- PROBLEMS WITH THE E-RATE PROGRAM: WASTE, FRAUD, AND ABUSE CONCERNS IN THE WIRING OF OUR NATION'S SCHOOLS TO THE INTERNET Part 1

[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]

PROBLEMS WITH THE E-RATE PROGRAM: WASTE, FRAUD, AND ABUSE CONCERNS IN
THE WIRING OF OUR NATION'S SCHOOLS TO THE INTERNET
Part 1

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HEARING

before the

SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS

of the

COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

__________

JUNE 17, 2004

__________

Serial No. 108-92

__________

Printed for the use of the Committee on Energy and Commerce

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

__________

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2004
95-443PDF

For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

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
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi, Vice Chairman TED STRICKLAND, Ohio
VITO FOSSELLA, New York DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania TOM ALLEN, Maine
MARY BONO, California JIM DAVIS, Florida
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
LEE TERRY, Nebraska HILDA L. SOLIS, California
MIKE FERGUSON, New Jersey CHARLES A. GONZALEZ, Texas
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
CHARLES F. BASS, New Hampshire TOM ALLEN, Maine
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
Vice Chairman HENRY A. WAXMAN, California
MIKE FERGUSON, New Jersey EDWARD J. MARKEY, Massachusetts
MIKE ROGERS, Michigan JOHN D. DINGELL, Michigan,
JOE BARTON, Texas, (Ex Officio)
(Ex Officio)

(ii)

C O N T E N T S

__________
Page

Testimony of:
Diaz, Santos, President, Data Research Corporation........... 67
Feaster H. Walker, III, Inspector General, Federal
Communications Commission.................................. 11
Lambert, Cristina, President and Chief Executive Officer,
Puerto Rico Telephone Company; accompanied by Arnaldo Diaz,
Strategic Business Officer, Enterprise Services............ 63
Mattey, Carol E., Deputy Chief, Wireline Competition Bureau,
Federal Communications Commission, accompanied by Jane E.
Mago, Chief, Office of Strategic Planning and Policy
Analysis, Federal Communications Commission................ 90
McDonald, George, Vice President, Schools and Libraries
Division, Universal Service Administrative Company......... 97
Rey, Hon. Cesar A., Secretary, Department of Education,
Commonwealth of Puerto Rico; accompanied by Carlos Vidal
Arbona, Chief Technology Officer, Puerto Rico Department of
Education; and Adonay Ramirez, ARJ Professional and
Consulting Service, Inc.................................... 49
Saldana, Hon. Manuel Diaz, Comptroller, Commonwealth of
Puerto Rico................................................ 23

(iii)

PROBLEMS WITH THE E-RATE PROGRAM: WASTE, FRAUD, AND ABUSE CONCERNS IN
THEWIRING OF OUR NATION'S SCHOOLS TO THE INTERNET

----------

THURSDAY, JUNE 17, 2004

House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Oversight and Investigations,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:30 a.m., in
room 2322, Rayburn House Office Building, James C. Greenwood
(chairman) presiding.
Members present: Representatives Greenwood, Bass, Walden,
Barton (ex officio), DeGette, and Markey.
Also present: Representatives Green and Rush.
Staff present: Mark Paoletta, majority counsel; Peter
Spencer, majority professional staff; Tom Feddo, majority
counsel; Jaylyn Jensen, legislative analyst; Michael Abraham,
legislative clerk; Gregg Rothschild, minority counsel; and
David Nelson, minority investigator and economist.
Mr. Greenwood. The hearing will come to order. The Chair
recognizes himself for the purpose of making an opening
statement. This morning we begin a series of oversight hearings
regarding the so-called E-Rate Program. E-Rate, which was
created by vague and little notice provision of the
Telecommunications Act of 1996, provides poor schools and
libraries with discounts for basic telephone services, Internet
access, and much of the internal connection gear that comprises
the telecommunications network.
Nearly 1\1/2\ years ago this subcommittee began a careful
and methodical examination of the E-Rate Program. From the very
beginning of that investigation, the subcommittee has found
waste and abuse in the E-Rate Program and since then our E-Rate
oversight has developed on several major fronts.
These hearings will illustrate several serious program
flaws uncovered by that oversight. Unfortunately, these flaws
have led to tragic stories of waste and misuse of E-Rate funds.
We have found that the program's current structure and
administration invite scams, both simple and sophisticated, and
waste serious amount of money.
Whether it be bid rigging, poor planning, and lack of
meaningful competition, or loopholes in the program's rules, a
common and tragic theme recurs. Many children, perhaps hundreds
of thousands, are deprived of the educational benefits that E-
Rate funded infrastructure offered them. While a well-intended
idea, the E-Rate Program as it is currently structured is an
invitation for disaster. Indeed, if one were to design a
program to pour money out the window, this would be the way to
do it.
E-Rate is financed through a mechanism called the Universal
Service Fund which in turn is funded by mandatory contributions
from interstate telecommunication service providers.
Predictably, most telephone companies have chosen to pass the
burden of these mandatory contributions onto consumers as a
universal service fee on their phone bills. Each year the
Universal Service Fund allocates $2.25 billion to the E-Rate
Program. That number bears repeating, $2.25 billion.
Who controls this immense pot of money? Many Americans
might be concerned to learn the answer. It is the Universal
Service Administrative Company, a wholly owned subsidiary of
the National Exchange Carrier Association which is an alliance
of telecommunications service providers. This management
structure is troublesome, and at the very minimum its ``fox
inside the henhouse'' appearance is more than a little
disconcerting.
What agency is responsible for the program's rules and
regulations, and for supervising USAC? The Federal
Communications Commission. The program's rules and the process
by which the FCC creates them are, to say the least,
complicated and cumbersome. What is more, we have found that
the program's current rules do little to foster a competitive
bidding environment that ensures the E-Rate Program pays the
best price for equipment and services.
In addition, the Inspector General will testify that it
took 22 months for the FCC to provide critical policy guidance
to USAC about E-Rate Program administration. I am confident
that the American people do not consider these circumstances to
be the hallmarks of an efficient and effective program.
Yet, in a 1998 Report to Congress, the FCC asserted that
the administration of the E-Rate Program was ``efficient,
innovative, and effective.'' That representation is disturbing
in light of what our work has uncovered, what the FCC's
Inspector General has found, and what the nation's press has
unearthed.
For example, the subcommittee's scrutiny of E-rate work in
Chicago public schools prompted SBC to pay $8.8 million back to
the E-Rate Program for improperly stockpiled switches and
equipment. Our investigation in Puerto Rico found $23 million
worth of improperly stockpiled equipment and a $58 million
computer network that remains virtually unused.
Just 2 weeks ago, the FCC IG and a Justice Department task
force secured a plea agreement regarding a multi-million dollar
bid-rigging scheme by NEC and others intended to defraud the E-
Rate Program by preying on San Francisco Unified School
District, as well as schools in Michigan, Arkansas, and South
Carolina.
The Justice Department has pursued similar E-rate scams in
Milwaukee and New York City. Meanwhile, the Atlanta Journal-
Constitution recently reported on serious abuses of tens of
millions of dollars of E-Rate Program money in Atlanta's public
school system. These reports have now taken our investigation
to Atlanta. I fear that we may be only seeing the tip of the
iceberg.
These instances clearly demonstrate that the FCC's
injudicious statement 6 years ago that E-rate was an efficient
and effective program falls far short of the mark. The FCC and
USAC have a lot to answer for, and much work to do. However, we
should also acknowledge that Congress must shoulder some
responsibility as well, perhaps more time, and certainly more
debate and discussion, should have been spent in carefully
crafting this program to achieve its admirable goal.
Today's hearing will focus in detail on Puerto Rico's use
of E-rate funds, but these specifics will also provide an
invaluable opportunity to consider the bigger picture of E-
rate's flaws. In Puerto Rico, E-rate--that is, the American
rate-payer--paid for more than $100 million of equipment and
services. We have discovered that most of the equipment and
services have never been, and will never be, put to effective
use for Puerto Rico's children.
The subcommittee found $23 million in telecommunications
equipment, wireless access cards and related gear, still
shrink-wrapped and sitting on storage pallets in a government
warehouse. While the equipment has sat there, E-rate funds were
paid out for this equipment's purchase and its installation. E-
rate paid Puerto Rico Telephone Company $31 million for high-
speed service and Internet access, yet those services went
virtually unused. This is outrageous.
Today, after over $101 million has been spent by the
program to build Puerto Rico's schools a high speed network for
Internet access, schoolchildren access the Internet by slow,
dial-up modems on roughly two computers per school. That is,
50,000 students graduate each year from the largest school
system in the Nation without having any of the Internet access
and high-tech learning resources that the program is intended
to support.
Puerto Rico's E-rate experience is a story of questionable
technology planning; questionable billing for E-rate products
and services by the vendors, Puerto Rico Telephone Company and
Data Research Corporation; confused efforts to rebuild Puerto
Rico's E-Rate Program after the current administration assumed
office; and, a critical failure on the part of USAC, and
ultimately the FCC, to recognize the severity of the situation
and take charge when more than $100 million of E-rate
investment was at risk.
The delay by FCC and USAC to intervene after the appearance
of evidence of waste and abuse, coupled with contract disputes
among vendors and the administration, have squandered precious
time. Subcommittee staff found E-rate-funded equipment
essentially sitting idle in Puerto Rico's schools, and serious
questions exist regarding network functionality in many schools
due to disuse, corrosion, and inadequate maintenance of
essential equipment.
Delay may also be hampering legitimate remedial efforts by
the current administration. The Puerto Rico Department of
Education appears to be implementing a number of controls to
manage future E-rate work, and to have a substantive plan to
implement technology for educational use and for integrating
curricula and teacher training to ensure the effective use of
E-rate infrastructure.
However, the anticipated delay to resolve past funding
issues seriously jeopardizes previously implemented E-rate
work. Although the FCC was clearly preparing to work closely
with Puerto Rico in the Fall of 2002, the agency made a mid-
course correction in the Spring of 2003, abandoned what it had
termed a ``workout plan,'' and undertook a much more arms-
length approach to the school district. Late last year, the FCC
ordered USAC to process Puerto Rico's E-rate applications after
completing a series of audits. As a result, the E-rate quagmire
in Puerto Rico may not be resolved until 2005 or later.
Puerto Rico demonstrates that the E-Rate Program's
administration is anything but efficient, innovative, and
effective. The program is overly complex and poorly managed.
Robust competitive bidding procedures are virtually absent.
There appears to be no oversight in a program where rigorous
oversight should be paramount. And at the end of the day, while
there is certainly blame to go around, the buck has to stop at
the agency that is charged with running this program.
I look forward to discussing these circumstances with the
witnesses this morning.
Finally, on a more personal note, I would like to
acknowledge our first lead counsel on this investigation,
Michael Geffroy. Mike has since left to work on the House
Select Committee on Homeland Security, and today, as a Major in
the United States Marine Corps, is on a leave of absence while
serving as an attorney in Iraq. We sincerely appreciate his
selfless dedication and service to our nation during this war,
as well as all of his work for this subcommittee on the E-Rate
Program.
I would also like to thank Tom Bennett, the Assistant
Inspector General for USF Oversight, for the valuable
assistance he has provided to our staff during this
investigation. I thank all the witnesses for attending and now
recognize the gentlelady from Colorado, Ms. DeGette, for her
opening statement.
Ms. DeGette. Thank you, Mr. Chairman. I would also like to
join in welcoming our colleague, The Delegate from Puerto Rico,
Mr. Arcevedo-Vila, who is with us today and I know is very,
very concerned and involved in these issues as they relate to
Puerto Rico. Thank you for joining us.
The E-Rate has done a lot of good but it also has some
serious problems as the Chairman noted. I am committed to this
program and I think we as Congress have a responsibility to
determine how some of these glitches that we will be hearing
about today will be fixed.
I think the problems are fixable but only if we increase
oversight and crack down on some of the worst offenders and
fraudulent practices. We need to stop wasting millions of
dollars but, most importantly, we need to guarantee that the
kids that this innovative program is intended to serve are not
the ultimate victims.
In order for the E-Rate Program to be successful and to do
what it is supposed to do, a pretty tight partnership has got
to exist among the many entities who participate in the
process. What we too often have found is a real breakdown of
the partnerships due to many factors including intentional
manipulation, indifference, or inexperience.
I look forward to exploring what I see as two of the most
serious problems to be addressed in order to ensure that the E-
Rate is accomplishing its mission. First, the bad apple vendors
who take advantage of school districts and then essentially
take the money and run and, second, the apparent lack of
oversight that has allowed for large amounts of money to go to
schools that have no ability to proceed with actually utilizing
the funds and equipment that they receive.
We have seen numerous examples of unscrupulous vendors and
so-called consultants who have taken advantage of schools with
little experience or resources to compete for E-Rate dollars.
These vendors help them successfully apply and in the process
are able to manipulate the situation for their own benefit.
The end result is schools that are left with lots of
equipment that they don't need or haven't the foggiest idea of
how to use. People like me who have elementary and secondary-
aged children see this every day. Schools which are just
crammed with equipment that no one has a clue how to turn on.
Sometimes it seems to be the over eagerness and perhaps the
naivete of school districts that puts them in this vulnerable
situation to begin with.
It doesn't take much to convince school districts,
particularly poor ones with little resources to begin with, to
try and get the latest and greatest equipment. Then they end up
with all sorts of cutting edge technological paraphernalia
which is useless to them in the end because they don't have the
hardware or the personnel expertise to make the use of it.
This, too, has been a factor in some of the failures we have
seen.
As we all know, today we will be focusing primarily on what
happened in Puerto Rico. I am very interested in hearing our
witnesses discuss how they are both going to fix the mess that
was created by the previous administration and move forward
with a system that will actually serve the children.
In addition, I think the FCC needs to articulate their
oversight process and explain to us how such large amounts of
money have ended up going to schools that clearly have no
ability to use the money effectively. If there isn't better
oversight, these problems will not be fixed and, frankly, this
is a problem that needs to be fixed right away. It is the kids
who are paying for the ineptitude, fraud, and overall
ineffectiveness that has been found so often in this innovative
program that has the ability to give them a technological head
start in life.
When you look at the really heartwarming E-Rate success
stories and how some students have benefited from this program,
how well the money was spent, and then you look at the millions
of dollars that have been wasted, it really underscores the
problem at hand. Think of what could have been accomplished and
how many kids would have been touched if these millions of
dollars that have literally been thrown away had accomplished
what they were supposed to. This has to be fixed, it has to be
fixed now. We owe our kids no less.
Mr. Chairman, I want to thank you for holding this hearing
and I look forward to the testimony and I yield back the
balance of my time.
Mr. Greenwood. The Chair thanks the gentlelady. Does the
gentleman from Oregon have an opening statement?
Mr. Walden. Mr. Chairman, I am going to waive on the
opening statement so we can hear from our witnesses and get
into the questions.
Mr. Greenwood. Very well. The gentleman from Illinois, Mr.
Rush. Do you have an opening statement, sir?
Mr. Rush. Mr. Chairman, I am not a member of the
subcommittee but I want to thank you for allowing me to
participate at this hearing. I am here today because I am
concerned about recent revelations of fraud and abuse in
certain communities or cities that have occurred with the E-
Rate Program.
Because of this, some have called into question whether the
program should exist at all. Mr. Chairman and members of the
subcommittee, I am here to tell you that we should not let a
few bad apples spoil the bushel. Again, I am aware of the fraud
and misuse in Puerto Rico.
It is my understanding that the Puerto Rican government led
by its Governor is making sure that all of those culpable are
either in jail or being brought to justice. They are making
every effort to retrieve the money that was stolen. I have
absolute confidence in the Puerto Rican government. I have
worked with them in the past and I want to continue to work
with them in the future on the E-Rate Program and similar
programs.
In addition, I would be remiss if I did not mention the
problems that the Chicago public schools had with implementing
its E-Rate Program. As you know, $5 million of equipment
supplied by telecom carrier SBC to the Chicago school system
sat in a warehouse for years. However, Mr. Chairman, I am
confident that both the Chicago public schools and the Puerto
Rican government have implemented safeguards to prevent this
from happening again. I am certain and assured, particularly in
this Chicago public school system, that this problem has been
solved and will never, ever, ever happen again.
By in large, Mr. Chairman, the E-Rate Program is working
and is fulfilling its mandate. It has now been over 7 years
since the E-Rate Program was created as part of the
Telecommunications Act of 1996. The program is now commencing
its sixth year of providing discounts on telecommunication
services, Internet access, and internal connections to
libraries and public and private schools.
This program has transformed America's schools and
libraries into 21 century institutions opening up opportunities
for even the poorest and most remote rural areas to take
advantage of the vast resources of the Internet and the power
of distance learning.
In my district alone we have millions to wire our public
schools and our libraries. It is clear that since the
initiation of this program, the impact of providing universal
connectivity to schools and libraries in my district have
definitely contributed to bridging the gap between the haves
and the have-nots.
Mr. Chairman, in adopting this program, the Congress
acknowledged the importance of providing the nation's schools
and libraries with telecommunications technology. It is clear
that since the initiation of this program, the impact of
providing universal connectivity to our schools and libraries
have definitely contributed to bridging the gap between the
haves and the have-nots.
Mr. Chairman, I yield back the balance of my time.
Mr. Greenwood. The Chair thanks the gentleman and, just for
the record, would share with him that our investigation is
intended neither as an indictment of certainly the current
administration of the Puerto Rican Department of Education nor
the Chicago school district or any other, is but a more
necessary look at what is wrong with the safeguards and
oversight in the program that would allow these problems to
have occurred in the first place. Nor do we impugn the noble
intention of the program.
The gentleman from Texas is welcome to join us as well and
he is recognized for his opening statement.
Mr. Green. Thank you, Mr. Chairman. And, again, not being a
member of the committee like my colleague from Illinois, I
appreciate the opportunity to allow me to waive on.
Particularly, I appreciate you and our ranking member calling
this series of hearings on the E-Rate Program.
With our recent receipt of over $50 million last year the
Houston school district has received approximately $200 million
in Universal Service Funds through the E-Rate. Clearly, there
are widespread problems with fraud and abuse under this program
in many areas, including my own, but between 1998 and 2001
Internet access in minority classrooms in Houston jumped from
37 percent to 81 percent. 95 percent of all Houston public
school classrooms are now connected with over 90 percent using
high-speed connections.
Teachers are connected to school resources at their homes
and soon students will be connected at home also. Smaller
school districts also benefit. Another much smaller district,
which is 80 percent economically disadvantaged, has received
more than $1.5 million in E-Rate funding. This low-income
district is now scoring over 90 percent on all state
achievement tests and the school administrators say that could
not have happened without the E-Rate.
These are real accomplishments and we are successfully
bridging the digital divide because of the Universal Service
Fund and E-Rate, investments that are paid back many time over
when these children fully enter our society and our work force.
We need a massive reform to stop the E-Rate from acting as a
cash cow for outlaws who would waste money intended for school
children, often poor and minority school children. I am glad to
see the Department of Justice is now involved. These important
hearings will uncover the extent of the problem and after that
we will begin to examine the legislative solutions for the
Universal Service Fund and the E-Rate Program.
One of the stories we will hear today is about the multi-
million dollar Internet backbone built in Puerto Rico but not
utilized because schools do not have the machines for the
children to use. We drafted legislation, the Children's Access
Technology Act, H.R. 94, to direct unused E-Rate funds for
hardware purchases for low-income school districts. Wiring the
schools is one thing but we need computers in the classrooms as
well.
In addition to wiring and installing hardware, the other
critical ingredient is teacher training for this equipment.
This, too, is an ineligible use of E-Rate funding, a limitation
which is counterproductive. By making E-Rate available but
severely limited to uses, an incentive to install gold-plated
server networks have developed. We must develop serious time
and energy in rebuilding the program by eliminating the waste,
fraud, and abuse that is equal to stealing from our school
children. I believe the important element of reform is to
revisit what we use E-Rate funds for and strongly consider
making training and hardware purchases eligible.
Again, Mr. Chairman, I thank you for allowing me to waive
on the subcommittee and I appreciate you allowing me to
participate.
Mr. Greenwood. The Chair thanks the gentleman and welcomes
him to participate in this hearing.
Before we call the witnesses, I want to share with the
members of the committee and all those present some visual aids
to give you a picture of what we found in our investigation of
the Puerto Rican system.
In February of this year committee staff members went down
to Puerto Rico for a site visit accompanied by Tom Bennett from
the FCC's Office of Inspector General. While in Puerto Rico
they were shown this warehouse in Bayamon just outside of San
Juan. Actually, that is not the picture at all. That is the
video tape. I will queue it up momentarily. There we are. That
is the warehouse in Bayamon. In this warehouse our staff found
more than $23 million worth of computer equipment which has
been sitting in storage for close to 4 years.
Photo two, please. This is a photo from inside the
warehouse that shows boxes of wireless computer cards still
shrink wrapped and stacked floor to ceiling. There were 73,000
cards purchased in 1999 and 2000 that were never installed.
Photo three shows boxes of cabling and wireless card
adapters that cost half a million dollars and also were never
installed.
Photo four, more wireless card adapters. These were
intended to be used with the 73,000 wireless cards in computers
that never were purchased.
Photo five, last, a picture of still more wireless cards,
all told $23 million worth. At the time each card cost more
than $300 to purchase so that is $300 times 73,000 of them.
Obviously they were never installed. Row upon row of computer
equipment paid for by American telephone rate payers going to
waste and becoming more obsolete each day.
Now, we can go to the video. My staff also took video
footage during their visit to Puerto Rico in February. The
corner of this warehouse is packed floor to ceiling with
computer equipment for Puerto Rican schools. These are the
73,000 wireless computer cards that I mentioned. $23 million
worth bought and paid for with E-Rate dollars. This video is
only about a minute long but it will give the committee and the
public a better understanding of the breadth and the extent of
the equipment improperly stored in this warehouse.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy
and Commerce
Thank you Chairman Greenwood. This morning we begin a public review
of the E-rate program, a program that offers schools and libraries
financial assistance so they can more ably afford Internet access and
other telecom services necessary for their educational missions.
We all recognize that E-rate is a popular program with many success
stories--a program we want to ensure works cost-effectively to achieve
the goals Congress intended it to achieve. We also recognize that, when
it comes to popular programs, stakeholders may resist close scrutiny,
for fear the apple cart will be upset.
Mr. Chairman, I agree with you that this program deserves the close
bipartisan scrutiny you have led this past year. Let me assure you, as
we go forward, we will not shy from rocking some apple carts to make
sure proper oversight of this program is performed--and the E-rate
funds are expended properly.
There are serious questions about the setup and implementation of
this program. There are powerful incentives in the program for waste,
fraud, and abuse. Those applying for funds are asking E-rate to spend
other people's money--money consumers pay every month on their phone
bills.
Substantial sums of money are involved here. Since it began funding
services in 1998, E-rate's administrator has approved some $12.9
billion for distribution on behalf of schools and libraries around the
nation. The service providers, the phone companies, equipment makers,
network installers have received some $8 billion of these funds so far
for the products and services they sold to the schools. Has it been
well spent? That's what we intend to determine.
There have been success stories, but, again, at what cost?
We found, and we have read about, equipment worth tens of millions
of dollars laying around in warehouses, and extravagant purchases of
equipment that far surpass a school district's needs. For example, why
would it be necessary to install three network switches, at a cost of
up to $100 thousand each, in a single school when just one of these
high-tech switches could run a small school system?!
For the past two years the Inspector General of the Federal
Communications Commission (FCC) has been telling us his office cannot
ensure the program is sufficiently protected from waste, fraud, and
abuse. Indeed, his concerns, in part, prompted this Committee to
initiate its review almost a year and half ago.
We know the program is not sufficiently protected from waste,
fraud, and abuse from example upon example:
This past December, when Committee staff were about to perform a
site visit of Chicago Public Schools, SBC alerted staff on the eve of
their visit to $5 million of warehoused equipment--paid for by E-rate
but never installed by the company.
In Atlanta just a few weeks ago a newspaper investigation reported
more than $4 million of equipment purchased but gathering dust in
warehouses, along with evidence of inappropriate and wasteful
purchases--powerful network gear capable of running whole school
districts had been purchased for a single elementary school.
In my own state of Texas, an El Paso school district purchased one
year of IBM network maintenance services that amounted to about
$270,000 per every school--including elementary schools--just to insure
a brand-new network was running properly.
Recently, NEC pleaded guilty to federal charges of bid-rigging and
wire fraud scheme involving San Francisco schools, among other
districts across the country. And there are a number of active law
enforcement investigations into activities like this around the nation.
And, of course, today we are reviewing the case of the Puerto Rico
Department of Education, which is truly a story of lost opportunity for
tens of thousands of students who have never had access to a network
and broadband services purchased with more than $100 million in E-rate
funds.
I look forward to learning more about Puerto Rico's experience
today. I'd like to understand the scale and nature of any wasted
funding and what has been done to resolve the situation. I'd also like
to understand what this case demonstrates about broader problems in the
E-rate program.
I'm pleased to see that we will hear from the FCC's Inspector
General today, who can outline and discuss with us his broad concerns
with the E-rate program. Let me also welcome our witnesses, who have
come to explain their roles and perspective in Puerto Rico, and on the
E-rate program generally.
Finally, let me extend a special welcome to Dr. Cesar Rey, Puerto
Rico's Secretary of Education. I understand his administration has been
working to resolve problems within his department's program and I am
especially interested in his perspective.
You all should know this Committee will work hard to get to the
bottom of the problems in the program and see that changes are made
where necessary. This work begins with a solid foundation of bipartisan
oversight--and I'm optimistic that the review beginning today will lead
to much fruitful work ahead.
Thank you, Mr. Chairman. I yield back the remainder of my time.
______

Prepared Statement of Hon. John D. Dingell, a Representative in
Congress from the State of Michigan
Mr. Chairman, thank you for initiating this investigation and
holding this hearing. The waste, fraud, and abuse uncovered in the E-
rate program is an outrage. And the Federal Communications Commission's
(FCC) mishandling of this program is inexcusable.
We now know significant sums have been wasted, and that the
allocation process is rife with abuse. Some of the corporate scofflaws
are being called to account, but that process has not as yet
effectively deterred the rampant fraud associated with this program.
USAC, the private corporation that the FCC established to administer
the E-rate program, has failed to protect the ratepayers' dollars,
thereby shortchanging our children. Critical questions such as the true
ability of schools to follow reasonable technology plans are simply
ignored. Schools may apply for funds without any serious showing that
the electrical systems in often very old buildings can support modern
telecommunications equipment. Nor do schools need to assure that the
vital hardware, the computers themselves that must be provided locally,
is available for the students. There is not the slightest attempt to
determine prior to the funding whether the school district has both the
local funds and the ability to train teachers in the use of the
technology.
Functionally, the FCC has turned this program over to the vendors
by refusing to establish adequate oversight of the 28,000 proposals
funded each year. Even worse, the FCC proposes to check compliance with
only a handful of audits, some 128 to date. The FCC Inspector General
is only permitted three positions to oversee the program and those
individuals are largely assigned to grand juries around the country.
Gold-plated equipment paid for by the telephone ratepayers, often
at prices that exceed any charged elsewhere, lies unused and growing
obsolete in classrooms where no teachers have been trained in its
potential applications. Worse we have found millions of dollars worth
of these very expensive components aging in warehouses despite vendor
and school district ``certifications'' that they have been installed
and are operating as intended.
Today we will hear the tragic story of Puerto Rico, the school
district with the largest number of campuses in the country. We will
hear how $100 million was wasted without a single child benefitting
from a single connection to the Internet. We will hear a story of
vendor greed, phone company charges for access despite a lack of
connections, misconduct by previous local officials, and bureaucratic
incompetence.
Thanks to local money, each school now has two computers hooked up
to the Internet by dial-up modems. But we have lost valuable time for
the children of Puerto Rico. The administrators of the E-rate program
and the administrators of the Puerto Rico Department of Education must
work together to assure that another year does not go by while this
generation of children waits for the opportunity that the E-rate
program is supposed to provide.
We have shining examples of what the E-rate program can provide and
I hope that some of the success stories from schools where it has
worked will be exhibited at future hearings. In those places where
local officials have a good plan and the wherewithal to carry it out,
and where vendors do not have effective control of the fund procuring
process, the E-rate funds have been a godsend, opening vistas of
learning and opportunity to students that would not have ever been
possible for most of their parents or even older siblings.
E-rate funds, used properly, can truly improve the future for
millions of Americans. I look forward to working with my colleagues on
whatever changes are necessary to make that promise a reality.

Mr. Greenwood. With that, I call forward our first
witnesses and they are Mr. H. Walker Feaster III, Inspector
General for the Federal Communications Commission. Good
morning, sir, and welcome. Have a seat. The Honorable Manuel
Diaz Saldana, Comptroller of the Commonwealth of Puerto Rico.
Good morning to you, sir, and welcome.
As you may have been advised, it is the custom of this
subcommittee to take testimony under oath. I will have to ask
if either of you object to giving your testimony under oath.
Okay. I also need to advise you that pursuant to the rules of
this committee and of the House, you are entitled to be
represented by counsel. Do either of you wish to be represented
by counsel? Okay. In that case, if you would stand and raise
your right hands. Do you swear that the testimony you are about
to give is the truth, the whole truth, and nothing but the
truth?
[Witnesses sworn.]
Mr. Greenwood. Very well. You are under oath and, Mr.
Feaster, we will begin with you. You are recognized for 5
minutes for your opening statement. Make sure your microphone
is on.

TESTIMONY OF H. WALKER FEASTER III, INSPECTOR GENERAL, FEDERAL
COMMUNICATIONS COMMISSION; AND HON. MANUEL DIAZ SALDANA,
COMPTROLLER, COMMONWEALTH OF PUERTO RICO

Mr. Feaster. Good morning again. Mr. Chairman and members
of the subcommittee, I am Walker Feaster, Inspector General of
the Federal Communications Commission. I appreciate the
opportunity to come before you today to discuss oversight of
the E-Rate Program and to discuss concerns that my office has
with the program as a result of our involvement in audits and
investigations.
In my testimony I will briefly summarize my office's
involvement in USF Oversight, discuss our specific actions with
respect to Puerto Rican Department of Education, our
involvement in the E-Rate Program, and describe in more general
terms the concerns that my office has with the E-Rate Program.
At this point I originally planned to introduce Thomas
Bennett, my Assistant Inspector general for USF Oversight who
is responsible for the oversight of the E-Rate Program.
However, Mr. Bennett has taken ill today and is unable to be
with us.
I believe it is particularly timely that we now discuss
waste, fraud, and abuse of the E-Rate Program given recent
events and media interest. In November 2003 Florida Today and
WKMG, Channel 6, in Orlando, Florida, published a series of
reports describing questionable spending of E-Rate funding by
Brevard County School District.
In April 2004 five individuals were indicted in connection
with charges of conspiracy, mail fraud, and money laundering
involving the E-Rate Program. The indictment charges that USAC
paid these individuals over $1.2 million for goods and services
that were not provided to schools.
Last month, as the Chairman mentioned, NEC was fined $20.6
million for criminal fines in a civil settlement and
restitution relating to charges of collusion and wire fraud in
the E-Rate Program. Also, last month the Atlanta Journal-
Constitution ran a series of articles reported wasteful
spending of E-Rate funding by the Atlanta public school system.
The Atlanta Journal-Constitution reported that the public
school system had bought more equipment than was needed,
routinely overpaid for goods and services, and stored unused
network equipment worth about $4.5 million in the warehouses.
My office first looked at the USF as part of the audit of
the Commission's fiscal year 1999 financial statement. Since
that time our office has continued to devote considerable
resources to oversight of the USF and the E-Rate Program in
particular. However, several obstacles have impeded our ability
to implement effective independent oversight of the program.
The primary obstacle we have dealt with as been a lack of
adequate resources to conduct audit and provide audit support
to investigations. We have requested appropriated funding to
obtain contract support for USF oversight activities but those
funding requests have yet to be approved.
I am presently able to devote three full-time auditors and
two auditors part-time to the USF. Despite these limited
resources, my office has implemented an independent oversight
program that includes audits conducted using both internal
resources and other Federal Office of Inspector General under
reimbursable agreements, a review of audit work conducted by
USAC, and active participation in Federal investigations of E-
Rate fraud. In addition to other audits of compliance, I
believe it would be appropriate to conduct a broad-based review
of the program.
Puerto Rican Department of Education. I would like briefly
to discuss allegations that my office received regarding
wrongdoing related to PRDOE's involvement in the E-Rate Program
and programmatic concerns that are highlighted by PRDOE.
In April 2001, my office was contacted by an auditor from
the Office of the Comptroller of Puerto Rico who alleged
wrongdoing by PRDOE related to the receipt of E-Rate funding.
The allegation were that PRDOE did not comply with state and
local procurement regulations during the E-Rate vendor
selection process and that PRDOE had not secured access to all
the resources such as teacher training and electrical
infrastructure at schools necessary to make effective use of
goods and services being provided.
Based on information we gathered and reviewed in a
preliminary investigation, we referred the matter to Federal
law enforcement on May 31, 2001. That investigation is ongoing
and we are continuing to provide support to the investigation
as warranted.
The Puerto Rican matter highlights several concerns that my
office has had with the program. These concerns are lack of
timely and effective resolution for audit findings from the E-
Rate beneficiary audits, inadequacies in the competitive
procurement requirements, effective use of purchased goods and
services and inadequacies in applicant certifications regarding
compliance with program requirements.
Program rules require that applicants use a competitive
procurement process to select vendors. We question whether the
rules are adequate to ensure competitive process is followed.
In addition, weak record keeping requirements to support the
procurement process as well as other aspects of E-Rate
application offer little protection to the program.
Site visits to PRDOE facilities have verified that schools
had neither the physical infrastructure to support the system
that was planned nor appropriate equipment and training to
effectively use the E-Rate funded system. Additionally, some
assets purchased with the E-Rate funding are yet to be
installed in Puerto Rican schools. These conditions exist
despite PRDOE's certifications that they were prepared to make
effective use of the goods and services purchased with the E-
Rate funds.
The E-Rate Program is heavily reliant on applicant
certifications in lieu of independent verification.
In addition to concerns that are highlighted by PRDOE, my
office has identified other concerns as the result of audits
and investigations.
USAC has implemented numerous procedures to administer to
the E-Rate Program. The Commission has formally adopted some
but not all of the USAC operating procedures. We believe that
this distinction between program rules and USAC implementing
procedures represents a weakness in program design and we
believe that this situation contributes to confusion regarding
the rules governing the program.
The differentiation between program rules and USAC
procedures is illustrated in the technology planning area.
Program rules require the applicant's to prepare a technology
plan and that the technology plan be approved. USAC
implementing procedures contain detailed requirements for the
contents of technology plans which significantly add to the
value and validity of the plan. We have observed many instances
of noncompliance with program rules and USAC procedures related
to the technology and planning process.
The E-Rate Program allows eligible schools and libraries to
receive goods and services based on discount rates with the
fund picking up the portion not paid by the applicant. A number
of audits have identified that applicants have not filed
program requirements for discount rate calculation or were
unable to support the discount rate calculated.
Applicants are required to pay their portion of the cost
for E-Rate goods and services to their service providers and
are required to bill the applicants for these costs. We have
found examples of applicants not paying their portion or not
paying their portion in a timely manner and service providers
not billing for these costs.
The Office of Inspector General remains committed to
meeting our responsibility for providing effective oversight of
the USF and we believe we have made significant progress.
However, until resources and funding are available to provide
adequate oversight to the program, I am unable to provide
assurance that the program is protected from waste, fraud, and
abuse.
Thank you. I will be happy to try to answer any of your
questions.
[The prepared statement of H. Walker Feaster III follows:]
Prepared Statement of H. Walker Feaster III, Inspector General, Federal
Communications Commission
introduction
Mr. Chairman and Members of the Subcommittee, I appreciate the
opportunity to appear before the subcommittee today to discuss concerns
regarding waste, fraud, and abuse in the E-rate program. In my comments
and written testimony, I will provide a brief summary of my office's
involvement in USF oversight, discuss our specific actions with respect
to the Puerto Rico Department of Education's (PRDOE) involvement in the
E-rate program, and describe in more general terms the concerns that my
office has with the E-rate program. I would also like to introduce
Thomas Bennett, the Assistant Inspector General for USF Oversight in
the FCC Office of Inspector General. Mr. Bennett is responsible for USF
oversight including oversight of the E-rate program and is available to
answer specific questions you may have about my office's oversight of
E-rate.
history of independent oversight of the universal service fund (usf)
My office first looked at the USF in 1999 as part of our audit of
the Commission's FY 1999 financial statement when the USF was
determined to be part of the FCC's reporting entity for financial
statement reporting. During that audit, we questioned the Commission
regarding the nature of the USF and, specifically, whether it was
subject to the statutory and regulatory requirements for federal funds.
Starting with that inquiry, the Office of Inspector General has
continued to devote considerable resources to oversight of the USF.
Due to materiality and our assessment of audit risk, we have
focused much of our attention on the USF mechanism for funding
telecommunications and information services for schools and libraries,
also known as the ``Schools and Libraries Program'' or the ``E-rate''
program. Applications for program funding have increased from 30,675 in
funding year 1998 to 43,050 for the current funding year. Applications
were received from schools and libraries in each of the 50 states, the
District of Columbia, and most territories and included 15,255
different service providers. Requested funding has increased from
$2,402,291,079 in funding year 1998 to $4,538,275,093 for the current
funding year.
OIG Oversight
During FY 2001, we worked with Commission representatives as well
as with the Defense Contract Audit Agency (DCAA) and the Universal
Service Administrative Company (USAC), to design an audit program that
would provide the Commission with programmatic insight into compliance
with rules and requirements on the part of E-rate program beneficiaries
and service providers. Our program was designed around two corollary
and complementary efforts. First, we would conduct reviews on a
statistical sample of beneficiaries large enough to allow us to derive
inferences regarding beneficiary compliance at the program level.
Second, we would establish a process for vigorously investigating
allegations of fraud, waste, and abuse in the program.
Unfortunately, several obstacles have impeded our ability to
implement effective, independent oversight of the program. The primary
obstacle has been a lack of adequate resources to conduct audits and
provide audit support to investigations. Since our initial involvement
in independent oversight of the USF as part of our conduct of the FY
1999 financial statement audit, we have demonstrated our commitment to
independent oversight of the USF by adding two (2) staff auditor
positions and by organizing USF oversight activities under an Assistant
Inspector General for USF Oversight. This represents dedication of
three (3) of the eight (8) auditors on the staff of the FCC OIG to USF
oversight. In addition to the OIG staff dedicated to USF oversight, two
(2) audit staff members responsible for financial audit are also
involved in USF oversight as part of the financial statement audit
process.
We have also requested appropriated funding to obtain contract
support for our USF oversight activities. In our FY 2004 budget
submission, we requested $2 million for USF oversight. That request was
increased to $3 million in the President's budget submission for FY
2004. Unfortunately, this funding was not included in the Commission's
final budget for FY 2004. We are currently considering alternatives for
obtaining access to contract audit support to implement the USF
oversight portions of our FY 2004 audit plan.
Despite limited resources, my office has implemented an aggressive
independent oversight program. My oversight program includes: (1)
audits conducted using internal resources; (2) audits conducted by
other federal Offices of Inspector General under reimbursable
agreements; (3) review of audit work conducted by USAC; and (4) active
participation in federal investigations of E-rate fraud.
OIG Audits Using Internal Resources
We have completed eleven (11) audits that we initiated during
fiscal year 2002 using auditors detailed from the Commission's Common
Carrier Bureau (since reorganized as the Wireline Competition Bureau)
and audit reports are being finalized for the two (2) remaining audits.
For the eleven (11) audits that have been completed, we concluded that
applicants were compliant with program rules in five (5) of the audits,
that applicants were generally compliant in two (2) of the audits, and
that the applicants were not compliant with program rules in four (4)
of the audits. We have recommended recovery of $731,494 as shown below:

