[Federal Register Volume 62, Number 116 (Tuesday, June 17, 1997)]
[Rules and Regulations]
[Pages 32862-32962]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-15081]
[[Page 32861]]
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Part II
Federal Communications Commission
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47 CFR Parts 36, 54, and 69
Universal Service; Final Rule
Federal Register / Vol. 62, No. 116 / Tuesday, June 17, 1997 / Rules
and Regulations
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 36, 54, and 69
[CC Docket No. 96-45; FCC 97-157]
Universal Service
AGENCY: Federal Communications Commission.
ACTION: Final rule.
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SUMMARY: The Report and Order released May 8, 1997, promulgates rules
implementing the statutory requirements of the Telecommunications Act
of 1996 relating to universal service. The rules adopted in this Order
are intended to promote affordable access to telecommunications and
information services to low-income consumers and consumers residing in
high cost, rural, and insular regions of the nation. The Order
establishes the definition of services to be supported by Federal
universal service support mechanisms, carriers eligible for universal
service support, and the specific timetable for implementation. The
Order modifies existing federal universal service support in the
interstate high cost fund, the dial equipment minutes weighting
program, long term support, and the Lifeline and Link-Up program. In
addition, this Order establishes new universal service support
mechanisms for eligible schools and libraries to purchase
telecommunications services at discounted rates and eligible rural
health care providers to have access to telecommunications services at
rates comparable to those in urban areas.
EFFECTIVE DATES: July 17, 1997, except for Subpart E of Part 54 which
will become effective on January 1, 1998.
FOR FURTHER INFORMATION CONTACT: Timothy Peterson, Legal Counsel,
Common Carrier Bureau, (202) 418-1500, or Sheryl Todd, Common Carrier
Bureau, (202) 418-7400.
SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Report
and Order adopted May 7, 1997, and released May 8, 1997. The full text
of the Report and Order is available for inspection and copying during
normal business hours in the FCC Reference Center (Room 239), 1919 M
St., NW., Washington, DC. Pursuant to the Telecommunications Act of
1996, the Commission released a Notice of Proposed Rulemaking and Order
Establishing Joint Board, Federal-State Joint Board on Universal
Service, CC Docket No. 96-45 on March 8, 1996 (61 FR 10499 (March 14,
1996)), a Recommended Decision on November 8, 1996 (61 FR 63778
(December 2, 1996)), and a Public Notice on November 18, 1996 (61 FR
63778 (December 2, 1996)) seeking comment on rules to implement
sections 254 and 214(e) of the Act relating to universal service. As
required by the Regulatory Flexibility Act (RFA), the Report and Order
contains a Final Regulatory Flexibility Analysis. Pursuant to section
604 of the RFA, the Commission performed a comprehensive analysis of
the Report and Order with regard to small entities and small incumbent
LECs. The Report and Order also contains new information collection
requirements subject to the Paperwork Reduction Act (PRA). The
Commission has published a separate notice in the Federal Register
relating to these information collection requirements (62 FR 28024 (May
22, 1997)).
Summary of the Report and Order:
Principles
1. Pursuant to section 254(b)(7) and consistent with the Joint
Board's recommendation, we establish ``competitive neutrality'' as an
additional principle upon which we base policies for the preservation
and advancement of universal service. Consistent with the Joint Board's
recommendation, we define this principle, in the context of determining
universal service support, as:
Competitive Neutrality--Universal service support mechanisms and
rules should be competitively neutral. In this context, competitive
neutrality means that universal service support mechanisms and rules
neither unfairly advantage nor disadvantage one provider over
another, and neither unfairly favor nor disfavor one technology over
another.
2. We agree with the Joint Board that, as a guiding principle,
competitive neutrality is consistent with several provisions of section
254 including the explicit requirement of equitable and
nondiscriminatory contributions. We also note that section 254(h)(2)
requires the Commission to establish competitively neutral rules
relating to access to advanced telecommunications and information
services for eligible schools, health care providers, and libraries. In
addition, we agree that an explicit recognition of competitive
neutrality in the collection and distribution of funds and
determination of eligibility in universal service support mechanisms is
consistent with congressional intent and necessary to promote ``a pro-
competitive, de-regulatory national policy framework.''
3. We concur in the Joint Board's recommendation that the principle
of competitive neutrality in this context should include technological
neutrality. Technological neutrality will allow the marketplace to
direct the advancement of technology and all citizens to benefit from
such development. By following the principle of technological
neutrality, we will avoid limiting providers of universal service to
modes of delivering that service that are obsolete or not cost
effective. We also agree that the principle of competitive neutrality,
including the concept of technological neutrality, should be considered
in formulating universal service policies relating to each and every
recipient and contributor to the universal service support mechanisms,
regardless of size, status, or geographic location. We agree with the
Joint Board that promoting competition is an underlying goal of the
1996 Act and that the principle of competitive neutrality is consistent
with that goal. Accordingly, we conclude that the principle of
competitive neutrality is ``necessary and appropriate for the
protection of the public interest'' and is ``consistent with this Act''
as required by section 254(b)(7).
4. We agree with the Joint Board's recommendation that our
universal service policies should strike a fair and reasonable balance
among all of the principles identified in section 254(b) and the
additional principle of competitive neutrality to preserve and advance
universal service. Consistent with the recommendations of the Joint
Board, we find that promotion of any one goal or principle should be
tempered by a commitment to ensuring the advancement of each of the
principles enumerated above.
5. We agree with the Joint Board's conclusion that Congress
specifically addressed issues relating to individuals with disabilities
in section 255 and, therefore, do not establish, at this time,
additional principles related to individuals with disabilities for
purposes of section 254. In the Notice of Inquiry adopted pursuant to
section 255 (61 FR 50465 (September 26, 1996)), the Commission sought
comment on the implementation and enforcement of section 255. The
Commission also recently released a Notice of Inquiry seeking comment
on improving telecommunications relay service (TRS) for individuals
with hearing and speech disabilities (CC Docket No. 90-571). Although
we are mindful of the commenters' concerns regarding the affordability
of, and access to, telecommunications services by individuals with
disabilities, we find that those concerns are more appropriately
addressed in the context of the Commission's implementation of
[[Page 32863]]
section 255. Therefore, we do not adopt principles related to
telecommunications users with disabilities in this proceeding.
6. We have considered the requests to promote access to affordable
telecommunications services to other groups and organizations,
including minorities and community-oriented organizations, but we
decline to adopt these proposals as additional principles. We decline
at this time to adopt additional principles the purpose of which would
be to extend universal service support to individuals, groups, or
locations other than those identified in section 254.
Definition of Universal Service: What Services To Support
7. Designated Services
We generally adopt the Joint Board's recommendation and define the
``core'' or ``designated'' services that will be supported by universal
service support mechanisms as: Single-party service; voice grade access
to the public switched network; DTMF signaling or its functional
equivalent; access to emergency services; access to operator services;
access to interexchange service; access to directory assistance; and
toll limitation services for qualifying low-income consumers. In
arriving at this definition, we have adopted the Joint Board's analysis
and recommendation that, for purposes of section 254(c)(1), the
Commission define ``telecommunications services'' in a functional
sense, rather than on the basis of tariffed services. We find that this
definition of core universal services promotes competitive neutrality
because it is technology neutral, and provides more flexibility for
defining universal service than would a services-only approach. We also
find that all four criteria enumerated in section 254(c)(1) must be
considered, but not each necessarily met, before a service may be
included within the general definition of universal service, should it
be in the public interest. We interpret the statutory language,
particularly the word ``consider,'' as providing flexibility for the
Commission to establish a definition of services to be supported, after
it considers the criteria enumerated in section 254(c)(1) (A) through
(D). We conclude that the core services that we have designated to
receive universal service support are consistent with the statutory
criteria in section 254(c)(1).
8. Single-Party Service
We agree with and adopt the Joint Board's conclusion that single-
party service is widely available and that a majority of residential
customers subscribe to it, consistent with section 254(c)(1)(B).
Moreover, we concur with the Joint Board's conclusion that single-party
service is essential to public health and safety in that it allows
residential consumers access to emergency services without delay.
Single-party service also is generally consistent with the public
interest, convenience, and necessity because, by eliminating the
sharing required by multi-party service, single-party service
significantly increases the consumer's ability to place calls
irrespective of the actions of other network users and with greater
privacy than party line service can assure. In addition, single-party
service is being deployed in public telecommunications networks by
telecommunications carriers. We adopt the finding that the term
``single-party service'' means that only one customer will be served by
each subscriber loop or access line. Eligible carriers must offer
single-party service in order to receive support regardless of whether
consumers choose to subscribe to single-or multi-party service. In
addition, to the extent that wireless providers use spectrum shared
among users to provide service, we find that wireless providers offer
the equivalent of single-party service when they offer a dedicated
message path for the length of a user's particular transmission. We
concur with the Joint Board's recommendation not to require wireless
providers to offer a single channel dedicated to a particular user at
all times.
9. Voice Grade Access to the Public Switched Network
We conclude that voice grade access includes the ability to place
calls, and thus incorporates the ability to signal the network that the
caller wishes to place a call. Voice grade access also includes the
ability to receive calls, and thus incorporates the ability to signal
the called party that an incoming call is coming. We agree that these
components are necessary to make voice grade access fully beneficial to
the consumer. We find that, consistent with section 254(c)(1), voice
grade access to the public switched network is an essential element of
telephone service, is subscribed to by a substantial majority of
residential customers, and is being deployed in public
telecommunications networks by telecommunications carriers. In
addition, we find voice grade access to be essential to education,
public health, and public safety because it allows consumers to contact
essential services such as schools, health care providers, and public
safety providers. For this reason, it is also consistent with the
public interest, convenience, and necessity.
10. We also adopt the Joint Board's recommendation that voice grade
access should occur in the frequency range between approximately 500
Hertz and 4,000 Hertz for a bandwidth of approximately 3,500 Hertz.
Although we conclude below that certain higher bandwidth services
should be supported under section 254(c)(3) for eligible schools,
libraries, and rural health care providers, we decline to adopt,
pursuant to section 254(c)(1), a higher bandwidth than that recommended
by the Joint Board. We conclude, except as further designated with
respect to eligible schools, libraries and health care providers, that
voice grade access, and not high speed data transmission, is the
appropriate goal of universal service policies at this time because we
are concerned that supporting an overly expansive definition of core
services could adversely affect all consumers by increasing the expense
of the universal service program and, thus, increasing the basic cost
of telecommunications services for all.
11. Support for Local Usage
We agree with the Joint Board that the Commission should determine
the level of local usage to be supported by federal universal service
mechanisms and that the states are best positioned to determine the
local usage component for purposes of state universal service
mechanisms. Further, we agree that, in order for consumers in rural,
insular, and high cost areas to realize the full benefits of affordable
voice grade access, usage of, and not merely access to, the local
network should be supported.
12. We find, consistent with the Joint Board's conclusion, that we
have the authority to support a certain portion of local usage,
pursuant to the universal service principles adopted above. In
particular, section 254(b)(1) states that ``[q]uality services should
be available at just, reasonable, and affordable rates.'' As a result,
ensuring affordable ``access'' to those services is not sufficient.
Universal service must encompass the ability to use the network,
including the ability to place calls at affordable rates.
13. We are also concerned, however, that consumers might not
receive the benefits of universal service support unless we determine a
minimum amount of local usage that must be included within the
supported services. We intend to consider this issue in our Further
Notice of Proposed Rulemaking (``FNPRM'') on a forward-looking economic
cost methodology, which will
[[Page 32864]]
be issued by June 1997. We are making various changes to the existing
universal service support mechanisms--including making support portable
to competing carriers--that will become effective on January 1, 1998.
The Commission will also separately seek further information regarding,
for example, local usage, and local usage patterns, in order to
determine the appropriate amount of local usage that should be provided
by carriers receiving universal service support. We will, by the end of
1997, quantify the amount of local usage that carriers receiving
universal service support will be required to provide.
14. Defining minimum levels of usage is critical to the
construction of a competitive bidding system for providing universal
service to high cost areas. An auction for only the ``access'' portion
of providing local service would be neither competitively nor
technologically neutral, because competitors and technologies with low
``access'' costs yet high per-minute costs would be unduly favored in
such an auction. This could result in awarding universal service
support to a less efficient technology, which is the precise result
that a competitive bidding system is meant to avoid. In addition, a
carrier with low access costs could then charge high per-minute rates
to consumers, which would increase consumers' overall bills, rather
than reducing them, as is the expected result of competition. Such a
result is not consistent with the principle in section 254(b)(1) that
these ``services'' are to be ``affordable.''
15. DTMF Signaling
The Joint Board recommended including DTMF signaling or its digital
functional equivalent among the supported services, and we adopt this
recommendation. We find that the network benefit that emanates from
DTMF signaling, primarily rapid call set-up, is consistent with the
public interest, convenience, and necessity, pursuant to section
254(c)(1)(D). Although consumers do not elect to subscribe to DTMF
signaling, we find that DTMF signaling provides network benefits, such
as accelerated call set-up, that are essential to a modern
telecommunications network. In addition, we agree with NENA's
characterization of DTMF signaling as a potential life- and property-
saving mechanism because it speeds access to emergency services. Thus,
we find that supporting DTMF signaling is essential to public health
and public safety, consistent with section 254(c)(1)(A), and is being
deployed in public telecommunications networks by telecommunications
carriers, consistent with section 254(c)(1)(C). We also adopt the Joint
Board's conclusion that other methods of signaling, such as digital
signaling, can provide network benefits equivalent to those of DTMF
signaling. In particular, we note that wireless carriers use out-of-
band digital signaling mechanisms for call set-up, rather than DTMF
signaling. Consistent with the principle of competitive neutrality, we
find it is appropriate to support out-of-band digital signaling
mechanisms as an alternative to DTMF signaling. Accordingly, we include
DTMF signaling and equivalent digital signaling mechanisms among the
services supported by federal universal service mechanisms.
16. Access to Emergency Services
In addition, we concur with the Joint Board's conclusion that
access to emergency services, including access to 911 service, be
supported by universal service mechanisms. We agree with the conclusion
that access to emergency service i.e., the ability to reach a public
emergency service provider, is ``widely recognized as essential to * *
* public safety,'' consistent with section 254(c)(1)(A). Due to its
obvious public safety benefits, including access to emergency services
among the core services is also consistent with the public interest,
convenience, and necessity. Further, consistent with the Joint Board's
recommendation and NENA's comments in favor of supporting access to 911
service, we define access to emergency services to include access to
911 service. Noting that nearly 90 percent of lines today have access
to 911 service capability, the Joint Board found that access to 911
service is widely deployed and available to a majority of residential
subscribers. For these reasons, we include telecommunications network
components necessary for access to emergency services, including access
to 911, among the supported services.
17. We also include the telecommunications network components
necessary for access to E911 service among the services designated for
universal service support. Access to E911 is essential to public health
and safety because it facilitates the determination of the approximate
geographic location of the calling party. We recognize, however, that
the Commission does not currently require wireless carriers to provide
access to E911 service. As set forth in the Commission's Wireless E911
Decision (61 FR 40348 (August 2, 1996)), access to E911 includes the
ability to provide Automatic Numbering Information (``ANI''), which
permits that the PSAP have call back capability if the call is
disconnected, and Automatic Location Information (``ALI''), which
permits emergency service providers to identify the geographic location
of the calling party. We recognize that wireless carriers are currently
on a timetable, established in the Wireless E911 Decision, for
implementing both aspects of access to E911. For universal service
purposes, we define access to E911 as the capability of providing both
ANI and ALI. We note, however, that wireless carriers are not required
to provide ALI until October 1, 2001. Nevertheless, we conclude that,
because of the public health and safety benefits provided by access to
E911 services the telecommunications network components necessary for
such access will be supported by federal universal service mechanisms
for those carriers that are providing it. We recognize that wireless
providers will be providing access to E911 in the future to the extent
that the relevant locality has implemented E911 service. In addition,
because the Wireless E911 Decision establishes that wireless carriers
are required to provide access to E911 only if a mechanism for the
recovery of costs relating to the provision of such services is in
place, there is at least the possibility that wireless carriers
receiving universal service support will be compensated twice for
providing access to E911. We intend to explore whether the possibility
is in fact being realized and, if so, what steps we should take to
avoid such over-recovery in a Further Notice of Proposed Rulemaking.
18. We support the telecommunications network components necessary
for access to 911 service and access to E911 service, but not the
underlying services themselves, which combine telecommunications
service and the operation of the PSAP and, in the case of E911 service,
a centralized database containing information identifying approximate
end user locations. The telecommunications network represents only one
component of 911 and E911 services; local governments provide the PSAP
and generally support the operation of the PSAP through local tax
revenues. We conclude that both 911 service and E911 service include
information service components that cannot be supported under section
254(c)(1), which describes universal service as ``an evolving level of
telecommunications services.'' Accordingly, we include only the
telecommunications network components necessary for access to 911
[[Page 32865]]
and E911 services among the services that are supported by federal
universal service mechanisms.
19. Access to Operator Services
In addition, we adopt the Joint Board's recommendation to include
access to operator services in the general definition of universal
service. Access to operator services is widely deployed and used by a
majority of residential customers. For purposes of defining the core
section 254(c)(1) services and consistent with the Joint Board's
recommendation, we base our definition of ``operator services'' on the
definition the Commission used to define the duties imposed upon LECs
by section 251(b)(3), namely, ``any automatic or live assistance to a
consumer to arrange for billing or completion, or both, of a telephone
call.'' Contrary to the suggestion of CWA, there is no evidence on the
record to suggest that automated systems provide inadequate access to
operator services for consumers in emergency situations. We also do not
require initial contact with a live operator for purposes of operator
services because we expect that most consumers will more appropriately
rely upon their local 911 service in an emergency situation. To the
extent that access to operator services enables callers to place
collect, third-party billed, and person-to-person calls, among other
things, we find that such access may be essential to public health and
is consistent with the public interest, convenience, and necessity.
20. Access to Interexchange Service
We adopt the Joint Board's recommendation to include access to
interexchange service among the services supported by federal universal
service mechanisms. We conclude that access to interexchange service
means the use of the loop, as well as that portion of the switch that
is paid for by the end user, or the functional equivalent of these
network elements in the case of a wireless carrier, necessary to access
an interexchange carrier's network. This decision is consistent with
the principle set forth in section 254(b)(3) that ``consumers * * *
should have access to telecommunications and information services
including interexchange services.'' In addition, we agree that the
majority of residential customers currently have access to
interexchange service, thus satisfying a criterion set forth in section
254(c)(1)(B). Access to interexchange service also is widely deployed
in public telecommunications networks by telecommunications carriers.
Further, as observed by the Joint Board and commenters, access to
interexchange service is essential for education, public health, and
public safety, particularly for customers who live in rural areas and
require access to interexchange service to reach medical and emergency
services, schools, and local government offices. For these reasons,
access to interexchange service also meets the public interest,
convenience, and necessity criterion of section 254(c)(1)(D).
21. We emphasize that universal service support will be available
for access to interexchange service, but not for the interexchange or
toll service. We find that the record does not support including toll
service among the services designated for support, although, as
discussed below, we find that the extent to which rural consumers must
place toll calls to reach essential services should be considered when
assessing affordability. Nevertheless, universal service should not be
limited only to ``non-competitive'' services. One of the fundamental
purposes of universal service is to ensure that rates are affordable
regardless of whether rates are set by regulatory action or through the
competitive marketplace. We note that section 254(k), which forbids
telecommunications carriers from using services that are not
competitive to subsidize competitive services, is not inconsistent with
our conclusion that it is permissible to support competitive services.
22. We do not include equal access to interexchange service among
the services supported by universal service mechanisms. Equal access to
interexchange service permits consumers to access the long-distance
carrier to which the consumer is presubscribed by dialing a 1+ number.
