying to USAC during its review process?
Mr. MUSCARI. Mr. Chairman, based upon the advice of my attorneys, I respectfully decline at this time to answer based upon my
rights under the Fifth Amendment of the U.S. Constitution.
Chairman BARTON. And, Mr. Muscari, are you refusing to answer
all of these questions based on your right against self-incrimination
afforded to you under the Fifth Amendment of the U.S. Constitution?
Mr. MUSCARI. I am.

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Chairman BARTON. And is it your intention to assert such right
in response to all further questions from the subcommittee today?
Mr. MUSCARI. Yes.
Chairman BARTON. Given that, as long as you understand that
you are still subject to being recalled by the subcommittee at a date
future, I am going to dismiss you at this time, again, subject to the
right to be recalled. Do you understand that?
Mr. MUSCARI. I do understand, yes.
Chairman BARTON. Okay. Then you too are excused, sir.
At this time, the Chair will now call forward the remainder of
our panel from Panel 2: Dr. Emma Epps, superintendent of the
Ecorse School District in Ecorse, Michigan; Dr. Douglas Benit, the
former director of facilities at Ecorse School District; Dr. William
Singleton, the superintendent of the Jasper County School District
in Jasper County, South Carolina; and Mr. Robert McCain, the
former NEC BNS project manager at Ecorse School District who is
appearing before us by video link. If those of you that are in the
chamber will come forward and be seated at the table.
As each of you individuals know, this subcommittee conducts its
investigative hearings by taking all testimony under oath. Do any
of you object to testifying under oath? Let the record show that all
three individuals said that they are willing to testify under oath.
You also have the right to be advised by counsel under the Constitution of the United States of America. Do any of you have counsel that are with you today?
Ms. EPPS. Yes.
Chairman BARTON. Dr. Epps, would you read into the record
your counsel, please, maam? You just push the button.
Mr. ALLEN. Yes, Mr. Chairman. Floyd Allen, representing Dr.
Epps and Dr. Benit.
Chairman BARTON. Okay. Dr. Benit, do you haveoh, he is counsel for both of you. Dr. Singleton, do you have counsel with you?
Mr. SINGELTON. No.
Chairman BARTON. Okay. Will all of you please stand and raise
your right hand? Oh, Mr. McCain, do you object to testifying under
oath?
Mr. MCCAIN. No.
Chairman BARTON. You also have the right to be advised by
counsel. Do you have a counsel with you today?
Mr. MCCAIN. Yes, Mr. Sutra.
Chairman BARTON. Could you bring him into the video.
Mr. SUTRA. Good morning, Mr. Chairman. Steve Sutra.
Chairman BARTON. Okay. Mr. Sutra needs to stay in camera
range, because he is going to have to be sworn too. So would
all
Mr. SUTRA. I am not getting sworn.
Chairman BARTON. Are the attorneysI thought they did. Will
our witnesses please stand to be sworn and raise your right hand.
[Witnesses sworn.]
Chairman BARTON. Be seated.
Okay. Mr. McCain, we are going to recognize you for 7 minutes.
Your statement is in the record, and if you would like to elaborate
on that, we would like to have your elaboration.
Mr. MCCAIN. No statement, sir.

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Chairman BARTON. No statement. Okay. Dr. Epps, would you
like to make an opening statement?
Ms. EPPS. No, sir, I have no statement.
Chairman BARTON. Okay. Dr. Benit, would you like to make an
opening statement?
Mr. BENIT. No, sir.
Chairman BARTON. Okay. Dr. Singleton, would you like to make
an opening
Mr. SINGELTON. No, sir.
Chairman BARTON. So we have nobody that wishes to make an
opening statement. Okay. The Chair would suspend for just a second.
[Pause.]
Chairman BARTON. The Chair is going to recognize Mr. Walden
for 10 minutes.
Mr. WALDEN. Thank you, Mr. Chairman. Mr. McCain, when you
were NEC BNS project manager at Ecorse School District, what
were your job responsibilities?
Mr. MCCAIN. My responsibilities were to install the products that
were within the job package and get them operational and turn
them over to the school district.
Mr. WALDEN. And what year did NEC BNS conduct work for
Ecorse while you were the project manager?
Mr. MCCAIN. The work started in February 2001.
Mr. WALDEN. And who was your primary contact at Ecorse
School District, sir?
Mr. MCCAIN. Dr. Benit.
Mr. WALDEN. Dr. Benit. Okay. And did you interact or work
often with Dr. Epps?
Mr. MCCAIN. No.
Mr. WALDEN. Did you work at all with Judy Green from VNCI
while managing the Ecorse project?
Mr. MCCAIN. No.
Mr. WALDEN. Who built the TV production studio for Ecorse?
Mr. MCCAIN. NEC.
Mr. WALDEN. NEC. Okay.
Mr. MCCAIN. Yes, sir.
Mr. WALDEN. Whose idea was it to provide Ecorse School District
with a TV production studio?
Mr. MCCAIN. That was from information we received from Dr.
Benit.
Mr. WALDEN. So it was Dr. Benits idea to build the TV studio?
Mr. MCCAIN. Yes, sir.
Mr. WALDEN. Please turn to the NEC document numbered 6345.
That is 6345. How much money was awarded to Ecorse School District by the E-Rate program for funding year 2000?
Mr. MCCAIN. The document 6345 indicates $4,135,969.81.
Mr. WALDEN. That is what it shows. Mr. McCain, please describe
document 6347. What is Dr. Benit insisting on dollar values for,
in-kind items, document 6347?
Mr. MCCAIN. His inquiry was to identify the in-kind dollars and
what that detailed reference to products that were being proposed
for installation.
Mr. WALDEN. And at document 6348, go to that one.

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Mr. MCCAIN. Yes, sir.
Mr. WALDEN. Why does Dr. Benit describe the TV studio as being
at a critical status?
Mr. MCCAIN. That was to interface with the current onsite construction contractors to make ready the rooms for the TV production studio.
Mr. WALDEN. All right. So you had contractors onsite doing wiring installation, and from your recollection, he felt it was important, it was a critical status for the TV studio.
Mr. MCCAIN. Yes, sir.
Mr. WALDEN. Mr. McCain, looking now at document 6350 and
6351, do you have those in front of you, sir?
Mr. MCCAIN. Yes, sir.
Mr. WALDEN. Could you briefly describe these e-mails and the
issue being discussed here?
Mr. MCCAIN. The first document, 6350, was initiated from Dr.
Benit to Gerard McNulty, who was the account exec from NEC assigned to the Ecorse project, and he wanted to request an overview
of the dollars allocated from the SLD funding to properly be evaluated as to how those funds were going to be identified within the
project scope.
Mr. WALDEN. Okay. And does that cover 6351 as well then?
Mr. MCCAIN. 6351 is a reference to a meeting I had with Dr.
Benit and updated my immediate supervisor, Randy Weekly. After
that meetingsorry, during that meeting, Dr. Benit did express
from this document that he had requested detail regarding the production studio cost and that he would follow up the following week
with Mr. Weekly.
Mr. WALDEN. And we are talking about the TV production studio?
Mr. MCCAIN. Yes, sir.
Mr. WALDEN. Okay. And now turn to document 6352. What is
this lengthy document?
Mr. MCCAIN. This document was originated from Bill Barber who
was a systems engineer for NEC in reference to the video TV production studio. It outlines all the line items that had been within
the initial design, identifying those items and what the total dollar
amount was.
Mr. WALDEN. And what is that total dollar amount of the TV studio?
Mr. MCCAIN. The original design was $1,040,239.62, and that is
reflected on document 6363.
Mr. WALDEN. And lets go to document 6364 and 6365. Do you
recognize this document, and can you please describe your understanding of this document and in particular the second page. Is
this a document you recognize, sir?
Mr. MCCAIN. Yes. This document was identifying the NEC proposed use of funds, which is in the left columns. The middle columns were the response of the funds as to what was being requested to be installed by Dr. Benit, and the right column shows
the balance of award funds from the original amount authorized by
the SLD funding.
Mr. WALDEN. All right. And who built this spreadsheet, do you
know?

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Mr. MCCAIN. Dr. Benit.
Mr. WALDEN. And, again, the first column shows what?
Mr. MCCAIN. The first column shows the original dollars in reference to the design of the line items located on the left column
there.
Mr. WALDEN. Okay. And the second column again?
Mr. MCCAIN. Is what Dr. Benit had requested funding to be
spent for those particular line items in that dollar amount.
Mr. WALDEN. It is what Dr. Benit requested the line items be.
Mr. MCCAIN. Yes.
Mr. WALDEN. And is that what the okay next to the numbers in
the second column would mean?
Mr. MCCAIN. Yes.
Mr. WALDEN. And is thatso that is Dr. Benits okay?
Mr. MCCAIN. Yes, sir.
Mr. WALDEN. All right. This document then seems to indicate
that Dr. Benit knew that E-rate funds were covering all the costs
of the TV studio. Is that a correct assumption?
Mr. MCCAIN. Yes, sir.
Mr. WALDEN. All right. Then please turn to 6366.
Mr. MCCAIN. Okay.
Mr. WALDEN. Who drafted this memo to you, sir?
Mr. MCCAIN. That is from Bill Barber, the systems design engineer for NEC for the video.
Mr. WALDEN. And would you agree that this memo describes a
Dr. Benit who is intimately involved with the design, construction
and many minor details of the TV studio?
Mr. MCCAIN. Yes. This document was reviewed with Dr. Benit to
be extended to the contractors onsite to address some of the items
that needed to be completed to provide a functional TV production
studio.
Mr. WALDEN. And, finally, turn with me to 6377. Can you briefly
describe this e-mail?
Mr. MCCAIN. This e-mail was originated from Dr. Benit to myself, Bill Barber and John Colvin, who was the director of the public sector for NEC, requesting NEC to support an open house conducted at Ecorse School District May 17 through May 19. I, in
turn, from the middle of the document, 6367, had requested from
the contractor that was hired by NEC to install the TV production
studio to also be onsite to assist in the open house.
Mr. WALDEN. All right. Given all the hype over the ribbon-cutting ceremony, does it seem likely to you that Dr. Epps could be
unaware of the fact that NEC built this studio for Ecorse through
the E-Rate program?
Mr. MCCAIN. No, she couldnt be unaware of it.
Mr. WALDEN. She could not be unaware.
Mr. MCCAIN. Right.
Mr. WALDEN. Mr. McCain, did you ever learn or hear whether
Ecorse paid NEC BNS its required E-rate copayment?
Mr. MCCAIN. No.
Mr. WALDEN. Does that mean, no, you never learned or heard or
they never made the copayment?
Mr. MCCAIN. I never learned or heard.

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Mr. WALDEN. So you dont know whether that copayment was
ever made?
Mr. MCCAIN. That is correct.
Mr. WALDEN. All right.
Chairman BARTON. Do you have further questions?
Mr. WALDEN. Mr. Chairman, I dont have any further questions
at this time.
Chairman BARTON. Okay. The Chair would recognize Ms.
DeGette for 10 minutes if she wishes.
Ms. DEGETTE. I have no questions at this time.
Chairman BARTON. Okay. The Chair would then recognize himself for 10 minutes.
Dr. Epps, you have just heard Mr. McCain in his comments on
some of the contracts that were in your school district. What is
your understanding of your districts financial obligation in participating in the E-Rate program?
Ms. EPPS. My understanding is that we followed the rules of the
E-Rate program. That is my understanding.
Chairman BARTON. Dr. Benit?
Mr. BENIT. My understandingcould you repeat the
Chairman BARTON. After listening to Mr. McCains answers to
Congressman Waldens questions and some of the contracts that
were let for your school district, including the way a television studio was built and paid for, what is your understanding of your
school districts financial obligation to participate in the E-Rate
program?
Mr. BENIT. My understanding is that the district is supposed to
pay a 10 percent share because they are at a 90 percent rate. A
lot of the documents that we referred to, Mr. Colvin and I reverted
back, with our counsels, back to the original agreement. So my understanding is that all the equipment that was supposed to be
spent, all the E-rate dollars supposed to be spent on E-rate was
spent and the TV production was something that they provided
that was outside of E-rate.
Chairman BARTON. Had you seen the documents that Mr. Walden referred to with the various columns? Have you seen those documents?
Mr. BENIT. Yes.
Chairman BARTON. Okay. Have we asked unanimous consent to
put those documents in the record? Okay. The Chair would ask
unanimous consent that the binder that has been prepared for this
hearing be put in the record. Is there objection? And the Chair
would indicate that this particular document that is NEC E-rate
contract, district attachment, rider A, memorandum of understanding is one of the documents that has been put in the record.
So you have seen this document?
Mr. BENIT. I saw it just as we were waiting here.
Chairman BARTON. Oh. You had not seen it before today.
Mr. BENIT. No. The document that was on top?
Chairman BARTON. Well, the primary document that we are referring to is the
Mr. BENIT. That was signed by myself and John Colvin?
Chairman BARTON. Yes. And on page 0635, which shows the
spreadsheet.

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Mr. BENIT. Where do I find this?
Chairman BARTON. It is in your binder, and it is at tabit is
called the Benit spreadsheet.
Mr. BENIT. Okay. What tab number is that?
Chairman BARTON. Well, that is a very good question. We need
to get that. You obviously have the right to take a look at that. Tab
85.
Mr. BENIT. I dont have a tab 85 in this one, sir. Oh, here it is.
Hang on.
Chairman BARTON. It is a big binder, so we certainly
Mr. BENIT. Okay. I see the spreadsheet.
Chairman BARTON. Okay. And do you see the middle column
where it says, EPS response to proposed use of funds? That is
that middle column.
Mr. BENIT. Yes, I do, sir. I see that column, but I
Chairman BARTON. And do you see the blocks, like $700,000 has
been blocked and then next to it it says, okay. And then the next
one is $500,000 and it is okay. And then $1 million and it is okay.
And then $14,000 and it is okay. And then $800,000 total, which
is not blocked, but that says, okay.
Mr. BENIT. I see all that, but I also want to go on record as after
we did this and we had a discussion with our attorneys, we went
back to the original agreement that was signed.
Chairman BARTON. I am not sure I understand that response. Do
you want to elaborate on that?
Mr. BENIT. All I want to say is that we signed a memorandum
of understanding to the contract. We did some of this spreadsheet,
we discussed it with our attorneys and went back to the original
memorandum of understanding that all the E-rate dollars are supposed to be spent for E-rate purposes.
Chairman BARTON. So even though these say, okay, you are
saying that that was invalid, that you retracted that.
Mr. BENIT. Absolutely. That was done through a telephone conversation with John Colvin of NEC, I believe it was his attorney,
our attorney and myself.
Chairman BARTON. Mr. McCain, can you hear me?
Mr. MCCAIN. Yes.
Chairman BARTON. Do you want to respond to Dr. Benit saying
that even though we have got these documents that they were later
disallowed?
Mr. MCCAIN. I was not part of those conversations that Dr. Benit
had with Mr. Colvin and his counsel.
Chairman BARTON. Okay. Dr. Epps, does your school districts
high school have a television production studio?
Ms. EPPS. Yes.
Chairman BARTON. Do you know when that production studio
was built?
Ms. EPPS. I am thinking the 2001-2002 school year.
Chairman BARTON. Do you know who built the production studio?
Ms. EPPS. I was asked that question. I know that NEC donated
the radio-TV room to the school district.
Chairman BARTON. So it is your understanding that NEC BNS
built the studio?

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Ms. EPPS. Yes.
Chairman BARTON. And, Dr. Benit, is that your understanding as
well?
Mr. BENIT. My understanding is they contributed the equipment.
We were completing the building of a new high school at that time.
We had I think about 40, 50 contractors onsite. We had to put air
conditioning in the room, we had to paint the room. We used those
contractors through our construction manager to come in there and
make the room ready for the TV production.
Chairman BARTON. Do you know whose idea it was to build the
TV studio?
Mr. BENIT. I dont recall, but I know there was a lot of discussions with a lot of people, and that was one idea that came up.
Chairman BARTON. Dr. Epps, do you recall who thought of the
idea to build this studio?
Ms. EPPS. No, sir, I dont recall.
Chairman BARTON. When somebody approached you with it, did
you question whether it should be built and who was going to pay
for it or did you just accept that television studios kind of fell out
of the sky?
Ms. EPPS. No, sir. When Dr. Benit brought it to my attention, it
was supposed to be a donation from NEC.
Chairman BARTON. So your impression was that it was a donation.
Ms. EPPS. Yes, sir.
Chairman BARTON. Dr. Benit, is that your impression also?
Mr. BENIT. Yes, it is.
Chairman BARTON. Okay. Mr. McCain, do you have any comment
you would like to make on who paid for the construction of this studio?
Mr. MCCAIN. From the direction we were given, the funding for
the Ecorse project was all funded reference to what was identified
on the spreadsheet, initiated by Dr. Benit. I am not aware of any
donations of the TV production at NECs cost.
Chairman BARTON. So, Mr. McCain, your testimony would be,
based on the record, that this television studio was built with Erate money, not with money donated.
Mr. MCCAIN. That is correct.
Chairman BARTON. All right. Dr. Benit and Dr. Epps, now that
you have heard that, do you still stand by the original answer that
this was somehow donated money?
Mr. BENIT. I do, because Mr. McCain was nothe was a project
manager. He was not involved in any of the discussions. He is not
even aware of the discussion that John Colvin and I had to go back
to the original agreement that was agreed to.
Chairman BARTON. Do you agree, Dr. Benit, and you also, Dr.
Epps, that this television studio cost over $750,000?
Ms. EPPS. Sir, I dont know the financial value of that radio-TV
studio.
Chairman BARTON. Dr. Epps, as superintendent
Ms. EPPS. Yes, sir.
Chairman BARTON. [continuing] are you expected to track the financial aspects of the school district that you are superintendent
of?

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Ms. EPPS. Yes, sir.
Chairman BARTON. Is $750,000 something that you would normally be expected to have some awareness of? I mean is that a
small sum, a large sum that it would be expected that an individual in your position would have a knowledge of and where the
money came from and how it was spent?
Ms. EPPS. If it came from the school district, but my understanding is it was a donate item to the school district.
Chairman BARTON. Do you have anything in the record that
shows that it was a donation? Is there anywhere a document where
whoever you think donated it actually made that donation and submitted a letter, a check, a voucher at all
Ms. EPPS. No, sir, I am not aware
Chairman BARTON. [continuing] that you could provide to this
committee documentation?
Ms. EPPS. No, sir, I am not aware of a check or a letter. I only
know about the memorandum that was signed by Dr. Benit and I
think Mr. Colvin.
Chairman BARTON. Dr. Benit, do you want to comment on that?
Mr. BENIT. The document that was signed by Mr. Colvin of NEC,
the vice president of E-Rate Operations at the time, and myself,
with our attorneys present, stated that the non-E-rate items could
include a TV production studio that would be donated by NEC.
Chairman BARTON. But there is no documentation to that. I
mean we agreeI think we agree the television station cost
$750,000. Do either of you dispute that?
Mr. BENIT. I haventit has been a long time, so I am not aware
of the value.
Chairman BARTON. Okay. Dr. Benit, do you recall that when you
were questioned about this by the committee staff during the interview process, you said that you didnt know who paid for the studio?
Mr. BENIT. I dont recall that either, because I do know that the
studios equipment was donated by NEC, but I also know that a
lot of the contractors that we had on staff through our construction
manager was doing work throughout that building and through
that area at all times while they were there.
Chairman BARTON. Well, are you all aware, Dr. Epps and Dr.
Benit, that this television studio, just the actual studio itself, was
ineligible at the time and would be ineligible today for E-rate funding?
Mr. BENIT. I am aware that it was donated. The agreement says
it was supposed to be outside. It wasnt supposed to violate any Erate rules or SLD rules.
Chairman BARTON. Okay. But there is no documentation that the
committee staff is aware of that shows that such a donation was
ever made. The documentation that we have shows in fact that it
was paid for by E-rate funding. Now, I
Mr. BENIT. I dont have any of that information.
Chairman BARTON. Mr. Walden?
Mr. WALDEN. Mr. Chairman, a question for Dr. Epps and Dr.
Benit. Did anyone in your district bother to check with the USAC
to see if E-rate allowed a $750,000 gift from a vendor receiving government funds?

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Mr. BENIT. No. I have asked our attorney to make sure that
whatever we do we are in compliance.
Mr. WALDEN. Who is your attorney?
Mr. BENIT. Jaffey Rait.
Mr. WALDEN. And do you know if he checked?
Mr. BENIT. I dont know. They were supposed to let us know if
something was askew, but I never did hear from him back that we
werent doing something right.
Mr. WALDEN. Mr. McCain, would you have known of any of these
other financial memos that we are hearing about today?
Mr. MCCAIN. No.
Mr. WALDEN. You wouldnt have known.
Mr. MCCAIN. No.
Mr. WALDEN. You were the onsite project manager. Who told you
how this was being funded?
Mr. MCCAIN. All the financials were done through Dallas.
Mr. WALDEN. Okay. So you just installed the TV studio.
Mr. MCCAIN. Yes, sir.
Mr. WALDEN. Is that right?
Mr. MCCAIN. Yes.
Mr. WALDEN. Then how did you know about this memo, the
spreadsheet that Mr. Benit had?
Mr. MCCAIN. That was extended to me from my immediate supervisor.
Mr. WALDEN. And who is that?
Mr. MCCAIN. Randy Weekly.
Mr. WALDEN. Okay. Then I want to go to a memo to Mr. Weekly
from Mr. Benit. This is 06347, dated February 15, 2001, 2:54 in the
afternoon, and it says, and I quote, I am reviewing the two sides;
however, I have discussed my concerns with our superintendent,
Dr. Epps, regarding the services to be provided by NEC. We would
like to know in detail just what you were provided and a dollar
value assigned to each. I want to firm up what is going to be considered as in-kind and the dollar assigned to each. I am going to
review the in-kind amounts tomorrow, and I will e-mail you the
changes which I see. I would want this in place before we proceed
any further with this project along with the coordination between
existing contractors and your final scope of work. Call me on my
cell or e-mail me. What do you mean by the in kind part of this?
Mr. BENIT. In kind would be any kind of donations that would
was beyond the E-rate dollars that were applied.
Mr. WALDEN. See, it is our understanding that USAC does not
allow for gifts like this.
Mr. BENIT. I am not aware of that.
Mr. WALDEN. And your attorney clearly wasnt aware of that; is
that what you are
Mr. BENIT. They have not informed me of that.
Mr. WALDEN. Mr. Chairman, I yield back.
Chairman BARTON. I want to go back then. This television studio
that $750,000 was spent for and which our records show was spent
with E-rate funding, which each of you, Dr. Epps and Dr. Benit,
indicate was donated, although there is no documentation that you
received the donation or even a letter notifying you of the donation.
How has that TV studio been used or is it even being used?

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Ms. EPPS. Yes, sir, it is being used by the students at the high
school every day.
Chairman BARTON. By the students at the high school every day.
Ms. EPPS. We have classes. We do TV classes for credit.
Chairman BARTON. Has it been used by local businesses to generate revenue?
Ms. EPPS. No, sir.
Chairman BARTON. Not at all?
Ms. EPPS. No, sir.
Chairman BARTON. Dr. Benit?
Mr. BENIT. No. It is only for students. It started out being used
by students and is still being used by students.
Chairman BARTON. Mr. McCain, do you have any information
that the television studio has been used for local business, by local
businesses to generate revenue?
Mr. MCCAIN. No.
Chairman BARTON. Dr. Epps, do you know how much money the
E-Rate program was granted to your school for the funding year
2000?
Ms. EPPS. I believe with the reduction, I believe it came to about
$7 million.
Chairman BARTON. $7 million.
Ms. EPPS. Like six point something million dollars.
Chairman BARTON. Okay. Our records show $4 million, but if you
say $7 million, okay. Dr. Benit, what is your recollection?
Mr. BENIT. Well, I think the original award through NEC was
about $7 million. I conducted a review and told Dr. Epps that I
thought that one portion of the award was redundance and I asked
to reduce it by $3.3 million. And so the final award came out to
$4.1 million. I wrote a letter back to Schools and Libraries and
asked them to
Chairman BARTON. So originally the $7 million that Dr. Epps referred to was granted, and then when that was reviewed, you made
a decision, or somebody, you and Dr. Epps made a decision that
some of those funds were not eligible and you refunded some of the
money or didnt accept it so that the final number is the $4.135
million?
Mr. BENIT. Well, those funds were eligible, but we reviewed what
our needs were within the district and didnt feel that we needed
the redundancy that that award would give us, so I asked the
Schools and Libraries by a letter to cut that funding for that particular award.
Chairman BARTON. Dr. Epps, do you want to comment on that?
Ms. EPPS. Dr. Benit reviewed our needs and I remember he came
to my office and told me that he had reviewed our needs in terms
of the E-rate. He had reviewed our bond project. We were building
the high school, another school at that time and remodeling two
others, so we had a big project going. And he had reviewed all of
that, and he felt that there were some items that would be redundant to what we were doing over with the bond so that he wanted
to reduce the amount. And my comment was if that is what we
needed to do, we didnt want anything that we didnt need, so he
wrote a letter or e-mail reducing that amount. And the exact figures he knows exactly how much that was.

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Chairman BARTON. Well, we haveI have got 12 more questions,
but I havent even asked Dr. Singleton a question yet, and I want
to ask him some. I just want the record to show that our documents indicate that the Ecorse School District E-rate funds paid for
any number of projects and equipment that was ineligible, including servers, security systems, video equipment, a message center
for the high school football field. And I would also like to indicate
that our records and documents that we have created during the
course of this investigation cast some question on the Ecorse copay
for E-rate-related work that NEC and BNS accomplished for your
school district in 2001. Would Dr. Epps or Dr. Benit, either one of
you, wish to document for the committee that you in fact did pay
the copay and not roll it into the E-rate that would be ineligible
because the local school district is supposed to pay a copay?
Mr. BENIT. Well, I think we can provide that information to you.
Also, there was no scoreboard paid for. That was paid for with bond
funds. We have checks that were paid out of the bank trust fund
for that. Most of the items that you read off were paid through the
bond funds of the district that was handled through a bank trust
account.
Chairman BARTON. So you dispute the records that indicate the
E-rate funds were used in a way they shouldnt have been used to
provide and pay for that. And we can give a detailed list of that
equipment.
Mr. BENIT. If you could do that, then I would like to provide you
with documentation that shows that it was paid for out of the district bond funds.
Chairman BARTON. Okay. Mr. Walden?
Mr. WALDEN. Thank you, Mr. Chairman. I want to go back to
something because I am confused. The spreadsheet we talked
about, number 6365, that there is testimony that these were your
okays next to it and it lists the TV studio, the spreadsheet Mr.
McCain and I were talking about, tab 85.
Mr. BENIT. Yes.
Mr. WALDEN. And that is your spreadsheet, right, and those are
your okays.
Mr. BENIT. Yes, that is correct.
Mr. WALDEN. And it does list TV studio on there, correct?
Mr. BENIT. It does.
Mr. WALDEN. And then didnt you testify earlier that that is basically an old document that was superseded then by the memorandum of understanding with Mr. Colvin that would be found
under
Mr. BENIT. No. The memorandum of understanding was signed
first. What I did say was that after this was done, we talkedI
talked with Mr. Colvin and our attorneys and it was agreed we are
out of line as far as E-rate rules, so we had to go back to the original memorandum of understanding.
Mr. WALDEN. How were you out of line as regards to E-rate
rules?
Mr. BENIT. Well, we felt that we werethis doesnt show the
money all being spent for what it did in the memorandum of understanding. So we are trying to get back to the memorandum of
understanding.

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Mr. WALDEN. I am confused because you are talking about two
memoranda of understanding, correct?
Mr. BENIT. No, I am not; I am talking about one.
Mr. WALDEN. Okay. The one that came after this
Mr. BENIT. No, the one that came before that.
Mr. WALDEN. Okay. Is that the one on tab 79?
Mr. BENIT. I dont know.
Mr. WALDEN. Why dont you take a look at tab 79. This is the
one that is dated January 18, 2000.
Mr. BENIT. Yes. This is the one I am referring to.
Mr. WALDEN. Okay. But your spreadsheet, if I am correct, is
dated after that.
Mr. BENIT. That is right. I am saying that after that we got into
more detail and I was trying to find out how much money was
being spent, but, like I said, there were some discussions on those
items. We met with our counsels, we had a conference call, we
talked, and we were advised to go back to the original memorandum of understanding, which we did.
Mr. WALDEN. And were you advised that you couldnt have a TV
studio as part of that discussion?
Mr. BENIT. No, I was not.
Mr. WALDEN. But yet that shows up here on the spreadsheet as
being moved around, right?
Mr. BENIT. It does.
Mr. WALDEN. Why was it on the spreadsheet?
Mr. BENIT. Well, it was on the spreadsheet that I was playing
around with things. Then we went back to counsel and said, What
can we do and what cant we do, and they said, Go back to your
regular memorandum of understanding. That will guide you to stay
within the school and library rules. Mr. WALDEN. So are you testifying that your counsel never saw this spreadsheet?
Mr. BENIT. Yes, I am.
Mr. WALDEN. They never saw it.
Mr. BENIT. I dont believe they did. Maybe they did. I cant recall.
Mr. WALDEN. You cant recall. Okay. So you had no knowledge
anywhere along the way that E-rate couldnt fund a TV studio?
Mr. BENIT. Well, it says in the memorandum a media production
room is non-qualified equipment and services, so that had to be donated. So my understanding it was donated.
Mr. WALDEN. It is your understanding that NEC then just
turned around and donated $1 million or $750,000 or whatever
worth of
Mr. BENIT. That is my understanding.
Chairman BARTON. Would the gentleman yield?
Mr. WALDEN. Certainly.
Chairman BARTON. Well, then, Dr. Benit, if that is the case, this
original memo of understanding that you have referred to refers to
a number of items that total, if I am reading this right, a little over
$2 million. Were those installed also, the 24-port Cisco 3524 series
ethernet switch, the NEC 8550 ATM workgroup switch, the 6066
gigabyte backbone switches, the four Cisco 3508 gigabyte ATM
intermediary backbone switches and the four Cisco 3660 routers?
Were those actually installed?

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Mr. BENIT. My understanding everything on the first sheet of
memorandum of understanding was installed.
Chairman BARTON. Now, our understanding is that some of those
items were not installed because the money was switched to pay
for the television studio. Mr. McCain, do you have a comment on
that?
Mr. MCCAIN. What NEC installed was in reference to the document 6365, and within line item 3 it indicates the data system. It
also references back to the MOU.
Chairman BARTON. So are youthat is kind of a confusing answer. Dr. Benit and Dr. Epps are saying that the television studio
was donated and that this other material that is listed on page 1
was also installed. Is that what you are saying too or are you saying that only some of the equipment on page 1 was installed and
the funds that werent used for that were used to pay for the TV
studio, which is our understanding?
Mr. MCCAIN. I am not aware of any donation that NEC made for
the TV production studio.
Chairman BARTON. I understand that, but my question is was
money that was supposed to be used for these switches, which
would be eligible for E-rate funding, was it reallocated to pay for
the television studio, which was ineligible for E-rate funding? That
is what the documents tend to indicate.
Mr. MCCAIN. The NEC installed what was on the spreadsheet in
reference to document 6365 and how those line items were implemented and the associated dollar amount.
Chairman BARTON. Okay. Well, I have oneMr. Walden. And we
need to get to Mr. Singleton here pretty soon.
Mr. WALDEN. All right. I am sorry, sir. Mr. McCain, have you
done several of these installs like this?
Mr. MCCAIN. Yes, sir.
Mr. WALDEN. From your experience, are these figures that are on
spreadsheet, 06365, are those numbers, the costs there, are those
pretty standard? Are they below what you would see charged elsewhere or are they inflated?
Mr. MCCAIN. No, they are not inflated. I mean new technology
is very expensive these days.
Mr. WALDEN. Okay. So I guess my question is then did a full
$4,135,900 and whatever that says, 81I didnt bring my glasses
todayis that what was spent?
Mr. MCCAIN. Yes.
Mr. WALDEN. On the project?
Mr. MCCAIN. Yes, sir.
Mr. WALDEN. And is the only way you could have spent that to
have spent the million for the TV studioor $800,000, I am sorry?
Mr. MCCAIN. What we didwhat NEC did is from this spreadsheet, an agreement by both parties, we installed the line items
that are on the spreadsheet to use the funds that were approved
by the SLD funding.
Mr. WALDEN. And would that include the $800,000 for the TV
studio?
Mr. MCCAIN. Yes.
Mr. WALDEN. Okay.
Chairman BARTON. All right.

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Mr. WALDEN. And one final time, neither superintendent, you all
dont know, Doctors, whether your school district ever came up
with the match amount.
Ms. EPPS. It is my understanding, sir, that we paid our matching, either through the bond money that we had or our general
fund.
Mr. WALDEN. But you dont know which?
Ms. EPPS. I cant say we paid $10 from this or that. I dont have
that information.
Mr. WALDEN. Dr. Benit, you dont know specifically either.
Mr. BENIT. Well, I do know. I present it to our business office
that they need to pay a match. I am not sure what happened. I believe that they did, but I would have to go back and review the
records to find out how it was paid.
Mr. WALDEN. And you havent done that prior to this hearing at
all?
Mr. BENIT. No, because I am working in another district, and I
just got the request to come here while I am trying to get another
district working.
Mr. WALDEN. All right.
[During the hearing, Members of the Oversight and Investigations Subcommittee and the Committee Chairman requested that either Dr. Emma
Epps, the Superintendent of Ecorse Public School District, or Dr. Douglas
Benit, the former facilities director at Ecorse Public School District, provide the Committee with documentation demonstrating that the school district in fact paid its E-rate copayment, and did not use E-rate funds to
cover the districts obligation. Dr. Benit stated that the requested information could be provided to supplement the record. Following subsequent requests from Committee staff that Dr. Benit provide the documentation before the record closed, Dr. Benit, through his attorney, produced several
documents to the Committee that were irrelevant and failed to answer the
outstanding questions. At the close of the record, the Committee has no
documentation that in fact demonstrates that Ecorse Public School District
did not use E-rate funds to pay for ineligible products and services and to
pay for the school districts required co-payment.]

Chairman BARTON. Well, before we get off of that issue, what

does a television studio have to do with connecting your students
to the Internet? Either one of you.
Mr. BENIT. Well, as a donated piece of equipment, it does teach
kids how to project themselves, how to do TV production and
Chairman BARTON. That has nothing to do with the Internet.
That has nothing to do with wiring your school system so that your
students can receive material for educational purposes over the
Internet.
Mr. BENIT. I understand that. All kids can, all buildings have
total access to the Internet.
Chairman BARTON. So you all think that E-rate funds should be
spent to put television studios in every high school in this country,
even though none of it is used for Internet purposes. You want to
expand the intent of the E-Rate program.
Mr. BENIT. No, sir, that is not what we said.
Chairman BARTON. Well, we had another school superintendent
from the San Francisco School District here before us. She refused
to sign documents. She instigated an investigation that resulted in
tens of millions of dollars being refunded to her credit, and in this
case, the school district that you represent, you all have a very

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vague notion of what was spent and what it was spent for and
dont appear, quite frankly, to be too concerned about it, which is
a disappointment to me.
Let me ask Dr. Singleton some questions for the record. Dr. Singleton, you are the superintendent of the Jasper County School
District in South Carolina; is that not correct?
Mr. SINGELTON. That is correct.
Chairman BARTON. What is your understanding of your school
districts financial obligation to participate in the E-Rate program?
Mr. SINGELTON. We have written severalworked with NABSE
and also with the VNCI and NEC. That is how we became involved. When I became superintendent in 1999, we wrote the first
grant or filed the first forms for E-rate funding. And, as I mentioned in my written testimony, I was at a conference and E-rate
was being promoted by NABSE.
Chairman BARTON. Is that where you met Judy Green for the
first time?
Mr. SINGELTON. I believe she was there, but I remember George
Marchelos. I remember him specifically.
Chairman BARTON. Do you know to what extent, if any, Judy
Green was involved in assisting Mr. Duncan in your district preparing E-rate forms and paperwork for the grant application?
Mr. SINGELTON. When I returned I filed the first form, 470, in
Nashville, and when I came back I turned everything over to Mr.
Duncan. He was our director of technology at that time, and he
was working with, I believe it was, Kim Mars and Judy Green and
Gerard McNulty.
Chairman BARTON. Do you know if Judy Green helped Mr. Duncan to prepare the E-rate RFP?
Mr. SINGELTON. From what Mr. Duncan said, he had assistance
from the organization, NEC and VNCI.
Chairman BARTON. But do you know if the employee or the consultant of NEC BNS was Judy Green, the woman here today who
refused to testify under oathwho took her Fifth Amendment right
against self-incriminationI want to be exact on that.
Mr. SINGELTON. I dont know for a fact that she sat down and
wrote the application, but she was physically in the district on several occasions. I can say VNCI filed the first form out in Nashville,
and I know that for a fact because after the breakout session I
came back downstairs and did that application electronically and
sent it in.
Chairman BARTON. Okay. Do you have the big notebook with all
the tabs there at the desk before you?
Mr. SINGELTON. This?
Chairman BARTON. Yes, sir. Could you turn to tab 48, please, sir?
Tab 48 should be the Jasper County memorandum of understanding.
Mr. SINGELTON. Yes, sir.
Chairman BARTON. Do you see that?
Mr. SINGELTON. Yes.
Chairman BARTON. Could you tell us how much money was
awarded to the Jasper County School District by the E-Rate program for year 2000?
Mr. SINGELTON. Well, the amounts meant $10.4 million.

