• 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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