As discussed below, including equal access to interexchange service
among the services supported by universal service mechanisms would
require a Commercial Mobile Radio Service (CMRS) provider to provide
equal access in order to receive universal service support. We find
that such an outcome would be contrary to the mandate of section
332(c)(8), which prohibits any requirement that CMRS providers offer
``equal access to common carriers for the provision of toll services.''
Accordingly, we decline to include equal access to interexchange
service among the services supported under section 254(c)(1).
23. We note that the Commission has not required CMRS providers to
provide dialing parity to competing providers under section 251(b)(3)
because the Commission has not yet determined that any CMRS provider is
a LEC. We seek to implement the universal service provisions of section
254 in a manner that is not ``biased toward any particular
technologies,'' consistent with the Joint Board's recommendation. In
light of the provision of section 332(c)(8) stating that non-LEC CMRS
providers are statutorily exempt from providing equal access and
because the Commission has not determined that any CMRS providers
should be considered LECs, we find that supporting equal access would
undercut local competition and reduce consumer choice and, thus, would
undermine one of Congress' overriding goals in adopting the 1996 Act.
Accordingly, we do not include equal access to interexchange carriers
in the definition of universal service at this time.
24. Access to Directory Assistance and White Pages Directories
We also adopt the Joint Board's recommendation to include access to
directory assistance, specifically, the ability to place a call to
directory assistance, among the core services pursuant to section
254(c)(1). Access to directory assistance enables customers to obtain
essential information, such as the telephone numbers of government,
business, and residential subscribers. We agree that directory
assistance is used by a substantial majority of residential customers,
is widely available, is essential for education, public health, and
safety, and is consistent with the public interest, convenience, and
necessity. Accordingly, we conclude that providing universal service
support for access to directory assistance is consistent with the
statutory criteria of section 254(c)(1).
25. We further agree with the Joint Board's recommendation not to
support white pages directories and listings. We concur with the Joint
Board's determination that white pages listings are not
``telecommunications services'' as that term is defined in the Act. As
the Joint Board recognized, unlike white pages directories and
listings, access to directory assistance is a functionality of the loop
and, therefore, is a service in the functional sense.
26. Toll Limitation Services
Additionally, we include the toll limitation services for
qualifying low-income consumers among those that will be supported
pursuant to section 254(c). We find that including these services
within the supported services is essential to the public health and
safety because, as discussed below, toll limitation services will help
prevent subscribership levels for low-income
[[Page 32866]]
consumers from declining. Thus, we find that toll limitation services
will promote access to the public switched network for low-income
consumers and, therefore, are in the public interest, consistent with
the criteria of section 254(c)(1).
27. Access to Internet Services
We agree with the Joint Board's determination that Internet access
consists of more than one component. Specifically, we recognize that
Internet access includes a network transmission component, which is the
connection over a LEC network from a subscriber to an Internet Service
Provider, in addition to the underlying information service. We also
concur with the Joint Board's observation that voice grade access to
the public switched network usually enables customers to secure access
to an Internet Service Provider, and, thus, to the Internet. We
conclude that the information service component of Internet access
cannot be supported under section 254(c)(1), which describes universal
service as ``an evolving level of telecommunications services.''
Furthermore, to the extent customers find that voice grade access to
the public switched network is inadequate to provide a sufficient
telecommunications link to an Internet service provider, we conclude
that such higher quality access links should not yet be included among
the services designated for support pursuant to section 254(c)(1). We
find that a network transmission component of Internet access beyond
voice grade access should not be supported separately from voice grade
access to the public switched network because the record does not
indicate that a substantial majority of residential customers currently
subscribe to Internet access by using access links that provide higher
quality than voice grade access. In addition, although access to
Internet services offers benefits that contribute to education and
public health, we conclude that it is not ``essential to education,
public health, or public safety'' as set forth in section 254(c)(1)(A).
Under the more expansive authority granted in section 254(h), however,
we agree that supporting Internet access under that section is
consistent with Congress' intent to support Internet access for
eligible schools, libraries, and rural health care providers.
28. Other Services
We conclude that, at this time, no other services that commenters
have proposed to include in the general definition of universal service
substantially meet the criteria set forth in section 254(c)(1). We
emphasize that this section also defines universal service as
``evolving'' and, therefore, as described below, the Commission will
review the services supported by universal service mechanisms no later
than January 1, 2001. In addition, as discussed below, we find that the
issues relating to the telecommunications needs of individuals with
disabilities, including accessibility and affordability of services,
will be addressed in the context of the Commission's implementation of
section 255.
29. We are mindful of the concern expressed by commenters that an
overly broad definition of universal service might have the unintended
effect of creating a barrier to entry for some carriers because
carriers must provide each of the core services in order to be eligible
for universal service support. We concur with the Joint Board's
conclusion that conditioning a carrier's eligibility for support upon
its provision of the core services will not impose an anti-competitive
barrier to entry. We note that other services proposed by commenters,
at a later time, may become more widely deployed than they are at
present, or otherwise satisfy the statutory criteria by which we and
the Joint Board are guided.
30. Feasibility of Providing Designated Service
We conclude that eligible carriers must provide each of the
designated services in order to receive universal service support. In
three limited instances, however, we conclude that the public interest
requires that we allow a reasonable period during which otherwise
eligible carriers may complete network upgrades required for them to
begin offering certain services that they are currently incapable of
providing. Given the Joint Board's finding that not all incumbent
carriers are currently able to offer single-party service, we find that
excluding such carriers from eligibility for universal service support
might leave some service areas without an eligible carrier, especially
in areas where there currently is no evidence of competitive entry.
Therefore, as to single-party service, we will permit state
commissions, upon a finding of ``exceptional circumstances,'' to grant
an otherwise eligible carrier's request that, for a designated period,
the carrier will receive universal service support while it completes
the specified network upgrades necessary to provide single-party
service. This is consistent with the Joint Board's recommendation that
state commissions be permitted to grant requests by otherwise eligible
carriers for a period to make necessary upgrades if they currently are
unable to provide single-party service.
31. We conclude, consistent with the Joint Board's finding that
some carriers are not currently capable of providing access to E911
service, that it may be warranted to provide universal service support
to carriers that are not required under Commission rules to provide
E911 service and to carriers that are completing the network upgrades
required for them to provide access to E911 service. Access to E911
will be supported only to the extent that the relevant locality has
implemented E911 service. If the relevant locality has not implemented
E911 service, otherwise eligible carriers that are covered by the
Commission's Wireless E911 Decision are not required to provide such
access at this time to qualify for universal service support. Even in
cases in which the locality has implemented E911 service, some wireless
carriers are not currently capable of providing access to E911 service.
Although we have directed cellular, broadband PCS, and certain SMR
carriers to provide access to E911 service, we set a five-year period
during which these carriers must make the technical upgrades necessary
to offer access to E911 service. Consequently, requiring carriers to
provide access to E911 service at this time may prevent many wireless
carriers from receiving universal service support during the period
that we have already determined to be appropriate for wireless carriers
to complete preparations for their offering E911 service. We find that
this would be contrary to the principle that universal service policies
and rules be competitively neutral. In light of these considerations,
we will make some accommodation during the period in which these
carriers are upgrading their systems.
32. The Joint Board envisioned granting a period to make upgrades
while still receiving support only if a carrier could meet a ``heavy
burden that such a * * * period is necessary and in the public
interest'' and if ``exceptional circumstances'' warranted the granting
of support during that period. We find that the Joint Board's
recommendation provides a reasoned and reasonable approach to ensuring
access to single-party service while, at the same time, recognizing
that ``exceptional circumstances'' may prevent certain carriers serving
rural areas from offering single-party service. We conclude that this
approach also makes sense in the context of toll limitation service and
access to E911 when a locality has implemented E911 service.
Accordingly,
[[Page 32867]]
we conclude that a carrier that is otherwise eligible to receive
universal service support but is currently incapable of providing
single-party service, toll limitation service, or access to E911 in the
case where the locality has implemented E911 service may, if it
provides each of the other designated services, petition its state
commission for permission to receive universal service support for the
designated period during which it is completing the network upgrades
required so that it can offer these services. A carrier that is
incapable of offering one or more of these three specific universal
services must demonstrate to the state commission that ``exceptional
circumstances'' exist with respect to each service for which the
carrier desires a grant of additional time to make network upgrades.
33. We emphasize that this relief should be granted only upon a
finding that ``exceptional circumstances'' prevent an otherwise
eligible carrier from providing single-party service, toll limitation,
or access to E911 when the locality has implemented E911 service. A
carrier can show that exceptional circumstances exist if individualized
hardship or inequity warrants a grant of additional time to comply with
the general requirement that eligible carriers must provide single-
party service, toll limitation service, and access to E911 when the
locality has implemented E911 service and that a grant of additional
time to comply with these requirements would better serve the public
interest than strict adherence to the general requirement that an
eligible telecommunications carrier must be able to provide these
services to receive universal service support. The period during which
a carrier could receive support while still completing essential
upgrades should extend only as long as the relevant state commission
finds that ``exceptional circumstances'' exist and should not extend
beyond the time that the state commission deems necessary to complete
network upgrades. We conclude that this is consistent with the intent
of section 214(e) because it will ensure that ultimately all eligible
telecommunications carriers offer all of the services designated for
universal service support.
34. We recognize that some state commissions already may have
mandated single-party service for telecommunications service providers
serving their jurisdictions. If a state commission has adopted a
timetable by which carriers must offer single-party service, a carrier
may rely upon that previously established timetable and need not
request another transition period for federal universal service
purposes. Specifically, where a state has ordered a carrier to provide
single-party service within a specified period pursuant to a state
order that precedes the release date of this Order, the carrier may
rely upon the timetable established in that order and receive universal
service support for the duration of that period.
35. Extent of Universal Service
The Joint Board recommended that support for designated services be
limited to those carried on a single connection to a subscriber's
primary residence and to businesses with only a single connection. In
light of our determination, however, to adopt a modified version of the
existing universal service support system for high cost areas, we
conclude, consistent with the proposal of the state Joint Board
members, that all residential and business connections in high cost
areas that currently receive high cost support should continue to be
supported for the periods set forth below. For rural telephone
companies this means that both multiple business connections and
multiple residential connections will continue to receive universal
service support at least until January 1, 2001. We intend, however, to
continue to evaluate the Joint Board's recommendation to limit support
for primary residential connections and businesses with a single
connection as we further develop a means of precisely calculating the
forward-looking economic cost of providing universal service in areas
currently served by non-rural telephone companies. As we determine how
to calculate forward-looking economic cost, or as states do so in
state-conducted cost studies, we necessarily will examine the forward-
looking economic cost of supporting additional residential connections
or multiple connection businesses. Depending on how we determine the
forward-looking economic cost of the primary residential connection,
for example, there may be little incremental cost to additional
residential connections. In that case, for instance, there would be no
need to support additional residential connections. We will consider
the forward-looking cost of supporting designated services provided to
multiple-connection businesses as well. We recognize the arguments
raised by the several parties that commented on this aspect of the
Joint Board's recommendation, but we do not address the merits of these
arguments at this time. We intend to examine the record on this issue
in our FNRPM on a forward-looking economic cost methodology.
36. Quality of Service
We concur with the Joint Board's recommendation against the
establishment of federal technical standards as a condition to
receiving universal service support. Further, we agree with the Joint
Board that the Commission should not adopt service quality standards
``beyond the basic capabilities that carriers receiving universal
service support must provide.'' Section 254(b)(1) establishes
availability of quality services as one of the guiding principles of
universal service, but, contrary to CWA's characterization of this
section as a statutory requirement, section 254(b)(1) does not mandate
specific measures designed to ensure service quality. Rather, section
254(b) sets forth the statutory principles that the Joint Board
considered when making its recommendations and, similarly, must guide
the Commission as it implements section 254.
37. Based on the Joint Board's recommendation that the Commission
not establish federal technical standards as a condition to receiving
universal service support, we conclude that the Commission should rely
upon existing data, rather than specific standards, to monitor service
quality at this time. Several states currently have service quality
reporting requirements in place for carriers serving their
jurisdictions. We find, consistent with the Joint Board's
recommendation, that imposing additional requirements at the federal
level would largely duplicate states' efforts. In addition, imposing
federal service quality reporting requirements could be overly
burdensome for carriers, particularly small telecommunications
providers that may lack the resources and staff needed to prepare and
submit the necessary data. For this reason, we also decline to expand,
solely for universal service purposes, the category of
telecommunications providers required to file ARMIS service quality and
infrastructure reporting data. Currently, ARMIS filing requirements
apply to carriers subject to price cap regulation that collectively
serve 95 percent of access lines. We will not extend ARMIS reporting
requirements to all carriers because we find that additional reporting
requirements would impose the greatest burdens on small
telecommunications companies.
38. We will rely upon service quality data provided by the states
in combination with those data that the Commission already gathers from
price cap carriers through existing data
[[Page 32868]]
collection mechanisms in order to monitor service quality trends. We
concur with the Joint Board's recommendation that state commissions
share with the Commission, to the extent carriers provide such data,
information regarding, for example, the number and type of service
quality complaints filed with state agencies. We encourage state
commissions to submit to the Commission the service quality data they
receive from their telecommunications carriers.
39. We conclude that states may adopt and enforce service quality
rules that are competitively neutral, pursuant to section 253(b), and
that are not otherwise inconsistent with rules adopted herein. We
concur with commenters that favor state implementation of carrier
performance standards. Relying on data compiled by the National
Association of Regulatory Utilities Commissioners, we note that 40
states and the District of Columbia have service quality standards in
place for telecommunications companies. Because most states have
established mechanisms designed to ensure service quality in their
jurisdictions, we find that additional efforts undertaken at the
federal level would be largely redundant. We conclude that state-
imposed measures to monitor and enforce service quality standards will
help ``ensure the continued quality of telecommunications services, and
safeguard the rights of consumers,'' consistent with section 253(b). In
light of the existing state mechanisms designed to promote service
quality, we conclude that state commissions are the appropriate fora
for resolving consumers' specific grievances regarding service quality.
40. We agree with the Joint Board's conclusion that, to the extent
the Joint Board recommended, and we adopt, specific definitions of the
services designated for support, these basic capabilities establish
minimum levels of service that carriers must provide in order to
receive support. For example, we conclude above that voice grade access
to the public switched network should occur in the frequency range
between approximately 500 Hertz and 4,000 Hertz for a bandwidth of
approximately 3,500 Hertz. Although not a service quality standard per
se, this requirement will ensure that all consumers served by eligible
carriers receive some minimum standard of service.
41. Reviewing the Definition of Universal Service
The Commission shall convene a Joint Board no later than January 1,
2001, to revisit the definition of universal service, as section
254(c)(2) anticipates. In addition to relying upon existing data
collection mechanisms, such as ARMIS reports, the Commission will
conduct any surveys or statistical analysis that may be necessary to
make the evaluations required by section 254(c)(1) to change the
definition of universal service.
Affordability
42. We agree with and adopt the Joint Board's finding that the
definition of affordability contains both an absolute component (``to
have enough or the means for''), which takes into account an
individual's means to subscribe to universal service, and a relative
component (``to bear the cost of without serious detriment''), which
takes into account whether consumers are spending a disproportionate
amount of their income on telephone service. We adopt the
recommendation that a determination of affordability take into
consideration both rate levels and non-rate factors, such as consumer
income levels, that can be used to assess the financial burden
subscribing to universal service places on consumers.
43. Subscribership Levels
We also concur in the Joint Board's finding that subscribership
levels provide relevant information regarding whether consumers have
the means to subscribe to universal service and, thus, represent an
important tool in evaluating the affordability of rates. Based on
recent nationwide subscribership data, the Joint Board judged that
existing local rates are generally affordable. We find that recent
subscribership data, indicating that 94.2 percent of all American
households subscribed to telephone service in 1996, and the record in
this proceeding are consistent with the Joint Board's determination. We
recognize that affordable rates are essential to inducing consumers to
subscribe to telephone service, and also that increasing the number of
people connected to the network increases the value of the
telecommunications network. Further, we note that insular areas
generally have subscribership levels that are lower than the national
average, largely as a result of income disparity, compounded by the
unique challenges these areas face by virtue of their locations.
44. We also agree with the Joint Board that subscribership levels
are not dispositive of the issue of whether rates are affordable. As
the Joint Board concluded, subscribership levels do not address the
second component of affordability, namely, whether paying the rates
charged for services imposes a hardship for those who subscribe.
Accordingly, we conclude that the Commission and states should use
subscribership levels, in conjunction with rate levels and certain
other non-rate factors, to identify those areas in which the services
designated for support may not be affordable.
45. Non-Rate Factors
The record demonstrates that various other non-rate factors affect
a consumer's ability to afford telephone service. We agree that the
size of a customer's local calling area is one factor to consider when
assessing affordability. Specifically, we concur with the Joint Board's
finding that the scope of the local calling area ``directly and
significantly impacts affordability,'' and, thus, should be a factor to
be weighed when determining the affordability of rates. We further
agree with the Joint Board that an examination that would focus solely
on the number of subscribers to which one has access for local service
in a local calling area would be insufficient. Instead, a determination
that the calling area reflects the pertinent ``community of interest,''
allowing subscribers to call hospitals, schools, and other essential
services without incurring a toll charge, is appropriate. In reaching
this conclusion, we agree with commenters that affordability is
affected by the amount of toll charges a consumer incurs to contact
essential service providers such as hospitals, schools, and government
offices that are located outside of the consumer's local calling area.
Toll charges can greatly increase a consumer's expenditure on
telecommunications services, mitigating the benefits of universal
service support. In addition, rural consumers who must place toll calls
to contact essential services that urban consumers may reach by placing
a local call cannot be said to pay ``reasonably comparable'' rates for
local telephone service when the base rates of the service are the same
in both areas. Thus, we find that a determination of rate affordability
should consider the range of a subscriber's local calling area,
particularly whether the subscriber must incur toll charges to contact
essential public service providers.
46. In addition, we agree with the Joint Board that consumer income
levels should be among the factors considered when assessing rate
affordability. We concur with the Joint Board's finding that a nexus
exists between income level and the ability to afford universal
service. A rate that is affordable to
[[Page 32869]]
affluent customers may not be affordable to lower-income customers. In
light of the significant disparity in income levels throughout the
country, per-capita income of a local or regional area, and not a
national median, should be considered in determining affordability. As
the Joint Board concluded, determining affordability based on a
percentage of the national median income would be inequitable because
of the significant disparities in income levels across the country.
Specifically, we agree that such a standard would tend to overestimate
the price at which services are affordable when applied to a service
area where income level is significantly below the national median.
Accordingly, we decline to adopt proposals to establish nationwide
standards for measuring the impact of customer income levels on
affordability.
47. We also agree with the Joint Board that cost of living and
population density affect rate affordability. Like income levels, cost
of living affects how much a consumer can afford to pay for universal
services. The size of a consumer's calling area, which tends to be
smaller in areas with low population density, affects affordability. In
addition, given that cost of living and population density, like income
levels, are factors that vary across local or regional areas, we find
that these factors should be considered by region or locality.
48. Finally, we agree with and adopt the Joint Board's finding that
legitimate local variations in rate design may affect affordability.
Such variations include the proportion of fixed costs allocated between
local services and intrastate toll services; proportions of local
service revenue derived from per-minute charges and monthly recurring
charges; and the imposition of mileage charges to recover additional
revenues from customers located a significant distance from the wire
center. We find that states, by virtue of their local rate-setting
authority, are best qualified to assess these factors in the context of
considering rate affordability.
