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                            Before the
                Federal Communications Commission
                      Washington, D.C. 20554
                                   )
In the Matter of                        )
Request for Review by                   )
the Department of Education of the           )    Application No. 18132    
State of Tennessee of the Decision of        
the Universal Service Administrator          )
                                   )
Request for Review by                   )
Integrated Systems and Internet Solutions, Inc.   )
of the Decision of                      )
the Universal Service Administra                       )
                                   )
Request for Review by                   )
Education Networks of America           )
of the Decision of                      )
the Universal Service Administrator          )
                                   )
Federal-State Joint Board on Universal Service    )    CC Docket No. 96-45
                                   )    
Changes to the Board of Directors            )
of the National Exchange Carrier             )    CC Docket No. 97-21
Association, Inc.                       )

                              ORDER

Adopted:  August 11, 1999                         Released:  August 11, 1999  

By the Commission:  Commissioner Furchtgott-Roth approving in part, concurring in part, and
dissenting in part, and issuing a statement at a later date.

                         I.  INTRODUCTION

     1.  By this Order, we grant in part and deny in part the requests for review filed by the
Department of Education of the State of Tennessee (Tennessee) and Education Networks of
America (ENA).  As explained more fully below, we find that Tennessee may receive discounts on
Internet access service provided by ENA, but may not receive discounts on charges by ENA to
Tennessee related to components of the ConnecTEN network it previously owned, but sold to
ENA.  We also deny the request for review filed by Integrated Systems and Internet Solutions,
Inc. (ISIS 2000) and dismiss as moot its Objection to Application/Request for Expedited
Declaratory Ruling filed April 3, 1998.  As described below, we find that, contrary to ISIS 2000's
claim, Tennessee complied with our competitive bidding requirements.  

                         II.  BACKGROUND

     2.  Section 254(h)(1)(B) of the Communications Act of 1934, as amended, requires:

          [a]ll telecommunications carriers . . . upon a bona fide request for any of its
     services that are within the definition of universal service under subsection (c)(2),
     [to] provide such services to elementary schools, secondary schools, and libraries
     for educational purposes at rates less than the amounts charged for similar services
     to other parties.

Section 254(c)(3) states that, in addition to services designated as eligible for universal service
support generally, the Commission "may designate additional services for such support
mechanisms for schools . . . for the purposes of subsection (h)."   In light of these provisions, the
Commission concluded that the definition of universal service for schools and libraries includes
telecommunications services, internet access and internal connections ("eligible services").  

     3.  Schools may receive discounted telecommunications services only from
telecommunications carriers, but may receive discounted Internet access services and internal
connections even from non-telecommunications providers.  In order to receive discounts on
eligible services, schools must file certain information with the administrator of the universal
service support mechanisms, the Universal Service Administrative Company (USAC or
Administrator).  Specifically, the school must file an application with the Administrator that, inter
alia, sets forth the school's technological needs and the services for which discounts are sought
(Form 470).  The school must generally use the Form 470 application as the basis for seeking
competitive bids on the services for which discounts are sought.  Once the school has signed a
contract for the eligible services, it must notify the Administrator of the signed contract, as well as
of the estimate of funds needed to cover the discounts to be given those services that qualify as
eligible services.  Notification is accomplished by filing the Form 471 application.  The
Administrator then determines the amount of discounts for which the school is eligible.  

     4.   Consistent with these requirements, Tennessee submitted its Form 470 application to
the Administrator for receipt of competitive bids, and announced its intent to award the contract
for Internet access service to ENA on March 20, 1998.  ISIS 2000 also bid on Tennessee's
request for Internet access service without success.  Subsequent to the contract award, but prior
to the time Tennessee filed its Form 471 application with the Administrator, ISIS 2000 filed an
objection with the Commission and the Administrator.  At the same time, ISIS 2000 also availed
itself of Tennessee's comprehensive bid protest process.  After the administrative review part of
the Tennessee bid protest process was completed, and ISIS 2000's bid protest was denied,
Tennessee filed its Form 471 application with the Administrator.  On February 26, 1999, the
Administrator notified Tennessee that it would not receive support it requested from the schools
and libraries universal service support mechanism for discounts on Internet access service.  On
March 29, 1999, Tennessee, ENA, and ISIS 2000 requested Commission review of the
Administrator's decision. These requests for review are the subject of this decision.

                         III.  DISCUSSION
 
A.  Compliance with the Commission's Competitive Bid Requirements

     1.  Administrator's Decision

     5. ISIS 2000 generally complained before the Administrator that Tennessee failed to
comply with the Commission's competitive bid requirements found in sections 54.504 and 54.511
of the Commission's  rules.  With regard to this specific issue, ISIS 2000 essentially took issue
with the fact that Tennessee, in its consideration of the cost factor, awarded more bid points to
ENA's bid even though ENA's total, initial bid was greater than ISIS 2000's bid.  The
Administrator determined that it would "defer to the state and local competitive bid procurement
review procedures and findings."  ISIS 2000 seeks review of this aspect of the Administrator's
decision.

     2.  Discussion   

     6.  For the reasons discussed below, we conclude that, contrary to ISIS 2000's argument
and consistent with the Administrator's finding, Tennessee did comply with the Commission's
competitive bid requirements.  In particular, we find that Tennessee adequately considered price,
as well as other factors, in determining the most cost-effective bid.  Therefore, we deny ISIS
2000's request for review with respect to the Administrator's determination on this issue.

