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Federal Communications Commission FCC 03- 294
Before the Federal Communications Commission
Washington, D. C. 20554
In the Matter of
Federal- State Joint Board on Universal Service
Petition of the Puerto Rico Department of Education to Release Funds Associated with
the Schools and Libraries Universal Service Support Mechanism for Years 2001 and 2002
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CC Docket No. 02- 6
Order
Adopted: November 14, 2003 Released: November 25, 2003
By the Commission:
I. INTRODUCTION
1. In this Order, we direct the Schools and Libraries Division (SLD) of the Universal Service Administrative Company (USAC, or Administrator) to review and process the
applications of the Puerto Rico Department of Education (PRDOE) for funding years (FY) 2001 and 2002 1 under the schools and libraries universal support mechanism (E- rate Program) with
the conditions contained in this Order. We direct USAC to engage an independent auditor to examine PRDOE’s compliance with the Commission’s requirements for FY 2001 and 2002
funding, before USAC commits or disburses FY 2001 and 2002 funds on behalf of PRDOE.
2. We also direct USAC to engage an independent auditor to examine PRDOE’s compliance with Commission rules during the first three years of its participation in the E- rate
Program (FY 1998, 1999, 2000). Upon completion of that audit, we will address issues related to PRDOE’s participation in the E- rate program for those three funding years, including any
need for recovery of funds that were distributed during those years.
II. BACKGROUND
A. Program Rules and Policies
3. Under the E- rate program, eligible schools, libraries, and their consortia may apply for discounts on eligible telecommunications services, Internet access, and internal connections. 2
1 For these two funding years, PRDOE has requested $69,500, 969 in internal connections, telecommunications
services, and Internet access. See SLD’s website, . 2
47 C. F. R. §§ 54. 502, 54.503.
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In order to receive discounts on eligible services, the Commission’s rules require that the applicant make a bona fide request for services by filing with the Administrator an FCC Form
470, which is posted to the Administrator’s website for all potential competing service providers to review. 3 The Commission’s rules require eligible schools and libraries to seek competitive
bids for all services eligible for discounts. 4 After the FCC Form 470 is posted, the applicant must wait at least 28 days before entering into binding service agreements with its chosen
providers. 5 When choosing a service provider, the applicant must select the most cost effective bid. 6
4. Once the applicant has complied with the Commission’s competitive bidding requirements and signed a contract for eligible services, the applicant must file FCC Form 471 to
notify the Administrator of the services that have been ordered, the carrier with whom the applicant has signed the contract, and an estimate of funds needed to cover the discounts
requested for eligible services. 7 SLD reviews the FCC Forms 471 it receives and issues funding commitment decisions in accordance with the Commission’s rules.
5. USAC does not provide funds directly to schools and libraries. Instead, the Administrator disburses funds to eligible service providers who, in turn, offer discounted
services to eligible schools and libraries. 8 The applicant may ask its service provider to bill the discounted amount. Alternatively, the applicant may pay the full, undiscounted amount, and
then file a designated form with the Administrator to request reimbursement. 9
6. In order to protect against waste, fraud, and abuse, action on pending applications is deferred when USAC is made aware of investigations by federal, state, or local authorities that
potentially implicate compliance with program rules for that funding request. In order to avoid jeopardizing non- public investigations, USAC does not notify applicants that an application may
3 Schools and Libraries Universal Service, Description of Services Requested and Certification Form, OMB 3060-0806
(FCC Form 470); 47 C. F. R. § 54. 504( b); Federal- State Joint Board on Universal Service, CC Docket No. 96- 45, Report and Order, 12 FCC Rcd 8776, 9078, para. 575 (1997) (Universal Service Order), as corrected by
Federal- State Joint Board on Universal Service, CC Docket No. 96- 45, Errata, FCC 97- 157 (rel. June 4, 1997), affirmed in part, Texas Office of Public Utility Counsel v. FCC, 183 F. 3d 393 (5th Cir. 1999) (affirming Universal
Service First Report and Order in part and reversing and remanding on unrelated grounds), cert. denied, Celpage, Inc. v. FCC, 120 S. Ct. 2212 (May 30, 2000), cert. denied, AT& T Corp. v. Cincinnati Bell Tel. Co., 120 S. Ct. 2237
(June 5, 2000), cert. dismissed, GTE Service Corp. v. FCC, 121 S. Ct. 423 (Nov. 2, 2000). 4
47 C. F. R. § 54. 504; Universal Service Order, 12 FCC Rcd at 9029, para. 480. 5
47 C. F. R. § 54. 504( b). Services also may be provided under tariff or month- to- month arrangements. 6
Universal Service Order, 12 FCC Rcd at 9029- 30, para. 481. 7
47 C. F. R. § 54. 504( c); Schools and Libraries Universal Service, Services Ordered and Certification Form, OMB 3060- 0806 (FCC Form 471).