49. Determining Rate Affordability
We agree with the Joint Board that states should exercise initial
responsibility, consistent with the standards set forth above, for
determining the affordability of rates. We further concur with the
Joint Board's conclusion that state commissions, by virtue of their
rate-setting roles, are the appropriate fora for consumers wishing to
challenge the affordability of intrastate rates for both local and toll
services. The unique characteristics of each jurisdiction render the
states better suited than the Commission to make determinations
regarding rate affordability. Each of the factors proposed by parties
and endorsed by the Joint Board with the exception of subscribership
levels--namely, local calling area size, income levels, cost of living,
and population density--represents data that state regulators, as
opposed to the Commission, are best situated to obtain and analyze.
50. As the Joint Board recommended, the Commission will work in
concert with states and U.S. territories and possessions informally to
address instances of low or declining subscribership levels. Such
informal cooperation may consist of sharing data or conducting joint
inquiries in an attempt to determine the cause of low or declining
subscribership rates in a given state, or providing other assistance
requested by a state. We will defer to the states for guidance on how
best to implement federal-state collaborative efforts to ensure
affordability. We find that this dual approach in which both the states
and the Commission play significant roles in ensuring affordability is
consistent with the statutory mandate embodied in section 254(i).
51. In addition, where ``necessary and appropriate,'' the
Commission, working with the affected state or U.S. territory or
possession, will open an inquiry to take such action as is necessary to
fulfill the requirements of section 254. We conclude that such action
is warranted with respect to insular areas. The record indicates that
subscribership levels in insular areas are particularly low.
Accordingly, we will issue a Public Notice to solicit further comment
on the factors that contribute to the low subscribership levels that
currently exist in insular areas, and to examine ways to improve
subscribership in these areas.
52. Some commenters have suggested that the Commission provide
universal service support for rates that are found to be unaffordable
or where subscribership levels decline from current levels. We agree
that, if subscribership levels begin to drop significantly from current
levels, we may need to take further action. Among the benefits
subscribership brings to individuals is access to essential services,
such as emergency service providers, and access to entities such as
schools, health care facilities and local governments. In addition,
subscribers enjoy the increased value of the telephone network, i.e.,
the large numbers of people who can be reached via the network, that
results from high subscribership levels. We agree with Puerto Rico Tel.
Co. that, because the Puerto Rico subscribership level remains
significantly below the national average, it is not appropriate to
delay action until a subscribership level that is already low declines
further. As discussed above, we find that further action is warranted
with respect to insular areas.
53. In addition, we will continue actively to monitor
subscribership across a wide variety of income levels and demographic
groups and encourage states to do likewise. The Commission currently
uses Census Bureau data to publish reports that illustrate
subscribership trends among households, including subscribership by
state, as well as nationwide subscribership rates by categories
including income level, race, and age of household members, and
household size. We find that any response to a decline in
subscribership revealed by our analysis of the relevant data should be
tailored to those who need assistance to stay connected to the network.
54. We concur with the Joint Board's recommendation to implement a
national benchmark to calculate the amount of support eligible
telecommunications carriers will receive for serving rural, insular,
and high cost areas. The Joint Board declined to establish a benchmark
based on income or subscribership and specifically did not equate the
benchmark support levels with affordability. We agree. Setting the
rural, insular and high cost support benchmark based on income and
subscribership would fail to target universal service assistance and
could therefore needlessly increase the amount of universal service
support. Recent data show that telephone subscribership was 96.2
percent in 1996 for households with annual incomes of at least $15,175
and 85.4 percent for households with annual incomes below $15,175. The
Joint Board concluded that, because telephone penetration declines
significantly for low-income households, the impact of household income
is more appropriately addressed through programs designed to help low-
income households obtain and retain telephone service, rather than as
part of the high cost support mechanism. Accordingly, we adopt the
Joint Board's recommendation to channel support designed to assist low-
income consumers through the Lifeline and Link Up programs, rather than
through the high cost support methodology.
[[Page 32870]]
Carriers Eligible for Universal Service Support
55. Adoption of Section 214(e)(1) Criteria
Consistent with the Joint Board's recommendation, we adopt the
statutory criteria contained in section 214(e)(1) as the rules for
determining whether a telecommunications carrier is eligible to receive
universal service support. Pursuant to those criteria, only a common
carrier may be designated as an eligible telecommunications carrier,
and therefore may receive universal service support. In addition, each
eligible carrier must, throughout its service area: (1) Offer the
services that are supported by federal universal service support
mechanisms under section 254(c); (2) offer such services using its own
facilities or a combination of its own facilities and resale of another
carrier's services, including the services offered by another eligible
telecommunications carrier; and (3) advertise the availability of and
charges for such services using media of general distribution.
56. Statutory Construction of Section 214(e)
We conclude that section 214(e)(2) does not permit the Commission
or the states to adopt additional criteria for designation as an
eligible telecommunications carrier. As noted by the Joint Board,
``section 214 contemplates that any telecommunications carrier that
meets the eligibility criteria of section 214(e)(1) shall be eligible
to receive universal service support.'' Section 214(e)(2) states that
``[a] state commission shall * * * designate a common carrier that
meets the requirements of paragraph (1) as an eligible
telecommunications carrier * * *.'' Section 214(e)(2) further states
that ``* * * the State commission may, in the case of an area served by
a rural telephone company, and shall, in the case of all other areas,
designate more than one common carrier as an eligible
telecommunications carrier for a service area designated by the State
commission, so long as each additional requesting carrier meets the
requirements of paragraph (1).'' Read together, we find that these
provisions dictate that a state commission must designate a common
carrier as an eligible carrier if it determines that the carrier has
met the requirements of section 214(e)(1). Consistent with the Joint
Board's finding, the discretion afforded a state commission under
section 214(e)(2) is the discretion to decline to designate more than
one eligible carrier in an area that is served by a rural telephone
company; in that context, the state commission must determine whether
the designation of an additional eligible carrier is in the public
interest. The statute does not permit this Commission or a state
commission to supplement the section 214(e)(1) criteria that govern a
carrier's eligibility to receive federal universal service support.
57. In addition, state discretion is further limited by section
253: A state's refusal to designate an additional eligible carrier on
grounds other than the criteria in section 214(e) could ``prohibit or
have the effect of prohibiting the ability of any entity to provide any
interstate or intrastate telecommunications service'' and may not be
``necessary to preserve universal service.'' Accordingly, we conclude
that the section 253 precludes states from imposing additional
prerequisites for designation as an eligible telecommunications
carrier. Although section 214(e) precludes states from imposing
additional eligibility criteria, it does not preclude states from
imposing requirements on carriers within their jurisdictions, if these
requirements are unrelated to a carrier's eligibility to receive
federal universal service support and are otherwise consistent with
federal statutory requirements. Further, section 214(e) does not
prohibit a state from establishing criteria for designation of eligible
carriers in connection with the operation of that state's universal
service mechanism, consistent with section 254(f).
58. Consistent with the findings we make above, we disagree with
GTE's assertion that the use of the phrases ``a carrier that receives
such support'' and ``any such support * * *'' instead of the phrase
``such eligible carrier'' in section 254(e) indicates that Congress
intended to require carriers to meet criteria in addition to the
eligibility criteria in section 214(e). We conclude that the quoted
language indicates only that a carrier is not entitled automatically to
receive universal service support once designated as an eligible
telecommunications carrier.
59. The terms of section 214(e) do not allow us to alter an
eligible carrier's duty to serve an entire service area. Consequently,
we cannot modify the requirements of section 214(e) for carriers whose
technology limits their ability to provide service throughout a state-
defined service area. We note, however, that any carrier may, for
example, use resale to supplement its facilities-based offerings in any
given service area.
60. Additional Obligations as a Condition of Eligibility
We reject proposals to impose additional obligations as a condition
of being designated an eligible telecommunications carrier pursuant to
section 214(e) because section 214(e) does not grant the Commission
authority to impose additional eligibility criteria.
61. We emphasize that, even if we had the legal authority to impose
additional obligations as a condition of being designated an eligible
telecommunications carrier, we agree with the Joint Board that these
additional criteria are unnecessary to protect against unreasonable
practices by other carriers. As the Joint Board explained, section
214(e) prevents eligible carriers from attracting only the most
desirable customers by limiting eligibility to common carriers and by
requiring eligible carriers to offer the supported services and
advertise the availability of these services ``throughout the service
area.''
62. We further conclude that adopting the eligibility criteria
imposed by the statute without elaboration is consistent with the Joint
Board's recommended principle of competitive neutrality because, once
the forward-looking and more precisely targeted high cost methodology
is in place, all carriers will receive comparable support for
performing comparable functions. Several ILECs assert that the Joint
Board's recommendation not to impose additional criteria is in conflict
with its recommended principle of competitive neutrality because some
carriers, such as those subject to COLR obligations or service quality
regulation, perform more burdensome and costly functions than other
carriers that are eligible for the same amount of compensation. The
statute itself, however, imposes obligations on ILECs that are greater
than those imposed on other carriers, yet section 254 does not limit
eligible telecommunications carrier designation only to those carriers
that assume the responsibilities of ILECs. We find that the imposition
of additional criteria, to the extent that they would preclude some
carriers from being designated eligible pursuant to section 214(e),
would violate the principle of competitive neutrality.
63. Treatment of Particular Classes of Carriers
We agree with the Joint Board's recommendation that any
telecommunications carrier using any technology, including wireless
technology, is eligible to receive
[[Page 32871]]
universal service support if it meets the criteria under section
214(e)(1). We agree that any wholesale exclusion of a class of carriers
by the Commission would be inconsistent with the language of the
statute and the pro-competitive goals of the 1996 Act. The treatment
granted to certain wireless carriers under section 332(c)(3)(A) does
not allow states to deny wireless carriers eligible status. We also
agree that non-ILECs and carriers subject to price cap regulation
should be eligible for support. We agree with the Joint Board that
price cap regulation is an important tool for smoothing the transition
to competition and that its use should not foreclose price cap
companies from receiving universal service support. We find that
requiring price cap carriers to cover their costs of providing
universal service through internal cross-subsidies would violate the
statutory directive that support for universal service be ``explicit.''
Consequently, in our decision here and in the Access Charge Reform
Order, we adopt a plan to eliminate implicit subsidies as we identify
and make explicit universal service support. Because we have determined
that we will not exclude price cap companies from eligibility, we agree
with the Joint Board that we need not delineate the difference between
price cap carriers and other carriers, as proposed in the Further
Comment Public Notice.
64. We note that not all carriers are subject to the jurisdiction
of a state commission. Nothing in section 214(e)(1), however, requires
that a carrier be subject to the jurisdiction of a state commission in
order to be designated an eligible telecommunications carrier. Thus
tribal telephone companies, CMRS providers, and other carriers not
subject to the full panoply of state regulation may still be designated
as eligible telecommunications carriers.
65. Advertising
We agree with the Joint Board's analysis and recommendation that we
not adopt, at this time, nationwide standards to interpret the
requirement of section 214(e)(1)(B) that eligible carriers advertise,
throughout their service areas, the availability of, and charges for,
the supported services using media of general distribution. We agree
that, in the first instance, states should establish any guidelines
needed to govern such advertising. We agree that the states, as a
corollary to their obligation to designate eligible telecommunications
carriers, are in a better position to monitor the effectiveness of
carriers' advertising throughout their service areas. We also agree
with the Joint Board that competition will help ensure that carriers
inform potential customers of the services they offer. Although we
decline to adopt nationwide standards for interpreting section
214(e)(1)(B), we encourage states, as they determine whether to
establish guidelines pursuant to that section, to consider the
suggestion that the section 214(e)(1)(B) requirement that carriers
advertise in ``media of general distribution'' is not satisfied by
placing advertisements in business publications alone, but instead
compels carriers to advertise in publications targeted to the general
residential market. We conclude that no further regulations are
necessary to define the term ``throughout.'' The dictionary definition
--``in or through all parts; everywhere''--requires no further
clarification.
66. Relinquishment of Eligible Carrier Designation
We conclude that no additional measures are needed to implement
section 214(e)(4), the provision that reserves to the states the
authority to act upon an eligible carriers's request to relinquish its
designation as an eligible carrier.
67. Facilities Requirement
Section 214(e)(1) requires that, in order to be eligible for
universal service support, a common carrier must offer the services
supported by federal universal service support mechanisms throughout a
service area ``either using its own facilities or a combination of its
own facilities and resale of another carrier's services (including the
services offered by another eligible telecommunications carrier).'' In
interpreting the facilities requirement, we first address the meaning
of the term ``facilities'' and then address the meaning of the phrase
``own facilities.''
68. Defining the Term ``Facilities'' in Section 214(e)(1)
We interpret the term ``facilities,'' for purposes of section
214(e), to mean any physical components of the telecommunications
network that are used in the transmission or routing of the services
designated for support under section 254(c)(1). We conclude that this
interpretation strikes a reasonable balance between adopting a more
expansive definition of ``facilities,'' which would undermine the Joint
Board's recommendation to exclude resellers from eligible status, and
adopting a more restrictive definition of ``facilities,'' which we fear
would thwart competitive entry into high cost areas.
69. We adopt this definition of ``facilities,'' in part, to remain
consistent with the Joint Board's recommendation that ``a carrier that
offers universal service solely through reselling another carrier's
universal service package'' should not be eligible to receive universal
service support. By encompassing only physical components of the
telecommunications network that are used to transmit or route the
supported services, this definition, in effect, excludes from
eligibility a ``pure'' reseller that claims to satisfy the facilities
requirement by providing its own billing office or some other facility
that is not a ``physical component'' of the network, as defined in this
Order. We find that our determination to define ``facilities'' in this
manner is consistent with congressional intent to require that at least
some portion of the supported services offered by an eligible carrier
be services that are not offered through ``resale of another carrier's
services.''
70. Whether the Use of Unbundled Network Elements Qualifies as a
Carrier's ``Own Facilities''
We conclude that a carrier that offers any of the services
designated for universal service support, either in whole or in part,
over facilities that are obtained as unbundled network elements
pursuant to section 251(c)(3) and that meet the definition of
facilities set forth above, satisfies the facilities requirement of
section 214(e)(1)(A).
71. In making this decision, we first look to the language of
section 214(e)(1)(A), which references two classes of carriers that are
eligible for support--carriers using their ``own facilities'' and
carriers using ``a combination of (their) own facilities and resale of
another carrier's services.'' Neither the statute nor the legislative
history defines the term ``own'' as that term appears within the phrase
``own facilities'' in section 214(e)(1)(A). In addition, neither
category in section 214(e)(1)(A) explicitly refers to unbundled network
elements. Notwithstanding the lack of an express reference to unbundled
network elements in section 214(e), however, we conclude that it is
unlikely that Congress intended to deny designation as eligible to a
carrier that relies, even in part, on unbundled network elements to
provide service, given the central role of unbundled network elements
as a means of entry into local markets. Because the statute is
ambiguous with respect to whether a carrier providing service through
the use of unbundled network elements is providing service through its
``own facilities'' or through
[[Page 32872]]
the ``resale of another carrier's services,'' we look to other sections
of the Act and to legislative intent to resolve the ambiguity.
72. In so doing, we conclude that Congress did not intend to deny
designation as eligible to a carrier that relies exclusively on
unbundled network elements to provide service in a high cost area,
given that the Act contemplates the use of unbundled network elements
as one of the three primary paths of entry into local markets. We have
consistently held that Congress did not intend to prefer one form of
local entry over another. As we recognized in the Local Competition
Order (61 FR 45476 (August 29, 1996)), ``[t]he Act contemplates three
paths of entry into the local market--the construction of new networks,
the use of unbundled elements of the incumbent's network, and resale.
The 1996 Act requires us to implement rules that eliminate statutory
and regulatory barriers and remove economic impediments to each.'' In
the Recommended Decision, the Joint Board explicitly stated that
``[c]ompetitive neutrality'' is ``embodied in'' section 214(e). Indeed,
the Joint Board recommended ``that the Commission reject arguments that
only those telecommunications carriers that offer universal service
wholly over their own facilities should be eligible for universal
service [support].''
73. We conclude that the phrase ``resale of another carrier's
services'' does not encompass the provision of service through
unbundled network elements. The term ``resale'' used in section 251
refers to an ILEC's duty to offer, at wholesale rates, ``any
telecommunications service that the carrier provides at retail'' as
well as the duty of every LEC not to prohibit ``the resale of its
telecommunications services.'' Section 251 makes it clear that an
ILEC's duty to offer retail services at wholesale rates is distinct
from an ILEC's obligation to provide ``nondiscriminatory access to
network elements on an unbundled basis.'' We find that the statute's
use, in section 214(e)(1), of the term used in sections 251(b)(1) and
251(c)(4)--``resale''--suggests that Congress contemplated that the
provision of services via unbundled network elements was different from
the ``resale of another carrier's services.'' In addition, to interpret
the phrase ``resale of another carrier's services'' to encompass the
provision of a telecommunications service through use of unbundled
network elements obtained from an ILEC would require the Commission to
find that the provision of nondiscriminatory access to an unbundled
network element by an ILEC is the provision of a ``telecommunications
service''--an interpretation that is not consistent with the Act. A
``network element'' is defined as a ``facility or equipment used in the
provision of a telecommunications service'' that also ``includes
features, functions, and capabilities that are provided by means of
such facility or equipment * * *.'' A ``network element'' is not a
``telecommunications service.''
74. We conclude that, when a requesting carrier obtains an
unbundled element, such element--if it is also a ``facility''--is the
requesting carrier's ``own facilit[y]'' for purposes of section
214(e)(1)(A) because the requesting carrier has the ``exclusive use of
that facility for a period of time.'' The courts have recognized many
times that the word ``own''--as well as its numerous derivations--is a
``generic term'' that ``varies in its significance according to its
use'' and ``designate[s] a great variety of interests in property.''
The word ``ownership'' is said to ``var(y) in its significance
according to the context and the subject matter with which it is
used.'' The word ``owner'' is a broad and flexible word, applying not
only to legal title holders, but to others enjoying the beneficial use
of property. Indeed, property may have more than one ``owner'' at the
same time, and such ``ownership'' does not merely involve title
interest to that property.
75. Additionally, we note that section 214(e)(1) uses the term
``own facilities'' and does not refer to facilities ``owned by'' a
carrier. We conclude that this distinction is salient based on our
finding that, unlike the term ``owned by,'' the term ``own facilities''
reasonably could refer to property that a carrier considers its own,
such as unbundled network elements, but to which the carrier does not
hold absolute title.
76. In the context of section 214(e)(1)(A), unbundled network
elements are the requesting carrier's ``own facilities'' in that the
carrier has obtained the ``exclusive use'' of the facility for its own
use in providing services, and has paid the full cost of the facility,
including a reasonable profit, to the ILEC. The opportunity to purchase
access to unbundled network elements, as we explained in the Local
Competition Order, provides carriers with greater control over the
physical elements of the network, thus giving them opportunities to
create service offerings that differ from services offered by an
incumbent. This contrasts with the abilities of wholesale purchasers,
which are limited to offering the same services that an incumbent
offers at retail. This greater control distinguishes carriers that
provide service over unbundled network elements from carriers that
provide service by reselling wholesale service and leads us to conclude
that, as between the two terms, carriers that provide service using
unbundled network elements are better characterized as providing
service over their ``own facilities'' as opposed to providing ``resale
of another carrier's services.''
77. Unlike a pure reseller, a carrier that provides service using
unbundled network elements bears the full cost of providing that
element, even in high cost areas. Section 252(d)(1)(A)(i) requires that
the price of an unbundled network element be based on cost; a carrier
that purchases access to an unbundled network element incurs all of the
forward-looking costs associated with that element. We conclude that
universal service support should be provided to the carrier that incurs
the costs of providing service to a customer. Because a carrier that
purchases access to an unbundled network element incurs the costs of
providing service, it is reasonable for us to find that such a carrier
should be entitled to universal service support for the elements it
obtains.