     7.  As ISIS 2000 correctly notes, the Commission's rules generally require schools to seek
competitive bids on the services for which they seek a discount.  In addition, section 54.511
states that schools shall "carefully consider all bids submitted and may consider relevant factors
other than the pre-discount prices submitted by providers."  The Commission explained its
competitive bid requirements by stating that it concurred with the Joint Board's recommendation
that the Commission permit schools "'maximum flexibility' to take service quality into account
and to choose the offering . . . that meets their needs 'most effectively and efficiently,'" but noted
that price should be the "primary factor" in selecting a bid.  Indeed, in discussing the competitive
bid requirements specifically with regard to Internet access, the Commission noted that the Joint
Board recommended that "the Commission require schools and libraries [only] to select the most
cost-effective supplier of access."  Moreover, the Commission specifically stated in this regard
that other factors, such as "prior experience, personnel qualifications, including technical
excellence, and management capability, including schedule compliance," form a "reasonable basis
on which to evaluate whether an offering is cost-effective."  The Commission later reaffirmed its
position that "schools . . . are not required to select the lowest bids offered, although the
Commission stated that price should be the 'primary factor.'"

     8.  In its request for review, ISIS 2000 argues that our rules require that "[b]efore non-
cost factors may even be considered, section 54.504 requires the objective consideration of pre-
discount price."  Although we are not certain that the order in which factors are considered is
important, we disagree with ISIS 2000 to the extent that it is suggesting that the Commission
intended its statement that "price should be the primary factor in selecting a bid" to mean that
price should be the initial determining factor considered to the exclusion of other factors.  Price
cannot be properly evaluated without consideration of what is being offered.  Interpreting the
Commission's competitive bid rules as requiring schools to select the lowest bid with little regard
for the quality of services necessary to achieve technology goals would obviate the "maximum
flexibility" the Commission expressly afforded schools.  That was not the Commission's
intention.

     9.  In light of ISIS 2000's complaint here, we take this opportunity to provide useful
guidance with regard to our competitive bid requirements and factors that may be considered in
evaluating competitive bids for purposes of our rules.  As stated above, we concurred with the
Joint Board's recommendation that schools involved in the competitive bid process be allowed to
"take service quality into account and to choose the offering . . . that meets their needs 'most
effectively and efficiently.'"  Indeed, just after we stated that price should be the primary factor in
selecting a bid, we continued the discussion by focusing on cost-effectiveness.  In addition, we
specifically listed factors other than price, such as technical excellence, that could "form a basis on
which to evaluate whether an offering is cost-effective."  The paragraph on this issue in the
Universal Service Order should be read as a whole to say that a school should have the flexibility
to select different levels of service, to the extent such flexibility is consistent with that school's
technology plan and ability to pay for such services, but, when selecting among comparable
services, a school should be guided by price in its selection.  Even among bids for comparable
services, however, this does not mean that the lowest bid must be selected.  Price, however,
should be carefully considered at this point to ensure that any considerations between price and
technical excellence (or other factors) are reasonable. 

     10.  We expect that we can generally rely on local and/or state procurement processes that
include a competitive bid requirement as a means to ensure compliance with our competitive bid
requirements.  That is, we believe it sensible, as the Administrator did, to rely on state and/or local
procurement rules and practices for determining compliance with our competitive bid
requirements because such rules and practices will generally consider price to be a "primary
factor" (as explained supra), and select the most cost-effective bid.  Thus, consistent with
Tennessee's view, and contrary to ISIS 2000's view, we conclude that the Administrator need
not make a separate finding of compliance with our competitive bid requirements in this instance. 
We note that, even in those instances when schools do not have established competitive bid
procurement processes, the Administrator generally need not make a separate finding that a
school has selected the most cost-effective bid.  Such a finding is not generally necessary because
a school has an incentive to select the most cost-effective bid, even apart from any procurement
requirements, because it must pay its pro rata share of the cost of the services requested. Absent
evidence to the contrary in a particular case, we believe that this incentive is generally sufficient to
support a conclusion that a school has selected the most cost-effective bid for requested services.  
  

     11.  In that regard, we note that this record reflects that the procurement process at issue
here did consider price as a "primary factor," and required selection of the most cost-effective bid. 
Specifically, Tennessee law states that procurement regulations "shall require:  (1) [t]o the
greatest practicable extent, evaluation and consideration of . . . cost in the awarding of the
contracts."  In addition, Tennessee's request for bids indicated that the contract would be
awarded to the most cost effective bidder.  We believe all of this supports the conclusion that
the procurement process at issue here complies with our competitive bid requirements, and
therefore, our competitive bid requirements were met.

     12.    As to ISIS 2000's narrower complaint that section 54.504 of our rules requires
schools to consider only the prediscount price when evaluating the cost component of a bid
(assuming a bidding process that evaluates cost in a separate category from other non-cost
factors), we note at the outset that, regardless of whether we agree with this interpretation, the
record evidence supports Tennessee's and ENA's argument that differences in the service offerings
were such that Tennessee could reasonably prefer the ENA service offering over the ISIS 2000
service offering.  As such, a comparison of price is not determinative of a cost-effective bid in
this case.    

