[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 3

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               ----------                              

                           SEPTEMBER 22, 2004

                               ----------                              

                           Serial No. 108-124

                               ----------                              

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house
 PROBLEMS WITH THE E-RATE PROGRAM: WASTE, FRAUD, AND ABUSE CONCERNS IN 
       THE WIRING OF OUR NATION'S SCHOOLS TO THE INTERNET--Part 3
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 PROBLEMS WITH THE E-RATE PROGRAM: WASTE, FRAUD, AND ABUSE CONCERNS IN 
           THE WIRING OF OUR NATION'S SCHOOLS TO THE INTERNET
                                 Part 3

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 22, 2004

                               __________

                           Serial No. 108-124

                               __________

       Printed for the use of the Committee on Energy and Commerce


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

                               __________
                    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:
    Bohuchot, Ruben, Chief Technology Officer, Associate 
      Superintendent, Dallas Independent School District.........   141
    Caine, Christopher G., Vice President, Government Programs, 
      IBM, accompanied by Mike Pratt.............................   245
    Carlisle, Jeffrey, Chief, Wireline Competition Bureau, 
      Federal Communications Commission..........................    20
    Feaster, Walker, III, Inspector General, Federal 
      Communications Commission; accompanied by Thomas Cline, 
      Assistant Inspector General, Audits, Federal Communications 
      Commission;................................................     8
    Foster, Sharon, Technology Information Systems Director, 
      Ysleta Independant School District.........................   148
    Glogovac, Paula, former E-Rate Consultant to Sun Microsystems   155
    Green, Judy, former E-Rate Consultant, Video Network 
      Communications; accompanied by Quentin Lawson, Executive 
      Director, National Alliance for Black Educators; Carl 
      Muscari, former President and CEO, Video Network 
      Communications; Robert McCain, Program Manager, NEC BNS; 
      Emma Epps, Superintendent, Ecorse Public School District; 
      Douglas Benit, former Facilities Director, Ecorse Public 
      School District; and William Singleton, Superintendent, 
      Jasper County Schools, Ridgeland, South Carolina...........    51
    Hawthorne, Nathaniel, General Counsel, Alpha 
      Telecommunications, Incorporated...........................   196
    McDonald, George, Vice President, Schools and Libraries 
      Division, Universal Service Administration Company.........    15
    Tafoya, Charles, Superintendent, El Paso Independent School 
      District...................................................   123

                                 (iii)

  

 
 PROBLEMS WITH THE E-RATE PROGRAM: WASTE, FRAUD, AND ABUSE CONCERNS IN 
       THE WIRING OF OUR NATION'S SCHOOLS TO THE INTERNET--Part 3

                              ----------                              


                     WEDNESDAY, SEPTEMBER 22, 2004

                  House of Representatives,
                  Committee on Energy and Commerce,
              Subcommittee on Oversight and Investigations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton, 
(acting chairman of the subcommittee) presiding.
    Members present: Representatives Stearns, Bass, Walden, 
Rogers, Barton (ex officio), Deutsch, and DeGette.
    Also present: Representative Bono.
    Staff present: Mark Paoletta, majority counsel; Tom Feddo, 
majority counsel; Peter Spencer, majority professional staff; 
Jaylyn Jensen, majority professional staff; Michael Abraham, 
legislative clerk; David Nelson, minority counsel; and Jessica 
McNiece, minority clerk.
    Chairman Barton. The subcommittee will come to order. 
Today, we are continuing a series of hearings by the Oversight 
and Investigations Subcommittee of the Energy and Commerce 
Committee on problems with the E-Rate program, waste, fraud, 
abuse concerns in the wiring of our Nation's schools to the 
Internet.
    We are going to have three panels. The first panel is a 
panel of Federal officials responsible for overseeing the 
program, approving the program, and monitoring compliance with 
the regulations for the program. Our next two panels consist of 
officials of local school districts and various private vendors 
and consultants who have assisted those districts in applying 
for and using funds within the program.
    This hearing is going to resume our focus on problems with 
the front end of the E-Rate process, the critical area of the 
program where applicants must take certain required steps to 
plan and choose the products and services that they wish E-Rate 
to support. Failure to take the right steps at the beginning of 
the process can result in wasteful spending, if not fraud and 
abuse, when the E-rate funds begin to flow.
    This hearing will also resume the subcommittee's 
examination of a bid-rigging conspiracy involving a large 
vendor, NEC BNS, which affected E-rate applications in a number 
of school districts around the country. In late May of this 
year, the NEC pled guilty to conspiring to eliminate 
competition in E-rate projects and also to wire fraud.
    This past July, we examined this conspiracy largely in 
connection with the San Francisco Unified School District. We 
heard about a fraudulent $50 million application that passed 
the normal approval process and was thankfully eventually 
stopped because one key individual, that district's 
superintendent, took responsibility and turned down the 
questionable funding and launched an internal investigation. In 
that case, because of that superintendent's responsible 
actions, E-rate funds did not flow into the conspirator's 
hands.
    In contrast, we are going to look at a couple of districts 
where the superintendents did not stop the questionable 
funding, where E-rate funds were expended, and we will examine 
how the school districts abdicated their duty to responsibly 
manage the people's money.
    Four of the witnesses in connection with the topic today 
declined to appear voluntarily. Therefore, this committee had 
to issue subpoenas last week to command their presence and 
testimony. Among those that we had to subpoena that are here 
today are the superintendent of the Ecorse Michigan Public 
School District, Dr. Emma Epps, and the former facilities 
director for Ecorse, Dr. Douglas Benit. Both of these school 
officials can help us, if they will, understand how Ecourse 
became involved with NEC BNS and how they developed plans to 
spend E-rate funds, including spending on goods and services 
that were ineligible for E-rate discounts.
    We also have Mr. Quentin Lawson, the executive director of 
the National Alliance of Black School Educators, NABSE. He can 
explain how NABSE assisted school districts with their E-rate 
plans and how NEC BNS became involved with these plans.
    We have also issued a subpoena to Mrs. Judith Green, an E-
rate consultant and former employee of VNCI, a now defunct 
company that supplied E-rate gear to school districts through 
NEC BNS. Although U.S. marshals were not able to serve Mrs. 
Green to command her appearance at our July hearing, she has 
been successfully served this time, and we have provided her 
another opportunity to explain what she knows about the NEC BNS 
conspiracy.
    A well-run E-Rate program requires a high degree of 
accountability on the part of applicants, vendor participants 
and the managers of the program, both at the Universal Service 
Administrative Company, or USAC, and the Federal Communications 
Commission, the FCC. There are many key questions we must 
address on this front. For example, how do we ensure that 
school districts have done their homework, as the program 
requires, and have planned and decided what they need from E-
rate before they choose vendors? How do we ensure that the 
competitive bidding for goods and services has been conducted 
properly and truly is competitive? How do we ensure that 
vendors and consultants do not insinuate their advice 
inappropriately in this process?
    To help us answer these questions, another aspect of this 
hearing involves a case where about 20 school districts applied 
for a total of $500 million in E-rate support but were rejected 
for the funding by USAC, the E-rate administrator, because they 
did not select E-rate goods and services competitively. The 
year before this massive rejection, the El Paso Independent 
School District, which is the seventh largest district in 
Texas, applied for and received E-rate discounts using the very 
same methods later identified by the FCC as undermining the 
competitive process.
    It is notable that El Paso E-rate support increased by some 
$64 million in a single year. In other words, it went from 
around $4 million 1 year to around $67 million, I believe, the 
next year when it deployed this strategy to use a single vendor 
as a so-called strategic technology integrator for the purposes 
of E-rate work. El Paso's public request for this integrator 
made clear that the district had not yet determined what goods 
and services it would seek on E-rate applications, thus 
suggesting that the winning vendor would become closely 
involved in the subsequent E-rate planning process.
    The success of El Paso's funding request appears to have 
influenced school district decisions around the region the very 
next year. In other words, the word got out that there was easy 
money to be had. Those districts that decided to implement a 
strategy similar to El Paso's fortunately, for the taxpayers, 
were later rejected because the strategy did undermine 
competition.
    We will hear from the vendor that served El Paso as the 
integrator, IBM, about its role in the process today. We will 
also hear from several of the school districts and from other 
witnesses who can shed light on how the process unfolded. I am 
hopeful they can explain how the public came to be so poorly 
served.
    What happened in El Paso and in the other districts will 
provide for this subcommittee a window into the program setup, 
the quality of planning by school districts and the impacts on 
price and eligibility of services when competition is not able 
to flourish. Throughout this review, I have remained very 
troubled by the performance of the FCC and USAC at actually 
rooting out waste, fraud, and abuse. They are supposed to be 
guardians of the public trust. In many cases, in my opinion, 
they have failed to adequately discharge their oversight 
responsibility. These case studies today will further 
illuminate problems that we found within their oversight of the 
program. The pace and scope of program reforms have been, in 
many cases, too little and too late.
    Finally, and more fundamentally, I have serious concerns 
about why the FCC set up the program this way in the first 
place. From the evidence emerging from the series of hearings, 
this program needs wholesale restructuring.
    With that said, I look forward to hearing from the USAC and 
the FCC as well as the numerous other witnesses at this hearing 
today. I look forward to getting clear answers so that we can 
do our job as the oversight committee to reform the program, so 
that the public trust is not squandered. I want to welcome all 
of our panelists and, with that, I would recognize the 
distinguished ranking member of the subcommittee, Mr. Deutsch 
of Florida, for any opening statement which he wishes to make.
    Mr. Deutsch. Thank you, Mr. Chairman, for recognizing me 
for the purpose of making an opening statement. As you are 
aware, the opportunity to make opening statements, which has 
long been recognized in the Committee on Energy and Commerce on 
a bipartisan basis as a member's right, was denied members on 
Wednesday, September 15. Before proceeding with my initial 
remarks, let me note that next Congress, regardless of who is 
in the majority, members will have an opportunity to debate and 
vote on the serious break with committee precedent and 
tradition. In the interim, I strongly urge that committee 
precedent and tradition be respected. Again, I want to thank 
you for recognizing me for this opening statement this morning.
    Mr. Chairman, I commend you for holding this hearing and 
the investigation that has led up to today's inquiry. The E-
Rate program has far-reaching consequences and is among those 
that determine the economic health and security of this Nation 
for years to come. Congress enacted the E-Rate program to 
assure that all of our children have schools and libraries that 
connect to the Internet. Seven years and over $15 billion 
later, the program has not yet achieved that goal.
    In fairness, there has been some marvelous success stories. 
In those instances where competent administrators have combined 
E-rate funds with other funding sources and good planning, they 
have produced classrooms where first graders do Powerpoint 
presentations and third graders forecast weather. 
Unfortunately, this is clearly not the norm.
    Mr. Chairman, this subcommittee has a history of exposing 
waste, fraud and abuse in Federal programs. We have usually 
been able to proceed on a bipartisan basis because it is in the 
interest of everyone to expose and halt such practices. In this 
investigation, the subcommittee has unfortunately hit the 
trifecta. Our first hearing focused on waste--$100 million 
spent in Puerto Rico for high-speed Internet, yet the two 
computers per school were connected to the Internet via dial-up 
modems provided from local funds. All E-rate funds were wasted. 
Our second hearing focused on fraud. NEC Corporation paid $20 
million in fines and pled guilty to criminal charges involving 
bid-rigging of an E-rate contract in San Francisco and 
elsewhere. Local officials stopped the fraud from coming to 
fruition in San Francisco. Two of the school districts where 
NEC and its co-conspirators fraudulently obtained funds will be 
part of today's hearings.
    This hearing really focuses on abuse of the program. One of 
the premier technology corporations, IBM, devised schemes to 
appropriate virtually all of the funds available for wiring 
30,000 schools and school districts in the country to a handful 
of school districts that agreed to become strategic partners 
with that company in use of E-rate funds. In 2002, school 
districts listing IBM as a primary vendor submitted 
applications totaling about $1 billion in costs to wire the 
internal connections in a handful of school districts.
    The applications were modeled on its, ``success,'' in El 
Paso, Texas where IBM managed to spend $69 million the year 
before to supply those schools with equipment and services that 
far exceeded the ability of the district to effectively utilize 
them. This gold-plate equipment was installed without the 
necessary discussions and teacher trainings. Much of it has 
gone unused. A prime example is the $27 million spent on a help 
desk that the extent that such funds might have been eligible 
for E-rate funds largely duplicated the warranties that should 
have come with the installed equipment. That desk operated for 
only a couple of months and provided no present-day benefit for 
the school children of El Paso.
    Mr. Chairman, you and your staff have indeed documented how 
a program that was enacted to serve such an important goal has 
been derailed by incompetent administration, greedy vendors and 
in some cases ill-prepared local school officials. The IBM case 
study demonstrates once again how this program that is supposed 
to benefit our children has been captured by vendors whose only 
interest is fattening their own pockets. E-rate was designed to 
close the digital divide, to close the gap between those 
children whose parents could afford to provide them with a 
computer connected to the Internet at home, whose community 
schools taught them how to utilize the unlimited information 
available on the World Wide Web, to make a place for themselves 
in this increasingly technologically dependent economy and 
those Americans who are not so advantaged.
    It is these children, the children of America's hardworking 
families whose jobs have been lost to competition from cheap 
foreign labor who must access the new technology if they have 
any hope of being part of the economic future of this country. 
And this country can ill-afford to be a Nation divided between 
the competitive and the ill-equipped. Look forward to the 
testimony.
    Chairman Barton. I thank the distinguished ranking member 
of Florida for that opening statement. Before he recognizes the 
vice chairman, I'd just like to take a point of personal 
privilege to point out that the Chair held the start of this 
hearing for 15 minutes so that the distinguished ranking member 
could be here to give that statement.
    Mr. Deutsch. I thank you.
    Chairman Barton. And we have honored the tradition of 
opening statements on both sides in every hearing this 
committee has done this year except one when it was the 
chairman's judgment that the political implications of that 
particular subject did not rise to the requirement that the 
opening statements tradition should be honored. So if we can 
keep the purpose of the hearings and the legislation under 
consideration to be constructive, there won't be any 
restrictions on opening statements.
    And with that, the Chair would recognize the distinguished 
vice chairman of the subcommittee, Mr. Walden of Oregon, for an 
opening statement.
    Mr. Walden. Thank you, Mr. Chairman, and thank you for your 
work on this and many other issues. Today, as you said, we will 
continue to explore a critical issue with respect to our 
oversight of the E-Rate program, and that is how well does the 
application process ensure that applicants have taken the 
appropriate steps to choose the most cost-effective E-rate 
goods and services? This is a central issue with this program. 
Weaknesses upfront in the application process, be it the 
planning or the competitive process, to choose the goods and 
services for E-rate support paves the way either to effective 
educational enhancements, as envisioned for the program, or to 
the waste and abuse of limited resources.
    Incentives really matter. When a program is designed to 
provide recipients and applicants access to others' money, 
there is a powerful incentive to buy more than is needed. And 
when tens of millions of dollars are at issue, there is a very 
powerful incentive to spend wastefully. To prevent such 
wasteful spending, the program must deploy measures that 
enhance the incentives that ensure efficient and effective 
spending for schools and libraries.
    At today's hearing, we will approach this from several 
perspectives. We will continue to look at the impact of the NEC 
BNS conspiracy we heard testimony about this past July and the 
involvement of certain schools in this mess. We will also focus 
on the planning and decisions by school districts that pursued 
a procurement method advertised as useful for, ``maximizing,'' 
E-rate funding.
    And we will hear today about school districts' obligations 
to do their homework so that what they ask for can be put to 
use. I am interested to learn more from our witnesses about the 
burdens of planning and also about the ways to plan properly so 
that districts don't bite off more than they can chew. I am 
interested to learn how we can strengthen the incentives to 
plan properly. I would also like to learn if efforts to improve 
certifications on the applications are sufficient for this 
task. Planning is essential. Also essential is to know the 
rules and understand what is necessary for a competitive 
process to flourish.
    We will hear today about a case where competition did not 
flourish and where it appears that school districts really did 
not fully plan out what they needed for the program. The result 
was tens of millions of dollars of questionable spending in one 
poor school district. In another school district, the result 
was an application that asked for more than what the district 
really needed. Fortunately, the district took subsequent steps 
to scale back the request, but I am not sure that is what 
normally happens.
    What is the responsibility of the vendor in these 
situations? Despite a powerful incentive to sell and do 
business, vendors must play by the E-rate rules as well. So 
today we will be able to learn about the responsibilities of 
vendors in this process and whether the requirements and rules 
are clear and sufficient to ensure that vendors participate 
appropriately.
    One of the foremost issues we must address is 
accountability. Today, we will hear about accountability from 
all parties--the school districts, the vendors, and the agency 
charged with overseeing the program--and I think this is 
critical for our oversight of this very important program. So I 
look forward to welcoming the witnesses, and I would especially 
like to thank the efforts made by Charles Tafoya of El Paso 
Independent School District who will join us by video 
conference link today. We appreciate his efforts, especially 
given the last minute complications in his plans to attend the 
hearing.
    Thank you, Mr. Chairman, and I will yield back whatever 
time remains.
    Chairman Barton. We thank the gentleman of Oregon for that 
opening statement and recognize the gentleman of Michigan, Mr. 
Rogers, for any opening statement he wishes to make. The 
gentleman yields.
    The Chair would ask unanimous consent that all members of 
the subcommittee not present have the requisite number of days 
to put their opening statements formally in the record. Without 
objection, so ordered.
    [Additional statement submitted for the record follows:]
 Prepared Statement of Hon. Greg Walden, a Representative in Congress 
                        from the State of Oregon
    Thank you, Mr. Chairman. Today we will continue to explore a 
critical issue with respect to our oversight of the E-rate program. And 
that is: how well does the application process ensure that applicants 
have taken the appropriate steps to choose the most cost-effective E-
rate goods and services?
    This is a central issue with this program. Weaknesses up front in 
the application process--be it the planning or the competitive process 
to choose the goods and services for E-rate support--paves the way 
either to effective educational enhancements envisioned for the program 
or to the waste and abuse of limited resources.
    Incentives really matter. When a program is designed to provide 
recipients and applicants access to other people's money, there is a 
powerful incentive to buy more than is needed. And when tens of 
millions of dollars are at issue, there is a powerful incentive to 
spend wastefully.
    To prevent such wasteful spending, the program must deploy measures 
that enhance the incentives that ensure efficient and effective 
spending for schools and libraries.
    At today's hearing we will approach this from several perspectives; 
we will continue to look at the impact of the NEC-BNS conspiracy we 
heard testimony about this past July, and the involvement of certain 
schools in this mess; we will also focus on the planning and decisions 
by school districts that pursued a procurement method advertised as 
useful for ``maximizing'' E-rate funding.
    We'll hear today about school districts' obligations to do their 
homework, so what they ask for can be put to use. I'm interested to 
learn more from our witnesses about the burdens of planning, and also 
about the ways to plan properly so districts don't ``bite off more than 
they can chew.'' I'm interested to learn how we can strengthen the 
incentives to plan properly. I would like to learn if efforts to 
improve certifications on the applications are sufficient for this 
task.
    Planning is essential. Also essential is to know the rules and to 
understand what is necessary for a competitive process to flourish.
    We'll hear today about a case where competition did not flourish 
and where it appears that school districts really did not fully plan 
out what they needed for the program. The result was tens of millions 
of dollars of questionable spending in one poor school district. In 
another school district, the result was an application that asked for 
more than what the district really needed. (Fortunately, the district 
took subsequent steps to scale the request back; but I'm not sure 
that's what normally happens.)
    What is the responsibility of the vendor in these situations? 
Despite a powerful incentive to sell and do business, vendors must play 
by the E-rate rules as well. Today we'll be able to learn about the 
responsibilities of vendors in this process and whether the 
requirements and rules are clear and sufficient to ensure vendors 
participate appropriately.
    One of the foremost issues we must address is accountability. Today 
we'll hear about accountability from all parties--the school districts, 
the vendors, and the agency charged with overseeing the program. I 
think this is a critical hearing for our oversight of this program.
    Let me welcome the witnesses. I'd like to thank, especially, the 
efforts made by Charles Tafoya of El Paso Independent School District, 
who will join us via video link today. We appreciate his efforts given 
the last minute complications in his plans to attend the hearing.
    Thank you, Mr. Chairman. I'll yield back the remainder of my time.

    Chairman Barton. We would now like our first panel to come 
forward. We have Mr. Walker Feaster, III, who is the Inspector 
General of the Federal Communications Commission. He is 
accompanied by Mr. Thomas Cline, the Assistant Inspector 
General for Audits. We have Mr. George McDonald, the vice 
president, Schools and Libraries Division, the Universal 
Service Administrative Company. We also have Mr. Jeffrey 
Carlisle, the Chief of the Wireline Competition Bureau of the 
FCC.
    Gentlemen, I think each of you understand that it is the 
tradition of this subcommittee to take all testimony under 
oath. Do any of you object to testifying under oath? Let the 
record show they all shook their head that they don't object.
    It is also the tradition and your right under the United 
States Constitution to be advised by counsel during your 
testimony. Do any of you so wish to be advised by counsel? Let 
the record show they all shook their head that said no.
    Would each of you gentlemen please rise and raise your 
right hand?
    [Witnesses sworn.]
    Chairman Barton. Be seated. We are going to start with you, 
Mr. Feaster. Your testimony formally is in the record in its 
entirety, and we will recognize you for 7 minutes to elaborate 
on that. Welcome to the subcommittee.

  TESTIMONY OF WALKER FEASTER, III, INSPECTOR GENERAL, FEDERAL 
    COMMUNICATIONS COMMISSION; ACCOMPANIED BY THOMAS CLINE, 
  ASSISTANT INSPECTOR GENERAL, AUDITS, FEDERAL COMMUNICATIONS 
   COMMISSION; GEORGE MCDONALD, VICE PRESIDENT, SCHOOLS AND 
 LIBRARIES DIVISION, UNIVERSAL SERVICE ADMINISTRATION COMPANY; 
   AND JEFFREY CARLISLE, CHIEF, WIRELINE COMPETITION BUREAU, 
               FEDERAL COMMUNICATIONS COMMISSION

    Mr. Feaster. Thank you, sir. Good morning, Mr. Chairman and 
members of the subcommittee. I appreciate the opportunity to 
appear before you today to discuss concerns regarding waste, 
fraud and abuse in the E-Rate 9rogram. I would like to 
introduce Tom Cline. He is my Assistant Inspector General for 
Audits and has been heavily involved in our oversight of the E-
Rate program.
    This is the second opportunity that I have had to testify 
before the subcommittee in these matters. In my comments and 
written testimony, I will discuss my office's involvement in 
the investigations of NEC Business Network Solutions and IBM 
Global Services and describe in more general terms the 
programmatic concerns raised by these investigations.
    First, I will briefly discuss my office's involvement in an 
ongoing Federal investigation involving NEC BNS. I want to 
point out that there are aspects of this case that I am not at 
liberty to discuss because of an ongoing nature of this 
investigation. In fact, the two audit staff in my office that 
are involved in this investigation are prohibited by law from 
disclosing information that they have been provided related to 
this case that was developed through the grand jury process.
    We first received allegations related to NEC BNS in August 
2001 and referred the matter to the FBI. In July 2002, we 
established a working relationship with the Antitrust Division 
of the Department of Justice to investigate E-rate fraud and we 
provided information related to this case. The Antitrust 
Division opened an investigation and my office have been 
involved in supporting this ongoing investigation since that 
time.
    Now, I will briefly discuss my office's involvement in an 
investigation involving participation in the E-Rate program by 
IBM. In February 2002, my office was contacted by the general 
counsel of USAC regarding an anonymous letter that they had 
received alleging wrongdoing by IBM related to their 
involvement in providing E-rate support to the El Paso 
Independent School District. The letter was signed, ``Concerned 
Taxpayer,'' and outlined three areas of concern involving El 
Paso's applications: The need for the program and IBM's role 
and them driving that need, apparent violations of Federal and 
State rules governing the procurement process and a lack of 
project information for the El Paso School Board and public. 
The letter provided a great deal of detail regarding the 
project and IBM's involvement and clearly raised legitimate 
questions about whether or not program rules were followed.
    As a result of the allegations raised in the concerned 
taxpayer letter, USAC initiated a special investigation of 
IBM's involvement as a service provider with El Paso for 
funding years 2001 and 2002 and with the Ysleta Independent 
School District for funding year 2002. Based on the results of 
the analysis, USAC concluded that Ysleta failed to comply with 
program requirements and that those Ysleta funding requests 
associated with IBM should be denied. USAC further recommended 
that they deny funding requests associated with IBM when the 
request fit the pattern of Ysleta and El Paso.
    We referred this matter to the Antitrust Division shortly 
after they established an E-Rate Fraud Task Force in July 2002 
and began supporting their work. Antitrust initiated a 
preliminary inquiry in October 2002. Meanwhile, in September 
2002, we received additional allegations regarding IBM's 
overinvolvement in the competitive bidding process in numerous 
E-rate submissions, and we forwarded this additional 
information to the Antitrust attorney directing the 
investigation. In April 2004, we were advised that the 
Department of Justice has closed a preliminary inquiry of the 
IBM matter. We discussed this case with representatives from 
the Antitrust Division and were informed that they did not 
identify any evidence of criminal activity based on the 
material that they reviewed as part of the preliminary inquiry. 
After receiving this information, my office closed their case 
on this matter.
    The NEC BNS and IBM investigations highlight two general 
concerns that my office has with the design of the E-Rate 
program: One, weaknesses in the rules governing the competitive 
procurement of goods and services, and, two, overreliance on 
self-certifications received from beneficiaries and vendors on 
E-rate funding applications. It has been frustrating to me and 
my staff that these are concerns that were identified in 2002 
and the Commission has yet to fully address these matters. The 
Commission has only recently started to address recommendations 
by the Antitrust Division of DOJ for strengthening program 
certifications. These recommendations are on three tracks: One 
track, some recommendations have been incorporated into E-rate 
forms and are at OMB for approval; two, some recommendations 
are out for public comment; and, three, some recommendations 
are not being implemented at this time.
    For this third group of recommendations, my office, along 
with DOJ and the Wireline Competition Bureau, will work 
together to see how they can be implemented. We believe all the 
antitrust recommendations would resort in better management of 
this program and in delays in implementing these 
recommendations or the lack thereof in some cases represents an 
ongoing risk to the program. In view of these and numerous 
other concerns about the E-Rate program, 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 effective independent 
oversight of the USF Program. However, primarily because of the 
lack of adequate resources, we have been unable to fully 
implement an oversight program. There has been progress made in 
making resources available to us for conducting E-rate audits, 
but we believe that direct access to the USF is the best manner 
for obtaining the resources needed or adequate oversight and, 
as I have stated in the past, until resources and funding are 
available to provide adequate independent oversight for the USF 
Program, we are unable to give the chairman, Congress and the 
public an appropriate level of assurance that the program is 
protected from fraud, waste and abuse. Thank you, and I will be 
happy to try to answer any of your questions.
    [The prepared statement of H. Walker Feaster III follows:]

Prepared Statement of H. Walker Feaster III, Inspector General, Federal 
                       Communications Commission

                              INTRODUCTION

    Mr. Chairman and Members of the Subcommittee, I appreciate the 
opportunity to appear before the subcommittee today to discuss concerns 
regarding waste, fraud, and abuse in the E-rate program. This is the 
second opportunity that I have had to testify before the subcommittee 
on these matters. In my comments and written testimony, I will discuss 
my office's involvement in the investigations of NEC-BNS and IBM and 
describe in more general terms the programmatic concerns raised by 
these investigations.

             NEC-BUSINESS NETWORK SOLUTIONS INC. (NEC-BNS)

    In this section of my testimony, I will briefly discuss my office's 
involvement in an on-going federal investigation involving NEC-BNS. I 
want to point out that there are aspects of this case that I am not at 
liberty to discuss because of the on-going nature of this 
investigation. In fact, the two audit staff in my office that are 
involved in this investigation are prohibited by law from disclosing 
information that they have been provided related to this case that was 
developed through the Grand Jury process.
    In August 2001, my office was contacted by an Associate General 
Counsel with the Universal Service Administrative Company (USAC) 
regarding a request for information from an investigator from the 
Office of the City Attorney for the City and County of San Francisco. 
We obtained a copy of the request for information that was provided to 
USAC and a copy of the USAC response. In September 2001, we referred 
this matter to the Governmental Fraud Unit of the Federal Bureau of 
Investigation (FBI) in accordance with the process that we had 
established with the FBI for centralized management of E-rate fraud 
cases.
    In July 2002, my office established a working relationship with the 
Antitrust Division of the Department of Justice to investigate E-rate 
fraud. The Antitrust Division was interested in E-rate fraud because of 
the large number of cases that included allegations of bid rigging and 
other violations related to the Sherman Act. Information related to 
this case was provided to the E-rate fraud task force established by 
the Antitrust Division and my office has been involved in supporting 
this on-going investigation since that time. As part of our support for 
the investigation, my office has performed in-depth analyses of E-rate 
documents, testified before a federal grand jury, participated in the 
execution of a search warrant, evaluated seized electronic media, and 
participated in numerous witness interviews.
    As part of the analysis that we performed for federal law 
enforcement, we examined NEC-BNS participation in the E-rate program 
with the purpose of identifying suspect activity. For the universe of 
NEC-BNS participation in the program from funding years 1998 through 
2004, we identified fifty-three (53) E-rate applications at twenty (20) 
schools that we concluded were suspect. These fifty-three (53) 
applications represented approximately $380 million in requested E-rate 
funding, over $40 million in commitments, and $29.7 million in 
disbursed funding. Although these applications represented only 27% of 
the E-rate applications during this period that included NEC-BNS, they 
represented 93% of requested funds and 96% of disbursed funds. The 
results of our analysis was shared with federal law enforcement and 
served as the basis for the NEC-BNS portion of the overall 
investigation.
    To date, there have been numerous indictments and plea agreements 
related to this case. In October 2002, Desmond McQuoid and US Machinery 
were indicted for mail fraud in the United States District Court for 
the Northern District of California. In March 2003, Mr. McQuoid entered 
into a plea agreement in which he agreed to plead guilty to mail fraud. 
In that plea agreement, Mr. McQuoid agreed to numerous facts regarding 
the matter including the following facts concerning E-rate fraud:

 Participating in a scheme to submit false and inflated funding 
        requests to the USAC and SLD a part of the E-Rate program 
        beginning in 1999 and continuing until 2000.
 Allowing the competitive bid process to be compromised by the 
        consultants he was working with.
 Despite being aware that the contractors had submitted inflated bid 
        price information to the School District and the USAC and SLD, 
        not taking steps to correct the information provided.
 Attempting to obtain a 10 million dollar in-kind donation from the 
        main contractor by having them purchase computer workstations 
        from US Machinery and then donate these servers to the School 
        District.
 Attempting to use the excess funds in the inflated bids to pay for 
        these products even though I knew that the USAC and SLD had 
        disallowed using their funds for these expenditures.
    In March 2003, US Machinery entered into a plea agreement in which 
they agreed to plead guilty to mail fraud. In that plea agreement, US 
Machinery agreed to numerous facts regarding the matter including the 
following facts regarding E-rate fraud:

 US Machinery bid to supply computer servers as part of an E-Rate 
        application submitted by and on behalf of the San Francisco 
        Unified School District.
 US Machinery learned during the process that some of the contractors 
        had submitted inflated bids to the School District and to the 
        USAC and SLD.
 US Machinery brought this fact to Dennis McQuoid's attention and 
        failed correct the misstatements in the bid documents.
 Dennis McQuoid arranged a meeting with the principal contractor--and 
        tried to obtain a concession from the contractor to purchase 
        computers from US Machine.
 As a result, the contractor was then supposed to donate these 
        computers to the School District.
    In May 2004, NEC-BNS entered into a plea agreement as a result of 
this investigation. In that agreement, NEC-BNS agreed to plead guilty 
to one count of wire fraud in violation of 18 U.S.C.  1343 and one 
count of conspiracy to suppress and eliminate competition in violation 
of the Sherman Antitrust Act, 15 U.S.C.  1. As part of the settlement, 
NEC-BNS agreed to pay $20,685,263 in criminal fines, civil settlement, 
and restitution.

                          IBM GLOBAL SERVICES

    In this section of my testimony, I will briefly discuss my office's 
involvement in an investigation involving participation in the E-rate 
program by IBM Global Services (IBM).
    In February 2002, my office was contacted by the General Counsel of 
the Universal Service Administrative Company (USAC) regarding a letter 
they had received alleging wrongdoing by IBM related to their 
involvement in providing E-rate support to the El Paso Independent 
School District (EPISD). The letter, signed ``Concerned Tax Payer'', 
outlined three areas of concern: (1) the need for the program and IBM's 
role in driving that need; (2) apparent violations of Federal and state 
rules governing the procurement process; and (3) the lack of project 
information for the EPISD board and the public. The letter provided a 
great deal of detail regarding the project and IBM's involvement and 
clearly raised legitimate questions about whether or not program rules 
were followed.
    As a result of the allegations raised in the ``Concerned Tax 
Payer'' letter, USAC initiated a special investigation of IBM's 
involvement as a service provider with EPISD for funding years 2001 and 
2002 and with the Ysleta Independent School District (Ysleta ISD) for 
funding year 2002. Based on the results of their analysis, USAC 
concluded that Ysleta ISD failed to comply with program requirements 
and that those Ysleta funding requests associated with IBM should be 
denied. USAC further recommended that SLD deny funding requests 
associated with IBM when those requests fit the pattern of Ysleta ISD 
and EPISD.
    As I discussed earlier in my testimony, we established a working 
relationship with the Antitrust Division of the Department of Justice 
in June 2002. We referred this matter to the Antitrust Division shortly 
after they established an E-rate fraud task force in July 2002. In 
September 2002, representatives from my office visited with 
representatives on the Antitrust task force to review case material. In 
October 2002, the Antitrust attorney directing the investigation 
requested authority within the Antitrust Division to conduct a 
preliminary inquiry ``to pursue a possible bid rigging scheme in which 
competing telecommunication providers may have colluded with each 
other, with school districts, or through representatives, on contracts 
for communications equipment sold to El Paso ISD in El Paso, Texas, 
Ysleta ISD in Ysleta, Texas, and potentially other districts 
nationwide.'' Authority to conduct a preliminary inquiry was granted.
    In September 2002, we received additional allegations regarding IBM 
participation in the E-rate program. These allegations were provided 
following a Train-the-Trainers workshop provided by the Schools and 
Libraries Division of USAC during which SLD trainers encouraged 
participants to provide any information highlighting serious violations 
of program rules. The allegations address IBM's ``over-involvement in 
the competitive bidding process.'' The allegations provided information 
detailing a pattern of virtually identical ``cookie-cutter'' or 
``laundry list-type'' form 470s posted by applicants around the country 
and provided detailed information on a number of these schools issuing 
``strikingly similar'' requests for proposals around the same time as 
the form 470s were posted seeking essentially the same thing--``a 
strategic technology partner--to assist the district in securing E-rate 
funds.'' We forwarded this additional information to the Antitrust 
attorney directing the investigation.
    In April 2004, we were advised that the Department of Justice had 
closed their preliminary inquiry of the IBM matter. We discussed this 
case with representatives from the Antitrust Division and were informed 
that they did not identify any evidence of criminal activity based on 
the material that they reviewed as part of the preliminary inquiry. 
After receiving this information, my office closed their case file on 
this matter.

  PROGRAMMATIC CONCERNS HIGHLIGHTED BY NEC-BNS AND IBM INVESTIGATIONS

    The NEC-BNS and IBM investigations highlight two general concerns 
that my office has with the design of the E-rate program: (1) 
weaknesses in the rules governing the competitive procurement of goods 
and service; and (2) over-reliance on self certification.
Competitive Procurement
    Program rules require that applicants use a competitive procurement 
process to select service providers. In establishing this requirement, 
the Commission recognized that ``(c)ompetitive bidding is the most 
efficient means for ensuring that eligible schools and libraries are 
informed about all of the choices available to them'' and that 
``(a)bsent competitive bidding, prices charged to schools and libraries 
may be needlessly high, with the result that fewer eligible schools and 
libraries would be able to participate in the program or the demand on 
universal service support mechanisms would be needlessly great.''
    Applicants are required to submit a form 470 identifying the 
products and services needed to implement the technology plan. The form 
470 is posted to the USAC web page to notify service providers that the 
applicant is seeking the products and services identified. Applicants 
must wait at least 28 days after the form 470 is posted to the web site 
and consider all bids they receive before selecting the service 
provider to provide the services desired. In addition, applicants must 
comply with all applicable state and local procurement rules and 
regulations and competitive bidding requirements. The form 470 cannot 
be completed by a service provider who will participate in the 
competitive process as a bidder and the applicant is responsible for 
ensuring an open, fair competitive process and selecting the most cost-
effective provider of the desired services. Further, although no 
program rule establishes this requirement, applicants are encouraged by 
USAC to save all competing bids for services to be able to demonstrate 
that the bid chosen is the most cost-effective, with price being the 
primary consideration.
    In the case of IBM, it seems clear that the practices followed by 
several of the school districts that selected IBM as their service 
provider for participation in the E-rate program for the funding years 
reviewed did not follow program requirements for the competitive 
procurement of goods and services. Although the Department of Justice 
did not find evidence of criminal activity, USAC denied numerous 
applications involving IBM as a result of their investigation and the 
Commission affirmed USAC decisions regarding these applications in the 
order they adopted in December 2003.
    On June 5, 2002, USAC prepared a preliminary special investigation 
report summarizing the results of that review. In that preliminary 
report, USAC concluded that both EPISD and Ysleta ISD utilized a 
Request for Proposal (RFP) format that did not make price the major 
factor in the selection of the service provider in violation of program 
rules. In October 2002, USAC prepared a preliminary draft analysis of 
issues identified in the EPISD and Ysleta ISD funding requests, 
determined that funding requests for the two school districts followed 
the same basic pattern, and presented the results of their legal 
analysis focusing on the Ysleta ISD funding requests. In that document, 
USAC concluded that:

 Ysleta selected IBM as its service provider by a process other than 
        the FCC Form 470 posting process and without defining the 
        specific services that would be provided;
 Ysleta selected IBM as its service provider without complying with 
        the requirements that the applicant select the most cost-
        effective provider of service with low cost being the primary 
        factor;
 Compliance with FCC Form 470 posting requirement is necessary in 
        addition to applicable state and local procurement 
        requirements;
 IBM's proposal specifies a range of services that it will provide as 
        the Strategic Technology Partner. Many of these services are 
        not eligible for funding.
 IBM's proposal emphasizes developing the technology plan and 
        structuring funding requests in order to maximize funding 
        requests; and
 Requests for Proposal contain similar language and raise significant 
        questions as to whether IBM was improperly involved in the 
        selection process.
    In the case of NEC-BNS, wrongdoing rose to the level of criminal 
activity. In the plea agreement that NEC-BNS accepted, NEC-BNS admitted 
to the following facts regarding this case:

 NEC ``participated in a conspiracy with one or more vendors of 
        equipment and services related to telecommunications, Internet 
        access, and/or internal connections, a purpose of which was to 
        suppress and eliminate competition for E-Rate program 
        projects''.
 In furtherance of the conspiracy, NEC ``reached an agreement with its 
        co-conspirators to frustrate the competitive process on the E-
        Rate projects by allocating contracts and submitting fraudulent 
        and non-competitive bids'' and, to carry out this conspiracy, 
        NEC ``discussed with these co-conspirators prospective bids for 
        the E-Rate projects; agreed with these co-conspirators who 
        would be the lead contractor on the project and who would 
        participate on the project as subcontractors to the designated 
        lead contractors; submitted fraudulent and non-competitive bids 
        in accordance with the conspiratorial agreement.'' Further, NEC 
        engaged two consultants who ``took steps to ensure the success 
        of the conspiracy by eliminating and disqualifying bids from 
        non-conspirators and either directly awarding the contracts or 
        using their best efforts to persuade the school district 
        officials to award contracts to the designated lead 
        contractors.

Reliance on Applicant Certifications
    The E-rate program is heavily reliant on applicant and service 
provider certifications. For example, on the form 470, applicants 
certify that the support received is conditional upon the ability of an 
applicant to secure access to all of the resources, including 
computers, training, software, maintenance, and electrical connections, 
necessary to use effectively the services that will be purchased under 
this mechanism. On the form 471, applicants make several important 
certifications. Applicants certify that they have ``complied with all 
applicable state and local laws regarding procurement of services for 
which support is being sought'' and that ``the services that the 
applicant purchases--will not be sold, resold, or transferred in 
consideration for money or any other thing of value.'' Other 
certifications are required on various program forms.
    Reliance on applicant and service provider certifications has been 
an area of concern in my office for some time. We have two concerns 
regarding certifications. The first concern deals with over-reliance on 
certifications in lieu of USAC verification and validation of applicant 
and service provider assurances as part of USAC's normal review 
processes. The significance of this concern has been diminished 
somewhat by steps that USAC has taken, and is proposing to take, to 
strengthen the Program Integrity Assurance (PIA) process.
    The second, and more serious, concern is related to the design of 
the certifications. Concerns about the design of program certifications 
were first brought to our attention by federal law enforcement. 
Numerous concerns about certification design were brought to our 
attention during our first meeting with the E-rate fraud task force 
established by the Antitrust division of the Department of Justice in 
July 2002. A representative from the Commission's Wireline Competition 
Bureau (WCB) was present during that discussion. At our request, task 
force members provided written comments on program certifications in 
December 2002. Some of the concerns expressed by task force members 
dealt with applicant certification to future events (i.e., on the form 
470, applicants certify that they recognize that support is conditional 
upon the schools ``securing access to all of the resources . . . 
necessary to use the services purchased effectively'').
    In the case of IBM, the pattern that was observed at several 
applicants shows applicants reporting on the form 470 that they do not 
have Requests for Proposal for the specific internal connections being 
sought and certifying that the request has been examined and that ``to 
the best of my knowledge, information, and belief, all statements of 
fact contained herein are true.'' Shortly after form 470s were posted, 
applicants would issue a separate RFP (``strikingly similar'' in many 
cases) for a ``Technology Implementation and Systems Integrator 
Partner.'' The RFP for the ``Technology Implementation and Systems 
Integrator Partner'' states that the ``selected vendor will serve as 
the prime contractor for any projects funded through E-rate.'' 
Effectively, applicants provided assurance to the program that they 
have not sought proposals for E-rate projects at the same time that 
they clearly have.
    In the case of NEC-BNS, there are numerous examples of fraudulent 
representations on program forms. In fact, it may be more challenging 
to identify certifications that were not fraudulent representations. 
Desmond McQuoid certified that he was authorized to submit requests on 
behalf of the San Francisco Unified School District when he was not. He 
further certified that the state and local procurement regulations were 
followed and that program rules were followed when neither of these 
statements was accurate.

         CERTIFICATION WEAKNESSES HAVE NOT BEEN FULLY ADDRESSED

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

                               CONCLUSION

    The Office of Inspector General remains committed to meeting our 
responsibility for providing effective independent oversight of the 
Universal Service Fund 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 an 
unacceptably high risk of fraud, waste and abuse through noncompliance 
and program weaknesses. We are concerned with program rules governing 
the competitive procurement of goods and service and with the over 
reliance on certifications. In view of these concerns, I believe that 
it would be appropriate to conduct a broad based review of the program.
    We believe we have made significant progress toward our goal of 
designing and implementing an effective, independent oversight program. 
However, primarily because of a lack of adequate resources, we have 
been unable to implement our oversight program. But some progress has 
been made. We have partnered with USAC to accomplish approximately 100 
audits of E-rate beneficiaries using contracted resources available to 
them and the Commission has been actively furthering efforts for us to 
use the USF to accomplish more audits. But we believe direct access to 
the USF is the best manner with which to obtain the necessary resources 
and, as I have stated previously, until resources and funding are 
available to provide adequate independent oversight for the USF 
program, we are unable to give the Chairman, Congress and the public an 
appropriate level of assurance that the program is protected from 
fraud, waste and abuse.
    Thank you and I will be happy to answer any of your questions.

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

                  TESTIMONY OF GEORGE MCDONALD

    Mr. McDonald. Thank you, Mr. Chairman. Good morning, 
members of the subcommittee. Thank you for inviting me here 
today to discuss USAC's administration of the E-Rate program. 
Previous hearings have given me the opportunity to outline our 
procedures to combat waste, fraud, and abuse. Today, I want to 
focus on requirements for conducting a fair and open 
competitive process and ensuring cost-effective use of E-rate 
funds. While USAC has responsibility for ensuring applications 
are properly reviewed, applicants and service providers alike 
have responsibility for knowing and following the spirit, 
intent, and letter of the law and rules of the program. The 
FCC, in a series of recent rulemakings, has stressed that 
accountability.
    We have been concerned from the beginning of the program 
about service providers offering and applicants accepting free, 
ineligible services. Since service providers must cover their 
costs, these free services would be paid for through inflated 
prices on eligible equipment. Two key program requirements 
designed to protect the integrity of the program are that 
applicants must conduct fair and open competitive processes to 
select service providers, and applicants must pay the non-
discount share of the cost of eligible goods and services. 
These requirements are intended to ensure that the applicants 
and E-rate are getting fair value. The rules require 
competition over the price of eligible services, competitively 
neutral RFPs, and that applicants select the cost-effective 
offer with price the primary factor.
    The rules also require that applicants pay their share of 
the cost so that they have a stake in selecting the most cost-
effective offer and so that they do not request services in 
excess of their needs. If service providers offer to waive the 
non-discount share of the cost, they remove any incentive for 
the applicant, who is the one making the decision, to select 
the most cost-effective alternative. If service providers do 
waive the applicant's share, they cover their costs by 
inflating the pre-discount costs so that the discount share to 
be paid by USAC more than covers their cost and E-rate is the 
loser.
    The E-Rate program is designed to give applicants 
discretion in deciding which technology solutions best meet 
their educational objectives. USAC generally does not second 
guess the technology choices applicants make, but the 
subcommittee and USAC have seen instances of goldplating, 
purchases that are clearly excessive for the use that will be 
made of them. The Commission recently directed that applicants 
certify that the bid selected was, ``the most cost-effective 
means of meeting educational needs and technology plan goals.'' 
If an applicant solely relies on service provider 
recommendations, this may lead to applications that run afoul 
of program rules. Therefore, applicants must take the necessary 
steps to determine if the recommended solution is in fact what 
is needed.
    As the E-Rate program has matured, E-rate consultants have 
played an increasing role. However, applicants remain 
responsible for their applications and for ensuring that there 
is a fair and open competitive process. USAC has denied 
millions of dollars in funding requests when we have determined 
that the consultant who provided free services to the 
applicants was associated with the service provider selected.
    Let me now turn to the participation of IBM in the E-Rate 
program. In January 2002, USAC received an anonymous letter 
alleging program abuses at the El Paso Independent School 
District in Texas, as Mr. Feaster has said. Our Special 
Investigations Team began an investigation which led to a 
concern that the procurement approach may not have been 
consistent with program rules. We identified a number of 
funding year 2002 applicants who were requesting large amounts 
of E-rate discounts and funding requests associated with IBM 
and who may have used a similar procurement approach. 
Ultimately, we concluded that the procurement approach was not 
consistent with the rules, and we denied requests for over $500 
million.
    The rules require applicants to identify the specific 
eligible services for which they will seek funding based on the 
applicant's technology plan, to solicit bids from competing 
service providers and then to choose the most cost-effective 
alternative with price the primary factor. These applicants and 
IBM participated in a two-step approach which consisted first 
of choosing a strategic technology partner and then, with the 
help of that partner, deciding which eligible services to seek 
funding for. At the first step, each applicant used the Generic 
Form 470 and a similar RFP indicating that they had not decided 
which specific services they needed and sought a partner to 
help them make those decisions. Since the applicant's did not 
identify the specific services they were seeking, the proposals 
did not state the cost of the services. Consequently, the 
applicants did not make the selection of the service provider 
based on which was the most cost-effective alternative.
    After IBM was selected, the second step began. At this 
step, IBM worked with the applicants to identify the specific 
services for which funding would be sought. This meant that at 
the time the decisions were made about what specific services 
to request E-rate discounts for and how much to request, there 
was only one service provider at the table. Consequently, the 
price competition for eligible services that the FCC rules 
envisioned never took place. IBM and the applicants appealed 
USAC's denials; the FCC affirmed USAC's decisions to deny 
funding in all but one instance.
    We funded El Paso in funding year 2001 even though El Paso 
used the two-step approach that we determined was inconsistent 
with program rules in the next year. This occurred because our 
review procedures did not flag the El Paso application for a 
particular kind of heightened scrutiny. We review almost 40,000 
applications for funding every year, and we use a staff of some 
150 people to conduct those reviews. With a process of that 
magnitude, we appropriately rely on written procedures to guide 
the reviews to ensure consistency and equity for all 
applicants. Our procedures did not contemplate the two-step 
procurement approach in 2001 and therefore we did not identify 
this application as one requiring heightened scrutiny. We have 
learned much more about the services IBM was offering through 
our intense review of the 2002 applications and concluded based 
on that analysis and on review of statements of work for El 
Paso for 2001 that our 2001 funding commitments for El Paso may 
have included a substantial amount of ineligible services. We 
have asked IBM to respond to our tentative conclusions. 
Depending on that response, we may seek recovery of a 
substantial portion of the funds we dispersed to IBM for work 
in El Paso in 2001.
    Mr. Chairman, thank you for providing me with the 
opportunity to address the subcommittee. I would be happy to 
respond to any questions.
    [The prepared statement of George McDonald follows:]

Prepared Statement of George McDonald, Universal Service Administrative 
         Company Vice President, Schools and Libraries Division

    Good morning, Mr. Chairman and Members of the Subcommittee. I am 
George McDonald, Vice President of the Universal Service Administrative 
Company (``USAC'') with responsibility for the Schools and Libraries 
Division. Thank you for inviting me here today to discuss USAC's 
administration of the ``E-rate'' program.

Protecting Against Pre-Commitment Program Abuse
    Previous hearings held by this Subcommittee about E-rate have given 
me the opportunity to outline our procedures to combat those who would 
try to circumvent program rules, which can lead to waste, fraud or 
abuse. Today, I will focus on requirements for conducting a fair and 
open competitive process and ensuring cost-effective use of E-rate 
funds. These are the responsibilities of the applicant and areas that 
the applicant must take responsibility for prior to submitting an 
application. While USAC has responsibility for ensuring applications 
are properly reviewed, applicants and service providers alike have 
responsibility for knowing and following the spirit, intent, and letter 
of the law and rules of the program. The Federal Communications 
Commission (FCC), in a series of recent rulemakings, has stressed that 
accountability.
    Free, Ineligible Services--We have been concerned from the 
beginning of the program about service providers offering and 
applicants accepting free, ineligible services and have taken steps to 
address this potential for abuse. Since service providers must cover 
their costs, these ``free'' services would not be free to E-rate; they 
would be paid for through inflated prices on eligible equipment. For 
example, NEC-Business Network Solutions Inc. (NEC) admitted in its 
recent plea agreement that it planned to ``donate'' millions of dollars 
worth of ineligible computer workstations to the San Francisco Unified 
School District (SFUSD) and that NEC actually planned to use E-rate 
funds to cover the costs of these ``donated'' workstations. NEC also 
admitted that the funding requests that were submitted to us for SFUSD 
contained inflated prices.
    An applicant can, however, accept free, ineligible services, along 
with eligible services, request discounts, and satisfy the rules if the 
applicant complies with the following requirement. The applicant must 
reduce the prediscount cost of the eligible services by the fair market 
value of the ineligible services it will be provided at no cost. When 
we review applications, we look for free, ineligible services so that 
we may take appropriate action.
    USAC is authorized to provide funding for eligible services only. 
This prohibits applicants and service providers from using discounts to 
subsidize the procurement of ineligible or unrequested services. The 
value of all price reductions, promotional offers, and ``free'' 
services must be deducted from the pre-discount cost of services. In 
this manner, universal service funds are not used to subsidize 
ineligible services. Similarly, since applicants are required to choose 
the most cost-effective bid with the price of eligible services being 
the primary factor, applicants cannot base their decisions on free, 
ineligible offerings by service providers.
    Competitive Process to Select Service Provider and Payment of the 
Non-Discount Share of the Cost of Eligible Goods and Services--Two key 
program requirements designed to prevent waste, fraud, and abuse, and 
to protect the integrity of the program are that applicants must 
conduct fair and open competitive processes to select service providers 
and applicants must pay the non-discount share of the cost of eligible 
goods and services. If applicants do not comply with these 
requirements, their applications will be denied. These requirements are 
intended to ensure that the applicants and E-rate are getting fair 
value. The rules require competition over the price of eligible 
services, competitively neutral RFPs, and that applicants select the 
most cost-effective offer with price the primary factor. Applicants 
must remain in control of the procurement process and cannot abdicate 
their responsibilities to a service provider who is competing for their 
business, or to a consultant.
    The rules also require that applicants pay their share of the cost 
so that they have a stake in selecting the most cost-effective offer 
and so that they do not request services in excess of their needs. If 
service providers offer to waive the non-discount share of the cost, 
they remove any incentive for the applicant, who is the one making the 
decision, to select the most cost-effective alternative. This 
undermines the goal of preventing waste, fraud, and abuse. If service 
providers waive the non-discount share of the cost, they must still 
cover their costs. They do this by inflating the prediscount cost so 
that the discount share to be paid by USAC more than covers their 
costs, and E-rate is the loser.
    Goldplating--The E-rate program is designed to give applicants 
discretion in deciding which technology solutions best meet their 
educational objectives. Some applicants seek discounts only for basic 
phone service and dial-up Internet access. Others seek assistance in 
building sophisticated networks with broadband connections for Internet 
access and distance learning. USAC generally does not ``second guess'' 
the choices applicants make, but the Subcommittee and USAC have seen 
instances of ``goldplating''-- purchases that are clearly excessive for 
the use that will be made of them. Applicants are responsible for the 
reasonableness of their choices. To emphasize this responsibility, the 
Commission recently directed that applicants explicitly certify that 
``the selection of services and service providers is based on the most 
cost effective means of meeting educational needs and technology plan 
goals.'' We can and do deny requests when the applicant did not select 
the most cost-effective offering with price the primary factor, when 
applications include a substantial amount of ineligible services, or 
when requested services clearly go well beyond the requirements set out 
in the applicant's technology plan. Applicants are responsible for 
their requests--they must do the planning for technology solutions tied 
to their educational objectives, they make the certifications on the 
forms, they are to share the cost. If an applicant solely relies on 
service provider recommendations, this may lead to applications that 
run afoul of program rules. Therefore, applicants must take the 
necessary steps to be in a position to determine if the recommended 
solution is in fact what is needed.
    Consultants--As the E-rate program has matured, E-rate consultants 
have played an increasing role. Consultants offer a variety of services 
to applicants, from providing advice with respect to the available 
technologies, to submitting program forms, to overseeing the 
competitive process underlying the application. As with deciding which 
technology solutions best meet their educational objectives, applicants 
have discretion to choose a consultant. However, applicants remain 
responsible for their applications and for ensuring that there is a 
fair and open competitive process. USAC has denied millions of dollars 
in funding requests when we have determined that the ``consultant'' who 
provided free services to the applicant was associated with the service 
provider selected.