78. We conclude that interpreting the term ``own facilities'' to
include unbundled network elements is the most reasonable
interpretation of the statute, given Congress's intent that all three
forms of local entry must be treated in a competitively neutral manner.
If the term ``own facilities'' is interpreted not to include service
provided through unbundled network elements, however, a carrier
providing service using unbundled network elements would suffer a
substantial cost disadvantage compared with carriers using other entry
strategies. In effect, excluding a competitive local exchange carrier
(CLEC) that uses exclusively unbundled network elements from being
designated an eligible carrier could make it cost-prohibitive for CLECs
choosing this entry strategy to serve high cost areas because ILECs
serving those areas will receive universal service support. We cannot
reconcile these implications with the ``pro-competitive'' goals of the
1996 Act and the goals of universal service and section 254. As a
result, the most reasonable interpretation of section 214(e)(1)(A) is
that the phrase ``own facilities'' includes the provision of service
through unbundled network elements, and that a carrier that uses
[[Page 32873]]
exclusively unbundled network elements to serve customers would be
entitled to receive the support payment, subject to the cap that we
describe below, that would allow it to compete with carriers utilizing
other entry strategies.
79. To hold otherwise would threaten the central principles of the
universal service system and the 1996 Act. In the Local Competition
Order, we explicitly stated that, in enacting section 251(c)(3),
Congress did not intend to restrict the entry of CLECs that use
exclusively unbundled network elements. Indeed, entry by exclusive use
of unbundled elements might be common in high cost areas--for example,
a carrier considering providing service to a single high-volume
customer or only to a portion of a high cost area might be encouraged
to offer service using unbundled elements throughout an entire service
area if it could compete with the incumbent and other entrants that may
already be receiving a payment from the universal service fund.
80. If we interpreted the term ``own facilities'' not to include
the use of unbundled network elements, the end result would be that the
entry strategy that includes the exclusive use of unbundled network
elements would be the only form of entry that would not benefit from,
either directly or indirectly, universal service support. A carrier
that has constructed all of its facilities would certainly be eligible
for support under section 214(e)(1), as would an entrant that offers
service through a mix of facilities that it had constructed and resold
services. A pure reseller indirectly receives the benefit of the
support payment, because, as discussed above, the retail rate of the
resold service already incorporates the support paid to the underlying
incumbent carrier. Such an environment--in which some forms of entry
are eligible for support but one form of entry is not--is not
``competitively neutral.'' In addition, this outcome would create an
artificial disincentive for carriers using unbundled elements to enter
into high cost areas.
81. Several commenters urge us to adopt an interpretation of the
term ``own facilities'' that would exclude the use of unbundled network
elements. These commenters assert that, in light of the Joint Board's
recommendation that support be ``portable,'' a narrow interpretation of
the section 214(e) facilities requirement is necessary to ensure that
ILECs receive adequate funds to construct, maintain, and upgrade their
telecommunications networks. We are not persuaded by these arguments
because we find that the pricing rule in section 252(d)(1) that applies
to unbundled network elements assures that the costs associated with
the construction, maintenance, and repair of an incumbent's facilities,
including a reasonable profit, would already be recovered through the
payments made by the carrier purchasing access to unbundled network
elements. The carrier purchasing access to those elements will, in
turn, receive a universal service support payment. To the extent that
these commenters' arguments are premised on their contention that
unbundled network element prices do not compensate ILECs for their
embedded costs, and that ILECs are constitutionally entitled to
recovery of their embedded costs, we will address that issue in a later
proceeding in our Access Charge Reform docket.
82. Although the states have the ultimate responsibility under
section 214(e) for deciding whether a particular carrier should be
designated as eligible, we are fully authorized to interpret the
statutory provisions that govern that determination. This language
appears in a federal statute, establishing a federal universal service
program. It is clearly appropriate for a federal agency to interpret
the federal statute that it has been entrusted with implementing.
Moreover, we believe it is particularly important for us to set out a
federal interpretation of the ``own facilities'' language in section
214, particularly as it relates to the use of unbundled network
elements. We note that the ``own facilities'' language in section
214(e)(1)(A) is very similar to language in section 271(c)(1)(A),
governing Bell operating company (BOC) entry into interLATA services.
While we are not interpreting the language in section 271 in this
Order, given the similarity of the language in these two sections, we
would find it particularly troubling to allow the states unfettered
discretion in interpreting and applying the ``own facilities'' language
in section 214(e). In order to avoid the potential for conflicting
interpretations from different states, we believe it is important to
set forth a single, federal interpretation, so that the ``own
facilities'' language is consistently construed and applied.
83. Level of Facilities Required To Satisfy the Facilities Requirement
We adopt the Joint Board's conclusion that a carrier need not offer
universal service wholly over its own facilities in order to be
designated as eligible because the statute allows an eligible carrier
to offer the supported services through a combination of its own
facilities and resale. We find that the statute does not dictate that a
carrier use a specific level of its ``own facilities'' in providing the
services designated for universal service support given that the
statute provides only that a carrier may use a ``combination of its own
facilities and resale'' and does not qualify the term ``own
facilities'' with respect to the amount of facilities a carrier must
use. For the same reasons, we find that the statute does not require a
carrier to use its own facilities to provide each of the designated
services but, instead, permits a carrier to use its own facilities to
provide at least one of the supported services. By including carriers
relying on a combination of facilities and resale within the class of
carriers eligible to receive universal service support, and by
declining to specify the level of facilities required, we believe that
Congress sought to accommodate the various entry strategies of common
carriers seeking to compete in high cost areas. We conclude, therefore,
that, if a carrier uses its own facilities to provide at least one of
the designated services, and the carrier otherwise meets the definition
of ``facilities'' adopted above, then the facilities requirement of
section 214(e) is satisfied. For example, we conclude that a carrier
could satisfy the facilities requirement by using its own facilities to
provide access to operator services, while providing the remaining
services designated for support through resale.
84. In arriving at this conclusion, we compare Congress's use of
qualifying language in the section 271(c)(1)(A) facilities requirement
with the absence of such language in the section 214(e) requirement.
Section 271(c)(1)(A) provides that a BOC that is seeking authorization
to originate in-region, interLATA services must enter into
interconnection agreements with competitors that offer ``telephone
exchange service either exclusively over their own facilities or
predominantly over their own telephone exchange service facilities in
combination with the resale of the telecommunications services of
another carrier.'' By contrast, section 214(e) does not mandate the use
of any particular level of a carrier's own facilities.
85. Several ILECs assert that eligible carriers that furnish only a
de minimis level of facilities should not be entitled to receive
universal service support. ILECs are concerned that, unless a carrier
is required to provide a substantial level of its own facilities
throughout a service area, a CLEC may be able to receive a level of
support in excess of its actual costs, and thereby gain a competitive
advantage over
[[Page 32874]]
ILECs. For example, ILECs argue that, because the prices of unbundled
network elements may be averaged over smaller geographic areas than
universal service support, the cost that a competitive carrier will
incur for serving a customer using unbundled network elements will not
match the level of universal service support the CLEC will receive for
serving that customer.
86. This asymmetry could arise because of the procedures currently
used to calculate the cost of serving a customer. Because it is
administratively infeasible to calculate the precise cost of providing
service to each customer in a service area, and because rate averaging
and the absence of competition generally have allowed it, the cost of
providing service has been calculated over a geographic region, such as
a study area, and the total cost of providing service in that area has
been averaged over the number of customers in that area. This average
cost provides the basis for calculating universal service support in
that area. To illustrate, the average cost of providing service in a
study area might be $50.00 per customer, but the cost of providing
service might be $10.00 in urban portions of the area, $40.00 in the
suburban portions, and $100.00 in outlying regions. Although the cost
of providing the supported services will be calculated at the study
area level in 1998, the cost of unbundled network elements is
calculated by the states, possibly over geographic areas smaller than
study areas. Thus, the total support given to a carrier per customer in
a study area might be $20.00, but the price of purchasing access to
unbundled network elements to serve a customer in that study area might
be $10.00, $60.00, or $100.00, depending on where the customer is
located. Consequently, a CLEC might pay $10.00 to purchase access to an
unbundled network element in order to serve a customer in a city, but
receive $20.00 in universal service support.
87. We emphasize that the uneconomic incentives described above are
largely connected with the modified existing high cost mechanism that
will be in place until January 1, 1999. We also conclude, based on the
reasons set forth immediately below, that the situation described by
the ILECs will occur, at most, infrequently during this period. We
conclude that the ILECs' concerns should be significantly alleviated
when the forward-looking and more precisely targeted methodology to
calculate high cost support becomes effective. Specifically, in our
forthcoming proceeding on the high cost support mechanism that will
take effect January 1, 1999, we intend to address fully any potential
dissimilarities between the level of disaggregation of universal
service support and the level of disaggregation of unbundled network
element prices. Nevertheless, we agree with the ILECs that we should
limit the ability of competitors to make decisions to enter local
markets based on artificial economic incentives created under the
modified existing mechanism.
88. To this end, we take the following actions to reduce the
incentives that a CLEC may have to enter a rural or non-rural market in
an attempt to exploit the asymmetry described above. First, we conclude
that a carrier that serves customers by reselling wholesale service may
not receive universal service support for those customers that it
serves through resale alone. In addition, we conclude below that a CLEC
using exclusively unbundled network elements to provide the supported
services will receive a level of universal service support not
exceeding the price of the unbundled network elements to which it
purchases access.
89. In markets served by non-rural carriers, we conclude that the
risk of the anticompetitive behavior described above is minimal
because, as of January 1, 1999, universal service support for non-rural
high cost carriers will be determined using a forward-looking
methodology that will more precisely target support. We doubt that
carriers will incur the costs necessary to meet the eligibility
requirements of section 214(e) in order to exploit this opportunity
when the support mechanisms will soon change. Further, the incentive
for a CLEC to enter an area served by a non-rural carrier to gain an
unfair advantage is diminished because the level of universal service
support per customer in these areas is small relative to the start-up
costs of attracting customers and the cost of providing service to
those customers using unbundled network elements.
90. We also expect that state commissions, in the process of making
eligibility determinations, will play an important part in minimizing
the risk of anticompetitive behavior as described above. Under section
214(e)(3), a state commission must make a finding that designation of
more than one eligible carrier is in the public interest in a service
area that is served by a rural telephone company. Accordingly, under
section 214(e)(3), a state commission may consider whether a
competitive carrier seeking designation as an eligible carrier will be
able to exploit unjustly the asymmetry between the price of unbundled
network elements and the level of universal service support. Under
section 251(f), rural telephone companies are not required to provide
nondiscriminatory access to unbundled network elements pursuant to
section 251(c)(3) until the relevant state commission determines that a
bona fide request under section 251(c) for such access ``is not unduly
economically burdensome, is technically feasible, and is consistent
with section 254 (other than sections (b)(7) and (c)(1)(D) thereof).''
Thus, state commissions may also consider whether a CLEC's request for
nondiscriminatory access to unbundled network elements is consistent
with universal service, and will be able to take into account the
arguments of ILECs to the extent that they are not addressed by the
measures discussed herein.
91. Location of Facilities for Purposes of Section 214(e)
Although we conclude above that the term ``facilities'' includes
any physical components of the telecommunications network that are used
in the transmission or routing of the supported services, we find that
the statute does not mandate that the facilities be physically located
in that service area. We find that it is reasonable to draw a
distinction between particular facilities based on the relationship of
those facilities to the provision of specific services as opposed to
their physical location within a service area both for reasons of
promoting economic efficiency as well as competitive neutrality. We
conclude that our determination not to impose restrictions based solely
on the location of facilities used to provide the supported services is
competitively neutral in that it will accommodate the various
technologies and entry strategies that carriers may employ as they seek
to compete in high cost areas.
92. Eligibility of Resellers
We adopt the Joint Board's analysis and conclusion that section
214(e)(1) precludes a carrier that offers the supported services solely
through resale from being designated eligible in light of the statutory
requirement that a carrier provide universal service, at least in part,
over its own facilities. Under any reasonable interpretation of the
term ``facilities,'' a ``pure'' reseller uses none of its own
facilities to serve a customer. Rather, a reseller purchases service
from a facilities owner and resells that service to a customer. As
explained above, resellers should not be entitled to receive universal
service support directly from federal universal service
[[Page 32875]]
mechanisms because the universal service support payment received by
the underlying provider of resold services is reflected in the price
paid by the reseller to the underlying provider.
93. We conclude that no party has demonstrated that the statutory
criteria for forbearance have been met and therefore we agree with the
Joint Board that we cannot exercise our forbearance authority to permit
``pure'' resellers to become eligible for universal service support. In
order to exercise our authority under section 10(a) of the Act to
forbear from applying a provision of the Act, we must determine that:
(1) Enforcement of the provision ``is not necessary to ensure that the
charges, practices, classifications, or regulations by, for, or in
connection with that telecommunications carrier or telecommunications
service are just and reasonable and are not unjustly or unreasonably
discriminatory;'' (2) enforcement of such provision ``is not necessary
for the protection of consumers;'' and (3) ``forbearance from applying
such provision * * * is consistent with the public interest.'' In
addition, we must consider ``whether forbearance * * * will promote
competitive market conditions.'' If pure resellers could be designated
eligible carriers and were entitled to receive support for providing
resold services, they, in essence, would receive a double recovery of
universal service support because they would recover the support
incorporated into the wholesale price of the resold services in
addition to receiving universal service support directly from federal
universal service support mechanisms. Making no finding with respect to
the first two criteria, we conclude that it is neither in the public
interest nor would it promote competitive market conditions to allow
resellers to receive a double recovery. Indeed, allowing such a double
recovery would appear to favor resellers over other carriers, which
would not promote competitive market conditions. Allowing resellers a
double recovery also would be inconsistent with the principle of
competitive neutrality because it would provide inefficient economic
signals to resellers.
94. We adopt the Joint Board's recommendation that no additional
guidelines are necessary to interpret section 254(e)'s requirement that
a carrier that receives universal service support shall only use that
support for the facilities and services for which it is intended. We
agree with the Joint Board's conclusion that the optimal approach to
minimizing misuse of universal service support is to adopt mechanisms
that will set universal support so that it reflects the costs of
providing universal service efficiently. We conclude that we will adopt
the Joint Board's recommended approach to minimizing the misuse of
support by taking steps to implement forward-looking high cost support
mechanisms and implementing the rules set forth in our accompanying
Access Charge Reform Order. We adopt the Joint Board's recommendation
that we rely upon state monitoring of the provision of supported
services to ensure that universal service support is used as intended
until competition develops. We agree with the Joint Board that, if it
becomes evident that federal monitoring is necessary to prevent the
misuse of universal service support because states are unable to
undertake such monitoring, the Commission, in cooperation with the
Joint Board, will consider the need for additional action. In addition,
we agree with the Joint Board that no additional rules are necessary to
ensure that only eligible carriers receive universal service support
because a carrier must be designated as an eligible carrier by a state
commission in order to receive funding. Finally, as discussed below,
because the services included in the Lifeline program are supported
services, we note that only eligible carriers may receive universal
service support for these services, as required by section 254(e).
95. State Adoption of Non-Rural Service Areas
We adopt the Joint Board's finding that sections 214(e)(2) and
214(e)(5) require state commissions to designate the area throughout
which a non-rural carrier must provide universal service in order to be
eligible to receive universal service support. We agree with the Joint
Board that, although this authority is explicitly delegated to the
state commissions, states should exercise this authority in a manner
that promotes the pro-competitive goals of the 1996 Act as well as the
universal service principles of section 254. We also adopt the Joint
Board's recommendation that states designate service areas that are not
unreasonably large. Specifically, we conclude that service areas should
be sufficiently small to ensure accurate targeting of high cost support
and to encourage entry by competitors. We also agree that large service
areas increase start-up costs for new entrants, which might discourage
competitors from providing service throughout an area because start-up
costs increase with the size of a service area and potential
competitors may be discouraged from entering an area with high start-up
costs. As such, an unreasonably large service area effectively could
prevent a potential competitor from offering the supported services,
and thus would not be competitively neutral, would be inconsistent with
section 254, and would not be necessary to preserve and advance
universal service.
96. We agree with the Joint Board that, if a state commission
adopts as a service area for its state the existing study area of a
large ILEC, this action would erect significant barriers to entry
insofar as study areas usually comprise most of the geographic area of
a state, geographically varied terrain, and both urban and rural areas.
We concur in the Joint Board's finding that a state's adoption of
unreasonably large service areas might even violate several provisions
of the Act. We also agree that, if a state adopts a service area that
is simply structured to fit the contours of an incumbent's facilities,
a new entrant, especially a CMRS-based provider, might find it
difficult to conform its signal or service area to the precise contours
of the incumbent's area, giving the incumbent an advantage. We
therefore encourage state commissions not to adopt, as service areas,
the study areas of large ILECs. In order to promote competition, we
further encourage state commissions to consider designating service
areas that require ILECs to serve areas that they have not
traditionally served. We recognize that a service area cannot be
tailored to the natural facilities-based service area of each entrant,
we note that ILECs, like other carriers, may use resold wholesale
service or unbundled network elements to provide service in the
portions of a service area where they have not constructed facilities.
Specifically, section 254(f) prohibits states from adopting regulations
that are ``inconsistent with the Commission's rules to preserve and
advance universal service.'' State designation of an unreasonably large
service area could also violate section 253 if it ``prohibit[s] or
ha[s] the effect of prohibiting the ability of an entity to provide any
interstate or intrastate telecommunications service,'' and is not
``competitively neutral'' and ``necessary to preserve and advance
universal service.''
97. Authority To Alter Rural Service Areas
We find that, in contrast with non-rural service areas, section
214(e)(5) requires the Commission and the states to act in concert to
alter the service areas for areas served by rural carriers. We conclude
that the plain language of section 214(e)(5) dictates that neither
[[Page 32876]]
the Commission nor the states may act alone to alter the definition of
service areas served by rural carriers. In addition, we conclude that
the language ``taking into account'' indicates that the Commission and
the states must each give full consideration to the Joint Board's
recommendation and must each explain why they are not adopting the
recommendations included in the most recent Recommended Decision or the
recommendations of any future Joint Board convened to provide
recommendations with respect to federal universal service support
mechanisms. Furthermore, we conclude that the ``pro-competitive, de-
regulatory'' objectives of the 1996 Act would be furthered if we
minimize any procedural delay caused by the need for federal-state
coordination on this issue. Therefore, we conclude that we should
determine, at this time, the procedure by which the state commissions,
when proposing to redefine a rural service area, may obtain the
agreement of the Commission.
98. Under the procedures we adopt, after a state has concluded that
a service area definition different from a rural telephone company's
study area would better serve the universal service principles found in
section 254(b), either the state or a carrier must seek the agreement
of the Commission. Upon the receipt of the proposal, the Commission
will issue a public notice on the proposal within 14 days. If the
Commission does not act upon the proposal within 90 days of the release
date of the public notice, the proposal will be deemed approved by the
Commission and may take effect according to the state procedure. If the
Commission determines further consideration is necessary, it will
notify the state commission and the relevant carriers and initiate a
proceeding to determine whether it can agree to the proposal. A
proposal subject to further consideration by the Commission may not
take effect until both the state commission and this Commission agree
to establish a different definition of a rural service area, as
required by section 214(e)(5). Similarly, if the Commission initiates a
proceeding to consider a definition of a rural service area that is
different from the ILEC's study area, we shall seek the agreement of
the relevant state commission by submitting a petition to the relevant
state commission according to that state commission's procedure. No
definition of a rural service area proposed by the Commission will take
effect until both the state commission and this Commission agree to
establish a different definition. In keeping with our intent to use
this procedure to minimize administrative delay, we intend to complete
consideration of any proposed definition of a service area promptly.