     13. Moreover, to the extent that ISIS 2000 is suggesting that, when a school evaluates
cost in a separate category from other non-cost categories, the school must always award the
most points for the cost category to the lowest bidder in order to comply with section 54.504, we
cannot agree.  While we certainly expect that schools will evaluate the actual dollar amount
proposed by a bidder, we do not intend to limit them to considering only the absolute dollar
amount proposed such that they must always award the most points in the cost category to the
lowest bid.  Schools should be free to consider other issues relevant to cost, such as whether the
price bid is realistic for the services proposed.  While we appreciate ISIS 2000's concern for fiscal
responsibility in the schools and libraries universal service program, we note that, as ISIS 2000
itself references, requiring schools to pay their pro rata share of the overall prediscount price
provides some incentive for schools to show fiscal constraint.  

     14.  It appears that ISIS 2000's ultimate complaint in this regard is that Tennessee's
criteria for evaluating cost "incentivized bidders to offer the highest pre-discount price."  While
we need not address this specific concern for the reasons discussed above, we note that ISIS
2000's argument does not work as an absolute.  That is, although the actual formula used to
evaluate the prices of the bidders resulted in ENA receiving more points than ISIS 2000 in the
cost category, even though ISIS 2000's bid was lower than ENA's bid at that point in time, as
Tennessee points out, under other circumstances, a lower bid would receive more points. 
Although the formula used to evaluate cost may have awarded the highest points for cost to bids
maximizing federal support, this is not prohibited by our rules.

B.  Eligibility for Discounts on Services Related to Existing ConnecTEN Components

     1.  Administrator's Decision

     15.  Before the Administrator, ISIS 2000 argued generally that a transaction underlying
Tennessee's requests for discounts on its Form 471 application rendered some amount of the
requests ineligible.  Specifically, in its bid to provide Internet access to Tennessee, ENA
proposed to buy software and the right to use certain components of the existing wide area
network owned and used by the schools of Tennessee, the ConnecTEN network, in its (ENA's)
provision of Internet access service during a transitional period.  ISIS 2000 argued that payment
by Tennessee to ENA for Internet access service provided over components of a wide area
network and any associated internal connections (the ConnecTEN network), formerly owned by
Tennessee, but sold to ENA, should not be considered as part of a service eligible for discounts
because the wide area network and internal connections were delivered to, and paid for by,
Tennessee before January 1, 1998.  ISIS 2000 argued that these components corresponded to the
first few request lines on Tennessee's Form 471 application.

     16.  The Commission's rules do not provide for discounts on services provided to schools
before January 1, 1998.  The Administrator denied discounts on costs related to the ConnecTEN
network, finding that:

          [f]irst, the purchase and installation of the facilities in question were made prior to
     January 1, 1998. Second, the purchase of components of a wide area network is
     not eligible for discounts under the Schools and Libraries Universal Service
     Support Mechanism.  Both of these principles would have precluded the funding of
     discounts for these costs had [Tennessee] retained ownership of these facilities. 
     Third, the rules which restrict discounts from being approved on services delivered
     or equipment purchased prior to January 1, 1998 cannot be avoided by virtue of
     transferring ownership of the facilities in question to ENA and providing for ENA's
     charging of these costs back to [Tennessee] as part of the costs of Internet
     access.

Both Tennessee and ENA seek review of this aspect of the Administrator's decision.

     2.  Discussion

     17.  We deny Tennessee's request that we find the use of existing ConnecTEN
components to be part of ENA's eligible Internet access service because we conclude that such
components were part of an ineligible wide area network when owned by Tennessee.  Although
we believe the components at issue are part of an ineligible wide area network based on the
description in the record, we note that, it is conceivable they could be internal connections.  If
they are internal connections, they do not meet the requirement that services eligible for discounts
must be received by a school after January 1, 1998.  Specifically, we find that the transfer of
some components of the ConnecTEN system from Tennessee to ENA does not change the
eligibility status of those components.   

     18.  As described in the record, the ConnecTEN network is a network that connects all
Tennessee K-12 public schools to each other and to the Internet.  Section 54.500 of our rules
defines a wide area network as "a voice or data network that provides connections from one or
more computers within an eligible school . . . to one or more computers or networks that are
external to such eligible school."  Section 54.518 of our rules states that "[t]o the extent that
states [or] schools . . . build or purchase a wide area network to provide telecommunications
services, the cost of such wide area networks shall not be eligible for universal service
discounts."   Although we believe the record supports a finding that the components at issue are
part of a wide area network, we note that the record is not as precise as we would like for
determining where the ConnecTEN network ended and internal connections may have begun. 
Thus, it is conceivable that some of the components purchased by ENA could have been internal
connections used by the schools to connect to the ConnecTEN network.  The Commission
allows discounts on internal connections, which have been described as a "service [that] is eligible
for support as a component of the institution's internal connections only if it is necessary to
transport information all the way to individual classrooms."  Section 54.507(f) of the
Commission's rules, however, limits funding any discounts for eligible services to services
received after January 1, 1998."   

     19.  Based on the record before us, we find that the ConnecTEN network was a wide area
network that, if Tennessee had retained ownership, would have been ineligible for federal
universal service discounts.  Moreover, although we believe that the ConnecTEN network is a
wide area network, to the extent that there is the possibility that any of the software or use of
routers purchased by ENA could have been internal connections when owned by Tennessee, these
internal connections to the ConnecTEN network were installed before January 1, 1998, thereby
disqualifying them from eligibility pursuant to section 54.507(f), unless the change in ownership
affects such eligibility.

