Telecommunications: Initiatives Taken by Three States to Promote
Increased Access and Investment (Chapter Report, 03/12/96,
GAO/RCED-96-68).

Advances in telecommunications can improve the public's access to
various services regardless of where they live. For example, two-way
communications can enable high-school students to participate in
advanced science courses offered by other high school districts and
patients at rural clinics to be diagnosed by medical specialists at
distant urban hospitals. Some states have already taken steps to make
these services more widely available. This report focuses on (1) how
three states--Iowa, Nebraska, and North Carolina--have encouraged
private investment in improving their telecommunications infrastructure,
(2) how they have provided for increased and more-affordable access to
advanced telecommunications services, and (3) what lessons their
experiences could hold for others.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-96-68
     TITLE:  Telecommunications: Initiatives Taken by Three States to 
             Promote Increased Access and Investment
      DATE:  03/12/96
   SUBJECT:  Telecommunications equipment
             Telecommunications operations
             Computer networks
             State programs
             Educational facilities
             Cooperative agreements
             Data transmission operations
             Wide area networks
             Public schools
             State/local relations
IDENTIFIER:  Iowa
             Nebraska
             North Carolina
             Iowa Telecommunications Network
             Nebraska School Technology Fund
             Internet
             Dept. of Education Star Schools Program
             
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Cover
================================================================ COVER


Report to the Committee on Agriculture, Nutrition, and Forestry, U.S. 
Senate

March 1996

TELECOMMUNICATIONS - INITIATIVES
TAKEN BY THREE STATES TO PROMOTE
INCREASED ACCESS AND INVESTMENT

GAO/RCED-96-68

Telecommunications Initiatives in Three States

(348016)


Abbreviations
=============================================================== ABBREV

  ARPA - Advanced Research Projects Agency (Department of Defense)
  ATM - asynchronous transfer mode
  GAO - General Accounting Office
  NTIA - National Telecommunications and Information Administration
  (Department of Commerce)
  SONET - synchronous optical network
  USDA - U.S.  Department of Agriculture

Letter
=============================================================== LETTER


B-261952

March 12, 1996

The Honorable Richard G.  Lugar
Chairman
The Honorable Patrick J.  Leahy
Ranking Minority Member
Committee on Agriculture, Nutrition,
 and Forestry
United States Senate

As you know, the Congress recently enacted landmark
telecommunications legislation that is expected to reduce regulations
and give consumers access to a greater variety of telecommunications
services at lower prices.  Recognizing the benefits an advanced
telecommunications system can provide to their constituents, several
states with large rural populations have undertaken projects to make
advanced telecommunications more widely available. 

This report responds to your request that we provide information on
(a) how selected states have encouraged private investment in
advanced telecommunications, (b) how these states have encouraged
widespread access, and (c) what lessons their experiences could
provide for others. 

We are sending copies of this report to the Chairman, Federal
Communications Commission, and the Administrator, National
Telecommunications and Information Administration.  We will also make
copies available to others upon request. 

Please call me at (202) 512-2834 if you have any questions.  Major
contributors to this report are listed in appendix II. 

John H.  Anderson, Jr.
Director, Transportation and
 Telecommunications Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

Advances in telecommunications can improve people's access to a wide
range of services no matter where they live.  For example, using
two-way video communications, high school students can participate in
advanced science classes taught in other school districts and
patients at rural clinics can be diagnosed by medical specialists at
distant urban hospitals.  Some states have already taken steps to
make these types of services more widely available.  Their
experiences can assist officials in other states and federal
policymakers who are seeking to encourage widespread access to these
services. 

The Chairman and Ranking Minority Member of the Senate Committee on
Agriculture, Nutrition, and Forestry asked GAO to provide information
on selected states that have started developing their
telecommunications infrastructure.  Specifically, GAO is reporting on
(1) how these states encouraged private investment in improving their
telecommunications infrastructure, (2) how they provided for
increased and affordable access to advanced telecommunications
services,\1 and (3) what lessons their experiences could provide for
others. 


--------------------
\1 In this report, the term "advanced telecommunications services"
describes any service not available over a standard telephone line. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Historically, private investors have financed the building of the
nation's telephone system, the form of telecommunications that
reaches the most customers.  Today, in order to provide advanced
telecommunications services like two-way video communications and
high-speed data connections, telephone companies would need to invest
billions of dollars in improving their infrastructure by, for
example, replacing copper wire with fiber optic cables and installing
advanced computerized switches.  The telephone companies have already
begun making these investments, mainly in business districts and
high-density residential areas where there are opportunities to make
a profit.  In rural areas, where there are fewer businesses and the
cost of delivering service is usually higher, the current profit
incentives are generally not high enough for companies to invest in
providing such services. 

State and federal policymakers are looking for ways to promote the
widespread deployment of advanced telecommunications in order to make
the delivery of these services more cost-effective and promote
economic development.  GAO reviewed the experiences of three states
that experts in the field consider to be leaders in the development
of statewide advanced telecommunications:  Iowa, whose network
provides two-way video communications; Nebraska, which uses less
advanced technology to provide high-speed data connections and video
conferencing; and North Carolina, which provides two-way video
communications to several sites simultaneously using the most
advanced technology available.  Officials in these states have worked
with the private sector and with potential users to encourage private
investment and ensure the availability of services in less densely
populated rural areas. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Iowa, Nebraska, and North Carolina encouraged private investment in
advanced telecommunications infrastructure by offering to become
major customers of these services from the telephone companies.  In
Iowa, the telephone companies were reluctant in 1987 to make the
investment needed to provide these services because of doubts about
the profitability of such a system, so the state financed and built
its own network.  However, by the time Nebraska and North Carolina
began their projects in the early 1990s, the telephone companies had
already begun upgrading their systems and were more willing to make
the investment the states wanted.  They also decided that they would
rather have the states as customers than as competitors.  As a result
of these states' efforts, the telephone companies made improvements
faster than they would have on their own. 

To provide affordable access to a large segment of their populations,
all three states are making advanced telecommunications services
available through sites located in local public buildings, rather
than in individual homes.  State and federal agencies are assisting
local organizations by paying some of the costs for the equipment and
connections needed to use these services.  Two states--Iowa and North
Carolina--are making the services more affordable by charging the
same price for using the network at every location, even at remote
locations that are more expensive to serve.  Nebraska has arranged
for local schools to get discounts on service from the telephone
companies.  Each state has made advanced services available to
between about 100 and about 400 sites, but each is in the early
stages of its efforts and plans to connect many more sites in the
next several years.  However, even though the three states have
focused on connecting high schools to the network, more than half of
the high schools remain unconnected.  Rural counties contain more
high schools than urban counties, and more rural high schools have
yet to be connected. 

The three states' experiences illustrate the importance of building
and maintaining consensus among the parties that will be involved in
constructing, financing, and using an advanced telecommunications
network--the telecommunications companies, anticipated users, state
legislators, and state executive branch officials.  Addressing the
concerns of these parties can help prevent the construction delays
that can result from design changes and funding shortfalls. 
Identifying a stable source of funding for advanced
telecommunications programs can also help promote widespread use by
local organizations. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      STATES ENCOURAGED PRIVATE
      COMPANIES TO BUILD NETWORK
      INFRASTRUCTURE
-------------------------------------------------------- Chapter 0:4.1

While each of the three states wanted to use advanced
telecommunications to improve its residents' access to services, each
also wanted to avoid, if possible, the large-scale public
expenditures required to build the needed infrastructure.  To
convince the telephone companies to make the upgrades needed to
provide the advanced services, the states offered to be long-term
customers. 

When Iowa, the first state to undertake such an effort, began its
project in 1987, uncertainties about the profitability of the
advanced services discouraged the telephone companies from accepting
the risks of investing in upgrading the system, despite the state's
offer to be a long-term customer.  As a result, Iowa used state funds
to build a network that reaches all 99 of the state's counties.  To
connect additional local sites to the state network, Iowa has begun
contracting with private companies. 

By 1990, when Nebraska and North Carolina began their projects, the
telephone companies had already begun some system upgrades and had
tested or offered advanced services in limited areas.  They were thus
more willing to invest in the infrastructure needed to offer advanced
services.  The companies also realized that long-term arrangements in
which the states were customers could reduce the risk of investment
by providing a steady income.  Finally, the companies did not want to
compete with a state-owned system like the one Iowa built.  As a
result, the states were able to accelerate the deployment of improved
infrastructure. 


