February 16, 1999 Web posted at: 2:16 p.m. EST (1916 GMT) by David Rohde and Neal Weinberg

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Should schools be receiving federal funds for Internet access? Yes No View Results

(IDG) -- For the past year, almost every user organization in the country has paid a 3% to 5% surcharge on its voice and data services to help wire America's classrooms for Internet access. While network managers have complained about the price tag, many comforted themselves in the knowledge that the financial bite would boost education by putting kids online.

So it may surprise you to know that $79,000 of the $132,000 that the Yazoo City, Miss., school district is getting from the E-rate program is simply being used to offset its regular BellSouth and AT&T phone bills; it has nothing to do with Internet access. Lincoln-Sudbury High School in the affluent Boston suburb of Sudbury is likewise getting 40 percent off its phone bill, but hasn't heard back yet on its application to upgrade the school's Internet access line from 56K bit/sec to T-1.

But the Mississippi and Massachusetts schools are doing better than the giant 1,200-school New York City school district - it hasn't received one dime of its requested $87 million in E-rate discounts.

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In fact, one year into the program, only 40 percent of the $1.9 billion available for the 18-month period ending in June has been allocated. That leaves more than $1 billion unspent.

What's going on here? The story of E-rate - the crown jewel in the federal government's plan to expand "universal service" - is a tale of political infighting, frustrated vendors and value-added resellers (VAR), bureaucrats learning technology on the fly, and vast reams of paperwork trailing the promise of e-commerce. And virtually all of it is paid for by you, the enterprise network builders of America.

Now some experts are saying the whole idea behind the program is flawed - that it's silly to be paying for such a broad slice of technology when some schools can't even get enough textbooks or classrooms. But most network managers, inside and outside of school districts, would be satisfied with reforms that would better target the money directly to online educational resources and reduce the E-rate program's complexity and delays.

Changing the rules

As originally created by the Federal Communications Commission in May 1997, E-rate was designed to provide $2.25 billion per year to schools and libraries for advanced network services. It's the program President Clinton and Vice President Gore are referring to when they talk about putting all classrooms online by 2000.

The administration's backing provided heavyweight political support for E-rate, but it also created confusion because few people outside the education community realize that E-rate is part of the government's universal service scheme, which also subsidizes telephone service. In fact, the organization originally chartered to administer E-rate - the Schools and Libraries Corp. (SLC) - was merged into the larger Universal Service Administration Co. (USAC) as of Jan. 1.

The idea behind E-rate was that long-distance carriers would pay for the bulk of the program, in exchange for the FCC rolling back the access fees that interexchange carriers pay to local carriers. But the Big 3 balked, insisting that wasn't enough compensation. And to the FCC's dismay, the long-distance carriers began to pass on the E-rate charges to business users in January 1998 and to residential users in July 1998.

In an effort to lessen the burden on businesses and consumers, the FCC lowered its sights last summer, reducing the funding level from $2.25 billion in the first year to $1.3 billion. To accommodate the drop in funding, the FCC also changed the rules in midstream.

E-rate funds are not handed out to end users. Rather, they are given in the form of discounts off telecommunications services and equipment, and providers are reimbursed by the government. Alternatively, providers reimburse users who are awarded discounts after they already paid full price.

Originally, the FCC said E-rate would apply to all telecom services, Internet access and associated LAN and WAN equipment. That plan offered discounts of 20 percent to 90 percent according to each school district's economic status, with poorer districts getting the larger discounts.

Under the revised plan, the discount range remains the same, but the FCC says it can only guarantee that the poorest schools will get equipment as well as services, while the rest might only get carrier and ISP discounts.

The program then stalled for several months until mid-December 1998, when the SLC finally mailed "commitment letters" to 3,000 applicants - a move that authorizes those applicants to file a new form to get their discounts.

"It's obviously rolling out a lot slower than anyone anticipated," says Ronald Sheps, education market manager for Westcon, a Tarrytown, N.Y., distributor of Nortel Networks' Bay Networks gear. So far, 18,451 letters have been sent, but one-third of the applicants still haven't heard anything.

Many of the early winners have E-rate discounts that have precious little to do with Internet access.

That's largely because the SLC is handling the simpler applications first. More complicated applications require additional scrutiny because government auditors last year demanded each application pass a "Program Integrity Assurance" review to prevent waste and fraud.