     20.  We note at the outset that there is some dispute in the record regarding what ENA
actually purchased from Tennessee.  Even if we assume the facts as presented by ENA and
Tennessee, that ENA purchased software and the right to use routers to deliver Internet access
service, we think that the fact that these components would not be eligible for discounts if the
state continued to own them is determinative of how they should be treated upon transfer of their
ownership to ENA.  Given that the rules that would apply to Tennessee were part of the
Commission's attempt to define eligibility parameters, we are concerned that, were we to allow
transfers such as the one made by Tennessee to ENA to receive funding, the effect of these rules
would be severely undermined.  In particular, if we were to allow schools to transfer their state-
built wide area networks to private parties, who then used that network to provide service and
included in the charges to the school some portion of the cost of that network, our rule
prohibiting the funding of wide area networks built or purchased by schools would very likely be
vitiated.  Contrary to the intent of the rule, there would be a significant incentive to have some
portion of that network, previously paid for completely by the state or school, subsequently
funded by the federal universal service fund.  

     21.  We also find that, to the extent that these components could be internal connections,
rather than wide area network components, charges to Tennessee related to these internal
connections would not be eligible for discounts.  Since any internal connections that might have
been purchased were installed prior to January 1, 1998, they would not generally be eligible for
discounts.  Consistent with the Administrator's decision, we believe that, were we to allow
Tennessee discounts on services that it purchased prior to the start date of the federal schools and
libraries program merely because it transferred its ownership to another entity, we would undercut
section 54.507(f).  We note that this is analogous to the lease/purchase arrangement discussed in
the Administrator's Clients' Commonly Asked Questions - Set III.  There the Administrator
correctly explained that "if an eligible school . . . originally purchased internal connections prior to
January 1, 1998, and later refinanced the purchase sometime after January 1, 1998, the date of
service delivery will be the original purchase or acquisition date, which in this example, is prior to
January 1, 1998." 

     22.  We understand Tennessee's and ENA's argument that Tennessee requested support
from the universal service fund for the provision of basic Internet access and no Internet access
service was provided prior to January 1, 1998.  Moreover, we recognize the appeal of their
argument that the ConnecTEN components are "necessary for the efficient transmission of
information to students and teachers," and thus, should be considered a part of the provision of
Internet access service.  We think, however, that, in order to ensure that schools do not transfer
otherwise ineligible components or services to third parties so that they may receive discounts that
they would not otherwise be entitled to, we must apply sections 54.518 and 54.507(F) to these
circumstances.  Moreover, although a state network may be eligible to receive discounts in the
provision of internet access service under certain circumstances,  we have no basis on the record
to determine if that would be the case here.  As we explained above, the fact that a component of
a network is used in the provision of Internet access service is not the sole determinant of its
eligibility. Therefore, we deny funding requests by Tennessee for charges including costs
associated with the ConnecTEN network.

     23.  We also agree with ENA that section 54.507(f), prohibiting the funding of services
prior to January 1, 1998, cannot be interpreted to mean that Internet access service providers
must use equipment in their networks that was purchased after January 1, 1998.  The basis of
our decision here, however, is not whether the service provider owned equipment purchased prior
to January 1, 1998 and used thereafter to provide Internet access service.  
Rather, the basis of our decision, as explained above, is grounded in the highly, fact-specific
nature of this case, i.e., that the facilities that Tennessee sold to ENA were part of a wide area
network that would have been ineligible for discounts when owned by Tennessee or, to the extent
such facilities could conceivably be existing internal connections, that they would be ineligible for
discounts.

     24.  Both ENA and Tennessee argue that the ConnecTEN transaction was the most cost-
effective method for providing Internet access service to the schools of Tennessee, and that any
other approach would have burdened the federal universal service fund more.  Cost-
effectiveness with regard to one particular request, however, misses the broader, more significant
issue.  Cost-effectiveness cannot transform an ineligible service into an eligible service, and as
described above, our rules are designed to ensure cost-effective administration of the schools and
libraries support mechanism as a whole.  Accepting Tennessee's argument here could lead to
circumvention of these rules, which ultimately could lead to costly funding for ineligible services
overall.   

C.  Eligibility for Discounts on Services Related to ENA Network Upgrades

     1.  Administrator's Decision

     25.  The Administrator denied Tennessee's request for discounts on the charges ENA will
assess Tennessee for the construction of "Education Hub sites" and purchase of caching
servers to be used in ENA's provision of Internet access service. In addition, this decision is
applicable to new router facilities to be purchased by ENA and located at individual schools. 
Because we discuss the router facilities and hub sites together, we will refer to them collectively
as hub sites.  Although ENA and Tennessee argued that the hub sites were an integral part of 
ENA's provision of Internet access service, the Administrator reasoned that the related costs for
which discounts were requested were for the purchase and installation of facilities.  Under the
schools and libraries program, these facilities are generally viewed as either internal connections
or wide area network components.  If these facilities are viewed as internal connections,
Tennessee would receive no support because funding for internal connections in the first year of
this program was insufficient to provide discounts at the level for which Tennessee was
qualified.  If these facilities are wide area network components, the Administrator found that,
"[t]hese wide area network components are ineligible for discounts because purchased wide area
network components are not eligible for support." With regard to the caching servers, although
ENA made an alternative argument that they were expressly authorized by the Commission as
eligible internal connections, the Administrator concluded that the caching servers were not
eligible internal connections because they "are not necessary to transport information all the way
to individual classrooms."