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Chairman BARTON. What is the document before you indicate?
Mr. SINGELTON. This indicates that 9.5
Chairman BARTON. Four-eight.
Mr. SINGELTON. [continuing] 48.
Chairman BARTON. On the page marked 6374, can you describe
the items listed under the caption, Non-qualified equipment and
services?
Mr. SINGELTON. Electrical upgrade, university training for teachers, climate control system, alterations of internal existing structure.
Chairman BARTON. That is enough. The entire document is in
the record, but would you just summarize. Does it look like there
are dozens of items that were non-qualified on that page, including
personal computers? There are a lot of items on that.
Mr. SINGELTON. Yes, sir.
Chairman BARTON. You would agree with that? Do you know if
Jasper County received all of those items even though they were
non-qualified?
Mr. SINGELTON. I believe we received most of the items.
Chairman BARTON. You believe that you did receive.
Mr. SINGELTON. Yes.
Chairman BARTON. Okay. On the next page, 6375, what is the
total cost of the so-called bonus package?
Mr. SINGELTON. Three million fifty.
Chairman BARTON. Three million fifty. Now, do you acknowledge
that that means your school district received $3 million in nonqualified items for which they should not have been paid for by the
E-Rate program?
Mr. SINGELTON. Well, we received it as a bonus package. It was
given to us as a bonus package.
Chairman BARTON. All right.
Mr. SINGELTON. That was promoted by VNCI, NEC and
Chairman BARTON. Define in your own words what a bonus package means.
Mr. SINGELTON. In my words, and what was said to us, was that
a bonus package would pay for the matchingcould be used as the
matching for our portion that the district should have been paying.
Chairman BARTON. That makes no sense at all.
Mr. SINGELTON. Well, that is what was told to us.
Chairman BARTON. All right.
Mr. SINGELTON. That the bonus package could be used as in
kind. They would give us that and we could, in turn, use that as
the matching for the district.
Chairman BARTON. All right. The E-Rate program is supposed to
befunds for the E-Rate program are supposed to be used to actually create the Internet connection, the servers, the wiring, the
switches, the monitors, the computers so that students can participate and receive information over the Internet and help with their
education. None of the equipment that was listed in the bonus
package does that. It is not qualified, it is not part of it. Some of
it may be if there are some computers there. Those funds to the
tune of $3 million were non-eligible and should not have been funded by E-rate. If the school district wanted those, the school district
should have paid for them themselves. There is no free lunch, and

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you want us to believe that $3 million worth of equipment could
be given to your school district and you really think that the vendor that provided it did it and didnt charge the government for it.
On a $4 million contract, they could give you a $3 million bonus.
Mr. SINGELTON. A $9 million
Chairman BARTON. Well, but $3 million of it was listed as bonus.
Mr. SINGELTON. That is correct. And I am just repeating what
was told to us, that we
Chairman BARTON. But you didnt question that.
Mr. SINGELTON. No, sir, I did not.
Ms. DEGETTE. Mr. Chairman, would you yield for 1 second?
Chairman BARTON. I would be happy to.
Ms. DEGETTE. Dr. Singleton, who told you that this list of nonqualified equipment could be applied toward the districts match?
Mr. SINGELTON. Well, if you read through this document, it says
in-kind and
Ms. DEGETTE. No. Who told you that?
Mr. SINGELTON. When we first started discussing this out in
Nashville, I know it was discussed there
Ms. DEGETTE. Who
Mr. SINGELTON. Morales, George Morales mentioned it when we
got back to our district. Gerard McNulty, Judy Green, that whole
group
Ms. DEGETTE. All of them told you that?
Mr. SINGELTON. Yes, maam.
Ms. DEGETTE. Thank you, Mr. Chairman.
Chairman BARTON. Doctor, doesnt it strike you as too good to be
true that you could receive all these bonus items and have your copayment waived by NEC BNS?
Mr. SINGELTON. We know now sir, that it is too good to be true.
There are no free lunches, I will agree with that. Understanding
that we are a very rural, poor school district, NABSE involvement
by
Chairman BARTON. So it is just dont look a gift horse in the
mouth.
Mr. SINGELTON. Yes. Yes.
Chairman BARTON. That is kind of the
Mr. SINGELTON. Well, a reputable organization like NABSE we
just assumed that everything was okay.
Chairman BARTON. I can understand that. The Chair would ask
unanimous consent to recall Mr. McDonald of USAC if he is still
in the audience. He is still under oath.
Mr. McDonald, you have heard Superintendent Epps and Superintendent Benit and now Dr. Singleton all indicate that they were
getting equipment and bonus packages and donations. Would that
be allowed, including a television studio, under the existing E-Rate
program, even if it was donated?
Mr. MCDONALD. These would be the kind of free, ineligible services I was talking about this morning, that the cost of those services need to be covered somehow, and they are covered by inflating
the cost of eligible services so that E-rate ends up paying for them.
TV production studio, we do pay for connectivity. We pay for distance learning. If the TV production studio were being used for dis-

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tance learning, switches and cables that were carrying that data
would be eligible but not the TV production studio itself.
Chairman BARTON. And if Dr. Singletons school district had contacted USAC and asked about this bonus package or the concept
of a bonus package, what would your reviewers response have
been?
Mr. MCDONALD. We have been pretty clear about free, ineligible
services from the inception of the program, that they are not eligible, that the applicants should not acquire free, ineligible services
from service providers.
Chairman BARTON. Do you do anything to be proactive to send
out materials to these small school districts and these rural school
districts and low-income school districts that would tend not to
have professionalor not as likely to have professional staff that
were up to date on these programs to inform them, to warn them,
so to speak, to be wary of these kind of proposals that in fact they
are illegal?
Mr. MCDONALD. We have a web site that we try to promote as
much as possible where we put information about the rules of the
program. We have a toll-free call center that participants can call
and get information. We do an annual train the trainer conference
and bring people in from all the States and train and hope that
they will go back and train, and we do a mass mailing at the start
of the window for each funding year to basically all applicants in
the program, trying to highlight significant features of the program, things that have been problems that we have found recently.
Chairman BARTON. Before I letI think Mr. Walden may have
a question for you, but I sent a letter, and I think Mr. Dingell sent
a letter, we signed a letter asking that this particular vendor be
barred because of what they have done. Do you know the status of
that debarment proceeding? Would that be your agency or would
it go to the FCC directly?
Mr. MCDONALD. That would be the FCC, sir.
Chairman BARTON. And you are not aware ofMs. DeGette, do
you wish to ask a question?
Ms. DEGETTE. Thank you. Dr. Singleton, I just wanted to clear
a couple of things up. And thank you for appearing today. You are
making some sense here. This in-kind donation agreement that we
have been talking about, now you were told by Judy Green and
others that these were going to be donated by NEC, correct?
Mr. SINGELTON. Donated.
Ms. DEGETTE. And were you aware of an application by NEC for
E-rate money to pay for these items?
Mr. SINGELTON. No. I was not aware of that, no.
Ms. DEGETTE. Okay. Did you know that E-rate money cannot be
used to pay for these items?
Mr. SINGELTON. I know now, but that never occurred to me in
the beginning because they were donated items.
Ms. DEGETTE. Right. You just thought they were donating it as
part of your agreement, right?
Mr. SINGELTON. Yes.
Ms. DEGETTE. Now, as you look at this list of items, is there anything on this list thatwell, everything on this list you needed to

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be able to hook up computers for kids to use them in the classroom,
didnt you?
Mr. SINGELTON. That is correct.
Ms. DEGETTE. Did your school district have $3 million to pay for
all this equipment?
Mr. SINGELTON. No, we do not.
Ms. DEGETTE. What would have happened if you didnt have a
way to get this equipment? Did you have
Mr. SINGELTON. We would never put it in. We could never afford
this kind of equipment.
Ms. DEGETTE. Right. Now, lets say that Congress said that you
had to pay 20 percent. Because now you know, right, that there is
a 10 percent amount? What would you say to Congress if we said,
Well, the way we are going to stop the kind of fraud by Judy
Green and others is to make you pay for 20 percent?
Mr. SINGELTON. I think that would be detrimental to districts
like ours. Rural, poor districts cannot afford to pay upfront or to
pay the percentage that is required. Small amount but the magnitude of this project we could never afford it, we could never pay
it.
Ms. DEGETTE. Do you have any ideas what kind of changesbecause I know you would never support fraudulent transactions at
all for your district, right?
Mr. SINGELTON. No, maam. That will get you fired.
Ms. DEGETTE. Well, it will do worse than that. And so my question to you is what do you think Congress can do to make sure that
this E-rate money goes to school districts like yours, the poorest
school districts in the country to help the students, but at the same
time there are not people just skimming millions of dollars off of
it fraudulently.
Mr. SINGELTON. Really, I think the whole application process, I
believe, needs to be revamped. It seems to be a complicated process, and I dont know all the ins and outs because my technology
persons have always done it, and I have sort of taken a back seat
and they just bring it to me and say, Okay. We have got this approved, and I have signed documents as they came in. But I believe that isthe process is complicated, and I think the bid process may need to be looked at, because when we got into this
project, and if you ask me how VNCI and NEC got into it, I could
not tell you today. I know that we started in Nashville, and from
then on they were partnering with us. So it is unclear exactly how
they started. And maybe by just signing on and having them transmit that 470, that first application, and they are off and running
with us.
Ms. DEGETTE. Thank you. Thank you for sharing those views. I
appreciate it.
Mr. WALDEN [presiding]. Dr. Epps, are you a member of NABSE?
Ms. EPPS. Yes, I am.
Mr. WALDEN. I am not sure, is that mic on?
Ms. EPPS. Yes, I am.
Mr. WALDEN. Thank you. Are you currently an officer of NABSE?
Ms. EPPS. Yes, sir.
Mr. WALDEN. And how long have you been an officer at NABSE?
Ms. EPPS. I think 1998.

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Mr. WALDEN. You were elected
Ms. EPPS. Secretary.
Mr. WALDEN. [continuing] secretary. And you are nowwhat is
your title now?
Ms. EPPS. President-elect.
Mr. WALDEN. President-elect.
Ms. EPPS. Yes, sir.
Mr. WALDEN. You appear in the NABSE E-Rate marketing video
that we viewed a short time ago.
Ms. EPPS. Yes, sir.
Mr. WALDEN. What do you know about NABSEs participation in
the E-Rate program?
Ms. EPPS. As a board member, I know that a presentation was
made to us about a partnership and I, as a board member, voted
at that meeting because
Mr. WALDEN. You voted for the partnership?
Ms. EPPS. For the partnership to assist school districts that
didnt have the persons to do the work.
Mr. WALDEN. Sure. And you are aware of the, what was it, 1.5
percent fee that NABSE got back off some of these contracts, if not
all?
Ms. EPPS. That was in the presentation.
Mr. WALDEN. Okay. And Mr. McDonald again, is that fee generally acceptable under USAC rules?
Mr. MCDONALD. Depending on the role that NABSE would be
playing. If it is playing a role as the consultant and steering work
to those companies in order to get the 1.5 percent, no, that is not
keeping a fair and open competitive process.
Mr. WALDEN. Did you see the video?
Mr. MCDONALD. I did.
Mr. WALDEN. Did it trouble you that they listed various companies in the video, NEC, UNCI?
Mr. MCDONALD. If I were seeing that for the first time, I
wouldnt be sure exactly what was being said there. If NABSE had
money and these companies were volunteering to come out and
help people put technology plans together and not going to corrupt
the process of the selection of the service provider, that would be
okay.
Mr. WALDEN. Will USAC be looking at NABSEs role?
Mr. MCDONALD. Yes.
Mr. WALDEN. Okay. And in terms of these school districts, are yo
pursuing recovery? I mean we are hearing a lot today about $4 million and a free TV studio.
Mr. MCDONALD. I am making notes here.
Mr. WALDEN. I bet you have. Dr. Epps, what role did Quentin
Lawson play on behalf of NABSE and NABSEs participation in the
E-Rate program?
Ms. EPPS. Sir, I cant tell you what his role was, other than as
a board member, as I said, at the meeting, the project was presented to the board, but I cant
Mr. WALDEN. Does the board have legal counsel that reviewed
this process, do you know?
Ms. EPPS. The policy, sir, is that when projects are brought before the board, the general process is that if it is an agreement or

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a contract, as a board member, I know that it is supposed to go to
the legal attorney.
Mr. WALDEN. Who is that?
Ms. EPPS. The legal attorney is Mr. McCutcheon.
Mr. WALDEN. Mr. McCutcheon. Okay. What do you know about
NABSEs E-rate partnership with NEC, VNCI and IBM?
Ms. EPPS. What I know has to do with there was a presentation
that there would be a partnership. I dont know the intricate details of what that was and how it all came together. I dont have
that detailed information, as I was one member.
Mr. WALDEN. That wasnt presented in your board meeting?
There would be documents, minutes perhaps.
Ms. EPPS. The information was presented to the board. I cant recall, tell you all of the details of the presentation, but just like all
the other initiatives, it was presented to the board.
Mr. WALDEN. All right. If you would take a look at tab 66 in our
big binder there.
Ms. EPPS. Okay.
Mr. WALDEN. I was just wondering if you were aware that
NABSE had entered this memorandum of understanding with NEC
BNS and VNCI? This was in January 2001. It references there the
1.5 percent of the gross revenue of said contract.
Ms. EPPS. And what is the question, sir?
Mr. WALDEN. Were you aware that NABSE had entered this
memorandum of understanding with NEC BNS and VNCI?
Ms. EPPS. I wasnt aware of this particular memorandum. I have
seen it recently, but I was not aware of it previously.
Mr. WALDEN. Okay. Were you aware that this MOU provided for
the compensation of NABSE by those vendors?
Ms. EPPS. One and a half percent.
Mr. WALDEN. Right. Were you aware of that?
Ms. EPPS. I think that wasif my memory serves me correctly,
that was presented in the
Mr. WALDEN. As part of the presentation?
Ms. EPPS. [continuing] presentation.
Mr. WALDEN. Yes. I question the term, donation versus perhaps
commission on sales. I mean it is 1.5 percent of the gross revenues is part of the agreement.
Why would NABSE get that funding, the 1.5 percent, as opposed
to just helping schools for free, because that is your mission, right?
Ms. EPPS. Well, our mission is to help schools and children, yes.
Mr. WALDEN. Right. Why take 1.5 percent? I mean that could be
quite a bit of money on what we have heard today in terms of the
size of some of these contracts.
Ms. EPPS. Yes. Well, I can answer as one board member. At the
time it was presented
Mr. WALDEN. Do you know how much money they did make?
Ms. EPPS. No, sir.
Mr. WALDEN. That doesnt show up in a budget item ordo you
get like monthly cash-flow statements or P&Ls?
Ms. EPPS. No, sir. I havent seen monthly cash-flow statements,
but it would eventually be in the audit, I am sure, at the end of
the year.
Mr. WALDEN. The audit? How often does your board meet?

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Ms. EPPS. I attend board meetings about three times a year.
Mr. WALDEN. And that is how often the board meets?
Ms. EPPS. Yes, sir, about three times a year.
Mr. WALDEN. And at those meetings, do they give you financial
statements? I mean do they give you sort of
Ms. EPPS. Yes, sir.
Mr. WALDEN. [continuing] quarterly cash-flows or
Ms. EPPS. Yes, sir, we get financial statements.
Mr. WALDEN. Okay. But this isnt one you looked at as a new line
of business?
Ms. EPPS. I did not particularly pay attention to that.
Mr. WALDEN. Is that information
Ms. EPPS. I cant say that it was there or not.
Mr. WALDEN. Sure. I have been through various boards I have
been on and I understand how that happens. Is that information
you could provide for us, though? NABSE?
Ms. EPPS. I am sure that NABSE could provide that for you.
Mr. WALDEN. Well, you are the president-elect. I mean is that
something you would help us get?
Ms. EPPS. I think that you could request that from the office, and
I am sure they would give you that.
Mr. WALDEN. Okay. Because it would be interesting to know just
how much money was generated off the E-rate projects in the
NABSE.
So take a look at tab 66, for exampleI am sorry, 68. VNCI,
Video Network Communications, Inc. provided NABSE on October
1999 it appears to be $37,000. How big is your annual budget?
Ms. EPPS. I am sorry?
Mr. WALDEN. How big is your annual budget at NABSE?
Ms. EPPS. I really dont
Mr. WALDEN. Would $37,000 in one payment be considered quite
a bit? I mean are we talking a $10 million budget or
Ms. EPPS. As a board member, I would think that $37,000 is a
lot.
Mr. WALDEN. So if I were looking at your P&L for the prior 4
months, $37,000 would jump out as a line item, wouldnt it, in
terms of revenue source? And that is just one check. Is that what
you are telling me, that that would tend to show up? I mean how
big an organization
Ms. EPPS. In revenue, I am sure it would show up in the office,
but I dont remember seeing this check.
Mr. WALDEN. No, I wouldnt think you would see the check. But
I mean I am just thinking back to my own company and others.
I mean $37,000 is a pretty good chunk of dough, and that is just
one check. Were there others maybe? How about at tab 69, July
2001. That is a $10,000, looks like, check. Again, it looks like from
VNCI. It just seems like a lot of money coming in, I dont know.
And I think tab 69 and 70 also have revenue coming in as well,
it looks like, $45,000 from VNCI. It just seems like a lot of money
coming out of this program. I mean do you know the kind of technical support that your folks athow many people are in this division at NABSE that help schools? How big is the staff for the Erate side of things?

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Ms. EPPS. I dont remember how many. I couldnt give you a
number of the staff doing the E-rate, what I consider the E-rate
time. I can tell you just about the staff now.
Mr. WALDEN. How many are on staff now total?
Ms. EPPS. Hold on a second.
Mr. WALDEN. Sure.
Ms. EPPS. I believe, sir, it is maybe 6 or 7 regular people, and
then there are, like, interns.
Mr. WALDEN. So you are not a big organization here, 6 or 7. And
that is full-time staff when you say the word, regular?
Ms. EPPS. I believe that it is about that many full-time.
Mr. WALDEN. Okay. So 6 or 7 full-time. And that would include
people working on E-rate or do you
Ms. EPPS. Well, working on projects. I dont know who would exactly in the office work on specific projects.
Mr. WALDEN. Right. No, but it would be within that group of 6
or 7 people.
Ms. EPPS. That is the NABSE staff.
Mr. WALDEN. Yes. So the current staff you have that would have
been the ones that would be getting the payments, in effect. I mean
the payment came to NABSE, right, that we have the checks under
the tabs that I referenced earlier?
Ms. EPPS. I see the checks, sir. I dont knowI havent looked
at in terms of when they were. I dont knowthe staff has changed
and the staff changes, so I cant say this exact 6 and 7 people were
the people
Mr. WALDEN. No, I understand that. I am not saying that. I am
just saying that when NABSE was holding itself out as a technological consultant for school districts like the one Mr. Singleton is
superintendent of, in theory, you had 6 or 7 people or positions,
right?
Ms. EPPS. Yes, sir.
Mr. WALDEN. That is what you have testified to.
Ms. EPPS. That is how many we have now, sir, that I know of.
Mr. WALDEN. Was it more or less then?
Ms. EPPS. I said that I couldnt tell you how many it was, if you
remember when I said, during what I am considering the E-rate
time. I said now I would say it was 6 or 7 and some interns.
Mr. WALDEN. Was it more during the E-rate time?
Ms. EPPS. I really dont know the number of staff members at
that time.
Mr. WALDEN. Okay.
Ms. EPPS. And I am thinking 2001. That is what I call E-rate
time.
Mr. WALDEN. All right. Did you rely a lot on Judy Green?
Ms. EPPS. I dont know if NABSE relied on Ms. Green.
Mr. WALDEN. Was the NABSE Board informed that Quentin
Lawson had joined the VNCI Board? See Tab 88 if you want to,
there is a reference.
Ms. EPPS. Sir, I, as a board member, was made aware of that
this year, 2004, this year.
Mr. WALDEN. Okay. So you just learned about it sometime in
2004.
Ms. EPPS. Yes, sir.

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Mr. WALDEN. Okay. All right. Now, does that present any conflict
of interest in your mind?
Ms. EPPS. I, as an individualI would tend to think that it is
as an individual, I would think that it wasnt
Mr. WALDEN. It was not?
Ms. EPPS. It could be a conflict.
Mr. WALDEN. It could be a conflict.
Ms. EPPS. I mean I would think, as an individual. I cant
Mr. WALDEN. Mr. McDonald, do you think that presents a conflict?
Mr. MCDONALD. It certainly deepens the issue of were these fair
and open competitive processes.
Mr. WALDEN. Are you aware of these payments to NABSE?
Mr. MCDONALD. No, sir.
Mr. WALDEN. Do they seem out of the ordinary, hard to tell?
Mr. MCDONALD. They would be out of the ordinary. As we discussed earlier today, if we had seen these, we would have misconstrued them as causing a problem, and we would have denied
the applications.
Mr. WALDEN. Are these payments the kind of payments that you
would go back and review and seek refunds on if they are not
I mean
Mr. MCDONALD. It sounds like E-rate funds were used to make
the payments to NABSE and those would not be eligible uses of Erate funds.
Mr. WALDEN. Unless they provided very specific technological
support to the districts, right?
Mr. MCDONALD. Unless they were installing or providing
connectivity services.
Mr. WALDEN. All right. Anything else? All right. Thank you all
for your patience and time. We have no other questions for this
panel. You are dismissed. We will take a brief 5-minute recess because we have to bring up another witness by video. While our
technicians work on that, we will be in recess for 5 minutes.
[Brief recess.]
[The prepared testimony of William Singleton follows:]
PREPARED STATEMENT

OF

WILLIAM SINGLETON, SUPERINTENDENT, JASPER COUNTY

SCHOOLS
SCHOOL YEAR 1999-2000

I was somewhat familiar with the E-Rate Program some time before 1999. However, after attending the National Alliance of Black School Educators (NABSE) Conference in Nashville, Tennessee, I became more familiar with the program. I began
to take notice after being approached by a representative from VNCI, who had on
display numerous pieces of telecommunication equipment in the hotel lobby. VNCI
representatives stood in the hotel lobby soliciting conference participants to attend
a breakout session on how to acquire E-Rate funds. Several announcements were
made by NABSE officials encouraging conference participants to attend the breakout session.
A representative of VNCI encouraged conference participants to attend the breakout session to hear testimonies from other school districts that were recipients of
their equipment (see Exhibit A). The breakout session was very interesting. School
district representatives and superintendents that had received E-Rate funds shared
how they enhanced their school districts technology program. As I recall, a superintendent from a small school district in the state of California shared during the
breakout session that he had received somewhere in the neighborhood of three million dollars. The school district was approximately half the size of Jasper County

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School Districts three thousand student population. I became interested because the
California school districts demographics for free and reduced lunch population was
very similar to Jasper County.
The second selling point was that VNCI was promoting a special NABSE bonus
package of free telecommunication equipment. The school district would receive as
in-kind donations to be used as the school districts 15% match (district had at this
time 85% free and reduced lunch program). The bonus package included a 33 inch
TV monitor for each classroom, pan-tilt-zoom cameras, 400 computers, 12 laptop
computers, 100 teacher workstations, etc. (see Exhibit B). During the presentation
at the NABSE Conference, VNCI agreed to assist any school district that needed
help with the application process. After the session, participants returned to the
lobby and completed the first phase of the application process, Form 470.
Upon my return from the NABSE Conference in Nashville, Tennessee, I turned
the project over to Michael Duncan, the school districts Director of Technology. As
we continued throughout the school year, the Director of Technology, along with
VNCI and NEC staff, filed the other necessary paperwork.
SCHOOL YEAR 2000-2001

After notification of the E-Rate subsidy awarded to Jasper County, Judy Green,
VNCI representative, and Gerard McNulty made a presentation to the Jasper County Board of Education (see Exhibit C). At this meeting, the focus seemed to change
from VNCI to NEC. As a matter of fact, Gerard McNulty announced that Ken Morrison would be the onsite manager for NEC and Jonathan James for VNCI. These
individuals worked with Michael Duncan, Jasper County Director of Technology, in
completing the application process and designing the system.
Believing everything was legitimate, Michael Duncan informed me periodically on
the status of the project. Michael Duncan resigned from the school district on June
25, 2001 due to health reasons.
SCHOOL YEAR 2001-2002

Early in the 2001-2002 school year, I was contacted by George Marchelos, VNCI
representative, to recommend him to Eleanor Adams, Director of the Salkehatchie
Consortium, to present the E-Rate program to the other superintendents using Jasper as a model for acquiring E-Rate funds. As I recall, George Marchelos and Judy
Green presented the program to the consortium superintendents on November 27,
2001 (see Exhibit D).
Ed Sauls was brought in to replace Michael Duncan and found that most of the
VNCI video-conferencing equipment did not work properly or was not working at
all.
SCHOOL YEAR 2002-2003

Attorney Karen Jones, U. S. Department of Justice, came to Jasper County to investigate the E-Rate subsidy that was allocated to Jasper County. I shared with her
what I knew about the program, basically the information communicated in this
document.
SCHOOL YEAR 2003-2004

On July 30, 2003, I was subpoenaed to appear before the United States District
Court Eastern District of Michigan Grand Jury. I gave the same testimony as outlined in this document and what was shared with Attorney Jones.
After receiving notice that NEC pleaded guilty and agreed to pay restitution and
supply Jasper County School District with eighteen months of free maintenance
services, we are still trying to negotiate a workable contract.
SUMMARY

I believe it is vital that the E-Rate program continue although the application
process seems to be complicated and burdensome. After learning more about the ERate program over the past three years and our school districts involvement in the
investigation of E-Rate, I feel the following problems were present:
1. VNCI offered Jasper County a Bonus Package with equipment that was ineligible
for E-Rate funds.
2. VNCI as a provider of video-conferencing equipment assisted with the application
process Form 470 in Nashville, Tennessee.
3. Excessive equipment, such as a server in every classroom, probably was not necessary.

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4. VNCI/NEC agreeing not to charge the school district the 15% match (85% free/
reduced lunch), the match would be the in-kind NABSE Bonus Package donation.
5. I believe VNCI/NEC may have been involved in the RFP and bid process, which
was handled by the Director of Technology.
It appears that large companies, such as VNCI/NEC, have been going around the
country offering solutions to school district technology problems and taking advantage of the E-Rate program.

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Mr. WALDEN. Let me call the Subcommittee on Oversight and Investigations back to order, and we now have our third panel ready
to go, including our witness by video. We have Mr. Charles Tafoya,
superintendent, El Paso Independent School District; Ms. Sharon
Foster, technology information systems director; Mr. Ruben
Bohuchotdid I say that rightchief technology officer, associate
superintendent, Dallas Independent School District; Ms. Paula
Glogovac, former E-rate consultant to Sun Microsystems; Mr. Nathaniel Hawthorne, general counsel, Alpha Telecommunications,
Incorporated; Mr. Christopher G. Caine, vice president, Government Programs for IBM, accompanied by Mr. Mike Pratt.
And you are aware the committee is holding an investigative
hearing and when doing so has had the practice of taking testimony under oath. Do you have any objection to testifying under
oath? Let the record show they all indicated no.
The Chair then advises you that under the rules of the House
and the rules of the committee you are entitled to be advised by
counsel. Do you desire to be advised by counsel during your testimony? Mr. Bohuchot, the answer is yes and could you identify your
counsel, please, or have your counsel come up to one of the microphones? Please make sure it is turned on. It is not
MS. JALLOH. I am sorry, my name is Joni Jalloh. I am an attorney for Dallas ISD here with Mr. Bohuchot.
Mr. WALDEN. Okay. Thank you. Ms. Foster, do you wish to be
represented by counsel?
Ms. FOSTER. Yes.
Mr. WALDEN. And your counsel, please identify yourself, sir.
Mr. PINE. Clyde Pine on behalf of Ysleta Independent School District.
Mr. WALDEN. Okay. And lets see, Ms. Glogovac?
Ms. GLOGOVAC. No.
Mr. WALDEN. Do not wish to be represented by counsel. Mr.
Hawthorne?
Mr. HAWTHORNE. No.
Mr. WALDEN. The answer is no. Mr. Caine?
Mr. CAINE. Yes.
Mr. WALDEN. And your counsel, sir?
Mr. CAINE. Biz van Gelder.
Mr. WALDEN. Sorry, could you say that again?
Mr. CAINE. Ms. Biz van Gelder.
Mr. WALDEN. Thank you. And Mr. Pratt?
Mr. PRATT. It would be the same.
Mr. WALDEN. Okay. And lets see, witness in the video is Mr.
Tafoya. Mr. Tafoya, do you wish to be represented by counsel?
Mr. TAFOYA. Yes.
Mr. WALDEN. And your counsels name?
Mr. SOFFI. Anthony Soffi.
Mr. WALDEN. Thank you, sir. In that case, lets see, in that case,
if you would, the witnesses, rise and raise your right hand, I will
then swear you in.
[Witnesses sworn.]
Mr. WALDEN. Let the record show they all indicate, yes, they do.

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So you are now under oath, and you may now give a 5-minute
summary of your written statement. Mr. Tafoya, we are going to
start with you this afternoon.
TESTIMONY OF CHARLES TAFOYA, SUPERINTENDENT, EL
PASO INDEPENDENT SCHOOL DISTRICT; RUBEN BOHUCHOT
CHIEF
TECHNOLOGY
OFFICER,
ASSOCIATE
SUPERINTENDENT, DALLAS INDEPENDENT SCHOOL DISTRICT;
SHARON FOSTER, TECHNOLOGY INFORMATION SYSTEMS DIRECTOR, YSLETA INDEPENDANT SCHOOL DISTRICT; PAULA
GLOGOVAC, FORMER E-RATE CONSULTANT TO SUN MICROSYSTEMS; NATHANIEL HAWTHORNE, GENERAL COUNSEL,
ALPHA
TELECOMMUNICATIONS,
INCORPORATED;
AND
CHRISTOPHER G. CAINE, VICE PRESIDENT, GOVERNMENT
PROGRAMS, IBM, ACCOMPANIED BY MIKE PRATT

Mr. TAFOYA. Thank you. Mr. Chairman, thank you for the opportunity to speak with you today. As indicated earlier, my names is
Charles L. Tafoya. I am the superintendent of the El Paso Independent School District and in that capacity I have decided to
present a short statement on behalf of the district for the hearing.
We also have provided you a much more detailed statement, which
is available, again, at your convenience.
Although I was not superintendent during most of the relevant
period, I have some familiarity with the program. The district is
the largest school district within the El Paso, Texas County in far
west Texas, along the border of New Mexico and Mexico. El Paso
is primarily an Hispanic city with a population of over 600,000 students. The district is a poor school districtI am sorry, with over
600,000 residents, not students. The district is a poor school district with many poor students. About 70 percent of the districts
students are eligible for free and reduced lunches under Federal
law, though many of its schools have a much higher proportion.
As one can readily see, the district students are extremely poor
and in great need of benefits from the projects to be completed
using E-rate funding. Relatively few students within the district
have access to computers at home, much less access to educational
resources through the Internet. For many district students, the
school computers are the only computers to which they have access.
The digital divide is a major problem within the district, and, unfortunately, many of its students are on the wrong side of that divide.
The district has been a beneficiary of the E-Rate program since
its inception. In year 4 of the program, the district received an
award of approximately $65 million. That was a major grant, and
the district was ecstatic about it. The award was made several
months into year 4 and the district had less time than expected to
complete the projects. Those year 4 projects were a major undertaking for the district. The district devoted significant financial and
manpower resources of its own to the projects. The projects were
timely completed and implemented by the district and the service
provider, IBM.
Principally, though, some special contract provisions with IBM
I am sorry, principally through some special contract provisions
with IBM, the district was able to save money and was in fact able

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to return over $9.3 million from its funding while still completing
the projects.
The district sought E-rate funding again in year 5 of the program
but a significantly lower amount. That is the year in which problems with the program came to light in a major way. Unbeknownst
to the district, the Request for Proposal developed and used by the
district for year 4 was used as a model by school districts throughout the country. At almost all of those other districts, IBM was the
successful vendor.
An issue arose as to whether that Request for Proposal was in
full compliance with program rules. The FCC ultimately concluded
that the RFP model was improper but acknowledged the ambiguity
of the rules and good faith of the districts. The district was, and
remains, adamant that its E-rate projects should be performed for
a fair price and with the best value for the dollar.
The district is responsible for its pro rata contribution in the
event of program funding for a project. The district contribution,
though, does not reflect all of the true costs that the district E-rate
awarded. Specifically, if a particular E-rate project is awarded program funding, the district must not only contribute its pro rata
share but must also pay for the computers and other ineligible
hardware necessary to use the eligible services under the project,
for additional staff to handle installation and operation of the
project and for additional training in related areas to best utilize
the resources of the project.
In addition, the district feels strongly that technology and other
resources at its various schools is equitable. Consequently, the district must pay for similar ineligible projects similar to an approved
project at schools ineligible for E-rate funding. Accordingly, the districts contribution in the event of program funding is actually
much greater than pro rata contribution.
The district is very thankful for E-rate funding that it has previously received. That funding has provided immeasurable benefits
to students of the district. The written statement addresses those
in more detail. By way of example, a major benefit of the program
funds for El Paso ISD teachers and students was acquisition of a
computer network and connectivity to and amongst campuses. Another residual benefit is exactly being realized as I speak to you
through the ability to have been connected to the El Paso Community College from where this broadcast is being projected. The network required cabling and wiring in schools and provision of specialized network electronics. Using program funds, in combination
with the districts own resources, the network was installed and
implemented. One cannot over emphasize the point that, without
program funds, it would have taken many, many years for the district to create and complete such a network across the district. Indeed, due to the time delays that would have been involved, the attendant issues of obsolescence in the meantime, it is indeed questionable if the network would have ever been fully completed and
compatible.
The district believes that its experience in this regard has been
shared by many school districts across the country. The primary
benefit from the program was high-speed Internet access. The
funding not only allowed many more students to gain access to the

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Internet, it also committed our students to expand their educational experience. E-rating funding has permitted the district to
complete needed projects in the technology area in an effort to provide its students with an enhanced opportunity for success in the
future. To be clear, through program funds, the district did not
seek to achieve and did not achieve a technology advantage over
other school districts. Instead, the district sought to use such funding to catch up to other districts.
Although thankful for the funding from the program, the district
has experienced frustration with the program as more fully outlined in the written statement. These frustrations primarily involve
ambiguities in the rules and the length of delays in making
awards, which make it difficult for school districts to properly handle technology projects. The district has learned a number of lessons from the program participation. These lessons learned are
likely to apply to many other school districts. The written statement addresses those in greater detail.
I did want to briefly focus on a few of those related to the issues
of preparedness and commitment. A district seeking E-rate funds
needs to ensure that it has properly planned for the projects, is
ready to manage the installation and completion of the projects and
is prepared to manage the actual usage of the projects, after completion. Each of these steps takes a major commitment by the district. For instance, beyond the technology plan required under the
program, a school district needs to do a comprehensive review and
analysis of its education needs, various technology solutions to
meet those needs, compatibility and structure issues as well as sustainability issues. Merely getting the latest and the greatest system may not be appropriate if it is not compatible with existing
technology, it does not meet the actual and structural needs or cannot be sustained in the future.
Moreover, in order to ensure that E-rate projects actually have
a direct positive effect in the classroom, a school district should expect to spend substantial sums on teacher training, staff, and
again, preparedness; equipment and other ineligible items under Erate. In short, a program participant, in order to fully enjoy the
benefits of program projects, should make a greater commitment of
its own staff, money and other resources in determining its technology needs, preparing and designing projects, overseeing and supervising project installation and ensuring implementation of the
projects.
We believe that the district acted reasonably, in good faith, within legal guidelines. Although its efforts were good, the district believes there was room for improvement. It is working to address
those issues. The district believes that the E-Rate program is a
good program and should be retained. Some reforms, though, are
needed. The written statement discusses those in more detail as
well.
The district believes, in conclusion, that notwithstanding the
problems, the program has been very successful in bringing much
needed technology to school districts across the country. Such technology has brought great benefits to the students involved. Thank
you, Mr. Chairman.
[The prepared statement of Charles Tafoya follows:]

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PREPARED STATEMENT OF CHARLES TAFOYA, SUPERINTENDENT, EL PASO
INDEPENDENT SCHOOL DISTRICT
INTRODUCTION