For example, a portion of Yazoo City's E-rate funding will cover the wiring and equipment to link five schools and a central office to the state Department of Education's network for Internet access and e-mail. But the bulk of the E-rate funding is simply a discount on the school system's plain old telephone service with BellSouth and AT&T. "Hopefully we can talk the school board into taking that money and putting it into technology," says Larry Summers, director of technology for the school district.

The WAN question

A big holdup on most of the remaining applications has to do with rule changes regarding whether the SLC should fund WAN access equipment and private fiber for metropolitan-area school networks.

Early last year the SLC came out with a policy stating its funds were not to be used for WANs, drawing a distinction between WANs and services for accessing the public Internet. The statement drew a storm of protest from schools and vendors who complained the SLC didn't understand how Internet access works.

Many large and mid-size school districts are likely to concentrate traffic from several schools at a central site, where an ISP would provide a fat T-1 or T-3 pipe to the Internet. But if the districts installed branch-office routers at individual schools to provide frame relay or ISDN connections back to a data center, they would also naturally want to run their internal administrative traffic - what the SLC dubbed an ineligible WAN - over those same links.

The original SLC policy would have forced even large school districts to buy Internet access separately for each school and perhaps even run traffic from internal applications out to the Internet, says Kevin Warner, Cisco's director of education market development.

"We didn't want to flood the Internet with traffic that doesn't have to be there," Warner says.

Westcon's Sheps is less diplomatic: "A lot of this has to do with people writing legislation regarding technologies they don't understand."

The SLC then began revising its policy, at one point suggesting that while servers and hubs would be fully covered, routers would be only partially covered, with discounts prorated according to the amount of traffic sent outside the school district. The SLC's decisions "changed at some points almost hourly," Warner says.

In the end, Sheps says the SLC is now likely to allow all routers and frame relay access devices and even most local fiber buildouts.

But other critics blame the FCC. "Hire some people at the FCC who are not lawyers," says Jerry Hausman, a professor of economics at the Massachusetts Institute of Technology and a prominent E-rate critic. "If they got somebody in there who was not Al Gore's next-door neighbor in prep school but who actually knows something about this stuff, then this kind of thing wouldn't happen."

The confusion over the funding of network equipment is being reflected in new applications for E-rate discounts. The SLC recently started taking E-rate applications for the 1999-2000 school year, even though it still has thousands of 1998-1999 applications on which to rule.

Taking the SLC's cue, applicants are cooling it on the equipment side. "Eighty percent of the new applications are for ISP or service-provider services," says Eric Won, a public sector account manager for Virtual Networks/Ikon, a Cisco reseller in Irvine, Calif.

Many VARs say the delays and confusion have created a perverse effect, one in which E-rate has actually retarded educational technology rather than enhanced it.

"The whole E-rate situation put everybody back a year," Won says.

The pace of payouts is especially troubling to large districts such as that of New York, which is seeking $87 million spread over 1,200 schools serving one million students. Joe Salvati, the city's E-rate coordinator, is worried that the entire 1998-1999 school year will go by without his planned frame relay network being installed and without any new services being delivered to students.

Salvati finds himself in a Catch-22. It's his understanding that he has to spend the first round of E-rate money by June. But his project is so massive that even after he receives notification that the funds are available, it will take months before he can turn on the frame relay network designed to provide dedicated T-1 and fractional T-1 access to the Internet. The plan requires wiring between seven and 12 classrooms in each of 1,200 schools, building secure areas in each school to install frame relay access devices, and installing and configuring the equipment.

Salvati says New York has been putting up its own money to get a head start on the infrastructure work in anticipation of the E-rate notification. "We're running out of money," he says.

At Lincoln-Sudbury High School in suburban Boston, Educational Technology Coordinator Nancy Errico isn't giving up. She was a little annoyed with the E-rate process, saying the forms were unclear. She's also frustrated over not knowing whether she will receive the funding to upgrade the school's 56K frame relay Internet access link to a full T-1. Errico says the school has 200 PCs in its six computer labs, and when just a quarter of them are online at once, the link bogs down for everyone.

Undaunted, Errico says she's fully prepared to apply again in the next round of funding.

Exhaustion for users . . . and resellers

New York's Salvati describes the application process as "extremely complex and time-consuming," but he understands any system that tries to satisfy the needs of school districts of all shapes and sizes is bound to be complex.