----------------------------------------------------------------------------------------------------------------
Potential
Report Date Applicant Conclusion Fund
Recovery
----------------------------------------------------------------------------------------------------------------
09/11/02................................. Enoch Pratt Free Library.... Compliant................... $0
02/03/03................................. Robeson County Public Compliant................... 0
Schools.
02/05/03................................. Wake County Public Schools.. Compliant................... 0
08/27/03................................. Albemarle Regional Library.. Compliant................... 0
12/22/03................................. St. Matthews Lutheran School Not Compliant............... 136,593
12/22/03................................. Prince William County Generally Compliant......... 5,452
Schools.
12/22/03................................. Arlington Public School Generally Compliant......... 7,556
District.
03/24/04................................. Immaculate Conception School Not Compliant............... 68,846
04/06/04................................. Children's Store Front Not Compliant............... 491,447
School.
05/19/04................................. St. Augustine School........ Not Compliant............... 21,600
05/25/04................................. Southern Westchester BOCES.. Compliant................... 0
----------
$731,494
----------------------------------------------------------------------------------------------------------------

Audits Conducted by Other Federal Offices of Inspector General
On January 29, 2003, we executed a Memorandum of Understanding
(MOU) with the Department of the Interior (DOI) OIG. The MOU is a
three-way agreement among the Commission, DOI OIG, and USAC for reviews
of schools and libraries funded by the Bureau of Indian Affairs and
other universal service support beneficiaries under the audit
cognizance of DOI OIG. Under the agreement, auditors from the
Department of the Interior perform audits for USAC and the FCC OIG. In
addition to audits of schools and libraries, the agreement allows for
the DOI OIG to consider requests for investigative support on a case-
by-case basis. We have issued two (2) audit reports under this MOU and
have completed fieldwork on three (3) additional audits. For the audit
where we determined that the applicant was not compliant, we have
recommended recovery of $2,084,399. A summary of completed audits is as
follows:

We have also established a working relationship with the Office of
Inspector General at the Education Department (Education OIG). In April
2003, Education OIG initiated an audit of the use of federal education
funding to purchase equipment to make effective use of internal
connections and internet connectivity funding by E-rate at a large
recipient. My office has been providing support to this audit.
In January 2004, Education OIG presented a plan for an audit of
telecommunication services at a large E-rate recipient. Because of the
significant amount of E-rate funding for telecommunication services at
this recipient, Education OIG has proposed that they be reimbursed for
this audit under a three-way MOU similar to the existing MOU with DOI
OIG. In April 2004, the Universal Service Board of Directors approved
the MOU. We are in the process of finalizing the MOU for execution and
initiating the audit.
Review of USAC Audits
We have reviewed work performed by USAC's Internal Audit Division
and performed the procedures necessary under our audit standards to
rely on that work. In December 2002, USAC established a contract with a
public accounting firm to perform agreed-upon procedures at a sample of
seventy-nine (79) beneficiaries from funding year 2000. The sample of
beneficiaries was selected by the OIG. In a departure from the two
previous large-scale E-rate beneficiary audits conducted by USAC, the
agreed-upon procedures being performed under this contract would be
performed in accordance with both the Attestation Standards established
by the American Institute of Certified Public Accountants (AICPA)
Standards and Generally Accepted Government Auditing Standards, issued
by the Comptroller General (GAGAS). In March 2003, we signed a contract
with a public accounting firm to provide audit support services for USF
oversight to the OIG. The first task order that we established under
this contract was for the performance of those procedures necessary to
determine the degree to which we can rely on the results of that work
(i.e., to verify that the work was performed in accordance with the
AICPA and GAGAS standards). The OIG review team is currently completing
this work. Many of the audit findings raised by this body of work are
reflected in the section addressing concerns with the E-rate program.
Support to Investigations
In addition to conducting audits, we are providing audit support to
a number of investigations of E-rate recipients and service providers.
To implement the investigative component of our plan, we established a
working relationship with the Antitrust Division of the Department of
Justice (DOJ). The Antitrust Division has established a task force to
conduct USF investigations comprised of attorneys in each of the
Antitrust Division's seven (7) field offices and the National Criminal
Office. We are also supporting several investigations being conducted
by Assistant United States Attorneys.
We are currently supporting twenty-two (22) investigations and
monitoring an additional eighteen (18) investigations. Unfortunately,
the increased interest in these cases has resulted in an increased
demand for OIG audit support. In fact, the amount of audit support has
exacerbated our previously stated concern about the availability of
resources and our ability to implement other components of our USF
oversight plan. Allegations being investigated in these cases include
the following:

Procurement irregularities--including lack of a competitive process
and bid rigging;
False Claims--Service Providers billing for goods and services not
provided;
Ineligible items being funded; and
Beneficiaries are not paying the local portion of the costs resulting
in inflated costs for goods and services to the program and
potential kickback issues.
puerto rico department of education (prdoe)
In this section of my testimony, I will briefly discuss allegations
that my office received regarding wrongdoing related to PRDOE's
involvement in the E-rate program, describe the preliminary
investigation that we conducted of this matter, and discuss our on-
going monitoring of PRDOE's involvement in the E-rate program as a
result of these allegations. In addition, I will discuss programmatic
concerns that my office has developed as a result of our involvement in
audits and investigations that are highlighted by PRDOE's participation
in the E-rate program.
Allegations from the Office of the Comptroller of Puerto Rico (OCPR)
In April 2001, my office was contacted by an auditor from the
Office of the Comptroller of Puerto Rico (OCPR) and advised of
allegations of wrongdoing by PRDOE related to the receipt of E-rate
funding. We were advised that PRDOE did not comply with state and local
procurement regulations during the vendor selection process for funding
years 1998 and 1999 of the schools and libraries program. In addition,
the auditor stated that two of the bidders argued against the selection
decision and that the appellate process was not followed as required by
the regulations governing PRDOE procurement actions. The auditor
explained that the appellate process would have prevented PRDOE from
signing a contract until an administrative review was conducted.
Further, the auditor stated that PRDOE may have violated program rules
that require applicants to certify that they have secured access to all
the resources necessary to make effective use of the goods and services
being provided. The auditor explained that, as part of the audit
process, representatives from OCPR visited schools and that ``the
majority of the schools'' did not have electrical connections and
secure areas for the equipment. Further, the auditor stated that the
PRDOE has not obtained computers and had not provided training to
teachers.
Preliminary Investigation
Based on the allegations, my office conducted a preliminary
investigation to determine if the matter should be referred to federal
law enforcement for investigation. After receiving the allegation from
the Office of the Comptroller, we contacted the Universal Service
Administrative Company (USAC) and requested documents relevant to this
matter. On May 17, 2001, we received the requested documents from USAC.
In their narrative summary, USAC stated that PRDOE has applied for
universal service support for schools and libraries in each funding
year of the program.
A summary of E-rate commitments and disbursements for funding years
1998, 1999, and 2000 is as follows:

----------------------------------------------------------------------------------------------------------------
Funding Year Service Provider Commitments Disbursements
----------------------------------------------------------------------------------------------------------------
1998.......................................... Data Research Corporation (DRC). $11,796,599 $11,796,160
Puerto Rico Telephone Company, 34,426,082 9,933,963
Inc. (PRTC).
-------------------------------
$46,222,681 $21,730,123

1999.......................................... Data Research Corporation (DRC). $42,124,085 $25,204,157
Puerto Rico Telephone Company, 14,755,694 8,331,894
Inc. (PRTC).
-------------------------------
$56,879,779 $33,536,051

2000.......................................... Data Research Corporation (DRC). $37,674,521 $32,565,581
Puerto Rico Telephone Company, 17,930,567 13,391,113
Inc. (PRTC).
-------------------------------
$55,605,088 $45,956,694

Total......................................... Data Research Corporation (DRC). $91,595,205 $69,565,897
Puerto Rico Telephone Company, 67,112,343 31,656,971
Inc. (PRTC).
-------------------------------
$158,707,548 $101,222,868
===============================
----------------------------------------------------------------------------------------------------------------

On May 29, 2001, we held a teleconference with the auditor from
OCPR who had contacted my office regarding this matter. The objective
of the teleconference was to further discuss the allegations set forth
in the referral and to determine if any additional information was
available relevant to this matter. During the teleconference, we
discussed the scope of the audit performed by the Office of the
Comptroller and the extent of testing performed during the review. In
addition, we made arrangements to obtain additional information
including a copy of the regulations governing the PRDOE procurement
process. During the teleconference, the auditor stated that fieldwork
on the audit was performed from March 2000 through April 2001. The
auditor stated that a draft report had been prepared summarizing the
results of the audit but that the draft report was still going through
the review process and would not be available for approximately two
months. During the teleconference, the auditor provided a detailed
description of the work performed to support the allegations contained
in referral. With respect to the procurement, the auditor stated that
they reviewed proposals and other documents documenting the evaluation
process, interviewed PRDOE personnel involved in the process, and
interviewed a service provider. To determine whether the PRDOE had the
resources available to make effective use of the eligible services,
OCPR auditors visited thirty (30) schools and examined the level of
implementation.
Included in the documents provided by USAC was a Draft Agreed-Upon
Procedures Report Prepared by Arthur Andersen summarizing the results
of an agreed-upon procedures review they conducted for E-rate
recipients in Funding Year 1998. Arthur Andersen selected the Puerto
Rico Department of Education as one of the recipients where procedures
were performed. Arthur Andersen examined the procurement process during
Funding Year 1998 as part of that review. In addition, Arthur Andersen
visited two schools and a data center as part of the examination to
determine whether the PRDOE had the resources available to make
effective use of the eligible services. In their draft report, Arthur
Andersen stated that they had ascertained ``through discussion with
PRDOE management that they had established appropriate (sic) to
evaluate and select the most cost-effective bidder based on the
responses to their 470 posting.'' Arthur Andersen further stated that
``PRDOE management also indicated that all bids received were
appropriately evaluated in accordance with state and local
requirements.'' With respect to the availability of resources, Arthur
Andersen stated that ``we noted that there were no (desktop) computers
in any of the classrooms visited'' and that, as a result, ``PRDOE was
not able (as of the date of our site visit) to fully meet the
educational objectives (and training requirements) for which E-Rate
funding had been provided.'' We obtained additional information from
USAC regarding the scope of the Arthur Andersen review including
working papers documenting the procedures performed to evaluate the
procurement process followed by PRDOE.
Based upon our assessment of this information and our discussion
with the auditor from the OCPR, we determined that the audit performed
by OCPR was more comprehensive in nature and included a more detailed
examination of both the procurement process and the availability of
resources. Further, we determined that OCPR, given their role in the
government of Puerto Rico and their knowledge of the operations of
PRDOE, was better positioned to evaluate the schools and libraries
program in Puerto Rico. Based on the results of our preliminary
investigation, we referred this matter to Federal law enforcement on
May 31, 2001. That investigation is on-going and we are continuing to
provide support to the investigation as warranted.
On-going Monitoring of PRDOE
In addition to supporting an on-going Federal investigation related
to this matter, my office has continued to monitor efforts by PRDOE to
address issues related to funding years 1998, 1999, and 2000, and to
continue to participate in the E-rate program. An auditor from my staff
participated as an observer in three (3) meetings between USAC and
PRDOE during 2002. In a meeting in January 2001, representatives from
PRDOE presented a plan to address concerns from funding years 1998,
1999, and 2000. In a meeting in April 2002, representatives from PRDOE
provided a status report on activities that they had taken to implement
their corrective action plan. In a meeting in October 2002,
representatives from PRDOE, including the Secretary of PRDOE, provided
a status on implementation of corrective action and made an argument
for approval of FY 2001 and 2002 funding. In February 2004, a
representative from my office traveled to Puerto Rico to assist
professional staff from the Energy and Commerce Committee during their
investigation of PRDOE participation in the E-rate program.
programmatic concerns highlighted by prdoe's participation in e-rate
The Puerto Rico matter highlights several concerns that my office
has with the E-rate program as a result of our involvement in audits
and investigations.
Resolution of Audit Findings and Fund Recoveries--Since our
involvement in this program, I have become increasingly concerned about
efforts to resolve audit findings and to recover funds resulting from
E-rate beneficiary audits. It has been our observation that audit
findings are not being resolved in a timely manner and that, as a
result, actions to recover inappropriately disbursed funds are not
being taken in a timely manner. In some cases, it appears that audit
findings are not being resolved because USAC is not taking action in a
timely manner. In other cases, findings are not being resolved because
USAC is not receiving guidance from the Commission that is necessary to
resolve findings. USAC is prohibited under program rules from making
policy, interpreting unclear provisions of the statute or rules, or
interpreting the intent of Congress. As a result of this prohibition,
USAC must seek guidance from the Commission when audit findings are not
clearly violations of Commission rules.
In the case of PRDOE, we have concerns about the manner in which
audit findings identified by Arthur Anderson during their audit of
PRDOE's participation in the E-rate program in funding year 1998 were
resolved. Although we were not involved in this audit, we obtained and
reviewed the report as part of our preliminary investigation of the
allegations raised by OCPR. In addition, we have continued to obtain
information on the resolution of USAC audits as part of our program
oversight activities. In their report, Arthur Anderson identified three
(3) findings during their audit of PRDOE. Two of the audit findings
related to services being delivered after the last date to receive
services. The third finding related to inadequate detail being provided
on customer bills. The three findings and resolution of those findings
as identified in the final audit report are as follows:

------------------------------------------------------------------------
Finding Finding Detail Resolution
------------------------------------------------------------------------
Services delivered after the 6 of 38 cabling No Action
last date to receive services. projects could Required.
not be verified Received FCC
as complete as waiver of rule
testing was not violation
completed. consistent with
the other 1998
(FY1) rule
violations waived
in the 10/8/99
order.
Inadequate detail provided on The contract No Action
customer bills. payment was Required. This
reduced due to observation has
the contractor been classified
failing to as a non-material
install in some finding, as there
schools by the is not evidence
due date. of any request
However, there for reimbursement
was insufficient for ineligible
documentation to equipment.
verify the
accuracy of the
reduction.
Services delivered after the Non e-rate Action Pending.
last date to receive services. equipment SLD wrote to the
(100,000 Puerto Rico
workstations) was Department of
not installed due Education (PRDOE)
to a legal about this
dispute with a observation.
potential bidder. PRDOE then asked
for a meeting
with the FCC and
SLD at which time
they disclosed
that there were
significant
irregularities
concerning the
application and
installation of
approved
services. PRDOE
has been
responsive to the
issues raised and
has conducted
their own
investigation.
Commitments and
disbursements are
on hold pending
final resolution
with the FCC.
------------------------------------------------------------------------

With respect to the first finding, USAC determined that no action
was required because of a Commission rule waiver for funding year 1998.
We examined the finding and the rule waiver and questioned the
applicability of the waiver to this finding. The finding relates to the
delivery of goods and services by the required delivery date. The
section of the rule waiver referenced by USAC in response to our
inquiries addresses competitive bidding and form 471 filing. USAC
explained that they received confirmation from Commission staff that an
installation after the September 30 deadline would qualify under the
order. We obtained and examined a copy of this confirmation and
questioned the authority of the staff attorney who provided this
confirmation to waive rules that are ``similar'' to the rules waived in
the rule waiver for funding year 1998. We requested an explanation from
the Commission staff and were advised that the interpretation by the
staff attorney in this matter was ``overly broad'' and that waiver
order ``did not waive the requirement that services be installed by a
specific date.''
With respect to the second finding, USAC determined that no action
was required and classified this as a non-material finding at the same
time stating in the report that the ``Audit report did not contain
sufficient detail to determine the exposure amount.'' We requested
additional explanation from USAC and were advised that ``because of a
lack of detail within the contract and customer bills the auditors were
unable to verify the accuracy of this reduction'' and that ``the
auditor did not make a determination as to the potential risk.'' USAC
went on to state that ``(t)he lack of detail in the contract or the
customer bill is not considered a rule violation and we have not sought
recovery in these instances.'' The issue of violating program rules
versus non-compliance with USAC procedures is a matter of serious
concern that is addressed later in this testimony. The issue of
required documentation under program rules is also an area of concern
that I address in more detail later in this testimony.
The third finding, computers not being installed as a result of a
bidder dispute, is the issue that started the discussion between USAC
and PRDOE in which other irregularities were raised. In response to a
letter from USAC regarding this finding, PRDOE met with USAC in January
2002 and presented the results of an assessment they performed on the
status of the school network funded by E-rate. We refer to this
assessment in our discussion of concerns related to applicant
certifications and delivery of goods and services.
Competitive Procurement--Program rules require that applicants use
a competitive procurement process to select vendors. In establishing
this requirement, the Commission recognized that ``(c)ompetitive
bidding is the most efficient means for ensuring that eligible schools
and libraries are informed about all of the choices available to them''
and that ``(a)bsent competitive bidding, prices charged to schools and
libraries may be needlessly high, with the result that fewer eligible
schools and libraries would be able to participate in the program or
the demand on universal service support mechanisms would be needlessly
great.''
Applicants are required to submit a form 470 identifying the
products and services needed to implement the technology plan. The form
470 is posted to the USAC web page to notify service providers that the
applicant is seeking the products and services identified. Applicants
must wait at least 28 days after the form 470 is posted to the web site
and consider all bids they receive before selecting the service
provider to provide the services desired. In addition, applicants must
comply with all applicable state and local procurement rules and
regulations and competitive bidding requirements. The form 470 cannot
be completed by a service provider who will participate in the
competitive process as a bidder and the applicant is responsible for
ensuring an open, fair competitive process and selecting the most cost-
effective provider of the desired services. Further, although no
program rule establishes this requirement, applicants are encouraged by
USAC to save all competing bids for services to be able to demonstrate
that the bid chosen is the most cost-effective, with price being the
primary consideration.
Although the programs competitive bidding requirements were
intended to ensure that schools and libraries are informed about all of
the choices available to them, we have observed numerous instances in
which beneficiaries are not following the program's competitive bidding
requirements or are not able to demonstrate that competitive bidding
requirements are being followed. In the case of PRDOE, we have several
concerns about whether or not a competitive procurement process was
followed during the selection of service providers.

OCPR highlighted numerous concerns regarding the competitive process
in their allegations provided in April 2001 and previously
discussed in this testimony.
OCPR reported numerous examples of PRDOE non-compliance with
procurement regulations in Audit Report TI-03-09 summarizing
the results of their audit of the acquisition of equipment and
services related to the EDUNET network (i.e., PRDOE's
involvement in the E-rate program).
The United States Department of Education Office of Inspector General
(ED OIG) has issued numerous reports over the last several
years highlighting contract administration issues with PRDOE.
Program rules require that applicants follow a competitive process
and that applicants keep the kinds of procurement records that they
keep for other purchases. However, Commission staff have provided
guidance stating that ``the mere failure of the beneficiary to produce
documentation relating to the competitive bidding process cannot form
the basis for finding a rule violation or seeking recovery of funds. A
rule violation could be established if the audit process secured the
beneficiary's record retention plan and determined that the beneficiary
had failed to comply with that policy.'' Commission staff have stated
that a rule violation ``could be established if the audit process
secured the beneficiary's record retention plan and determined that the
beneficiary had failed to comply with that policy.'' In effect,
Commission staff have taken the position that if no record retention
plan exists, there is no requirement for the applicant to maintain
records.
Delivery of Goods and Services--Site visits are conducted during
most E-rate beneficiary audits. Site visits are conducted for several
reasons including to evaluate the eligibility of facilities where
equipment is installed, verify that equipment is installed and
operational, and to verify that equipment is being used for its
intended purpose. In the case of PRDOE, we have several concerns about
the delivery of goods and services.

In their January 2002 presentation to USAC, PRDE reported that:
the status of each school regarding internal cabling,
communication lines, servers, physical facilities and
electricity was unknown because no reliable documentation
was available;
communication lines from a sample of 100 schools were not
installed, were not activated, or were out of service; and
that
many of the schools have electrical deficiencies and security
problems.
During their audit, Arthur Anderson reported that six (6) of thirty
(38) cabling projects could not be verified as complete as
testing was not completed. As I indicated previously, USAC
closed this audit finding because of guidance received from
Commission staff regarding the Commission's rule waiver
regarding funding year 1998. Commission staff have subsequently
advised us that the rule waiver order for funding year 1998 did
not address the rule governing delivery of equipment by the
required due date.
In February 2004, a representative from my office accompanied
professional staff from the Energy and Commerce Committee
during a visit to Puerto Rico. During that visit, the OIG
representative and House staff were advised that a large number
of wireless cards (approximately 74,000) that were purchased
with E-rate funding remained on a loading dock in a PRDE
warehouse. We visited the warehouse and confirmed that the
wireless cards were in their original packaging on pallets. The
E-rate program purchased 74,224 wireless cards during funding
year 1999 at a total cost to the program of approximately
$24,123,592, including installation.
Reliance on Applicant Certifications--The E-rate program is heavily
reliant on applicant certifications. On the form 470, applicants
certify that the support received is conditional upon the ability of an
applicant to secure access to all of the resources, including
computers, training, software, maintenance, and electrical connections,
necessary to use effectively the services that will be purchased under
this mechanism. Other certifications are required on various program
forms. In the case of PRDOE, we have several concerns about whether or
not PRDOE was prepared to make effective use of the goods and services
purchased.

In their January 2002 presentation to USAC, PRDOE reported that:
The server and communications infrastructure required at the
central offices was inappropriate to properly utilize the
network;
no network management process had been defined; and
many of the schools had electrical and security problems.
In their April 2003 Audit Report (TI-03-09) summarizing the results
of their audit of the acquisition of equipment and services
related to the EDUNET network, OCPR reported that:
The communications network infrastructure installed in the school
was not being used;
the Department had not acquired computers for the students;
the teachers had limited knowledge of computer use; and
the physical and electrical conditions in the schools did not
have the capacity required to use the communications
equipment and computers. With respect to this issue, OCPR
reported that:
Fifteen of the thirty schools visited did not have adequate
electrical installations for connecting the computers they
expected to acquire for students;
twelve of the thirty schools visited did not have grills for
the protection of the installed communications equipment;
eleven of the thirty schools did not have locked cabinets for
the equipment; and
four of the thirty schools did not have adequate locks on the
doors of the rooms where the communications equipment was
located.
other programmatic concerns
In addition to concerns that are highlighted by the PRDOE's
participation in the E-rate program, my office has identified other
concerns as a result of our participation in E-rate audits and
investigations. A brief summary of those concerns is as follows:
Program Design and Beneficiary Compliance--Under Commission staff
oversight, USAC has implemented numerous policies and procedures to
administer the E-rate program. In some cases, the Commission has
adopted these USAC operating procedures, in other cases however, USAC
procedures have not been formally adopted by the FCC. In those cases
where USAC implementing procedures have not been formally adopted by
the Commission, it is the position of Commission staff that there is no
legal basis for recovery of funds when applicants fail to comply with
these procedures.
We are concerned about the distinction that Commission staff makes
between program rules and USAC implementing procedures for a number of
reasons.

First, we believe that this distinction represents a weakness in
program design. Within their authority under program rules,
USAC has established implementing procedures to ensure that
program beneficiaries comply with program rules and that the
objectives of the program are met. In those cases where USAC
has established implementing procedures that are not supported
by program rules, USAC and the Commission have no mechanism for
enforcing beneficiary compliance.
Second, we believe that it is critical that participants in the E-
rate program have a clear understanding of the rules governing
the program and the consequences that exist if they fail to
comply with those rules. We are concerned that the Commission
has not determined the consequences of beneficiary non-
compliance in many cases and that, in those instances where the
Commission has addressed the issue of consequences for non-
compliance, the consequences associated with clear violations
of program rules do not appear to be consistent.
Third, a clear understanding of the distinction between program rules
and USAC implementing procedures is necessary for the design
and implementation of effective oversight. It is necessary for
the timely completion of audits and the timely resolution of
audit findings and implementation of corrective action
resulting from audits.
Applicant Technology Planning--As I have discussed above, program
rules require that applicants prepare a technology plan and that the
technology plan be approved. The approved technology plan is supposed
to include a sufficient level of information to justify and validate
the purpose of a request for E-rate funding. USAC implementing
procedures state that approved technology plans must establish the
connections between the information technology and the professional
development strategies, curriculum initiatives, and library objectives
that will lead to improved education and library services. Although the
technology plan is intended to serve as the basis for an application,
we have observed many instances of non-compliance with program rules
and USAC procedures related to the technology planning process.
Examples of technology planning concerns identified during audits and
investigations are as follows:

Technology plans are not being reviewed and approved in accordance
with program rules. Commission staff have provided guidance
failure to prepare a technology plan and have that plan
approved in a timely manner is basis for full recovery of
disbursements.
Technology plans do not address all required plan elements in
accordance with USAC implementing procedures for technology
planning. As I have discussed above, Commission staff have
provided guidance that failure to comply with USAC implementing
procedures for technology plans is not a rule violation and
does not warrant recovery of funds.
Applicants not being able to provide documentation to support the
review and approval of technology plan.
USAC guidance on technology planning states that ``(i)n the event
of an audit, you may be required to produce a certification similar to
the SLD sample `Technology Plan Certification Form,' in order to
document approval of your technology plan.'' Numerous audits have
included findings beneficiaries were unable to provide documentation to
demonstrate the review and approval of technology plans. Although
program rules require that applicants have a technology plan and that
the plan be approved, the rules do not require that the applicant
maintain specific documentation regarding the approval process.
Discount Calculation--The E-rate program allows eligible schools
and libraries to receive telecommunications services, Internet access,
and internal connections at discounted rates. Discounts range from 20%
to 90% of the costs of eligible services, depending on the level of
poverty and the urban/rural status of the population served, and are
based on the percentage of students eligible for free and reduced
lunches under the National School Lunch Program (NSLP) and other
approved alternative methods. A number of audits have identified audit
findings that applicants have not followed program requirements for
discount rate calculation or were unable to support the discount rate
calculated.
Payment of the Non-Discount Portion--Applicants are required to pay
the non-discount portion of the cost of the goods and services to their
service providers and service providers are required to bill applicants
for the non-discount portion. The discount rate calculation and program
requirement for payment of the non-discount portion are intended to
ensure that recipients avoid unnecessary and wasteful expenditures and
encourage schools to seek the best pre-discount rate. Examples of
concerns identified during audits and investigations are as follows:

Applicant not paying the non-discount portion;
Applicant not paying the non-discount portion in a timely manner; and
Service providers not billing recipients for the non-discount
portion.
conclusion
The Office of Inspector General remains committed to meeting our
responsibility for providing effective independent oversight of the
Universal Service Fund program. As I have described in this testimony,
we continue to have numerous concerns about this program. The results
of audits that have been performed and the allegations under
investigation lead us to believe the program may be subject to
unacceptably high risk of fraud, waste and abuse through noncompliance
and program weaknesses. We are concerned with efforts to resolve audit
findings and to recover funds resulting from E-rate beneficiary audits
and we are concerned with aspects of program design and beneficiary
compliance with program rules. In view of these concerns, I believe
that it would be appropriate to conduct a broad based review of the
program.
We believe we have made significant progress toward our goal of
designing and implementing an effective, independent oversight program.
However, primarily because of a lack of adequate resources, we have
been unable to implement our oversight program. As I have stated
previously, until resources and funding are available to provide
adequate independent oversight for the USF program, we are unable to
give the Chairman, Congress and the public an appropriate level of
assurance that the program is protected from fraud, waste and abuse.
Thank you, Mr. Bennett and I will be happy to answer any of your
questions.

Mr. Greenwood. Thank you, Mr. Feaster.

TESTIMONY OF MANUEL DIAZ SALDANA

Mr. Saldana. Mr. Chairman and members of the Subcommittee
on Oversight and Investigations of the U.S. House of
Representatives, good morning. My name is Manuel Diaz Saldana.
I come before this committee in my official capacity as
Comptroller of the Commonwealth of Puerto Rico in response to
your invitation of June 1, 2004. Accompanying me today are
Attorney Alfonso Cristian, Assistant Comptroller, and Ms. Olga
Ortez, auditor.
I am pleased to be able to participate in these hearings
and share with you the information obtained during the audit
conducted on the E-Rate Program implemented in the Puerto Rico
Department of Education regarding the acquisition of equipment
and services for the EDUNET network. In more detail a statement
on this subject has been submitted to this subcommittee. The
role of the Comptroller is to audit all the programs, accounts,
and expenditures of the Commonwealth of its agencies and
instrumentalities and of its municipalities in order to
determine if they have been made in accordance with the law.
The findings with recommendations to the Government entities
are published by me of all these reports on the Internet also.
The funds assigned to subsidize government programs are
treated as if they were, for all intent and purposes, revenues,
accounts, and expenditures of the Commonwealth of Puerto Rico.
Violations of law are referred to the appropriate state, local,
or Federal agencies. Complying with the recommendations, this
money is covered by means of a program called the Corrective
Action Plan, CAP. The audit report that we made is TI-03-09 of
April 14, 2003. This report covers the period from March 24,
2000, to April 27, 2001, and focuses on five findings.
Finding 1: Aggressive acquisition of equipment and services
for the EDUNET network without the use of a formal bidding
process and other deficiencies. The first phase consisted of
establishing the infrastructures for the communications network
including internal connections and telecommunications and
Internet access for 760 schools. This phase was to be completed
by September 30, 1999.
In October 1998 the Education Department awarded three
contracts to two companies, Puerto Rico Telephone Company and
DRC Corporation at a cost of $51.3 million for the acquisition
of telecommunication equipment and contracting the Internet
access services.
The second phase of the Internet project consisted of
establishing the infrastructure for the communication network
including internal connections and telecommunications with
wireless technology and providing Internet access for 780
addition schools. This phase was to be completed by September
30, 2000. On April 5, 1999, the Education Department awarded a
contract to DRC in the amount of $51.4 million for work on the
second phase of the EDUNET network.
Finding two addresses deficiencies detected in
implementation and use of the telecommunication infrastructure
installed for the EDUNET network in schools. These were
detected during a physical inspection of the schools. The
telecommunication infrastructure network installed in schools
was not being used. The Education Department has not acquired
computers for the students. The teacher does not have the
knowledge in computer use.
Physical and electrical conditions in the schools do not
have the capacity required for using the communication and
computer equipment. In fifteen schools 50 percent of those lack
adequate electrical installation to connect the computers that
were to be acquired for the students. We believe these
deficiencies resulted from the poor planning and inadequate
supervision of the contractors by the Education Department.
Finding three addresses the improper use of Federal funds
from a Federal program for expenses incurred by the Education
Department on the EDUNET network.
Finding four addresses the absence of important clauses in
the contract that would have been protecting the best interest
of the Education Department. Two of these contracts did not
contain clauses requiring the contractor to supply certain
documents required by the Commonwealth regulations regarding
compliance with local tax regulations and filing tax returns.
Finding five addresses the fact that two contracts related
to the EDUNET network were not raised to the Office of the
Comptroller and others were raised late as required by law.
Status of the Findings: All findings were referred to the
Secretary of Justice of the Commonwealth. To this day the
findings are still under advisement. The findings were also
referred to the Education Department which has notified us that
they have taken steps to remedy these equations.
Conclusion: Mr. Chairman, the improper use of Commonwealth
and Federal funds, especially in PRDOE programs that are
directly related to the proper education of children is of
serious and vital concern to our office. I thank you for the
interest in this important issue and I would be happy to answer
any questions that any member of this committee might have.
Thank you.
[The prepared statement of Manuel Diaz Saldana follows:]
Prepared Statement of Manuel Diaz Saldana, Comptroller, Commonwelth of
Puerto Rico
In my capacity as Comptroller of the Commonwealth of Puerto Rico
(Comptroller), and as requested by you, I am pleased to offer
information regarding the E-rate program in the Puerto Rico Department
of Education (PRDOE). This is a federal program designed to subsidize
the deployment of telecommunication services to eligible schools and
libraries.
Before going into the Audit Report, I will briefly describe our
oversight role regarding the expenditure of public funds within the
Commonwealth of Puerto Rico. This background information may help the
Subcommittee understand the nature of our audits, the reports we issue
and our jurisdiction.
Article III, Section 22, of the Constitution of the Commonwealth of
Puerto Rico, created the position of Comptroller in 1952. The
Comptroller is appointed by the Governor with the advice and consent of
the majority of the total number of members of the Puerto Rico
Legislature. In my case, I was sworn in, on October 2, 1997, for a
period of 10 years, which term is established also by the Constitution.
The role of the Comptroller is set forth in the Constitution: to . . .
audit all the revenues, accounts and expenditures of the Commonwealth,
of its agencies and instrumentalities and of its municipalities, in
order to determine if they have been made in accordance with the law.
Because of this constitutional mandate, the audits are conducted with
full independence from the three branches of government.
The findings on every audit are published by means of audit reports
prepared upon completion of the investigation. Before publishing, each
report is first sent to the Governor, the President of the Senate and
the Speaker of the House of Representatives. In the reports, we provide
recommendations to the audited entities.
Concurrently with the adoption of the Constitution of Puerto Rico,
our legislature enacted Law No. 9 on July 24, 1952, which set the
framework and further defined the purpose and scope of the Office of
the Comptroller. Among other things, said law grants authority to the
Comptroller to: (a) adopt auditing standards, (b) determine when to
publish and whom to notify our reports, (c) delegate any function,
except rulemaking, (d)--require other agencies to comply with our
requests for financial and other information necessary for a complete
understanding of the matter under investigation, (e) issue subpoenas,
and (f) require any public official, except the Governor of Puerto
Rico, to comply with a subpoena issued by the Office of the
Comptroller.
The Office of the Comptroller treats federal funds that are
assigned to subsidize local government programs as if they were, for
all intent and purposes, revenues, accounts and expenditures of the
Commonwealth of Puerto Rico. As such, we generally audit them as part
of the audit of the local fund allocated to the government entities'.
However, these audits are not done to comply with any federal
government purpose or requirement. They are strictly a local initiative
to ascertain the appropriate use of such funds. Nevertheless, it should
be pointed out that government agencies that receive federal funds
usually are required to make a commitment to the federal government to
audit the use of such funds, using external auditors, as part of the
qualification process to receive them. Therefore, our audit of federal
funds is an additional control measure that we have voluntarily
adopted.
Ours is a post-audit function, generally limited to compliance, not
financial auditing. In other words, we audit transactions that have
already occurred to make sure they have been carried out in compliance
with applicable laws and regulations. Furthermore, the audit work we
carry out is governed by generally accepted auditing standards adopted
by the Comptroller. Pre-audits are beyond our jurisdiction.
Our Mission's statement conforms to the constitutional mandate: to
oversee the transactions of public funds and property, with
independence and objectivity, in order to ascertain that they have been
carried out in accordance with the law, and to promote the effective
and efficient use of government resources for the benefit of our
people. The Vision is to be a world-class model for public office,
distinguished by: the excellence of its highly qualified human
resources, dedicated to continuous improvement, a sophisticated
infrastructure and optimum quality services. Included in our Vision is
our obligation to serve Puerto Rico as a true agent of change,
integrating the efforts of the public and private sectors, in order to
promote the honest use of the resources entrusted to the government by
the People.
We have adopted many personal and professional Values, which are
comprehended in the followings Core Values:

Commitment--We are dedicated to our work
Integrity--We work in a responsible manner
Sensibility--We respect the dignity of all human beings
Justice--We watch for the strictest compliance with the law
Excellence--We are constantly improving ourselves
The Mission, Vision and Values define not only what we are as a
highly regarded public institution, but also who we are as public
servants.
Our Office is not a law-enforcement agency, nor do we have judicial
or administrative adjudicating powers. Findings arising out of the
audit reports are referred to the appropriate law enforcement agencies,
such as the local Justice Department, the Office of Government Ethics
of Puerto Rico and the Office of the Special Independent Prosecutor's
Panel of Puerto Rico. Our findings can also be referred to the United
States District
Attorney's Office for the District of Puerto Rico, and other
federal agencies that use our findings to further their investigations,
particularly if the audit reveals the improper use of federal funds.
Once an audit report is published we monitor the agency's
compliance with the recommendations by means of a follow-up program
called the Corrective Action Plan (CAP). This plan provides all
government entities 90 days to submit an initial CAP. This period
begins on the first day of the month following the publication of the
audit report. Complementary reports must be submitted within 90 days
from the initial report or a preceding complementary report.
I will now directly address Audit Report TI-03-09, published by our
Office on April 14, 2003. This report was the result of an audit
conducted by our Information Technology Audit Division on the Office of
Information Systems and School Technology of PRDOE regarding the
acquisition of equipment and services for the EDUNET network and the
contracting and implementation of the network.
The Audit Report covers from March 24, 2000 through April 27, 2001,
and focuses on five major findings. A mayor finding is defined in our
report as a deviation from norms regarding the operations of the
audited unit that have a material effect, either in quantitative or
qualitative terms.
findings and recommendations
Finding 1--Acquisition of equipment and services for the EDUNET network
without the use of a formal bidding process and other
deficiencies related to the contracts awarded
In 1997 the PRDOE embarked on a telecommunications project called
EDUNET. It consisted of a communications network between all schools
and administration offices. The purpose of the project was to integrate
technology with education. The project encompassed videoconferencing
and Internet access. The program would involve a total of 1,540
schools.
In March 1998 PRDOE submitted a request for federal E-rate funds to
begin implementation of the first phase of EDUNET. This phase consisted
of establishing the infrastructures for the communications network,
including internal connections and telecommunications, and providing
Internet access for--760 schools. It was estimated the phase would be
completed by September--30,--1999.
In October 1998 PRDOE awarded the contracts listed below to two
companies at a cost of $51,353,490 for acquiring the telecommunications
equipment and contracting the Internet access services:

CONTRACTS
----------------------------------------------------------------------------------------------------------------
NUMBER DATE SERVICE COST
----------------------------------------------------------------------------------------------------------------
1. 081-99-0161.......................... October 26, 1998.......... Telecommunications........ $31,122,910
2. 081-99-0162.......................... October 26, 1998.......... Transport & Internet...... 7,123,248
3. 081-99-0164.......................... October 15, 1998.......... Internal Connections...... 13,107,332
---------------
$ 51,353,490
----------------------------------------------------------------------------------------------------------------

