*Pages 1--9 from Microsoft Word - 10368.doc* Federal Communications Commission DA 01- 1721 Before the Federal Communications Commission Washington, DC 20554 In the Matter of ) ) ) Federal- State Joint Board on ) CC Docket No. 96- 45 Universal Service ) ) Changes to the Board of Directors of the ) CC Docket No. 97- 21 National Exchange Carrier Association, Inc. ) ) Total Communications, Inc. ) ) Site Link Communications, Inc. ) ) Requests for Review of ) Decisions of the Universal Service ) Administrator ) ) ORDER Adopted: July 19, 2001 Released: July 20, 2001 By the Common Carrier Bureau: 1. In this Order, we address Requests for Review filed by more than 150 schools and libraries (“ Consolidated Applicants”) seeking support from the Commission’s universal service support mechanism for eligible schools and libraries. 1 The Consolidated Applicants all appeal the denial of their Funding Year 3 applications by the Schools and Libraries Division (SLD) by the Universal Service Administrative Company (USAC or Administrator) 2 . For the reasons discussed herein, we remand all of the Requests for Review of the Consolidated Applicants for individual review by SLD in accordance with the guidance set forth in this Order. 1 See Appendix A, infra, for a list of specific Requests for Review remanded to SLD pursuant to this Order. All of the Consolidated Applicants were joined in a consolidated Request for Review filed on their behalf by Schwaninger & Associates, P. C. See Letter from Benjamin Aron to Office of the Secretary, Federal Communications Commission, filed November 13, 2000 (Consolidated Appeal); see also Letter from Benajmin Aron to Mark Seifert and Andy Firth, Federal Communications Commission, filed March 6, 2001. 2 Section 54. 719( c) of the Commission’s rules provides that any person aggrieved by an action taken by a division of the Administrator may seek review from the Commission. 47 C. F. R. § 54. 719( c). 1 Federal Communications Commission DA 01- 1721 2 I. BACKGROUND 2. Under the schools and libraries universal service support mechanism, eligible schools, libraries, and consortia that include eligible schools and libraries, may apply for discounts on eligible telecommunications services, Internet access, and internal connections. 3 The Commission’s rules require eligible schools and libraries to seek competitive bids for all services eligible for discounts. 4 To comply with the competitive bidding requirement, the Commission’s rules first require that an applicant submit to the Administrator a completed FCC Form 470, in which the applicant sets forth its technological needs and lists the services for which it seeks discounts. 5 The Administrator must post the FCC Form 470 to its web site, where all potential service providers can consider it. 6 Once the FCC Form 470 has been posted for 28 days and the applicant has signed a contract for eligible services with a service provider, the applicant must then submit a completed FCC Form 471 application to notify the Administrator of the services that have been ordered, the service provider with which the applicant has signed a contract, and an estimate of the funds needed to cover the discounted portion of the price of the eligible services. 7 The competitive bidding requirement is important to the integrity of the schools and libraries support mechanism “because it implements the principle of competitive neutrality by allowing all providers access to information about particular schools’ and libraries’ needs and because it helps to ensure that schools and libraries will receive the lowest possible pre- discount price.” 8 3. All of the Consolidated Applicants applied for universal service funding for funding Year 3 of the universal service program for eligible schools and libraries, which runs from July 1, 2000, to June 30, 2001. All of the Consolidated Applicants apparently entered into business relationships with Total Communications, Inc. (Total Com), wherein Total Com agreed to serve as a “consultant” to the applicant and assist them in obtaining supported services and vendors to provide such services for Year 3 of the schools and libraries universal services support program. 9 The record shows that all of the Consolidated Applicants eventually selected Site Link Communications, Inc. (Site Link) as their service vendor. 10 3 47 C. F. R. §§ 54.502, 54.503. 4 47 C. F. R. § 54.504. 5 47 C. F. R. § 54.504( b)( 1), (b)( 3). 6 47 C. F. R. § 54. 504( b)( 3). 7 47 C. F. R. § 54. 504( c). 8 Federal- State Joint Board on Universal Service, Order on Reconsideration, CC Docket No. 96- 45, 12 FCC Rcd. 10095, 10098, at para. 9 (1997). 9 See letter of SLD to Consolidated Schools (“ Further Explanation of Administrator’s Funding Decision”), dated October 13, 2000, at 1 (Explanatory Letter). 10 Explanatory Letter at 1. 