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

Conclusion
    Mr. Chairman, thank you for providing me with the opportunity to 
address the Subcommittee. I would be happy to respond to any questions 
you may have.

    Chairman Barton. We thank you. Now I want to welcome Mr. 
Jeffrey Carlisle who is the Chief of the Wireline Competition 
Bureau of the FCC. Mr. Carlisle, your statement is in the 
record in its entirety, and we welcome you to elaborate on it 
for 7 minutes. Welcome to the subcommittee.

                  TESTIMONY OF JEFFREY CARLISLE

    Mr. Carlisle. Thank you. Good morning, Mr. Chairman and 
distinguished members of the subcommittee. I was named Chief of 
the Wireline Competition Bureau on August 4, 2004. As such, 
many of the incidents that are the subject of this hearing 
occurred before my tenure, and I do not have firsthand 
knowledge of them. I am here, however, to relate to you the 
facts as I have ascertained them. I am also here to communicate 
to you that with respect to the E-Rate program, I am working 
hard to achieve three main goals: First, to acquaint myself 
with the program and learn about its functioning in detail; 
second, to get up to speed with the current status of 
proceedings and pending audits and enforcement actions, 
including the IBM case which the Commission concluded at the 
end of last year; and, third, to continue work already started 
to improve functioning and oversight of the program.
    With the 2002 launch of the schools and libraries 
rulemaking proceeding, the Commission has sought to improve the 
effectiveness, fairness and efficiency of the E-Rate program 
and taken significant steps to prevent waste, fraud and abuse. 
In April 2003, the Commission adopted debarment rules. In 
December 2003, the Commission established limits on the use of 
the internal connections, restrictions on funding for 
duplicative services and clarified eligible services.
    We have adopted rules to revise our approach to recovery of 
funds for violations, strengthened our audit and investigation 
processes and will make recommendations to adjust the discount 
matrix and also to require recipients of funding to conduct 
their own independent audits.
    Competitive bidding is a cornerstone of the E-Rate program 
because it limits waste, ensures program integrity and assist 
applicants in receiving the best value for their limited funds. 
The potential weaknesses in the competitive bidding system were 
highlighted by the facts in the various 2002 IBM applications. 
Under the E-Rate program rules for competitive bidding, after 
developing a technology plan, applicants are required to seek 
competitive bids on goods and services eligible for E-rate 
discounts by completing and posting an FCC Form 470 on the USAC 
web site.
    In the IBM cases, the applicants submitted a broad generic 
version of the Form 470 indicating they were seeking virtually 
every product and service eligible for E-rate discounts rather 
than developing a list of services actually desired based on 
their technology plans with sufficient specificity to enable 
bidders to submit realistic bids with prices for specified 
services.
    This was coupled with the applicants posting an RFP for a 
systems integrator, something they did not disclose on Form 470 
even though Form 470 asks for such disclosure. IBM, in 
responding to these RFPs, did not provide specific prices for 
specific facilities and services, nor were such responses 
requested. Rather, the RFPs sought general information and 
prices for acting as a systems integrator, and IBM responded 
with hourly rates. Subsequently, the school districts selected 
IBM and then negotiated a contract for E-rate-eligible products 
and services.
    After receiving a whistleblower's anonymous letter in 
January 2002, USAC investigated and ultimately denied Ysleta's 
request for funding on December 3, 2002, then denied eight 
other applications that selected IBM as a systems integrator. 
On December 8, 2003, after de novo review of the facts in these 
multiple cases, the Commission upheld USAC's denial of 8 of the 
9 funding requests, totaling over $250 million. The Commission 
found in general that the two-step bidding process, that is 
procurement of a systems integrator followed by private 
negotiation with that integrator for goods and services 
eligible for E-rate support, violated the Commission's 
competitive bidding requirements.
    The Commission permitted the applicants denied funding to 
have a second chance to receive funding for funding year 2002 
and allowed them to seek further bona fide competitive bids. 
The eight school districts denied funding resubmitted funding 
requests seeking a total of $40 million in services, an amount 
substantially less than the prior requests. IBM was permitted 
to bid again but bid on only one of these applications and was 
not successful.
    The Commission acted unanimously in just over a year after 
USAC initially denied funding in the IBM cases, even as it was 
addressing numerous other cases and was engaged in general 
rulemakings to improve the E-Rate program. In the course of the 
IBM cases, USAC denied a quarter of a billion dollars of 
support and also denied an additional quarter billion dollars 
of support for funding year 2002 to nine applicants in similar 
circumstances involving IBM. Thus, in the IBM cases, no funding 
was distributed and no dollars had to be recovered.
    I believe there is more that we can and should be doing. As 
I indicated at the beginning of my testimony, since the IBM 
case was concluded, the Commission has implemented further 
oversight requirements, and the Bureau has recommended changes 
to certification requirements to the Office of Management and 
Budget for approval. We believe these steps will continue to 
improve our oversight over the program, and we will continue to 
use adjudications, rulemakings and audits to help us identify 
areas of E-rate program administration that are vulnerable to 
fraud or to confusion that leads to waste and abuse.
    Thank you, Mr. Chairman, for the opportunity to participate 
in your review of the E-Rate program. I look forward to your 
questions.
    [The prepared statement of Jeffrey Carlisle follows:]

  Prepared Statement of Jeffrey Carlisle, Chief, Wireline Competition 
               Bureau, Federal Communications Commission

    Good morning, Mr. Chairman and distinguished members of the 
Subcommittee. I was named Chief of the Wireline Competition Bureau on 
August 4, 2004. As such, many of the incidents that are the subject of 
this hearing occurred before my tenure and I do not have first-hand 
knowledge of them. I am here, however, to relate the facts to you as I 
have ascertained them. More importantly, I am here to communicate to 
the Subcommittee that, with respect to the E-rate Program, I am working 
hard to achieve three main goals: first, to acquaint myself with the 
program and learn about its functioning in detail; second, to get up to 
speed with the current status of pending audits and enforcement 
actions, including the IBM case which the Commission concluded at the 
end of last year; and third to continue and advance the work already 
started to improve functioning and oversight of the program, and 
thereby eliminate waste, fraud and abuse.

            I. THE COMMISSION IS IMPROVING PROGRAM OVERSIGHT

    As a program that benefits the public, the E-rate program has 
matured to such a level that it has attracted bad actors that bend and 
violate the public trust. We began to detect these individuals and 
entities, in some cases schools or libraries, as early as 2001, in 
reviewing audits completed in the year 2000. These individuals and 
entities have either gamed the system and exploited loopholes in our 
rules, or they have committed outright fraud, and engaged in deceptive 
practices in an effort to thwart our system of internal checks and 
audits. Some turn out to be honest mistakes, but some have also 
resulted in civil and criminal prosecutions. The sheer gall of some of 
these deceptions--bid rigging, failure to deliver services already paid 
for, falsified forms and kickbacks--is disappointing, given that this 
is a program to benefit children and library patrons, but it is not 
surprising. We are dealing with elements in some instances that 
acknowledge no moral limits, regardless of the purposes of the program.
    Understanding this, the Commission has redoubled its efforts to 
deter and detect all forms of waste, fraud and abuse in the E-rate 
program, and we believe we can demonstrate good progress toward this 
goal.
    Since the program's inception, and more recently with the 2002 
launch of the Schools and Libraries Universal Support Mechanism 
rulemaking, the Commission has sought to improve the effectiveness, 
fairness, and efficiency of the E-rate program, while preventing waste, 
fraud and abuse.
    In April 2003, the Commission adopted rules to bar participation in 
the program of any individuals and companies that have been found 
criminally or civilly liable for actions that violate our rules. We 
already have applied these procedures in three instances, and we have 
sought comment on whether to expand the reach of our debarment rules.
    In December 2003, the Commission emphasized that our rules have 
always prohibited funding of duplicative equipment and services. To 
prevent entities from exploiting discounts on internal connections, the 
Commission adopted rules to prevent program applicants from making 
repeated, uneconomical upgrades or transferring their purchases to 
other entities, except in special circumstances. The Commission also 
endorsed an initiative to publicize specific lists of services and 
equipment that are eligible for E-rate discounts, both to help 
applicants more easily avoid ineligible ones and to clarify the scope 
of the program.
    In July of this year, the Commission adopted rules to revise our 
recovery approach such that recovery actions are no longer limited to 
instances in which service providers have violated our rules, but 
instead recovery is directed against any party or parties (including 
service providers and E-rate applicants) that have committed rule or 
statutory violations.
    Last month, the Commission adopted the Schools and Libraries Fifth 
Report and Order, in which it addressed a number of issues that have 
surfaced as a result of audits conducted during the Commission's 
oversight of the E-rate program. The Schools and Libraries Fifth Report 
and Order strengthens the Commission's current process for conducting 
audits and investigations of the E-rate program in a timely and 
efficient fashion. Specifically, the order establishes a framework for 
determining the appropriate amount to be recovered when funds are 
disbursed in violation of the statute and our rules. In addition, the 
order sets forth a framework for heightened scrutiny for applicants and 
service providers that have violated our rules in the past. The order 
also extends the ``red light'' rule of the FCC's existing Debt 
Collection rules to bar fund recipients from receiving additional 
program benefits if they have yet to repay the fund for past erroneous 
disbursements. Our ``red light'' rule provides that the Commission 
shall withhold action on any application or request for benefits made 
by an entity that is delinquent in its non-tax debts owed to the 
Commission, and dismiss all such applications or requests if the 
delinquent debt is not resolved. The Fifth Report and Order also 
responds to recommendations made by the Commission's Office of 
Inspector General (OIG), including codifying USAC procedures into our 
rules and strengthening the program's document retention requirements, 
so that any misdeeds can be more easily detected and prosecuted. 
Consistent with the OIG's recommendations, the order also modifies 
technology plan requirements to require applicants to have an approved 
plan that follows the U.S. Department of Education technology plan 
guidelines, subject to an additional requirement that an applicant show 
that it has the necessary resources to achieve its technology aims.
    In response to recommendations from the U.S. Department of Justice, 
the Fifth Report and Order also requires applicants to make important 
new certifications as a prerequisite to funding. For example, 
applicants must now certify that price will be the primary factor in 
bid selection, and, as a guard against gold-plating, that they will 
select the most cost-effective means to achieve goals of their 
technology plans. Finally, the order establishes a process to codify 
USAC procedures and update those requirements as necessary to protect 
against waste, fraud and abuse.
    This Fall, we will make recommendations to the Commission on 
revising the schedule of discounts schools and libraries are accorded 
under the program, as they purchase equipment and services. We believe 
that adjusting the discounts so that applicants are required to 
increase their contribution to those purchases will encourage schools 
and libraries to make better economic choices, and further minimize the 
opportunities for abuse. We also continue to tighten and monitor the 
competitive bidding process to minimize opportunities for waste, fraud 
and abuse. The potential weaknesses in a competitive bidding system 
were highlighted by the facts in the various 2002 IBM applications.

    II. THE IBM CASES ILLUSTRATE THE NEED FOR CONTINUING REFORM AND 
                               VIGILANCE

    Under the E-rate program rules for competitive bidding, after 
developing a technology plan, applicants are required to seek 
competitive bids on goods and services eligible for E-rate discounts by 
completing and posting an FCC Form 470 on the USAC website. Applicants 
also must satisfy applicable state procurement rules, wait at least 28 
days after posting before committing to a contract, and in selecting 
their service providers, make price the primary consideration. 
Competitive bidding is a cornerstone of the E-rate program because it 
limits waste, ensures program integrity, and assists applicants in 
receiving the best value for their limited funds.
    In the IBM cases, the applicants submitted a broad, generic version 
of the Form 470 indicating that they were seeking virtually every 
product and service eligible for E-rate discounts, rather than 
developing a list of services actually desired, based on their 
technology plans, with sufficient specificity to enable bidders to 
submit realistic bids with prices for specified services. While the 
Form 470 offered applicants the chance to inform potential bidders if 
there was a more specific request for proposal (RFP) that they could 
consult, the applicants in the IBM cases generally indicated that one 
was not available, even though they posted such an RFP only five days 
after filing their respective Form 470s with USAC.
    In the principal IBM case, involving Ysleta Schools District 
(Ysleta), the applicant indicated that it was seeking a ``Technology 
Implementation and Systems Implementation Partner'' to ``assist the 
District in preparing applications on the District's behalf for E-rate 
funding . . .'' Five firms responded to Ysleta's RFP. IBM submitted a 
147-page response that addressed each category in the RFP. In that 
response, the only prices that IBM quoted were hourly rates for Systems 
Integration, ranging from $394 per hour for a Project Executive to $49 
per hour for a Project Administrator. A ``systems integrator'' operates 
in the role of a prime contractor for coordinating services actually 
delivered by subcontractors. Our rules, however, contemplate a direct 
relationship between the applicants and the service providers, not an 
indirect relationship through an intermediary subcontracting unit.
    In its response to the RFP, IBM did not place bids on the specific 
products and services that were eligible for E-rate discounts, as 
required by our rules. Ysleta selected IBM subject to the condition 
that a satisfactory contract could be negotiated between IBM and Ysleta 
over the scope of work and the prices of E-rate-eligible products and 
services. IBM and Ysleta engaged in those negotiations and completed 
them on January 17, 2002. The final contract included five statements 
of work, ranging from just under $1 million to more than $12 million, 
each with detailed specifications, prices, and terms.
    Triggered by a whistleblower's anonymous letter in May 2002, USAC 
sent a special investigator to do a site visit and collect 
documentation from Ysleta concerning whether it had the resources to 
effectively use the services it had purchased. After reviewing Ysleta's 
application and supporting documents, USAC denied Ysleta's request for 
funding on December 3, 2002, based on violations of the Commission's 
competitive bidding rules, and provided Ysleta and IBM with a detailed 
explanation for that denial. Soon thereafter, USAC also denied eight 
other applications that selected IBM as system integrator. On January 
30, 2003, Ysleta and IBM sought Commission review of USAC's decision, 
and the eight other applicants associated with IBM filed similar 
appeals.
    On December 8, 2003, after a de novo review of the facts of Ysleta 
and similar cases, the Commission upheld USAC's denial of eight of the 
nine funding requests totaling over $250 million, for Ysleta, Donna, El 
Paso, and Galena Park in Texas; the Navajo Education Technology 
Consortium and Albuquerque in New Mexico; Oklahoma City, Oklahoma; and 
Memphis, Tennessee. The Commission found, in general, that the so-
called ``two-step'' bidding process (i.e., procurement of a system 
integrator followed by private negotiation with that integrator for the 
goods and services eligible for E-rate support) that IBM had 
participated in with Ysleta and others had violated the Commission's 
competitive bidding requirements.
    Specifically, the Commission found in Ysleta that:

1. Ysleta did not attempt to select the products and services that 
        represented the most cost-effective offerings, with price as 
        the primary consideration. The only prices that IBM presented 
        were hourly rates for systems integration. No bids were for 
        prices for any E-rate supported offerings. Ysleta did not 
        request or obtain sufficient data about the prices of IBM's 
        competitors for E-rate services to know if IBM's prices 
        represented the most cost-effective option. Ysleta's internal 
        assessment of cost-effectiveness was not sufficient;
2. The manner in which Ysleta and other schools used Form 470 had the 
        effect of eliminating competitive bidding for the products and 
        services eligible for discounts under the E-rate program, 
        because Ysleta's form failed to describe the services that it 
        sought to purchase in sufficient detail to enable potential 
        providers to formulate bids. Specifically, the structure and 
        content of the RFP meant that potential vendors of specific 
        services would be unlikely to respond in a meaningful way to 
        the all-inclusive FCC Form 470;
3. Because Ysleta's two-step system integration approach was 
        inconsistent with our competitive bidding requirements and 
        Ysleta failed to demonstrate that it selected IBM with price as 
        the primary factor, it failed to submit a bona fide request for 
        service, contrary to section 254(h)(1)(B) of the Communications 
        Act; and
4. Compliance with state and local procurement processes did not exempt 
        Ysleta from complying with the Commission's competitive bidding 
        rules.
    The Commission found it in the public interest, however, to permit 
the applicants that were denied funding to have a second chance to 
receive Funding Year 2002 support for services that they sought by 
seeking bona fide competitive bids. In particular, the Commission found 
that there was ``substantial and widespread reliance'' on USAC's prior 
approval of applications that utilized two-step bidding. USAC could 
reasonably have been construed as sanctioning the improper two-step 
bidding process by approving a 2001 application by El Paso, which 
involved IBM. The processing window for these rebid applications closed 
on June 9, 2004.
    The eight school districts denied funding by the IBM decision have 
resubmitted funding requests seeking a total of $40 million in 
services, an amount that is substantially less than the prior requests. 
IBM was permitted to bid again because, as stated in the order, the 
Commission believes that its rules were not as clear as we would have 
liked, and that IBM may not have realized that its aggressive 
interpretation of the rules actually crossed the line. As it turns out, 
IBM bid on only one of these applications, and it was not successful. 
As directed by the Commission, USAC is carefully scrutinizing these 
requests to ensure that they are consistent with the Commission rules 
as clarified in the Order. USAC is also investigating the circumstances 
surrounding El Paso's 2001 application.

                III. THE LESSONS LEARNED FROM THIS CASE

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

    Chairman Barton. We thank you, Mr. Carlisle. The Chair 
would recognize himself for the first round of questions, and 
the staff would put the clock at 10 minutes.
    Mr. McDonald, I am going to ask you just some general 
questions to set the parameters. Do you know approximately how 
much money is being spent each year on the E-Rate program 
nationally?
    Mr. McDonald. We have a cap on dispursements and 
collections of $2.25 billion annually. We commit up to about 
that level and we disperse about 80 percent of that. We 
actually send checks out for about 80 percent.
    Chairman Barton. So about $2.25 billion. And has that 
amount changed since the program was implemented in the late 
1990's? Has it been about $2 billion each year?
    Mr. McDonald. That was the cap, as originally set, and then 
in 1998 the Commission changed the first fund year from a 12-
month to 18 months and lowered the cap to $1.925. Since then it 
has been $2.25 billion a year, and the Commission has recently 
provided for rollover of unused funds for prior year.
    Chairman Barton. Okay. So in the history of the program, we 
have expended somewhere around $12 billion; is that just a ball 
park figure?
    Mr. McDonald. I think it is about $8 billion in actual 
money out the door.
    Chairman Barton. $8 billion out of the door. As we speak, 
how many requests are pending for funding, either for this year 
or the next year; do you know, in terms of dollars?
    Mr. McDonald. We have committed $740 million for the 
funding year we are in now, and the cap for this year is $2.4 
billion.
    Chairman Barton. So you have expended about a third of the 
money that is allocated for this year.
    Mr. McDonald. We have committed, sir. We send letters out 
to commit funds, and then as applicants do the work, applicants 
or service providers can bill us for that. Our actual 
expenditures are much less than $740 million.
    Chairman Barton. Okay. Now, my first question--I just kind 
of want to get that in the record so we know what we are 
talking about--I believe this is our third hearing on this 
program, it may be the fourth hearing, but every hearing it is 
one horror story after another. Is this a program that we 
should suspend any funding until we can get it right, just stop 
spending the money until we can get the program rules right? 
Mr. Feaster, do you want to take a shot at that?
    Mr. Feaster. We agree that there has been a series of 
horror stories. I think the movement has been in the right 
direction. From our perspective, it hasn't been fast enough. I 
think it would be a real major decision for somebody to make to 
suspend the program. I think the schools are very dependent 
upon the money to maintain connections to the Internet and get 
new connections. I think that would be a very radical decision. 
I think tightening up the procedures, as happened in the past 
and will hopefully happen in the future, you will see less 
horror stories. And we also are instigating a broad-based audit 
program using USF funds to check up on more applicants than we 
have been doing in the past where we are looking at a program 
of 250 audits over the next 18 months to identify major 
problems.
    Chairman Barton. Mr. McDonald, do you have an opinion 
whether we should suspend the program?
    Mr. McDonald. Sir, I think you would have to weigh it 
against disruption to schools and libraries across this 
country. We have focused on particular instances that are very 
troubling. One of the ones we are here to talk about today, as 
Mr. Carlisle said, except for the 2001 money in El Paso, the 
money did not go out the door; we stopped it. As I have told 
the committee before, we are initiating a new program of 1,000 
site visits to complement the application and invoice reviews 
we do and the audits we do.
    The audits that we have done, and we have worked very 
closely with Mr. Feaster and his team on these audits, they 
have identified issues but they haven't identified very many 
instances of fraud. I think that the subcommittee staff has 
done a good job of focusing on the worst cases. I don't think 
that the public should come away from these hearings thinking 
what they are hearing in these hearings----
    Chairman Barton. By the testimony of one of you gentlemen, 
there are 150 program reviewers and you admit that most of it 
is self certification. You assume that what they are telling 
you is the truth because you just don't have the staff to 
really investigate it. Was that your testimony, Mr. McDonald?
    Mr. McDonald. I believe Mr. Feaster spoke about the self 
certification.
    Chairman Barton. So we are basically on an honor system 
here. We have spent $8 billion and there is a real question 
about how much of that has been effectively utilized. Mr. 
Carlisle, do you have a view on whether we should suspend the 
program?
    Mr. Carlisle. I would largely agree with Mr. Feaster on 
this. I think it would be a radical decision. And if I could 
provide a little specificity about why, my understanding is is 
that it is not as if in every funding year you are funding 
schools and libraries from the ground up to build new systems 
and establish new connections. A good deal of the funding is 
sent out in order to maintain connections that are already 
there.
    Chairman Barton. Well, one of my questions is where are we 
in wiring our schools? What percent of the eligible schools and 
libraries have been wired effectively? Do we have any 
statistics on that? Are we 90 percent there or 80 percent 
there?
    Mr. Carlisle. In our recent 706 report, we identified--I 
can't speak to the percent that are eligible for funding, but 
in the 706 report, we stated that 94 percent of the schools in 
the country have broadband access, and somewhere between 94 and 
95 percent of libraries, I believe, do.
    Chairman Barton. So we are over the 90 percent level. That 
would indicate that there is really not a need to continue to 
fund at the $2 billion plus year level.
    Mr. Carlisle. Well, a review of that level may be in order, 
although I would say that, again, you have recurring costs for 
the connections that are already there. There are monthly 
payments that you have to make to keep a broadband line up or a 
telephone line up.
    Chairman Barton. Well, I guarantee you, as long as money is 
available, people are going to ask for it. We could double the 
program to $4 billion a year and there would be requests for $4 
billion. We could double that to $8 billion and there would be 
requests for $8 billion. If we cut it to $1 billion, if it is 
really 100 percent--as we get closer to 100 percent, change the 
rules a little bit, the user community will adapt to that and 
do that effectively.
    Well, one of my next questions, since nobody said we ought 
to suspend the program, I was hoping somebody would say we 
should, but I have to be honest and our expert witnesses here 
that are in charge of the program say we shouldn't, should we 
restructure the program so that the local communities that are 
requesting the funding have to put more of their local tax 
dollars upfront to participate? In other words, instead of 
requesting Federal dollars and you go out and use them, should 
we set it up so that you go out and we set out the program 
requirements. The local school district, the local library goes 
out and puts in a system that meets those requirements and then 
gets reimbursed for it. Obviously, if the local taxpayers are 
on the hook, the school board members and the administrators 
are going to make sure or I would think they would make sure 
that those monies are actually effectively used because it is 
coming out of their local tax base. Mr. Feaster, do you have a 
comment on that?
    Mr. Feaster. I think that would be an excellent idea. From 
the standpoint of oversight, the more local money that goes 
into a system, I think the better it is going to be. I would 
have to defer to the program operators in terms of the impact 
on whether the schools that don't have that money how that 
would affect them in the operation of the program.
    Chairman Barton. Mr. McDonald, do you have an opinion on 
that? Just the general concept. I understand that we would have 
to do a lot of work to work it out.
    Mr. McDonald. I think you would see a much lower 
participation by the poorer schools who would have to come up 
with that money upfront. The poorer schools frequently wait for 
our commitment letters to initiate service because they don't 
have that money, and when they are assured----
    Chairman Barton. Well, but now 94 percent have gotten some 
connection established, if Mr. Carlisle's statistics are 
relevant. So we are not starting from ground zero. You could 
set up some sort of a loan program that a low-income school 
district could apply for a loan, and once they show that they 
are actually spending the money for what it is supposed to be, 
they could be reimbursed. I understand there is a difference 
between El Paso Independent School District in far west Texas, 
it is low income, and in Highland Park School District in urban 
Dallas that is one of the higher income districts in the 
country. I understand that.
    So you could have some special provisions for low income 
participation based on some sort of a loan program. But unless 
we force accountability or at least incentivize accountability 
at the local level, if you have got a pile of Federal dollars 
that are just out there, people are going to grab at it. It is 
free money, it is found money, it is somebody else's money. So 
you have got to figure--I think we have to figure out a way to 
make sure that there is a real incentive at the local level to 
use the money for which it is intended.
    Mr. Carlisle, do you have a comment on some sort of a 
system where the local dollars go upfront?
    Mr. Carlisle. Well, I think your proposal would certainly 
create that incentive. I would have the same concern, although 
what you point out about much of the facilities already being 
in place would be a countervailing consideration. We are taking 
steps and will make a recommendation to the Commission in the 
next month or so to lower the discount rate that is currently 
applied, which would have the effect of requiring school 
districts to have more skin in the game, to put more of their 
money upfront in order to qualify for funding. That coupled 
with a requirement that certain of those recipients would have 
to do independent audits would also be a control on the 
program, an alternative one to what you have suggested but a 
control.
    Chairman Barton. Let the record show that ``skin in the 
game'' is a technical term used at the FCC for the local 
community to put more of their dollars at risk in the beginning 
of the program.
    Mr. McDonald, before my time--my time has expired. You 
wrote a letter to Mr. Bob Richter who is with IBM Corporation, 
in charge of their national E-Rate program. This letter was 
dated September 16. It is directed toward the El Paso 
Independent School District funding for the year 2001, and the 
amount of money that was dispersed under that was a little over 
$55 million. The thrust of this letter appears to be that a 
fair amount of that money may have to be reimbursed. Do you 
care to comment of what percentage of that $55 million this 
letter indicates might need to be reimbursed?
    Mr. McDonald. Potentially a significant amount of that, and 
we have invited IBM to come back to us and help clarify which 
of these services that they delivered an invoice for are 
eligible and which are not.
    Chairman Barton. But do you think it is going to be in the 
neighborhood of $40 million or half of it?
    Mr. McDonald. I don't think it would be that high. The 
analysis attached to the letter walked through the individual 
pieces of it, and a portion of the issue is what schools got 
the services? Were they schools that qualified for the 90 
percent discount rate or was it the entire school district? And 
the answer to that question could be a significant piece, and 
we just don't know.
    Chairman Barton. The Chair would ask unanimous consent that 
the letter with the attachments be included in the record. I am 
told that the minority staff has seen this letter? Is there any 
objection? With hearing no objection, this letter is included 
in the record.
    My final question before I turn it over to Ms. DeGette, in 
the El Paso case, they were being funded in the $2 million to 
$4 million range and then the funding request jumped up to over 
$60 million. Is there no protocol within USAC, when you have 
such a huge increase from a prior year, that that is not 
automatically red-flagged? We had the same case in the Dallas 
Independent School District where they were going along at an 
amount of money and then there was a significant jump in a 
single year. Does that not raise some internal flag that needs 
to be investigated?
    Mr. McDonald. It does since these hearings have begun, sir. 
I think after the last hearing we realized that that should 
have been an additional flag for us, and we have made that an 
automatic step now.
    Chairman Barton. Okay. The Chair would recognize Ms. 
DeGette of Colorado for 10 minutes.
    Ms. DeGette. Thank you, Mr. Chairman. I agree with the 
chairman that one of the reasons this money has been so grossly 
misused is because of lack of oversight and local 
accountability, but my concern is one that Mr. McDonald 
articulated, which is that some of these school districts are 
so poor, I mean after all the whole program is to target poor 
districts, that they may not have the financial wherewithal to 
even come up with an initial amount of money. And what I would 
like to explore is I was just telling staff my daughter in the 
Denver Public Schools, which does receive this money, they quit 
watering the lawn at her high school because they don't have 
enough money to maintain the grass. So I was trying to think 
about how they would come up with enough money to make a major 
investment in computer wiring, and I think that is a concern we 
all share.
    But my concern is how do we find alternative ways to ensure 
that this money is well spent? And I wanted to ask you a couple 
of questions, Mr. Feaster. You testified in your opening 
statement that it would take additional enforcement resources 
to really do the job that you need to do; is that correct?
    Mr. Feaster. That is correct; yes, ma'am.
    Ms. DeGette. You have, I think, three folks investigating 
these complaints right now; is that right?
    Mr. Feaster. Yes, ma'am.
    Ms. DeGette. How many staff do you think you would need to 
adequately investigate and do this oversight?
    Mr. Feaster. Approximately 16 additional staff. We are in 
the process of developing a request for proposals to conduct 
approximately 250 audits of the program over the next 18 
months. For us to do that many reviews of the audits, we would 
need additional resources.
    Ms. DeGette. Do you have a ball park sense of the kind of 
resources you are talking about, a dollar amount?
    Mr. Feaster. For the 250 audits, about $10 million.
    Ms. DeGette. Ten million? And do you have any estimate 
about how much fraud and waste and abuse is going on out there, 
roughly?
    Mr. Feaster. Based on 135 audits that have been done over 
the past couple of years, we found about 36 percent of those 
people were not following the rules.
    Ms. DeGette. Do you have any sense about how much money we 
are talking about with that 36 percent, roughly?
    Mr. Feaster. No, I don't.
    Ms. DeGette. What do you think--do you have advocate 
independent audits of these applications?
    Mr. Feaster. Yes, I do.
    Ms. DeGette. Tell me how that would work, and are there 
additional rules that can be put into place to beef up 
independent audits?
    Mr. Feaster. When you say independent audit, I think that 
the audits done by my organization or by contractors under my 
authority is the way to go. USAC also does internal audit--
using an internal audit staff, they also do audits. I think 
that adds to the number of audits we do. The concept I think 
you are talking about is independent audits by the school 
district.
    Ms. DeGette. That would be helpful too, I would think.
    Mr. Feaster. We would have to review that to ensure that 
they are truly independent. If the school district is paying 
somebody to do something, they tend to get the results they 
like. That is always a possibility.
    Ms. DeGette. But there is a mechanism that can be put into 
place as part of the application process to ensure independent 
audits by school districts, I would assume.
    Mr. Feaster. We could develop something in coordination 
with USAC and the Wireline Bureau.
    Ms. DeGette. Now, can USAC funds be used for independent 
audits?
    Mr. Feaster. We are going to try to do that with my office 
and USAC partnering in some audits.
    Ms. DeGette. Mr. Carlisle, in your testimony, you said that 
the Wireline Competition Bureau is making a recommendation to 
the Commission on revising the schedule of discounts that 
schools libraries are quoted under the program. And what this 
recommendation would do, as you testified, it would increase 
applicants to increase their contribution to purchases. And 
this is what I am concerned about: I am wondering if you are 
concerned whether these disadvantaged school districts will 
have a difficult time paying for the equipment as a result of 
the increased costs of the schools, and has your agency done 
any research on this issue?
    Mr. Carlisle. My staff is looking into it as part of the 
process of making a recommendation. Obviously, any 
recommendation that we make to the Commission is going to take 
that into account.
    Ms. DeGette. So you don't have any firm proposal to 
increase the cost to the schools of the equipment and services, 
correct?
    Mr. Carlisle. I have not read the recommendation yet, so I 
don't exactly know what----
    Ms. DeGette. I am sorry, is there a recommendation already?
    Mr. Carlisle. Not before the Commission yet. My staff is in 
the process of writing that, which would be a recommended order 
to the Commission.
    Ms. DeGette. And what kind of research is your staff doing 
to take into account the financial ability of these poor school 
districts to pay?
    Mr. Carlisle. Well, typically, what we do in any rulemaking 
proceeding is review the record that we have got on hand, the 
comments and replies filed, which will include comments and 
replies filed by the school districts and advocates on their 
behalf, and also have meetings with them to find out what the 
scope of that issue is.
    Ms. DeGette. And what is that--is that comment period open 
now?
    Mr. Carlisle. I am not sure--I am sure it is----
    Ms. DeGette. Someone is shaking her head no behind you.
    Mr. Carlisle. I am sure it is closed at this point, but I 
am not sure exactly----
    Ms. DeGette. I mean was there notice to these school 
districts?
    Mr. Carlisle. It would have been the same public notice 
that anyone receives of any rulemaking that we have. So it is 
publication in the Federal Register. I don't know that specific 
notice was sent. We have had ex parte meetings with a number of 
schools already, schools and libraries already, that would be 
affected by changing the discount rate. But in terms of when 
the initial notice of proposed rulemaking went out, it would 
have been the same publication that the rest of the public 
received about it.
    Ms. DeGette. And do you know whether--since the comment 
period is closed, do you know how many comments that you have 
received and from what types of schools and so on?
    Mr. Carlisle. Off the top of my head, no, but I would be 
happy to work with your staff to give you that information.
    Ms. DeGette. That would be great. Mr. Chairman, I would ask 
unanimous consent that Mr. Carlisle be allowed to submit in 
writing the kinds of responses to my questions.
    Mr. Walden [presiding]. Absolutely. Without objection.
    Ms. DeGette. Thank you. Now, I am wondering, Mr. McDonald, 
I think you testified a minute ago in response to the 
chairman's question that you had some concerns about these 
schools, the needy schools being able to pay a higher 
percentage. I am wondering if you can elaborate on that answer 
and tell me why you do have that concern?
    Mr. McDonald. At a 90 percent discount rate, the schools 
are paying 10 percent. If the discount rate were lowered to 80 
percent, the schools would pay 20. That is a doubling of the 
share they have to come up with, so from their perspective, 
that isn't a trivial impact on them. I am not taking a position 
about should the rate be changed or not, just that from that 
perspective, every 10 percent decrease in the maximum discount 
rate is a doubling or tripling of what the schools have to pay 
today.
    Ms. DeGette. Do you know if anybody has done any research 
on whether reducing the E-rate contribution from 90 percent to 
80 percent would have any effect on the wrongdoers? I mean it 
still seems to me that if you have a 20 percent match, there is 
going to be an incentive on some people's part because there is 
still 80 percent.
    Mr. McDonald. You mean----
    Ms. DeGette. Where is the tipping point where it would 
really create more accountability?
    Mr. McDonald. You may be aware that USAC formed a Task 
Force on Prevention of Waste, Fraud and Abuse last year, and 
the task force spent a lot of time on this question. And there 
were advocates--the composition of the task force included 
representatives of schools, rural schools, urban schools, 
libraries, service providers, and there was extensive 
discussion about this, some people pushing for maximum 70 
percent rate. The task force ended up at 80 percent, very much 
the kind of issues you were just going through there. Is the 
non-discount share large enough to stop the wrongdoing?
    Ms. DeGette. Right.
    Mr. McDonald. Was it still possible for the service 
provider to inflate the price and get that money back? That is 
where they came out. I have learned more about what is really 
going on in some of what the committee has seen, because 
documents that have come to your attention have not come to 
ours. Obviously, they aren't sharing these documents with us.
    Ms. DeGette. And this task force, as I understand it, was 
primarily composed of vendors, while there were others on the 
task force; is that right?
    Mr. McDonald. No, I think it is primarily applicants that 
were--vendors and applicants. We tried to get a cross section 
of all the stakeholders in the program. So there were a number 
of school applicants, a number of library applicants, rural 
schools, Catholic schools.
    Ms. DeGette. It would be helpful to me, Mr. Cline, if you 
could--I am sorry, Mr. McDonald, if you could--the name tags 
are over--Mr. Cline says, ``Oh, no.''
    If you could supplement your testimony with the list of who 
was on that task force, that would be very helpful.
    Mr. McDonald. Be happy to do that.
    Ms. DeGette. Thank you.
    [The information referred to follows:]

