AT&T, Feds Ignore Low-Price Mandate Designed to Help Schools

By Wire News Sources on May 1, 2012

by Jeff Gerth

At
the dawn of the Internet era, Congress set out to avert a digital divide
between rich and poor students. In a landmark bill, lawmakers required the
nation’s phone companies to provide bargain voice and data rates to schools and
to subsidize the cost of equipment and services, with the biggest subsidies
going to the schools with the most disadvantaged children.

More
than a decade later, as schools struggle for funding amid widespread budget
cuts, there is growing evidence that the program’s crucial low-price
requirement has been widely neglected by federal regulators and at least one
telecom giant.

A
decade after the program started, AT&T was still not training its employees
about the mandatory low rates, which are supposed to be set at the lowest price
offered to comparable customers. Lawsuits and other legal actions in Indiana,
Wisconsin, Michigan and New York have turned up evidence that AT&T and
Verizon charged local school districts much higher rates than it gave to
similar customers or more than what the program allowed.

AT&T
has charged some schools up to 325 percent more than it charged others in the
same region for essentially the same services. Verizon charged a New York
school district more than twice as much as it charged government and other
school customers in that state.

The
companies say they comply with the rules of the program, known as E-Rate.

Meanwhile,
the federal government has made scant effort to enforce the requirement that
companies give the preferential rate to schools. The Federal Communications
Commission, which oversees the program, has yet to bring an enforcement action
against any carrier for violating the low-price rule, according to interviews
and documents, some obtained under the Freedom of Information Act. And the FCC,
acting through the private company that administers the program, has provided
little if any guidance to companies on how to apply the best-price rule.
Indeed, in 2010, companies such as AT&T and Verizon sought clarification on
the rule.

“Time
and again, we find that schools are rarely advised by the telephone companies
of their best available rates,” said Howard Rotto,
whose New York consulting firm has represented dozens of schools in the
Northeast for four decades. “When representatives of the carrier do not even
know of the existence of their best pricing,” Rotto
asked, “how can such a rate ever be offered or known?”

At
the most basic level, the victims of this failure are the nation’s
schoolchildren who receive suboptimal broadband access. Many requests for
assistance cannot be funded under the current program. If lower prices were
charged, more schools could benefit.

But
there’s another set of victims: the vast majority of people with a cellular or
landline phone contract.

As
designed by Congress, telecom companies must contribute to a fund, administered
by the federal government, that subsidizes the
equipment and services provided under the program. Most of the companies raise
this money by directly charging their customers.

Sift
through that pile of papers at home and take a look at your monthly bill.
Amidst all those charges you’ve never really understood you’ll probably find a
small one labeled “Universal Service Fund.” Skimmed off every consumer’s
payment each month, those dollars and nickels add up, creating a pot of money of
about .25 billion to subsidize telecom and Internet services for America’s
schoolchildren and library users.

Schools
and libraries draw on this fund to help pay for the services provided by the
telecom companies — virtually all schools are eligible, but the poorer
the school, the more it can draw. Requests for help almost always exceed the
available funding. So when phone companies charge inflated rates to schools and
government regulators turn a blind eye, this fund is depleted faster; fewer
schools and libraries benefit; and money taken from millions of telephone
customers goes to boost corporate profits instead of to help as many
schoolchildren as possible.

Indeed,
a perverse bureaucratic process denies most schools the funding to carry
broadband services all the way into actual classrooms. Here’s how it works:
Schools are rarely if ever turned down for funding to bring broadband main
lines to the exterior walls of the schoolhouse.

But
the internal connections, from wiring to jacks, that
complete the last leg and extend connectivity down to actual classrooms,
computers and telephones are deemed a lower priority, so-called “Priority 2.”
(Priority 2 also includes maintenance.) As a result, only the very poorest
schools are eligible for this funding. The rest — including many
poor-but-not-destitute schools — don’t get the subsidies to carry
broadband that last crucial stretch from outside the schoolhouse to inside
classrooms.