8 See Changes to the Board of Directors of the National Exchange Carrier Association, Inc., Federal- State Joint
Board on Universal Service, CC Docket Nos. 97- 21 and 96- 45, Order, FCC 99- 291, paras. 8- 9 (rel. October 8, 1999), recon. pending; Changes to the Board of Directors of the National Exchange Carrier Association, Inc.,
Federal- State Joint Board on Universal Service, CC Docket Nos. 97- 21 and 96- 45, Order, FCC 00- 350 (rel. October 26, 2000), appeal pending sub nom., United States Telecommunications Association v. Federal Communications
Commission, No. 00- 1500, filed November 27, 2000; see also SLD’s website, .
9 The reimbursement form is called the Billed Entity Applicant Reimbursement (BEAR) Form.
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be on hold.
B. USAC Audit of PRDOE and Pending Investigations
7. In accordance with its standard operating procedures, USAC committed and disbursed funds on behalf of PRDOE during FY 1998- 2000 to two service providers, Puerto
Rico Telephone Company (PRTC) and Data Research Communications Company (DRC). 10 After the first year of operation of the program, USAC initiated audits of selected beneficiaries in
order to carry out its obligation to protect against waste, fraud and abuse. This audit of FY 1998 beneficiaries, conducted by an independent audit firm, was completed in 2000. The audit
identified apparent program violations with respect to PRDOE for funding year 1998. Specifically, the independent auditors determined that, in the classrooms visited, there were no
desktop computers, which would appear to violate the Commission’s requirement that recipients have the necessary resources to utilize the services funded by the E- rate. 11
8. In response to that audit, on December 5, 2001, USAC suspended payments on behalf of PRDOE for FY 1998- 2000 for failure to “secure access to all of the resources, including
computers” necessary to make use of the discounted services purchased with the E- rate funding. 12 After consultation with the Wireline Competition Bureau, USAC also suspended
consideration of PRDOE’s applications for FY 2001 and 2002, and it required PRDOE to respond to the findings of the USAC- initiated audit. 13 In its December 5, 2001 Suspension
Letter, USAC asked PRDOE for a detailed analysis of the state of the E- rate program in Puerto Rico, including information on computer installation, curriculum software, teacher training and
the school electrical systems. 14 In January, 2002, PRDOE responded to USAC with written and in- person reports. PRDOE stated that it had launched a three- pronged E- rate recovery effort that
focused on PRDOE’s schools, its central communications network, and its central offices. 15 PRDOE updated its reports in April and October, 2002, detailing its progress in achieving the
goals of its recovery program. On September 27, 2002, PRDOE wrote USAC, urging USAC to resume its processing of PRDOE’s FY 2001 and 2002 applications. 16
9. Meanwhile, in the fall of 2000, soon after the USAC- initiated audit, Puerto Rico held
10 PRDOE received commitments for its 1540 schools for telecommunications services, Internet access, and internal
connections for FY 1998, 1999, and 2000, totaling $158 million dollars. Of that, $101 million dollars was disbursed. See Letter from Dr. César A. Rey Hernández, Secretary, PRDOE, to Jane Mago, General Counsel,
Federal Communications Commission, dated January 30, 2003 (PRDOE Petition) at 4 and Exhibit I (Appendix B of Arthur Andersen Audit Report, dated October 17, 2001). In FY 1998, PRDOE selected Puerto Rico Telephone
Company (PRTC) for telecommunications service and Internet access, and Data Research Communication Corporation (DRC) for internal connections. In FY 1999, PRDOE selected PRTC for telecommunications service,
both PRTC and DRC for Internet access, and DRC for internal connections. In FY 2000, PRDOE selected DRC for Internet access, and PRTC and DRC for internal connections.