      SERVICES ARE AVAILABLE
      THROUGH SOME PUBLIC
      ORGANIZATIONS
-------------------------------------------------------- Chapter 0:4.2

Although all of the states wanted to accelerate the pace at which the
advanced services could be made widely available, they considered
delivering these services to homes unfeasible.  Instead, they
concentrated on providing services in public buildings such as
schools, libraries, and hospitals, where the equipment could be used
by many people. 

In each state, the local sites are responsible for purchasing the
equipment needed to gain access to advanced telecommunications
services, as well as paying the ongoing usage costs.  The cost of
purchasing equipment, such as video monitors, has ranged from $3,000
to $120,000 per site.  To use the video system, users paid $20 per
hour in Nebraska, between $5 and $40 per hour in Iowa, and $2,992 per
month plus $23 per hour in North Carolina.  To make using these
services more affordable, the states have helped local sites pay for
some equipment.  Local sites have also received federal grants to pay
some of the connection costs.  In addition, Iowa and North Carolina
have established uniform rates at affordable levels so that sites in
distant rural areas do not pay more than those in more urban areas,
and Nebraska has used its buying power to help schools negotiate
favorable rates from the telephone companies. 

Although the states are still in the early stages of their efforts,
each has made advanced telecommunications services more widely
available to its citizens through local organizations.  Iowa has
completed two of the three parts of its project.  As of October 1995,
it had connected 157 sites, and it plans to connect 474 more sites by
2000.  Nebraska had connected over 400 elementary and secondary
schools as of February 1996 and is working with communities to help
them develop new applications.  North Carolina is in the third year
of its project; as of February 1996, it had connected over 100 sites. 

Officials in all three states believe that providing advanced
telecommunications services to rural residents is of great
importance.  However, much remains to be done to provide access to
such services in rural areas.  GAO's review of the number of high
schools that are currently connected indicates that despite their
emphasis on improving education, more than half of the high schools
in each state do not yet have access to advanced telecommunications. 
Rural counties contain more high schools than urban counties, and
more rural high schools have yet to be connected. 


      STATES' EXPERIENCES OFFER
      LESSONS
-------------------------------------------------------- Chapter 0:4.3

Reaching consensus about how advanced telecommunications services
will be provided and used among all interested parties has proved
important to implementing a project successfully.  Participants said
that telecommunications companies can be convinced to provide
advanced services to public organizations if the proposal makes
"business sense." Long-term customer agreements with the states,
prior favorable experience working with public agencies, and the
ability to sell advanced services to commercial customers can
encourage the companies' acceptance of this type of proposal. 

State and private-sector officials indicated that reaching agreement
with potential users on how to use an advanced telecommunications
system can help ensure that the system will provide the services they
want at a price they are willing to pay.  Identifying a stable source
of financial support to assist users in paying the costs of
connection is also important so that future users have access to some
assistance. 

Obtaining and maintaining legislative support for financing a project
can help prevent the delays that can result from reductions in
funding.  And while officials of a state's executive branch can serve
as advocates that keep the project on track, care must be taken to
ensure that the administrative responsibilities for implementing the
project are clearly defined. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

This report makes no recommendations. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

GAO provided copies of a draft of this report to senior officials in
the three states we visited, including the Chief Operating Officer,
Iowa Communications Network, and the Education Policy Advisor, Office
of the Governor of Iowa; the Director, Division of Communications,
State of Nebraska; and the Advisor to the Governor for Policy,
Budget, and Technology and the State Controller in North Carolina for
their review and comment.  They generally agreed with the facts
presented in the draft and provided updated information and technical
corrections, which GAO incorporated where appropriate.  A detailed
discussion of their comments and GAO's responses is included at the
end of chapter 4.  GAO also asked responsible officials with the
Department of Commerce's National Telecommunications and Information
Administration (NTIA), including the Director, Public Broadcasting
Division, Office of Telecommunications and Information Applications,
to review the draft.  They commented that the draft accurately
portrayed NTIA and its programs. 


INTRODUCTION
============================================================ Chapter 1

Advances in telecommunications technology have the potential to
provide new and improved services to people no matter where they
live.  For example, students in rural areas of Iowa are being taught
Russian, music, and calculus by teachers in distant urban centers
through two-way video communications.  North Carolina has begun to
link rural and urban hospitals to provide rural sites with access to
medical specialists via video.  A telephone company in Nebraska has
created jobs in a small rural town by establishing a nationwide
telemarketing business.  Modern telecommunications can thus be used
both to improve the delivery of services and to promote economic
development. 

In figure 1.1, a technician at a hospital in Des Moines is
transmitting an echocardiogram to be read by a specialist at the
University of Iowa hospitals in Iowa City, Iowa--100 miles away. 
Using advanced telecommunications instead of sending a tape by a
2-hour courier trip results in a quicker diagnosis and more timely
treatment for the patient. 

   Figure 1.1:  Remote Diagnosis
   Using Advanced
   Telecommunications in Iowa

   (See figure in printed
   edition.)

   Source:  Iowa Health System
   Telemedicine Program.

   (See figure in printed
   edition.)

While services such as two-way video are offered in some places in
the United States today, they are not widely available because the
current telecommunications infrastructure, notably the telephone
system, was not designed to provide them.\1

Billions of dollars worth of infrastructure improvements would be
needed in order to quickly transmit data and high-quality video
images throughout the nation.  Some state governments are currently
looking for ways to accelerate this investment and ensure that
services will be affordable and widely available to their residents. 
The experiences of the states that have begun this process can
provide critical information to federal policymakers and to other
states as they revise their telecommunications policies and seek to
develop a modern telecommunications infrastructure. 


--------------------
\1 See, for example, School Facilities:  America's Schools Not
Designed or Equipped for 21st Century (GAO/HEHS-95-96, Apr.  4,
1995). 


   COMPETITION IS EXPECTED TO
   ENCOURAGE PRIVATE INVESTMENT
   AND DEVELOPMENT OF MODERN
   INFRASTRUCTURE
---------------------------------------------------------- Chapter 1:1

Historically, private investors have financed the building of the
United States' telephone system, the most widely available form of
telecommunications infrastructure.  This system now provides services
to over 93 million American households.  As of 1994, about 94 percent
of American households had access to basic telephone services. 

Telephone companies are already improving their infrastructure to be
able to provide advanced telecommunications services.  This
investment is occurring mainly in business districts and more densely
populated residential areas.  Profit incentives are not high for
companies to provide such service in rural areas, where there are
fewer businesses and the cost of delivering services is usually
higher, unless financial support is available or cost averaging is
applied.  It is likely that private investment in advanced
telecommunications will be slower in rural areas as well.  Recent
studies by the Department of Commerce and Office of Technology
Assessment found that the use of telecommunications can be
particularly beneficial to rural areas, where the population density
is low.\2 However, the distances between people in rural areas also
increase the cost of providing these services.\3 Some industry
observers expect increased competition to lead to lower prices and
more choices in telephone service.\4

Others point out, however, that competition is less likely to develop
in rural areas and that customers in these areas may be faced with
higher prices because without subsidies or cost averaging, the prices
for telecommunications services will likely reflect the higher cost
of providing service there.\5


--------------------
\2 Rural America at the Crossroads:  Networking for the Future,
Office of Technology Assessment (May 25, 1994) and Survey of Rural
Infrastructure Technologies, U.S.  Department of Commerce, NTIA
Special Publication 95-33 (Sept.  1995). 

\3 And, while the costs of serving geographically dispersed customers
are higher, telecommunications costs are also higher in rural areas
than in urban areas because the equipment costs are generally spread
over fewer customers. 

\4 The Telecom Revolution--An American Opportunity, Progress and
Freedom Foundation (May 1995). 

\5 Keeping Rural America Connected:  Costs and Rates in the
Competitive Era, Organization for the Protection and Advancement of
Small Telephone Companies (1994). 


      INFRASTRUCTURE UPGRADES CAN
      ALLOW THE DELIVERY OF
      ADVANCED SERVICES
-------------------------------------------------------- Chapter 1:1.1

Advanced telecommunications services can be provided, in part, by
upgrading the current telephone system's infrastructure to increase
the capacity, or "bandwidth" of the telephone lines and switches.\6
These upgrades include powerful new computer switches, complex
software, and fiber optic cables that combine to form a high
capacity, "broadband" telecommunications infrastructure.  The
technologies that can be used for upgrades are diverse.  For
instance, replacing existing copper telephone lines with new fiber
optic lines can dramatically increase capacity, enabling the lines to
carry many thousands of times more data.  In addition to telephone
lines, other kinds of technologies--including satellites, cellular
telephones, and cable television systems--can transmit information as
part of the telecommunications infrastructure. 