Mr. Chairman, thank you for the opportunity to speak to you this morning. My
name is Charles Tafoya. I am the Superintendent of the El Paso Independent School
District (El Paso I.S.D.), I have been asked to provide this statement on behalf
of El Paso I.S.D. for this hearing of the House Energy and Commerce Committees
Subcommittee on Oversight and Investigations entitled Problems with the E-Rate
Program: Waste, Fraud, and Abuse Concerns in the Wiring of Our Nations Schools
to Internet.
El Paso I.S.D. welcomes the Subcommittees interest in the E-Rate Program (the
Program or E-Rate) of the Federal Communications Commission (the FCC),
and administered by its Schools & Libraries Division (the SLD) and the Universal
Service Administrative Company (USAC), and believes that Congressional hearings reviewing the Programs good points and bad points are overdue. Such a review
should generally be done with any federal program on a periodic basis. On the other
hand, we admittedly would have preferred that El Paso I.S.D.s own participation
in the Program not be a focus of this Subcommittees review.
Although I was not Superintendent at El Paso I.S.D. during the most of the relevant periods discussed below [becoming interim Superintendent during 2002, and
Superintendent in January 2003], I am or have become familiar with El Paso
I.S.D.s participation in the Program.
I have attached a statement from the El Paso I.S.D. website describing my background, as well as a copy of my curriculum vitae.
The final page of this written statement includes one-page summary of the major
points of this written statement.
I also intend to present an oral presentation of five minutes or less at the hearing.
Due to the time limitations for such presentation, as well as for my answers to questions from members of the Committee, and the consequent inability to provide detailed, properly nuanced and articulated presentations and responses, my oral testimony at the hearing is and will be subject to, and qualified, supplemented, and
clarified by, this written statement.
BACKGROUND OF THE EL PASO COMMUNITY

Before proceeding further, it is important for you to understand the circumstances

which El Paso I.S.D. faces in its daily efforts to educate and prepare its students
for the future.
El Paso I.S.D. is the largest school district within El Paso County, Texas. Its
school boundaries encompass much of the City of El Paso. El Paso is located at the
far western end of Texas, wedged between Mexico and New Mexico. In fact, El Paso
is so far west in Texas, that it is actually closer to Los Angeles than the eastern
border of Texas. It is also said that Texarkana is closer to Chicago than El Paso.
El Paso is located in the Chihuahuan desert, with the Franklin Mountains [being
the southern end of the Rocky Mountains in the United States] bisecting the city.
The Rio Grande river flows south through a portion of El Paso, and then becomes
the border with New Mexico, and ultimately becomes the border with Mexico [which
river border continues to the Gulf of Mexico].
The El Paso community enjoys a long history. Although the first Spanish arrived
in the area in the late 1500s [including what is asserted to be the first Thanksgiving ceremony in North America in 1598 by Juan de Onate and his colonists], the
original Spanish settlements in El Paso were not established until the 1680s.
The population of El Paso County is approximately 680,000. The city of Cuidad
Juarez, Mexico borders El Paso. Cuidad Juarez has a population believed to be from
1,000,000 to 1,500,000 persons. To be clear, unlike the San Diego-Tijuana border
area, El Paso and Juarez are actually physically next to each other, separated only
by the Rio Grande. The bridges across the Rio Grande handle northbound [i.e. into
El Paso] traffic of about 15,000,000 vehicles and 9,000,000 pedestrians per year.
Demographically, El Paso is a primarily Hispanic city. It is believed to have the
largest proportion of Hispanics in its population amongst cities over 500,000 in the
country. Approximately 78% of its population is described as Hispanic according to
census records. About 17% of its population is non-Hispanic whites, with AsianAmericans and African-Americans constituting only small portions of the population.
El Paso I.S.D. is a poor school district with many poor students, and each have
many needs, especially in the technology area. About 70% of El Paso I.S.D.s students are eligible for free and reduced lunches under federal law, though many

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of its schools have a much higher proportion. Indeed, at close to two-thirds of El
Paso I.S.D.s schools, more than 90% of the students are eligible for free and reduced lunches. The 2000 Profile of Selected Economic Characteristics issued by the
United States Census Bureau estimates the per capita income for 1999 in the El
Paso, Texas area at $14,388 per year. For comparison, according to the same survey,
the annual per capita income for 1999 in the United States was $21,587, for the
State of Texas was $19,617, and for the Washington D.C. area was $28,659.
As one can readily see, El Paso I.S.D. students are extremely poor, and in great
need of the benefits from the projects to be completed using E-Rate funding. Relatively few students within El Paso I.S.D. have access to computers at home, much
less access to educational resources through the Internet. For many El Paso I.S.D.
students, the school computers are the only computers to which they have access.
The digital divide is a major problem within El Paso I.S.D., and unfortunately
many of its students are on the wrong side of the divide.
EL PASO I.S.D.S HISTORY WITH E-RATE PROGRAM

The rules and objectives of the Program have changed over time. Initially, the
Program appeared to be used primarily for reimbursement of school districts for
telecommunication expenses. Later, cabling for computer networks became popular
under the Program. More recently, E-Rate funding for other sorts of so-called internal connections have been commonly sought. The problems with the Program that
prompted these Subcommittees hearings appear to have involved this final category.
El Paso I.S.D. has been a beneficiary of the Program since its inception. In Year
1 of the Program 11, El Paso I.S.D. sought funding for telecommunications and internal connections, and received an award of $2,669,822 from the SLD. For Year 2 of
the Program, El Paso I.S.D. was granted funding of $6,463,713 for telecommunications, internal access, and internal connection. In Year 3 of the Program, El Paso
I.S.D. received $1,422,392 in funding for telecommunications, internal access, and
internal connection. El Paso I.S.D. was awarded $65,683,831 in E-Rate funding in
Year 4 of the Program, for a variety of telecommunications, internal access, and internal connections projects. El Paso I.S.D.s request for Year 5 E-Rate funding of
$46,094,835 was denied by the SLD. Upon appeal, in light of confusion over Program rules, in December 2003, the FCC permitted El Paso I.S.D. and a few other
districts to re-submit funding applications for Year 5. That has been done, and such
new application is now pending for $1,433,932. El Paso I.S.D.s funding request in
Year 6 of the Program for $10,352,203, for both telecommunications, internal access,
and some internal connections, was unexpectedly denied by the SLD on an alleged
technicality. El Paso I.S.D. strongly disputes that contention and has appealed the
SLDs decision to the FCC. Looking closely at those circumstances, one cannot help
but wonder whether retaliation against El Paso I.S.D. played a part in that denial.
That appeal is still pending. El Paso I.S.D. has also recently filed for funding under
Year 7 of the Program. $2,598,600 has been sought, in connection with telecommunications, high speed fiber network, and internal connection projects in Year
7.
The eligible campuses at El Paso I.S.D. under the Program currently consists of
3 high schools, 3 auxiliary campuses, 7 middle school campuses and 39 elementary
school campuses, for a total of 52 campuses.
EL PASO I.S.D.S PARTICIPATION IN YEAR 4 OF THE PROJECT

Since El Paso I.S.D.s participation in Year 4 of the Program unexpectedly and

unintentionally appears to have been a catalyst to problems nationwide in the subsequent funding year, further review of such participation [as well as that of Year
5] is in order.
To better understand the E-Rate funding process, an applicant must comply with
the following steps in order to be considered to have a complete application about
which a funding decision may be made: (1) the applicant must develop a technology
plan; (2) the applicant must file with the SLD a Form 470, describing the goods and
services it wishes to procure in accordance with its technology plan; (3) the SLD
then posts the Form 470 on its website, so that vendors interested in providing such
goods or services can contact the applicant, make a bid, and seek to become the provider of the same; (4) to the extent that state or local procurement laws apply to
the applicant, the applicant must comply with those laws, such as by issuance of
1 The nomenclature for the funding years in the Program has changed from Year 6, etc. to
Year 2003-2004, etc. This statement will generally use the former terminology, for convenience.

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competitive bid requests or requests for proposal; (5) the applicant reviews bids and
responses from interested vendors, under the Form 470 process and/or state or local
procurement laws; (6) the applicant must wait at least 28 days after filing of the
Form 470 in order to contract with a particular vendor, so that sufficient time is
permitted for vendors to respond or make bids; (7) the applicant selects the successful vendor to provide the goods and/or services under the Form 470; (8) the applicant enters into a contract with the successful vendor; (9) the applicant files a Form
471 with the SLD, in which it names the successful vendor as the service provider,
using the vendors unique service provider identification number or SPIN, for the
goods and/or services under the Form 470; and (10) the applicant then awaits any
decision by the SLD as to whether or not funding will be granted, and in what
amount, under the Form 471. If the SLD awards a grant of Program funds to an
applicant, the applicant must then file a Form 486, accepting such grant. Each applicant also is required, under Program rules, to pay a proportion of the charges
[often 10% or so] from the service provider, as a condition of participation.
During each year of the Program, El Paso I.S.D. has had a longstanding technology plan, as modified from time to time (the Technology Plan), upon which its
Program participation has been based. In other words, El Paso I.S.D. has sought
E-Rate funding for projects consistent with its Technology Plan. Importantly, El
Paso I.S.D. has not relied and does not rely solely on E-Rate funding to satisfy the
goals of the Technology Plan, instead using its own funds and other sources as
available. The E-Rate funding, however, has essentially permitted El Paso I.S.D. to
accelerate the timetables for completion of such projects, thereby providing the benefits of technology for more students.
In December 2000, El Paso I.S.D. posted a Form 470 for Year 4 of the Program
(the Year 4 Form 470), in accordance with Program requirements. The Year 4
Form 470 was posted through the SLD web-site. A hard-copy of the Year 4 Form
470 was signed by El Paso I.S.D. and forwarded to the SLD.
In December 2000, El Paso I.S.D. also issued its Request for Proposal No. 10100 entitled Strategic Technology Solution Provider (the Request for Proposal).
The first page of the Request for Proposal stated in relevant part as follows:
. . . This Strategic Technology Partnership agreement will include, but not be
limited to, E-rate funded projects. The selected vendor should be prepared to assist the District with all aspects of the E-rate process and should demonstrate
knowledge and experience in dealing with E-rate funded projects. All E-rate applications will be submitted using the successor bidders single SPIN number.
Vendors must provide their SPIN number as part of their response . . .
The Request for Proposal sought a vendor to provide integrated provision of goods
and services for El Paso I.S.D.s proposed E-Rate projects. This was somehow different than what El Paso I.S.D. had done in prior years. Due to part to the loss
of personnel experienced with the Program, more outside assistance from the vendor
appeared to be beneficial to El Paso I.S.D. Utilization of outside expertise is not inappropriate, especially in the area of technology.
It is unrealistic to expect school districts to have in-house expertise to understand,
plan, and identify the specific plans, specifications, and other details of projects of
seeking funding. Districts rarely have expertise to do so. The districts generally understand only what projects need to be done and the basic scope and outline of those
projects, but do not often know ahead of time the particular plans and specifications
for those projects [especially in the technology area where new technologies and
techniques come into play very quickly]. This is a very complicated field, and hard
for a district to keep track of state-of-the-art goods and services. If a district tried
to design a technology project completely on its own, including all plans and specifications, it would not necessarily design the most cost-effective project, and its design would likely include inefficiencies, waste, and obsolete items. Accordingly, it
makes sense for a district to seek systems integration expertise from a third party.
By way of example, one should keep in mind the analogy of an individual building
an addition to a house. In theory, a person could build the addition himself, but that
is very rare indeed since individuals almost never have the necessary expertise and
experience to do so. Instead, individuals generally do have in mind their basic needs
and desires for the addition [no. of bedrooms, no. of baths, approx. square footage,
one or two-story, exterior facing, style, etc.], but do not know all of the details [depth
of foundation slab, location of plumbing and electrical conduit, framing details and
techniques, etc.]. In addition, the homeowner generally does not know exactly how
the framing, plumbing, HVAC, electrical, and other systems of the addition can be
made compatible with those in the existing portion of the house. Of course, the
homeowner rarely creates the blueprints on his/her own. The homeowner instead
generally retains an architect and/or a homebuilder to prepare the blueprints, based
upon the homeowners basic needs and desires. Those blueprints are not completed,

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however, by the architect/contractor without significant input from the homeowner.
The homeowner usually reviews those plans and specifications with the architect/
contractor and suggests many changes. In that regard, price is an important consideration, and changes are made to the blueprints accordingly. The price of the project
is negotiated between the parties. The homeowner retains final control over the
plans and specifications, and the price, especially since the homeowner has the right
to end negotiations and seek a new builder, if necessary. As applied to the Program,
the homeowner is akin to a district seeking Program funding, the addition is akin
to the new projects desired to the existing technology at the district, the homeowners basic needs and desires of the homeowner are akin to the technology plan
adopted by district seeking Program funding, the plans and specifications as set
forth in the blueprints are akin to the details contained in the Form 471 filed by
such district, and the architect and contractor are akin to the service provider for
the district. Consequently, this general contractor approach seemed reasonable to
El Paso I.S.D. when adopted through the Request for Proposal.
The Request for Proposal was prepared by an El Paso I.S.D. employee, based upon
review of similar bid documents prepared by other school districts nationally as well
as substantial drafting on his own. Importantly, it was not prepared by any vendor,
and not based upon draft documents provided by any vendor.
The Request for Proposal was noticed by El Paso I.S.D. in newspaper notices, and
placed upon its web-site. El Paso I.S.D. provided copies of its Request for Proposal
to eleven different companies who requested a copy, not all ones who ultimately bid.
The deadline for submitting responses to the Request for Proposal was December
19, 2000, and responses were thereafter opened. Eight vendors [IBM, Amherst Computer, Diversified Technical Services, Kent Data Communications, ESEI, Southwestern Bell, Time Warner Cable, and Cervantes CC] responded to the Request for
Proposal in some form or fashion. The Year 4 470 did not generate any responses,
in and of itself.
An evaluation committee composed of El Paso I.S.D. Technology and Finance Department officials reviewed the responses and recommended IBM to the Board of
Trustees of El Paso I.S.D. At a Board meeting on January 9, 2001, the Board of
Trustees of El Paso I.S.D. selected IBM as the putative awardee under the Request
for Proposal, and thus, if a final contract [including pricing] was successfully negotiated and finalized, as the service provider for the El Paso I.S.D. projects for which
a Funding Year 2001 application was to be made.
Thereafter, IBM and El Paso I.S.D. entered into an IBM Customer Agreement
dated as of January 2001, with incorporated Statements of Work dated January
2001, as well as an Addendum to Customer Agreement for January 2001 SOWs (collectively, the Year 4 Contract). The Year 4 Contract had a one-year term, with
an option by El Paso I.S.D. to renew for two additional one-year terms. The Statements of Work included with the Year 4 Contract outlined in detail the projects to
be completed under the Program.
Importantly, the Year 4 Contract contained special provisions whereby El Paso
I.S.D. retained the right to select the ultimate providers of many services and products, through use of procurement requirements of Texas state-law (the Special Procurement Provisions). The Special Procurement Provisions are found within the Addendum to the Year 4 Contract. In this way, El Paso I.S.D. intended to minimize
the costs for such services and products, and thereby minimize the amounts of Program funding, and thus El Paso I.S.D.s pro rata contribution, ultimately required
to perform the desired E-Rate projects. El Paso I.S.D. insisted upon such terms, and
after challenging negotiations, was able to obtain IBMs consent to the same. It is
El Paso I.S.D.s understanding that it was the only district nationwide during Year
4 of the Program to obtain such special protection provisions from IBM, and one of
only two [the other being a sister district in El Paso County aware of such contract
terms] nationwide obtaining such provisions from IBM during Year 5 of the Program.
El Paso I.S.D. then filed a Form 471 for Year 4 of the Program (the Year 4 Form
471) with the SLD, as required.
El Paso I.S.D. later received a substantial award of funding from the SLD for
Year 4 of the Program for IC/IA Services and Telco Services. El Paso I.S.D. accepted
such funding, and the projects thereunder have been completed. This award was
dated September 28, 2001, for the Year 4 funding year beginning July 1, 2001. As
one can see, the award was not received until well after the beginning of the funding year in question.
Upon receipt of such award, El Paso I.S.D. recognized that, due to the SLDs
delays in making the grant, it had less time than originally anticipated to complete
the desired E-Rate projects. El Paso I.S.D. took a variety of internal steps to manage the construction of those projects, including retention of a consultant to act as

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overall project manager, looking out for El Paso I.S.D.s interests, as well as a commitment [often called upon] by its Board of Trustees to hold special meetings or take
additional efforts to take the necessary Board actions to complete the projects on
a timely basis. El Paso I.S.D.s Board of Trustees also made a substantial financial
commitment from the limited reserves of the District, to pay for its required share
of Program costs.
Ultimately, El Paso I.S.D. was able to complete the Year 4 projects on a timely
basis. Through use of the Special Procurement Provisions, El Paso I.S.D. was also
able to achieve costs savings and was able to essentially return significant funding
to SLD that was not needed to complete the projects in question. Through the Special Procurement Provisions, the pricing was capped at those set in the Form 471s,
but El Paso I.S.D. had the opportunity to obtain any better pricing later by the selection of subcontractors and/or suppliers through separate, later competitive procurement. With that better pricing, El Paso I.S.D. hoped to achieve additional savings. In fact, due in large part to the special procurement provisions of the Year
4 Contract, and otherwise due to its intent to ensure that its projects were limited
to critical needs, El Paso I.S.D. ultimately did not need to spend, and returned, over
$9.3 million from its Year 4 Program funding. In essence, El Paso I.S.D. obtained
desired and requested goods and services for a much lower price, and thus achieve
more bang for the buck as it intended. This conduct demonstrated El Paso I.S.D.s
continued commitment to avoid fraud, waste, and abuse in pricing, both for its own
benefit and the Program itself.
El Paso I.S.D. was and remains adamant that its E-Rate projects should be performed for a fair price, and with the most bang for the buck. El Paso I.S.D. is also
very concerned about sustainability of its technology projects for the long-term, and,
since Program funding from year to year cannot be guaranteed, El Paso I.S.D. needs
to ensure that any Project can be sustained without Program funding in the future.
Although El Paso I.S.D. sought to meet such goal with respect to all E-Rate projects,
in 20-20 hindsight, it feels that, due to ambiguities in and misunderstanding of Program rules, the so-called Help Desk portion of the maintenance statement of work
did not prove to be sustainable [contrary to El Paso I.S.D.s original intent and belief].
It is important to remember that El Paso I.S.D. is responsible for its pro rata contribution in the event of Program funding for a project. In the case of Year 4 funding, it alone represented a major financial commitment from El Paso I.S.D. That direct contribution, though, does not reflect all of the true costs to El Paso I.S.D. of
Program funding. Specifically, if a particular E-Rate project is awarded Program
funding, El Paso I.S.D. must not only contribute its pro rata share, but must also
pay for the computers or other ineligible hardware necessary to use the eligible
services under the project, for additional staff to handle installation and operation
of the project, and for additional training [not otherwise eligible] in related areas
to best utilize the resources of the project. In addition, El Paso I.S.D. feels strongly
that technology and other resources at its various schools be equitable; consequently, El Paso I.S.D. must pay for similar, ineligible projects, similar to an approved project, at other schools who are not granted Program funding due to a lower
free and reduced lunch level. In short, El Paso I.S.D. has to spend its own money
to ensure that each school, whether or not it received Program funding, has similar
resources. Accordingly, El Paso I.S.D.s contribution in the event of Program funding
is actually much greater than pro rata contribution. That alone is significant incentive for El Paso I.S.D. to seek cost-effective acquisition of the projects, which El Paso
I.S.D. has sought to do in each case.
EL PASO I.S.D.S PARTICIPATION UNDER YEAR 5 OF THE PROGRAM

Year 5 of the Program encountered many problems nationwide. In hindsight, it

appears that, based upon El Paso I.S.D.s large award in Year 4, many districts
across the nation prepared requests for proposal for Year projects almost identical
to the Year 4 Request for Proposal of El Paso I.S.D. El Paso I.S.D. was unaware
of those circumstances. It did share a draft of the Request for Proposal with a sister
district in El Paso County, Texas, Ysleta Independent School District; staff of local
districts commonly share bid documents or similar materials in an effort to avoid
unnecessary duplication of efforts.
Frankly, El Paso I.S.D. is somewhat upset that, without its knowledge or consent,
the so-called El Paso model was presumably pitched to other districts nationwide,
who ultimately selected a single vendor, resulting in what are now viewed by some
as abuses in the Program. That was not the intent of El Paso I.S.D., and it is very
concerned about being indirectly and unknowingly tied to such conduct.

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The nationwide problems with Year 5 of the Program also directly affected El
Paso I.S.D. For such Program year, El Paso I.S.D. filed a Form 470 for internal connections and related services, as well as for telecommunications services.
With respect to those telecommunication services, El Paso I.S.D. acquired services
from AT&T for long-distance service and local telephone service. Section 44.031(b)(4)
of the Texas Education Code authorizes school districts to acquire goods or services
under the catalogue purchase system under Section 2157.001 et. seq. of the Texas
Government Code. Under this catalogue purchase program, the DIR [being a Texas
state agency] creates a list of approved statewide vendors for specified goods and
services, after a process involving review of different pricing factors, among others.
This process essentially forces interested vendors to offer specially discounted prices
on a statewide-basis, in order to be listed as an approved vendor, in order to be able
to make sales to local governments across the state. The DIR itself advises vendors
on its website:
DIR expects to receive the vendors best pricing, since all state agencies, cities, counties, and other local governments, public school districts, and public colleges and universities can buy through the DIR contracts. Based on the states
anticipated volume, vendors need to offer DIR deep discounts from their list
price. Those discounts must apply to all DIR customers, regardless of their size,
which means that a small agency would receive the same base discounts that
a large agency would receive, although entities buying large quantities should
be able to negotiate deeper discounts through the DIR contracts.
The catalogue purchasing program, under state law, supersedes any requirement for
a local district to perform a second competitive procurement [insofar as the DIR has
already done a competitive procurement previously]. AT&T was/is an approved vendor on the DIR catalogue. The telecommunication services of AT&T as offered in the
DIR catalogue were tariffed services. El Paso I.S.D. approved AT&T as the provider
of such services for Year 5 of the Program, based upon the procurement under the
DIR catalogue.
With respect to internal connections and related services for Year 5 of the Program, after review and analysis by staff and approval by the Board of Trustees at
a meeting on January 8, 2002, El Paso I.S.D. decided to renew its relationship with
IBM as service provider for Year 5. As noted above, El Paso I.S.D. posted a new
Form 470 for Year 5, though not required to do so under Program rules due to the
renewal. Nevertheless, El Paso I.S.D. wanted to inquire as to any interest from
other possible vendors, in an effort to determine whether or not renewal was costeffective and should take place. No responses or inquiries were received by El Paso
I.S.D. from vendors to the 2002 Form 470 for IC/IA Services sufficient to convince
El Paso I.S.D. not to renew its existing contract with IBM; El Paso I.S.D. invited
further responses from any such inquiring vendor, but substantive information or
materials were not received on a timely basis, if at all. During an internal process,
El Paso I.S.D. itself reduced the funding levels it would seek from the Program for
Year 5, due to El Paso I.S.D.s desire to reduce the scope of the projects thereunder.
Thereafter, El Paso I.S.D., in consultation with IBM, finalized the specifications for
the specific goods and services necessary for completion of such internal connections
and related projects. The funding requested for such projects for Year 5 of the Program represented a significant reduction in amounts as requested by El Paso I.S.D.,
and as awarded by SLD, for Year 4.
After further negotiations with IBM, El Paso I.S.D. and IBM entered into Statements of Work dated January 2002, as well as an Addendum to Customer Agreement for January 2002 SOWs (collectively, the Year 5 Contract). The Year 5 Contract also contained similar Special Procurement Provisions. The Year 5 Contract
effectively represented the renewal and extension of the IBM Customer Agreement,
to cover Year 5 projects and new statements of work.
As noted above, funding for El Paso I.S.D. under Year 5 of the Program was denied by the SLD. Such denial was dated March 10, 2003, although Year 5 of the
Program actually began on July 1, 2002. In other words, El Paso I.S.D. did not learn
of a decision on its Year 5 funding until about three months before Year 5 ended.
El Paso I.S.D. appealed the decision of the SLD to FCC. By FCC Order 03-313
dated December 8, 2003 in Matter of Request for Review of the Decision of the Universal Service Administrator by Ysleta Independent School District, et. al., CC Docket Nos. 96-45 and 97-21 (the Ysleta Order), the FCC effectively upheld the denial
of Year 5 funding, but granted a waiver of Program rules to permit El Paso I.S.D.
and several other school districts to re-file its application for Year 5 funding under
certain conditions. El Paso I.S.D. believes that its Year 4 and Year 5 procurement
for a service provider under the Program complied with applicable state and federal
law. Nevertheless, the FCC effectively found that certain aspects of such procurement did not comply with Program rules. On the other hand, the FCC implicitly

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admitted that ambiguities and/or past course of dealing might have confused districts as to such legal issues, and therefore permitted re-filing of the applications.
El Paso I.S.D. has done so, though its requested figure is much less than before,
due to reductions in market prices, obsolescence of several projects, and completion
of all or part of some projects using other resources, among other things. El Paso
I.S.D. still believed that its conduct was appropriate and not in violation of Program
rules. Nevertheless, in the circumstances El Paso I.S.D. [as well as the other affected districts] decided not to appeal the Ysleta order to the courts and to instead
take advantage of the FCCs allowance of re-filing of the application at issue. The
relief permitted by the FCCs ruling was an acceptable compromise in the districts
view, and the time and expense of protracted litigation was not justified.
BENEFITS TO EL PASO I.S.D. STUDENTS FROM E-RATE FUNDING

El Paso I.S.D. is very thankful for the E-Rate funding that it has previously received. That funding has provided immeasurable benefits to students of El Paso
I.S.D. We believe it is important for Congress to recognize the wonderful things that
have been accomplished at the front lines of education, due to its funding of the Program.
In Year 1 of the Program, the awarded Program funds allowed El Paso I.S.D. to
provide 1,263 local long-distance service connections for telephones in El Paso I.S.D.
and provided high-speed Internet access to 2,479 computers at El Paso I.S.D. In addition, such funding allowed eligible campuses to have connections to the Internet
and provided structural cabling to all such campuses. With Year 2 Program funding,
El Paso I.S.D. was able to continue to provide and supply high-speed Internet access
to all the EPISD campuses and to provide additional 1,800 local long-distance service connections for telephones. El Paso I.S.D. used Year 3 Program funding to continue to provide telecommunications services to EPISDs telephones and high-speed
Internet access to computers. El Paso I.S.D. also was able to obtain new telephone
connections for campuses, upgrade networks at all eligible campuses for new telephone systems, and to install additional structural cabling to eligible campuses. El
Paso I.S.D. was also able to procure network interface cards and upgrade network
switches for all eligible campuses. With Year 3 funding, El Paso I.S.D. was in addition able to procure maintenance and hardware support services for network electronics. In Year 4 of the Program, El Paso I.S.D.s award was used to continue to
provide telecommunications and Internet access with El Paso I.S.D.s telephones
and computers. It also provided an entire redesigned of El Paso I.S.D.s computer
network. The wide area network became a dedicated fiber network as part of this
redesign. Structural cabling was also added to eligible campuses and horizontal
cable to all campuses was upgraded with enhanced category 5 cable. Fiber optic
lines were added to telecommunications lines at eligible campuses and network electronics were upgraded with switches and related components. El Paso I.S.D. also received a new email system for its employees. It also procured new application service. The Year 4 funding also provided funding for virtual schooling, technology-instruction integration, and technology planning.
A major benefit of the Program funds for El Paso I.S.Ds teachers and students
was acquisition of a computer network and connectivity to and amongst campuses.
The network required cabling and wiring in schools and provision of specialized network electronics. Using Program funds, in combination with its own resources, the
network was installed and implemented. One cannot over-emphasize the point that,
without Program funds, it would have taken many, many years for El Paso I.S.D.
to create and complete such a network across the district. Indeed, due to the time
delays that would have been involved, and the attendant issues of obsolescence in
the meantime, it is indeed questionable that the network would have ever been fully
complete and compatible. El Paso I.S.D. believes that its experience in this regard
has been shared by many school districts across the country.
A related benefit from Program was high-speed Internet access. The prior Internet
access provided speed of 1.5 mps. Program funding permitted El Paso I.S.D. to provide such access both through installation of appropriate cabling and network electronics, as well as provision of Internet access services. There was a major problem
with campuses using the old system to do classroom work assignments through the
Internet or other network resources because it was too slow. Slow speed was due
to the saturation of T-1 line that had been providing service. Essentially, over time
classroom Internet usage rates increased significantly at El Paso I.S.D. and demand
on the system increased for that reason and due to increasing file sizes. The number
and size of files and presentations available for educational purposes also increased
significantly. In other words, more websites often had more large, video or multimedia presentations available for review, as opposed to previous times. Using the

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old Internet access, it was difficult, if not impracticable, for El Paso I.S.D. students
to fully utilize such educational resources. Importantly, due to the slowness of the
old system, it at times was difficult for students to even getting any access to the
Internet and many stopped trying to do so. The old system was causing a severe
detriment to the education of El Paso I.S.D. students. It was no longer working and
El Paso I.S.D. students were beginning to fall further behind other students in technology matters as a result. It is also important to realize that the Texas Essential
Knowledge in Skills requirements include technology as part of the required curriculum for students in Texas. In addition, teacher evaluations are based upon their
use of technology. State-wide demands were also placing additional pressure upon
El Paso I.S.D. to increase the use of technology. The old system was unable to meet
that challenge.
Fortunately, due to Program funding, this challenge was in fact met. In addition,
the funding not only allowed many more students to gain access to the Internet, it
also permitted such Internet experience to be reasonably practicable. Furthermore,
Program funding also included web and file service that permitted students to learn
high-tech skills involving developing websites and in sharing research. That was
something that could not have been done using the El Paso I.S.D. own resources.
El Paso I.S.D. has also been pleased with the result from its acquisition of video
carts with Program funding. Indeed, El Paso I.S.D. since then has purchased many
more video carts, using its own resources, and is in process of acquiring more. El
Paso I.S.D. is seeking to make sure that each campus has at least one such cart.
These specialized video carts allow up to eight interactive sessions to occur
simulteously. There are often used for video-conferencing whereby one teacher can
provide instruction to classes at multiple schools. It is also used to permit multiple
classrooms to have interactive sessions to hear and talk to distinguished visitors.
In essence, each cart allows broadcasting from a single site to other sites across the
district, as a form of distance learning. In addition, the El Paso I.S.D. broadcast studio can provide broadcasts through the video carts to particular classrooms districtwide. The video carts are very popular with both teachers and students and have
proven to be a great learning tool. They have allowed El Paso I.S.D. to share the
resources of better or specialized teachers with more students. It has had a dramatic
effect at the classroom level.
As you can see, E-Rate funding has permitted El Paso I.S.D. to complete needed
projects in the technology areas, in an effort to provide its students with a fair opportunity to succeed in the future. To be clear, through Program funds, El Paso
I.S.D. did not seek to achieve, and did not achieve, a technological advantage over
average school districts. Instead, the district sought to use such funding to catch up
to those other districts. Although El Paso I.S.D. has not been able to fully bridge
the gap in this regard, E-Rate funds have permitted it to at least come within
range of being able to do so. Without the Program funds, El Paso I.S.D. and similarly-situated participants would technologically now be so far behind a typical
school district so that it could never expect to catch up as a practical matter.
El Paso I.S.D. sought the Program funding to aid the eligible schools. Such funding, however, though has also provided incidental [and initially unintended] benefits
district-wide and throughout the El Paso community. By way of example, the network advances achieved with Program funding also make it possible for El Paso
I.S.D. to comply with certain of the Adequate Yearly Progress and No Child Left
Behind Act requirements. With the network, there also can be greater accountability at the campus level, better review of campus-level data and information, better communication between central office and campuses, and greater sharing of resources amongst campuses. In addition, due to the increased connectivity afforded
from E-Rate projects in combination with El Paso I.S.D.s own resources, the district
was able to utilize distance-learning to reach students and parents for educational
programs. Using one such program, over 225 virtual learning students were able
to complete high school requirements and graduate from El Paso I.S.D. this year;
those young adults [principally from areas of eligible schools] would not otherwise
have received high school diplomas, with resultant detriment to their own lives and
those of their families, to the local economy, and to the local community. El Paso
I.S.D. has also developed the Orion project with the local university, community college, and others to provide dual enrollment as well as specialized training in No
Child Left Behind Act and other issues, for both students and teachers. The goal
is to create a county-wide educational network to provide educational growth, and
hopefully economic growth for the depressed local economy. Rather than simply
have a collection of disparate, independent centers of basic, secondary, or higher
education, El Paso I.S.D. and these other educational bodies are seeking to establish
El Paso County as an educational community, through creative and cost-effective
sharing of technological information and resources. Again, these benefits were not

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sought from the funding, but El Paso I.S.D. has been able to leverage the Program
funds using other resources in order to work on this greater good for the community
as a whole. El Paso I.S.D. believes that a principal purpose of the Program was to
benefit local communities, through provision of funding to aid the technology programs of schools.
It is important to raise this issue of leveraging the Program funds. As discussed
in detail elsewhere, Program funds are limited in amount and also may be legally
expended only on certain sorts of technology goods and services; therefore, districts
must commit significant resources on their own in order to ensure proper implementation of the projects. Consequently, Program funds must be leveraged by a grantee-district with other sources of funds. In addition, a project constructed with Program funds also should be leveraged by a grantee-district with other non-Program
projects, in order to meet technology needs. El Paso I.S.D. recognizes that the Program was not created to fulfill all technological needs of school districts, but instead
provides a substantial down payment to be leveraged by the districts.
FRUSTRATIONS WITH THE PROGRAM

Although thankful for the funding from the Program, El Paso I.S.D. believes it
is also important for Congress to understand frustrations that El Paso I.S.D. has
had with the operation and administration of the Program. Those frustrations are
believed to be shared with many other school districts across the country.
Probably the primary concern of El Paso I.S.D. and other school districts revolves
around an inability to fully understand the ever-changing Program requirements,
based upon changes in the actual rules as well as changes in SLDs interpretation
of such rules. As El Paso I.S.D. and many other districts have learned, doing something the same way as successfully done in the prior funding year, even in the absence of any formal Program rule changes, is no guarantee that the SLD will approve such approach in the current funding year. Indeed, that is the principal issue
with El Paso I.S.D.s Year 6 appeal. Furthermore, many have complained about the
SLDs previous apparent refusal to make its manual of eligibility requirements for
goods and services available to the public, leading many well-meaning districts to
inadvertently seek ineligible goods or services or misunderstand those requirements.
El Paso I.S.D., of course, recognizes that some annual changes in SLD policy are
probably warranted, but wishes that such changes are announced publically and in
sufficient time for districts to comply with the same. Furthermore, the Program
rules have proven to be vague and ambiguous on a large number of points, making
it difficult for districts to seek compliance. For example, in El Paso I.S.D.s own experience, different persons with the SLD, different E-Rate consultants, different
service providers, different attorneys, and different staff persons will have differing
interpretations of particular Program rules. If nationally-recognized E-Rate experts
in Washington, D.C. in constant communication with SLD officials do not agree
upon rule interpretations, it is difficult, if not impossible, to expect a typical school
district elsewhere in the nation to fully and properly understand what is expected
of it under the rule.
Another major frustration with the Program arises from the SLDs continued
delays in making funding decisions. This frustration is believed to be shared by
many, if not most, applicants. A funding year under the Program runs from July
1 of one year to June 30 of the following year. Generally, a recipient of Program
funding must complete the project in question by such June 30 date [although short
extensions in certain categories have been permitted by the SLD]. The SLD, however, has routinely issued decisions on Program funding requests long after the beginning of the funding year. For instance, in Year 4 of the Program, El Paso I.S.D.
was notified of the SLDs decision almost three months into the funding year in
question. In Year 5, the decision of the SLD was received about nine months after
the commencement date of the funding year. For Year 6 of the Program, El Paso
I.S.D. received notice of the SLD decision about six months after the start of the
funding year. In short, the SLD has issued its decisions after the funding year begins, and not beforehand. As a result, the districts are hard-pressed to adequately
and properly complete the funded projects, with appropriate oversight.
Such delays in decision-making also wreak havoc on a school districts ability to
plan technology projects, whether or not based upon E-Rate funding. A districts
technology projects for a particular funding year are generally dependent upon what
Program funding was awarded in the prior funding year. If such funding was denied
in whole or part, the district might need to re-urge such request in the next funding
year. By way of example, using a pipeline analogy to reflect the linear nature of
many projects, a district cannot be expected to request funds to build mile 5 of a
pipeline without knowing whether mile 4 of the pipeline has been funded for con-

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struction. Due to the SLDs late announcement of funding decisions, districts have
little time to develop projects for the next funding year before Form 470s for that
year must be posted. In El Paso I.S.D.s case, it has often learned of the SLD decision on a particular funding year after its Form 470 for the next funding year is
due. El Paso I.S.D.s experience is not unique.
Similarly, many technology projects must be integrated in order to be usable. It
is not uncommon for a district to plan a particular project eligible for Program funding, along with a related ineligible project using its own funds. Oftentimes, the timing of such projects must be coordinated. For example, a districts plans to acquire
computers for a classroom is necessarily linked to its request for eligible cabling to
classrooms. With the delays in decisions on Program funding, the districts plans for
the other projects are delayed and disrupted.
In this regard, due to delayed decision-making, districts are often in the uncomfortable position of wondering whether to use precious resources of their own on
needed technology projects for which E-Rate funding requests have been long pending. If a district decides to do the project outside of E-Rate, only to later get an Program award, it can effectively lose the requested E-Rate funding, as well as the ability to otherwise use those funds of its own for other needed technology projects.
It is also important to remember that technology constantly changes. Under current Program rules, it is not unusual for a district to be required to issue specifications for particular goods in October of a year in its Form 470, with a decision by
the SLD on funding taking place perhaps 12-18 months later, and actual procurement much later. Oftentimes, and El Paso I.S.D. experienced this as well, requested
goods are obsolete, no longer compatible with other items, or no longer manufactured at the time actual acquisition thereof is to occur.
In this vein, it is important to point out that the SLD has reportedly suspended
awards for the 2003 and 2004 funding years while it resolves problems arising from
a change in its accounting system. It is not entirely clear when the SLD will again
issue funding commitments.
As a related matter, the appeals process with the SLD and FCC of funding decisions is slow. Not only are decisions delayed in the first place, but delays in appellate decisions aggravate the problems described above.
El Paso I.S.D. realizes that the Program was in its infancy when these problems
arose. It is a relatively new federal program, and growing pains should have been
expected. The structure of the Program was different from other federal programs,
and the roles of the SLD and USAC were somewhat unusual. The complaints about
ambiguous rules and requirements with the Program are in large part similar to
those made about any new federal program during its early years. It often takes
a number of years for the gray areas to be identified and addressed. It is also important to remember that the Program also experienced a dramatic increase in both
the number of applications and in the dollar amount of monies requested. The regulatory bodies were presumably, and not surprisingly, overwhelmed to some extent
as a result.
El Paso I.S.D., despite its frustration [and that of other districts], recognizes that
staff of the SLD and USAC were probably trying to do the best job they could with
limited resources, and were also acting in good faith with respect to handling of the
Program [except, perhaps with respect to somewhat-suspicious funding denials by
SLD after the Ysleta order was issued]. Moreover, El Paso I.S.D. does wish to acknowledge that the FCC has more recently issued a number of orders and new rules
addressing a wide variety of issues in the Program, and is expected to issue more
in the near future. Those orders are welcome, and provide much more guidance and
clarification to applicants and service provider as to Program requirements. It is
hoped that those orders will limit this sort of frustration commonly experienced by
applicants in seeking to understand the Program.
LESSONS LEARNED BY EL PASO I.S.D.