11 PRDOE Petition at Exhibit 1, page B- vi.
12 Letter from George McDonald, USAC, to PRDOE, dated December 5, 2001, at 1- 2. (Suspension Letter).
13 Id.
14 Id. at 2.
15 PRDOE Petition at Exhibit IV.
16 Letter from PRDOE to George McDonald, USAC, dated September 27, 2002.
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general elections. In early 2001, the new governor took office and appointed a new Secretary of Education to head PRDOE. Upon taking over, the new Secretary determined that in many
schools the equipment did not appear to have been properly installed, and in other schools the electrical infrastructure was obsolete or inadequate. 17 The new Secretary immediately began
corrective measures, including hiring an outside consulting firm to undertake a comprehensive and critical analysis of the status of the E- rate program under PRDOE. 18 PRDOE cancelled
DRC’s service contract under the E- rate program, and subsequently asked the Department of Justice of the Commonwealth of Puerto Rico to investigate DRC’s record of performance. 19 At
the same time, other federal and local authorities began investigating questionable procedures at the PRDOE under the prior administration’s tenure. Between January, 2001 and January, 2002,
four separate entities initiated investigations of PRDOE. 20 These investigations, examining events that occurred prior to January, 2001, uncovered a past record of competitive bidding
violations, contracts inconsistent with federal requirements, and funds spent on “unallowable activities.” 21 Irregularities in the use of U. S. Department of Education funds led the U. S.
Department of Justice to indict Victor Fajardo- Velez, Secretary of Education for Puerto Rico from 1994 to 2000. That individual subsequently was sentenced to three years in federal prison
and required to pay restitution of over $4 million. 22 Federal investigations into these matters are ongoing.
10. As previously noted, late in 2001, USAC suspended payment to PRDOE for all outstanding commitments for FY 1998, 1999, and 2000. Subsequently, PRTC brought a lawsuit
against DRC, alleging it had failed to pay PRTC for services rendered to it. DRC, in turn, counterclaimed, and filed a third- party complaint against USAC in the Commonwealth Court of
Puerto Rico. 23 The complaint seeks $77 million in damages from USAC, based in part on the contention that funding commitments issued by USAC constituted binding contracts with the
PRDOE. DRC claims that USAC is responsible for any funds due to PRTC based on USAC's funding commitments in previous program years. DRC is claiming that USAC's cessation of
payments under the schools and libraries support mechanism is the cause of DRC's default
17 PRDOE Petition at 3.
18 Id.
19 Id. at 5 and Exhibit XII.
20 Investigations were launched by (1) a committee of the Puerto Rican Senate; (2) by the Department of Justice of
the Commonwealth of Puerto Rico; (3) by a committee of prominent citizens (“ Blue Ribbon Committee”), appointed by Commonwealth Governor Sila M. Calderón (see PRDOE Petition at 5); and (4) by the U. S.
Department of Education. PRDOE Petition at 5- 6; Letter from William D. Hansen, U. S. Department of Education, to Puerto Rico Governor Sila M Calderón, dated May 29, 2002, at 2 (USDOE Letter).
21 USDOE Letter at 2.
22 See Criminal Docket for Case 02- CR- 42- ALL, U. S. v. Victor Fajardo- Velez, U. S. District Court, Puerto Rico (San
Juan), filed Jan. 22, 2002, sentence entered December 12, 2002. The indictment charged that between 1994 and 2000, the defendant and his co- defendants extorted approximately $4.3 million from PRDOE contractors.
Defendant recruited his sister- in- law to represent two corporations, in order to divert funds from them, and he awarded approximately $138 million in contracts to four corporations owned by other defendants. Joint press
release of the United States Attorney, District of Puerto Rico; the Puerto Rico Office of the Federal Bureau of Investigation; U. S. Department of Education, Office of Inspector General; and the Puerto Rico Office of the
Comptroller, January 23, 2002. 23
Puerto Rico Telephone Company v. DRC Corporation v. Universal Service Administrative Company, Civ. No. KAC- 02- 5075-( 901) (Sala Superior de San Juan).
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against PRTC. DRC also claims relief against USAC based on USAC's funding commitments to PRDOE.