Besides the infrastructure needed to move information over distances,
advanced telecommunications depend on two other elements--on-site
equipment and switches that have been upgraded to handle larger
amounts of information.  Figure 1.2 illustrates these components of a
network.  The equipment at the originating site turns the information
generated by the user, such as sounds, words, and pictures, into a
form that can be transmitted.  The switches route the transmission to
its destination through cables or some other transmission channel. 
Once the transmission arrives at its destination, other types of
on-site equipment convert the transmission back into the same usable
form of sounds, words, or pictures. 

   Figure 1.2:  Conceptual View of
   Network Components

   (See figure in printed
   edition.)


--------------------
\6 Information Superhighway:  Issues Affecting Development
(GAO/RCED-94-285, Sept.  30, 1994). 


      RECENTLY ENACTED FEDERAL
      LEGISLATION IS EXPECTED TO
      INCREASE COMPETITION
-------------------------------------------------------- Chapter 1:1.2

The President recently signed legislation reforming federal
telecommunications law.\7 This new law envisions a telecommunications
industry in which a variety of companies--local telephone,
long-distance, cable television, and wireless--can offer similar
services and compete with one another.  For example, the new law
allows competition for local telephone services. 

While promoting deregulation, this law seeks to preserve and advance
the concept of "universal service"--affordable and widely available
telephone service.  Universal service has been a federal goal since
the enactment of the Communications Act of 1934, and federal and
state governments have supported this goal through a series of
subsidies and other types of assistance.  The effect of this policy
has been to make telephone service more affordable for residential
customers and rural users.  The new law provides for the
establishment of a joint federal-state board to make recommendations
to the Federal Communications Commission on the steps necessary to
preserve and advance the goal of universal service.\8


--------------------
\7 P.L.  104-104, enacted Feb.  8, 1996. 

\8 Under the legislation, universal service is an evolving level of
services to be established periodically, taking into account advances
in telecommunication and information technologies and services. 
Among the principles to be taken into account in preserving and
advancing universal service are access in rural and high-cost areas,
and access to advanced telecommunication services for schools, health
care facilities, and libraries. 


   STATES VIEW ADVANCED
   TELECOMMUNICATIONS AS
   CONTRIBUTING TO MORE EFFECTIVE
   SERVICES AND ECONOMIC
   DEVELOPMENT
---------------------------------------------------------- Chapter 1:2

At the state level, officials have discussed the value of advanced
telecommunications services in national forums such as the National
Governors' Association and the National Conference of State
Legislators.  They envision using advanced telecommunications to
provide education, health care, and other public services more
effectively and more equitably (see fig.  1.3).  They also believe
these services will make their states more attractive to new and
expanding businesses and allow their rural residents to participate
more fully in state government.  As a result, leaders in state
governments are looking for ways to accelerate the development of the
telecommunications infrastructure. 

   Figure 1.3:  Conceptual View of
   Network Users

   (See figure in printed
   edition.)


      IOWA, NEBRASKA, AND NORTH
      CAROLINA WERE AMONG THE
      FIRST TO BEGIN NETWORK
      DEVELOPMENT
-------------------------------------------------------- Chapter 1:2.1

Three states with significant rural populations--Iowa, Nebraska and
North Carolina--have been cited as leaders in the development of
statewide advanced telecommunications services.  Recognizing that
decisions about private investment for improving the
telecommunications infrastructure are driven by market circumstances,
officials in these states have worked with the private sector and
with potential users to encourage private investment and ensure the
availability of service in less densely populated rural areas.  Table
1.1 shows the demographics of these three states relative to the
nation as a whole. 



                               Table 1.1
                
                Demographic and Economic Characteristics
                          of the Three States

                                  United                         North
                                  States      Iowa  Nebraska  Carolina
------------------------------  --------  --------  --------  --------
Population (1994)\a             260,341,  2,829,00  1,623,00  7,070,00
                                     000         0         0         0
Area (square miles)             3,717,52    56,276    77,359    52,672
                                       2
Number of counties                 3,043        99        93       100
Percentage of population that       24.8      39.4      33.9      49.6
 is rural (1990)\b
Number of rural counties\c         2,383        88        88        75
Percentage of population              20        56        49        33
 living in rural counties
 (1994)
Number of farms (1995)\d        2,073,32   100,000    56,000    58,000
                                       0
----------------------------------------------------------------------
\a Data from the U.S.  Bureau of the Census, Statistical Abstract of
the United States (1995). 

\b Data from the U.S.  Bureau of the Census, 1990 Census of
Population, General Population Characteristics, United States. 

\c Unless otherwise specified, we have used the U.S.  Department of
Agriculture (USDA) Rural-Urban Continuum Codes for Metro and Nonmetro
Counties to distinguish between urban and rural counties.  USDA
defines counties coded 0-3 as metro, or urban counties, and counties
coded 4-9 as nonmetro, or rural, counties.  For a further discussion
of urban/rural definitions, see Rural Development:  Profile of Rural
Areas (GAO/RCED-93-40FS, Apr.  20, 1993). 

\d Data from USDA, Agricultural Statistics Board, National
Agricultural Statistics Service. 


      IOWA'S PRIMARY GOAL WAS
      EQUALIZING ACCESS TO
      EDUCATION
-------------------------------------------------------- Chapter 1:2.2

Iowa is a midsized agricultural state with a population of about 2.8
million.  The state has a large number of midsized towns--ranging
from 8,000 to 10,000 people--which are fairly equally distributed in
the eastern two-thirds of the state.  The state also has about
100,000 farms.  Of Iowa's 99 counties, 88 are considered rural. 

Iowa's primary goals for a statewide telecommunications network were
improving educational services and equalizing educational resources,
such as the course offerings available at urban and rural educational
facilities.  Iowa selected a system based on high-capacity fiber
optic technology and SONET\9 software that was capable of
transmitting voice, data, and two-way interactive video.  This
technology provides high-quality pictures that let students and
teachers see each other clearly. 


--------------------
\9 SONET--synchronous optical network--is an international standard
for transmitting information over optical fiber cable at high speeds. 


      NEBRASKA'S FIRST PRIORITY
      WAS AFFORDABLE TECHNOLOGY
-------------------------------------------------------- Chapter 1:2.3

Nebraska is a predominantly agricultural state with a scattered
population.  Sixty percent of the state's 1.6 million residents are
located in four major cities; the rest live in small and midsized
communities that are often distant from each other.  The western
parts of the state are sparsely populated.  Of the state's 93
counties, 88 are considered rural, and 10 of the 25 counties with the
smallest populations in the nation are located in Nebraska. 

Nebraska's first priority for its network was providing high-speed
data services, such as Internet connections, at prices that the
state's small, rural schools and organizations could afford.  The
frame-relay\10 technology that the state selected, streamlines data
transmissions and allows data to travel more quickly and
cost-effectively than other alternatives.  The state has also created
a video network that community organizations can use for meetings,
hearings, and training sessions, using leased T-1 lines.\11 The
"compressed" video technology selected for the network reduces the
bandwidth needed to send pictures and the cost of transmission. 
However, the resulting video images are often seen as jerky or
blurred. 


--------------------
\10 Frame relay is a type of technology in which large amounts of
data are broken into smaller, variable-length pieces called "frames."

\11 T-1 lines combine the capacity of 24 transmission channels into a
single, high-speed channel.  With some enhancements, standard copper
telephone lines can carry T-1 signals. 


      NORTH CAROLINA'S PRIMARY
      GOAL WAS IMPROVING EDUCATION
      AND MAKING BUSINESS MORE
      COMPETITIVE
-------------------------------------------------------- Chapter 1:2.4

About half of North Carolina's 7 million residents live in midsized
towns found along a central corridor stretching east from the state's
largest city, Charlotte, to the Atlantic coastline.  This area
includes the generally affluent Raleigh-Durham metropolitan area and
Research Triangle Park, one of the nation's leading centers for
medical, electronic, and industrial research.  The western part of
the state is mountainous and forested, and many of the state's least
populated counties are found in this area.  The coastal region also
includes isolated towns.  Of North Carolina's 100 counties, 75 are
considered rural. 

