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But when explaining why the actual costs for the second quarter exceeded the estimates by $1.2 million, SLC states that its costs have risen "for our"N 0*0*0*"  X-program integrity assurance unit to help protect against waste, fraud and abuse." yOy-ԍxFirst Quarter 1999 Program Size Projections for the Schools and Libraries Universal Service Program, dated November 2, 1998, at 5. Again in the fourth quarter estimates, SLC "further supplemented its program integrity operations to protect against waste fraud and abuse. These costs are reflected in the Fourth Quarter  X-estimate."  yO-ԍxFourth Quarter 1998 Program Size Projections for the Schools and Libraries Universal Service Program, dated July 31, 1998, at 2. I fully support the efforts to ensure that this program is being administered in an efficient and consistent manner and believe that the audits that occurred have been essential. I  X-believe, however, that after the program has been running for more than a year, additional overexpenditures for "program integrity assurances" should require more of an explanation than a word processing macro that says "to protect against waste fraud and abuse."  X1- xD. ` ` The Commission inaccurately states that these increased expenses for program integrity were necessary for "discounts" when this level of scrutiny has only been necessary because the Commission required a  X -system of "cash grants" directly to schools and libraries. (#` x xMost importantly, all of these program integrity assurances have only been necessary because the FCC required that schools apply for cash grants not merely "discounts" on telecommunications services. If the Commission had merely required that telecommunications carriers provide a certain level of discount for their telecommunications services when provided to schools and libraries, these excessive administrative expenses would have been unnecessary. A complex cash grant system with thousands of applications from schools all over the country was not what Congress envisioned nor what the statute required, and has necessitated a federal bureaucracy to "process" these applications. Auditing and oversight is only needed because of the use of cash grants instead of a more limited discount program. Moreover, if there has to be an application process, at least a statebystate block grant program would have provided for only 50 applications and a much smaller application review process.  X-  X- xE.` ` I do not believe that the Commission can "continue" to monitor closely when it has not been doing so thus far. (#`  Xe- xIn objecting to the second quarter contribution factors, I noted that SLC was allocated almost four times as much money for administrative expenses as the highcost/low income  X -funds and that the administrative budget increased from $2.7 million to $4.4 million or by 65% in just that one quarter. In objecting to the next quarter's contribution factors, I noted that these increased administrative expenses continued in the third quarter, despite the fact that, at that time, the Schools and Libraries Corporation could not even provide an accurate"x0*0*0*"  X-estimate of all its administrative costs for the first quarter.x yOy-ԍxThird Quarter 1998 Fund Size Requirements for the Schools and Libraries Universal Service Program, dated May 1, 1998. In their subsequent filings, the Schools and Libraries Corporation now calculates their actual First Quarter administrative expenses with no offset for interest income earned as $4.4 million. This amount is well in excess of the $2.7 million that was actually budgeted, and does not even include the additional 1.9 million which was paid to NECA during the first quarter for additional startup expenses. Fourth Quarter 1998 Fund Size Requirements for the Schools and Libraries Universal Service Program, dated July 31, 1998, at page 3. Despite raising these concerns for almost nine months, the Commission continues ahead with the Schools and Libraries Corporation's budget, while raising issues about the budget of other programs. Indeed, the Commission has not addressed many of the questions I have raised above, such as what happened to the third and fourth quarter money already allocated to processing the 1999  X-application forms? And, why shouldn't the FCC review the SLC's budget in a similar manner as Congress reviews this agency's request? With that background, I cannot support the word "continue" in the phrase "continue to monitor closely." xAs an example of the Commission's arbitrary scrutiny, I look to the Commission's  X -reference in reviewing the RHCC's budget to making sure that it "serves the public interest."D  yO-ԍxPublic Notice at 3.D First, I note my continuing frustration with such an arbitrary standard. As I have explained above why is the RHCC's excessive budget not in the public interest but the SLC's greater budget in the public interest, despite the fact that both are excessive when compared to the High Cost/Low Income Program's budget? I can only conclude that the Commission has an arbitrary bias in favor of some universal service programs over others. xA better standard to evaluate or monitor the cost of the program is one advocated by the Schools and Libraries Corporation itself 1% of the total program ceiling. In its second quarter filing, SLC indicated that: %>   X-XxEven with the growth, SLC's current estimate of its program delivery budget is significantly less than 1.0 percent of the program ceiling for 1998 and this for a year when the SLC will incur substantial nonrecurring startup costs and  X-will go through two complete cycles of processing applications. yO! -ԍxSecond Quarter 1998 Program Size Projections for the Schools and Libraries Universal Service Program, dated January 30, 1998, at 9.  