99. Adoption of Study Areas
We find that retaining the study areas of rural telephone companies
as the rural service areas is consistent with section 214(e)(5) and the
policy objectives underlying section 254. We agree that, if
competitors, as a condition of eligibility, must provide services
throughout a rural telephone company's study area, the competitors will
not be able to target only the customers that are the least expensive
to serve and thus undercut the ILEC's ability to provide service
throughout the area. In addition, we agree with the Joint Board that
this decision is consistent with our decision to use a rural ILEC's
embedded costs to determine, at least initially, that company's costs
of providing universal service because rural telephone companies
currently average such costs at the study-area level. Some wireless
carriers have expressed concern that they might not be able to provide
service throughout a rural telephone company's study area because that
study area might be noncontiguous. In such a case, we note that this
carrier could supplement its facilities-based service with service
provided via resale. In response to the concerns expressed by wireless
carriers, however, we also encourage states, as discussed more fully
below, to consider designating rural service areas that consist of only
the contiguous portions of ILEC study areas. Further, we agree that any
change to a study area made by the Commission should result in a
corresponding change to the corresponding rural service area. Thus, we
encourage a carrier seeking to alter its study area to also request a
corresponding change in its service area, preferably as a part of the
same regulatory proceeding. If the carrier is not initiating any
proceedings with this Commission, it should seek the approval of the
relevant state commission first, and then either the state commission
or the carrier should seek Commission agreement according to the
procedures described above. We agree with the Joint Board that this
differing treatment of rural carriers sufficiently protects smaller
carriers and is consistent with the Act.
100. We also conclude that universal service policy objectives may
be best served if a state defines rural service areas to consist only
of the contiguous portion of a rural study area, rather than the entire
rural study area. We conclude that requiring a carrier to serve a non-
contiguous service area as a prerequisite to eligibility might impose a
serious barrier to entry, particularly for wireless carriers. We find
that imposing additional burdens on wireless entrants would be
particularly harmful to competition in rural areas, where wireless
carriers could potentially offer service at much lower costs than
traditional wireline service. Therefore, we encourage states to
determine whether rural service areas should consist of only the
contiguous portions of an ILEC's study area, and to submit such a
determination to the Commission according to the procedures we describe
above. We note that state commissions must make a special finding that
the designation is in the public interest in order to designate more
than one eligible carrier in a rural service area, and we anticipate
that state commissions will be able to consider the issue of contiguous
service areas as they make such special findings.
101. We agree with the Joint Board's analysis and conclusion that
it would be consistent with the Act for the Commission to base the
actual level of universal service support that carriers receive on the
cost of providing service within sub-units of a state-defined service
area, such as a wire center or a census block group (CBG). We reject
Bell Atlantic's argument that the language in section 214(e)(5) gives
the states exclusive authority to establish non-rural service areas
``for the purpose of determining universal service obligations and
support mechanisms.'' As the Joint Board concluded, the quoted language
refers to the designation of the area throughout which a carrier is
obligated to offer service and advertise the availability of that
service, and defines the overall area for which the carrier may receive
support from federal universal service support mechanisms. Bell
Atlantic is therefore incorrect when it argues that the approach
recommended by the Joint Board ignores the phrase ``and support
mechanisms.'' The universal service support a carrier will receive will
be based on the Commission's determination of the cost of providing the
supported services in the service area designated by a state
commission.
102. We conclude that, consistent with our decision to use a
modification of the existing high cost mechanisms until January 1,
1999, the Commission will continue to use study areas to calculate the
level of high cost support that carriers receive. Because we are
continuing to use study areas to calculate high cost support until
January 1, 1999, if a state commission follows our admonition to
designate a service
[[Page 32877]]
area that is not unreasonably large, that service area will likely be
smaller than the federal support areas during that period. We conclude
that the decision to continue to use study areas to calculate the level
of high cost support is nonetheless consistent with the Act for two
reasons. First, as the Joint Board found, the Act does not prohibit the
Commission from calculating support over a geographic area that is
different from a state-defined service area. Second, so long as a
carrier does not receive support for customers located outside the
service area for which a carrier has been designated eligible by a
state commission, our decision is consistent with section 214(e)(5)'s
requirement that the area for which a carrier should receive universal
service support is a state-designated service area. We agree with the
Joint Board, however, that calculating support over small geographic
areas will promote efficient targeting of support. We therefore adopt
the Joint Board's recommendation and conclude that, after January 1,
1999, we will calculate the amount of support that carriers receive
over areas no larger than wire centers. We will further define support
areas as part of our continuing effort to perfect the method by which
we calculate forward-looking economic costs.
103. Unserved Areas
We agree with the Joint Board that we should not adopt rules at
this time governing how to designate carriers for unserved areas. We
conclude that the record remains inadequate for us to fashion a
cooperative federal-state program to select carriers for unserved
areas, as proposed in the NPRM. We conclude that, if, in the future, it
appears that a cooperative federal-state program is needed, we will
then revisit this issue and work with state commissions and the Joint
Board to create a program. We seek information that will allow us to
determine whether additional measures are needed. Therefore, we
strongly encourage state commissions to file with the Common Carrier
Bureau reports detailing the status of unserved areas in their states.
In order to raise subscribership to the highest possible levels, we
seek to determine how best to provide service to currently-unserved
areas in a cost-effective manner. We seek the assistance of state
commissions with respect to this issue.
104. Implementation
The administrator of the universal service support mechanisms shall
not disburse funds to a carrier providing service to customers until
the carrier has provided, to the administrator, a true and correct copy
of the decision of a state commission designating that carrier as an
eligible telecommunications carrier. A state commission seeking to
alter a rural service area has the choice of either filing itself, or
requiring an affected eligible telecommunications carrier to file, a
petition with the Commission seeking the latter's agreement with the
newly defined rural service area. We delegate authority to the Common
Carrier Bureau to propose and act upon state proposals to redefine a
rural service area.
Rural, Insular, and High Cost
105. Use of Forward-Looking Economic Cost
We agree with the Joint Board's recommendation that the proper
measure of cost for determining the level of universal service support
is the forward-looking economic cost of constructing and operating the
network facilities and functions used to provide the supported services
as defined per section 254(c)(1). We agree that, in the long run,
forward-looking economic cost best approximates the costs that would be
incurred by an efficient carrier in the market. The use of forward-
looking economic costs as the basis for determining support will send
the correct signals for entry, investment, and innovation.
106. We agree with the Joint Board that the use of forward-looking
economic cost will lead to support mechanisms that will ensure that
universal service support corresponds to the cost of providing the
supported services, and thus, will preserve and advance universal
service and encourage efficiency because support levels will be based
on the costs of an efficient carrier. Because forward-looking economic
cost is sufficient for the provision of the supported services, setting
support levels in excess of forward-looking economic cost would enable
the carriers providing the supported services to use the excess to
offset inefficient operations or for purposes other than ``the
provision, maintenance, and upgrading of facilities and services for
which the support is intended.''
107. We also agree that a forward-looking economic cost methodology
is the best means for determining the level of universal service
support. We find that a forward-looking economic cost methodology
creates the incentive for carriers to operate efficiently and does not
give carriers any incentive to inflate their costs or to refrain from
efficient cost-cutting. Moreover, a forward-looking economic cost
methodology could be designed to target support more accurately by
calculating costs over a smaller geographical area than the cost
accounting systems that the ILECs currently use.
108. Embedded Cost
Several ILECs have asserted that only a universal service mechanism
that calculates support based on a carrier's embedded cost will provide
sufficient support. As we discussed, the use of forward-looking
economic cost will provide sufficient support for an efficient provider
to provide the supported services for a particular geographic area.
Thus, we conclude that the universal service support mechanisms should
be based on forward-looking economic cost, and we reject the arguments
for basing the support mechanisms on a carrier's embedded cost.
109. To the extent that it differs from forward-looking economic
cost, embedded cost provide the wrong signals to potential entrants and
existing carriers. The use of embedded cost would discourage prudent
investment planning because carriers could receive support for
inefficient as well as efficient investments. The Joint Board explained
that when ``embedded costs are above forward-looking costs, support of
embedded costs would direct carriers to make inefficient investments
that may not be financially viable when there is competitive entry.''
The Joint Board also explained that if embedded cost is below forward-
looking economic cost, support based on embedded costs would erect an
entry barrier to new competitors, because revenue per customer and
support, together, would be less than the forward-looking economic cost
of providing the supported services. Consequently, we agree with the
conclusion that support based on embedded cost could jeopardize the
provision of universal service. We also agree that the use of embedded
cost to calculate universal service support would lead to subsidization
of inefficient carriers at the expense of efficient carriers and could
create disincentives for carriers to operate efficiently.
110. ``Legacy'' Cost
Several commenters assert that the use of forward-looking economic
cost necessitates the establishment of a separate mechanism to
reimburse ILECs for their ``legacy cost,'' which they define to include
the under-depreciated portion of the plant and equipment.
[[Page 32878]]
Several ILECs contend that unless we explicitly provide a mechanism for
them to recover their under-depreciated costs, the use of forward-
looking economic cost to determine universal service support would
constitute a taking under the Fifth Amendment. No carrier, however, has
presented any specific evidence that the use of forward-looking
economic cost to determine support amounts will deprive it of property
without just compensation. Indeed, the mechanisms we are creating today
provide support to carriers in addition to other revenues associated
with the provision of service.
111. Construction Costs
US West proposes to establish a separate support mechanism for the
cost of constructing facilities. Under US West's proposal, the carrier
that first constructed the facility to serve an end user would receive
support for its construction costs, even if the end user switched to
another carrier. The second carrier to serve the end user would receive
support only for its operational expenses. Under the US West proposal,
only the carrier that constructed first, generally an ILEC, except in
currently unserved areas, would receive support to cover the
facilities' construction costs. We observe that allowing only the ILEC
to receive support for the construction of the facilities used to
provide universal service would, however, discourage new entrants from
constructing additional facilities in high cost areas, thereby
discouraging facilities-based competition, in contravention of
Congress's explicit goals. Further investigation is needed to determine
whether there are special circumstances, such as the need to attract
carriers to unserved areas or to upgrade facilities, in which it may or
may not be reasonable to compensate one-time costs with one-time
payments. Because we believe this issue should be examined further, we
will consider this proposal in a future proceeding.
112. Determination of Forward-Looking Economic Cost for Non-Rural
Carriers
Having adopted the Joint Board recommendation that universal
service support be based upon forward-looking economic cost, we next
consider how such cost should be determined. The Joint Board found that
cost models provide an ``efficient method of determining forward-
looking economic cost, and provide other benefits, such as the ability
to determine costs at smaller geographic levels than would be practical
using the existing cost accounting system.'' The Joint Board also found
that because they are not based on any individual company's costs, cost
models provide a competitively neutral estimate of the cost of
providing the supported services. Based on those conclusions, the Joint
Board recommended that the amount of universal service support a
carrier would receive should be calculated by subtracting a benchmark
amount from the cost of service for a particular geographic area, as
determined by the forward-looking economic cost model.
113. The Joint Board discussed the three cost models that had been
presented to it during the proceeding, but did not endorse a specific
model. The Joint Board concluded that, before a specific model could be
selected, several issues would need to be resolved, including how the
various assumptions among the models regarding basic input levels were
determined, which input levels were reasonable, what were the
relationships among the inputs, why certain functionalities included in
one model were not present in the other models, and which of the unique
set of engineering design principles for each model were most
reasonable.
114. Three different forward-looking cost models were submitted to
the Commission for consideration in response to the January 9 Public
Notice: the BCPM; the Hatfield model; and the TECM. These three models
use many different engineering assumptions and input values to
determine the cost of providing universal service. For example,
Hatfield 3.1 uses loading coils in its outside plant to permit the use
of longer copper loops, thereby reducing the amount of fiber required
for outside plant. In contrast, the BCPM relies more heavily on fiber
and avoids the use of loading coils; this assumption increases the cost
of service that BCPM predicts. Another example is that Hatfield designs
the interoffice network required to provide local service in a multiple
switch environment, while the BCPM accounts for this interoffice
service by allowing the user to input a switch investment percentage.
115. There has been significant progress in the development of the
two major models--the BCPM and Hatfield 3.1--since the Joint Board made
its recommendation. For example, the ability of both models to identify
which geographic areas are high cost for the provision of universal
service has been improved. The BCPM uses seven different density
groups, rather than the six zones used in the BCM2, to determine for a
given CBG the mixture of aerial, buried, and underground plant, feeder
fill factors, distribution fill factors, and the mix of activities in
placing plant, such as aerial placement or burying, and the cost per
foot to install plant. Hatfield also increased the number of density
zones, going from six density zones in Hatfield Version 2.2.2 to nine
in Hatfield 3.1.
116. While acknowledging remaining problems with the models in
their report to the Commission, the state members of the Joint Board
recommend that the Commission reject the TECM and select in this Order
one of the remaining models to determine the needed level of universal
service support in order to focus the efforts of industry participants
and regulators. Specifically, three of the state members recommend that
the Commission select the BCPM as the platform from which to seek
further refinement to the modeling process. The state members of the
Joint Board recommend that the non-rural carriers move to the use of a
model over a three-year period. According to the state members, such a
period will allow for continued evaluation of the model's accuracy and
permit any needed improvements to be made before non-rural carriers
receive support based solely on the model. The state members of the
Joint Board also recommend that the Commission and Joint Board members
and staff work with the administrator to monitor the use of the model.
117. We agree with the state members that the TECM should be
excluded from further consideration for use as the cost model because
the proponents have never provided nationwide estimates of universal
service support using that model. We also agree with the state members
that there are many issues that still need to be resolved before a cost
model can be used to determine support levels. In particular, the
majority state members note that the model input values should not be
accepted. Instead, they suggest specific input values for the cost of
equity, the debt-equity ratio, depreciation lives, the cost of
switches, the cost of digital loop carrier equipment and the percentage
of structures that should be shared. The majority state members are
also concerned with the models' logic for estimating building costs.
They see no justification for tying building costs to the number of
switched lines as Hatfield 3.1 does and they suggest that using BCPM's
technique of estimating building costs as a percent of switch costs is
not logical. In light of the wide divergence and frequent changes in
data provided to us, we agree with the recommendation of the dissenting
state members of the Joint Board that we cannot at this time reasonably
apply either of the models currently before us
[[Page 32879]]
to calculate forward-looking economic costs of providing universal
service.
118. The proposed cost models also use widely varying input values
to determine the cost of universal service, and in many cases the
proponents have not filed the underlying justification for the use of
those values. For example, BCPM no longer uses ARMIS expenses as the
basis for its expense estimates. Instead, BCPM bases expenses on a
survey of eight ILECs. Neither the survey instrument nor the individual
carrier responses to the survey have been filed with the Commission.
The proponents have not provided supporting information underlying
their determinations of expenses. This lack of support fails to meet
the Joint Board's criterion for evaluation that the underlying data and
computations should be available to all interested parties. We agree
with the state members of the Joint Board that this lack of support
makes it impossible to determine whether the estimated expenses are the
minimum necessary to provide service. The Hatfield 3.1 model also is
based on information that has not been fully made available to the
Commission and all interested parties. For example, the Hatfield 3.1
model adjusts the number of supported lines assigned to a CBG on the
basis of an undisclosed algorithm. This algorithm has not been filed
with the Commission. The application of this algorithm, however,
increased the number of households in one state by 34 percent.
Moreover, in regard to the fiber/copper cross-over point, the
proponents of the Hatfield 3.1 model have submitted no studies to show
that the decision concerning the cross-over point between the use of
copper and fiber that they chose represents the least-cost
configuration, as required by the Joint Board.
119. Despite significant and sustained efforts by the commenters
and the Commission, the versions of the models that we have reviewed to
date have not provided dependable cost information to calculate the
cost of providing service across the country. The majority state
members emphasize that their recommendation to use the BCPM is not an
endorsement of all aspects of the model, but rather that they regard
the model as the best platform at this time from which the Commission,
state commissions, and interested parties can make collective
revisions. Indeed, the report finds that neither the Hatfield 3.1 model
nor the BCPM meets the criteria set out by the Joint Board pertaining
to openness, verifiability, and plausibility. The report also discusses
several specific issues that the majority state members of the Joint
Board contend must be addressed before the BCPM can be considered for
use in determining support levels, including the dispersion of
population within a CBG, the plant-specific operating expenses used by
the model, and interoffice local transport investment. We agree with
the state members that there are significant unresolved problems with
each of these cost models, such as the input values for switching
costs, digital loop carrier equipment, depreciation rates, cost of
capital, and structure sharing. We also agree with them that line count
estimates should be more accurate and reflect actual ILEC counts.
120. Based on these problems with the models, we conclude that we
cannot use any of the models at this time as a means to calculate the
forward-looking economic cost of the network on which to base support
for universal service in high cost areas. Consequently, we believe that
it would be better to continue to review both the BCPM and Hatfield
models. Further review will allow the Commission and interested parties
to compare and contrast more fully the structure and the input values
used in these models. We find that continuing to examine the various
models will not delay our implementation of a forward-looking economic
cost methodology for determining support for rural, insular, and high
cost areas. As discussed above, we will issue a FNPRM on a forward-
looking cost methodology for non-rural carriers by the end of June
1997. We anticipate that by the end of the year we will choose a
specific model that we will use as the platform for developing that
methodology. We anticipate that we will seek further comment on that
selection and the refinements necessary to adopt a cost methodology by
August 1998 that will be used for non-rural carriers starting on
January 1, 1999. Consequently, as we explain below, we will continue
using mechanisms currently in place to determine universal service
support until January 1, 1999, while we resolve the issues related to
the forward-looking economic cost models.
121. We also agree with the dissenting state members of the Joint
Board that our actions are consistent with the requirements of section
254 because we have identified the services to be supported by federal
universal service support mechanisms, and we are setting forth a
specific timetable for implementation of our forward-looking cost
methodology. Moreover, our actions here are consistent with section
254's requirement that support should be explicit. Making ``implicit''
universal service subsidies ``explicit'' ``to the extent possible''
means that we have authority at our discretion to craft a phased-in
plan that relies in part on prescription and in part on competition to
eliminate subsidies in the prices for various products sold in the
market for telecommunications services. Consequently, we reject the
arguments that section 254 compels us immediately to remove all costs
associated with the provision of universal service from interstate
access charges. Under the timetable we have set forth here, we will
over the next year identify implicit interstate universal support and
make that support explicit, as further provided by section 254(e).
122. As the basis for calculating federal universal service support
in their states, we will use forward-looking economic cost studies
conducted by state commissions that choose to submit such cost studies
to determine universal service support. As discussed further below, we
today adopt criteria appropriate for determining federal universal
service support to guide the states as they conduct those studies. We
ask states to elect, by August 15, 1997, whether they will conduct
their own forward-looking economic cost studies. States that elect to
conduct such studies should file them with the Commission on or before
February 6, 1998. We will then seek comment on those studies and
determine whether they meet the criteria we set forth. The Commission
will review the studies and comments received, and only if we find that
the state has conducted a study that meets our criteria will we approve
those studies for use in calculating federal support for non-rural
eligible telecommunications carriers rural, insular, and high cost
areas to be distributed beginning January 1, 1999. We intend to work
closely with the states as they conduct these forward-looking economic
cost studies. We will also work together with the states and the Joint
Board to develop a uniform cost study review plan that would
standardize the format for presentation of cost studies in order to
facilitate review by interested parties and by the Commission.
