An Expanding Universe for a Universal Service Program

by Andy Oram
June 8, 2001

The story of the E-Rate—a program that subsidizes computer networks and Internet access in schools, libraries, and rural health clinics—teaches us that Americans are willing to pay for a social policy they believe in. The program has been thrown more than once upon the jagged rocks of political controversy and yet continues to prove seaworthy. Even as the general political wave shifts away from government funding of public programs and toward deregulation, the E-Rate sails onward, leaving any calls for its abolition relegated to isolated political tidepools.

Reform of the E-Rate, on the other hand, has often been urged. In this article I’ll look at some of the more far-reaching suggestions, and examine the observations that critics have made of the program.

Success—at a cost

The E-Rate was passed as part of a massive Telecommunications Act in 1996; many people consider the handful of clauses establishing the program to be the only part of the act that benefited the public as opposed to telecommunications companies. The first year of disbursements was 1998-1999; the program is now in its third year.

The political security of the E-Rate has been attributed to the large number of institutions it has helped across the country. Anyone who kills the program would have to incur the wrath of educators, parents, and anyone else who has benefited or hopes to benefit in the future.

Statistics show the base of support for the program. Last year (the second year of the program, 1999-2000), according to tables posted by the Universal Service Administrative Company that administers the program, the E-Rate funded almost 8,000 individual schools and over 16,000 school districts, along with 5000 libraries. Rural health care centers have not been left out; this year they received 7 million dollars.

And that year actually saw a dip in applications. Sara Fitzgerald of the consulting firm Funds For Learning, says that the excitement of the first year gave way to disappointment because some schools had to accept less in funding than they had applied for. It turned out that everybody got funded in the second year, so the third year has seen a resurgence: “more than 36,000 applications from schools and libraries across the country requesting approximately $4.72 billion in E-rate discounts” according to USAC.

Administratively, the program has worked out a lot of kinks and should be considered a success. The first non-profit corporation set up to run the schools and libraries program was criticized on many grounds, including sloppiness and the legal right of the FCC to set up a corporation. Now the fund is administered by USAC, the same corporation that handles all universal service programs. The program is weighted toward poor schools, as intended, and is administered efficiently and fairly. Mel Blackwell, Vice President of External Communications for USAC, says, “Despite some earlier concerns, there has been no systematic misuse; nearly all our applicants follow the rules. We have a rigorous evaluation process followed up by auditing.” In the E-Rate’s third year, the main complaint by recipients of funds is that they’d like more of the same—the mark of success in my book.

What are the costs of the E-Rate? The public pays about 3% more on long-distance calls to fund the program. This charge, which is not insubstantial, led to a political backlash in 1998, but this has largely blown over. As we’ll see at the end of the article, though, ripples from that explosion continue to be visible as low-background radiation.

The E-Rate is not easy on schools and libraries either. Complaints about paperwork and planning are widespread. They can be heard, for instance, from coordinator Bretton Himsworth at E-Rate Central, a firm that “holds the hands of school districts” in New York state when they’re applying for E-Rate funds. He says, “The E-Rate is excellent, but applying for discounts is much too time-consuming. It could be a lot easier. Schools are incredibly understaffed in their administrative departments.” Small vendors who bid for school and library contracts also complain about bureaucracy.

But when you’re trying to support universal service, a certain amount of bureaucracy is also universal. I suspect that some critics of the E-Rate would like to see oversight and auditing reduced so that they could seize on the inevitable abuses and mistakes that would follow in order to discredit the whole venture.

Beyond the time involved to fill out forms, schools have had to make enormous stretches to plan their deployment of networks. According to a paper (in PDF format) by the Benton Foundation, “The E-Rate has forced school administrators to acquire new knowledge and to learn new forms of collaboration” among many stakeholders. Long-range planning also had to get more serious and detailed than ever before in many school districts. These can be seen as side benefits (if they improve decision-making processes) but there’s no doubt they’re burdensome administrative overhead.

The final cost is in missed opportunities, where certain equipment costs were excluded from reimbursement. I’ll return to this point in the next section.

Sorry, that doesn’t qualify

The key to many difficulties with the E-Rate lies in what it can fund and what it can’t. The limits were initially imposed by Congress and then refined by the FCC. As a telecommunications program, the E-Rate is naturally limited to telecommunications and networking. But there is no chance of building a network if a school lacks computers, teacher training, or even decent wiring. In many century-old school buildings with ancient electrical cables, the problem is not only the last mile but the last ten feet.