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    Mr. Walden. Mr. McDonald, I want to go to you. Could you 
turn to tab 65 in our notebook of information? You will find 
there a memo from Mr. Quentin R. Lawson of the National 
Alliance of Black School Educators to Mr. Bob Emery, John 
Colvin and Don Parker. And attached thereto is a November 2, 
2000 letter from NEC to Mr. Lawson in which you will see--are 
you on the same? Okay. In which you will see right off the top 
he says, ``Dear Mr. Lawson, I am pleased to respond to your 
letter on behalf of the VNCI, NEC and IBM,'' quote, unquote, 
``the team.''
    And then later on page 2 of that letter he says, on sub 6, 
``The teaming agreement related to the team members 
participation with one another is in negotiation and will 
remain the confidential information of each member of the team. 
The team, while fully committed to supporting NABSE and NABSE's 
membership, believes that any contractual arrangement between 
NABSE and the team could be construed inappropriately by third 
parties.''
    And on the third page, he writes--or these people write, 
Mr. Colvin, Mr. Emery and Mr. Parker, ``As an offset to the 
costs that NABSE will incur in support of this partnership, 
NABSE will receive an annual payment of 1.5 percent of the 
cumulative business generated by the team members in sales to 
NABSE member schools.''
    Is this some sort of kickback we are dealing with here? How 
would you describe this 1.5 percent payment back to NABSE and 
this reference to how this might be misconstrued by third 
parties?
    Mr. McDonald. My understanding is that NABSE was presenting 
itself as a disinterested consultant to these school districts, 
helping them participate in E-rate. As I mentioned in my 
testimony, we have denied millions of dollars where that 
consultant who is controlling the process of selection of 
vendor is associated with those vendors.
    Mr. Walden. Do you think that is the case here, that NABSE 
was associated with the vendors?
    Mr. McDonald. NABSE certainly has an interest in making 
sure the work goes to these vendors, because they make money if 
it does. Presumably, they don't if it does not.
    Mr. Walden. And what qualifications, from your experience, 
did the NABSE people bring to the process as technical 
qualifications?
    Mr. McDonald. I don't know, sir.
    Mr. Walden. Are you familiar with other such agreements 
where there is a percentage that goes back based on sales to a 
third party?
    Mr. McDonald. I recall the incident of Total Com and there 
was an FCC decision on this where we found Total Com was the 
consultant where whenever they were involved with an applicant, 
the applicant chose an outfit called SiteLink to provide 
internal connections. We got hold, in that case, of a contract 
that the applicant and Site Link would sign that named Total 
Com a beneficiary of the contract. It didn't specify the 
percentage, as I recall, but presumably there was some money 
going back to Total Com based on getting business for SiteLink. 
We denied those applications; the FCC upheld that decision.
    Mr. Walden. But that is a similar sort of scheme to what we 
are reading about here?
    Mr. McDonald. I would think that is similar; yes, sir.
    Mr. Walden. And so would this be in violation of your rules 
then?
    Mr. McDonald. If this document had come to our attention, 
we would have denied these applications.
    Mr. Walden. Now that this document has come to your 
attention, is there a mechanism for recovery if this is in 
violation of your rules?
    Mr. McDonald. Yes, sir.
    Mr. Walden. And is that something you are pursuing?
    Mr. McDonald. Yes, sir.
    Mr. Walden. All right. Mr. Feaster, from your perspective 
as the IG, what is your reaction to this?
    Mr. Feaster. It would be something we would look into. It 
may be part of a wider investigation that is ongoing at the 
present time. I don't know that for a fact, though.
    Mr. Walden. All right. Mr. McDonald, your testimony 
indicates that your investigations of El Paso in funding year 
2001 have shown, as you said, there were substantial amounts of 
ineligible services funded. Walk me through this process of 
going back and recovering on those that you determine are 
ineligible. Is that happening? Will that happen in 2001?
    Mr. McDonald. Let me just amend my answer to that last 
question. NEC reached a settlement agreement with the Justice 
Department and we won't seek, as I understand it, additional 
money from NEC. They settled all their issues with E-rate. So 
as we go back to look at the NABSE stuff, as I understand it, 
we wouldn't be looking to take--to recover----
    Mr. Walden. From NEC. But what about the other participants 
in that?
    Mr. McDonald. Yes. Yes. In 1999, we discovered that we had 
made some errors in making commitments in the first year. We 
were in the middle of an audit, disclosed that to the auditor. 
That led to discussions with the Commission and led to issuance 
of an order in 1999, the Commitment Adjustment Order, where the 
Commission directed how do we do this when we discover after 
the fact that we have committed money and dispursed money in 
violation of the rules? So the process was established back 
then, and they have recently amended that process in the fifth 
report and order so that previously we could only seek money 
from the service provider, now the guidance is to seek it from 
whoever the guilty party is, whoever violated the rules. In the 
old days, there was an opportunity for the service provider to 
offset the money owed back to us from additional invoices that 
would be otherwise properly paid. They have eliminated the 
offset option, so----
    Mr. Walden. They have to pay you back.
    Mr. McDonald. [continuing] it has to be paid. And they have 
moved it under the Debt Collection Improvement Act so that 
there is much more teeth in getting the money back and applied 
the so-called red light rule to that, that we won't make any 
other payments and we will deny other requests if they are 
delinquent in making those payments. The Commission has moved 
strongly to tighten up recovery for rule violations.
    Mr. Walden. What is your take on the fact that IBM bundled 
its consulting services, valued at 7 percent of the cost of 
each E-rate project, under the fees charged to the district and 
El Paso?
    Mr. McDonald. I would say they were bundling ineligible 
services and seeking recovery of payments for ineligible 
services.
    Mr. Walden. You testified that your investigation of El 
Paso concluded that the procurement approach was not consistent 
with the rules. Is this because of their strategic technology 
partnership with IBM? And how else was the procurement approach 
in violation of the rules?
    Mr. McDonald. In my testimony, I talked about the two-step 
approach, and I think that is the fundamental issue, that they 
avoided the competition over prices of goods and services, but 
there were a number of other flaws in the processes. As my 
colleagues have pointed out, the Form 470 listed virtually 
every possible product and services----
    Mr. Walden. Right. That is sort of like saying here is the 
catalog. I want everything in it but I don't know exactly when 
or what.
    Mr. McDonald. Yes, sir.
    Mr. Walden. But make it all available to me at the 
discount.
    Mr. McDonald. So that doesn't provide any guidance to 
would-be vendors about what do you really want, what should I 
bid on?
    Mr. Walden. And have they thought through what they need.
    Mr. McDonald. Correct.
    Mr. Walden. Isn't that the underlying issue here?
    Mr. McDonald. Yes, sir. The 470 said there was no RFP. 
There was an RFP, and it was very different from the Form 470, 
as Mr. Carlisle, I believe, testified. So there were a number 
of issues in addition to ineligible services in the statements 
of work.
    Mr. Walden. I want to go back just briefly to a comment you 
made about where USAC had made some errors in approving funds 
and then you later told your auditor. What happens in that case 
or in future cases if USAC makes the mistake? Does the district 
still have to pay it back or how--I mean where does this equal 
out?
    Mr. McDonald. In the commitment adjustment order, the 
commission addressed that and said in a number of instances the 
mistakes we made were rule violations, and for that first year 
they waived those. The others were statutory violations that we 
were paying for ineligible services or paying for 
telecommunications services to be provided by an ineligible 
telecommunications provider. They concluded those were 
statutory violations, and they had no authority to waive those, 
so we had to seek recovery. Folks who----
    Mr. Walden. How do you end up with rule and statutory 
violations when you are administering this program? How did 
that happen?
    Mr. McDonald. Well, the statute is not very detailed, and 
the----
    Mr. Walden. I see.
    Mr. McDonald. [continuing] Commission has obviously done a 
lot to flesh this program out in rules.
    Mr. Walden. All right. Mr. Feaster, you mentioned steps the 
Commission has taken to address the programmatic weaknesses and 
expressed frustration, though, with the pace of the Commission. 
We have a new gentleman who has just taken over with the 
Commission. Can you elaborate on what bothers you with the 
process, what Mr. Carlisle can do or has done since taking over 
and what remains?
    Mr. Feaster. I think the full implementation of the DOJ 
recommendations on certifications is one positive step. We have 
had discussions about that and we have both agreed that our 
staffs should work together with DOJ to see how far we can go 
with those certification changes. Also, they have some items 
out for comment which would tighten up the competitive process 
aspects of the program that we would--we would like to see the 
requirement for three bids as a minimum requirement. We think 
that would help the process be more competitive and lower the 
prices for the equipment. The Bureau has a--we know they have a 
lot to do but we think that they need to expedite, and I think 
Mr. Carlisle has committed to that process.
    Mr. Walden. Mr. Carlisle, would you like to comment on 
that?
    Mr. Carlisle. I have committed to that process. I think one 
of the first public statements I made after I took the Office 
of Bureau Chief was that I had four primary things that we had 
to get done, and E-rate was right on there, improving oversight 
of them. We obviously have many, many things that we have to 
get done in the Bureau, but in terms of the things we 
absolutely have to get done as top priorities, that is right up 
there at the top.
    My sense is that we are continuing the work that was 
started with the 2002 notice of proposed rulemaking. We have 
already released three orders at this point, typing up aspects 
of the program on our fifth report and order, and we are moving 
into our sixth report and order, which is the recommendations 
that we will be making in the next month or so. So we are doing 
the best we can with what we have got, and we will continue to 
do so. And I am also committed to working with Mr. Feaster and 
also Mr. Fishel at the Office of the Managing Director and our 
general counsel.
    Mr. Walden. We appreciate that. Obviously, you have got a 
bucket with a lot of money in it, and a lot of people have been 
drilling holes in the bottom of it.
    Mr. Feaster. That is true.
    Mr. Walden. And it is time to plug those holes. Thank you. 
The Chair recognizes the gentleman from New Hampshire, Mr. 
Bass, for questions.
    Mr. Bass. I will pass, Mr. Chairman.
    Mr. Walden. Chair recognizes the gentlewoman from Colorado, 
Ms. DeGette, for further questions.
    Ms. DeGette. Are we going to do two rounds?
    Mr. Walden. If you have any further questions you want to 
ask.
    Ms. DeGette. Thank you very much, Mr. Chairman. Thank you, 
Mr. Chairman. I have actually never known Mr. Bass to pass on 
questions, so I wasn't quite prepared.
    Mr. Feaster, I just wanted to ask you, your written 
testimony indicated that the FCC IG established a working 
relationship with the Antitrust Division of the DOJ, in large 
part because of the number of investigations that you were 
supporting involved allegations regarding the competitive 
procurement process. About how many competitive procurement 
process investigations are you currently supporting the 
Antitrust Division with?
    Mr. Feaster. I believe there are about 35. I don't know if 
they are all antitrust related. We work with two groups, 
actually, the FBI and the Antitrust people, and I am not sure 
how that 35 breaks down. Maybe Tom knows.
    Mr. Cline. I am not certain exactly of the active 
investigations that are in process how many of them 
specifically relate to competitive procurement problems. Some 
of them relate to items such as paying for goods and services 
that were not received. But we do know that we have 35 that are 
active at the moment, and our office is actively supporting 18 
of those with audit support and work like that. The others we 
are monitoring, we are aware of them, and we respond to 
requests when we receive them.
    Ms. DeGette. And that is in addition to the existing work 
that you folks have.
    Mr. Feaster. Yes.
    Ms. DeGette. And that is with the three agents that you 
have?
    Mr. Feaster. Yes, ma'am.
    Mr. Cline. They are auditors, though, ma'am.
    Ms. DeGette. Oh, they are auditors. I have just got to say 
on behalf of the committee, and I think we would all agree, you 
folks have been doing a heck of a job with very limited 
resources, so hopefully we can get you some more resources to 
continue your fine work.
    Mr. Feaster. Thank you.
    Ms. DeGette. Now, Mr. Carlisle, I want to come back to you 
for a minute because you testified that USAC denied a quarter 
of a billion dollars in support to the IBM cases and that no 
dollars have to be recovered because funding was never 
distributed. And Mr. McDonald talked in his testimony about how 
USAC was concerned about funding year 2001 and the ineligible 
services from IBM. So I guess my question is if it turns out 
that El Paso was guilty of receiving money for ineligible 
products and services, is the FCC going to make every 
appropriate effort to recover those monies?
    Mr. Carlisle. Yes.
    Ms. DeGette. Okay. My other question, and I don't know if 
you can answer this or someone else, do you all think that if 
there hadn't been this whistleblower letter, that the El Paso 
case would have come to light? Would we have found that? Mr. 
McDonald?
    Mr. McDonald. In my longer statement, I think it may have 
not got into my oral statement, I do believe we would have 
uncovered the 2002 pattern. There were so many applicants doing 
the same thing, seeking so much money that I believe we would 
have conducted intensive reviews of those, sought the 
competitive bidding documents and learned what the approach 
was. And I think that would have led us to look back to El Paso 
2001.
    Ms. DeGette. Do you think it would have happened as quickly 
as it did or would it have happened after monies were already 
dispersed?
    Mr. McDonald. I am glad we got the letter.
    Ms. DeGette. How many cases do you think are out there like 
that that haven't had whistleblower letters? Mr. McDonald?
    Mr. McDonald. One, the whistleblower hotline is a very 
effective tool for us. It does bring our attention to a lot of 
issues, and we have a special investigations team that follows 
up on every complaint we get--telephone calls, letters, 
whatever. In addition to that, we have our own pretty intensive 
review of applications. We look for similarities across 
applications that would suggest service provider involvement in 
those applications. So we have our own means at this and we 
catch a lot of this ourselves without whistleblower complaints, 
but that is a very valuable tool.
    Ms. DeGette. Well, I understand you have mechanisms in 
place, but, as we heard in the last hearing and as we have seen 
ample evidence, there are just these gross examples of fraud 
going on throughout the country, and I am wondering if there 
are procedures other than the ones you have in place that can 
be put into place so that we can catch these systems like El 
Paso early on.
    Mr. McDonald. We are in funding year 2004, and the 
committee is focused on Puerto Rico was 1998 and 1999; San 
Francisco I think was 1999 or 2000. We have gotten a lot more 
sophisticated from those early years as we have learned about 
the abuses of the program. After these hearings, we go back and 
think about the issues that you have raised and what could we 
do to literally improve our procedures to address them. We want 
to get this right, and we are looking for every means we can to 
improve to make sure we get it.
    Ms. DeGette. So it is your view that since 2000-2001 these 
gross abuses are not occurring at the rates they were before 
then?
    Mr. McDonald. I believe they are not occurring in the rates 
they were before then. We have hired certified fraud examiners 
to look at these applications, to look for patterns. One of the 
first things we do when we get the applications data entered is 
look for patterns across, look for very large requests from 
smaller school districts, is there a pattern, and then we go 
look for those.
    Ms. DeGette. Okay. So then here is my question: If we have 
adequate enforcement in place now, why are we talking about 
lowering the E-rate contribution or the formula to 80 percent?
    Mr. McDonald. Are you asking me that?
    Ms. DeGette. Yes.
    Mr. McDonald. Well, I am saying we are getting better. I 
think that we are catching this much better than we used to. I 
don't want to represent that there is no fraudulent activity in 
E-rate today.
    Ms. DeGette. What do you think about that, Mr. Feaster?
    Mr. Feaster. It goes back to the fact that we haven't done 
enough work in the audit area to make that statement 
positively, but we have indications that waste and fraud is 
widespread.
    Ms. DeGette. Do you think it has decreased dramatically 
since these new controls have been put into place?
    Mr. Feaster. I don't know if it decreased dramatically. I 
think it has taken a bite out of it. The review process has 
been strengthened. We are doing more audits. We are finding 
more problems. The more audits we do, the more problems we 
find, so I don't know whether it is decreasing or we are just 
finding more or finding less.
    Ms. DeGette. We don't really have a way to know right now 
how much fraud and abuse is out there, do we?
    Mr. Feaster. No, we don't. Hopefully, once I get 250 audits 
under our belt, we will be able to tell you.
    Ms. DeGette. Mr. Carlisle, I want to ask you, many vendors 
and school districts have been found guilty--and I recognize 
that you are new, so the information you have will be based on 
what your agency has been doing--but many of the vendors and 
school districts have been found guilty of violating E-Rate 
program rules, either accidentally or maliciously. Some of the 
repeat offenders like IBM have been allowed to continue 
operating with the E-Rate program, and I am wondering why that 
is.
    Mr. Carlisle. Well, our debarment rules, which were adopted 
in April 2003, debar participation in the program of anybody 
who has been convicted of a criminal offense related to the 
program or of civil fraud or like civil charges related to 
actions within the program.
    Ms. DeGette. I am sorry, I am confused. Civil actions, you 
mean a judgment, a court judgment? Okay. Because people don't--
--
    Mr. Carlisle. If they are sued for fraud or there is a DOJ 
civil action against them for fraud, yes, exactly.
    Ms. DeGette. Which is--okay. I am confused, because I 
thought that it required a criminal conviction.
    Mr. Carlisle. No.
    Ms. DeGette. No?
    Mr. Carlisle. In April 2003, we made clear that if there 
are civil--if they have been found liable for civil judgments 
related to the program, things like fraud, et cetera, they can 
also be debarred from the program.
    Ms. DeGette. Okay. And can these vendors avoid that kind of 
finding by entering into a settlement agreement which 
specifically doesn't have a finding of fraud and thereby be 
eligible for continued participation in the E-Rate program?
    Mr. Carlisle. Theoretically, they would not have received a 
conviction and also not a civil judgment against them, so, 
theoretically, yes. However, my understanding is is that 
applications submitted for funding by such vendors would be 
subjected to a higher level of scrutiny.
    Ms. DeGette. Since April 2003, when you folks promulgated 
these standards, has there been a civil judgment that would 
debar somebody from eligibility under the E-Rate program?
    Mr. Carlisle. Not to my knowledge, although we have 
debarred individuals on the basis of criminal convictions.
    Ms. DeGette. Right. And how many have been debarred on that 
basis?
    Mr. Carlisle. Three, and we have pending action on several 
others.
    Ms. DeGette. And who was that?
    Mr. Carlisle. Oscar Alvarez, John Angelitis and Duane 
Maynard.
    Ms. DeGette. So those were three individuals who were 
convicted. What about some of these big companies? Has any 
company, has any corporation been debarred?
    Mr. Carlisle. I believe the Enforcement Bureau currently 
has under consideration debarment of NEC, but they have not yet 
completed that proceeding.
    Ms. DeGette. And that has been a criminal proceeding as 
well, NEC, right?
    Mr. Carlisle. I believe so, yes.
    Ms. DeGette. Thank you.
    Mr. Bass [presiding]. The Chair recognizes himself for 10 
minutes. Mr. Feaster, did you agree with the Commission's order 
regarding the IBM matter?
    Mr. Feaster. Yes and no. First, we agreed with the 
Commission agreeing with USAC in denying the applications. The 
no is that we thought they were--that the schools played a role 
in the misdeeds, that there should have been action taken 
against the schools and also against IBM. Basically, the order 
let them redo it, and we think that IBM shouldn't have had the 
opportunity to rebid, and the schools should have lost the 
money.
    Mr. Bass. What are your specific concerns regarding the 
program's competitive bidding requirements? What do you believe 
is the effect of weakness in this area of program design?
    Mr. Feaster. The effect is basically to cost the Universal 
Service Fund more money. The lack of competition means higher 
prices paid for equipment. The long-range effect is that the 
schools that are the neediest end up losing money because the 
fund is capped.
    Mr. Cline. Sir, if I could expand on that as well.
    Mr. Bass. Sure.
    Mr. Cline. We believe that the current competitive process 
that is utilized for E-rate funding decisions--or applications, 
excuse me, is based upon some faulty assumptions. There is an 
assumption that the posting by the applicant of the 470 on 
USAC's web site for 28 days is going to generate a cycle of 
competitive activities, that there will be vendors looking at 
these 470's and there will be this activity of phone calls and 
discussions. And we could certainly not say anything to the 
extent that that may or may not be true, but our audits 
indicate that that frequently does not happen. The posting of 
the 470--the 470 is too general for vendors to be able to 
generate good and competitive and sort of point-on bids that 
meet the schools needs, and frequently that just does not 
generate the level of competition that was originally 
envisioned by this process.
    Mr. Bass. Mr. Feaster, what are your specific concerns 
regarding the program's reliance on self certification? What do 
you believe is the effect of weaknesses in this area on the 
program design?
    Mr. Feaster. Well, the conclusion we have reached regarding 
certification is that the bad guys will certify anything, and 
we recommended that the Bureau take the DOJ recommendations and 
implement them on their forms to strengthen the language on the 
forms and let the antitrust people when they do find misconduct 
to take the appropriate legal action. That has partly been 
done, and we were working with the Bureau to implement the 
other ones, other recommendations that hadn't been fully 
implemented yet.
    Mr. Bass. What do you think it is--the weakness in this 
area, what effect do you think it has on program design, in 
general? How does it affect the rest of the process?
    Mr. Feaster. Well, the certification process is a major 
foundation of the program, and if people are certifying to 
things that they haven't done, we allow funding to occur for 
when it shouldn't occur. So, again, it goes back to money being 
misused by the applicants of the program. That means less money 
for the truly needy applicants.
    Mr. Cline. If I could expand----
    Mr. Bass. Yes.
    Mr. Cline. [continuing] another thought on that matter. 
What we frequently run into in discussions with the 
certifications, again with the Antitrust Division, is the lack 
of strength that the certifications as they currently are is 
sort of ignoring the impact of some of the actions the 
Commission has taken recently to improve the certifications and 
forms. Discussions we have had with numerous antitrust 
attorneys indicate that these certifications provide no 
strength, they have no basis by which they can make charges.
    An interesting fallout of some of the charges and some of 
the charges that are being worked on in active investigations 
under the E-Rate program is they, to our knowledge, never 
include a charge of false statements. Now, in government 
contracting, in grants, in numerous other activities involving 
the transfer of Federal funds, false statements is kind of one 
of those bread and butter charges. Typically, if you have 
committed a crime, you have made a false statement. I think it 
is telling that we have no charges of false statements in this 
program, and it goes back to the weakness with the 
certifications.
    Mr. Bass. Mr. Feaster, in testimony today, we hear that El 
Paso Independent School District's $27 million maintenance 
operation was, ``consistent,'' with its technology plan. Do you 
believe rules regarding technology plans are sufficient to 
prevent wasteful spending?
    Mr. Feaster. No, we don't. One of the findings that we have 
come up in our audits is the difference between program rules 
and implementing procedures established by USAC, and we have 
been recommending that those implementing procedures be 
codified by the Commission in order to bring them up to the 
status of rules where we could take money back for violation of 
those. One of those areas is the tech plan, that there are a 
lot of implementing procedures that we would like to see 
codified.
    Mr. Bass. Mr. McDonald, if you would be good enough to turn 
to tab 38 and 39.
    Mr. McDonald. Yes, sir.
    Mr. Bass. Mr. McDonald, tab 38 and 39. One issue with the 
strategic partnership approach is the vendor getting--an 
example of the vendor getting too involved in the application 
process. These e-mails used the term, ``verbal commit.'' What 
do you make of that? What does that imply to you about the 
integrity of the competitive process?
    Mr. McDonald. It appears that the verbal commit is 
occurring before the Form 470 is even posted, which is a 
violation of the rules. The Form 470 is to be posted, wait 28 
days, consider all the bids you got and choose the most cost 
effective. It appears that wasn't followed in this instance.
    Mr. Bass. And, obviously, the--well I am not going to 
answer the question for you--what does it imply about the 
integrity of the competitive process? It is pretty self 
evident.
    Mr. McDonald. Yes. The commitment was made before it was 
even begun.
    Mr. Bass. Right. You state that you would probably have 
caught the El Paso-IBM patterns absent the anonymous letter; is 
that correct?
    Mr. McDonald. Yes, sir.
    Mr. Bass. Do you think your processes would have captured 
the full pattern of activity?
    Mr. McDonald. We didn't see these documents. I think your 
powers to get documents are better than ours.
    Mr. Bass. Well, have you changed your procedures since then 
to make sure you can catch such an activity?
    Mr. McDonald. We have certainly broadened our scrutiny of 
the competitive process and sought--much more than we used to--
we are seeking the RFPs, all bids that were received, 
evaluation worksheets to see how the winning vendor was 
selected. We are doing much, much more of that than we used to.
    Mr. Bass. Later we will hear from Charles Tafoya, the 
superintendent of the El Paso Independent District who alleges 
in his written testimony that USAC unexpectedly denied their 
year 6 funding request. It might be a form of retaliation. What 
can you tell us about this application and why it was denied?
    Mr. McDonald. We did subject El Paso to heightened scrutiny 
in funding year 2003 based on denying its application in 2002. 
Part of the review was whether they had secured access to the 
necessary resources to make effective use of the discounts, and 
we were not able to get clear documentation that they had 
budgeted for the non-discount share for all the services they 
were requesting. So we denied on that basis. If they think that 
is incorrect, that they did present that documentation to us, 
they can appeal to the FCC if they do that timely.
    Mr. Bass. One last question, Mr. McDonald. What is the 
appropriate role for a consultant in the E-Rate program, and 
what is your understanding of Judy Green's role in the NEC BNS 
case? In your opinion, do you think it was appropriate?
    Mr. McDonald. A consultant ought to not have any ties to 
service providers. If the consultant is going to control the 
process, have any influence on the process to select the 
service provider, that consultant needs to be an arms length 
from everybody, just as the applicant needs to ensure a fair 
and open process, selection of the most cost-effective 
provider. If I understand Ms. Green's relationship, she had a 
relationship to the vendors that were selected to do the work.
    Mr. Bass. Which, obviously, was not appropriate.
    Mr. McDonald. Not appropriate.
    Mr. Bass. All right. Thank you, Mr. McDonald. My time has 
expired. The committee has completed questioning of this panel. 
We have no further questions to submit at this time. We are 
about to have votes called on the floor of the House, so what 
the Chair would like to do is to call a recess of the 
subcommittee until such time as the votes are complete, at 
which time we will swear in the second panel. With that, the 
Chair will declare a recess.
    [Brief recess.]
    Chairman Barton The subcommittee will come back to order. 
We are now ready to call the second panel forward, but before 
we do that, we are going to show a brief video regarding the E-
Rate program, which has been produced by committee staff during 
the course of this investigation. So could we dim the lights 
and show the video? Produced to the committee staff, not 
produced by the committee staff. Do we have sound on this?
    [Video plays.]
    The Moderator. The expanded use of computers in schools is 
leading to important transformations tied to the use of 
multimedia applications, broadband width communication pipes 
and widely distributed connectivity to the Internet, exposing 
students and teachers to an exciting world of synchronous 
distance learning, streaming audio and video and a host of 
other digital advances.
    For many schools, however, especially those in high poverty 
and geographically isolated communities, a lack of access to 
this new technology is a serious problem. They are caught in 
the digital divide. The National Alliance of Black School 
Educators, known as NABSE, stands ready to help schools bridge 
that divide through the federally funded E-Rate program. 
Recently, NABSE has put together a program designed to help 
schools achieve the funding they deserve from the often 
complicated E-rate process. This program utilizes NABSE's 
considerable experience in the application process, combined 
with the technical expertise of NABSE's world-class technology 
partners, NEC, IBM and VNCI, among others.
    Video Speaker 1. Certainly one of NABSE's major goals is to 
bring the latest state-of-the-art equipment, methodologies and 
best practices to its members. And with the advent of the E-
Rate program, NABSE is very pleased that we have entered a 
partnership with our three or four hybrid organizations, and 
these are technology firms who are making it much easier for 
the NABSE schools to apply for E-rate funds, providing 
technical assistance in completing the application, conducting 
the research. So we are appealing to NABSE superintendents, to 
the principals, that when you hear about this program that you 
will call us right away and request, at no cost to you, 
assistance from the support group so we can assure that, one, 
you are getting the maximum amount of the E-rate funds that is 
allowable for your school district.
    Video Speaker 2. Our children are video learners. We have a 
multimedia generation of children in our public schools today, 
but yet we have an educational system that is designed to teach 
them in a black and white format. That is probably the easiest 
way to say it. Chalk and erasers, that is not the way our 
children are learning.
    The Moderator. The E-Rate program was authorized by 
Congress as a part of the Telecommunications Act of 1996. The 
E-Rate program provides all public and private schools and 
libraries access to affordable telecommunications and advanced 
digital technologies.
    Video Speaker 3. NABSE was able to partner with the Jasper 
County School District, partner with VNCI and we began the 
process of developing our needs and desires for the Jasper 
County School District. And so it was not--I can't say that it 
was extremely easy because it wasn't, but it wasn't quite as 
difficult as it could have been if we did not have the 
partnership, and that was the key factor.
    Video Speaker 4. NABSE has really in its mission, if you 
look at our mission, one of our goals speaks to partnering with 
individuals, organizations, institutions and entities of all 
forms. We welcome the partnerships, and more importantly we 
welcome the spirit in which the partners have come forth.
    Video Speaker 5. If a small school district thinks that 
they can develop all of the technology that is needed by their 
students for the future, if they think they can do that alone, 
then they are sadly mistaken. And when we were able to get all 
of the help and the assistance from NABSE, then the amount of 
money that we received went through the ceiling. Ten and a half 
million dollars for a district this size is basically unheard 
of. A million dollars versus $10 million, big difference. A 
million dollars, you can put in a few wires; $10 million, you 
can do video conferencing, and that is even better.
    The Moderator. Most rural schools, due to their locations, 
do not have access to the world-class technology that NABSE's 
partners provide. These partnerships give both the rural and 
urban schools the ability to do the accurate technology needs 
assessments required for E-rate applications. To aid school 
districts in acquiring the technology they need, NABSE has 
developed consulting services which partner with several world-
class companies: NEC, IBM and VNCI, among others. These 
partnerships, combined with NABSE's assistance throughout the 
application process, have made the E-Rate program a success for 
districts large and small.
    Video Speaker 6. In terms of a very small school district 
like I have, yes, it was very important to have NABSE's 
assistance. I do not have the time nor the staff, and NABSE has 
been able to assist our school district in obtaining over $88 
million in funds. My school districts received approximately 
$9.8 million apiece.
    Video Speaker 7. NABSE, NEC Business Relations and VNCI for 
Jasper County School District have proven to be perfect 
partners. The technical people from VNCI and NEC, as a matter 
of fact, they came in so quickly it almost scared me.
    Video Speaker 8. Why this team is so important is that they 
do this every day. They have people on their staff who are 
trained and who will be able to answer the technical questions, 
who will be able to research information. They know how other 
school districts have done it, so they are able to bring that 
knowledge and information to bear to be sure that the NABSE 
school district gets the maximum amount of funds available.
    The Moderator. To bridge the digital divide, today's 
schools need technology solutions that span the entire range of 
products and services required in the field of education. 
NABSE's technology partners offer a wide range of desktops, 
laptops and high-quality monitors. With today's trends toward 
optimal speeds, it is essential to be on the cutting edge of PC 
processing. Video solutions are beginning to be developed in 
progressive districts and campuses. Distance learning has 
allowed the K through 12 and campus educators to expand beyond 
the walls of their facilities. Classroom content is boundless.
    Video Speaker 9. Students will be able to see resources, 
they will be able to see things around the world in real time 
that they have never been able to see before.
    Video Speaker 10. They love, they want it, and we must 
bring that technology to the students. They deserve it, and we 
owe them our very best.
    The Moderator. NABSE and its partners are well versed in 
the E-rate application process. NABSE personnel can help school 
districts fill out the application, while the technology 
partners can help in the needs assessment criteria. For 
assistance in E-rate applications, technology planning and 
needs assessment, school districts should contact NABSE before 
the window of opportunity is gone.
    Video Speaker 11. We appeal to the superintendents, to 
principals, to the technology directors to pursue this project 
with vigor. As we have stated before, it certainly isn't going 
to last forever. Some corporate member of the school district 
must come to us, let us know that they are interested, because 
otherwise the funds will go to other school districts. When 
their program ends, then we will find that once again many of 
the older schools in central city that will be operating for 
the next 30 or 40 years will not be wired. The students will be 
deprived of this, and therefore the digital divide will become 
broader and wider and wider as the years go.
    [Video ends.]
    Chairman Barton. All right. At this time, the Chair is 
going to use an unusual procedure. The second panel consists of 
seven individuals: Ms. Judy Green, a former E-rate consultant 
for Video Network Communications; Mr. Quentin Lawson, the 
executive director of the National Alliance of Black School 
Educators; Mr. Carl Muscari, former president and CEO of Video 
Network Communications; Mr. Robert McCain, program manager for 
NEC BNS; Dr. Emma Epps who is superintendent of the Ecorse 
Public School District; Dr. Douglas Benit, former facilities 
director for the Ecorse Public School District; and Dr. William 
Singleton who is the superintendent of the Jasper County 
Schools in Ridgeland, South Carolina.
    Some of you have indicated that you are going to refuse to 
answer questions and use your constitutional guarantee to plead 
the Fifth Amendment. So we are going to call the individuals 
who we believe are going to exercise that right forward first. 
So at this time, we are going to call forward the following 
witnesses: Ms. Judy Green, Mr. Quentin Lawson and Mr. Carl 
Muscari. If you individuals would please come forward. And you 
can be seated at the table.
    We do need to indicate for the record that Ms. Green and 
Mr. Lawson declined to come forward voluntarily and were 
subpoenaed and they did answer their subpoena. Ms. Green was 
subpoenaed to attend our July 22 hearing, but U.S. marshals 
were unable to find her to serve the subpoena. Ironically, on 
the very day that we held that hearing, Ms. Green's attorney 
notified the committee staff that he had actually been 
retained.
    During the last hearing then, I explained how serious this 
committee takes its need to get testimony and how serious we 
are about our subpoenas being honored. I indicated that we 
would again subpoena Ms. Green. We have done that and to her 
credit she has answered that subpoena. But we will take every 
action under the law in doing our oversight responsibility for 
the people of the United States to compel attendance when we 
deem that it is necessary to get the facts of the issues that 
are under investigation.
    I think each of you individuals know that it is the 
practice of this subcommittee to take testimony under oath. 
Does anybody here oppose testifying under oath? Let the record 
show that two of the three shook their head. Mr. Muscari, you 
haven't indicated. Do you have a problem with testifying under 
oath? Okay. You also know that you have the right to be advised 
by counsel. Do you all have counsel here? Could each of you 
bring your counsels forward and speak into the microphone and 
let us know who those individuals are. Ms. Green? You have got 
to push that button. There is a little button you have to push 
to turn the microphone on.
    Mr. Lincenberg. My name is Gary Lincenberg, counsel for Ms. 
Green.
    Chairman Barton. Okay. Mr. Lawson?
    Mr. Lawson. Pete Harrison.
    Chairman Barton. And he is your counsel?
    Mr. Lawson. He is my counsel.
    Chairman Barton. Okay. Mr. Muscari?
    Mr. Savage. It is Joseph F. Savage, Jr. for Mr. Muscari.
    Chairman Barton. Okay. Will each of you individuals please 
rise, raise your right hand?
    [Witnesses sworn.]
    Chairman Barton. Be seated.
    The Chair will now recognize Ms. Green for the purposes of 
making an opening statement if you so desire. Do you wish to 
make an opening statement?

    TESTIMONY OF JUDY GREEN, FORMER E-RATE CONSULTANT, VIDEO 
    NETWORK COMMUNICATIONS; ACCOMPANIED BY QUENTIN LAWSON, 
EXECUTIVE DIRECTOR, NATIONAL ALLIANCE FOR BLACK EDUCATORS; CARL 
       MUSCARI, FORMER PRESIDENT AND CEO, VIDEO NETWORK 
 COMMUNICATIONS; ROBERT MCCAIN, PROGRAM MANAGER, NEC BNS; EMMA 
 EPPS, SUPERINTENDENT, ECORSE PUBLIC SCHOOL DISTRICT; DOUGLAS 
    BENIT, FORMER FACILITIES DIRECTOR, ECORSE PUBLIC SCHOOL 
DISTRICT; AND WILLIAM SINGLETON, SUPERINTENDENT, JASPER COUNTY 
               SCHOOLS, RIDGELAND, SOUTH CAROLINA

    Ms. Green. No.
    Chairman Barton. Okay. Let the record indicate that Ms. 
Green declined to make an opening statement. The Chair would 
now recognize Mr. Lawson for purposes of making an opening 
statement if you so desire.
    Mr. Lawson. No.
    Chairman Barton. Mr. Lawson declines to make an opening 
statement. The Chair will now recognize Mr. Muscari to make an 
opening statement if he wishes.
    Mr. Muscari. I have no opening statement. Thank you.
    Chairman Barton. Mr. Muscari also declines to make an 
opening statement. The Chair will then recognize himself for 10 
minutes for questions.
    Ms. Green, on July 22, 2004, we heard from the San 
Francisco City Attorney's Office about an elaborate conspiracy 
between individuals at NEC BNS and VNCI, including you, George 
Marchelos and others in which the co-conspirators eliminated 
competitive bidding and inflated prices on contracts related to 
the E-Rate program. As you know, NEC BNS ultimately pleaded 
guilty to conspiracy to suppress and eliminate competition for 
the E-Rate program projects and to wire fraud. As a former 
employee of VNCI, were you part of the conspiracy by NEC BNS, 
VNCI and others to defraud the E-Rate program by rigging bids, 
inflating contract prices, forging the signatures of school 
district officials and lying to USAC officials during their 
review of that process?
    Ms. Green. On advice of counsel, I respectfully decline to 
answer that question based on my Fifth Amendment constitutional 
right.
    Chairman Barton. Ms. Green, are you refusing to answer all 
of this committee's questions on the right against self-
incrimination which is afforded to you under the Fifth 
Amendment of the United States Constitution?
    Ms. Green. Yes, sir.
    Chairman Barton. And is it your intention to assert such 
right in response to all further questions from the 
subcommittee today?
    Ms. Green. Yes, sir.
    Chairman Barton. Given that, I will dismiss you at this 
time, but I want to make it perfectly clear that you are still 
subject to being recalled by this subcommittee if we deem it 
necessary. Do you understand that?
    Ms. Green. Yes.
    Chairman Barton. If you don't, now is the time to----
    Ms. Green. No. Can I just----
    Chairman Barton. If you say anything, you are going to have 
to answer every question.
    Ms. Green. All right.
    Chairman Barton. I am not going to play games with you. You 
have got the right to take the Fifth Amendment, which you have 
done, but once you answer one question, then you have waived 
that right, and we could ask you many questions. So at this 
time, I am going to excuse you subject to recall if necessary.
    We are now going to go to you, Mr. Lawson. We have just 
seen a video that NABSE, of which you are affiliated with, 
produced, marketing their E-Rate program. You appear in that 
program. The video refers to an E-rate-related partnership 
between NABSE, VNCI, NEC BNS and others. As the executive 
director of NABSE, were you aware of the conspiracy by NEC BNS, 
VNCI, Judy Green, George Marchelos and others to defraud the E-
Rate program by rigging bids and inflating contract prices?
    Mr. Lawson. Mr. Chairman, as you know, there are ongoing 
Federal criminal investigations into the same events that are 
the subject of this hearing. I have fully cooperated with the 
officials conducting these criminal investigations; however, in 
view of the open-ended Federal criminal investigations that are 
currently ongoing, I reluctantly, and contrary to my desire to 
testify, will follow the advice of my legal counsel and 
respectfully decline to testify based upon my rights under the 
Fifth Amendment to the United States Constitution. I hope that 
the subcommittee will not draw a negative inference from my 
assertion of this basic constitutional right guaranteed by the 
Bill of Rights. I respectfully request that the letter prepared 
and submitted by my counsel, dated September 17, 2004, be 
considered part of the record of this hearing.
    Chairman Barton. Are you refusing to answer the question 
based on your constitutional rights under the Fifth Amendment?
    Mr. Lawson. Yes.
    Chairman Barton. Then we cannot accept the letter that you 
just asked that we put into the record. Ms. DeGette has already 
indicated that she would object, I would object, Mr. Walden 
will object. You can't have it both ways. You can't honor your 
rights under the Fifth Amendment and then, I won't say sneak 
into the record, but put into the record something that is to 
your benefit, so to speak.
    Mr. Lawson, are you refusing to answer all of the questions 
on the rights against self-incrimination afforded to you under 
the Fifth Amendment of the U.S. Constitution?
    Mr. Lawson. Yes.
    Chairman Barton. And is it your intention to assert such 
right in response to all further questions from the 
subcommittee today?
    Mr. Lawson. Yes.
    Chairman Barton. Given that, with the understanding, as we 
just explained to Ms. Green, that there may be further requests 
for you to come before this subcommittee, I am going to dismiss 
you at this time, subject to the right of recall if necessary. 
Do you understand that?
    Mr. Lawson. Yes.
    Chairman Barton. Okay. Then at this time, you are excused 
also.
    Mr. Lawson. Thank you.
    Chairman Barton. Mr. Muscari, on July 22, 2004, we heard 
testimony about an elaborate conspiracy between individuals at 
NEC BNS and VNCI, including Judy Green, George Marchelos and 
others, in which the co-conspirators eliminated competitive 
bidding and inflated prices on contracts related to the E-Rate 
program. As you know, NEC BNS later pleaded guilty to 
conspiracy to suppress and eliminate competition for the E-Rate 
program projects and to wire fraud. As a former president and 
CEO of NEC BNS, were you aware of this conspiracy by your 
company, or your former company, VNCI, Judy Green, George 
Marchelos and others to defraud the E-Rate program by rigging 
bids, inflating contract prices, forging signatures of school 
district officials and lying to USAC during its review process?
    Mr. Muscari. Mr. Chairman, based upon the advice of my 
attorneys, I respectfully decline at this time to answer based 
upon my rights under the Fifth Amendment of the U.S. 
Constitution.
    Chairman Barton. And, Mr. Muscari, are you refusing to 
answer all of these questions based on your right against self-
incrimination afforded to you under the Fifth Amendment of the 
U.S. Constitution?
    Mr. Muscari. I am.
    Chairman Barton. And is it your intention to assert such 
right in response to all further questions from the 
subcommittee today?
    Mr. Muscari. Yes.
    Chairman Barton. Given that, as long as you understand that 
you are still subject to being recalled by the subcommittee at 
a date future, I am going to dismiss you at this time, again, 
subject to the right to be recalled. Do you understand that?
    Mr. Muscari. I do understand, yes.
    Chairman Barton. Okay. Then you too are excused, sir.
    At this time, the Chair will now call forward the remainder 
of our panel from Panel 2: Dr. Emma Epps, superintendent of the 
Ecorse School District in Ecorse, Michigan; Dr. Douglas Benit, 
the former director of facilities at Ecorse School District; 
Dr. William Singleton, the superintendent of the Jasper County 
School District in Jasper County, South Carolina; and Mr. 
Robert McCain, the former NEC BNS project manager at Ecorse 
School District who is appearing before us by video link. If 
those of you that are in the chamber will come forward and be 
seated at the table.
    As each of you individuals know, this subcommittee conducts 
its investigative hearings by taking all testimony under oath. 
Do any of you object to testifying under oath? Let the record 
show that all three individuals said that they are willing to 
testify under oath.
    You also have the right to be advised by counsel under the 
Constitution of the United States of America. Do any of you 
have counsel that are with you today?
    Ms. Epps. Yes.
    Chairman Barton. Dr. Epps, would you read into the record 
your counsel, please, ma'am? You just push the button.
    Mr. Allen. Yes, Mr. Chairman. Floyd Allen, representing Dr. 
Epps and Dr. Benit.
    Chairman Barton. Okay. Dr. Benit, do you have--oh, he is 
counsel for both of you. Dr. Singleton, do you have counsel 
with you?
    Mr. Singelton. No.
    Chairman Barton. Okay. Will all of you please stand and 
raise your right hand? Oh, Mr. McCain, do you object to 
testifying under oath?
    Mr. McCain. No.
    Chairman Barton. You also have the right to be advised by 
counsel. Do you have a counsel with you today?
    Mr. McCain. Yes, Mr. Sutra.
    Chairman Barton. Could you bring him into the video.
    Mr. Sutra. Good morning, Mr. Chairman. Steve Sutra.
    Chairman Barton. Okay. Mr. Sutra needs to stay in camera 
range, because he is going to have to be sworn too. So would 
all----
    Mr. Sutra. I am not getting sworn.
    Chairman Barton. Are the attorneys--I thought they did. 
Will our witnesses please stand to be sworn and raise your 
right hand.
    [Witnesses sworn.]
    Chairman Barton. Be seated.
    Okay. Mr. McCain, we are going to recognize you for 7 
minutes. Your statement is in the record, and if you would like 
to elaborate on that, we would like to have your elaboration.
    Mr. McCain. No statement, sir.
    Chairman Barton. No statement. Okay. Dr. Epps, would you 
like to make an opening statement?
    Ms. Epps. No, sir, I have no statement.
    Chairman Barton. Okay. Dr. Benit, would you like to make an 
opening statement?
    Mr. Benit. No, sir.
    Chairman Barton. Okay. Dr. Singleton, would you like to 
make an opening----
    Mr. Singelton. No, sir.
    Chairman Barton. So we have nobody that wishes to make an 
opening statement. Okay. The Chair would suspend for just a 
second.
    [Pause.]
    Chairman Barton. The Chair is going to recognize Mr. Walden 
for 10 minutes.
    Mr. Walden. Thank you, Mr. Chairman. Mr. McCain, when you 
were NEC BNS' project manager at Ecorse School District, what 
were your job responsibilities?
    Mr. McCain. My responsibilities were to install the 
products that were within the job package and get them 
operational and turn them over to the school district.
    Mr. Walden. And what year did NEC BNS conduct work for 
Ecorse while you were the project manager?
    Mr. McCain. The work started in February 2001.
    Mr. Walden. And who was your primary contact at Ecorse 
School District, sir?
    Mr. McCain. Dr. Benit.
    Mr. Walden. Dr. Benit. Okay. And did you interact or work 
often with Dr. Epps?
    Mr. McCain. No.
    Mr. Walden. Did you work at all with Judy Green from VNCI 
while managing the Ecorse project?
    Mr. McCain. No.
    Mr. Walden. Who built the TV production studio for Ecorse?
    Mr. McCain. NEC.
    Mr. Walden. NEC. Okay.
    Mr. McCain. Yes, sir.
    Mr. Walden. Whose idea was it to provide Ecorse School 
District with a TV production studio?
    Mr. McCain. That was from information we received from Dr. 
Benit.
    Mr. Walden. So it was Dr. Benit's idea to build the TV 
studio?
    Mr. McCain. Yes, sir.
    Mr. Walden. Please turn to the NEC document numbered 6345. 
That is 6345. How much money was awarded to Ecorse School 
District by the E-Rate program for funding year 2000?
    Mr. McCain. The document 6345 indicates $4,135,969.81.
    Mr. Walden. That is what it shows. Mr. McCain, please 
describe document 6347. What is Dr. Benit insisting on dollar 
values for, ``in-kind items,'' document 6347?
    Mr. McCain. His inquiry was to identify the in-kind dollars 
and what that detailed reference to products that were being 
proposed for installation.
    Mr. Walden. And at document 6348, go to that one.
    Mr. McCain. Yes, sir.
    Mr. Walden. Why does Dr. Benit describe the TV studio as 
being at a ``critical status?''
    Mr. McCain. That was to interface with the current onsite 
construction contractors to make ready the rooms for the TV 
production studio.
    Mr. Walden. All right. So you had contractors onsite doing 
wiring installation, and from your recollection, he felt it was 
important, it was a critical status for the TV studio.
    Mr. McCain. Yes, sir.
    Mr. Walden. Mr. McCain, looking now at document 6350 and 
6351, do you have those in front of you, sir?
    Mr. McCain. Yes, sir.
    Mr. Walden. Could you briefly describe these e-mails and 
the issue being discussed here?
    Mr. McCain. The first document, 6350, was initiated from 
Dr. Benit to Gerard McNulty, who was the account exec from NEC 
assigned to the Ecorse project, and he wanted to request an 
overview of the dollars allocated from the SLD funding to 
properly be evaluated as to how those funds were going to be 
identified within the project scope.
    Mr. Walden. Okay. And does that cover 6351 as well then?
    Mr. McCain. 6351 is a reference to a meeting I had with Dr. 
Benit and updated my immediate supervisor, Randy Weekly. After 
that meeting--sorry, during that meeting, Dr. Benit did express 
from this document that he had requested detail regarding the 
production studio cost and that he would follow up the 
following week with Mr. Weekly.
    Mr. Walden. And we are talking about the TV production 
studio?
    Mr. McCain. Yes, sir.
    Mr. Walden. Okay. And now turn to document 6352. What is 
this lengthy document?
    Mr. McCain. This document was originated from Bill Barber 
who was a systems engineer for NEC in reference to the video TV 
production studio. It outlines all the line items that had been 
within the initial design, identifying those items and what the 
total dollar amount was.
    Mr. Walden. And what is that total dollar amount of the TV 
studio?
    Mr. McCain. The original design was $1,040,239.62, and that 
is reflected on document 6363.
    Mr. Walden. And let's go to document 6364 and 6365. Do you 
recognize this document, and can you please describe your 
understanding of this document and in particular the second 
page. Is this a document you recognize, sir?
    Mr. McCain. Yes. This document was identifying the NEC 
proposed use of funds, which is in the left columns. The middle 
columns were the response of the funds as to what was being 
requested to be installed by Dr. Benit, and the right column 
shows the balance of award funds from the original amount 
authorized by the SLD funding.
    Mr. Walden. All right. And who built this spreadsheet, do 
you know?
    Mr. McCain. Dr. Benit.
    Mr. Walden. And, again, the first column shows what?
    Mr. McCain. The first column shows the original dollars in 
reference to the design of the line items located on the left 
column there.
    Mr. Walden. Okay. And the second column again?
    Mr. McCain. Is what Dr. Benit had requested funding to be 
spent for those particular line items in that dollar amount.
    Mr. Walden. It is what Dr. Benit requested the line items 
be.
    Mr. McCain. Yes.
    Mr. Walden. And is that what the okay next to the numbers 
in the second column would mean?
    Mr. McCain. Yes.
    Mr. Walden. And is that--so that is Dr. Benit's okay?
    Mr. McCain. Yes, sir.
    Mr. Walden. All right. This document then seems to indicate 
that Dr. Benit knew that E-rate funds were covering all the 
costs of the TV studio. Is that a correct assumption?
    Mr. McCain. Yes, sir.
    Mr. Walden. All right. Then please turn to 6366.
    Mr. McCain. Okay.
    Mr. Walden. Who drafted this memo to you, sir?
    Mr. McCain. That is from Bill Barber, the systems design 
engineer for NEC for the video.
    Mr. Walden. And would you agree that this memo describes a 
Dr. Benit who is intimately involved with the design, 
construction and many minor details of the TV studio?
    Mr. McCain. Yes. This document was reviewed with Dr. Benit 
to be extended to the contractors onsite to address some of the 
items that needed to be completed to provide a functional TV 
production studio.
    Mr. Walden. And, finally, turn with me to 6377. Can you 
briefly describe this e-mail?
    Mr. McCain. This e-mail was originated from Dr. Benit to 
myself, Bill Barber and John Colvin, who was the director of 
the public sector for NEC, requesting NEC to support an open 
house conducted at Ecorse School District May 17 through May 
19. I, in turn, from the middle of the document, 6367, had 
requested from the contractor that was hired by NEC to install 
the TV production studio to also be onsite to assist in the 
open house.
    Mr. Walden. All right. Given all the hype over the ribbon-
cutting ceremony, does it seem likely to you that Dr. Epps 
could be unaware of the fact that NEC built this studio for 
Ecorse through the E-Rate program?
    Mr. McCain. No, she couldn't be unaware of it.
    Mr. Walden. She could not be unaware.
    Mr. McCain. Right.
    Mr. Walden. Mr. McCain, did you ever learn or hear whether 
Ecorse paid NEC BNS its required E-rate copayment?
    Mr. McCain. No.
    Mr. Walden. Does that mean, no, you never learned or heard 
or they never made the copayment?
    Mr. McCain. I never learned or heard.
    Mr. Walden. So you don't know whether that copayment was 
ever made?
    Mr. McCain. That is correct.
    Mr. Walden. All right.
    Chairman Barton. Do you have further questions?
    Mr. Walden. Mr. Chairman, I don't have any further 
questions at this time.
    Chairman Barton. Okay. The Chair would recognize Ms. 
DeGette for 10 minutes if she wishes.
    Ms. DeGette. I have no questions at this time.
    Chairman Barton. Okay. The Chair would then recognize 
himself for 10 minutes.
    Dr. Epps, you have just heard Mr. McCain in his comments on 
some of the contracts that were in your school district. What 
is your understanding of your district's financial obligation 
in participating in the E-Rate program?
    Ms. Epps. My understanding is that we followed the rules of 
the E-Rate program. That is my understanding.
    Chairman Barton. Dr. Benit?
    Mr. Benit. My understanding--could you repeat the----
    Chairman Barton. After listening to Mr. McCain's answers to 
Congressman Walden's questions and some of the contracts that 
were let for your school district, including the way a 
television studio was built and paid for, what is your 
understanding of your school district's financial obligation to 
participate in the E-Rate program?
    Mr. Benit. My understanding is that the district is 
supposed to pay a 10 percent share because they are at a 90 
percent rate. A lot of the documents that we referred to, Mr. 
Colvin and I reverted back, with our counsels, back to the 
original agreement. So my understanding is that all the 
equipment that was supposed to be spent, all the E-rate dollars 
supposed to be spent on E-rate was spent and the TV production 
was something that they provided that was outside of E-rate.
    Chairman Barton. Had you seen the documents that Mr. Walden 
referred to with the various columns? Have you seen those 
documents?
    Mr. Benit. Yes.
    Chairman Barton. Okay. Have we asked unanimous consent to 
put those documents in the record? Okay. The Chair would ask 
unanimous consent that the binder that has been prepared for 
this hearing be put in the record. Is there objection? And the 
Chair would indicate that this particular document that is NEC 
E-rate contract, district attachment, rider A, memorandum of 
understanding is one of the documents that has been put in the 
record.
    So you have seen this document?
    Mr. Benit. I saw it just as we were waiting here.
    Chairman Barton. Oh. You had not seen it before today.
    Mr. Benit. No. The document that was on top?
    Chairman Barton. Well, the primary document that we are 
referring to is the----
    Mr. Benit. That was signed by myself and John Colvin?
    Chairman Barton. Yes. And on page 0635, which shows the 
spreadsheet.
    Mr. Benit. Where do I find this?
    Chairman Barton. It is in your binder, and it is at tab--it 
is called the Benit spreadsheet.
    Mr. Benit. Okay. What tab number is that?
    Chairman Barton. Well, that is a very good question. We 
need to get that. You obviously have the right to take a look 
at that. Tab 85.
    Mr. Benit. I don't have a tab 85 in this one, sir. Oh, here 
it is. Hang on.
    Chairman Barton. It is a big binder, so we certainly----
    Mr. Benit. Okay. I see the spreadsheet.
    Chairman Barton. Okay. And do you see the middle column 
where it says, ``EPS response to proposed use of funds?'' That 
is that middle column.
    Mr. Benit. Yes, I do, sir. I see that column, but I----
    Chairman Barton. And do you see the blocks, like $700,000 
has been blocked and then next to it it says, ``okay.'' And 
then the next one is $500,000 and it is okay. And then $1 
million and it is okay. And then $14,000 and it is okay. And 
then $800,000 total, which is not blocked, but that says, 
``okay.''
    Mr. Benit. I see all that, but I also want to go on record 
as after we did this and we had a discussion with our 
attorneys, we went back to the original agreement that was 
signed.
    Chairman Barton. I am not sure I understand that response. 
Do you want to elaborate on that?
    Mr. Benit. All I want to say is that we signed a memorandum 
of understanding to the contract. We did some of this 
spreadsheet, we discussed it with our attorneys and went back 
to the original memorandum of understanding that all the E-rate 
dollars are supposed to be spent for E-rate purposes.
    Chairman Barton. So even though these say, ``okay,'' you 
are saying that that was invalid, that you retracted that.
    Mr. Benit. Absolutely. That was done through a telephone 
conversation with John Colvin of NEC, I believe it was his 
attorney, our attorney and myself.
    Chairman Barton. Mr. McCain, can you hear me?
    Mr. McCain. Yes.
    Chairman Barton. Do you want to respond to Dr. Benit saying 
that even though we have got these documents that they were 
later disallowed?
    Mr. McCain. I was not part of those conversations that Dr. 
Benit had with Mr. Colvin and his counsel.
    Chairman Barton. Okay. Dr. Epps, does your school 
district's high school have a television production studio?
    Ms. Epps. Yes.
    Chairman Barton. Do you know when that production studio 
was built?
    Ms. Epps. I am thinking the 2001-2002 school year.
    Chairman Barton. Do you know who built the production 
studio?
    Ms. Epps. I was asked that question. I know that NEC 
donated the radio-TV room to the school district.
    Chairman Barton. So it is your understanding that NEC BNS 
built the studio?
    Ms. Epps. Yes.
    Chairman Barton. And, Dr. Benit, is that your understanding 
as well?
    Mr. Benit. My understanding is they contributed the 
equipment. We were completing the building of a new high school 
at that time. We had I think about 40, 50 contractors onsite. 
We had to put air conditioning in the room, we had to paint the 
room. We used those contractors through our construction 
manager to come in there and make the room ready for the TV 
production.
    Chairman Barton. Do you know whose idea it was to build the 
TV studio?
    Mr. Benit. I don't recall, but I know there was a lot of 
discussions with a lot of people, and that was one idea that 
came up.
    Chairman Barton. Dr. Epps, do you recall who thought of the 
idea to build this studio?
    Ms. Epps. No, sir, I don't recall.
    Chairman Barton. When somebody approached you with it, did 
you question whether it should be built and who was going to 
pay for it or did you just accept that television studios kind 
of fell out of the sky?
    Ms. Epps. No, sir. When Dr. Benit brought it to my 
attention, it was supposed to be a donation from NEC.
    Chairman Barton. So your impression was that it was a 
donation.
    Ms. Epps. Yes, sir.
    Chairman Barton. Dr. Benit, is that your impression also?
    Mr. Benit. Yes, it is.
    Chairman Barton. Okay. Mr. McCain, do you have any comment 
you would like to make on who paid for the construction of this 
studio?
    Mr. McCain. From the direction we were given, the funding 
for the Ecorse project was all funded reference to what was 
identified on the spreadsheet, initiated by Dr. Benit. I am not 
aware of any donations of the TV production at NEC's cost.
    Chairman Barton. So, Mr. McCain, your testimony would be, 
based on the record, that this television studio was built with 
E-rate money, not with money donated.
    Mr. McCain. That is correct.
    Chairman Barton. All right. Dr. Benit and Dr. Epps, now 
that you have heard that, do you still stand by the original 
answer that this was somehow donated money?
    Mr. Benit. I do, because Mr. McCain was not--he was a 
project manager. He was not involved in any of the discussions. 
He is not even aware of the discussion that John Colvin and I 
had to go back to the original agreement that was agreed to.
    Chairman Barton. Do you agree, Dr. Benit, and you also, Dr. 
Epps, that this television studio cost over $750,000?
    Ms. Epps. Sir, I don't know the financial value of that 
radio-TV studio.
    Chairman Barton. Dr. Epps, as superintendent----
    Ms. Epps. Yes, sir.
    Chairman Barton. [continuing] are you expected to track the 
financial aspects of the school district that you are 
superintendent of?
    Ms. Epps. Yes, sir.
    Chairman Barton. Is $750,000 something that you would 
normally be expected to have some awareness of? I mean is that 
a small sum, a large sum that it would be expected that an 
individual in your position would have a knowledge of and where 
the money came from and how it was spent?
    Ms. Epps. If it came from the school district, but my 
understanding is it was a donate item to the school district.
    Chairman Barton. Do you have anything in the record that 
shows that it was a donation? Is there anywhere a document 
where whoever you think donated it actually made that donation 
and submitted a letter, a check, a voucher at all----
    Ms. Epps. No, sir, I am not aware----
    Chairman Barton. [continuing] that you could provide to 
this committee documentation?
    Ms. Epps. No, sir, I am not aware of a check or a letter. I 
only know about the memorandum that was signed by Dr. Benit and 
I think Mr. Colvin.
    Chairman Barton. Dr. Benit, do you want to comment on that?
    Mr. Benit. The document that was signed by Mr. Colvin of 
NEC, the vice president of E-Rate Operations at the time, and 
myself, with our attorneys present, stated that the non-E-rate 
items could include a TV production studio that would be 
donated by NEC.
    Chairman Barton. But there is no documentation to that. I 
mean we agree--I think we agree the television station cost 
$750,000. Do either of you dispute that?
    Mr. Benit. I haven't--it has been a long time, so I am not 
aware of the value.
    Chairman Barton. Okay. Dr. Benit, do you recall that when 
you were questioned about this by the committee staff during 
the interview process, you said that you didn't know who paid 
for the studio?
    Mr. Benit. I don't recall that either, because I do know 
that the studio's equipment was donated by NEC, but I also know 
that a lot of the contractors that we had on staff through our 
construction manager was doing work throughout that building 
and through that area at all times while they were there.
    Chairman Barton. Well, are you all aware, Dr. Epps and Dr. 
Benit, that this television studio, just the actual studio 
itself, was ineligible at the time and would be ineligible 
today for E-rate funding?
    Mr. Benit. I am aware that it was donated. The agreement 
says it was supposed to be outside. It wasn't supposed to 
violate any E-rate rules or SLD rules.
    Chairman Barton. Okay. But there is no documentation that 
the committee staff is aware of that shows that such a donation 
was ever made. The documentation that we have shows in fact 
that it was paid for by E-rate funding. Now, I----
    Mr. Benit. I don't have any of that information.
    Chairman Barton. Mr. Walden?
    Mr. Walden. Mr. Chairman, a question for Dr. Epps and Dr. 
Benit. Did anyone in your district bother to check with the 
USAC to see if E-rate allowed a $750,000 gift from a vendor 
receiving government funds?
    Mr. Benit. No. I have asked our attorney to make sure that 
whatever we do we are in compliance.
    Mr. Walden. Who is your attorney?
    Mr. Benit. Jaffey Rait.
    Mr. Walden. And do you know if he checked?
    Mr. Benit. I don't know. They were supposed to let us know 
if something was askew, but I never did hear from him back that 
we weren't doing something right.
    Mr. Walden. Mr. McCain, would you have known of any of 
these other financial memos that we are hearing about today?
    Mr. McCain. No.
    Mr. Walden. You wouldn't have known.
    Mr. McCain. No.
    Mr. Walden. You were the onsite project manager. Who told 
you how this was being funded?
    Mr. McCain. All the financials were done through Dallas.
    Mr. Walden. Okay. So you just installed the TV studio.
    Mr. McCain. Yes, sir.
    Mr. Walden. Is that right?
    Mr. McCain. Yes.
    Mr. Walden. Then how did you know about this memo, the 
spreadsheet that Mr. Benit had?
    Mr. McCain. That was extended to me from my immediate 
supervisor.
    Mr. Walden. And who is that?
    Mr. McCain. Randy Weekly.
    Mr. Walden. Okay. Then I want to go to a memo to Mr. Weekly 
from Mr. Benit. This is 06347, dated February 15, 2001, 2:54 in 
the afternoon, and it says, and I quote, ``I am reviewing the 
two sides; however, I have discussed my concerns with our 
superintendent, Dr. Epps, regarding the services to be provided 
by NEC. We would like to know in detail just what you were 
provided and a dollar value assigned to each. I want to firm up 
what is going to be considered as in-kind and the dollar 
assigned to each. I am going to review the in-kind amounts 
tomorrow, and I will e-mail you the changes which I see. I 
would want this in place before we proceed any further with 
this project along with the coordination between existing 
contractors and your final scope of work. Call me on my cell or 
e-mail me.'' What do you mean by the in kind part of this?
    Mr. Benit. In kind would be any kind of donations that 
would was beyond the E-rate dollars that were applied.
    Mr. Walden. See, it is our understanding that USAC does not 
allow for gifts like this.
    Mr. Benit. I am not aware of that.
    Mr. Walden. And your attorney clearly wasn't aware of that; 
is that what you are----
    Mr. Benit. They have not informed me of that.
    Mr. Walden. Mr. Chairman, I yield back.
    Chairman Barton. I want to go back then. This television 
studio that $750,000 was spent for and which our records show 
was spent with E-rate funding, which each of you, Dr. Epps and 
Dr. Benit, indicate was donated, although there is no 
documentation that you received the donation or even a letter 
notifying you of the donation. How has that TV studio been used 
or is it even being used?
    Ms. Epps. Yes, sir, it is being used by the students at the 
high school every day.
    Chairman Barton. By the students at the high school every 
day.
    Ms. Epps. We have classes. We do TV classes for credit.
    Chairman Barton. Has it been used by local businesses to 
generate revenue?
    Ms. Epps. No, sir.
    Chairman Barton. Not at all?
    Ms. Epps. No, sir.
    Chairman Barton. Dr. Benit?
    Mr. Benit. No. It is only for students. It started out 
being used by students and is still being used by students.
    Chairman Barton. Mr. McCain, do you have any information 
that the television studio has been used for local business, by 
local businesses to generate revenue?
    Mr. McCain. No.
    Chairman Barton. Dr. Epps, do you know how much money the 
E-Rate program was granted to your school for the funding year 
2000?
    Ms. Epps. I believe with the reduction, I believe it came 
to about $7 million.
    Chairman Barton. $7 million.
    Ms. Epps. Like six point something million dollars.
    Chairman Barton. Okay. Our records show $4 million, but if 
you say $7 million, okay. Dr. Benit, what is your recollection?
    Mr. Benit. Well, I think the original award through NEC was 
about $7 million. I conducted a review and told Dr. Epps that I 
thought that one portion of the award was redundance and I 
asked to reduce it by $3.3 million. And so the final award came 
out to $4.1 million. I wrote a letter back to Schools and 
Libraries and asked them to----
    Chairman Barton. So originally the $7 million that Dr. Epps 
referred to was granted, and then when that was reviewed, you 
made a decision, or somebody, you and Dr. Epps made a decision 
that some of those funds were not eligible and you refunded 
some of the money or didn't accept it so that the final number 
is the $4.135 million?
    Mr. Benit. Well, those funds were eligible, but we reviewed 
what our needs were within the district and didn't feel that we 
needed the redundancy that that award would give us, so I asked 
the Schools and Libraries by a letter to cut that funding for 
that particular award.
    Chairman Barton. Dr. Epps, do you want to comment on that?
    Ms. Epps. Dr. Benit reviewed our needs and I remember he 
came to my office and told me that he had reviewed our needs in 
terms of the E-rate. He had reviewed our bond project. We were 
building the high school, another school at that time and 
remodeling two others, so we had a big project going. And he 
had reviewed all of that, and he felt that there were some 
items that would be redundant to what we were doing over with 
the bond so that he wanted to reduce the amount. And my comment 
was if that is what we needed to do, we didn't want anything 
that we didn't need, so he wrote a letter or e-mail reducing 
that amount. And the exact figures he knows exactly how much 
that was.
    Chairman Barton. Well, we have--I have got 12 more 
questions, but I haven't even asked Dr. Singleton a question 
yet, and I want to ask him some. I just want the record to show 
that our documents indicate that the Ecorse School District E-
rate funds paid for any number of projects and equipment that 
was ineligible, including servers, security systems, video 
equipment, a message center for the high school football field. 
And I would also like to indicate that our records and 
documents that we have created during the course of this 
investigation cast some question on the Ecorse copay for E-
rate-related work that NEC and BNS accomplished for your school 
district in 2001. Would Dr. Epps or Dr. Benit, either one of 
you, wish to document for the committee that you in fact did 
pay the copay and not roll it into the E-rate that would be 
ineligible because the local school district is supposed to pay 
a copay?
    Mr. Benit. Well, I think we can provide that information to 
you. Also, there was no scoreboard paid for. That was paid for 
with bond funds. We have checks that were paid out of the bank 
trust fund for that. Most of the items that you read off were 
paid through the bond funds of the district that was handled 
through a bank trust account.
    Chairman Barton. So you dispute the records that indicate 
the E-rate funds were used in a way they shouldn't have been 
used to provide and pay for that. And we can give a detailed 
list of that equipment.
    Mr. Benit. If you could do that, then I would like to 
provide you with documentation that shows that it was paid for 
out of the district bond funds.
    Chairman Barton. Okay. Mr. Walden?
    Mr. Walden. Thank you, Mr. Chairman. I want to go back to 
something because I am confused. The spreadsheet we talked 
about, number 6365, that there is testimony that these were 
your okays next to it and it lists the TV studio, the 
spreadsheet Mr. McCain and I were talking about, tab 85.
    Mr. Benit. Yes.
    Mr. Walden. And that is your spreadsheet, right, and those 
are your okays.
    Mr. Benit. Yes, that is correct.
    Mr. Walden. And it does list TV studio on there, correct?
    Mr. Benit. It does.
    Mr. Walden. And then didn't you testify earlier that that 
is basically an old document that was superseded then by the 
memorandum of understanding with Mr. Colvin that would be found 
under----
    Mr. Benit. No. The memorandum of understanding was signed 
first. What I did say was that after this was done, we talked--
I talked with Mr. Colvin and our attorneys and it was agreed we 
are out of line as far as E-rate rules, so we had to go back to 
the original memorandum of understanding.
    Mr. Walden. How were you out of line as regards to E-rate 
rules?
    Mr. Benit. Well, we felt that we were--this doesn't show 
the money all being spent for what it did in the memorandum of 
understanding. So we are trying to get back to the memorandum 
of understanding.
    Mr. Walden. I am confused because you are talking about two 
memoranda of understanding, correct?
    Mr. Benit. No, I am not; I am talking about one.
    Mr. Walden. Okay. The one that came after this----
    Mr. Benit. No, the one that came before that.
    Mr. Walden. Okay. Is that the one on tab 79?
    Mr. Benit. I don't know.
    Mr. Walden. Why don't you take a look at tab 79. This is 
the one that is dated January 18, 2000.
    Mr. Benit. Yes. This is the one I am referring to.
    Mr. Walden. Okay. But your spreadsheet, if I am correct, is 
dated after that.
    Mr. Benit. That is right. I am saying that after that we 
got into more detail and I was trying to find out how much 
money was being spent, but, like I said, there were some 
discussions on those items. We met with our counsels, we had a 
conference call, we talked, and we were advised to go back to 
the original memorandum of understanding, which we did.
    Mr. Walden. And were you advised that you couldn't have a 
TV studio as part of that discussion?
    Mr. Benit. No, I was not.
    Mr. Walden. But yet that shows up here on the spreadsheet 
as being moved around, right?
    Mr. Benit. It does.
    Mr. Walden. Why was it on the spreadsheet?
    Mr. Benit. Well, it was on the spreadsheet that I was 
playing around with things. Then we went back to counsel and 
said, ``What can we do and what can't we do,'' and they said, 
``Go back to your regular memorandum of understanding. That 
will guide you to stay within the school and library rules.'' 
Mr. Walden. So are you testifying that your counsel never saw 
this spreadsheet?
    Mr. Benit. Yes, I am.
    Mr. Walden. They never saw it.
    Mr. Benit. I don't believe they did. Maybe they did. I 
can't recall.
    Mr. Walden. You can't recall. Okay. So you had no knowledge 
anywhere along the way that E-rate couldn't fund a TV studio?
    Mr. Benit. Well, it says in the memorandum a media 
production room is non-qualified equipment and services, so 
that had to be donated. So my understanding it was donated.
    Mr. Walden. It is your understanding that NEC then just 
turned around and donated $1 million or $750,000 or whatever 
worth of----
    Mr. Benit. That is my understanding.
    Chairman Barton. Would the gentleman yield?
    Mr. Walden. Certainly.
    Chairman Barton. Well, then, Dr. Benit, if that is the 
case, this original memo of understanding that you have 
referred to refers to a number of items that total, if I am 
reading this right, a little over $2 million. Were those 
installed also, the 24-port Cisco 3524 series ethernet switch, 
the NEC 8550 ATM workgroup switch, the 6066 gigabyte backbone 
switches, the four Cisco 3508 gigabyte ATM intermediary 
backbone switches and the four Cisco 3660 routers? Were those 
actually installed?
    Mr. Benit. My understanding everything on the first sheet 
of memorandum of understanding was installed.
    Chairman Barton. Now, our understanding is that some of 
those items were not installed because the money was switched 
to pay for the television studio. Mr. McCain, do you have a 
comment on that?
    Mr. McCain. What NEC installed was in reference to the 
document 6365, and within line item 3 it indicates the data 
system. It also references back to the MOU.
    Chairman Barton. So are you--that is kind of a confusing 
answer. Dr. Benit and Dr. Epps are saying that the television 
studio was donated and that this other material that is listed 
on page 1 was also installed. Is that what you are saying too 
or are you saying that only some of the equipment on page 1 was 
installed and the funds that weren't used for that were used to 
pay for the TV studio, which is our understanding?
    Mr. McCain. I am not aware of any donation that NEC made 
for the TV production studio.
    Chairman Barton. I understand that, but my question is was 
money that was supposed to be used for these switches, which 
would be eligible for E-rate funding, was it reallocated to pay 
for the television studio, which was ineligible for E-rate 
funding? That is what the documents tend to indicate.
    Mr. McCain. The NEC installed what was on the spreadsheet 
in reference to document 6365 and how those line items were 
implemented and the associated dollar amount.
    Chairman Barton. Okay. Well, I have one--Mr. Walden. And we 
need to get to Mr. Singleton here pretty soon.
    Mr. Walden. All right. I am sorry, sir. Mr. McCain, have 
you done several of these installs like this?
    Mr. McCain. Yes, sir.
    Mr. Walden. From your experience, are these figures that 
are on spreadsheet, 06365, are those numbers, the costs there, 
are those pretty standard? Are they below what you would see 
charged elsewhere or are they inflated?
    Mr. McCain. No, they are not inflated. I mean new 
technology is very expensive these days.
    Mr. Walden. Okay. So I guess my question is then did a full 
$4,135,900 and whatever that says, 81--I didn't bring my 
glasses today--is that what was spent?
    Mr. McCain. Yes.
    Mr. Walden. On the project?
    Mr. McCain. Yes, sir.
    Mr. Walden. And is the only way you could have spent that 
to have spent the million for the TV studio--or $800,000, I am 
sorry?
    Mr. McCain. What we did--what NEC did is from this 
spreadsheet, an agreement by both parties, we installed the 
line items that are on the spreadsheet to use the funds that 
were approved by the SLD funding.
    Mr. Walden. And would that include the $800,000 for the TV 
studio?
    Mr. McCain. Yes.
    Mr. Walden. Okay.
    Chairman Barton. All right.
    Mr. Walden. And one final time, neither superintendent, you 
all don't know, Doctors, whether your school district ever came 
up with the match amount.
    Ms. Epps. It is my understanding, sir, that we paid our 
matching, either through the bond money that we had or our 
general fund.
    Mr. Walden. But you don't know which?
    Ms. Epps. I can't say we paid $10 from this or that. I 
don't have that information.
    Mr. Walden. Dr. Benit, you don't know specifically either.
    Mr. Benit. Well, I do know. I present it to our business 
office that they need to pay a match. I am not sure what 
happened. I believe that they did, but I would have to go back 
and review the records to find out how it was paid.
    Mr. Walden. And you haven't done that prior to this hearing 
at all?
    Mr. Benit. No, because I am working in another district, 
and I just got the request to come here while I am trying to 
get another district working.
    Mr. Walden. All right.