El Paso I.S.D. has learned a number of lessons from its Program participation.
In particular, due to the above-described problems that El Paso I.S.D. encountered
with the Program, El Paso I.S.D. has also reviewed and studied causes of such problems. Although El Paso I.S.D. would prefer to place full responsibility upon others
for those problems, it recognizes and concedes that it bears some of the practical,
if not legal, responsibility for the same.
For instance, El Paso I.S.D. in Year 4 of the Program [unlike prior or subsequent
Program years] appears to have relied too heavily upon its service provider, IBM,
in developing the specifics of the statements of work. As mentioned above, El Paso
I.S.D. lost a number of key employees with Program experience and expertise shortly before the Year 4 process began. El Paso I.S.D. also had a relatively new tech-

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nology director with essentially no Program experience [though very experienced
generally in technology areas]. Consequently, El Paso I.S.D. sought to select a strategic technology solution provider to provide additional assistance with respect to
Program matters. In the circumstances, that was a reasonable approach. On the
other hand, IBM submitted statements of work for Year 4 to El Paso I.S.D. for review with limited opportunity for extensive study and analysis before the deadline
for submission of the Year 4 Form 471s. Accordingly, El Paso I.S.D. technology department did confirm that the projects represented by statements of work were consistent with its Technology Plan and were ones desired by the district. Unfortunately, there was insufficient time for a detailed review and analysis by various affected departments of El Paso I.S.D. to ensure that those projects were in fact initially configured to meet the specific goals of such department or that each such
project [although functionally sufficient] was the preferred solution of the particular
department compared to other approaches. El Paso I.S.D. feels that its review was
legally sufficient, but in hindsight believes that more review and analysis would
have been better. Of course, the Special Procurement Provisions and other provisions in the Year 4 Contract did provide El Paso I.S.D. with an opportunity to further review and modify projects even after an award of Program funds. El Paso
I.S.D. in fact exercised these special contractual rights and modified several projects
from the initial proposals, in accordance with Program rules, in order to better satisfy the needs of the district. Nevertheless, in retrospect, the preferred approach
would have been to internally develop project details with little or no assistance
from the service provider [recognizing, of course, that the service provider is still
a valuable source of expertise for which it would inappropriate to ignore or discount
entirely].
On a related topic, looking back at the situation with further knowledge and experience, El Paso I.S.D. now wishes it had had a better understanding in advance of
the benefits of one or more Year 4 projects in comparison to the costs thereof. This
concern is principally directed at the Year 4 SOW maintenance project, which cost
about $27 million. El Paso I.S.D. now questions whether the benefits of the project
justified such a cost, not only to the Program but also to El Paso I.S.D. for its 10%
share. El Paso I.S.D. expended a significant amount of its own funds on this project,
and has not been satisfied with it. The maintenance project involved a number of
different sub-parts [such as maintenance of certain existing technology, inventorying
of existing technology goods, etc.], though the help desk was a principal part thereof. The help desk was very effective in permitting El Paso I.S.D. to quickly identify
and address problems of users, with a great benefit to student, teacher, and administrative productivity. Importantly, the help desk immediately referred calls from
ineligible schools to the technology department, in order to ensure such assistance
services were provided exclusively to eligible locations.
From a purely functional perspective, the help desk worked. Unfortunately, El
Paso I.S.D. did not realize at the time of acquisition the legal effect under Program
rules of characterization of the help desk, and thus that the help desk would not
survive the end of the Year 4 term. That was a definite surprise to the district. El
Paso I.S.D. was under impression that the help desk would survive and that the
district would continue to run it in the future, using its own staff. That did not
prove to be the case. El Paso I.S.D. reviewed different alternatives, but Program
rules prevented some from being utilized and cost considerations interfered with
others. In the process of that additional review, El Paso I.S.D. also discovered that
the help desk configuration used certain proprietary software of a third party, for
which an individual license for the district [as opposed to a presumed nationwide
IBM license] was cost-prohibitive. The design of the help desk, in retrospect, did
not necessarily conform to the long-term needs of the district, and made it difficult
to sustain in that configuration. Ultimately, and in light of the denial of Year 5
funding by the SLD, El Paso I.S.D. could not afford bearing the entire cost of continuing the help desk, and IBM ceased providing such services to the district. The
help desk did not meet the expectations of El Paso I.S.D. for the project. In this
regard, the district expected the help desk to achieve a much greater reduction
in pending work orders than actually experienced. To be clear, though, El Paso
I.S.D. believes that it received substantial value from the maintenance project in
Year 4 of the Program, but, in 20/20 hindsight, feels that the overall costs thereof
may have outweighed the long-term value to the district. As a result of these concerns, El Paso I.S.D. significantly decreased its request for maintenance contract
funding for Year 5 of the Program, and deleted requests for similar sorts of funding
in future years.
In short, although El Paso I.S.D. in good faith sought to make cost-effective acquisitions, it now questions whether the purchases met its expectations and fully justified the costs. It is, of course, not unusual for anyone to second-guess a purchase

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of any good or service. Buyers remorse is a well-recognized phenomenon based in
large part on the fact that a purchase rarely, if ever, meets all initial expectations
or desires of the buyer. Even persons who spend extraordinary amounts of time and
effort in studying and analyzing proposed purchases often suffer from buyers remorse after actually making the selection and using the product or service in question. El Paso I.S.D. does not feel that its acquisitions violated any Program rules,
but nevertheless wishes that additional, extra effort had been made in analyzing
and understanding the projects in advance. Such effort might not had lead to a different result [due to outside variables], but should have at least offered a better opportunity to avoid the problems experienced by the district.
Another important lesson learned of El Paso I.S.D. involves readiness for the
projects. There are two main components of readiness: (a) readiness to manage installation and completion of the projects; and (b) readiness to manage the actual
usage of the projects after completion. As a condition to Program participation, a
district must essentially certify in the Form 471 that it is ready to and capable of
implementing the proposed project(s), specifically:
25. The eligible schools and libraries listed in Block 4 of this application have
secured access to all of the resources, including computers, training, software,
maintenance, and electrical connections necessary to make effective use of the
services purchased as well as to pay the discounted charges for eligible services.
El Paso I.S.D. believes that its readiness was sufficient to meet that minimum
standard. On the other hand, it also feels that even more resources should have
been committed by the district to ensure project success.
When it first received notice that a substantial award had been made to it in Year
4 of the Program, El Paso I.S.D. quickly reviewed whether or not it had sufficient
staffing to oversee and supervise the installation of the desired projects, wondering
whether it had bit off more than it could chew [especially since the late award
by the SLD left a significantly reduced time period for completion of all the requested projects]. Through re-assignment of staff and new hires [including retention
of a program manager designated to oversee day-to-day issues on the project installation], and the extra efforts of existing staff, El Paso I.S.D. was able to devote sufficient resources for that phase of the project. Nevertheless, the district probably initially under-estimated the amount and extent of effort that would be required to
monitor and supervise completion of the projects. Even though its commitment was
adequate, El Paso I.S.D. also now feels in hindsight that even further commitment
of staffing and other resources to the supervision of project installation would have
been preferable.
Additionally, as noted above, readiness also concerns the ability of a district to
implement the project at the end-user level, in order to gain the full expected benefits thereof. It is important to keep in mind that many eligible projects under the
Program [e.g.new servers and cabling] provide benefits to teachers and students,
without necessarily necessitating additional training. On the other hand, other technology projects [whether or not acquired using Program funds] do require a district
to invest significant resources of its own in training and related usage issues. For
example, without training of teachers in use of a new software program for classroom use, the program may prove to have limited practical benefit. This investment
is not just on an administrative level. Indeed, the teachers themselves must invest
additional time on their own in developing new lesson plans or materials, or converting old materials to the new system, to take advantage of the new software program. Ideally, the training should be on-going, and incorporate best practices
learned district-wide. El Paso I.S.D. formerly had technology coordinators at most,
if not all, campuses. These persons, among other things, aided and trained teachers
on a continuing basis on technology matters. El Paso I.S.D. was somewhat advanced, compared to other school districts, in having such campus-level technology
staff. Such training and assistance, though, is generally ineligible for funding under
the Program. Unfortunately, due to serious budget concerns, those positions were
eliminated before implementation of the Year 4 projects. In retrospect, El Paso
I.S.D. feels that, although not necessarily legally required or even the industrystandard, the district should have made budget cuts elsewhere and made provision
at the time to re-institute the technology-coordinator program at campuses, in order
to take better advantage of classroom-level projects. El Paso I.S.D. believes that
project implementation was successful, but feels that there was and is room for improvement which the technology coordinator program could support.
Upon further analysis of its technology acquisitions, whether or not using Program funds, El Paso I.S.D. also believes that additional planning, above and beyond
a technology plan, is appropriate for many projects for which Program funding is
sought. For instance, a particular network component may satisfy the technology
plan, may fulfill the functional needs, may be at a low price, and may work per-

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fectly, but still be a poor purchase for a particular district. In isolation, the component may be ideal, but the acquisition needs to be considered in light of the total
technology universe at the district and in the community. Ideally, a district should
review and analyze, from an engineering perspective and otherwise, whether a proposed project is in fact compatible with all of its existing systems, whether the design of the project actually satisfies discrete technological goals, whether the technological goals fulfill particular educational goals, and whether there is a capacity in
the community to support and sustain the project in questions over the long run.
This sort of review should permit a district to make more intelligent purchasing decisions. For instance, a new server may be faster, but is not necessarily better
than the existing one if large capacity is what the district really requires. A particular software program may meet educational goals, but may be unacceptable if
it is not fully compatible with existing hardware systems. Community support is
critical; if the locale has no persons capable of operating or supporting a particular
project in the future, the sustainability, and thus value, of the project may be called
into question.
That sort of study and evaluation would ordinarily require experienced, highlyskilled persons familiar with cutting-edge technology issues, with the requisite
training and certification in the field of computer or electrical engineering. Ideally,
such a review and analysis could be performed in-house by El Paso I.S.D. and other
school districts. Unfortunately, that is generally not realistic. In the first place,
many locales outside of hi-tech communities do not have a sufficient population
of such experienced and skilled persons so as to permit a school district to find and
retain an adequate number of such persons on its staff. In any event, to the extent
a community has such persons available for hire by a school district, a district generally would be unable to pay a market-rate salaries sufficient to attract and retain
such persons. Although, like other districts, El Paso I.S.D. has many experienced
and skilled employees in its technology department, those persons do not necessarily
have the top-flight credentials and experience to handle this sort of additional analysis. Consequently, such services have to be retained from third parties, hopefully
third parties who are also vendors of products which may be at issue in the evaluation. Such services can be very expensive. El Paso I.S.D. doubts that many, if any,
districts have engaged in such an exhaustive review and analysis before seeking
Program funding. Nevertheless, the district feels that such an approach [even if not
required by Program rules] would provide substantial benefits to it, and better ensure the right projects for the district are implemented. El Paso I.S.D. is in the process of putting in place a comprehensive engineering and design review of its technology systems, which it would hope to be able to supplement on a periodic basis,
in order to better guide its acquisitions of technology in the future [whether or not
under the Program].
In a somewhat related vein, El Paso I.S.D. also recognizes that it is important
for technology acquisitions, whether or not using Program funds, to be coordinated
amongst many departments of the district. For instance, if even a particular product
meets the requirements of teachers and other educators, and also is deemed to be
a good, compatible product by the technology department, a problem may still exist
if the particular schools do not have facilities sufficient to locate and maintain the
product. El Paso I.S.D. has encountered such a problem with certain campus-level
servers. Specifically, at a few school sites with severe space limitations, servers were
placed in janitor closets to reduce noise in classroom areas. Unfortunately, some of
those closets did not necessarily have sufficient cooling for ideal server usage. In
other cases, they did have sufficient cooling, but the evaporative cooling systems
[whereby the air is cooled by the addition of moisture, rather than its deletion as
in normal air conditioning; evaporative cooling is common in the desert Southwest
among houses, businesses, and schools] unfortunately generated too much moisture
for ideal server usage. El Paso I.S.D. incurred additional costs for server support
at these limited locations. After extensive review of various costly alternatives, the
district is planning to relocate those servers to a centralized location with adequate
space, cooling, and ventilation [from which they will continue to serve the same eligible campuses in the same way]. This sort of site-specific, detailed, operational
issue is not something that ordinarily would be considered by any school district
when making a technology purchase. Nevertheless, El Paso I.S.D. believes such a
review and coordination amongst various departments would yield significant benefits. Such a process is difficult to design, establish, and implement, but the district
is working towards doing so.
El Paso I.S.D. furthermore enjoys a much better understanding of the true, complete costs of Program participation. As discussed elsewhere in this statement, a district ordinarily must expend much more money than its 10% share in order to implement Program projects. There are many necessary costs that are ineligible for

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Program funding, but are vital for the project to succeed. El Paso I.S.D. made a substantial monetary commitment in Year 4 of the Program, above and beyond the
awarded Program monies. It believes that such commitment was in excess of many
other participating districts. In retrospect, though, El Paso I.S.D. realizes that an
even greater district commitment, both initially and continuing over time, is needed
to achieve the desired goals and expectations of technology projects.
By way a somewhat different house analogy, one may view an award under a
Program as a gift of a shell of a house, with simply the foundation and framing
in place. That is a great gift, but is not a cost-free one. The house only achieves
its full value if the recipient of the gift then expends its own resources to add the
plumbing, electrical, roofing, HVAC, walls, and other facilities and to furnish the
finished house with furniture, fixtures, and appliances. The cost of the work needed
to properly implement the gift of the shell house would typically be much greater
than the value of the gift. In the case at hand, the Program only funds certain
items, and to a certain extent. Beyond that, the participating district must make
a major commitment of financial, staffing, and other resources to the funded
projects, in order to ensure that they fulfill the intended goals.
To be absolutely clear, El Paso I.S.D. does not believe that it violated any laws
or Program rules. Nevertheless, using 20/20 hindsight, there are things that El Paso
I.S.D. would have like to have done differently with respect to Year 4 of the Program, and Year 5 of the Program to some extent as well. In short, although its efforts were good enough, the district believes there was room for improvement. Importantly, El Paso I.S.D. has striven to avoid these sorts of problems with respect
to subsequent-years participation in the Program. It feels that it handled Year 5
better than Year 4, Year 6 better than Year 5, and Year 7 better than Year 6. El
Paso I.S.D. believes Year 8 participation will be even better than the prior years.
Honest mistakes can and will be made by any participant in the Program [indeed,
by any participant in any federal program of any kind]; on the other hand, El Paso
I.S.D. has sought to identify any errors, learn from those errors, correct those errors,
and avoid similar errors in the future. For example, El Paso I.S.D. now exclusively
or almost exclusively develops specifics for Program projects on its own. It also has
developed in-house expertise on Program matters, and has retained an independent
E-Rate consultant for assistance [who is not a vendor to El Paso I.S.D. of technology
items]. The district also has re-started its technology-coordinator program at campuses. Sustainability of projects without Program funding [which has turned out to
be doubtful] is also a primary consideration for El Paso I.S.D. The district also has
invested more of its own resources in training and campus assistance on technology
matters, to better ensure that monies spent on technology have the desired impact
on the education of students. El Paso I.S.D. has a more realistic view of what sort
and quantity of projects can be feasibly and efficiently implemented by it in any particular year, considering all of the other necessary ineligible costs, and has therefore
substantially revised its Program funding requests.
El Paso I.S.D. believes that many similarly-situated school districts seeking to
participate in the Program may experience some or all of such problems, amongst
others, and is sharing its lessons learned in order to provide guidance to those districts, as well as to aid Congress in its review of the Program as a whole. The primary theme running through these lessons is additional district commitment. A
Program participant, in order to fully enjoy the benefits of Program projects, should
make a greater commitment of its own staff, money, and other resources in determining its technology needs, preparing and designing projects, overseeing and supervising project installation, and in ensuring effective implementation of the
projects. Though El Paso I.S.D. believes its commitment in these regards was at
least legally sufficient, it also now feels that even a greater commitment was and
is warranted to ensure project success.
REFORMS WITH THE PROGRAM

Within the last year or so, the FCC has adopted a number of rule changes to the
Program and has commenced proceedings to adopt additional rule changes. The
SLD in such time period also appears to be much better in making important policies and information available to the public, so that districts can better seek to comply with Program or SLD requirements. These changes are welcomed, and seem to
go a long ways towards addressing both the concerns of El Paso I.S.D. expressed
above, along with Program problems or abuses that have been reported in certain
locations elsewhere in the country.
Nevertheless, El Paso I.S.D. does have some recommendations on further reforms
in the Program. The districts reforms focus primarily on issues arising to the experiences of it and similar school districts. Since El Paso I.S.D.s experience did not

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involve fraud or similar conduct [contrary to what may be the situation in other
cases addressed by this Committee], the focus is on these other issues.
In the first place, particularly in light of the delays in awards under the Program,
it would be preferable for districts to be permitted a complete 12-month period after
receipt of the award notice, in which to complete the projects. Alternatively, the period for completion of projects could run for a period of 18 to 24 months after the
commencement of the funding year. This additional time would allow for better review and control of project completion.
El Paso I.S.D., not surprisingly, would request that overall funding of the Program be expanded. The Program is basically funded by fees imposed on telecommunication billings, rather than the general revenues of the federal government.
Even a slight increase in such fees would result in much greater educational benefits for students throughout this country.
It is also important for Congress to recognize that, under the Program, many technology items are not available for funding. For instance, there may be funding for
cabling to classrooms, but not for computers in the classroom. In addition, and very
importantly, Program funds generally cannot be used for training of teachers or
other district personnel to fully and adequately utilize the equipment funded under
the Program, or even to retain personnel specifically assigned to teach the faculty
on how to take advantage of the new equipment during instructional exercises. The
goal of the Program is to reach the students. Although El Paso I.S.D. strives to use
its own funds to bridge the gap between Program-acquired items and the actual instructional effect on students, apparently not all school districts can or will do so.
Due to problems that have arisen in the past with the Program, there would likely
need to be some limits and restrictions on use of such funding. Nevertheless, if certain training or retention costs for districts in connection with new Program goods
were made eligible for E-Rate funding, the benefits to the students from such goods
should increase.
Whether from the universal services fees or regular budgeting, El Paso I.S.D. also
believes that the FCC and SLD do need additional funding, in order to allow
prompter handling of applications, appeals, and even audits. The problems with
delays in decision-making are probably best served through additional personnel resources for these agencies.
Of course, the Lessons Learned section above also highlights issues that El Paso
I.S.D. believes are appropriate for consideration by other Program applicants. Some
of those issues perhaps might be the subject of changes in Program rules. By way
of example, if an applicant is seeking a major overhaul of its entire computer network, perhaps the Program rules should require, in addition to the technology plan,
some sort of engineering analysis to better ensure that the network design is appropriate for the applicant and compatible with its other components.
Incidentally, and as something not directly experienced by it, El Paso I.S.D. also
wishes to highlight an area of potential abuse under the Program in the future.
There are a number of companies who act as E-Rate consultants. With the complexity and confusion surrounding Program requirements, that sort of expertise is
very valuable to applicants and service providers. Some of these E-Rate consultants
are very accomplished, reputable, and experienced. Unfortunately, not all necessarily fall in that category. El Paso I.S.D. is concerned that abuses might arise
amongst some of these consultants. Although El Paso I.S.D. has not contracted with
this second category of consultant, it believes that other districts nationwide have
done so on occasion. It is El Paso I.S.D.s understanding that one or more of such
lesser consultants may charge fees to their clients on a contingency basis, based
upon the amount of the award received from the SLD by such clients. That sort of
compensation method could easily lead such consultants to over-estimate what technology requirements are needed for districts and to request much greater funding
than actually needed. In other words, one wonders whether some of the complaints
lodged against certain vendors under the Program may in the future be applicable
to some of such consultants.
El Paso I.S.D. again wishes to point out that the FCC and SLD have already
adopted a number of Program reforms and have issued clarifications on many of the
gray areas of Program rules. Those reforms and clarifications are expected to continue in the future. Since, the regulatory agencies appear to have already addressed
or to be in the process of addressing many of the problems with the Program, it
is not entirely clear that direct Congressional legislation is needed at this time to
address those issues [except with respect to the issue of increased funding].

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OVERALL EVALUATION OF THE PROGRAM

El Paso I.S.D. believes that, notwithstanding the problems, the Program has been
very successful in bringing much-needed technology to school districts across the
country. Such technology has brought great benefits to the students involved. The
Program has certainly made allowed El Paso I.S.D. to make great strides in catching up to other, more affluent school districts and providing its students with a fair
opportunity to compete and succeed in the real world. To be clear, El Paso I.S.D.
has not sought, and has not acquired, technology projects far in advance of other
districts. Instead, the Program funding, combined with El Paso I.S.Ds own resources, has allowed it to get closer to catching up with a typical school district in
the nation.
CONCLUSION

In conclusion, El Paso I.S.D. has greatly appreciated the opportunity to participate in the E-Rate program over the years. Such participation has greatly benefited
the students at El Paso I.S.D., giving them a fair opportunity to compete with their
peers from other communities.
El Paso I.S.D., like other school districts, also supports efforts to reform problems
or abuses with the Program. It regrets any role that it may have unintentionally
and unwittingly had with respect to any such problems.
El Paso I.S.D. has acted in good faith, and in what it believed to be a reasonable
fashion in compliance with albeit-ambiguous Program rules. El Paso I.S.D. does not
believe it did anything illegal, and certainly does not believe there is any basis to
justify a recovery against the district. In 20/20 hindsight, of course, there are things
that El Paso I.S.D. would likely have done differently.
Mr. Chairman, thank you again for this opportunity to present EPISDs positions
and views on the E-Rate Program.

Mr. WALDEN. We appreciate your testimony. Thank you for joining us by video conference today.
Mr. Bohuchot.
TESTIMONY OF RUBEN BOHUCHOT

Mr. BOHUCHOT. One quick statement. On page 3 of the document

that I turned in, toward the bottom there is a number $84 million
some odd hundred thousand dollars. It should be $86 million.
Thank you.
[The prepared statement of Ruben Bohuchot follows:]

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Mr. WALDEN. And that is your opening statement, sir? All right.
Thank you.
Ms. Foster, welcome. Do you have an opening statement?
TESTIMONY OF SHARON FOSTER

Ms. FOSTER. Yes, thank you.

Mr. Chairman, thank you for the opportunity to speak to you this
morning, well, this afternoon now. My name is Sharon Foster. I am
currently the Executive Director of Technology Information Systems for the Ysleta Independent School District in El Paso, Texas.
During my career as an educator, I have had experience in virtually every aspect of classroom and administrative work. I have
been a classroom teacher, campus administrator, technology trainer, director of instructional technology, and currently the Executive
Director of Technology Information Systems.
That position requires me to oversee instructional technology, administrative information systems, and telecommunication networks. All of my experience is with large urban districts with student populations of over 45,000 students.
I worked in the El Pas Independent School District, a neighboring district of YISD, for 15 years, the last eight of which where
I was the head of the Instructional Technology Department. Part
of my responsibility in that position was that of the E-Rate coordinator.
I served as E-Rate coordinator for the first 3 years of the E-Rate
program. As the E-Rate coordinator, I met with other technology
and telecommunications staff to identify projects for which EPISD
would seek E-Rate funding.
In addition to determining the appropriateness and scope of the
E-Rate projects, I would make sure that all application requirements were met in a timely manner and addressed in the request
for additional information from the schools and libraries division of
the Federal Communications Commission.
In August 2000, I left EPISD in order to join YISD as an employee. My departure was not related to the E-Rate program in
EPISD. I left EPISD prior to the bidding process for the year 4 submission.
At YISD, I assumed the position of Director of Instructional
Technology. As Director, I worked with YISDs E-Rate coordinator,
Richard Duncan, and other staff members to determine future ERate projects for the District in years 4, 5, 6, and 7.
In other words, I was involved in YISDs participation in the ERate program, but not principally responsible for such participation.
I recently was named the Executive Director for Technology and
Information Systems at Ysleta and now, once again, I am responsible for overseeing the E-Rate projects. The most significant improvement that E-Rate has enabled to be achieved in my experience as been the improvement to school district infrastructure with
both EPISD and Ysleta.
As done by most school districts across the nation, EPISD and
YISD use the initial E-Rate projects to improve the speed and reliability of voice and data networks. E-Rate projects provide the basics for each districts network which supports virtually any type

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of technology based instruction, including high speed Internet access to all classrooms, distance learning systems, video to classrooms, integrated phone networks, and other improved network
functionality.
E-Rate funding has allowed for acquisitions by school districts of
network electronics that insured high speed access and for the cabling and distributed networks across every instructional area.
Most school districts would never have been able to afford the cabling and network initiatives that E-Rate funded.
The E-Rate program has been the mechanism that many large
under-funded school districts have used to improve telecommunication infrastructure. School districts have discovered that virtually
all instructional initiatives require one essential element, namely a
high speed reliable telecommunications network. One of the great
successes of the E-Rate program is that it has been able to help
school districts enormously in developing those networks. With that
said there are several issues in the administration of the program
that have created obstacles to districts and planning projects, providing continuity and managing the projects from year to year.
Technology projects are linear, and in the case of most school districts, are planned in phased in implementations. Planning for
those projects can be done with estimated E-Rate funding from 1
year to the next. But, so far, the experience of most districts has
been that funding is nearly always delayed.
For example, currently, YISD is managing proposed projects for
years 5, 6, and 7 of the E-Rate program. Some of those funds have
been awarded. Some have not. In some cases decisions on initial
and/or continued funding have not always been clear.
In planning a multi-year project it is extremely difficult to provide assurances to campuses when it is unclear how fast implementation can proceed based on unknown levels of funding and/or indefinite schedules for release of funds. The delays have proven
frustrating to districts.
In the case of YISD, we have tried, and for the large part succeeded in applying for funds based on correct interpretation of ERate funding guidelines. There have been instances when we have
had to provide additional information, explanation to the SLD for
guidance and in virtually every case, our position has been determined to be correct.
In the very few instances when our interpretation of funding or
use guidelines have not been upheld, our interpretation of E-Rate
guidelines were made in good faith, reasonably based, and in a line
with how other school districts have interpreted those same guidelines.
It has been difficult and has taken a tremendous staff effort to
maintain our understanding of funding guidelines. In particular,
knowledge of eligible products, eligible locations, and how you determine in what instances campuses are not eligible for E-Rate
funding have been at best less than straightforward.
We understand the need for E-Rates guidelines to evolve and for
the guidelines to change in some instances, but that makes the districts efforts, especially in multi-year project planning or long-term
network development, extremely difficult.

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One increasing common issue with E-Rate program among school
districts is the best use of funds to provide for the appropriate network design and development that both support instructional needs
of the particular district and that allow the district to take advantage of the support, the network, in the future.
The E-Rate funds have been used overwhelmingly for the upgrade of the networks, and though the funds cannot be used for
specific instructional purposes, the distinction between hardware
and software that is exclusively instructional is difficult to maintain.
Districts are using networks to support Web based projects, administrative information management systems, submission of state
mandated reports, and E-mail systems that are important to both
administrative and instructional functions, and its difficult if not
impossible to segregate.
In my view, what districts and E-Rate administrators have found
most difficult about the use of E-Rate funds is managing multi-year
projects, implementing large projects without adequate support resources, insuring that teachers skill sets match the upgrades in
the network capability and instructional potential, and dealing
with the changes in regulations and application of rules. I have
found with both EPISD and YISD that one of the essential elements in the use of E-Rate funds is insuring that the projects supported by each funding are successful.
However, without a support mechanism for the teachers who will
be using the technology, including training, staff development, and
campus-based technology support services it is virtually impossible
for districts to implement technology projects that would be successful and use the full potential of the networks that E-Rate has
funded.
That would be the task of all school districts, including YISD,
that use E-Rate funds. In many instances districts have been criticized for failing to capitalize fully on the improvements afforded
through E-Rate. In my experience some of that lost capacity has
been almost predictable.
In the first years of the E-Rate program, districts for the most
part applied for only what they could implement. It is my personal
opinion that in the following years of the E-Rate program, when
the vendors began to have more of a role in the application process
and when further ambiguities arose regarding the scope and extent
of the E-Rate program, many school districts across the country
may have asked for too much too quickly and were not in the best
position to fully support the technology projects for which funding
was awarded.
Such districts likely had the needs for that technology and justifiably requested E-Rate funding for those projects, but in hindsight perhaps should have been less ambitious in order to better
assure fully effective implementation.
As school districts have more skillfully used E-Rate funds and
have developed support staff for the technology infrastructure
made possible by the E-Rate program, I believe it is more critical
for districts to insure that technology infrastructure and capability
is driven by instructional need; that teacher technology skill sets
are established through staff development and training; and that

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campus based technology support is provided. In my opinion, technology projects fail when there is no identified instructional need
for the technology; when teachers are asked to use technology that
does not support their teaching outcomes; when teachers are asked
to use technology without sufficient training; or when campuses are
required to support technology without adequate resources.
Although the E-Rate program has enabled vastly improved networks for school districts, the use of those networks has been limited by the lack of funding for the training in campus-based support that would help better insure full success. In some instances
school districts have had to abandon technology projects or have
implemented projects that did not provide the results that were
hoped for due to training, staff development, and support issues.
For school districts like El Paso in Ysleta, the E-Rate program
has been a successful program. It does, however, require some adjustments on the part of both the school district, in general, and
the E-Rate program.
However, without the funding provided by E-Rate program, there
is no question that many of the instructional initiatives and some
of the instructional programs in progress in these school districts
would not have been possible. Such funding has significantly benefited the instructional process at each of these districts.
YISD is not a wealthy district. Its free and reduced lunch average is 86 percent. In general, YISD has a low economic profile. The
2000 profile selected economic characteristics issued by the United
States Census Bureau estimates the per capital income for 1999 in
El Paso, Texas was $14,388 per year.
It should be noted that YISDs boundaries do not include the
areas generally recognized as being the most affluent in El Paso.
So the figures for the census tracks within YISD boundaries would
be probably lower.
For comparison, according to the same survey, the annual per
capita income for 1999 in the United States was $21,587 and for
the State of Texas it was $19,000, and for the Washington, D.C.
area it was $28,659. As one can readily see, YISD students are in
poor financial circumstances and in great need of the benefits from
the projects that can be completed using E-Rate funding.
The primary impact on YISD of E-Rate funding that is no longer
available is that instructional advantages available through a typical telecommunications network would in all likelihood no longer
be available.
Mr. WALDEN. Ms. Foster, how much longer do you have in your
testimony?
Ms. FOSTER. Thirty seconds.
Mr. WALDEN. You are about 11 minutes into. Okay.
Ms. FOSTER. I am sorry.
Well, I will just tell you, to close it up, if the E-Rate program
should go away, it would significantly damage our instructional
program and as access for our students.
Thank you.
[The prepared statement of Sharon Foster follows:

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PREPARED STATEMENT OF SHARON FOSTER, EXECUTIVE DIRECTOR, TECHNOLOGY
INFORMATION SYSTEMS, YSLETA INDEPENDENT SCHOOL DISTRICT
BACKGROUND

Mr. Chairman, thank you for the opportunity to speak to you this morning. My
name is Sharon Foster. I am currently the Executive Director of Technology Information Systems of the Ysleta Independent School District (YISD) in El Paso,
Texas. I have been asked to provide this statement for this hearing of the House
Energy and Commerce Committees Subcommittee on Oversight and Investigations
entitled Problems with the E-Rate Program: Waste, Fraud, and Abuse Concerns in
the Wiring of Our Nations Schools to Internet. A copy of my curriculum vitae is
attached to this statement.
During my career as an educator, I have had experience in virtually every aspect
of classroom and administrative work. I have been a classroom teacher, campus administrator, technology trainer, Director of Instructional Technology and acting Executive Director for Technology Information Systems. I am currently the Executive
Director of Technology Information Systems for YISD in El Paso, Texas, a position
that requires me to oversee instructional technology, administrative information
systems, and telecommunication networks.
All of my experience is with large urban districts with student populations over
45,000. I worked in El Paso Independent School District (EPISD), a neighboring
district of YISD, for 15 years, the last eight of which were as head of the Instructional Technology Department. Part of my responsibility in that position was that
of E-Rate Coordinator. I served as E-Rate Coordinator for years 1 through 3 of the
E-Rate Program. As E-rate Coordinator, I met with other technology and telecommunication staff to identify projects for which EPISD would seek E-Rate funding. In addition to determining the appropriateness and scope of the E-Rate projects,
I would make sure that all application requirements were met in a timely manner
and addressed any requests for additional information from the Schools and Libraries Division of the Federal Communications Commission (the SLD).
In August of 2000, I left EPISD in order to join YISD an as employee. My departure was not related to the E-Rate program at EPISD. I left EPISD prior to the bidding process for year 4 of the E-Rate Program. At YISD, I assumed the position of
Director of Instructional Technology. As Director, I worked with YISDs E-Rate coordinator, Richard Duncan, and other staff members to determine future E-Rate
projects for the District (years 4, 5, 6, and 7). In other words, I was involved in
YISDs participation in the E-Rate program, but am not principally responsible for
such participation.
I recently was named Executive Director for Technology and Information Systems
at Ysleta and now, am once in again responsible for over-seeing E-Rate projects.
WHAT E-RATE HAS DONE FOR DISTRICTS

The most significant improvement that E-Rate has enabled to be achieved in my

experience has been the improvement to school district infrastructure, with both
EPISD and YISD. As done by most school districts across the nation, EPISD and
YISD used the initial E-Rate projects to improve the speed and reliability of voice
and data networks. E-Rate projects provided the basics for each districts network,
which supports virtually any type of technology-based instruction, including highspeed internet access to all classrooms, distance learning systems, video to classrooms, integrated phone networks [such as phone service to every classroom], and
other improved network functions. Very early on in the E-Rate program, dial-up or
other non-broadband Internet access was identified as inadequate for technologybased instruction in the classroom. E-Rate funding has allowed for acquisitions by
school districts of network electronics that ensured high-speed access, and for the
cabling that distributed network access to every instructional area.
Most school districts would never have been able to afford the cabling and network initiatives that E-Rate funded. Moreover, without the E-Rate funds and the
flexibility in their use, most school districts would never have been able to develop
the in-house expertise for such extensive cabling projects. YISD explored the feasibility of training and using district-employees as cablers for the network cabling,
and its turnover costs in employees alone would have been prohibitive. Skilled network technicians were able to seek employment in virtually locale, and YISD would
have lost employees as to whom it had spent a great deal of money to train. E-Rate
funding allowed poor school districts to cable schools on an aggressive schedule,
using vendors specializing in that work, and thereby allowing them to try to catch
up to more affluent districts in terms of computer networking.

