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FCC Rejects Most IBM-Related Appeals, But Lets Applicants Re-Apply

The full Federal Communications Commission has rejected appeals on behalf of seven large school districts and a consortium whose 2002 E-rate applications were rejected because of competitive bidding violations involving IBM, but said it will permit them to restart their competitive bidding processes and file new applications for internal connections for that year.

The appeals sought to reverse the SLD's decision to reject $250.9 million worth of internal connections discounts and $13.7 million worth of Priority One discounts sought by the Ysleta, Donna, Galena Park, and El Paso school districts in Texas, the Navajo Education Technology Consortium and Albuquerque School District in New Mexico, the Oklahoma City school district in Oklahoma and the Memphis school district in Tennessee.

The FCC separately considered an appeal filed by the Winston-Salem School District in North Carolina, and, reversed the SLD's decision in that school district's appeal because the circumstances were slightly different.

In its 51-page decision, the FCC said that "the procurement processes presented. . . thwart the Commission's competitive bidding policies." The FCC said that the applicants had chosen a systems integrator to provide millions of dollars worth of services, but "chose the systems integrator without seeking bids on any of the prices of the specific E-rate-funded services sought." It also expressed concern that the applicants had posted Forms 470 "expressing interest in purchasing a catalogue of virtually every eligible service, rather than developing a list of services actually desired, based on their technology plans, with sufficient specificity to enable bidders to submit realistic bids with prices for specified services."

In summary, the FCC said: "These practices are contrary to our rules and policies and create conditions for considerable waste of funds. . . . Such waste harms individual applicants that do not receive the most cost-effective services. If allowed to continue, the practices identified here would harm other applicants who may be under-funded because funds needlessly have been diverted to these excessive program expenditures."

The FCC's decision focused primarily on the circumstances involving the Ysleta School District, which was the first school district whose application was rejected after the SLD posted a notice on its Web site warning applicants about a pattern of practices it had uncovered when it reviewed applications for the 2002 funding year. However, the FCC said the individual cases were very similar, and, in an Appendix, discussed each one in turn.

The FCC said it would allow the eight applicants to rebid for their services because the "SLD could reasonably have been construed as sanctioning" the bidding process that was used when it approved the El Paso district's application for the 2001 funding year. The FCC noted that IBM had marketed its success with the El Paso contract the previous year, by emphasizing that the district had received less than $2 million in discounts in 2000, but that after selecting IBM, it had received more than $70 million worth of funding commitments.

The FCC said, "We find that waiver of our rules to permit applicants to rebid services. . . is in the public interest in light of the uncertain application of our rules to the novel situation presented, and the substantial and widespread reliance on prior SLD approval."

The FCC added, "We anticipate that we will rarely find good cause to grant a waiver of our rules based on confusion among applicants in applying them. . . . Here, we think that such consideration is appropriate because enforcement of these rules in these circumstances would impose an unfair hardship on the applicants."

Under the FCC order, the applicants will have until February 6, 2004 to post a new Form 470 application for the 2002 funding year, and then until April 23, 2004 to submit a new Form 471 application. The FCC said the districts "may select a Systems Integrator for project management, but not without seeking bids from potential Systems Integrators that specify prices to be charged by the Systems Integrator for eligible services." It added that "nothing in this order prevents IBM from submitting new bids for services."

The FCC said, however, that it would not provide discounts on the districts'recurring costs for telecommunications services and Internet access that had been rejected at the same time. Those requests totaled about $13.7 million worth of discounts on the applications in question. It said such an approach was not "overly harsh, since applicants proceeded at their own risk to take service, and we would be remiss to permit discounts in a situation where parties assumed the risk of proceeding in the face of SLD's denial."

The decision will not apply to applicants "who were denied by SLD under similar factual circumstances, but who elected not to file appeals with SLD or the Commission." These applicants, the FCC said, "failed to maintain their rights on appeal."

In its lengthy decision, the FCC made clear that "costs, trade-in allowances and discounts [must] be fairly and appropriately derived, so that, for example, the cost for eligible components is not inflated in order to compensate for discounts of other components not included in the funding requests." It also explained why Ysleta's funding request for Help Desk services would not be eligible for support, based on program rules. The FCC instructed the SLD to closely scrutinize the re-submitted funding requests to determine whether ineligible services were included.

In the case of the Winston-Salem school district, the FCC found that the school district had received only one bid, from IBM, in response to its Form 470 application, which included a long list of E-rate-eligible services. The school district released an RFP later in the year for System Integrator-type services, and chose a different vendor, Eperitus, to fill that role. The FCC remanded the school district's application back to the SLD for reconsideration.

For the 2002 funding year, the SLD has already approved $2.1 billion worth of funding commitments, but it was authorized to approve up to $2.7 billion worth of discounts. It is still reviewing additional applications from that funding year to ensure that they comply with program rules. Because the FCC said that the school districts that were subject to its decision could not request more than they had in their original applications, it appears that the SLD will have a large enough contingency fund available to address those requests from its original 2002 funding pool. In a separate filing, the Universal Service Administrative Company recently reported to the FCC that it expects to have about $400 million available to roll over next spring for the 2004 funding pool.

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