The first two contracts were awarded to Puerto Rico Telephone
Company (PRTC) and the third to DRC Corporation. The first contract was
later amended by Contract 081-99-0161A to change the telecommunications
equipment. The amendment reduced the contract's cost to $10,863,557.
The contract included recurring costs for the rent of telecommunication
lines.
The second contract was also amended by Contract 081-99-0162A to
change the transport services. This had the effect of increasing the
costs to $17,374,754. The contract included recurring costs for
Internet access services.
As of April 27, 2001, the cutoff date of the audit, both companies
had submitted invoices for $40,059,626. Of this amount, $35,854,964 had
been paid from Erate funds and $3,114,638 from Commonwealth funds.
Unpaid invoices totaled--$1,090,024.
Our audit revealed that:
1. Contrary to federal and Commonwealth regulations, formal bid
procurement procedures were not followed to award the three contracts.
PRDOE only considered the proposals submitted by the two companies that
were contracted. The first two contracts were awarded to PRTC and the
third one to DRC Corporation.
2. The Director of PRDOE's Budget Department certified the
availability of funds to pay for the services rendered under the
contracts on February 22, 1999. That is, 119 days after the contracts
were awarded.
3. Contrary to established rules, there was no evidence that the
contracts were approved by the Commonwealth's Office of Management and
Budget, either before or after they were awarded.
In March 1999 PRDOE submitted a new request for E-rate funds to the
federal government. These additional funds were considered necessary
for the second phase of the EDUNET network. This phase consisted of
establishing the infrastructure for the communications network,
including internal connections and telecommunications, with wireless
technology and providing Internet access for 780 schools. Federal funds
in the amount of $56,879,778 were approved for this second phase. PRDOE
had to match that assignment with Commonwealth funds in the amount of
$6,373,499. It was estimated the phase would be completed by September
30, 2000.
On April 5, 1999, PRDOE awarded contract 081-99-0423 to DRC, in the
amount of $51,478.221 to work on the second phase. As of April 27,
2001, the cutoff date of our audit, the company had submitted invoices
for $33,849,881. Of this amount $26,834,997 had been paid from E-rate
funds and PRDOE had paid $6,885,731 from Commonwealth funds. Unpaid
invoices amounted to $129,153.
The audit also revealed that:
1. Contrary to federal and Commonwealth regulations formal bid
procurement procedures were not followed to award the contract.
Instead, PRDOE requested and evaluated proposals. PRDOE named an
Evaluations Committee to evaluate proposals for the E-rate funds. An
examination of the request for proposals and the procedure followed by
PRDOE in awarding this contract to DRC revealed, furthermore, the
following irregularities:
a. The request for proposals did not specify a final date for their
submission. Neither did it specify a date for opening the same.
b. Of the six proposals received only two complied with the requested
specifications. The director of PRDOE's Office of Information
Systems and School Technology (OISST) evaluated them. There was
no evidence indicating that the PRDOE's Evaluations Committee
considered the proposals. OISST prepared two memos to the
Secretary of Education regarding the proposals but neither
contained any recommendation for awarding the contract or
reasons for not considering the other five proposals.
4. The Director of OISST requested from the Director of PRDOE's
Budget Office a certification on the availability of funds to pay for
the services rendered under the contract on October 19, 1999. That is,
197 days after the contract was awarded.
5. Contrary to established rules, there was no evidence the
contract was approved by the Commonwealth's Office of Management and
Budget, either before or after it was awarded.
recommendations
Four recommendations were made on this finding. The first was
directed to the Secretary of Justice of the Commonwealth requesting her
to consider the finding and take any action that may be deemed
appropriate (Recommendation 1). The other three recommendations were
directed to PRDOE's Secretary: the first was to comply, in the future,
with the regulations on awarding contracts that require a formal bid
process (Recommendation 2); the second was to make sure that they
obtain, before awarding any contract, a certification from PRDOE's
Budget Office on the availability of funds to pay for the services
required (Recommendation 3); and the third was to make sure that they
submit to the Commonwealth's Office of Management and Budget any
contract regarding computer related products or services before
awarding them (Recommendation 4).
Finding 2--Deficiencies in the implementation and the use of the
telecommunications infrastructure installed for the EDUNET
network
In a physical inspection of 30 schools which took place from
October 11 to November 21, 2000 (18 schools corresponding to the first
phase, whose work was supposed to have been completed by September 30,
1999, and 12 schools corresponding to the second phase, whose work was
supposed to have been completed by September 30, 2000) we discovered
various deficiencies in the implementation of the EDUNET network as
follows:

a. The telecommunications infrastructure network installed in the
schools was not used.
b. PRDOE had not acquired the computers for the students.
c. The teachers had limited knowledge on computer use.
d. Physical and electrical conditions in the schools didn't have the
capacity required for using the communication and computer
equipment, as follows:
1. Fifteen schools (50%) lacked adequate electrical installations
to connect the computers that were to be bought for the
students.
2. Twelve of the schools (40%) lacked bars to protect the
communication equipment installed.
3. Eleven of the schools (37%) didn't have their communication
equipment cabinets under lock and key.
4. Four of the schools (13%) didn't have adequate locks in the
doors of the rooms where the communication equipment was
installed.
5. Two of the schools (7%) had broken connection ports.
6. One of the schools (3%) maintained open the security covers on
the antennas.
7. One of the schools under reconstruction maintained the antennas
exposed to water and dust.
8. The person in charge of maintenance in one of the schools had to
patch some holes in a wall because the contractors omitted
to do it.
9. One of the schools maintained two connection boxes without
covers and with the cables exposed.
10. One of the schools had the communication cable tubing broken
and separated from the wall.
In our opinion poor planning and the absence of adequate continuous
supervision of the work done by the contractors caused these
deficiencies. Because of our findings, up to April 27, 2001, we believe
PRDOE did not obtain any benefit from the investment of $73,614,511 in
internal connections and telecommunications, and $294,996 in services
from lines connected to the Internet of the EDUNET network that
correspond to the amounts billed by the contractors.
recommendations
On this second finding we made two recommendations. The first, once
again, directed to the Secretary of Justice of the Commonwealth
requesting her to consider the finding and take any action that may be
deemed appropriate (Recommendation 1). The other to PRDOE's Secretary
requesting that for any project similar to the one discussed in this
second finding the following have to be done: before acquiring computer
related equipment and awarding contracts for such services, make a
study to determine what else is necessary (Recommendation 5.a.); an
efficient working plan must be established to improve the
infrastructure of all the schools and to complete the implementation of
the EDUNET network (Recommendation 5.b.); and PRDOE must supervise all
contractors adequately in order to attain the project's objectives
(Recommendation 5. c.).
Finding 3--The improper use of funds from a federal program for
expenses incurred by the Department [of Education] on the
EDUNET network, and the absence of participation of the Office
of External Resources [of the Department] in the evaluation and
assignment of funds for said project
On December 15, 1998 and August 25 1999 PRDOE awarded to a company
contracts amounting to $142,850. These were contracts 081-99-0286
($44,850) and ORE-081-00-070 ($98,000). The contracted services
consisted of assessing the work done by PRTC and DRC in the
implementation of the EDUNET network. Part of the money that was
earmarked to pay for the services rendered, amounting to $92,850 came
from another federal program known as Title III Funds and $50,000 from
the Goals 2000 Program, which were granted by the federal government
for other educational purposes not compatible with this contract.
As of April 10, 2001 PRDOE had improperly paid $44,850 using Title
III Funds for costs related to the first contract for work done between
May and September 1999.
The process of assessing and assigning funds to pay for the
contracts was done in an irregular manner. PRDOE's Director of the
Office of External Resources approved the use of said federal funds
without first determining if the contracts complied with the conditions
of the federal programs that supplied the funds.
recommendations
On the third finding we made three recommendations. The first, once
again, was directed to the Secretary of Justice of the Commonwealth
requesting her to consider the finding and take any action that may be
deemed appropriate (Recommendation 1). The other two were directed to
PRDOE's Secretary requesting that he take steps to ensure that Title
III Funds are only used for the purposes for which they were authorized
by law (Recommendation 6), to make sure all proposals for using federal
funds be processed in PRDOE's Office of Federal Affairs and that the
transactions involved comply with all applicable laws and regulations
(Recommendation 7).
Finding 4--Absence of important clauses and certifications by the
contractors in the contracts for services related to the EDUNET
network
An evaluation of contracts 081-99-0161, 081-99-0162, 081-99-0164,
and 081-99-0423 and their respective amendments revealed the following
mistakes:
1. Omission of important clauses and information that would have
protected the best interests of PRDOE:

a. Regarding conflicts of interest by the contracting companies'
personnel.
b. A stipulation to the effect that any changes in the services
provided had to be approved by PRDOE.
c. A stipulation to the effect that subcontractors had to be approved
by PRDOE.
d. On contract 081-99-0423 the account from which the services rendered
would be paid was not identified.
e. Contracts 081-99-0164 and 081-99-0423 did not include the employers'
social security number and the incorporation registration
number.
f. Contract 081-99-0164 did not include an enclosure with a list of the
schools, which would be receiving services under the contract.
The auditors obtained the list from PRDOE's Request of Funds
Form prepared on March 11, 1998.
g. In the amendments to the contracts (Nos. 081-99-0161A and 081-99-
0162A), the exhibits were not included as part of the
contracts. They were also not available for examination.
2. Contracts 081-99-0164 and 081-99-0423 did not contain clauses
requiring the contractors to supply certain documents required by
Commonwealth regulations. The following documents were not included in
the contract files, nor were they available for examination:

a. Tax Debt Certifications and Income Tax Return Filing Certifications
from the Commonwealth Treasury Department
b. Personal and Real Estate Property Debt Certifications
c. Unemployment, disability and social security for drivers (as
applicable) Debt Certifications
recommendations
On this fourth finding we made three recommendations. The first one
once again directed to the Secretary of Justice of the Commonwealth
requesting her to consider the finding and take any actions that might
be deemed appropriate (Recommendation 1). The other two were directed
to PRDOE's Secretary requesting that he take steps to ensure that all
contracts contain the appropriate clauses to protect the interests of
PRDOE (Recommendation 8) and to make sure the contractors provide the
certifications required by laws or regulations (Recommendation 9).
Finding 5--Absence of registration or late registration of the
contracts related to the EDUNET network in the Office of the
Comptroller of Puerto--Rico
According to Commonwealth Law No. 18, approved on October 30, 1975,
as amended, all government entities must maintain a register of all the
contracts they award, and their amendments. Additionally, they must
submit a copy of the contracts and amendments to the Office of the
Comptroller within 15 days after the contracts are signed.
As of March 12, 2001, PRDOE had not submitted contracts 081-99-
0161, 081-99-0162, and 081-99-0423, awarded in October 1998 and August
1999, or their respective amendments in the amount of $76,149,672.
There were also other contracts, identified in the Audit Report
that were submitted late to our Office. The tardiness fluctuated
between 175 and 397 days.
recommendations
On this fifth finding we made two recommendations. The first one
once again directed to the Secretary of Justice of the Commonwealth
requesting her to consider the finding and take any actions that may be
deemed appropriate (Recommendation 1) and the second to PRDOE's
Secretary requesting compliance with Law No. 18 (Recommendation 10).
As of the date of this letter, according to our evaluation of the
CAP, and a complementary report submitted by PRDOE, the status of the
nine audit recommendations directed at them is as follows:

1. Recommendation 2, regarding PRDOE's compliance with regulations on
awarding contracts that require a formal bid process, is
considered as having been complied with. PRDOE has informed us
that formal bidding procedures are being followed.
2. Recommendation 3, regarding obtaining a certification from PRDOE's
Budget Office on the availability of funds to pay for the
services required before awarding any contract, is considered
as having been complied with. PRDOE has informed us that they
are obtaining the certifications at the appropriate time.
3. Recommendation 4, regarding submission for approval to the
Commonwealth's Office of Management and Budget any contract
regarding computer related products or services before awarding
the same, will be followed-up on our next audit of PRDOE.
4. Recommendation 5.a, regarding that a study must be made to determine
what is necessary before acquiring computer related equipment
and awarding contracts for such services similar to those
discussed in Finding 2, will be followed-up on our next audit
of PRDOE.
5. Recommendation 5.b, regarding that in any project similar to the one
discussed in Finding 2, an efficient working plan must be
established to improve the infrastructure of all the schools
and to complete the implementation of the EDUNET network, is
considered partially completed. PRDOE was asked to submit a
working plan contemplating the status of every school and the
completion date for the EDUNET network by school. PRDOE has
indicated that they plan to have the EDUNET operating by
December 2004.
6. Recommendation 5.c, regarding that in any project similar to the one
discussed in Finding 2, PRDOE must supervise all contractors
adequately in order to attain the project's objectives, is
considered as having been complied with. PRDOE has informed us
that the projects are being supervised adequately.
7. Recommendation 6, regarding using Title III federal funds only for
the purposes for which they were authorized by law, will be
followed-up on our next audit of PRDOE.
8. Recommendation 7, regarding processing in PRDOE's Office of Federal
Affairs all proposals requesting federal funds and that the
transactions involved comply with all applicable laws and
regulations, is considered as complied with. PRDOE has informed
us that the required processing is being done.
9. Recommendation 8, regarding the inclusion in all contracts of the
appropriate clauses to protect the interests of PRDOE, is
considered as complied with. PRDOE has informed us that the
appropriate clauses are being included.
10. Recommendation 9, regarding contractors providing all the
certifications required by laws or regulations, is considered
as having been complied with. PRDOE has informed us the
certifications are being supplied.
11. Recommendation 10, regarding compliance with Law 18 which requires
copies of all contracts to be filed in the Office of the
Comptroller, is considered as having been complied with. PRDOE
has informed us they are in compliance with said--law.
As of today, the recommendations made to the Secretary of Justice
of the Commonwealth regarding each of the five findings are under
advisement by said Secretary.
As a normal working procedure we have accepted PRDOE's allegations
of compliance with our recommendations based on the allegations they
have included in their CAP. In the next audit of the unit we will
verify said compliance.
The proper use of Commonwealth and federal funds, especially in
PRDOE programs that are directly related to the proper education of
children, is matter of serious and vital concern to our Office. Mr.
Chairman and all the other members of this Committee, I thank you for
your interest in this critical issue. If you, or your staff, have any
questions regarding this presentation, please call me at (787) 250-3300
or call Mr. Alfonso M. Christian, Esq., Assistant Comptroller, at (787)
250-3305, or Mrs. Lourdes Diaz at (787) 294-0286.

Mr. Greenwood. Three seconds to spare, Mr. Saldana. Well
done.
The Chair recognizes himself for 10 minutes for questions.
Let me start with you, Mr. Feaster, and let me just ask you
the most basic question. In your opinion, who is at fault for
the E-Rate funding that wasted money in Puerto Rico?
Mr. Feaster. Well, obviously, I think, we have to point to
the PRDOE, Puerto Rican Department of Education, as the primary
problem here. Their failure to plan for effective use of the
equipment at one stage.
Mr. Greenwood. Is this a case of malfeasance or mis-
feasance or non-feasance?
Mr. Feaster. I would sort of have to wait until the
investigation is completed to come to that conclusion but,
certainly from the standpoint of failure to plan for effective
use of the equipment and having the facilities and the
equipment ready to use, the telecommunication aspects need to
be a major concern.
Mr. Greenwood. In your view, what drove the nature and the
magnitude of this program? This program that was clearly overly
ambitious providing equipment to hook up computers to the
Internet when they didn't have the computers to do it, the lack
of training, the lack of preparedness, the lack of planning. In
your view, was this overly ambitious program, did it result
from vendors' motivation to sell more goods and services than
the school could use? Was that a motivating factor or do you
think the size and scope of their program was driven by the
Department of Education?
Mr. Feaster. I am sure a little bit of each of those. In
other areas we found the vendors are trying to stimulate
business and make money off these things. It is hard for us to
say since we haven't done any work there and we are waiting for
the outcome of the investigations.
Mr. Greenwood. Okay. You talked about the auditing function
and you talked specifically about your auditing function. As we
look at this program and try to figure out what sort of
structural reforms may be necessary, one of the questions that
I have is where is the best place or best places for the
auditing to occur? That is a clear common theme as we look at
all of these school districts there just seems to be a lack of
auditing going on. Should that be the function?
Should there be a more strenuous requirement that the
school district receiving these funds should hire, independent
accounts to audit the program and report both to the school
district and to USAC? Is that where part of it should lie?
Should USAC itself have more personnel dedicated to auditing or
should that be an FCC function that has more vigorous auditing,
or should it be your shop, the IG, or some combination?
Mr. Feaster. Several years ago I was asked the question of
how many audits should we do and my answer was more. I think
the answer is a combination of all those people. Somebody is
going to have to provide the money to do these.
Mr. Greenwood. Excuse me for interrupting you but you can
ask for more Federal resources for your shop.
Mr. Feaster. Yes, sir.
Mr. Greenwood. We can ask for more Federal resources for
the FCC but the program is bringing in $2.25 billion a year. It
seems to me there ought to be a way to use those funds for the
auditing function and to do it as part of the contract with the
schools. If you are going to give a school district $100
million or $50 million, that seems like plenty of money to have
a requirement that they hire, the school district does, an
outside auditor to monitor this in ways perhaps the school
district isn't prepared or equipped to do.
Mr. Feaster. I would agree with that. I think that all the
parties in there should be doing audits. The school district
under a single audit concept. USAC, we work closely with their
internal auditing staff. We do believe that our independent
oversight, the FCC IG's independent oversight, is probably the
best way of doing it. As I said before, we invite all types of
audits.
Mr. Greenwood. This isn't the first time that the Federal
Government has overseen the giving away of grant money to
localities. It happens hundreds of different ways in the
Federal Government every day. Why are we reinventing the wheel
here? Isn't there a stand operating--aren't there standard
operating procedures? Isn't there a state-of-the-art if you are
going to move money through the Federal Government?
I know this is unique in that the money never really lands
in the hands of the Federal Government per se but, nonetheless,
it seems to me that the FCC rules that govern how you audit a
program like this ought to be modeled on some state-of-the-art.
We have been doing this for a couple of hundred years.
Mr. Feaster. There is a grant model in existence and we
would recommend at least evaluating the program against those
standards.
Mr. Greenwood. And what is that grant money?
Mr. Feaster. It basically calls for a single audit of these
facilities financed by the beneficiary or state or local
government doing the audit. It provides for better record
keeping than the current program.
Mr. Greenwood. How could this program exist for this number
of years without somebody at the FCC or somebody at USAC
figuring that out? You go to a standard model and to have the
grantees do the single audit.
Mr. Feaster. I don't have the answer to that question but
we had a lot of telecommunications attorneys trying to do grant
work and I think----
Mr. Greenwood. There is your problem. Elaborate if you
would on this business with the USAC procedures and the FCC
rules. Do I understand that one of the problems here is that if
USAC, or anyone else, discovers something that is consistently
not going well and USAC wants to change its procedures to
tighten up the accountability that they then have to go to FCC
and go through a formal rulemaking procedure before they can do
that?
Mr. Feaster. That is the approach to it. Now, what USAC has
done to fill in the gaps is come up with their own what we call
implementing procedures. Their status is really less than full-
blown rules and the primary difference between those is that we
can make recoveries based on violations of USAC procedures but
cannot make recoveries, financial recoveries, based on rules
passed by the Commission. That was a determination made by our
General Counsel's Office.
Mr. Greenwood. Is there a phenomena here where the program
can be seen to be potentially hemorrhaging money because of
some frailty in the way the program is organized and you can't
stop that hemorrhaging until you go through the USAC procedure,
the FCC procedure.
Mr. Feaster. Yes. A very timely process. Our office would
advocate a codification of the implementing procedures by USAC
to make one set of rules for the public to deal with. The
implementing procedures really put meat on the FCC rules and we
think there are very valuable things in those procedures to
improve the program.
Mr. Greenwood. Do you think you know how much money has
been wasted in Puerto Rico?
Mr. Feaster. No, sir. Well, I would start with $101 million
from what I have heard.
Mr. Greenwood. That is probably about the right number.
Mr. Feaster. I am not sure.
Mr. Greenwood. What is your sense of USAC's progress in
fixing its programmatic weaknesses?
Mr. Feaster. They are moving in the right direction. I
think we would have to include USAC and the Wireline
Competition Bureau. They are moving in the right direction. We
think they are moving too slowly. We have in the past made
suggestions that haven't been fully implemented yet. We will be
making additional suggestions after this hearing to improve the
structure of the program to make it more difficult to take
advantage of it. But they are heading in the right direction,
just slowly.
Mr. Greenwood. Do you have a personal opinion as to whether
this whole USAC concept makes any sense of whether the notion
that we have is nonprofit, nonFederal entity responsible for a
charge that goes to all the rate payers is essentially a tax
imposed by the Congress indirectly on phone service and, yet,
dispensed by nonFederal and, in many ways, nonaccountable
organizations?
Mr. Feaster. We would like to see a more contract-oriented
relationship between USAC and the Commission. That is my
personal opinion.
Mr. Greenwood. What do you mean by that?
Mr. Feaster. A formalized contract just like we do with any
other contractor.
Mr. Greenwood. And what advantage would we gain by that
model?
Mr. Feaster. I think better control.
Mr. Greenwood. Are there limits to the degree to which the
FCC can tell USAC what to do?
Mr. Feaster. The Bureau can tell USAC what to do. I don't
think there are any limits. We turn over new turf on almost a
daily basis.
Mr. Greenwood. My time has expired. The gentlelady from
Colorado.
Ms. DeGette. Thank you, Mr. Chairman. Mr. Feaster, you told
the chairman that you believe that the primary fault of the
failure in Puerto Rico was the fault of the PRDOE for failure
to plan for the use of the equipment. Correct?
Mr. Feaster. Yes.
Ms. DeGette. Do you think the vendors bear any burden to
educate the schools and the educators in the Department have to
use the equipment? Do you think that is part of the blame?
Mr. Feaster. I think that they are certainly capable of
doing that and I would think as a way to treat a good customer
to help them plan the program where possible.
Ms. DeGette. That they should educate them how to use it?
Mr. Feaster. I don't think an organization the size of
PRDOE should rely upon a vendor to do that. I think they are
large enough to have their own experts, CIO or something like
that to plan this operation.
Ms. DeGette. Certainly they are large enough and
sophisticated enough to contract with the vendors to educate
them to make that part of the----
Mr. Feaster. Certainly, yes, if they are not like a little
school with a very small population or a very limited technical
staff.
Ms. DeGette. In your opening statement you testified that
you have requested funding for additional resources since you
only have three IGs for the whole country of that funding.
Right?
Mr. Feaster. It was in our 2004 budget.
Ms. DeGette. And how much did you request?
Mr. Feaster. $3 million.
Ms. DeGette. And was that for additional inspectors?
Mr. Feaster. No, it is for contract, resources to hire
contractors.
Ms. DeGette. And do you expect that will be funded?
Mr. Feaster. It has been rejected by the Congress of the
United States.
Ms. DeGette. So you are just left with what you have got.
Mr. Feaster. Right.
Ms. DeGette. Let me ask you this. The chairman was asking
you, or he was opining about all the money that we have in the
fund and wondering why we couldn't use that for oversight. My
question is under the current statutory scheme, do you believe
that we could use money from the fund for your program for
outside auditing?
Mr. Feaster. The FCC does not have, I am told by General
Counsel's Office, the direct authority to use the fund.
Ms. DeGette. Would that require statutory change, if you
know?
Mr. Feaster. I believe so.
Ms. DeGette. Thank you. Now, you testified and in your
written testimony you talked about instances of bid rigging,
lack of competitive process, service providers billing for
goods and services not provided, ineligible items being funded,
and beneficiaries not paying the local portion of their cost.
How prevalent, in your view, are these types of abuses and
similar instances of malfeasance within the overall
administration of the E-Rate Program?
Mr. Feaster. In the past year through a combination of
audits by USAC, the FCC IG's office, done 122 audits and 32
percent of those audits were found to be noncompliant with
program rules. The remaining portions of the 122, or 83 of
them, were found to have some findings related to USAC
implementing procedures. At least one-third of the audits that
we conducted in the past year have been found noncompliant.
Ms. DeGette. So that is a pretty substantial number I would
say. Wouldn't you agree?
Mr. Feaster. Yes, ma'am.
Ms. DeGette. Now, your testimony touches upon recovery of
lost or misused E-Rate money. Are there any institutional
guidelines whereby the FCC can recover lost money?
Mr. Feaster. Yes, they can do that.
Ms. DeGette. How do they do that?
Mr. Feaster. By basically notifying the applicant. They
have been in violation and they recover the money.
Ms. DeGette. And how often has that been done?
Mr. Feaster. I don't know specifically. It has occurred.
Ms. DeGette. Has it occurred often, do you know? I mean, I
am just wondering.
Mr. Feaster. I don't have the details. They have recovered
$20.8 million.
Ms. DeGette. Over what period of time?
Mr. Feaster. Maybe a better USAC question.
Ms. DeGette. Okay. If you could just state your name. Thank
you. Since the inception of the program that is the total?
Mr. Feaster. Yes.
Ms. DeGette. Who in the FCC is charted trying to recover
the lost money? Is it the Wireline Competition Bureau, WCB?
Mr. Feaster. WCB and our Chief Financial Officer.
Ms. DeGette. Okay. Do they go after service providers?
Mr. Feaster. They now currently are able to go after
service providers.
Ms. DeGette. Do they go after them, do you know?
Mr. Feaster. Yes, I think they do.
Ms. DeGette. Okay. What happens when the FCC goes after a
service provider?
Mr. Feaster. I am not sure.
Ms. DeGette. Oh, you don't understand?
Mr. Feaster. No, I am sorry.
Ms. DeGette. Okay. I mean, are they able to effectively
recover the money? Did they sue them or what did they do?
Mr. Feaster. I think they contacted them directly. I am not
sure of that, whether they were sued or not.
Ms. DeGette. Okay. That is not your purview? Do you have an
opinion as to whether we need programmatic or statutory changes
to ensure the efficient and complete recovery of funds?
Mr. Feaster. I think we have enough rules to do that and I
think there is some work going on to expand who we can get the
money from Ms. DeGette. Okay. Now, in your written testimony
you talked about the fact that in addition to conducting audits
the FCC Inspector General's Office is providing audit support
to a number of investigations of E-Rate recipients and service
providers. You state that the IG is currently supporting 22
investigations and monitoring an additional 18 investigations.
Can you explain to me the difference between supporting and
monitoring E-Rate investigations?
Mr. Feaster. Yes, ma'am. We are just monitoring. We are
just keeping in touch with them and not providing any resource
support like doing additional audit work. We are just keeping
track of the investigation, how it is going, what they are
doing. We are talking about the FBI and the U.S. Attorney's
Office. When we provide direct support, we are sending our
auditors out to do audits in support of the investigative
activities.
Ms. DeGette. In your opinion, would additional resources
for your office assist you in better monitoring those
investigations?
Mr. Feaster. Yes, ma'am.
Ms. DeGette. Why?
Mr. Feaster. We just don't have enough staff here. These
two people right here are two-thirds of my staff.
Ms. DeGette. And the other one is sick, right?
Mr. Feaster. And the other one is sick. They are constantly
on the road and these investigations are spread throughout the
country and we need either additional resources to hire
contractors or additional staff. We prefer to do it through
contractors if at all possible.
Ms. DeGette. And why is that?
Mr. Feaster. It is more efficient. Right now we have a high
workload. If that workload would drop, we would have excess
people and we don't like to be in that position.
Ms. DeGette. That is very efficient, Mr. Chairman. I am
going to yield back the balance of my time. If we have a second
round, I have some questions specific to Puerto Rico.
Mr. Greenwood. The Chair thanks the gentlelady and welcomes
the chairman of the full committee, the gentleman from Texas,
Mr. Barton, and recognizes him for 10 minutes.
Chairman Barton. Thank you, Mr. Chairman. I want to
complement you and the Oversight Investigation staff for
holding this hearing and starting this process. This is not the
only hearing that we are going to do on this. It is important
that we start the process correctly.
I am at a little bit of a loss, Mr. Inspector General, on
how to question you because it appears to me that you want to
do the right thing but you just don't simply have the
resources. I guess my first question, what do you view your
role to be given that you only have a handful of people and are
expected to be the Inspector General for a vast Federal agency
that literally touches all aspects of the American economy?
Mr. Feaster. We keep pushing. I think right now we are in
the process of trying to develop a three-way memorandum of
understanding between USAC and a contractor and our office to
use the Universal Service Fund to obtain contract resources.
Chairman Barton. You are appointed by the President. Is
that not correct?
Mr. Feaster. No, sir. I am appointed by the agency head.
Chairman Barton. By the agency.
Mr. Feaster. Yes, sir.
Chairman Barton. Do you ever meet with other Inspector
Generals of the Federal agencies? Is there a monthly meeting?
Mr. Feaster. Yes, sir.
Chairman Barton. Is it allowed to discuss pending cases
when you have those meetings? Can you all talk about what you
are doing?
Mr. Feaster. That generally is not the format. It is a more
formal setting basically dealing with community wide issues. We
are sort of unique in that community, though.
Chairman Barton. I don't know but would it be ever
appropriate for you to ask the other Inspector Generals to
share staff or resources, at least on a temporary basis?
Mr. Feaster. Most of the Inspector Generals are very tight
in their staff limitations. We have basically had one agreement
with the Department of Interior IG's Office. They are providing
staff on a reimbursable basis to us. We have currently are
involved in developing a memorandum of understanding with the
Department of Education who are doing some audits for us in New
York.
Chairman Barton. Let me get a little more specific about
the pending issue. This E-Rate Program that has been in effect
since the mid to late 1990's, it is ministered by something
called the Universal Service Administration, I think, what is
your view of them?
Mr. Feaster. They are a very capable organization that try
to do the right thing.
Chairman Barton. You honestly believe that given the fact
that every time we look under a rock we see misuse and grants
that should not have been granted and equipment that sits in
warehouses? You really think they are capable?
Mr. Feaster. I think they need to do more work and
different type of work. We keep pushing, urging.
Chairman Barton. Who appoints the head of that
organization?
Mr. Feaster. The Chairman of the FCC.
Chairman Barton. The Chairman of the FCC. And once
appointed, does that individual serve at the pleasure of the
chairman or is there a specific timeframe?
Mr. Feaster. I don't believe. There is a term I think they
serve at the pleasure of the chairman.
Chairman Barton. Okay. Do you think it would be a good idea
if we had them come in and sit where you are sitting?
Mr. Feaster. I think they are here.
Chairman Barton. They are going to be on the next panel?
Mr. Feaster. Yes, sir.
Chairman Barton. That is a very good idea.
Mr. Feaster. I think so. I do want to make a point. One of
the solutions to our resource program is getting access to the
Universal Service Fund from my office and I do think we need
congressional legislation to do that or some way of getting
legal access to that fund. That would solve my resource problem
and let me hire contractors to conduct independent audits.
Chairman Barton. We have collected about $13 billion in
this fund and my opinion based on the summaries I read, a lot
of that money has not been spent very wisely. If I were to give
you three choices about the E-Rate Program, one would be to
eliminate it. Second would be to continue it as it is and give
them a bonus for the way it has been operated. The other would
be to restructure or reform it. Which of those options would
you choose?
Mr. Feaster. I think I may take the third option, sir. We
are trying to do that right now.
Chairman Barton. Do you think the Congress needs to
legislatively direct that restructuring?
Mr. Feaster. As my chairman likes to say, that is above my
pay grade. I will leave that up to you to make that decision.
Chairman Barton. You are entitled to an opinion.
Mr. Feaster. I don't know if we really need that or not. I
think some maybe direction and guidance from Congress may be a
solution.
Chairman Barton. In the audits and investigations that your
staff has conducted, would it be their view that the recipients
or the applicants for these funds viewed the program as a big
candy jar? Kind of free money or something that they didn't
have to really put too much attention into how money was going
to be spent because it wasn't their money?
Mr. Feaster. I would agree to that. I think if they treated
it more like their money rather than free money, I think it
would be a lot different.
Chairman Barton. Would it be appropriate, if we were to
have a legislative solution, that we would seek some sort of a
codification of situations in which we could request or require
refunds of monies that have already been spent?
Mr. Feaster. Yes, sir.
Chairman Barton. Okay. Would it be appropriate if we were
to pass legislation in this area to put specific penalties
perspectively in place up to and including not only fines but
perhaps criminal penalties for misuse and abuse of funds
appropriated through this program?
Mr. Feaster. Yes, sir.
Chairman Barton. I have got 3 more minutes. I think I am
going to yield back because there are some other questions but
they are really more directed to the other panels. I do want to
ask the gentleman from Puerto Rico. My understanding is the
problems that we have discovered at Puerto Rico are because of
a change in the Governor of that commonwealth and the fact that
investigations were begun that showed that the prior
administration had not been responsible. Is that a fair
statement?
Mr. Saldana. Well, I would say, sir, as I mentioned in the
other report, the whole problem arises because of a lack of
proper planning from the Education Department. I insist, and
that is something you may consider here, is that you may
request or administer regulations that whenever funds are
assigned to the states, there should be a review agency.
Like in Puerto Rico we have the Office of Management and
Budget, the local Puerto Rico Office of Management and Budget
that should be as the control for the recipient which is in
this case the Education Department. For me that would be very
critical. And then itself I will also say that schools by
themself should submit proposals to the Education Department
that should be evaluated in detail as which of them will be
ready to receive the funds.
Then after that those schools are evaluated, a certain
number of schools which could be no more than 10 or 20 percent
of the total that should be considered for the compilation or
summation for the request of funds to the Federal agency. That
could be a way that you can establish some kind of control to
avoid situations like this because Puerto Rico applied for the
whole funds that we are assigning total but then we didn't have
adequate control so this shouldn't happen. But I think in view
of other cases that you are discussing here this morning, you
can establish that kind of regulation.
Chairman Barton. Well, I want you to know that, I mean, we
ask that you come and you have come and cooperated and we
appreciate that. We are not picking on Puerto Rico. We could
have almost picked a school district or a community out of the
hat. We chose Puerto Rico because of the size of the situation
and the fact that when our staff went down to conduct an onsite
investigation, we found quite a bit of equipment that was just
sitting around in warehouses.
It is not an indication. Do not take this indication that
you are the only part of this program that has a problem. I
think it is systemic and endemic and the point of these
hearings are to outline that and then to try to find a remedy
to correct it so we can continue the program in the future.
With that, Mr. Chairman, I would yield back.
Mr. Greenwood. The Chair thanks the gentleman. The Chair
welcomes the gentleman from Massachusetts, Mr. Markey, who has
agreed to yield while he prepares his question to Mr. Walden
who has a time constraint problem. The Chair recognizes Mr.
Walden for 10 minutes.
Mr. Walden. Thank you, Mr. Chairman. Thank you, Mr. Markey.
Mr. Feaster, I want to make sure I understand this. There have
been, what, 142 audits done?
Mr. Feaster. 122.
Mr. Walden. 122 over 6 years in this program?
Mr. Feaster. No. That was this past year, sir.
Mr. Walden. I am sorry.
Mr. Feaster. Over the past year.
Mr. Walden. So 1 year?
Mr. Feaster. Yes.
Mr. Walden. How many audits in total have been done over
the length of the program?
Mr. Feaster. Probably close to 200.
Mr. Walden. Okay. So a total of 200 audits over 6 years. Is
that pretty close?
Mr. Feaster. I am sorry?
Mr. Walden. 200 audits over 6 years?
Mr. Feaster. That is an estimate just off the top of my
head.
Mr. Walden. And how many grants are issued each year?
Mr. Feaster. There are over 30,000 beneficiaries.
Mr. Walden. Beneficiaries. Each year?
Mr. Feaster. Each year.
Mr. Walden. It has been active for 6 years?
Mr. Feaster. Yes, sir.
Mr. Walden. Is that pretty much an average, 30,000 a year
over 6 years?
Mr. Feaster. I think it has been increasing.
Mr. Walden. Okay. And we have looked at basically 200 of
those? Am I looking at this correctly?
Mr. Feaster. That or less.
Mr. Walden. So less than 200.
Mr. Feaster. Right. I don't have the numbers in front of
me.
Mr. Walden. Less than 200 beneficiaries have been audited
over 6 years and there are roughly 30,000 beneficiaries.
Mr. Feaster. Yes. A very limited program of audits.
Mr. Walden. And we have spent $8 billion out of this fund?
Mr. Feaster. I thought the number was $13 billion.
Mr. Walden. I think that is how much has come in.
Mr. Feaster. I don't have those numbers. I am sorry.
Mr. Walden. But it is somewhere between $8 and $13 billion.
Mr. Feaster. The annual rate is $2.5 billion.
Mr. Walden. The money that is collected comes from rate
payers' phone bills. Can you tell me the track that it goes on
then? I pay it, it goes to the phone company.
Mr. Feaster. The phone company gives it to the FCC.
Mr. Walden. It goes to the FCC. Goes to the Universal
Service Fund.
Mr. Feaster. And then the Universal Service Fund sends the
money out to the beneficiaries.
Mr. Walden. To the beneficiaries. Does it ever go through
the hands of the FCC? Does it ever come through the Congress?
Mr. Feaster. No, sir.
Mr. Walden. And the USAC itself is made up of whom?
Mr. Feaster. Private nonprofit company.
Mr. Walden. Comprised of?
Mr. Feaster. People hired.
Mr. Walden. By who?
Mr. Feaster. By USAC.
Mr. Walden. So the National Exchange Carrier Association?
It leaves the phone companies then?
Mr. Feaster. They represent the phone companies but USAC is
private independent.
Mr. Walden. Right. I am trying to figure out who owns USAC.
How do you become a USAC that gets $2.5 billion a year? That is
a pretty good deal and nobody looks at you.
Mr. Feaster. I am not exactly sure, sir.
Mr. Walden. All right. Of your audits that you've done,
what is the percent of those that are noncompliant?
Mr. Feaster. Of the 122, 32 percent are noncompliant.
Mr. Walden. And what does noncompliant mean?
Mr. Feaster. There were substantial violations of
Commission rules involved.
Mr. Walden. And then there's another group that has been
noncompliant with procedures. Correct? Isn't there a difference
between procedures used and----
Mr. Feaster. Right. If they are noncompliant with
procedures, we call those findings but they are non-cost
recoverable.
Mr. Walden. And that is because the statute doesn't allow
for----
Mr. Feaster. That is because our General Counsel has said
we have to have a formal Commission rule to recover the funds
related to those violations.
Mr. Walden. And has anyone sought a formal Commission rule
to do that, to change that so we can recover it?
Mr. Feaster. We have suggested that and I think the Bureau
is thinking about it. We have suggested that they codify the
USAC procedures in order to make them, in effect, rules and
recoverable.
Mr. Walden. How much do you think is out there that could
be recoverable if the rules were changed by the FCC to allow
recovery of violation of the procedures?
Mr. Feaster. Well, I don't have the exact numbers but there
were findings. Even in the audit, the 122 we've audited, the
ones that were found generally compliant there were findings of
violations of USAC procedures in those so I think there is a
substantial sum of money in addition to the ones that are
recoverable under the noncompliant ones.
Mr. Walden. And the amount of the noncompliant recoverable?
Mr. Feaster. I don't have that number in front of me.
Mr. Walden. Can you give me an estimate?
Mr. Feaster. I would have to check on that number. I am not
trusting what I am seeing there.
Mr. Walden. Okay. Can you give me a ballpark number?
Mr. Feaster. Well, I believe the recoverables under the
noncompliant ones are $3 million so I think we are probably
talking substantially above that number. At least double that
number.
Mr. Walden. Okay. That you could go after if the rules were
changed.
Mr. Feaster. Yes, sir.
Mr. Walden. And then when it comes to auditing, how many
auditors do you really think you need to oversee this program
effectively and what would the cost of that be?
Mr. Feaster. To just do the E-Rate Program we estimate that
we will need approximately $12 million to hire contractors to
do that and some additional staff on my staff to review the
work of contractors that would do about 240 audits.
Mr. Walden. Per year?
Mr. Feaster. Per year. Yes, sir.
Mr. Walden. And you think that would be an adequate number
of audits?
Mr. Feaster. That would give us a statistically valid
sample of the community that we could draw conclusions from to
see how bad the problem actually is.
Mr. Walden. Because what you are really finding now is at
least half of these beneficiaries are either not compliant with
the rules or the procedures. Right?
Mr. Feaster. Yes, sir. Yes.
Mr. Walden. I mean, is this an astonishing finding?
Mr. Feaster. To me it is. Yes, sir.
Mr. Walden. Do you find this anywhere else where you audit?
Mr. Feaster. No.
Mr. Walden. How long has this been going on? Six years?
Mr. Feaster. Six years.
Mr. Walden. Then I want to go to another point. I mean, I
spent a few years on a community bank audit board before I came
here on the Audit Committee. I asked this in the Ag Committee
and the IG there said, ``Can't audit the books of the Forest
Service.'' They have eventually done that. I said, ``Anybody
held accountable for the lack of ability to audit for how this
thing is run?''
What about here? Are people being held accountable when you
go in? I know in Puerto Rico, I guess, one of the gentlemen
actually has a free lunch program in a Florida prison now but
what are you finding? Are people who engage in these fraudulent
acts being held accountable? Are the people in the Government?
I am a local government supporter with as few Federal strings
as possible but this is outrageous.
Mr. Feaster. What we've seen so far other than the people
that have violated criminal statutes and being prosecuted by
the U.S. Attorney's Office. There is very little holding the
schools accountable for these actions. In many instances at
least they have to be turning a closed eye to what is going on.
Mr. Walden. So people aren't getting reprimanded or fired
or their incompetence?
Mr. Feaster. We have seen no indications of that. The
Commission certainly doesn't do it to the schools. I assume
that our Chairman would hold the Bureau accountable if he
didn't think they were doing a good job.
Mr. Walden. What would be the most important change we
could make to clean up this mess?
Mr. Feaster. I think rather than one of a series of things
that we need to do. Strengthen the competitive bidding process.
Strengthen the certification process. Strengthen record
keeping. Rules to codify implementing procedures of the USAC.
Increasing the oversight of tech plans. That is a short list of
things we need to do.
Mr. Walden. Thank you. I appreciate the work you and your
folks have done, and the same for you, sir.
Mr. Chairman, I have to go chair another hearing. I will
try to get back for more of this. Thank you.
Mr. Greenwood. The Chair thanks the gentleman and
recognizes the gentleman from Massachusetts for 10 minutes for
inquiry.
Mr. Markey. I thank the gentleman very much. Back in 1992 I
cast a vote for NAFTA and NAFTA was going to speed up the rate
at which American jobs would be churned. It was a very
difficult vote for me. In 1993 as Chairman of the
Telecommunications Subcommittee when I was putting together the
Telecommunications Act, I built in a provision that called for
discounted rates for schools, for kids, that telephone
companies would have to provide as part of the Universal
Service Fund. The bill was ultimately filibustered in the
Senate in 1994. It died.
Then in 1995 and 1996 on the Senate side Senator
Rockefeller and Snowe did an excellent job of refining the idea
and turning it into this program. At the time what I did was I
gave a name to the program at the time. I called it the E-Rate
or Education Rate. That was the title I gave to it so that it
would be a program that dealt with the need that our country
had if we were going to engage the global community to ensure
that the kids in our country had access to the skill set they
would need in order to compete for jobs in a global economy.
That would be technology based jobs. We were going to give
up the low-end jobs in order to compete for the high-end jobs.
That was the trade and that was how I saw the
Telecommunications Act. That is why I moved to make the
discounted rates in there and why the Senate ultimately framed
it.
So the E-Rate is something that I am obviously very proud
of. As I am sitting here listening, Mr. Chairman, to what is
going on, I was thinking over the Boston Public Library the
inscription is, ``The education of its people is the best
defense of a country.''
Just think if in the Defense budget we purchased all the
tanks, all the planes, but we didn't educate the people to use
them but we had all the hardware. What kind of defense would
that be? Well, the education of the people is the best defense
for a country so that was the thought here. Put it in every
library. Put it in every school. Give a discount, especially to
the kids who are in the poorer schools because the kids in the
poorer schools are less likely to have the computers at home.
That was the whole idea. It would be in the school. It would be
the substitute. Wealth won't be a barrier.
When I was a kid growing up you took your books home, you
competed with the school's superintendent's kid. If you don't
have a computer at home, you had better have it in the
classroom, and you better have a teacher who knows how to use
it and knows how to train the kid. Then the kids can compete.
That was the whole idea. It was a simple idea in a world in
which we were going to have more and more information-based
jobs. That was what it was all about.
It was about the poorest kids because we really don't have
to worry about the wealthiest kids because those kids already
have--they have already mastered nine different technologies by
the time they are 17 and it is on their resume as they apply to
Ivy League schools all across the country. That is not the
problem.
It is the lower end kids who are just as smart but they
just can't take the books home and compete any longer. They
need the technology. That is why this is such a crime against
the children. All those companies and all those public
officials who turned a blind eye are turning a blind eye to the
destruction of opportunities for children to gain the skill set
they would need in order to compete in a global economy.
That is the real scandal here. That is the real scandal
because we had a deal. The Congress had a deal. The American
people had a deal. We will speed up trade but we will also
speed up access to the skill set for the families and the kids
in those families who are going to be most vulnerable. Just an
absolute scandal that this has happened.
So we obviously can't allow this to continue any longer
because it just makes my blood boil that in one territory, one
part of our country $100 million can be taken from the children
because there is no substitute for it in those families for the
most part and they just don't have an alternative. If it wasn't
going to be done in the classroom, it wasn't going to be done
and it just dooms that whole generation of kids to yet another
cycle waiting for the next generation to be given the same
opportunities. That is the real tragedy of what we're hearing.
Thank you both for the work you have done. I appreciate it.
I know you feel the same way and it means the world what you
do.
Thank you, Mr. Chairman, for this hearing.
You only have three inspectors, Mr. Feaster? Is that what I
heard?
Mr. Feaster. Yes, sir.
Mr. Markey. Three inspectors for the entire United States
of America?
Mr. Feaster. And the Commonwealth of Puerto Rico.
Mr. Markey. And the Commonwealth of Puerto Rico. What
percentage of the total fraud do you believe you have touched
so far? Are you at the tip of the iceberg? Have you hit the
iceberg or the tip of the iceberg?
Mr. Feaster. At the very tip.
Mr. Markey. The very tip of the iceberg.
Mr. Feaster. Everything we have looked at, every rock we
turn over we find stuff.
Mr. Markey. And do you find that it is the biggest
companies as well as the smallest contractors? Do you find it
in all aspects of the vending community?
Mr. Feaster. Yes. As I mentioned in my earlier statement,
NEC, a very large contractor agreed to a payment of $20
million. One or two-person scam units in New York were
convicted also. A full range of possibilities there.
Mr. Markey. How many inspectors do you need, Mr. Feaster?
Mr. Feaster. In order to do 240 audits which would be a
statistically valid sample, I need about $12 million and 3 or 4
additional staff.
Mr. Markey. Well, I think that we on a bipartisan basis
should make sure that you get that money if for no other reason
that you would save us basically 99 cents on the dollar.
Mr. Feaster. I will give you every dollar back in
recoveries for everything I spend.
Mr. Markey. No, I think you will give us back far more.
Mr. Feaster. Yes, sir.
Mr. Markey. I think you would give us back 99 cents for
every cent we spend. That is my appealing. Just because there
will be a cop on the beat tapping the sidewalk letting people
know there is a much higher percentage that they are going to
be--I hope somebody does jail time for this. I mean, I really
do. I hope somebody goes to prison. I really do. It just boils
my blood. This is so much bigger.
We don't have a celebrity here. You know what the problem
is? The people we are talking about, the victims are some 7-
year-old kids some place so it is never going to make the front
sections of the newspapers. It is not going to be above the
fold and collar of some famous inside trading person. We are
talking about $65,000 or $100,000 which just obsesses every
single magazine. That is nothing.
That is the tragedy of our system, that we don't focus on
this. Inside traders steal children's future. That is a scandal
worth covering above the fold of the front page every single
day and I know it is not going to but it is true.
How many inspectors do you have, Mr. Saldana?
Mr. Saldana. We have 435.
Mr. Markey. Inspectors?
Mr. Saldana. Auditors. Yes, sir.
Mr. Markey. Auditors. Yeah.
Mr. Saldana. But we have to cover the whole Commonwealth.
We have more than 2,400 units. But we don't have enough funds
also.
Mr. Markey. You do not have enough funds. Now, is most of
this, do you think, in the phone bills? Are the phone bills a
relatively small part of the scandal and the wiring and the
rest of it is where the real problem occurred?
Mr. Feaster. It is the internal connections.
Mr. Markey. So two-thirds of the fund is pretty much the
phone bills so there may be some scamming on phone bills but
for the most part that is not where the real scandal is. It is
over here with all the work these contractors are doing. Uh?
Mr. Feaster. Yes, sir. My staff reminds me we haven't done
enough work to draw that conclusion yet.
Mr. Markey. The conclusion on the phone bills?
Mr. Feaster. Yes. We are just not sure because we haven't
done enough work.
Mr. Markey. So the phone bills themselves might be a
scandal but you just don't know yet. That is just because you
are limited to three people?
Mr. Feaster. Yes, sir.
Mr. Markey. That is unbelievable. That is unbelievable. So
has there ever been any evidence of phone scandals? Are there
any grand juries going on around the country on the phone bill
issues that you know of? You don't know of any?
Mr. Feaster. No.
Mr. Markey. Okay. How many grand juries are going on with
regard to the other side of it, the wiring and all that
contracting? How many, to your knowledge, is going on?
Mr. Feaster. There were 40 cases that were monitored. I
think there are two.
Mr. Markey. Two.
Mr. Feaster. And there are some ongoing investigations that
I don't think reached that grand jury stage.
Mr. Markey. And are there scandals the size of Puerto Rico
out there in the United States, the 50 states?
Mr. Feaster. I don't think so. I am not sure.
Mr. Markey. Not sure.
Mr. Feaster. It is hard to tell how much of the funds are
at risk to draw that conclusion.
Mr. Greenwood. The time of the gentleman has expired.
Mr. Markey. Okay. I thank the gentleman.
Mr. Greenwood. The Chair thanks the gentleman and we will
do a brief second round. Just a couple points. The story was
above the fold, first page of USA Today last week so we are
getting some attention. We are getting some attention.
Mr. Markey. I mean everyday.
Mr. Greenwood. I understand.
Mr. Markey. A relatively small insider trading case can
be----
Mr. Greenwood. That was her fault. That was her fault.
Mr. Markey. In terms of the news coverage it is just the
proportionality.
Mr. Greenwood. I don't disagree with the gentleman. I don't
disagree with the gentleman. I always thought Ed-Rate stood for
Ed Markey. I didn't realize it was education. I am delighted to
learn that.
The $12 million that you have suggested, Mr. Feaster,
according to my calculations, will be .05 percent of the budget
so it is a tiny little portion. Our staff will do some work. I
still think probably the most efficient way to audit this thing
is to have every program audited out of the funds at every
school district. That way you get 100 percent instead of a
statistically important. We may need to do both.
Let me turn to Mr. Saldana. Your testimony describes a
number of irregularities and failures in the bidding process.
You note that the Puerto Rico Department of Education has
complied with your recommendations. How are you going to ensure
that the Department's assertions are accurate?
Mr. Saldana. We are going to perform another audit the next
coming year. As soon as we have resources available we will be
there verifying everything they are doing.
Mr. Greenwood. Are you certain you are going to have the
resources available to do that?
Mr. Saldana. At least we will try with the resources we
already have. We have that in our plan for the coming year.
Yes, sir. We will visit several schools on a random basis and
verify it ourself that everything should be the proper set up.
Mr. Greenwood. And what would be the consequences for the
school district if it failed to follow your recommendations?
Mr. Saldana. Well, we will be directly on the Education
Department because they are the ones that are responsible for
that. That is what I was saying before is that you may consider
establishing some kind of a relation that whether funds are
going to be assigned for this program should be based on a
quota and should be based on applications directly by the
different schools and those that comply with the requirements
before.
They make the petition of funds to the Federal agency and
they should be verified and should be evaluated and given some
kind of rating. Those within that level should be considered
for the application of funds but never in excess of a certain
amount of percent of the total needs. That way when they come
next year, you can verify that if they comply with the previous
program, then you can assign.
Mr. Greenwood. That is way too sensible an approach for the
U.S. Government but it makes a lot of sense to me. What are you
able to say about the Department's abilities, the Puerto Rican
Department of Education's ability to administer and plan for
spending E-Rate funds at present? Have they changed their
capability?
Mr. Saldana. Yes, they are improving. We have regular
meetings with the secretary and his staff. They have created
some kind of controls. They have established an audit committee
that includes persons from other agencies which is very
commendable and we recognize that. We will be very fine when we
perform this next year.
Mr. Greenwood. Okay. I don't need the balance of my time.
Would the gentlelady from Colorado like another 5 minutes?
Ms. DeGette. Thank you, Mr. Chairman. Before I ask my
questions, I would ask unanimous consent to submit Mr.
Dingell's opening statement for the record.
Mr. Greenwood. Without objection.
Ms. DeGette. Thank you. Mr. Saldana, I had some questions
for you which I think would help us in figuring out how exactly
this abuse is occurring in other places as well as in Puerto
Rico. You noted that the audits of the PRDOE contract with the
DRC revealed that counter to Federal and Commonwealth
regulations, formal bid procurement procedures were not
followed to award the contract. Instead, PRDOE requested and
evaluated proposals. Do you know who was responsible for
instituting those bid procedures?
Mr. Saldana. The secretary himself.
Ms. DeGette. The secretary. And were those procedures
illegal?
Mr. Saldana. No. The procedures were properly established.
The fact is that they didn't follow the established procedure.
Ms. DeGette. Oh, I see. They had procedures. And who was it
that didn't follow the procedures?
Mr. Saldana. The secretary with a committee that he had
designated for that purpose. All the agencies in the island had
strict regulations about the process and they have a board for
adjudicating the different big processes. They didn't comply
with those requirements.
Ms. DeGette. Was that the fact they didn't comply with the
process illegal?
Mr. Saldana. Yes, that is illegal.
Ms. DeGette. And other criminal prosecutions going on?
Mr. Saldana. Well, we have referred that to the Justice
Department, to the Commonwealth Justice Department, and they
are awaiting that at this time. We also had referred that to
the Federal district attorneys there in Puerto Rico.
Ms. DeGette. And were any civil remedies pursued against
those individuals?
Mr. Saldana. They have those two options. Either criminal
or civil or both.
Ms. DeGette. Okay. Now, you testified that a physical
inspection of 30 schools between October 11 and November 21,
2000, yielded a number of disturbing discoveries. Among the
deficiencies you noted that a telecommunications infrastructure
network installed in the schools was not used, that PRDOE had
not acquired the computers for the students, that the teachers
had limited knowledge on computer use, and that physical and
electrical conditions in the schools did not have the capacity
required for the communication and computer equipment. Right?
Mr. Saldana. Yes.
Ms. DeGette. Who was responsible for those failings?
Mr. Saldana. Well, the committee that should have evaluated
all that and to have the approval of the Office of Management
and Budget of the Commonwealth because they have a committee
that evaluates all the information technology proposals that
they didn't follow those regulations.
Ms. DeGette. Do you have any evidence of--I mean, was this
just slip-shod management or was there actually monetary
compensation under the table? Do we know why they did this?
Mr. Saldana. We don't have that evidence at this time.
Ms. DeGette. Okay. So you don't really know?
Mr. Saldana. If the Justice Department and the Commonwealth
had that, that is something I don't know.
Ms. DeGette. Exactly. Okay. Now, your findings led you to
say that PRDOE did not attain any benefit from the investment
of $73 million, in internal connections and telecommunications
and almost 300,000 in services from lines connected to the
Internet of the EDUNET network that corresponded to the amounts
billed to the contractors. Who is to blame for that misuse?
That is almost $74 million.
Mr. Saldana. The management of the Department at that time
should be held accountable and obviously they have to establish
a claim to the contractors in that process also. That is
something that has to be evaluated in accordance with the
contract that was signed with those companies.
Ms. DeGette. How did you find out about these problems? How
did they come to your Department's attention?
Mr. Saldana. Well, we go there. We have a schedule of
audits that we perform. We also receive complaints. We have a
system whereby any citizen or public employee may call our
office and report any kind of condition. That may be like an
improper situation or fraud situation they can refer to us.
Ms. DeGette. And how did you find out about it in this
case?
Mr. Saldana. In this case was regular audit that we have.
Ms. DeGette. I am sorry. What?
Mr. Saldana. Regular audit that we go there and then we
start making the evaluations of different aspects. We have
issued several reports that are indicated in this report that
are related with other matters that we reported that were not
being followed in accordance with regulations also.
Ms. DeGette. And once you discovered these abuses during
your regular audit, did you then report that to the IG's
Office? Did they get involved in this then?
Mr. Saldana. At some time they attained the information
from us. We sent them the information.
Ms. DeGette. Mr. Feaster, I want to ask you of the number
of investigations that you conduct, how many of them occur as
the result and alert a local official or someone like Mr.
Saldana's office contacting you with this information?
Mr. Feaster. It is a wide range of inputs. Concerned
citizens, service providers who didn't get contracts, local
officials, U.S. officials.
Ms. DeGette. Would you say the bulk of your investigations
occur because of complaints from all this variety of groups or
are they because of regular audits like Mr. Saldana's
Department was conducting?
Mr. Feaster. I would say about 50/50.
Ms. DeGette. Would it help you to do independent audits if
you had the additional staff?
Mr. Feaster. Yes. I wouldn't want to be totally dependent
upon outside sources or a hotline or things like that.
Ms. DeGette. All right. Thank you.
Thank you, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentlelady. Did the
gentleman from Texas want to question the second round? Okay.
In that case, Mr. Feaster, Mr. Saldana, thank you very much for
your help this morning. We appreciate it. You are excused.
Mr. Feaster. Thank you.
Mr. Greenwood. The Chair would call forward our second
panel consisting of the Honorable Cesar A. Rey, Ph.D.,
Secretary of the Department of Education for the Commonwealth
of Puerto Rico who is accompanied by Mr. Carlos Vidal Arbona,
Chief Technology Officer at the Puerto Rico Department of
Education, and by Mr. Adonay Ramirez, ARJ Professional and
Consulting Service, Inc. Also Ms. Cristina Lambert, President
and Chief Executive Officer of the Puerto Rico Telephone
Company, accompanied by Arnaldo Diaz, Strategic Business
Officer, Enterprise Services, and Mr. Santos Diaz, President of
Data Research Corporation.
Good morning to you all and welcome. We thank you for being
here. I think all of you were here when I advised the previous
panel that pursuant to the custom of this committee we take our
testimony under oath and so I need to ask if any of the
witnesses today object to providing your testimony under oath?
Seeing no such objection, I will also advise you that pursuant
to the rules of this committee and the House, you are entitled
to be represented by counsel. Do any of the witnesses wish to
be represented by counsel this morning?
Ms. Lambert. My counsel is here. If he can participate,
that would be fine.
Mr. Greenwood. Well, he may or may not participate but if
he is representing you, then you need to identify him by name,
please.
Ms. Lambert. Jim Slattery.
Mr. Greenwood. Jim Slattery. We have heard of him and we
know who he is. Anyone else wish to be represented by counsel?
Mr. Diaz, do you?
Mr. Santos Diaz. Yes. Good morning. My name is Santos Diaz.
I also have with me Mr. John Nevares who is my legal counsel.
Mr. Greenwood. Okay. Welcome to you as well, sir.
Mr. Rey. My legal adviser is here.
Mr. Greenwood. Your legal adviser is here. And his name is?
Mr. Rey. Adonay Ramirez Jimenez.
Mr. Greenwood. Welcome. Thank you, sir.
Okay. If the witnesses would then stand and raise your
right hand, please.
[Witnesses sworn.]
Mr. Greenwood. You are under oath and we will begin, I
believe, with Mr. Rey. Welcome, sir, and you are recognized to
give your opening statement.