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An example of the way that the E-Rate program allowed fully functioning networks was in the implementation of the YISD telephone network. While YISD could
not use E-Rate funds for some of the network costs [for example, the purchase of
the individual phone sets], E-Rate funds did allow YISD to purchase the PBX and
switching equipment, and funded the cabling to the classroom. YISD could never
have afforded the integrated phone system it now has without the use of E-Rate
funds. That telephone system has benefited teachers and students at the district.
Similarly, the E-Rate program has allowed school districts to upgrade network
electronics on reasonable schedules. Indeed, for districts like YISD, they have been
able to manage the upgrades and use the network routers, servers and other electronics in very effective ways. Cabling upgrades, for example from 10-Base T cabling
to cabling with more capability and reliability, have been possible via E-Rate funding. These upgrades have provided benefits to faculty and students, and aided the
instructional process.
CONCERNS AND PROBLEMS WITH E-RATE PROGRAM

The E-Rate program has been the mechanism that many large, under-funded
school districts have used to improve telecommunication infrastructure. School districts have discovered that virtually all instructional initiatives require one essential
element: namely, a high-speed, reliable telecommunications network. One of the
great successes of the E-Rate program is that it has been able to help school districts enormously in developing those networks.
There are several issues in the administration of the program that have created
obstacles to districts in planning projects, providing continuity, and managing the
projects from year to year.
Technology projects are linear, and in the case of most school districts, are
planned in phased implementations. Planning for those projects can be done with
estimated E-Rate funding from one year to the next, but so far the experience of
most districts has been that funding is nearly always delayed. For example, currently, YISD is managing proposed projects for years 5, 6, and 7 of the E-Rate program. Some of those funds have been awarded, some have not, and in some cases
the decisions on initial and/or continued funding have not always been clear. In
planning a multi-year project, it is extremely difficult to provide assurances to campuses when it is unclear how fast implementation can proceed, based on unknown
levels of funding and/or indefinite schedules for release of funds. The delays have
proven frustrating to districts.
In the case of YISD, we have tried and for the largest part succeeded in applying
for funds based on correct interpretation of E-Rate funding guidelines. There have
been instances when we have had to provide additional information and explanation
to the SLD for guidance, and in virtually every case our position has been determined to be correct. In the very few instances when our interpretation of funding
or use guidelines have not been upheld, our interpretation of E-Rate guidelines were
made in good faith, reasonably-based, and in line with how other school districts
have interpreted the guidelines.
It has been difficult, and has taken a tremendous staff effort, to maintain our understanding of funding guidelines. In particular, knowledge of eligible products, eligible locations, and how to determine in what instances campuses are not eligible
for E-Rate funding have been, at best, less than straightforward. We understand the
need for E-Rates guidelines to evolve, and for guidelines to change in some instances, but that makes the districts efforts, especially in multi-year project planning or long-term network development, extremely difficult. School districts are generally also faced with equity issues; in other words, ensuring that all campuses, including those that are not E-Rate eligible, receive fair and equitable treatment by
the district in terms of technology acquisition and funding.
One increasing-common issue with the E-Rate program amongst school districts
is the best use of funds to provide for the appropriate network design and development that both supports instructional needs of the particular district and that allows the district to take advantage of and support the network in the future. The
E-Rate funds have been used overwhelmingly for the upgrade of networks, and
though the funds cannot be used for specific instructional purposes, the distinction
between hardware and software that is exclusively instructional is difficult to maintain. Districts are using networks to support web-based projects, administrative information management systems, submission of state-mandated reports, and e-mail
systems that are important to both administrative and instructional functions, and
difficult if not impossible to segregate.
In my view, what districts and E-Rate administrators have found most difficult
about the use of E-Rate funds is managing multi-year projects, implementing large

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projects without adequate support resources, ensuring that teacher skill-sets match
the upgrades in network capabilities and instructional potential, and dealing with
the changes in regulations and application of rules. I have found, with both EPISD
and YISD, that one of the essential elements in the use of E-Rate funds is ensuring
that the projects supported by such funding are successful. However, without a support mechanism for the teachers who will be using the technology, including training and staff development, and campus-based technology support services, it is virtually impossible for districts to implement technology projects that will be successful and use to full potential the networks that E-Rate funds have enabled. That will
be the task of all school districts, including YISD, that use E-Rate funds.
In many instances, districts have been criticized for failing to capitalize fully on
the improvements afforded through E-Rate. In my experience, some of that lost capacity has been almost predictable. In the first years of the E-Rate program, districts for the most part, applied for only what they could implement. It is my personal opinion that, in the following years of E-Rate program, when vendors began
to have more of a role in the application process and when further ambiguities arose
regarding the scope and extent of the E-Rate program, many school districts across
the country may have asked for too much too quickly, and were not in the best position to fully support the technology projects for which funding was awarded. Such
districts likely had the needs for that technology, and justifiably requested E-Rate
funding for those projects, but in hindsight perhaps should have been less ambitious
in order to better assure fully effective implementation.
As school districts have more skillfully used E-Rate funds, and have developed
support staff for the technology infrastructure made possible by the E-Rate program, I believe it is more critical for districts to ensure that technology infrastructure and capability is driven by instructional need, that teacher technology skill-sets
are established through staff development and training, and that campus-based
technology support is provided. In my opinion, technology projects fail when there
is no identified instructional need for the technology, when teachers are asked to
use technology that does that support their teaching outcomes, when teachers are
asked to use technology without sufficient training, or when campuses are required
to support technology without adequate resources.
Although the E-Rate program has enabled vastly improved networks for school
districts, the use of those networks has been limited by the lack of funding for the
training and campus-based support that would help better ensure full success. In
some instances, school districts have had to abandon technology projects, or have
implemented projects that did not provide the results that were hoped for, due to
training, staff development, and support issues. One specific example was the initial
success in EPISD technology projects when when Campus Technology Coordinators
(CTC) were part of all technology planning and implementations. When funding for
CTCs was no longer available, several projects decreased in usefulness because of
the difficulty individual campuses had in making sure teachers were adequately
supported and that equipment was always working and available for use. In short,
staff development for technology use must meet instructional needs, and funding for
staff development, like the funding for network and technology projects, must be on
a consistent, realistic, multi-year basis.
For school districts like EPISD and YISD, the E-Rate program has been a successful program. It does, however, require some adjustments, on the part of both school
districts in general and the E-Rate program. However, without the funding from
provided by the E-Rate program, there is no question that many of the instructional
initiatives and some of the instructional progress in these schools districts would not
have been possible. Such funding has significantly benefited the instructional process at such districts.
CLOSING REMARKS

YISD is not a wealthy district; its free and reduced lunch average is 86%. In
general, YISD has a low economic profile. The 2000 Profile of Selected Economic
Characteristics, issued by the United States Census Bureau, estimates the per capita income for 1999 in the El Paso, Texas at $14,388 per year. It should be noted
that YISDs boundaries do not include the areas generally recognized as being the
most affluent of El Paso, so the figures for census tracts within YISDs boundaries
would probably be lower. For comparison, according to the same survey, the annual
per capita income for 1999 in the United States was $21,587, for the State of Texas
was $19,617, and for the Washington D.C. was $28,659. As one can readily see,
YISD students are in poor financial circumstances, and in great need of the benefits
from the projects that can be completed using E-Rate funding.

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The primary impact to YISD if E-Rate funding is no longer available is that instructional advantages available through a typical telecommunications network
would, in all likelihood, no longer be available. It would be virtually impossible for
YISD to fund the maintenance of the network, and within several years we would
have a much smaller access to Internet resources, limited student e-mail availability, and virtually no services for teachers in the way of voice or data network
capability. In such a case, our goal would be to continue to offer the best services
we could to teachers and students, but, realistically, that level of network service
would be very small in comparison to the current levels. Ultimately, the instructional variety and opportunity would be decreased for the students of YISD. I think
that would be true for other poor districts throughout the country.
Thank you again for providing me with this opportunity to present testimony.

Mr. WALDEN. Thank you. We appreciate your comments. They

were very much on point.
Ms. Glogovac, welcome.
TESTIMONY OF PAULA GLOGOVAC

Ms. GLOGOVAC. Thank you, Mr. Chairman, and subcommittee

members. I appreciate the opportunity to speak with you today.
My name is Paula Glogovac. I was a contractor for Sun Microsystems, where I provided E-Rate program management resources
to the company.
My role as a program manager was to review the E-Rate program rules for applications and service providers and to make sure
those rules were communicated to the Sun sales and marketing
team. I was the knowledge base for any questions regarding the ERate program to the Sun sales and marketing team, and starting
in year 6 of the E-Rate program, I reviewed 470s that were actually posted on USACs Website, looking for internal connection
needs, and would try to make initial contact with the applicant or
their suggested contacts to qualify them for Sun opportunities.
I did this throughout the entire United States. I supported Suns
internal accounts receivables, payables, and order entry groups in
processing all the paper work. I was the single point of contact for
Sun with USAC and the SLD for paper work process and any
issues Sun might have had.
My experience with E-Rate programs started at the end of year
1 when I was a full-time Sun employee covering the K-12 educational market in support of the Sun sales team across the United
States. I consistently ran the program while at Sun for the next 2
years as a full-time employee.
I managed Suns involvement in the E-Rate program as a contractor for the last 5 years. I attended the E-Rate service provider
training in San Diego that was provided by USAC and the SLD,
and I might add it was very beneficial. I also participated in the
bi-weekly service provider conference calls on a regular basis to
stay current with the program, which also allowed me to ask questions that were relevant at the time.
What I have seen with this program is that in many cases it does
work for schools and libraries that have effectively learned how to
adhere to the rules, understand the process and value the much
needed support. In several cases, service providers are not following the program rules, as I have experienced myself.
For example, some have been developing the 470s for small
schools and capturing the sales along with it, without the knowledge of this being against the program rules by the applicant. They

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156
prey upon applicants that have no knowledge of the program but
are told that this service provider can get them money for computers. I saw it a lot.
This happened in year 6 across the United States with small
charter schools, religious schools, and special schools. Some consultants actually blocked service providers from responding to the
470s that are posted by not allowing them to get appropriate technical information to size products and services for what the account
needs or by stating that the applicant is going to use a State contract to purchase from.
Even if you are on the State contract, they are choosing what
they want versus having a service provider provide them with information on what is available to them. Some service providers are
providing ineligible products and services knowing that they are
not eligible under the program rules, as I will get into in just a few
moments. This makes the applicant feel like they are getting a better solution and leaves those of us who are adhering to the rules
not an option.
I also see applicants making several program rule violations.
Some applicants will prerelease their RFPs prior to the posting of
the 470s and then will close the RFP response prior to the 28-day
waiting window.
Some will require a mandatory prebid conference attendance
prior to or very shortly after the 470 being posted. This makes it
almost impossible for a service provider to respond to these applications unless they have had prior notification of the RFP from the
applicant.
Some applicants will release an RFP with ineligible products or
services or with clear violations of the program rules. In one case
just this year, a consortium applicant required a 3-percent kickback on all sales. In another case, an applicants RFP was for global positioning products and services.
In other cases, I have seen on the 470 forms and in RFPs applicants specifying specific brand names of products and not allowing
anyone else to respond. In making contact with some of these applicants, I have heard that they are already working with a vendor,
that they are only buying off their State contract, that they are
using the same vendor as last year, that they already have enough
responses or they do not even return my fax, phone calls, or Emails even though that is the suggested method of contacting these
vendors or applicants.
But not much is publicly stated about what the investigations
have found through all of these contacts that I have made and publicized to the whistleblower hotline. I am still seeing some of the
same activities happening today as I did in year 6.
Today when I see a possible violation, I actually try to tell the
applicant what the violation is and recommend that they call the
800 number at USAC to get their take on it and ask what they can
do about it. I do not know how successful that is. It is anyones
guess.
In one case I was brought in by the Sun sales team to work with
them on the E-Rate Project that they had been selected for. It was
an E-mail solution. In this case, as I started to get more involved
in it, I had serious questions about the integrity of what was going

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157
on with this applicant and the originally awarded service provider.
The applicant was El Paso Independent School District, and the selected service provider on the original 471 form was IBM.
I had been given a Statement of Work that was provided to Sun
by IBM and had El Paso ISDs name on it. I reviewed the Statement of Work, and it had several issues. They included ineligible
products and services and had products that did not pertain to just
an E-mail solution.
I sent an E-mail off to the service provider E-mail Alias, asking
if these products and services were eligible, and the response back
in most cases was no.
We had a conference call with El Paso ISD and IBM representatives discussing these issues, and IBMs response was that we
should take this off line to discuss it, that they had FCC lawyers
that handled this kind of stuff. In my opinion, saying that in front
of the applicant gives them the belief that IBM is behind this 100
percent and I would buy into that as an applicant, as well.
I did take this off line with Don Riddick from IBM. Don told me
not to worry about that, that they would take care of it. I was to
fill out the service substitution form, and that would take care of
everything. He did not appear to be concerned about the products
and services that were being offered in the Statement of Work that
were not eligible.
In trying to fill out the service substitution form, I realized that
IBM did not include their E-mail software solution on any line
item. I informed the Sun sales team, and I was instructed to call
Woodrow Lee from IBM.
When I spoke with Mr. Lee, he informed me that they did not
include it because their E-Rate consultant had advised them not to.
In the Statement of Work it was listed as Lotus Notes, and in my
E-mail to the service provider Alias, I specifically asked if Lotus
Notes was eligible, and they said no.
I responded back to Mr. Lee that they must have known it was
not eligible and did not include it on their itemized list on the 471.
Again, he said no, but their E-Rate consultant had advised them
not to.
If that was the case, I did not know how I could substitute out
E-mail software solution for one that did not exist on their original
471. IBM agreed that Sun should also leave off their software solution.
I believe that it would not be acceptable since the original 470
products and services must match the 471, and in turn, the service
substitution form also needed to match the products and services
selected.
This was confirmed to me by SLD in another E-mail. Sun has
substantial discounts that they provide to educational institutions.
In this case, since we were asked by the applicant to work through
IBM on this project, we were not able to pass along those educational discounts.
We did offer to go direct with El Paso ISD, and the price would
be substantially lower for El Paso ISD. El Paso ISD again directed
Sun to work through IBM. IBM also stated to Sun that we needed
to work through them.

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158
We did, however, provide our best possible pricing to IBM, considering that we were providing all of the products and installation
services, but IBM did not like our price. It was unclear to Sun why
IBM required us to provide them with a price that allowed them
to take approximately 51 percent of the overall cost for the project,
as they specified on the original 471 form, with Sun doing most of
the work, not to mention that Sun was providing an E-mail solution that could cover the entire school district versus the 5,000 accounts that were mentioned in IBMs Statement of Work.
When Sun would not come down in our price to IBM, IBM told
Sun they were going to rebid the project and release an RFP that
would be due in approximately 1 day. It was clear to the Sun sales
team that even though they had been selected amongst three vendors, one of which was IBM, that Sun would not get the business
unless IBM had made a significant amount of money off the E-mail
solution.
In closing today, I would like to say that the intent of the E-Rate
program is very good one. Service providers and applicants that do
not feel ownership in working within the program rules and guidelines should not jeopardize those applicants and service providers
that do adhere to the program rules and value what the program
does for them.
There needs to be more extreme measures taken against the
waste, fraud, and abuse, and there are tools out there that can
help. There are some proficient sets of tools for service providers
and applicants to help them with the E-Rate process. These tools
could be modified to assist USAC and the SLD in providing a traceable method for service providers and applicants to work together.
Without the traceable contact between service providers and applicants, it will be very difficult to monitor the waste, fraud, and
abuse.
These tools could also help in identifying patterns of consultants
and service providers that might be working together, as well as
service providers and applicants. Exposing the program violations
and the offenders in a public forum is key to fixing some of these
problems. It is also important for those that report waste, fraud,
and abuse to get some sort of notification of what happened with
the reporting. This would encourage more reporting of these issues
when they see results from it versus nothing for years.
By eliminating the waste, fraud, and abuse, all of our schools
and libraries will have an opportunity to take full advantage of
what this program has to offer.
Thank you.
[The prepared statement of Paula Glogovac follows:]
PREPARED STATEMENT

OF

PAULA GLOGOVAC

My name is Paula Glogovac. I was a contractor for Sun Microsystems, Inc., where
I provided E-rate Program Management Resources to the Company. My role as a
Program Manager was to review the E-Rate Program Rules for Applicants and Services Providers and to make sure those Rules were communicated to the Sun Sales
and Marketing Team. I was the knowledge base for any questions regarding the ERate Program to the Sun Sales and Marketing Team. Starting in Year 6 of the ERate Program, I reviewed 470s as they were posted, looking for Internal Connections needs and would try to make initial contact with the applicant or their suggested contact(s) to qualify them for Sun opportunities. I did this throughout the
entire United States. I supported Suns internal accounts receivables, payables, and

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159
order entry groups in processing paperwork. I was the single point of contact for
Sun with USAC and the SLD for paperwork processing and issues.
My experience with the E-Rate Program started at the end of Year 1, when I was
a full-time Sun Employee covering the K-12 Educational Market in support of the
Sun Sales Team in the United States. I consistently ran the program while at Sun
for the next 2 years. I managed Suns involvement in the E-rate Program as a contractor for the last 5 years. I attended the E-rate Service Provider Training in San
Diego that was provided by USAC & SLD. I also participated in the Bi-Weekly Service Provider Conference Calls on a regular basis to stay current with the program.
What I have seen with this program is that in many cases it does work for
Schools and Libraries that have effectively learned how to adhere to the rules, understand the process and value the much needed support. In several cases, service
providers are not following the program rules. For example; some have been developing the 470s for small schools and capturing the sales along with it, without the
knowledge of this being against the program rules, by the applicant. They prey upon
applicants that have no knowledge of the program, but are told that this service provider can get them money for computers. This happened in Year 6, across the
United States with small charter schools, religious schools and special schools. Some
consultants actually block service providers from responding to the 470s that are
posted by not allowing them to get appropriate technical information to size products and services for what the account needs, or by stating that the applicant is
going to use a State Contract to purchase from. Even if you are on the state contract, they are choosing what they want vs. having a service provider provide them
with information on whats available to them. Some service providers are providing
ineligible products and services, knowing that they are not eligible under the program rules, as I will get into in just a few moments. This makes the applicant feel
like they are getting a better solution.
I also see Applicants making several program rule violations. Some applicants will
pre-release their RFPs prior to the posting of the 470s and will then close the RFP
response prior to the 28-day waiting window. Some will require a mandatory prebid conference attendance prior to or very shortly after the 470 being posted. This
makes it almost impossible for a Service Provider to respond to these applications,
unless they had notification of the RFP from the applicant. Some applicants will release an RFP with ineligible products or services or with clear violations of the program rules. In one case, just this year a consortia applicant required a 3% kickback
on all sales. In another case, an applicants RFP was for Global Positioning products
and services. In other cases, I have seen on the 470 forms and in RFPs applicants
specifying specific brand names of products and not allowing anyone else to respond.
In making contact with some applicants, I have heard that they are already working
with a vendor, that they are only buying off their state contract, that they are using
their same vendor as last year, that they already have enough responses or they
dont return my faxes, phone calls or e-mails even though that is their specified
method of contacting them. Very little has been highly publicized about these issues,
until just recently. But not much is publicly stated about what the investigations
have found once you do report these violations. Im still seeing some of the same
activities happening today as I did in Year 6. Today when I see a possible violation,
I actually try to tell the applicant what the violation is and recommend to them to
call the 800 number with USAC to get USACs take on whether its a violation or
not and what can be done about it. I dont know how successful that is.
In one case, I was brought in by the Sun Sales Team to work with them on an
E-rate Project that they had been selected for. It was an E-mail solution. In this
case as I started to get more involved in it, I had serious questions about the integrity of what was going on with this applicant and the originally awarded service
provider. The applicant was El Paso Independent School District and the selected
Service Provider on the original 471 forms was I.B.M. (International Business Machines). I had been given a Statement of Work that was provided to Sun by IBM
and had El Paso ISDs name on it. (See Reference #1) I reviewed the Statement of
Work and it had several issues. They included ineligible products and services and
had products that didnt pertain to just an E-mail Solution. I sent an e-mail off to
the Service Provider E-mail Alias asking if these products and services were eligible
and the response back was NO. (See Reference #2) We had a conference call with
El Paso ISD and I.B.M. representatives discussing these issues and I.B.M.s response was that we should take this offline to discuss, but they had FCC lawyers
that handled this kind of stuff. I did take this offline with Don Riddick from IBM.
Don told me not to worry about it that they would take care of it. I was to fill out
the service substitution form and that would take care of everything. He didnt appear to be concerned about the products and services that were being offered in the
Statement of Work that were not eligible. In trying to fill out the service substi-

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tution form, I realized that IBM didnt include their e-mail software solution on any
line item. (See Reference #3) I informed the Sun Sales Team and I was instructed
to call Woodrow Lee from I.B.M. When I spoke with Mr. Lee, he informed me that
they didnt include it on there because their E-rate Consultant had advised them
not to. In the Statement of Work it was listed as Lotus Notes and in my e-mail to
the Service Provider Alias, I specifically asked if Lotus Notes was eligible and they
said NO. I responded back to Mr. Lee that they must have known it wasnt eligible
and didnt include it on their itemized list on the 471. Again, he said no, but their
E-rate Consultant had advised them not to. If that was the case, I didnt know how
I could substitute our e-mail software solution for one that didnt exist on their
original 471. IBM agreed that Sun should also leave off their software solution. I
believed that it would not be acceptable, since the original 470 products and services
must match the 471 and in turn the service substitution form also needed to match
the products and services selected. This was confirmed to me by the SLD in another
e-mail. Sun has substantial discounts that they provided to Educational Institutions. In this case, since we were asked by the applicant to work through I.B.M.
on this project, we were not able to pass along those Educational discounts. We did
offer to go direct with El Paso ISD and the price would be substantially lower for
El Paso ISD. El Paso ISD again directed Sun to work through IBM. IBM also stated
to Sun that we needed to work through them. (See Reference # 4) We did however,
provide our best possible pricing to IBM considering that we were providing all the
products and installation services, but IBM didnt like our price. It was unclear to
Sun why IBM required us to provide them with a price that allowed them to take
approximately 51% of the overall cost for the project, as they specified on the original 471 form, with Sun doing most of the work. (See Reference #5) Not to mention,
that Sun was providing an e-mail solution that could cover the entire school district
vs. the 5,000 accounts that were mentioned in IBMs Statement of Work. When Sun
wouldnt come down in our price to IBM, IBM told Sun they were going to rebid
the project and release an RFP that would be due in approximately 1 day. (See Reference #6) It was clear to the Sun Sales Team that even though they had been selected amongst three vendors, one of which was IBM, that Sun would not get the
business unless IBM had made a significant amount of money off of the E-mail Solution.
In closing, I would like to say that the intent of the E-Rate Program is a very
good one. Service Providers and Applicants that dont feel ownership in working
within the program rules and guidelines, should not jeopardize those Applicants and
Service Providers that do adhere to the programs rules and value what the program
does for them. There needs to be more extreme measures taken against the waste,
fraud and abuse and there are tools out there that can help. There are some proficient sets of tools for Service Providers and Applicants to help them with the Erate Process. These tools could be modified to assist USAC & the SLD in providing
a traceable method for service providers and applicants to work together. Without
that traceable contact between service providers and applicants, it will be very difficult to monitor the waste, fraud and abuse. These tools could also help in identifying patterns of consultants and services providers that might be working together,
as well as service providers and applicants. Exposing the program violations and the
offenders in a public forum is key to fixing some of these problems. Its also important for those that report waste, fraud and abuse to get some sort of notification
of what happened with their reporting. This would encourage more reporting of
these issues when they see results from it. By eliminating the waste, fraud, and
abuse, all of our schools and libraries will have an opportunity to take full advantage of what this program has to offer.

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Mr. WALDEN. Thank you. Thank you for your testimony.

Mr. Hawthorne, welcome.
TESTIMONY OF NATHANIEL HAWTHORNE

Mr. HAWTHORNE. I think I will stand.

Mr. WALDEN. I think your microphone is not on, sir.
Mr. HAWTHORNE. Thank you.
I think I will pass on an opening statement, and I will stand
ready to respond to any questions.
Mr. WALDEN. All right. Thank you very much.
[The prepared statement of Nathaniel Hawthorne follows:]

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245
Mr.
Mr.
Mr.
Mr.

WALDEN. All right. Thank you very much.

Caine, welcome.
CAINE. Thank you.
WALDEN. Do you have an opening statement for us today?
TESTIMONY OF CHRISTOPHER G. CAINE

Mr. CAINE. I do.

Mr. Chairman and Ms. DeGette, thank you very much.
I am Chris Caine, Vice President of Governmental Programs for
IBM.
I appreciate this opportunity to provide IBMs perspective regarding the E-Rate program. We have a long history of commitment to public education and working to help our Nations leaders
improve K through 12 schools. Therefore, we responded willingly in
1997 when FCC Chairman Reed Hunt requested our help in educating school districts about the newly created E-Rate program.
We recognize that you and other members of this committee have
raised important questions about a number of issues surrounding
the program, including incompatible technologies that do not work
together, equipment delivered but not installed, billing for equipment or services not provided, and procurement irregularities. And
these are important issues and they should be addressed.
But we believe in IBM that overall the E-Rate program has been
a success in helping millions of disadvantaged students bridge the
digital divide. IBM is here today voluntarily because we care about
the program and we want to help you and others make it the best
it can be.
IBM has participated in the program as a service provider since
its inception. Our extensive experience in E-Rate and in K through
12 education has given us an insight into the E-Rate program and
how its goals can be fully realized.
Some have suggested that IBM has been too involved in the procurement process because school officials listened to advice from
IBM prior to issuing a request for proposal. We strongly disagree.
The SLD guidance encourages vendors to share their experience
with schools and specifically authorizes vendors to provide assistance in the development of an RFP as long as the resulting procurement is neutral. IBM has confidence in school districts to objectively consider technical options from various sources and apply
their good judgment to make sound and proper procurement decisions.
Deploying a modern network infrastructure is not a simple task,
especially under the often tight schedules imposed by the E-Rate
program. So it is important that the schools get the right technical
and project management help, and I think we heard that from
some of our earlier speakers.
As this committee has learned from prior hearings, students,
teachers, and communities will suffer if much needed equipment is
left stacked in a warehouse for lack of coordination or technical
skills. This is why IBM supported the choice by the El Paso Independent School District, among others, to use a systems integration
approach for selected E-Rate projects.
As a systems integrator, IBM can provide a single point of accountability to insure that all components of the network will be

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installed as planned and will work properly together. In El Paso
IBM delivered good, tangible value on time and on budget.
Deploying complex network systems is not a plug and play activity. A collection of the lowest priced piece parts is often not the
most cost effective decision. That approach may not optimize the
cost of the overall solution, and the parts may not work together
effectively.
Implementing such projects under the strict rules of the E-Rate
program and dealing with the old physical infrastructure that is
frequently found in many school districts carries substantial risk
and requires considerable program management experience. For
these reasons, we believe systems integration is a valuable approach.
El Paso selected IBM as its E-Rate systems integrator in January 2001, following an open, two-step procurement process permitted under Texas law. In the first step, El Paso ranked bidders
based on technical qualifications, experience, and pricing information. As a result of this step, El Paso selected IBM as the most
qualified bidder.
In the second step, the district entered into detailed negotiations
with us and satisfied itself that we were the most cost effective
vendor for meeting its comprehensive network requirements.
As part of our E-Rate engagement in El Paso, IBM provided
maintenance support, including a centralized help desk to keep the
network up and running. We believe that quality maintenance is
critical for a school district to get the full value out of its technology investments, another thing we just heard recently from
other speakers on the panel here.
The Consortium for School Networking agrees. The consortium,
which is made up of education leaders in technology from school
districts across the country, notes the importance of a formalized
support infrastructure. In addition, the group reports that over 95
percent of school districts with more than 20,000 students, such as
El Paso, use help desks to provide technical support.
This industry standard practice is a good way to provide fast resolution for network problems and insure high network availability.
It is important to remember that the E-Rate program is relatively
new and that the rules are still evolving. Since the beginning of the
program, we have complied with the rules as we understood them
at the time. It is very unfortunate that El Paso and other school
districts were denied funding, despite the fact that they had followed application approaches that the SLD has previously approved.
However, we believe the FCC ultimately reached a fair and balanced decision in its Ysleta order. Significantly, the Commission
acknowledged that some E-Rate program rules were unclear and
applied inconsistently. Consequently, the Commission took the unusual step of waiving its rules to allow these applicants to conduct
rebids and to reapply for the denied funding.
The Commission also expressly noted that IBM could participate
in these rebid applications. IBM has always taken compliance with
E-Rate rules very seriously. Now that the Commission has provided additional clarification, we are working even harder to insure
our compliance. We have hired two highly regarded E-Rate experts

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from the applicant community and consolidated expertise into an
E-Rate Center of Competence as a resource for IBM staff.
Our Center of Competence is actively engaged with the SLD. For
example, we are proactively seeking to resolve questions about the
rules, working to improve clarity of our statements of work and
participating in the on-line product data base pilot program.
Members of the committee, IBM is committed to the ongoing success of E-Rate, and we will continue to work with the SLD, the
Commission and you to improve the program. As you can see in our
written statement, we have offered some recommendations for the
program, the most important of which is to make the rules as simple and as clear as possible.
Thank you for the opportunity to be here, and I will look forward
to answering your questions.
[The prepared statement of Christopher G. Caine follows:]
PREPARED STATEMENT OF CHRISTOPHER G. CAINE, VICE PRESIDENT, GOVERNMENTAL
PROGRAMS,, INTERNATIONAL BUSINESS MACHINES CORPORATION
INTRODUCTION

Mr. Chairman, Members of the Subcommittee, I am Christopher G. Caine, Vice

President, Governmental Programs for IBM. I appreciate the opportunity to appear
before this Subcommittee to provide IBMs perspective regarding the E-rate program.
IBM has had a long history working with our nations educators. For example, in
1986 IBM pioneered the use of technology in classrooms with the introduction of
Teaching and Learning with Computers, a pioneering use of technology in the classroom. Since 1994, through our Reinventing Education program, IBM has given almost $75 million in philanthropic technology grants and worked with school partners to improve student achievement. As a result of this grant program, the Center
for Children and Technology, which has researched technology and learning for over
two decades, estimates that over 90,000 teachers and millions of students are using
the educational technology tools created by IBM and our school partners. Last year
alone, we provided over $35M in grants to elementary and secondary schools, making IBM the largest corporate contributor to K-12 education. And to advance the
cause of public school reform, IBM organized and hosted National Education Summits in 1996, 1999 and 2001, bringing together the nations governors and business
and education leaders to collaborate on this important goal.
Clearly, IBM was committed to improving schools through the application of information technology long before the E-rate program was created.
IBM AND E-RATE

Because of IBMs strong commitment to improving K-12 education and bringing

the opportunities created by information technology to all students in our nation,
we were pleased when Congress created the E-rate program as part of the Telecommunications Act of 1996. We believed then as we believe today that the program
was structured properly to provide greater assistance to those schools that have the
greatest need, helping to provide opportunities for economically disadvantaged students to participate in the information age.
Shortly after the FCC established the initial rules to govern the E-rate program
in 1997, I participated in a small meeting of high-tech leaders where then-FCCChairman Reed Hundt asked us directly to help educate schools across the country
about the opportunities of E-rate. IBM willingly responded by creating a booklet
that described the new program, and we mailed a copy to over 12,000 school districts in the nation. We followed up by providing seminars about E-rate for school
officials and meeting with individual districts to talk about how E-rate could help
them meet their communities educational needs and objectives.
IBM has participated in the E-rate program as a service provider since its inception, and we believe that the program has been an enormous success in bringing
the vast resources and opportunities of the Internet to deserving students. E-rate
funding has allowed many of our countrys poorest school districts to bridge the digital divide.

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The E-rate program has provided the opportunity to many poorer school districts
to explore new ways to use technology to enhance teaching and learning. Many districts have found that the universal access to the Internet that E-rate funding provides has exposed their students to a depth and breadth of material that their local
teachers could not possibly have developed and delivered on their own. The program
has the added benefit of helping to prepare our nations students for the career requirements of a highly competitive, technology-based economy.
Since the beginning of the Erate program, IBM has served well over 200 E-rate
customers in over 30 states. As the largest computer company and IT services company in the world with a history of applying our world-class research capabilities
to educational challenges, IBM has provided a broad range of eligible networking
products and services under the E-rate program. IBM has the resources to support
many of the largest school districts across the country.
We believe that IBM has an excellent record of helping schools achieve their educational objectives under the E-rate program, delivering complex networking solutionson time and on budgetto meet the increasingly sophisticated demands of
districts with tens of thousands of students, teachers and staff.
E-RATE INVESTMENTS TO IMPROVE EDUCATION

Our experience has shown that with clear goals and proper planning, school districts can leverage information and communication technology to transform the
learning environment, providing effective tools for teachers and leading to measurable improvements in student achievement. Therefore, IBM fully endorses the Erate program requirement that schools base their technology investments on a comprehensive Technology Plan that is aligned with their educational goals.
As the El Paso Independent School District stated in its 2000-2001 Technology
Plan:
In addition to a sound background in traditional academics, todays students
must be competent and confident in using a wide range of technology in a variety of settings. Today, and in the future, most career paths require the use of
computers and a wide-range of other technology. In short, students must be as
comfortable using a computer or other technology as they are in using a pencil
and paper.
In our work over the last decade with school partners in our Reinventing Education program, IBM has encouraged schools to take a systemic approach to education reform, consistent with the goals of the E-rate program. For technology to be
used effectively in the classroom, it must be fully integrated in the curriculum, and
professional development opportunities must be provided for teachers so that they
can learn how to use it. If these principles are followed, the resulting improvements
can be dramatic. Indeed, as research has shown, students in Reinventing Education
classrooms have outperformed their peers on standardized achievement tests. Fortunately, the E-rate program created by Congress is making it possible for more students to enjoy the educational benefits of technology in the classroom.
IBM also believes that network infrastructure that schools install today should be
designed to avoid rapid obsolescence by supporting evolving technical requirements
and by accommodating reasonably projected future growth in demand for network
capacity. The network infrastructure should support not only basic Web usage and
e-mail, but should also be designed to support sensible, proven technologies that can
greatly improve the productivity and effectiveness of the educational environment,
such as online dissemination of lesson plans, classroom administration, and stored
broadcasts or real-time, interactive video instruction to enable distance learning and
sharing of the best-available teaching resources. Based on their educational goals
and available resources, school districts must make the ultimate decision about
what technology they should deploy.
TECHNOLOGY CHALLENGES FACING SCHOOLS

Many school districts have required substantial investments in recent years to upgrade their network infrastructures so that they could meet their educational objectives and prepare their students for the networked world. But deploying a modern
enterprise network is not a simple task. For example, a district with 50,000 students plus thousands of teachers and administrators has networking requirements
that are at least as complex as those of a small city. Many districts do not have
sufficient technical staff and knowledge to handle these projects on their own. They
require considerable assistance with the deployment, configuration, project management, technical support and maintenance for their large, complex network infrastructure projects. The Erate program has made it possible for many economically

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disadvantaged school districts to obtain the technology products and services that
they need to offer their students the same opportunities as more fortunate districts.
Certain constraints imposed by the E-rate program structure and the school environment, generally, create additional challenges in deploying advanced network infrastructure. For example, the annual E-rate funding cycle requires that major
projects be performed on an artificially accelerated basis, compressed to fit into a
narrow time window between receipt of E-Rate funding approval (often after long
delays) and the funding year deadline. Meeting this tight schedule is further complicated by having to work around classroom schedules, after hours and during
school holidays. And the simple fact that many school buildings were built decades
ago, long before the Internet and the need for wiring classrooms were contemplated,
can present difficult deployment problems, such as asbestos removal and inadequate
electrical supply.
Given the complexity of the task of installing, integrating and maintaining a sophisticated network environment, especially under the often-tight schedules imposed
by the E-rate annual funding cycle, it is important that school districts get the right
technical and project management help. And if a school district hires multiple vendors separately to perform portions of the work, they may also find it difficult to
coordinate among them.
Congress, the FCC and the SLD are well aware of the potential for waste if expensive equipment is left stacked in a warehouse for lack of planning, coordination,
or technical skills. IBM has also seen cases where computers sit unused, gathering
dust in classrooms, because schools had not invested sufficiently in technical support, maintenance or teacher training. In each case, expensive investments are
idled, the schools instructional objectives and technology vision are frustrated, and
E-rate goals of bridging the digital divide go unfulfilled.
IBM HELPS SCHOOLS MEET THESE CHALLENGES

One way that IBM has responded to these challenges has been by proposing a systems integration approach for selected E-rate projects. Systems integration is recognized as the most effective procurement model for governments and businesses undertaking complex IT projects. In fact, the Federal Governments use of systems integrators is longstanding and extensive. Since each school districts requirements
are unique and districts often have varying levels of technology resources, schools
have seen great value in working with a technology partner like IBM.
As a systems integrator, IBM can provide a single point of accountability so that
school administrators are assured that all components of their network will be installed on time, within budget, and will work properly together. IBM can take responsibility for all of the work performed by multiple vendors and subcontractors,
and for keeping school officials and boards of education informed. And by overseeing
the entire project, IBM is able to provide a fixed-price commitment to a school district, enabling it to plan its budget and funding needs more precisely and avoid costly overruns. Once installed, IBM can provide ongoing technical support and maintenance to ensure that the network stays up and running so the school district can
obtain the full benefit of its E-rate-funded investment.
IBM does not consider systems integration to be a one size fits all approach.
Some school districts choose to hire a systems integrator to manage their project,
while other districts prefer to act as their own general contractor. IBM offers its
products, services, and experience either way. IBM strives to be a true partner to
many of our nations poorest school districts, helping them through the labyrinth of
technological solutions for their needs, as well as through the E-rate process itself,
while providing proven solutions. At the heart of each partnership is a firm understanding of the connection between infrastructure and educational results, and a
commitment by IBM to assist the school district with its technology goals.
2001 E-RATE FUNDING FOR EL PASO INDEPENDENT SCHOOL DISTRICT

Among the school districts that IBM has served as part of the E-rate program is
the El Paso Independent School District (EPISD or El Paso), which at the time
served over 63,000 students in 52 elementary schools, 16 middle schools and 16 high
schools, with over 8,000 employees. EPISD is an economically disadvantaged district, with a large portion of its students eligible for the National School Lunch Program. The mission of EPISD is to meet the diverse needs of all students and empower them to become successful members of a global community. EPISD developed
a thorough and forward-looking Technology Plan designed to achieve its educational
goals.
The selection by EPISD of IBM as its strategic technology partner provides an example of IBMs role as a systems integrator in the E-rate program. El Paso had par-

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ticipated in the E-rate program from Funding Years 1 through 3 with service providers other than IBM. In December 2000, El Paso posted a Form 470 for Year 2001
on the Universal Service Administrative Company, Schools and Libraries Division
(SLD) Web site in accordance with E-rate program rules. El Paso also issued a
Request for Proposal (RFP) in December 2000 detailing El Pasos requirements and
describing the form of the prospective contract.
EPISD selected IBM as its systems integration partner in January 2001 after
evaluating competitive bids from IBM and seven other vendors, following a negotiated solicitation process in accordance with Texas State procurement regulations,
FCC rules and SLD requirements in effect at the time. El Paso recognized that the
complex network solution they sought to procure to support their educational objectives was not a simple, commodity purchase in which the cheapest initial proposal
would necessarily be the most cost-effective solution over time. So EPISD issued an
RFP and followed an open, transparent, two-step procurement process permitted
under Texas law. In the first step, EPISD ranked systems integration partner bidders based on technical qualifications, experience and pricing of skilled labor. As the
result of this step, EPISD selected IBM as the most qualified bidder to implement
the network environment as envisioned in its Technology Plan.
In the second step, the District entered into detailed negotiations with IBM to
agree to contractual terms, with price as a primary factor in the final selection.
EPISD satisfied itself that it was receiving the right combination of cabling, equipment, software and services at a fair and reasonable price that, considering all of
the factors, made IBM the most cost-effective vendor for meeting its comprehensive
network requirements. At the end of the second step, EPISD staff presented its decision and rationale for consideration by the Board of Trustees in open, public meetings. The Board then voted in favor of the recommendation and issued formal authorization for the contracts. The SLD subsequently reviewed EPISDs E-rate funding request in thorough detail and awarded E-rate funding to EPISD in October
2001.
EPISDs contracts with IBM allowed the District to bid out portions of the purchases to ensure competitive prices and provided for termination if the District became dissatisfied with IBMs performance. IBM believes that the EPISD technical
staff and Board had sufficient procurement expertise and experience to make sound
decisions to ensure they received the best value for the money.
The lowest priced initial solution is often not, over time, the most cost-effective
use of taxpayer dollars. IBM believes that selection of a systems integrator is an
effective approach for procuring complex information technology systems. Where
school districts seek a comprehensive networking solution, as in El Paso, the proven
ability of the integrator to manage such a difficult project to completion on time and
on budget is particularly relevant.
Federal and state procurement laws provide for government procurements of complex IT systems, like the one in El Paso, through the use of a procurement model
that weighs vendor qualifications, technical expertise and management experience,
along with price, to choose the most cost-effective provider. The FCC recognized this
point in two key decisions governing the E-rate program. The Commissions 1997
Universal Service Order gave schools maximum flexibility to take service quality
into account and to choose the offeringthat meets their needs most effectively and
efficiently. (emphasis added) And in its 1999 Tennessee Order, the Commission
upheld a bid selection process in which price was an important factor, but was explicitly given a lower weighting than technological approach. In other words, price
was not required to be the most important selection criterion.
The work that EPISD procured in 2001 under the E-rate program was particularly complex. IBM acted as a systems integrator, or general contractor, providing
a single point of contact and accountability so that EPISD could be assured that the
network and all of its components would be installed as planned and work properly.
IBM worked closely with EPISDs senior management and technical staff to ensure
that the network solution and product selection met the requirements as specified
by the District in line with their approved Technology Plan and that the solution
complied with E-rate eligibility rules as EPISD and IBM understood them. We also
made regular presentations to the Board of Trustees to keep them apprised of
progress and to seek their direction and approval.
IBM implemented a network solution, providing internal connections necessary
for high-speed Internet access to enable distance learning and to take advantage of
the educational resources available on the Internet. We accomplished this challenging task to connect and integrate these schools into an advanced communication
network in a very compressed time frame, as required by E-rate program rules. We
delivered everything that we committed to deliver, on time and on budgetand it
worked.