     2. Discussion

     26.  The issue before us devolves to whether Tennessee essentially requested discounts for
the purchase of ineligible facilities or eligible services.  Based on the specific facts in the record
before us, we conclude that the service offered by ENA is Internet access service that is fully
supportable, with the exception of charges related to the purchase of existing ConnecTEN
components.  Therefore, we find that costs related to ENA's purchase of hub sites and caching
servers made to provide Internet access service to Tennessee may be properly characterized as
part of its Internet access service and instruct the Administrator to work with the Bureau and
Tennessee to determine the exact amount of funds necessary to cover the discounts for
Tennessee's Internet access service except as expressly disallowed in section B above.  Thus,
where we refer to ENA's network in this section of our decision, our analysis is only applicable to
the upgrades made by ENA to provide Internet access service to Tennessee.

     27.  At the outset, we find, contrary to ENA's and Tennessee's position, that we can,
where appropriate, look behind transactions underlying requests for discounts to ensure that they
comply with our rules.  Indeed, although our de novo review in this instance leads to a finding
that is contrary to the Administrator's finding, we applaud the Administrator's efforts and
diligence in examining this particular request for discounts, as well as all such requests.  In order
to reach our goal of ensuring that as many schools receive discounts for eligible services as
possible, we believe the Administrator must be as diligent in examining transactions underlying
requests as it was here. We believe that the Administrator must undertake this type of examination
when it has reason to believe further examination of an application is necessary, and therefore,
find that the Administrator undertook the correct course in its diligent examination of this
application.  

     28.  As stated above, however, the question to be answered here is whether ENA will
provide Internet access services or another service to Tennessee, or whether Tennessee is actually
purchasing ineligible facilities.  To determine the answer to this question, we must look to our
relevant eligibility rules, which are:  (1) the definition of eligible services, and (2) the rule
excluding support for wide area networks.  With regard to eligible services, our rules allow non-
telecommunications carriers to be eligible for universal service support for providing Internet
access service and installation and maintenance of internal connections.  Section 54.5 of our
rules defines Internet access as "[t]he transmission of information as part of a gateway to an
information service, [and] may include data transmission, address translation, protocol
conversion, billing management, introductory information content, and navigational systems that
enable users to access information services." Section 54.506 states that a service is eligible for
support as internal connections if "such service is necessary to transport information within one or
more instructional buildings of a single school campus."  Moreover, as previously stated, section
54.518 of rules states that "[t]o the extent that states, schools, or libraries build or purchase a
wide area network to provide telecommunications services, the cost of such wide area networks
shall not be eligible for universal service discounts provided under this subpart."

     29.  We note at the outset that no one questions that ENA will provide Internet access
service to Tennessee.  Rather, the issue that ISIS 2000 raises is whether the fact that ENA will
use universal service support to build the underlying facilities to provide Internet access service
makes a difference for support eligibility.  We find that, under the narrow circumstances
presented, this fact does not affect support eligibility.  We recognize that all service providers
include within their prices to customers some amount of the cost of building facilities to provide
the service.  Indeed, by way of analogy, we have allowed common carriers to include within their
rates to customers, some amount of the cost of the facilities used to provide such services to
customers.  Similarly, we would expect ENA to include at least some portion of the cost of the
facilities used to provide Internet access service in its rates to Tennessee.  Therefore, because we
expect Internet access service providers to include some portion of the cost of facilities used to
provide Internet access service within the charges for providing Internet access service, and
because our rules do not otherwise specifically prohibit support to Internet access service as
provided by ENA (as explained below), we cannot, at this time, find that the costs of the
underlying facilities to be built by ENA to provide Internet access service to Tennessee should be
excluded from ENA's charges for providing Internet access service. 

     30.  Looking first at whether this is a wide area network ineligible for discounts pursuant
to section 54.518, we conclude that the hub sites and caching servers described above that are
specifically related to ENA's upgrades made to provide Internet access service to Tennessee, are
not part of an ineligible wide area network that was built or purchased by a state, school, or
library to provide telecommunications services.  As described in the record, Tennessee will have
no ownership of the ENA network, including the hub sites and caching servers.  Moreover, we
note that Tennessee asserts, without dispute from other parties, that the ENA network, including
the hub sites and caching servers, will not be used by Tennessee for telecommunications services,
but only will provide Internet access services.  Thus, it would appear that, even if this were a
wide area network built for Tennessee, it was not built to provide telecommunications services,
and thus falls outside the reach of section 54.518.  We note, however, that this is not the sole
determinative factor here.  We would hesitate to rely on this factor alone without further
investigation, out of concern that a wide area network such as this could be used to provide
telecommunications services. 