123. If a state elects not to conduct its own forward-looking
economic cost study or that the state-conducted study fails to meet the
criteria we adopt today, the Commission will determine the forward-
looking economic cost of providing universal service in that state
according to the Commission's forward-looking cost methodology. We will
seek the Joint Board's assistance in developing our method of
calculating forward-looking economic cost, which
[[Page 32880]]
we intend to develop by building on the work already done by the Joint
Board, its staff, and industry proponents of various cost models. We
will issue a FNPRM by the end of June 1997 seeking additional
information on which to base the development of a reliable means of
determining the forward-looking economic cost of providing universal
service. We shall also separately seek information on issues such as
the actual cost of purchasing switches, the current cost of digital
loop carriers, and the location of customers in the lowest density
areas.
124. Criteria for Forward-Looking Economic Cost Determinations
Whether forward-looking economic cost is determined according to a
state-conducted cost study or a Commission-determined methodology, we
must prescribe certain criteria to ensure consistency in calculations
of federal universal service support. Consistent with the eight
criteria set out in the Joint Board recommendation, we agree that all
methodologies used to calculate the forward-looking economic cost of
providing universal service in rural, insular, and high cost areas must
meet the following criteria:
(1) The technology assumed in the cost study or model must be the
least-cost, most-efficient, and reasonable technology for providing the
supported services that is currently being deployed A model, however,
must include the ILECs' wire centers as the center of the loop network
and the outside plant should terminate at ILECs' current wire centers.
The loop design incorporated into a forward-looking economic cost study
or model should not impede the provision of advanced services. For
example, loading coils should not be used because they impede the
provision of advanced services. We note that the use of loading coils
is inconsistent with the Rural Utilities Services guidelines for
network deployment by its borrowers. Wire center line counts should
equal actual ILEC wire center line counts, and the study's or model's
average loop length should reflect the incumbent carrier's actual
average loop length.
(2) Any network function or element, such as loop, switching,
transport, or signaling, necessary to produce supported services must
have an associated cost.
(3) Only long-run forward-looking economic cost may be included.
The long-run period used must be a period long enough that all costs
may be treated as variable and avoidable. The costs must not be the
embedded cost of the facilities, functions, or elements. The study or
model, however, must be based upon an examination of the current cost
of purchasing facilities and equipment, such as switches and digital
loop carriers (rather than list prices).
(4) The rate of return must be either the authorized federal rate
of return on interstate services, currently 11.25 percent, or the
state's prescribed rate of return for intrastate services. We conclude
that the current federal rate of return is a reasonable rate of return
by which to determine forward looking costs. We realize that, with the
passage of the 1996 Act, the level of local service competition may
increase, and that this competition might increase the ILECs' cost of
capital. There are other factors, however, that may mitigate or offset
any potential increase in the cost of capital associated with
additional competition. For example, until facilities-based competition
occurs, the impact of competition on the ILEC's risks associated with
the supported services will be minimal because the ILEC's facilities
will still be used by competitors using either resale or purchasing
access to the ILEC's unbundled network elements. In addition, the cost
of debt has decreased since we last set the authorized rate of return.
The reduction in the cost of borrowing caused the Common Carrier Bureau
to institute a preliminary inquiry as to whether the currently
authorized federal rate of return is too high, given the current
marketplace cost of equity and debt. We will re-evaluate the cost of
capital as needed to ensure that it accurately reflects the market
situation for carriers.
(5) Economic lives and future net salvage percentages used in
calculating depreciation expense must be within the FCC-authorized
range. We agree with those commenters that argue that currently
authorized lives should be used because the assets used to provide
universal service in rural, insular, and high cost areas are unlikely
to face serious competitive threat in the near term. To the extent that
competition in the local exchange market changes the economic lives of
the plant required to provide universal service, we will re-evaluate
our authorized depreciation schedules. We intend shortly to issue a
notice of proposed rule making to further examine the Commission's
depreciation rules.
(6) The cost study or model must estimate the cost of providing
service for all businesses and households within a geographic region.
This includes the provision of multi-line business services, special
access, private lines, and multiple residential lines. Such inclusion
of multi-line business services and multiple residential lines will
permit the cost study or model to reflect the economies of scale
associated with the provision of these services.
(7) A reasonable allocation of joint and common costs must be
assigned to the cost of supported services. This allocation will ensure
that the forward-looking economic cost does not include an unreasonable
share of the joint and common costs for non-supported services.
(8) The cost study or model and all underlying data, formulae,
computations, and software associated with the model must be available
to all interested parties for review and comment. All underlying data
should be verifiable, engineering assumptions reasonable, and outputs
plausible.
(9) The cost study or model must include the capability to examine
and modify the critical assumptions and engineering principles. These
assumptions and principles include, but are not limited to, the cost of
capital, depreciation rates, fill factors, input costs, overhead
adjustments, retail costs, structure sharing percentages, fiber-copper
cross-over points, and terrain factors.
(10) The cost study or model must deaverage support calculations to
the wire center serving area level at least, and, if feasible, to even
smaller areas such as a Census Block Group, Census Block, or grid cell.
We agree with the Joint Board's recommendation that support areas
should be smaller than the carrier's service area in order to target
efficiently universal service support. Although we agree with the
majority of the commenters that smaller support areas better target
support, we are concerned that it becomes progressively more difficult
to determine accurately where customers are located as the support
areas grow smaller. As SBC notes, carriers currently keep records of
the number of lines served at each wire center, but do not know which
lines are associated with a particular CBG, CB, or grid cell. Carriers,
however, would be required to provide verification of customer location
when they request support funds from the administrator.
125. In order for the Commission to accept a state cost study
submitted to us for the purposes of calculating federal universal
service support, that study must be the same cost study that is used by
the state to determine intrastate universal service support levels
pursuant to section 254(f). A state need not perform a new cost study,
but may submit a cost study that has already been performed for
evaluation by the Commission. We also encourage a state, to the extent
possible and consistent
[[Page 32881]]
with the above criteria, to use its ongoing proceedings to develop
permanent unbundled network element prices as a basis for its universal
service cost study. This would reduce duplication and diminish
arbitrage opportunities that might arise from inconsistencies between
the methodologies for setting unbundled network element prices and for
determining universal service support levels. In particular, we wish to
avoid situations in which, because of different methodologies used for
pricing unbundled network elements and determining universal service
support, a carrier could receive support for the provision of universal
service that differs from the rate it pays to acquire access to the
unbundled network elements needed to provide universal service.
Consequently, to prevent differences between the pricing of unbundled
network elements and the determination of universal service support, we
urge states to coordinate the development of cost studies for the
pricing of unbundled network elements and the determination of
universal service support.
126. Development and Selection of a Suitable Forward-Looking Support
Mechanism for Rural Carriers
Consistent with our plan for non-rural carriers, we shall commence
a proceeding by October 1998 to establish forward-looking economic cost
mechanisms for rural carriers. Although a precise means of determining
forward-looking economic cost for non-rural carriers will be prescribed
by August 1998 and will take effect on January 1, 1999, rural carriers
will begin receiving support pursuant to support mechanisms
incorporating forward-looking economic cost principles only when we
have sufficient validation that forward-looking support mechanisms for
rural carriers produce results that are sufficient and predictable.
Consistent with the Joint Board's recommendation that mechanisms for
determining support for rural carriers incorporate forward-looking cost
principles, rather than embedded cost, we will work closely with the
Joint Board, state commissions, and interested parties to develop
support mechanisms that satisfy these principles.
127. To ensure that the concerns of rural carriers are thoroughly
addressed, Pacific Telecom suggests that a task force be established
specifically to study the development and impact of support mechanisms
incorporating forward-looking economic cost principles for rural
carriers. State Joint Board members and USTA have also recommended the
formation of a rural task force to study and develop a forward-looking
economic cost methodology for rural carriers. The state Joint Board
members contend that such a task force ``should provide valuable
assistance in identifying the issues unique to rural carriers and
analyzing the appropriateness of proxy cost models for rural
carriers.'' We support this suggestion. Such a task force should report
its findings to the Joint Board. We encourage the Joint Board to
establish the task force soon, so that its findings can be included in
any Joint Board report to the Commission prior to our issuance of the
FNPRM on a forward-looking economic cost methodology for rural carriers
by October 1998. Although the Joint Board has the responsibility to
appoint the members of the task force, we suggest that it include a
broad representation of industry, including rural carriers, as well as
a representative from remote and insular areas. We also suggest that
the meetings and records of the task force be open to the public.
128. Specifically, through the FNPRM, we will seek to determine
what mechanisms incorporating forward-looking economic cost principles
would be appropriate for rural carriers. We require that mechanisms
developed and selected for rural carriers reflect the higher operating
and equipment costs attributable to lower subscriber density, small
exchanges, and lack of economies of scale that characterize rural
areas, particularly in insular and very remote areas, such as Alaska.
We also require that cost inputs be selected so that the mechanisms
account for the special characteristics of rural areas in its cost
calculation outputs. We recognize the unique situation faced by
carriers serving Alaska and insular areas may make selection of cost
inputs for those carriers especially challenging. Thus, if the selected
mechanisms include a cost model, the model should use flexible inputs
to accommodate the variation in cost characteristics among rural study
areas due to each study area's unique population distribution.
Moreover, the Commission, working with the Joint Board, state
commissions, and other interested parties, will determine whether
calculating the support using geographic units other than CBGs would
more accurately reflect a rural carrier's costs. The Commission will
likewise consider whether such mechanisms should include a ``maximum
shift or change'' feature to ensure that the amount of support each
carrier receives will not fluctuate more than an established amount
from one year to the next, similar to the provision in
Sec. 36.154(f)(1) of the Commission's rules to mitigate separations and
high cost fund changes.
129. The Commission with the Joint Board's assistance will also
consider whether a competitive bidding process could be used to set
support levels for rural carriers. The record does not support adoption
of competitive bidding as a support mechanism at this time. The FNPRM
will examine the development of such a competitive bidding process that
will meet the requirements of both sections 214(e) and 254.
130. Applicable Benchmarks
The Joint Board recommended that the Commission adopt a benchmark
based on nationwide average revenue per line to calculate the support
eligible telecommunications carriers would receive for serving rural,
insular, and high cost areas. The Joint Board recommended that the
support that an eligible telecommunications carrier receives for
serving a supported line in a particular geographic area should be the
cost of providing service calculated using forward-looking economic
cost minus a benchmark amount. The benchmark is the amount subtracted
from the cost of providing service that is the basis for determining
the support provided from the federal universal service support
mechanisms.
131. The Joint Board recommended setting the benchmark at the
nationwide average revenue per line, because ``that average reflects a
reasonable expectation of the revenues that a telecommunications
carrier would be reasonably expected to use to offset its costs, as
estimated in the proxy model.'' Because it recommended that eligible
residential and single-line business be supported, with single-line
businesses receiving less support, the Joint Board recommended defining
two benchmarks, one for residential service and a second for single-
line business service. Because they found that a revenue-based
benchmark will require periodic review and more administrative
oversight than a cost-based benchmark, however, the majority state
members of the Joint Board recommended, in their second report to the
Commission the use of a benchmark based on the nationwide average cost
of service as determined by the cost model.
132. We agree with the Joint Board's recommendation, and intend to
establish a nationwide benchmark based on average revenues per line for
local, discretionary, interstatecaretA and intrastate access
services, and other telecommunications revenues that will be used with
either a cost model or a
[[Page 32882]]
cost study to determine the level of support carriers will receive for
lines in a particular geographic area. A non-rural eligible
telecommunications carrier could draw from the federal universal
service support mechanism for providing supported services to a
subscriber only if the cost of serving the subscriber, as calculated by
the forward-looking cost methodology, exceeds the benchmark. We note
that a majority of the commenters support the use of a benchmark based
on revenues per line. We also agree with the Joint Board that there
should be separate benchmarks for residential service and single-line
business service.
133. Consistent with the Joint Board's recommendation, we shall
include revenues from discretionary services in the benchmark. We agree
with Time Warner that a determination of the amount of support a
carrier needs to serve a high cost area should reflect consideration of
the revenues that the carrier receives from providing other local
services, such as discretionary services. As the Joint Board noted,
those revenues offset the costs of providing local service. Setting the
benchmark at a level below the average revenue per line, including
discretionary services, would allow a carrier to recover the costs of
discretionary services from customers purchasing these discretionary
services and from the universal service mechanisms. This unnecessary
payment would increase the size of the universal service support
mechanisms, and consequently require larger contributions from all
telecommunications carriers. We agree that competition could reduce
revenues from a particular service, we anticipate that the development
of competition in the local market will also lead to the development of
new services that will produce additional revenues per line and to
reductions in the costs of providing the services generating those
revenues. We will also review the benchmark at the same time we review
the means for calculating forward-looking economic cost. Thus, at these
periodic reviews, we can adjust both the forward-looking cost
methodology and the benchmark to reflect the positive effects of
competition.
134. We include revenues from discretionary services in the
benchmark for additional reasons. The costs of those services are
included in the cost of service estimates calculated by the forward-
looking economic cost models that we will be evaluating further in the
FNPRM. Revenues from services in addition to the supported services
should, and do, contribute to the joint and common costs they share
with the supported services. Moreover, the former services also use the
same facilities as the supported services, and it is often impractical,
if not impossible, to allocate the costs of facilities between the
supported services and other services. For example, the same switch is
used to provide both supported services and discretionary services.
Consequently, in modeling the network, the BCPM and the Hatfield 3.1
models use digital switches capable of providing both supported
services and discretionary services. Therefore, it would be difficult
for the models to extract the costs of the switch allocated to the
provision of discretionary services.
135. We also include both interstate and intrastate access revenues
in the benchmark, as recommended by the Joint Board. Access to IXCs and
to other local wire centers is provided by a part of the switch known
as the port. The methodologies filed in this proceeding include the
costs of the port as costs of providing universal service. The BCPM,
however, subtracts a portion of port costs allocated to toll calls.
Hatfield 3.1, in contrast, includes all port costs in the costs of
providing supported services. Both methodologies exclude per-minute
costs of switching that are allocated to toll calls. Therefore, the
methodologies filed in this proceeding do not include all access costs
in the costs of providing universal service. Access charges to IXCs,
however, have historically been set above costs as one implicit
mechanism supporting local service. We therefore conclude that, unless
and until both interstate and intrastate access charges have been
reduced to recover only per-minute switch and transport costs, access
revenues should be included in the benchmark. Accordingly, we reject
the proposals by some commenters to exclude revenues from discretionary
and access services in calculating the benchmark.
136. We also agree with the Joint Board that setting the benchmark
at nationwide average revenue per line is reasonable because that
average reflects a reasonable expectation of the revenues that a
telecommunications carrier could use to cover its costs, as estimated
by the forward-looking cost methodology we are adopting. A nationwide
benchmark will also be easy to administer and will make the support
levels more uniform and predictable than a benchmark set at a regional,
state, or sub-state level would make them. A nationwide benchmark, as
the Joint Board noted, will also encourage carriers to market and
introduce new services in high costs areas as well as urban areas,
because the benchmark will vary depending upon the average revenues
from carriers serving all areas. For that reason, contrary to the
contentions of some commenters, we conclude that a nationwide benchmark
will not harm carriers serving rural areas but rather encourage them to
introduce new services. We note that support levels for rural carriers
will be unaffected by the benchmark unless and until they begin to
transition to a forward-looking cost methodology, which would occur no
earlier than 2001. Further, we note that the states have discretion to
provide universal service support beyond that included in the federal
universal service support mechanism.
137. We agree the Joint Board's recommendation to adopt two
separate benchmarks, one for residential service and a second for
single-line business services. Because business service rates are
higher than residential service rates, we consider those additional
revenue derived from business services when developing the benchmark.
We note that the only parties who have opposed adopting separate
benchmarks contend that, because ILECs do not keep separate records for
residential and business revenues, separate benchmarks would be
administratively difficult. We do not believe, however, that using two
revenue benchmarks will be administratively difficult. For purposes of
universal service support, the eligible telecommunications carrier need
not determine the exact revenues per service, but only the number of
eligible residential and business connections it serves in a particular
support area. To calculate support levels, the administrator will take
the cost of service, as derived by the forward-looking cost
methodology, and subtract the applicable benchmark and multiply that
number by the number of eligible residential or business lines served
by the carrier in that support area.
138. The majority state members depart from the Joint Board
recommendation and now suggest the use of a cost-based benchmark. They
contend that it may be difficult to match the revenue used in a
benchmark with the cost of service included in the model. They also
argue that a revenue benchmark would require periodic review and more
regulatory oversight than a cost-based benchmark. Although we recognize
there may be some difficulties in using a revenue-based benchmark, we
agree with the Joint Board that a cost-based benchmark should not be
relied upon at this time. As the Joint Board noted, it is best to
compare the revenue to the cost to determine the needed support rather
[[Page 32883]]
than to examine only the cost side of the equation. A cost-based
benchmark, as Time Warner states, does not reflect the revenue already
available to a carrier for covering its costs for the supported
services. Even in some areas with above average costs, revenue can
offset high cost without resort to subsidies, resulting in maintenance
of affordable rates. We also agree with the majority state members of
the Joint Board that a cost-based benchmark will not completely satisfy
the objective of ensuring that only a reasonable allocation of joint
and common costs are assigned to the cost of the supported services.
Although the majority state members of the Joint Board now express
concern about the difficulty in matching the service revenue and the
cost of services included in a model, we remain confident that we can
do that. We also do not find that it will be administratively difficult
to establish and maintain a revenue-based benchmark, and intend to
review the benchmark when we review the forward-looking economic cost
methodology. Consequently, we will not adopt a cost-based benchmark at
this time, but will, as the majority state members of the Joint Board
suggest, address in the FNPRM the specific benchmark that should be
used.
139. As stated above, we have determined that the revenue benchmark
should be calculated using local service, access, and other
telecommunications revenues received by ILECs, including discretionary
revenue. Based on the data we have received in response to the data
request from the Federal-State Joint Board in CC Docket 80-286 (80-286
Joint Board) on universal service issues, it appears that the benchmark
for residential services should be approximately $31 and for single-
line businesses should be approximately $51. We recognize, as did the
Joint Board, that the precise calculation of the level of the benchmark
must be consistent with the means of calculating the forward-looking
economic costs of constructing and operating the network. Thus, we do
not adopt a precise calculation of the benchmark at this time, but will
do so after we have had an opportunity to review state cost studies and
the study or model that will serve as the methodology for determining
forward looking economic costs in those states that do not conduct cost
studies. We will also seek further information, particularly to clarify
the appropriate amounts of access charge revenue and intraLATA toll
revenue that should be included in the revenue benchmark.
140. We have determined to assess contributions for the universal
service support mechanisms for rural, insular, and high cost areas
solely from interstate revenues. We have adopted this approach because
the Joint Board did not recommend that we should assess intrastate as
well as interstate revenues for the high cost support mechanisms and
because we have every reason to believe that the states will
participate in the federal-state universal service partnership so that
the high cost mechanisms will be sufficient to guarantee that rates are
just, reasonable, and affordable. Support for rural, insular, and high
cost areas served by non-rural carriers distributed through forward-
looking economic cost based mechanisms need only support interstate
costs. We will monitor the high cost mechanisms to determine whether
additional federal support becomes necessary.
141. Accordingly, we must determine the federal and state shares of
the costs of providing high cost service. We have concluded that the
federal share of the difference between a carrier's forward looking
economic cost of providing supported services and the national
benchmark will be 25 percent. Twenty-five percent is the current
interstate allocation factor applied to loop costs in the Part 36
separations process, and because loop costs will be the predominant
cost that varies between high cost and non-high cost areas, this factor
best approximates the interstate portion of universal service costs.