    [During the hearing, Members of the Oversight and 
Investigations Subcommittee and the Committee Chairman 
requested that either Dr. Emma Epps, the Superintendent of 
Ecorse Public School District, or Dr. Douglas Benit, the former 
facilities director at Ecorse Public School District, provide 
the Committee with documentation demonstrating that the school 
district in fact paid its E-rate copayment, and did not use E-
rate funds to cover the district's obligation. Dr. Benit stated 
that the requested information could be provided to supplement 
the record. Following subsequent requests from Committee staff 
that Dr. Benit provide the documentation before the record 
closed, Dr. Benit, through his attorney, produced several 
documents to the Committee that were irrelevant and failed to 
answer the outstanding questions. At the close of the record, 
the Committee has no documentation that in fact demonstrates 
that Ecorse Public School District did not use E-rate funds to 
pay for ineligible products and services and to pay for the 
school district's required co-payment.]

    Chairman Barton. Well, before we get off of that issue, 
what does a television studio have to do with connecting your 
students to the Internet? Either one of you.
    Mr. Benit. Well, as a donated piece of equipment, it does 
teach kids how to project themselves, how to do TV production 
and----
    Chairman Barton. That has nothing to do with the Internet. 
That has nothing to do with wiring your school system so that 
your students can receive material for educational purposes 
over the Internet.
    Mr. Benit. I understand that. All kids can, all buildings 
have total access to the Internet.
    Chairman Barton. So you all think that E-rate funds should 
be spent to put television studios in every high school in this 
country, even though none of it is used for Internet purposes. 
You want to expand the intent of the E-Rate program.
    Mr. Benit. No, sir, that is not what we said.
    Chairman Barton. Well, we had another school superintendent 
from the San Francisco School District here before us. She 
refused to sign documents. She instigated an investigation that 
resulted in tens of millions of dollars being refunded to her 
credit, and in this case, the school district that you 
represent, you all have a very vague notion of what was spent 
and what it was spent for and don't appear, quite frankly, to 
be too concerned about it, which is a disappointment to me.
    Let me ask Dr. Singleton some questions for the record. Dr. 
Singleton, you are the superintendent of the Jasper County 
School District in South Carolina; is that not correct?
    Mr. Singelton. That is correct.
    Chairman Barton. What is your understanding of your school 
district's financial obligation to participate in the E-Rate 
program?
    Mr. Singelton. We have written several--worked with NABSE 
and also with the VNCI and NEC. That is how we became involved. 
When I became superintendent in 1999, we wrote the first grant 
or filed the first forms for E-rate funding. And, as I 
mentioned in my written testimony, I was at a conference and E-
rate was being promoted by NABSE.
    Chairman Barton. Is that where you met Judy Green for the 
first time?
    Mr. Singelton. I believe she was there, but I remember 
George Marchelos. I remember him specifically.
    Chairman Barton. Do you know to what extent, if any, Judy 
Green was involved in assisting Mr. Duncan in your district 
preparing E-rate forms and paperwork for the grant application?
    Mr. Singelton. When I returned I filed the first form, 470, 
in Nashville, and when I came back I turned everything over to 
Mr. Duncan. He was our director of technology at that time, and 
he was working with, I believe it was, Kim Mars and Judy Green 
and Gerard McNulty.
    Chairman Barton. Do you know if Judy Green helped Mr. 
Duncan to prepare the E-rate RFP?
    Mr. Singelton. From what Mr. Duncan said, he had assistance 
from the organization, NEC and VNCI.
    Chairman Barton. But do you know if the employee or the 
consultant of NEC BNS was Judy Green, the woman here today who 
refused to testify under oath--who took her Fifth Amendment 
right against self-incrimination--I want to be exact on that.
    Mr. Singelton. I don't know for a fact that she sat down 
and wrote the application, but she was physically in the 
district on several occasions. I can say VNCI filed the first 
form out in Nashville, and I know that for a fact because after 
the breakout session I came back downstairs and did that 
application electronically and sent it in.
    Chairman Barton. Okay. Do you have the big notebook with 
all the tabs there at the desk before you?
    Mr. Singelton. This?
    Chairman Barton. Yes, sir. Could you turn to tab 48, 
please, sir? Tab 48 should be the Jasper County memorandum of 
understanding.
    Mr. Singelton. Yes, sir.
    Chairman Barton. Do you see that?
    Mr. Singelton. Yes.
    Chairman Barton. Could you tell us how much money was 
awarded to the Jasper County School District by the E-Rate 
program for year 2000?
    Mr. Singelton. Well, the amounts meant $10.4 million.
    Chairman Barton. What is the document before you indicate?
    Mr. Singelton. This indicates that 9.5----
    Chairman Barton. Four-eight.
    Mr. Singelton. [continuing] 48.
    Chairman Barton. On the page marked 6374, can you describe 
the items listed under the caption, ``Non-qualified equipment 
and services?''
    Mr. Singelton. Electrical upgrade, university training for 
teachers, climate control system, alterations of internal 
existing structure.
    Chairman Barton. That is enough. The entire document is in 
the record, but would you just summarize. Does it look like 
there are dozens of items that were non-qualified on that page, 
including personal computers? There are a lot of items on that.
    Mr. Singelton. Yes, sir.
    Chairman Barton. You would agree with that? Do you know if 
Jasper County received all of those items even though they were 
non-qualified?
    Mr. Singelton. I believe we received most of the items.
    Chairman Barton. You believe that you did receive.
    Mr. Singelton. Yes.
    Chairman Barton. Okay. On the next page, 6375, what is the 
total cost of the so-called bonus package?
    Mr. Singelton. Three million fifty.
    Chairman Barton. Three million fifty. Now, do you 
acknowledge that that means your school district received $3 
million in non-qualified items for which they should not have 
been paid for by the E-Rate program?
    Mr. Singelton. Well, we received it as a bonus package. It 
was given to us as a bonus package.
    Chairman Barton. All right.
    Mr. Singelton. That was promoted by VNCI, NEC and----
    Chairman Barton. Define in your own words what a bonus 
package means.
    Mr. Singelton. In my words, and what was said to us, was 
that a bonus package would pay for the matching--could be used 
as the matching for our portion that the district should have 
been paying.
    Chairman Barton. That makes no sense at all.
    Mr. Singelton. Well, that is what was told to us.
    Chairman Barton. All right.
    Mr. Singelton. That the bonus package could be used as in 
kind. They would give us that and we could, in turn, use that 
as the matching for the district.
    Chairman Barton. All right. The E-Rate program is supposed 
to be--funds for the E-Rate program are supposed to be used to 
actually create the Internet connection, the servers, the 
wiring, the switches, the monitors, the computers so that 
students can participate and receive information over the 
Internet and help with their education. None of the equipment 
that was listed in the bonus package does that. It is not 
qualified, it is not part of it. Some of it may be if there are 
some computers there. Those funds to the tune of $3 million 
were non-eligible and should not have been funded by E-rate. If 
the school district wanted those, the school district should 
have paid for them themselves. There is no free lunch, and you 
want us to believe that $3 million worth of equipment could be 
given to your school district and you really think that the 
vendor that provided it did it and didn't charge the government 
for it. On a $4 million contract, they could give you a $3 
million bonus.
    Mr. Singelton. A $9 million----
    Chairman Barton. Well, but $3 million of it was listed as 
bonus.
    Mr. Singelton. That is correct. And I am just repeating 
what was told to us, that we----
    Chairman Barton. But you didn't question that.
    Mr. Singelton. No, sir, I did not.
    Ms. DeGette. Mr. Chairman, would you yield for 1 second?
    Chairman Barton. I would be happy to.
    Ms. DeGette. Dr. Singleton, who told you that this list of 
non-qualified equipment could be applied toward the district's 
match?
    Mr. Singelton. Well, if you read through this document, it 
says in-kind and----
    Ms. DeGette. No. Who told you that?
    Mr. Singelton. When we first started discussing this out in 
Nashville, I know it was discussed there----
    Ms. DeGette. Who----
    Mr. Singelton. Morales, George Morales mentioned it when we 
got back to our district. Gerard McNulty, Judy Green, that 
whole group----
    Ms. DeGette. All of them told you that?
    Mr. Singelton. Yes, ma'am.
    Ms. DeGette. Thank you, Mr. Chairman.
    Chairman Barton. Doctor, doesn't it strike you as too good 
to be true that you could receive all these bonus items and 
have your copayment waived by NEC BNS?
    Mr. Singelton. We know now sir, that it is too good to be 
true. There are no free lunches, I will agree with that. 
Understanding that we are a very rural, poor school district, 
NABSE involvement by----
    Chairman Barton. So it is just don't look a gift horse in 
the mouth.
    Mr. Singelton. Yes. Yes.
    Chairman Barton. That is kind of the----
    Mr. Singelton. Well, a reputable organization like NABSE we 
just assumed that everything was okay.
    Chairman Barton. I can understand that. The Chair would ask 
unanimous consent to recall Mr. McDonald of USAC if he is still 
in the audience. He is still under oath.
    Mr. McDonald, you have heard Superintendent Epps and 
Superintendent Benit and now Dr. Singleton all indicate that 
they were getting equipment and bonus packages and donations. 
Would that be allowed, including a television studio, under the 
existing E-Rate program, even if it was donated?
    Mr. McDonald. These would be the kind of free, ineligible 
services I was talking about this morning, that the cost of 
those services need to be covered somehow, and they are covered 
by inflating the cost of eligible services so that E-rate ends 
up paying for them. TV production studio, we do pay for 
connectivity. We pay for distance learning. If the TV 
production studio were being used for distance learning, 
switches and cables that were carrying that data would be 
eligible but not the TV production studio itself.
    Chairman Barton. And if Dr. Singleton's school district had 
contacted USAC and asked about this bonus package or the 
concept of a bonus package, what would your reviewers' response 
have been?
    Mr. McDonald. We have been pretty clear about free, 
ineligible services from the inception of the program, that 
they are not eligible, that the applicants should not acquire 
free, ineligible services from service providers.
    Chairman Barton. Do you do anything to be proactive to send 
out materials to these small school districts and these rural 
school districts and low-income school districts that would 
tend not to have professional--or not as likely to have 
professional staff that were up to date on these programs to 
inform them, to warn them, so to speak, to be wary of these 
kind of proposals that in fact they are illegal?
    Mr. McDonald. We have a web site that we try to promote as 
much as possible where we put information about the rules of 
the program. We have a toll-free call center that participants 
can call and get information. We do an annual train the trainer 
conference and bring people in from all the States and train 
and hope that they will go back and train, and we do a mass 
mailing at the start of the window for each funding year to 
basically all applicants in the program, trying to highlight 
significant features of the program, things that have been 
problems that we have found recently.
    Chairman Barton. Before I let--I think Mr. Walden may have 
a question for you, but I sent a letter, and I think Mr. 
Dingell sent a letter, we signed a letter asking that this 
particular vendor be barred because of what they have done. Do 
you know the status of that debarment proceeding? Would that be 
your agency or would it go to the FCC directly?
    Mr. McDonald. That would be the FCC, sir.
    Chairman Barton. And you are not aware of--Ms. DeGette, do 
you wish to ask a question?
    Ms. DeGette. Thank you. Dr. Singleton, I just wanted to 
clear a couple of things up. And thank you for appearing today. 
You are making some sense here. This in-kind donation agreement 
that we have been talking about, now you were told by Judy 
Green and others that these were going to be donated by NEC, 
correct?
    Mr. Singelton. Donated.
    Ms. DeGette. And were you aware of an application by NEC 
for E-rate money to pay for these items?
    Mr. Singelton. No. I was not aware of that, no.
    Ms. DeGette. Okay. Did you know that E-rate money cannot be 
used to pay for these items?
    Mr. Singelton. I know now, but that never occurred to me in 
the beginning because they were donated items.
    Ms. DeGette. Right. You just thought they were donating it 
as part of your agreement, right?
    Mr. Singelton. Yes.
    Ms. DeGette. Now, as you look at this list of items, is 
there anything on this list that--well, everything on this list 
you needed to be able to hook up computers for kids to use them 
in the classroom, didn't you?
    Mr. Singelton. That is correct.
    Ms. DeGette. Did your school district have $3 million to 
pay for all this equipment?
    Mr. Singelton. No, we do not.
    Ms. DeGette. What would have happened if you didn't have a 
way to get this equipment? Did you have----
    Mr. Singelton. We would never put it in. We could never 
afford this kind of equipment.
    Ms. DeGette. Right. Now, let's say that Congress said that 
you had to pay 20 percent. Because now you know, right, that 
there is a 10 percent amount? What would you say to Congress if 
we said, ``Well, the way we are going to stop the kind of fraud 
by Judy Green and others is to make you pay for 20 percent''?
    Mr. Singelton. I think that would be detrimental to 
districts like ours. Rural, poor districts cannot afford to pay 
upfront or to pay the percentage that is required. Small amount 
but the magnitude of this project we could never afford it, we 
could never pay it.
    Ms. DeGette. Do you have any ideas what kind of changes--
because I know you would never support fraudulent transactions 
at all for your district, right?
    Mr. Singelton. No, ma'am. That will get you fired.
    Ms. DeGette. Well, it will do worse than that. And so my 
question to you is what do you think Congress can do to make 
sure that this E-rate money goes to school districts like 
yours, the poorest school districts in the country to help the 
students, but at the same time there are not people just 
skimming millions of dollars off of it fraudulently.
    Mr. Singelton. Really, I think the whole application 
process, I believe, needs to be revamped. It seems to be a 
complicated process, and I don't know all the ins and outs 
because my technology persons have always done it, and I have 
sort of taken a back seat and they just bring it to me and say, 
``Okay. We have got this approved,'' and I have signed 
documents as they came in. But I believe that is--the process 
is complicated, and I think the bid process may need to be 
looked at, because when we got into this project, and if you 
ask me how VNCI and NEC got into it, I could not tell you 
today. I know that we started in Nashville, and from then on 
they were partnering with us. So it is unclear exactly how they 
started. And maybe by just signing on and having them transmit 
that 470, that first application, and they are off and running 
with us.
    Ms. DeGette. Thank you. Thank you for sharing those views. 
I appreciate it.
    Mr. Walden [presiding]. Dr. Epps, are you a member of 
NABSE?
    Ms. Epps. Yes, I am.
    Mr. Walden. I am not sure, is that mic on?
    Ms. Epps. Yes, I am.
    Mr. Walden. Thank you. Are you currently an officer of 
NABSE?
    Ms. Epps. Yes, sir.
    Mr. Walden. And how long have you been an officer at NABSE?
    Ms. Epps. I think 1998.
    Mr. Walden. You were elected----
    Ms. Epps. Secretary.
    Mr. Walden. [continuing] secretary. And you are now--what 
is your title now?
    Ms. Epps. President-elect.
    Mr. Walden. President-elect.
    Ms. Epps. Yes, sir.
    Mr. Walden. You appear in the NABSE E-Rate marketing video 
that we viewed a short time ago.
    Ms. Epps. Yes, sir.
    Mr. Walden. What do you know about NABSE's participation in 
the E-Rate program?
    Ms. Epps. As a board member, I know that a presentation was 
made to us about a partnership and I, as a board member, voted 
at that meeting because----
    Mr. Walden. You voted for the partnership?
    Ms. Epps. For the partnership to assist school districts 
that didn't have the persons to do the work.
    Mr. Walden. Sure. And you are aware of the, what was it, 
1.5 percent fee that NABSE got back off some of these 
contracts, if not all?
    Ms. Epps. That was in the presentation.
    Mr. Walden. Okay. And Mr. McDonald again, is that fee 
generally acceptable under USAC rules?
    Mr. McDonald. Depending on the role that NABSE would be 
playing. If it is playing a role as the consultant and steering 
work to those companies in order to get the 1.5 percent, no, 
that is not keeping a fair and open competitive process.
    Mr. Walden. Did you see the video?
    Mr. McDonald. I did.
    Mr. Walden. Did it trouble you that they listed various 
companies in the video, NEC, UNCI?
    Mr. McDonald. If I were seeing that for the first time, I 
wouldn't be sure exactly what was being said there. If NABSE 
had money and these companies were volunteering to come out and 
help people put technology plans together and not going to 
corrupt the process of the selection of the service provider, 
that would be okay.
    Mr. Walden. Will USAC be looking at NABSE's role?
    Mr. McDonald. Yes.
    Mr. Walden. Okay. And in terms of these school districts, 
are yo pursuing recovery? I mean we are hearing a lot today 
about $4 million and a free TV studio.
    Mr. McDonald. I am making notes here.
    Mr. Walden. I bet you have. Dr. Epps, what role did Quentin 
Lawson play on behalf of NABSE and NABSE's participation in the 
E-Rate program?
    Ms. Epps. Sir, I can't tell you what his role was, other 
than as a board member, as I said, at the meeting, the project 
was presented to the board, but I can't----
    Mr. Walden. Does the board have legal counsel that reviewed 
this process, do you know?
    Ms. Epps. The policy, sir, is that when projects are 
brought before the board, the general process is that if it is 
an agreement or a contract, as a board member, I know that it 
is supposed to go to the legal attorney.
    Mr. Walden. Who is that?
    Ms. Epps. The legal attorney is Mr. McCutcheon.
    Mr. Walden. Mr. McCutcheon. Okay. What do you know about 
NABSE's E-rate partnership with NEC, VNCI and IBM?
    Ms. Epps. What I know has to do with there was a 
presentation that there would be a partnership. I don't know 
the intricate details of what that was and how it all came 
together. I don't have that detailed information, as I was one 
member.
    Mr. Walden. That wasn't presented in your board meeting? 
There would be documents, minutes perhaps.
    Ms. Epps. The information was presented to the board. I 
can't recall, tell you all of the details of the presentation, 
but just like all the other initiatives, it was presented to 
the board.
    Mr. Walden. All right. If you would take a look at tab 66 
in our big binder there.
    Ms. Epps. Okay.
    Mr. Walden. I was just wondering if you were aware that 
NABSE had entered this memorandum of understanding with NEC BNS 
and VNCI? This was in January 2001. It references there the 1.5 
percent of the gross revenue of said contract.
    Ms. Epps. And what is the question, sir?
    Mr. Walden. Were you aware that NABSE had entered this 
memorandum of understanding with NEC BNS and VNCI?
    Ms. Epps. I wasn't aware of this particular memorandum. I 
have seen it recently, but I was not aware of it previously.
    Mr. Walden. Okay. Were you aware that this MOU provided for 
the compensation of NABSE by those vendors?
    Ms. Epps. One and a half percent.
    Mr. Walden. Right. Were you aware of that?
    Ms. Epps. I think that was--if my memory serves me 
correctly, that was presented in the----
    Mr. Walden. As part of the presentation?
    Ms. Epps. [continuing] presentation.
    Mr. Walden. Yes. I question the term, ``donation'' versus 
perhaps ``commission'' on sales. I mean it is 1.5 percent of 
the gross revenues is part of the agreement.
    Why would NABSE get that funding, the 1.5 percent, as 
opposed to just helping schools for free, because that is your 
mission, right?
    Ms. Epps. Well, our mission is to help schools and 
children, yes.
    Mr. Walden. Right. Why take 1.5 percent? I mean that could 
be quite a bit of money on what we have heard today in terms of 
the size of some of these contracts.
    Ms. Epps. Yes. Well, I can answer as one board member. At 
the time it was presented----
    Mr. Walden. Do you know how much money they did make?
    Ms. Epps. No, sir.
    Mr. Walden. That doesn't show up in a budget item or--do 
you get like monthly cash-flow statements or P&Ls?
    Ms. Epps. No, sir. I haven't seen monthly cash-flow 
statements, but it would eventually be in the audit, I am sure, 
at the end of the year.
    Mr. Walden. The audit? How often does your board meet?
    Ms. Epps. I attend board meetings about three times a year.
    Mr. Walden. And that is how often the board meets?
    Ms. Epps. Yes, sir, about three times a year.
    Mr. Walden. And at those meetings, do they give you 
financial statements? I mean do they give you sort of----
    Ms. Epps. Yes, sir.
    Mr. Walden. [continuing] quarterly cash-flows or----
    Ms. Epps. Yes, sir, we get financial statements.
    Mr. Walden. Okay. But this isn't one you looked at as a new 
line of business?
    Ms. Epps. I did not particularly pay attention to that.
    Mr. Walden. Is that information----
    Ms. Epps. I can't say that it was there or not.
    Mr. Walden. Sure. I have been through various boards I have 
been on and I understand how that happens. Is that information 
you could provide for us, though? NABSE?
    Ms. Epps. I am sure that NABSE could provide that for you.
    Mr. Walden. Well, you are the president-elect. I mean is 
that something you would help us get?
    Ms. Epps. I think that you could request that from the 
office, and I am sure they would give you that.
    Mr. Walden. Okay. Because it would be interesting to know 
just how much money was generated off the E-rate projects in 
the NABSE.
    So take a look at tab 66, for example--I am sorry, 68. 
VNCI, Video Network Communications, Inc. provided NABSE on 
October 1999 it appears to be $37,000. How big is your annual 
budget?
    Ms. Epps. I am sorry?
    Mr. Walden. How big is your annual budget at NABSE?
    Ms. Epps. I really don't----
    Mr. Walden. Would $37,000 in one payment be considered 
quite a bit? I mean are we talking a $10 million budget or----
    Ms. Epps. As a board member, I would think that $37,000 is 
a lot.
    Mr. Walden. So if I were looking at your P&L for the prior 
4 months, $37,000 would jump out as a line item, wouldn't it, 
in terms of revenue source? And that is just one check. Is that 
what you are telling me, that that would tend to show up? I 
mean how big an organization----
    Ms. Epps. In revenue, I am sure it would show up in the 
office, but I don't remember seeing this check.
    Mr. Walden. No, I wouldn't think you would see the check. 
But I mean I am just thinking back to my own company and 
others. I mean $37,000 is a pretty good chunk of dough, and 
that is just one check. Were there others maybe? How about at 
tab 69, July 2001. That is a $10,000, looks like, check. Again, 
it looks like from VNCI. It just seems like a lot of money 
coming in, I don't know.
    And I think tab 69 and 70 also have revenue coming in as 
well, it looks like, $45,000 from VNCI. It just seems like a 
lot of money coming out of this program. I mean do you know the 
kind of technical support that your folks at--how many people 
are in this division at NABSE that help schools? How big is the 
staff for the E-rate side of things?
    Ms. Epps. I don't remember how many. I couldn't give you a 
number of the staff doing the E-rate, what I consider the E-
rate time. I can tell you just about the staff now.
    Mr. Walden. How many are on staff now total?
    Ms. Epps. Hold on a second.
    Mr. Walden. Sure.
    Ms. Epps. I believe, sir, it is maybe 6 or 7 regular 
people, and then there are, like, interns.
    Mr. Walden. So you are not a big organization here, 6 or 7. 
And that is full-time staff when you say the word, ``regular?''
    Ms. Epps. I believe that it is about that many full-time.
    Mr. Walden. Okay. So 6 or 7 full-time. And that would 
include people working on E-rate or do you----
    Ms. Epps. Well, working on projects. I don't know who would 
exactly in the office work on specific projects.
    Mr. Walden. Right. No, but it would be within that group of 
6 or 7 people.
    Ms. Epps. That is the NABSE staff.
    Mr. Walden. Yes. So the current staff you have that would 
have been the ones that would be getting the payments, in 
effect. I mean the payment came to NABSE, right, that we have 
the checks under the tabs that I referenced earlier?
    Ms. Epps. I see the checks, sir. I don't know--I haven't 
looked at in terms of when they were. I don't know--the staff 
has changed and the staff changes, so I can't say this exact 6 
and 7 people were the people----
    Mr. Walden. No, I understand that. I am not saying that. I 
am just saying that when NABSE was holding itself out as a 
technological consultant for school districts like the one Mr. 
Singleton is superintendent of, in theory, you had 6 or 7 
people or positions, right?
    Ms. Epps. Yes, sir.
    Mr. Walden. That is what you have testified to.
    Ms. Epps. That is how many we have now, sir, that I know 
of.
    Mr. Walden. Was it more or less then?
    Ms. Epps. I said that I couldn't tell you how many it was, 
if you remember when I said, during what I am considering the 
E-rate time. I said now I would say it was 6 or 7 and some 
interns.
    Mr. Walden. Was it more during the E-rate time?
    Ms. Epps. I really don't know the number of staff members 
at that time.
    Mr. Walden. Okay.
    Ms. Epps. And I am thinking 2001. That is what I call E-
rate time.
    Mr. Walden. All right. Did you rely a lot on Judy Green?
    Ms. Epps. I don't know if NABSE relied on Ms. Green.
    Mr. Walden. Was the NABSE Board informed that Quentin 
Lawson had joined the VNCI Board? See Tab 88 if you want to, 
there is a reference.
    Ms. Epps. Sir, I, as a board member, was made aware of that 
this year, 2004, this year.
    Mr. Walden. Okay. So you just learned about it sometime in 
2004.
    Ms. Epps. Yes, sir.
    Mr. Walden. Okay. All right. Now, does that present any 
conflict of interest in your mind?
    Ms. Epps. I, as an individual--I would tend to think that 
it is--as an individual, I would think that it wasn't----
    Mr. Walden. It was not?
    Ms. Epps. It could be a conflict.
    Mr. Walden. It could be a conflict.
    Ms. Epps. I mean I would think, as an individual. I can't--
--
    Mr. Walden. Mr. McDonald, do you think that presents a 
conflict?
    Mr. McDonald. It certainly deepens the issue of were these 
fair and open competitive processes.
    Mr. Walden. Are you aware of these payments to NABSE?
    Mr. McDonald. No, sir.
    Mr. Walden. Do they seem out of the ordinary, hard to tell?
    Mr. McDonald. They would be out of the ordinary. As we 
discussed earlier today, if we had seen these, we would have 
misconstrued them as causing a problem, and we would have 
denied the applications.
    Mr. Walden. Are these payments the kind of payments that 
you would go back and review and seek refunds on if they are 
not--I mean----
    Mr. McDonald. It sounds like E-rate funds were used to make 
the payments to NABSE and those would not be eligible uses of 
E-rate funds.
    Mr. Walden. Unless they provided very specific 
technological support to the districts, right?
    Mr. McDonald. Unless they were installing or providing 
connectivity services.
    Mr. Walden. All right. Anything else? All right. Thank you 
all for your patience and time. We have no other questions for 
this panel. You are dismissed. We will take a brief 5-minute 
recess because we have to bring up another witness by video. 
While our technicians work on that, we will be in recess for 5 
minutes.
    [Brief recess.]
    [The prepared testimony of William Singleton follows:]

Prepared Statement of William Singleton, Superintendent, Jasper County 
                                Schools

                         SCHOOL YEAR 1999-2000

    I was somewhat familiar with the E-Rate Program some time before 
1999. However, after attending the National Alliance of Black School 
Educators (NABSE) Conference in Nashville, Tennessee, I became more 
familiar with the program. I began to take notice after being 
approached by a representative from VNCI, who had on display numerous 
pieces of telecommunication equipment in the hotel lobby. VNCI 
representatives stood in the hotel lobby soliciting conference 
participants to attend a breakout session on how to acquire E-Rate 
funds. Several announcements were made by NABSE officials encouraging 
conference participants to attend the breakout session.
    A representative of VNCI encouraged conference participants to 
attend the breakout session to hear testimonies from other school 
districts that were recipients of their equipment (see Exhibit A). The 
breakout session was very interesting. School district representatives 
and superintendents that had received E-Rate funds shared how they 
enhanced their school district's technology program. As I recall, a 
superintendent from a small school district in the state of California 
shared during the breakout session that he had received somewhere in 
the neighborhood of three million dollars. The school district was 
approximately half the size of Jasper County School District's three 
thousand student population. I became interested because the California 
school district's demographics for free and reduced lunch population 
was very similar to Jasper County.
    The second selling point was that VNCI was promoting a special 
NABSE bonus package of free telecommunication equipment. The school 
district would receive as ``in-kind'' donations to be used as the 
school district's 15% match (district had at this time 85% free and 
reduced lunch program). The bonus package included a 33 inch TV monitor 
for each classroom, pan-tilt-zoom cameras, 400 computers, 12 laptop 
computers, 100 teacher workstations, etc. (see Exhibit B). During the 
presentation at the NABSE Conference, VNCI agreed to assist any school 
district that needed help with the application process. After the 
session, participants returned to the lobby and completed the first 
phase of the application process, Form 470.
    Upon my return from the NABSE Conference in Nashville, Tennessee, I 
turned the project over to Michael Duncan, the school district's 
Director of Technology. As we continued throughout the school year, the 
Director of Technology, along with VNCI and NEC staff, filed the other 
necessary paperwork.

                         SCHOOL YEAR 2000-2001

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

                         SCHOOL YEAR 2001-2002

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

                         SCHOOL YEAR 2002-2003

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

                         SCHOOL YEAR 2003-2004

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

                                SUMMARY

    I believe it is vital that the E-Rate program continue although the 
application process seems to be complicated and burdensome. After 
learning more about the E-Rate program over the past three years and 
our school district's involvement in the investigation of E-Rate, I 
feel the following problems were present:

1. VNCI offered Jasper County a Bonus Package with equipment that was 
        ineligible for E-Rate funds.
2. VNCI as a provider of video-conferencing equipment assisted with the 
        application process Form 470 in Nashville, Tennessee.
3. Excessive equipment, such as a server in every classroom, probably 
        was not necessary.
4. VNCI/NEC agreeing not to charge the school district the 15% match 
        (85% free/reduced lunch), the match would be the in-kind NABSE 
        Bonus Package donation.
5. I believe VNCI/NEC may have been involved in the RFP and bid 
        process, which was handled by the Director of Technology.
    It appears that large companies, such as VNCI/NEC, have been going 
around the country offering solutions to school district technology 
problems and taking advantage of the E-Rate program.

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    Mr. Walden. Let me call the Subcommittee on Oversight and 
Investigations back to order, and we now have our third panel 
ready to go, including our witness by video. We have Mr. 
Charles Tafoya, superintendent, El Paso Independent School 
District; Ms. Sharon Foster, technology information systems 
director; Mr. Ruben Bohuchot--did I say that right--chief 
technology officer, associate superintendent, Dallas 
Independent School District; Ms. Paula Glogovac, former E-rate 
consultant to Sun Microsystems; Mr. Nathaniel Hawthorne, 
general counsel, Alpha Telecommunications, Incorporated; Mr. 
Christopher G. Caine, vice president, Government Programs for 
IBM, accompanied by Mr. Mike Pratt.
    And you are aware the committee is holding an investigative 
hearing and when doing so has had the practice of taking 
testimony under oath. Do you have any objection to testifying 
under oath? Let the record show they all indicated no.
    The Chair then advises you that under the rules of the 
House and the rules of the committee you are entitled to be 
advised by counsel. Do you desire to be advised by counsel 
during your testimony? Mr. Bohuchot, the answer is yes and 
could you identify your counsel, please, or have your counsel 
come up to one of the microphones? Please make sure it is 
turned on. It is not----
    MS. Jalloh. I am sorry, my name is Joni Jalloh. I am an 
attorney for Dallas ISD here with Mr. Bohuchot.
    Mr. Walden. Okay. Thank you. Ms. Foster, do you wish to be 
represented by counsel?
    Ms. Foster. Yes.
    Mr. Walden. And your counsel, please identify yourself, 
sir.
    Mr. Pine. Clyde Pine on behalf of Ysleta Independent School 
District.
    Mr. Walden. Okay. And let's see, Ms. Glogovac?
    Ms. Glogovac. No.
    Mr. Walden. Do not wish to be represented by counsel. Mr. 
Hawthorne?
    Mr. Hawthorne. No.
    Mr. Walden. The answer is no. Mr. Caine?
    Mr. Caine. Yes.
    Mr. Walden. And your counsel, sir?
    Mr. Caine. Biz van Gelder.
    Mr. Walden. Sorry, could you say that again?
    Mr. Caine. Ms. Biz van Gelder.
    Mr. Walden. Thank you. And Mr. Pratt?
    Mr. Pratt. It would be the same.
    Mr. Walden. Okay. And let's see, witness in the video is 
Mr. Tafoya. Mr. Tafoya, do you wish to be represented by 
counsel?
    Mr. Tafoya. Yes.
    Mr. Walden. And your counsel's name?
    Mr. Soffi. Anthony Soffi.
    Mr. Walden. Thank you, sir. In that case, let's see, in 
that case, if you would, the witnesses, rise and raise your 
right hand, I will then swear you in.
    [Witnesses sworn.]
    Mr. Walden. Let the record show they all indicate, yes, 
they do.
    So you are now under oath, and you may now give a 5-minute 
summary of your written statement. Mr. Tafoya, we are going to 
start with you this afternoon.

     TESTIMONY OF CHARLES TAFOYA, SUPERINTENDENT, EL PASO 
 INDEPENDENT SCHOOL DISTRICT; RUBEN BOHUCHOT CHIEF TECHNOLOGY 
 OFFICER, ASSOCIATE SUPERINTENDENT, DALLAS INDEPENDENT SCHOOL 
    DISTRICT; SHARON FOSTER, TECHNOLOGY INFORMATION SYSTEMS 
 DIRECTOR, YSLETA INDEPENDANT SCHOOL DISTRICT; PAULA GLOGOVAC, 
    FORMER E-RATE CONSULTANT TO SUN MICROSYSTEMS; NATHANIEL 
     HAWTHORNE, GENERAL COUNSEL, ALPHA TELECOMMUNICATIONS, 
    INCORPORATED; AND CHRISTOPHER G. CAINE, VICE PRESIDENT, 
      GOVERNMENT PROGRAMS, IBM, ACCOMPANIED BY MIKE PRATT

    Mr. Tafoya. Thank you. Mr. Chairman, thank you for the 
opportunity to speak with you today. As indicated earlier, my 
names is Charles L. Tafoya. I am the superintendent of the El 
Paso Independent School District and in that capacity I have 
decided to present a short statement on behalf of the district 
for the hearing. We also have provided you a much more detailed 
statement, which is available, again, at your convenience.
    Although I was not superintendent during most of the 
relevant period, I have some familiarity with the program. The 
district is the largest school district within the El Paso, 
Texas County in far west Texas, along the border of New Mexico 
and Mexico. El Paso is primarily an Hispanic city with a 
population of over 600,000 students. The district is a poor 
school district--I am sorry, with over 600,000 residents, not 
students. The district is a poor school district with many poor 
students. About 70 percent of the district's students are 
eligible for free and reduced lunches under Federal law, though 
many of its schools have a much higher proportion.
    As one can readily see, the district students are extremely 
poor and in great need of benefits from the projects to be 
completed using E-rate funding. Relatively few students within 
the district have access to computers at home, much less access 
to educational resources through the Internet. For many 
district students, the school computers are the only computers 
to which they have access. The digital divide is a major 
problem within the district, and, unfortunately, many of its 
students are on the wrong side of that divide.
    The district has been a beneficiary of the E-Rate program 
since its inception. In year 4 of the program, the district 
received an award of approximately $65 million. That was a 
major grant, and the district was ecstatic about it. The award 
was made several months into year 4 and the district had less 
time than expected to complete the projects. Those year 4 
projects were a major undertaking for the district. The 
district devoted significant financial and manpower resources 
of its own to the projects. The projects were timely completed 
and implemented by the district and the service provider, IBM.
    Principally, though, some special contract provisions with 
IBM--I am sorry, principally through some special contract 
provisions with IBM, the district was able to save money and 
was in fact able to return over $9.3 million from its funding 
while still completing the projects.
    The district sought E-rate funding again in year 5 of the 
program but a significantly lower amount. That is the year in 
which problems with the program came to light in a major way. 
Unbeknownst to the district, the Request for Proposal developed 
and used by the district for year 4 was used as a model by 
school districts throughout the country. At almost all of those 
other districts, IBM was the successful vendor.
    An issue arose as to whether that Request for Proposal was 
in full compliance with program rules. The FCC ultimately 
concluded that the RFP model was improper but acknowledged the 
ambiguity of the rules and good faith of the districts. The 
district was, and remains, adamant that its E-rate projects 
should be performed for a fair price and with the best value 
for the dollar.
    The district is responsible for its pro rata contribution 
in the event of program funding for a project. The district 
contribution, though, does not reflect all of the true costs 
that the district E-rate awarded. Specifically, if a particular 
E-rate project is awarded program funding, the district must 
not only contribute its pro rata share but must also pay for 
the computers and other ineligible hardware necessary to use 
the eligible services under the project, for additional staff 
to handle installation and operation of the project and for 
additional training in related areas to best utilize the 
resources of the project.
    In addition, the district feels strongly that technology 
and other resources at its various schools is equitable. 
Consequently, the district must pay for similar ineligible 
projects similar to an approved project at schools ineligible 
for E-rate funding. Accordingly, the district's contribution in 
the event of program funding is actually much greater than pro 
rata contribution.
    The district is very thankful for E-rate funding that it 
has previously received. That funding has provided immeasurable 
benefits to students of the district. The written statement 
addresses those in more detail. By way of example, a major 
benefit of the program funds for El Paso ISD teachers and 
students was acquisition of a computer network and connectivity 
to and amongst campuses. Another residual benefit is exactly 
being realized as I speak to you through the ability to have 
been connected to the El Paso Community College from where this 
broadcast is being projected. The network required cabling and 
wiring in schools and provision of specialized network 
electronics. Using program funds, in combination with the 
district's own resources, the network was installed and 
implemented. One cannot over emphasize the point that, without 
program funds, it would have taken many, many years for the 
district to create and complete such a network across the 
district. Indeed, due to the time delays that would have been 
involved, the attendant issues of obsolescence in the meantime, 
it is indeed questionable if the network would have ever been 
fully completed and compatible.
    The district believes that its experience in this regard 
has been shared by many school districts across the country. 
The primary benefit from the program was high-speed Internet 
access. The funding not only allowed many more students to gain 
access to the Internet, it also committed our students to 
expand their educational experience. E-rating funding has 
permitted the district to complete needed projects in the 
technology area in an effort to provide its students with an 
enhanced opportunity for success in the future. To be clear, 
through program funds, the district did not seek to achieve and 
did not achieve a technology advantage over other school 
districts. Instead, the district sought to use such funding to 
catch up to other districts.
    Although thankful for the funding from the program, the 
district has experienced frustration with the program as more 
fully outlined in the written statement. These frustrations 
primarily involve ambiguities in the rules and the length of 
delays in making awards, which make it difficult for school 
districts to properly handle technology projects. The district 
has learned a number of lessons from the program participation. 
These lessons learned are likely to apply to many other school 
districts. The written statement addresses those in greater 
detail.
    I did want to briefly focus on a few of those related to 
the issues of preparedness and commitment. A district seeking 
E-rate funds needs to ensure that it has properly planned for 
the projects, is ready to manage the installation and 
completion of the projects and is prepared to manage the actual 
usage of the projects, after completion. Each of these steps 
takes a major commitment by the district. For instance, beyond 
the technology plan required under the program, a school 
district needs to do a comprehensive review and analysis of its 
education needs, various technology solutions to meet those 
needs, compatibility and structure issues as well as 
sustainability issues. Merely getting the latest and the 
greatest system may not be appropriate if it is not compatible 
with existing technology, it does not meet the actual and 
structural needs or cannot be sustained in the future.
    Moreover, in order to ensure that E-rate projects actually 
have a direct positive effect in the classroom, a school 
district should expect to spend substantial sums on teacher 
training, staff, and again, preparedness; equipment and other 
ineligible items under E-rate. In short, a program participant, 
in order to fully enjoy the benefits of program projects, 
should make a greater commitment of its own staff, money and 
other resources in determining its technology needs, preparing 
and designing projects, overseeing and supervising project 
installation and ensuring implementation of the projects.
    We believe that the district acted reasonably, in good 
faith, within legal guidelines. Although its efforts were good, 
the district believes there was room for improvement. It is 
working to address those issues. The district believes that the 
E-Rate program is a good program and should be retained. Some 
reforms, though, are needed. The written statement discusses 
those in more detail as well.
    The district believes, in conclusion, that notwithstanding 
the problems, the program has been very successful in bringing 
much needed technology to school districts across the country. 
Such technology has brought great benefits to the students 
involved. Thank you, Mr. Chairman.
    [The prepared statement of Charles Tafoya follows:]

     Prepared Statement of Charles Tafoya, Superintendent, El Paso 
                      Independent School District

                              INTRODUCTION

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

                  BACKGROUND OF THE EL PASO COMMUNITY

    Before proceeding further, it is important for you to understand 
the circumstances which El Paso I.S.D. faces in its daily efforts to 
educate and prepare its students for the future.
    El Paso I.S.D. is the largest school district within El Paso 
County, Texas. Its school boundaries encompass much of the City of El 
Paso. El Paso is located at the far western end of Texas, wedged 
between Mexico and New Mexico. In fact, El Paso is so far west in 
Texas, that it is actually closer to Los Angeles than the eastern 
border of Texas. It is also said that Texarkana is closer to Chicago 
than El Paso.
    El Paso is located in the Chihuahuan desert, with the Franklin 
Mountains [being the southern end of the Rocky Mountains in the United 
States] bisecting the city. The Rio Grande river flows south through a 
portion of El Paso, and then becomes the border with New Mexico, and 
ultimately becomes the border with Mexico [which river border continues 
to the Gulf of Mexico].
    The El Paso community enjoys a long history. Although the first 
Spanish arrived in the area in the late 1500's [including what is 
asserted to be the first Thanksgiving ceremony in North America in 1598 
by Juan de Onate and his colonists], the original Spanish settlements 
in El Paso were not established until the 1680's.
    The population of El Paso County is approximately 680,000. The city 
of Cuidad Juarez, Mexico borders El Paso. Cuidad Juarez has a 
population believed to be from 1,000,000 to 1,500,000 persons. To be 
clear, unlike the San Diego-Tijuana border area, El Paso and Juarez are 
actually physically next to each other, separated only by the Rio 
Grande. The bridges across the Rio Grande handle northbound [i.e. into 
El Paso] traffic of about 15,000,000 vehicles and 9,000,000 pedestrians 
per year.
    Demographically, El Paso is a primarily Hispanic city. It is 
believed to have the largest proportion of Hispanics in its population 
amongst cities over 500,000 in the country. Approximately 78% of its 
population is described as Hispanic according to census records. About 
17% of its population is non-Hispanic whites, with Asian-Americans and 
African-Americans constituting only small portions of the population.
    El Paso I.S.D. is a poor school district with many poor students, 
and each have many needs, especially in the technology area. About 70% 
of El Paso I.S.D.'s students are eligible for ``free and reduced 
lunches'' under federal law, though many of its schools have a much 
higher proportion. Indeed, at close to two-third's of El Paso I.S.D.'s 
schools, more than 90% of the students are eligible for ``free and 
reduced lunches''. The 2000 Profile of Selected Economic 
Characteristics issued by the United States Census Bureau estimates the 
per capita income for 1999 in the El Paso, Texas area at $14,388 per 
year. For comparison, according to the same survey, the annual per 
capita income for 1999 in the United States was $21,587, for the State 
of Texas was $19,617, and for the Washington D.C. area was $28,659.
    As one can readily see, El Paso I.S.D. students are extremely poor, 
and in great need of the benefits from the projects to be completed 
using E-Rate funding. Relatively few students within El Paso I.S.D. 
have access to computers at home, much less access to educational 
resources through the Internet. For many El Paso I.S.D. students, the 
school computers are the only computers to which they have access. The 
``digital divide'' is a major problem within El Paso I.S.D., and 
unfortunately many of its students are on the wrong side of the divide.