     31.  Consistent with our decision supra, with regard to the ConnecTEN components, we
must consider whether the arrangement between Tennessee and ENA reaches essentially the same
result as that which is prohibited by section 54.518; namely whether, through the contract
between Tennessee and ENA, Tennessee has in essence built or purchased a wide area network to
provide telecommunications services.  We believe relevant indicia for making this determination
include, but are not limited to, the service provided over the network, exclusivity arrangements,
lease purchase arrangements, and the structure of the contract (e.g., substantial payment for
upfront capital costs).  None of these factors alone is necessarily determinative, but they must be
considered in light of facts presented.

     32.  As previously stated, Tennessee asserts that the ENA network, including hub sites
and caching servers, will only be used to provide Internet access service, not telecommunications
service.  Moreover, on the whole, the record does not provide a basis for finding that Tennessee
and ENA have an exclusivity arrangement limiting the use of the ENA network to Tennessee.  As
ISIS 2000 notes, the ENA network could "ultimately serve many users."  Indeed, ISIS 2000
cites to an ENA Investment proposal to show that ENA "expects to add more users such as
private schools [and] health care providers."  Although Tennessee has suggested that it would
"utilize the full capacity of the ENA network [for the duration of the contract]," ENA later
claims that "ENA and its team in fact are providing Internet access today to over 100,000
computers located in the State's K-12 schools as well as access to thousands of other
customers."  Although it would be difficult to determine whether Tennessee is ENA's only
customer because ENA is comprised of a number of entities, including ISDN-NET, a large
Internet service provider in Tennessee, we note that, even if Tennessee were ENA's only
customer, that fact alone does not prove that Tennessee has an exclusive right to use the network. 
 In addition, with regard to any lease-purchase arrangement, ENA states that "there is no
provision for the State to own any part of the system that ENA will own and use during or after
the contract period." 

     33.  There is significant dispute on the record with regard to the structure of this contract. 
Some evidence suggests that ENA sought a significant upfront payment that would be used to
finance its capital investment, including the hub sites and caching servers, but other evidence
shows that Tennessee will actually pay both recurring and nonrecurring charges to ENA.  
Moreover, ENA and Tennessee present evidence showing that some Internet service providers
regularly structure charges to customers using both upfront, nonrecurring and recurring charges. 
Tennessee's actual application, as submitted to the Administrator, shows that for each Internet
access service level above basic Internet access service, the nonrecurring charges to be paid by
Tennessee to ENA are greater than the recurring charges.   Tennessee avows, however,  that the
nonrecurring charges cannot be considered evidence of a "purchase" of facilities, but rather were
accepted as a way to reduce the total cost of Internet access service.    Although we are
somewhat concerned about the level of the nonrecurring charges,  because high nonrecurring
charges weigh more in favor of an appearance of "purchase" of facilities by Tennessee, we believe
other factors, as discussed above and Tennessee's statement with regard to its payment structure,
tilt the balance toward not imputing a finding that ENA built a wide area network for Tennessee. 
Thus, we find that the hub sites and caching servers are not ineligible facilities pursuant to section 
54.518.

     34.  We must now consider whether these hub sites and caching servers are within the
definition of eligible services.  As previously stated, the relevant eligible services to consider here
are internal connections and Internet access service.  Moreover, although internal connections are
generally eligible for discounts, in this first year of our program, discounts for internal connections
were provided only to schools with discounts levels of seventy percent or above, and Tennessee's
discount level fell below the seventy percent level.  Thus, if these facilities are internal
connections, they will be ineligible for this first program year.  

     35.  In light of the funding constraints on internal connections, we note that there may be
some incentive for schools to claim that facilities used in reaching the Internet are part of the end-
to-end Internet access service, rather than internal connections.  Moreover, as a practical matter,
we believe that there are instances where it is difficult to draw a line between end-to-end Internet
access service and internal connections because Internet service providers configure their
networks and services differently.  For example, ENA maintains that these facilities fall within the
definition of Internet access because they are used in the "transmission of information as part of a
gateway to an information service," and (for the hub sites) are "navigational systems that enable
users to access information services."  Indeed, ENA explains that the hub sites are used "to route
Internet access traffic and provide access to web-based e-mail capabilities, virtual reserve desks,
and custom security."  Moreover, ENA points out that the caching servers will allow storage of
the "most frequently visited sites [on the Internet]," and will thus, allow for the "most efficient
possible 'transmission of information as part of a gateway to an information service.'"  

     36.  There is no dispute that these facilities will function in the way described by ENA. 
Indeed, ENA and Tennessee present evidence that many Internet service providers operate their
Internet networks in a similar fashion. Thus, if we find that these upgrades are not internal
connections, we believe there is a sufficient basis for finding them to be part of an end-to-end
Internet access service.  But, as the Administrator found, certain components in the ENA
network, such as the routers located at the schools, may be considered, at least in some
circumstances, internal connections.  Thus, we must decide where to draw the line in these
particular circumstances.  In drawing this line, we will, consistent with the definition of internal
connections, also take into account practical considerations, such as administrative ease and
expediency in evaluating applications for discounts and how our priority rules with regard to
eligible services may be affected by our decision herein.  