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Providing a modern technology infrastructure to support education is important
and will create long-term benefits for our students. Such infrastructure may require
significant investment, but it is an investment we must be willing to make. Implementing network projects of this size, scope and complexity for a fixed price under
the strict rules and time constraints of the E-rate program carries substantial risk
and requires considerable program management experience. A collection of the lowest priced piece parts is often not the most cost-effective decision. That approach
may not optimize the cost of the overall solution, and the parts may not work together effectively. It may be tempting to go with such a cheaper solution, only to
find out later that the Districts educational goals are not met when the network
cannot be deployed as planned or is frequently down.
IBM has the resources and capability to meet the challenges of implementing
complex network systems under the E-rate program. Based on customer satisfaction
surveys and comments from key EPSID staff, IBM believes that we met or exceeded
the Districts expectations. IBM is proud of the job that we did. We believe that we
built the right solutions and delivered the value that we promised to the District.
For Funding Year 2001, IBM implemented and integrated a total of nine projects,
including cabling, network electronics, server upgrade, Web and file servers, Fiber
Internet Access, video, e-mail, Web access and technical support. The following section provides further detail on the technical support IBM provided to EPISD.
IBM TECHNICAL SUPPORT SERVICES FOR EPISD

Prior to the projects IBM undertook at EPISD, the District had only begun to introduce a modern technology infrastructure, and they lacked sufficient technical
staff to properly support their new network infrastructure. To meet their needs,
EPISD sought a service provider to assist with technical support under the E-rate
program. The use of vendor resources in such cases is common, as illustrated by a
study by the Consortium for School Networking (CoSN)., made up of education leaders in technology from school districts across the country and others CoSN found
that over half of the school districts surveyed outsourced at least some of their technical support.1
IBM provided technical support and maintenance to EPISD using a methodology
IBM had honed through many years of support for customers with similar reliability
requirements and with environments of similar complexity. The goal was to enable
the network infrastructure to operate reliably and with little downtime, so that it
would be available to students and teachers to support learning in the classroom.
IBM first set up a Technical Services Office (TSO), which designed, developed and
implemented the support services. The TSO provided project coordination, site and
connectivity networking services support, network infrastructure support, Web
maintenance support, Local Area Network (LAN) and network hardware maintenance support, and help desk support. The IBM services achieved the following improvements for EPISD:
Higher network availability.
The ability to resolve network problems quickly, shortening downtime.
Routine maintenance and technical change management methods to reduce unplanned connectivity outages.
Network performance metrics to track quality of service and improvements.
A single-point-of-contact help desk to screen calls and route them either to the
IBM network support for eligible services, or to EPISDs own desktop PC support function for services not covered by E-rate.
Trouble report status accessible by Web or phone.
IBM believed then, as it does now, that an effective technical support and maintenance program is an essential element of any school districts technology investment. We believe that quality maintenance support is critical for a school district
to get the full value out of its technology investments. School districts are also coming to the realization that technical support is a critical element of their IT budget
that can no longer be treated as an afterthought to be handled by technologically
savvy teachers and students in their spare time. As CoSN has observed:
Ever-broadening use of personal workstations and the Internet in schools
has increased the awareness of support costs and the need for a more formalized support infrastructure. The increasingly complex technology infrastructure
makes the historically informal support approaches less adequate or practical. 2
1 Consortium for School Networking study available at http://classroomtco.cosn.org/surveyltechlpress.html
2 http://classroomtco.cosn.org/gartnerlintro.html

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CoSN reports that over 95 percent of school districts with more than 20,000 students use help desks to provide technical support, so this is a very common practice
among large districts such as El Paso. 3 Help desks are a good way to provide fast
resolution of network problems and ensure high network availability.
2002 EPISD E-RATE FUNDING DENIAL

In November 2001, a month after receiving its funding award for E-rate Year
2001, EPISD posted a Form 470 on the SLD website for Funding Year 2002. According to EPISD, the District wanted to inquire into any additional vendor interest in
providing internal connection or Internet access services, and to ensure that renewing the IBM contract would be cost-effective and advisable. It did not issue an RFP
for Funding Year 2002, and received no response to the Form 470 posting that it
considered sufficient to prompt non-renewal. Consequently, El Paso conducted an internal review of its projects for 2002 and discussed pricing in detail with IBM prior
to its decision to renew the contract. El Pasos Board of Trustees voted to renew
IBMs contract on January 8, 2002. Through the first half of calendar year 2002,
IBM continued implementation of its Year 2001 E-rate contract, successfully installing the new network and support infrastructure for EPISD.
The 2001 funding year ended on June 30, 2002, without El Paso receiving a funding decision for Year 2002. In anticipation of eventually receiving 2002 funding,
IBM, at its own risk and expense, continued to provide technical support for EPISD
beyond the end of our Year 2001 service contract. This support continued for six
months until the end of calendar year 2002, when IBM reached the point at which
it was unwilling to continue service without being paid. IBM did not subsequently
seek payment from EPISD after E-rate funding was denied, despite the fact that
IBM incurred millions of dollars in expenses in providing technical support services
for those extra six months.
El Paso did not receive the SLD decision denying its Year 2002 application until
March 10, 2003. Among the reasons for the denial, SLD criticized EPISDs use of
the two-step procurement process for EPISDs Year 2001 application (which the
SLD had approved the prior year), and therefore questioned whether EPISD had
adequately established that IBM was the most cost effective vendor for Year 2002.
IBM supported El Paso in its appeal of the SLD funding denial to the FCC, and
IBM also filed its own appeal at the FCC. IBM urged the Commission to expedite
the appeals of EPISD and other similarly situated school districts. The Commissions Ysleta Order subsequently upheld the SLDs denial of Year 2002 funding for
EPISD, Ysleta and six other school districts. The Order was released on December
8, 2003, eighteen months after the end of the 2001 funding year.
While waiting for the delayed Year 2002 funding decision, IBM and EPISD discussed various options for continuing technical support services in the event that
funding was ultimately denied. EPISD originally had intended to transition technical support services over to its internal staff over time, but this plan was dependent upon renewal of E-Rate funding. EPISD and IBM had not planned the project
to address the eventuality that E-Rate funding for the technical support service
would be approved for one year and then abruptly cancelled for subsequent years.
As of December 2002, it was still too early in the implementation of the services
for the EPISD staff to have gained enough experience with the system to effectively
take over operation of it themselves. EPISD considered purchasing the system from
IBM 4, but it did not believe that alternative was viable given the short timing and
lack of funding.
This was a frustrating time for both EPISD and IBM. Substantial start-up effort
and cost were expended on establishing the Technical Support Office, the help desk,
the maintenance procedures, the tools and the supporting computer systems. It is
very unfortunate that a change in the interpretation or application of the Erate
rules caused much of the return on this investment to be unnaturally truncated.
IBM also regrets that El Paso, Ysleta and other schools were delayed by a year or
more in the implementation of their Technology Plans due to denial of their Year
2002 funding applications, which were submitted to the SLD in good-faith reliance
upon the SLDs previous approval of similar applications. However, EPISD did receive full value from the other important E-Rate projects IBM implemented for Year
2001.
3 http://classroomtco.cosn.org/surveyltechlsupport.html
4 Since IBM had been providing technical support to the District as a service, E-rate rules did
not permit us at the end of the contract to donate the tools that we were using to EPISD.

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THE COMMISSIONS YSLETA ORDER

IBM believed that we had complied with all applicable rules relating to the El
Paso projects and Year 2002 proposals, including Erate program rules, state procurement rules and communities local procurement requirements, as we understood
them at the time. In addition to complying with the rules, IBM met its commitments in delivering products and services to our funded Erate customerssome of
the largest school districts in the country with the most challenging network requirements.
Significantly, the Commission, in ruling on the funding appeals by IBM and our
school district partners in El Paso, Ysleta and elsewhere, acknowledged that some
E-rate program rules were unclear and applied inconsistently. The Commissions
Ysleta Order said: SLD could reasonably have been construed as sanctioning the
two-step Systems Integration process by approving the El Paso Independent School
Districts application for Year 2001. ( 69) Further, the Ysleta Order
acknowledge[d] that the Commissions use of varying phraseology in the same decision [concerning whether price must be the primary factor or only a primary factor] created some ambiguity on this issue. ( 50) And as the Commission noted,
some applicants received funding despite circumstances similar to those of the denied applications associated with IBM. For example, while some of IBMs E-rate
customers were criticized for including a broad list of internal connections services
on their Forms 470, other districts that were not working with IBM received funding despite using the same or similar lists of services.5
Because of applicants substantial and widespread reliance on prior SLD funding
decisions and to avoid imposing an unfair hardship on applicants, the Commission
took the unusual step of waiving its rules to allow these applicants to conduct
rebids and reapply for denied funding under the new guidance issued as part of
the appeals order. The Commission expressly noted that IBM would be eligible to
participate in these rebids.
IBM believes that it is very unfortunate that El Paso, Ysleta and other school districts were denied funding for Year 2002, despite the fact that they followed application approaches that SLD had previously funded. However, given the circumstances,
we commend the Commission for reaching a fair and balanced decision on these districts funding appeals. What is most important is that the Commission provided additional guidance on E-rate rules to ensure that they are interpreted as intended
and gave these school districts the opportunity to conduct rebids under this guidance so that they would not lose out on Year 2002 funding opportunities.
IBMS RELATIONSHIPS WITH SCHOOL DISTRICTS

Some have suggested that IBM may have exerted improper influence on the procurement process at certain school districts, because school officials listened to advice from IBM prior to issuing a Request for Proposal (RFP). We strongly disagree.
IBM has been successful in winning E-rate contracts from many districts across the
country, but this is not surprising, since IBM for many years has been a major information technology supplier to both commercial and governmental customers. IBM
has a reputation for being able to handle the most challenging systems integration
projects, and the company has a long history of providing innovative IT solutions
for K12 education.
In some cases, individual school districts interested in applying for E-Rate funding shared with each other, or IBM shared with a school district, sample RFP documents that other school districts had previously used successfully. School districts
could learn from these examples and tailor an RFP to meet their needs. SLD guidance encourages vendors to share their experience with schools and specifically authorizes vendors to provide assistance in the development of an RFP, as long as the
resulting procurement is neutral. IBM strives at all times to comply with applicable
state, local, and E-rate rules and regulations.
It is appropriate for vendors to get to know their school customers, understand
their needs, goals, and Technology Plans, and offer advice. In fact, school districts
should be encouraged to seek input from as many competing vendors as possible.
As a company that has worked closely with American public school systems for decades, it is natural for school administrators to seek our advice and for us to offer
thoughts on technology-related education matters. IBM believes that school districts
can objectively consider input from various sources and apply their own good judgment to make sound procurement decisions. School officials understand very well
that they must comply fully with all applicable procurement regulations and must
5 [W]e acknowledge that SLD has approved other funding requests in the past that utilized
all-inclusive FCC Forms 470 similar to that submitted by Ysleta. (Ysleta Order, 35)

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obtain the approval of independent boards of education for their procurement decisions.
ELIGIBILITY OF PRODUCTS AND SERVICES

The SLDs guidance on eligibility of products and services for E-rate discounts is
contained in the Eligible Services List. Since the beginning of the E-rate program,
applicants and service providers have frequently raised questions about interpretation of the ESL. In response, the SLD has periodically updated the ESL to elaborate
and provide clarification about what products and services are covered. However,
given the rapid advances in networking and information technology, it is very difficult to provide a clear, definitive statement on the eligibility of the broad range
of products and services that a school district might consider as part of its technology infrastructure. There is always room for improvement, and SLD should strive
to provide greater clarity and certainty about eligibility by continuing to update and
refine the ESL.
Given the evolving nature of the ESL, it is understandable that there would be
varying interpretations about whether a certain product or service is considered eligible. IBM has made a good-faith attempt to understand and comply with the ESL
as it existed at the time, and we have added and deleted products and services from
our E-rate portfolio as a result of the periodic changes in the ESL. However, we are
very concerned that new guidance in the ESL might be applied retroactively to declare a product or service that was previously approved for funding by SLD now ineligible and subject to recovery of funds from the applicant or service provider.
IBM is very willing to work with the Commission and SLD to identify areas of
the Eligible Services List that would benefit from further clarification, but we believe that new guidance should only apply prospectively.
ONGOING SUCCESS OF E-RATE

IBM is committed to the ongoing success of the Erate program, and we will continue to work with the SLD, the Commission and Congress to improve the program
so that it can continue to help bring the latest tools for learning to schoolchildren,
teachers and communities.
IBM has always taken compliance with the E-Rate rules very seriously, and we
have spent considerable time trying to understand and comply with the rules. Each
region in our Erate sales team was responsible for monitoring, understanding, and
complying with program rules. Employees who worked on E-rate projects participated in annual training sessions and periodic conference calls and e-mail updates.
Each year every IBM employee must certify that he or she will comply with IBMs
Business Conduct Guidelines requiring compliance with all applicable laws and regulations. Employees who participate in sales to government entities, such as E-rate
school customers, must read and certify to a separate set of Public Sector Guidelines.
Now that the Commission has provided additional clarification, we are working
even harder to ensure our compliance. We have hired two highly regarded E-rate
experts from the applicant community and consolidated expertise into an E-rate
Center of Competence as a resource for IBM staff and our customers. Our Center
of Competence is actively engaged with the SLD. For example, we are proactively
seeking to resolve questions about the rules, working to improve the clarity of our
statements of work, and participating in the online product database pilot.
RECOMMENDATIONS TO IMPROVE E-RATE

IBM offers the following recommendations to improve the E-rate program and
help ensure its continuing success:
1. Make rules simple and clear. Ensure rules are simple, consistent, clear and
fully disclosed to the public. The entire rules structure must be open and public.
In particular, processing criteria used by the SLD to review applications and
invoices should be open and publicly available. Capturing all questions asked
by applicants and service providers and their answers in a wide ranging Frequently Asked Questions (FAQ) would help to improve program integrity, clarity and compliance.
2. Expedite application reviews and appeals. Provide SLD with adequate resources to process applications and appeals in a timely manner. Appeals and
prior year applications pending at SLD should have top priority for processing
over current year applications.
3. Provide adequate advance notice of rules changes. Advance notice of
changes in FCC rules and SLD guidance should be given so that applicants will

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have adequate time to plan budget changes. Changes that have significant impact on applicants should be made after longer advance notice.
4. Clarify the Eligible Services List. SLD should provide illustrative examples
of both eligible and ineligible products and services to help clarify the Eligible
Services List and create greater certainty for applicants and service providers.
SLD should create a Web-based Eligible Services List with links to SLDs answers to questions posed by applicants and service providers over time.
5. Identify E-rate consultants and their business relationships. IBM agrees
with the recommendation of SLDs waste, fraud and abuse task force that Erate consultants should disclose their business relationships with service providers for both applicants and other service providers to see. Alternatively, consultants who also sell eligible services on a third party basis should be prohibited from involvement in the procurement process on behalf of applicants.
Thank you for the opportunity to be here to offer IBMs perspective on the E-rate
program and how it can be improved. I look forward to answering your questions.

Mr. WALDEN. Mr. Caine, thank you for being here, and thank
you all for your testimony this afternoon and for your patience
throughout the day. I know this has been a long hearing. It is an
important issue, and I want to assure all of you and everyone else
listening in that it is our goal as well to make sure that thewe
are picking up some audio somewhere. It is me. That is a frightening thought. I do not know if there is a way towell, if you could
turn off your microphone for now because we are hearing all of that
back here.
Thank you.
I just want to assure people that it is our goal as well to figure
out how to make E-Rate work because we have seen how it does
not work and we have seen how vendors have misused it to their
advantage and how some school districts have been overtaken by,
frankly, greedy vendors who have gone out of their way to rip off
the system, and so we are committed to try and figure out how we
make it work, work right, work fairly because there are a lot of districts that need to be wired and operated.
Ms. Glogovac, in your comments, you made reference to awareness of a consortium that gets a 3-percent kickback, I believe was
your term.
Ms. GLOGOVAC. This year I was reviewing 470s. I believe it was
in the May or June timeframe, and I saw that there was an RFP
for a consortium.
In reviewing the RFP, I believe it was on line. It read that they
were looking for a 3-percent kickback from the vendors that were
going to get the business.
Mr. WALDEN. Tell me what the consortium is.
Ms. GLOGOVAC. I do not know exactly. I cannot remember off the
top of my head, but I
Mr. WALDEN. But these would have been school districts?
Ms. GLOGOVAC. I believe it was school districts that were allowed
to use this contract.
Mr. WALDEN. Who was putting together the contract?
Ms. GLOGOVAC. The consortia was.
Mr. WALDEN. Who is the
Ms. GLOGOVAC. I do not know the exact name of the consortia.
I did not bring that information with me.
Mr. WALDEN. Okay.
Ms. GLOGOVAC. I did report it to the whistleblower hotline.
Mr. WALDEN. All right. Good. But in general terms, just so I understand, when you say consortia, is that a consortia of vendors?

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Ms. GLOGOVAC. No, it is a consortia of applicants. So it could be
a number of school districts, private schools lumped into one application.
Mr. WALDEN. Right, and they basically said, You come provide
this to us, and we will give you?
Ms. GLOGOVAC. Basically it was an RFP that said they were looking for E-Rate products and services, and in order to go through
this RFP and win the business for the RFP, you had to provide
them back 3 percent of whatever you sold into those applicant
sites.
Mr. WALDEN. I wonder from your experience would that be a violation of the USAC rules?
Ms. GLOGOVAC. I think we heard today that, yes, it is.
Mr. WALDEN. I would think so as well.
You did report that to the hotline, you said?
Ms. GLOGOVAC. Yes, I did.
Mr. WALDEN. That is what I thought. Okay.
What I would like to do now is have you walk us through what
happened again with IBM and the E-mail solution. Sun Microsystems, as I understand it, was selected to provide the E-mail
services by the school district.
Ms. GLOGOVAC. According to what I was told by the Sun sales
team, there was what they called a bake-off. There were three vendors, one of which was IBM and I believe the other vendor was
Novell; were brought in, and they presented their E-mail solution
to the school district, and I do not know if the board was there or
who was there. I was not privy to that information, but Sun was
actually selected.
And then Sun was told that they needed to work back through
IBM for the project.
Mr. WALDEN. Okay, and yet when Sun submitted a proposal,
IBM wanted to add costs, 51 percent?
Ms. GLOGOVAC. What happened was Sun provided a cost to IBM.
IBM had a specific number associated with it based on the original
471 they submitted and, I guess, were awarded.
Mr. WALDEN. Okay. Let me see if I understand this. So is it accurate then to say Sun came in and said, Here is an E-mail solution
that will work for your district?
Ms. GLOGOVAC. Yes.
Mr. WALDEN. And here is what we think it costs to do that.
Ms. GLOGOVAC. Correct.
Mr. WALDEN. And then you were told by the district you had to
work back through IBM?
Ms. GLOGOVAC. No, we were told that we needed to work through
IBM.
Mr. WALDEN. By whom?
Ms. GLOGOVAC. By the district.
Mr. WALDEN. Yes, that is what I mean. The district told you that
you have got to work through IBM.
Ms. GLOGOVAC. Yes.
Mr. WALDEN. And it is your recollection then that IBM said, We
have got to up this cost by 51 percent?

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Ms. GLOGOVAC. No, what IBM was telling Sun was, You need
to lower your cost in order for us to get what we need out of the
amount that was designated for this project.
Mr. WALDEN. What were they going to do with that money? Do
you know?
Ms. GLOGOVAC. I do not know.
Mr. WALDEN. Mr. Caine, are you familiar with that situation?
Mr. CAINE. I would be happy to comment on it, Mr. Chairman.
We disagree with the characterization that Sun has presented.
We were selected as the systems integrator, as I mentioned in my
opening statement.
Mr. WALDEN. Okay.
Mr. CAINE. We pointed out certain risks to the school district,
that if they were to implement the Sun E-mail solution, they needed to consider as the systems integrator, the party responsible for
bringing it all together, all of the parts together.
Mr. WALDEN. Right.
Mr. CAINE. These risks included schedule delays, need to rework
designs, the need for SLD change approvals and possibly increased
costs, which is the dialog we were having with our applicant and
our partner, the school district.
IBM also pointed out the pros and cons of a non-Sun and nonIBM solution, as Ms. Glogovac said, Novell.
Mr. WALDEN. Okay.
Mr. CAINE. Ultimately the school district chose neither IBMs solution nor Suns solution. They chose Novell. So we believe we
played the role as a systems integrator fairly, pointing out to the
school district the appropriate considerations they needed to keep
in mind on this particular topic.
So neither IBM nor Sun received the E-mail solution. An entirely
independent vendor, Novell, did.
Mr. WALDEN. And, Ms. Glogovac, do you have a comment on
that?
Ms. GLOGOVAC. I guess my comment would be that why would
IBM not consult with El Paso prior to selecting Sun during the
three-step process of selecting Sun amongst the three vendors if
they were playing that role.
Mr. WALDEN. All right. Now, Sun had already installed the system in EPSID, right?
Ms. GLOGOVAC. That I do not know.
Mr. WALDEN. All right. Okay. Mr. Tafoya, you state in your testimony that your school district lost a number of employees shortly
before the funding year 4 application process, and your technology
director had essentially no program experience.
Did the district rely on its strategic technology provider to fill the
gap in knowledge on E-Rate experience?
Mr. TAFOYA. It was my belief because, again, as I said, I was not
directly involved at that time with the E-Rate program; I was in
the district, and so I was watching the progress of the program. It
was my belief that they really did not, if I understood your question correctly, have the resources internally to provide that kind of
leadership to answer those technical questions.
Mr. WALDEN. You relied on a strategic technology provider?
Mr. TAFOYA. That is correct. That is what I saw.

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Mr. WALDEN. Okay, and to your knowledge, prior to issuing the
request for a strategic provider, did the district consult with USAC
or other E-Rate authority as to the propriety of this approach?
Mr. TAFOYA. Again, it was my understanding in the conversations that I heard at the board meetings that I attended that we
were compliant with all of the current rules.
Mr. WALDEN. Okay, and you state that IBM, after it was chosen
as a strategic technology provider, submitted statements of work to
your district for review with limited opportunity for extensive study
and analysis before the E-Rate application deadline. Could you
elaborate on that comment?
Mr. TAFOYA. I am sorry. Part of that broke up at the very end
there.
Mr. WALDEN. Yes. The question is this. You state that IBM, after
it was chosen as the strategic technology provider, submitted statements of work to your district for review with limited opportunity
for extensive study and analysis before the E-Rate application
deadline. In other words, you did not have much time to review
this; is that correct, or your district did not?
Mr. TAFOYA. No.
Mr. WALDEN. Could you elaborate on that? Why was that? What
happened?
Mr. TAFOYA. I believe there were a couple of reasons that that
took place. One was that after the award was made, you had a limited window of opportunity for the actual execution of the work
itself, and I think the other thing that happened is because of the
scope of the number of projects that were involved, there was a real
scramble to make sure that we got all of that addressed as quickly
as we could.
I think there was a big concern on the part of the district that,
with an award of this magnitude, which was highly publicized in
the community, that we did not want to have any appearance
whatsoever of having essentially misrepresented what we are capable of doing, and by that I mean that we wanted to make sure that
the money that was awarded was used, that it was, you know, the
intent of the board.
Mr. WALDEN. Right.
Mr. TAFOYA. And it was the intent of the administration to make
sure that based on the original design that we were able to deliver
within that timeframe what we said we could.
Mr. WALDEN. Okay. You state the work submitted by IBM was
consistent with the districts technology plan.
Mr. TAFOYA. Yes, sir.
Mr. WALDEN. Does the technology plan provide guidelines as to
the specific scope and size of the projects?
Mr. TAFOYA. It was scalable. Yes, sir, it did, but again, as I said,
what happened was, which I saw as a problem for the district looking at it externally in this capacity, was that the award was made,
and there was approximately 90 days of lost time. And I believe
that that window of opportunity that was sunk really did affect the
overall technology implementation.
Mr. WALDEN. All right. You state in your testimony the help desk
operation did not necessarily conform to the long-term needs of
your district. Do you believe the district got its moneys worth?

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Mr. TAFOYA. Frankly, no.
Mr. WALDEN. Why?
Mr. TAFOYA. I think, again, there was a lot of confusion as to
who was going to own the equipment after the help desk was installed. There were a number of work orders that were left that
were unattended to simply because, again, we ran out of time and
ran out of opportunity to utilize the equipment that was available.
Mr. WALDEN. How much did you pay for that help desk operation?
Mr. TAFOYA. It is my recollection it was somewhere in the neighborhood of $27 million.
Mr. WALDEN. Twenty-seven million dollars for the help desk?
Over what period of time and for how many schools?
Mr. TAFOYA. That would have been over approximately I would
say a 6-month period of time, and it would have been for the 53
eligible schools.
Mr. WALDEN. So 6 months, 53 eligible schools, $27 million?
Mr. TAFOYA. Yes, sir.
Mr. WALDEN. Just for a help desk?
Mr. TAFOYA. That is correct.
Mr. WALDEN. What did the help desk do? Is this where you just
call and say, I am having trouble with my server. What do I do?
Is this a support desk?
Mr. TAFOYA. Essentially that is what it was, and I believe that
was one of the reasons that there was concern and questions that
were being asked within the district as to what the value at that
point was of what we were receiving.
Mr. WALDEN. I hope there were questions. I mean, I do not know.
Some of you all do this, but I mean, I pay software support services
for software I have, but $27 million in 4 months seems like an
awful lot. I do not know.
Ms. Foster, do you have a reaction to that? Is that normal? Is
that what is going on out there with our E-Rate money?
Ms. FOSTER. I do not think that is normal. I think it is excessive.
Mr. WALDEN. By how much? What would I expect? I mean, I do
not know.
Ms. FOSTER. You know, really, there are all sorts of products and
they all have different bells and whistles. So it would be hard to
say, but my opinion would be that it is very excessive.
Mr. WALDEN. I mean, lets go back a second here. Twenty-seven
million over 4 months, right? Fifty-three schools. Now, I am not a
mathematician, but you could hire people probably for a good share
of their life for that money and put them in the district, couldnt
you? Pay them a million bucks a piece and you have got 27 people.
Mr. CAINE. Mr. Chairman.
Mr. WALDEN. Yes.
Mr. CAINE. I would be happy to comment.
Mr. WALDEN. Please do.
Mr. CAINE. I think there are a couple of things we have to remember. First of all, the 1 year timeframe that the E-Rate program
imposes upon school districts and their service providers to both
come up with the 470s, the statements of work, and the plan, to
submit the application
Mr. WALDEN. I am aware of that.

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Mr. CAINE. [continuing] to get the funding approval, okay, eats
up a fair amount of time.
Mr. WALDEN. That is why they operate on a 15-month budget
year.
Mr. CAINE. So when you get your approval, then you have a limited period of time on which to execute your plan.
Mr. WALDEN. Okay.
Mr. CAINE. Because the funding year stops. In this case, it
stopped at June 30.
Mr. WALDEN. Right.
Mr. CAINE. You do have some capacity to continue work until
September.
Mr. WALDEN. All right.
Mr. CAINE. So the program rules have a very compressed and a
very intensive timeframe for both application approval and execution.
Mr. WALDEN. Right.
Mr. CAINE. This is why we feel as a systems integrator that that
is a good approach, because if we are willing to sign up for that
as a school districts partner in this process, we will have the accountability to make sure that it ends on time and on budget.
Now, let me go exactly to your point. The help desk was more
than just a help desk as you know it. Okay? There is a lot of risk
in the timeframe to execute. So, therefore, there is a lot of pressure
to get it done, and I talked in my opening statement about who suffers if you do not get it done.
So there were startup costs involved because in El Paso we were
going from no infrastructure and no maintenance to support this
infrastructure that we were building to something. This was a
large, complex system.
Mr. WALDEN. But in that startup cost phase you just
referenced
Mr. CAINE. Yes.
Mr. WALDEN. [continuing] is that part of the $27 million?
Mr. CAINE. Yes.
Mr. WALDEN. Okay.
Mr. CAINE. Okay. So there are startup costs that, as I can discuss later, were not evident; were not evident in the following years
or would not have been evident in the following years. We never
got to the following years. Okay?
So within two and a half months of beginning the operation, IBM
helped reduce the outstanding trouble tickets that the school district had from the old El Paso help desk arrangement, all right,
from 600 down to 173. We thought that was good value.
Mr. WALDEN. How much did they pay for the old help desk?
Mr. CAINE. We were not their partner. So I cannot answer that
question, but my point, if I could just finish, my point here is to
say that there was a presentation made to the board. The board
reviewed the progress that had been made in that funding year
and seemed pleased with it.
Now, let me just say at the end of that funding year, El Paso did
not have funding approvals for the following year. We, the company, stayed with the school district and ran that maintenance and
help desk service for 6 months following the end of that year re-

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ceiving no funds. So we stayed on with the school district from
June until the end of the year on our cost because we knew that
we had built this; we thought there was good value to the school
district; and we did not want to leave the school district just hanging there.
Mr. WALDEN. I am sure they appreciated that.
Ms. Foster, do you know what your costs were for the help desk
prior to IBM?
Ms. FOSTER. No. I really was not responsible for the help desk.
So I could not tell you.
Mr. WALDEN. All right.
Mr. HAWTHORNE. May I make a comment on the help desk issue?
Mr. WALDEN. Yes. Somebody help me out here.
Mr. HAWTHORNE. I think one of the issues that got the attention
of IBM initially was that the help desk that was in place, and representing Alpha got our attention, was that they basically had no
network, and it would take up to 4 months for a teacher or students if there was a problem in the network to get it repaired.
And so what happened is that IBM came in. Let me back up. The
school district realized that they really needed some help in this
area, and that was the impetus for focusing on the help desk.
And I might suggest also that there is probably maintenance in
there. To just say that there was a help desk, that somebody is sitting there to answer phones
Mr. WALDEN. How many people were involved in the help desk?
Mr. Caine?
Mr. CAINE. I do not know the exact number, Mr. Chairman.
Mr. WALDEN. And how long was the help desk in operation for
that $27 million?
Mr. CAINE. Well, as I said, we started, and then we got it up.
We would have liked to have gotten it up earlier than we did within that year.
Mr. WALDEN. That is fine.
Mr. CAINE. It was up for 212 months.
Mr. WALDEN. 212 months?
Mr. CAINE. 212 months, until the funding year ended June 30.
Mr. WALDEN. And for that 212 month period, that is where the
$27 million was allocated?
Mr. CAINE. No, Mr. Chairman. That portion of the award for that
maintenance support, which included the help desk, was a part of
a startup.
Mr. WALDEN. How much was the help desk then?
Mr. CAINE. I do not have the breakout number for you on that,
but for the maintenance for that network and for that infrastructure, which Mr. Hawthorne just referred to, that entire piece was
$27 million, and we believe that within the 212 months that it was
upso we basically got it up in April
Mr. WALDEN. So you got up a network. Let me see if I understand this because I do not do what you all do. You created, wired,
hard wired the 53 schools, got a network up and running among
all those schools, and then had a support system in place including
staff to keep it running. Does that kind of capture what you did?
Mr. CAINE. Yes, that is correct. Yes, you have described it correctly. I wanted to be care.