              EL PASO I.S.D.'S HISTORY WITH E-RATE PROGRAM

    The rules and objectives of the Program have changed over time. 
Initially, the Program appeared to be used primarily for reimbursement 
of school districts for telecommunication expenses. Later, cabling for 
computer networks became popular under the Program. More recently, E-
Rate funding for other sorts of so-called internal connections have 
been commonly sought. The problems with the Program that prompted these 
Subcommittee's hearings appear to have involved this final category.
    El Paso I.S.D. has been a beneficiary of the Program since its 
inception. In Year 1 of the Program 11, El Paso I.S.D. 
sought funding for telecommunications and internal connections, and 
received an award of $2,669,822 from the SLD. For Year 2 of the 
Program, El Paso I.S.D. was granted funding of $6,463,713 for 
telecommunications, internal access, and internal connection. In Year 3 
of the Program, El Paso I.S.D. received $1,422,392 in funding for 
telecommunications, internal access, and internal connection. El Paso 
I.S.D. was awarded $65,683,831 in E-Rate funding in Year 4 of the 
Program, for a variety of telecommunications, internal access, and 
internal connections projects. El Paso I.S.D.'s request for Year 5 E-
Rate funding of $46,094,835 was denied by the SLD. Upon appeal, in 
light of confusion over Program rules, in December 2003, the FCC 
permitted El Paso I.S.D. and a few other districts to re-submit funding 
applications for Year 5. That has been done, and such new application 
is now pending for $1,433,932. El Paso I.S.D.'s funding request in Year 
6 of the Program for $10,352,203, for both telecommunications, internal 
access, and some internal connections, was unexpectedly denied by the 
SLD on an alleged technicality. El Paso I.S.D. strongly disputes that 
contention and has appealed the SLD's decision to the FCC. Looking 
closely at those circumstances, one cannot help but wonder whether 
retaliation against El Paso I.S.D. played a part in that denial. That 
appeal is still pending. El Paso I.S.D. has also recently filed for 
funding under Year 7 of the Program. $2,598,600 has been sought, in 
connection with telecommunications, high speed fiber network, and 
internal connection projects in Year 7.
---------------------------------------------------------------------------
    \1\ The nomenclature for the funding years in the Program has 
changed from ``Year 6'', etc. to ``Year 2003-2004'', etc. This 
statement will generally use the former terminology, for convenience.
---------------------------------------------------------------------------
    The eligible campuses at El Paso I.S.D. under the Program currently 
consists of 3 high schools, 3 auxiliary campuses, 7 middle school 
campuses and 39 elementary school campuses, for a total of 52 campuses.

        EL PASO I.S.D.'S PARTICIPATION IN YEAR 4 OF THE PROJECT

    Since El Paso I.S.D.'s participation in Year 4 of the Program 
unexpectedly and unintentionally appears to have been a catalyst to 
problems nationwide in the subsequent funding year, further review of 
such participation [as well as that of Year 5] is in order.
    To better understand the E-Rate funding process, an applicant must 
comply with the following steps in order to be considered to have a 
complete application about which a funding decision may be made: (1) 
the applicant must develop a technology plan; (2) the applicant must 
file with the SLD a Form 470, describing the goods and services it 
wishes to procure in accordance with its technology plan; (3) the SLD 
then posts the Form 470 on its website, so that vendors interested in 
providing such goods or services can contact the applicant, make a bid, 
and seek to become the provider of the same; (4) to the extent that 
state or local procurement laws apply to the applicant, the applicant 
must comply with those laws, such as by issuance of competitive bid 
requests or requests for proposal; (5) the applicant reviews bids and 
responses from interested vendors, under the Form 470 process and/or 
state or local procurement laws; (6) the applicant must wait at least 
28 days after filing of the Form 470 in order to contract with a 
particular vendor, so that sufficient time is permitted for vendors to 
respond or make bids; (7) the applicant selects the successful vendor 
to provide the goods and/or services under the Form 470; (8) the 
applicant enters into a contract with the successful vendor; (9) the 
applicant files a Form 471 with the SLD, in which it names the 
successful vendor as the ``service provider'', using the vendor's 
unique ``service provider identification number'' or ``SPIN'', for the 
goods and/or services under the Form 470; and (10) the applicant then 
awaits any decision by the SLD as to whether or not funding will be 
granted, and in what amount, under the Form 471. If the SLD awards a 
grant of Program funds to an applicant, the applicant must then file a 
Form 486, accepting such grant. Each applicant also is required, under 
Program rules, to pay a proportion of the charges [often 10% or so] 
from the service provider, as a condition of participation.
    During each year of the Program, El Paso I.S.D. has had a 
longstanding technology plan, as modified from time to time (the 
``Technology Plan''), upon which its Program participation has been 
based. In other words, El Paso I.S.D. has sought E-Rate funding for 
projects consistent with its Technology Plan. Importantly, El Paso 
I.S.D. has not relied and does not rely solely on E-Rate funding to 
satisfy the goals of the Technology Plan, instead using its own funds 
and other sources as available. The E-Rate funding, however, has 
essentially permitted El Paso I.S.D. to accelerate the timetables for 
completion of such projects, thereby providing the benefits of 
technology for more students.
    In December 2000, El Paso I.S.D. posted a Form 470 for Year 4 of 
the Program (the ``Year 4 Form 470''), in accordance with Program 
requirements. The Year 4 Form 470 was posted through the SLD web-site. 
A hard-copy of the Year 4 Form 470 was signed by El Paso I.S.D. and 
forwarded to the SLD.
    In December 2000, El Paso I.S.D. also issued its Request for 
Proposal No. 101-00 entitled ``Strategic Technology Solution Provider'' 
(the ``Request for Proposal''). The first page of the Request for 
Proposal stated in relevant part as follows:
        . . . This Strategic Technology Partnership agreement will 
        include, but not be limited to, E-rate funded projects. The 
        selected vendor should be prepared to assist the District with 
        all aspects of the E-rate process and should demonstrate 
        knowledge and experience in dealing with E-rate funded 
        projects. All E-rate applications will be submitted using the 
        successor bidder's single SPIN number. Vendors must provide 
        their SPIN number as part of their response . . .
    The Request for Proposal sought a vendor to provide integrated 
provision of goods and services for El Paso I.S.D.'s proposed E-Rate 
projects. This was somehow different than what El Paso I.S.D. had done 
in prior years. Due to part to the loss of personnel experienced with 
the Program, more outside assistance from the vendor appeared to be 
beneficial to El Paso I.S.D. Utilization of outside expertise is not 
inappropriate, especially in the area of technology.
    It is unrealistic to expect school districts to have in-house 
expertise to understand, plan, and identify the specific plans, 
specifications, and other details of projects of seeking funding. 
Districts rarely have expertise to do so. The districts generally 
understand only what projects need to be done and the basic scope and 
outline of those projects, but do not often know ahead of time the 
particular plans and specifications for those projects [especially in 
the technology area where new technologies and techniques come into 
play very quickly]. This is a very complicated field, and hard for a 
district to keep track of state-of-the-art goods and services. If a 
district tried to design a technology project completely on its own, 
including all plans and specifications, it would not necessarily design 
the most cost-effective project, and its design would likely include 
inefficiencies, waste, and obsolete items. Accordingly, it makes sense 
for a district to seek systems integration expertise from a third 
party.
    By way of example, one should keep in mind the analogy of an 
individual building an addition to a house. In theory, a person could 
build the addition himself, but that is very rare indeed since 
individuals almost never have the necessary expertise and experience to 
do so. Instead, individuals generally do have in mind their basic needs 
and desires for the addition [no. of bedrooms, no. of baths, approx. 
square footage, one or two-story, exterior facing, style, etc.], but do 
not know all of the details [depth of foundation slab, location of 
plumbing and electrical conduit, framing details and techniques, etc.]. 
In addition, the homeowner generally does not know exactly how the 
framing, plumbing, HVAC, electrical, and other systems of the addition 
can be made compatible with those in the existing portion of the house. 
Of course, the homeowner rarely creates the blueprints on his/her own. 
The homeowner instead generally retains an architect and/or a 
homebuilder to prepare the blueprints, based upon the homeowner's basic 
needs and desires. Those blueprints are not completed, however, by the 
architect/contractor without significant input from the homeowner. The 
homeowner usually reviews those plans and specifications with the 
architect/contractor and suggests many changes. In that regard, price 
is an important consideration, and changes are made to the blueprints 
accordingly. The price of the project is negotiated between the 
parties. The homeowner retains final control over the plans and 
specifications, and the price, especially since the homeowner has the 
right to end negotiations and seek a new builder, if necessary. As 
applied to the Program, the homeowner is akin to a district seeking 
Program funding, the addition is akin to the new projects desired to 
the existing technology at the district, the homeowner's basic needs 
and desires of the homeowner are akin to the technology plan adopted by 
district seeking Program funding, the plans and specifications as set 
forth in the blueprints are akin to the details contained in the Form 
471 filed by such district, and the architect and contractor are akin 
to the service provider for the district. Consequently, this ``general 
contractor'' approach seemed reasonable to El Paso I.S.D. when adopted 
through the Request for Proposal.
    The Request for Proposal was prepared by an El Paso I.S.D. 
employee, based upon review of similar bid documents prepared by other 
school districts nationally as well as substantial drafting on his own. 
Importantly, it was not prepared by any vendor, and not based upon 
draft documents provided by any vendor.
    The Request for Proposal was noticed by El Paso I.S.D. in newspaper 
notices, and placed upon its web-site. El Paso I.S.D. provided copies 
of its Request for Proposal to eleven different companies who requested 
a copy, not all ones who ultimately bid.
    The deadline for submitting responses to the Request for Proposal 
was December 19, 2000, and responses were thereafter opened. Eight 
vendors [IBM, Amherst Computer, Diversified Technical Services, Kent 
Data Communications, ESEI, Southwestern Bell, Time Warner Cable, and 
Cervantes CC] responded to the Request for Proposal in some form or 
fashion. The Year 4 470 did not generate any responses, in and of 
itself.
    An evaluation committee composed of El Paso I.S.D. Technology and 
Finance Department officials reviewed the responses and recommended IBM 
to the Board of Trustees of El Paso I.S.D. At a Board meeting on 
January 9, 2001, the Board of Trustees of El Paso I.S.D. selected IBM 
as the putative awardee under the Request for Proposal, and thus, if a 
final contract [including pricing] was successfully negotiated and 
finalized, as the service provider for the El Paso I.S.D. projects for 
which a Funding Year 2001 application was to be made.
    Thereafter, IBM and El Paso I.S.D. entered into an IBM Customer 
Agreement dated as of January 2001, with incorporated Statements of 
Work dated January 2001, as well as an Addendum to Customer Agreement 
for January 2001 SOWs (collectively, the ``Year 4 Contract''). The Year 
4 Contract had a one-year term, with an option by El Paso I.S.D. to 
renew for two additional one-year terms. The Statements of Work 
included with the Year 4 Contract outlined in detail the projects to be 
completed under the Program.
    Importantly, the Year 4 Contract contained special provisions 
whereby El Paso I.S.D. retained the right to select the ultimate 
providers of many services and products, through use of procurement 
requirements of Texas state-law (the ``Special Procurement 
Provisions''). The Special Procurement Provisions are found within the 
Addendum to the Year 4 Contract. In this way, El Paso I.S.D. intended 
to minimize the costs for such services and products, and thereby 
minimize the amounts of Program funding, and thus El Paso I.S.D.'s pro 
rata contribution, ultimately required to perform the desired E-Rate 
projects. El Paso I.S.D. insisted upon such terms, and after 
challenging negotiations, was able to obtain IBM's consent to the same. 
It is El Paso I.S.D.'s understanding that it was the only district 
nationwide during Year 4 of the Program to obtain such special 
protection provisions from IBM, and one of only two [the other being a 
sister district in El Paso County aware of such contract terms] 
nationwide obtaining such provisions from IBM during Year 5 of the 
Program.
    El Paso I.S.D. then filed a Form 471 for Year 4 of the Program (the 
``Year 4 Form 471'') with the SLD, as required.
    El Paso I.S.D. later received a substantial award of funding from 
the SLD for Year 4 of the Program for IC/IA Services and Telco 
Services. El Paso I.S.D. accepted such funding, and the projects 
thereunder have been completed. This award was dated September 28, 
2001, for the Year 4 funding year beginning July 1, 2001. As one can 
see, the award was not received until well after the beginning of the 
funding year in question.
    Upon receipt of such award, El Paso I.S.D. recognized that, due to 
the SLD's delays in making the grant, it had less time than originally 
anticipated to complete the desired E-Rate projects. El Paso I.S.D. 
took a variety of internal steps to manage the construction of those 
projects, including retention of a consultant to act as overall project 
manager, looking out for El Paso I.S.D.'s interests, as well as a 
commitment [often called upon] by its Board of Trustees to hold special 
meetings or take additional efforts to take the necessary Board actions 
to complete the projects on a timely basis. El Paso I.S.D.'s Board of 
Trustees also made a substantial financial commitment from the limited 
reserves of the District, to pay for its required share of Program 
costs.
    Ultimately, El Paso I.S.D. was able to complete the Year 4 projects 
on a timely basis. Through use of the Special Procurement Provisions, 
El Paso I.S.D. was also able to achieve costs savings and was able to 
essentially return significant funding to SLD that was not needed to 
complete the projects in question. Through the Special Procurement 
Provisions, the pricing was capped at those set in the Form 471s, but 
El Paso I.S.D. had the opportunity to obtain any better pricing later 
by the selection of subcontractors and/or suppliers through separate, 
later competitive procurement. With that better pricing, El Paso I.S.D. 
hoped to achieve additional savings. In fact, due in large part to the 
special procurement provisions of the Year 4 Contract, and otherwise 
due to its intent to ensure that its projects were limited to critical 
needs, El Paso I.S.D. ultimately did not need to spend, and returned, 
over $9.3 million from its Year 4 Program funding. In essence, El Paso 
I.S.D. obtained desired and requested goods and services for a much 
lower price, and thus achieve ``more bang for the buck'' as it 
intended. This conduct demonstrated El Paso I.S.D.'s continued 
commitment to avoid fraud, waste, and abuse in pricing, both for its 
own benefit and the Program itself.
    El Paso I.S.D. was and remains adamant that its E-Rate projects 
should be performed for a fair price, and with the most ``bang for the 
buck''. El Paso I.S.D. is also very concerned about sustainability of 
its technology projects for the long-term, and, since Program funding 
from year to year cannot be guaranteed, El Paso I.S.D. needs to ensure 
that any Project can be sustained without Program funding in the 
future. Although El Paso I.S.D. sought to meet such goal with respect 
to all E-Rate projects, in 20-20 hindsight, it feels that, due to 
ambiguities in and misunderstanding of Program rules, the so-called 
``Help Desk'' portion of the maintenance statement of work did not 
prove to be sustainable [contrary to El Paso I.S.D.'s original intent 
and belief].
    It is important to remember that El Paso I.S.D. is responsible for 
its pro rata contribution in the event of Program funding for a 
project. In the case of Year 4 funding, it alone represented a major 
financial commitment from El Paso I.S.D. That direct contribution, 
though, does not reflect all of the true costs to El Paso I.S.D. of 
Program funding. Specifically, if a particular E-Rate project is 
awarded Program funding, El Paso I.S.D. must not only contribute its 
pro rata share, but must also pay for the computers or other ineligible 
hardware necessary to use the eligible services under the project, for 
additional staff to handle installation and operation of the project, 
and for additional training [not otherwise eligible] in related areas 
to best utilize the resources of the project. In addition, El Paso 
I.S.D. feels strongly that technology and other resources at its 
various schools be equitable; consequently, El Paso I.S.D. must pay for 
similar, ineligible projects, similar to an approved project, at other 
schools who are not granted Program funding due to a lower ``free and 
reduced lunch'' level. In short, El Paso I.S.D. has to spend its own 
money to ensure that each school, whether or not it received Program 
funding, has similar resources. Accordingly, El Paso I.S.D.'s 
contribution in the event of Program funding is actually much greater 
than pro rata contribution. That alone is significant incentive for El 
Paso I.S.D. to seek cost-effective acquisition of the projects, which 
El Paso I.S.D. has sought to do in each case.

       EL PASO I.S.D.'S PARTICIPATION UNDER YEAR 5 OF THE PROGRAM

    Year 5 of the Program encountered many problems nationwide. In 
hindsight, it appears that, based upon El Paso I.S.D.'s large award in 
Year 4, many districts across the nation prepared requests for proposal 
for Year projects almost identical to the Year 4 Request for Proposal 
of El Paso I.S.D. El Paso I.S.D. was unaware of those circumstances. It 
did share a draft of the Request for Proposal with a sister district in 
El Paso County, Texas, Ysleta Independent School District; staff of 
local districts commonly share bid documents or similar materials in an 
effort to avoid unnecessary duplication of efforts.
    Frankly, El Paso I.S.D. is somewhat upset that, without its 
knowledge or consent, the so-called ``El Paso model'' was presumably 
pitched to other districts nationwide, who ultimately selected a single 
vendor, resulting in what are now viewed by some as abuses in the 
Program. That was not the intent of El Paso I.S.D., and it is very 
concerned about being indirectly and unknowingly tied to such conduct.
    The nationwide problems with Year 5 of the Program also directly 
affected El Paso I.S.D. For such Program year, El Paso I.S.D. filed a 
Form 470 for internal connections and related services, as well as for 
telecommunications services.
    With respect to those telecommunication services, El Paso I.S.D. 
acquired services from AT&T for long-distance service and local 
telephone service. Section 44.031(b)(4) of the Texas Education Code 
authorizes school districts to acquire goods or services under the 
catalogue purchase system under Section 2157.001 et. seq. of the Texas 
Government Code. Under this catalogue purchase program, the DIR [being 
a Texas state agency] creates a list of approved statewide vendors for 
specified goods and services, after a process involving review of 
different pricing factors, among others. This process essentially 
forces interested vendors to offer specially discounted prices on a 
statewide-basis, in order to be listed as an approved vendor, in order 
to be able to make sales to local governments across the state. The DIR 
itself advises vendors on its website:
          DIR expects to receive the vendors' best pricing, since all 
        state agencies, cities, counties, and other local governments, 
        public school districts, and public colleges and universities 
        can buy through the DIR contracts. Based on the state's 
        anticipated volume, vendors need to offer DIR deep discounts 
        from their list price. Those discounts must apply to all DIR 
        customers, regardless of their size, which means that a small 
        agency would receive the same base discounts that a large 
        agency would receive, although entities buying large quantities 
        should be able to negotiate deeper discounts through the DIR 
        contracts.
The catalogue purchasing program, under state law, supersedes any 
requirement for a local district to perform a second competitive 
procurement [insofar as the DIR has already done a competitive 
procurement previously]. AT&T was/is an approved vendor on the DIR 
catalogue. The telecommunication services of AT&T as offered in the DIR 
catalogue were tariffed services. El Paso I.S.D. approved AT&T as the 
provider of such services for Year 5 of the Program, based upon the 
procurement under the DIR catalogue.
    With respect to internal connections and related services for Year 
5 of the Program, after review and analysis by staff and approval by 
the Board of Trustees at a meeting on January 8, 2002, El Paso I.S.D. 
decided to renew its relationship with IBM as service provider for Year 
5. As noted above, El Paso I.S.D. posted a new Form 470 for Year 5, 
though not required to do so under Program rules due to the renewal. 
Nevertheless, El Paso I.S.D. wanted to inquire as to any interest from 
other possible vendors, in an effort to determine whether or not 
renewal was cost-effective and should take place. No responses or 
inquiries were received by El Paso I.S.D. from vendors to the 2002 Form 
470 for IC/IA Services sufficient to convince El Paso I.S.D. not to 
renew its existing contract with IBM; El Paso I.S.D. invited further 
responses from any such inquiring vendor, but substantive information 
or materials were not received on a timely basis, if at all. During an 
internal process, El Paso I.S.D. itself reduced the funding levels it 
would seek from the Program for Year 5, due to El Paso I.S.D.'s desire 
to reduce the scope of the projects thereunder. Thereafter, El Paso 
I.S.D., in consultation with IBM, finalized the specifications for the 
specific goods and services necessary for completion of such internal 
connections and related projects. The funding requested for such 
projects for Year 5 of the Program represented a significant reduction 
in amounts as requested by El Paso I.S.D., and as awarded by SLD, for 
Year 4.
    After further negotiations with IBM, El Paso I.S.D. and IBM entered 
into Statements of Work dated January 2002, as well as an Addendum to 
Customer Agreement for January 2002 SOWs (collectively, the ``Year 5 
Contract''). The Year 5 Contract also contained similar Special 
Procurement Provisions. The Year 5 Contract effectively represented the 
renewal and extension of the IBM Customer Agreement, to cover Year 5 
projects and new statements of work.
    As noted above, funding for El Paso I.S.D. under Year 5 of the 
Program was denied by the SLD. Such denial was dated March 10, 2003, 
although Year 5 of the Program actually began on July 1, 2002. In other 
words, El Paso I.S.D. did not learn of a decision on its Year 5 funding 
until about three months before Year 5 ended.
    El Paso I.S.D. appealed the decision of the SLD to FCC. By FCC 
Order 03-313 dated December 8, 2003 in Matter of Request for Review of 
the Decision of the Universal Service Administrator by Ysleta 
Independent School District, et. al., CC Docket Nos. 96-45 and 97-21 
(the ``Ysleta Order''), the FCC effectively upheld the denial of Year 5 
funding, but granted a waiver of Program rules to permit El Paso I.S.D. 
and several other school districts to re-file its application for Year 
5 funding under certain conditions. El Paso I.S.D. believes that its 
Year 4 and Year 5 procurement for a service provider under the Program 
complied with applicable state and federal law. Nevertheless, the FCC 
effectively found that certain aspects of such procurement did not 
comply with Program rules. On the other hand, the FCC implicitly 
admitted that ambiguities and/or past course of dealing might have 
confused districts as to such legal issues, and therefore permitted re-
filing of the applications. El Paso I.S.D. has done so, though its 
requested figure is much less than before, due to reductions in market 
prices, obsolescence of several projects, and completion of all or part 
of some projects using other resources, among other things. El Paso 
I.S.D. still believed that its conduct was appropriate and not in 
violation of Program rules. Nevertheless, in the circumstances El Paso 
I.S.D. [as well as the other affected districts] decided not to appeal 
the Ysleta order to the courts and to instead take advantage of the 
FCC's allowance of re-filing of the application at issue. The relief 
permitted by the FCC's ruling was an acceptable compromise in the 
district's view, and the time and expense of protracted litigation was 
not justified.
        benefits to el paso i.s.d. students from e-rate funding
    El Paso I.S.D. is very thankful for the E-Rate funding that it has 
previously received. That funding has provided immeasurable benefits to 
students of El Paso I.S.D. We believe it is important for Congress to 
recognize the wonderful things that have been accomplished at the front 
lines of education, due to its funding of the Program.
    In Year 1 of the Program, the awarded Program funds allowed El Paso 
I.S.D. to provide 1,263 local long-distance service connections for 
telephones in El Paso I.S.D. and provided high-speed Internet access to 
2,479 computers at El Paso I.S.D. In addition, such funding allowed 
eligible campuses to have connections to the Internet and provided 
structural cabling to all such campuses. With Year 2 Program funding, 
El Paso I.S.D. was able to continue to provide and supply high-speed 
Internet access to all the EPISD campuses and to provide additional 
1,800 local long-distance service connections for telephones. El Paso 
I.S.D. used Year 3 Program funding to continue to provide 
telecommunications services to EPISD's telephones and high-speed 
Internet access to computers. El Paso I.S.D. also was able to obtain 
new telephone connections for campuses, upgrade networks at all 
eligible campuses for new telephone systems, and to install additional 
structural cabling to eligible campuses. El Paso I.S.D. was also able 
to procure network interface cards and upgrade network switches for all 
eligible campuses. With Year 3 funding, El Paso I.S.D. was in addition 
able to procure maintenance and hardware support services for network 
electronics. In Year 4 of the Program, El Paso I.S.D.'s award was used 
to continue to provide telecommunications and Internet access with El 
Paso I.S.D.'s telephones and computers. It also provided an entire 
redesigned of El Paso I.S.D.'s computer network. The wide area network 
became a dedicated fiber network as part of this redesign. Structural 
cabling was also added to eligible campuses and horizontal cable to all 
campuses was upgraded with enhanced category 5 cable. Fiber optic lines 
were added to telecommunications lines at eligible campuses and network 
electronics were upgraded with switches and related components. El Paso 
I.S.D. also received a new email system for its employees. It also 
procured new application service. The Year 4 funding also provided 
funding for virtual schooling, technology-instruction integration, and 
technology planning.
    A major benefit of the Program funds for El Paso I.S.D's teachers 
and students was acquisition of a computer network and connectivity to 
and amongst campuses. The network required cabling and wiring in 
schools and provision of specialized network electronics. Using Program 
funds, in combination with its own resources, the network was installed 
and implemented. One cannot over-emphasize the point that, without 
Program funds, it would have taken many, many years for El Paso I.S.D. 
to create and complete such a network across the district. Indeed, due 
to the time delays that would have been involved, and the attendant 
issues of obsolescence in the meantime, it is indeed questionable that 
the network would have ever been fully complete and compatible. El Paso 
I.S.D. believes that its experience in this regard has been shared by 
many school districts across the country.
    A related benefit from Program was high-speed Internet access. The 
prior Internet access provided speed of 1.5 mps. Program funding 
permitted El Paso I.S.D. to provide such access both through 
installation of appropriate cabling and network electronics, as well as 
provision of Internet access services. There was a major problem with 
campuses using the old system to do classroom work assignments through 
the Internet or other network resources because it was too slow. Slow 
speed was due to the saturation of T-1 line that had been providing 
service. Essentially, over time classroom Internet usage rates 
increased significantly at El Paso I.S.D. and demand on the system 
increased for that reason and due to increasing file sizes. The number 
and size of files and presentations available for educational purposes 
also increased significantly. In other words, more websites often had 
more large, video or multi-media presentations available for review, as 
opposed to previous times. Using the old Internet access, it was 
difficult, if not impracticable, for El Paso I.S.D. students to fully 
utilize such educational resources. Importantly, due to the slowness of 
the old system, it at times was difficult for students to even getting 
any access to the Internet and many stopped trying to do so. The old 
system was causing a severe detriment to the education of El Paso 
I.S.D. students. It was no longer working and El Paso I.S.D. students 
were beginning to fall further behind other students in technology 
matters as a result. It is also important to realize that the Texas 
Essential Knowledge in Skills requirements include technology as part 
of the required curriculum for students in Texas. In addition, teacher 
evaluations are based upon their use of technology. State-wide demands 
were also placing additional pressure upon El Paso I.S.D. to increase 
the use of technology. The old system was unable to meet that 
challenge.
    Fortunately, due to Program funding, this challenge was in fact 
met. In addition, the funding not only allowed many more students to 
gain access to the Internet, it also permitted such Internet experience 
to be reasonably practicable. Furthermore, Program funding also 
included web and file service that permitted students to learn high-
tech skills involving developing websites and in sharing research. That 
was something that could not have been done using the El Paso I.S.D. 
own resources.
    El Paso I.S.D. has also been pleased with the result from its 
acquisition of video carts with Program funding. Indeed, El Paso I.S.D. 
since then has purchased many more video carts, using its own 
resources, and is in process of acquiring more. El Paso I.S.D. is 
seeking to make sure that each campus has at least one such cart. These 
specialized video carts allow up to eight interactive sessions to occur 
simulteously. There are often used for video-conferencing whereby one 
teacher can provide instruction to classes at multiple schools. It is 
also used to permit multiple classrooms to have interactive sessions to 
hear and talk to distinguished visitors. In essence, each cart allows 
broadcasting from a single site to other sites across the district, as 
a form of distance learning. In addition, the El Paso I.S.D. broadcast 
studio can provide broadcasts through the video carts to particular 
classrooms district-wide. The video carts are very popular with both 
teachers and students and have proven to be a great learning tool. They 
have allowed El Paso I.S.D. to share the resources of better or 
specialized teachers with more students. It has had a dramatic effect 
at the classroom level.
    As you can see, E-Rate funding has permitted El Paso I.S.D. to 
complete needed projects in the technology areas, in an effort to 
provide its students with a fair opportunity to succeed in the future. 
To be clear, through Program funds, El Paso I.S.D. did not seek to 
achieve, and did not achieve, a technological advantage over average 
school districts. Instead, the district sought to use such funding to 
catch up to those other districts. Although El Paso I.S.D. has not been 
able to fully ``bridge the gap'' in this regard, E-Rate funds have 
permitted it to at least come within range of being able to do so. 
Without the Program funds, El Paso I.S.D. and similarly-situated 
participants would technologically now be so far behind a typical 
school district so that it could never expect to catch up as a 
practical matter.
    El Paso I.S.D. sought the Program funding to aid the eligible 
schools. Such funding, however, though has also provided incidental 
[and initially unintended] benefits district-wide and throughout the El 
Paso community. By way of example, the network advances achieved with 
Program funding also make it possible for El Paso I.S.D. to comply with 
certain of the Adequate Yearly Progress and No Child Left Behind Act 
requirements. With the network, there also can be greater 
accountability at the campus level, better review of campus-level data 
and information, better communication between central office and 
campuses, and greater sharing of resources amongst campuses. In 
addition, due to the increased connectivity afforded from E-Rate 
projects in combination with El Paso I.S.D.'s own resources, the 
district was able to utilize distance-learning to reach students and 
parents for educational programs. Using one such program, over 225 
``virtual learning'' students were able to complete high school 
requirements and graduate from El Paso I.S.D. this year; those young 
adults [principally from areas of eligible schools] would not otherwise 
have received high school diplomas, with resultant detriment to their 
own lives and those of their families, to the local economy, and to the 
local community. El Paso I.S.D. has also developed the Orion project 
with the local university, community college, and others to provide 
dual enrollment as well as specialized training in No Child Left Behind 
Act and other issues, for both students and teachers. The goal is to 
create a county-wide educational network to provide educational growth, 
and hopefully economic growth for the depressed local economy. Rather 
than simply have a collection of disparate, independent centers of 
basic, secondary, or higher education, El Paso I.S.D. and these other 
educational bodies are seeking to establish El Paso County as an 
``educational community'', through creative and cost-effective sharing 
of technological information and resources. Again, these benefits were 
not sought from the funding, but El Paso I.S.D. has been able to 
leverage the Program funds using other resources in order to work on 
this greater good for the community as a whole. El Paso I.S.D. believes 
that a principal purpose of the Program was to benefit local 
communities, through provision of funding to aid the technology 
programs of schools.
    It is important to raise this issue of ``leveraging'' the Program 
funds. As discussed in detail elsewhere, Program funds are limited in 
amount and also may be legally expended only on certain sorts of 
technology goods and services; therefore, districts must commit 
significant resources on their own in order to ensure proper 
implementation of the projects. Consequently, Program funds must be 
``leveraged'' by a grantee-district with other sources of funds. In 
addition, a project constructed with Program funds also should be 
``leveraged'' by a grantee-district with other non-Program projects, in 
order to meet technology needs. El Paso I.S.D. recognizes that the 
Program was not created to fulfill all technological needs of school 
districts, but instead provides a substantial ``down payment'' to be 
leveraged by the districts.

                     FRUSTRATIONS WITH THE PROGRAM

    Although thankful for the funding from the Program, El Paso I.S.D. 
believes it is also important for Congress to understand frustrations 
that El Paso I.S.D. has had with the operation and administration of 
the Program. Those frustrations are believed to be shared with many 
other school districts across the country.
    Probably the primary concern of El Paso I.S.D. and other school 
districts revolves around an inability to fully understand the ever-
changing Program requirements, based upon changes in the actual rules 
as well as changes in SLD's interpretation of such rules. As El Paso 
I.S.D. and many other districts have learned, doing something the same 
way as successfully done in the prior funding year, even in the absence 
of any formal Program rule changes, is no guarantee that the SLD will 
approve such approach in the current funding year. Indeed, that is the 
principal issue with El Paso I.S.D.'s Year 6 appeal. Furthermore, many 
have complained about the SLD's previous apparent refusal to make its 
manual of eligibility requirements for goods and services available to 
the public, leading many well-meaning districts to inadvertently seek 
ineligible goods or services or misunderstand those requirements. El 
Paso I.S.D., of course, recognizes that some annual changes in SLD 
policy are probably warranted, but wishes that such changes are 
announced publically and in sufficient time for districts to comply 
with the same. Furthermore, the Program rules have proven to be vague 
and ambiguous on a large number of points, making it difficult for 
districts to seek compliance. For example, in El Paso I.S.D.'s own 
experience, different persons with the SLD, different E-Rate 
consultants, different service providers, different attorneys, and 
different staff persons will have differing interpretations of 
particular Program rules. If nationally-recognized E-Rate experts in 
Washington, D.C. in constant communication with SLD officials do not 
agree upon rule interpretations, it is difficult, if not impossible, to 
expect a typical school district elsewhere in the nation to fully and 
properly understand what is expected of it under the rule.
    Another major frustration with the Program arises from the SLD's 
continued delays in making funding decisions. This frustration is 
believed to be shared by many, if not most, applicants. A funding year 
under the Program runs from July 1 of one year to June 30 of the 
following year. Generally, a recipient of Program funding must complete 
the project in question by such June 30 date [although short extensions 
in certain categories have been permitted by the SLD]. The SLD, 
however, has routinely issued decisions on Program funding requests 
long after the beginning of the funding year. For instance, in Year 4 
of the Program, El Paso I.S.D. was notified of the SLD's decision 
almost three months into the funding year in question. In Year 5, the 
decision of the SLD was received about nine months after the 
commencement date of the funding year. For Year 6 of the Program, El 
Paso I.S.D. received notice of the SLD decision about six months after 
the start of the funding year. In short, the SLD has issued its 
decisions after the funding year begins, and not beforehand. As a 
result, the districts are hard-pressed to adequately and properly 
complete the funded projects, with appropriate oversight.
    Such delays in decision-making also wreak havoc on a school 
district's ability to plan technology projects, whether or not based 
upon E-Rate funding. A district's technology projects for a particular 
funding year are generally dependent upon what Program funding was 
awarded in the prior funding year. If such funding was denied in whole 
or part, the district might need to re-urge such request in the next 
funding year. By way of example, using a ``pipeline'' analogy to 
reflect the linear nature of many projects, a district cannot be 
expected to request funds to build mile 5 of a pipeline without knowing 
whether mile 4 of the pipeline has been funded for construction. Due to 
the SLD's late announcement of funding decisions, districts have little 
time to develop projects for the next funding year before Form 470s for 
that year must be posted. In El Paso I.S.D.'s case, it has often 
learned of the SLD decision on a particular funding year after its Form 
470 for the next funding year is due. El Paso I.S.D.'s experience is 
not unique.
    Similarly, many technology projects must be integrated in order to 
be usable. It is not uncommon for a district to plan a particular 
project eligible for Program funding, along with a related ineligible 
project using its own funds. Oftentimes, the timing of such projects 
must be coordinated. For example, a district's plans to acquire 
computers for a classroom is necessarily linked to its request for 
eligible cabling to classrooms. With the delays in decisions on Program 
funding, the district's plans for the other projects are delayed and 
disrupted.
    In this regard, due to delayed decision-making, districts are often 
in the uncomfortable position of wondering whether to use precious 
resources of their own on needed technology projects for which E-Rate 
funding requests have been long pending. If a district decides to do 
the project outside of E-Rate, only to later get an Program award, it 
can effectively lose the requested E-Rate funding, as well as the 
ability to otherwise use those funds of its own for other needed 
technology projects.
    It is also important to remember that technology constantly 
changes. Under current Program rules, it is not unusual for a district 
to be required to issue specifications for particular goods in October 
of a year in its Form 470, with a decision by the SLD on funding taking 
place perhaps 12-18 months later, and actual procurement much later. 
Oftentimes, and El Paso I.S.D. experienced this as well, requested 
goods are obsolete, no longer compatible with other items, or no longer 
manufactured at the time actual acquisition thereof is to occur.
    In this vein, it is important to point out that the SLD has 
reportedly suspended awards for the 2003 and 2004 funding years while 
it resolves problems arising from a change in its accounting system. It 
is not entirely clear when the SLD will again issue funding 
commitments.
    As a related matter, the appeals process with the SLD and FCC of 
funding decisions is slow. Not only are decisions delayed in the first 
place, but delays in appellate decisions aggravate the problems 
described above.
    El Paso I.S.D. realizes that the Program was in its infancy when 
these problems arose. It is a relatively new federal program, and 
``growing pains'' should have been expected. The structure of the 
Program was different from other federal programs, and the roles of the 
SLD and USAC were somewhat unusual. The complaints about ambiguous 
rules and requirements with the Program are in large part similar to 
those made about any new federal program during its early years. It 
often takes a number of years for the ``gray areas'' to be identified 
and addressed. It is also important to remember that the Program also 
experienced a dramatic increase in both the number of applications and 
in the dollar amount of monies requested. The regulatory bodies were 
presumably, and not surprisingly, overwhelmed to some extent as a 
result.
    El Paso I.S.D., despite its frustration [and that of other 
districts], recognizes that staff of the SLD and USAC were probably 
trying to do the best job they could with limited resources, and were 
also acting in good faith with respect to handling of the Program 
[except, perhaps with respect to somewhat-suspicious funding denials by 
SLD after the Ysleta order was issued]. Moreover, El Paso I.S.D. does 
wish to acknowledge that the FCC has more recently issued a number of 
orders and new rules addressing a wide variety of issues in the 
Program, and is expected to issue more in the near future. Those orders 
are welcome, and provide much more guidance and clarification to 
applicants and service provider as to Program requirements. It is hoped 
that those orders will limit this sort of frustration commonly 
experienced by applicants in seeking to understand the Program.

                   LESSONS LEARNED BY EL PASO I.S.D.

    El Paso I.S.D. has learned a number of lessons from its Program 
participation. In particular, due to the above-described problems that 
El Paso I.S.D. encountered with the Program, El Paso I.S.D. has also 
reviewed and studied causes of such problems. Although El Paso I.S.D. 
would prefer to place full responsibility upon others for those 
problems, it recognizes and concedes that it bears some of the 
practical, if not legal, responsibility for the same.
    For instance, El Paso I.S.D. in Year 4 of the Program [unlike prior 
or subsequent Program years] appears to have relied too heavily upon 
its service provider, IBM, in developing the specifics of the 
statements of work. As mentioned above, El Paso I.S.D. lost a number of 
key employees with Program experience and expertise shortly before the 
Year 4 process began. El Paso I.S.D. also had a relatively new 
technology director with essentially no Program experience [though very 
experienced generally in technology areas]. Consequently, El Paso 
I.S.D. sought to select a ``strategic technology solution provider'' to 
provide additional assistance with respect to Program matters. In the 
circumstances, that was a reasonable approach. On the other hand, IBM 
submitted statements of work for Year 4 to El Paso I.S.D. for review 
with limited opportunity for extensive study and analysis before the 
deadline for submission of the Year 4 Form 471s. Accordingly, El Paso 
I.S.D. technology department did confirm that the projects represented 
by statements of work were consistent with its Technology Plan and were 
ones desired by the district. Unfortunately, there was insufficient 
time for a detailed review and analysis by various affected departments 
of El Paso I.S.D. to ensure that those projects were in fact initially 
configured to meet the specific goals of such department or that each 
such project [although functionally sufficient] was the preferred 
solution of the particular department compared to other approaches. El 
Paso I.S.D. feels that its review was legally sufficient, but in 
hindsight believes that more review and analysis would have been 
better. Of course, the Special Procurement Provisions and other 
provisions in the Year 4 Contract did provide El Paso I.S.D. with an 
opportunity to further review and modify projects even after an award 
of Program funds. El Paso I.S.D. in fact exercised these special 
contractual rights and modified several projects from the initial 
proposals, in accordance with Program rules, in order to better satisfy 
the needs of the district. Nevertheless, in retrospect, the preferred 
approach would have been to internally develop project details with 
little or no assistance from the service provider [recognizing, of 
course, that the service provider is still a valuable source of 
expertise for which it would inappropriate to ignore or discount 
entirely].
    On a related topic, looking back at the situation with further 
knowledge and experience, El Paso I.S.D. now wishes it had had a better 
understanding in advance of the benefits of one or more Year 4 projects 
in comparison to the costs thereof. This concern is principally 
directed at the Year 4 ``SOW maintenance'' project, which cost about 
$27 million. El Paso I.S.D. now questions whether the benefits of the 
project justified such a cost, not only to the Program but also to El 
Paso I.S.D. for its 10% share. El Paso I.S.D. expended a significant 
amount of its own funds on this project, and has not been satisfied 
with it. The maintenance project involved a number of different sub-
parts [such as maintenance of certain existing technology, inventorying 
of existing technology goods, etc.], though the ``help desk'' was a 
principal part thereof. The ``help desk'' was very effective in 
permitting El Paso I.S.D. to quickly identify and address problems of 
users, with a great benefit to student, teacher, and administrative 
productivity. Importantly, the ``help desk'' immediately referred calls 
from ineligible schools to the technology department, in order to 
ensure such assistance services were provided exclusively to eligible 
locations.
    From a purely functional perspective, the ``help desk'' worked. 
Unfortunately, El Paso I.S.D. did not realize at the time of 
acquisition the legal effect under Program rules of characterization of 
the ``help desk'', and thus that the ``help desk'' would not survive 
the end of the Year 4 term. That was a definite surprise to the 
district. El Paso I.S.D. was under impression that the ``help desk'' 
would survive and that the district would continue to run it in the 
future, using its own staff. That did not prove to be the case. El Paso 
I.S.D. reviewed different alternatives, but Program rules prevented 
some from being utilized and cost considerations interfered with 
others. In the process of that additional review, El Paso I.S.D. also 
discovered that the ``help desk'' configuration used certain 
proprietary software of a third party, for which an individual license 
for the district [as opposed to a presumed nationwide IBM license] was 
cost-prohibitive. The design of the ``help desk'', in retrospect, did 
not necessarily conform to the long-term needs of the district, and 
made it difficult to sustain in that configuration. Ultimately, and in 
light of the denial of Year 5 funding by the SLD, El Paso I.S.D. could 
not afford bearing the entire cost of continuing the ``help desk'', and 
IBM ceased providing such services to the district. The ``help desk'' 
did not meet the expectations of El Paso I.S.D. for the project. In 
this regard, the district expected the ``help desk'' to achieve a much 
greater reduction in pending work orders than actually experienced. To 
be clear, though, El Paso I.S.D. believes that it received substantial 
value from the maintenance project in Year 4 of the Program, but, in 
20/20 hindsight, feels that the overall costs thereof may have 
outweighed the long-term value to the district. As a result of these 
concerns, El Paso I.S.D. significantly decreased its request for 
maintenance contract funding for Year 5 of the Program, and deleted 
requests for similar sorts of funding in future years.
    In short, although El Paso I.S.D. in good faith sought to make 
cost-effective acquisitions, it now questions whether the purchases met 
its expectations and fully justified the costs. It is, of course, not 
unusual for anyone to ``second-guess'' a purchase of any good or 
service. ``Buyer's remorse'' is a well-recognized phenomenon based in 
large part on the fact that a purchase rarely, if ever, meets all 
initial expectations or desires of the buyer. Even persons who spend 
extraordinary amounts of time and effort in studying and analyzing 
proposed purchases often suffer from ``buyer's remorse'' after actually 
making the selection and using the product or service in question. El 
Paso I.S.D. does not feel that its acquisitions violated any Program 
rules, but nevertheless wishes that additional, extra effort had been 
made in analyzing and understanding the projects in advance. Such 
effort might not had lead to a different result [due to outside 
variables], but should have at least offered a better opportunity to 
avoid the problems experienced by the district.
    Another important ``lesson learned'' of El Paso I.S.D. involves 
readiness for the projects. There are two main components of readiness: 
(a) readiness to manage installation and completion of the projects; 
and (b) readiness to manage the actual usage of the projects after 
completion. As a condition to Program participation, a district must 
essentially certify in the Form 471 that it is ready to and capable of 
implementing the proposed project(s), specifically:
        25. The eligible schools and libraries listed in Block 4 of 
        this application have secured access to all of the resources, 
        including computers, training, software, maintenance, and 
        electrical connections necessary to make effective use of the 
        services purchased as well as to pay the discounted charges for 
        eligible services.
El Paso I.S.D. believes that its readiness was sufficient to meet that 
minimum standard. On the other hand, it also feels that even more 
resources should have been committed by the district to ensure project 
success.
    When it first received notice that a substantial award had been 
made to it in Year 4 of the Program, El Paso I.S.D. quickly reviewed 
whether or not it had sufficient staffing to oversee and supervise the 
installation of the desired projects, wondering whether ``it had bit 
off more than it could chew'' [especially since the late award by the 
SLD left a significantly reduced time period for completion of all the 
requested projects]. Through re-assignment of staff and new hires 
[including retention of a program manager designated to oversee day-to-
day issues on the project installation], and the extra efforts of 
existing staff, El Paso I.S.D. was able to devote sufficient resources 
for that phase of the project. Nevertheless, the district probably 
initially under-estimated the amount and extent of effort that would be 
required to monitor and supervise completion of the projects. Even 
though its commitment was adequate, El Paso I.S.D. also now feels in 
hindsight that even further commitment of staffing and other resources 
to the supervision of project installation would have been preferable.
    Additionally, as noted above, readiness also concerns the ability 
of a district to implement the project at the end-user level, in order 
to gain the full expected benefits thereof. It is important to keep in 
mind that many eligible projects under the Program [e.g.--new servers 
and cabling] provide benefits to teachers and students, without 
necessarily necessitating additional training. On the other hand, other 
technology projects [whether or not acquired using Program funds] do 
require a district to invest significant resources of its own in 
training and related usage issues. For example, without training of 
teachers in use of a new software program for classroom use, the 
program may prove to have limited practical benefit. This investment is 
not just on an administrative level. Indeed, the teachers themselves 
must invest additional time on their own in developing new lesson plans 
or materials, or converting old materials to the new system, to take 
advantage of the new software program. Ideally, the training should be 
on-going, and incorporate ``best practices'' learned district-wide. El 
Paso I.S.D. formerly had technology coordinators at most, if not all, 
campuses. These persons, among other things, aided and trained teachers 
on a continuing basis on technology matters. El Paso I.S.D. was 
somewhat advanced, compared to other school districts, in having such 
campus-level technology staff. Such training and assistance, though, is 
generally ineligible for funding under the Program. Unfortunately, due 
to serious budget concerns, those positions were eliminated before 
implementation of the Year 4 projects. In retrospect, El Paso I.S.D. 
feels that, although not necessarily legally required or even the 
industry-standard, the district should have made budget cuts elsewhere 
and made provision at the time to re-institute the technology-
coordinator program at campuses, in order to take better advantage of 
classroom-level projects. El Paso I.S.D. believes that project 
implementation was successful, but feels that there was and is room for 
improvement which the technology coordinator program could support.
    Upon further analysis of its technology acquisitions, whether or 
not using Program funds, El Paso I.S.D. also believes that additional 
planning, above and beyond a technology plan, is appropriate for many 
projects for which Program funding is sought. For instance, a 
particular network component may satisfy the technology plan, may 
fulfill the functional needs, may be at a low price, and may work 
perfectly, but still be a poor purchase for a particular district. In 
isolation, the component may be ideal, but the acquisition needs to be 
considered in light of the total technology universe at the district 
and in the community. Ideally, a district should review and analyze, 
from an engineering perspective and otherwise, whether a proposed 
project is in fact compatible with all of its existing systems, whether 
the design of the project actually satisfies discrete technological 
goals, whether the technological goals fulfill particular educational 
goals, and whether there is a capacity in the community to support and 
sustain the project in questions over the long run. This sort of review 
should permit a district to make more intelligent purchasing decisions. 
For instance, a new server may be ``faster'', but is not necessarily 
better than the existing one if ``large capacity'' is what the district 
really requires. A particular software program may meet educational 
goals, but may be unacceptable if it is not fully compatible with 
existing hardware systems. Community support is critical; if the locale 
has no persons capable of operating or supporting a particular project 
in the future, the sustainability, and thus value, of the project may 
be called into question.
    That sort of study and evaluation would ordinarily require 
experienced, highly-skilled persons familiar with ``cutting-edge'' 
technology issues, with the requisite training and certification in the 
field of computer or electrical engineering. Ideally, such a review and 
analysis could be performed in-house by El Paso I.S.D. and other school 
districts. Unfortunately, that is generally not realistic. In the first 
place, many locales outside of ``hi-tech'' communities do not have a 
sufficient population of such experienced and skilled persons so as to 
permit a school district to find and retain an adequate number of such 
persons on its staff. In any event, to the extent a community has such 
persons available for hire by a school district, a district generally 
would be unable to pay a market-rate salaries sufficient to attract and 
retain such persons. Although, like other districts, El Paso I.S.D. has 
many experienced and skilled employees in its technology department, 
those persons do not necessarily have the top-flight credentials and 
experience to handle this sort of additional analysis. Consequently, 
such services have to be retained from third parties, hopefully third 
parties who are also vendors of products which may be at issue in the 
evaluation. Such services can be very expensive. El Paso I.S.D. doubts 
that many, if any, districts have engaged in such an exhaustive review 
and analysis before seeking Program funding. Nevertheless, the district 
feels that such an approach [even if not required by Program rules] 
would provide substantial benefits to it, and better ensure the right 
projects for the district are implemented. El Paso I.S.D. is in the 
process of putting in place a comprehensive engineering and design 
review of its technology systems, which it would hope to be able to 
supplement on a periodic basis, in order to better guide its 
acquisitions of technology in the future [whether or not under the 
Program].
    In a somewhat related vein, El Paso I.S.D. also recognizes that it 
is important for technology acquisitions, whether or not using Program 
funds, to be coordinated amongst many departments of the district. For 
instance, if even a particular product meets the requirements of 
teachers and other educators, and also is deemed to be a good, 
compatible product by the technology department, a problem may still 
exist if the particular schools do not have facilities sufficient to 
locate and maintain the product. El Paso I.S.D. has encountered such a 
problem with certain campus-level servers. Specifically, at a few 
school sites with severe space limitations, servers were placed in 
janitor closets to reduce noise in classroom areas. Unfortunately, some 
of those closets did not necessarily have sufficient cooling for ideal 
server usage. In other cases, they did have sufficient cooling, but the 
evaporative cooling systems [whereby the air is cooled by the addition 
of moisture, rather than its deletion as in normal air conditioning; 
evaporative cooling is common in the desert Southwest among houses, 
businesses, and schools] unfortunately generated too much moisture for 
ideal server usage. El Paso I.S.D. incurred additional costs for server 
support at these limited locations. After extensive review of various 
costly alternatives, the district is planning to relocate those servers 
to a centralized location with adequate space, cooling, and ventilation 
[from which they will continue to serve the same eligible campuses in 
the same way]. This sort of site-specific, detailed, operational issue 
is not something that ordinarily would be considered by any school 
district when making a technology purchase. Nevertheless, El Paso 
I.S.D. believes such a review and coordination amongst various 
departments would yield significant benefits. Such a process is 
difficult to design, establish, and implement, but the district is 
working towards doing so.
    El Paso I.S.D. furthermore enjoys a much better understanding of 
the true, complete costs of Program participation. As discussed 
elsewhere in this statement, a district ordinarily must expend much 
more money than its 10% share in order to implement Program projects. 
There are many necessary costs that are ineligible for Program funding, 
but are vital for the project to succeed. El Paso I.S.D. made a 
substantial monetary commitment in Year 4 of the Program, above and 
beyond the awarded Program monies. It believes that such commitment was 
in excess of many other participating districts. In retrospect, though, 
El Paso I.S.D. realizes that an even greater district commitment, both 
initially and continuing over time, is needed to achieve the desired 
goals and expectations of technology projects.
    By way a somewhat different ``house'' analogy, one may view an 
award under a Program as a gift of a ``shell'' of a house, with simply 
the foundation and framing in place. That is a great gift, but is not a 
cost-free one. The house only achieves its full value if the recipient 
of the gift then expends its own resources to add the plumbing, 
electrical, roofing, HVAC, walls, and other facilities and to furnish 
the finished house with furniture, fixtures, and appliances. The cost 
of the work needed to properly implement the gift of the ``shell'' 
house would typically be much greater than the value of the gift. In 
the case at hand, the Program only funds certain items, and to a 
certain extent. Beyond that, the participating district must make a 
major commitment of financial, staffing, and other resources to the 
funded projects, in order to ensure that they fulfill the intended 
goals.
    To be absolutely clear, El Paso I.S.D. does not believe that it 
violated any laws or Program rules. Nevertheless, using 20/20 
hindsight, there are things that El Paso I.S.D. would have like to have 
done differently with respect to Year 4 of the Program, and Year 5 of 
the Program to some extent as well. In short, although its efforts were 
``good enough'', the district believes there was room for improvement. 
Importantly, El Paso I.S.D. has striven to avoid these sorts of 
problems with respect to subsequent-years participation in the Program. 
It feels that it handled Year 5 better than Year 4, Year 6 better than 
Year 5, and Year 7 better than Year 6. El Paso I.S.D. believes Year 8 
participation will be even better than the prior years. Honest mistakes 
can and will be made by any participant in the Program [indeed, by any 
participant in any federal program of any kind]; on the other hand, El 
Paso I.S.D. has sought to identify any errors, learn from those errors, 
correct those errors, and avoid similar errors in the future. For 
example, El Paso I.S.D. now exclusively or almost exclusively develops 
specifics for Program projects on its own. It also has developed in-
house expertise on Program matters, and has retained an independent E-
Rate consultant for assistance [who is not a vendor to El Paso I.S.D. 
of technology items]. The district also has re-started its technology-
coordinator program at campuses. Sustainability of projects without 
Program funding [which has turned out to be doubtful] is also a primary 
consideration for El Paso I.S.D. The district also has invested more of 
its own resources in training and campus assistance on technology 
matters, to better ensure that monies spent on technology have the 
desired impact on the education of students. El Paso I.S.D. has a more 
realistic view of what sort and quantity of projects can be feasibly 
and efficiently implemented by it in any particular year, considering 
all of the other necessary ineligible costs, and has therefore 
substantially revised its Program funding requests.
    El Paso I.S.D. believes that many similarly-situated school 
districts seeking to participate in the Program may experience some or 
all of such problems, amongst others, and is sharing its ``lessons 
learned'' in order to provide guidance to those districts, as well as 
to aid Congress in its review of the Program as a whole. The primary 
theme running through these lessons is ``additional district 
commitment''. A Program participant, in order to fully enjoy the 
benefits of Program projects, should make a greater commitment of its 
own staff, money, and other resources in determining its technology 
needs, preparing and designing projects, overseeing and supervising 
project installation, and in ensuring effective implementation of the 
projects. Though El Paso I.S.D. believes its commitment in these 
regards was at least legally sufficient, it also now feels that even a 
greater commitment was and is warranted to ensure project success.