C. PRDOE’s Petition
11. On January 30, 2003, PRDOE petitioned the Commission to direct USAC to resume processing PRDOE’s applications for FY 2001 and 2002. 24 PRDOE argues that such
relief is appropriate for the following reasons: (1) as a result of the 2000 general elections in Puerto Rico, the leadership of PRDOE is new, and unaffiliated with the administration from the
first three years of the E- rate program in Puerto Rico; (2) independent audits identified the needed changes in administrative structure and control mechanisms; (3) PRDOE launched a
“recovery program” to implement the findings of the independent auditors; and (4) PRDOE responded promptly to requests by USAC for documents and other information.
12. PRDOE states that its recovery program has corrected three key areas that were formerly deficient: (1) the network itself; (2) the infrastructure in the schools; and (3) the
infrastructure at the PRDOE central offices. Carried out with funding from non- E- rate sources, PRDOE states it has made $80 million in school electrical repairs, installed 3,300 school
computers, set up network help desks with 43 technicians, and trained 27,000 teachers (65% of all teachers), with training scheduled for more teachers. PRDOE states that it is strictly
enforcing bidding regulations. PRDOE has rewritten vendor contracts to include enforceable anti- corruption clauses. PRDOE also has instituted a validation process that measures actual
access of schools to the network. According to PRDOE, it has moved from practically no schools connected to the network to more than 600 schools. 25
13. PRDOE pledges to continue cooperating with ongoing investigations of funding years 1998- 2000. 26 It commits to comply with all applicable local and federal laws, and to
periodically retain an external independent professional firm to evaluate the operational aspects of its E- rate projects and future use of E- rate funds. 27 It also states it will apply its new anti-corruption
procedures to funding requests for FY 2001 and 2002, including any service substitution requests that may be required since the original submissions for FY 2001 and 2002.
14. PRDOE states that it has insufficient funds to keep its technology development
24 See PRDOE Petition. See also Wireline Competition Bureau Seeks Comment on a Petition by Puerto Rico
Department of Education to Release Funds Associated With Schools and Libraries Universal Service Support Mechanism for Funding Years 2001 and 2002, CC Docket No. 02- 6, Public Notice, DA 03- 1731 (rel. May 16, 2003)
(PRDOE Public Notice). Comments, all in support of PRDOE’s Petition, were submitted by the Hon. Anibal Acevedo- Vilá, Resident Commissioner, Commonwealth of Puerto Rico, U. S. House of Representatives; Centennal
Communications Corp.; and The Hispanic Information and Telecommunications Network, Inc. PRDOE had selected PRTC for telecommunications service and Internet access and DRC for Internet access and internal
connections for FY 2001. PRDOE selected PRTC for telecommunications service, Internet access, and internal connections and Sprint for telecommunications service for FY 2002.
25 PRDOE Petition at 5. There are 1,540 schools in the public system of the Commonwealth of Puerto Rico. Id. at
2, note 1. 26
See id. at 5- 6. 27
Id. at 6.
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program underway without reentry into the E- rate program. 28 PRDOE states that vendors provided E- rate- eligible services to PRDOE during funding years 2001- 2002 and still have not
received payment for these services. 29 It also indicates its desire to substitute a service provider other than DRC for internal connections in Funding Year 2001, upon receiving a funding
commitment. Finally, PRDOE states that those who will lose the most from a curtailment of its technology initiative are the 660,000 students enrolled in Puerto Rico’s public schools.
According to PRDOE, every year that PRDOE is unable to participate in the E- rate program results in 50,000 Puerto Ricans graduating from high school without the benefits of the E- rate
program. 30
III. DISCUSSION
15. PRDOE asks the Commission to direct USAC to resume processing its applications seeking discounts from the schools and libraries support mechanisms for FY 2001 and 2002. As
explained above, USAC deferred action on these applications as a result of the beneficiary audit which revealed evidence of potential program violations by PRDOE in prior years. Subsequent
to that audit, USAC became aware of a number of local and federal law enforcement investigations involving activities of the Puerto Rico Department of Education. Under the facts
presented here, it was appropriate for USAC to defer action on PRDOE’s FY 2001 and 2002 applications, upon receiving the results of the beneficiary audit and learning of the additional
investigations underway in Puerto Rico. We believe that such action is necessary to ensure that the goals of section 254 are met. Specifically, we must guard against waste, fraud, and abuse of
E- rate funds to ensure that all schools and libraries receive the benefits of access to advanced telecommunications and information services. This is particularly important here because
demand for discounts under the schools and libraries support mechanism continues to exceed the supply of funds. To guard against waste, fraud, and abuse, it is reasonable for USAC generally
to defer action on applications upon receiving evidence of potential program violations, including evidence acquired from an active law enforcement investigation related to the E- rate
related activities of the applicant or any of the service providers utilized by that applicant, until such time as questions raised by the evidence can be resolved. 31 Thus, USAC correctly deferred
action on PRDOE’s FY 2001 and 2002 applications in light of the investigations by several third parties of PRDOE’s conduct with regard to activities related to their 1998, 1999, and 2000 E- rate
applications. That deferral should generally continue until the investigation is resolved, or until there is sufficient reason to believe that potential program violations are not implicated in the
deferred applications.