The primary objectives for North Carolina's network were improving
education and making North Carolina's businesses more competitive. 
The state selected state-of-the-art technology:  a high-capacity
fiber optic network and advanced ATM\12 switches that can connect a
very large number of users and support very fast interactive video
transmission to multiple users simultaneously.  The costs of this
advanced system were considered acceptable because state and
private-sector officials believed that it would have a longer useful
life than a system built with older technologies. 


--------------------
\12 ATM--asynchronous transfer mode--is a technology that transfers
large amounts of data in smaller, fixed-length pieces.  ATM is able
to mix types of data, such as voice, images, and full-motion video. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:3

The Chairman and Ranking Minority Member of the Senate Committee on
Agriculture, Nutrition, and Forestry asked us to provide information
on selected states that have started developing their
telecommunications infrastructure, specifically (1) how these states
encouraged private investment in improving their telecommunications
infrastructure, (2) how they provided for increased and affordable
access to advanced telecommunications services, and (3) what lessons
their experiences could provide for others. 

To respond to this request, we conducted case studies of three
states--Iowa, Nebraska, and North Carolina--that (1) include rural
populations that constitute at least one-third of the state's total
population and (2) have made significant progress in deploying
statewide advanced telecommunications systems.  To answer the first
two objectives, we used a case-study approach that included
interviews with state and private-sector officials and reviews of
state planning documents, audit reports, and network operation
figures, as well as pertinent economic and demographic data for the
states and the nation.  To answer the second objective, we also
examined the extent to which high schools in rural and urban areas
have access to the states' networks.  We chose high schools because
providing service to them was a goal in all three states.  We relied
on USDA for a determination of urban and rural counties and on the
states' data for a listing of connected and unconnected schools.  To
answer the third objective, we asked project participants in the
three states what factors had helped or hindered their efforts; we
combined this information with our observations and analysis to
identify the lessons. 

We performed our work from June 1995 through February 1996 in
accordance with generally accepted government auditing standards.  We
discussed a draft of this report with senior officials with
responsibility for the networks in the three states we visited, as
well as with NTIA officials.  These officials generally agreed with
the information presented and provided some information to clarify
and update the report.  A detailed discussion of their comments and
our responses is included at the end of chapter 4. 


STATES ENCOURAGED PRIVATE
COMPANIES TO BUILD THE NETWORK
INFRASTRUCTURE
============================================================ Chapter 2

While all three states wanted to use advanced telecommunications to
make services more accessible to their residents, each also wanted to
avoid, if possible, the large-scale public expenditures that could be
required to build the needed infrastructure.  As a result, all three
states encouraged the telephone companies operating in their states
to invest in upgrading the existing networks more quickly so that the
companies could make advanced telecommunications services available
within the states' time frames. 

Each of the states tried to encourage private investment through the
use of long-term agreements whereby the state would purchase advanced
telecommunications services from the telephone companies.  At the
time Iowa tried this strategy, uncertainties about the profitability
of providing advanced services discouraged the telephone companies
from accepting the risks of investing in the statewide network needed
to provide these services.  However, by the time Nebraska and North
Carolina began their projects, the telephone companies had already
begun to upgrade their facilities, by, for example, using more fiber
optic lines.  Also, having the states as long-term customers provided
an income stream and reduced the risk of investment.  Finally, by
investing in their own infrastructure, companies could avoid
competing with a state-owned facility. 


   IOWA FACED EARLY DIFFICULTIES
   IN ATTRACTING PRIVATE-SECTOR
   INVOLVEMENT
---------------------------------------------------------- Chapter 2:1

In 1987, Iowa began efforts to become the first state to create a
fiber optic telecommunications network that would deliver services to
classrooms throughout the state.  The Iowa Public Broadcasting Board
was directed to develop a design for a video network, and a formal
request for private-sector proposals to construct the network was
issued in 1988.  According to state officials, the request had
several technical flaws in it, and telephone company representatives
were uncertain whether they would be able to recover the costs of
building the system.  Despite these uncertainties, the state received
three bids to build the network.  After reviewing these, the state
announced its intent to award the contract to one of the companies. 
However, a challenge was filed and the intended award was overturned
in March 1989. 

State officials ascribe the state telephone companies' lack of
interest in the project to several factors.  These include doubts
about the profitability of the network, a belief that it would be too
expensive, and hesitancy to make investments in a long-term project
that might not allow them to recover their investment in an
acceptable time frame.  These officials also told us that they
believe that the state's telephone companies were not prepared to
make the internal policy decisions needed to make long-term lease
agreements or ready to make infrastructure improvements as quickly as
the state required.  One telephone company cited as an inhibiting
factor the cost and complications of assembling proposals for such an
uncertain outcome.  Another saw the level of investment, lack of a
known customer base, and high technology required as substantial
risks. 

In May of 1989, the state legislature passed a law providing the
initial funding to build the Iowa Communications Network.  This
state-owned, statewide network was to be designed to provide video,
voice, and data service to the state government and educational
system.  The proposal was not debated by the full legislature and was
adopted on the last day of the legislative session.  The staff
responsible for the design of the network later told Iowa's state
auditor that they were not involved in the drafting of the provision
until the final days of the legislative session and did not have
sufficient time to analyze the proposed network or its costs.\1
According to state officials, telephone company representatives were
also excluded from this process.  In December 1989, the state asked
for proposals to build the network.  Two companies bid on the
project, but both bids were rejected as too costly, and the proposal
was withdrawn. 

In October 1990, Iowa issued a third, more limited proposal intended
to reduce the cost of building the network by, for example, including
fewer sites.  This proposal did not provide for the equipment or
modifications necessary to fully carry the state government's voice
and data service.  A contract to begin construction was awarded in
April 1991, and $96 million in bonds were issued to finance the
system.  However, it was later determined that the state government's
telephone service needed to be included in order to generate
sufficient cash flow for operations.  To fund the resulting design
modifications, the state was forced to issue a second set of bonds in
1993 for $18.5 million. 


--------------------
\1 See Special Report on the Iowa Communications Network, State of
Iowa, Office of the Auditor of State (Nov.  30, 1993). 


      FIRST PARTS OF IOWA'S
      NETWORK WERE COMPLETED WITH
      STATE FINANCING
-------------------------------------------------------- Chapter 2:1.1

Despite these difficulties, Iowa has now completed parts I and II of
its network.  The first part entailed installing a network control
center at an armory in central Iowa and linking it to the state's 15
community colleges, 3 state universities, and more than 25 private
colleges; Iowa Public Television; and the state capital complex.  The
second part involved extending the network so that it was available
in each of the state's 99 counties.  These two parts were completed
by late in 1993.  State officials estimated that Iowa had spent more
than $100 million to build the network as of the end of 1993.  Figure
2.1 shows the network Iowa built during these first two parts. 

   Figure 2.1:  Parts I and II of
   the Iowa Communications Network

   (See figure in printed
   edition.)

Source:  GAO's illustration based on information from the Iowa
Communications Network. 


      IOWA IS ATTEMPTING TO SHARE
      FUTURE COSTS WITH PRIVATE
      SECTOR
-------------------------------------------------------- Chapter 2:1.2

Iowa began Part III of its network in early 1995.  In this final
part, Iowa will connect an additional 474 sites by 1999, including
more than 350 schools and 87 libraries, at an estimated additional
cost of about $95 million.  Under Part III, Iowa is required by
statute to lease fiber optic cable facilities from qualified private
telecommunications providers.  Thus, to connect the remaining sites,
the state is contracting with private companies to provide the local
connections.  The state will pay the construction cost of installing
the fiber circuit, then lease the circuit from the private provider
for 7 years.  State officials expect this arrangement to be
especially beneficial to the smaller telephone companies.  This
arrangement also reduces the initial amount of capital that private
companies need to participate in network development. 

Because of some legislators' concerns about whether the state should
own and operate a network, the legislature requested a study to
examine alternatives, which ranged from retaining state ownership of
the network to selling the network.  On the basis of the study, the
Iowa Telecommunications and Technology Commission, which manages the
network, unanimously recommended retaining state ownership because it
was the most practical option at the time.  The legislature accepted
this recommendation and, according to state officials, the
legislature will restudy this issue in the year 2000. 