Last
year, the E-Rate program received Priority 2 requests totaling more than twice
as much money as it could fund. Worse, many schools don’t even bother to apply
for “Priority 2” services because they know they’ll be turned down. Wisconsin
estimated in 2005 that 98 percent of its schools and libraries do not qualify.
In 2010 New York wrote to the FCC, “Many otherwise needy schools and libraries
have received no Internal Connections funding — ever!” And the FCC itself
declared in 2010 that “the vast majority” of schools and libraries “do not
receive funds for the internal infrastructure necessary to utilize increased
broadband capacity.”

From
2009 to 2011, Priority 1 services accounted for about two-thirds of the funds
committed. This year, the estimated demand for Priority 1 services will essentially exhaust the entire fund.

How
could Congress’s plan have gone so far awry?

An
examination of the program by ProPublica shows that from the beginning,
oversight of how the money was spent was turned over to private companies that
employ numerous former telecom executives.

The
leading company hired to oversee the program provided little if any training or
guidance to phone companies over the past decade in how to calculate the
bargain prices, known as “lowest corresponding price.” Instead, according to
documents and interviews, it focused on the schools,
examining whether their purchases of equipment were cost effective.The company and the FCC even forced schools
and libraries — many of them unskilled in negotiating complex telecom
contracts — to pay millions of dollars in penalties for failing to follow
the program’s voluminous and cumbersome rules.

Yet
16 years after the law passed the FCC has not brought even one case against a
phone company for violating the “lowest corresponding price” requirement.
Efforts to enforce the rule have come exclusively through private legal action,
such as lawsuits, and one Justice Department-led investigation that examined
pricing in Indiana.

Much
about the E-Rate program remains hidden from public view. Telecom contracts are
mostly private, so it is not possible to judge how frequent or widespread
violations of the lowest-corresponding-price rule might be. For this report,
ProPublica relied on documents, many obtained from lawsuits, as well as dozens
of interviews.

Mike
Balmoris, a spokesman for AT&T, declined to
answer specific questions about the company’s practices but released a
statement saying “AT&T complies fully with the E-Rate requirements,
including the lowest corresponding price rule.”

In
an email, Verizon spokesman Ed McFadden said the company regularly trains its
employees on all legal obligations, “including requirements of the E-Rate
program,” as part of a larger effort “to conduct business with all our
customers at the highest ethical standards.” The FCC also declined to answer
questions.

A
statement provided by an FCC spokesman, Mark Wigfield,
cited the program’s overall success; the commission’s efforts to improve
“safeguards against waste, fraud and abuse;” rules requiring schools to engage
in competitive bidding to ensure low prices; and audits by the private company
regulating the program that compare prices that companies charge schools to
“those charged other customers.”

The
FCC declined to make those audits available. But through a FOIA request,
ProPublica requested every audit for the first 12 years of the E-Rate program
involving the lowest-corresponding-price rule. The government provided what it
said was a complete set — a mere nine audits.

In
broad terms, they show that regulators paid little attention to telecom service
providers while coming down hard on schools. Indeed, most of the audits deal
with the companies as a side issue; the main focus is on whether the schools,
not the companies, complied with the program’s complex regulations. Some of the
audits are heavily redacted, but in the available text none mentions lowest
corresponding price, the key cost-saving requirement.

The E-Rate Program

E-Rate
was created through the Telecommunications Act of 1996, which President Bill
Clinton made law through the first e-signing of a
federal bill. The act mandated broader telecommunications access through four
programs, including E-Rate for the nation’s schools and libraries.

When
a school or library qualifies for E-Rate, the fund subsidizes 20 percent to 90
percent of the telecom bill, depending on how poor the school or library is. (A
key measure of poverty: the percentage of students who qualify for the
government’s free or reduced-cost school lunch program.)

The
FCC says the program has been a success. At the time of E-Rate’s launch, 65
percent of public schools were connected to the Internet. By 2005, about 97
percent were, thanks largely to E-Rate, according to the FCC.

A
few days after signing the act, Clinton highlighted “a requirement for
companies to provide a discount for connecting all of our classrooms and
libraries to the information superhighway.”

One
reason for the bargain-rate requirement is to make sure that as many
schoolchildren and library patrons as possible benefit. Another reason to
require companies to provide preferential rates, according to the FCC, is that
many schools and libraries suffer from a “lack of experience” when it comes to
“negotiating in a competitive telecommunications market.” Indeed, telecom
pricing is notoriously complex and opaque, and the E-Rate program benefits “many
of nation’s poorest and most isolated communities,” according to an FCC
document.