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Mr. WALDEN. Yes, sure. No, that is all right. That is what we are
after here.
And for that you got paid $27 million, but is the $27 million just
for the support or is it for the technicians to go in and wire and
hook things up and crawl around in the buildings?
Mr. Pratt, do you know?
Mr. PRATT. Yes. There was the help desk. There was actually onsite support, maintenance if somebody had to go out onsite to do
that. So that was all included in that. The number of people between the onsite maintenance and the help desk were in the 40
range.
Mr. WALDEN. So 40 people?
Mr. PRATT. Yes. Also, it was a problem that the school district
at the time had no space on their facility to house the Operations
Center. So we had to go out within the city of El Paso and find a
location that was proximate to the district that we could then outfit
and build out, put all of the tools in place.
So all of those things were rolled into that $27 million startup
cost.
Mr. WALDEN. Is that all E-Rate eligible?
Mr. PRATT. It was part of the service. It was required to put that
in place as part of the service which is eligible under E-Rate based
on the rules at the time.
Mr. WALDEN. All right. All right. My time has long since expired.
My apologies to my ranking member.
Ms. DeGette.
Ms. DEGETTE. Thank you, Mr. Chairman.
Ms. Foster, I was very impressed by your testimony. You seem
to really know this business quite well and have been involved in
it for a long time, and you also seem to be very committed, as I
am sure everyone here is, to the goals of the E-Rate, which is to
help low income students learn to use computers and have a level
playing field.
So let me ask you something we have been struggling with today,
which is how do we eliminate the waste, fraud, and abuse that
seems to be rampant in the program. One of the suggestions has
been, as you probably heard, that we increase the local match to
20 percent. I am wondering from your perspective what that would
do for the E-Rate program in these low income school districts.
Ms. FOSTER. I think that if you increased it to 80 percent, it
would be very difficult for districts, such as Ysleta, your poorer districts, to continue to provide what we are currently and to go forward with projects because one thing that you have to consider is
that E-Rate does pay for certain eligible services, and mostly what
we have used it for in the past and what I always use it for was
connectivity issues and teleco issues.
But then theres a whole other thing. You are building this infrastructure, but what you want to do with that is to educate kids.
Ms. DEGETTE. Right.
Ms. FOSTER. And so, therefore, you have to train the teachers,
which is not E-Ratable. You have to buy the computers, which is
not E-Ratable, and that is very expensive. Those types of services
are very expensive, and so, therefore, the district is already putting

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a huge chunk of money into trying to go forward with these technology initiatives.
E-Rate does a great job in giving us our connectivity and our
teleco services, but then districts make a huge commitment as well
so that you have the tools necessary so that if you raise that to 80
percent it would be very hard.
Ms. DEGETTE. And, in fact, we have seen some examples like in
our last hearing with Puerto Rico where they did all of the
connectivity, but then they did not actually put in the computers
or train the teachers, and that does not help the students one iota,
does it?
Ms. FOSTER. Not at all.
Ms. DEGETTE. For your school district, YISD, how much would
you estimate that you spend, and you probably know, for teacher
training and for hardware and other aspects that are not covered
by the E-Rate annually?
Ms. FOSTER. District-wide annually, we probably spend $8, $9
million annually.
Ms. DEGETTE. And how many students do you have in your district?
Ms. FOSTER. About 45,000.
Ms. DEGETTE. Ms. Glogovac, I am wondering if you can tell me
in your testimony you said you thought there were a lot of tools
out there for discovery of waste, fraud, and abuse that are being
under-utilized that perhaps we could look at. I am wondering if you
could explain some of those.
Ms. GLOGOVAC. Well, I am lucky enough to get access to some
tools from Funds for Learning. I do not know if you are familiar
with them. They are an organization here in the D.C. area. They
are E-Rate consultants. They provide consulting services to applicants and service providers, and Sun actually purchased one of
their packages that allows them to view the 470 forms line item
by line item and identify which applicants are looking for internal
connections needs.
You can also go in and view what the applicants have been
awarded for the last 5 years of E-Rate program, which kind of tells
you how they might be increasing in their requests, and it also will
allow you to pull up which service providers have been selected by
that applicant in those subsequent years, which can provide you
with information about a pattern of consistently the same service
provider or possibly consistently the same consultants and service
providers working together with an applicant. So that is possible.
Ms. DEGETTE. What you are saying is that the regulators could
just look at that data on line and begin to see patterns.
Ms. GLOGOVAC. Yes, you could.
Ms. DEGETTE. Which, in fact, is what they did, to deny some of
these IBM contracts and other contracts for El Paso and other
school districts. They saw patterns and said that is a problem.
Ms. GLOGOVAC. Right.
Ms. DEGETTE. I wanted to clarify something. You are not here
testifying today on behalf of Sun, correct?
Ms. GLOGOVAC. That is absolutely correct.
Ms. DEGETTE. You do not work for Sun anymore because you got
laid off, right?

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Ms. GLOGOVAC. Correct.
Ms. DEGETTE. And you are just here testifying as to what you
saw in your years of employment with that company, right?
Ms. GLOGOVAC. That is correct, and I also have a passion for this
program, the E-Rate program, and that is why I am here today.
Ms. DEGETTE. And why is that?
Ms. GLOGOVAC. I have two children that go to school and I work
in the school, and I know how hard it is for schools to get funding
for projects, and technology is at the top of the list of most of the
schools. And I think this program really helps them out. I think it
is important.
Ms. DEGETTE. Thank you.
Mr. Caine, I wanted to follow up on a question that the chairman
asked because I was a little confused when Ms. Glogovac was testifying. She said Sun had a much lower rate that they were able to
offer educational institutions, but IBM, as the manager in the El
Paso situation, declined that.
I am wondering if you know why that was declined, that lower
rate.
Mr. CAINE. Ms. DeGette, I do not believe that we necessarily declined the lower rate. What we did is we looked at what the integration implications were of a Sun offering. Of course, the school
district has to make these determinations, which they ultimately
did, on selecting the Novell solution, but as you go to a fixed price
contract and as the systems integrator, we had to manage where
all of the different funds were going to ultimately come out for all
of the different parts of what the school district had asked for.
So when we presented, and we raised these issues with the
school district about the various options and implications of the
three vendor choices, the school district arrived at their decision.
Ms. DEGETTE. So the school district was the one in your recollection that decided not to use Sun. It was not IBM.
Mr. CAINE. The school district ultimately made the decision to
take Novell, correct.
Ms. DEGETTE. And I am going to have staff bring you a document. This was a document that was prepared by the USAC about
IBMs application. It says Evaluation of IBMs Statement of Work.
Do you see that on the top? I just want to make sure we have the
same.
Mr. CAINE. Yes, I do.
Ms. DEGETTE. Okay. This is USACs evaluation of the IBM
Statement of Work for the El Paso Independent School District Email system for the funding year 2001, and it talks about the various ineligibility issues that arise.
You can take a look on the second page of this document. At the
bottom it says, Specific areas of the Statement of Work that raise
questions are as follows. Do you see that there?
Mr. CAINE. I do.
Ms. DEGETTE. And it says, Section 2.2 describes implementation
services that appear to include high level ineligible consulting, such
as updating the objectives and vision. Furthermore, the scope of
the work described raises a question whether the extent of work
that received funding approved in the previous year was completed
successfully.

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I am wondering if you can comment on whether or not IBM was
aware that they were violating program rules with this item or
were just misadvised by your employees and consultants about
what was allowable under the E-Rate program rules.
Mr. CAINE. Well, Ms. DeGette, we have never seen this document
before. So
Ms. DEGETTE. Well, are you aware of the issues raised there
about Section 2.2?
Mr. CAINE. No, I am not personally aware.
Ms. DEGETTE. Who would be aware of that?
Mr. CAINE. I am not sure I can tell you who specifically would
be aware of it. This is the first time we have seen the document.
I would say
Ms. DEGETTE. Well, forget about the document. Do you know
about the issue that is raised right there?
Mr. CAINE. Not specifically, no.
Ms. DEGETTE. So the USAC never told you that there was high
level ineligible consulting?
Mr. CAINE. Well, I do not know the date of this document, and
so it is hard for me to answer your question precisely, Ms. DeGette,
because it does not have a date. I do not know whether
Ms. DEGETTE. Well, it is March 2003, sir, if that helps you.
Mr. CAINE. Okay. That is helpful, but it does not help me answer
the question, but it certainly is, therefore, the case that that would
be after our engagement with El Paso.
Ms. DEGETTE. Okay. Section 2.2so you have never seen this
evaluation, even though you are in charge ofwhat is your title?
It is Vice President for Government Programs?
Mr. CAINE. That is correct, but I am not
Ms. DEGETTE. But you have never seen this evaluation of the
IBM Statement of Work?
Mr. CAINE. Ms. DeGette, I have never seen this evaluation, and
I am not in charge of the overall E-Rate activity for the company,
but I am involved with it.
Ms. DEGETTE. Okay. Who is in charge of the E-Rate activity for
the company?
Mr. CAINE. Let me explain my role if I could, as Vice President
of Governmental Programs, I have responsibility for public policy
issues for the company of which the E-Rate program, Edits and
Section, was one. So I have been involved with the E-Rate program
on behalf of the company, commenting on its development when it
was a legislative proposal and when it became a regulatory reality
and program.
Ms. DEGETTE. Okay. So you are a guy who can testify as to the
policy implications on behalf of IBM of the E-Rate, correct?
Mr. CAINE. That is correct.
Ms. DEGETTE. Who is in charge of the E-Rate applications and
the program within your company?
Mr. CAINE. We have a management system in IBM that is a distributed management system, a matrix management system. There
is no E-Rate division of IBM.
Ms. DEGETTE. So there is no equivalent within IBM of what Ms.
Glogovac did when she was at Sun?

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Mr. CAINE. I have to remember precisely the way she said it, but
I thought I heard her say that she was a subject matter expert; is
that correct?
Ms. GLOGOVAC. Single point of contact.
Mr. CAINE. Okay. So we have a management system within IBM
that allows different people to get close to the customer because we
have a very large company. So we have sales people and we have
execution people who will get to know what the requirements of a
school district are all across the country.
Obviously we have been working with school districts for a long
time. So we have a matrix management system that brings a team
of people together when working with a school district about what
their needs are, E-Rate or not. In the context of an E-Rate discussion, it would be a number of different people. We have regular discussions about the E-Rate rules. We have conference calls. We have
now, as I said in my statement, created a Center of Competence
within the company.
But at the end of the day the organizational structure within the
IBM company relative to the E-Rate program uses the fundamental
matrix management system we have as an enterprise.
Ms. DEGETTE. So what you are saying is for each team that goes
out there in the field to advise the El Paso school system or the
Denver public school system or any other school system, you are relying on the members of each of those individual teams to have the
familiarity with eligibility under the E-Rate program.
Ms. DEGETTE. That is correct, and they are backed up by people
who are not necessarily customer facing, but are knowledgeable
about the program and the rules as
Ms. DEGETTE. Who are those people?
Mr. CAINE. Those people, they would be people within the company, again, broken up into different section that would be dealing
with the public sector and education.
Ms. DEGETTE. Are those people identified as resources for those
folks out in the field?
Mr. CAINE. Sure, and the staff. We have made these people available to the staff of the subcommittee for numerous interviews over
the last
Ms. DEGETTE. And how many of those people are there?
Mr. CAINE. I cannot tell you exactly how many there are.
Ms. DEGETTE. Okay. Mr. Chairman, I would like it if Mr. Caine
could supplement hisI am sorry. Is Mr. Hawthorne helping out
there? Do you know Mr. Hawthorne?
Mr. CAINE. Yes.
Mr. HAWTHORNE. One of the resources sitting right here. This
matrix that he is talking about, they were authorized to contact
Alpha Telecommunications for E-Rate help.
Ms. DEGETTE. That is the folks out in the field that Mr. Caine
is describing. Was Alpha basically the consultant for IBM on eligibility issues under the E-Rate program?
Mr. HAWTHORNE. That is correct, as I pointed out in my testimony. That is correct.
Ms. DEGETTE. Okay, and are you the only consultant or is Alpha
the only consultant that they were using?
Mr. HAWTHORNE. That I do not know.

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Ms. DEGETTE. Okay. Do you know the answer to that, Mr. Pratt?
Mr. PRATT. Yes, maam. We have evolved over time as the program has grown, and in the early days we had retained Alpha as
part of our expertise on the E-Rate program, and that was nationally. They were available to us nationally. We have evolved now.
As Mr. Caine has said, we have brought in from the applicant community, we brought in additional experts. We have approximately
five folks. We have training that is conducted on a yearly basis as
the E-Rate cycle starts again, brings up to speed on the eligible
services, but we do have a central point that is responsible for
making sure that we are all applying and adhering to the
Ms. DEGETTE. And the central point is Alpha?
Mr. PRATT. No, it was initially, and we have now expanded. In
addition to still using Alpha, we now have our own folks. As I said,
we have got five IBM folks that are actually providing that support.
Mr. CAINE. Ms. DeGette, we hired Alpha to help us deepen our
internal expertise about the program. We felt we had expertise, but
we wanted more. They were a very knowledgeable and respected
E-Rate enterprise. So we hired them as a consultant to help us internally.
Ms. DEGETTE. That is great. What I am wondering is when all
of your sales people are out in the field trying to work with these
school districts and other educational entities, is there someone or
a group, and I guess you are saying now there is.
Mr. Pratt, when was that group established within the company?
Mr. CAINE. When was it established?
Ms. DEGETTE. Yes, I was asking Mr. Pratt since he seems to
know.
Mr. PRATT. Yes, we started formulating it toward the end of last
year in terms of the current population that is in the group that
is supporting us today.
Ms. DEGETTE. The end of 2003?
Mr. PRATT. Yes, as we have evolved.
Ms. DEGETTE. Okay.
Mr. PRATT. That is where the group that is in place today began,
and then prior to that we were using folks like Alpha.
Ms. DEGETTE. Okay. So here is my question. There is some sales
team out in the field, and they are trying to do a big contract. Were
they required to vet that contract through Alpha so that the people
with the expertise could see whether there were ineligible items
there?
Mr. HAWTHORNE. That is correct, through Alpha.
Ms. DEGETTE. Was that a requirement that IBM put on its sales
folks? I know Alpha did it, but was it a requirement?
Mr. PRATT. Yes, maam.
Ms. DEGETTE. And the sales folks all knew that?
Mr. PRATT. Yes, maam.
Ms. DEGETTE. And now what happens, now that you have this
internal team?
Mr. PRATT. The same exact thing, but we have, as I said, we
have got an internal group now that has built up the expertise. We
brought them in with that same level. So the first point of contact
would be that team now.

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Ms. DEGETTE. Okay. So I guess I will ask you, Mr. Hawthorne,
then since Alpha was apparently the E-Rate expert hired by IBM
at the time that these applications were disallowed. Why from your
perspective were there so many ineligible items in these contracts,
in these proposals?
Mr. HAWTHORNE. I do not recall any ineligible items in the contracts.
Ms. DEGETTE. I mean, maybe you can take a look at that document that I gave Mr. Caine.
Actually, Mr. Chairman, shall I go on on that?
I am going to yield, and I will come back to you, Mr. Hawthorne.
Mr. WALDEN. All right. Mr. Bohuchot, lets start with you.
In your testimony you said on page 3, During the review of the
SOWs, I questioned the size and scope of the effort being proposed
by IBM. I was told that it was okay. You never get everything you
ask for. The SLD always reduces the scope of the work. Who said
that?
Mr. BOHUCHOT. I do not recall the name of the individual. It was
one of the Alpha people.
Mr. WALDEN. One of the Alpha people. Okay. Then walk through
with me how all of this works because the districts pre-discount
total you said went from $216,030,996 to $129,185,228, a difference
of nearly $85 million.
Mr. BOHUCHOT. Eighty-six.
Mr. WALDEN. All right. It is 84,845,768. Oh, that is right. Okay.
So that is the figure that we needed to correct.
Mr. BOHUCHOT. Right.
Mr. WALDEN. I stand corrected. So okay. Eighty-six million dollars.
How do you go from a $216 million project to a 100now, do we
change the one? No, we do not. Okay. So how do you go down to
about a $129 million project? That is a fairly substantial change.
What happened?
Mr. BOHUCHOT. Well, once IBM had been selected as the strategic technology partner for the district, they had aggressively
started the work to go ahead and figure out what the filing with
the SLD was going to be, and when I was giving those documents
to sign, I was just blown away by $216 million.
Mr. WALDEN. It does tend to get your attention.
Mr. BOHUCHOT. Yes, and I asked some questions.
Mr. WALDEN. Of whom?
Mr. BOHUCHOT. Of the IBM and the Alpha people who were in
my office.
Mr. WALDEN. All right.
Mr. BOHUCHOT. And when that comment that you had quoted
was made, and I asked a few high level questions, and I had told
them at that time that I did not believe that that was a correct filing, that we are going to reduce it or that I needed to look at it
in greater detail. The problem was that it needed to be signed and
sent to the SLD to meet a time line.
I did
Mr. WALDEN. Who came up with the $86 million reduction?
Mr. BOHUCHOT. What we did is we subsequently met. After I
signed the documents that went forward to the SLD, I had let the

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SLD know that I was going to look at the projects in detail and
more than likely was going to reduce the filing.
I had spent some time with the documents, the statements of
work that were given to me by IBM, and set a meeting with IBM
and Alpha, and we sat down to talk about it, and I was not convinced that there was not some redundancy in cost. By the time we
had finished that meeting, we had reduced it by $86 million.
Mr. WALDEN. So there was redundancy in cost?
Mr. BOHUCHOT. In my opinion there was.
Mr. WALDEN. How so?
Mr. BOHUCHOT. There was for file service, for example, there was
the cost to set up the file servers, and you do the conditioning work
to get them ready to be installed, and then the actual installation,
and then when I looked at the technical support Statement of
Work, there was alsoyou seem quizzical.
Mr. WALDEN. No, go ahead.
Mr. BOHUCHOT. Okay. When I looked at the technical support,
which was another filing, it seemed to be redundant, some of that
activity, with the file server activity. So when we kind of agreed
that there was some redundancy there, we went ahead and reduced
the technical support.
Mr. WALDEN. Did you have technical people on your team evaluating this?
Mr. BOHUCHOT. Yes, sir.
Mr. WALDEN. So they took a look at this contractor. Was IBM
your technical person for the company?
Mr. BOHUCHOT. Well, yeah, they were.
Mr. WALDEN. The integrator. So you had your own tech people
looking at what IBM had put forward. Are they the ones who put
forward the $200 million recommendation?
Mr. BOHUCHOT. IBM did. I will say that, you know, when I sat
down with IBM, I had my wide area network director.
Mr. WALDEN. Sure.
Mr. BOHUCHOT. My No. 1 technician, in essence, with me, and
he was agreeing that, you know, everything was okay relative to
the file server filing and the technical support filing, and I did take
him outside the room, and I asked him not to say anything until
I finished the discussion.
Mr. WALDEN. Why? Why did you do that?
Mr. BOHUCHOT. Well, because he honestly believed thathe did
not understand the direction that I was taking relative to try and
see if there was redundancy.
Mr. WALDEN. I see.
Mr. BOHUCHOT. And he believed that the filings were absolutely
spot on. He had help to work on them and had a sense of ownership in those also.
Mr. WALDEN. I see. So he helped put all of that together.
Mr. BOHUCHOT. He participated with IBM. So I had asked him
not
Mr. WALDEN. So you were coming back from a management
standpoint saying, Justify what is in here.
Mr. BOHUCHOT. Well, the item that got him to kind of settle
down was when I said to him, If you take the $49 million of tech-

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nical support and you divide it by $250 an hour, that is 102 people.
Where are you going to put 102 people at?
Mr. WALDEN. So your tech support was $49 million?
Mr. BOHUCHOT. Right.
Mr. WALDEN. Over what period of time?
Mr. BOHUCHOT. It would have depended. I mean, if we had 10
months to do the project, it would have been 10 months. If we
had
Mr. WALDEN. What did you whittle it down to in that sector?
Mr. BOHUCHOT. We went from $49 million down to $13 million,
and quite frankly, at $13 million I kind of acquiesced there because, you know, I really did not at that time know that it would
be $13 million. At that point I said okay.
Mr. WALDEN. Okay. So you got it down. How big is your project
compared to El Pasos?
Mr. BOHUCHOT. We have 165,000 students. So we are what, four
times?
Mr. WALDEN. How many schools?
Mr. BOHUCHOT. Two hundred eighteen schools.
Mr. WALDEN. I want to compare apples to apples here. I represent an apple growing region. So I always like to do that. We
grow pears.
Mr. BOHUCHOT. As a percent, El Paso would have been larger
than DISD.
Mr. WALDEN. Yes, I guess that is my question.
Mr. BOHUCHOT. Right.
Mr. WALDEN. So you had a bigger project with more schools with
a smaller size help desk or help work?
Mr. BOHUCHOT. I thought it was going to be a huge help desk
for a while.
Mr. WALDEN. But you cut yours down to $13 million is my point.
Mr. BOHUCHOT. Right.
Mr. WALDEN. And El Paso still stayed at $27 million, right? For
next year, but still, what is the difference?
Mr. CAINE. I was going to clarify one of the comments about El
Paso, which was the following year, which was never funded. That
cost was cut in half basically in the proposal because the startup
costs
Mr. WALDEN. So year 2. Was his year 1 or year 2?
Mr. BOHUCHOT. Year 5.
Mr. WALDEN. Year 5. Okay. What were your year 1 costs on the
help desk then?
Mr. BOHUCHOT. DISD has been very conservative relative to filing for E-Rate. Our year 1 was, I thinkwell, I can tell you exactly. Our year 1 filing was $12,272,000.
Mr. WALDEN. That is for your total project though, right?
Mr. BOHUCHOT. Internal connections was $12 million; telecom
was $105.
We have been very conservative for a number of reasons. One is
that we are cash strapped, revenue strapped district, and having
the commensurate matching funds has not been an easy thing.
Mr. WALDEN. What happens now? I understand you have been
rejected.

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Mr. BOHUCHOT. Well, we were rejected for E-Rate year 5. IBM
had asked us to appeal, and we had thought about that, but we decided not to appeal.
Understand that this whole process was about a year, 10, 11
months in making. So during that time we had the benefit of all
the work that we did with IBM and the numbers that we developed
with them.
Mr. WALDEN. But your tech support staff today, are they able to
keep the network up and running and do all of that?
Mr. BOHUCHOT. Well, it kind of is not a fair question because we
did not get the funding that year. So we are just now working on
the funding for E-Rate year 6. So, I mean, our tech support
Mr. WALDEN. But dont you have a network up and running
today?
Mr. BOHUCHOT. Yes. For what we have got up and running,
which is a fairly robust network, we keep everything running with
the staff that we have that is full time.
Mr. WALDEN. And what does that cost you?
Mr. BOHUCHOT. Probably $600,000, $650,000 a year.
Mr. WALDEN. Thank you.
Mr. Caine and Mr. Pratt, the CIO of Dallas Independent School
District testifies that he questioned the size and scope of the effort
being proposed by IBM, and he says IBM told him you never get
everything you ask for. You just heard me go through that, with
the implication that the district should ask for more than they plan
to receive. At least that is the way I would read it.
Is this how the system operates?
Mr. CAINE. Mr. Chairman, we have a different characterization
than Mr. Bohuchot about what happened on this particular point.
Mr. WALDEN. All right.
Mr. CAINE. We disagree with his characterization, and I will be
happy to explain.
Mr. WALDEN. Yes, please do. How did you get to over $200 million?
Mr. CAINE. Mr. Chairman, the initial proposal from IBM to Dallas was $100 million, and it was not our proposal at $220 million.
Mr. WALDEN. Whose was it?
Mr. CAINE. It was the decision of the school district.
Mr. WALDEN. Okay. We are somewhere between $100 and $200
million off here. Who made the decision to take your proposal at
$200 million, Mr. Bohuchot? Was it your folks?
Mr. BOHUCHOT. I received documentation to sign to forward to
the SLD of $216 million.
Mr. WALDEN. Who gave you the documentation?
Mr. BOHUCHOT. I suppose it was IBM. I mean, IBM was the
partner that was supposed to help us bring those out.
Mr. WALDEN. Okay. Mr. Caine, you seem to know that you submitted $100 million, and Mr. Bohuchot says documentation is $200
million. Who but the other $100 in there?
Mr. CAINE. Mr. Chairman, our understanding is that Mr.
Bohuchot had a conversation with George McDonald, the SLD, and
after that conversation the $200 million was reduced, but we never
proposed originally the $200 million. We proposed a $100 million
scope.

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Mr. BOHUCHOT. If I can, maybe
Mr. WALDEN. If you can enlighten us, yes, because I was left
with the impression from your comments, Mr. Bohuchot, that it
was IBM that brought you a $216 million contract or proposal.
Mr. BOHUCHOT. I have a document here and its proposed adjustments that was developed by IBM, and the numbers that we are
talking about, the $216 reduced, are in this document here.
Mr. WALDEN. Would it be possible for you to provide that?
Mr. BOHUCHOT. Sure.
Mr. WALDEN. For the record, without objection.
[The following was received for the record:]

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Mr. CAINE. And, Mr. Chairman, if I could just add that we have
provided all of our documents to the committee staff, as well.
Mr. WALDEN. Including this one?
Mr. CAINE. All of the documents that we have, yes.
Mr. WALDEN. All of the documents that you have?
Mr. CAINE. Yes, all the documents
Mr. WALDEN. Is this a document you recognize? Can you show
this?
Mr. CAINE. I have to see it.
Mr. WALDEN. Oh, yes, that is always good in this process.
Mr. Caine needs to see that.
Yes, it has the IBM logo on it, Mr Caine. I will give you a minute
with that.
Mr. Hawthorne, do you have some knowledge of this?
Mr. HAWTHORNE. Your Honor, I do recall working with the Dallas School District, and I recall that it was one of the more sophisticated school districts that we worked with. And my recollection
is that the Dallas School District, the technology person, drove the
process, and that the member that originated $200 million or
thereabouts was a Dallas School District member, not an Alpha or
an IBM member, and that this number was reduced not voluntarily. It was only reduced after Mr. Bohuchot had a conversation
with the SLD, specifically Mr.I forget his name.
Mr. WALDEN. McDonald?
Mr. HAWTHORNE. McDonald, yes.
So it was not reduced, in my opinion, as an independent review.
Mr. CAINE. And, Mr. Chairman, I do want to answer your question about this.
Mr. WALDEN. Yes, please.
Mr. CAINE. Yes, we did submit this document to the staff.
Mr. WALDEN. Okay. So we do have it. As you can tell, we have
a lot of them in the binder.
Ms. DeGette.
Ms. DEGETTE. Thank you, Mr. Chairman.
Okay. Mr. Hawthorne, if you could just take a look at that document that I had given to Mr. Caine, the one that says evaluation
of IBM Statement of Work, and maybe you are familiar with some
of these issues. I will simplify my questioning.
If you can look at Appendix A, it says Appendix A, Eligibility
Issues Contained in Statement of Work, and first of all, have you
ever seen this document from the USAC?
Mr. HAWTHORNE. No, I have not.
Ms. DEGETTE. What Appendix A appears to be, well, what it says
it is, the left column and the information that follows describes information contained in the Statement of Work. The right columns
provides conclusions about the E-Rate eligibility of the products or
service described by the statements.
Do you see that there?
Mr. HAWTHORNE. I see it, yes, maam.
Ms. DEGETTE. Okay. So here is my question to you. It says Section 2.2 is titled E-mail installation planning. Eligibility comment:
this may imply initial planning which is not eligible per the eligible
services list.

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Were you aware of any problems with the title of Section 2.2, implying that there may be ineligible planning?
Mr. HAWTHORNE. What it says, maam, is ineligible initial planning, which is outside the scope of E-Rate.
Ms. DEGETTE. So that was not contemplated?
Mr. HAWTHORNE. No, it does not say that planning is ineligible
because it is.
Ms. DEGETTE. Right.
Mr. HAWTHORNE. It is eligible.
Ms. DEGETTE. But what you are saying is there was no ineligible
planning contained.
Mr. HAWTHORNE. I was not aware of any initial planning. To be
perfectly honest, it was very difficult to get IBM moving on the
project at all because they wanted to wait until the project was
funded. So to my knowledge, there was no initial planning.
Ms. DEGETTE. Okay. What about Item 2? Now, this clearly says
in the next category here Section 2.2, Item 2, is develop distributed
E-mail architecture. That was clearly in the Statement of Work,
but the eligibility comment says such an activity clearly falls within the ineligible initial planning category. Architecture must already be known for applicants to indicate the products and services
to be deployed, which is a requirement of Form 471.
Now, did IBM run this by you before they put this section in
their Statement of Work? That is clearly ineligible.
Mr. HAWTHORNE. Well, the SLD says it is clearly ineligible, but
they also say that it clearly falls within the ineligible initial planning category.
Ms. DEGETTE. Right. Develop distributed E-mail architecture is
within the ineligible initial planning category, right?
Mr. HAWTHORNE. Ineligible initial planning category. That is
what it says in the right-hand column, and again, I am not aware
of any initial planning done by IBM on this project.
Ms. DEGETTE. No, what the USAC is saying is this item, develop
distributed E-mail architecture, is ineligible because it is within
the initial planning category, but you disagree with that?
Mr. HAWTHORNE. I know of no initial planning involving this.
Ms. DEGETTE. Well, what they are saying the initial planning is
develop distributed E-mail architecture. You do not think
develop
Mr. HAWTHORNE. During the initial planning stage?
Ms. DEGETTE. Yes.
Mr. HAWTHORNE. If it is in the initial planning stage, it would
be ineligible, but I do not recall that being done, during the initial
planning stage. There was no initial planning.
Ms. DEGETTE. Lets talk about the fifth little section there, the
second one from the bottom, which says Section 2.2, Item 12, is assist in developing standards for conductivity, security, and access
from outside the firewall, and the comment is, Security features
are not eligible under current program rules and, thus, consultation in security standards would not be eligible.
What is your response to that?
Mr. HAWTHORNE. I do not know what current program rules you
are talking about. Are you talking about current current program

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rules or are they talking about current rules that were current at
the time El Paso made its application?
Program rules change each year.
Ms. DEGETTE. Did this program rule change, since you are an expert?
Mr. HAWTHORNE. My recollection is that connectivity dealing
with firewalls was eligible in 2001. I may be wrong.
Ms. DEGETTE. It was? Okay. Did IBM run this item past you as
the expert on the E-Rate eligibility?
Mr. HAWTHORNE. If it was in the Statement of Work, they ran
it, yes.
Ms. DEGETTE. So you saw the whole Statement of Work, right?
Mr. HAWTHORNE. Yes.
Ms. DEGETTE. Okay. Take a look at the next page of Appendix
A, and it says Section 2.5, Web maintenance overview indicates
that Cyber Control content filtering software will be provided. Do
you see that?
Mr. HAWTHORNE. Yes.
Ms. DEGETTE. Now, the comment is filtering software is not eligible. What is your opinion on that?
Mr. HAWTHORNE. I would saying filtering software is not eligible.
Ms. DEGETTE. But it was
Mr. HAWTHORNE. I do not recall seeing this in the El Paso Statement of Work.
Ms. DEGETTE. Okay, but the USAC apparently did see it in the
El Paso Statement of Work.
Mr. HAWTHORNE. So they say, yes.
Ms. DEGETTE. But you do not recall, and you reviewed that.
Mr. HAWTHORNE. I did personally.
Ms. DEGETTE. Okay. So you made a mistake? Would that be
Mr. HAWTHORNE. Well, I am not above making mistakes, but I
make very few of them.
Ms. DEGETTE. Well, as I recall, your company received what,
about $2.4 million in fees as a result of the
Mr. HAWTHORNE. From IBM, that is correct.
Ms. DEGETTE. For the El Paso project.
Mr. HAWTHORNE. That is correct.
Ms. DEGETTE. Were you the one that worked on this or were
there others that helped you review it?
Mr. HAWTHORNE. There were others, yes.
Ms. DEGETTE. How many others?
Mr. HAWTHORNE. There were three of us altogether.
Ms. DEGETTE. And did you review this and then did you provide
written comments to IBM about their proposal or did you draft the
Statement of Work?
Mr. HAWTHORNE. No, IBM provided the Statement of Work,
which we reviewed and we provided
Ms. DEGETTE. And who was it you dealt with at IBM with respect to the El Paso proposal?
Mr. HAWTHORNE. I believe it was Don Riddick.
Ms. DEGETTE. Don Riddick?
Mr. HAWTHORNE. Yes, thats my recollection.
Ms. DEGETTE. Okay. And did you provide any comments to Mr.
Riddick about ineligible items?

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Mr. HAWTHORNE. Continually.
Ms. DEGETTE. Do we have that documentation?
Mr. HAWTHORNE. I believe I provided everything that was in our
possession regarding that.
Ms. DEGETTE. Okay. Now, Mr. Caine, when this initial Statement of Work was developed by IBM for the El Paso district, were
you in your position at IBM at that time? I think that was 2001.
Mr. CAINE. Yes.
Ms. DEGETTE. Did anyone bring it to your attention, any issues
relating to ineligible items in the Statement of Work for El Paso?
Mr. CAINE. No.
Ms. DEGETTE. So that is why you told me earlier when I showed
you this document you did not have any idea, correct?
Mr. CAINE. We have never seen this document before. We have
never and the IBM company has not seen this document before.
Ms. DEGETTE. As far as you know. You have never seen it.
Mr. CAINE. No, but I am consulting with my colleagues, we
turned everything over to the subcommittee that we have, and we
have never seen this, and we do not know the date of it.
Ms. DEGETTE. Okay.
Mr. CAINE. Can I just amplify one thing that Mr. Hawthorne
said?
Ms. DEGETTE. Sure.
Mr. CAINE. The eligible services list has evolved dramatically
over the time, over the years of this program, and different interpretations have been made about what is eligible and what is not
eligible throughout that time period. So in defense of Mr. Hawthorne, it is very hard to make a definitive statement about a document we have never seen before that is making a decision about
an eligible service without a time context to know whether it aligns
with the El Paso application or not.
Ms. DEGETTE. Well, Mr. Caine, let me say this. We are concerned, and we are not just trying to pick on IBM. We are concerned because we are talking about millions and millions, in some
cases hundreds of millions of dollars from the E-Rate fund which
are just wildly going around and which could be used to wire up
these low income schools.
And I am going to ask Mr. McDonald to come back up in a
minute and talk about this, but it seems to me that when corporations and their consultants are making so much money from these
projects, the letter of the regulations should be followed, and I do
not think you would disagree with that.
Mr. CAINE. Not one bit.
Ms. DEGETTE. One bit.
Mr. CAINE. Not one bit, and that is exactly why we believe the
rules and the criteria should be clear, and quite honestly, they
have not been either clear or consistently applied over time.
Ms. DEGETTE. I would like to recall Mr. McDonald.
Mr. WALDEN. Mr. McDonald, could you rejoin us for this panel?
I think you have now been on all three panels, and as a reminder,
you remain under oath.
Ms. DEGETTE. Thank you, Mr. McDonald. I know you have had
a long day today.

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Are you familiar with the document that I have been talking
with these gentlemen about?
Mr. MCDONALD. I am.
Ms. DEGETTE. And did you prepare that document?
Mr. MCDONALD. A colleague of mine on my staff did.
Ms. DEGETTE. And when was that document prepared?
Mr. MCDONALD. We did not date this. There are a series of these
drafts that we provided to your staff. IBM did not see this analysis
until last week when we sent a letter to them asking them to comment on our tentative conclusions. So they would not have recognized this document.
Ms. DEGETTE. Okay. I think I have got a copy of that. That letter
that was sent last week was sent to Bob Richter?
Mr. MCDONALD. That is correct.
Ms. DEGETTE. And he is addressed in your letter as the National
E-Rate program Executive, correct?
Mr. MCDONALD. Yes, I believe he is in the new Center of Competence that Mr.
Ms. DEGETTE. Is that right, Mr. Caine?
Mr. CAINE. That is correct.
Ms. DEGETTE. Okay. Now, some of the issues that were outlined
in the evaluation of the IBM Statement of Work, were those issues
also contained in your letter that was sent to IBM last week?
Mr. MCDONALD. Yes.
Ms. DEGETTE. So while they may not be familiar with this particular document, they are familiar with those issues, right?
Mr. MCDONALD. That letter just went out last Thursday.
Ms. DEGETTE. So were they apprised of the eligibility issues before last week?
Mr. MCDONALD. No, maam.
Ms. DEGETTE. So, for example, in Appendix A, when I am asking
Mr. Hawthorne and Mr. Caine about these ineligibility issues, they
were never informed of that before?
Mr. MCDONALD. They were not informed before the letter last
Thursday. That is correct.
Ms. DEGETTE. Okay.
Mr. MCDONALD. We were working with the FCC about getting
this document out.
Ms. DEGETTE. All right. Well, let me ask you this because we
were talking about some of these issues that were in Appendix A,
Section 2.2, develop distributed E-mail architecture, and the eligibility comment was such an activity clearly falls within the ineligible initial planning category.
Can you explain why that item would be ineligible?
Mr. MCDONALD. Applicants are supposed to do technology planning. They are supposed to develop their network concepts, the
planned architecture and so forth, and then put out a Form 470
that describes that actual services they need to fill that technology
plan. The planning developing architecture, that kind of information, that kind of work is supposed to be done ahead of time before
filing the Form 470, and certainly before filing the Form 471. That
is ineligible for discount.
What is eligible for discount is the actual work to put that technology plan in place.