     37.  Under the definition of internal connections, a service is considered a component of
internal connections if it is necessary "to transport information within one or more instructional
buildings of a single school campus."  In interpreting this definition vis-a-vis Internet access
services, we believe it reasonable to establish a rebuttable presumption that, if a service includes
facilities that are located on the school premises and are used to transport information, they are
internal connections.  It seems reasonable to presume that, if the facilities used in providing a
service are located on the school premises, they are generally necessary to transport information
within one or more buildings of the school campus, and are not part of an end-to-end Internet
access service. Thus, in evaluating applications for discounts, the Administrator may generally
presume that facilities located on a single school campus are internal connections.  We believe this
provides clearer guidance to the Administrator in evaluating applications for discounts, and
reaches the right balance in regard to burdens on schools to show that certain facilities used in
providing a service are truly part of an end-to-end Internet access service, and not mislabeled
internal connections to the detriment of other schools' abilities to receive telecommunications
services or Internet access service.

     38.  We believe, however, that schools may rebut this presumption in the application
evaluation process.  To rebut this presumption, we believe it reasonable to consider evidence of
where the Internet access service begins and/or ends.  As described in detail in the record, the hub
sites located at the schools (excluding for the purpose of this discussion those related to the
ConnecTEN network as described supra) are ENA's point of presence.  In essence, the hub sites
located on the school premises do not "function solely to transmit information over the distance
from the classroom to the Internet service provider," rather they act as the point where ENA,
the Internet access service provider, begins to provide Internet access service.  Indeed, according
to ENA and Tennessee, the schools' internal networks will function without connection to the
ENA hub site located on the schools' premises, thus, indicating that these hub sites are not
necessary to transport information within the schools' instructional buildings on a single campus,
and are thus, not internal connections.  As described in the record, Tennessee's schools have
routers and hubs within the schools that act to transmit the information from the classroom to the
hub sites at issue here.  ENA has located its point of presence for Internet access service at the
schools.  Moreover, we note that ENA and Tennessee avow that the facilities at issue operate
solely for the purpose of providing Internet access service, which we believe, because they serve
no other purpose, provides some indication that they are part of an Internet access service.

     39.  We note, however, that our inquiry cannot end here because, when the rules of
priority are in effect, there is an incentive to characterize certain facilities used in the provision of
internal connections that may also be provided by the Internet access service provider as Internet
access service.  For example, the Internet service provider may end its service at a regional office,
but provide a school with internal connections such as routers used to aggregate traffic within the
school.  To minimize the potential for mischaracterization, where warranted, we will also look at
other indicia to determine if a component of a service is indeed part of the specified service.
Relevant indicia include, but are not limited to, ownership of the facility used to provide the
service, any lease-purchase arrangements regarding such facility, exclusivity arrangements
regarding such facility, maintenance agreements regarding such facility and upfront capital costs. 

     40.  Using these indicia, we find that the hub sites at issue here are not internal
connections.  First, there is no evidence that the hub sites at issue here are, or will be, owned by
Tennessee.  Nor, is there evidence of a lease-purchase agreement between ENA and Tennessee
for Tennessee to purchase the hub sites at the end of the contract term.  In addition, although the
service provided by ENA to Tennessee has been described as "dedicated access," the hub sites
located on school premises have "other ports for access from other customers[;] the point of
presence router is not dedicated to Tennessee."  Finally, although the nonrecurring charges
related to ENA's upgrades are large, thus providing some indication that this seems more like a
purchase of a facility that could be used for internal connections, we believe all factors taken
together weigh against a finding of internal connections and in favor of a finding of Internet access
service.

     41.  With regard to the caching servers, we note that the Administrator concluded that
they do not meet the definition of internal connections because, as described on the record, they
are not "necessary to  transport information within one or more instructional buildings of a single
school campus."  Even if Tennessee owned these facilities and they resided on school premises,
we would not find them to be internal connections because, based on the record, they seem to
provide levels of efficiency in the delivery of information, but are not necessary to transporting
such information.  We note, however, that when used by an Internet service provider in its
provision of Internet access service, caching servers may be included as part of the cost of that
service, as described above.   

     42.  Although we find that the hub sites and caching servers here are part of the underlying
facilities used to provide Internet access service, and thus, may be properly included as part of the
cost of providing such service, we are troubled by the effect of this decision.  When we started
this program, we did not envision providing support to fund significantly the backbone of a
provider's network.  At the same time, we obviously did not wish to foreclose competition by
funding only established service providers.  Indeed, if we concluded that ENA were prohibited
from support in this instance, we could very well start down the path of excluding significant
competition.  We believe we need to consider in the very near future a way to reach a balance
between ensuring that schools receive supported services and significantly funding a new
company's network.  

D.  Public Interest Issue

     43.  We do not find it in the public interest to waive our rules to allow Tennessee to
receive discounts on charges related to the ConnecTEN network.  Although Tennessee has
requested that the Commission find it in the "public interest" to ensure Internet access service
with support from the universal service fund for Tennessee's public schools to avoid a "digital-
divide," we cannot conclude that Tennessee has made the requisite showing to support a waiver
of our rules with regard to the ConnecTEN network.  Moreover, we note that our decision with
regard to the ENA upgrades discussed supra in section C, should mitigate any concerns with
regard to a "digital divide."     

     44.  Since we have found that Tennessee's request for discounts on charges related to the
ConnecTEN network should be denied support under our rules, we presume Tennessee seeks a
waiver of sections 54.507(f) and  54.518 to allow for funding of discounts on its requested
services.  Section 1.3 of the Commission's rules provides that "[a]ny provision of the rules may be
waived by the Commission . . . if good cause therefor is shown."  As interpreted by the courts,
this requires that a petitioner demonstrate that "special circumstances warrant a deviation from
the general rule and that such a deviation will serve the public interest.  Tennessee has failed to
show that special circumstances warrant deviation from applicable rules.  