2 Federal Communications Commission DA 01- 1721 3 4. Each of the Consolidated Schools received identical letters from SLD dated October 13, 2000, denying their requests for universal service funding. 11 In this Explanatory Letter, SLD stated its reasons for its denial of funding to all of the Consolidated Applicants. First, SLD stated that all of the affected applicants had entered into agreements with Total Com under which Total Com would locate grants to cover the non- discount portion of funding that the applicant was required to pay, and if Total Com were unable to locate such grants, the applicant would not be responsible for its obligation. 12 Second, SLD stated that the contracts between Site Link and the applicants made Total Com a third- party beneficiary of the contracts, and consequently, when Total Com reviewed the contracts submitted by Site Link, it had a direct financial interest in the contract. 13 Third, SLD stated that a comparison of competing bids showed that Total Com selected the Site Link proposals even when comparable or updated equipment was offered in the competing bids at roughly half the price of that in the Site Link proposals, and some of these competing bids indicated that Total Com did not provide the detail necessary to enable bidders to formulate adequate bids. 14 Fourth, SLD stated that there was no evidence that Total Com evaluated competing bids. 15 Finally, SLD stated that the “guarantor” arrangement, whereby Total Com assumed responsibility for covering the non- discount portion of an applicant’s costs, “raises a strong inference that the Site Link proposals were inflated to ensure that Site Link would not lose the value of the applicant’s contribution.” 16 5. On appeal, the Consolidated Applicants raise several challenges to SLD’s decision. In general, the Consolidated Applicants argue that SLD has failed to consider each application individually, misstated the facts relating to the individual applications, and failed to apply any standards of law. 17 For example, the Consolidated Applicants point out that 24 of the Consolidated Applicants never entered into a “guarantor” relationship with Total Com because those 24 schools had the resources to cover their non- discount portion of the funding. 18 The Consolidated Applicants also argue that, for the remainder of the applicants, SLD fails to state why as a matter of law this arrangement raises concern. 19 6. The Consolidated Applicants acknowledge that vendors were required to pay Total Com’s “consulting fees” via a third- party interest in their service contracts, amounting to three percent of the contract price, but argue that there is no rule preventing any such arrangement. 20 11 Explanatory Letter, passim. 12 Explanatory Letter at 1. 13 Explanatory Letter at 1 14 Explanatory Letter at 2. 15 Explanatory Letter at 2. 16 Explanatory Letter at 2. 17 Consolidated Appeal at 3, 17- 21. 18 Consolidated Appeal at 3. 19 Consolidated Appeal at 3. 20 Consolidated Appeal at 9. 3 Federal Communications Commission DA 01- 1721 4 Furthermore, the Consolidated Applicants argue that such an arrangement does not conflict with the goals of the applicants or the schools and libraries universal service program, and cannot be abused in Total Com’s favor. 21 Finally, the Consolidated Applicants strongly object to SLD’s allegation of competitive bidding irregularities, noting that these allegations are unfounded because SLD has provided few factual details or examples to substantiate this allegation. 22 The Consolidated Applicants also object to SLD’s stated “inference” of improper bidding practices as one basis for its decision to deny funding to the Consolidated Applicants. II. DISCUSSION 7. As an initial matter, we conclude that the Consolidated Applicants have sufficiently demonstrated that there may be enough factual disparities between each of the applications that justify individualized review. We recognize that there are many similar elements linking each of the applications of the Consolidated Applicants. For example, each and every one of the Consolidated Applicants entered into a “consulting” agreement with Total Com, and eventually selected Site Link as their primary service provider. We also recognize that SLD believed that its decision to dispose of all of the applications of the Consolidated Applicants in a single determination letter was within the scope of its affirmative duty to prevent instances of fraud, waste, and abuse in the universal service support mechanism. 8. On appeal, however, the Consolidated Applicants have demonstrated the need for review on a case- by- case basis. It is unclear from the record to what extent SLD analyzed each of the schools’ unique facts and circumstances, prior to rendering its decision. Without reaching conclusions on the merits of each application, therefore, we remand all of the Requests for Review to SLD for individual processing, and direct SLD to review each application and determine whether, based on the individual facts, each application complies with program requirements. In the event that any applications fail to comply with program requirements, SLD shall state the specific factual basis for its determination. 