142. Prior to the adoption of the 25 percent interstate allocation
factor for loop costs, the Commission allocated most non-traffic
sensitive (NTS) plant costs on the basis of a usage-based measure,
called the Subscriber Plant Factor (SPF). In 1984, the Commission and
the 80-286 Joint Board recognized that there was no purely economic
method of allocating NTS costs on a usage-sensitive basis. Therefore,
the Commission adopted a fixed interstate allocation factor to separate
loop costs between the interstate and intrastate jurisdictions. In
establishing a 25 percent interstate allocation factor for loop costs,
the Commission was guided by the following four principles adopted by
the 80-286 Joint Board: ``(1) Ensure the permanent protection of
universal service; (2) provide certainty to all parties; (3) be
administratively workable; and (4) be fair and equitable to all
parties.'' Because we find that the four principles adopted by the 80-
286 Joint Board are consistent with the principles set out in section
254(b) and because universal service support is largely attributable to
high NTS loop costs, we find that applying the 25 percent interstate
allocation factor historically applied to loop costs in the Part 36
separations process is appropriate here.
143. We believe that the states will fulfill their role in
providing for the high cost support mechanisms. Indeed, we note that
there is evidence that such state support is substantial, as states
have used a variety of techniques to maintain low residential basic
service rates, including geographic rate averaging, higher rates for
business customers, higher intrastate access rates, higher rates for
intrastate toll service, and higher rates for discretionary services.
The Commission does not have any authority over the local rate setting
process or the implicit intrastate universal service support reflected
in intrastate rates. We believe that it would be premature for the
Commission to substitute explicit federal universal service support for
implicit intrastate universal service support before states have
completed their own universal service reforms through which they will
identify the support implicit in existing intrastate rates and make
that support explicit. Although we are not, at the outset, providing
federal support for intrastate, as well as interstate, costs associated
with providing universal services, we will monitor the high cost
mechanisms to ensure that they are sufficient to ensure just,
reasonable, and affordable rates. We expect that the Joint Board and
the states will do the same and we hope to work with the states in
further developing a unified approach to the high cost mechanisms.
144. Non-Rural Carriers
We will continue to use the existing high cost support mechanisms
for non-rural carriers through December 31, 1998, by which time we will
have a forward-looking cost methodology in place for non-rural
carriers. We are also adopting rules that will make this support
portable, or transferable, to competing eligible telecommunications
carriers when they win customers from ILECs or serve previously
unserved customers. We also shall limit the amount of corporate
operations expenses that an ILEC can recover through high cost loop
support. We shall also extend the indexed cap on the growth of the high
cost loop fund. These modifications to the existing mechanisms shall
take effect on January 1, 1998.
145. Although the Joint Board defined universal service to include
support for single residential and business lines only, we join the
state members of the Joint Board in recognizing that an
[[Page 32884]]
abrupt withdrawal of support for multiple lines may significantly
affect the operations of carriers currently receiving support for
businesses and residential customers using multiple lines. Again,
because we will only continue to use the existing support mechanisms
for 1998, we find that non-rural carriers should continue to receive
high cost assistance and LTS for all lines. We shall continue to
evaluate whether support for second residential lines, second
residences, and multiple line businesses should be provided under the
forward-looking economic cost methodology.
146. Alternative Options
We have considered different methods for calculating support until
a forward-looking economic cost methodology for non-rural carriers
becomes effective. First, we could extend application of the Joint
Board's recommendation for rural carriers to non-rural carriers and
provide high loop cost support and LTS benefits on a per-line basis for
all high cost carriers, based on amounts received for each line that
are set at previous years' embedded costs. We decline to take that
approach, however, because we, like the state members of the Joint
Board, are concerned that a set per-line support level may not provide
carriers adequate support because such support does not take into
consideration any necessary and efficient facility upgrades by the
carrier.
147. A second alternative would be to calculate costs based on the
models before us, either by choosing a model or taking an average from
the results of the models. As we have stated, flaws in and unanswered
questions about the models that have been submitted in this proceeding
prevent us from choosing one now to determine universal service support
levels. For example, the proponents use widely divergent input values
for structure sharing and switch costs to determine the cost of
providing service. We agree with the commenters that these variations
account for a large part of the difference in results between the
models. We also agree with the state members of the Joint Board that
the current versions of the models are flawed in how they distribute
households within a CBG. The BCPM and Hatfield models also inaccurately
determine the wire centers serving many customers. These inaccuracies
can create great variance in the costs of service determined by the
models. For those reasons, we find that it would better serve the
public interest not to use the current versions of the models, but to
continue to work with the model proponents, industry, and the state
commissions to improve the models before we select one to determine
universal service support.
148. At this point we conclude that we should not select one model
over another because both models lack a compelling design algorithm
that specifies where within a CBG customers are located. The BCPM model
continues to uniformly distribute customers within the CBG, and
therefore spreads customers across empty areas and generates lot sizes
that appear to be larger than the actual lot sizes. On the other hand,
the clustering algorithm used in the Hatfield 3.1 model requires that
85 percent of the population live within two or four clusters within a
CBG. This requirement could misrepresent actual population locations
when the population is clustered differently.
149. A third alternative is the proposal made by BANX to base
universal support on prices for unbundled network elements. We reject
this alternative because the record before us indicates that the states
have yet to set prices for all of the unbundled network elements needed
to provide universal service, including loop, inter-office transport,
and switching.
150. We conclude that the public interest is best served by using
high cost mechanisms that allow carriers to continue receiving support
at current levels while we continue to work with state regulators to
select a forward-looking economic cost methodology. This approach will
ensure that carriers will not need to adjust their operations
significantly in order to maintain universal service in their service
areas pending adoption of a forward-looking economic cost methodology.
151. Indexed Cap
In order to allow an orderly conversion to the new universal
service mechanisms, the Joint Board on June 19, 1996 recommended
extending the interim cap limiting growth in the Universal Service Fund
until the effective date of the rules the Commission adopts pursuant to
section 254 and the Joint Board's recommendation. We adopted that
recommendation on June 26, 1996. Because we will continue to use the
existing universal service mechanisms, with only minor modifications,
until the forward-looking economic cost mechanisms become effective, we
clarify that the indexed cap on the Universal Service Fund will remain
in effect until all carrier receive support based on a forward-looking
economic cost mechanism. We anticipate that non-rural carriers will
begin receiving universal service support based on the forward-looking
economic cost mechanisms on January 1, 1999.
152. Continued use of this indexed cap will prevent excessive
growth in the size of the fund during the period preceding the
implementation of a forward-looking support mechanisms. We find that a
cap will encourage carriers to operate more efficiently by limiting the
amount of support they receive. From our experience with the indexed
cap on the current high cost support mechanisms, implemented pursuant
to the recommendations of the Joint Board in the 80-286 proceeding, we
find that the indexed cap effectively limits the overall growth of the
fund, while protecting individual carriers from experiencing extreme
reductions in support.
153. Corporate Operations Expense
In order to ensure that carriers use universal service support only
to offer better service to their customers through prudent facility
investment and maintenance consistent with their obligations under
section 254(k), we shall limit the amount of corporate operations
expense that may be recovered through the support mechanisms for high
loop costs. A limitation on the inclusion of such expenses was proposed
in the 80-286 NPRM. Commenters in this proceeding and the 80-286
proceeding generally support limiting the amount of corporate
operations expense that can be recovered through the high cost
mechanisms because costs not directly related to the provision of
subscriber loops are not necessary for the provision of universal
service. Most commenters suggest that there be a cap on the amount of
corporate operations expense that a carrier is allowed to recover
through the universal service mechanism, but some assert that these
expenses should not be allowed at all. We agree with the commenters
that these expenses do not appear to be costs inherent in providing
telecommunications services, but rather may result from managerial
priorities and discretionary spending. Consequently, we intend to limit
universal service support for corporate operations expense to a
reasonable per-line amount, recognizing that small study areas, based
on the number of lines, may experience greater amounts of corporate
operations expense per line than larger study areas.
154. We conclude that, for each carrier, the amount of corporate
operations expense per line that is supported through our universal
service
[[Page 32885]]
mechanisms should fall within a range of reasonableness. We shall
define this range of reasonableness for each study area as including
levels of reported corporate operations expense per line up to a
maximum of 115 percent of the projected level of corporate operations
expense per line. The projected corporate operations expense per line
for each service area will be based on the number of access lines and
calculated using a formula developed from a statistical study of data
submitted by NECA in its annual filing.
155. Furthermore, we will grant study area waivers only for
expenses that are consistent with the principle in section 254(e) that
carriers should use universal service support for the ``provision,
maintenance, and upgrading of facilities and services for which the
support is intended.'' Consistent with our limitation on corporate
operations expense discussed above, we believe that corporate
operations expense in excess of 115 percent of the projected levels are
not necessary for the provision of universal service, and therefore,
absent exceptional circumstances, we will not grant waivers to provide
additional support for such expenses. To the extent a carrier's
corporate operations expense is disallowed pursuant to these
limitations, the national average unseparated cost per loop shall be
adjusted accordingly.
156. Portability of Support
Under section 254(e), eligible telecommunications carriers are to
use universal service support for the provision, maintenance, and
upgrading of facilities and services for which the support is intended.
When a line is served by an eligible telecommunications carrier, either
an ILEC or a CLEC, through the carrier's owned and constructed
facilities, the support flows to the carrier because that carrier is
incurring the economic costs of serving that line.
157. In order not to discourage competition in high cost areas, we
adopt the Joint Board's recommendation to make carriers' support
payments portable to other eligible telecommunications carriers prior
to the effective date of the forward-looking mechanism. A competitive
carrier that has been designated as an eligible telecommunications
carrier shall receive universal service support to the extent that it
captures subscribers' lines formerly served by an ILEC receiving
support or new customer lines in that ILEC's study area. At the same
time, the ILEC will continue to receive support for the customer lines
it continues to serve. We conclude that paying the support to a CLEC
that wins the customer's lines or adds new subscriber lines would aid
the emergence of competition. Moreover, in order to avoid creating a
competitive disadvantage for a CLEC using exclusively unbundled network
elements, that carrier will receive the universal service support for
the customer's line, not to exceed the cost of the unbundled network
elements used to provide the supported services. The remainder of the
support associated with that element, if any, will go the ILEC to cover
the ILEC's economic costs of providing that element in the service area
for universal service support.
158. During the period in which the existing mechanisms are still
defining high cost support for non-rural carriers, we find that the
least burdensome way to administer the support mechanism will be to
calculate an ILEC's per-line support by dividing the ILEC's universal
service support payment under the existing mechanisms by the number of
loops served by that ILEC. That amount will be the support for all
other eligible telecommunications carriers serving customers within
that ILEC's study area.
159. As previously stated, we conclude that carriers that provide
service throughout their service area solely through resale are not
eligible for support. In addition, we clarify the Joint Board's
recommendation on eligibility and find that carriers that provide
service to some customer lines through their own facilities and to
others through resale are eligible for support only for those lines
they serve through their own facilities. The purpose of the support is
to compensate carriers for serving high cost customers at below cost
prices. When one carrier serves high cost lines by reselling a second
carrier's services, the high costs are borne by the second carrier, not
by the first, and under the resale pricing provision the second carrier
receives revenues from the first carrier equal to end-user revenues
less its avoidable costs. Therefore it is the second carrier, not the
first, that will be reluctant to serve absent the support, and
therefore it should receive the support.
160. Use of Embedded Cost to Set Support Levels for Rural Carriers
We adopt the Joint Board's recommendation that, after a reasonable
period, support for rural carriers also should be based on their
forward-looking economic cost of providing services designated for
universal service support. Although it recommended using forward-
looking economic cost calculated by using a cost model to determine
high cost support for all eligible telecommunications carriers, the
Joint Board found that the proposed models could not at this time
precisely model small, rural carriers' cost. The Joint Board expressed
concern that, if the proposed models were applied to small, rural
carriers, the models' imprecision could significantly change the
support that such carriers receive, providing carriers with funds at
levels insufficient to continue operations or, at the other extreme, a
financial windfall. The Joint Board noted that, compared to the large
ILECs, small, rural carriers generally serve fewer subscribers, serve
more sparsely populated areas, and do not generally benefit from
economies of scale and scope as much as non-rural carriers. Rural
carriers often also cannot respond to changing operating circumstances
as quickly as large carriers. We agree with the Joint Board that rural
carriers not use a cost model or other means of determining forward-
looking economic cost immediately to calculate their support for
serving rural high cost areas, but we do support an eventual shift from
the existing system.
161. Use of a Forward-Looking Economic Cost Methodology by Small Rural
Carriers
We acknowledge commenters' concerns that the proposed mechanisms
incorporating forward-looking economic cost methodologies filed in this
proceeding should not in their present form be used to calculate high
cost support for small, rural carriers. At present, we recognize that
these mechanisms cannot presently predict the cost of serving rural
areas with sufficient accuracy. Consistent with the Joint Board's
recommendation, we anticipate, however, that forward-looking support
mechanisms that could be used for rural carriers within the continental
United States will be developed within three years of release of this
Order. We conclude that a forward-looking economic cost methodology
consistent with the principles we set forth in this section should be
able to predict rural carriers' forward-looking economic cost with
sufficient accuracy that carriers serving rural areas could continue to
make infrastructure improvements and charge affordable rates. We
conclude that calculating support using such a forward-looking economic
cost methodology would comply with the Act's requirements that support
be specific, predictable, and sufficient and that rates for consumers
in rural and high cost areas be affordable and reasonably comparable to
rates charged for similar services in urban areas.
[[Page 32886]]
Moreover, such a mechanism could target support by calculating costs
over a smaller geographical area than the study areas currently used.
In addition, we find that the use of mechanisms incorporating forward-
looking economic cost principles would promote competition in rural
study areas by providing more accurate investment signals to potential
competitors. Accordingly, we find that, rather than causing rural
economies to decline, as some commenters contend, the use of such a
forward-looking economic cost methodology could bring greater economic
opportunities to rural areas by encouraging competitive entry and the
provision of new services as well as supporting the provision of
designated services. Because support will be calculated and then
distributed in predictable and consistent amounts, such a forward-
looking economic cost methodology would compel carriers to be more
disciplined in planning their investment decisions.
162. Conversion to a Forward-Looking Economic Cost Methodology
Consistent with the Joint Board, we recognize that new universal
service funding mechanisms could significantly change (but not
necessarily diminish) the amount of support rural carriers receive.
Moreover, we agree that compared to large ILECs, rural carriers
generally serve fewer subscribers, serve more sparsely populated areas,
and do not generally benefit as much from economies of scale and scope.
For many rural carriers, universal service support provides a large
share of the carriers' revenues, and thus, any sudden change in the
support mechanisms may disproportionately affect rural carriers'
operations. Accordingly, we adopt the Joint Board's recommendation to
allow rural carriers to continue to receive support based on embedded
cost for at least three years. Once a forward-looking economic cost
methodology for non-rural carriers is in place, we shall evaluate
mechanisms for rural carriers. Rural carriers will shift gradually to a
forward-looking economic cost methodology to allow them ample time to
adjust to any changes in the support calculation.
163. Treatment of Rural Carriers
We conclude that a gradual shift to a forward-looking economic cost
methodology for small, rural carriers is consistent with the Act and
our access charge reform proceeding. Section 251(f)(1) grants rural
telephone companies an exemption from section 251(c)'s interconnection
requirements, under specific circumstances, because Congress recognized
that it might be unfair to both the carriers and the subscribers they
serve to impose all of section 251's requirements upon rural companies.
Furthermore, the companion Access Charge Reform Order limits
application of the rules adopted in that proceeding to price-cap ILECs.
The Access Charge Reform Order concludes that access reform for non-
price-cap ILECs, which tend to be small, rural carriers, will occur
separately from reform for price-cap ILECs because small, rural ILECs,
which generally are under rate-of-return regulation, may not be subject
to some of the duties under section 251 (b) and (c) and will likely not
have competitive entry into their markets as quickly as price cap ILECs
will experience. Because the Commission's access reform proceeding does
not propose generally to change access charge rules for non-price-cap
ILECs, we find without merit Minnesota Coalition's argument that the
current embedded-cost support mechanisms must be maintained because
changes to part 69 may cause rural carriers' revenues to decrease.
Consistent with our approach towards non-price-cap ILECs in access
charge reform, we conclude that rural carriers' unique circumstances
warrant our implementation of separate mechanisms.
164. Supported Lines
In the process of selecting a forward-looking economic cost
methodology for calculating universal service support for carriers
serving high cost areas, we will determine whether lines other than
primary residential and single business connections should be eligible
for support. For this reason, we conclude that rural carriers should
continue to receive high cost loop assistance, DEM weighting, and LTS
support for all their working loops until they move to a forward-
looking economic cost methodology. State members of the Joint Board
concur with this determination.
165. Modifications to Existing Support Mechanisms
The Joint Board recommended that for the three years beginning
January 1, 1998, high cost support for rural ILECs be calculated based
on high cost loop support, DEM weighting, and LTS benefits for each
line based on historic support amounts. We are persuaded, however, by
the commenters and the recent State High Cost Report that, even in the
absence of new plant construction, this may not provide rural carriers
adequate support for providing universal service because support to
offset cost increases in maintenance expenses due to natural disasters
or inflation would not be available. We also find that, in order to
maintain the quality of the service they offer their customers,
carriers may not be able to avoid upgrading their facilities. We find
that, consistent with the State High Cost Report, the level of support
recommended by the Joint Board may not permit carriers to afford
prudent facility upgrades.
166. The state members recommend that the Commission adopt an
industry proposal regarding the determination of the needed amount of
support for rural carriers rather than the recommendation of the Joint
Board. Expressing concern that setting high cost support, DEM
weighting, and LTS at the current per-line amount could discourage
carriers from investing in their networks, the state members endorse a
proposal that would: (1) Use a carrier's embedded costs as compared to
the 1995 nationwide average loop cost, adjusted annually to reflect
inflation, to determine whether a carrier receives high cost support;
(2) use the 1995 interstate allocation factor for DEM weighting; and
(3) freeze the percentage of the NECA pool that is associated with LTS
at 1996 levels. The state Joint Board members further recommend that,
during the period before rural carriers begin to draw support based
solely on a forward-looking cost methodology, each carrier continue to
receive support based on all of the carrier's working lines, not just
the eligible residential and single-line business lines. The state
members of the Joint Board also depart from the Joint Board's
recommendation that rural carriers not be allowed to elect to draw
support solely based on forward-looking economic costs until January 1,
2001, when all rural carriers would begin using a forward-looking cost
study for calculating their high cost support.
167. We are persuaded by commenters stating that rural carriers
require more time to adjust to any change in universal service support
than large carriers do. While giving rural carriers ample time to plan
for changes from the current methodology, we shall retain many features
of the current support mechanisms for them until they move to a
forward-looking economic cost methodology. Because we believe that
rural carriers must begin immediately to plan their network maintenance
and development more carefully, we will use some attributes of the ILEC
Associations' proposal to limit the growth of the size of the current
high cost support mechanisms beginning in 2000. We will use those
mechanisms until they are replaced by
[[Page 32887]]
the forward-looking economic cost methodology. The ILEC Associations'
proposal would control the growth in support received by the carriers
but still leave support to cover, at least partially, costs of
essential plant investment. Because they find this proposal to offer a
better initial mechanism for rural carriers than the Joint Board's
recommendations, state Joint Board members also support the ILEC
Associations' proposal. Starting on January 1, 1998, rural carriers
shall receive high cost loop support, DEM weighting assistance, and LTS
benefits on the basis of the modification of the existing support
mechanism, described below. In addition, the other modifications to the
existing mechanisms set forth shall also take effect on January 1,
1998.