Funds are apportioned to schools in order, from the poorest (in terms of pupil population) to the richest. The fund can cover both Internet access (such as dial-up accounts and dedicated lines) and internal connections (such as routers). However, all requests for Internet access are satisfied before requests for internal connections. A school whose Internet access reaches to a machine in the principal’s office, but no further, is clearly frustrated in trying to provide educational opportunities to students. This may be why some districts were discouraged after the first year of the E-Rate. Some will have to be disappointed this year as well.

The FCC also decided to exclude wide area networks from the E-Rate. You can fund a network within the school building, and a line to your ISP, but not a network connection that crosses a public right-of-way. So if there are several schools in a district that want to interconnect by, let us say, wireless packet radio, they have to pay for that themselves.

And that’s almost criminal, according to worldwide community networking expert Dave Hughes of Old Colorado City Communications. According to him and his colleagues, wireless Internet holds out the greatest hope for many areas to get online.

Consider this: when a rural school installs an antenna, not only can it connect to an ISP who offers wireless access, and to other schools in the district, but to the homes of all students and teachers within approximately a 15-mile radius. All they need to do is install fairly cheap antenna on their roofs. Students would then have Internet access not only at school, but also for homework and student-to-student chat in the evenings. Furthermore, after installation, schools will own their equipment and can use it for years almost cost-free. They need to pay for the Internet connection, but not for any expensive line to a phone company. This technology, therefore, threatens to take profits from phone companies while it empowers communities.

Hughes has installed networks like these before the E-Rate existed. But he says that E-Rate rules at the FCC, through “a mixture of conspiracy and incompetence,” made it very hard for wireless solutions to be installed in schools. Schools can still use the E-Rate to pay for wireless Internet service, but they have to fall back on their own funds to buy and install all the equipment. “Precious few” have done this. Instead, most fell into dependency on the local phone company—a dependency that will last long after political pressures get rid of the E-Rate. Some schools have abandoned wireless solutions for traditional phone lines that are less flexible and, in the long run, more expensive.

Hughes says the decision was not one made in ignorance. He and other wireless proponents had been lobbying the FCC for years before the E-Rate to allow greater access to spectrum for wireless. When the E-Rate was mandated by Congress, Hughes met with the current FCC chair Reed Hundt and others to urge for rules that permitted expenditures for wireless equipment. He therefore brands the rules excluding wireless as a conscious choice on the part of the FCC to protect the monopolies of large phone companies.

The former lieutenant governor of Alaska, Red Boucher, requested a waiver from the FCC so that E-Rate funds could be used for wireless equipment that would be used for communications after school hours with local parents and students. This waiver is still pending. The reason Boucher wanted communication with the home was to overcome “the first digital divide: the one between children and parents.” He actually set up a local community network (using wireless) before he obtained Internet access, so that parents would get used to networking and not feel left behind.

Red Boucher shares many traits with his colleague Hughes: both are military veterans who saw battle and now have no compunction about speaking their minds. Boucher says, “Connecting schools in urban areas is completely different from connecting schools in rural areas—and an Indian village in Alaska is different from a small town in Montana, which is different from the Third World, and so on.” (It’s worth noting that the Benton Foundation report cited earlier covered research in four large cities; the conclusions in it are valuable for such cities but may not apply everywhere.)

Could the E-Rate be more inclusive? Probably it should be. But as pointed out by Bonnie Bracey, a nationally renowned educator and proponent of educational technology as a teaching tool, “The E-Rate was meant to create a level playing field for institutions trying to get access to existing technology, not to promote new and relatively untested methods for connecting schools and communities.”

Effects on competition

Small phone companies and ISPs, who run on a shoestring in the best of times, complain that contracts under the E-Rate almost always go to incumbent telephone companies like Verizon, SBC Communications, and Qwest. In other words, the money collected by these companies goes back to these companies, and the E-Rate ends up as a public subsidy for them. Some people even complain that the E-Rate helps to perpetuate aging telephone networks that should be ripped out and replaced.

These concerns are widely echoed, even by those outside the industry like Bracey. But some independent companies do manage to win E-Rate contracts. They simply have to be aware of schools’ and libraries’ proposals and persuade these organizations that the small competitors offer cheaper and better service. Blackwell says “We post bids on our Web site for 28 days. Any and all comers can look there and go through the process. In a program dispensing as much funding as this one, you’ll naturally attract bigger players, but there’s a vast array of venders who have competed for these contracts and won.”

Help is available to ISPs from numerous consultants, and sometimes even from the government. Marianne Granoff, an ISP operator in New Mexico, reports that the state’s Department of Education recommended to schools that they mail their Requests for Proposals to their local ISPs.