TESTIMONY OF HON. CESAR A. REY, SECRETARY, DEPARTMENT OF
EDUCATION, COMMONWEALTH OF PUERTO RICO; ACCOMPANIED BY CARLOS
VIDAL ARBONA, CHIEF TECHNOLOGY OFFICER, PUERTO RICO DEPARTMENT
OF EDUCATION; AND ADONAY RAMIREZ, ARJ PROFESSIONAL AND
CONSULTING SERVICE, INC.; CRISTINA LAMBERT, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, PUERTO RICO TELEPHONE COMPANY; ACCOMPANIED
BY ARNALDO DIAZ, STRATEGIC BUSINESS OFFICER, ENTERPRISE
SERVICES; AND SANTOS DIAZ, PRESIDENT, DATA RESEARCH CORPORATION

Mr. Rey. Good morning, Mr. Chairman. I am very proud and
very honored to be here.
Mr. Greenwood. Let me just suggest you pull a microphone a
little closer to you. They are very directional and speak
directly into it.
Mr. Rey. Is this better?
Mr. Greenwood. That is better. Thank you.
Mr. Rey. Again, my name is Cesar Hernandez. I am a
Sociologist and the Secretary of education for the Commonwealth
of Puerto Rico since January 7, 2001. This is the first time
that I hold a public office. I have been a Dean of Academic
Affairs and this is my first time with this type of experience.
Prior to accepting this responsibility, I dedicated all my life
to research and to higher education in Puerto Rico.
We proudly accepted the invitation of this subcommittee to
share with you some of our experiences in the ongoing efforts
to provide the school children of Puerto Rico with advanced
telecommunication services, as well as to incorporate Puerto
Rico to the E-Rate Program. I submitted a written presentation
with an attachment consistent of the sequence of relevant
events related to our Department and the university.
Previously we submitted to this committee's professional
staff our petition on January 30, 2003, to the Federal
Communications Commission, FCC, plus exhibits which we request
that it also be become part of the public record of these
hearings.
The public school system of Puerto Rico is one of the
largest under the jurisdiction of the United States. We have
more than 610,000 students attending 1,540 schools scattered
over an area of 3,500 square miles. Our Department has close to
80,000 employees who are represented by four different labor
unions and has a yearly budget of approximately $3 billion, the
largest in the Commonwealth.
You are aware that all Puerto Ricans with business,
residential, or several telephones contribute daily to the
Universal Fund, also commonly known as the E-Rate Fund. Puerto
Ricans have continued to pay into the fund even though our
Department has received no funds at all from the FCC since the
year 2000.
Under my administration our Department is committed to
developing a state-of-the-art, efficient island-wide network to
provide a uniform communications and Internet service covering
all municipalities in the main island of Puerto Rico and the
two adjacent island-municipalities, Vieques and Culebra, with
or with E-Rate assistance. This is the program that we
inherited upon taking office in July 2001.
Network design. We did not find any document with the
design of the network nor documentation regarding how it was
going to be developed, data volumes, cost estimates, management
systems and support. Simple observation showed an awkward
structure with one half of the schools fitted with a wireless
system connected to the supplier's facilities, and the other
half with a wired--terrestrial--system serviced by a different
supplier connected to the Department's central offices in San
Juan. The two systems did not interface.
Infrastructure at PRDE central offices. The server and
communications infrastructure at the Department's central
offices was totally inappropriate.
Computer purchases. A bid to purchase about 100,000
computers had been conducted by the previous administration,
before 2001, of course. This bid was successfully protested in
court by some vendors and the bid was canceled with IBM among
others.
Status of the project. Of the 1,500 schools in the system,
only a handful--less than 10--were regularly connecting to the
Internet. The project was simply not operating.
We hired a private consultant who made a preliminary
evaluation with a sample of 100 schools. We discovered that,
first, more than 50 percent of the communications lines were
out of service, not activated nor installed. Second,
communications equipment was installed in inappropriate areas
that were too small, too hot, or got wet when it rained. Third,
central office infrastructure necessary to support the network
was not appropriate. Fourth, no prior evaluation of vendor
performance was found.
Between the summer of 2001 and the summer of 2003 we took a
series of steps in an attempt to rescue the inherited project
with a three-prong approach, on the school side, in the middle,
and the Department's central offices. We adopted a turnkey
approach for technology acquisition which proved to be
successful. This includes hardware, software, communications,
electricity, security and furniture--when applicable. We
developed the standard for uniformity in laboratory
acquisitions and developed two types of laboratories: mobile
and fixed.
Mobile laboratories consist of a cart with 26 printers and
a server with very low electrical requirements. They can be
moved to any room during academic hours and when not in use can
be stored in a secure place. The fixed laboratories have 26
desktop computers, two printers and a server. Since 2001 we
have installed more than 340 labs at the investment of $28.5
million in Commonwealth funds.
We performed a survey to identify training needs among
teachers. Questionnaires were distributed to 46,000 teachers
and we received 44,000 responses which represents 95 percent
which is extremely high, 95 percent response rate. Some of the
findings were:
First, 75 percent of the teachers indicated little
knowledge about computers. Second, 84 percent admitted very
little knowledge about software packages like Word, PowerPoint,
and Excel. Third, 83 percent indicated that they used computers
in their classes very few times, among other findings.
Obviously, the training efforts conducted in the past have
not been effective. As a result, we designed and implemented a
training program tailored to these specific needs and oriented
toward deliverables or products usually needed by the teacher
to do his/her job. We started the trainings during the summer
of 2001 and through March 2004 have had 48,000 enrollments. As
a result, our teachers have been trained and supervised to use
computers as a classroom tool.
An aggressive school repair project was implemented to
upgrade infrastructure and more than $80 million were spent
during the first 2 years repairing physical and electrical
facilities of the 1,000 schools. Upon discontinuation of
terrestrial services on June 30, 2003, we connected
approximately 400 schools via dial-up telephony. Conscious that
this is not a final solution we proceeded to identify available
offerings and evaluated alternative technical solutions.
In November 2003 we decided to discard terrestrial
connections and ultimately chose a satellite broadband
connection as a cost effective and efficient solution--$12.4
million per year versus $36 million per year for the former
solution.
Let us now talk about our experience with the FCC and USAC.
During the calendar year 2000 at the request of FCC and USAC
Arthur Andersen conducted an independent review of 17
beneficiaries of the USAC support mechanism financed by E-Rate
funds for the first funding year, 1998-1999. Our Department was
one of the beneficiaries subject of the review.
The Andersen auditors visited Puerto Rico in August 2000
prior to the general elections of that year. Andersen's report
to USAC was not issued until October 17, 2001, that is, more
than a year after their site visit to Puerto Rico. The only
finding of this audit that was adverse to PRDE relates to the
absence of desktop computers in any of the classrooms of the
only two schools visited out of the total 1,540 schools in the
system.
Based upon this finding concerning year 1, USAC wrote a
letter to PRDOE dated December 5, 2001, citing the Andersen
finding in the context of being ``very concerned'' and demanded
that our Department provide additional information concerning
our ability to use schools and libraries support mechanism
funding before USAC will commit any additional funding. That
was 2001. Thus, Puerto Rico was effectively cutoff from the E-
Rate Funds Program before allowing our Department to reach to
the Andersen report.
We immediately responded and explicitly addressed each and
every one of the issues raised in the December 5, 2001, letter,
both in writing and through a personal presentation to FCC/
USAC, where our compliance with their requests were amply
documented. this presentation occurred on January 15, 2002,
followed by my letter of January 23, 2002, to Mr. George
McDonald, USAC Vice President for the Schools and Libraries
Division.
This letter and its exhibits, as well as subsequent
submissions to FCC/USAC provide the detailed information about
acquisition of computers, lists of schools where equipment had
been installed, specific information about our investments in
the project, information on teacher's training and not just
evaluations, but detailed reports on significant infrastructure
repairs and upgrades. To date, USAC has never responded in
writing to our letter of January 23, 2002.
As a matter of fact, neither the FCC nor USAC ever provided
our Department with any procedural guidelines, a timetable nor
any specific steps that we could have or should have taken to
immediately regain access to the R-Rate Program. The
information and documents provided in our January 23, 2002
letter were supplemented during personal visits of high-ranking
delegations of the PRDOE to FCC/USAC on April 26 and October 1,
2002.
During these visits, USAC personnel made general comments
complimenting our efforts, but did not produce any official
pronouncement regarding the process by which FCC/USAC was
evaluating our Department's ability to use the schools and
libraries support mechanism, nor when would a decision be
rendered.
On September 27, 2002, I formally demanded in writing from
USAC the immediate availability of funding for years 4 and 5. I
personally hand delivered said letter to Attorney Jane Mago,
then General Counsel to the FCC during a meeting of October 1,
2002. To date, the letter as well remains unanswered.
Another 3 months elapsed without any action on the part of
FCC/USAC. Again, at our request, on January 23, 2003, another
delegation of the PRDE visited both USAC and the FCC. At that
meeting, Attorney Mago, who was still the General counsel for
FCC, requested that we submit yet another request in writing to
the FCC fully documented. She promised that upon receipt of
such document by the FCC she would see to it that a decision
would be made by the FCC within 10 days. We again complied and
filed on January 30, 2003, a seven-page letter with 12 exhibits
to which I made reference at the beginning of this
presentation.
Several months again passed without any response and,
again, at our insistence another meeting with FCC/USAC was
scheduled for late May 2003. A few days earlier, on May 16,
2003, the FCC issued a public notice requesting any interested
parties to submit comments on our January 30 letter. All
comments received by the FCC supported our Department's
petition. Again, nothing happened throughout the summer of
2003.
In August 2003 we decided to approach the Energy and
Commerce Committee of the U.S. House of Representatives in an
effort to obtain support for our requests for the release of
the funding. Following that meeting, we later received in
Puerto Rico the visit of several staff member of this
committee.
In November 2003 at the request and insistence of the PRDE,
a delegation from our Department accompanied by Puerto Rico
Resident Commissioner, the Honorable Anibal Acevedo Vila,
visited the FCC and met with Commissioners Kevin J. Martin and
Michael Copps, and with senior legal advisors to the other
three Commissioners, to again insist on a resolution.
Finally, on November 23, 2003, the FCC issued a resolution
and order (FCC-03-294) instructing the USAC to process the
Puerto Rico Department of Education's application for E-Rate
funding for years 4, 5, and 6, subject to prior completion of
an external audit. Almost 6 months later, on April 28, 2004,
USAC formally advised the PRDE that it had retained the
services of KPMG, LLP to perform the audit, which finally
commenced on May 24, 2004.
In summary, our Department has made aggregate investments
beyond $300 million of non-E-Rate funds and has been working
very hard to take necessary corrective action to offer our
students a project that works without the support of the FCC
and USAC. The recovery plan we have undertaken has produced
tangible results and benefits for the students and teachers of
Puerto Rico. However, with E-Rate funding we can do much more.
Conclusion. In the past our Department has been bogged down
by unending litigation and vendor-driven development plans. As
a result we inherited an alarmingly expensive, over-engineered
system that did not work.
Recommendations. Whatever agency of the U.S. Government is
ultimately entrusted with administering the E-Rate Program must
ensure that the service recipient certifies invoices and
services received prior to disbursing payments to the vendors.
Second, the E-Rate support mechanism should allow districts to
acquire with E-Rate funds service validation software to
corroborate services and facilitate invoice certification.
Third, the agency administering the E-Rate fund should have
a technical advisory team available for school districts to
consult openly on technical matters or doubtful supplier
practices.
Fourth, current policy does not allow the use of the
network for administrative purposes. This forces schools to
acquire and sustain a second network, or to engage in complex
procedures to account for a network utilization between
academic and administrative tasks. Administrative use of the E-
Rate funded network by schools should be allowed given that
schools increasingly are required to collect data to comply
with existing Federal laws and programs such as No Child Left
Behind, Carl D. Perkins, Special Education, and other programs.
Fifth, if access to the Internet for educational purposes
is the primary object of the Universal Fund, then a government
agency more knowledgeable of the process of education and more
sensitive to the needs of the school system should be in charge
of administering the distribution of the funds. For example,
the U.S. Department of Education which, by the way, would also
be far less involved with the priorities and aspirations of the
telecommunications companies.
We commend this committee's initiative to take a hard look
at the E-Rate Program and it will support any congressional
action to restructure the E-Rate Program so that it better
serves its intended educational purposes. On behalf of the more
than 600,000 students in Puerto Rico, we encourage you to do
so. Thank you very much.
[The prepared statement of Cesar Rey follows:]
Prepared Statement of Cesar A. Rey Hernandez, Secretary, Department of
Education, Commonwealth of Puerto Rico
Good Morning Mr. Chairman and members of the Subcommittee on
Oversight and Investigations of the Energy and Commerce Committee of
the U.S. House of Representatives. My name is Cesar Augusto Rey
Hernandez. I am a Sociologist and the Secretary of Education for the
Commonwealth of Puerto Rico. I have been the Secretary of Education
since January 7, 2001 when I was appointed by a new government
administration elected on November 7th 2000. This is the first time
that I hold a public office. Prior to accepting this responsibility, I
dedicated my whole life to higher education and to the Academia, at the
Universidad del Sagrado Corazon in San Juan, and other institutions.
Perhaps you are aware that the public school system of the
Commonwealth of Puerto Rico is one of the largest under the
jurisdiction of the United States, with more than 610,000 students
attending 1540 schools scattered over an area of 3,500 square miles.
The Puerto Rico Department of Education (PRDE) has close to 80 thousand
employees who are represented by 4 different labor organizations, and
has a yearly budget of approximately $3 billion. Every year, close to
30,000 young men and women graduate from our public school system.
These students need to be capable of mastering the tools of the
information age. We cannot allow them to lag behind in the digital
arena because their socioeconomic profile may have limited their access
to computing devices and the Internet.
As you know, Puerto Ricans with business, residential, or cellular
telephones contribute daily to the Universal Fund administered by the
Federal Communications Commission (FCC) through the Universal Service
Administrative Company (USAC).
Puerto Ricans have continued to pay into the Universal Fund even
when Puerto Rico has received no funding at all from the FCC/USAC since
2000, despite the fact that since early 2002 we documented to the FCC/
USAC the measures taken to overcome the shortcomings and deficiencies
of the technology project inherited from the past. My administration
and the team of people that have worked with me from day one have
invested their best efforts to produce a lasting contribution in all
areas of the educational endeavor, including the development of an
effective and useful technology program.
Our Department is committed to developing a state-of-the-art,
efficient island-wide network to provide a uniform communications and
Internet service to about 1540 public schoo1s in Puerto Rico, covering
all municipalities in the main island of Puerto Rico and two adjacent
island-municipalities, Vieques and Culebra, with or without E-Rate
assistance.
We have proudly accepted the invitation of this Subcommittee on
Oversight and Investigations to share with you some of our experiences
in the ongoing effort to provide our schoolchildren with advanced
telecommunications services as well as our efforts to reincorporate
Puerto Rico into the E-Rate program.
background
The technological project to connect the Puerto Rico public school
system to the Internet with E-Rate funds started in 1998-99 (year 1)
with 760 schools, when E-Rate funds were provided by FCC/USAC for
communication lines, communications equipment and internal connections.
In 1999-00 (year 2) funds were provided for communication lines,
communications equipment and internal connections for 780 additional
schools, including two servers for each of those schools, for a total
of 1560 servers. In 2000-01 (year 3) funds were approved for about 100
additional schools not completed in previous phases, and 4600
additional servers. For 2001-02 (year 4, first year under our
administration) PRDE applied for completing the installation of
communication facilities for about 200 schools pending from previous
years.
One of the first challenges we faced upon taking office was filing
the E-Rate funding application (form 471) for year 4 (July 2001 thru
June 2002), which was due on January 18, 2001. We only had ten calendar
days to file the application. The previous administration had filed
Form 470 in late 2000 and had received and evaluated the corresponding
vendor proposals, based on their technology project.
Due to the short period of time available to review proposals, much
less to evaluate the project as a whole, we used the following criteria
to file the application:

We should seek to complete tasks already started;
Provide maintenance to the already installed equipment;
Pay rent for communication lines already installed;
Seek E-Rate discounts for internal connections and internet access
already contracted.
We avoided initiating new tasks or attempting to change the
technological approaches of the project until the pending tasks were
completed, the entire project was evaluated, tests were performed and
the real status and effectiveness of the program was determined.
Preliminary evaluation
Early in 2001 we realized that evaluating the inherited project in
detail was going to require a long time, due among other reasons, to
its huge magnitude and its over-engineered design. Therefore, we
decided to divide the process in two parts: a preliminary evaluation
and a detailed evaluation. The preliminary evaluation produced the
following findings:

1. Network design. We did not find any document with the design of the
network nor documentation regarding how it was going to be
developed, data volumes, cost estimates, management systems and
support. Simple observation showed a rather awkward structure
with one half of the schools fitted with a wireless system
connected to the supplier's facilities, and the other half with
a wired (terrestrial) system serviced by a different supplier
connected to the Department's central offices in San Juan. The
two systems did not interface.
2. Management. No established procedures to manage network security,
installing new versions of programs, troubleshooting or
updating drivers or similar network management tasks were
found. Neither were the tools and people to be used for this
work identified. Properly managing the network is very
important, both because of the number of schools relying on it
and because of its wide geographical extension. It is
impossible to provide reasonable service turnaround if
technicians have to travel to each school in order to fix
problems or provide support. On the other hand, the capacity of
the servers was too low to implement centralized management and
support functions.
3. Electrical and security infrastructure. Many schools had electrical
deficiencies and security problems. In others, electricity was
not enough to properly power computers and many did not have
security bars to protect the equipment from theft, abuse or
vandalism.
4. Infrastructure at PRDE central offices. The server and
communications infrastructure at the Department's central
offices was totally inappropriate. We inherited a jumbled
mishmash of cables strung in a haphazard manner without any
systematic organization or observance of industry standards for
servicing. The PRDE internal local area network (LAN) needed to
be completely rebuilt so as to provide the maintenance and
remote support services essential to properly use the school
network
5. Multiyear contracts and procurement process. One of the contracts
inherited from the previous administration for Internet service
for year 3 (2000-2001) was amended in December of 2000 to
extend its term until 2004. Besides, local bidding procedures
did not appear to have been followed when choosing suppliers.
6. Computer Purchases. A bid to purchase about 100,000 computers had
been conducted by the previous administration. This bid was
successfully protested by some vendors. The final ruling issued
by the Puerto Rico Court of Appeals notified on March 2001
upheld the protest, and the bid was cancelled.
7. Status of the project. The condition of each school regarding
internal cabling, communication lines, servers, physical
facilities and electricity was unknown. No reliable
documentation was available regarding the status of the project
in each school and overall. Of the 1540 schools in the system,
only a handful (less than 10) were regularly connecting to the
Internet. The project was simply not operating.
action steps
Main Strategies
After the preliminary evaluation in early 2001, and pending further
analysis, we attempted to rescue the inherited project with a three
pronged approach:

On the school side. Provide computers to schools by developing
computer laboratories; design and implement a teacher training
program; implement a school repair program; design and
implement a program to begin using technology in the classroom.
Allocate funds for computer software.
At the center. Requested a detailed evaluation of the network from an
independent, private consultant. Design and test a methodology
to provide administration and support to the network. Review of
the legal, regulatory and financial aspects of the project vis-
a-vis E-Rate funding.
At the central office side. Design and implement a new LAN
infrastructure, and a new server infrastructure for the central
office buildings. Establish a Help Desk unit to provide support
to regional offices and schools.
By following this approach we attacked the project's deficiencies
in an integrated way, taking all important aspects into consideration,
not just the installation of computer and communications equipment.
Also, this approach allowed us to pilot test several additional
technology projects which were necessary complements to the school
network project.
Detailed evaluation
We decided to carry out a more thorough evaluation, which included
visiting schools and performing communication tests. In order to
execute the evaluation we contracted a private consultant. On July 2001
the consultant was hired and the evaluation process commenced.
In September 2001, the consultant presented his report on the
status of the school network. Some of the salient findings were:

1. More than 50% of the communication lines from a sample of 100
schools were not installed, were not activated or were out of
service.
2. Servers and communication equipment were installed in inappropriate
areas that were too small or got wet when it rained. Electrical
installations for servers and communications equipment were not
adequate or did not exist.
3. Central office infrastructure necessary to support the network was
not appropriate.
4. No project plans were prepared, nor was any evaluation of vendor
performance done.
5. No Requests for Proposals had been prepared to guide vendors in
submitting proposals.
6. Multiyear contracts were signed during the last days of the previous
administration, without documented justification.
7. Ineffective technical trainings were provided (i.e.: 12 weeks in a
row of continuous Microsoft trainings to non-technical people).
8. Many school directors did not know about the project, therefore
their commitment level with the project was very low or
inexistent.
Based on these findings we stepped up our efforts to demand
accountability from the existing vendors through a series of measures,
including weekly meetings. We also decided to extend the detailed tests
to the remaining 1400 schools. The Office of Management and Budget of
the Commonwealth government cooperated by providing us with resources
to perform these tests in a short period of time.
When we started the evaluation not more than 9 schools out of 1540
were effectively connected to the Internet.
We designed a methodology to provide administration and support to the
school network
An approach to manage servers and workstations from PRDE central
offices using Microsoft Active Directory was designed and tested. Test
results supported the implementation of this method. Many
administrative tasks such as software distribution, configuration,
problem troubleshooting and security implementation could now be
performed remotely. Travel time to provide these services to schools
could be recovered and used towards additional service requests. The
current network management tools based on a simpler design requiring no
network support functions from staff at the school level, is less
people dependent, has lower operational costs and makes uniform
administration less complex.
Provide computers to schools
We adopted a fully ``turnkey'' solution approach for technology
acquisition which has proved to be consistently successful. This
includes hardware, software, communications, electricity, security and
furniture (when applicable). This approach has set the standard for
uniformity in laboratory acquisitions.
Two different types of school laboratories were designed: mobile
and fixed. Mobile laboratories consist of a cart with 26 laptops, a
printer and a server. The cart has very low electrical requirements. It
can be moved to any room during academic hours and, when not in use can
be stored in a secure place. The fixed ones have 26 desktop computers,
two printers and a server. They also include all electrical
requirements, as well as air conditioning and security bars (for
windows and doors). Both types of laboratories also include
complementary audiovisual equipment for the purpose of leveraging and
extending the educational potential of the computers that make up the
laboratory.
The choice of equipment is made individually by each school in
accordance with guidelines developed by the Office of Information
Systems. The choice takes into consideration the condition of the
electrical infrastructure, the security exposure of the school and the
suitability of classrooms to be dedicated as laboratories. Three bids
have been successfully conducted since 2001 for mobile and fixed
laboratories. We have already installed 343 of these laboratories, an
investment of $28.5 million in Commonwealth funds.
Vendors have been required to provide the electrical and security
infrastructure, together with the necessary hardware, software and
communications products. Vendors were also required to connect the
laboratories to the school (E-Rate funded) network. As you can see, in
this way we have not only been taking care of the need for computers,
but also the electrical and the security requirements to reduce outage
or system unavailability.
Train teachers in the use of technology
A basic premise in adopting the use of technology is that the
obstacles to widespread use must be understood prior to committing
large investments. The prior administration's efforts to promote
computer use by distributing 37,000 laptops to teachers only achieved
instant gratification as demonstrated by a teacher survey of literacy
levels administered in 2001. We performed a survey to identify training
needs among school teachers. Questionnaires were distributed to 46,311
teachers. We received 44,311 responses, which represents a 95.7%
response rate. Some of the findings were:

1. 75% indicated their knowledge about computers was low.
2. 84% indicated their knowledge about software packages like Word,
Power Point and Excel was very low.
3. 83% indicated their use of computers in administrative tasks was
very low.
4. 80% indicated they used computers in their classes very few times.
5. 82% indicated their use of computers to produce materials for their
classes was very little.
6. 79% indicated they do not use computers regularly to search for
supporting material (Internet, encyclopedias, dictionaries).
7. 83% indicated their use of the computer in an integrated way in the
classroom is very little.
8. 78% indicated they do not consider the computer a tool for their
professional development.
The training efforts conducted in the past apparently were not
effective. As a result, we designed and implemented a training program
tailored to these specific needs and oriented towards deliverables or
products usually needed by the teacher to do his/her job. We started
the trainings during the summer of 2001 and through March of 2004 have
had 48,627 enrollments.
Initiate academic projects using computers
In order to obtain optimal educational benefit from the use of
computers it is not enough to install computers in schools and to train
teachers. We have to integrate their use to specific academic projects.
Initially we began to apply this principle through a project ca1Ied
``Escuelas de Iniciativa''. In it, teachers were trained, coordinated
and supervised to use computers as a classroom tool. This was a
complete academic project that included training, support from expert
professionals and assessment. Subsequently we developed a network of
centers ``CITEDs'' (Centros de Innovacion Tecnologica para la Docencia)
staffed with a teacher who is a Specialist in Educational Technology
and whose main mission is to train teachers in the use of technology in
the classroom. Specialists are available in more than 60 CITEDs around
the island to assist a particular teacher with a project or a group of
teachers requiring training.
Implement a school repair project
A school repair project was implemented in order to prepare schools
for the August 2002 semester (``Proyecto 1000''). More than $80 million
were spent repairing physical and electrical facilities in that project
alone. Other projects to repair electrical facilities and install
window bars were financed with non E/Rate funds.
Allocate funds for computer software
The previous administration signed a $25 million dollar four-year
agreement with Microsoft to acquire 60,000 license sets of several
software packages that included the Windows operating system, the
Microsoft Office Productivity Suite, Encarta, Atlas, and Publisher. The
contract included training and consulting services. Teacher training
offerings included basic, intermediate and advance usage of the
Microsoft tools, graphic software for education material development
and Internet integration into to the curriculum.
Additionally, most technology integration projects implemented
since 2001 provided funds for purchasing content software to be used by
students and teachers.
Improve central office infrastructure
When we analyzed the computer and communications infrastructure at
PRDE's central office, we realized that it was far away from the
infrastructure required to support the academic and administrative
projects being conducted. The cabling had been installed by non-
qualified personnel, without being certified nor following any industry
standards. Almost daily a segment of the network was down. The capacity
of the servers was too low and system response time was measured in
minutes instead of seconds. A varied assortment of communications
devices were used (hubs, switches, bridges) causing data traffic
bottlenecks and a generally unreliable network. A $1.2 million project
to redesign and install a standards compliant network was carried out
with Commonwealth funds and now provides reliable service to the
central and regional offices. To complete the infrastructure upgrade a
server farm project totaling $1.9 million was installed in replacement
of a mainframe system, to house academic as well as administrative
support systems serving the Department and its schools.
Help Desk support
Between 2001 and 2004 we have recruited 48 persons to staff and
improve Help Desk services. They have been trained to certify
laboratory installations and also to provide technical support to stand
alone PCs. Thirteen of these technicians serve the Central offices,
while thirty five serve the regional offices and schools.
Project Reconceptualization
Upon the discontinuation of terrestrial services on June 30, 2003,
we proceeded to connect as many schools as we could--400 to be exact--
via dial up telephony. Conscious that this is not a final solution on
which to operate an educational technology program we proceeded to
identify available offerings in the marketplace and evaluated during
five months alternative technical solutions. We decided to discard
terrestrial connections and ultimately decided upon satellite broadband
connections as a cost effective and efficient solution ($12.4 million
per year vs. $36 million per year).
interaction with fcc/usac
Up to now we have been outlining the efforts made by our
administration to provide the public school system of Puerto Rico with
a reliable and useful wide area computer network to serve both the
academic and administrative functions of the Department of Education.
The network will also allow our teachers and students to be connected
to and learn to benefit from access to the world wide web, commonly
known as the ``Internet''. You have also noted that all of these
efforts have been undertaken during a period when Puerto Rico has been
cut off from the E-Rate Funding Program entirely. It is now appropriate
to inform this Committee on the experience our Department has had with
the agencies of the U.S. Government entrusted with administering and
distributing the Universal Service Fund; that is, the Federal
Communications Commission (FCC) and the Universal Service
Administrative Company (USAC).
During the calendar year 2000, at the request of FCC/USAC Arthur
Andersen, LLP was hired to conduct an independent review of 17
beneficiaries of the USAC support mechanism financed by E-Rate Funds
for the first funding year (98-99). The Puerto Rico Department of
Education (PRDE) was one of the beneficiaries subject of the review.
The Andersen auditors visited Puerto Rico between August 23 and
September 1, 2000. They inspected the Central Data Center of the PRDOE
and physically verified that the equipment funded by the E-Rate Program
existed and had been installed for the purpose of supporting Internet
connectivity for 780 Schools which then had T-1 lines. They also
verified that teachers had been provided with laptop computers which
enable them to access the Internet.
Andersen's report to USAC was not issued until October 17, 2001,
that is, more than a year after their site visit to Puerto Rico. The
only finding of this audit that was adverse to PRDE relates to the
absence of desktop computers in any of the classrooms of the only two
(2) schools visited out of the total 1,540 schools in the system.
Based upon this finding concerning Year 1, USAC wrote a letter to
PRDOE dated December 5, 2001 citing the Andersen finding in the context
of being ``very concerned'' and demanded that our Department ``must
provide additional information concerning its ability to use Schools
and Libraries Support Mechanism funding''. Specifically, we were
requested to produce ``before USAC will commit any additional funding''
the following:

1. Detailed information about the acquisition of computers to make use
of the connections.
2. A list of the schools where equipment had been installed.
3. Specific information about PRDE's investments in productivity and
curriculum software.
4. The PRDE progress in delivering professional development (teacher
training).
5. PRDE's evaluation of any necessary upgrades to the electrical
systems in the schools.
The letter concluded that USAC would not commit nor disburse any
additional funding to Puerto Rico (irrespective of the program year)
until it had received and evaluated our Department's response to the
above letter, which was received in my office during the last few days
of 2001, between Christmas and New Years Day.
Of course, by then we already had the benefit of the report of our
independent consultant which had been rendered in September, 2001 and
had spent long months and substantial resources in evaluating and
working to rescue the program. By then we were also well aware of the
magnitude of the problem that we had inherited which did not
necessarily become apparent from the Andersen findings. Long before
then we had already started to implement corrective measures based on
the recovery strategy we designed. But, the fact remains that FCC/USAC,
without first allowing PRDE to react to the Andersen report, had
effectively cut-off Puerto Rico from the E-Rate Funds Program.
We immediately responded and explicitly addressed each and every
one of the issues raised in the December 5, 2001 letter, both in
writing and through a personal presentation to FCC/USAC, where our
compliance with their requests were amply documented. This presentation
occurred on January 15, 2002, followed by my letter of January 23, 2002
to Mr. George McDonald, USAC Vice President for the Schools and
Libraries Division. This letter and its exhibits, as well as subsequent
submissions to FCC/USAC, provide the detailed information about
acquisition of computers, lists of schools where the equipment had been
installed, specific information about our investments in the project,
which to date far exceed the funds ever disbursed by FCC/USAC,
information on teacher's training and not just evaluations, but
detailed reports on significant infrastructure repairs and upgrades. To
date, USAC has never responded in writing to our letter of January 23,
2002.
As a matter of fact, neither the FCC nor USAC ever provided our
Department with any procedural guidelines, a timetable nor any specific
steps that we could have or should have taken to immediately regain
access to the E-Rate Program. It should be noted that FCC/USAC took the
unilateral decision to stop E-Rate Funding for Puerto Rico 15 months
after the Andersen site review, without any prior consultation with the
PRDOE and without an opportunity for our Department to react to the
Andersen report prior to the drastic action that was taken.
The information provided to FCC/USAC on January 23, 2002 was
supplemented during personal visits of high-ranking delegations of the
PRDOE to FCC/USAC on April 26 and October 1, 2002. During these visits,
USAC personnel made general comments complimenting our efforts, but did
not produce any official pronouncement regarding the process by which
it was evaluating our Department's ``ability to use the schools and
libraries support mechanism'', nor when would a decision be rendered.
Since time continued to pass without any decision from FCC/USAC
regarding access by Puerto Rico to the E-Rate program on September 27,
2002 our Department formally demanded in writing from USAC the
immediate availability of funding for Years 4 and 5 after having more
than fully complied with all of the requests contained in USAC's letter
of December of 2001. I personally hand-delivered a copy of said letter
to Atty. Jane Mago, then General Counsel to the FCC during a meeting at
the FCC on October 1, 2002. Again, nothing happened. Today my letter of
September 27, 2002 also remains unanswered.
After another three months elapsed without any action on the part
of FCC/USAC, again at our request, on January 23, 2003 another high
ranking delegation of the PRDE visited both USAC and the FCC. At that
meeting, Atty. Mago, who was still the General Counsel, requested that
the PRDE submit yet another request in writing to the FCC, fully
documented, again requesting the release of E-Rate Funding for Puerto
Rico. She stated that upon receipt of such document by the FCC she
would see to it that the document reach the desks of the Commissioners,
and that the PRDE would receive a decision within ten days. Naturally,
we again complied and filed on January 30, 2003 a 7-page letter with 12
exhibits to once more formally request the immediate availability to
Puerto Rico of E-Rate Funding for Years 4 and 5. The exhibits,
consisted of prior correspondence and printed summaries of the personal
presentations that had been made to FCC/USAC on January, April and
October of 2002 and January 23, 2003. Following the January 30
submission, we began to receive occasional verbal requests for
documents or information, and verbal inquiries from FCC/USAC staff,
primarily on our procurement procedures.
Since several months again passed without any response from FCC/
USAC, at the request of PRDE another meeting with FCC/USAC was
scheduled for late May 2003. A few days earlier, on May 16, the FCC
issued a public notice requesting any interested parties to submit
comments on our January 30 letter. All comments received by the FCC
supported our Department's petition. Again, nothing happened throughout
the Summer of 2003.
In August, 2003, we decided to approach the Commerce and Energy
Committee of the U.S. House of Representatives in an effort to obtain
support for our requests for the release of the funding. Following that
meeting, we later (Feb/04) received in Puerto Rico the visit of several
staff members of this Committee.
In November of 2003, and at the request and insistence of the PRDE,
a delegation from our Department, accompanied by Puerto Rico Resident
Commissioner, the Honorable An!bal Acevedo Vil , visited the FCC and
met with Commissioners Kevin J. Martin and Michael J. Copps and with
senior legal advisors to the other three Commissioners, to again insist
on a resolution.
Finally, on November 25, 2003 the FCC issued a resolution and order
(FCC-03-294) instructing USAC to process the Puerto Rico Department of
Education's applications for E-Rate Funding for Years 4, 5 and 6,
subject to prior completion of an external audit. Almost 6 months
later, on April 28, 2004 USAC formally advised the PRDE that it had
retained the services of KPMG, LLP to perform the audit, which finally
commenced on May 24, 2004.
closing remarks
Our Department has made aggregate investments beyond $300 million
of non ERATE funds and has been working very hard in a planned and
reasoned manner to analyze what was done by the previous administration
and to take the necessary corrective action to offer our students a
project that works. We believe that we have focused every important
aspect of the project, including policy setting, technology planning,
network development, administration, support and maintenance, school
equipment, school infrastructure, central office infrastructure,
teacher training, academic projects and Help Desk support. We are
committed to continue developing our program by installing computers at
the schools, training teachers, designing new academic projects and
making sure vendors do their corresponding part.
The recovery plan we have undertaken without any E-Rate support has
produced tangible results and benefits for the student and teachers of
Puerto Rico. But we definitely can use E-Rate funding and E-Rate
support to continue. Every additional delay in proceeding with funds
disbursements will make the catch-up cycle longer and more difficult.
Worse of all, it will allow more students to graduate without necessary
skills. Any further delays or worse yet, continued inaction, will have
even more Puerto Ricans wondering why they are contributing to the
Universal Service Fund.
Lastly, we would like to share a few thoughts that in our
estimation may assist the US Congress in enacting legislation that will
result in an E-Rate program more beneficial to the educational process.
1. The PRDE in the past has been bogged down with unending
litigation and vendor-driven development plans. As a result we
inherited an alarmingly expensive, over-engineered system that did not
work. When our participation in the E-Rate program was abruptly shut-
off and we were obliged to seek alternatives, we were able to identify
viable options at much lower costs. The huge cost of installing
terrestrial networks makes E-Rate an attractive subsidy source for
telecom companies wanting to extend their network into the rural areas
where the customer density is low.
2. Whatever agency of the US government is ultimately entrusted
with administering the E-Rate program, must ensure that the service
recipient certifies invoices and services received prior to disbursing
payments to the vendors. Also, the E-Rate support mechanism should
allow districts to acquire with E-Rate funds service validation
software to corroborate services and facilitate invoice certification.
3. Telecommunications equipment connection is only half of the
equation--inconsistent service availability is the recurrent loss/waste
gap with a potential to drain resources that could be used to service
more schools. The agency administering the E-Rate fund should have a
technical advisory team available for school districts to consult
openly on technical matters or doubtful supplier practices. The cost of
providing this service will be insignificant compared to the potential
savings.
4. Current FCC/USAC policy does not allow the use of the network
for administrative purposes. This forces schools to acquire and sustain
a second network, or to engage in complex procedures to account for
network utilization between academic and administrative tasks.
Administrative use of the E-Rate funded network by schools should be
allowed given that schools increasingly are required to collect data to
comply with existing federal laws and programs (i.e. No Child Left
Behind, Carl D. Perkins, Special Education, and other programs.)
5. If access to the Internet for educational purposes is the
primary object of the Universal Fund, then a government agency more
knowledgeable of the process of education and more sensitive to the
needs of the school system should be in charge of administering the
distribution of the funds. For example, the US Department of Education,
which by the way, would also be far less involved with the priorities
and aspirations of the telecommunications companies.
We commend this Committee's initiative to take a hard look at the
E-Rate program and will support any congressional action to restructure
the E-Rate program so that it better serves its intended educational
purposes. On behalf of the more than 600 thousand school children of
Puerto Rico we encourage you to do so. Thank you very much.
timeline

Sequence of relevant events related to PRDOE ERATE project
------------------------------------------------------------------------
Date Event
------------------------------------------------------------------------
1998...................................... USAC approves $46,222,680
in E-Rate funds to PRDOE
1999...................................... USAC approves $56,879,778
in E-Rate funds to PRDOE
2000...................................... USAC approves $55,605,088
in E-Rate fund to PRDOE
Augusta 23-September 1, 2000.............. Arthur Andersen audit for
first funding year (1998)
October 17, 2001.......................... Arthur Andersen presents
audit report to USAC.
------------------------------------------------------------------------
2001
------------------------------------------------------------------------
January 7, 2001........................... Dr. Cesar Rey Hernandez
takes office
January 8, 2001........................... Dr. Cesar Rey Hernandez
names an advisory committee
of professionals to address
the telecommunications and
Internet supplier selection
process and meet the
January 18th E-Rate funds
request deadline. The
evaluation committee
fulfilled the request in
the absence of the Systems
Department Director who had
resigned as of December
31st. Proposals had already
been requested and received
by the previous
administration.
January 18, 2001.......................... E-Rate funding application
due date for year 4 (2001).
January 18, 2001.......................... Advisory committee
recommends avoiding
initiating new tasks or
changing the technological
approaches of the project
until the pending tasks
were completed, the whole
project was evaluated, and
tests were performed to
determine the real status
of the project.
February 2001............................. Dr. Rey issues letter
instructing school
directors to stop any local
activities involving E-Rate
funding.
March-April 2001.......................... PRDOE designs a three-
pronged strategy to recover
the project (the Center
(network), the schools and
the Central Office)
July 2001................................. PRDOE hires ARJ Professional
and Consulting Services to
assess current situation
and uses this information
to seek responsibility from
vendors
September 18, 2001........................ ARJ Consulting and
Consulting Services
publishes ReEducATe network
assessment.
October 30, 2001.......................... PRTC letter to PRDOE serving
as basis for recovery plan
to correct installation
deficiencies identified by
PRDOE.
September 4, 2001......................... First laboratory bid awarded
(100 laboratories)
December 5, 2001.......................... USAC requests PRDOE to
provide additional
information concerning its
capability to use the E-
Rate funding mechanism. The
letter infonns PRDOE that
USAC withholds from making
commitments or
disbursements to PRDOE
vendors until evaluation of
response to its letter.
------------------------------------------------------------------------
2002
------------------------------------------------------------------------
January 15, 2002.......................... PRDOE makes first personal
presentation to USAC, OIG
and FCC on progress
readiness to participate in
E-Rate program
January 23, 2002.......................... Dr. Cesar Rey Hernandez
letter to George McDonald
at USAC. Letter also
indicates that contractors
have been advised to
provide services and repair
installations which were
not made adequately or face
legal actions for
noncompliance. No response
from USAC.
January 23, 2002.......................... PRDOE cancels DRC contract.
February 26, 2002......................... DRC discontinues Internet
and telecommunications
service to schools
serviced.
March 2002................................ Bid 2002-030 was awarded.
Bid authorized the
acquisition of 3,362
Desktop Computers.
Computers were installed in
school libraries.
April 26, 2002............................ Second presentation to USAC/
FCC on efforts made by
PRDOE to meet E-Rate
program requirements.
September 27, 2002........................ Dr. Cesar Rey letter to USAC
formally requesting
immediate release of funds
for years 4 (2001) and 5
(2002).
October 1, 2002........................... Hand delivery to FCC General
Counsel of formal letter
requesting USAC the release
of years 4 and 5 funds.
October 1, 2002........................... Third presentation to USAC
on efforts made by PRDOE to
meet E-Rate program
requirements.
------------------------------------------------------------------------
2003
------------------------------------------------------------------------
January 23, 2003.......................... Fourth presentation from
PRDOE to USAC/FCC.
January 30, 2003.......................... PRDOE provides FCC with
information requested in
January 23rd meeting.
May 16, 2003.............................. FCC issues public notice
requesting any interested
party to submit comments on
PRDOE's petition. All
comments received supported
PRDOE's petition.
June 30, 2003............................. PRTC discontinues Internet
and telecommunications
service to schools serviced
June 30, 2003............................. PRTC files a civil suit
against the PRDOE before
the Superior Court of
Puerto Rico
August 21, 2003........................... Meeting with Energy and
Commerce Committee Staff to
describe PRDE efforts to
obtain approval and release
of funding.
September 19, 2003........................ Dr. Carmen Collazo Rivera
letter to Thomas Dilenge,
Energy and Commerce
Committee requesting
participation in the E-Rate
fund to provide Internet
access to public school
students.
November 2003............................. PRTC drops the civil suit
against the PRDOE.
November 25, 2003......................... FCC Order instructing USAC
to carry out two audits of
the E-Rate program: 1998-
2000 and 2001-2003.
February 2, 2004.......................... Commerce and Energy staff
members visit Puerto Rico
through February 5th to
perform fact finding
activities.
February 13, 2004......................... PRDOE meets with USAC
(McDonald and staff) to
inquire status of FCC
ordered E-Rate audit,
provide background
documents for audit and
request prompt start
April 30, 2004............................ Alternate Telecommunications
and Internet provider
ReEducATe Contract signed
using a satellite based
alternative.
May 24, 2004.............................. USAC E-Rate Audit by KPMG
begins.
------------------------------------------------------------------------

Mr. Greenwood. Thank you, Mr. Secretary. That was very well
done and very constructive. We appreciate it.
We will move to you next, Ms. Lambert.

TESTIMONY OF CRISTINA LAMBERT

Ms. Lambert. Good morning. Thank you for allowing me the
opportunity to be here with you this morning. I have submitted
my testimony in writing. What I would like to do is just take
this time to share with you the highlights of that testimony. I
have chosen not to read the testimony at this time. I also
promise not to make this a technology session but I have a
chart here that I will be referring to as I speak.
Let me give you a little background about me. I am Cristina
Lambert and I am currently the President and CEO of Puerto Rico
Telephone. I have been in the telecommunications industry for
30 years previously with Continental Telephone and then with
GTE. I went to Puerto Rico after the privatization in August
1999.
Let me begin by sharing that I am committed to supporting
education in Puerto Rico for the people of Puerto Rico, for the
children of Puerto Rico. My interest here today is to see that
we move forward with funding for Puerto Rico.
About Puerto Telephone Company, it has been around for 90
years and I have to say that Arnaldo Diaz, who is here with me
today, has been involved in the E-Rate project since it started
in 1998. Puerto Telephone is a very advanced telephone company.
100 percent digital network, fiber optic around the island,
fully redundant network. Most of all, to this panel, it is
committed to quality.
When I say it is committed to quality, I mean that we,
Puerto Rico Telephone, have made an investment of $1.2 billion
in infrastructure improvement over the last 5 years. That
improvement was made in the network to serve 1.6 million
wireline and wireless customers.
We understand that telecommunications is important not only
for education but for the economic well being of Puerto Rico.
For economic growth, quality of life, a job placement, a solid
telecommunications network is required. PRT contributes to the
local Universal Fund, the major contributor on the island to
that fund.
In addition to that contribution, we offer scholarships to
students of Puerto Rico annually, internships to the students
of Puerto Rico to work in the telephone company, and we have 30
digital centers around the island and the very poorest
neighborhoods in Puerto Rico because we understand that it is
important to cross the digital divide. Again, I state that we
fully support E-Rate and the vision that this body of
Government had when E-Rate was established.
If you would allow me to move to the chart, I would like to
share with you what Puerto Rico Telephone's involvement has
been over the past 5 years in the E-Rate Program. For color
coordination, Puerto Rico Telephone is in orange and what
you'll see there is that we are responsible for providing
broadband access to the schools. When you see a piece of
equipment there it's a router. That router was to be housed in
the cabinet that you see in blue. Beyond the entrance of the
school building, Puerto Rico Telephone's responsibility was to
ensure that router was functional within the school.
Beyond that, PRT did not have responsibility inside of the
school for internal wiring, for placement of the cabinet, for
education, training, or any other of those functions that you
see listed on that chart. I won't bore you with the details of
all the color coordination, but as we refer and as we talk to
this process, you can see that what this demonstrates it was
not an end-to-end solution.
Each vendor had responsibility and what you have been
hearing today may have been a lack of coordination or
administration or project management of this process. It was by
far complicated and complex to deliver service. Again, we were
responsible for the installation, the configuration, and the
maintenance of that network.
In order for PRT to deliver telephone service to the
schools of Puerto Rico, and I need to back up to say that the
implementation of EDUNET in Puerto Rico was in phases. In Phase
I Puerto Rico Telephone had responsibility directly to the
Department of Education to provide service. The Department of
Education was our customer.
In Phase II we provided transport service as a vendor to
DRC. Again, in all the 1,500 schools we were responsible for
providing access. To do that, Puerto Rico Telephone in 1998
purchased an ATM network, an ATM frame relay network, to
deliver that service, purchased a significant amount of central
office equipment to deliver that service and, in some cases,
had to construct facilities to the schools because there were,
in fact, no facilities at those schools.
In all cases we paid our vendors to deliver those services
because many of the vendors in Puerto Rico that deliver
services are small companies and they would not be able to
extend credit for such a network for extended period of time.
I want to add much more to this discussion but, again, I
promise not to make it a technical solution or technical
discussion so I would only say that all of the audits that you
have heard talked about today, the FCC audit, the USAC audit,
the controller's audit, all point to a number of issues but the
focus has not necessarily been on the transport.
We can talk briefly about the project that was implemented
in 2002. To demonstrate, Puerto Rico Telephone worked with the
Department of Education to create model schools, 400 model
school. In those model schools we invested $1.3 million of
funds that we never intended to recuperate to demonstrate that
with an end-to-end provider we could, in fact, make this
project work. That was a very successful process.
Mr. Greenwood. Let me interrupt you for a second. What you
heard there is we are about to have some votes and what I would
like to try to do is have you wrap up very quickly. We will
have lots of questions for you.
Ms. Lambert. Okay.
Mr. Greenwood. We will try to get Mr. Diaz' testimony in
before we have to break.
Ms. Lambert. I'll do it in 2 seconds.
Mr. Greenwood. Excellent.
Ms. Lambert. I talked about the 400 school project. It was
very successful and we demonstrated there that this project
could work. Let me just end by saying that Puerto Rico
Telephone delivers telecommunication service to the Department
of Education and a number of other national and local
companies. We have 35,000 circuits in service every given day
and of those only 100 customers at most are out of service at
any given time. We know that we are very capable of delivering
high-bandwidth service to our customers. We want to support the
Department of Education and continue to do so on an everyday
basis by providing telecom service. Thank you very much.
Prepared Statement of Cristina Lambert, Puerto Rico Telephone Company
introduction
My name is Cristina Lambert and I am President and Chief Executive
Officer of Puerto Rico Telephone. I assumed my current position in
November 2003. I originally joined PRT in August of 1999. My
responsibilities at that time included managing the company's sales,
marketing and network operations functions. I have been in the
telecommunications industry for 30 years serving in various capacities
at Contel and GTE.
I want to thank you for inviting me to appear today at this hearing
regarding the E-Rate program. I am pleased to have the opportunity to
address these issues that are critically important to me, Puerto Ricans
and to this nation.
PRT is a diversified telecommunications company operating in the
Commonwealth of Puerto Rico. Puerto Rico Telephone has been committed
to providing modern, quality telecommunications services to as many
Puerto Ricans as possible. PRT is the most technologically advanced and
most reliable telecommunications company in Puerto Rico and the
Caribbean. PRT's network is 100 percent digital with over 75,000 miles
of fiber optic cable serving approximately 1.6 million wireline and
wireless customers and we continue to invest in our infrastructure.
Over the past five years we have invested over $1.2 billion in our
network.
PRT places tremendous emphasis on providing modern
telecommunications as a means of improving the economic welfare of
Puerto Ricans and the overall business environment in the Commonwealth.
In particular, PRT is committed to improving and enhancing educational
programs on the island. Beyond the company's direct contributions to
the universal service fund, PRT has earmarked millions of dollars to
scholarships, internships, work-study programs, research grants and
Internet community centers for the people of Puerto Rico.
From its inception, PRT has fully supported the E-rate program and
its objective of ensuring Internet access to public and private schools
in Puerto Rico. This project has been a focal point of the company's
mission of ``building the foundation of the new Puerto Rico.''
prt's participation in the doe's internet access projects
In 1998 the Puerto Rico Department of Education began an Internet
Access project for Puerto Rico's public school system, originally
called EDUNET but later named RE-EDUCATE. The plan originally called
for the provision of Internet access to approximately 750 public
schools in Puerto Rico (later denoted as the Phase I schools) and
ultimately for access to over 1500 schools (the new schools being
denoted as the Phase II schools). From 1998 to 2003 PRT was a vendor
for the DOE in what has been termed Years 1 through 5 of the E-rate
program. Our duties as a vendor were specified by the DOE in accordance
with the Department's procurement process and as approved by USAC's
Schools and Libraries Division. I have attached a chart, which sets
forth the responsibilities of PRT, another vendor, DRC, and DOE for
years 1 through 5.
During those years, under the terms of the contracts, PRT provided
broadband access (T-1, ATM), to connect each of the Phase I schools to
a central ATM node located at the DOE's premises. PRT also sold and
provided maintenance to communications premises equipment (CPEs)--
routers, not computers--for all Phase I schools. It is important for
this body to understand that PRT was not in charge of this project. It
was a vendor who was contractually obligated to provide services
pursuant to DOE or, in some years, to DRC as a subcontractor.
In each year, DOE was responsible for the overall project
management and for providing an adequate electrical infrastructure and
environmental conditions for the reliable operation of the
telecommunications equipment. Indeed, DOE had certified in each of the
470 forms it submitted to SLD during the life of the program that the
Department was able to provide such oversight and infrastructure. In
addition, DOE was responsible for training teachers, having computer
equipment available and installed, and for providing ``help desk''
assistance. Necessary telecommunications equipment storage and inside
wiring was the responsibility of other DOE vendors. Therefore, during
this five-year period of this E-Rate project PRT was contractually
responsible for:

1. A broadband connection to each of the Phase I schools to the central
ATM node located at DOE central offices providing the PRT-
installed routers access to the Internet.
2. Broadband connections to each of the Phase II schools (the other
half of the 1500 schools), as a subcontractor to DRC. In each
case, before billing could begin this vendor accepted the
connection.
3. The installation, configuration, and maintenance of routers in
approximately half of the over 1500 public schools in Puerto
Rico, the Phase I schools, and at the central site at the DOE
main office.
prt's performance in the re-educate project
In each year of the Program, PRT met and exceeded its obligations
as set out above. Underscoring PRT's continued dedication to the E-Rate
program and the ultimate successful operation of the RE-EDUCATE
network, PRT also performed a number of additional tasks beyond those
for which it was contractually obligated. For example, when equipment
was damaged due to problems attributable to the school's power
deficiencies and cabinet placement and design--even though PRT had
previously pointed out the placement and design problems--PRT routinely
replaced equipment that was outside of the scope of the maintenance
contract and did so free of charge. In all years, PRT routinely met
with DOE personnel to highlight areas of potential improvement and to
work towards solving problems with the network and specific schools.
During Year Four of the project a new administration took office in
Puerto Rico. PRT worked hand-in-hand with the current DOE
administration to demonstrate that, under the proper environmental
conditions, the RE-EDUCATE network could provide consistent high
bandwidth Internet service to the schools. To that end, PRT volunteered
to invest over $1.2 million of its own time and resources to ``Project
400.'' This project's objective was a top-to-bottom evaluation of end-
user Internet Access capabilities of 400 specific Phase I schools. In
each of these schools, PRT performed electrical and internal wiring
infrastructure recovery work, provided Uninterrupted Power Supplies
(UPS) to protect PRT's provided equipment and installed larger cabinets
in appropriate locations. In addition, during 2002, PRT loaned the DOE
approximately 300 personal computers to enhance the ability of the
Project 400 schools to make use of Internet access.
In Year 5, the DOE announced that PRT had been awarded a ``turn key
solution'' contract. Shortly thereafter, the DOE and PRT demonstrated
that: the whole Re-educate network could be stabilized. Specifically,
PRT installed a network operations center staffed with PRT personnel on
DOE's premises to monitor network performance and dispatch personnel to
remedy any problems. In addition, PRT trained over 30 newly hired DOE
technical support personnel to assist schools in internal
troubleshooting, greatly expanding available support services.
Thanks to the substantial effort put forth by PRT, by the end of
2002 PRT had firmly established that Phase I schools had reliable
Internet service. At the same time, the DOE asked PRT to determine if
Phase II schools could be cost-effectively integrated into the overall
RE-EDUCATE network. To that end, PRT established that integration was
feasible through the successful completion of a pilot program at three
schools in May 2002. We have a video, which we will be pleased to
provide you, exploring these efforts at one of the schools, the
University Gardens School, that highlights the accomplishments achieved
in meeting the DOE's challenge.
During Years 4 and 5 (2001-2003), the DOE awarded contracts to
continue its RE-EDUCATE network but the SLD did not fund the DOE. PRT,
as a contractually obligated service provider, could not unilaterally
terminate services to the DOE. Importantly, the DOE never requested
that we terminate the services. On the contrary, the DOE asked us to
continue to provide service even though we were not being paid. PRT
continued to provide service, in good faith, throughout the term of the
contract. But with no assurance of payment we were forced to terminate
services to the DOE on June 30, 2003 when the Year 5 contract expired.
concluding remarks
In conclusion, PRT has met and exceeded all of its contractual
obligations in providing equipment and services to the Puerto Rico
public schools and in many cases went well beyond those obligations,
demonstrating our clear commitment to the educational and social goals
of E-Rate. Admittedly this project was not an unqualified success; I
believe that Project 400 proved that the RE-EDUCATE network as
conceived by DOE and Congress and implemented by DOE selected vendors
could provide high speed Internet access to the schoolchildren of
Puerto Rico.
Indeed, PRT has seen first hand, as an E-Rate vendor in a
different, non-Reeducate, project at over 100 private schools in Puerto
Rico, that reliable Internet access can be successfully utilized by the
educational system--more than 60,000 students and over 4,000 teachers
at private schools have benefited from this program.
The facilities in place in Puerto Rico's public schools today are
key building blocks for providing the students in the Puerto Rico
public school system with reliable high speed Internet access in the
future. We are eager to assist the DOE in completing this project,
assuming we can agree on terms, which meet both parties' needs and
ensure timely payment of PRT's contractual charges.
I would be happy to answer any of your questions.

Mr. Greenwood. Thank you.
Mr. Santos Diaz, you are recognized for 5 minutes and then
we will break probably until about 12:30.

