[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

=======================================================================

                                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

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                           WASHINGTON : 2004
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                    COMMITTEE ON ENERGY AND COMMERCE

                      JOE BARTON, Texas, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
RALPH M. HALL, Texas                   Ranking Member
MICHAEL BILIRAKIS, Florida           HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
JAMES C. GREENWOOD, Pennsylvania     FRANK PALLONE, Jr., New Jersey
CHRISTOPHER COX, California          SHERROD BROWN, Ohio
NATHAN DEAL, Georgia                 BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming               BART STUPAK, Michigan
JOHN SHIMKUS, Illinois               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
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:

----------------------------------------------------------------------------------------------------------------
                                                                                                       Potential
               Report Date                           Applicant                    Conclusion              Fund
                                                                                                        Recovery
----------------------------------------------------------------------------------------------------------------
11/06/03.................................  Santa Fe Indian School......  Compliant...................         $0
01/07/04.................................  Navajo Preparatory Academy..  Not Compliant...............  2,084,399
----------------------------------------------------------------------------------------------------------------

    We have also established a working relationship with the Office of 
Inspector General at the Education Department (Education OIG). In April 
2003, Education OIG initiated an audit of the use of federal education 
funding to purchase equipment to make effective use of internal 
connections and internet connectivity funding by 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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