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Ms. DEGETTE. And do the vendors know that?
Mr. MCDONALD. I believe they do.
Ms. DEGETTE. And was that the case in 2001?
Mr. MCDONALD. That has always been the case.
Ms. DEGETTE. Okay. So the rules did not change around that?
Mr. MCDONALD. Firewall has changed since 2001.
Ms. DEGETTE. Okay. Now, so when you say here Section 2.3,
Item 3 indicates that IBM servers will be installed and configured
with free firewall software, you say here or your colleague says
firewall software is not eligible. But that was not true in 2001? It
was eligible?
Mr. MCDONALD. No, it was not eligible in 2001, and in looking
at the eligible services list, they would have seen firewall is ineligible.
Ms. DEGETTE. Okay, and again, in 2001, were the vendors well
aware that firewall software was not eligible at that time?
Mr. MCDONALD. They should have been. It was on our eligible
services list.
Ms. DEGETTE. And certainly consultants who were experts in the
E-Rate program would know that I would think.
Mr. MCDONALD. I would hope so.
Mr. HAWTHORNE. Consult
Ms. DEGETTE. Let me finish.
Just one more question, Mr. McDonald. Where it says Section
2.5, Web maintenance overview indicates that Cyber Patrol content
filtering software will be provided, and then the comment is filtering software is not eligible; was that the rule in 2001?
Mr. MCDONALD. That has been the clear rule from the beginning.
I believe Congress addressed that when they passed the Childrens
Internet Protection Act, I believe.
Ms. DEGETTE. Okay. What I would like you to do, just take just
a second and look over this Appendix A and tell me for all of the
items on Appendix A, were those rules in place in 2001 and should
the vendors have known about it in 2001.
Mr. MCDONALD. I believe so.
Ms. DEGETTE. All right. Mr. Chairman, I would ask unanimous
consent that both this document, Evaluation of IBM Statement of
Work, and also the September 16 letter from the USAC to IBM
be entered in the record.
Mr. WALDEN. The letter is already in the record, but the other
information will be added.
Without objection, so ordered.
Ms. DEGETTE. And I would also say, Mr. Chairman, that I would
hope that the USAC where it is seeing issues like this, where there
is widespread ineligibility in these applications would communicate
that to the vendors immediately. I would hope that would happen
because I can now understand some of Mr. Caines confusion at
least.
Mr. McDonald?
Mr. MCDONALD. At this point we were waiting for the FCC decision on the basic big picture with the IBM procurement approach,
which was true of El Paso as well. So we did not know what the
guidance was going to be about the procurement approach, and if
the decision was it was improper and was always improper, we

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would have sought to recover the money from El Paso for everything independent of the services. We were doing this analysis. Depending on what the FCC decided, then we would pursue recovery
based on the services. That was what was going through our mind.
Ms. DEGETTE. Thank you.
Thank you, Mr. Chairman.
Mr. WALDEN. I believe Mr. Hawthorne wanted a follow-up.
Mr. HAWTHORNE. I am not sure what the procedure here is, but
could we have additional time to respond to this document since we
have just seen it today?
Ms. DEGETTE. Mr. Hawthorne, we would give you
Mr. WALDEN. The record remains open for 10 days.
Ms. DEGETTE. I would not object to allowing you to send a written response.
Mr. HAWTHORNE. When Mr. McDonald was speaking, and I am
not positive on this; I have to go back and review the rules, but
it says on Section 2.3, Appendix A, the second column, firewall
software is not eligible, but then it says, Program rules require
cost allocation for such components.
I am not aware that the cost allocation process was even in place
when El Paso was funded. Again, I may be wrong. I would just like
an opportunity to review.
Ms. DEGETTE. Mr. Hawthorne, I have no objection whatsoever to
you being allowed extra time to respond.
Mr. HAWTHORNE. Thank you.
Mr. WALDEN. And our record does remain open.
Mr. McDonald.
Mr. MCDONALD. And our letter asks IBM to respond to us within
30 days. They have asked for an extension of that, which we will
grant, to get back to us with a detailed response to our analysis.
Mr. WALDEN. All right. I guess sort of fundamentally here, Mr.
Caine or Mr. Pratt, did El Paso need a $67 million system? And
did Dallas need a $216 million system?
Mr. CAINE. Mr. Chairman, the E-Rate program asks school districts to develop a technology plan, as we talked about this afternoon.
Mr. WALDEN. Right.
Mr. CAINE. It is that plan that service providers or vendors like
IBM are asked to respond to. We do not tell the school district
what they need. They set up the requirements, and then we respond to their 470s and their RFPs accordingly.
That process goes through obviously a judgment and a decisionmaking process by the schools and then boards. This was a fairly
open, very open process of the plan that the school districts preparewhat is in the communitys interest. Do they need it? Do
they have the appropriate funds to put up their share as you were
talking about earlier this afternoon?
And so we respond to what the community feels it needs.
Mr. WALDEN. Okay, but how does that gibe then with the sort
of cookie cutter approaches IBM came up with for various school
districts, the almost identical, if not identical, proposal? Twentyone of them?
Mr. CAINE. Well, we would not necessarily say they were cookie
cutters. We were saying that the school districts obviously are in-

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terested in understanding what other school districts are doing.
They can get that information from various sources: the SLD
Website. There are a number of Websites within the E-Rate community.
Now, each school district has to come up with its own technology
plan.
Mr. WALDEN. Okay. Mr. McDonald, werent these 470s pretty
much identical?
Mr. MCDONALD. They were.
Mr. WALDEN. Do you think that represents individual plans from
each district of those you saw in those 470s?
Mr. MCDONALD. I believe the committee staff has an E-mail from
Seattle from IBM to the Seattle Public Schools attaching the 470,
suggesting this is a good 470 that is very broad and it gives us lots
of flexibility.
So I think there is reason to believe that the 470s were suggested by IBM.
Mr. WALDEN. Is this one of these where they basically ask for
every available service?
Mr. MCDONALD. The 470, I have used the word encyclopedic.
It appears to try to cover every possible service and equipment that
is eligible under the program.
Mr. WALDEN. All right. I want to get back to my other question.
Did Dallas need a $216 million system?
Mr. CAINE. Mr. Chairman, only they can answer that question.
We suggested to them that they did not at the beginning.
Mr. WALDEN. Then let me have you go to Tab 41, and I realize
you say you told them $100 and some million dollar system, but
it is like two or three pages in here, and it is from one of your
folks, IBM H0026480, and it is from a James Whitmer, I believe,
who is with IBM.
Mr. CAINE. Mr. Chairman, could I just ask are you on Tab 41 did
you say?
Mr. WALDEN. I believe that is correct. Tab 41, and then about
three pages in, and you give your IBM number at the bottom.
Mr. CAINE. James Whitmer, yes, and you said the number was?
Mr. WALDEN. Zero, zero, two, six, four, eight, zero. Two, six, four,
eight, zero.
Mr. CAINE. Okay.
Mr. WALDEN. And I go back to this because here, this person,
Jim Whitmer, is your IBM Global Services Integrated Technology
Services Sales, and it is dated in March. And, Mr. Pratt, I believe
you were cced on this E-mail, and it says, We met with Dallas
ISD staff today and our approach to any changes will not require
a new QA or PCRs. Worst case, they will eliminate one of the
SOWs which will most likely be the video SOW. This would actually be a postponement until E-Rate 6. We will be meeting with
them again this Thursday and will encourage them to move ahead
with the SOWs as submitted totaling 216M. If there are any questions, please let me know. Thanks. Regards, Jim Whitmer.
So you are telling me you submit a $100 and some million dollar
proposal. It comes back at 200, but then your folks are saying, hey,
you know, we are going to try to get them to move ahead as
planned here for the full $216.

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Mr. Pratt, do you have a comment on that or Mr. Bohuchot? Mr.
Caine?
Mr. Pratt.
Mr. PRATT. Yes, sir. I wasnt directly involved in the conversation. I got copied on a lot of notes for Western Region, but my understanding was that when DISD came back and said the requirements due based on the technology plan, this is what we need, we
felt the integrity of the program would be held up. If we started
reducing at that point, there was a question that the SLD would
come back and say why was this asked for in the first place.
And so it was better to continue with the original submission.
Mr. WALDEN. Well, what that says to me is we never believed in
the original submission of 216. That was them. Now they are coming back saying that is more than we need, and you are saying, no,
lets keep the 216 in there. They might ask other questions? Is that
what you are saying?
Mr. PRATT. Not necessarily other questions, but once we
Mr. WALDEN. Well, you said it might bring into question, I think
you said, the integrity of the submission.
Mr. PRATT. The integrity of the submission. It would raise questions as to why would you submit $216 million in the first place
if
Mr. WALDEN. Well, isnt that a realistic question somebody needed to ask? Why do you think it raises that question?
Mr. Hawthorne? Mr. Caine? We are talking a lot ofMr.
Bohuchot, how do you respond to that?
It appears hereI will just read it again. We will be meeting
with them again this Thursday. I assume that means you all, the
school district, and will encourage them to move ahead with the
SOWs as submitted totaling $216 million.
Mr. BOHUCHOT. I am supposing that we met on a Thursday, and
we jointly came to the conclusion that we should reduce the filing,
which generated the document that you have got.
Mr. WALDEN. Right, that then came out in May, right? That
says, The following summary shows adjustments based on reduced
number of schools, recent due diligence, and the elimination of the
video SOW.
So, indeed, Mr. Whitmer was right. You are going to eliminate,
but I guess the question I have is: what happens in between here?
I mean, on the one hand, I am toldone second, Mr. Hawthorne.
I will give you time.
Mr. HAWTHORNE. Okay.
Mr. WALDEN. On the one hand, I was told it was not IBMs plan.
Then it seems to be like it is your techies and the school district
pumped it up. It comes back to IBM. IBM said, Hey, not our plan.
We did not pump it up to 216. They did. But then when you start
to question it, their people are saying, We are going to try and
keep them going at 216 because somebody may question why it was
pumped up. Mr. Hawthorne?
Mr. HAWTHORNE. You know, IBM certainly does not need any
help from me, but my recollection on this particular item was that
there was talk of a reduction, but when you are talking reduction,
you just cant start lopping stuff off. What you have to do is look
and see what is out there.

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Do you just reduce by a certain dollar amount or do you see how
much you want to cut back on your maintenance? Do you see how
much you want to cut back on your internal connections?
It has to be some type of proportionate adjustment. You do not
just
Mr. WALDEN. Well, I do not dispute that. That is not the question here.
Mr. HAWTHORNE. Well, I think it is the question. From what I
have heard being bantered about here is that there was this great
reduction because someone looked at this and said, We cannot afford this. We do not want to do this.
Mr. WALDEN. No, that is not what I heard. What I heard was
from Mr. Bohuchot, they figured out it was gold plated. It was far
more than they needed for their system. Isnt that what you basically said, Mr. Bohuchot? Eighty-six million?
Mr. BOHUCHOT. Quite frankly, a lot of it was because I felt that
I would end up here eventually regardless of what was being filed.
Mr. WALDEN. Not everybody is that lucky, but we are glad you
are here.
Mr. BOHUCHOT. And here I am, and I would rather explain $17
million in technical support versus $43 million or whatever it was.
Mr. WALDEN. All right.
Mr. BOHUCHOT. So you were suspicious of this; is that right?
Most people do not wake up in the morning and say, Gee, I think
I am going to get to go to the O&I Subcommittee some day.
IBM and the district has a long, good standing relationship. I
personally have worked with numerous IBM staffers. They were
our partner implementing a major ERP system, finance H.R. payroll, and quite frankly, without them, we would not have got it
done on time and under budget. So it is not an IBM personal thing.
Mr. WALDEN. No.
Mr. BOHUCHOT. We hit a wall, and the wall said there is $216
million there. Ruben, you have to sign the documents to let it go.
Are you comfortable signing it?
Quite frankly, I was not comfortable signing it.
Mr. WALDEN. Good for you.
Mr. BOHUCHOT. Well, I do not want to take credit for it.
Also I do not know if Mr. McDonald remembers, but I also called
George.
Mr. WALDEN. Right.
Mr. BOHUCHOT. And I said, George, I have signed this thing, but
I want to let you know that I am going to adjust it.
Mr. WALDEN. Do you remember that, Mr. McDonald?
Mr. MCDONALD. I do, sir.
Mr. WALDEN. You do. Okay.
I want to go to Tab 17, and you all may want to take a look at
this. Mr. McDonald, I think this was the document that you recently referred to when you talked about Seattle. I will let you get
that in front of you, sir.
Mr. MCDONALD. Yes, sir.
Mr. WALDEN. In about the third paragraph down, it says Mitchell, and that is John Mitchell. Who is John Mitchell?
Mr. MCDONALD. He is a consultant to Seattle Public Schools for
overseastheir E-Rate.

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Mr. WALDEN. It says, Mitchell stated that he called George
McDonald after the December 3, 2002 Website noticed was posted
because he was concerned that SPS would be targeted for scrutiny
because they had used the Form 470 boilerplate template that IBM
had provided to them during their preliminary discussions with
IBM when they posted their FCC Form 470. Mitchell forwarded me
the E-mail that he received from IBM with the FCC Form 470
boilerplate template attached.
This, by the way, is from Kristy Carroll to file, and then the next
graph says, Mitchell stated the discussions with IBM began in October and that he was on a conference call with Steve Mueller and
Charles Gentry. He stated that one of IBMs selling points was that
they represented to him that former SLD attorneys work for IBM,
and as a consequence IBM knows all of the loopholes in the program. Mitchell said that because SPS had started the E-Rate process a little late this year, that the plan with IBM was that SPS
would use the Western States consulting contract agreement rather
than go through local procurement regulations.
And it later says Mitchell said that he saw it as a way for IBM
to get around State procurement cycle and says Mitchell stated
that another one of IBMs selling points was that IBM could get
SPS a lot more funding than they had gotten in the past.
The next page it says Mitchell stated that he was told by Alpha
or Gentry that they could increase the number of 90 percent sites
at the SPS from 13 to 40, and then says Mitchell stated that he
started feeling unpleasant about the discussions with IBM in November.
Can you address this for us?
Mr. MCDONALD. Kristy Carroll is our Associate General Counsel.
She is here with us today.
And when we posted the notice in December 2002, we posted a
prominent notice on our Website about the procurement pattern
that IBM had engaged in, and I contacted Mr. Bohuchot at that
point, and a lot of the applicants who had 2002 applications with
IBM to tell them I was not making any judgment about the 2002
applications, except this letter was the only one that we had completed, but that to alert them that our conclusion that this procurement pattern was not consistent with the rules. So as they approached, we were in the filing window for 2003. They would have
a heads up not to continue down this road or at least to do so at
risk since our conclusion was that it was not consistent.
So that Website notice prompted Mr. Mitchell to call me and said
we did not go through this process, but we did use the encyclopedic
470.
The allegation of that SLD attorney is working for IBM, I know
nothing about that. Certainly USAC attorney, I know all of the attorneys that have worked for USAC, and I am not aware that any
of them work for IBM.
And then he did provide the template 470.
Mr. WALDEN. All right.
Mr. MCDONALD. If I could go back to the question that Congresswoman DeGette asked.
Mr. WALDEN. Yes.

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Mr. MCDONALD. Giving IBM a heads up about the ineligible
services, in our December 2002 denial letter for this letter which
we copied IBM on, there is an entire discussion in there about ineligible services that we believe were not the basis of our denial.
It was the procurement pattern, but that we gave them a heads up
that we thought they were asking for ineligible in the initial planning.
Ms. DEGETTE. Thank you for clarifying your testimony, Mr.
McDonald, because that is what I was just saying. The staff has
before it sounded like there was no notice at all, and in fact, your
testimony right now shows there was notice several years ago.
Mr. MCDONALD. December 2002.
Ms. DEGETTE. Thank you.
Mr. WALDEN. Mr. Caine, do you want to comment?
Mr. CAINE. I was just going to say that that was relative to the
Ysleta denial, and therefore prompted the appeals to the Commission both by the Ysleta School District and other school districts,
about those denials of funding. So in that context, yes, Mr. McDonald is correct.
But the Commission ruled five-nothing on an opinion that we
think was very fair and balanced and pointed out a number of
things where there was inconsistency and ambiguity all the way
around.
Mr. WALDEN. Did they rule on this issue of the boilerplate proposals?
Mr. CAINE. No, I dont believe that was part of the decision.
Mr. WALDEN. All right. Lets go to Tab 33. Perhaps you can help
us clarify this one as well, Mr. Caine. This is an E-mail to Tracy
Diaz/Austin/IBM at IBM U.S. from Jack McKinney, Kansas City
IBM at IBM U.S., and it talks about E-Rate lessons learned, year
5 strategic partnership agreement, Oklahoma City schools, $49 million.
And if you drop down to the second from the bottom point, it
talks about communication and time lines are areas that need improvement, and then the second from the bottom point says, The
customer knows that the pricing for the SOWs are significantly inflated but has notI assume that should be had. It is just the
letter Abut has not a conversation on how this will be remedied.
Our pricing methodology would be undefendable in public forum.
Do you have any idea what this document that is supplied by
IBM would
Mr. CAINE. No, I do not, but I will tell you that relative to Statements of Work
Mr. WALDEN. Im sorry. Relevant to?
Mr. CAINE. SOWs.
Mr. WALDEN. Okay.
Mr. CAINE. Statements of Work.
Mr. WALDEN. Yes.
Mr. CAINE. They were frequently expansive by many applicants
in the program. As a matter of fact, there was guidance given that
expansive Statements of Work enabled substitutions and revisions
later on to be made.
Mr. WALDEN. Sure.

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Mr. CAINE. So that the 470 process also were made to be expansive because they were basically public notices, and that there were
school districts that we had nothing to do with that were funded
using expansive 470s and Statements of Work.
So I cannot refer to this specific E-mail as you have asked me
to do, Mr. Chairman, but on the topic of expansive Statements of
Work and the 470 process, we do have experience that says, yes,
vague, expansive Statements of Work are not the preferable approach, but they were the reality at the time.
Mr. WALDEN. Are they still the reality, Mr. McDonald?
Mr. MCDONALD. I hope since the Ysleta order that they are not,
and we are looking at those then.
Mr. WALDEN. Wouldnt this be like hiring a contractor to do a remodel on your house and the contractor basically comes back and
says, Here, Mr. Homeowner or Mrs. Homeowner. You know, everything at Home Depot. I am not sure what I am going to use, but
here is your Statement of Work? Isnt that pretty close to what
was happening in some instances?
Mr. MCDONALD. The 470 was like that. The Statements of Work
were tied to specific functions, the E-mail, the servers, and that
kind of thing.
Mr. WALDEN. Because it looks to me like the missing piece here
is the homeowner, and that tends, I guess to be sort of us. I guess
you, if you have your auditors, but we wonder whether enough of
that, but who is saying, Wait a minute. I do not need everything
in Home Depot. I just want to fix my kitchen?
Mr. CAINE. Mr. Chairman.
Mr. WALDEN. Yes.
Mr. CAINE. Could I just make a reference to the FCCs Ysleta
order?
Mr. WALDEN. Sure.
Mr. CAINE. On this point?
Mr. WALDEN. Yes.
Mr. CAINE. The order was quoted as saying the SLD cautioned
applicants in the past to be expansive in listing services on FCC
Form 470 to provide applicants with greater flexibility to make
service substitutions post commitment.
So that is what the FCC rule determined in their order on the
Ysleta appeals.
Mr. WALDEN. Tell me the difference between the Statement of
Work and the 470.
Mr. HAWTHORNE. The 470 is a document, an FCC Form 470.
Mr. WALDEN. Right.
Mr. HAWTHORNE. Which the applicant is supposed to use to list
his required services or the services that he is looking for, and it
has to stay posted for 28 days and hopefully during that period of
time vendors will call and try and get more information. There is
a place on the 470 to indicate what the
Mr. WALDEN. So how is the Statement of Work?
Mr. HAWTHORNE. The Statement of Work is the actual work, that
if the successful vendor gets and defines that it is supposed to provide.
Mr. WALDEN. Okay. So going back to this earlier E-mail
Mr. HAWTHORNE. It is a contract.

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Mr. WALDEN. Okay. Going back to this earlier E-mail I had, the
one from Mr.here it is right herethe one from Mr. Whitmer
then, Mr. Hawthorne, where he says, We will be meeting with
them, being Dallas, again this Thursday and will encourage them
to move ahead with the SOWs as submitted totaling $216 million.
So this is not the wish list anymore, if I understand you right.
Mr. HAWTHORNE. No.
Mr. WALDEN. This is actual statements of work?
Mr. HAWTHORNE. That is correct. Those are contracts, which I
would assume were submitted to
Mr. WALDEN. And they should have been the whittled down
version of I am only doing my bathroom and my kitchen, not the
whole house. I do not need everything in Home Depot.
Mr. HAWTHORNE. If Dallas was dissatisfied with the Statement
of Work before it was executed, I would think they would have an
opportunity to say, I do not want this. I want that, and you know,
because it is a negotiated document.
Mr. WALDEN. Right, but it is an IBM person who is saying, We
are going to try and convince Dallas to stay with the 216, the
Statements of Work as submitted.
Mr. HAWTHORNE. Well, again, I get to the point that I raised earlier. In my opinion, you have to go back and reevaluate what you
have asked for from bottom up. You just cannot start lopping off
goods and services just based on the Statement of Work. What did
you ask for? I mean, I do not think that can be done.
Mr. CAINE. Mr. Chairman, this is one area that needs improvement. We would clearly acknowledge that in the program. Okay?
There is no process actually to coming backwards, and there should
be probably. Okay? In this particular context that you were just referring to.
Mr. WALDEN. But didnt Dallas hire you at IBM to come help
give them guidance as to what they need to wire their schools?
Wasnt that your role?
Mr. CAINE. Yes, to be their strategic partner.
Mr. WALDEN. So at what point in that partnership do you say to
Dallas, We do not think you need all of this stuff?
Mr. Pratt, were you involved in that part of it?
Mr. PRATT. Not with the Dallas.
Mr. WALDEN. All right. Mr. Caine, you were not involved in that.
Mr. CAINE. I was not, but as I said in my statement, we believe
we said that at the front end. Our initial proposals were
significantly
Mr. WALDEN. Yes, but later in this E-mail, your own people are
saying we are going to try and get them to hold to 216, and Mr.
Pratt said reducing it might call into question the integrity of the
overall proposal, right?
I mean, all right. Ms. Glogovac
Mr. HAWTHORNE. May I comment on the 470 before you move
on?
Mr. WALDEN. Sure.
Mr. HAWTHORNE. I agree with the statements that E-Rate is very
important in the process of wiring schools. It is crucial.
Mr. WALDEN. Nobody is disputing that.

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Mr. HAWTHORNE. And I disagree with the statement that 94 percent of the schools have been wired. I mean, there are schools that
have not even been touched by E-Rate.
However, it appears that E-Rate has now become a game. School
districts want to get money, and people at the government level
will say to them, Well, you know, gosh. You didnt put this on your
470. Were not going to allow it. You might have made some vague
reference to it, but you know, it is not there. So we are going to
deny you.
There is that Catch-22. Do you put a lot of stuff on the 470 or
do you put what you think you might need and that evolves over
time?
Mr. WALDEN. But couldnt you come back the next year and get
that which you
Mr. HAWTHORNE. Time moves on.
Mr. WALDEN. Well, yes, but that is true in any project, right? I
mean, if I go get a loan in a bank
Mr. HAWTHORNE. I thought the objective here was to put technology in place to educate kids.
Mr. WALDEN. Of course it is. Of course it is, but if I go get a loan
from a bank to do my home remodeling and I get a certain amount
of money, that is what I have got to operate under, right?
I do not know. Let me go on to Ms. Glogovac. Did Sun do work
for EPISD prior to funding year 4?
Ms. GLOGOVAC. That I do not know. What I do know is that Sun
was selected the year prior to that to provide servers, and for some
unknown reason that I was not privy to, El Paso did not follow
through on that funding commitment and never made the purchase.
Mr. WALDEN. My understanding was that Sun did provide an Email system of some sort.
Ms. GLOGOVAC. That I do not know.
Mr. WALDEN. All right. Do you recall what the budget was for
EPISDs E-mail system?
Ms. GLOGOVAC. I do not know what that was.
Mr. WALDEN. Okay. Mr. Caine has testified that the budget they
were provided with was to be used in the best interest of the district. How many E-mail addresses did the system Sun was going
to provide? What was the capability?
Ms. GLOGOVAC. I believe Sun had an unlimited license, software,
E-mail software package.
Mr. WALDEN. What does that mean?
Ms. GLOGOVAC. Meaning it would scale with however many users
they need to use.
Mr. WALDEN. So they could have an unlimited number of E-mail
addresses?
Ms. GLOGOVAC. Correct.
Mr. WALDEN. And then what is the capacity of what EPISD and
IBM put in?
Ms. GLOGOVAC. I believe their Statement of Work said 3,000, but
on conversations on conference calls, I was told 5,000.
Mr. WALDEN. So is that correct, Mr. Caine or Mr. Pratt? Do you
know? Is the system in El Paso 5,000 E-mail addresses?

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Mr. CAINE. I cannot confirm the number for you, Mr. Chairman,
but I do know that the proposal from Sun included E-mail addresses for ineligible activities in schools. So there was always a distinction between eligible schools in the district and ineligible schools
in the district, and that was a factor.
Mr. WALDEN. So you advised them of that?
Mr. CAINE. That was part of the consideration that we brought
to the attention of the school district.
Mr. WALDEN. Paula, is that correct?
Ms. GLOGOVAC. I would have to say that El Paso was completely
open to selecting how many E-mail licenses they wanted to deploy
and where they wanted to deploy them. That was not dictated by
Sun.
Mr. WALDEN. But were they ineligible places?
Ms. GLOGOVAC. I have no idea. I do not know what school was
ineligible in El Paso, and that was not brought up to our attention
on any conference call that I know of.
Mr. WALDEN. Even by IBM?
Ms. GLOGOVAC. No, or El paso.
Mr. WALDEN. And who is the area coordinator? Are you, Ms. Foster? No. You were the area
Ms. GLOGOVAC. I was a contractor that was brought in to assist
the Sun sales team.
Mr. WALDEN. So, Mr. Caine, you were involved in that discussion
then. Where is your information coming from?
Mr. CAINE. No, I was not involved in the conversation, but I do
think that it is probably a question about eligible schools versus ineligible schools within the El Paso School District that the district
could answer. But I do know that not all schools in the El Paso
School District were eligible, and so there has to be this distinction.
Mr. WALDEN. I wonder if our superintendent on videocan you
address this issue, sir? Thanks for keeping your mic off, too, so that
we do not get the feedback. But this issue of ineligible E-mail addresses in our schools.
Mr. TAFOYA. Yes, sir. I do recall there was conversation that took
place at that time, that we had to be careful that we did not cross
the line of the eligibility using E-Rate money, and so I do know
that just like I said, the piece of the conversation that I can recall
was that there was concern that the scope of work would not exceed what we were eligible to receive in E-Rate funding.
Mr. TAFOYA. And are you satisfied with the notion of like 5,000
E-mails versus unlimited?
Mr. TAFOYA. We were satisfied with what we received because it
was what we could afford within that E-Rate funding.
Mr. WALDEN. Thank you, sir.
Ms. DEGETTE. Just very quickly, Mr. Chairman, Mr. Caine, if
you could take a look at Tab 65 of your notebook. This is the agreement. We got this from NABSE. I do not know if you have seen
this, Mr. Caine.
Mr. CAINE. No, I have not.
Ms. DEGETTE. Okay. This is the agreement with NABSE, the one
that Mr. McDonald was testifying about earlier, and part of the
agreement talks about on page 3 the offset to the cost that NABSE
will incur in support of this partnership. NABSE shall receive an

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annual payment of 1.5 percent of the cumulative business. This is
the kickback we have been talking about all day. Do you see that
on page 3?
Mr. CAINE. I do.
Ms. DEGETTE. Now, this agreement was signed by Donald J.
Parker, the customer service executive for IBM Global Services on
behalf of IBM. Do you see that on the last page there?
Mr. CAINE. I do.
Ms. DEGETTE. Did Mr. Parker as far as you know have the authority to enter into this type of agreement?
Mr. CAINE. Actually the video was quite a surprise to us. We
were not aware of it. We had actually asked the staff when we
were told that it existed to see it. We were not given an opportunity to see it.
But he was not sanctioned to do this. This was not an official
IBM activity. Our company
Ms. DEGETTE. Is he still with the company? Do you know?
Mr. CAINE. No, he is not.
Our company does have relationships, Ms. DeGette, with a number of educational organizations, but none specifically for E-Rate
performance. We have not done that. So it was not sanctioned by
the IBM company, and I think if I could justI do not mean to propose where you are going, but if I could just point to the next tab,
which is also a document that talks about a memorandum of understanding on this point. It is conspicuously not signed by IBM.
Ms. DEGETTE. Okay. Well, but you would not dispute the fact
that by Mr. Parkers signature on this document on behalf of IBM
he bound the company contractually to that, correct?
Mr. CAINE. Well, we would dispute that.
Ms. DEGETTE. You would?
Mr. CAINE. Yes, we would.
Ms. DEGETTE. Well
Mr. CAINE. Yes, we would. He was not sanctioned to do this for
the company, and it is actually a proposal, not a contract.
Ms. DEGETTE. I will yield to the chairman.
Mr. WALDEN. I just wanted to note the committee staff had tried
repeatedly to interview Mr. Parker, and apparently IBM does not
know where he is anymore.
Mr. CAINE. He is no longer an employee of the IBM company.
Mr. WALDEN. So otherwise we would have shared that at that
time.
Ms. DEGETTE. I am studying this, and in fact, it is an agreement.
It is a letter agreement, and on page 2, it says the team, well, fully
committed to supporting NABSE, and NABSEs membership believes that any contractual agreement could be construed inappropriately by third parties. The team is not going to request an exclusive or formal endorsement by NABSE. The individual members
are content that NABSE will recommend the team and each team
members with the same confidence and vigor.
So, in fact, what this is, it is a letter agreement that everybody
is agreeing to. Disagree?
Mr. CAINE. Ms. DeGette, yes, in this sense: that he was not sanctioned to do this. We are as surprised about this as you seem to

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be disturbed by it, and we are as well, and we are referring it to
our attorneys as soon as we get a copy of this.
Ms. DEGETTE. Well, take it with you.
Mr. CAINE. I would be happy to.
Ms. DEGETTE. Are your customer service executives authorized
to sign letter agreements of this nature?
Mr. CAINE. No.
Ms. DEGETTE. And are they informed of that in some personnel
guideline or handbook?
Mr. CAINE. Each IBM employee is asked each year to sign a business conduct guideline, which is a code of conduct. All right? And
they know that contracts have to go through or proposals have to
go through a rigorous process.
Ms. DEGETTE. Is there a written guideline for that, that talks
about that in the code of conduct?
Mr. CAINE. I would have to go back and look at the
Ms. DEGETTE. I would appreciate it if you would supplement
your response on this, and I will tell you, frankly, my concern, and
it is a concern for all of the companies that are doing these E-Rate
contracts. I mean, I always tell people in this committee, and the
chairman has heard me say it, in my law practice I am on inactive
status in Colorado, but I practiced for a number of years, and I will
tell you this looks like a letter agreement to me.
And the thing I was always worried about when I represented
corporations in my law practice was exactly this type of thing
where you have got sales representatives signing what end up to
be binding contracts.
And I will tell you probably your lawyers will tell you that even
though Donald J. Parker may not have had the legal authority to
sign this, if he is doing it and putting it out there to the world, you
would have been bound by this. So that is a concern.
Mr. CAINE. Well, we appreciate your comments, and we are going
to look into this very, very quickly and very forcefully.
Ms. DEGETTE. Good, and the other concern I have, first of all, to
your knowledge, I would assume, you are unaware of any other
contracts that IBM or any of its representatives have entered into
for kickback agreements to organizations, correct?
Mr. CAINE. Correct.
Ms. DEGETTE. And that would not be your policy, I would assume.
Mr. CAINE. Never.
Ms. DEGETTE. So, Mr. Hawthorne, as a consultant, did your company ever enter into agreements that involved kickbacks to the organization?
Mr. HAWTHORNE. Absolutely not.
Ms. DEGETTE. Okay. But here was my concern, Mr. Caine. Earlier when you were testifying, and I am glad you have put this little group together of E-Rate experts, but when you put so much authority on sales reps. out in the field, sometimes this kind of thing
in an aggressive market can result, and so I would hope IBM
would take this very seriously and adopt some clear rules.
Mr. CAINE. We do Ms. DEGETTE. Thank you very much.
Thank you, Mr. Chairman. I yield back.

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Mr. WALDEN. I appreciate the gentle womans comments and her
participation for this full day.
Mr. Tafoya, if I could just ask you a question, sir, because one
of the other issues that we are looking at, and we did certainly in
the North Carolina situation, are districts now in a position where
they have, frankly, bitten off more than they can chew? And is that
the case in your district, sir?
Because this is an enormous amount of equipment. It is not a
new technology. Do you have the information, staff up to speed to
really be able to run a system like this? Is this something other
districts need to take note of?
Mr. TAFOYA. Well, I would like to bring the answer two ways. I
do believe that an award of this magnitude really needs to be scrutinized very, very carefully simply because all of the residual expense and support that is required once the installation takes place
is very overwhelming. We feel fortunate that we do have the capacity with the structure now to manage the network that we have in
place. We are not exactly where we want to be, but we have made
great strides, and we will continue to devote because we have, in
fact, a commitment from our board to continue to devote resources
to make sure that this network does, in fact, work.
But I would say overall an award of this magnitude needs much
longer scrutiny than I think we took in El Paso.
Mr. WALDEN. So a good lesson learned for other districts that
may be going down this path?
Mr. TAFOYA. I believe so, yes sir.
Mr. WALDEN. I was reading through the PowerPoint presentation
that, Mr. Johnston, Jack Johnston, the Executive Director of Technology Information, had done, I think, for the board in which he
said, We are no longer in the drivers seat.
This was in 2002 as the whole system was rolling out, and he
said with the introduction of the first class technology came the
need for skill upgrade for many of the TIS staff. What IBM could
provide within the SLD guidelines for skill transfer, they did so.
Unfortunately my staff has a long way to go before we could ever
be expected to provide the same level of service as IBM in many
areas.
And so it looks to me like as this handoff occurs for other districts that may be observing this whole process, they need to learn
the lesson your district learned the hard way it sounds like.
Mr. TAFOYA. Mr. Chair, I believe one of the things that we always have to keep in mind in public education is that sometimes
it is hard to embrace a business model where you have recurring
revenue and an opportunity to grow that resource to support that
in a public setting where you have limited resources that are going
to be pressed a number of different directions.
Mr. WALDEN. I appreciate your comments.
I have no other questions for our panel. I know we have been rejoined by the distinguished Chairman of the full committee who
has put a lot of energy into oversight over the years and continues
to as our Chairman.
Mr. Chairman, I would yield.

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Chairman BARTON. Well, Mr. Chairman, and Ranking Member
DeGette, I do not want to delay this. This is another of our all day
hearings.
I do want to thank our witnesses for being here and participating, and I have actually been watching a lot of this on TV in
my office as I have had a series of meetings. So it is six oclock.
I am not going to ask any direct questions.
I guess I do want to ask the gentleman that represents IBM.
Which one is that?
Mr. WALDEN. That is Mr. Caine and Mr. Pratt.
Chairman BARTON. How can a company as credible as IBM is
participate in the way that apparently you all have where we have
gone into these districts and just the amount of money that has
been requested, it has increased by orders of magnitude?
I mean, I cannot tell you how disappointed I am to find that out.
I mean, what is the real justification for that?
Mr. CAINE. Mr. Chairman, we believed we were responding to
the technology plans the school districts were putting together, that
we were complying with the rules as we understood them at the
time. There are a number of decisions that had been made
throughout the program that allowed these kinds of approaches to
be sanctioned in the Ysleta decision and denials. That question was
called, and we submitted our comments.
Quite honestly, we were happy that it was called, and the FCC
looked at a number of issues here, and they decided 5-0, in that
order, and we have learned from that, and we have actually made
adjustments since that time, since the FCC came out with its decision, but these are
Chairman BARTON. But, you know, in the panel before you we
had some rural school districts or at least low income school districts where I do not believe your company was one of the vendors,
but you know, it is fairly credible to some extent if the school district says, well, we do not really know a whole lot about the program, but if a company like IBM says it is okay, it is okay.
And when you look at the amounts of money that are requested,
I think ultimately the accountability is at the local level, the school
board and the school superintendent. If it is a library, the city
council, the county or whatever, but companies like IBM have a lot
of credibility, and to use that in a way that just has the appearance
of abusing the public trust is just extremely disappointing, you
know.
I have not really read the hearing record directly on point in detail on what IBMs relationship was and direct participation is, but
IBM is one of the icons of corporate America, I have to say I am
very disappointed, and I certainly hope that you will take back to
your management and to the board that we expect companies of
your stature to honor the public trust and not try to push these
things, you know, right to the extreme letter of the law or your interpretation of it.
Mr. CAINE. Mr. Chairman, I appreciate your comments, and I
can tell you that I do not think you were here when I had my opening statement. This program is very important to us, and we do not
want to ever jeopardize it, and we have been willing to work with

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you and your staff and the Commission and the SLD to make
changes to the program so that it is successful.
So relative to the purpose and the mission of this program, the
IBM company takes it very seriously, and that is why we are here,
and that is why we are here voluntarily.
Mr. BOHUCHOT. Well, I want to end on this note. We have a document from USAC, and has this been put into the record?
Mr. WALDEN. Yes, it is in the record, Mr. Chairman.
Mr. BOHUCHOT. But the paragraph that has been highlighted
said, Mr. Mitchell stated discussions with IBM begin in October
and that he was on a conference call with Steve Mueller and
Charles Gentry. He stated that one of IBMs selling points was that
they had represented to him that former SLD attorneys worked for
IBM and as a consequence IBM knows all of the loopholes in the
program.
You know, we are going to do our very best to close those loopholes, and we are going to hope that the IBMs of the world do their
very best to honor the spirit as well as the exact technicalities of
the new program.
And with that, Mr. Walden, I would yield back.
Mr. WALDEN. Thank you, Mr. Chairman.
And I will tell you after three of these hearings, it makes me
wonder what is going on elsewhere around the country that we
need to continue to look at as this program evolves. We are seeing
some progress in some areas, but it is troubling.
I think the one thing we probably would all agree on is our kids
need access to the Internet in their schools, and it is our responsibility to make sure that happens, but in a way that we can have
a straight face, look at the taxpayers and rate payers and say we
are good guardians and stewards of your money.
And what we have seen in some instances around the country,
Mr. Chairman, we cannot tell them that, and we have got to make
sure and get on top of it, and that is what this committees job is
and we will continue to do it.
So I want to thank our witnesses who have spent the day with
us by video an din person, and the record will remain pen for an
additional 30 days for additional questions and comments.
And with that, the Subcommittee on Oversight and Investigations stands adjourned.
[Whereupon, at 6:16 p.m., the hearing was adjourned.]
[Additional material submitted for the record follows:]

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