Under
FCC regulations, schools are required to try to obtain competitive bids from
phone companies, while the companies are required to charge no more than their
“lowest corresponding price,” which the agency defined as “the lowest price [a
telecom company] charges to similarly situated non-residential customers for
similar services.”

Weak Enforcement

Almost
from the inception of the program, phone companies have advocated for leeway in
determining the lowest corresponding price. In 1997, representatives from five
former Bell companies — three of which are now part of AT&T —
wrote to the FCC that companies should be allowed “to determine the lowest
corresponding price … based on a consideration of factors normally used in
determining prices within a competitive market.”

Meanwhile,
the FCC has repeatedly declined to back the pricing rule with tough
enforcement. In 1997, the FCC proposed that companies could get reimbursed through
the program only if they first certified that they had complied specifically with
the pricing rule — a strong legal requirement that might have left
companies liable to the federal False Claims Act if they misrepresented their
prices. The FCC cited the “universe of records” a company “must review to
determine lowest corresponding price.” But the agency never enacted that
certification proposal.

In
2005, the FCC again proposed that service providers, as part of their annual E-Rate
filings, certify specifically they had charged the “lowest” price to schools
and libraries. But after industry opposition, the plan was dropped, according
to public filings. Wigfield, the FCC spokesman, declined to say why the agency did not require
certification. (The FCC does require a broad, annual certification, in
which companies are instructed to affirm their compliance with E-Rate rules.)

The
FCC, through the nonprofit firm Universal Service Administrative Co., or USAC, has taken action against phone companies
for a variety of infractions — but never has it demanded a refund or
penalty for violating the lowest-corresponding-price rule.

As
for AT&T, as recently as 2007 it issued its employees a 61-page “E-Rate
Compliance Training” manual, used as part of an annual required course for
employees. The pricing rule is not mentioned.

In
its statement to ProPublica, the company spokesman said, “AT&T has implemented training and procedures to ensure
compliance with all E-Rate requirements.”

Unequal Pricing

Working
out of his modest home in Waupun, Wis., Todd Heath runs a niche business: He
takes a cut from any refunds he manages to obtain for telecom customers, mainly
schools. In 2008, Heath wondered why schools he represented, in small cities
like Kaukauna, West Bend and Fond du Lac, were paying far more than others for
essentially the same services from the same company: Wisconsin Bell, a unit of
AT&T.

The
schools were all in the E-Rate program, and it wasn’t long before Heath accused
the company of violating the lowest-corresponding-price rule. His complaints
are now in federal court.

Under
whistleblower laws, if the suit results in a financial settlement, Heath stands
to gain a portion of that money.

Heath’s
complaint

alleges that in 2005, school districts in Burlington, Grafton, Cudahy and
Altoona paid as much as 80 percent more for the “identical” central office
exchange service from Wisconsin Bell than did the Fond du Lac School District.

Also that year, according
to the court complaint, Milwaukee, West Bend and Sheboygan were paying far
higher rates for office exchange services than what was available under an
agreement between Wisconsin Bell and the state of Wisconsin that allowed
schools and libraries to get the same favored rate the state was getting. For
example, the Wisconsin state contract price for a service called ISDN/PRI,
which integrates voice and data into a single line, was 0 per month,
according to the complaint. But schools in Fond du Lac, Hartford, Kaukana, Kimberly and West Bend were billed at prices
ranging from 0 to ,268 per month, the complaint states.

Heath’s complaint asserts
that “Wisconsin Bell routinely has withheld information about these available
rates from public school and library customers, and it has billed almost all of
them at much higher rates, sometimes three times as high as LCP,” or lowest
corresponding price.

The allegation that
Wisconsin Bell hid the state rates from schools is wrong, the company says,
because the contract rates were “publicly known.”

E-Rate regulations,
however, require that the lowest corresponding price be more than just publicly
known; that price must be provided to schools and libraries in the program.
Phone companies “shall not charge” schools or libraries “a price above the
lowest corresponding price,” the regulations state. (There is an exception for
a rate so low that the company loses money, but the FCC must sign off on this
exception. An agency spokesman, asked about any such cases, did not provide an
example.)