Vendors and resellers have also become annoyed, especially those that started courting schools for the first time on the basis of the federal handout. "A lot of people saw the $2 billion to $2.5 billion per year in networking and rushed into the market," Sheps says. "They thought schools would be handing out purchase orders on the street."

One thing that was supposed to help users and vendors was SLC's Web site, originally touted as a showcase of e-commerce where bids would be handled electronically. For many, E-rate has instead turned into a paperwork nightmare.

"I'm not mad, I'm frustrated," says Rosemary Mayers, a computer teacher at two schools in Beaverton, Ore., who says she spent 100 hours on the E-rate forms and has little to show for it.

She applied for E-rate money to wire classrooms so St. Matthew's School in Beaverton could deliver Internet access to students. However, seven waves of funding letters came and went, and Mayers is still sitting high and dry. "That school desperately needs it, but we've received no funding letters at all," she says. And Mayers was shocked to learn that because of a technicality in the rules, she will only receive half the amount she expected for Internet access at a second school in Beaverton.

In addition to eligibility questions, SLC has had a hard time maintaining up-to-date basic factual information online. In fact, the site acknowledges that some applicants and vendors are receiving database error messages while accessing certain areas. The latest postings on the site also concede that the SLC did not meet its goal of allocating most of the money by January.

In fact, no funding commitments were issued until mid-December and no schedule of commitment "waves" has been posted online, although the site does say that there will be two to four additional waves. Calling the SLC on the phone seems to be a hit-or-miss prospect. A recording on the SLC's toll-free help line says the organization is "currently processing a large volume of applications." Then it adds: "If you are calling to check the status of your application, please understand that we will not be able to discuss your application at this time."

But administrators who do manage to reach SLC personnel say they are helpful in ironing out questions.

Benefits vs. skepticism

To be sure, there are some success stories. For example, the New Mexico School for the Deaf in Santa Fe received $78,000 in E-rate discounts to upgrade its LAN from shared 10M bit/sec Ethernet to switched 10/100M bit/sec Ethernet. Computer System Coordinator Mike Romero says bandwidth was severely restricted with the old network and "kids had to sit and wait" for Internet access. The school has a 56K bit/sec frame relay link to a state-run Internet connection in Albuquerque, N.M.

This additional LAN bandwidth will also open the door to live videoconferencing at the 120-student residential school, Romero says.

And there are some side benefits as well, even for those who aren't getting the money yet. "Virtually every school in America came up with a shopping list," says Westcon's Sheps. "A lot of schools said, 'We have to do this anyway.'"

School administrators staunchly defend the rationale behind E-rate, arguing that any discount the carriers provide will be offset in the long run by a technologically aware society in which more people add second phone lines and buy broadband Internet access.

But E-rate critics say all that isn't worth an extra tax on corporate and consumer phone bills. Says MIT's Hausman: "There are a lot of other ways to raise people's consciousness."

Some critics go even further, questioning the very premise of the program. "Why should technology purchases get special subsidies when school books and other educational tools generally do not?" asks Lawrence Gasman, president of Communications Industry Researchers, a market-research firm in Charlottesville, Va. "Textbooks are of unquestioned usefulness in schools, whereas the educational impact of the Internet is questionable." He says E-rate should be scrapped entirely.

Even most of those who want to keep the program say the process can be considerably quickened and streamlined. The two-part application process involving Forms 470 and 471 can easily be melded into one, says John Schmidt, district treasurer and technology leader for the Schenectady, N.Y., schools.

Others suggest that the money should simply be sent back to the states, or the school districts, without any micromanaging of how the money should be spent.

But the biggest priority - and one that Congress could easily fix - is to redraw the program to make sure that on the services side, E-rate subsidizes only Internet access, or services that clearly enable it, such as frame relay or T-1 dedicated access lines.

"Subsidies were instituted that are now being used to pay telephone bills." Gasman says. "That strikes me as something that Congress certainly did not have in mind when it passed the Telecommunications Act of 1996."

It may be high time for the government to redraw the E-rate program to ensure it's subsidizing high-speed access to new worlds of information, not phone calls across town to find out why Johnny didn't show up for class today.

David Rohde is a senior editor for Network World. Neal Weinberg is a features reporter for Network World.