9. In particular, we note that some of the factors outlined by SLD as reasons for its mass denial of the Consolidated Applicants’ applications require an examination of each school’s individual facts and circumstances. For example, consulting fees in general are not eligible for funding through the universal service support mechanism. 23 SLD, however, customarily applies its “30 percent rule” in determining whether the amount of requested funding for ineligible services amounts to such a degree that denial of the entire funding request is necessary. 24 Thus, 21 Consolidated Appeal at 9- 10. 22 Consolidated Appeal at 10- 17. 23 Universal service support is provided to eligible schools and libraries for telecommunications services, Internet access, and internal connections. See 47 C. F. R. § 54.502 –505. SLD literature provides notice to applicants that consulting services are not eligible for universal service support. See Schools and Libraries Division, Eligible Services List, http:// www. sl. universalservice. org/ data/ pdf/ eligibleserviceslist. pdf at 37 (January 24, 2001). 24 The “30- percent policy” is not a Commission rule, but rather is an internal SLD benchmark utilized during its application review process, to enable SLD to approve funding requests for eligible services without having to spend an excessive amount of time working with an applicant that for the most part is requesting funding of ineligible 4 Federal Communications Commission DA 01- 1721 5 while consulting fees are ineligible for funding, the question of whether such fees in a funding request exceed the 30 percent threshold is a factual question that must be determined for each individual applicant. 10. On remand, therefore, we direct SLD to assess each of the Consolidated Applicants’ applications to determine the exact degree to which any ineligible “consulting fees” were present in funding requests. We furthermore direct SLD to specify, in concrete terms, the factual basis for any other finding it makes for each of the Consolidated Applicants. While we believe that SLD has identified potentially serious issues surrounding the applications of the Consolidated Applicants, we believe that each of the Consolidated Applicants is entitled to individualized review. We recognize that SLD, after further review, may still be able to identify applicants whose applications share common material facts and raise identical substantive issues. In the interest of administrative efficiency, SLD shall, within its discretion, be permitted to issue identical determination letters to “groups” of the Consolidated Applicants, provided that the factual and substantive similarities between the applicants in a group are clearly explained. III. ORDERING CLAUSE 11. Accordingly, IT IS ORDERED, pursuant to sections 1- 4, and 254 of the Communications Act of 1934, as amended, 47 U. S. C. §§ 151- 154 and 254, and sections 54.719 and 54.722 of the Commission’s rules, 47 C. F. R. §§ 54.719 and 54.722, that the Letters of Appeal filed by the named parties to this Order ARE REMANDED to the Schools and Libraries Division for further consideration as provided herein. FEDERAL COMMUNICATIONS COMMISSION Carol Mattey Deputy Chief, Common Carrier Bureau services. If 30 percent or less of the request is for funding of ineligible services, SLD normally will approve the portion that is for eligible services. If more than 30 percent of the request is for funding of ineligible services, SLD will deny the application in its entirety. See, e. g., Request for Review of the Decision of the Universal Service Administrator by New Kensington- Arnold School District New Kensington, Pennsylvania, Federal- State Joint Board on Universal Service, Changes to the Board of Directors of the National Exchange Carrier Association, Inc., Order, File No. SLD- 28754, CC Dockets No. 96- 45, 97- 21, 1999 WL 1216147 (F. C. C., Dec 21, 1999); Request for Review of the Decision of the Universal Service Administrator by Western Heights Public School District, Federal- State Joint Board on Universal Service, Changes to the Board of Directors of the National Exchange Carrier Association, Inc., Order, File No. SLD- 54054, CC Dockets No. 96- 45, 97- 21, 15 FCC Rcd 8502 (Com. Car. Bur. 1999). 