TESTIMONY OF SANTOS DIAZ

Mr. Santos Diaz. Good morning everybody. I am very happy to
be here. Is this okay?
Mr. Greenwood. Yes, it is. Good morning, sir.
Mr. Santos Diaz. Good morning to you. Good morning, Mr.
Chairman, Congressmen, ladies. My name is Santos Diaz. I am
very pleased to inform and testify today before the Oversight
and Investigations Subcommittee of the Committee on Energy and
Commerce of the U.S. House of Representatives as President of
DRC, regarding my knowledge of the advance Telecommunications
Services provided to the public schools in Puerto Rico by DRC
under the E-Rate program.
On April 8, 1998, DRC presented a proposal to the Puerto
Rico Department of Education to provide services covered under
the School and Libraries Division of Universal Service
Administrative Corporation E-Rate funding program. Our proposal
came in response to a request for proposal, USAC form 470,
posted by the PRDE on the USAC website as required by the E-
Rate program regulations. The request for proposal posted by
the PRDE required three categories of services:
(1) Internal Connections, (2) Internet Access, and (3)
Telecommunications Services for 760 public schools in PR.
The PRDE decided to implement the E-Rate program in two
phases consisting of two blocks of schools. In its first year,
1998-1999, PRDE's E-rate program covered and requested funding
and services for approximately half of all public schools in
PR.
DRC's proposal included the offering of services only for
the Internal Connections part of the RFP since DRC at that
moment was only a systems integration operation and not an
Internet Service Provider.
DRC was evaluated by the PRDE as the best alternative for
the Internal Connection services and was awarded the
installation of the communications infrastructure--wiring--for
the first block of 760 schools. Puerto Rico Telephone Company
was awarded the Telecommunications and Internet Access services
part of the RFP.
It is my understanding that the only company to present a
proposal that year for the Internet Access and
Telecommunications requested was PRTC. For the Internal
Connections services both PRTC and DRC presented offers. DRC,
which possessed ample previous experience and expertise in the
installation of cable infrastructures, was nevertheless the
lowest bidder and was thus accordingly selected. The contract
so awarded totaled some $13,107,332.
DRC's implementation of the project begun on January 1999,
when funds were officially approved by USAC, and ended around
September 1999. During that time period, DRC installed and
tested 91,000 drops of UTP Cat5 wiring at 745 schools,
invoicing 86,640 drops as contracted with PRDE and funded by E-
Rate.
During this implementation phase, some infrastructure
deficiencies issues such as lack of adequate electrical
facilities and vandalism were encountered. To that effect a
letter was sent to Mr. Kivio Peguero, Information Systems
Director for the PRDE, informing him of these complications and
presenting the PRDE with our recommendations.
An average of 12 classrooms per school were cabled with 8-
12 wiring drops per classroom. All wiring drops installed were
tested and accepted by PRDE. The external auditing company
contracted by the PRDE for such purposes, Software Designers,
performed the certification and acceptance processes at every
school.
Namely, Software Designers would issue a cabling
certification report to PRDE certifying the installation as
complete and functional. After receiving such completion
certification for any specific school, DRC would proceed to
invoice, as required, both USAC and the PRDE for their
respective share of the services rendered.
On March 8, 1999 DRC presented a proposal in response to a
USAC form 470 request for proposal published by the PRDE on the
USAC site requesting services and offers from eligible service
providers for year 2 of E-Rate, 1999-2000. The PRDE requested
new services for the second block of public schools, consisting
of some 780 schools, and the continuation of services for the
first block of schools performed in year 1 of E-Rate. This time
around DRC's proposal included the provision of all services
requested: Internal Connections, Internet Access and
Telecommunications.
DRC was evaluated as the best alternative for the new block
of schools, awarded the bid, and contracted to perform various
services. Other services were awarded to other eligible service
providers, including PRTC.
DRC's awarded contract, which totaled $51,478,221, provided
for the installation of wireless communications infrastructure
and the provision of the telecommunications and Internet access
at each of the 780 schools comprising PRDE's E-Rate
implementation phase 2.
The project was implemented between October 1999--when USAC
officially approved the funding commitment--and May 2000.
During that period DRC provided equipment, installed the
wireless communications infrastructure at 762 schools, and
initiated the installation of T1 telecommunication lines and
the Internet access services to the schools.
DRC subcontracted PRTC, the incumbent Local Exchange
Carrier, to install the T1 telecommunication lines. By the end
of the fiscal year, June 30, 2000, PRTC had installed 392 T1
lines and thus those 392 schools were connected with access to
the Internet. Accordingly, DRC invoiced both USAC and the PRDE.
The acceptance criteria----
Mr. Greenwood. Mr. Diaz, I hate to do this to you. You are
about halfway through your testimony and about 120 percent
through your time. That is okay but I do have to get down to
the floor and vote so I'll give you a choice. We can come back
at 12:30 and you can resume your testimony or, if you would
like, you can sort of get to the bottom line.
Mr. Santos Diaz. I would like to continue with my
testimony.
Mr. Greenwood. In that case, the committee will recess
until 12:30. I would note for the witnesses that on the B level
of this building there are two restaurants, so to speak, where
you can get something to eat. Thank you.
[Whereupon, at 11:53 a.m., the subcommittee recessed, to
reconvene at 12:34 p.m. the same day.]
Mr. Greenwood. The meeting will come to order. I would ask
the witnesses to return to the table, please.
Mr. Diaz, would you like to complete your testimony now,
please?
Mr. Santos Diaz. Yes. Thank you. I guess I was a little--
when I was told 5 minutes, I think everybody was saying I was
going a little too fast so I was just trying to cover all the
material in that time slot.
I think I am talking about year 2000 now and I'll just
continue reading what I was presenting. During that period DRC
provided equipment, installed the wireless communications
infrastructure at 762 schools, and initiated the installation
of T1 telecommunication lines and the Internet access services
to the schools.
DRC subcontracted PRTC, the incumbent Local Exchange
Carrier, to install the T1 telecommunication lines. By the end
of the fiscal year, June 30, 2000, PRTC had installed 392 T1
lines and thus those 392 schools were connected with access to
the Internet. By the way, the documentation that I have with
me, what it documents is the installation of all these schools
whereby between DRC, the Department of Education, in this case
the schools, and Puerto Rico Telephone Company.
The process that we followed was basically we had two forms
which we call the preinstallation form and a post-installation
form where we were getting the signatures of not only Puerto
Telephone Company, but also the representative of the schools
who would see the connectivity or the installation. In other
words, the access to the Internet. This evidence we brought
with us. This we did for each and every school.
Mr. Greenwood. We will enter that into the record.
Mr. Santos Diaz. We did submit copies of all this evidence.
Mr. Greenwood. Thank you.
Mr. Santos Diaz. Okay. Again, the acceptance process was as
follows: First, DRC would issue a pre-acceptance installation
document which included the school information, the date of the
T1 installation, and the service order number.
PRTC would then issue its own T1 installation certification
document signed both by the local carrier installer and the DRC
project manager, certifying that the T1 had been installed and
was functioning properly.
Following the issuance of these certifications, DRC would
proceed to invoice USAC and the PRDE. All other products and
services contracted and provided during year 2 of E-Rate were
similarly accepted by PRDE and documented accordingly before
DRC proceeded to invoice USAC and the PRDE.
The problems with vandalism and the inadequate school
electrical infrastructure persisted throughout the program's
second year. Yet, once the installation process was finished
and so certified at each school, it was the PRDE's
responsibility to maintain and safe keep the installed
equipment, to provide adequate electricity, to provide the
personal computers and software for the students and teachers--
end users--and to train the teachers on proper techniques and
ways of using the Internet as a teaching tool.
If any equipment was not function properly or not being
used at all after acceptance by the PRDE due to the above-
mentioned issues, that is a situation out of the control and
responsibility of DRC.
On January 5, 2000, DRC and PRTC partnered and presented a
joint proposal to the PRDE in response to the 470 request for
proposal published by the PRDE at the USAC site for the third
year of E-Rate funding. On January 18, the PRDE awarded DRC,
PRTC, and four other eligible service providers a series of
different services contracts. Another seven bidders were not
awarded any services. DRC was awarded the Internal Connections,
Internet Access, and Telecommunications services contracts,
totaling $45,570,800 dollars, and it was approved for funding
by USAC with an 87 percent discount.
During this third year of E-Rate, DRC continued with the
installation of T1 telecommunication lines to the schools not
yet connected, provided the Internet access to these schools,
and provided additional equipment such as servers, tape drives
and UPS protection for the equipment. By the end of the fiscal
year, June 30, 2001, PRTC had installed and connected 709 T1
telecommunication lines and DRC was providing Internet access
services to these schools.
Accordingly, DRC proceeded to invoice both USAC and the
PRDE after any service and/or equipment was accepted by the
PRDE. Sadly, the problems with vandalism and the inadequate
school electrical infrastructure similarly persisted throughout
the program's third year. PRDE's failure to avert and/or
correct the threat of vandalism, to provide adequate electrical
facilities, and to supply end users--students and teachers--
with computers and software failed.
This situation was and continues to be a detriment for the
most effective use of the installed equipment, communications
infrastructure and Internet access services by the end users.
School vandalism, lack of adequate facilities, and personal
computers, and absence of proper teacher training on using the
Internet as a teaching tool are definitely the biggest
liabilities the PRDE still faces today.
On December 26, 2000, DRC presented a proposal to the PRDE
in response to the 470 request for proposal published by the
PRDE at the USAC site, requesting services from eligible
providers for year 4 of E-Rate funding. On January 17, 2001 the
PRDE awarded DRC the Internal Connections services contract for
establishing the wiring backbone between the different
buildings in those schools having more than one structure as
well as the contract for the continuation of the Internet
Access and Telecommunications for the block of schools DRC was
servicing at that moment.
PRDE similarly awarded PRTC the contract for the
continuation of the Internet Access and Telecommunications to
the block of schools PRTC was servicing at that moment. Another
nine bidders were not awarded any services. DRC was awarded
Internal Connections, Internet Access and Telecommunications
services contracts totaling $22,841,714 dollars. Nevertheless,
the funding request was never officially approved for funding
by USAC for reasons unknown to us.
Notwithstanding, DRC and its subcontractor PRTC continued
installing T1 telecommunications lines to those schools not yet
connected based on the expectation of a later approval of the
funds as had happened on the previous E-Rate years.
On January 23, 2002 the PRDE unilaterally and without any
contractually valid or supportable reason canceled the existing
contract with DRC, simultaneously requesting it to formally
shut down the Internet Access and Telecommunications services
being provided. DRC requested the PRDE's reconsideration of its
decision, but the PRDE did not do so, forcing DRC to shut down
its service.
At present, this unilateral decision is being contested in
the U.S. Federal Court of Puerto Rico, where DRC has filed suit
against the PRDE, the Government of the Commonwealth of Puerto
Rico, and USAC. The service provided by DRC up to the point of
shutdown had been invoiced but no payment has been received
even though USAC apparently approved the requested funding in
2003. A total of 736 public schools were connected with T1
lines and Internet access service by the date that service was
reluctantly stopped.
On December 20, 2001, DRC presented a proposal to the PRDE
in response to the 470 RFP published at the USAC site,
requesting services from eligible providers for year 5 of E-
Rate funding. PRDE awarded the bid to PRTC even though DRC's
proposal was some $9,209,015 lower in cost than the PRTC offer.
DRC contested this decision to the PRDE's Bidding Committee,
but PRDE's appeals board decided to uphold the previous award
to PRTC.
As far as I know the funding for year 5 of E-Rate was never
approved by USAC and the Internet access and telecommunication
services for the first block of schools were also discontinued
by PRTC sometime during the fiscal year.
DRC was forced to close down operations and did not
participate in the bidding process in year 6 of E-Rate, July
2003 to June 2004. It is my understanding that the bid was
awarded to Centennial of Puerto Rico but that the money for
funding was not approved at all or in time for them to
implement a new infrastructure.
As far as I know and understand, the E-Rate program as a
whole, including the equipment and telecommunications
infrastructure created with E-Rate funds in the PRDE, is for
all practical purposes defunct and all the money and efforts
invested for nearly 4 years in building a solid and robust
communications infrastructure, both locally and in the wide
area network, has gone awry. One of the things I want to stress
is that if during the last 3\1/2\ years the----
[The prepared statement of Santos Diaz follows:]
Prepared Statement of Santos Diaz, President, Data Research Corporation
My name is Santos Diaz Diaz, President of Data Research Corporation
(DRC). I am very pleased to inform and testify today before the
Oversight and Investigations Subcommittee of the Committee on Energy
and Commerce of the U.S. House of Representatives, in my capacity as
President of DRC, regarding my knowledge of the advance
Telecommunications Services provided to the public schools in Puerto
Rico by DRC under the E-Rate program.
On April 8, 1998, DRC presented a proposal to the Puerto Rico
Department of Education (PRDE) to provide services covered under the
School and Libraries Division of Universal Service Administrative
Corporation (USAC) E-Rate funding program. Our proposal came in
response to a request for proposal (RFP), USAC form 470, posted by the
PRDE on the USAC website as required by the E-Rate program regulations.
The request for proposal posted by the PRDE required three (3)
categories of services:

(1) Internal Connections,
(2) Internet Access, and
(3) Telecommunications Services
for 760 public schools in PR.
The PRDE decided to implement the E-Rate program in two (2) phases
consisting of two blocks of schools. In its first year, 1998-1999,
PRDE's E-rate program covered and requested funding and services for
approximately half of all public schools in PR.
DRC's proposal included the offering of services only for the
Internal Connections part of the RFP since DRC at that moment was only
a systems integration operation and not an Internet Service Provider
(ISP).
DRC was evaluated by the PRDE as the best alternative for the
Internal Connection services and was awarded the installation of the
communications infrastructure (wiring) for the first block of 760
schools. Puerto Rico Telephone Company (PRTC) was awarded the
Telecommunications and Internet Access services part of the RFP.
It is my understanding that the only company to present a proposal
that year for the Internet Access and Telecommunications requested was
PRTC. For the Internal Connections services both PRTC and DRC presented
offers. DRC, which possessed ample previous experience and expertise in
the installation of cable infrastructures, was nevertheless the lowest
bidder and was thus accordingly selected. The contract so awarded
totaled some $ 13,107,332.
DRC's implementation of the project begun on January 1999, when
funds were officially approved by USAC, and ended around September of
1999. During that time period, DRC installed and tested 91,000 drops of
UTP Cat5 wiring at 745 schools, invoicing 86,640 drops as contracted
with PRDE and funded by E-Rate.
During this implementation phase, some infrastructure deficiencies
issues' such as lack of adequate electrical facilities and vandalism--
were encountered. To that effect a letter was sent to Mr. Kivio
Peguero, Information Systems Director for the PRDE, informing him of
these complications and presenting the PRDE with our recommendations.
An average of twelve (12) classrooms per school were cabled with 8-
12 wiring drops per classroom. All wiring drops installed were tested
and accepted by PRDE. The external auditing company contracted by the
PRDE for such purposes, Software Designers, performed the certification
and acceptance processes at every school. Namely, Software Designers
would issue a cabling certification report to PRDE certifying the
installation as complete and functional. After receiving such
completeion certification for any specific school, DRC would proceed to
invoice, as required, both USAC and the PRDE for their respective share
of the services rendered.
On March 8, 1999 DRC presented a proposal in response to a USAC
form 470 request for proposal published by the PRDE on the USAC site
requesting services and offers from eligible service providers for year
2 of E-Rate, 1999-2000. The PRDE requested new services for the second
block of public schools, consisting of some 780 schools, and the
continuation of services for the first block of schools performed in
year 1 of E-Rate. This time around DRC's proposal included the
provision of all services requested: Internal Connections, Internet
Access and Telecommunications.
DRC was evaluated as the best alternative for the new block of
schools, awarded the bid, and contracted to perform various services.
Other services were awarded to other eligible service providers,
including PRTC.
DRC's awarded contract, which totaled $ 51,478,221, provided for
the installation of wireless communications infrastructure and the
provision of the telecommunications and Internet access at each of the
780 schools comprising PRDE's E-Rate implantation phase 2.
The project was implemented between October 1999--when USAC
officially approved the funding commitment--and May 2000. During that
period DRC provided equipment, installed the wireless communications
infrastructure at 762 schools, and initiated the installation of T1
telecommunication lines and the Internet access services to the
schools.
DRC subcontracted PRTC, the incumbent Local Exchange Carrier, to
install the T1 telecommunication lines. By the end of the fiscal year,
June 30, 2000, PRTC had installed 392 T1 lines and thus those 392
schools were connected with access to the Internet. Accordingly, DRC
invoiced both USAC and the PRDE.
The acceptance criteria and process for the T1 installation at the
schools was defined based on telecommunication industry standards. Such
was undertaken as follows. First, DRC would issue a pre-acceptance
installation document which included the school information, the date
of the T1 installation, and the service order number.
PRTC would then issue its own T1 installation certification
document signed both by the local carrier installer and the DRC project
manager, certifying that the T1 had been installed and was functioning
properly.
Following the issuance of these certifications, DRC would proceed
to invoice USAC and the PRDE.
All other products and services contracted and provided during year
2 of E-Rate were similarly accepted by PRDE and documented accordingly
before DRC proceeded to invoice USAC and the PRDE.
The problems with vandalism and the inadequate school electrical
infrastructure persisted throughout the program's second year. Yet,
once the installation process was finished and so certified at each
school, it was the PRDE's responsibility to maintain and safe keep the
installed equipment, to provide adequate electricity, to provide the
personal computers and software for the students and teachers (end
users), and to train the teachers on proper techniques and ways of
using the Internet as a teaching tool. After acceptance by the PRDE,
any equipment malfunction as well as PRDE's consequent inability to
utilize the services and equipment provided by DRC due to the
abovementioned vandalism is a circumstance beyond DRC's control and
contractual responsibility.
The PRDE was not effective in preventing vandalism, educating its
students about the importance of safekeeping and protecting the new
equipment and infrastructure, and in updating and improving its
utilities infrastructure.
On January 5, 2000, DRC and PRTC partnered and presented a joint
proposal to the PRDE in response to the 470 request for proposal
published by the PRDE at the USAC site for the 3rd year of E-Rate
funding.
On the 18th of January, the PRDE awarded DRC, PRTC, and four other
eligible service providers a series of different services contracts.
Another seven (7) bidders were not awarded any services.
DRC was awarded the Internal Connections, Internet Access, and
Telecommunications services contracts, totaling $ 45,570,800 dollars,
and it was approved for funding by USAC with an 87% discount.
During this third year of E-Rate, DRC continued with the
installation of T1 telecommunication lines to the schools not yet
connected, provided the Internet access to these schools, and provided
additional equipment such as servers, tape drives and UPS protection
for the equipment. By the end of the fiscal year, June 30, 2001, PRTC
had installed and connected 709 T1 telecommunication lines and DRC was
providing Internet access services to these schools. Accordingly, DRC
proceeded to invoice both USAC and the PRDE after any service and/or
equipment was accepted by the PRDE.
Sadly, the problems with vandalism and the inadequate school
electrical infrastructure similarly persisted throughout the program's
third year. PRDE's failure to avert and/or correct the threat of
vandalism, to provide adequate electrical facilities, and to supply end
users (students and teachers) with computers and software failed. This
situation was and continues to be a detriment for the most effective
use of the installed equipment, communications infrastructure and
Internet access services by the end users. School vandalism, lack of
adequate facilities, and personal computers, and absence of proper
teacher training on using the Internet as a teaching tool are
definitely the biggest liabilities the PRDE still faces today.
On December 26, 2000, DRC presented a proposal to the PRDE in
response to the 470 request for proposal published by the PRDE at the
USAC site, requesting services from eligible providers for year 4 of E-
Rate funding. On the 17th of January, 2001 the PRDE awarded DRC the
Internal Connections services contract for establishing the wiring
backbone between the different buildings in those schools having more
than one structure as well as the contract for the continuation of the
Internet Access and Telecommunications for the block of schools DRC was
servicing at that moment. PRDE similarly awarded PRTC the contract for
the continuation of the Internet Access and Telecommunications to the
block of schools PRTC was servicing at that moment. Another nine (9)
bidders were not awarded any services. DRC was awarded Internal
Connections, Internet Access and Telecommunications services contracts
totaling $ 22,841,714 dollars. Nevertheless, the funding request was
never officially approved for funding by USAC for reasons unknown to
us.
Notwithstanding, DRC and its subcontractor PRTC continued
installing T1 telecommunications lines to those schools not yet
connected based on the expectation of a later approval of the funds as
had happened on the previous E-rate years.
On January 23, 2002 the PRDE unilaterally and without any
contractually valid or supportable reason cancelled the existing
contract with DRC, simultaneously requesting it to formally shut down
the Internet Access and Telecommunications services being provided. DRC
requested the PRDE's reconsideration of its decision, but the PRDE did
not do so, forcing DRC to shut down its service.
At present, this unilateral decision is being contested in the U.S.
Federal Court of Puerto Rico, where DRC has filed suit against the
PRDE, the Government of the Commonwealth of Puerto Rico, and USAC. The
service provided by DRC up to the point of shutdown had been invoiced
but no payment has been received even though USAC apparently approved
the requested funding in 2003. A total of 736 public schools were
connected with T1 lines and Internet access service by the date that
service was reluctantly stopped.
On December 20, 2001, DRC presented a proposal to the PRDE in
response to the 470 RFP published at the USAC site, requesting services
from eligible providers for year 5 of E-Rate funding. PRDE awarded the
bid to PRTC even though DRC's proposal was some $ 9,209,015 lower in
cost than the PRTC offer. DRC contested this decision to the PRDE's
Bidding Committee, but PRDE's appeals board decided to uphold the
previous award to PRTC.
As far as I know the funding for year 5 of E-Rate was never
approved by USAC and the Internet access and telecommunication services
for the first block of schools were also discontinued by PRTC sometime
during the fiscal year.
DRC was forced to close down operations and did not participate in
the bidding process in year 6 of E-Rate, July 2003-June 2004. It is my
understanding that the bid was awarded to Centennial of Puerto Rico but
that the money for funding was not approved at all or in time for them
to implement a new infrastructure.
As far as I know and understand, the E-Rate program as a whole,
including the equipment and telecommunications infrastructure created
with E-Rate funds in the PRDE, is for all practical purposes defunct
and all the money and efforts invested for nearly four years in
building a solid and robust communications infrastructure, both locally
and in the wide area network, has gone awry.

Mr. Greenwood. Tell you what, Mr. Diaz. You've taken 15
minutes of a 5-minute allotment so we will get to the other
things you would like to stress hopefully in the questions.
The Chair recognizes himself for 10 minutes for the purpose
of inquiry.
Dr. Rey, you state in your testimony that your initial
evaluation found only nine schools out of 1,540 were
effectively connected to the Internet. Given this and the
related facts you report such as the limited computer literacy
of the teachers, how much of the $100 million dispersed in E-
Rate funds has been wasted?
Mr. Rey. That will be very difficult to calculate but, to
my understanding, most of that money was a waste as the letter
from the FCC that I received on November 27 stated. It will be
very difficult to calculate that to be precise.
Mr. Greenwood. And how much of that do you think is going
to be able to be recovered? Is it all down the drain? Is the
equipment that is in the warehouses, the $23 million worth of
equipment?
Mr. Rey. The warehouse that you saw is not functional at
this point because it is outdating. We are investing in new
equipment that brings the wireless so we are investing more
than $90 million and we are bidding for $90 million that we
might get liberated from the R-Rate fund for the last 3 years,
4, 5, and 6 year.
Mr. Greenwood. What is going to happen to the $23 million
of equipment in the warehouses? Is it going to be thrown away?
Mr. Rey. I would like Mr. Vidal to answer that, please.
Mr. Greenwood. Well, Mr. Vidal, did I swear you in?
Mr. Vidal. Yes.
Mr. Greenwood. Okay. In that case, you can respond.
Mr. Vidal. The equipment that is in the warehouse is
equipment that through time has become obsolete. You can go
into a computer store now and buy equipment with four times
that capacity for probably a third of the cost of what that
cost. The question we would ask ourselves is if we are going to
invest in installing equipment and we were to use similar type
of equipment, would we invest in putting in equipment that has
a future life of 3 years or would we invest in installing
equipment that has become obsolete over the past 3 years?
Mr. Greenwood. Dr. Rey, your administration found what
appears to be wholly inadequate infrastructure in planning for
the E-Rate network. What responsibility does the Puerto Rico
Department of Education have as an institution for the waste of
these funds? I was surprised to hear you say that you never
found any documentation that there was even a plan.
Mr. Rey. That is true.
Mr. Greenwood. That is incredible to me.
Mr. Rey. That is true. I guess the Department by that time
had the obligation to coordinate and establish a plan. They
didn't. And to claim that plan for the vendors also. We don't
have any evidence to date to show that they did that. It was
misplanning and misleading funds.
Mr. Greenwood. And has there been any effort to interview
those who should have been responsible?
Mr. Rey. Of course, and we have a case in court now that is
taking care of that.
Mr. Greenwood. This is a case where through greed,
incompetence, and maybe criminal activity not only was $100
million of rate payer's money squandered, but worse than that
the educational opportunity of hundreds of thousands of
children was squandered. When are we going to find out who is
responsible?
Mr. Rey. That is in the Justice Department of Puerto Rico
at this point We have been collaborating since day 1 with the
U.S. Department of Education, with the FBI, and with the
Justice Department in Puerto Rico. We made an audit in our
first 3 months of incumbency. As the Secretary for Education we
made an audit of all the things that were misplaced and we
established an ongoing process that is still going on regarding
auditing process in the Department. Not only the technology but
the rest of the administration.
Mr. Greenwood. Do you expect that there will be criminal
charges filed in this case?
Mr. Rey. I hope so.
Mr. Greenwood. And do you have any evidence that would
suggest criminal behavior at this point?
Mr. Rey. I think I am not allowed to say that publicly at
this point but the Department Secretary of Education is in jail
as we speak.
Mr. Greenwood. What responsibility do you think the vendors
have for all of this waste?
Mr. Rey. I guess they have a responsibility to educate and
coordinate and to establish a process of coordination of that
investment that USAC and FCC is doing. As a matter of fact, we
don't manage the money. The money goes directly through USAC to
the vendors so they have the obligation to establish an order
and a educational process of that investment.
Mr. Greenwood. Does it seem to you that since there is no
documentation of a plan here, does it look to you like the
vendors created a gold-plated system that was far more than the
capacity of the school district to absorb just so they could
sell the maximum amount of equipment and make the most money?
Mr. Rey. Probably they did.
Mr. Greenwood. Mr. Vidal, you are nodding your head. Take a
microphone and tell us what you think.
Mr. Vidal. Our evaluation of this is that the system design
was over-engineered.
Mr. Greenwood. By whom? Who is responsible for that over-
engineering?
Mr. Vidal. When the Secretary and his team came into office
and they found what was already installed there, they found
that there were multiple pieces of equipment, each of them
consuming electricity, of course, and demanding of the
electrical infrastructure of the school. On top of that, there
were two servers. There was a----
Mr. Greenwood. You say two servers. You mean in each
school?
Mr. Vidal. Yes. Four servers in each school. I am being
corrected. And there was also----
Mr. Greenwood. Where one would have sufficed?
Mr. Vidal. Yes. Yes. Two additional----
Mr. Greenwood. That wasn't an accident, was it?
Mr. Vidal. I think that----
Mr. Greenwood. You think that was stupidity or do you think
that was somebody figuring I would rather sell you four servers
per school than one?
Mr. Vidal. I cannot speak to the motives but one would say
that you tend to start small and grow from there as you see
results. Here this was sort of a grandiose solution to what----
Mr. Greenwood. I am still not getting who did the over-
engineering. Was it school district officials? Was it somebody
who was selling the equipment driving this process and telling
the school officials that, ``This is what you need. You need
four servers in every school.''
Mr. Vidal. I think that may point to the fact of some of
the limitations we are finding with the E-Rate Program earlier.
Mr. Greenwood. Say that again, please?
Mr. Vidal. That point perhaps to one of the limitations you
were pointing earlier in which the doctor also mentioned when
he said vendor driven. On one side the technical depth that a
vendor has and all the possibilities they can sell and jiggle
in front of people's eyes, plus perhaps the lower literacy that
some of the districts may have may create the right conditions
for this to happen.
Mr. Greenwood. Are you aware of any evidence that the
vendors were wining and dining school officials in order to
carry their favor?
Mr. Rey. I don't have any evidence of that. However, what
is evident is that they didn't have control and USAC was not
executing any controls over the process that was going on. I
mean, we're talking about more than $100 million without any
controlled supervision or auditing. That is risky to say the
least.
Mr. Greenwood. It is grotesque is what it is. Why did you
terminate the contract with DRC?
Mr. Rey. Because we weren't satisfied with the performance.
Of course, that was not a good investment as we saw it at that
time.
Mr. Greenwood. Do you differ with Mr. Diaz' testimony?
Mr. Rey. Of course.
Mr. Greenwood. Tell us how. In what way?
Mr. Rey. Because they have a different problem. They see
this in a different manner. We audit our processes. We know the
investment that USAC and FCC made. We calculate the investment
that they made and the performance was extremely low, extremely
poor. Nine schools connected to the Internet after $100 million
of investment paying $36 million per year. That is quite
eloquent, I guess.
Mr. Greenwood. What is your understanding for why funding
was withheld in 2001 and 2002?
Mr. Rey. Because of the chaos that the former secretary had
in place.
Mr. Greenwood. Do you think that USAC is responding
appropriately to your new plans now or do you think they are
dragging their feet?
Mr. Rey. Dragging their feet, I guess, because after 3\1/2\
years now is when we get a letter to continue our process and
there will be auditing now but it took them too long to answer
that letter and to answer that petition. As a matter of fact,
we invested more than $300 million in the whole process in
order to keep on track the process of E-Rate and connect to the
Internet.
Mr. Greenwood. The gentlelady from Colorado is recognized
for 10 minutes.
Ms. DeGette. Thank you, Mr. Chairman. Mr. Diaz, how much
money did your company receive as a result of these contracts
with the PRDOE?
Mr. Santos Diaz. Around $90 million, I believe.
Ms. DeGette. $90 million.
Mr. Santos Diaz. In 4 years.
Ms. DeGette. And, Ms. Lambert, how much did your company
receive as a result of these contracts?
Ms. Lambert. If you will give me just a second, I'll put my
glasses on.
Ms. DeGette. I would be happy to.
Ms. Lambert. Okay. If I am reading this correctly, in year
one the company was awarded $10 million and billed $9.9
million. In year two the amount invoiced was $8 million. In
year three the amount invoiced was $13 million. Those are the
three.
Ms. DeGette. That adds up to about $31 million.
Ms. Lambert. For the 3 years, yes.
Ms. DeGette. Right, $31 million over 3 years. Now, you
testified, I believe, Ms. Lambert, that the job of PRT was to
take the wires up to the school buildings. Correct?
Ms. Lambert. Yes.
Ms. DeGette. Into the router?
Ms. Lambert. Into the router.
Ms. DeGette. And then you testified, Mr. Diaz, that your
company's job was the internal connections.
Mr. Santos Diaz. That is correct.
Ms. DeGette. Now, listening to the two of you testify
today, I don't hear either one of you saying that your
companies had any responsibility to work with the Department of
Education to see that these systems actually went into place
and worked. Do you think you had any responsibility to do that?
Mr. Santos Diaz. Ms. Congressman, we did have meetings. As
a matter of fact, we had weekly meetings and there are minutes
of meetings where we would bring in our issues. When I say we,
Puerto Telephone Company and DRC where we stressed what were
our concerns. We address them the way we needed to up to the
point of our responsibility which was very well dictated by E-
Rate.
Ms. DeGette. So your answer, sir, is yes, you do think you
had some responsibility rather than just collecting $90 million
to see that students actually had this available.
Mr. Santos Diaz. That is correct.
Ms. DeGette. What about you, Ms. Lambert?
Ms. Lambert. Okay. Well, what you see depicted there is the
contractual responsibility.
Ms. DeGette. You know what? I used to be a lawyer. I
understand reading contracts.
Ms. Lambert. Sure.
Ms. DeGette. But your company collected $31 million over a
3-year period. Do you think you had a responsibility to work
with the other vendor and the Department of Education?
Ms. Lambert. Yes, we did.
Ms. DeGette. And what did you do to try to achieve that
end?
Ms. Lambert. Well, in the case of the 400 schools we used
rate-payer's money to----
Ms. DeGette. I am sorry?
Ms. Lambert. We used rate-payer's money to conduct internal
wiring where it was needed.
Ms. DeGette. And when was that, Ms. Lambert?
Ms. Lambert. In 2002.
Ms. DeGette. That was well after----
Ms. Lambert. Yes.
Ms. DeGette. [continuing] all the events we are talking to.
Right?
Ms. Lambert. We began to raise the issues and we have
records that we have submitted to this body indicating that we
were raising the issues since 1999 and working with the
Department of Education to correct those issues. I share your
concern and would state for the record that this administration
has provided the resources to coordinate this process much more
effectively than the previous administration did. What I
believe is lacking was an implementation team, someone who
coordinated this effort effectively and understood the
technology enough to coordinate it.
Ms. DeGette. But with all due respect, you folks are the
ones with the technical expertise to do that.
Ms. Lambert. Yes.
Ms. DeGette. And in experiences that I have had with other
providers who deal with customers. If the customers don't
have--I am not saying they are not to blame because there is
plenty of blame to go around here, but what people do
especially when they are collecting fees of this staggering
size is they hire people to come in and help execute that. Did
you do any of that?
Mr. Santos Diaz. Yes, we----
Ms. DeGette. Okay. Mr. Diaz.
Mr. Santos Diaz. Yes, we went beyond our responsibility.
Ms. DeGette. What did you do?
Mr. Santos Diaz. As a matter of fact, we even established a
monitoring system which we have in our own facilities where we
had people assigned looking at screens all day just to make
sure that the lines were up and running.
Ms. DeGette. But they weren't, were they?
Mr. Santos Diaz. Yes, they were. We had 740 lines up and
running.
Ms. DeGette. But how many schools were up and running?
Mr. Santos Diaz. That is 740 schools.
Ms. DeGette. 740 schools. Is that true, Dr. Rey? Could you
please give me your side of the story?
Mr. Rey. Yes, indeed. We made an audit as soon as we got to
the office and we established day-to-day basis checking on
schools, evening sending people to check on the connection and
the finding was the one that I told you. That is why we have a
difference, a radical difference.
Ms. DeGette. You told us nine schools.
Mr. Rey. Nine schools.
Ms. DeGette. Out of how many schools?
Mr. Rey. 1,500.
Ms. DeGette. 1,500.
Mr. Santos Diaz. May I add?
Ms. DeGette. Go ahead.
Mr. Santos Diaz. When we came in the rule of the games were
totally changed. Let me just stress on this. The
telecommunications standards for connectivity, this is the
evidence that we bring in. Basically our responsibility through
the E-Rate program is to make sure that all the way up to the
wall drop there was communications.
In other words, E-Rate specifically says that you cannot on
eligible items such as providing computers, such as training
teachers, such as providing additional software was construed
as eligible and, if provided by the service provider, it would
be understood as a kickback. The Department of Education wanted
us to do that. In many instances we have minutes of meetings
whereby they would say, ``If you do not provide these
computers, if you do not do these other things, you will not
get paid.'' We have evidence of all this.
Ms. DeGette. Your view is that E-Rate--let me just get
clear on this. Your view is the E-Rate specifically prohibits
you from going in for no cost----
Mr. Santos Diaz. That is correct.
Ms. DeGette. [continuing] and identifying problems and
working with them to----
Mr. Santos Diaz. No. Identify problems we did.
Ms. DeGette. I mean, I am not----
Mr. Santos Diaz. We had meetings every week and----
Ms. DeGette. Sir, I understand you had meetings. Are you
saying, though--what you're saying is you could not be
reimbursed for training teachers and I understand that the law
prohibits you from paying for electricity, for example. But,
aside from the meetings, what did you do to try to make this
system work together? Did you work, for example, with PRT to
make sure the connections worked?
Mr. Santos Diaz. Yes. As a matter of fact, we had people
from PRTC in our offices weekly. We hired also a third party
consultant just to make sure that the communications were
established between the schools through DRC and, again, through
the Department of Education. We did go beyond and we tried. I
am the product of a public school. I studied all my life in
public schools and I really wanted to see this work also. We
did everything within out responsibilities to make this work.
However, there was another agenda that didn't make it. If they
would have acquired----
Ms. DeGette. Let us do this.
Mr. Santos Diaz. Can I just add this? If they would have
acquired in the last 3\1/2\ years 100,000 computers, this would
have been working. They don't have any computers. They expect
the service provider to give them out for free. That is totally
illegal.
Ms. DeGette. Here is the problem. They don't have computers
because there has just been all this money spent and for no
result and now they can't get any money from anybody. I would
say that is probably pretty accurate. Wouldn't it be?
Mr. Santos Diaz. That is true.
Ms. DeGette. Mr. Vidal.
Mr. Vidal. I would like to just make a comment and also
give the opportunity to Professor Ramirez who was the project
manager for that project. I will translate for him when he
speaks.
Mr. Ramirez. I just want to comment that during the summer
of 2001 a special project was conducted with the vendors to
provide access to 100 schools from Phases I and II meaning
those that were wired and also used the wireless connections
internally.
After 3 months of efforts, only 63 of those 100 were
finally connected. Based on these results, we requested from
the vendors a plan to recover the schools under their
responsibility. As a result, one vendor presented what we have
called Proyecto 400.
The other vendor also presented a recovery plan and the
sole fact that they agreed on the recovery plan without any
complaint is an acknowledgement of the critical status of the
project.
Ms. DeGette. I think Mr. Ramirez wanted to speak.
Mr. Vidal. When he came in as a project manager for the
network project in July 2001, because he didn't have any
documentation which to go on and get started, he called the
suppliers to come in for a meeting to then set the stage. He
said everything that is passed is behind us. Let's get going.
Let's get started. Let's have a fresh start. Let's concentrate
on getting 100 schools up. Demonstrate that you can get 100
schools up and running.
They put a modest goal in front of them. Let's get at least
one computer to be able to reach the Internet at each one of
those 100 schools and let's get it done by the end of July. So
3 months afterwards they had 63. They were not able to achieve
the full 100 in 1 month or in 3 months.
Ms. DeGette. Gracias. Mr. Diaz, I just have one more
question. You testified that you were concerned and brought
this up during regular meetings. I wanted to ask you during
what period of time was the equipment that we saw in the
photographs and videotape sold to the Department of Education?
Mr. Santos Diaz. I believe it was 1999/2000.
Ms. DeGette. And during that same period did anyone at your
company have concerns that the program was not going well, that
the third category on that chart was not happening?
Mr. Santos Diaz. We have plenty of documentation sent to
the Department of Education where we were setting up the
awareness of the things that were going on. The same problems.
Ms. DeGette. I understand. You know, I don't mean to be
short with you. I have a limited amount of time as does every
other member. My question is this $23 million of equipment that
was sold through the E-Rate and is now sitting in a warehouse,
did you ever say or did anybody at your company ever say,
``Let's stop doing this. Let's stop getting this money in and
putting this equipment in the warehouse until we start wiring
up some schools.''
Mr. Santos Diaz. Specifically, the wiring was done. The
infrastructure was in place and those cards were for a bid of
100,000 computers which was out, was awarded, and then
contested as----
Ms. DeGette. But you never said, ``This isn't going to
happen. I think we had better put a halt to this until it
starts getting----
Mr. Santos Diaz. How are we going to know that the bid was
going to be contested to this vendor and the 100,000 computers
were not going to be in?
Ms. DeGette. Let me ask you this. You heard Mr. Vidal
testify that now because of technological changes this
equipment is three, 4 years out of date at a minimum. Are you
willing to do anything to work with them to try to----
Mr. Santos Diaz. We have always been willing and I do not
agree in terms that this equipment cannot be used. We all know
here in this room----
Ms. DeGette. He never said it can't be used. He said----
Mr. Santos Diaz. It was obsolete.
Ms. DeGette. Do you agree with that or not?
Mr. Santos Diaz. Sure, I agree. I mean, technology changes
every 6 months and we know that. There are faster computers,
faster equipment, and so on, but that doesn't mean that you
can't use what you have. If that's what you have and that's
what you paid for, why not use it? That I do not agree with.
Ms. DeGette. That is a great attitude toward the school
children of Puerto Rico.
Mr. Greenwood. The Chair recognizes himself for 10 minutes.
Did you want to say something, Ms. Lambert?
Ms. Lambert. Yes. I just have a comment in regard to
Project 400. PRT participated with the vendor on the project--I
am sorry, with the Department of Education on the Project 400
because we believed that an end-to-end provider such as us
would enable this project to work.
When the comment was made that it was in acknowledgement of
an error, it was more in acknowledgement to demonstrate that
the equipment that was purchased is usable and that we could
provide Internet access to the schools and working together as
a team we would be successful in that effort.
We even did so on some of the Phase II schools to
demonstrate that, in fact, the Phase II school's technology
could also be integrated. When we came up to see Jane Mago we,
in fact, showed her a video of one of the Phase II schools in
which the technology was integrated to be functional. I just
wanted to share that with you.
Mr. Greenwood. Let me ask this question and then we will
get back to you, Mr. Diaz. My understanding of the way this
program works is that the E-Rate funds cannot be used to
actually buy the computers. It can't buy PCs and it can't buy
lap tops so the school district is required to certify before
it is eligible for these funds that, in fact, it has the
computers and it has the software. It has that stuff to justify
all of the infrastructure to hook it up to the Internet. Is
that right?
Mr. Santos Diaz. That is correct.
Mr. Greenwood. Okay. Now, you just mentioned the fact that
they had put out an RFP and a bid to buy 100,000 computers.
Were you clear and are you clear today on whether, in fact,
that met the letter of the law? In other words, they weren't
able to certify that they had those computers. They may have
been able to certify that they were in the process of trying to
acquire them but what is your understanding of what the law
requires or the rules require in terms of actually having them
in their custody in place in their schools out to bid?
Mr. Santos Diaz. My understand is that every year the
Department of Education had to present a plan whereby they
would justify the acquisition of the equipment. That was the
first thing that had to happen. I never saw the plan but they
had mentioned to us that they were in the process of acquiring
100,000 computers.
Mr. Greenwood. I understand that but I am asking you this.
Is that sufficient? We can ask the USAC people when they get up
next but is it your understanding that having put out a bid is
sufficient to meet the requirement that they had the computers
available to them to justify the connection?
Mr. Santos Diaz. I don't have any knowledge of that.
Mr. Greenwood. You don't know one way or the other whether
it is or not?
Mr. Santos Diaz. No.
Mr. Greenwood. Now, you ordered 73,000 wireless cards for
Puerto Rico's schools. Is that right?
Mr. Santos Diaz. Based on what they requested from us.
Mr. Greenwood. The Department lacked the computers to
install them, as we just said. You unsuccessfully attempted to
return 20,000 of those to Lucent. Is that correct?
Mr. Santos Diaz. That is correct.
Mr. Greenwood. Nonetheless, DRC submitted invoices for
payment by E-Rate for the purchase and the installation while
they sat, and while they continue to sit, wrapped and
uninstalled. Why did DRC violate program rules and improperly
seek payment for this equipment?
Mr. Santos Diaz. As a matter of fact, that issue was
addressed by the vice president, the lady who was in charge,
where she called E-Rate Public Schools and Library Division
stating that in our proposal we had included these cards and it
was all bundled as a price the configuration of the card. What
was the procedure?
He said, ``Well, if you have to install them and configure
them and the computers will be acquired later on, sure, you
don't have to unbundle the configuration side of it. You can
bill for it and then subsequently configure these cards when
installed.'' Those were the procedures that we followed.
Mr. Greenwood. Did you retain all the payment for the
installation?
Mr. Santos Diaz. Did I retain?
Mr. Greenwood. I mean, you got paid for that?
Mr. Santos Diaz. I got paid for part of it, not all of it.
Again, we still have pending payments from E-Rate.
Mr. Greenwood. But would you want to be paid for installing
something that you didn't install?
Mr. Santos Diaz. No, no, if it is not going to happen.
Mr. Greenwood. It sounds like it is not going to happen.
Mr. Santos Diaz. It looks like it is not going to happen
because they haven't acquired the 100,000 computers which that
would be the solution for all this. If they would have acquired
100,000 computers, this would have been up and running as it
should Mr. Greenwood. And whose idea was it to try to take the
leap all the way to a wireless system? In other words, not
being----
Mr. Santos Diaz. The Department of Education. When the RPF,
what is says is the infrastructure using the latest technology.
That is what it specifically said.
Mr. Greenwood. Using the latest technology. And so who
interpreted that phrase to mean wireless?
Mr. Santos Diaz. Well, about three companies that went
through the bidding process offered wireless alternatives.
Mr. Greenwood. Including yours?
Mr. Santos Diaz. Including ours.
Mr. Greenwood. How did DRC first learn about the E-Rate
program?
Mr. Santos Diaz. As we specifically state, it was through
the USAC publication of the 470 where they request bidding for
Puerto Rico and other States.
Mr. Greenwood. What happened to DRC when the current
administration was elected?
Mr. Santos Diaz. First thing is we went through all this
political persecution. Not only myself but all entrepreneurs
with the previous administration.
Mr. Greenwood. What does that mean?
Mr. Santos Diaz. That means that we are prostatehooders and
anything that smells prostatehood. All the entrepreneurs
canceled their contracts and we were just part of them. I was
very attached to a previous Governor and previous commissioner
in resident. It is very well known that I am a prostatehooder.
Mr. Greenwood. Let me be clear. Do you believe the
Department of Education canceled the contract with DRC because
of your politics and not because of the services of your
company?
Mr. Santos Diaz. That is correct.
Mr. Greenwood. What do you have to say to that, Mr.
Secretary?
Mr. Rey. Mr. Chairman----
Mr. Santos Diaz. Honestly. We evaluated all the companies
that were working for us and after a year we canceled the
contract because of the lack of performance. That is the type
of thing that we have to avoid.
Mr. Greenwood. How many contracts like Mr. Diaz', like
DRC's, were canceled by the Puerto Rican Department of
Education?
Mr. Santos Diaz. I don't recall the number exactly.
Mr. Greenwood. Give me an order of magnitude.
Mr. Santos Diaz. All the vendors or all the outsourcing
that was justified within the budget of the Department was
canceled.
Mr. Greenwood. Would you say this is in the order of
magnitude of 10 or 100 or 1,000?
Mr. Santos Diaz. We kept some of them. I don't know. Maybe
10. I am not sure.
Mr. Greenwood. You think maybe the entire Department of
Education canceled 10 contracts?
Mr. Santos Diaz. We are talking about $3 billion. I don't
recall honestly. It probably could be 10 of different types of
contracts.
Mr. Greenwood. So it wasn't just contracts that had to do
with the E-Rate Program?
Mr. Santos Diaz. Of course no. Lawyers and public relations
agencies.
Mr. Greenwood. And over what period of time from the time
that your administration took over, how long did it take for
those contracts to be canceled?
Mr. Santos Diaz. First of all, we evaluate them and we get
the change for them to prove that they were useful to the
Department and that they could attain and achieve their
performance as they promised to after an evaluation, after a
legal consultation.
Mr. Greenwood. So are we talking that this happened in a
matter of days, weeks, months, or years?
Mr. Santos Diaz. By any means months.
Mr. Greenwood. Months.
Mr. Santos Diaz. Even a year.
Mr. Greenwood. Do you happen to know anything about the
political affiliation of any of those contracts, the companies
or the individuals of all those contracts?
Mr. Santos Diaz. That is not a criteria and, again, I have
been 20 years of my life during research. I come from
economics. I don't come from a political party and that is the
mentality that this government has.
Mr. Greenwood. We have quite different testimony here.
Don't we? We have the Secretary of Education under oath saying
there was no political consideration in the dismissal of any of
these contracts. We have Mr. Diaz under oath saying that there
was wholesale cancellation of contracts for political reasons
including your own. Is that right?
Mr. Santos Diaz. Yes. As a matter of fact, I can add that
all our contracts with all agencies were canceled during the
same period of time so this obviously was a political thing.
Mr. Greenwood. Are you aware of other companies that shared
your political affiliation that had their contracts canceled by
the Department of Education?
Mr. Santos Diaz. I would say nearly 100 percent of all
entrepreneurs with the previous administration have canceled
their contracts. 100 percent.
Mr. Greenwood. And do you differ with the Secretary's
estimate that as far as the Department of Education was
concerned, the order of magnitude was something like 10
contracts?
Mr. Santos Diaz. I do not have that kind of information.
Mr. Greenwood. You don't know?
Mr. Santos Diaz. No.
Mr. Rey. Mr. Chairman, can I add that several of the
contractors that were working for the Department of Education
are in jail today just for the record.
Mr. Greenwood. Okay. Back to you, Mr. Secretary. Why are
you shifting to a satellite system which will use little if any
of the currently installed infrastructure?
Mr. Rey. I will ask Mr. Vidal to answer that question. To
start with, it is cheaper, it is faster, and in terms of
connectivity brings us a better option to our schools but the
details Mr. Vidal will take of.
Mr. Vidal. The key reason is the price and functionality, a
very, very attractive ratio for the Department. When the last
bid for year 6 was awarded to Centennial, Puerto Rico, that
decision eventually was challenged by the Puerto Telephone
Company. That challenge consumed about 7 months of one of our
entire years to try to get this system up and running.
On June 30 when the service was discontinued, we were faced
now with 7 months delayed in having service to the schools, no
connectivity to the Internet, and having to do something quick
about it because school was starting in August.
We devised then an emergency plan utilizing traditional
telephones, just dial-up telephones, to at least provide access
to two computers that prior to that had been installed in every
library of all the schools. In parallel with that we evaluated
alternatives and alternatives that were of a size or of the
depth of the pocket that the Department could afford. As a
result of that, we found that satellite technology was
available and could work. We tested not only satellite
technology but we tested different vendors, satellite vendors,
and also we tested other technologies.
The test showed us under real circumstances actually
putting into a school that had a laboratory with 26 computers
that it could withstand and provide that level of service. Then
we made the decision to settle ourselves on this technology and
proceed with all necessary steps to begin installation.
Mr. Greenwood. Let me finally ask this question. You may
have testified to this, Secretary Rey, but I don't recall. Tell
me about your expectations to purchase computers, what your
time line is and when you expect to have enough computers,
whether it is 100,000 or whatever it is, to be adequate to the
task of educating the children.
Mr. Rey. We have 12,000 computers already in. By the end of
the year my aim is to connect all the schools of Puerto Rico to
the Internet and to have the proper equipment in place in all
schools in Puerto Rico.
Mr. Greenwood. By the end of this year?
Mr. Rey. Yes, indeed.
Mr. Greenwood. I may have you back.
Mr. Rey. Sure. We would be glad to be back.
Mr. Greenwood. Does the gentlelady from Colorado wish to
inquire further?
Ms. DeGette. Thank you, Mr. Chairman. Now, Ms. Lambert, I
wanted to follow up a little bit with you. You testified I
believe that your company received about $31 million dollars.
Correct?
Ms. Lambert. For years 1, 2, and 3.
Ms. DeGette. For years 1, 2, and 3. Most of that was for T1
service to the schools. Correct?
Ms. Lambert. That is correct.
Ms. DeGette. I understand that you were charging $1,500 per
school per month for the T1 line service. Is that right? You
charged it for 5 years, I think. You were paid for the first 3
years. Right?
Ms. Lambert. That is correct. May I answer in terms of----
Ms. DeGette. Sure. Go ahead.
Ms. Lambert. The $1,500 is a tariff rate and the service
that was requested was an ATM T1 line. It is very different
from a framed relay or fractional T1. The request was for an
ATM T1 connectivity with a vision to provide video and distance
learning on those lines.
Ms. DeGette. Tragically few, if any, of the schools were
actually able to utilize those lines. Correct?
Ms. Lambert. I think the vision was not met.
Ms. DeGette. Anywhere. Right?
Ms. Lambert. In the schools, yes.
Ms. DeGette. Right. Now, I would like to know for those
lines you just described how much does it actually cost for
out-of-pocket cost, marginal cost, etc., for an idle T1 line?
Ms. Lambert. We do not measure our margins based on a
particular product so I can't answer for you what my margin
would be on an ATM line. But if I may answer generally
speaking, the investment was made in the ATM network. The
investment was made in the transmission equipment and all of
those facilities could not be used for another customer when
they were dedicated to the school.
Ms. DeGette. So does that come up to a loss or a lost
opportunity cost then of $1,500 per month per school?
Ms. Lambert. Well, I am not sure I understand.
Ms. DeGette. If you don't know, you don't know.
Ms. Lambert. I am not sure I understand your question.
Ms. DeGette. Well, I mean, here is my question. For 5 years
you had these ATM lines to the schools for which you were
billing $1,500 per school. You were paid most of the $31
million for the first 3 years for these lines which were not
usable. Right? And then, as I understand it, you billed for the
next 2 years for those lines and now you are in litigation over
being paid for that even thought they weren't used then.
Correct?
Ms. Lambert. Well, first----
Ms. DeGette. No, is that right?
Ms. Lambert. No, that is not right.
Ms. DeGette. Okay. Tell me where I am wrong.
Ms. Lambert. Okay. First of all, we are not in litigation.
Ms. DeGette. Okay.
Ms. Lambert. The Secretary and I have come to an agreement
that we are going to work through our differences on this issue
so we are not in litigation.
Ms. DeGette. That is the best news I have heard all day.
Ms. Lambert. Second, we made the investment and the network
purchase primarily to provide schools. Again, I was not in
Puerto Rico at the time but I know at the time that this
service was requested, PRT did not have an ATM network so the
company made an investment in purchasing the capability to
provide an ATM capability----
Ms. DeGette. And how much did the company pay for that?
Ms. Lambert. I can't answer that question.
Ms. DeGette. See, you can see why we are frustrated because
what we are seeing is you guys being paid $31 million to hook
up these ATM lines which were never used and still aren't being
used to this day. We see DRC being paid almost $90 million and
there is $23 million of stuff sitting in warehouses that is now
obsolete which they are saying we should use anyway and still
only very few schools are wired. I don't have much time left
but you get my drift. I am not going to sit here and argue with
you, both of you, and everybody. You know, this is about kids.
Ms. Lambert. I understand.
Ms. DeGette. I don't care how you cost it out or the lost
opportunity costs or the investment. You have made a profit
from this and you cannot--I mean, you have. One reason we
instituted the E-Rate is so that school children could benefit
from increased competition. I know you get that.
I have a couple more questions for Secretary Rey. Is it
your understanding that the E-Rate rules mandate that bids be
awarded to whichever vendor is able to provide all the services
in the schools, RFP, at the lowest price?
Mr. Rey. That is my understanding, of course.
Ms. DeGette. I want to know if you have any idea how the
previous administration's award to the 5-year E-Rate contract
to PRTC, even though DRC's proposal was $9.2 million lower in
cost than the PRTC offer?
Mr. Rey. I don't have any answer.
Ms. DeGette. Okay. Now, I think you testified in your
opening statement that your schools have received no E-Rate
funding since 2001. Is that correct?
Mr. Rey. That is correct.
Ms. DeGette. What effect has that had on Puerto Rico
schools and school children?
Mr. Rey. It took us 3 years to be here doing some testimony
trying to recover some money and with a lot of struggle trying
to connect 400 schools that we have connected today. I mean, it
took us 3\1/2\ years to struggle with the E-Rate funding in
order to construct the connectivity of the children of Puerto
Rico to the world through the Internet. However, again, I have
to say that our Government has invested more than $300 million
trying to reconstruct whatever was left out by the former
administration.
Ms. DeGette. What effect has this had on the kids?
Mr. Rey. Detrimental effects for now and for the future
because perhaps we are dragging our feet in terms of the
knowledge that they should have at this point in Puerto Rico.
Ms. DeGette. Now, in your opening statement you also
testified about your frustration with the FCC and the USAC for
their failure to help Puerto Rico rectify these problems in a
timely manner. Even today do you have any indication when
Puerto Rico might receive E-Rate funds?
Mr. Rey. Not at all.
Ms. DeGette. And I just want to ask----
Mr. Rey. Even though I am very optimistic about it.
Ms. DeGette. There is always an optimist in every crowd.
Mr. Rey. That is why I am Secretary for Education.
Otherwise, I wouldn't be here.
Ms. DeGette. And we admire your efforts.
Mr. Rey. Thank you.
Ms. DeGette. I have no further questions.
Mr. Nevares. Mr. Chairman, if I may be heard just very
briefly.
Mr. Greenwood. Were you sworn in with the rest? Did you
take the oath?
Mr. Nevares. No, but I can take the oath.
Mr. Greenwood. All right. Then you will have to stand and
raise your right hand.
[Witness sworn.]
Mr. Greenwood. Please restate your name again for the
record.
Mr. Nevares. My name is John Nevares.
Mr. Greenwood. Speak right directly into the microphone Mr.
Nevares. Going back to the bid for 100,000 computers that was
challenged in the courts in Puerto and canceled by the court,
if this new administration in the year 2001 had come out with a
bid for 100,000 computers, we wouldn't be here today because
the children of Puerto would have a computer to work with but
they waited until now, 3\1/2\ years later, to acquire, I just
heard, 12,000 computers which I know are not even connected to
the Internet because in a press conference given by the
Secretary on May 6, which I can provide to the committee, he
stated that they still had--and this is May 6, 2004--that they
still at the Department of Education public school system only
3,000 computers for the children.
Mr. Greenwood. Do you presume to know why it is that the
school district did not order the 100,000 computers 3 years
ago?
Mr. Nevares. I have no idea why they didn't----
Mr. Greenwood. Let us ask Mr. Rey.
Mr. Nevares. [continuing] bid 100,000 computers and that
would have solved one part of the problem. The other problem
would have been the electrical problems in some schools which
could have also been fixed and we wouldn't be here today.
Mr. Greenwood. Okay. Mr. Rey, you want to quickly respond
to that?
Mr. Rey. Our priority was to connect the schools to the
Internet. As a matter of fact, we reviewed the whole process
when we arrived to the Department because it was not a matter
of buying things and gadgets, state-of-the-art, to satisfy the
vendors. It was to connect the people of Puerto Rico, the
students of Puerto Rico to the Internet.
Mr. Greenwood. What the gentleman just testified I think
would argue is you had the phone company up and running. You
had the lines dropped at the schools. You had the equipment in
the warehouse. The missing component was the computers. That is
his argument.
Mr. Rey. We audit all the process, Mr. Chairman, and that
is not the reality that we found.
Mr. Greenwood. Okay. Well, you can understand our
frustration. The picture that we have here now is $30 million
worth of phone service that was never utilized down the drain.
We have something like $58 million worth of lines run to
schools which will now rot for the next century because they
are not going to be used.
And we have got $23 million worth of equipment in
warehouses that will probably be bulldozed into a landfill in
Puerto Rico somewhere and that is all money paid by
grandmothers trying to call their kids to wish them a happy
birthday somewhere in the United States. This a grotesque waste
of public dollars and we are going to put an end to it in this
committee.
All right. We thank you all for your testimony and for
traveling to Washington.
Mr. Rey. Mr. Chairman, I commend you for this initiative
and congratulations and thank you for the invitation.
Mr. Greenwood. Thank you, sir. Thank you.
Okay. I would ask the third panel consisting of Ms. Carol
Mattey, Deputy Chief of Wireline Competition Bureau for the
Federal Communications Commission, and Ms. Jane E. Mago, Chief,
Office of Strategic Planning and Policy Analysis at the Federal
Communications Commission, and Mr. George McDonald, Vice
President, Schools and Libraries Division, Universal Service
Administrative Company.
Okay. Good afternoon. We thank you for your patience and we
look forward to your testimony. It is the custom of this
subcommittee to take testimony under oath and so I begin by
asking if any of you object to giving your testimony under oath
this afternoon.
Ms. Mattey. No.
Mr. Greenwood. I also need to inform you that pursuant to
the rules of this committee and the House that you are entitled
to be represented by counsel as you give your testimony. Do any
of you wish to be represented by counsel?
Ms. Mattey. No.
Mr. McDonald. No.
Mr. Greenwood. Okay. In that case, would you please rise
and raise your right hands.
[Witnesses sworn.]
Mr. Greenwood. You are under oath. Is it Mattey?
Ms. Mattey. Mattey.
Mr. Greenwood. Okay. You are recognized for your opening
statement. Make sure the microphone is turned on. If it has a
green light, it is on. Pull it as close to your mouth as
possible so everyone can hear you. Thank you.