   NEBRASKA AND NORTH CAROLINA
   ACCELERATED PRIVATE INVESTMENT
---------------------------------------------------------- Chapter 2:2

By the early 1990s, when Nebraska and North Carolina were beginning
to seek private-sector assistance in providing advanced
telecommunications services, the telephone companies were more
receptive to cooperative arrangements because of changes that had
occurred since Iowa began its project.  According to private-sector
officials we spoke with in both Nebraska and North Carolina, the
telephone companies had already begun efforts to upgrade their
facilities and were more willing to finance network development. 

To provide the services the states wanted, the companies had to, for
example, replace copper wires with fiber optic lines and upgrade
their switches.  According to telephone company representatives in
both Nebraska and North Carolina, the companies were already planning
to make some of these improvements.  For example, telephone company
officials we spoke with said that their companies were increasing the
use of fiber optic cable in their systems because it is more
cost-effective and reliable than copper lines.  Officials also told
us that they had already begun to test and offer some advanced
services, such as fast data service and video communications for
education, in limited areas. 

Iowa's experience also served as a motivating factor.  By
demonstrating that a state could build its own network, Iowa reduced
some of the earlier uncertainties about cost and demand.  However,
according to telephone company officials in Nebraska and North
Carolina, the telephone companies did not want the states to build
networks that could compete with them for business, as Iowa had done. 

Participants in North Carolina identified prior experience with
advanced telecommunications pilot projects involving public- and
private-sector participants as a factor that helped convince
companies to work with the state on its advanced network.  There, the
telephone companies had conducted several projects testing advanced
telecommunications applications for schools and hospitals.  These
tests helped convince the companies that it was technically feasible
to offer advanced telecommunications services on a larger scale. 
Participants also identified the positive working relationship
developed during an upgrade of the state's telephone system as a
factor that built trust between the companies and the state
government. 

According to participants in Nebraska, the reduction of state
regulations on telephone service prompted the telephone companies to
experiment by offering new services.  The companies were more willing
to offer such services in Nebraska, officials said, in order to
demonstrate the benefits of deregulation to other states.\2

In this environment, the long-term leases that Nebraska and North
Carolina offered--called an "anchor-tenant" arrangement--helped
convince the telephone companies that responding to their states'
proposals was in their best business interests.  For example, as a
result of a meeting with several state telephone companies,
Nebraska's Division of Communications has entered into 5-year
agreements to buy frame-relay services at wholesale prices.  At the
same time, costs are reduced for the telephone companies because the
state is performing functions, such as billing, that the company
performs for other customers. 

North Carolina used a similar anchor-tenant arrangement to attract
private investment.  After deciding it wanted to make advanced
telecommunications services available statewide, the State
Controller's Office asked the local telephone companies to help
develop the technical specifications required for this network.  It
then struck formal agreements with three major local telephone
companies and a long-distance company to build the infrastructure
needed for its applications.  In return, the state agreed to pay
rates based on estimates of a certain level of use, which were
derived from the original projections of the number of sites to be
connected and their levels of connection time.  These rates are
reviewed every 2 years and can be adjusted to reflect the actual
usage if the state and the companies agree.  By basing their rates on
projected usage and allowing for changes based on actual usage, the
telephone companies could plan to recover their costs in a time
period they thought was reasonable. 

According to participants in the projects in Nebraska and North
Carolina, these long-term agreements between the states and the
telephone companies benefited the companies in the following ways: 

  -- Investment risk was reduced by ensuring a stream of revenues to
     help recover the costs of installing the hardware. 

  -- The infrastructure that was upgraded is owned by the companies,
     and any capacity not committed to the state could be sold to
     other customers.  (In North Carolina, officials estimate that 75
     percent of the capacity of the upgraded network will be
     available for lease to private customers.)

  -- The presence of an advanced telecommunications infrastructure
     can serve as an economic development tool to help states attract
     new business and retain existing jobs--which means the companies
     will have more customers to sell their services to in the
     future. 

Although the telephone companies had begun to make some improvements
to their systems, company representatives agreed that the states'
efforts encouraged them to make improvements faster than they would
have on their own, especially in rural areas.  Representatives of one
of the Nebraska companies we interviewed estimated that they had
invested $7.5 million in the state system by October 1995.  The
company expects its investment to rise to $14 million in the near
term.  Officials with the three telephone companies we spoke with in
North Carolina estimated that they had invested about $43 million
through August 1995 to upgrade their facilities.  Two of the three
North Carolina companies could not, however, estimate how much
investment was due solely to the state's efforts. 


--------------------
\2 A court-imposed legal restriction was cited as a barrier to
building statewide networks, but recently enacted legislation seeks
to loosen this restriction.  Certain local telephone companies, such
as US West and Bell South, were previously prohibited from offering
services outside of specific geographic areas.  Under the new law,
they can offer service outside of those areas if they meet certain
requirements. 


STATES HAVE PROVIDED ACCESS TO
MANY LOCAL ORGANIZATIONS AND PLAN
TO DO MORE
============================================================ Chapter 3

The three states we visited agreed that making advanced
telecommunications services available to public organizations was
more practical than providing services to individual homes.  They
made services more affordable for users by providing funding for some
local equipment and establishing lower prices for users than these
users could obtain on their own.  These policies were designed in
part to address the concerns of rural residents, who could face
higher prices because of the distances between rural communities and
the smaller number of people living in them.  While all three states
have made progress in providing advanced telecommunications services
to communities, they are still in the early stages of deploying their
networks and plan to connect many more sites over the next several
years.  A review of the number of rural high schools connected in
each state indicates that many are still waiting for connections. 


   STATES HAVE GIVEN PRIORITY TO
   CONNECTING PUBLIC ORGANIZATIONS
---------------------------------------------------------- Chapter 3:1

Although all of the states wanted to accelerate the pace at which
services could be made widely available, they considered delivering
advanced services to homes unfeasible and unnecessary.  Instead, the
three states decided to provide for increased and affordable advanced
telecommunication services by locating access points in public
buildings--such as schools, libraries, and hospitals--where the
equipment could be used by many people.  Each state has begun
connecting sites at these locations.  Table 3.1 illustrates the type
and number of organizations that have been connected to the states'
networks. 



                               Table 3.1
                
                  Examples of Sites Located in Public
                 Organizations With Access to Advanced
                           Telecommunications

                        Iowa (as of     Nebraska (as    North Carolina
Type of site            10/95)          of 2/96)        (as of 2/96)
----------------------  --------------  --------------  --------------
Schools (K-12)          57              420\a           53

Community colleges      50              5               24

Universities            16              3               11

Medical sites           13              1               19

Libraries               1               5               1

Other                   20 (including   9 (state        10 (including
                        3 area          agencies)\b     9 state and
                        education                       special
                        agencies, 2                     agencies and 1
                        National Guard                  local
                        sites, 12                       government
                        state                           site)
                        agencies, and
                        3 federal
                        agencies)
----------------------------------------------------------------------
\a Of these sites, six provide video communications. 

\b The number of other public and municipal users in Nebraska is
unknown. 

Source:  Based on information from state officials and state
documents. 

Figure 3.1 shows some ways in which advanced telecommunications are
being used in each state. 

   Figure 3.1:  Examples of How
   Advanced Telecommunications Are
   Used in Three States

   (See figure in printed
   edition.)

All of the states are giving special priority to improving education,
and more than 500 schools in these states now have access to
instructional resources located beyond their classrooms and
buildings.  All three states see the use of technology as a way to
equalize educational opportunities between rural and urban areas. 
North Carolina, like several other states, is being sued over alleged
inequities in the amount of funding available to school districts in
different parts of the state.  The state hopes that use of the
network will help alleviate these concerns and that, once connected,
smaller, poorer schools will have access to specialized educational
service regardless of their resource base. 

All the states expect other types of users to benefit from access to
the network.  Iowa provides services to federal agencies, such as the
U.S.  Postal Service and Department of Veterans Affairs.  Nebraska's
video network is open to community groups such as churches and
chambers of commerce.  Iowa and North Carolina are using their
systems to conduct judicial hearings from remote locations.  In
addition, Iowa and Nebraska expect to use the availability of modern
telecommunications as an economic development tool.  Similarly, North
Carolina hopes that making advanced services available to businesses
will help the state attract and retain companies. 