16. We find that USAC proceeded in a probing and cautious fashion in this case, which is appropriate with respect to applications and/ or Funding Request Numbers (FRNs) that are
linked to an ongoing law enforcement investigation. At the same time, we recognize that
28 Id. at 5.
29 PRDOE Public Notice at 2; see also Letter from Jon Slater, PRT Telefonica de Puerto Rico, to César Rey,
PRDOE, June 13, 2003. (PRT Telefonica de Puerto Rico Letter) 30
PRDOE Petition at 5. 31
USAC’s practice, which, as this case demonstrates, is the correct one, is specifically to defer action on any application or funding request number (FRN) when it is aware of an active law enforcement investigation of either
the applicant or service provider related to that application or FRN.
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indefinitely deferring action on applications could inadvertently harm individuals that ultimately will be cleared of any wrongdoing, particularly in those instances when an investigation takes
years. As we recently stated in addressing the State of Tennessee’s petition for relief, we are disinclined to relegate applications to an uncertain status for an indefinite period of time during
the pendency of any protracted investigations. 32 Thus, we believe that there are circumstances where deferring action on an application in whole or in part is unnecessary to prevent waste,
fraud and abuse, notwithstanding the pendency of an ongoing law enforcement investigation. 33 In reviewing such applications, however, USAC must subject such applications and/ or FRNs to
probing and cautious review and carefully consider the specific facts presented in each case. In particular, where, as is true here, there are law enforcement investigations pending, we think it
appropriate for USAC to subject these requests to a more intensive review, tailored to the nature of the allegations that have been raised. 34
17. Here, it was appropriate for USAC to defer action on PRDOE’s FY 2001 and 2002 applications in light of the ongoing investigation of activities at PRDOE in the recent prior
years, particularly in light of the indictment and conviction of the former Secretary of Education for Puerto Rico for extortion activities related to contractors for PRDOE. 35 However, as
discussed below, PRDOE has convinced us that it has taken sufficient action to ensure that the prior issues have been addressed and will not occur again. Thus, we direct USAC to review and
process the funding requests of PRDOE for FY 2001 and 2002, other than those associated with DRC, consistent with the conditions contained in this Order. We conclude that such action is
appropriate in light of PRDOE’s change in leadership and the achievements of its recovery program. This conclusion in no way should be viewed as condoning the actions that occurred in
the first three years of PRDOE’s E- rate funding. We will address the appropriate measures that will be taken with respect to funding years 1998- 2000 in a separate, forthcoming order.
18. As we stated in the recent Tennessee Order, the Commission takes seriously all allegations of waste, fraud and abuse. 36 We are disturbed by the allegations of fraud and waste
relating to PRDOE’s activities during the first three years of PRDOE’s participation in the E- rate program. 37 Should the investigations of the first three years result in additional convictions, the
Commission’s suspension and debarment rules will automatically be triggered. 38 The petition before us, as well as our review of the record, however, convinces us that the fundamental
circumstances of leadership and administrative control have changed dramatically since the first three years of the PRDOE program. 39 In determining whether relief is appropriate, we fulfill
32 See Request for Immediate Relief by the State of Tennessee, Order, CC Dockets No. 96- 45, 97- 21, FCC 03- 161
(rel. July 2, 2003) (Tennessee Order), at paras. 12, 17. 33
Of course, USAC must continue to deny all requests that are inconsistent with our rules and requirements applicable to the schools and libraries support mechanism.
34 This heightened scrutiny may include site visits and other investigatory activities, as well as independent audits.
35 See note 22 above.
36 Tennessee Order at para. 17.
37 See supra note 20.
38 Second Report and Order, 18 FCC Rcd at 9224- 9228, paras. 64- 77. See also 47 CFR § 54. 521
39 E. g., PRDOE’s recovery program has revamped the infrastructure and networks in and among the schools, and in
PRDOE’s central offices. PRDOE Petition at 4.