TESTIMONY OF CAROL E. MATTEY, DEPUTY CHIEF, WIRELINE
COMPETITION BUREAU, FEDERAL COMMUNICATIONS COMMISSION;
ACCOMPANIED BY JANE E. MAGO, CHIEF, OFFICE OF STRATEGIC
PLANNING AND POLICY ANALYSIS, FEDERAL COMMUNICATIONS
COMMISSION; AND GEORGE McDONALD, VICE PRESIDENT, SCHOOLS AND
LIBRARIES DIVISION, UNIVERSAL SERVICE ADMINISTRATIVE COMPANY

Ms. Mattey. Good morning Chairman Greenwood and
distinguished members of the subcommittee. I am Carol Mattey,
Deputy Bureau Chief of the Wireline Competition Bureau and
joining me today is Jane Mago, Chief of the Office of Strategic
Planning and Policy Analysis at the FCC.
We appreciate the opportunity to appear before you to
discuss the E-Rate Program which provides critical support
enabling schools and libraries to access the vast resources of
the Internet. E-Rate has provided over $11 billion in discounts
enabling literally millions of school children and library
patrons including those in many of the nation's poorest and
most isolated communities to obtain access to modern
telecommunications and information services for educational
purposes.
Communities in every state in the Nation have benefited
from E-Rate. Ninety-nine percent of public schools now have
Internet access and 94 percent of them have broadband
connections in large part due to the discounts available from
the E-Rate.
USAC administers the E-Rate Program on a day-to-day basis
subject to FCC oversight. Our oversight through rulemaking,
fact-specific adjudicatory decisions, and auditing is
fundamental to maintaining an effective E-Rate Program that is
free of waste, fraud, and abuse.
Despite the existence of bad actors that have taken
advantage of certain aspects of the program design, we believe
that this program is an overall success. There will always be
those who try to game the system, but the Commission is
committed to closing the loopholes where abuse can occur.
The Commission has already made a number of changes through
rulemaking to deter waste, fraud, and abuse. For instance, we
have adopted rules to debar bad actors from the program and
limits on repeated requests for internal connections. We are
also using the rulemaking process to address the issues of
program design raised by the Office of Inspector General. We
will be addressing recovery issues and strengthening our
document retention requirements. We also are working to
synchronize our rules and USAC's procedures to ensure effective
enforcement.
Today's hearing is focusing on one matter, the special case
of the E-Rate applications of Puerto Rico Department of
Education. Puerto Rico is a case where there was admitted
misconduct in the first years of the E-Rate funding. That
misconduct led USAC to suspend processing of any PRDOE funding
requests. After several meetings with FCC staff, Puerto Rico
formally requested in early 2003 action on its pending request.
By that time the Commission was aware that there were a
number of cases in which either a service provider or a
beneficiary were under some form of investigation that had
caused them to be suspended from the E-Rate Program. Puerto
Rico was only one such situation and the Commission concluded
that it was imperative to develop a framework that would
protect the E-Rate fund in such situations while remaining
sensitive to the interest of parties that may ultimately be
cleared of any wrongdoing.
The Commission stated and applied this frame work in the
Puerto Rico order issued in November 2003. The Commission
unanimously held that USAC generally should defer action on any
application upon receiving evidence of potential program
violations until there is sufficient reason to believe that
those violations are no longer implicated In concise terms, the
Puerto Rico order lays out a trust but verify policy. The
Commission's trust is based on Puerto Rico's current
administration's assertion that it has complied with the
Commission's rules and has implemented a plan to correct the
fundamental deficiencies in the infrastructure of Puerto Rico's
schools.
The required audits are the means by which the Commission
verifies the assertions of the current Puerto Rico
administration. The Puerto Rico experience provides a good
lesson on how the FCC can enhance program integrity.
Irregularities were uncovered through routine program audits
and self-disclosure. USAC responded with a measured response
that demanded correction of program violations before risking
further E-Rate dollars.
The Commission used its review of this matter to craft a
general policy framework to deal with entities subject to
investigation for failure to comply with our rules. This policy
allows Puerto Rico to move forward as a program participant if
it can pass the rigors of a targeted audit designed to test the
areas that have been identified as weaknesses.
As the Puerto Rico situation illustrates, we oversee the
operation of E-Rate through a system of audits that measure
day-to-day compliance with our rules. In 2004 the Commission is
implementing an even more extensive audit program. We intend to
use statistical sampling techniques so that the audit results
can provide a basis for forming conclusions about overall
program compliance and also provide us with needed information
to comply with the Improper Payments Act of 2002.
To conclude, we are committed to making ongoing
improvements in the E-Rate Program and welcome questions on
these issues. Thank you, Mr. Chairman and committee members for
the opportunity to participate in this review.
Mr. Greenwood. Thank you.
Ms. Mago, do you have testimony?
Ms. Mago. My testimony was covered by Ms. Mattey.
Mr. Greenwood. All right. That is what I thought might be
the case.
[The prepared statement of Jane E. Mago follows:]
Prepared Statement of Jane E. Mago, Chief, Office of Strategic Planning
and Policy Analysis, and Carol E. Mattey, Deputy Chief, Wireline
Competition Bureau, Federal Communications Commission
Good morning, Chairman Greenwood, Representative Deutsch, and
distinguished members of the Subcommittee. We appreciate the
opportunity to appear before you to discuss the FCC's efforts to
continue to improve the E-rate program and provide critical support
enabling schools and libraries to access the vast resources of the
Internet. The Commission is proud to be implementing this important
aspect of universal service support.
introduction
The schools and libraries mechanism of the FCC's universal service
program, often called the E-rate program, has provided discounts
enabling literally millions of school children and library patrons,
including those in many of the nation's poorest and most isolated
communities, to obtain access to modern telecommunications and
information services for educational purposes. Our nation has benefited
significantly from the E-rate program, which the FCC created to fulfill
Congress's direction in section 254(h) of the Communications Act.
Over the course of the first six years of its existence, the E-rate
program has committed over $11 billion in funds to schools and
libraries in every state in the nation. This support has benefited
communities across the country, large and small, urban and rural.
According to the U.S. Department of Education, ninety-two percent of
classrooms in public schools were connected to the Internet in 2002,
while only fifty-one percent were connected in 1998, the first year of
the program. Ninety-nine percent of public schools now have Internet
access, and ninety-four percent of them have broadband connections.
This tremendous progress is due in significant part to the discounts
available from the E-rate program.
As an ongoing matter, the E-rate program enables schools and
libraries to pay discounted rates to keep this access affordable. Once
the schools and libraries are wired, they still face monthly recurring
service charges for telecommunications service and Internet access.
These service charges are sizeable. Indeed, in the 2004 filing window
schools and libraries sought support for $1.6 billion in
telecommunications services and Internet access.
The Universal Service Administrative Company (USAC) administers the
E-rate program on a day-to-day basis. USAC is a public non-profit
company that administers all four universal service programs. Among
other things, USAC currently processes nearly 40,000 E-rate
applications a year and disburses funds for approved applications. USAC
operates within the rules established by the FCC for the E-rate and
other universal service programs, and the Commission and its staff
exercise oversight over USAC.
As the E-rate program approaches its seventh birthday, the
Commission is actively assessing where we are and how we can improve
the E-rate program going forward. This is very much a team effort
within the FCC, with regular interactions between the Wireline
Competition Bureau, the Enforcement Bureau, the Office of Managing
Director, the Office of General Counsel, the Office of Strategic
Planning and Policy Analysis, and the Office of Inspector General.
Despite the existence of bad actors that have taken advantage of
certain aspects of the program design, we believe that this program has
been an overall success. There will always be those who try to game the
system, but the Commission is committed to closing the avenues where
abuse can occur and eradicating all waste, fraud and abuse in the E-
rate program. We recognize that it is our job, as it has been from day
one, to maintain oversight over the E-rate program. And while there
have been aberrations, by and large, we have enabled implementation of
the statutory goals with a minimum of waste, fraud and abuse.
The Commission's oversight program has had three chief
components--rulemaking, fact-specific adjudicatory decisions, and
auditing--and these three components continue to reinforce each other
as the program enters its seventh year.
We will be expanding the scope of our auditing work in the coming
year substantially, in order to meet our obligations under the Improper
Payments Information Act of 2002 (IPIA). Although the audit work
conducted to date suggests that the level of rule noncompliance is
relatively low, our goal is eradication. Let us emphasize: waste, fraud
and abuse is never acceptable. We will work vigorously to protect these
dollars from misuse.
Finally, the systems we have in place have successfully detected
situations, like the Puerto Rico Department of Education, where program
participants have run afoul of our rules. We learn from our
experiences: corrective measures have been launched to rectify past
problems, and prevent them from recurring in the future. And through
these efforts, we seek to ensure that the school children and library
patrons across America continue to enjoy the benefits of affordable
access to advanced telecommunications and information services.
oversight through rulemakings
In 2002, the E-rate program's fifth year, the Commission began an
ongoing review process, which continues to this day, to consider ways
to improve the E-rate program. The Commission issued a Notice of
Proposed Rulemaking (NPRM) to seek comment on ways to ensure that E-
rate program funds are utilized in an efficient, effective, and fair
manner, while preventing waste, fraud and abuse. Since then, the
Commission has issued a series of orders that have brought us further
down the road to improve the E-rate program, and the Commission
continues to pursue these reform goals today. Through our rulemaking
process, we seek to make the Commission's requirements more transparent
for all and to eliminate confusion as to what the FCC expects of
participants in this program.
In the last year, the Commission's rulemaking activities have
focused on tightening our rules to prevent waste of the limited E-rate
dollars by bad actors who seek to take advantage of certain aspects of
the program's design. For example, in April 2003, the Commission
adopted rules to debar individuals and companies that have proved to be
bad actors. We have procedures to expel from the program anyone
convicted of a criminal violation or found civilly liable for actions
relating to this program. We already have applied these procedures to
several companies, and we have sought comment on what other situations
may warrant debarment.
In December 2003, the Commission emphasized that our rules have
always prohibited funding of duplicative equipment and service. The
Commission also adopted new rules limiting the transfer of E-rate
funded equipment and limiting repeated requests for internal
connections. The Commission clarified the types of maintenance services
that are eligible for support, and adopted a more transparent process
for updating the list of eligible services in future years. In
addition, the Commission directed USAC to develop a pilot program to
test a computerized online list of eligible internal connections
equipment, a measure expected to enable USAC and the Commission to
better track the types of equipment the program is supporting.
The Commission's rulemaking efforts to improve the E-rate program
are ongoing. In December 2003, the Commission requested comment on
additional proposals designed to curb the occurrence of waste, fraud
and abuse. For instance, the Commission asked for public comment on
whether to adopt bright line rules for determining ``cost effective''
funding requests, such as a specified dollar amount per student or
library patron for specific types of service; whether to codify
additional requirements for technology plans; and whether to require
that beneficiaries disclose their use of outside consultants. The
Commission also sought comment on whether to lower the highest discount
rates, in response to suggestions that the current discount levels may
not provide sufficient incentives to make prudent funding requests. The
comment cycle on this Further Notice of Proposed Rulemaking closed in
April, and we expect to make further recommendations in two or more
orders, one to be presented this quarter and the other to be presented
next quarter.
We also are using the rulemaking process to address issues of
program design raised by the Office of Inspector General. For instance,
the Wireline Competition Bureau is recommending that the Commission
refine its rules for recovery of funds committed in violation of
statutory or FCC requirements, and strengthen its document retention
requirements to enhance our oversight activities, as recommended by the
FCC's Office of Inspector General. We believe that such measures, if
adopted, would greatly reduce the occurrence of waste, fraud an abuse
by those who seek to unjustly enrich their own fortunes to the
detriment of the E-rate program.
In addition, we are working to synchronize our rules and USAC's
procedures. USAC has established numerous operating procedures to
administer the e-rate program on a day-to-day basis. USAC needs the
flexibility to act swiftly in response to specific inquiries and
situations. The Commission has codified a number of USAC procedures
through the rulemaking process in the last year, and the Wireline
Competition Bureau has directed USAC to prepare a list of all USAC
procedures a violation of which should form the basis for recovery of
funds. We are working to establish ``bright lines'' for beneficiary
compliance, where possible, and to make clear to beneficiaries the
consequences of noncompliance.
To sum up, as the program has matured, the measures taken by the
Commission to improve the E-rate program through our rulemaking
oversight have evolved beyond tightening ``nuts and bolts,'' to
refining the application and disbursement processes, to addressing
broader policy issues, such as creating incentives for beneficiaries to
reduce waste and promote more equitable consumption of the program's
resources.
oversight through adjudications
The second oversight tool the Commission uses is adjudication,
deciding specific factual cases under our rules.
Section 54.702(c) of the Commission's rules expressly states that
USAC ``may not make policy, interpret unclear provisions of the statute
or rules, or interpret the intent of Congress. Where the Act or the
Commission's rules are unclear, or do not address a particular
situation, the Administrator shall seek guidance from the Commission.''
Our rules also expressly provide that any party may seek Commission
review of any action taken by USAC. Through our review of appeals of
specific decisions made on E-rate applications, as well as our
examination of broader questions that necessarily arise in the course
of administering a $2.25 billion per year funding program, we exercise
oversight over the universal service fund and implement measures to
reduce the occurrence of waste, fraud and abuse.
By 2003, the Commission was aware that there were a number of cases
in which either a service provider, a beneficiary, or both, were under
some form of investigation that implicated their involvement in the E-
rate program. The Commission concluded that it was imperative to
address some specific problem situations. In doing so, it developed a
general framework for how to protect the E-rate fund in situations in
which one or more parties is under investigation for potential waste,
fraud and abuse, while remaining sensitive to the interests of parties
that ultimately may be cleared of any wrongdoing.
The Commission stated and applied its general framework in the
Puerto Rico Department of Education (PRDOE) Order issued in November
2003. The Commission unanimously held that USAC generally should defer
action on any application upon receiving evidence, including evidence
from an active law enforcement investigation, of potential program
violations, until such time as questions raised by the evidence can be
resolved, or until there is sufficient reason to believe that potential
program violations are no longer implicated. The Commission expressly
recognized that it may be appropriate to fund applications,
notwithstanding the pendency of an ongoing law enforcement
investigation, after subjecting such applications to an especially
probing and cautious review. This minimizes inadvertent harm to
innocent parties, such as a school and its students, or a library and
its patrons, who may have no involvement in any of the alleged
wrongdoing.
Today's hearing is focusing on the special case of the E-rate
applications of the Puerto Rico Department of Education (PRDOE). We are
pleased to work with the subcommittee and its staff in looking at these
transactions. PRDOE, in fact, is a case-in-point of how the
Commission's sequential process of rulemaking, adjudication, and audit
is effective.
In 2000, PRDOE was included in a randomly selected audit of
seventeen program beneficiaries conducted for the first program year
performed by outside auditors engaged by USAC, and field work commenced
later that year. In April 2001, the Office of the Comptroller General
of Puerto Rico informed the FCC's Office of Inspector General that the
Comptroller had found evidence that PRDOE had not complied with state
and local procurement regulations during years one and two of the
schools and libraries program. The IG referred the matter to the
Federal Bureau of Investigations in May 2001. Meanwhile, USAC concluded
its audit process in October 2001 and, in December 2001, issued a
letter to PRDOE suspending all pending disbursements and placing
further application processing on hold, pending receipt of further
information.
Over the course of 2002, PRDOE provided additional information to
USAC and Commission staff. The new PRDOE administration admitted to
USAC and to Commission staff that things were amiss under the prior
administration in the expenditure of E-rate funds. The new PRDOE
administration said that it would take corrective action, including
making major personnel and structural changes to mitigate and correct
the problems of the prior administration. In numerous meetings and
discussions FCC staff and PRDOE officials focused on ways to permit
PRDOE to participate in the E-rate program, while ensuring appropriate
protections against waste, fraud and abuse. In addition, over this
time, FCC staff coordinated with officials at the Department of
Education and Department of Justice regarding investigations relating
to PRDOE and proposals to ensure appropriate handling of funds in the
future.
Ultimately, and in recognition that the need to revalidate the
eligibility of E-rate applicants might not be unique to PRDOE,
Commission staff concluded that a public comment process would provide
the best way for the agency to move forward. While admittedly more time
consuming than what the parties had hoped, this process was transparent
and fair. Early in 2003, the new PRDOE administration requested in
writing that the Commission direct USAC to process its applications and
disburse funds for program years 2001 and 2002. This commenced the
adjudicatory process, and Commission staff sought public comment on
that request, received filings from three parties, and prepared
recommendations for the Commission.
On November 25, 2003 the Commission issued the PRDOE Order,
concluding that it would be appropriate for USAC to resume processing
of PRDOE's pending applications for funding years 2001 and 2002 upon
completion of a targeted, independent audit designed to provide
assurances of PRDOE's compliance with the FCC's rules. The Commission
maintained USAC's suspension of PRDOE's first three years of
participation in the program, pending completion of a separate
independent audit and further action by the Commission.
In concise terms, the PRDOE Order lays out a ``trust but verify''
policy towards the current Puerto Rican situation. The Commission's
trust is based on the current Puerto Rican administration's assertion
that it has complied with the Commission's rules and has implemented a
plan to correct fundamental deficiencies in the infrastructure of
PRDOE's schools and offices. The required audits are the means by which
the Commission verifies the assertions of the new PRDOE administration.
The PRDOE experience provides a good lesson on how the FCC can
enhance program integrity through routine detection, intervention and
responsive policymaking. Irregularities with PRDOE were uncovered
through routine program audits and self-disclosure by a subsequent
administration. USAC responded with the measured response that demanded
resolution of program violations before risking further E-rate dollars.
The Commission used its review of PRDOE to craft a general policy
framework to deal with entities subject to investigation for failure to
comply with our rules. This newly enunciated policy allows PRDOE to
move forward as a program participant if it can pass the rigors of a
targeted audit designed to test the areas that routine audits
identified as weaknesses under the prior administration.
The Puerto Rico story is not over. The targeted audits called for
in the FCC's November order have begun. We hope that PRDOE can
demonstrate that it was in compliance with our rules when it submitted
its applications in 2001 and 2002. Meanwhile, we are reviewing our
rules and audit procedures to learn from this experience. We all come
away wiser, and the E-rate program will be stronger as a result of this
experience. The lessons we have learned here and the process we have in
place hopefully will make the E-rate program work better in the future.
We are hard at work to avoid a ``next time.''
Even while devoting significant staff resources to addressing the
PRDOE case, the Commission ruled in two other major E-rate
adjudications in 2003. The Commission issued a major order that closely
examined procurement practices in a number of school districts, not in
Puerto Rico, that collectively sought over $250 million in E-rate
funding. The Commission concluded that those practices thwarted the
Commission's competitive bidding requirements and clarified what
applicants need to do to comply with our rules. Also in 2003, the
Commission addressed a case where a key individual associated with a
service provider that provided state-wide internet access service was
under law enforcement investigation. In that case, the Commission
concluded it was appropriate not to provide any support to that service
provider pending resolution of the investigation. At the same time, the
Commission made provisions to ensure that subcontractors that were not
in any way implicated by the investigation would receive payments for
services rendered. We note as well that the Commission decided each of
these adjudications unanimously.
oversight through audits
As the PRDOE situation illustrates, we oversee the operation of E-
rate through a system of audits that is a measure of day-to-day
compliance with our rules. We are expanding that system, to ensure that
we detect the bad actors we know will try to take advantage of the
program.
The Commission is strongly committed to maintaining a robust audit
program for the E-rate, and is working closely with USAC on all audits.
Audits of the E-rate program provide important information to the
Commission in assessing program compliance, and also in helping the
Commission identify steps that it may take to help reduce the
likelihood of waste, fraud and abuse.
We have an active E-rate audit program. Since the E-rate program's
inception, USAC has conducted beneficiary audits. USAC now has twelve
full-time staff that conducts internal audits of the program, and also
engages external independent auditors to do more extensive audit work.
The Wireline Competition Bureau has two full-time audit staff dedicated
to universal service oversight, as well as two audit staff that perform
that function on a part time basis.
In addition, our Office of Inspector General dedicates three of its
eight auditors to Universal Service Fund oversight. In October 2001, we
detailed another four auditors from the Wireline Competition Bureau
(then known as the Common Carrier Bureau) to assist in auditing the E-
rate program. In January 2003, we entered into a Memorandum of
Understanding with the Department of Interior and USAC to conduct
additional E-rate audits. Two audits have been completed under this
arrangement and fieldwork has been completed in three more.
The audit program is a cooperative effort. In December 2002, for
example, USAC engaged in an independent auditor to conduct 79
beneficiary audits from funding year 2000. At our request, these audits
were conducted according to government approved standards so that our
Inspector General could more easily use the data from those audits for
our purposes.
Early audits of the E-rate program were directed at a discrete
number of high dollar beneficiaries. More recently, the audit program
has expanded in terms of sheer numbers of beneficiaries audited and the
random selection of such beneficiaries. The annual number of audits has
grown from about two dozen in the early years to over one hundred in
2003. These audits are conducted by professional auditors, both
internal USAC audit staff, and independent auditors with whom USAC
contracts. To date, audits have been conducted of beneficiaries that
collectively have received over $1.1 billion in disbursements.
In 2003, audits were finalized for 106 randomly selected
beneficiaries, with the work performed by USAC's audit staff, USAC's
outside auditor, and the FCC's Office of Inspector General.
Collectively, those audits covered $263 million in disbursements and
the audit findings required only $3 million in recoveries. That is:
professional auditors found an error rate of less than 1.2 percent in
the audits completed last year. We want to lower that already low
percentage, but this recent work provides some comfort that waste,
fraud and abuse is not endemic to the program and that improvement
should continue.
In 2004, the Commission is implementing an even more intensive
audit program. We intend to use statistical sampling techniques, so
that the audit results can provide a basis for forming conclusions
about overall program compliance and provide needed information so that
we can comply with the IPIA. These efforts will provide the Commission
with more and better information on program and participant
performance.
Funding this expanded audit program has been challenging. Last
year, for example, the FCC unsuccessfully sought an appropriation to
enable our Inspector General to conduct independent audits of the
Universal Service Program. In the interim, we have drafted a new three-
way agreement among the FCC, the FCC's Inspector General, and USAC to
enable us to move forward with necessary audits. Under this agreement,
USAC will contract with independent auditors, applying government
auditing standards to conduct audits of a statistically significant
number of E-rate recipients. We anticipate that the results from these
audits will enable us to gauge vulnerabilities in the program so that
we can act to correct them.
Finally, we are committed to seeking a legislative clarification of
the Commission's authority to permit the FCC to transfer funds from the
Universal Service Fund to pay for necessary audits, implementation and
recovery actions. This will enable the FCC to contract directly with
auditors. We are working with OMB to propose specific legislation to
authorize the transfer.
In sum, audits are critical to the oversight package. Audits
confirm and close the loop. They provide us with information to assess
the wisdom of our rules. They inform future rulemakings; many of the
rule changes made in the last year or currently under consideration
have been sparked by what the audits have revealed to be weaknesses in
the current program design.
And finally, audits are the vehicle by which we determine if monies
need to be recovered from particular beneficiaries, so that the
benefits of the E-rate program go only to those who comply with our
rules. The agency is working to ensure timely resolution of all audit
findings, whether those audits are conducted by USAC internal audit
staff, independent outside auditors hired by USAC, or the FCC's Office
of Inspector General. We are also working to ensure timely recovery of
erroneously disbursed funds identified by these audits. We agree that
we all need to do better in this area, so that audit and recovery work
is completed more expeditiously. We expect that this quarter, the
Commission will act on several recommendations related to these issues
made by the Wireline Competition Bureau. We also are supportive of
USAC's plans to step up its outreach efforts to better educate
beneficiaries by scheduling 1,000 site visits a year.
conclusion
We are committed to making ongoing improvements in the e-rate
program, and we look forward to your questions on these issues. We
would be happy to provide any assistance to the Subcommittee and stand
ready to offer our technical and subject area expertise as you move
forward. Thank you, Mr. Chairman, for the opportunity to participate in
your review of the universal service fund's schools and libraries
support mechanism.

Mr. Greenwood. Mr. McDonald, you are recognized for your
opening statement.