Wisconsin Bell is seeking
dismissal of the lawsuit on various grounds. One is that the FCC has, in
essence, neglected its duty to train phone companies on how to determine the preferential
rate. The agency, according to a Wisconsin
Bell court filing
,
has “yet to provide authoritative benchmarks with respect to application of the
lowest corresponding price requirement.”

The AT&T
spokesman declined to discuss the Heath case but said the company “has worked
diligently with industry to seek additional FCC clarifications of these rules
where appropriate.”

Heath’s suit continues.

Regulatory
filings with the New York State Public Service Commission paint a similar
picture, but with Verizon. From
2005 to 2011, in the E-Rate program, Verizon charged far more to the
Bronxville, N.Y., school district for ISDN/PRI and
plain old telephone services than what was available under the state-negotiated
rate. For example, according to the filings, the state rate for PRI since 2008
has been 5 per month, but Bronxville has been charged more than twice that:
1 per month.

Verizon originally
contested the claim using a strategy similar to one AT&T deployed in
Wisconsin: putting the onus on the school. In a filing last summer, Verizon
said that the state master contract “process requires customers to submit a
request to receive the discount,” and there is no evidence that the Bronxville
school district “requested” the state rate for telephone service.

E-Rate regulations,
however, prohibit phone companies from charging more than the lowest
corresponding price.

Verizon and Bronxville
recently settled the case, according to Rotto, the
consultant, who worked with Bronxville on the matter. The terms of the
settlement are confidential.

While declining to discuss
specific disputes, Verizon spokesman McFadden said the company “is committed to
resolving any such disputes fairly.”

“If we make a mistake,” he
added, “it is our goal to fix it.”

Justice Department Steps In

USAC,
the nonprofit company that administers the program on behalf of the FCC,
audited the E-Rate bidding process in Indiana and gave it a clean bill of
health. But a law firm’s examination of the same bidding process, done for the state,
found problems and led to multimillion-dollar settlements with the Justice
Department, according to department records.

One
of those settlements took place in 2009, as the Justice Department was
considering filing civil claims against an AT&T subsidiary about its
Indiana E-Rate service, including for “overbilling the E-Rate program for
services provided.” The telecom giant paid .3 million to settle. It did not
admit wrongdoing.

The
lowest-corresponding-price rule is not referenced in the settlement
but figures prominently in a related compliance
agreement

with the FCC, executed the same day. There, AT&T agreed it “shall prepare a
written analysis sufficient to document its compliance with the requirement
that the rates it charges for E-Rate services in Indiana are not above the
lowest corresponding price.”

This
compliance agreement is the only example cited in the FCC’s statement to
ProPublica, but records show it was the Justice Department —not the FCC
— that led the investigation of the case. The FCC played a role in the
latter stages.

AT&T
declined to comment on the 2009 settlement.

The
following year, AT&T urged the FCC to drop the pricing rule altogether. “The
current competitive circumstances,” the company wrote the agency in 2010,
“warrant elimination of the lowest corresponding price rule.”

“A Regulatory Wild West”

Numerous
reports by Congress, the GAO and the FCC’s inspector general have criticized
the E-Rate program over such issues as waste, fraud, poor management and the
program’s hybrid oversight structure involving two private companies with links
to the telecom industry.

The
FCC is the final authority for E-Rate policies and oversight, but USAC
administers the program, conducts audits, approves or rejects applications and
pays invoices. USAC, in downtown Washington, employs “numerous” former telecom
executives, according to Eric Iversen, USAC’s
spokesman.

The
back-office work for USAC is actually performed by another company, Solix, based in New Jersey. Solix is owned by fewer than 200
investors, some of which are small telecom companies, and Solix employees also include ex-telecom industry
executives, according to public records and John Parry, the chief executive
officer of Solix.

Both
USAC and Solix say they hold their employees to
stringent codes of conduct to eliminate potential conflicts of interest, and
they have added protections in response to criticism.

Still,
in an interview a former FCC official who spoke on condition of anonymity
called the arrangement “a regulatory Wild West.”