                        REFORMS WITH THE PROGRAM

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

                   OVERALL EVALUATION OF THE PROGRAM

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

                               CONCLUSION

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

    Mr. Walden. We appreciate your testimony. Thank you for 
joining us by video conference today.
    Mr. Bohuchot.

                   TESTIMONY OF RUBEN BOHUCHOT

    Mr. Bohuchot. One quick statement. On page 3 of the 
document that I turned in, toward the bottom there is a number 
$84 million some odd hundred thousand dollars. It should be $86 
million. Thank you.
    [The prepared statement of Ruben Bohuchot follows:]

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    Mr. Walden. And that is your opening statement, sir? All 
right. Thank you.
    Ms. Foster, welcome. Do you have an opening statement?

                   TESTIMONY OF SHARON FOSTER

    Ms. Foster. Yes, thank you.
    Mr. Chairman, thank you for the opportunity to speak to you 
this morning, well, this afternoon now. My name is Sharon 
Foster. I am currently the Executive Director of Technology 
Information Systems for the Ysleta Independent School District 
in El Paso, Texas.
    During my career as an educator, I have had experience in 
virtually every aspect of classroom and administrative work. I 
have been a classroom teacher, campus administrator, technology 
trainer, director of instructional technology, and currently 
the Executive Director of Technology Information Systems.
    That position requires me to oversee instructional 
technology, administrative information systems, and 
telecommunication networks. All of my experience is with large 
urban districts with student populations of over 45,000 
students.
    I worked in the El Pas Independent School District, a 
neighboring district of YISD, for 15 years, the last eight of 
which where I was the head of the Instructional Technology 
Department. Part of my responsibility in that position was that 
of the E-Rate coordinator.
    I served as E-Rate coordinator for the first 3 years of the 
E-Rate program. As the E-Rate coordinator, I met with other 
technology and telecommunications staff to identify projects 
for which EPISD would seek E-Rate funding.
    In addition to determining the appropriateness and scope of 
the E-Rate projects, I would make sure that all application 
requirements were met in a timely manner and addressed in the 
request for additional information from the schools and 
libraries division of the Federal Communications Commission.
    In August 2000, I left EPISD in order to join YISD as an 
employee. My departure was not related to the E-Rate program in 
EPISD. I left EPISD prior to the bidding process for the year 4 
submission.
    At YISD, I assumed the position of Director of 
Instructional Technology. As Director, I worked with YISD's E-
Rate coordinator, Richard Duncan, and other staff members to 
determine future E-Rate projects for the District in years 4, 
5, 6, and 7.
    In other words, I was involved in YISD's participation in 
the E-Rate program, but not principally responsible for such 
participation.
    I recently was named the Executive Director for Technology 
and Information Systems at Ysleta and now, once again, I am 
responsible for overseeing the E-Rate projects. The most 
significant improvement that E-Rate has enabled to be achieved 
in my experience as been the improvement to school district 
infrastructure with both EPISD and Ysleta.
    As done by most school districts across the nation, EPISD 
and YISD use the initial E-Rate projects to improve the speed 
and reliability of voice and data networks. E-Rate projects 
provide the basics for each district's network which supports 
virtually any type of technology based instruction, including 
high speed Internet access to all classrooms, distance learning 
systems, video to classrooms, integrated phone networks, and 
other improved network functionality.
    E-Rate funding has allowed for acquisitions by school 
districts of network electronics that insured high speed access 
and for the cabling and distributed networks across every 
instructional area. Most school districts would never have been 
able to afford the cabling and network initiatives that E-Rate 
funded.
    The E-Rate program has been the mechanism that many large 
under-funded school districts have used to improve 
telecommunication infrastructure. School districts have 
discovered that virtually all instructional initiatives require 
one essential element, namely a high speed reliable 
telecommunications network. One of the great successes of the 
E-Rate program is that it has been able to help school 
districts enormously in developing those networks. With that 
said there are several issues in the administration of the 
program that have created obstacles to districts and planning 
projects, providing continuity and managing the projects from 
year to year.
    Technology projects are linear, and in the case of most 
school districts, are planned in phased in implementations. 
Planning for those projects can be done with estimated E-Rate 
funding from 1 year to the next. But, so far, the experience of 
most districts has been that funding is nearly always delayed.
    For example, currently, YISD is managing proposed projects 
for years 5, 6, and 7 of the E-Rate program. Some of those 
funds have been awarded. Some have not. In some cases decisions 
on initial and/or continued funding have not always been clear.
    In planning a multi-year project it is extremely difficult 
to provide assurances to campuses when it is unclear how fast 
implementation can proceed based on unknown levels of funding 
and/or indefinite schedules for release of funds. The delays 
have proven frustrating to districts.
    In the case of YISD, we have tried, and for the large part 
succeeded in applying for funds based on correct interpretation 
of E-Rate funding guidelines. There have been instances when we 
have had to provide additional information, explanation to the 
SLD for guidance and in virtually every case, our position has 
been determined to be correct.
    In the very few instances when our interpretation of 
funding or use guidelines have not been upheld, our 
interpretation of E-Rate guidelines were made in good faith, 
reasonably based, and in a line with how other school districts 
have interpreted those same guidelines.
    It has been difficult and has taken a tremendous staff 
effort to maintain our understanding of funding guidelines. In 
particular, knowledge of eligible products, eligible locations, 
and how you determine in what instances campuses are not 
eligible for E-Rate funding have been at best less than 
straightforward.
    We understand the need for E-Rate's guidelines to evolve 
and for the guidelines to change in some instances, but that 
makes the district's efforts, especially in multi-year project 
planning or long-term network development, extremely difficult.
    One increasing common issue with E-Rate program among 
school districts is the best use of funds to provide for the 
appropriate network design and development that both support 
instructional needs of the particular district and that allow 
the district to take advantage of the support, the network, in 
the future.
    The E-Rate funds have been used overwhelmingly for the 
upgrade of the networks, and though the funds cannot be used 
for specific instructional purposes, the distinction between 
hardware and software that is exclusively instructional is 
difficult to maintain.
    Districts are using networks to support Web based projects, 
administrative information management systems, submission of 
state mandated reports, and E-mail systems that are important 
to both administrative and instructional functions, and it's 
difficult if not impossible to segregate.
    In my view, what districts and E-Rate administrators have 
found most difficult about the use of E-Rate funds is managing 
multi-year projects, implementing large projects without 
adequate support resources, insuring that teachers' skill sets 
match the upgrades in the network capability and instructional 
potential, and dealing with the changes in regulations and 
application of rules. I have found with both EPISD and YISD 
that one of the essential elements in the use of E-Rate funds 
is insuring that the projects supported by each funding are 
successful.
    However, without a support mechanism for the teachers who 
will be using the technology, including training, staff 
development, and campus-based technology support services it is 
virtually impossible for districts to implement technology 
projects that would be successful and use the full potential of 
the networks that E-Rate has funded.
    That would be the task of all school districts, including 
YISD, that use E-Rate funds. In many instances districts have 
been criticized for failing to capitalize fully on the 
improvements afforded through E-Rate. In my experience some of 
that lost capacity has been almost predictable.
    In the first years of the E-Rate program, districts for the 
most part applied for only what they could implement. It is my 
personal opinion that in the following years of the E-Rate 
program, when the vendors began to have more of a role in the 
application process and when further ambiguities arose 
regarding the scope and extent of the E-Rate program, many 
school districts across the country may have asked for too much 
too quickly and were not in the best position to fully support 
the technology projects for which funding was awarded.
    Such districts likely had the needs for that technology and 
justifiably requested E-Rate funding for those projects, but in 
hindsight perhaps should have been less ambitious in order to 
better assure fully effective implementation.
    As school districts have more skillfully used E-Rate funds 
and have developed support staff for the technology 
infrastructure made possible by the E-Rate program, I believe 
it is more critical for districts to insure that technology 
infrastructure and capability is driven by instructional need; 
that teacher technology skill sets are established through 
staff development and training; and that campus based 
technology support is provided. In my opinion, technology 
projects fail when there is no identified instructional need 
for the technology; when teachers are asked to use technology 
that does not support their teaching outcomes; when teachers 
are asked to use technology without sufficient training; or 
when campuses are required to support technology without 
adequate resources.
    Although the E-Rate program has enabled vastly improved 
networks for school districts, the use of those networks has 
been limited by the lack of funding for the training in campus-
based support that would help better insure full success. In 
some instances school districts have had to abandon technology 
projects or have implemented projects that did not provide the 
results that were hoped for due to training, staff development, 
and support issues.
    For school districts like El Paso in Ysleta, the E-Rate 
program has been a successful program. It does, however, 
require some adjustments on the part of both the school 
district, in general, and the E-Rate program.
    However, without the funding provided by E-Rate program, 
there is no question that many of the instructional initiatives 
and some of the instructional programs in progress in these 
school districts would not have been possible. Such funding has 
significantly benefited the instructional process at each of 
these districts.
    YISD is not a wealthy district. Its free and reduced lunch 
average is 86 percent. In general, YISD has a low economic 
profile. The 2000 profile selected economic characteristics 
issued by the United States Census Bureau estimates the per 
capital income for 1999 in El Paso, Texas was $14,388 per year.
    It should be noted that YISD's boundaries do not include 
the areas generally recognized as being the most affluent in El 
Paso. So the figures for the census tracks within YISD 
boundaries would be probably lower.
    For comparison, according to the same survey, the annual 
per capita income for 1999 in the United States was $21,587 and 
for the State of Texas it was $19,000, and for the Washington, 
D.C. area it was $28,659. As one can readily see, YISD students 
are in poor financial circumstances and in great need of the 
benefits from the projects that can be completed using E-Rate 
funding.
    The primary impact on YISD of E-Rate funding that is no 
longer available is that instructional advantages available 
through a typical telecommunications network would in all 
likelihood no longer be available.
    Mr. Walden. Ms. Foster, how much longer do you have in your 
testimony?
    Ms. Foster. Thirty seconds.
    Mr. Walden. You are about 11 minutes into. Okay.
    Ms. Foster. I am sorry.
    Well, I will just tell you, to close it up, if the E-Rate 
program should go away, it would significantly damage our 
instructional program and as access for our students.
    Thank you.
    [The prepared statement of Sharon Foster follows:

  Prepared Statement of Sharon Foster, Executive Director, Technology 
        Information Systems, Ysleta Independent School District

                               BACKGROUND

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

                   WHAT E-RATE HAS DONE FOR DISTRICTS

    The most significant improvement that E-Rate has enabled to be 
achieved in my experience has been the improvement to school district 
infrastructure, with both EPISD and YISD. As done by most school 
districts across the nation, EPISD and YISD used the initial E-Rate 
projects to improve the speed and reliability of voice and data 
networks. E-Rate projects provided the basics for each district's 
network, which supports virtually any type of technology-based 
instruction, including high-speed internet access to all classrooms, 
distance learning systems, video to classrooms, integrated phone 
networks [such as phone service to every classroom], and other improved 
network functions. Very early on in the E-Rate program, dial-up or 
other non-broadband Internet access was identified as inadequate for 
technology-based instruction in the classroom. E-Rate funding has 
allowed for acquisitions by school districts of network electronics 
that ensured high-speed access, and for the cabling that distributed 
network access to every instructional area.
    Most school districts would never have been able to afford the 
cabling and network initiatives that E-Rate funded. Moreover, without 
the E-Rate funds and the flexibility in their use, most school 
districts would never have been able to develop the in-house expertise 
for such extensive cabling projects. YISD explored the feasibility of 
training and using district-employees as cablers for the network 
cabling, and its turnover costs in employees alone would have been 
prohibitive. Skilled network technicians were able to seek employment 
in virtually locale, and YISD would have lost employees as to whom it 
had spent a great deal of money to train. E-Rate funding allowed poor 
school districts to cable schools on an aggressive schedule, using 
vendors specializing in that work, and thereby allowing them to try to 
catch up to more affluent districts in terms of computer networking.
    An example of the way that the E-Rate program allowed fully 
functioning networks was in the implementation of the YISD telephone 
network. While YISD could not use E-Rate funds for some of the network 
costs [for example, the purchase of the individual phone sets], E-Rate 
funds did allow YISD to purchase the PBX and switching equipment, and 
funded the cabling to the classroom. YISD could never have afforded the 
integrated phone system it now has without the use of E-Rate funds. 
That telephone system has benefited teachers and students at the 
district.
    Similarly, the E-Rate program has allowed school districts to 
upgrade network electronics on reasonable schedules. Indeed, for 
districts like YISD, they have been able to manage the upgrades and use 
the network routers, servers and other electronics in very effective 
ways. Cabling upgrades, for example from 10-Base T cabling to cabling 
with more capability and reliability, have been possible via E-Rate 
funding. These upgrades have provided benefits to faculty and students, 
and aided the instructional process.

               CONCERNS AND PROBLEMS WITH E-RATE PROGRAM

    The E-Rate program has been the mechanism that many large, under-
funded school districts have used to improve telecommunication 
infrastructure. School districts have discovered that virtually all 
instructional initiatives require one essential element: namely, a 
high-speed, reliable telecommunications network. One of the great 
successes of the E-Rate program is that it has been able to help school 
districts enormously in developing those networks.
    There are several issues in the administration of the program that 
have created obstacles to districts in planning projects, providing 
continuity, and managing the projects from year to year.
    Technology projects are linear, and in the case of most school 
districts, are planned in phased implementations. Planning for those 
projects can be done with estimated E-Rate funding from one year to the 
next, but so far the experience of most districts has been that funding 
is nearly always delayed. For example, currently, YISD is managing 
proposed projects for years 5, 6, and 7 of the E-Rate program. Some of 
those funds have been awarded, some have not, and in some cases the 
decisions on initial and/or continued funding have not always been 
clear. In planning a multi-year project, it is extremely difficult to 
provide assurances to campuses when it is unclear how fast 
implementation can proceed, based on unknown levels of funding and/or 
indefinite schedules for release of funds. The delays have proven 
frustrating to districts.
    In the case of YISD, we have tried and for the largest part 
succeeded in applying for funds based on correct interpretation of E-
Rate funding guidelines. There have been instances when we have had to 
provide additional information and explanation to the SLD for guidance, 
and in virtually every case our position has been determined to be 
correct. In the very few instances when our interpretation of funding 
or use guidelines have not been upheld, our interpretation of E-Rate 
guidelines were made in good faith, reasonably-based, and in line with 
how other school districts have interpreted the guidelines.
    It has been difficult, and has taken a tremendous staff effort, to 
maintain our understanding of funding guidelines. In particular, 
knowledge of eligible products, eligible locations, and how to 
determine in what instances campuses are not eligible for E-Rate 
funding have been, at best, less than straightforward. We understand 
the need for E-Rate's guidelines to evolve, and for guidelines to 
change in some instances, but that makes the district's efforts, 
especially in multi-year project planning or long-term network 
development, extremely difficult. School districts are generally also 
faced with equity issues; in other words, ensuring that all campuses, 
including those that are not E-Rate eligible, receive fair and 
equitable treatment by the district in terms of technology acquisition 
and funding.
    One increasing-common issue with the E-Rate program amongst school 
districts is the best use of funds to provide for the appropriate 
network design and development that both supports instructional needs 
of the particular district and that allows the district to take 
advantage of and support the network in the future. The E-Rate funds 
have been used overwhelmingly for the upgrade of networks, and though 
the funds cannot be used for specific instructional purposes, the 
distinction between hardware and software that is exclusively 
instructional is difficult to maintain. Districts are using networks to 
support web-based projects, administrative information management 
systems, submission of state-mandated reports, and e-mail systems that 
are important to both administrative and instructional functions, and 
difficult if not impossible to segregate.
    In my view, what districts and E-Rate administrators have found 
most difficult about the use of E-Rate funds is managing multi-year 
projects, implementing large projects without adequate support 
resources, ensuring that teacher skill-sets match the upgrades in 
network capabilities and instructional potential, and dealing with the 
changes in regulations and application of rules. I have found, with 
both EPISD and YISD, that one of the essential elements in the use of 
E-Rate funds is ensuring that the projects supported by such funding 
are successful. However, without a support mechanism for the teachers 
who will be using the technology, including training and staff 
development, and campus-based technology support services, it is 
virtually impossible for districts to implement technology projects 
that will be successful and use to full potential the networks that E-
Rate funds have enabled. That will be the task of all school districts, 
including YISD, that use E-Rate funds.
    In many instances, districts have been criticized for failing to 
capitalize fully on the improvements afforded through E-Rate. In my 
experience, some of that lost capacity has been almost predictable. In 
the first years of the E-Rate program, districts for the most part, 
applied for only what they could implement. It is my personal opinion 
that, in the following years of E-Rate program, when vendors began to 
have more of a role in the application process and when further 
ambiguities arose regarding the scope and extent of the E-Rate program, 
many school districts across the country may have asked for too much 
too quickly, and were not in the best position to fully support the 
technology projects for which funding was awarded. Such districts 
likely had the needs for that technology, and justifiably requested E-
Rate funding for those projects, but in hindsight perhaps should have 
been less ambitious in order to better assure fully effective 
implementation.
    As school districts have more skillfully used E-Rate funds, and 
have developed support staff for the technology infrastructure made 
possible by the E-Rate program, I believe it is more critical for 
districts to ensure that technology infrastructure and capability is 
driven by instructional need, that teacher technology skill-sets are 
established through staff development and training, and that campus-
based technology support is provided. In my opinion, technology 
projects fail when there is no identified instructional need for the 
technology, when teachers are asked to use technology that does that 
support their teaching outcomes, when teachers are asked to use 
technology without sufficient training, or when campuses are required 
to support technology without adequate resources.
    Although the E-Rate program has enabled vastly improved networks 
for school districts, the use of those networks has been limited by the 
lack of funding for the training and campus-based support that would 
help better ensure full success. In some instances, school districts 
have had to abandon technology projects, or have implemented projects 
that did not provide the results that were hoped for, due to training, 
staff development, and support issues. One specific example was the 
initial success in EPISD technology projects when when Campus 
Technology Coordinators (CTC) were part of all technology planning and 
implementations. When funding for CTC's was no longer available, 
several projects decreased in usefulness because of the difficulty 
individual campuses had in making sure teachers were adequately 
supported and that equipment was always working and available for use. 
In short, staff development for technology use must meet instructional 
needs, and funding for staff development, like the funding for network 
and technology projects, must be on a consistent, realistic, multi-year 
basis.
    For school districts like EPISD and YISD, the E-Rate program has 
been a successful program. It does, however, require some adjustments, 
on the part of both school districts in general and the E-Rate program. 
However, without the funding from provided by the E-Rate program, there 
is no question that many of the instructional initiatives and some of 
the instructional progress in these schools districts would not have 
been possible. Such funding has significantly benefited the 
instructional process at such districts.

                            CLOSING REMARKS

    YISD is not a wealthy district; its ``free and reduced lunch'' 
average is 86%. In general, YISD has a low economic profile. The 2000 
Profile of Selected Economic Characteristics, issued by the United 
States Census Bureau, estimates the per capita income for 1999 in the 
El Paso, Texas at $14,388 per year. It should be noted that YISD's 
boundaries do not include the areas generally recognized as being the 
most affluent of El Paso, so the figures for census tracts within 
YISD's boundaries would probably be lower. For comparison, according to 
the same survey, the annual per capita income for 1999 in the United 
States was $21,587, for the State of Texas was $19,617, and for the 
Washington D.C. was $28,659. As one can readily see, YISD students are 
in poor financial circumstances, and in great need of the benefits from 
the projects that can be completed using E-Rate funding.
    The primary impact to YISD if E-Rate funding is no longer available 
is that instructional advantages available through a typical 
telecommunications network would, in all likelihood, no longer be 
available. It would be virtually impossible for YISD to fund the 
maintenance of the network, and within several years we would have a 
much smaller access to Internet resources, limited student e-mail 
availability, and virtually no services for teachers in the way of 
voice or data network capability. In such a case, our goal would be to 
continue to offer the best services we could to teachers and students, 
but, realistically, that level of network service would be very small 
in comparison to the current levels. Ultimately, the instructional 
variety and opportunity would be decreased for the students of YISD. I 
think that would be true for other poor districts throughout the 
country.
    Thank you again for providing me with this opportunity to present 
testimony.

    Mr. Walden. Thank you. We appreciate your comments. They 
were very much on point.
    Ms. Glogovac, welcome.

                   TESTIMONY OF PAULA GLOGOVAC

    Ms. Glogovac. Thank you, Mr. Chairman, and subcommittee 
members. I appreciate the opportunity to speak with you today.
    My name is Paula Glogovac. I was a contractor for Sun 
Microsystems, where I provided E-Rate program management 
resources to the company.
    My role as a program manager was to review the E-Rate 
program rules for applications and service providers and to 
make sure those rules were communicated to the Sun sales and 
marketing team. I was the knowledge base for any questions 
regarding the E-Rate program to the Sun sales and marketing 
team, and starting in year 6 of the E-Rate program, I reviewed 
470's that were actually posted on USAC's Website, looking for 
internal connection needs, and would try to make initial 
contact with the applicant or their suggested contacts to 
qualify them for Sun opportunities.
    I did this throughout the entire United States. I supported 
Sun's internal accounts receivables, payables, and order entry 
groups in processing all the paper work. I was the single point 
of contact for Sun with USAC and the SLD for paper work process 
and any issues Sun might have had.
    My experience with E-Rate programs started at the end of 
year 1 when I was a full-time Sun employee covering the K-12 
educational market in support of the Sun sales team across the 
United States. I consistently ran the program while at Sun for 
the next 2 years as a full-time employee.
    I managed Sun's involvement in the E-Rate program as a 
contractor for the last 5 years. I attended the E-Rate service 
provider training in San Diego that was provided by USAC and 
the SLD, and I might add it was very beneficial. I also 
participated in the bi-weekly service provider conference calls 
on a regular basis to stay current with the program, which also 
allowed me to ask questions that were relevant at the time.
    What I have seen with this program is that in many cases it 
does work for schools and libraries that have effectively 
learned how to adhere to the rules, understand the process and 
value the much needed support. In several cases, service 
providers are not following the program rules, as I have 
experienced myself.
    For example, some have been developing the 470's for small 
schools and capturing the sales along with it, without the 
knowledge of this being against the program rules by the 
applicant. They prey upon applicants that have no knowledge of 
the program but are told that this service provider can get 
them money for computers. I saw it a lot.
    This happened in year 6 across the United States with small 
charter schools, religious schools, and special schools. Some 
consultants actually blocked service providers from responding 
to the 470's that are posted by not allowing them to get 
appropriate technical information to size products and services 
for what the account needs or by stating that the applicant is 
going to use a State contract to purchase from.
    Even if you are on the State contract, they are choosing 
what they want versus having a service provider provide them 
with information on what is available to them. Some service 
providers are providing ineligible products and services 
knowing that they are not eligible under the program rules, as 
I will get into in just a few moments. This makes the applicant 
feel like they are getting a better solution and leaves those 
of us who are adhering to the rules not an option.
    I also see applicants making several program rule 
violations. Some applicants will prerelease their RFPs prior to 
the posting of the 470's and then will close the RFP response 
prior to the 28-day waiting window.
    Some will require a mandatory prebid conference attendance 
prior to or very shortly after the 470 being posted. This makes 
it almost impossible for a service provider to respond to these 
applications unless they have had prior notification of the RFP 
from the applicant.
    Some applicants will release an RFP with ineligible 
products or services or with clear violations of the program 
rules. In one case just this year, a consortium applicant 
required a 3-percent kickback on all sales. In another case, an 
applicant's RFP was for global positioning products and 
services.
    In other cases, I have seen on the 470 forms and in RFPs 
applicants specifying specific brand names of products and not 
allowing anyone else to respond. In making contact with some of 
these applicants, I have heard that they are already working 
with a vendor, that they are only buying off their State 
contract, that they are using the same vendor as last year, 
that they already have enough responses or they do not even 
return my fax, phone calls, or E-mails even though that is the 
suggested method of contacting these vendors or applicants.
    But not much is publicly stated about what the 
investigations have found through all of these contacts that I 
have made and publicized to the whistleblower hotline. I am 
still seeing some of the same activities happening today as I 
did in year 6.
    Today when I see a possible violation, I actually try to 
tell the applicant what the violation is and recommend that 
they call the 800 number at USAC to get their take on it and 
ask what they can do about it. I do not know how successful 
that is. It is anyone's guess.
    In one case I was brought in by the Sun sales team to work 
with them on the E-Rate Project that they had been selected 
for. It was an E-mail solution. In this case, as I started to 
get more involved in it, I had serious questions about the 
integrity of what was going on with this applicant and the 
originally awarded service provider. The applicant was El Paso 
Independent School District, and the selected service provider 
on the original 471 form was IBM.
    I had been given a Statement of Work that was provided to 
Sun by IBM and had El Paso ISD's name on it. I reviewed the 
Statement of Work, and it had several issues. They included 
ineligible products and services and had products that did not 
pertain to just an E-mail solution.
    I sent an E-mail off to the service provider E-mail Alias, 
asking if these products and services were eligible, and the 
response back in most cases was no.
    We had a conference call with El Paso ISD and IBM 
representatives discussing these issues, and IBM's response was 
that we should take this off line to discuss it, that they had 
FCC lawyers that handled this kind of stuff. In my opinion, 
saying that in front of the applicant gives them the belief 
that IBM is behind this 100 percent and I would buy into that 
as an applicant, as well.
    I did take this off line with Don Riddick from IBM. Don 
told me not to worry about that, that they would take care of 
it. I was to fill out the service substitution form, and that 
would take care of everything. He did not appear to be 
concerned about the products and services that were being 
offered in the Statement of Work that were not eligible.
    In trying to fill out the service substitution form, I 
realized that IBM did not include their E-mail software 
solution on any line item. I informed the Sun sales team, and I 
was instructed to call Woodrow Lee from IBM.
    When I spoke with Mr. Lee, he informed me that they did not 
include it because their E-Rate consultant had advised them not 
to. In the Statement of Work it was listed as Lotus Notes, and 
in my E-mail to the service provider Alias, I specifically 
asked if Lotus Notes was eligible, and they said no.
    I responded back to Mr. Lee that they must have known it 
was not eligible and did not include it on their itemized list 
on the 471. Again, he said no, but their E-Rate consultant had 
advised them not to.
    If that was the case, I did not know how I could substitute 
out E-mail software solution for one that did not exist on 
their original 471. IBM agreed that Sun should also leave off 
their software solution.
    I believe that it would not be acceptable since the 
original 470 products and services must match the 471, and in 
turn, the service substitution form also needed to match the 
products and services selected.
    This was confirmed to me by SLD in another E-mail. Sun has 
substantial discounts that they provide to educational 
institutions. In this case, since we were asked by the 
applicant to work through IBM on this project, we were not able 
to pass along those educational discounts.
    We did offer to go direct with El Paso ISD, and the price 
would be substantially lower for El Paso ISD. El Paso ISD again 
directed Sun to work through IBM. IBM also stated to Sun that 
we needed to work through them.
    We did, however, provide our best possible pricing to IBM, 
considering that we were providing all of the products and 
installation services, but IBM did not like our price. It was 
unclear to Sun why IBM required us to provide them with a price 
that allowed them to take approximately 51 percent of the 
overall cost for the project, as they specified on the original 
471 form, with Sun doing most of the work, not to mention that 
Sun was providing an E-mail solution that could cover the 
entire school district versus the 5,000 accounts that were 
mentioned in IBM's Statement of Work.
    When Sun would not come down in our price to IBM, IBM told 
Sun they were going to rebid the project and release an RFP 
that would be due in approximately 1 day. It was clear to the 
Sun sales team that even though they had been selected amongst 
three vendors, one of which was IBM, that Sun would not get the 
business unless IBM had made a significant amount of money off 
the E-mail solution.
    In closing today, I would like to say that the intent of 
the E-Rate program is very good one. Service providers and 
applicants that do not feel ownership in working within the 
program rules and guidelines should not jeopardize those 
applicants and service providers that do adhere to the program 
rules and value what the program does for them.
    There needs to be more extreme measures taken against the 
waste, fraud, and abuse, and there are tools out there that can 
help. There are some proficient sets of tools for service 
providers and applicants to help them with the E-Rate process. 
These tools could be modified to assist USAC and the SLD in 
providing a traceable method for service providers and 
applicants to work together. Without the traceable contact 
between service providers and applicants, it will be very 
difficult to monitor the waste, fraud, and abuse.
    These tools could also help in identifying patterns of 
consultants and service providers that might be working 
together, as well as service providers and applicants. Exposing 
the program violations and the offenders in a public forum is 
key to fixing some of these problems. It is also important for 
those that report waste, fraud, and abuse to get some sort of 
notification of what happened with the reporting. This would 
encourage more reporting of these issues when they see results 
from it versus nothing for years.
    By eliminating the waste, fraud, and abuse, all of our 
schools and libraries will have an opportunity to take full 
advantage of what this program has to offer.
    Thank you.
    [The prepared statement of Paula Glogovac follows:]

                  Prepared Statement of Paula Glogovac

    My name is Paula Glogovac. I was a contractor for Sun Microsystems, 
Inc., where I provided E-rate Program Management Resources to the 
Company. My role as a Program Manager was to review the E-Rate Program 
Rules for Applicants and Services Providers and to make sure those 
Rules were communicated to the Sun Sales and Marketing Team. I was the 
knowledge base for any questions regarding the E-Rate Program to the 
Sun Sales and Marketing Team. Starting in Year 6 of the E-Rate Program, 
I reviewed 470's as they were posted, looking for Internal Connections 
needs and would try to make initial contact with the applicant or their 
suggested contact(s) to qualify them for Sun opportunities. I did this 
throughout the entire United States. I supported Sun's internal 
accounts receivables, payables, and order entry groups in processing 
paperwork. I was the single point of contact for Sun with USAC and the 
SLD for paperwork processing and issues.
    My experience with the E-Rate Program started at the end of Year 1, 
when I was a full-time Sun Employee covering the K-12 Educational 
Market in support of the Sun Sales Team in the United States. I 
consistently ran the program while at Sun for the next 2 years. I 
managed Sun's involvement in the E-rate Program as a contractor for the 
last 5 years. I attended the E-rate Service Provider Training in San 
Diego that was provided by USAC & SLD. I also participated in the Bi-
Weekly Service Provider Conference Calls on a regular basis to stay 
current with the program.
    What I have seen with this program is that in many cases it does 
work for Schools and Libraries that have effectively learned how to 
adhere to the rules, understand the process and value the much needed 
support. In several cases, service providers are not following the 
program rules. For example; some have been developing the 470's for 
small schools and capturing the sales along with it, without the 
knowledge of this being against the program rules, by the applicant. 
They prey upon applicants that have no knowledge of the program, but 
are told that this service provider can get them money for computers. 
This happened in Year 6, across the United States with small charter 
schools, religious schools and special schools. Some consultants 
actually block service providers from responding to the 470's that are 
posted by not allowing them to get appropriate technical information to 
size products and services for what the account needs, or by stating 
that the applicant is going to use a State Contract to purchase from. 
Even if you are on the state contract, they are choosing what they want 
vs. having a service provider provide them with information on what's 
available to them. Some service providers are providing ineligible 
products and services, knowing that they are not eligible under the 
program rules, as I will get into in just a few moments. This makes the 
applicant feel like they are getting a better solution.
    I also see Applicants making several program rule violations. Some 
applicants will pre-release their RFP's prior to the posting of the 
470's and will then close the RFP response prior to the 28-day waiting 
window. Some will require a mandatory pre-bid conference attendance 
prior to or very shortly after the 470 being posted. This makes it 
almost impossible for a Service Provider to respond to these 
applications, unless they had notification of the RFP from the 
applicant. Some applicants will release an RFP with ineligible products 
or services or with clear violations of the program rules. In one case, 
just this year a consortia applicant required a 3% kickback on all 
sales. In another case, an applicants RFP was for Global Positioning 
products and services. In other cases, I have seen on the 470 forms and 
in RFP's applicants specifying specific brand names of products and not 
allowing anyone else to respond. In making contact with some 
applicants, I have heard that they are already working with a vendor, 
that they are only buying off their state contract, that they are using 
their same vendor as last year, that they already have enough responses 
or they don't return my faxes, phone calls or e-mails even though that 
is their specified method of contacting them. Very little has been 
highly publicized about these issues, until just recently. But not much 
is publicly stated about what the investigations have found once you do 
report these violations. I'm still seeing some of the same activities 
happening today as I did in Year 6. Today when I see a possible 
violation, I actually try to tell the applicant what the violation is 
and recommend to them to call the 800 number with USAC to get USAC's 
take on whether it's a violation or not and what can be done about it. 
I don't know how successful that is.
    In one case, I was brought in by the Sun Sales Team to work with 
them on an E-rate Project that they had been selected for. It was an E-
mail solution. In this case as I started to get more involved in it, I 
had serious questions about the integrity of what was going on with 
this applicant and the originally awarded service provider. The 
applicant was El Paso Independent School District and the selected 
Service Provider on the original 471 forms was I.B.M. (International 
Business Machines). I had been given a Statement of Work that was 
provided to Sun by IBM and had El Paso ISD's name on it. (See Reference 
#1) I reviewed the Statement of Work and it had several issues. They 
included ineligible products and services and had products that didn't 
pertain to just an E-mail Solution. I sent an e-mail off to the Service 
Provider E-mail Alias asking if these products and services were 
eligible and the response back was NO. (See Reference #2) We had a 
conference call with El Paso ISD and I.B.M. representatives discussing 
these issues and I.B.M.'s response was that we should take this offline 
to discuss, but they had FCC lawyers that handled this kind of stuff. I 
did take this offline with Don Riddick from IBM. Don told me not to 
worry about it that they would take care of it. I was to fill out the 
service substitution form and that would take care of everything. He 
didn't appear to be concerned about the products and services that were 
being offered in the Statement of Work that were not eligible. In 
trying to fill out the service substitution form, I realized that IBM 
didn't include their e-mail software solution on any line item. (See 
Reference #3) I informed the Sun Sales Team and I was instructed to 
call Woodrow Lee from I.B.M. When I spoke with Mr. Lee, he informed me 
that they didn't include it on there because their E-rate Consultant 
had advised them not to. In the Statement of Work it was listed as 
Lotus Notes and in my e-mail to the Service Provider Alias, I 
specifically asked if Lotus Notes was eligible and they said NO. I 
responded back to Mr. Lee that they must have known it wasn't eligible 
and didn't include it on their itemized list on the 471. Again, he said 
no, but their E-rate Consultant had advised them not to. If that was 
the case, I didn't know how I could substitute our e-mail software 
solution for one that didn't exist on their original 471. IBM agreed 
that Sun should also leave off their software solution. I believed that 
it would not be acceptable, since the original 470 products and 
services must match the 471 and in turn the service substitution form 
also needed to match the products and services selected. This was 
confirmed to me by the SLD in another e-mail. Sun has substantial 
discounts that they provided to Educational Institutions. In this case, 
since we were asked by the applicant to work through I.B.M. on this 
project, we were not able to pass along those Educational discounts. We 
did offer to go direct with El Paso ISD and the price would be 
substantially lower for El Paso ISD. El Paso ISD again directed Sun to 
work through IBM. IBM also stated to Sun that we needed to work through 
them. (See Reference # 4) We did however, provide our best possible 
pricing to IBM considering that we were providing all the products and 
installation services, but IBM didn't like our price. It was unclear to 
Sun why IBM required us to provide them with a price that allowed them 
to take approximately 51% of the overall cost for the project, as they 
specified on the original 471 form, with Sun doing most of the work. 
(See Reference #5) Not to mention, that Sun was providing an e-mail 
solution that could cover the entire school district vs. the 5,000 
accounts that were mentioned in IBM's Statement of Work. When Sun 
wouldn't come down in our price to IBM, IBM told Sun they were going to 
rebid the project and release an RFP that would be due in approximately 
1 day. (See Reference #6) It was clear to the Sun Sales Team that even 
though they had been selected amongst three vendors, one of which was 
IBM, that Sun would not get the business unless IBM had made a 
significant amount of money off of the E-mail Solution.
    In closing, I would like to say that the intent of the E-Rate 
Program is a very good one. Service Providers and Applicants that don't 
feel ownership in working within the program rules and guidelines, 
should not jeopardize those Applicants and Service Providers that do 
adhere to the programs rules and value what the program does for them. 
There needs to be more extreme measures taken against the waste, fraud 
and abuse and there are tools out there that can help. There are some 
proficient sets of tools for Service Providers and Applicants to help 
them with the E-rate Process. These tools could be modified to assist 
USAC & the SLD in providing a traceable method for service providers 
and applicants to work together. Without that traceable contact between 
service providers and applicants, it will be very difficult to monitor 
the waste, fraud and abuse. These tools could also help in identifying 
patterns of consultants and services providers that might be working 
together, as well as service providers and applicants. Exposing the 
program violations and the offenders in a public forum is key to fixing 
some of these problems. It's also important for those that report 
waste, fraud and abuse to get some sort of notification of what 
happened with their reporting. This would encourage more reporting of 
these issues when they see results from it. By eliminating the waste, 
fraud, and abuse, all of our schools and libraries will have an 
opportunity to take full advantage of what this program has to offer.

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    Mr. Walden. Thank you. Thank you for your testimony.
    Mr. Hawthorne, welcome.

                TESTIMONY OF NATHANIEL HAWTHORNE

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

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    Mr. Walden. All right. Thank you very much.
    Mr. Caine, welcome.
    Mr. Caine. Thank you.
    Mr. Walden. Do you have an opening statement for us today?

                TESTIMONY OF CHRISTOPHER G. CAINE

    Mr. Caine. I do.
    Mr. Chairman and Ms. DeGette, thank you very much.
    I am Chris Caine, Vice President of Governmental Programs 
for IBM.
    I appreciate this opportunity to provide IBM's perspective 
regarding the E-Rate program. We have a long history of 
commitment to public education and working to help our Nation's 
leaders improve K through 12 schools. Therefore, we responded 
willingly in 1997 when FCC Chairman Reed Hunt requested our 
help in educating school districts about the newly created E-
Rate program.
    We recognize that you and other members of this committee 
have raised important questions about a number of issues 
surrounding the program, including incompatible technologies 
that do not work together, equipment delivered but not 
installed, billing for equipment or services not provided, and 
procurement irregularities. And these are important issues and 
they should be addressed.
    But we believe in IBM that overall the E-Rate program has 
been a success in helping millions of disadvantaged students 
bridge the digital divide. IBM is here today voluntarily 
because we care about the program and we want to help you and 
others make it the best it can be.
    IBM has participated in the program as a service provider 
since its inception. Our extensive experience in E-Rate and in 
K through 12 education has given us an insight into the E-Rate 
program and how its goals can be fully realized.
    Some have suggested that IBM has been too involved in the 
procurement process because school officials listened to advice 
from IBM prior to issuing a request for proposal. We strongly 
disagree. The SLD guidance encourages vendors to share their 
experience with schools and specifically authorizes vendors to 
provide assistance in the development of an RFP as long as the 
resulting procurement is neutral. IBM has confidence in school 
districts to objectively consider technical options from 
various sources and apply their good judgment to make sound and 
proper procurement decisions.
    Deploying a modern network infrastructure is not a simple 
task, especially under the often tight schedules imposed by the 
E-Rate program. So it is important that the schools get the 
right technical and project management help, and I think we 
heard that from some of our earlier speakers.
    As this committee has learned from prior hearings, 
students, teachers, and communities will suffer if much needed 
equipment is left stacked in a warehouse for lack of 
coordination or technical skills. This is why IBM supported the 
choice by the El Paso Independent School District, among 
others, to use a systems integration approach for selected E-
Rate projects.
    As a systems integrator, IBM can provide a single point of 
accountability to insure that all components of the network 
will be installed as planned and will work properly together. 
In El Paso IBM delivered good, tangible value on time and on 
budget.
    Deploying complex network systems is not a plug and play 
activity. A collection of the lowest priced piece parts is 
often not the most cost effective decision. That approach may 
not optimize the cost of the overall solution, and the parts 
may not work together effectively.
    Implementing such projects under the strict rules of the E-
Rate program and dealing with the old physical infrastructure 
that is frequently found in many school districts carries 
substantial risk and requires considerable program management 
experience. For these reasons, we believe systems integration 
is a valuable approach.
    El Paso selected IBM as its E-Rate systems integrator in 
January 2001, following an open, two-step procurement process 
permitted under Texas law. In the first step, El Paso ranked 
bidders based on technical qualifications, experience, and 
pricing information. As a result of this step, El Paso selected 
IBM as the most qualified bidder.
    In the second step, the district entered into detailed 
negotiations with us and satisfied itself that we were the most 
cost effective vendor for meeting its comprehensive network 
requirements.
    As part of our E-Rate engagement in El Paso, IBM provided 
maintenance support, including a centralized help desk to keep 
the network up and running. We believe that quality maintenance 
is critical for a school district to get the full value out of 
its technology investments, another thing we just heard 
recently from other speakers on the panel here.
    The Consortium for School Networking agrees. The 
consortium, which is made up of education leaders in technology 
from school districts across the country, notes the importance 
of a formalized support infrastructure. In addition, the group 
reports that over 95 percent of school districts with more than 
20,000 students, such as El Paso, use help desks to provide 
technical support.
    This industry standard practice is a good way to provide 
fast resolution for network problems and insure high network 
availability. It is important to remember that the E-Rate 
program is relatively new and that the rules are still 
evolving. Since the beginning of the program, we have complied 
with the rules as we understood them at the time. It is very 
unfortunate that El Paso and other school districts were denied 
funding, despite the fact that they had followed application 
approaches that the SLD has previously approved.
    However, we believe the FCC ultimately reached a fair and 
balanced decision in its Ysleta order. Significantly, the 
Commission acknowledged that some E-Rate program rules were 
unclear and applied inconsistently. Consequently, the 
Commission took the unusual step of waiving its rules to allow 
these applicants to conduct rebids and to reapply for the 
denied funding.
    The Commission also expressly noted that IBM could 
participate in these rebid applications. IBM has always taken 
compliance with E-Rate rules very seriously. Now that the 
Commission has provided additional clarification, we are 
working even harder to insure our compliance. We have hired two 
highly regarded E-Rate experts from the applicant community and 
consolidated expertise into an E-Rate Center of Competence as a 
resource for IBM staff.
    Our Center of Competence is actively engaged with the SLD. 
For example, we are proactively seeking to resolve questions 
about the rules, working to improve clarity of our statements 
of work and participating in the on-line product data base 
pilot program.
    Members of the committee, IBM is committed to the ongoing 
success of E-Rate, and we will continue to work with the SLD, 
the Commission and you to improve the program. As you can see 
in our written statement, we have offered some recommendations 
for the program, the most important of which is to make the 
rules as simple and as clear as possible.
    Thank you for the opportunity to be here, and I will look 
forward to answering your questions.
    [The prepared statement of Christopher G. Caine follows:]

      Prepared Statement of Christopher G. Caine, Vice President, 
  Governmental Programs,, International Business Machines Corporation

                              INTRODUCTION

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

                             IBM AND E-RATE

    Because of IBM's strong commitment to improving K-12 education and 
bringing the opportunities created by information technology to all 
students in our nation, we were pleased when Congress created the E-
rate program as part of the Telecommunications Act of 1996. We believed 
then as we believe today that the program was structured properly to 
provide greater assistance to those schools that have the greatest 
need, helping to provide opportunities for economically disadvantaged 
students to participate in the ``information age.''
    Shortly after the FCC established the initial rules to govern the 
E-rate program in 1997, I participated in a small meeting of high-tech 
leaders where then-FCC-Chairman Reed Hundt asked us directly to help 
educate schools across the country about the opportunities of E-rate. 
IBM willingly responded by creating a booklet that described the new 
program, and we mailed a copy to over 12,000 school districts in the 
nation. We followed up by providing seminars about E-rate for school 
officials and meeting with individual districts to talk about how E-
rate could help them meet their communities' educational needs and 
objectives.
    IBM has participated in the E-rate program as a service provider 
since its inception, and we believe that the program has been an 
enormous success in bringing the vast resources and opportunities of 
the Internet to deserving students. E-rate funding has allowed many of 
our country's poorest school districts to bridge the ``digital 
divide''.
    The E-rate program has provided the opportunity to many poorer 
school districts to explore new ways to use technology to enhance 
teaching and learning. Many districts have found that the universal 
access to the Internet that E-rate funding provides has exposed their 
students to a depth and breadth of material that their local teachers 
could not possibly have developed and delivered on their own. The 
program has the added benefit of helping to prepare our nation's 
students for the career requirements of a highly competitive, 
technology-based economy.
    Since the beginning of the Erate program, IBM has served well over 
200 E-rate customers in over 30 states. As the largest computer company 
and IT services company in the world with a history of applying our 
world-class research capabilities to educational challenges, IBM has 
provided a broad range of eligible networking products and services 
under the E-rate program. IBM has the resources to support many of the 
largest school districts across the country.
    We believe that IBM has an excellent record of helping schools 
achieve their educational objectives under the E-rate program, 
delivering complex networking solutions--on time and on budget--to meet 
the increasingly sophisticated demands of districts with tens of 
thousands of students, teachers and staff.

                E-RATE INVESTMENTS TO IMPROVE EDUCATION

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

                  TECHNOLOGY CHALLENGES FACING SCHOOLS

    Many school districts have required substantial investments in 
recent years to upgrade their network infrastructures so that they 
could meet their educational objectives and prepare their students for 
the networked world. But deploying a modern enterprise network is not a 
simple task. For example, a district with 50,000 students plus 
thousands of teachers and administrators has networking requirements 
that are at least as complex as those of a small city. Many districts 
do not have sufficient technical staff and knowledge to handle these 
projects on their own. They require considerable assistance with the 
deployment, configuration, project management, technical support and 
maintenance for their large, complex network infrastructure projects. 
The Erate program has made it possible for many economically 
disadvantaged school districts to obtain the technology products and 
services that they need to offer their students the same opportunities 
as more fortunate districts.
    Certain constraints imposed by the E-rate program structure and the 
school environment, generally, create additional challenges in 
deploying advanced network infrastructure. For example, the annual E-
rate funding cycle requires that major projects be performed on an 
artificially accelerated basis, compressed to fit into a narrow time 
window between receipt of E-Rate funding approval (often after long 
delays) and the funding year deadline. Meeting this tight schedule is 
further complicated by having to work around classroom schedules, after 
hours and during school holidays. And the simple fact that many school 
buildings were built decades ago, long before the Internet and the need 
for wiring classrooms were contemplated, can present difficult 
deployment problems, such as asbestos removal and inadequate electrical 
supply.
    Given the complexity of the task of installing, integrating and 
maintaining a sophisticated network environment, especially under the 
often-tight schedules imposed by the E-rate annual funding cycle, it is 
important that school districts get the right technical and project 
management help. And if a school district hires multiple vendors 
separately to perform portions of the work, they may also find it 
difficult to coordinate among them.
    Congress, the FCC and the SLD are well aware of the potential for 
waste if expensive equipment is left stacked in a warehouse for lack of 
planning, coordination, or technical skills. IBM has also seen cases 
where computers sit unused, gathering dust in classrooms, because 
schools had not invested sufficiently in technical support, maintenance 
or teacher training. In each case, expensive investments are idled, the 
school's instructional objectives and technology vision are frustrated, 
and E-rate goals of bridging the digital divide go unfulfilled.

                IBM HELPS SCHOOLS MEET THESE CHALLENGES

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

      2001 E-RATE FUNDING FOR EL PASO INDEPENDENT SCHOOL DISTRICT

    Among the school districts that IBM has served as part of the E-
rate program is the El Paso Independent School District (EPISD or El 
Paso), which at the time served over 63,000 students in 52 elementary 
schools, 16 middle schools and 16 high schools, with over 8,000 
employees. EPISD is an economically disadvantaged district, with a 
large portion of its students eligible for the National School Lunch 
Program. The mission of EPISD is to meet the diverse needs of all 
students and empower them to become successful members of a global 
community. EPISD developed a thorough and forward-looking Technology 
Plan designed to achieve its educational goals.
    The selection by EPISD of IBM as its strategic technology partner 
provides an example of IBM's role as a systems integrator in the E-rate 
program. El Paso had participated in the E-rate program from Funding 
Years 1 through 3 with service providers other than IBM. In December 
2000, El Paso posted a Form 470 for Year 2001 on the Universal Service 
Administrative Company, Schools and Libraries Division (``SLD'') Web 
site in accordance with E-rate program rules. El Paso also issued a 
Request for Proposal (RFP) in December 2000 detailing El Paso's 
requirements and describing the form of the prospective contract.
    EPISD selected IBM as its systems integration partner in January 
2001 after evaluating competitive bids from IBM and seven other 
vendors, following a negotiated solicitation process in accordance with 
Texas State procurement regulations, FCC rules and SLD requirements in 
effect at the time. El Paso recognized that the complex network 
solution they sought to procure to support their educational objectives 
was not a simple, commodity purchase in which the cheapest initial 
proposal would necessarily be the most cost-effective solution over 
time. So EPISD issued an RFP and followed an open, transparent, ``two-
step'' procurement process permitted under Texas law. In the first 
step, EPISD ranked systems integration partner bidders based on 
technical qualifications, experience and pricing of skilled labor. As 
the result of this step, EPISD selected IBM as the most qualified 
bidder to implement the network environment as envisioned in its 
Technology Plan.
    In the second step, the District entered into detailed negotiations 
with IBM to agree to contractual terms, with price as a primary factor 
in the final selection. EPISD satisfied itself that it was receiving 
the right combination of cabling, equipment, software and services at a 
fair and reasonable price that, considering all of the factors, made 
IBM the most cost-effective vendor for meeting its comprehensive 
network requirements. At the end of the second step, EPISD staff 
presented its decision and rationale for consideration by the Board of 
Trustees in open, public meetings. The Board then voted in favor of the 
recommendation and issued formal authorization for the contracts. The 
SLD subsequently reviewed EPISD's E-rate funding request in thorough 
detail and awarded E-rate funding to EPISD in October 2001.
    EPISD's contracts with IBM allowed the District to bid out portions 
of the purchases to ensure competitive prices and provided for 
termination if the District became dissatisfied with IBM's performance. 
IBM believes that the EPISD technical staff and Board had sufficient 
procurement expertise and experience to make sound decisions to ensure 
they received the best value for the money.
    The lowest priced initial solution is often not, over time, the 
most cost-effective use of taxpayer dollars. IBM believes that 
selection of a systems integrator is an effective approach for 
procuring complex information technology systems. Where school 
districts seek a comprehensive networking solution, as in El Paso, the 
proven ability of the integrator to manage such a difficult project to 
completion on time and on budget is particularly relevant.
    Federal and state procurement laws provide for government 
procurements of complex IT systems, like the one in El Paso, through 
the use of a procurement model that weighs vendor qualifications, 
technical expertise and management experience, along with price, to 
choose the most cost-effective provider. The FCC recognized this point 
in two key decisions governing the E-rate program. The Commission's 
1997 Universal Service Order gave schools ``maximum flexibility to take 
service quality into account and to choose the offering--that meets 
their needs most effectively and efficiently.'' (emphasis added) And in 
its 1999 Tennessee Order, the Commission upheld a bid selection process 
in which price was an important factor, but was explicitly given a 
lower weighting than technological approach. In other words, price was 
not required to be the most important selection criterion.
    The work that EPISD procured in 2001 under the E-rate program was 
particularly complex. IBM acted as a systems integrator, or general 
contractor, providing a single point of contact and accountability so 
that EPISD could be assured that the network and all of its components 
would be installed as planned and work properly. IBM worked closely 
with EPISD's senior management and technical staff to ensure that the 
network solution and product selection met the requirements as 
specified by the District in line with their approved Technology Plan 
and that the solution complied with E-rate eligibility rules as EPISD 
and IBM understood them. We also made regular presentations to the 
Board of Trustees to keep them apprised of progress and to seek their 
direction and approval.
    IBM implemented a network solution, providing internal connections 
necessary for high-speed Internet access to enable distance learning 
and to take advantage of the educational resources available on the 
Internet. We accomplished this challenging task to connect and 
integrate these schools into an advanced communication network in a 
very compressed time frame, as required by E-rate program rules. We 
delivered everything that we committed to deliver, on time and on 
budget--and it worked.
    Providing a modern technology infrastructure to support education 
is important and will create long-term benefits for our students. Such 
infrastructure may require significant investment, but it is an 
investment we must be willing to make. Implementing network projects of 
this size, scope and complexity for a fixed price under the strict 
rules and time constraints of the E-rate program carries substantial 
risk and requires considerable program management experience. A 
collection of the lowest priced piece parts is often not the most cost-
effective decision. That approach may not optimize the cost of the 
overall solution, and the parts may not work together effectively. It 
may be tempting to go with such a ``cheaper'' solution, only to find 
out later that the District's educational goals are not met when the 
network cannot be deployed as planned or is frequently down.
    IBM has the resources and capability to meet the challenges of 
implementing complex network systems under the E-rate program. Based on 
customer satisfaction surveys and comments from key EPSID staff, IBM 
believes that we met or exceeded the District's expectations. IBM is 
proud of the job that we did. We believe that we built the right 
solutions and delivered the value that we promised to the District.
    For Funding Year 2001, IBM implemented and integrated a total of 
nine projects, including cabling, network electronics, server upgrade, 
Web and file servers, Fiber Internet Access, video, e-mail, Web access 
and technical support. The following section provides further detail on 
the technical support IBM provided to EPISD.