   STATES HAVE PROVIDED FINANCIAL
   SUPPORT TO MAKE EQUIPMENT AND
   USAGE MORE AFFORDABLE
---------------------------------------------------------- Chapter 3:2

In each of the states we studied, network users were expected to
purchase and install the equipment needed to use the state networks. 
For example, in schools this equipment includes users'
equipment--cameras, monitors, and computers--and the network
connection equipment that converts information, sounds, and pictures
into a form that can be transmitted. 

In Iowa, local users are expected to pay for classroom equipment, but
the state pays for network connection equipment for state and
educational users, while federal government and medical users pay for
their own connection equipment.  North Carolina expects its sites to
meet both costs.  Nebraska expects sites to purchase the equipment
needed to connect to the frame-relay system, but the state purchased
the equipment for the video conferencing sites.  In all three states,
the sites use funds from a variety of sources to pay these costs,
including capital budgets, grants, and private donations.  Table 3.2
shows examples of the connection expenses that schools in each state
must meet. 



                               Table 3.2
                
                  Examples of Network Connection Costs

                                                        Estimated cost
                        Type of                         of on-site
State                   network         Key uses        equipment
----------------------  --------------  --------------  --------------
Iowa                    SONET           Full-motion     $90,000-
                                        video           $100,000

Nebraska                T-1             Compressed      $50,000
                                        video

                        Frame-relay     Data            $3,000
                                        (Internet)

North Carolina          ATM/SONET       Full-motion     $80,000-
                                        video           $120,000

                        ATM/SONET       High-speed      $40,000
                                        data
----------------------------------------------------------------------
Source:  Based on information from state officials and documents. 

Nebraska's video costs are lower than Iowa's and North Carolina's,
reflecting the state's decision to use less-expensive technology. 
North Carolina's State Controller believes that the communities'
expenses will decline as the state's network technology matures and
becomes more generally available. 

All three states found that some local sites needed assistance in
paying for on-site equipment and offered such assistance using a
variety of techniques.  Iowa is using appropriated funds to help
schools pay for local connection equipment.  Nebraska has funded some
educational connections through several sources.  For example, it has
created a School Technology Fund from funds available from a planned
program to winterize the schools and proceeds from the state lottery. 
Grants from this fund will be used to help schools with small budgets
pay to prepare rooms and connect with the frame-relay network.  Also,
the state's Public Service Commission allowed telephone companies to
use a tax windfall to help schools connect to the Internet instead of
returning these funds directly to consumers.  The North Carolina
legislature created grants that can help local sites meet the cost of
preparing rooms and connecting equipment.  Of the first 132 sites
planned to be connected in North Carolina, 115 received some form of
state funding. 

States and communities have also used funds from federal programs to
pay for users' equipment and network connection equipment.\1 For
example, the Iowa National Guard used funds from the Department of
Defense's Advanced Research Projects Agency (ARPA) to link its 60
armories.  North Carolina's sites have also received grants from
federal agencies, including ARPA, NTIA, and USDA.  Table 3.3 lists
examples of the use of federal assistance by states and localities
for network development. 



                                    Table 3.3
                     
                       Examples of Federal Grants Used for
                        State Telecommunications Projects


Loca                Iowa          Nebraska        Public Library
tion  Iowa          Methodist     Department of   of Charlotte
of    National      Medical       Administrative  and             Office of the
site  Guard         Center        Services        Mecklenburg     Governor
----  ------------  ------------  --------------  --------------  --------------
Amou  $9.5 million  $700,000      $212,455        $450,000        $550,000
nt

Sour  ARPA          Health Care   NTIA            \NTIA           \NTIA
ce                  Financing
                    Administrati
                    on

Purp  Connect 60    Link rural    Plan for        Provide for     Connect
ose   armories      hospitals to  statewide       114 public      emergency
                    the Des       integrated      computer        departments at
                    Moines        telecommunicat  terminals for   four teaching
                    Medical       ions            gaining access  hospitals to
                    Center        infrastructure  to information  those in four
                                                  resources       rural
                                                                  hospitals and
                                                                  a military
                                                                  base for
                                                                  remote
                                                                  consultations
--------------------------------------------------------------------------------
Source:  Based on information from Department of Commerce and state
officials. 

According to an Iowa education official, federal funds have been key
to Iowa's ability to connect schools in a wide range of communities. 
A North Carolina official indicated that federal funds used for
earlier state projects, such as a medical project partially funded by
the National Science Foundation, contributed to their ability to plan
and implement a statewide network. 

Two states--Iowa and North Carolina--are making the services more
affordable by charging the same price for using the network at every
location, even at remote locations that are more expensive to serve. 
According to the North Carolina Governor's Office, North Carolina is
committed to ensuring that those who need service most, including
residents in remote rural areas, will not have to pay more for
services than those in other regions.  Iowa shares this commitment,
stating that there will be no regional price penalties.  As a result,
residents in rural counties in Iowa and North Carolina can obtain
services at the same rate as users in urban counties like those where
Dubuque and Raleigh are located.  Nebraska has not averaged rates for
all of its users but has averaged costs for state agency users. 

The prices that local organizations pay for network services vary by
state.  Users in Nebraska pay lower fees than users in the other two
states because Nebraska's technology is less advanced.  All of the
states charge users by the hour to use their systems, but North
Carolina also charges a fixed monthly fee.  Table 3.4 illustrates the
networks' rates for services and how they are applied. 



                               Table 3.4
                
                 Examples of Rates for Using the Video
                                Network

State                   Type of network         Price of network use
----------------------  ----------------------  ----------------------
Iowa                    SONET                   $5/hour for
                                                educational users,
                                                $10/hour for state
                                                government users, $40/
                                                hour for other users

Nebraska                T-1                     $20/hr

North                   ATM/SONET               $2,992/month plus $23/
Carolina                                        hour\a
----------------------------------------------------------------------
\a The rate that North Carolina charges its users is readjusted every
fiscal year.  Before November 1995, North Carolina charged $4,000 per
month for up to 64 hours of network use, plus $75 per hour for
additional hours. 

Source:  Based on information from state officials and state
documents. 

In North Carolina, the state government is the telecommunication
industry's largest customer, and the state has used this position to
purchase network services on behalf of other eligible network users. 
This strategy makes network use more affordable for local sites,
allowing them to purchase network time at prices 25-30 percent lower
than those available on the open market.  The Nebraska state
government is also purchasing large amounts of capacity and reselling
it to regional educational facilities at prices that state officials
said were lower than the facilities could negotiate by themselves. 
As a large customer, the state has also obtained discounts of
approximately 50 percent from telephone companies for schools that
are using the network. 

All three states have also used direct subsidies to make the services
more affordable.  Iowa currently subsidizes school sites, paying $35
of the $40 an hour that schools are charged for using the network.  A
raise in this rate resulted in a dramatic decrease in video usage,
and the $5 rate was reinstated after school officials indicated that
they were unwilling or unable to pay more.  In order to encourage
participation in the frame-relay network, Nebraska paid the usage
charges for all of the regional educational facilities connected to
this system during the first year of the network's operation.  In
North Carolina, the legislature originally allowed state funds to be
used for either site equipment or network costs.  For the current
fiscal year, the legislature approved funds averaging $2,800 per
month for each site to subsidize network costs for those sites
already connected to the network. 


--------------------
\1 We plan to issue a report on federal programs available to assist
rural communities with telecommunications later in 1996. 


   MANY SITES ARE CONNECTED
   ALREADY, BUT EVEN MORE REMAIN
   UNCONNECTED
---------------------------------------------------------- Chapter 3:3

Although the three states are still in the early stages of developing
their networks, each has made progress in making advanced
telecommunications services widely available to its citizens through
organizations such as schools, hospitals, and government agencies. 
Iowa has completed two of the three parts of its project.  As of
October 31, 1995, it had connected 157 sites, and it plans to connect
474 more sites by 2000.  Nebraska had connected over 400 schools
(kindergarten through 12th grade) as of February 1996 and is working
with a number of communities to help them develop demand for new
applications.  North Carolina has connected over 100 sites of the 800
sites the Governor's Office estimated that the state would connect by
the end of 1999.\2 However, in 1995 the legislature prohibited the
use of state funds to connect additional sites without further
legislative approval. 