USAC
provides training to phone companies on how to comply with E-Rate rules, and
its training materials from 2001 through 2011 are available on its website. Not
once is lowest corresponding price mentioned in those materials. Indeed, in
2010, the telecom industry publicly complained to the FCC that USAC has not
“provided any guidance” on the rule.

But while
largely ignoring the rule requiring companies to provide the bargain rate, USAC
requires schools, no matter how impoverished or small, to find a
“cost-effective” price through competitive bidding and other means.

In
2004, USAC hired an outside accounting firm to audit 100 schools and libraries —
not phone companies — in the E-Rate program. One section of the lengthy
audit protocol calls for checking with phone companies to see if they were
complying with the mandate to charge the lowest corresponding price, according
to documents provided by the FCC. The auditors found no violations.

After
that, USAC said in a statement to ProPublica, it “updated our audit program to
perform separate audits of beneficiaries and service providers,” which allowed
for more “focus” on the telecom industry. Still, the more recent audits found
no violations of the lowest-corresponding-price rule, according to the USAC
statement.

Punishing Schools

What
USAC and the FCC have done is penalize schools that uncover overcharging.

The
New York City Department of Education (NYCDOE) hired auditors to review
mountains of tedious phone bills. The auditors, who work on a contingency basis
and are commonly used by businesses and government, won refunds for several
millions of dollars in overcharges dating back almost a decade.

But
when city officials went to return part of those refunds to the E-Rate program,
they were effectively punished for doing so.

FCC
spokesman Wigfield said he could not comment because
the matter is pending. Others familiar with the New York City matter say there
have been discussions between the parties, but no resolution.

The
education department’s quandary was explained in an
Oct. 17, 2003, letter to the
FCC
.
Three outside billing firms, the letter explained, had documented about
million in “overcharges” by Verizon and its predecessors. Verizon provided a
refund.

The
city then figured out how much of the refund to share with the federal fund. E-Rate
subsidized the New York City schools at a rate of 78 percent. So first, New
York deducted the audit fees, about 25 percent, then multiplied the remainder
by 78 percent. That’s the amount it wanted to return to the E-Rate program.

But
in August 2003, USAC informed the New York education department that it owed
the fund’s share (78 percent) of the audit fee as well, according to New York’s
filing with the FCC. In effect, USAC was refusing to pay its share of an audit
that saved money for both New York and the E-Rate program.

This
“exceedingly poor public policy,” the city told the FCC, “would penalize NYCDOE
for its initiative,” and “discourage” similar audits.

At
that time, USAC was auditing only schools in the E-Rate program, not phone
companies.

The
FCC says audits are not considered educational services under E-Rate rules and
thus are not eligible for reimbursement.

Verizon,
in a statement emailed by spokesman McFadden, declined to comment on any particular
dispute, but McFadden said “occasional disagreements are unavoidable” and that
the company’s “goal” is to issue refunds “promptly and in the correct amount.”

The
last outside audit of New York City’s telephone bills was in 2009. Both Verizon
and New York City would not discuss the results, which are still being
resolved. Two people familiar with the results of the latest NYCDOE audit, who
declined to be identified because of the ongoing negotiations, said the amount of
overcharges detected exceeded million.

New
York is not alone. The Yonkers school district and the Detroit Public Schools,
records show, have encountered the same disincentive.

Detroit
hired a private firm to audit the school district’s telecom services, provided
by AT&T. That 2010 audit recommended a recovery of almost million for a
variety of erroneous charges. Among its findings: “under the E-Rate program
AT&T failed to offer [the Detroit Public Schools] the most favored rate,”
according to a summary of the audit.

But
Detroit is still reviewing the audit, according to spokesman Steven Wasko, who noted in an email the FCC’s disincentives for
audits. “Savings identified can actually amount to additional costs for the
district,” he wrote.

Detroit
has chosen to “strengthen its own reviews” rather than rely on outside
auditors, Wasco added.

AT&T
declined to comment on the Detroit audit.

Schools
have other complaints about the E-Rate program. Many say their requests to
enroll get mired in a regulatory “black hole,” while others protest
applications exceeding 300 pages. And there are hundreds of cases of rule
infractions, some technical, that force schools to
return money to the program, according to FCC documents.

The
FCC spokesman says the agency has “streamlined” the application process.


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