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both section 254’s requirement of ensuring quality services “at just, reasonable and affordable rates” and our duty to prevent waste, fraud and abuse. 40 We conclude that several factors weigh
in favor of directing USAC to resume consideration of PRDOE’s FY 2001 and 2002 funding requests seeking discounts for services provided by PRTC and Sprint.
19. At the outset, we note that the allegations under investigation relate to activities occurring in prior funding years, while PRDOE seeks action on funding requests for subsequent
years. We conclude that it is appropriate for USAC to proceed with respect to the later funding years, after subjecting the applications to heightened scrutiny to provide assurances that the
issues under investigation for the earlier years are not present in FY 2001 and 2002. Based on the representations made by PRDOE in this proceeding, PRDOE is rectifying the problems
created by the prior administration. 41 These efforts have allowed PRDOE to move beyond the problems of the past and towards section 254’s goal of enhancing access at reasonable and
affordable rates. 42 The current administration of PRDOE has been and continues to be responsive to federal and local authorities requesting information. PRDOE has undertaken
significant measures to install infrastructure, network, and desk equipment, and has undertaken training to utilize these resources. Moreover, PRDOE launched and implemented these changes
from its own funding sources, without relying on E- rate program funds.
20. Furthermore, we conclude, based on the record before us, that there are no outstanding allegations of waste, fraud, abuse, or other wrongdoing relating to any of the current
PRDOE leadership or employees, with respect to funding years 2001 and 2002. The only challenge to PRDOE’s procedures affecting those funding years has been resolved in PRDOE’s
favor. In response to allegations of bidding irregularities brought by the losing bidder in PRDOE’s FY 2001 award, the Commonwealth’s appellate court found against that bidder and
for PRDOE. 43 Similarly, there is no evidence that allegations in a currently pending bid protest for FY 2003 affects PRDOE’s funding requests for FY 2001 and 2002. Accordingly, we think
that the allegations pertaining to FY 2003 should be considered separately and should not bar consideration of PRDOE’s funding request for FY 2001 and 2002. 44 To further ensure that all
rules have been complied with for FY 2001 and 2002, we direct USAC, as discussed more fully below, to engage the services of an independent auditor to provide assurances that there has been
compliance with the Commission’s rules. We expect that auditor will examine, among other
40 47 U. S. C. § 254 (b)( 1); Tennessee Order at paras. 17, 22- 23.
41 PRDOE explains that its E- rate recovery program has connected 600 schools to the central network, has trained
65% (27,000) of its teaching force, has made $80 million in school electrical repairs, and installed 3,300 school computers. PRDOE Petition at 3- 5.
42 47 U. S. C. § 254 (b)( 1).
43 Centennial De Puerto Rico v. Junta De Subastas Central- Departamento De Educación, No. JR- 2002- 003, Estado
Libre Asociado De Puerto Rico En El Tribunal De Circuito De Apelaciones, Circuito Regional I De San Juan, (Feb. 6, 2003).
44 The challenge to the FY 2003 award was filed by the losing bidder in FY 2003, who happened to have been the
winning bidder in the FY 2002 award. That challenge to the FY2003 award is under consideration in Puerto Rico Telephone Company, Inc. v. Junta de Subastas Central- Departamento de Educación, Solicitud de Reconsideración
de Adjudicacion de Subasta (Junta de Revision Administrativa Departamento de Educación, filed February 14, 2003). We conclude that USAC should defer action on the portions of PRDOE’s funding year 2003 application
relating to this action until this matter is resolved by the appropriate authorities in Puerto Rico, or it obtains adequate assurances from an independent auditor that there are no bidding irregularities with respect to FY 2003.
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things, compliance with the Commission’s rules on the competitive bidding process in both FY 2001 and 2002.