Despite this progress, much remains to be done to make affordable
advanced telecommunications services widely available.  For example,
despite each state's emphasis on improving and equalizing education,
none of the three states had succeeded in connecting half of its high
schools by November 1995.  Nebraska had made the most progress,
connecting 140 of its 300 high schools.  More of the states'
unconnected schools are located in rural counties, where students may
be distant from urban centers.\3 These counties also contain more of
the states' high schools (see fig.  3.2). 

   Figure 3.2:  Number of
   Connected and Unconnected High
   Schools in Urban and Rural
   Counties in Three States

   (See figure in printed
   edition.)

Source:  Based on information from state officials and documents. 

In Iowa and Nebraska, the connected high schools are spread fairly
evenly throughout the states.  In North Carolina, however, a larger
number of counties do not have even one high school with access to
its advanced telecommunications network.  Figures 3.3, 3.4, and 3.5
show the geographic distribution of the connected high schools in
each state by county.  For all three states, maps showing the
connected high schools relative to the total number of high schools
in each county are presented in appendix I. 

   Figure 3.3:  Number of High
   Schools Connected to Advanced
   Telecommunications Network in
   Iowa, by County

   (See figure in printed
   edition.)

   sFigure 3.4:  Number of High
   Schools Connected to Advanced
   Telecommunications Network in
   Nebraska, by County

   (See figure in printed
   edition.)

   Figure 3.5:  Number of High
   Schools Connected to Advanced
   Telecommunications Network in
   North Carolina, by County

   (See figure in printed
   edition.)


--------------------
\2 The state also identified more than 3,400 sites as the maximum
potential number that could be connected. 

\3 According to North Carolina officials, one additional high school
was connected after November 1995.  The high school is located in
rural Hyde county. 


LESSONS OFFERED BY THE EXPERIENCES
OF THREE STATES
============================================================ Chapter 4

The three states we studied recognized that planning and building an
effective statewide advanced telecommunications network is an
expensive undertaking that can require years to complete.  Their
experiences illustrate the importance of building and maintaining
consensus among those parties that will be involved in constructing,
financing, and using the network--the telecommunications companies,
anticipated users, state legislators, and state executive branch
officials.  Addressing the concerns of these parties can help prevent
the construction delays and increased costs that result from
disagreements and financial constraints.  These lessons can be used
by other state policymakers as they begin or expand their own
advanced telecommunications projects, as well as by federal
policymakers who are considering what role the federal government
should play in developing a national information infrastructure. 


   TELECOMMUNICATIONS COMPANIES
   NEED TO SEE RETURN ON
   INVESTMENT
---------------------------------------------------------- Chapter 4:1

Securing the involvement of the telecommunications companies, whose
existing telephone and cable television systems can form the basis of
an advanced telecommunications network, is a key step, participants
told us.  Without cooperation from these companies, a state can build
its own network, as Iowa did, but it will incur substantial
construction and maintenance costs.  Company representatives stressed
that a company will only invest in upgrading its infrastructure if it
expects to recover its investment in a reasonable amount of time. 
Such investment did not occur in Iowa, where, according to state and
private-sector officials, the companies viewed the project as risky
and had doubts about the profitability of building the network. 
Several factors contributed to this assessment, including the
perceived technological risk and uncertainty about whether other
customers would pay for such services. 

Conversely, Nebraska and North Carolina were able to encourage
private investment because they worked with the companies to ensure
that their proposals made "business sense." Both states involved the
companies in decisions about the network's design so they would know
how much investment was needed to provide the anticipated services. 
In Nebraska, this process resulted in adopting a system using
well-known technology, thus reducing both the initial investment and
ongoing usage costs.  In North Carolina, the companies agreed to
provide the state with a system based on state-of-the-art technology
that was more expensive to install and use but could have a longer
useful life.  In both cases, the states and the companies agreed on a
system that they believed was technically feasible as well as
cost-effective.  Both also entered into long-term agreements with
customers (namely, the state) to guarantee a stream of revenue that
the companies could use to repay their initial investments and
thereby reduce their risks.  Also, by working with the state, the
companies could prevent the introduction of a potential competitor by
heading off the construction of a state-owned network like the one
built by Iowa.  Finally, the companies recognized that they could
benefit from the networks by selling advanced services to private
customers and by using the network to attract new customers and
retain existing ones. 


   AGREEING WITH POTENTIAL USERS
   ON WHAT THE SYSTEM WILL BE USED
   FOR IS IMPORTANT
---------------------------------------------------------- Chapter 4:2

Involving the potential users, including local educators and medical
professionals, state agencies, and businesses and trade organizations
such as chambers of commerce, is also important to ensure general
agreement about what services the network should provide.  If the
system does not meet the needs of the anticipated users, deployment
can be slowed, thereby increasing costs for those who are using the
system.  For example, while North Carolina involved potential users
during the planning for its network, the project has experienced
slower-than-anticipated acceptance by some users because of the high
cost of using the system.  One reason for this lower acceptance is
that the system was designed to carry two-way video to multiple
sites.  However, some of the schools that the state anticipated would
use the network wanted to buy only access to the Internet at higher
speeds than were available over conventional telephone lines, which
is a less expensive service to provide.\1 As a result, some users
were unwilling to pay for the capacity to send and receive video
images, when they would rather have had less expensive data
connections.  Since the rates the state pays the telephone companies
were based on estimates of use that have not been met, these rates,
and ultimately the rates charged to users, could go up to allow the
telephone companies to recover their investment, further discouraging
use of the statewide network. 

In Iowa, the development of the network was delayed by a disagreement
over what services to offer.  While the network was always intended
to provide video communications for the state's schools, disagreement
arose about whether it should carry telephone calls.  Iowa's state
auditor found that this lack of agreement caused several design
changes, which slowed the progress of the network. 


--------------------
\1 Officials told us that the state also offers this type of service,
but not over the ATM/SONET network. 


   LOCAL USER CONNECTIONS OFTEN
   DEPEND ON FUNDS THAT MAY NOT BE
   AVAILABLE IN THE FUTURE
---------------------------------------------------------- Chapter 4:3

As discussed in chapter 3, paying for equipment to connect to the
network and paying the ongoing usage charges can represent a
substantial investment by local users.  The states expected local
users to pay the costs associated with connecting to and using their
networks.  However, each state currently offers some type of
financial assistance to help pay some of these costs.  Only one of
three states, though, has approved enough funding to connect all the
users it planned for.  In Nebraska, the state plans to connect all
elementary and high schools to the Internet by 2000.  The state
legislature has approved $13 million for this purpose from a fund
originally created to winterize the schools.  According to a state
education official, this amount should be sufficient to pay for
connecting all of the state's schools to the Internet.  Iowa enacted
a plan to connect 474 sites to its network by 2000 but initially
appropriated funds to pay for about 100 sites through fiscal year
1996.  North Carolina has also approved state funds to assist users
through 1996 but has not approved funds to assist current users in
future years or to connect additional users.  If the states do not
commit additional funding, there is no guarantee that the sites that
want to participate later will get the same assistance that the
current sites are getting.  As a result, some local sites may be less
likely to connect to the networks if they have to pay more of the
costs themselves. 

Some local organizations have also used grants from federal agencies
to help pay for connection equipment.  However, under recent
proposals, some of the programs that provided these funds may be
eliminated.  For example, there are proposals pending in the Congress
to eliminate funds for the Department of Education's Star Schools
program, which helped pay for classroom equipment in Iowa.  In
addition, NTIA's information infrastructure grant program, which
serves mainly rural and disadvantaged urban areas and provided grants
in Nebraska and North Carolina, has been proposed for elimination. 
Should these proposals be carried out, local users would have fewer
funding sources available to help pay the costs associated with using
the advanced communications technology. 


   MAINTAINING LEGISLATIVE SUPPORT
   FOR PROJECTS' FINANCING CAN
   HELP PREVENT DELAYS
---------------------------------------------------------- Chapter 4:4

Each of the states planned to complete its advanced
telecommunications project over a number of years.  In Iowa and North
Carolina, where state funding was planned as a major source of
resources for the project, it was necessary to request funding
approval from the state legislature several times.  Since both
projects based their plans on future appropriations, they experienced
delays when they did not receive the level of funds they anticipated. 
In Iowa, the legislature originally approved about $50 million over 5
years to construct that state's network.  However, a series of
reductions and redirections reduced that amount by over 50 percent to
$23 million.  In a report, the state auditor found that these
shortfalls could impede the progress of the project.  North
Carolina's legislature approved $4.1 million for the project as
requested in fiscal year 1993.  In fiscal year 1994, the governor
requested an additional $5.3 million for the project, but the
legislature rescinded the original appropriation and approved $7
million.  A report by the state auditor concluded that this
uncertainty about funding left potential users in a quandary in
trying to plan for participation in the network.\2

More recently the legislature appropriated $2.5 million for use
through June 1996--again less than requested by the governor.  In
addition to providing less funding than requested, the legislature
explicitly prohibited the use of state funds to connect additional
sites to the network without further legislative approval.  As a
result, North Carolina has been able to connect far fewer sites than
it had planned. 