Granoff says, “Several small ISPs in New Mexico won contracts under the E-Rate, but the paperwork was formidable. Some ISPs had already been serving schools with subsidized rates, and therefore had pre-existing relationships that helped them win bids. In these cases, the E-Rate was beneficial to the schools but did not create new access where none had existed before. In most cases, it did allow the schools to upgrade their connections.”

Keith Pillow of Sylvan Information Services reports mixed results. “Where we’ve won against the big guys, we’ve convinced the local school’s network gurus that we’re able to provide comparable or better service than the big guys, and also a personal touch.” Where they’ve lost, it’s because the schools don’t want to take the time to compare a small, unknown competitor against an incumbent phone company. Pillow did not find E-Rate contracts worth the trouble. “Like most big companies, the government is slow to pay, whereas a lot of small ISPs expect money before service. And heaven help you if you make a mistake on the paperwork. The people on the phone are helpful, but it can still take months to correct a mistake.” And his overarching assessment is cynical: “The E-Rate mostly takes a lot of money from all the telcos (and ultimately their customers), and sends it back to just a few big telcos. That’s the basic story, and shouldn’t be confused by overstressing the few exceptions.”

Nancy Berry, who did billing for an ISP in New Mexico, says, “The E-Rate is great for the schools, but terrible for the ISPs. It takes 90 to 180 days to receive a check from the funding corporation. I personally cannot imagine a small ISP having the cash flow or man power to even consider offering services for SLC Funding.”

Barry Eastman is the Director of Business Operations at Front Range Internet, a “medium-sized ISP” in Fort Collins, Colorado, and reports being very happy with E-Rate. “We get paid pretty much on time—at least as much as a lot of our customers pay. I can count on them for the funds; I don’t have to worry about a customer going belly-up on me. Furthermore, in the past, when I wanted to offer access to a school I’d have to discount it a lot. Now I am able to charge the full rate that reflects my true costs.” Eastman shrugs off the burden of paperwork (“I don’t do much; most of it is done by the schools and libraries”). Under E-Rate, Front Range Internet serves 13 school districts and 4 libraries. Even though they have to lease lines from the incumbent Qwest, they are still winning customers away from Qwest.net, largely by offering better customer service.

We have to put all these reports and anecdotes together to see what keeps the smaller ISPs and phone companies from winning contracts:

These difficulties are no different from those faced all the time by small companies trying to make it in an environment where large and well-known companies already exist. Small companies are used to struggling against the odds. The odds could certainly be made worse than usual in this industry by some aspects of bureaucracies and phone company monopolies, but I believe the E-Rate should not take the blame.

Regulators, legislators, and critics

After a press conference in February by the new FCC chair Michael Powell, his humorous comments about a “Mercedes gap” were widely quoted as a disparagement of the goal of universal access to broadband. But in the same speech he announced firmly that “The E-Rate is a wonderful program” and that the digital divide is “an important issue.” All in all, he left considerable ambiguity about his views. Traces of them were perhaps detectable when he said he would defer to Congress about whether the states should administer the E-Rate. What was he hinting at?

Back in 1999, as chair of the Senate Communications Subcommittee, Senator Conrad Burns of Montana proposed legislation that would put the states in control of disbursing E-Rate funds, instead of a national non-profit corporation. This was the period of the strongest opposition to the E-Rate, and Burns become its most highly visible critic. Yet even Burns supports the concept of government subsidies for Internet access in schools. His proposal to route funds through the states was part of the general liberal/conservative debate over which government entity is most responsive to educational needs, and most competent to administer social programs in general. His proposed bill would also change the source of the E-Rate’s funding to the excise tax and put it under the National Telecommunications and Information Administration (a government agency promoting the public use of technology).

While this long-abandoned, 18-month-old proposal was apparently what Powell was resurrecting, many others doubt that it would be an improvement. Himsworth says, “Fifty independent E-Rate departments running the fund aren’t necessarily more efficient than one department. States might have trouble politically funding private schools, and libraries could also get the short end of the stick. Furthermore, states might decide to spend funds on a broad range of non-telecom items, like computers and teacher training. Telecom companies (who are already angry that companies like Cisco get paid out of the fund) would howl.”

In short, skepticism about the E-Rate persists in a kind of underground rumble, but the only changes being called for openly are in its details. Certainly, the rhetoric can turn into thunder at times. For instance, Hughes calls the E-Rate “nothing but a great, big windfall for the telephone companies, leaving nothing behind but bills.” But I prefer the assessment of his colleague Red Boucher: “Congress should be patted on the back for thinking about this new technology, but now it’s time to reevaluate the E-Rate” and extend its funding to more options for more communities.


Andy Oram is an editor at O’Reilly Media. This article represents his views only. It was originally published in the online magazine Web Review.