Using this standard, the SLC's first quarter 1999 budget should only be $3.25 million. The Schools and Libraries budget now exceeds that by almost $7 million. xIf that standard is too rigorous, however, then why not use the Commission's own statement's from a year ago. In the Public Notice setting the contribution factors for the first quarter of 1998, the Commission stated that: XxAdministrative expenses appear to be high relative to projected quarterly"  0*0*0*[" demand, because startup costs have been allocated to the first quarter. We anticipate that administrative expenses will total less than two percent of annual  X-program costs. yOK-ԍxPublic Notice released December 16, 1997, at note 20 (referring to RHCC's budget).xx  Even using this more generous standard, the Schools and Libraries Corporation's budget would exceed a "reasonable" amount (2%) by almost $4 million. I can only conclude that the Commission does not really intend to %>/   %>/ "continue to monitor" the expenses of this program with any standard that might be meaningful.  X - III.XxThe Costs of the Schools and Libraries Program Outweigh the Benefits, At Least  X -for Many States(#  X - xIn any event one thing that is clear is that, with such high administrative expenses, the costs of this program outweigh the benefits of it, at least to many particularly rural states. If the total amount requested by every applicant to the schools and libraries program were fully funded, the following rural or highcost states would not receive as much money or just barely as much money as the Schools and Libraries Corporation estimates that it will spend  Xb-on administrative expenses in the First Quarter of 1999 alone: Alaska ($10 million), Arkansas ($11 million), Idaho ($5 million), Kansas ($12 million), Maine ($3 million), Montana ($3 million), North Dakota ($4 million), Nebraska ($5 million) Nevada ($8 million), South Dakota ($4 million), Utah ($5 million), Vermont ($3 million), West Virginia (8 million) and Wyoming ($2 million). In contrast, large states like California ($277 million), Georgia ($104 million), Illinois ($109 million), New York ($138 million), and Texas ($169 million) are the big winners as they would all receive in excess of $100 million. Similarly, even if this distribution is examined on a per capita basis, many rural states would receive 60% or less than the national average: Arkansas, Idaho, Indiana, Kansas, Maine, Missouri, Montana, Nebraska, Oregon, Utah, Vermont, West Virginia, and Wyoming. I do not believe that such a distribution is what Congress intended by the "preservation" and "advancement" of universal  Xg-service.HgX yOp-ԍx47 USC Section 254 (b).H Rather, I believe Congress intended that rural areas should receive the lion's share of any increase in the federal universal service fund; support for rural and highcost areas should not be viewed as the residual after enormous amounts for other federal universal  X$-service obligations have been promised.$ {O"-ԍxSee Press Statement of Commissioner Harold FurchtgottRoth Regarding the Schools and Libraries Program's First Wave of Commitment Letters; Attachment A. xFinally, I note that these figures do not even represent all of the costs of the program. Ten million dollars in the first quarter is only the tip of the iceberg. What about the costs of the schools across America that must take the time and expense to fill out these applications? How many teacher, administrative and parent hours have been spent filling out these applications and how much state administrative time has been wasted reviewing them? "" B0*0*0*!" Moreover, what about the cost of the tens of millions of parents and teachers who have had their expectations raised only to have been crushed by a program that was illconceived from the start?  X- IV.XxThe Size and Scope of the Schools and Libraries Program is in Excess of  Xv-Congressional Intentions. (# xIn addition, as I have described on several occasions, the size and scope of the current schools and libraries program is far in excess of what was envisioned by Congress and thus  X -beyond the Commission's authority to establish.   {O -ԍxSee Testimony of Commissioner Harold FurchtgottRoth Regarding Universal Service before the Ways  {O] -and Means Committee of the House of Representatives. See also, Dissenting Statement of Commissioner Harold  {O' -FurchtgottRoth Regarding Federal State Joint Board on Universal Service, CC Docket 9645, Third Order on  {O -Reconsideration, 12 FCC Rcd 22801 (1997); Statement of Commissioner Harold FurchtgottRoth Regarding the Second Quarter 1998 Universal Service Contribution Factors, rel. March 20, 1998; Dissenting Statement of Commissioner Harold FurchtgottRoth Regarding the FederalState Joint Board Report to Congress, rel. April 10, 1998; Dissenting Statement of Commissioner Harold FurchtgottRoth Regarding the Report to Congress in Response to Senate Bill 1768 and Conference Report on H.R. 3579, rel. May 8, 1998; Statement of Commissioner Harold FurchtgottRoth Regarding the Common Carrier Bureau's Proposed Revisions of 1998 Collection Amounts For Schools and Libraries and Rural Health Care Universal Service Support Mechanisms, rel. May 13, 1998; Statement of Commissioner Harold FurchtgottRoth Regarding the Common Carrier Bureau's Clarification of "Services" Eligible for Discounts to Schools and Libraries, rel. June 11, 1998; Statement of Commissioner Harold FurchtgottRoth Regarding the Common Carrier Bureau's Third Quarter 1998 Universal Service Contribution Factors, rel. June 12, 1998. I believe that the universal service contributions, at least to the extent they are providing support for nontelecommunications services to nontelecommunications carriers, may not be fairly characterized as mere "fees." Some have argued that there is only one section of the act that provides funding for universal service and that any challenge to universal service necessarily sweeps in all of the  X -programs.   {O-ԍxSee Testimony of General Counsel Chris Wright Regarding Universal Service before the Ways and Means Committee of the House of Representatives. I point out, however, that the contributions for the schools, libraries, and rural  X-health care support mechanisms are based not only on interstate but intrastate revenues, while the contributions for the high cost program are based solely on interstate revenues. Thus, there are separate rates to fund separate programs. xI have also described on several occasions my conclusion that the legality of the  X-Commission's approach to calculating contributions is highly questionable.X!X yO#-ԍ xSeparate Statement of Commissioner Harold FurchtgottRoth Regarding the Second Quarter 1998 Universal Service Contribution Factors, rel. March 20, 1998; Dissenting Statement of Commissioner Harold FurchtgottRoth Regarding the FederalState Joint Board Report to Congress, rel. April 10, 1998.X As I read the Communications Act, it does not permit the Commission to assess contributions for universal service support mechanisms based on intrastate revenues. Rather, the Act makes clear that the power to collect charges based on such revenues rests within the exclusive province of the States." !0*0*0*S"ԌxFinally, I question whether the Commission's current plan to differentiate among bona fide applications as will be necessary with these contribution levels is legal. The Commission's rules already consider a schools' economic status in determining the level of support to which they may qualify. The Commission also takes economic status into account to determine whether the schools are even eligible for participation in the inside wiring aspect of the school and libraries program. I do not see how the Commission has the discretion to prioritize among bona fide applications. The universal service provisions of section 254(h)(1) mandate that "upon a bona fide request" the "telecommunications carriers ...shall"  XH-provide a discount.S"H yO -ԍx47 U.S.C.A. section 254(h)(1)(B). S All of the applications that met our previous rules are bona fide requests, and I question the propriety and legality of differentiating among them. In addition, I note that there is no such mandatory language under section 254(h)(2). Thus, I believe that the Commission must ensure that applications that have sought funding under 254(h)(1) are separated from those seeking funding 254(h)(2), and that the Commission ensure that the 254(h)(1) applications for legal services are fully funded. To the extent that an application seeks funding under section 254(h)(2), the Commission must set those applications aside until it can ensure adequate funding for all of the 254(h)(1) applications.  Xb- xConclusion xI reiterate my desire that the Commission delay further implementations of this new  X-universal service program until we have addressed  all aspects of universal service including rural and high cost issues. Such a delay would provide us the opportunity to reconsider some of our legal conclusions related to the implementation of this new program, as I believe we must do. At the very least, however, we must become more involved in the oversight of this program and the growing burden its administrative expenses are placing on  X-the telecommunications ratepayers.