Although Nebraska also planned a multiyear project, it did not rely
on appropriated state funds.  Instead, it was able to identify
funding for its project from other sources, such as lottery proceeds
and a one-time tax refund to telephone companies. 


--------------------
\2 Performance Audit Report:  North Carolina Information Highway,
Office of the State Auditor, North Carolina (Mar.  1995). 


   STATES' EXECUTIVE BRANCH CAN
   PROVIDE A PROJECT ADVOCATE AND
   COORDINATED LEADERSHIP
---------------------------------------------------------- Chapter 4:5

Each of the projects in the states we visited spanned a number of
years--longer than the individual terms of office of any of the
elected officials in those states.  According to those we spoke with,
having someone who could serve as an advocate for the program despite
changes in political leadership was helpful to maintaining the
government's support for the project.  For example, in Nebraska, the
director of the Division of Communications, has worked on the project
from its inception, through the governor's two terms of office. 
Despite changes in legislative support, North Carolina's project kept
progressing, in part because of the efforts of the governor's
technology advisor, who had been involved in the design of the
project since its inception.  In Iowa, the governor has been in a
position to advocate the state's program for nearly 10 years as a
result of being reelected to several consecutive terms in office. 

While an advocate can provide the vision that keeps the project on
track, a lack of consistent and coordinated management can limit the
effectiveness of the project.  According to a report by Iowa's state
auditor, the lack of a consistent management structure was one of the
problems that hindered the implementation of the state's project.\3
Responsibility for the project was initially split between the public
television agency and the Division of General Services, which had
three different administrators during the first 3 years of the
project.  It was not until 1994--3 years after network construction
began--that the legislature enacted a formal management structure,
the Iowa Telecommunications and Technology Commission, to oversee the
network's operations. 

Similarly, in North Carolina a 1992 performance audit report found
that the state needed to restructure its governance of information
technology and that it had not performed adequate planning for
information technology.\4 In response, the state formed the
Information Resources Management Commission, which is responsible for
setting state policy on information technology projects, including
the statewide network.  However, a 1995 report by the state auditor
found that while progress had been made, the number of agencies and
other organizations involved with the network raised the potential
for problems due to a lack of coordination.  The report recommended
that the state's technology-related functions be further
consolidated.\5 The state controller, who provides the staff for the
commission, did not concur with this recommendation on the grounds
that the commission was formed to perform this function and that it
was too early to evaluate its effectiveness. 


--------------------
\3 Special Report on the Iowa Communications Network. 

\4 Performance Audit of Information Technology and
Telecommunications, North Carolina General Assembly Government
Performance Audit Committee, Vol.  I, Final Report (Dec.  1992). 

\5 Performance Audit Report:  North Carolina Information Highway. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 4:6

We discussed a draft of this report with senior officials in the
three states we visited, including the Chief Operating Officer, Iowa
Communications Network, and the Education Policy Advisor, Office of
the Governor of Iowa; the Director, Division of Communications, State
of Nebraska; and the Advisor to the Governor for Policy, Budget, and
Technology and the State Controller in North Carolina.  Each provided
comments to clarify and update the draft, and we incorporated them
where appropriate. 

The Iowa officials commented that we had not included enough detail
about the technical capabilities of their network or the applications
it supported.  Because our report is intended for a non-technical
audience, we did not include the technical language they proposed. 
We did, however, add information in chapter 3 about how the network
is used beyond the specific education and medical applications we
identified.  The officials also pointed out that the state
legislature is currently considering a proposal to provide $150
million in educational technology funds.  We did not include this
information because the proposal had not been adopted as of February
23, 1996, and because the funds would not necessarily pay for costs
related to the network. 

The North Carolina officials told us that the 3,400 sites originally
identified as potential connections to the network were meant to
represent the maximum potential sites that could be connected and, as
such, are not the project's current goal.  They said that the only
official recommendation for the number of sites to be connected is
the 1993 Governor's Office estimate of 800 sites to be connected by
1999.  We changed the draft to reflect this clarification.  Officials
with the State Controller's Office commented that there was no need
to further consolidate state information technology management, as
recommended by the state auditor.  They said that reorganization was
unnecessary because the recently created Information Resources
Management Commission, which is housed in the Controller's Office,
already performs that function.  The state auditor, however,
identified several other organizations that still have responsibility
in this area.  Officials with the Controller's Office confirmed that
the responsibilities of the organizations identified in the state
auditor's report have not changed.  We clarified our discussion of
this issue and noted that the controller did not concur with the
auditor's recommendation. 

The Nebraska official who reviewed the draft provided clarifying
comments and updated data.  Officials with NTIA, including the
Director, Public Broadcasting Division, Office of Telecommunications
and Information Application, also reviewed the draft.  They told us
that it accurately portrayed NTIA and its program. 


LOCATION OF CONNECTED AND TOTAL
HIGH SCHOOLS IN THREE STATES, BY
COUNTY
=========================================================== Appendix I

Each of the states we visited has begun efforts to make advanced
telecommunications more widely available.  Within this broader
objective, each state has focused on providing its schools with
access to advanced services, such as high-speed Internet access or
two-way video communications.  To date, more than 500 schools have
access to these types of services.  To further illustrate the status
of the states' advanced telecommunications projects, the maps below
show the number of high schools in each county that were
participating in the project according to the most recently available
data.  For comparison, the total number of high schools in each
county is also presented.  The shaded counties are those classified
as metro, or urban, by the U.S.  Department of Agriculture. 

   Figure I.1:  Connected High
   Schools and Total High Schools
   in Iowa, by County, as of
   November 1995

   (See figure in printed
   edition.)

   Figure I.2:  Connected High
   Schools and Total High Schools
   in Nebraska, by County, as of
   November 1995

   (See figure in printed
   edition.)

   Figure I.3:  Connected High
   Schools and Total High Schools
   in North Carolina, by County,
   as of February 1996

   (See figure in printed
   edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

Phyllis Scheinberg
Marnie Shaul
James R.  Sweetman, Jr.
E.  Jerry Seigler
Amy Abramowitz
Mitchell Karpman
Phyllis Turner
Lynne Goldfarb

OFFICE OF THE GENERAL COUNSEL

Mindi Weisenbloom

CHICAGO FIELD OFFICE

Jennifer Arns
John Rose




RELATED GAO PRODUCTS
============================================================ Chapter 1

Telecommunications:  Competition in the Mobile Communications
Industry (GAO/T-RCED-96-20, Oct.  12, 1995). 

Information Technology Investment:  A Governmentwide Perspective
(GAO/AIMD-95-208, July 31, 1995). 

School Facilities:  America's Schools Not Designed or Equipped for
21st Century (GAO/HEHS-95-95, Apr.  4, 1995). 

Information Superhighway:  An Overview of Technical Challenges
(GAO/AIMD-95-23, Jan.  23, 1995). 

Information Superhighway:  Issues Affecting Development
(GAO/RCED-94-285, Sept.  30, 1994). 

Telecommunications:  Financial Information on 16 Telephone and Cable
Companies (GAO/RCED/AIMD-94-221FS, July 8, 1994). 

Communications Privacy:  Federal Policy and Actions (GAO/OSI-94-2,
Nov.  4, 1993). 

Economic Espionage:  The Threat to U.S.  Industry (GAO/T-OSI-92-6,
Apr.  29, 1992). 

Computer Security:  Hackers Penetrate DOD Computer Systems
(GAO/T-IMTEC-92-5, Nov.  20, 1991). 

Computers and Privacy:  How the Government Obtains, Verifies, Uses,
and Protects Personal Data (GAO/IMTEC-90-70BR, Aug.  3, 1990). 

Computer Security:  Virus Highlights Need for Improved Internet
Management (GAO/IMTEC-89-57, June 12, 1989). 


*** End of document. ***