                IBM TECHNICAL SUPPORT SERVICES FOR EPISD

    Prior to the projects IBM undertook at EPISD, the District had only 
begun to introduce a modern technology infrastructure, and they lacked 
sufficient technical staff to properly support their new network 
infrastructure. To meet their needs, EPISD sought a service provider to 
assist with technical support under the E-rate program. The use of 
vendor resources in such cases is common, as illustrated by a study by 
the Consortium for School Networking (CoSN)., made up of education 
leaders in technology from school districts across the country and 
others CoSN found that over half of the school districts surveyed 
outsourced at least some of their technical support.1
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    \1\ Consortium for School Networking study available at http://
classroomtco.cosn.org/survey_tech_press.html
---------------------------------------------------------------------------
    IBM provided technical support and maintenance to EPISD using a 
methodology IBM had honed through many years of support for customers 
with similar reliability requirements and with environments of similar 
complexity. The goal was to enable the network infrastructure to 
operate reliably and with little downtime, so that it would be 
available to students and teachers to support learning in the 
classroom. IBM first set up a Technical Services Office (TSO), which 
designed, developed and implemented the support services. The TSO 
provided project coordination, site and connectivity networking 
services support, network infrastructure support, Web maintenance 
support, Local Area Network (LAN) and network hardware maintenance 
support, and help desk support. The IBM services achieved the following 
improvements for EPISD:

 Higher network availability.
 The ability to resolve network problems quickly, shortening downtime.
 Routine maintenance and technical change management methods to reduce 
        unplanned connectivity outages.
 Network performance metrics to track quality of service and 
        improvements.
 A single-point-of-contact help desk to screen calls and route them 
        either to the IBM network support for eligible services, or to 
        EPISD's own desktop PC support function for services not 
        covered by E-rate.
 Trouble report status accessible by Web or phone.
    IBM believed then, as it does now, that an effective technical 
support and maintenance program is an essential element of any school 
district's technology investment. We believe that quality maintenance 
support is critical for a school district to get the full value out of 
its technology investments. School districts are also coming to the 
realization that technical support is a critical element of their IT 
budget that can no longer be treated as an afterthought to be handled 
by technologically savvy teachers and students in their spare time. As 
CoSN has observed:
          ``Ever-broadening use of personal workstations and the 
        Internet in schools has increased the awareness of support 
        costs and the need for a more formalized support 
        infrastructure. The increasingly complex technology 
        infrastructure makes the historically informal support 
        approaches less adequate or practical.'' 2
---------------------------------------------------------------------------
    \2\ http://classroomtco.cosn.org/gartner_intro.html
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    CoSN reports that over 95 percent of school districts with more 
than 20,000 students use help desks to provide technical support, so 
this is a very common practice among large districts such as El Paso. 
3 Help desks are a good way to provide fast resolution of 
network problems and ensure high network availability.
---------------------------------------------------------------------------
    \3\ http://classroomtco.cosn.org/survey_tech_support.html
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                    2002 EPISD E-RATE FUNDING DENIAL

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

                     THE COMMISSION'S YSLETA ORDER

    IBM believed that we had complied with all applicable rules 
relating to the El Paso projects and Year 2002 proposals, including 
Erate program rules, state procurement rules and communities' local 
procurement requirements, as we understood them at the time. In 
addition to complying with the rules, IBM met its commitments in 
delivering products and services to our funded Erate customers--some of 
the largest school districts in the country with the most challenging 
network requirements.
    Significantly, the Commission, in ruling on the funding appeals by 
IBM and our school district partners in El Paso, Ysleta and elsewhere, 
acknowledged that some E-rate program rules were unclear and applied 
inconsistently. The Commission's Ysleta Order said: ``SLD could 
reasonably have been construed as sanctioning the two-step Systems 
Integration process by approving the El Paso Independent School 
District's application'' for Year 2001. ( 69) Further, the Ysleta 
Order ``acknowledge[d] that the Commission's use of varying phraseology 
in the same decision [concerning whether price must be ``the primary 
factor'' or only ``a primary factor''] created some ambiguity on this 
issue.'' ( 50) And as the Commission noted, some applicants received 
funding despite circumstances similar to those of the denied 
applications associated with IBM. For example, while some of IBM's E-
rate customers were criticized for including a broad list of internal 
connections services on their Forms 470, other districts that were not 
working with IBM received funding despite using the same or similar 
lists of services.5
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    \5\ [W]e acknowledge that SLD has approved other funding requests 
in the past that utilized all-inclusive FCC Forms 470 similar to that 
submitted by Ysleta. (Ysleta Order,  35)
---------------------------------------------------------------------------
    Because of applicants' ``substantial and widespread reliance on 
prior SLD'' funding decisions and to avoid imposing an ``unfair 
hardship'' on applicants, the Commission took the unusual step of 
waiving its rules to allow these applicants to conduct ``rebids'' and 
reapply for denied funding under the new guidance issued as part of the 
appeals order. The Commission expressly noted that IBM would be 
eligible to participate in these rebids.
    IBM believes that it is very unfortunate that El Paso, Ysleta and 
other school districts were denied funding for Year 2002, despite the 
fact that they followed application approaches that SLD had previously 
funded. However, given the circumstances, we commend the Commission for 
reaching a fair and balanced decision on these districts' funding 
appeals. What is most important is that the Commission provided 
additional guidance on E-rate rules to ensure that they are interpreted 
as intended and gave these school districts the opportunity to conduct 
rebids under this guidance so that they would not lose out on Year 2002 
funding opportunities.

               IBM'S RELATIONSHIPS WITH SCHOOL DISTRICTS

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

                  ELIGIBILITY OF PRODUCTS AND SERVICES

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

                       ONGOING SUCCESS OF E-RATE

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

                   RECOMMENDATIONS TO IMPROVE E-RATE

    IBM offers the following recommendations to improve the E-rate 
program and help ensure its continuing success:

1. Make rules simple and clear. Ensure rules are simple, consistent, 
        clear and fully disclosed to the public. The entire rules 
        structure must be open and public. In particular, processing 
        criteria used by the SLD to review applications and invoices 
        should be open and publicly available. Capturing all questions 
        asked by applicants and service providers and their answers in 
        a wide ranging Frequently Asked Questions (FAQ) would help to 
        improve program integrity, clarity and compliance.
2. Expedite application reviews and appeals. Provide SLD with adequate 
        resources to process applications and appeals in a timely 
        manner. Appeals and prior year applications pending at SLD 
        should have top priority for processing over current year 
        applications.
3. Provide adequate advance notice of rules changes. Advance notice of 
        changes in FCC rules and SLD guidance should be given so that 
        applicants will have adequate time to plan budget changes. 
        Changes that have significant impact on applicants should be 
        made after longer advance notice.
4. Clarify the Eligible Services List. SLD should provide illustrative 
        examples of both eligible and ineligible products and services 
        to help clarify the Eligible Services List and create greater 
        certainty for applicants and service providers. SLD should 
        create a Web-based Eligible Services List with links to SLD's 
        answers to questions posed by applicants and service providers 
        over time.
5. Identify E-rate consultants and their business relationships. IBM 
        agrees with the recommendation of SLD's waste, fraud and abuse 
        task force that E-rate consultants should disclose their 
        business relationships with service providers for both 
        applicants and other service providers to see. Alternatively, 
        consultants who also sell eligible services on a third party 
        basis should be prohibited from involvement in the procurement 
        process on behalf of applicants.
    Thank you for the opportunity to be here to offer IBM's perspective 
on the E-rate program and how it can be improved. I look forward to 
answering your questions.

    Mr. Walden. Mr. Caine, thank you for being here, and thank 
you all for your testimony this afternoon and for your patience 
throughout the day. I know this has been a long hearing. It is 
an important issue, and I want to assure all of you and 
everyone else listening in that it is our goal as well to make 
sure that the--we are picking up some audio somewhere. It is 
me. That is a frightening thought. I do not know if there is a 
way to--well, if you could turn off your microphone for now 
because we are hearing all of that back here.
    Thank you.
    I just want to assure people that it is our goal as well to 
figure out how to make E-Rate work because we have seen how it 
does not work and we have seen how vendors have misused it to 
their advantage and how some school districts have been 
overtaken by, frankly, greedy vendors who have gone out of 
their way to rip off the system, and so we are committed to try 
and figure out how we make it work, work right, work fairly 
because there are a lot of districts that need to be wired and 
operated.
    Ms. Glogovac, in your comments, you made reference to 
awareness of a consortium that gets a 3-percent kickback, I 
believe was your term.
    Ms. Glogovac. This year I was reviewing 470's. I believe it 
was in the May or June timeframe, and I saw that there was an 
RFP for a consortium.
    In reviewing the RFP, I believe it was on line. It read 
that they were looking for a 3-percent kickback from the 
vendors that were going to get the business.
    Mr. Walden. Tell me what the consortium is.
    Ms. Glogovac. I do not know exactly. I cannot remember off 
the top of my head, but I----
    Mr. Walden. But these would have been school districts?
    Ms. Glogovac. I believe it was school districts that were 
allowed to use this contract.
    Mr. Walden. Who was putting together the contract?
    Ms. Glogovac. The consortia was.
    Mr. Walden. Who is the----
    Ms. Glogovac. I do not know the exact name of the 
consortia. I did not bring that information with me.
    Mr. Walden. Okay.
    Ms. Glogovac. I did report it to the whistleblower hotline.
    Mr. Walden. All right. Good. But in general terms, just so 
I understand, when you say ``consortia,'' is that a consortia 
of vendors?
    Ms. Glogovac. No, it is a consortia of applicants. So it 
could be a number of school districts, private schools lumped 
into one application.
    Mr. Walden. Right, and they basically said, ``You come 
provide this to us, and we will give you``?
    Ms. Glogovac. Basically it was an RFP that said they were 
looking for E-Rate products and services, and in order to go 
through this RFP and win the business for the RFP, you had to 
provide them back 3 percent of whatever you sold into those 
applicant sites.
    Mr. Walden. I wonder from your experience would that be a 
violation of the USAC rules?
    Ms. Glogovac. I think we heard today that, yes, it is.
    Mr. Walden. I would think so as well.
    You did report that to the hotline, you said?
    Ms. Glogovac. Yes, I did.
    Mr. Walden. That is what I thought. Okay.
    What I would like to do now is have you walk us through 
what happened again with IBM and the E-mail solution. Sun 
Microsystems, as I understand it, was selected to provide the 
E-mail services by the school district.
    Ms. Glogovac. According to what I was told by the Sun sales 
team, there was what they called a bake-off. There were three 
vendors, one of which was IBM and I believe the other vendor 
was Novell; were brought in, and they presented their E-mail 
solution to the school district, and I do not know if the board 
was there or who was there. I was not privy to that 
information, but Sun was actually selected.
    And then Sun was told that they needed to work back through 
IBM for the project.
    Mr. Walden. Okay, and yet when Sun submitted a proposal, 
IBM wanted to add costs, 51 percent?
    Ms. Glogovac. What happened was Sun provided a cost to IBM. 
IBM had a specific number associated with it based on the 
original 471 they submitted and, I guess, were awarded.
    Mr. Walden. Okay. Let me see if I understand this. So is it 
accurate then to say Sun came in and said, ``Here is an E-mail 
solution that will work for your district''?
    Ms. Glogovac. Yes.
    Mr. Walden. ``And here is what we think it costs to do 
that.''
    Ms. Glogovac. Correct.
    Mr. Walden. And then you were told by the district you had 
to work back through IBM?
    Ms. Glogovac. No, we were told that we needed to work 
through IBM.
    Mr. Walden. By whom?
    Ms. Glogovac. By the district.
    Mr. Walden. Yes, that is what I mean. The district told you 
that you have got to work through IBM.
    Ms. Glogovac. Yes.
    Mr. Walden. And it is your recollection then that IBM said, 
``We have got to up this cost by 51 percent''?
    Ms. Glogovac. No, what IBM was telling Sun was, ``You need 
to lower your cost in order for us to get what we need out of 
the amount that was designated for this project.''
    Mr. Walden. What were they going to do with that money? Do 
you know?
    Ms. Glogovac. I do not know.
    Mr. Walden. Mr. Caine, are you familiar with that 
situation?
    Mr. Caine. I would be happy to comment on it, Mr. Chairman.
    We disagree with the characterization that Sun has 
presented. We were selected as the systems integrator, as I 
mentioned in my opening statement.
    Mr. Walden. Okay.
    Mr. Caine. We pointed out certain risks to the school 
district, that if they were to implement the Sun E-mail 
solution, they needed to consider as the systems integrator, 
the party responsible for bringing it all together, all of the 
parts together.
    Mr. Walden. Right.
    Mr. Caine. These risks included schedule delays, need to 
rework designs, the need for SLD change approvals and possibly 
increased costs, which is the dialog we were having with our 
applicant and our partner, the school district.
    IBM also pointed out the pros and cons of a non-Sun and 
non-IBM solution, as Ms. Glogovac said, Novell.
    Mr. Walden. Okay.
    Mr. Caine. Ultimately the school district chose neither 
IBM's solution nor Sun's solution. They chose Novell. So we 
believe we played the role as a systems integrator fairly, 
pointing out to the school district the appropriate 
considerations they needed to keep in mind on this particular 
topic.
    So neither IBM nor Sun received the E-mail solution. An 
entirely independent vendor, Novell, did.
    Mr. Walden. And, Ms. Glogovac, do you have a comment on 
that?
    Ms. Glogovac. I guess my comment would be that why would 
IBM not consult with El Paso prior to selecting Sun during the 
three-step process of selecting Sun amongst the three vendors 
if they were playing that role.
    Mr. Walden. All right. Now, Sun had already installed the 
system in EPSID, right?
    Ms. Glogovac. That I do not know.
    Mr. Walden. All right. Okay. Mr. Tafoya, you state in your 
testimony that your school district lost a number of employees 
shortly before the funding year 4 application process, and your 
technology director had essentially no program experience.
    Did the district rely on its strategic technology provider 
to fill the gap in knowledge on E-Rate experience?
    Mr. Tafoya. It was my belief because, again, as I said, I 
was not directly involved at that time with the E-Rate program; 
I was in the district, and so I was watching the progress of 
the program. It was my belief that they really did not, if I 
understood your question correctly, have the resources 
internally to provide that kind of leadership to answer those 
technical questions.
    Mr. Walden. You relied on a strategic technology provider?
    Mr. Tafoya. That is correct. That is what I saw.
    Mr. Walden. Okay, and to your knowledge, prior to issuing 
the request for a strategic provider, did the district consult 
with USAC or other E-Rate authority as to the propriety of this 
approach?
    Mr. Tafoya. Again, it was my understanding in the 
conversations that I heard at the board meetings that I 
attended that we were compliant with all of the current rules.
    Mr. Walden. Okay, and you state that IBM, after it was 
chosen as a strategic technology provider, submitted statements 
of work to your district for review with limited opportunity 
for extensive study and analysis before the E-Rate application 
deadline. Could you elaborate on that comment?
    Mr. Tafoya. I am sorry. Part of that broke up at the very 
end there.
    Mr. Walden. Yes. The question is this. You state that IBM, 
after it was chosen as the strategic technology provider, 
submitted statements of work to your district for review with 
limited opportunity for extensive study and analysis before the 
E-Rate application deadline. In other words, you did not have 
much time to review this; is that correct, or your district did 
not?
    Mr. Tafoya. No.
    Mr. Walden. Could you elaborate on that? Why was that? What 
happened?
    Mr. Tafoya. I believe there were a couple of reasons that 
that took place. One was that after the award was made, you had 
a limited window of opportunity for the actual execution of the 
work itself, and I think the other thing that happened is 
because of the scope of the number of projects that were 
involved, there was a real scramble to make sure that we got 
all of that addressed as quickly as we could.
    I think there was a big concern on the part of the district 
that, with an award of this magnitude, which was highly 
publicized in the community, that we did not want to have any 
appearance whatsoever of having essentially misrepresented what 
we are capable of doing, and by that I mean that we wanted to 
make sure that the money that was awarded was used, that it 
was, you know, the intent of the board.
    Mr. Walden. Right.
    Mr. Tafoya. And it was the intent of the administration to 
make sure that based on the original design that we were able 
to deliver within that timeframe what we said we could.
    Mr. Walden. Okay. You state the work submitted by IBM was 
consistent with the district's technology plan.
    Mr. Tafoya. Yes, sir.
    Mr. Walden. Does the technology plan provide guidelines as 
to the specific scope and size of the projects?
    Mr. Tafoya. It was scalable. Yes, sir, it did, but again, 
as I said, what happened was, which I saw as a problem for the 
district looking at it externally in this capacity, was that 
the award was made, and there was approximately 90 days of lost 
time. And I believe that that window of opportunity that was 
sunk really did affect the overall technology implementation.
    Mr. Walden. All right. You state in your testimony the help 
desk operation did not necessarily conform to the long-term 
needs of your district. Do you believe the district got its 
money's worth?
    Mr. Tafoya. Frankly, no.
    Mr. Walden. Why?
    Mr. Tafoya. I think, again, there was a lot of confusion as 
to who was going to own the equipment after the help desk was 
installed. There were a number of work orders that were left 
that were unattended to simply because, again, we ran out of 
time and ran out of opportunity to utilize the equipment that 
was available.
    Mr. Walden. How much did you pay for that help desk 
operation?
    Mr. Tafoya. It is my recollection it was somewhere in the 
neighborhood of $27 million.
    Mr. Walden. Twenty-seven million dollars for the help desk? 
Over what period of time and for how many schools?
    Mr. Tafoya. That would have been over approximately I would 
say a 6-month period of time, and it would have been for the 53 
eligible schools.
    Mr. Walden. So 6 months, 53 eligible schools, $27 million?
    Mr. Tafoya. Yes, sir.
    Mr. Walden. Just for a help desk?
    Mr. Tafoya. That is correct.
    Mr. Walden. What did the help desk do? Is this where you 
just call and say, ``I am having trouble with my server. What 
do I do?'' Is this a support desk?
    Mr. Tafoya. Essentially that is what it was, and I believe 
that was one of the reasons that there was concern and 
questions that were being asked within the district as to what 
the value at that point was of what we were receiving.
    Mr. Walden. I hope there were questions. I mean, I do not 
know. Some of you all do this, but I mean, I pay software 
support services for software I have, but $27 million in 4 
months seems like an awful lot. I do not know.
    Ms. Foster, do you have a reaction to that? Is that normal? 
Is that what is going on out there with our E-Rate money?
    Ms. Foster. I do not think that is normal. I think it is 
excessive.
    Mr. Walden. By how much? What would I expect? I mean, I do 
not know.
    Ms. Foster. You know, really, there are all sorts of 
products and they all have different bells and whistles. So it 
would be hard to say, but my opinion would be that it is very 
excessive.
    Mr. Walden. I mean, let's go back a second here. Twenty-
seven million over 4 months, right? Fifty-three schools. Now, I 
am not a mathematician, but you could hire people probably for 
a good share of their life for that money and put them in the 
district, couldn't you? Pay them a million bucks a piece and 
you have got 27 people.
    Mr. Caine. Mr. Chairman.
    Mr. Walden. Yes.
    Mr. Caine. I would be happy to comment.
    Mr. Walden. Please do.
    Mr. Caine. I think there are a couple of things we have to 
remember. First of all, the 1 year timeframe that the E-Rate 
program imposes upon school districts and their service 
providers to both come up with the 470's, the statements of 
work, and the plan, to submit the application----
    Mr. Walden. I am aware of that.
    Mr. Caine. [continuing] to get the funding approval, okay, 
eats up a fair amount of time.
    Mr. Walden. That is why they operate on a 15-month budget 
year.
    Mr. Caine. So when you get your approval, then you have a 
limited period of time on which to execute your plan.
    Mr. Walden. Okay.
    Mr. Caine. Because the funding year stops. In this case, it 
stopped at June 30.
    Mr. Walden. Right.
    Mr. Caine. You do have some capacity to continue work until 
September.
    Mr. Walden. All right.
    Mr. Caine. So the program rules have a very compressed and 
a very intensive timeframe for both application approval and 
execution.
    Mr. Walden. Right.
    Mr. Caine. This is why we feel as a systems integrator that 
that is a good approach, because if we are willing to sign up 
for that as a school district's partner in this process, we 
will have the accountability to make sure that it ends on time 
and on budget.
    Now, let me go exactly to your point. The help desk was 
more than just a help desk as you know it. Okay? There is a lot 
of risk in the timeframe to execute. So, therefore, there is a 
lot of pressure to get it done, and I talked in my opening 
statement about who suffers if you do not get it done.
    So there were startup costs involved because in El Paso we 
were going from no infrastructure and no maintenance to support 
this infrastructure that we were building to something. This 
was a large, complex system.
    Mr. Walden. But in that startup cost phase you just 
referenced----
    Mr. Caine. Yes.
    Mr. Walden. [continuing] is that part of the $27 million?
    Mr. Caine. Yes.
    Mr. Walden. Okay.
    Mr. Caine. Okay. So there are startup costs that, as I can 
discuss later, were not evident; were not evident in the 
following years or would not have been evident in the following 
years. We never got to the following years. Okay?
    So within two and a half months of beginning the operation, 
IBM helped reduce the outstanding trouble tickets that the 
school district had from the old El Paso help desk arrangement, 
all right, from 600 down to 173. We thought that was good 
value.
    Mr. Walden. How much did they pay for the old help desk?
    Mr. Caine. We were not their partner. So I cannot answer 
that question, but my point, if I could just finish, my point 
here is to say that there was a presentation made to the board. 
The board reviewed the progress that had been made in that 
funding year and seemed pleased with it.
    Now, let me just say at the end of that funding year, El 
Paso did not have funding approvals for the following year. We, 
the company, stayed with the school district and ran that 
maintenance and help desk service for 6 months following the 
end of that year receiving no funds. So we stayed on with the 
school district from June until the end of the year on our cost 
because we knew that we had built this; we thought there was 
good value to the school district; and we did not want to leave 
the school district just hanging there.
    Mr. Walden. I am sure they appreciated that.
    Ms. Foster, do you know what your costs were for the help 
desk prior to IBM?
    Ms. Foster. No. I really was not responsible for the help 
desk. So I could not tell you.
    Mr. Walden. All right.
    Mr. Hawthorne. May I make a comment on the help desk issue?
    Mr. Walden. Yes. Somebody help me out here.
    Mr. Hawthorne. I think one of the issues that got the 
attention of IBM initially was that the help desk that was in 
place, and representing Alpha got our attention, was that they 
basically had no network, and it would take up to 4 months for 
a teacher or students if there was a problem in the network to 
get it repaired.
    And so what happened is that IBM came in. Let me back up. 
The school district realized that they really needed some help 
in this area, and that was the impetus for focusing on the help 
desk.
    And I might suggest also that there is probably maintenance 
in there. To just say that there was a help desk, that somebody 
is sitting there to answer phones----
    Mr. Walden. How many people were involved in the help desk? 
Mr. Caine?
    Mr. Caine. I do not know the exact number, Mr. Chairman.
    Mr. Walden. And how long was the help desk in operation for 
that $27 million?
    Mr. Caine. Well, as I said, we started, and then we got it 
up. We would have liked to have gotten it up earlier than we 
did within that year.
    Mr. Walden. That is fine.
    Mr. Caine. It was up for 2\1/2\ months.
    Mr. Walden. 2\1/2\ months?
    Mr. Caine. 2\1/2\ months, until the funding year ended June 
30.
    Mr. Walden. And for that 2\1/2\ month period, that is where 
the $27 million was allocated?
    Mr. Caine. No, Mr. Chairman. That portion of the award for 
that maintenance support, which included the help desk, was a 
part of a startup.
    Mr. Walden. How much was the help desk then?
    Mr. Caine. I do not have the breakout number for you on 
that, but for the maintenance for that network and for that 
infrastructure, which Mr. Hawthorne just referred to, that 
entire piece was $27 million, and we believe that within the 
2\1/2\ months that it was up--so we basically got it up in 
April----
    Mr. Walden. So you got up a network. Let me see if I 
understand this because I do not do what you all do. You 
created, wired, hard wired the 53 schools, got a network up and 
running among all those schools, and then had a support system 
in place including staff to keep it running. Does that kind of 
capture what you did?
    Mr. Caine. Yes, that is correct. Yes, you have described it 
correctly. I wanted to be care.
    Mr. Walden. Yes, sure. No, that is all right. That is what 
we are after here.
    And for that you got paid $27 million, but is the $27 
million just for the support or is it for the technicians to go 
in and wire and hook things up and crawl around in the 
buildings?
    Mr. Pratt, do you know?
    Mr. Pratt. Yes. There was the help desk. There was actually 
onsite support, maintenance if somebody had to go out onsite to 
do that. So that was all included in that. The number of people 
between the onsite maintenance and the help desk were in the 40 
range.
    Mr. Walden. So 40 people?
    Mr. Pratt. Yes. Also, it was a problem that the school 
district at the time had no space on their facility to house 
the Operations Center. So we had to go out within the city of 
El Paso and find a location that was proximate to the district 
that we could then outfit and build out, put all of the tools 
in place.
    So all of those things were rolled into that $27 million 
startup cost.
    Mr. Walden. Is that all E-Rate eligible?
    Mr. Pratt. It was part of the service. It was required to 
put that in place as part of the service which is eligible 
under E-Rate based on the rules at the time.
    Mr. Walden. All right. All right. My time has long since 
expired. My apologies to my ranking member.
    Ms. DeGette.
    Ms. DeGette. Thank you, Mr. Chairman.
    Ms. Foster, I was very impressed by your testimony. You 
seem to really know this business quite well and have been 
involved in it for a long time, and you also seem to be very 
committed, as I am sure everyone here is, to the goals of the 
E-Rate, which is to help low income students learn to use 
computers and have a level playing field.
    So let me ask you something we have been struggling with 
today, which is how do we eliminate the waste, fraud, and abuse 
that seems to be rampant in the program. One of the suggestions 
has been, as you probably heard, that we increase the local 
match to 20 percent. I am wondering from your perspective what 
that would do for the E-Rate program in these low income school 
districts.
    Ms. Foster. I think that if you increased it to 80 percent, 
it would be very difficult for districts, such as Ysleta, your 
poorer districts, to continue to provide what we are currently 
and to go forward with projects because one thing that you have 
to consider is that E-Rate does pay for certain eligible 
services, and mostly what we have used it for in the past and 
what I always use it for was connectivity issues and teleco 
issues.
    But then there's a whole other thing. You are building this 
infrastructure, but what you want to do with that is to educate 
kids.
    Ms. DeGette. Right.
    Ms. Foster. And so, therefore, you have to train the 
teachers, which is not E-Ratable. You have to buy the 
computers, which is not E-Ratable, and that is very expensive. 
Those types of services are very expensive, and so, therefore, 
the district is already putting a huge chunk of money into 
trying to go forward with these technology initiatives.
    E-Rate does a great job in giving us our connectivity and 
our teleco services, but then districts make a huge commitment 
as well so that you have the tools necessary so that if you 
raise that to 80 percent it would be very hard.
    Ms. DeGette. And, in fact, we have seen some examples like 
in our last hearing with Puerto Rico where they did all of the 
connectivity, but then they did not actually put in the 
computers or train the teachers, and that does not help the 
students one iota, does it?
    Ms. Foster. Not at all.
    Ms. DeGette. For your school district, YISD, how much would 
you estimate that you spend, and you probably know, for teacher 
training and for hardware and other aspects that are not 
covered by the E-Rate annually?
    Ms. Foster. District-wide annually, we probably spend $8, 
$9 million annually.
    Ms. DeGette. And how many students do you have in your 
district?
    Ms. Foster. About 45,000.
    Ms. DeGette. Ms. Glogovac, I am wondering if you can tell 
me in your testimony you said you thought there were a lot of 
tools out there for discovery of waste, fraud, and abuse that 
are being under-utilized that perhaps we could look at. I am 
wondering if you could explain some of those.
    Ms. Glogovac. Well, I am lucky enough to get access to some 
tools from Funds for Learning. I do not know if you are 
familiar with them. They are an organization here in the D.C. 
area. They are E-Rate consultants. They provide consulting 
services to applicants and service providers, and Sun actually 
purchased one of their packages that allows them to view the 
470 forms line item by line item and identify which applicants 
are looking for internal connections' needs.
    You can also go in and view what the applicants have been 
awarded for the last 5 years of E-Rate program, which kind of 
tells you how they might be increasing in their requests, and 
it also will allow you to pull up which service providers have 
been selected by that applicant in those subsequent years, 
which can provide you with information about a pattern of 
consistently the same service provider or possibly consistently 
the same consultants and service providers working together 
with an applicant. So that is possible.
    Ms. DeGette. What you are saying is that the regulators 
could just look at that data on line and begin to see patterns.
    Ms. Glogovac. Yes, you could.
    Ms. DeGette. Which, in fact, is what they did, to deny some 
of these IBM contracts and other contracts for El Paso and 
other school districts. They saw patterns and said that is a 
problem.
    Ms. Glogovac. Right.
    Ms. DeGette. I wanted to clarify something. You are not 
here testifying today on behalf of Sun, correct?
    Ms. Glogovac. That is absolutely correct.
    Ms. DeGette. You do not work for Sun anymore because you 
got laid off, right?
    Ms. Glogovac. Correct.
    Ms. DeGette. And you are just here testifying as to what 
you saw in your years of employment with that company, right?
    Ms. Glogovac. That is correct, and I also have a passion 
for this program, the E-Rate program, and that is why I am here 
today.
    Ms. DeGette. And why is that?
    Ms. Glogovac. I have two children that go to school and I 
work in the school, and I know how hard it is for schools to 
get funding for projects, and technology is at the top of the 
list of most of the schools. And I think this program really 
helps them out. I think it is important.
    Ms. DeGette. Thank you.
    Mr. Caine, I wanted to follow up on a question that the 
chairman asked because I was a little confused when Ms. 
Glogovac was testifying. She said Sun had a much lower rate 
that they were able to offer educational institutions, but IBM, 
as the manager in the El Paso situation, declined that.
    I am wondering if you know why that was declined, that 
lower rate.
    Mr. Caine. Ms. DeGette, I do not believe that we 
necessarily declined the lower rate. What we did is we looked 
at what the integration implications were of a Sun offering. Of 
course, the school district has to make these determinations, 
which they ultimately did, on selecting the Novell solution, 
but as you go to a fixed price contract and as the systems 
integrator, we had to manage where all of the different funds 
were going to ultimately come out for all of the different 
parts of what the school district had asked for.
    So when we presented, and we raised these issues with the 
school district about the various options and implications of 
the three vendor choices, the school district arrived at their 
decision.
    Ms. DeGette. So the school district was the one in your 
recollection that decided not to use Sun. It was not IBM.
    Mr. Caine. The school district ultimately made the decision 
to take Novell, correct.
    Ms. DeGette. And I am going to have staff bring you a 
document. This was a document that was prepared by the USAC 
about IBM's application. It says Evaluation of IBM's Statement 
of Work. Do you see that on the top? I just want to make sure 
we have the same.
    Mr. Caine. Yes, I do.
    Ms. DeGette. Okay. This is USAC's evaluation of the IBM 
Statement of Work for the El Paso Independent School District 
E-mail system for the funding year 2001, and it talks about the 
various ineligibility issues that arise.
    You can take a look on the second page of this document. At 
the bottom it says, ``Specific areas of the Statement of Work 
that raise questions are as follows.'' Do you see that there?
    Mr. Caine. I do.
    Ms. DeGette. And it says, ``Section 2.2 describes 
implementation services that appear to include high level 
ineligible consulting, such as updating the objectives and 
vision. Furthermore, the scope of the work described raises a 
question whether the extent of work that received funding 
approved in the previous year was completed successfully.''
    I am wondering if you can comment on whether or not IBM was 
aware that they were violating program rules with this item or 
were just misadvised by your employees and consultants about 
what was allowable under the E-Rate program rules.
    Mr. Caine. Well, Ms. DeGette, we have never seen this 
document before. So----
    Ms. DeGette. Well, are you aware of the issues raised there 
about Section 2.2?
    Mr. Caine. No, I am not personally aware.
    Ms. DeGette. Who would be aware of that?
    Mr. Caine. I am not sure I can tell you who specifically 
would be aware of it. This is the first time we have seen the 
document. I would say----
    Ms. DeGette. Well, forget about the document. Do you know 
about the issue that is raised right there?
    Mr. Caine. Not specifically, no.
    Ms. DeGette. So the USAC never told you that there was high 
level ineligible consulting?
    Mr. Caine. Well, I do not know the date of this document, 
and so it is hard for me to answer your question precisely, Ms. 
DeGette, because it does not have a date. I do not know 
whether----
    Ms. DeGette. Well, it is March 2003, sir, if that helps 
you.
    Mr. Caine. Okay. That is helpful, but it does not help me 
answer the question, but it certainly is, therefore, the case 
that that would be after our engagement with El Paso.
    Ms. DeGette. Okay. Section 2.2--so you have never seen this 
evaluation, even though you are in charge of--what is your 
title? It is Vice President for Government Programs?
    Mr. Caine. That is correct, but I am not----
    Ms. DeGette. But you have never seen this evaluation of the 
IBM Statement of Work?
    Mr. Caine. Ms. DeGette, I have never seen this evaluation, 
and I am not in charge of the overall E-Rate activity for the 
company, but I am involved with it.
    Ms. DeGette. Okay. Who is in charge of the E-Rate activity 
for the company?
    Mr. Caine. Let me explain my role if I could, as Vice 
President of Governmental Programs, I have responsibility for 
public policy issues for the company of which the E-Rate 
program, Edits and Section, was one. So I have been involved 
with the E-Rate program on behalf of the company, commenting on 
its development when it was a legislative proposal and when it 
became a regulatory reality and program.
    Ms. DeGette. Okay. So you are a guy who can testify as to 
the policy implications on behalf of IBM of the E-Rate, 
correct?
    Mr. Caine. That is correct.
    Ms. DeGette. Who is in charge of the E-Rate applications 
and the program within your company?
    Mr. Caine. We have a management system in IBM that is a 
distributed management system, a matrix management system. 
There is no E-Rate division of IBM.
    Ms. DeGette. So there is no equivalent within IBM of what 
Ms. Glogovac did when she was at Sun?
    Mr. Caine. I have to remember precisely the way she said 
it, but I thought I heard her say that she was a subject matter 
expert; is that correct?
    Ms. Glogovac. Single point of contact.
    Mr. Caine. Okay. So we have a management system within IBM 
that allows different people to get close to the customer 
because we have a very large company. So we have sales people 
and we have execution people who will get to know what the 
requirements of a school district are all across the country.
    Obviously we have been working with school districts for a 
long time. So we have a matrix management system that brings a 
team of people together when working with a school district 
about what their needs are, E-Rate or not. In the context of an 
E-Rate discussion, it would be a number of different people. We 
have regular discussions about the E-Rate rules. We have 
conference calls. We have now, as I said in my statement, 
created a Center of Competence within the company.
    But at the end of the day the organizational structure 
within the IBM company relative to the E-Rate program uses the 
fundamental matrix management system we have as an enterprise.
    Ms. DeGette. So what you are saying is for each team that 
goes out there in the field to advise the El Paso school system 
or the Denver public school system or any other school system, 
you are relying on the members of each of those individual 
teams to have the familiarity with eligibility under the E-Rate 
program.
    Ms. DeGette. That is correct, and they are backed up by 
people who are not necessarily customer facing, but are 
knowledgeable about the program and the rules as----
    Ms. DeGette. Who are those people?
    Mr. Caine. Those people, they would be people within the 
company, again, broken up into different section that would be 
dealing with the public sector and education.
    Ms. DeGette. Are those people identified as resources for 
those folks out in the field?
    Mr. Caine. Sure, and the staff. We have made these people 
available to the staff of the subcommittee for numerous 
interviews over the last----
    Ms. DeGette. And how many of those people are there?
    Mr. Caine. I cannot tell you exactly how many there are.
    Ms. DeGette. Okay. Mr. Chairman, I would like it if Mr. 
Caine could supplement his--I am sorry. Is Mr. Hawthorne 
helping out there? Do you know Mr. Hawthorne?
    Mr. Caine. Yes.
    Mr. Hawthorne. One of the resources sitting right here. 
This matrix that he is talking about, they were authorized to 
contact Alpha Telecommunications for E-Rate help.
    Ms. DeGette. That is the folks out in the field that Mr. 
Caine is describing. Was Alpha basically the consultant for IBM 
on eligibility issues under the E-Rate program?
    Mr. Hawthorne. That is correct, as I pointed out in my 
testimony. That is correct.
    Ms. DeGette. Okay, and are you the only consultant or is 
Alpha the only consultant that they were using?
    Mr. Hawthorne. That I do not know.
    Ms. DeGette. Okay. Do you know the answer to that, Mr. 
Pratt?
    Mr. Pratt. Yes, ma'am. We have evolved over time as the 
program has grown, and in the early days we had retained Alpha 
as part of our expertise on the E-Rate program, and that was 
nationally. They were available to us nationally. We have 
evolved now. As Mr. Caine has said, we have brought in from the 
applicant community, we brought in additional experts. We have 
approximately five folks. We have training that is conducted on 
a yearly basis as the E-Rate cycle starts again, brings up to 
speed on the eligible services, but we do have a central point 
that is responsible for making sure that we are all applying 
and adhering to the----
    Ms. DeGette. And the central point is Alpha?
    Mr. Pratt. No, it was initially, and we have now expanded. 
In addition to still using Alpha, we now have our own folks. As 
I said, we have got five IBM folks that are actually providing 
that support.
    Mr. Caine. Ms. DeGette, we hired Alpha to help us deepen 
our internal expertise about the program. We felt we had 
expertise, but we wanted more. They were a very knowledgeable 
and respected E-Rate enterprise. So we hired them as a 
consultant to help us internally.
    Ms. DeGette. That is great. What I am wondering is when all 
of your sales people are out in the field trying to work with 
these school districts and other educational entities, is there 
someone or a group, and I guess you are saying now there is.
    Mr. Pratt, when was that group established within the 
company?
    Mr. Caine. When was it established?
    Ms. DeGette. Yes, I was asking Mr. Pratt since he seems to 
know.
    Mr. Pratt. Yes, we started formulating it toward the end of 
last year in terms of the current population that is in the 
group that is supporting us today.
    Ms. DeGette. The end of 2003?
    Mr. Pratt. Yes, as we have evolved.
    Ms. DeGette. Okay.
    Mr. Pratt. That is where the group that is in place today 
began, and then prior to that we were using folks like Alpha.
    Ms. DeGette. Okay. So here is my question. There is some 
sales team out in the field, and they are trying to do a big 
contract. Were they required to vet that contract through Alpha 
so that the people with the expertise could see whether there 
were ineligible items there?
    Mr. Hawthorne. That is correct, through Alpha.
    Ms. DeGette. Was that a requirement that IBM put on its 
sales folks? I know Alpha did it, but was it a requirement?
    Mr. Pratt. Yes, ma'am.
    Ms. DeGette. And the sales folks all knew that?
    Mr. Pratt. Yes, ma'am.
    Ms. DeGette. And now what happens, now that you have this 
internal team?
    Mr. Pratt. The same exact thing, but we have, as I said, we 
have got an internal group now that has built up the expertise. 
We brought them in with that same level. So the first point of 
contact would be that team now.
    Ms. DeGette. Okay. So I guess I will ask you, Mr. 
Hawthorne, then since Alpha was apparently the E-Rate expert 
hired by IBM at the time that these applications were 
disallowed. Why from your perspective were there so many 
ineligible items in these contracts, in these proposals?
    Mr. Hawthorne. I do not recall any ineligible items in the 
contracts.
    Ms. DeGette. I mean, maybe you can take a look at that 
document that I gave Mr. Caine.
    Actually, Mr. Chairman, shall I go on on that?
    I am going to yield, and I will come back to you, Mr. 
Hawthorne.
    Mr. Walden. All right. Mr. Bohuchot, let's start with you.
    In your testimony you said on page 3, ``During the review 
of the SOWs, I questioned the size and scope of the effort 
being proposed by IBM. I was told that it was okay. `You never 
get everything you ask for. The SLD always reduces the scope of 
the work.' '' Who said that?
    Mr. Bohuchot. I do not recall the name of the individual. 
It was one of the Alpha people.
    Mr. Walden. One of the Alpha people. Okay. Then walk 
through with me how all of this works because the district's 
pre-discount total you said went from $216,030,996 to 
$129,185,228, a difference of nearly $85 million.
    Mr. Bohuchot. Eighty-six.
    Mr. Walden. All right. It is 84,845,768. Oh, that is right. 
Okay. So that is the figure that we needed to correct.
    Mr. Bohuchot. Right.
    Mr. Walden. I stand corrected. So okay. Eighty-six million 
dollars.
    How do you go from a $216 million project to a 100--now, do 
we change the one? No, we do not. Okay. So how do you go down 
to about a $129 million project? That is a fairly substantial 
change. What happened?
    Mr. Bohuchot. Well, once IBM had been selected as the 
strategic technology partner for the district, they had 
aggressively started the work to go ahead and figure out what 
the filing with the SLD was going to be, and when I was giving 
those documents to sign, I was just blown away by $216 million.
    Mr. Walden. It does tend to get your attention.
    Mr. Bohuchot. Yes, and I asked some questions.
    Mr. Walden. Of whom?
    Mr. Bohuchot. Of the IBM and the Alpha people who were in 
my office.
    Mr. Walden. All right.
    Mr. Bohuchot. And when that comment that you had quoted was 
made, and I asked a few high level questions, and I had told 
them at that time that I did not believe that that was a 
correct filing, that we are going to reduce it or that I needed 
to look at it in greater detail. The problem was that it needed 
to be signed and sent to the SLD to meet a time line.
    I did----
    Mr. Walden. Who came up with the $86 million reduction?
    Mr. Bohuchot. What we did is we subsequently met. After I 
signed the documents that went forward to the SLD, I had let 
the SLD know that I was going to look at the projects in detail 
and more than likely was going to reduce the filing.
    I had spent some time with the documents, the statements of 
work that were given to me by IBM, and set a meeting with IBM 
and Alpha, and we sat down to talk about it, and I was not 
convinced that there was not some redundancy in cost. By the 
time we had finished that meeting, we had reduced it by $86 
million.
    Mr. Walden. So there was redundancy in cost?
    Mr. Bohuchot. In my opinion there was.
    Mr. Walden. How so?
    Mr. Bohuchot. There was for file service, for example, 
there was the cost to set up the file servers, and you do the 
conditioning work to get them ready to be installed, and then 
the actual installation, and then when I looked at the 
technical support Statement of Work, there was also--you seem 
quizzical.
    Mr. Walden. No, go ahead.
    Mr. Bohuchot. Okay. When I looked at the technical support, 
which was another filing, it seemed to be redundant, some of 
that activity, with the file server activity. So when we kind 
of agreed that there was some redundancy there, we went ahead 
and reduced the technical support.
    Mr. Walden. Did you have technical people on your team 
evaluating this?
    Mr. Bohuchot. Yes, sir.
    Mr. Walden. So they took a look at this contractor. Was IBM 
your technical person for the company?
    Mr. Bohuchot. Well, yeah, they were.
    Mr. Walden. The integrator. So you had your own tech people 
looking at what IBM had put forward. Are they the ones who put 
forward the $200 million recommendation?
    Mr. Bohuchot. IBM did. I will say that, you know, when I 
sat down with IBM, I had my wide area network director.
    Mr. Walden. Sure.
    Mr. Bohuchot. My No. 1 technician, in essence, with me, and 
he was agreeing that, you know, everything was okay relative to 
the file server filing and the technical support filing, and I 
did take him outside the room, and I asked him not to say 
anything until I finished the discussion.
    Mr. Walden. Why? Why did you do that?
    Mr. Bohuchot. Well, because he honestly believed that--he 
did not understand the direction that I was taking relative to 
try and see if there was redundancy.
    Mr. Walden. I see.
    Mr. Bohuchot. And he believed that the filings were 
absolutely spot on. He had help to work on them and had a sense 
of ownership in those also.
    Mr. Walden. I see. So he helped put all of that together.
    Mr. Bohuchot. He participated with IBM. So I had asked him 
not----
    Mr. Walden. So you were coming back from a management 
standpoint saying, ``Justify what is in here.''
    Mr. Bohuchot. Well, the item that got him to kind of settle 
down was when I said to him, ``If you take the $49 million of 
technical support and you divide it by $250 an hour, that is 
102 people. Where are you going to put 102 people at?''
    Mr. Walden. So your tech support was $49 million?
    Mr. Bohuchot. Right.
    Mr. Walden. Over what period of time?
    Mr. Bohuchot. It would have depended. I mean, if we had 10 
months to do the project, it would have been 10 months. If we 
had----
    Mr. Walden. What did you whittle it down to in that sector?
    Mr. Bohuchot. We went from $49 million down to $13 million, 
and quite frankly, at $13 million I kind of acquiesced there 
because, you know, I really did not at that time know that it 
would be $13 million. At that point I said okay.
    Mr. Walden. Okay. So you got it down. How big is your 
project compared to El Paso's?
    Mr. Bohuchot. We have 165,000 students. So we are what, 
four times?
    Mr. Walden. How many schools?
    Mr. Bohuchot. Two hundred eighteen schools.
    Mr. Walden. I want to compare apples to apples here. I 
represent an apple growing region. So I always like to do that. 
We grow pears.
    Mr. Bohuchot. As a percent, El Paso would have been larger 
than DISD.
    Mr. Walden. Yes, I guess that is my question.
    Mr. Bohuchot. Right.
    Mr. Walden. So you had a bigger project with more schools 
with a smaller size help desk or help work?
    Mr. Bohuchot. I thought it was going to be a huge help desk 
for a while.
    Mr. Walden. But you cut yours down to $13 million is my 
point.
    Mr. Bohuchot. Right.
    Mr. Walden. And El Paso still stayed at $27 million, right? 
For next year, but still, what is the difference?
    Mr. Caine. I was going to clarify one of the comments about 
El Paso, which was the following year, which was never funded. 
That cost was cut in half basically in the proposal because the 
startup costs----
    Mr. Walden. So year 2. Was his year 1 or year 2?
    Mr. Bohuchot. Year 5.
    Mr. Walden. Year 5. Okay. What were your year 1 costs on 
the help desk then?
    Mr. Bohuchot. DISD has been very conservative relative to 
filing for E-Rate. Our year 1 was, I think--well, I can tell 
you exactly. Our year 1 filing was $12,272,000.
    Mr. Walden. That is for your total project though, right?
    Mr. Bohuchot. Internal connections was $12 million; telecom 
was $105.
    We have been very conservative for a number of reasons. One 
is that we are cash strapped, revenue strapped district, and 
having the commensurate matching funds has not been an easy 
thing.
    Mr. Walden. What happens now? I understand you have been 
rejected.
    Mr. Bohuchot. Well, we were rejected for E-Rate year 5. IBM 
had asked us to appeal, and we had thought about that, but we 
decided not to appeal.
    Understand that this whole process was about a year, 10, 11 
months in making. So during that time we had the benefit of all 
the work that we did with IBM and the numbers that we developed 
with them.
    Mr. Walden. But your tech support staff today, are they 
able to keep the network up and running and do all of that?
    Mr. Bohuchot. Well, it kind of is not a fair question 
because we did not get the funding that year. So we are just 
now working on the funding for E-Rate year 6. So, I mean, our 
tech support----
    Mr. Walden. But don't you have a network up and running 
today?
    Mr. Bohuchot. Yes. For what we have got up and running, 
which is a fairly robust network, we keep everything running 
with the staff that we have that is full time.
    Mr. Walden. And what does that cost you?
    Mr. Bohuchot. Probably $600,000, $650,000 a year.
    Mr. Walden. Thank you.
    Mr. Caine and Mr. Pratt, the CIO of Dallas Independent 
School District testifies that he questioned the size and scope 
of the effort being proposed by IBM, and he says IBM told him 
you never get everything you ask for. You just heard me go 
through that, with the implication that the district should ask 
for more than they plan to receive. At least that is the way I 
would read it.
    Is this how the system operates?
    Mr. Caine. Mr. Chairman, we have a different 
characterization than Mr. Bohuchot about what happened on this 
particular point.
    Mr. Walden. All right.
    Mr. Caine. We disagree with his characterization, and I 
will be happy to explain.
    Mr. Walden. Yes, please do. How did you get to over $200 
million?
    Mr. Caine. Mr. Chairman, the initial proposal from IBM to 
Dallas was $100 million, and it was not our proposal at $220 
million.
    Mr. Walden. Whose was it?
    Mr. Caine. It was the decision of the school district.
    Mr. Walden. Okay. We are somewhere between $100 and $200 
million off here. Who made the decision to take your proposal 
at $200 million, Mr. Bohuchot? Was it your folks?
    Mr. Bohuchot. I received documentation to sign to forward 
to the SLD of $216 million.
    Mr. Walden. Who gave you the documentation?
    Mr. Bohuchot. I suppose it was IBM. I mean, IBM was the 
partner that was supposed to help us bring those out.
    Mr. Walden. Okay. Mr. Caine, you seem to know that you 
submitted $100 million, and Mr. Bohuchot says documentation is 
$200 million. Who but the other $100 in there?
    Mr. Caine. Mr. Chairman, our understanding is that Mr. 
Bohuchot had a conversation with George McDonald, the SLD, and 
after that conversation the $200 million was reduced, but we 
never proposed originally the $200 million. We proposed a $100 
million scope.
    Mr. Bohuchot. If I can, maybe----
    Mr. Walden. If you can enlighten us, yes, because I was 
left with the impression from your comments, Mr. Bohuchot, that 
it was IBM that brought you a $216 million contract or 
proposal.
    Mr. Bohuchot. I have a document here and its proposed 
adjustments that was developed by IBM, and the numbers that we 
are talking about, the $216 reduced, are in this document here.
    Mr. Walden. Would it be possible for you to provide that?
    Mr. Bohuchot. Sure.
    Mr. Walden. For the record, without objection.
    [The following was received for the record:]