TESTIMONY OF GEORGE McDONALD

Mr. McDonald. Good morning, Mr. Chairman and members of the
subcommittee. My name is George McDonald. I am the Vice
President of the Universal Service Administrative Company
responsible for the Schools and Libraries Division. It is my
privilege to be here today to speak to you about USAC and its
administration of the Schools and Libraries Universal Service
Support Mechanism, commonly referred to as the E-Rate program.
USAC is the not-for-profit corporation designated by the
Federal Communications Commission to administer the E-rate
program based on the Telecommunications Act of 1996 and FCC
regulations adopted pursuant to the Act. In order to accomplish
our mission, we work closely with the FCC, consulting almost
daily on issues of implementation.
We are committed to helping prevent waste, fraud, and abuse
in the universal service support mechanisms, and we devote
substantial resources toward that goal so that the benefits of
the discounts go only to eligible recipients for eligible uses.
Before we began making funding commitments in 1998, we
hired an independent consultant to advise us on our internal
controls and attest to the adequacy of those controls. Our
internal controls are designed to ensure that commitment and
disbursement of E-Rate funds are consistent with FCC rules
relating, for example, to the eligibility of entities, of
services, and appropriate discount rates. Also, in 1998 staff
of the U.S. General Accounting Office reviewed our draft
procedures and recommended changes which we implemented.
We employ many tools to help assure compliance with program
rules. These include detailed application and invoice review
procedures, denials of funding commitments when appropriate,
rejection of incorrect invoices, audits of program
beneficiaries and service providers, recovery of funds where
rule violations are found, investigations of whistleblower
hotline complaints, support to law enforcement investigations,
and referral of matters involving suspected program abuse to
law enforcement authorities.
USAC's application and invoicing review procedures have
greatly evolved over the past 6 years, becoming more detailed
and comprehensive, as we have gained experience with the
program. For example, as we saw instances of service providers
not making applicants pay the nondiscount share--a key rule of
the program--we initiated verification of payment of that share
into our invoice review process. USAC's internal controls have
prevented the unlawful disbursement of hundreds of millions of
dollars.
We receive approximately 35,000 E-Rate applications per
year. In addition, we process an average 80,000 individual
requests for payment annually. Our fundamental responsibility
is to make well-founded decisions to approve or deny these
requests. Each of these documents is individually processed
using detailed Program Integrity Assurance, or PIA, review
procedures to arrive at an appropriate decision consistent with
program rules.
We also conduct audits of beneficiaries to assess applicant
program compliance. As a result of audit findings, we have
modified and strengthened our internal controls, improved our
outreach, and better educated applicants and service providers
regarding program rules.
In order to provide the public with a means of reporting
activities that may be in violation of E-Rate program rules,
USAC maintains a whistleblower hotline. USAC's Special
Investigations Team investigates every call to determine if
further action is required. We receive and follow up on over
100 calls per year.
Comprehensive applicant and service provider training in
program requirements are vital components of program integrity.
USAC's training of applicants and service providers emphasize
the importance of compliance with program rules and the
consequences of non-compliance.
One of the key lessons we have learned from our experience
in administering the program and from the audits we have
conducted, as well as from law enforcement investigations and
media reports, is that USAC needs a larger oversight presence
in the field. Site visits will allow us to assess more fully,
in real-time, how E-Rate funds are being used, to learn about
and publicize best practices in education technology and
program compliance, and to help ensure that products and
services have in fact been delivered and are being used
effectively. We have issued a Request for Proposals soliciting
bids to conduct some 1,000 site visits a year. This step will
further enhance program integrity.
Finally, let me turn to the participation of the Puerto
Rico Department of Education in the E-Rate program. For the
first 3 funding years of the program, 1998-2000, PRDOE applied
for and received a substantial amount of funding from USAC. As
a part of our initial set of audits of beneficiaries in 2000,
we selected PRDOE for an audit of the first funding year. The
audit was completed in October 2001.
We were particularly concerned about findings that 100,000
computers that were to be installed in classrooms had not by
then been purchased and installed and that there were no
computers in the two schools the auditors had visited. So we
advised PRDOE in December 2001 that we would make no further
commitments or disbursements of E-rate funds until we received
and evaluated its response to our inquiries concerning the
availability of computers and other resources required to make
effective use of the discounted services.
Since that time, USAC and the FCC have worked with PRDOE as
it has sought to come into compliance with program rules. In
November 2003, the FCC issued an order directing USAC to
conduct an audit of PRDOE prior to disbursing any additional E-
Rate funds. That audit has begun.
Mr. Chairman, thank you for providing me with the
opportunity to address the subcommittee. We look forward to
continuing to work with Congress to improve the Schools and
Libraries Support Mechanism. I would be happy to respond to any
questions you may have.
[The prepared statement of George McDonald follows:]
Prepared Statement of George McDonald, Universal Service Administrative
Company Vice President, Schools and Libraries Division
Good morning, Mr. Chairman and Members of the Subcommittee. My name
is George McDonald. I am the Vice President of the Universal Service
Administrative Company (``USAC'') responsible for the Schools and
Libraries Division. It is my privilege to be here today to speak to you
about USAC and its administration of the Schools and Libraries
Universal Service Support Mechanism, commonly referred to as the ``E-
rate'' program.
Overview
USAC is the not-for-profit corporation designated by the Federal
Communications Commission (``FCC'') to administer the E-rate program
based on the Telecommunications Act of 1996 and FCC regulations adopted
pursuant to the Act. In order to accomplish our mission, we work
closely with the FCC, consulting almost daily on issues of
implementation.
We are committed to helping prevent waste, fraud, and abuse in the
universal service support mechanisms, and we devote substantial
resources towards that goal so that the benefits of the discounts go
only to eligible recipients for eligible uses. I would like to describe
some of the administrative procedures we use to help ensure program
integrity. I will also outline a new initiative designed to further
improve compliance with program rules. Finally, I will briefly describe
USAC's activities concerning the Puerto Rico Department of Education's
participation in the E-rate program.
Before we began making funding commitments in 1998, we hired an
independent consultant, Coopers and Lybrand--which later became
PricewaterhouseCoopers--to advise us on our internal controls and
attest to the adequacy of those controls. Our internal controls are
designed to ensure that commitment and disbursement of E-rate funds are
consistent with FCC rules relating, for example, to the eligibility of
entities, of services, and appropriate discount rates. At the request
of Senator McCain, staff of the U.S. General Accounting Office reviewed
our draft procedures and recommended changes, which we implemented. For
example, we moved a procedure to scrutinize the resources applicants
have to use the discounted services from after commitment of funds to
before.
We employ many tools to help assure compliance with program rules.
These include detailed application and invoice review procedures,
denials of funding commitments when appropriate, rejection of incorrect
invoices, audits of program beneficiaries and service providers,
recovery of funds where rule violations are found, investigations of
whistleblower hotline complaints, support to law enforcement
investigations, and referral of matters involving suspected program
abuse to law enforcement authorities.
USAC's application and invoicing review procedures have greatly
evolved over the past six years, becoming more detailed and
comprehensive, as we have gained experience with the program. For
example, as we saw instances of service providers not making applicants
pay the nondiscount share (a key rule of the program), we initiated
verification of payment of that share into our invoice review process.
USAC's internal controls have prevented the unlawful disbursement of
hundreds of millions of dollars, either as a result of denials based on
failure to comply with program rules or cancellation of funding
requests by the applicant as a result of USAC inquiries.
Application and Invoice Volumes
We receive approximately 35,000 E-rate applications per year. In
addition, we process an average 80,000 individual requests for payment
annually. Our fundamental responsibility is to make well-founded
decisions to approve or deny these requests. Each of these documents is
individually processed using detailed Program Integrity Assurance, or
PIA, review procedures to arrive at an appropriate decision consistent
with program rules.
Audits
We also conduct audits of beneficiaries to assess applicant program
compliance. As a result of audit findings, we have modified and
strengthened our internal controls, improved our outreach, and better
educated applicants and service providers regarding program rules.
Whistleblower Hotline and Special Investigations Team
In order to provide the public with a means of reporting activities
that may be in violation of E-rate program rules, USAC maintains a
whistleblower hotline. USAC's Special Investigations Team investigates
every call to determine if further action is required. We receive and
follow up on over 100 calls per year.
Education Regarding Program Requirements
Comprehensive applicant and service provider training in program
requirements are vital components of program integrity. USAC's
applicant training--an annual conference of state E-rate coordinators
and regional meetings throughout the year--emphasize the importance of
compliance with program rules and the consequences of non-compliance.
USAC also provides training and education opportunities to service
provider participants in the program
New Site Visit Initiative
One of the key lessons we have learned from our experience in
administering the program and from the audits we have conducted, as
well as from law enforcement investigations and media reports, is that
USAC needs a larger oversight presence in the field. Site visits will
allow us to assess more fully, in real-time, how E-rate funds are being
used, to learn about and publicize best practices in education
technology and program compliance, and to help ensure that products and
services have in fact been delivered and are being used effectively. We
have issued a Request for Proposals soliciting bids to conduct some
1,000 site visits a year. This step will further enhance program
integrity.
Puerto Rico Department of Education
Finally, let me turn to the participation of the Puerto Rico
Department of Education (``PRDOE'') in the E-rate program. For the
first three funding years of the program, 1998-2000, PRDOE applied for
and received a substantial amount of funding from USAC. As a part of
our initial set of audits of beneficiaries in 2000, we selected PRDOE
for an audit of the first funding year. The audit was completed in
October 2001. We were particularly concerned about findings that
100,000 computers that were to be installed in classrooms had not by
then been purchased and installed and that there were no computers in
the two schools the auditors had visited. So we advised PRDOE in
December 2001 that we would make no further commitments or
disbursements of E-rate funds until we received and evaluated its
response to our inquiries concerning the availability of computers and
other resources required to make effective use of the discounted
services. Since that time, USAC and the FCC have worked with PRDOE as
it has sought to come into compliance with program rules. In November
2003, the FCC issued an order directing USAC to conduct an audit of
PRDOE prior to disbursing any additional E-rate funds. That audit has
begun.
Conclusion
Mr. Chairman, thank you for providing me with the opportunity to
address the Subcommittee. We look forward to continuing to work with
Congress to improve the Schools and Libraries Support Mechanism. I
would be happy to respond to any questions you may have.

Mr. Greenwood. Thank you very much.
The Chair recognizes himself for 10 minutes for inquiry.
Let me start with you, Mr. McDonald. How many people work at
USAC?
Mr. McDonald. There are 15 people in the Schools and
Libraries Division, a little over 100 in all of USAC. USAC
administers all the universal service support mechanisms.
Mr. Greenwood. So 15 for the Schools and Libraries Program?
Mr. McDonald. We out-source the day-to-day operations of
the program. Our contractors work force is between 200 and 300
depending on the time of year.
Mr. Greenwood. So you have 200 to 300 people under
contract. What do they do?
Mr. McDonald. They review applications, review appeals,
review invoices, conduct special investigations.
Mr. Greenwood. Why have you chosen that method as opposed
to having all internal employees?
Mr. McDonald. When we were beginning we weren't sure
exactly how this was going to work, what the volume of work was
going to be and we figured that outsourcing was the best way.
Mr. Greenwood. Do you still think it is?
Mr. McDonald. We competitively bid the award several years
ago. We anticipate competitively bidding it again. I think it
does provide the best opportunity to get the most efficient
productive work force.
Mr. Greenwood. Well, you have a lot of problems at USAC and
it seems to me that if the contractors are--I am trying to
figure out what responsibility the contractors have here. We
have got this very diffuse responsibility. You have got FCC,
you have got USAC, now we have got contractors, we have got
school districts. Let me be specific. With regard to the
100,000 computers for Puerto Rico, had they certified that they
weren't in possession of those as part of their application?
Mr. McDonald. They certified in their application for 1998
that they had secured access to the resources. We did evaluate
whether that was true in Puerto Rico's case and we did decide
that it was true. If they had the budget for the 100,000
computers, we would have regarded that as having secured
access.
Mr. Greenwood. Have you rethought that?
Mr. McDonald. I have not today. Maybe we will, sir. The
application----
Mr. Greenwood. It seems pretty fundamental. If you are
going to spend $100 million to hook up 100,000 computers, that
having gone through this experience where the computers
evaporated in a withdrawn and contested bid, that you want to
make sure in the future that certifying that you have access to
the computers means they are actually in your buildings.
Wouldn't you?
Mr. McDonald. One consideration is applicants apply for
these funds 5 months before the funding year starts. Then the
internal connections to actually link up the computers can take
months. The funding year is available for 15 months. Before
they would actually be able to hook them up could be 20 months
from when they apply for the funds.
Mr. Greenwood. Have you been here all day?
Mr. McDonald. Yes, sir.
Mr. Greenwood. Okay. When we had the first panel we had the
IG here. I asked him about auditing. The thing that sort of
surprised me about this, and you may have heard me say to him,
this is not the first instance in which the Federal Government
has tried to figure out how to take money and grant it out to
entities like schools and to do it in a way that minimizes
waste, fraud, and abuse. Yet, it seems that in the case of USAC
here, and I wasn't paying attention at the birth of USAC--have
you been there since the beginning?
Mr. McDonald. I started with the Schools and Libraries
Corporation in December 1997 before we were merged into USAC.
Mr. Greenwood. Okay. So when this whole process was
invented because admittedly you got precious little guidance
from the Congress as to what to do, but it seems to me if it
were my job to set up USAC and I knew I was going to be
bringing $2.5, $2.25 billion in the front door and putting it
out the back door every year, that I would want to look around
and say: what is the state-of-the-art of doing that to prevent
waste, fraud, and abuse? Somebody must have invented the best
way to make sure that in those instances you have got a maximum
number of fiscal controls in place. Did that happen?
Mr. McDonald. What we did, sir, was under the direction of
the Chairman of the FCC we engaged Coopers & Lybrand who later
became PriceWaterhouseCoopers to work with us to design the
procedures that we would follow. Senator McCain directed the
General Accounting Office to come in and review those
procedures as well. As I mentioned, we accommodated both the
auditors and the GAO in what those procedures were. We felt
like----
Mr. Greenwood. What was the essence of Coopers'
recommendation? Because apparently what you do, I think, you
have got--what did you say? Well, describe again your auditing
process. You audit how many of these applications?
Mr. McDonald. We review all the applications when they come
in.
Mr. Greenwood. Right.
Mr. McDonald. Do you mean literally the audits after the
fact?
Mr. Greenwood. Yes.
Mr. McDonald. In the first year we audited 17, next year
25, last year 102.
Mr. Greenwood. Is that pursuant to what Coopers'
recommended to you? If it is an order of magnitude of 30,000
applications and grants that you audit and the order of
magnitude of 10, 20, 30?
Mr. McDonald. The procedures that Coopers attested to and
the GAO was commenting on did not involve audits. They were
application invoice review procedures and fund management. We
developed that later, the beneficiary audit concept.
Mr. Greenwood. What is the state of the thinking at USAC?
You have got some egg on your face here. You have got Puerto
Rico. You have got Chicago. You have got Atlanta. You have got
El Paso, etc. What is the state-of-the-art of your thinking
with regard to what is the best way to get this egg off your
face and make this program work efficiently?
Mr. McDonald. The two lessons that I think we have learned
immediately, and this committee may help us learn more, are
that we need a larger physical presence. The audits, even the
122 that the Inspector General talked about, is such a small
piece of 30,000 so we think we need to get to a much larger
number and that is why----
Mr. Greenwood. All right. In terms of who does the
auditing, you can have the FCC in charge of auditing. You could
have USAC in charge of auditing. You could have the IG in
charge of auditing. You could have the individual grantee in
charge of auditing. You could have contractors do that. There
is a variety of ways. The thought that occurred to me is that
if I am a school district and I am getting $100 million of free
money, it doesn't seem like an awful lot to say, ``And part of
your deal, individual grantee, is you must contract with an
independent accounting firm to do an audit and provide
statements to USAC that demonstrates the fact that you are in
compliance with all the guidelines.''
Why wouldn't that be the most perfect way to do it because
then you will have 30,000 audits? Of course, there is an
expenditure of money involved but it would have to be a small
fraction of the $2.25 billion and it would seem to me even if
you required auditing in the case of every single grantee, you
would still be way ahead because you would reduce dramatically
the likelihood that you are going to have these boondoggles.
Mr. McDonald. That would require a rule change and as USAC
we are prohibited from advocating policy. It certainly is a
model----
Mr. Greenwood. Whoa. Is that right? You are prohibited from
advocating policy?
Mr. McDonald. Yes, sir. We are the neutral administrator.
We are to follow the FCC rules.
Mr. Greenwood. Since you guys are up to your hips in this
process, how does the FCC benefit from your knowledge if you
can't recommend policy?
Mr. McDonald. They know all the issues we confront, sir. We
take the issues to them, seek guidance from them. They review
hundreds of appeals every year. They see the issues that we
face.
Mr. Greenwood. Let me turn to you, Ms. Mattey.
Ms. DeGette. Will the gentleman yield real quick? Actually,
Mr. McDonald, while you can't advocate policies, I understand
the rules, if Chairman Greenwood asked you your opinion on a
policy he is thinking of, I think the rules allow you to give
your opinion on that.
Mr. McDonald. I was about to go on and say that other
Federal agencies do do that. The IG talked about the A133
audits and it seems to me an effective way to proceed.
Mr. Greenwood. I am surprised that it would take you until
this point in your career to decide that might be a good way to
proceed but I am not in your shoes.
Ms. Mattey, how would you respond to my questioning of Mr.
McDonald, the line of questioning I had there about what is the
best way to audit these programs and would it, in fact, make
sense to require that every grantee contract out for an
independent audit so that we are not simply taking 1/1000th of
the contracts and having spot audits.
Ms. Mattey. Is your proposal that the school pay for the
audit or would the payment come out of the Universal Service
Fund?
Mr. Greenwood. I think it could go either way because the
school has a matching part. Maybe this could be considered part
of its match. You have got a lot of money here and it is buying
a lot of gold-plated hardware which is fine, I suppose, as long
as it is not over-engineered. But it seems like for a
relatively small fraction of the cost of all of this hardware
that is going in these installations, somebody onsite--this is
the way it is done for highway projects. This is the way it is
done for a lot of Department of Defense projects. A lot of
grantees are required to go out and make sure they have an
independent single, I think, audit, they refer to it as, to
make sure they are in compliance.
Ms. Mattey. As a general matter I think the agency agrees
that more audits should be done. To that end we have been
having conversations with USAC and with the Inspector General,
and the agency is working to develop what is called a three-way
agreement under which there would be audit work done with the
FCC, an outside audit firm, and the schools and libraries.
Mr. Greenwood. But that is not what I am proposing. What do
you think about what I am proposing?
Ms. Mattey. One thing that does occur to me is there are
some schools and libraries that receive a very small amount of
support and the cost of auditing a school that, for instance,
is maybe only getting $10,000 worth of dial-up telephone funds.
Mr. Greenwood. That is a good point.
Ms. Mattey. But as a general proposition I think that any
school that is getting a sizable amount of support, it would be
a good idea to have a more robust audit of the schools.
Mr. Greenwood. I am going to yield after this question but
particularly for this reason--the way this program works is--
the reason I think this program is so easily ripped off is
because, first off, it is not even a tax dollar. It is an
invisible sort of tax that people don't really understand on
their phone bill. When you get your phone bill and this
Universal Service Charge is on there, you don't really even
know who to complain to.
There is no public pressure applied to the expenditure of
these dollars because nobody knows where this money goes except
us in this room practically. Then you have this sort of neither
fish nor foul USAC entity, nonprofit corporation, which isn't
elected, isn't really responsible to answer to political
pressure when they screw up.
Then you have school districts out there who are getting
80, 90 percent match. No big deal to them. They have not much
at stake in making sure that the money is spent well. They are
going to look good to the people who elected them as school
board directors getting all this free money and if they foul
up, they are not as politically at risk as if they had taken
this money out of the taxes of their local people.
All this in combination and then the tendency of the
vendors to drive the architecture to be as big and as expensive
as possible because the more they do, the more money they make
and the happier the school district is because it is all free
money anyway. It seems to me for all those reasons we need to
have not only more robust but we have to have a complete
transformation of the way we think about how to audit these
funds.
We have a series of three votes and it will probably take
us until 2:30 to accomplish that and return here so can you all
be here at 2:30 and then we will, therefore, recess until 2:30.
[Whereupon, at 1:59 p.m. the subcommittee recessed, to
reconvene the same day at 2:43.]
Mr. Greenwood. The meeting will come to order. The Chair
recognizes the gentlewoman from Colorado for 10 minutes for
inquiry.
Ms. DeGette. Thank you, Mr. Chairman.
Ms. Mattey, the Inspector General testified that, ``Every
rock that we turn over we find stuff.'' That is a quote. In
your statement you said that the audit work today suggest that
the level of rule noncompliance is relatively low. I am
wondering how you can square those two statements.
Ms. Mattey. The statement in my testimony is based on
looking at the dollars that have been dispersed and the
comparison of the dollars that need to be recovered based on
that audit work. There are two ways you can look at this. One
is to say I am auditing a beneficiary and that beneficiary has
violated a rule. But in some cases the rule violation in
question may only require that you recover a fraction of the
dollars that were provided to that entity, maybe 5 percent or 2
percent. The testimony we presented was looking at it in terms
of the dollars dispersed and the dollars that need to be
recovered.
Ms. DeGette. Well, if I may just beg to differ for a
minute, the problem is, as the Inspector General said, because
of lack of resources in the IG's Office they don't even have
enough audits going on every year to do a reliable sample size
to see what dollars need to be recovered. Do they?
Ms. Mattey. I can't comment on what he said. As I said
before, the agency thinks that the number of audits need to be
increased and that is something that we are all working
together to make happen.
Ms. DeGette. And until the audits are increased, I think it
would probably be fair to say that we don't really know the
magnitude of the problem of dollars that need to be recovered.
Isn't that fair to say?
Ms. Mattey. I think that is----
Ms. DeGette. If you don't know what is out there, you don't
know what you are losing. All you can base your data on is what
has been done so far.
Ms. Mattey. That is correct.
Ms. DeGette. Now, in your testimony you said that the
systems that the FCC has in place have, ``successfully detected
situations like the Puerto Rico Department of Education where
program participants have run afoul of our rules.'' I wonder
what you would view how much money was wasted in Puerto Rico
before the FCC successfully detected the situation?
Ms. Mattey. I think that is a question that has to await
the completion of the audit looking at what was received by
Puerto Rico during the first 3 years.
Ms. DeGette. Well, there was over $100 million spent in
Puerto Rico. Correct?
Ms. Mattey. That is my understanding.
Ms. DeGette. Do you have any opinion as to how much of that
money was wasted and how much was not wasted?
Ms. Mattey. I don't have enough information to have an
opinion on that. As I said, that is something the audit will
determine ultimately.
Ms. DeGette. And who is conducting that audit?
Ms. Mattey. That audit is being conducted by KPMG under
contract with USAC.
Ms. DeGette. And when will that audit be completed?
Ms. Mattey. I would defer to USAC on that. That is the
audit that the Commission ordered should happen.
Ms. DeGette. Mr. McDonald, when will that audit be
completed?
Mr. McDonald. They are onsite now. We expect site visits to
go into July and then I am not sure how long. I think a month
or 2 after that to resolve audit issues and give PRDOE to
respond, etc.
Ms. DeGette. Okay. Do either one of you, Mr. McDonald, or
Ms. Mattey, do you consider that the pace at which the Puerto
Rico situation was detected to be a success of the detection
systems of the FCC?
Ms. Mattey. My understanding of the situation is that USAC
informed Puerto Rico that no further disbursements would be
made less than 2 months after receiving that final audit report
in 2001.
Ms. DeGette. So you do think it was a success even though--
--
Ms. Mattey. I think in this situation it was important to
stop further money flowing to Puerto Rico.
Ms. DeGette. I cannot agree with you more. I really cannot
agree with you more but my question to you is that payment was
not stopped until over $100 million was paid out to Puerto
Rico. Do you think there is anything that can be done to stop?
I mean, you have been here--I think all of you have been here
all day.
You have heard about the terrible situation we have there
where we have how many schools? Six schools wired? Nine. Excuse
me. Nine schools wired? I hate to exaggerate in either
direction. I mean, nine schools are wired out of their many,
many schools and, yet, $100 million plus was spent. Do any of
you see a problem with the lack of detection earlier? Mr.
McDonald.
Mr. McDonald. As I mentioned in my statement, I think we
have all concluded that we need to be present in the field much
more than we are. It was an audit that caught that for us and
led to the stopping of the money but that is why we are going
to initiate these 1,000 site visits to get out there quickly
after we have been invoiced so the equipment and services
should have been delivered are they there.
Ms. DeGette. And in the Puerto Rico situation, as we heard
in the last panel, there were not even invoices. Correct?
Mr. McDonald. I am not sure what you mean, Congressman.
Ms. DeGette. Well, some of the testimony as I heard it was
that payments were being made without invoices to support those
payments. Were you aware of that?
Mr. McDonald. For many of the invoices we checked and there
were customer bills to support the invoices. In fact, in 2001
before we cutoff the disbursements we continued to verify with
PRDOE that the services were being received and installed and
we got that certification from PRDOE.
Ms. DeGette. Right. But you just said that the new plan is
to make sure that the invoices are accurate to send people out
into the field. Before 2001 the testimony I believe as I heard
it was that there were not even invoices when dispersements
were made.
Mr. McDonald. We don't make a disbursement without getting
an invoice from the service provider and in many of those cases
we would check to see is there a customer bill to support this.
Ms. DeGette. Well, in the Puerto Rico situation, is it your
testimony to the best of your recollection that all of the
payments that were made were supported by invoices because that
is not what we heard before.
Mr. McDonald. Eighty-eight percent of the funds that we
disbursed to PRDOE there was some manual verification. That
doesn't mean we verified a customer bill in all those cases but
I----
Ms. DeGette. Do you think that would be a good practice in
the future?
Mr. McDonald. This goes back to 1999 making disbursements
and we certainly increased our invoice checks, the number, and
the quality of those checks a lot.
Ms. DeGette. Is it the practice of your agency to only make
disbursements when supported by invoices or some other paper
documentation or electronic documentation?
Mr. McDonald. Today we don't verify 100 percent of the
invoices that come into us. They all go through automated
checks.
Ms. DeGette. Okay. That is not what I am asking you. I am
sorry. What I am asking you is do you make disbursements
without invoices?
Mr. McDonald. We don't make disbursements without invoices
from the service provider to us.
Ms. DeGette. That is my question. That is my question.
Thank you very much. Now, back before 2001, 1999/2000 when all
of this was going on in Puerto Rico, was that also the policy?
Mr. McDonald. That has always been the case.
Ms. DeGette. So have you gone back on this part of the
audit that is going on right now to see if there were payments
made without invoices during that period of time?
Mr. McDonald. There is no way in our system that a payment
would be made without either service provider invoice which
everything in Puerto Rico is a service provider invoice. There
is no way we would make a disbursement without a service
provider invoice.
Ms. DeGette. Okay. So the testimony we heard earlier then
was inaccurate?
Mr. McDonald. I don't remember what was said. Customer
bills would be different from invoices to us.
Ms. DeGette. Yeah, I understand. We are getting caught up
in semantics. Now, Mr. Greenwood's proposal, which I think has
some eloquence to it, that school districts pay for their own
audits, I guess I would just say, Mr. Greenwood, I think
particularly for the schools that are receiving funds with No
Child Left Behind and many state requirements, I think it may
be difficult for many of those schools to pay for these audits
out of their own separate resources.
But I definitely think it is a great idea to have them pay
for them out of a percentage of the E-Rate funds that they
receive. It would be part of the match. My question is do any
of you have an opinion as to what level of grant participation
you would want to have to have some kind of audit system come
into place. I think Ms. Mattey was right, you don't want people
getting $10,000 to have to----
Ms. Mattey. I don't know the specifics, but I would think
you would want to look at--I understand there is an existing
requirement that applies in other Federal programs and
depending on the number of Federal dollars received you get
audited every year or every 3 years so that, to me, just from a
conceptual level would seem to make sense.
There is a dollar threshold: if you get $50,000 or more,
maybe you get audited every 3 years. If you are getting a
million dollars, then maybe it is every year. Something like
that. I don't have specific figures, but something conceptually
like that.
Ms. DeGette. Great. Thank you.
Thank you, Mr. Chairman.
Mr. Greenwood. The Chair thanks the gentlelady. I want to
go back briefly to the question of what is considered waste and
what is isn't considered waste. The problem that I have is the
metric that you used in your testimony was what percentage of
the total dollars outlayed were actually recovered. The problem
that I have with that as a metric for waste is that the less
money you recover, the better you look.
Ms. Mattey. Actually, the metric I was talking about is the
dollars that need to be recovered compared to the total dollars
audited.
Mr. Greenwood. Right. I understand that. But here is the
problem I have with that. When you look at some of these cases
like at the Atlanta School District where they were putting
servers in top-of-the-line--let me read this. ``Atlanta
installed Cisco's top-of-the-line electronics, the equipment
that moves Internet traffic through cyberspace in every school
rather than in a limited number of regional hubs. Just two of
the components could run an entire network. Atlanta ultimately
bought more than 200 of them at $50,000 to $100,000 each.''
Assuming that is correct, they bought 198 extra servers. Are
you aware of that allegation from the----
Ms. Mattey. I have read the trade press reports about that.
Mr. Greenwood. Pardon me?
Ms. Mattey. I have read trade press reports.
Mr. Greenwood. Right. Okay. That certainly seems to me to
be something that one should count as waste even if it was
never recovered and even if there was never a decision made to
recover. Do you follow me?
Ms. Mattey. Yes.
Mr. Greenwood. Okay. And let us look at these kind of
issues. What sort of standards does either the FCC or USAC have
to make sure that we don't get over-engineered gold-plated
systems that would be the natural proclivity of a contractor
trying to maximize its profit? Anyone.
Ms. Mattey. Well, as a general matter, the Commission's
rules prohibit the funding of duplicative services. In a
situation where an entity is getting duplicative services, that
would be a violation of our rules.
Mr. Greenwood. How do you make sure that doesn't happen?
Ms. Mattey. Well, from a processing standpoint I would
defer to USAC.
Mr. McDonald. If we think the services that are being
requested are unreasonable, we look to the technology plan to
see if they are supported by the technology plan.
Mr. Greenwood. How did you respond to Secretary of
Education Rey's comment that they never found any document that
there even was a plan?
Mr. McDonald. They would have certified to us that they had
a plan approved by the U.S. Department of Education.
Mr. Greenwood. All right. So the Department of Education
has to approve their plan and USAC doesn't?
Mr. McDonald. Under FCC rules state agencies in this case
for Puerto Rico, the U.S. Department of Education, are
approvers of technology plans for school districts in their
state. We don't approve them but State Departments of Education
do.
Mr. Greenwood. So State Departments of Education do. I
didn't even know that. That is an entirely new wrinkle. So now
you have not only is the money collected by phone bills and it
is not in taxes and the school district doesn't really care
about how much is wasted because it is mostly not their money,
but you have got this state Department of Education which has
essentially no stake in this business certifying their plan. Is
that the way it works?
Mr. McDonald. As it does for the U.S. Department of
Education.
Mr. Greenwood. I understand that. Neither FCC nor the USAC
reviews these applications to see as to their adequacy. They
allow the State Departments of Education to do that?
Mr. McDonald. We don't review the technology plans. We may
review them if we have questions about the services being
sought in an application.
Mr. Greenwood. In other words, if you are not reviewing
them, how would questions arise?
Mr. McDonald. Because the services may look extraordinary.
In some cases, I recall once where we saw very expensive PBXs
and we verified that the price was legitimate for the PBX that
it was but it had a lot of functionality beyond what most
schools and libraries would acquire. We went to the technology
plan to see if that functionality was called for in the
technology plan and it was.
Mr. Greenwood. What motivation would a state Department of
Education have to tell one of its school districts that its
technology plan was excessive?
Mr. McDonald. Good government, sir. I don't have an answer
beyond that.
Mr. Greenwood. Um. Let me ask a question of you, Ms. Mago.
Secretary Rey states that you requested during a January 2003
meeting that he submit another request in writing for the
release of the funds and that the PRDOE would receive a
decision within 10 days. Is that true?
Ms. Mago. That is not true to the best of my recollection,
sir. I have been trying to figure out what I could have said
that could have been misinterpreted that way. My objective here
was to try to be as helpful as I could in the course of trying
to resolve a problem in a way that would preserve the integrity
of the E-Rate Program, not interfere with investigations that
were ongoing in other parts of the Government and the
Department of Justice and Department of Education and try to
figure out if there was some way that we could get to a point
where we could make a break between bad events of the past and
good events of the future.
Mr. Greenwood. You say in your testimony--I guess this is
directed to Ms. Mattey--that you intend to use statistical
sampling techniques so that audit results can provide a basis
for forming conclusions about overall program compliance. To
date have you conducted a systematic audit using such
statistical sampling techniques?
Ms. Mattey. Well, the last audit work that was done in the
last calendar year, my understanding is that the sample was
determined in consultation with the Office of Inspector General
so I would defer to Mr. Feaster as to whether that was a
statistically valid sample or was it a random sample. The
intent on a going-forward basis is to have the agency ensure
that a sample is a large enough size so that program
conclusions can be drawn from the audit work that is being done
in the coming year.
Mr. Greenwood. You state in your testimony that you are
reviewing your rules and audit procedures to learn from this
experience. What lessons do you derive from the fact that PRDOE
has been operating since December 2001 without an answer to its
funding requests?
Ms. Mattey. I think the bottom line here is that we want to
make sure that Puerto Rico is in compliance with the
Commission's rules before money flows to Puerto Rico. Sometimes
things take time but we have got to make sure we get it right.
Mr. Greenwood. Do you have a time table? Do you have an
estimate as to how long you think it will take?
Ms. Mattey. I would defer again to USAC. I believe he
testified about the timing of the audit and the audit process.
Mr. Greenwood. Would you repeat what you said about that,
Mr. McDonald?
Mr. McDonald. The site visits are currently underway. We
expect them to continue into July and then I think it will
probably take another few months to resolve any issues coming
out of that and give PRDOE an opportunity to respond to them.
Mr. Greenwood. Ms. Mattey, how many appeals are pending at
the FCC?
Ms. Mattey. I don't know that number off the top of my
head.
Mr. Greenwood. My staff tells me that the USAC tells them
it is 453.
Ms. Mattey. I don't know if that is the precise number but
that sounds right.
Mr. Greenwood. How many at the Bureau are working on them?
Ms. Mattey. Overall in the Bureau I believe we have about
seven people working on E-Rate related matters, but I would
want to supplement if I don't have the right figure.
Mr. Greenwood. Do you know how long it would take seven
people to get through 453 appeals? It just seems----
Ms. Mattey. We do several hundred every year and have since
the beginning of the program.
Mr. Greenwood. Okay. I want to go back to this issue, Mr.
McDonald, of the State Education Departments signing off on the
technology plans. Do you know how frequently State Departments
of Education do not sign off on them, that reject them as being
excessive or unrealistic or too ambitious or too expensive?
Mr. McDonald. I don't know that, sir. We wouldn't know
that. If they were back and forth to get a plan to an
approvable state, we wouldn't know that. We would just know
that the state finally had signed off on it.
Mr. Greenwood. So am I accurate when I say that neither
USAC nor the FCC assumes responsibility for whether the
technology plan is rational or not? You leave that entirely to
the Departments of Education?
Mr. McDonald. Pursuant to FCC rules the states are
permitted to be approvers of technology plans.
Mr. Greenwood. Do you agree with that, Ms. Mattey?
Ms. Mattey. He is accurately stating the Commission's
rules.
Mr. Greenwood. All right. Thinking about that, do you see
where that could cause some concern? It seems to me that when
we see some of this--when you have this motivation that I think
exist's in the place of the contractors and the vendors to try
to encourage the school districts to use what is--they only
have to pay 10 or 20 cents on the dollar--the incentive is to
overcapitalize the system, to build in a way that suits the
interest of the contractor, not necessarily the rate payer who
is paying for this, or even the taxpayers paying the 10 to 20
percent. I am uncomfortable with the notion that State
Departments of Education who have nothing at stake. It is not
state money. There is not a penny of state money.
Ms. Mattey. It is actually possible that the state is
providing the school's match. It may be coming out of state
budgets. It would depend on whether it is from the local school
district or the state, but my understanding is many school
districts do receive funding from the state and that would be--
--
Mr. Greenwood. Specifically for this program?
Ms. Mattey. I don't know for sure but my understanding is
states do provide the funding to the school districts.
Mr. Greenwood. In Pennsylvania we spend a lot of money on
state education. It goes in the form of student subsidy
formulae and so forth. The problem I have is that the
bureaucrats in the Department of Education in Harrisburg,
Pennsylvania, I don't see that they have a lot invested in
whether a school district in Philadelphia or Pittsburgh or
Scranton or Harrisburg or anywhere else overdoes their system.
I just really have a hard time imagining having spent 24 years
in Government that there are people sitting at desks in all
these state capitals saying, ``What do you mean two servers in
the school?'' I just find that hard to believe.
My time has expired. Does the gentlelady wish to inquire
further?
Ms. DeGette. I just wanted to ask Mr. McDonald. I think you
testified this audit is ongoing, that they are in the field
right now, that they should have some results within the next 2
months. Is that accurate?
Mr. McDonald. The site visits should be done in July. This
is information I have from our Director of Internal Audit who
is down there as we speak. He expects the site visits to be
completed in July and then I am anticipating that it would take
several months to resolve issues as they come out of the field.
Ms. DeGette. Is the intention then that the E-Rate funding
would be restored at that point to Puerto Rico?
Mr. McDonald. We will take the results of that audit and
see if we think that it documents any rule violations and come
to our recommendation about what to do with respect to the
2001/2002 applications.
Ms. DeGette. I know it is always dangerous when I do this
but I think I can speak for the Chairman. It seems to me that
the new administration in Puerto Rico is really making a
yeoman's effort and has been since 2001 to rectify a very, very
bad situation that resulted in $100 million being basically, in
my view, thrown to the winds. I know that the new
administration in Puerto Rico has been trying to work with USAC
and with the FCC to get the funding restored since 2001.
I am pleased to see you have the audit in the field now and
I support that. I think it is necessary after what has
transpired. I mean, the Puerto Rican school system is one of
the five largest in the country and all these school children
are sitting here without the kinds of services that they should
be entitled to and that Congress intended. When they testified
I heard their frustration in their voices.
I understand the need for an audit for resolving situations
but what I would say to all of you, and particularly you, Mr.
McDonald, is I really think that USAC and the FCC need to do
everything once this audit is completed to expedite funds back
to Puerto Rico so that we can get this program back on track. I
see you are nodding. I don't think you would disagree with that
in any way.
Mr. McDonald. I believe that the Bureau, the Office of
Inspector General, and USAC all share that feeling.
Ms. DeGette. I would further say, Mr. Chairman, I would
hope we would continue to use our oversight authority to ensure
that this happens in a timely fashion because what often
happens is these processes get bogged down and while we all
want to see a thorough investigation, we really don't want it
to get bogged down. We want that money to start going back.
Mr. McDonald. No FCC action is required if the audit is
clean and we have no issues. USAC can act on those
applications.
Ms. DeGette. Thank you.
Mr. Greenwood. The gentlelady yields the balance of her
time to me to just wrap up here. Let me just be clear, Ms.
Mattey. Why has it taken 2\1/2\ years to start the audit in
Puerto Rico when they came up to you as soon as they took
office and said--they came up to Washington and said, ``We have
a problem. Our predecessors really fouled this thing up. They
broke the rules. We have got to start from scratch.'' Why has
all of this been necessary for so much time to elapse?
Ms. Mattey. I think I will defer to Ms. Mago on this
because she was the person who was in contact with them.
Mr. Greenwood. Okay.
Ms. Mago. The answer quite simply is that we tried to work
with the Puerto Rico Department of Education. We had to go
through a number of different steps with outside parties
working with the Justice Department to ensure that we weren't
going to foul up any ongoing investigation, working with the
Department of Education to make sure that we were consistent
with their investigations and where they were going.
By the time we got to roughly January 2003 we were at a
point where we needed to--we said we are ready to try to go
forward. At that point we considered what was the proper
approach to have a framework because it was clear to us that
Puerto Rico was not the only situation where there might need
to be a work-out plan, if you will, to be able to go forward.
The process that we developed was to put the matter out for
public comment to get information in that way. The Commission
issued it's order by November 2003 and then we proceeded from
there.
Mr. Greenwood. Final question and I will ask each of you to
respond if you care to. Do you think this system needs to be
restructured based on these experiences?
Ms. Mattey. I would say there is always room for
improvement.
Mr. Greenwood. I thought you might say that.
Ms. Mago. And we have taken steps. We are moving forward.
We recognize that there is need for improvement and that is
why----
Mr. Greenwood. The distinction I am trying to make is the
distinction between incremental improvement where you propose
some rule changes as opposed to saying, ``Look at the way this
thing appears on the chart. The money flows here and then it
goes to FCC and then USAC and State Board of Education over
here.''
It seems to me, and it is probably not for you to say, but
it seems to me that, what is occurring to me is that, it needs
more than the kind of thinking that says there is always room
for improvement. That is not necessarily your function. It
seems to me we need to get out of the box and we sort of think
this thing from scratch.
Any other comments on that point? Without objection, the
binder will be made part of the official record and the record
will stay open for 30 days so that we can receive some other
responses we have requested from the witnesses. Thank you all
again for your testimony and the committee is adjourned.
[Whereupon, at 3:12 p.m., the subcommittee adjourned
subject to the call of the Chair.]

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