     45.  Specifically, although we applaud Tennessee's laudable goal of providing high quality
Internet access to all of its public schoolchildren to avoid a "digital divide" among them, we will
not waive our rules solely because Tennessee made a good faith attempt, but failed, to follow
such rules.  In other words, the fact that Tennessee was not able to meet its goal of providing high
quality Internet access to all of its public school children in this first year of our schools and
libraries program does not establish "special circumstances" warranting deviation from our rules. 
Given our competing goals of providing universal service support to enhance "access to advanced
telecommunications and information services" for classrooms and keeping telephone rates
affordable throughout the country, we will not waive our universal service support rules affecting
discounts for schools for "good faith" attempts to comply with the rules.  Moreover, we also are
concerned that the neediest schools receive eligible service first, as indicated by our priority
rules, and a waiver in this instance would likely adversely affect a needier school.  Therefore,
while we have reason to believe that Tennessee followed its procurement rules and awarded a
contract for what it terms "Internet access service" to a service provider in such a way as to
guarantee the most cost-effective service, such actions do not constitute "special circumstances"
sufficient to waive applicable rules.

E.  Other Issues

     46.  Although ISIS 2000's request for review states that it seeks "partial" review of the
Administrator's decision as it relates to the competitive bid requirements, it also states in a
footnote that:

          [i]n addition, currently pending before the Commission is ISIS 2000's Request for
     Expedited Declaratory Ruling, filed April 3, 1998, and subsequent pleadings
     requesting a declaratory ruling from the Commission with respect to the issues
     raised by the Department's competitive bidding process and subsequent application
     for funding.  ISIS 2000 requests that these issues be resolved in conjunction with
     this appeal.

ISIS 2000's initial pleadings, to which this footnote makes reference, raises broader issues than
those for which it ultimately seeks review here.  As such, it is not entirely clear if this limited
reference is intended as a request for broader review.  Regardless of that answer, however, we
believe that, through Tennessee's and ENA's requests for review, we have essentially addressed all
issues raised by ISIS 2000's initial pleadings; namely, whether Tennessee should receive support
for costs related to the ConnecTEN network and ENA's upgraded network.  Therefore, we find
that, because we have addressed these issues herein, ISIS 2000 1998 Objection, and
subsequently-filed related pleadings, is rendered moot.  We note that ISIS 2000 also originally
objected to requests for discounts on technical support for the facilities at issue here.  Although
not specifically raised in its request for review, we note that the Administrator correctly explained
that this technical support will be part of an eligible service to the extent the underlying service is
eligible.  

                         IV.  Conclusion

     47.  We therefore deny ISIS 2000's request for review regarding Tennessee's compliance
with our competitive bidding processes because we conclude that Tennessee indeed complied
with those requirements.  Moreover, we grant in part, and deny in part, ENA's and Tennessee's
requests for review.  Specifically, we find that, because Tennessee owned the ConnecTEN
network, and subsequently sold it to ENA, who then used it to provide Internet access service to
Tennessee, we will not allow discounts with regard to such transaction for the reasons discussed
above.  In addition, we find that, because ENA has shown that it is providing an end-to-end
Internet access service, we will allow discounts on charges for the provision of its Internet access
service, including the cost of facilities used to provide such service, except with regard to charges
related to the ConnecTEN network.

     48. We require the Bureau, through its oversight role, to work with the Administrator and
Tennessee to implement this decision.  We expect that Tennessee will provide, to the extent
necessary, any relevant information to the Administrator regarding charges related to the
ConnecTEN network that will allow those charges to be removed from its discount requests.  We
expect the Bureau to actively monitor these activities to ensure that our decision is implemented
expeditiously, and in no case should implementation, by way of an Administrator's Decision
Letter, be delayed longer than 10 working days from receipt of the information necessary to be
provided by Tennessee to implement our decision.  In addition, we wish to make clear that the
Bureau may waive any rules if, and, to the extent necessary, to effectuate our decision herein.    
                     
                       V.  ORDERING CLAUSES

     49.  Accordingly, IT IS ORDERED that, pursuant to sections 1-4, and 254 of the
Communications Act of 1934, as amended, 47 U.S.C.  151-154 and 254, and sections 1.3, 
54.504, 54.507(f), 54.511, 54.518, and 54.719, 47 C.F.R.  1.3, 54.504, 54.507(f), 54.511,
54.518, and 54.719, the requests for review filed by the Department of Education of the State of
Tennessee and Education Networks of America ARE DENIED IN PART and GRANTED IN
PART as described supra, and the request for review filed by Integrated Systems and Internet
Solutions, Inc, IS DENIED as described supra.

     50.  IT IS FURTHER ORDERED that the Objection to Application/Request for
Expedited Declaratory Ruling filed by Integrated Systems and Internet Solutions, Inc., IS
DISMISSED as moot.

     51.  IT IS FURTHER ORDERED that the Bureau, through its oversight role, work with
the Administrator and Tennessee to implement this decision. 

                              FEDERAL COMMUNICATIONS COMMISSION



                              Magalie Roman Salas
                              Secretary