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    Mr. Caine. And, Mr. Chairman, if I could just add that we 
have provided all of our documents to the committee staff, as 
well.
    Mr. Walden. Including this one?
    Mr. Caine. All of the documents that we have, yes.
    Mr. Walden. All of the documents that you have?
    Mr. Caine. Yes, all the documents----
    Mr. Walden. Is this a document you recognize? Can you show 
this?
    Mr. Caine. I have to see it.
    Mr. Walden. Oh, yes, that is always good in this process.
    Mr. Caine needs to see that.
    Yes, it has the IBM logo on it, Mr Caine. I will give you a 
minute with that.
    Mr. Hawthorne, do you have some knowledge of this?
    Mr. Hawthorne. Your Honor, I do recall working with the 
Dallas School District, and I recall that it was one of the 
more sophisticated school districts that we worked with. And my 
recollection is that the Dallas School District, the technology 
person, drove the process, and that the member that originated 
$200 million or thereabouts was a Dallas School District 
member, not an Alpha or an IBM member, and that this number was 
reduced not voluntarily. It was only reduced after Mr. Bohuchot 
had a conversation with the SLD, specifically Mr.--I forget his 
name.
    Mr. Walden. McDonald?
    Mr. Hawthorne. McDonald, yes.
    So it was not reduced, in my opinion, as an independent 
review.
    Mr. Caine. And, Mr. Chairman, I do want to answer your 
question about this.
    Mr. Walden. Yes, please.
    Mr. Caine. Yes, we did submit this document to the staff.
    Mr. Walden. Okay. So we do have it. As you can tell, we 
have a lot of them in the binder.
    Ms. DeGette.
    Ms. DeGette. Thank you, Mr. Chairman.
    Okay. Mr. Hawthorne, if you could just take a look at that 
document that I had given to Mr. Caine, the one that says 
``evaluation of IBM Statement of Work,'' and maybe you are 
familiar with some of these issues. I will simplify my 
questioning.
    If you can look at Appendix A, it says Appendix A, 
``Eligibility Issues Contained in Statement of Work,'' and 
first of all, have you ever seen this document from the USAC?
    Mr. Hawthorne. No, I have not.
    Ms. DeGette. What Appendix A appears to be, well, what it 
says it is, the left column and the information that follows 
describes information contained in the Statement of Work. The 
right columns provides conclusions about the E-Rate eligibility 
of the products or service described by the statements.
    Do you see that there?
    Mr. Hawthorne. I see it, yes, ma'am.
    Ms. DeGette. Okay. So here is my question to you. It says 
Section 2.2 is titled E-mail installation planning. Eligibility 
comment: this may imply initial planning which is not eligible 
per the eligible services list.
    Were you aware of any problems with the title of Section 
2.2, implying that there may be ineligible planning?
    Mr. Hawthorne. What it says, ma'am, is ineligible initial 
planning, which is outside the scope of E-Rate.
    Ms. DeGette. So that was not contemplated?
    Mr. Hawthorne. No, it does not say that planning is 
ineligible because it is.
    Ms. DeGette. Right.
    Mr. Hawthorne. It is eligible.
    Ms. DeGette. But what you are saying is there was no 
ineligible planning contained.
    Mr. Hawthorne. I was not aware of any initial planning. To 
be perfectly honest, it was very difficult to get IBM moving on 
the project at all because they wanted to wait until the 
project was funded. So to my knowledge, there was no initial 
planning.
    Ms. DeGette. Okay. What about Item 2? Now, this clearly 
says in the next category here Section 2.2, Item 2, is develop 
distributed E-mail architecture. That was clearly in the 
Statement of Work, but the eligibility comment says such an 
activity clearly falls within the ineligible initial planning 
category. Architecture must already be known for applicants to 
indicate the products and services to be deployed, which is a 
requirement of Form 471.
    Now, did IBM run this by you before they put this section 
in their Statement of Work? That is clearly ineligible.
    Mr. Hawthorne. Well, the SLD says it is clearly ineligible, 
but they also say that it clearly falls within the ineligible 
initial planning category.
    Ms. DeGette. Right. Develop distributed E-mail architecture 
is within the ineligible initial planning category, right?
    Mr. Hawthorne. Ineligible initial planning category. That 
is what it says in the right-hand column, and again, I am not 
aware of any initial planning done by IBM on this project.
    Ms. DeGette. No, what the USAC is saying is this item, 
develop distributed E-mail architecture, is ineligible because 
it is within the initial planning category, but you disagree 
with that?
    Mr. Hawthorne. I know of no initial planning involving 
this.
    Ms. DeGette. Well, what they are saying the initial 
planning is develop distributed E-mail architecture. You do not 
think develop----
    Mr. Hawthorne. During the initial planning stage?
    Ms. DeGette. Yes.
    Mr. Hawthorne. If it is in the initial planning stage, it 
would be ineligible, but I do not recall that being done, 
during the initial planning stage. There was no initial 
planning.
    Ms. DeGette. Let's talk about the fifth little section 
there, the second one from the bottom, which says Section 2.2, 
Item 12, is ``assist in developing standards for conductivity, 
security, and access from outside the firewall,'' and the 
comment is, ``Security features are not eligible under current 
program rules and, thus, consultation in security standards 
would not be eligible.''
    What is your response to that?
    Mr. Hawthorne. I do not know what current program rules you 
are talking about. Are you talking about current current 
program rules or are they talking about current rules that were 
current at the time El Paso made its application?
    Program rules change each year.
    Ms. DeGette. Did this program rule change, since you are an 
expert?
    Mr. Hawthorne. My recollection is that connectivity dealing 
with firewalls was eligible in 2001. I may be wrong.
    Ms. DeGette. It was? Okay. Did IBM run this item past you 
as the expert on the E-Rate eligibility?
    Mr. Hawthorne. If it was in the Statement of Work, they ran 
it, yes.
    Ms. DeGette. So you saw the whole Statement of Work, right?
    Mr. Hawthorne. Yes.
    Ms. DeGette. Okay. Take a look at the next page of Appendix 
A, and it says Section 2.5, ``Web maintenance overview 
indicates that Cyber Control content filtering software will be 
provided.'' Do you see that?
    Mr. Hawthorne. Yes.
    Ms. DeGette. Now, the comment is filtering software is not 
eligible. What is your opinion on that?
    Mr. Hawthorne. I would saying filtering software is not 
eligible.
    Ms. DeGette. But it was----
    Mr. Hawthorne. I do not recall seeing this in the El Paso 
Statement of Work.
    Ms. DeGette. Okay, but the USAC apparently did see it in 
the El Paso Statement of Work.
    Mr. Hawthorne. So they say, yes.
    Ms. DeGette. But you do not recall, and you reviewed that.
    Mr. Hawthorne. I did personally.
    Ms. DeGette. Okay. So you made a mistake? Would that be----
    Mr. Hawthorne. Well, I am not above making mistakes, but I 
make very few of them.
    Ms. DeGette. Well, as I recall, your company received what, 
about $2.4 million in fees as a result of the----
    Mr. Hawthorne. From IBM, that is correct.
    Ms. DeGette. For the El Paso project.
    Mr. Hawthorne. That is correct.
    Ms. DeGette. Were you the one that worked on this or were 
there others that helped you review it?
    Mr. Hawthorne. There were others, yes.
    Ms. DeGette. How many others?
    Mr. Hawthorne. There were three of us altogether.
    Ms. DeGette. And did you review this and then did you 
provide written comments to IBM about their proposal or did you 
draft the Statement of Work?
    Mr. Hawthorne. No, IBM provided the Statement of Work, 
which we reviewed and we provided----
    Ms. DeGette. And who was it you dealt with at IBM with 
respect to the El Paso proposal?
    Mr. Hawthorne. I believe it was Don Riddick.
    Ms. DeGette. Don Riddick?
    Mr. Hawthorne. Yes, that's my recollection.
    Ms. DeGette. Okay. And did you provide any comments to Mr. 
Riddick about ineligible items?
    Mr. Hawthorne. Continually.
    Ms. DeGette. Do we have that documentation?
    Mr. Hawthorne. I believe I provided everything that was in 
our possession regarding that.
    Ms. DeGette. Okay. Now, Mr. Caine, when this initial 
Statement of Work was developed by IBM for the El Paso 
district, were you in your position at IBM at that time? I 
think that was 2001.
    Mr. Caine. Yes.
    Ms. DeGette. Did anyone bring it to your attention, any 
issues relating to ineligible items in the Statement of Work 
for El Paso?
    Mr. Caine. No.
    Ms. DeGette. So that is why you told me earlier when I 
showed you this document you did not have any idea, correct?
    Mr. Caine. We have never seen this document before. We have 
never and the IBM company has not seen this document before.
    Ms. DeGette. As far as you know. You have never seen it.
    Mr. Caine. No, but I am consulting with my colleagues, we 
turned everything over to the subcommittee that we have, and we 
have never seen this, and we do not know the date of it.
    Ms. DeGette. Okay.
    Mr. Caine. Can I just amplify one thing that Mr. Hawthorne 
said?
    Ms. DeGette. Sure.
    Mr. Caine. The eligible services list has evolved 
dramatically over the time, over the years of this program, and 
different interpretations have been made about what is eligible 
and what is not eligible throughout that time period. So in 
defense of Mr. Hawthorne, it is very hard to make a definitive 
statement about a document we have never seen before that is 
making a decision about an eligible service without a time 
context to know whether it aligns with the El Paso application 
or not.
    Ms. DeGette. Well, Mr. Caine, let me say this. We are 
concerned, and we are not just trying to pick on IBM. We are 
concerned because we are talking about millions and millions, 
in some cases hundreds of millions of dollars from the E-Rate 
fund which are just wildly going around and which could be used 
to wire up these low income schools.
    And I am going to ask Mr. McDonald to come back up in a 
minute and talk about this, but it seems to me that when 
corporations and their consultants are making so much money 
from these projects, the letter of the regulations should be 
followed, and I do not think you would disagree with that.
    Mr. Caine. Not one bit.
    Ms. DeGette. One bit.
    Mr. Caine. Not one bit, and that is exactly why we believe 
the rules and the criteria should be clear, and quite honestly, 
they have not been either clear or consistently applied over 
time.
    Ms. DeGette. I would like to recall Mr. McDonald.
    Mr. Walden. Mr. McDonald, could you rejoin us for this 
panel? I think you have now been on all three panels, and as a 
reminder, you remain under oath.
    Ms. DeGette. Thank you, Mr. McDonald. I know you have had a 
long day today.
    Are you familiar with the document that I have been talking 
with these gentlemen about?
    Mr. McDonald. I am.
    Ms. DeGette. And did you prepare that document?
    Mr. McDonald. A colleague of mine on my staff did.
    Ms. DeGette. And when was that document prepared?
    Mr. McDonald. We did not date this. There are a series of 
these drafts that we provided to your staff. IBM did not see 
this analysis until last week when we sent a letter to them 
asking them to comment on our tentative conclusions. So they 
would not have recognized this document.
    Ms. DeGette. Okay. I think I have got a copy of that. That 
letter that was sent last week was sent to Bob Richter?
    Mr. McDonald. That is correct.
    Ms. DeGette. And he is addressed in your letter as the 
National E-Rate program Executive, correct?
    Mr. McDonald. Yes, I believe he is in the new Center of 
Competence that Mr.----
    Ms. DeGette. Is that right, Mr. Caine?
    Mr. Caine. That is correct.
    Ms. DeGette. Okay. Now, some of the issues that were 
outlined in the evaluation of the IBM Statement of Work, were 
those issues also contained in your letter that was sent to IBM 
last week?
    Mr. McDonald. Yes.
    Ms. DeGette. So while they may not be familiar with this 
particular document, they are familiar with those issues, 
right?
    Mr. McDonald. That letter just went out last Thursday.
    Ms. DeGette. So were they apprised of the eligibility 
issues before last week?
    Mr. McDonald. No, ma'am.
    Ms. DeGette. So, for example, in Appendix A, when I am 
asking Mr. Hawthorne and Mr. Caine about these ineligibility 
issues, they were never informed of that before?
    Mr. McDonald. They were not informed before the letter last 
Thursday. That is correct.
    Ms. DeGette. Okay.
    Mr. McDonald. We were working with the FCC about getting 
this document out.
    Ms. DeGette. All right. Well, let me ask you this because 
we were talking about some of these issues that were in 
Appendix A, Section 2.2, develop distributed E-mail 
architecture, and the eligibility comment was such an activity 
clearly falls within the ineligible initial planning category.
    Can you explain why that item would be ineligible?
    Mr. McDonald. Applicants are supposed to do technology 
planning. They are supposed to develop their network concepts, 
the planned architecture and so forth, and then put out a Form 
470 that describes that actual services they need to fill that 
technology plan. The planning developing architecture, that 
kind of information, that kind of work is supposed to be done 
ahead of time before filing the Form 470, and certainly before 
filing the Form 471. That is ineligible for discount.
    What is eligible for discount is the actual work to put 
that technology plan in place.
    Ms. DeGette. And do the vendors know that?
    Mr. McDonald. I believe they do.
    Ms. DeGette. And was that the case in 2001?
    Mr. McDonald. That has always been the case.
    Ms. DeGette. Okay. So the rules did not change around that?
    Mr. McDonald. Firewall has changed since 2001.
    Ms. DeGette. Okay. Now, so when you say here Section 2.3, 
Item 3 indicates that IBM servers will be installed and 
configured with free firewall software, you say here or your 
colleague says firewall software is not eligible. But that was 
not true in 2001? It was eligible?
    Mr. McDonald. No, it was not eligible in 2001, and in 
looking at the eligible services list, they would have seen 
firewall is ineligible.
    Ms. DeGette. Okay, and again, in 2001, were the vendors 
well aware that firewall software was not eligible at that 
time?
    Mr. McDonald. They should have been. It was on our eligible 
services list.
    Ms. DeGette. And certainly consultants who were experts in 
the E-Rate program would know that I would think.
    Mr. McDonald. I would hope so.
    Mr. Hawthorne. Consult----
    Ms. DeGette. Let me finish.
    Just one more question, Mr. McDonald. Where it says Section 
2.5, Web maintenance overview indicates that Cyber Patrol 
content filtering software will be provided, and then the 
comment is filtering software is not eligible; was that the 
rule in 2001?
    Mr. McDonald. That has been the clear rule from the 
beginning. I believe Congress addressed that when they passed 
the Children's Internet Protection Act, I believe.
    Ms. DeGette. Okay. What I would like you to do, just take 
just a second and look over this Appendix A and tell me for all 
of the items on Appendix A, were those rules in place in 2001 
and should the vendors have known about it in 2001.
    Mr. McDonald. I believe so.
    Ms. DeGette. All right. Mr. Chairman, I would ask unanimous 
consent that both this document, ``Evaluation of IBM Statement 
of Work,'' and also the September 16 letter from the USAC to 
IBM be entered in the record.
    Mr. Walden. The letter is already in the record, but the 
other information will be added.
    Without objection, so ordered.
    Ms. DeGette. And I would also say, Mr. Chairman, that I 
would hope that the USAC where it is seeing issues like this, 
where there is widespread ineligibility in these applications 
would communicate that to the vendors immediately. I would hope 
that would happen because I can now understand some of Mr. 
Caine's confusion at least.
    Mr. McDonald?
    Mr. McDonald. At this point we were waiting for the FCC 
decision on the basic big picture with the IBM procurement 
approach, which was true of El Paso as well. So we did not know 
what the guidance was going to be about the procurement 
approach, and if the decision was it was improper and was 
always improper, we would have sought to recover the money from 
El Paso for everything independent of the services. We were 
doing this analysis. Depending on what the FCC decided, then we 
would pursue recovery based on the services. That was what was 
going through our mind.
    Ms. DeGette. Thank you.
    Thank you, Mr. Chairman.
    Mr. Walden. I believe Mr. Hawthorne wanted a follow-up.
    Mr. Hawthorne. I am not sure what the procedure here is, 
but could we have additional time to respond to this document 
since we have just seen it today?
    Ms. DeGette. Mr. Hawthorne, we would give you----
    Mr. Walden. The record remains open for 10 days.
    Ms. DeGette. I would not object to allowing you to send a 
written response.
    Mr. Hawthorne. When Mr. McDonald was speaking, and I am not 
positive on this; I have to go back and review the rules, but 
it says on Section 2.3, Appendix A, the second column, 
``firewall software is not eligible,'' but then it says, 
``Program rules require cost allocation for such components.''
    I am not aware that the cost allocation process was even in 
place when El Paso was funded. Again, I may be wrong. I would 
just like an opportunity to review.
    Ms. DeGette. Mr. Hawthorne, I have no objection whatsoever 
to you being allowed extra time to respond.
    Mr. Hawthorne. Thank you.
    Mr. Walden. And our record does remain open.
    Mr. McDonald.
    Mr. McDonald. And our letter asks IBM to respond to us 
within 30 days. They have asked for an extension of that, which 
we will grant, to get back to us with a detailed response to 
our analysis.
    Mr. Walden. All right. I guess sort of fundamentally here, 
Mr. Caine or Mr. Pratt, did El Paso need a $67 million system? 
And did Dallas need a $216 million system?
    Mr. Caine. Mr. Chairman, the E-Rate program asks school 
districts to develop a technology plan, as we talked about this 
afternoon.
    Mr. Walden. Right.
    Mr. Caine. It is that plan that service providers or 
vendors like IBM are asked to respond to. We do not tell the 
school district what they need. They set up the requirements, 
and then we respond to their 470's and their RFPs accordingly.
    That process goes through obviously a judgment and a 
decisionmaking process by the schools and then boards. This was 
a fairly open, very open process of the plan that the school 
districts prepare--what is in the community's interest. Do they 
need it? Do they have the appropriate funds to put up their 
share as you were talking about earlier this afternoon?
    And so we respond to what the community feels it needs.
    Mr. Walden. Okay, but how does that gibe then with the sort 
of cookie cutter approaches IBM came up with for various school 
districts, the almost identical, if not identical, proposal? 
Twenty-one of them?
    Mr. Caine. Well, we would not necessarily say they were 
cookie cutters. We were saying that the school districts 
obviously are interested in understanding what other school 
districts are doing. They can get that information from various 
sources: the SLD Website. There are a number of Websites within 
the E-Rate community.
    Now, each school district has to come up with its own 
technology plan.
    Mr. Walden. Okay. Mr. McDonald, weren't these 470's pretty 
much identical?
    Mr. McDonald. They were.
    Mr. Walden. Do you think that represents individual plans 
from each district of those you saw in those 470's?
    Mr. McDonald. I believe the committee staff has an E-mail 
from Seattle from IBM to the Seattle Public Schools attaching 
the 470, suggesting this is a good 470 that is very broad and 
it gives us lots of flexibility.
    So I think there is reason to believe that the 470's were 
suggested by IBM.
    Mr. Walden. Is this one of these where they basically ask 
for every available service?
    Mr. McDonald. The 470, I have used the word 
``encyclopedic.'' It appears to try to cover every possible 
service and equipment that is eligible under the program.
    Mr. Walden. All right. I want to get back to my other 
question. Did Dallas need a $216 million system?
    Mr. Caine. Mr. Chairman, only they can answer that 
question. We suggested to them that they did not at the 
beginning.
    Mr. Walden. Then let me have you go to Tab 41, and I 
realize you say you told them $100 and some million dollar 
system, but it is like two or three pages in here, and it is 
from one of your folks, IBM H0026480, and it is from a James 
Whitmer, I believe, who is with IBM.
    Mr. Caine. Mr. Chairman, could I just ask are you on Tab 41 
did you say?
    Mr. Walden. I believe that is correct. Tab 41, and then 
about three pages in, and you give your IBM number at the 
bottom.
    Mr. Caine. James Whitmer, yes, and you said the number was?
    Mr. Walden. Zero, zero, two, six, four, eight, zero. Two, 
six, four, eight, zero.
    Mr. Caine. Okay.
    Mr. Walden. And I go back to this because here, this 
person, Jim Whitmer, is your IBM Global Services Integrated 
Technology Services Sales, and it is dated in March. And, Mr. 
Pratt, I believe you were cc'ed on this E-mail, and it says, 
``We met with Dallas ISD staff today and our approach to any 
changes will not require a new QA or PCRs. Worst case, they 
will eliminate one of the SOWs which will most likely be the 
video SOW. This would actually be a postponement until E-Rate 
6. We will be meeting with them again this Thursday and will 
encourage them to move ahead with the SOWs as submitted 
totaling 216M. If there are any questions, please let me know. 
Thanks. Regards, Jim Whitmer.''
    So you are telling me you submit a $100 and some million 
dollar proposal. It comes back at 200, but then your folks are 
saying, hey, you know, we are going to try to get them to move 
ahead as planned here for the full $216.
    Mr. Pratt, do you have a comment on that or Mr. Bohuchot? 
Mr. Caine?
    Mr. Pratt.
    Mr. Pratt. Yes, sir. I wasn't directly involved in the 
conversation. I got copied on a lot of notes for Western 
Region, but my understanding was that when DISD came back and 
said the requirements due based on the technology plan, this is 
what we need, we felt the integrity of the program would be 
held up. If we started reducing at that point, there was a 
question that the SLD would come back and say why was this 
asked for in the first place.
    And so it was better to continue with the original 
submission.
    Mr. Walden. Well, what that says to me is we never believed 
in the original submission of 216. That was them. Now they are 
coming back saying that is more than we need, and you are 
saying, no, let's keep the 216 in there. They might ask other 
questions? Is that what you are saying?
    Mr. Pratt. Not necessarily other questions, but once we----
    Mr. Walden. Well, you said it might bring into question, I 
think you said, the integrity of the submission.
    Mr. Pratt. The integrity of the submission. It would raise 
questions as to why would you submit $216 million in the first 
place if----
    Mr. Walden. Well, isn't that a realistic question somebody 
needed to ask? Why do you think it raises that question?
    Mr. Hawthorne? Mr. Caine? We are talking a lot of--Mr. 
Bohuchot, how do you respond to that?
    It appears here--I will just read it again. ``We will be 
meeting with them again this Thursday.'' I assume that means 
you all, the school district, ``and will encourage them to move 
ahead with the SOWs as submitted totaling $216 million.''
    Mr. Bohuchot. I am supposing that we met on a Thursday, and 
we jointly came to the conclusion that we should reduce the 
filing, which generated the document that you have got.
    Mr. Walden. Right, that then came out in May, right? That 
says, ``The following summary shows adjustments based on 
reduced number of schools, recent due diligence, and the 
elimination of the video SOW.''
    So, indeed, Mr. Whitmer was right. You are going to 
eliminate, but I guess the question I have is: what happens in 
between here? I mean, on the one hand, I am told--one second, 
Mr. Hawthorne. I will give you time.
    Mr. Hawthorne. Okay.
    Mr. Walden. On the one hand, I was told it was not IBM's 
plan. Then it seems to be like it is your techies and the 
school district pumped it up. It comes back to IBM. IBM said, 
``Hey, not our plan. We did not pump it up to 216. They did.'' 
But then when you start to question it, their people are 
saying, ``We are going to try and keep them going at 216 
because somebody may question why it was pumped up.'' Mr. 
Hawthorne?
    Mr. Hawthorne. You know, IBM certainly does not need any 
help from me, but my recollection on this particular item was 
that there was talk of a reduction, but when you are talking 
reduction, you just can't start lopping stuff off. What you 
have to do is look and see what is out there.
    Do you just reduce by a certain dollar amount or do you see 
how much you want to cut back on your maintenance? Do you see 
how much you want to cut back on your internal connections?
    It has to be some type of proportionate adjustment. You do 
not just----
    Mr. Walden. Well, I do not dispute that. That is not the 
question here.
    Mr. Hawthorne. Well, I think it is the question. From what 
I have heard being bantered about here is that there was this 
great reduction because someone looked at this and said, ``We 
cannot afford this. We do not want to do this.''
    Mr. Walden. No, that is not what I heard. What I heard was 
from Mr. Bohuchot, they figured out it was gold plated. It was 
far more than they needed for their system. Isn't that what you 
basically said, Mr. Bohuchot? Eighty-six million?
    Mr. Bohuchot. Quite frankly, a lot of it was because I felt 
that I would end up here eventually regardless of what was 
being filed.
    Mr. Walden. Not everybody is that lucky, but we are glad 
you are here.
    Mr. Bohuchot. And here I am, and I would rather explain $17 
million in technical support versus $43 million or whatever it 
was.
    Mr. Walden. All right.
    Mr. Bohuchot. So you were suspicious of this; is that 
right? Most people do not wake up in the morning and say, 
``Gee, I think I am going to get to go to the O&I Subcommittee 
some day.''
    IBM and the district has a long, good standing 
relationship. I personally have worked with numerous IBM 
staffers. They were our partner implementing a major ERP 
system, finance H.R. payroll, and quite frankly, without them, 
we would not have got it done on time and under budget. So it 
is not an IBM personal thing.
    Mr. Walden. No.
    Mr. Bohuchot. We hit a wall, and the wall said there is 
$216 million there. Ruben, you have to sign the documents to 
let it go. Are you comfortable signing it?
    Quite frankly, I was not comfortable signing it.
    Mr. Walden. Good for you.
    Mr. Bohuchot. Well, I do not want to take credit for it.
    Also I do not know if Mr. McDonald remembers, but I also 
called George.
    Mr. Walden. Right.
    Mr. Bohuchot. And I said, ``George, I have signed this 
thing, but I want to let you know that I am going to adjust 
it.''
    Mr. Walden. Do you remember that, Mr. McDonald?
    Mr. McDonald. I do, sir.
    Mr. Walden. You do. Okay.
    I want to go to Tab 17, and you all may want to take a look 
at this. Mr. McDonald, I think this was the document that you 
recently referred to when you talked about Seattle. I will let 
you get that in front of you, sir.
    Mr. McDonald. Yes, sir.
    Mr. Walden. In about the third paragraph down, it says 
Mitchell, and that is John Mitchell. Who is John Mitchell?
    Mr. McDonald. He is a consultant to Seattle Public Schools 
for overseas--their E-Rate.
    Mr. Walden. It says, ``Mitchell stated that he called 
George McDonald after the December 3, 2002 Website noticed was 
posted because he was concerned that SPS would be targeted for 
scrutiny because they had used the Form 470 boilerplate 
template that IBM had provided to them during their preliminary 
discussions with IBM when they posted their FCC Form 470. 
Mitchell forwarded me the E-mail that he received from IBM with 
the FCC Form 470 boilerplate template attached.''
    This, by the way, is from Kristy Carroll to file, and then 
the next graph says, ``Mitchell stated the discussions with IBM 
began in October and that he was on a conference call with 
Steve Mueller and Charles Gentry. He stated that one of IBM's 
selling points was that they represented to him that former SLD 
attorneys work for IBM, and as a consequence IBM knows all of 
the loopholes in the program. Mitchell said that because SPS 
had started the E-Rate process a little late this year, that 
the plan with IBM was that SPS would use the Western States 
consulting contract agreement rather than go through local 
procurement regulations.''
    And it later says Mitchell said that he saw it as a way for 
IBM to get around State procurement cycle and says Mitchell 
stated that another one of IBM's selling points was that IBM 
could get SPS a lot more funding than they had gotten in the 
past.
    The next page it says Mitchell stated that he was told by 
Alpha or Gentry that they could increase the number of 90 
percent sites at the SPS from 13 to 40, and then says Mitchell 
stated that he started feeling unpleasant about the discussions 
with IBM in November.
    Can you address this for us?
    Mr. McDonald. Kristy Carroll is our Associate General 
Counsel. She is here with us today.
    And when we posted the notice in December 2002, we posted a 
prominent notice on our Website about the procurement pattern 
that IBM had engaged in, and I contacted Mr. Bohuchot at that 
point, and a lot of the applicants who had 2002 applications 
with IBM to tell them I was not making any judgment about the 
2002 applications, except this letter was the only one that we 
had completed, but that to alert them that our conclusion that 
this procurement pattern was not consistent with the rules. So 
as they approached, we were in the filing window for 2003. They 
would have a heads up not to continue down this road or at 
least to do so at risk since our conclusion was that it was not 
consistent.
    So that Website notice prompted Mr. Mitchell to call me and 
said we did not go through this process, but we did use the 
encyclopedic 470.
    The allegation of that SLD attorney is working for IBM, I 
know nothing about that. Certainly USAC attorney, I know all of 
the attorneys that have worked for USAC, and I am not aware 
that any of them work for IBM.
    And then he did provide the template 470.
    Mr. Walden. All right.
    Mr. McDonald. If I could go back to the question that 
Congresswoman DeGette asked.
    Mr. Walden. Yes.
    Mr. McDonald. Giving IBM a heads up about the ineligible 
services, in our December 2002 denial letter for this letter 
which we copied IBM on, there is an entire discussion in there 
about ineligible services that we believe were not the basis of 
our denial. It was the procurement pattern, but that we gave 
them a heads up that we thought they were asking for ineligible 
in the initial planning.
    Ms. DeGette. Thank you for clarifying your testimony, Mr. 
McDonald, because that is what I was just saying. The staff has 
before it sounded like there was no notice at all, and in fact, 
your testimony right now shows there was notice several years 
ago.
    Mr. McDonald. December 2002.
    Ms. DeGette. Thank you.
    Mr. Walden. Mr. Caine, do you want to comment?
    Mr. Caine. I was just going to say that that was relative 
to the Ysleta denial, and therefore prompted the appeals to the 
Commission both by the Ysleta School District and other school 
districts, about those denials of funding. So in that context, 
yes, Mr. McDonald is correct.
    But the Commission ruled five-nothing on an opinion that we 
think was very fair and balanced and pointed out a number of 
things where there was inconsistency and ambiguity all the way 
around.
    Mr. Walden. Did they rule on this issue of the boilerplate 
proposals?
    Mr. Caine. No, I don't believe that was part of the 
decision.
    Mr. Walden. All right. Let's go to Tab 33. Perhaps you can 
help us clarify this one as well, Mr. Caine. This is an E-mail 
to Tracy Diaz/Austin/IBM at IBM U.S. from Jack McKinney, Kansas 
City IBM at IBM U.S., and it talks about E-Rate lessons 
learned, year 5 strategic partnership agreement, Oklahoma City 
schools, $49 million.
    And if you drop down to the second from the bottom point, 
it talks about communication and time lines are areas that need 
improvement, and then the second from the bottom point says, 
``The customer knows that the pricing for the SOWs are 
significantly inflated but has not''--I assume that should be 
``had.'' It is just the letter A--``but has not a conversation 
on how this will be remedied. Our pricing methodology would be 
undefendable in public forum.''
    Do you have any idea what this document that is supplied by 
IBM would----
    Mr. Caine. No, I do not, but I will tell you that relative 
to Statements of Work----
    Mr. Walden. I'm sorry. Relevant to?
    Mr. Caine. SOWs.
    Mr. Walden. Okay.
    Mr. Caine. Statements of Work.
    Mr. Walden. Yes.
    Mr. Caine. They were frequently expansive by many 
applicants in the program. As a matter of fact, there was 
guidance given that expansive Statements of Work enabled 
substitutions and revisions later on to be made.
    Mr. Walden. Sure.
    Mr. Caine. So that the 470 process also were made to be 
expansive because they were basically public notices, and that 
there were school districts that we had nothing to do with that 
were funded using expansive 470's and Statements of Work.
    So I cannot refer to this specific E-mail as you have asked 
me to do, Mr. Chairman, but on the topic of expansive 
Statements of Work and the 470 process, we do have experience 
that says, yes, vague, expansive Statements of Work are not the 
preferable approach, but they were the reality at the time.
    Mr. Walden. Are they still the reality, Mr. McDonald?
    Mr. McDonald. I hope since the Ysleta order that they are 
not, and we are looking at those then.
    Mr. Walden. Wouldn't this be like hiring a contractor to do 
a remodel on your house and the contractor basically comes back 
and says, ``Here, Mr. Homeowner or Mrs. Homeowner. You know, 
everything at Home Depot. I am not sure what I am going to use, 
but here is your Statement of Work''? Isn't that pretty close 
to what was happening in some instances?
    Mr. McDonald. The 470 was like that. The Statements of Work 
were tied to specific functions, the E-mail, the servers, and 
that kind of thing.
    Mr. Walden. Because it looks to me like the missing piece 
here is the homeowner, and that tends, I guess to be sort of 
us. I guess you, if you have your auditors, but we wonder 
whether enough of that, but who is saying, ``Wait a minute. I 
do not need everything in Home Depot. I just want to fix my 
kitchen''?
    Mr. Caine. Mr. Chairman.
    Mr. Walden. Yes.
    Mr. Caine. Could I just make a reference to the FCC's 
Ysleta order?
    Mr. Walden. Sure.
    Mr. Caine. On this point?
    Mr. Walden. Yes.
    Mr. Caine. The order was quoted as saying the SLD cautioned 
applicants in the past to be expansive in listing services on 
FCC Form 470 to provide applicants with greater flexibility to 
make service substitutions post commitment.
    So that is what the FCC rule determined in their order on 
the Ysleta appeals.
    Mr. Walden. Tell me the difference between the Statement of 
Work and the 470.
    Mr. Hawthorne. The 470 is a document, an FCC Form 470.
    Mr. Walden. Right.
    Mr. Hawthorne. Which the applicant is supposed to use to 
list his required services or the services that he is looking 
for, and it has to stay posted for 28 days and hopefully during 
that period of time vendors will call and try and get more 
information. There is a place on the 470 to indicate what the--
--
    Mr. Walden. So how is the Statement of Work?
    Mr. Hawthorne. The Statement of Work is the actual work, 
that if the successful vendor gets and defines that it is 
supposed to provide.
    Mr. Walden. Okay. So going back to this earlier E-mail----
    Mr. Hawthorne. It is a contract.
    Mr. Walden. Okay. Going back to this earlier E-mail I had, 
the one from Mr.--here it is right here--the one from Mr. 
Whitmer then, Mr. Hawthorne, where he says, ``We will be 
meeting with them,'' being Dallas, ``again this Thursday and 
will encourage them to move ahead with the SOWs as submitted 
totaling $216 million.''
    So this is not the wish list anymore, if I understand you 
right.
    Mr. Hawthorne. No.
    Mr. Walden. This is actual statements of work?
    Mr. Hawthorne. That is correct. Those are contracts, which 
I would assume were submitted to----
    Mr. Walden. And they should have been the whittled down 
version of I am only doing my bathroom and my kitchen, not the 
whole house. I do not need everything in Home Depot.
    Mr. Hawthorne. If Dallas was dissatisfied with the 
Statement of Work before it was executed, I would think they 
would have an opportunity to say, ``I do not want this. I want 
that,'' and you know, because it is a negotiated document.
    Mr. Walden. Right, but it is an IBM person who is saying, 
``We are going to try and convince Dallas to stay with the 216, 
the Statements of Work as submitted.''
    Mr. Hawthorne. Well, again, I get to the point that I 
raised earlier. In my opinion, you have to go back and 
reevaluate what you have asked for from bottom up. You just 
cannot start lopping off goods and services just based on the 
Statement of Work. What did you ask for? I mean, I do not think 
that can be done.
    Mr. Caine. Mr. Chairman, this is one area that needs 
improvement. We would clearly acknowledge that in the program. 
Okay? There is no process actually to coming backwards, and 
there should be probably. Okay? In this particular context that 
you were just referring to.
    Mr. Walden. But didn't Dallas hire you at IBM to come help 
give them guidance as to what they need to wire their schools? 
Wasn't that your role?
    Mr. Caine. Yes, to be their strategic partner.
    Mr. Walden. So at what point in that partnership do you say 
to Dallas, ``We do not think you need all of this stuff''?
    Mr. Pratt, were you involved in that part of it?
    Mr. Pratt. Not with the Dallas.
    Mr. Walden. All right. Mr. Caine, you were not involved in 
that.
    Mr. Caine. I was not, but as I said in my statement, we 
believe we said that at the front end. Our initial proposals 
were significantly----
    Mr. Walden. Yes, but later in this E-mail, your own people 
are saying we are going to try and get them to hold to 216, and 
Mr. Pratt said reducing it might call into question the 
integrity of the overall proposal, right?
    I mean, all right. Ms. Glogovac----
    Mr. Hawthorne. May I comment on the 470 before you move on?
    Mr. Walden. Sure.
    Mr. Hawthorne. I agree with the statements that E-Rate is 
very important in the process of wiring schools. It is crucial.
    Mr. Walden. Nobody is disputing that.
    Mr. Hawthorne. And I disagree with the statement that 94 
percent of the schools have been wired. I mean, there are 
schools that have not even been touched by E-Rate.
    However, it appears that E-Rate has now become a game. 
School districts want to get money, and people at the 
government level will say to them, ``Well, you know, gosh. You 
didn't put this on your 470. We're not going to allow it.'' You 
might have made some vague reference to it, but you know, it is 
not there. So we are going to deny you.
    There is that Catch-22. Do you put a lot of stuff on the 
470 or do you put what you think you might need and that 
evolves over time?
    Mr. Walden. But couldn't you come back the next year and 
get that which you----
    Mr. Hawthorne. Time moves on.
    Mr. Walden. Well, yes, but that is true in any project, 
right? I mean, if I go get a loan in a bank----
    Mr. Hawthorne. I thought the objective here was to put 
technology in place to educate kids.
    Mr. Walden. Of course it is. Of course it is, but if I go 
get a loan from a bank to do my home remodeling and I get a 
certain amount of money, that is what I have got to operate 
under, right?
    I do not know. Let me go on to Ms. Glogovac. Did Sun do 
work for EPISD prior to funding year 4?
    Ms. Glogovac. That I do not know. What I do know is that 
Sun was selected the year prior to that to provide servers, and 
for some unknown reason that I was not privy to, El Paso did 
not follow through on that funding commitment and never made 
the purchase.
    Mr. Walden. My understanding was that Sun did provide an E-
mail system of some sort.
    Ms. Glogovac. That I do not know.
    Mr. Walden. All right. Do you recall what the budget was 
for EPISD's E-mail system?
    Ms. Glogovac. I do not know what that was.
    Mr. Walden. Okay. Mr. Caine has testified that the budget 
they were provided with was to be used in the best interest of 
the district. How many E-mail addresses did the system Sun was 
going to provide? What was the capability?
    Ms. Glogovac. I believe Sun had an unlimited license, 
software, E-mail software package.
    Mr. Walden. What does that mean?
    Ms. Glogovac. Meaning it would scale with however many 
users they need to use.
    Mr. Walden. So they could have an unlimited number of E-
mail addresses?
    Ms. Glogovac. Correct.
    Mr. Walden. And then what is the capacity of what EPISD and 
IBM put in?
    Ms. Glogovac. I believe their Statement of Work said 3,000, 
but on conversations on conference calls, I was told 5,000.
    Mr. Walden. So is that correct, Mr. Caine or Mr. Pratt? Do 
you know? Is the system in El Paso 5,000 E-mail addresses?
    Mr. Caine. I cannot confirm the number for you, Mr. 
Chairman, but I do know that the proposal from Sun included E-
mail addresses for ineligible activities in schools. So there 
was always a distinction between eligible schools in the 
district and ineligible schools in the district, and that was a 
factor.
    Mr. Walden. So you advised them of that?
    Mr. Caine. That was part of the consideration that we 
brought to the attention of the school district.
    Mr. Walden. Paula, is that correct?
    Ms. Glogovac. I would have to say that El Paso was 
completely open to selecting how many E-mail licenses they 
wanted to deploy and where they wanted to deploy them. That was 
not dictated by Sun.
    Mr. Walden. But were they ineligible places?
    Ms. Glogovac. I have no idea. I do not know what school was 
ineligible in El Paso, and that was not brought up to our 
attention on any conference call that I know of.
    Mr. Walden. Even by IBM?
    Ms. Glogovac. No, or El paso.
    Mr. Walden. And who is the area coordinator? Are you, Ms. 
Foster? No. You were the area----
    Ms. Glogovac. I was a contractor that was brought in to 
assist the Sun sales team.
    Mr. Walden. So, Mr. Caine, you were involved in that 
discussion then. Where is your information coming from?
    Mr. Caine. No, I was not involved in the conversation, but 
I do think that it is probably a question about eligible 
schools versus ineligible schools within the El Paso School 
District that the district could answer. But I do know that not 
all schools in the El Paso School District were eligible, and 
so there has to be this distinction.
    Mr. Walden. I wonder if our superintendent on video--can 
you address this issue, sir? Thanks for keeping your mic off, 
too, so that we do not get the feedback. But this issue of 
ineligible E-mail addresses in our schools.
    Mr. Tafoya. Yes, sir. I do recall there was conversation 
that took place at that time, that we had to be careful that we 
did not cross the line of the eligibility using E-Rate money, 
and so I do know that just like I said, the piece of the 
conversation that I can recall was that there was concern that 
the scope of work would not exceed what we were eligible to 
receive in E-Rate funding.
    Mr. Tafoya. And are you satisfied with the notion of like 
5,000 E-mails versus unlimited?
    Mr. Tafoya. We were satisfied with what we received because 
it was what we could afford within that E-Rate funding.
    Mr. Walden. Thank you, sir.
    Ms. DeGette. Just very quickly, Mr. Chairman, Mr. Caine, if 
you could take a look at Tab 65 of your notebook. This is the 
agreement. We got this from NABSE. I do not know if you have 
seen this, Mr. Caine.
    Mr. Caine. No, I have not.
    Ms. DeGette. Okay. This is the agreement with NABSE, the 
one that Mr. McDonald was testifying about earlier, and part of 
the agreement talks about on page 3 the offset to the cost that 
NABSE will incur in support of this partnership. NABSE shall 
receive an annual payment of 1.5 percent of the cumulative 
business. This is the kickback we have been talking about all 
day. Do you see that on page 3?
    Mr. Caine. I do.
    Ms. DeGette. Now, this agreement was signed by Donald J. 
Parker, the customer service executive for IBM Global Services 
on behalf of IBM. Do you see that on the last page there?
    Mr. Caine. I do.
    Ms. DeGette. Did Mr. Parker as far as you know have the 
authority to enter into this type of agreement?
    Mr. Caine. Actually the video was quite a surprise to us. 
We were not aware of it. We had actually asked the staff when 
we were told that it existed to see it. We were not given an 
opportunity to see it.
    But he was not sanctioned to do this. This was not an 
official IBM activity. Our company----
    Ms. DeGette. Is he still with the company? Do you know?
    Mr. Caine. No, he is not.
    Our company does have relationships, Ms. DeGette, with a 
number of educational organizations, but none specifically for 
E-Rate performance. We have not done that. So it was not 
sanctioned by the IBM company, and I think if I could just--I 
do not mean to propose where you are going, but if I could just 
point to the next tab, which is also a document that talks 
about a memorandum of understanding on this point. It is 
conspicuously not signed by IBM.
    Ms. DeGette. Okay. Well, but you would not dispute the fact 
that by Mr. Parker's signature on this document on behalf of 
IBM he bound the company contractually to that, correct?
    Mr. Caine. Well, we would dispute that.
    Ms. DeGette. You would?
    Mr. Caine. Yes, we would.
    Ms. DeGette. Well----
    Mr. Caine. Yes, we would. He was not sanctioned to do this 
for the company, and it is actually a proposal, not a contract.
    Ms. DeGette. I will yield to the chairman.
    Mr. Walden. I just wanted to note the committee staff had 
tried repeatedly to interview Mr. Parker, and apparently IBM 
does not know where he is anymore.
    Mr. Caine. He is no longer an employee of the IBM company.
    Mr. Walden. So otherwise we would have shared that at that 
time.
    Ms. DeGette. I am studying this, and in fact, it is an 
agreement. It is a letter agreement, and on page 2, it says the 
team, well, fully committed to supporting NABSE, and NABSE's 
membership believes that any contractual agreement could be 
construed inappropriately by third parties. The team is not 
going to request an exclusive or formal endorsement by NABSE. 
The individual members are content that NABSE will recommend 
the team and each team members with the same confidence and 
vigor.
    So, in fact, what this is, it is a letter agreement that 
everybody is agreeing to. Disagree?
    Mr. Caine. Ms. DeGette, yes, in this sense: that he was not 
sanctioned to do this. We are as surprised about this as you 
seem to be disturbed by it, and we are as well, and we are 
referring it to our attorneys as soon as we get a copy of this.
    Ms. DeGette. Well, take it with you.
    Mr. Caine. I would be happy to.
    Ms. DeGette. Are your customer service executives 
authorized to sign letter agreements of this nature?
    Mr. Caine. No.
    Ms. DeGette. And are they informed of that in some 
personnel guideline or handbook?
    Mr. Caine. Each IBM employee is asked each year to sign a 
business conduct guideline, which is a code of conduct. All 
right? And they know that contracts have to go through or 
proposals have to go through a rigorous process.
    Ms. DeGette. Is there a written guideline for that, that 
talks about that in the code of conduct?
    Mr. Caine. I would have to go back and look at the----
    Ms. DeGette. I would appreciate it if you would supplement 
your response on this, and I will tell you, frankly, my 
concern, and it is a concern for all of the companies that are 
doing these E-Rate contracts. I mean, I always tell people in 
this committee, and the chairman has heard me say it, in my law 
practice I am on inactive status in Colorado, but I practiced 
for a number of years, and I will tell you this looks like a 
letter agreement to me.
    And the thing I was always worried about when I represented 
corporations in my law practice was exactly this type of thing 
where you have got sales representatives signing what end up to 
be binding contracts.
    And I will tell you probably your lawyers will tell you 
that even though Donald J. Parker may not have had the legal 
authority to sign this, if he is doing it and putting it out 
there to the world, you would have been bound by this. So that 
is a concern.
    Mr. Caine. Well, we appreciate your comments, and we are 
going to look into this very, very quickly and very forcefully.
    Ms. DeGette. Good, and the other concern I have, first of 
all, to your knowledge, I would assume, you are unaware of any 
other contracts that IBM or any of its representatives have 
entered into for kickback agreements to organizations, correct?
    Mr. Caine. Correct.
    Ms. DeGette. And that would not be your policy, I would 
assume.
    Mr. Caine. Never.
    Ms. DeGette. So, Mr. Hawthorne, as a consultant, did your 
company ever enter into agreements that involved kickbacks to 
the organization?
    Mr. Hawthorne. Absolutely not.
    Ms. DeGette. Okay. But here was my concern, Mr. Caine. 
Earlier when you were testifying, and I am glad you have put 
this little group together of E-Rate experts, but when you put 
so much authority on sales reps. out in the field, sometimes 
this kind of thing in an aggressive market can result, and so I 
would hope IBM would take this very seriously and adopt some 
clear rules.
    Mr. Caine. We do Ms. DeGette. Thank you very much.
    Thank you, Mr. Chairman. I yield back.
    Mr. Walden. I appreciate the gentle woman's comments and 
her participation for this full day.
    Mr. Tafoya, if I could just ask you a question, sir, 
because one of the other issues that we are looking at, and we 
did certainly in the North Carolina situation, are districts 
now in a position where they have, frankly, bitten off more 
than they can chew? And is that the case in your district, sir?
    Because this is an enormous amount of equipment. It is not 
a new technology. Do you have the information, staff up to 
speed to really be able to run a system like this? Is this 
something other districts need to take note of?
    Mr. Tafoya. Well, I would like to bring the answer two 
ways. I do believe that an award of this magnitude really needs 
to be scrutinized very, very carefully simply because all of 
the residual expense and support that is required once the 
installation takes place is very overwhelming. We feel 
fortunate that we do have the capacity with the structure now 
to manage the network that we have in place. We are not exactly 
where we want to be, but we have made great strides, and we 
will continue to devote because we have, in fact, a commitment 
from our board to continue to devote resources to make sure 
that this network does, in fact, work.
    But I would say overall an award of this magnitude needs 
much longer scrutiny than I think we took in El Paso.
    Mr. Walden. So a good lesson learned for other districts 
that may be going down this path?
    Mr. Tafoya. I believe so, yes sir.
    Mr. Walden. I was reading through the PowerPoint 
presentation that, Mr. Johnston, Jack Johnston, the Executive 
Director of Technology Information, had done, I think, for the 
board in which he said, ``We are no longer in the driver's 
seat.''
    This was in 2002 as the whole system was rolling out, and 
he said with the introduction of the first class technology 
came the need for skill upgrade for many of the TIS staff. What 
IBM could provide within the SLD guidelines for skill transfer, 
they did so. Unfortunately my staff has a long way to go before 
we could ever be expected to provide the same level of service 
as IBM in many areas.
    And so it looks to me like as this handoff occurs for other 
districts that may be observing this whole process, they need 
to learn the lesson your district learned the hard way it 
sounds like.
    Mr. Tafoya. Mr. Chair, I believe one of the things that we 
always have to keep in mind in public education is that 
sometimes it is hard to embrace a business model where you have 
recurring revenue and an opportunity to grow that resource to 
support that in a public setting where you have limited 
resources that are going to be pressed a number of different 
directions.
    Mr. Walden. I appreciate your comments.
    I have no other questions for our panel. I know we have 
been rejoined by the distinguished Chairman of the full 
committee who has put a lot of energy into oversight over the 
years and continues to as our Chairman.
    Mr. Chairman, I would yield.
    Chairman Barton. Well, Mr. Chairman, and Ranking Member 
DeGette, I do not want to delay this. This is another of our 
all day hearings.
    I do want to thank our witnesses for being here and 
participating, and I have actually been watching a lot of this 
on TV in my office as I have had a series of meetings. So it is 
six o'clock. I am not going to ask any direct questions.
    I guess I do want to ask the gentleman that represents IBM. 
Which one is that?
    Mr. Walden. That is Mr. Caine and Mr. Pratt.
    Chairman Barton. How can a company as credible as IBM is 
participate in the way that apparently you all have where we 
have gone into these districts and just the amount of money 
that has been requested, it has increased by orders of 
magnitude?
    I mean, I cannot tell you how disappointed I am to find 
that out. I mean, what is the real justification for that?
    Mr. Caine. Mr. Chairman, we believed we were responding to 
the technology plans the school districts were putting 
together, that we were complying with the rules as we 
understood them at the time. There are a number of decisions 
that had been made throughout the program that allowed these 
kinds of approaches to be sanctioned in the Ysleta decision and 
denials. That question was called, and we submitted our 
comments.
    Quite honestly, we were happy that it was called, and the 
FCC looked at a number of issues here, and they decided 5-0, in 
that order, and we have learned from that, and we have actually 
made adjustments since that time, since the FCC came out with 
its decision, but these are----
    Chairman Barton. But, you know, in the panel before you we 
had some rural school districts or at least low income school 
districts where I do not believe your company was one of the 
vendors, but you know, it is fairly credible to some extent if 
the school district says, well, we do not really know a whole 
lot about the program, but if a company like IBM says it is 
okay, it is okay.
    And when you look at the amounts of money that are 
requested, I think ultimately the accountability is at the 
local level, the school board and the school superintendent. If 
it is a library, the city council, the county or whatever, but 
companies like IBM have a lot of credibility, and to use that 
in a way that just has the appearance of abusing the public 
trust is just extremely disappointing, you know.
    I have not really read the hearing record directly on point 
in detail on what IBM's relationship was and direct 
participation is, but IBM is one of the icons of corporate 
America, I have to say I am very disappointed, and I certainly 
hope that you will take back to your management and to the 
board that we expect companies of your stature to honor the 
public trust and not try to push these things, you know, right 
to the extreme letter of the law or your interpretation of it.
    Mr. Caine. Mr. Chairman, I appreciate your comments, and I 
can tell you that I do not think you were here when I had my 
opening statement. This program is very important to us, and we 
do not want to ever jeopardize it, and we have been willing to 
work with you and your staff and the Commission and the SLD to 
make changes to the program so that it is successful.
    So relative to the purpose and the mission of this program, 
the IBM company takes it very seriously, and that is why we are 
here, and that is why we are here voluntarily.
    Mr. Bohuchot. Well, I want to end on this note. We have a 
document from USAC, and has this been put into the record?
    Mr. Walden. Yes, it is in the record, Mr. Chairman.
    Mr. Bohuchot. But the paragraph that has been highlighted 
said, ``Mr. Mitchell stated discussions with IBM begin in 
October and that he was on a conference call with Steve Mueller 
and Charles Gentry. He stated that one of IBM's selling points 
was that they had represented to him that former SLD attorneys 
worked for IBM and as a consequence IBM knows all of the 
loopholes in the program.''
    You know, we are going to do our very best to close those 
loopholes, and we are going to hope that the IBMs of the world 
do their very best to honor the spirit as well as the exact 
technicalities of the new program.
    And with that, Mr. Walden, I would yield back.
    Mr. Walden. Thank you, Mr. Chairman.
    And I will tell you after three of these hearings, it makes 
me wonder what is going on elsewhere around the country that we 
need to continue to look at as this program evolves. We are 
seeing some progress in some areas, but it is troubling.
    I think the one thing we probably would all agree on is our 
kids need access to the Internet in their schools, and it is 
our responsibility to make sure that happens, but in a way that 
we can have a straight face, look at the taxpayers and rate 
payers and say we are good guardians and stewards of your 
money.
    And what we have seen in some instances around the country, 
Mr. Chairman, we cannot tell them that, and we have got to make 
sure and get on top of it, and that is what this committee's 
job is and we will continue to do it.
    So I want to thank our witnesses who have spent the day 
with us by video an din person, and the record will remain pen 
for an additional 30 days for additional questions and 
comments.
    And with that, the Subcommittee on Oversight and 
Investigations stands adjourned.
    [Whereupon, at 6:16 p.m., the hearing was adjourned.]
    [Additional material submitted for the record follows:]

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