21. Although USAC has not acted on PRDOE’s FY 2001 and 2002 applications, we understand that PRDOE has, in fact, received at least some of the services for which it requested
discounts. 45 We also understand these service providers have not been paid the full (nondiscounted) amount. 46 This situation is not unusual. Due to the vast number of applications
each year for the E- rate program, commitments often may not occur by the time a new funding year, or even the new school year, commences. Applicants proceed at their own risk in taking
these services in advance of funding commitments, and ultimately may be liable for the full amount of the services, should funding commitments be denied. In most instances, such
applicants receive commitments at some point after the funding year begins, and therefore obtain their discounts retroactively. We, therefore, do not fault PRDOE or its suppliers for obtaining or
providing services in the absence of commitments, so long as it is understood that the eventual funding approval and payment, if any, will have to meet fully the requirements of our rules. 47
22. Taken together, the change in PRDOE’s leadership, administration and operating procedures represents a significant demarcation point in PRDOE’s relationship with the E- rate
program. We therefore view PRDOE’s conduct with respect to FY 1998, 1999 and 2000 as severable from that of FY 2001 and 2002, such that the two periods should be treated with
separate approaches and in separate orders. The analyses required for these two periods (FY 1998- 2000 and FY 2001- 2002) stem from separate sets of PRDOE decision- makers employing
separate administrative procedures. Audit techniques will be able to examine the relevant conduct during distinct phases of PRDOE’s participation in the E- rate program.
23. While we are aware that at least four separate investigations have been initiated relating to PRDOE, USAC has not, to date, undertaken an investigation of PRDOE’s compliance
with our rules during funding years 2001 and 2002. As a precondition to the commitment and release of FY 2001 and 2002 funds to PRDOE’s suppliers, PRDOE must be subject to an
independent audit to provide assurances that PRDOE has complied with the Commission’s E-rate rules for FY 2001 and 2002. USAC shall select the auditor, and that auditor shall perform
an audit consistent with the procedures currently being performed for pending beneficiary audits. 48 USAC may, at its discretion, utilize the auditor currently performing these beneficiary
audits. The audit shall be conducted in accordance with government auditing standards. 49 We
45 PRT Telefonica de Puerto Rico Letter.
46 Id.
47 Tennessee Order at paras. 9, 18.
48 USAC has retained the services of KPMG LLP to perform agreed- upon procedures audits of 78 beneficiaries of
the schools and libraries support mechanism for funding year 2000. The procedures were developed by USAC, in consultation with the Commission's Office of Inspector General. The audits are being conducted in accordance with
standards set by the American Institute for Certified Public Accountants and Government Auditing Standards. 49
See Chief Financial Officer’s Act of 1990, Public Law No. 101- 576, as expanded by the Government Management Reform Act of 1994, Public Law No. 103- 356. See also Application of Generally Accepted
Accounting Principles for Federal Agencies and Generally Accepted Government Auditing Standards to the Universal Service Fund and the Telecommunications Relay Services Fund, WC Docket No. 03- 213, Order,
FCC 03- 232 (rel. Oct. 3, 2003).
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recognize that it may not be appropriate to perform all the procedures currently being performed in the ongoing beneficiary audits, given that in this case the entity has not actually received any
funding under the program. Moreover, we note that the audit procedures currently being performed in the ongoing beneficiary audits are designed not only to determine whether
beneficiaries complied with all Commission rules in effect during the relevant funding year, but also to identify broader programmatic issues that may warrant revisions to our rules. The
procedures to be performed in the audit that we require today shall be tailored to address the particular issues raised in past investigations of PRDOE relating to compliance with Commission
rules in effect for the relevant funding years.
24. Based on the record before us, we also direct USAC not to process funding requests involving DRC for any services rendered during FY 2001 or 2002, or for prior years, in the
absence of further direction from the Commission. This precaution is necessary because the Department of Justice of the Commonwealth of Puerto Rico is investigating DRC’s performance
as a former contractor- of- record. 50 The record before us contains no further information on the status or conclusions of that investigation. We conclude it appropriate under these circumstances
for USAC to defer action indefinitely on all FRNs involving DRC because USAC is aware of an active law enforcement investigation directly related to these FRNs (namely, an investigation
relating specifically to the conduct of DRC vis- ŕ- vis PRDOE as a vendor of services supported by the E- rate). Conversely, where, as here, the applicant selected other service providers for
other funding requests, and we are not aware of any pending investigations specifically relating to those service providers’ conduct vis- ŕ- vis PRDOE, we conclude it appropriate for USAC to
proceed with respect to those other FRNs, after subjecting those FRNs to heightened scrutiny tailored to the nature of the allegations under investigation. 51 Further, to the extent that funds are
committed to PRDOE for FY 2001 and 2002, requests to change service providers 52 and/ or substitute service or equipment 53 may be considered, consistent with existing precedent. Such
requests will not be entertained with respect to the FRNs involving DRC at this time, pending resolution of the investigations relating to DRC.