#x6X@`7 X@# "] "0*0*0*" $Attachment A " "0*0*0*" x` `  hh@hppNovember 23, 1998  А X-T # Xw PE37|XP# oZPRESS STATEMENT REGARDING THE SCHOOLS AND LIBRARIES [CORPORATION'S FIRST WAVE OF COMMITMENT LETTERS   BY FEDERAL COMMUNICATIONS COMMISSIONER HAROLD FURCHTGOTTROTHTPT  Y>-TP  X'-#Xj\  P6G;ynXP#xToday, the Schools and Libraries Corporation announced that it has begun issuing commitment letters to schools and libraries across the country. As this program begins, it is an appropriate time to reflect upon what Congress intended for universal service to mean and compare that to how these programs are living up to those goals as envisioned by Congress. xUnder the 1996 Act, the Commission's primary universal service responsibility was to establish explicit and sufficient universal service fund %>A ing %>A  for rural America. The clear emphasis of Section 254 is to preserve and enhance universal service in rural, highcost areas of the country. Rural, highcost universal service is not just one of many objectives of  XX-Section 254; it should be the highest priority. There are other goals of Section 254, but it is  XC-difficult to read Section 254 in its entirety and understand how a federal universal service  X,-fund program could have as its primary emphasis anything other than rural support. It is hard  X-to dispute that the universal service section of the Telecommunications Act of 1996 was primarily intended to aid rural America.  X-xWith that goal in mind, let us examine what has taken place. Federal universal  X-service support has nearly doubled in size since passage of the Act. But amazingly, most of  X-that growth has not benefited rural states. Instead, growth of universal service has been for other programs that largely flow to other areas of the country. Indeed, in this first wave of commitment letters fr %>C o %>C m the Schools and Libraries Corporation, states like Alaska (only $206 thousand), Maine (only $230 thousand), Montana (only $335 thousand), North Dakota (only $241 thousand), Nevada (only $145 thousand), Vermont (only $103 thousand) and Wyoming (only $138 thousand) are all rural states that should be the primary beneficiaries of universal service, but instead they each receive less than 1/2 of one percent (.5%) of this initial distribution. Similarly, South Dakota (only $394 thousand), West Virginia (only $470 thousand), New Mexico (only $578 thousand), Nebraska (only $692 thousand), Arkansas (only $621 thousand), Colorado (only $641 thousand) and Idaho (only $462 thousand) receive less than 1%. Such a distribution cannot be what Congress envisioned. xMoreover, a close inspection of the total amounts requested by these states reveals a similar bias for urban states in this program. In their latest filing, the Schools and Libraries  X`#-Corporation estimates that its first quarter 1999  %>D administrative costs  %>D will exceed $10 million.#`# X%-ԍ#Xj\  P6G;ynXP#xFirst Quarter 1999 Program Size Projections for the Schools and Libraries Universal  X&-Service Program, dated November 2, 1998. #x6X@`7 X@# If the total amount requested by every applicant were accepted and fully funded, the following rural or highcost states would not receive as much money or just barely as much money "2% b#0*0*0*$" as the Schools and Libraries Corporation estimates that it will spend in administrative expenses in the First Quarter of 1999 alone: Alaska ($10 million), Arkansas ($11 million), Idaho ($5 million), Kansas ($12 million), Maine ($3 million), Montana ($3 million), North Dakota ($4 million), Nebraska ($5 million) Nevada ($8 million), South Dakota ($4 million), Utah ($5 million), Vermont ($3 million), West Virginia (8 million) and Wyoming ($2 million). In contrast, large states like California ($277 million), Georgia ($104 million), Illinois ($109 million), New York ($138 million), and Texas ($169 million) are the big winners as they would all receive in excess of 100 million. Similarly, even if this distribution is examined on a per capita basis, many rural states would receive 60% or less than the national average: Arkansas, Idaho, Indiana, Kansas, Maine, Missouri, Montana, Nebraska, Oregon, Utah, Vermont, West Virginia, and Wyoming. Again, I do not believe that such a distribution is what Congress intended. xAs of today, if one includes the Joint Board's recommended decision, the Commission will have provided universal service support for the schools and libraries program, and the rural health care program (although none of that money has been disbursed yet), provided additional support for the lifeline and linkup programs, and provided for additional universal service support for nonrural carriers. In effect, these potential universal service beneficiaries have been "promised" enormous and unending benefits, long before other potential universal service beneficiaries (specifically the rural, highcost program) have been addressed. I fear that for the small rural carriers, there may not be any money left to help increase their support. xCongress intended and the 1996 Act required that the Commission focus its  X-efforts on rural, high cost areas first, as opposed to finding support for these new programs  X-that primarily benefit other areas of the country. Rural, highcost universal service should not be viewed as the residual after enormous amounts for other federal universal service  X-obligations have been promised; rural areas should have received the lion's share of any  X-increase in the federal universal service fund.#x6X@`7 X@#  ?<