5 Federal Communications Commission DA 01- 1721 6 APPENDIX A LIST OF REQUEST FOR REVIEW REMANDED Applicant Application Number Abiline SDA School 170188 Adelphian Jr. Academy 162828 Advent Home Youth Services 190343 Advent Home Youth Services 181367 All Saints School 161536 Alpine Christian School 190476 Amarillo Junior Academy 171630 Amazing Grace Christian School 187002 Aqsa School 189192 Ariel Dear Academy 159471 Auburn Adventist Academy 160045 Auburn Adventist Academy 171216 Battle Creek Academy 163677 Berea Elem. Junior High School 160744 Berea Elem. Junior High School 162782 Berkshire Hills 160968 Bethany Junior Academy 159652 Bethany Lutheran School 181741 Bethel Junior Academy 159981 Bethel SDA Elem. School 195367 Betty Shabazz International 162294 Betty Shabbazz International 160429 Bishop Adventist School 184915 Brewster Adventist School 167832 Broadview Academy 196271 Bronx- Manhattan SDA School 186498 Brooklyn SDA Elem School 160964 Brooklyn SDA Elem. School 161886 Brooklyn Temple SDA Elem. School 159273 Buena Vista SDA School 159046 Coble Elementary School 167583 Carmel Christian School 172670 Cerebral Palsy Center School 192530 Chicago SDA Academy 159772 Choir Academy of Harlem 160158 Christ The King Catholic School 165807 Christ The King School 15971 Columbia Seventh Day Adventist 162640 Community Catholic School 181453 Community Leadership Academy 195873 6 Federal Communications Commission DA 01- 1721 7 Crescent City SDA School 195709 Crestview SDA Elem. School 171569 Dade Marine Institute- South 171381 Daystar Christian Academy 194920 Deamude SDA Elementary School 196444 Dexterville SDA Church Schoo 181294 Dr. Brumfield Johnson Christian Academy 183535 Eagle SDA School 196080 Eastside Multi- Cultural Community 162041 Excelsior Elementary 160159 Faith Family Academy of Oak Cliff 161571 Faith Family Academy of Oak Cliff 158781 Feather River SDA 160083 Flatbush SDA 163396 Forest City SDA 159818 Forest Park Adventist 169581 Fort Smith Christian School 162873 Fresno Adventist Academy 175834 Friends of Avalon Prep School 163059 Frontenac SDA 164074 Georgia Cumberland 185017 Glennville Christian Academy 182588 Greater Grace Christian Academy 196292 Greater Miami Academy 159426 Hanford Christian School 167386 Hartford Area School 163791 Heart of the Earth Center 162303 Hebron SDA School 161527 Hixson SDA School 159271 Holy Cross Catholic Elem School 166765 Holy Rosary Elementary School 165763 Immaculate Conception School 165423 Indianapolis Junior Academy 158880 James Valley Christian School 190409 Jasper Adventist Christian School 160240 Khamit Institute 162584 Kirkland SDA School 188681 Kirkland SDA School 163143 La Vida Mission 190793 Lakeland Adventist Jr. Academy 164011 Laurel Hall 196164 Madison Academy 195424 Maplewood Academy 161365 Maplewood Academy 159950 McMinnville SDA 159821 7 Federal Communications Commission DA 01- 1721 8 McMinnville SDA School 191729 Melrose Community School 165093 Midway Christian Academy 163822 Milo Elementary School 194767 Milwaukee SDA 173417 Mitchell Catholic Schools 167434 Mt. Aetna Adventist Elementary 168396 Murphy Adventist School 171635 Nelson Crane Christian School 160193 New Life Christian Academy 160953 New Vistas Christian School 196010 Normative Services Inc. 159047 Northeastern Academy 160161 Oakwood Academy 159345 O'Gorman High School 164999 O'Gorman Junior High School 166063 Optimal Christian Academy 163994 Our Lady of Blessed Sacrament 167265 Our Lady of Lourdes School 163787 Pacific Coast Christian School 185037 Paradise SDA School 194718 Pathfinder Village School 161424 Peninsula Marine Institute 163819 Platte Valley SDA Academy 171247 Reading SDA Junior Academy 163153 Reading SDA Junior Academy 163153 Redding SDA School 189974 Rio Grande Charter School of Excellence 162484 Rocky Knoll Elementary School 182594 Roncalli High School 165059 Sacred Heart School 166720 San Antonio Junior Academy 161324 Sheenway School & Culture Ctr. 161823 Sheenway School & Culture Ctr. 159704 Southwest Christian Academy 196250 SS Cyril Methodius School 172685 St Timothy Episcopal 163366 St. Agnes School 165148 St. Anthony School 166467 St. Dominick's School 194014 St. Joseph Cathedral School 169556 St. Joseph School 165619 St. Joseph's Indian School 166815 St. Lambert School 165127 St. Laurence O'Toole School 160519 8 Federal Communications Commission DA 01- 1721 9 St. Lawrence School 166694 St. Malachy Elementary School 159270 St. Martin School 166708 St. Mary's Elementary School 166485 St. Mary's Grade School 165556 St. Mary's High School 165885 St. Mary's School 165146 St. Matthews Lutheran School 184847 St. Michael School 195591 St. Michael School 165169 St. Peter School 166831 St. Thomas School 165170 Standifer Gap School 188035 Tampa Junior Academy 192778 Taylor Christian Academy 162381 Temple of Truth School 159653 The Cathedral School of Brooklyn 171413 The Intervention Group 160121 The Varnett Charter School 159929 Three Angels Academy 195686 Tri City Junior Academy 160088 Trinity Lutheran School 190490 Trinity Lutheran School 209257 Trinity Temple Academy 159774 Triumphant Charter School 171228 Tuolumne 170473 Waxahachie Faith Family Academy 186430 Westchester Area School 185216 Westcoast School 162507 Wisconsin Academy 159576 9