25. Finally, USAC has not undertaken a full investigation of the circumstances surrounding PRDOE’s participation in the E- rate program during its first three years. It is
critical that we expeditiously resolve all outstanding issues relating to funding years 1998, 1999 and 2000. We accordingly direct USAC to engage an independent auditor to examine PRDOE’s
50 PRDOE Petition at 5, Exhibit XII.
51 Thus, under the facts presented here, for funding requests involving service providers other than the one known to
be under investigation, USAC may issue affirmative funding commitments if it determines, after subjecting those requests to more intensive review, that the service providers for those FRNs are not implicated in the issues under
investigation, and the applicant and service providers have complied with program rules for those FRNS. The existence of an allegation, for instance, of a competitive bidding violation with respect to the selection of one service
provider should not preclude action on FRNs involving other service providers. 52
See In the Matter of Request for Review of the Decision of the Universal Service Administrator by Copan Public Schools, Copan Oklahoma, Federal- State Joint Board on Universal Service, Changes to the Board of Directors of
the National Exchange Carrier Association, Inc., CC Docket Nos. 96- 45 and 97- 21, 15 FCC Rcd 5498 (2000) (Copan Order). See also http:// www. sl. universalservice. org/ reference/ SpinChange. asp.
53 See In the Matter of Request for Guidance by Universal Service Administrator Concerning the Request of Los
Angeles Unified School District, CC Docket Nos. 96- 45 and 97- 21, Order, 16 FCC Rcd 3496, at 3499 (Com. Car. Bur. 2001). See also http:// www. sl. universalservice. org/ reference/ ServiceSub. asp.
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Federal Communications Commission FCC 03- 294
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first three E- rate funding years, FY 1998, 1999 and 2000. This audit shall be conducted separately from the audit of FY 2001 and 2002, and is not a precondition to the release of FY
2001 and 2002 funds on behalf of PRDOE, should such commitments and disbursements be warranted. This audit may be conducted by the same auditor as the audit for FY 2001 and 2002,
but that is not a requirement. As with the audit for FY 2001 and 2002, the audit for FY 1998- 2000 shall be conducted in a manner consistent with the procedures currently being performed
for pending beneficiary audits, and in accordance with government auditing standards. The Commission will use the audit of FY 1998- 2000 in determining what action is appropriate with
respect to PRDOE for the first three years of PRDOE’s E- rate program.
26. We will not hold PRDOE to a standard above and beyond that required by our rules, but neither will we accept anything less. We caution PRDOE that should it be determined that
PRDOE did not, in fact, properly comply with all applicable FCC rules for funding years 2001 and 2002, funding commitments for those years will be denied. The heightened scrutiny to
which we subject PRDOE’s requests is appropriate in light of the actions of PRDOE in the past. In light of these factors, we find it consistent with section 254 to direct USAC to resume
processing of PRDOE’s FY 2001 and 2002 funding requests associated with PRTC and Sprint, conditioned on the results of the independent audit demonstrating PRDOE’s material compliance
with the Commission’s rules. The Commission is committed and obliged to implement the E-rate program by advancing the overall public interest, a requirement we find is fulfilled by this
Order. 54
IV. ORDERING CLAUSES
27. ACCORDINGLY, IT IS ORDERED, pursuant to sections 1- 4, and 254 of the Communications Act of 1934, 47 U. S. C. §§ 151- 154 and 254, and section 54.503 of the
Commission's rules, 47 C. F. R. § 54.503, that the PRDOE Petition filed by the Puerto Rico Department of Education on January 30, 2003, IS GRANTED to the extent provided herein, and
subject to the conditions stated herein. We instruct SLD to resume review of PRDOE’s funding requests for year 2001 and 2002 applications and, if appropriate, issue the requisite funding
decision commitment letters and subsequent disbursements pursuant thereto.
28. IT IS FURTHER ORDERED that this Order is effective upon release.
FEDERAL COMMUNICATIONS COMMISSION
Marlene H. Dortch Secretary
54 Upon conclusion of this independent audit, we will review the first three years of PRDOE’s participation in the E-rate
program.
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