168. High Cost Loop Support
We agree with the state members of the Joint Board that rural
carriers may require a greater amount of support than fixed support
mechanisms would provide. Consequently, we decline to adopt the Joint
Board's recommendation to base support for high cost loops on costs
reported in 1995. In order to maintain existing facilities and make
prudent facility upgrades until such time as forward-looking support
mechanisms are in place, we direct that the use of the current formula
to calculate high cost loops for rural ILECs continue for two years.
Thus from January 1, 1998 through December 31, 1999, rural carriers
will calculate support using the current formulas.
169. Beginning January 1, 2000, however, rural carriers shall
receive high loop cost support for their average loop costs that exceed
115 percent of an inflation-adjusted nationwide average loop cost. The
inflation-adjusted nationwide average cost per loop shall be the 1997
nationwide average cost per loop as increased by the percentage in
change in Gross Domestic Product Chained Price Index (GDP-CPI) from
1997 to 1998. We index loop costs to inflation in order to limit the
growth in the fund because, historically, small carriers' costs have
risen faster than the national average cost per loop. As a result,
small carriers have drawn increased support from the fund. We are using
the GDP-CPI of the year for which costs are reported because the
support mechanisms reflect a two-year lag between the time when the
costs on which support is based are incurred and the distribution of
support. We are using the 1997 nationwide average loop cost per loop as
the benchmark because the 1998 nationwide average loop costs would not
be calculated until September 1999. The percentage of the above-average
loop cost that rural carriers may recover from the support mechanisms
during 2000 will remain consistent with the current provisions
concerning support for high loop costs in the Commission's rules. We
note that this modification to the existing benchmark for calculating
high cost loop support enjoys wide support among ILEC commenters and is
supported by the state Joint Board members in their report. We also
conclude that rural carriers should continue to receive this support
through the jurisdictional separations process, by allocating to the
interstate jurisdiction the amount of a recipient's universal service
support for loop costs.
170. Indexed Cap
Until rural carriers calculate their support using a forward-
looking economic cost methodology, we shall continue to prescribe a cap
on the growth of the fund to support high cost loops served by either
non-rural and rural carriers equal to the annual average growth in
lines. Because beginning January 1, 1999, non-rural carriers will no
longer receive support under the existing universal service mechanisms,
it is necessary to recalculate the cap based on the costs of the rural
carriers that will remain under the modified existing support
mechanisms. This overall cap will prevent excessive growth in the size
of the fund during the period preceding the implementation of a
forward-looking support mechanisms. We conclude that a cap will
encourage carriers to operate more efficiently by limiting the amount
of support they receive. We also conclude that excessive growth in high
loop cost support would make the change to forward-looking support
mechanisms more difficult for rural carriers if those support
mechanisms provide significantly different levels of support. From our
experience with the indexed cap on the current high cost support
mechanisms, implemented pursuant to the recommendations of the 80-286
Joint Board proceeding, we conclude that the indexed cap effectively
limits the overall growth of the fund, while protecting individual
carriers from experiencing extreme reductions in support.
171. DEM Weighting Support
We adopt the Joint Board's recommendation that a subsidy
corresponding in amount to that generated formerly by DEM weighting be
recovered from the new universal service support mechanisms.
Accordingly, the local switching costs assigned to the interstate
jurisdiction beginning in 1998 will include an amount based on the
modified DEM weighting factor. We will not, however, set DEM weighting
support on a per-line basis and calculate support for high switching
costs based on the amount by which revenues collected by each carrier
exceed what would be collected without DEM weighting for calendar year
1996. We conclude that setting support at those levels may not provide
rural carriers with sufficient resources to enable the carriers to make
prudent upgrades to their switching facilities so that they may
continue to offer quality service to their customers. As we have
discussed above, we do not believe that the fixed per-line support
recommended by the Joint Board would provide rural carriers adequate
support for providing universal service because support to offset
increases in maintenance expenses due to natural disasters or inflation
would not be available. We adopt a modified version of the ILEC
Associations' proposal to provide DEM weighting benefits prior to the
conversion to a forward-looking economic cost methodology.
172. Beginning on January 1, 1998, and continuing until a forward-
looking economic cost methodology for them becomes effective, rural
carriers will receive local switching support based on weighting of
their interstate DEM factors. Assistance for the local switching costs
of a qualifying carrier will be calculated by multiplying the carrier's
annual unseparated local switching revenue requirement by a local
switching support factor, where the local switching support factor is
the difference between the 1996 weighted and unweighted interstate DEM
factors. If the number of a carrier's lines increases during 1997 or
any successive year, either through the purchase of exchanges or
through other growth in lines, such that the current DEM weighting
factor would be reduced, the carrier must apply the lower weighting
factor to the 1996 unweighted interstate DEM factor in order to derive
the local switching support factor used to calculate universal service
support. We conclude that this mechanism will provide support for
carriers to make prudent upgrades to their switching equipment needed
to maintain, if not improve, the quality of service to their customers.
173. Long Term Support (LTS)
Consistent with the Joint Board's recommendation, beginning in
1998, rural carriers will recover from the new universal service
support mechanisms LTS at a level sufficient to protect their
[[Page 32888]]
customers from the effects of abrupt increases in the NECA CCL rates.
We agree with those commenters contending that the Joint Board's
recommendation that the mechanisms compensate each common line pool
member on the basis of its interstate common line revenue requirement
relative to the total interstate common line revenue requirement does
not consider each carrier's revenues from other sources, such as SLCs
and CCL charges. Accordingly, we decline to adopt the Joint Board's
recommendation to calculate the support for LTS on a fixed per-line
basis. Instead, we adopt a modified per-line support mechanisms for
providing LTS.
174. Beginning on January 1, 1998, we shall allow a rural carrier's
annual LTS to increase from its support for the preceding calendar year
based on the percentage of increase of the nationwide average loop
cost. LTS is a carrier's total common line revenue requirement less
revenues received from SLCs and CCL charges. This approach ties
increases in LTS to changes in common line revenue requirements.
Alternative options suggested are not sufficient because they depend on
an ability to determine a nationwide CCL charge, which will no longer
be possible if the non-pooling carriers switch to a per-line rather
than a per-minute CCL charge.
175. Corporate Operations Expense
As we described earlier, for universal service support, we will not
prescribe support for corporate operations expense for each carrier
study area, as measured on an average monthly per-line basis, in excess
of 115 percent of an amount projected for a service area of its sizes.
The projected amount will be defined by a formula based upon a
statistical study that predicts corporate operations expense based on
the number of access lines.
176. Sale of Exchanges
Until support for all carriers is based on a forward-looking
economic cost methodology, we conclude that potential universal service
support payments may influence unduly a carrier's decision to purchase
exchanges from other carriers. In order to discourage carriers from
placing unreasonable reliance upon potential universal service support
in deciding whether to purchase exchanges from other carriers, we
conclude that a carrier making a binding commitment on or after May 7,
1997 to purchase a high cost exchange should receive the same level of
support per line as the seller received prior to the sale. For example,
if a rural carrier purchases an exchange from a non-rural carrier that
receives support based on the forward-looking economic cost
methodology, the loops of the acquired exchange shall receive per-line
support based on the forward-looking economic cost methodology of the
non-rural carrier prior to the sale, regardless of the support the
rural carrier purchasing the lines may receive for any other exchanges.
Likewise, if a rural carrier acquires an exchange from another rural
carrier, the acquired lines will continue to receive per-line support
of the selling company prior to the sale. If a carrier has entered into
a binding commitment to buy exchanges prior to May 7, 1997, that
carrier will receive support for the newly acquired lines based upon an
analysis of the average cost of all its lines, both those newly
acquired and those it had prior to execution of the sales agreement.
This approach reflects the reasonable expectations of such purchasers
when they entered into the purchase and sale agreements. After support
for all carriers is based on the forward-looking economic cost
methodology, carriers shall receive support for all exchanges,
including exchanges acquired from other carriers, based on the forward-
looking economic cost methodology.
177. Early Use of Forward-Looking Economic Cost Methodology
Consistent with the recommendations in the State High Cost Report,
at this time, we find that, because of the current methodologies' high
margin of error for rural areas, we should not permit rural carriers to
begin to use the forward-looking economic cost methodology when the
non-rural ILECs do. We conclude that a forward-looking economic cost
methodology developed for non-rural carriers will require further
review before being applied to rural carriers. We conclude that a
forward-looking economic cost methodology for rural carriers should not
be implemented until there is greater certainty that the mechanisms
account reasonably for the cost differences in rural study areas.
178. Certification as a Rural Carrier
Consistent with the Joint Board's recommendation, we define ``rural
carriers'' as those carriers that meet the statutory definition of a
``rural telephone company.'' (47 U.S.C. 153(37)). In order for the
administrator to calculate support payments, a carrier must notify the
Commission and its state commission, that for purposes of universal
service support determinations, it meets the definition of a ``rural
carrier.'' Carriers should make such a notification each year prior to
the beginning of the payout period for that year. We find that a self-
certification process, coupled with random verification by the
Commission and the availability of the section 208 compliance process,
would ensure that support is distributed to a carrier without delay and
still provide adequate protection against abuse.
179. Portability of Support
We adopt the Joint Board's recommendation to make rural carriers'
support payments portable. A CLEC that qualifies as an eligible
telecommunications carrier shall receive universal service support to
the extent that it captures subscribers formerly served by carriers
receiving support based on the modified existing support mechanisms or
adds new customers in the ILEC's study area. We conclude that paying
the support to a competitive eligible telecommunications carrier that
wins the customer or adds a new subscriber would aid the entry of
competition in rural study areas.
180. We shall calculate an ILEC's per-line support by dividing the
ILEC's universal service support payment by the number of loops in the
ILEC's most recent annual loop count to calculate universal service
support for all eligible telecommunications carriers serving customers
within that ILEC's study area. Moreover, in order to avoid creating a
competitive disadvantage for an eligible CLEC using exclusively
unbundled network elements to provide service, that carrier will
receive the universal service support for the customer, not to exceed
the cost of the unbundled network elements used to provide the
supported services. If the service is provided in part through
facilities constructed and deployed by the CLEC and in part through
unbundled network elements, then support will be allocated between the
ILEC and the CLEC depending on the amount of support assigned to each
element and whether the carrier constructed the facilities used to
provide service or purchased access to an unbundled network element.
181. We conclude that determining a rural ILEC's per-line support
by dividing the ILECs' universal service support payment by the number
of loops served by that ILEC to calculate universal service support for
all eligible telecommunications carriers serving customers within that
rural ILEC's study area will be the least burdensome way to administer
the support mechanisms and will provide the competing carrier with an
incentive to operate efficiently. Besides using a forward-looking or
embedded costs system, the alternative
[[Page 32889]]
for calculating support levels for competing eligible
telecommunications carriers consists of requiring the CLECs to submit
cost studies. Compelling a CLEC to use a forward-looking economic cost
methodology without requiring the ILEC's support to be calculated in
the same manner, however, could place either the ILEC or the CLEC at a
competitive disadvantage. We thus disagree with commenters that assert
that providing support to eligible CLECs based on the incumbents'
embedded costs would violate section 254(e).
182. Alaska and Insular Areas
The Joint Board recommended that, because of the unique
circumstances faced by rural carriers providing service in Alaska and
insular areas, those carriers should not be required to shift to
support mechanisms based on the forward-looking economic cost at the
same time that other rural carriers are so required. The Joint Board
noted that carriers serving insular areas have higher shipping costs
for equipment and damage caused by tropical storms, while carriers
serving Alaska have limited construction periods and serve extremely
remote rural communities. Therefore, the Joint Board recommended that
rural carriers in Alaska and insular areas continue to receive support
based on the fixed support amounts. The Joint Board further recommended
that the Commission revisit at a future date the issue of when to move
such carriers to a forward-looking economic cost methodology. Given the
plan we adopt in this Order, we find that we do not need to resolve the
issue of rural carriers serving Alaska and insular areas at this time
because we have not set a timeframe for rural carriers to move to the
forward-looking economic cost methodology. We will revisit this
question when we decide the schedule for other rural carriers moving to
the forward-looking economic cost methodology. We agree with the Joint
Board that non-rural carriers serving Alaska and insular areas should
move to the forward-looking economic cost methodology at the same time
as other non-rural carriers. We note, however, that we retain the
ability to grant waivers of this requirement in appropriate cases.
183. We note that the forward-looking economic cost models that
have been presented to us so far do not include any information on
Alaska or the insular areas. We anticipate that information for non-
rural carriers serving Alaska and insular areas will be included in
future versions of the models. If such information is not available in
a timely manner, we recognize that we may need to adjust the schedule
for non-rural carriers serving Alaska and insular areas to move to
support based forward-looking economic cost. We will evaluate that
situation as we proceed with our determination of a forward-looking
economic cost methodology through the FNPRM. We also note that, in the
absence of such information in the models, the commissions for Alaska
and the insular areas may still submit a state cost study to the
Commission.
184. We agree with Guam Tel. Authority that, under the principle
set out in section 254(b)(3) this carrier should be eligible for
universal service support and clarify the procedures to be used for any
carriers, such as Guam Tel. Authority, that may not have historical
costs studies on which to base the set support amounts. Guam Tel.
Authority, or any other carrier serving an insular area that is not
currently included in the existing universal service mechanism, shall
receive support based on an estimate of annual amount of their embedded
costs. Such carriers must submit verifiable embedded-cost data to the
fund administrator.
185. Use of Competitive Bidding Mechanisms
In the NPRM, the Commission sought comment on whether competitive
bidding could be used to determine universal service support in rural,
insular, and high cost areas. Specifically, the Commission asked
whether relying on competitive bidding would be consistent with section
214(e), the provision of the statute that specifies the circumstances
under which telecommunications carriers are eligible to receive
universal service support. Under a competitive bidding mechanism
eligible telecommunications carriers would bid on the amount of support
per line that they would receive for serving a particular geographic
area.
186. The Joint Board identified many advantages arising from the
use of a competitive bidding system. We agree with the Joint Board and
the commenters that a compelling reason to use competitive bidding is
its potential as a market-based approach to determining universal
service support, if any, for any given area. The Joint Board and some
commenters also noted that by encouraging more efficient carriers to
submit bids reflecting their lower costs, another advantage of a
properly structured competitive bidding system would be its ability to
reduce the amount of support needed for universal service. In that
regard, the bidding process should also capture the efficiency gains
from new technologies or improved productivity, converting them into
cost savings for universal service. We find that competitive bidding
warrants further consideration.
187. We agree with the commenters that suggest we issue a notice to
examine issues related to the use of competitive bidding to set
universal service support levels for rural, insular, and high cost
areas. We find that the record in this proceeding does not contain
discussion of those issues adequate for us to define at this time a
competitive bidding mechanism that is also consistent with the
requirements of sections 214(e) and 254. Overall, there is even less
discussion in the comments on the Recommended Decision addressing the
use of competitive bidding by the Commission than in the comments filed
in response to the NPRM and the Common Carrier Bureau's Public Notice.
188. It is unlikely that there will be competition in a significant
number of rural, insular, or high cost areas in the near future.
Consequently, it is unlikely that competitive bidding mechanisms would
be useful in many areas in the near future. Given the limited utility
of a competitive bidding process in the near term, it is important that
we not rush to adopt competitive bidding procedures before we complete
a thorough and complete examination of the complex and unique issues
involved with developing bidding mechanisms for awarding of universal
service support. Furthermore, as envisioned in the proposals made to
the Commission thus far, competitive bidding will be a complement to,
not a substitute for, an alternative forward-looking economic cost
methodology. We will seek to define a role for a competitive bidding
mechanism as part of the forward-looking economic cost methodology by
which support to non-rural carriers for their provision of universal
service is defined after December 31, 1998.
189. We shall therefore issue a FNPRM examining specifically the
use of competitive bidding to define universal service support for
rural, insular, and high cost areas. Our goal will be to develop a
record on specific competitive bidding mechanisms sufficient to enable
us to adopt one, if we also find it to be in the public interest. A
separate proceeding will allow commenters to focus on the issues posed
by a decision to use competitive bidding for universal service support
in light of our actions in this Order.
[[Page 32890]]
Support for Low-Income Consumers
190. Authority to Revise Lifeline and Link Up Programs
We agree with the Joint Board that section 254(j) allows us to
adopt certain changes to the Lifeline program in order to make it
consistent with the goals of the 1996 Act. We thus concur with the
Joint Board's finding that Congress did not intend for section 254(j)
to codify every detail of the existing Lifeline program, but that it
intended to give the Joint Board and the Commission permission to leave
the Lifeline program in place without modification, despite Lifeline's
inconsistency with other portions of the 1996 Act.
191. Our authority to alter the existing low-income assistance
programs must be understood in light of our general authority to
preserve and advance universal service under section 254. We find that
section 254 clarifies the scope of the Commission's universal service
responsibilities in several fundamental respects. Most notably,
universal service as defined by section 254 is both intrastate and
interstate in nature. This feature of universal service is evident, for
example, in the case of low-income support programs. Affordability of
basic telephone service is necessary to ensure that low-income
consumers have access not only to intrastate services but to interstate
telecommunications as well.
192. Thus, we agree with the Joint Board that state and federal
governments have overlapping obligations to strengthen and advance
universal service. We further conclude that section 254 grants us
authority to ensure that states satisfy these obligations. That
authority is reflected, among other places, in Congress's directive
that the Commission ensure that support is ``sufficient'' to meet
universal service obligations. Although states also must ensure that
their support mechanisms are ``sufficient,'' they may only do so to the
extent that such mechanisms are not ``inconsistent with the
Commission's rules to preserve and advance universal service.''
193. In fulfilling our responsibility to preserve and advance
universal service, we find that the 1996 Act clarifies not only the
scope of the Commission's authority, but also the specific nature of
our obligations. With respect to the Lifeline and Link-Up programs, we
observe that the Act evinces a renewed concern for the needs of low-
income citizens. Thus, for the first time, Congress expresses the
principle that rates should be ``affordable,'' and that access should
be provided to ``low-income consumers'' in all regions of the nation.
These principles strengthen and reinforce the Commission's preexisting
interest in ensuring that telecommunications service is available ``to
all the people of the United States.'' Under these directives, all
consumers, including low-income consumers, are equally entitled to
universal service as defined by this Commission under section
254(c)(1).
194. We adopt the recommendation of the Joint Board to reject the
view offered by some commenters that section 254(j) prevents the
Commission from making any change to the Lifeline program. We find that
Congress did not intend to codify the existing Lifeline program so as
to immunize it from any future changes or improvements. We therefore
conclude that Congress intended section 254(j) to permit the Commission
to leave the Lifeline program in place, notwithstanding that the
program may conflict with the pro-competitive provisions of the 1996
Act.
195. Moreover, by its own terms, section 254(j) applies only to
changes made pursuant to section 254 itself. Our authority to restrict,
expand, or otherwise modify the Lifeline program through provisions
other than section 254 has been well established over the past decade.
In 1985, we created Lifeline under the general authority of sections 1,
4(i), 201, and 205 of the Act. Since then, we have relied on those
provisions to modify the program on several occasions. We must assume
that Congress was aware of the Commission's authority under Titles I
and II to amend Lifeline. Consequently, we agree with the Joint Board
that we retain the authority to revise the Lifeline program.
196. We also agree with the Joint Board that we are not barred from
relying on the authority of section 254 itself when modifying the
Lifeline program. Although section 254(j) provides that nothing in
section 254 ``shall affect'' the Lifeline program, nonetheless, like
the Joint Board, we do not believe that section 254(j) can reasonably
be read to prevent us from changing Lifeline to bring it into
conformity with the principles of section 254. Section 254 clearly
gives the Commission independent statutory authority to establish
federal mechanisms to provide universal service support to low-income
consumers, and section 254(j) in no way can be read to usurp the
Commission's authority under section 254 to establish such mechanisms.
Were section 254 to be interpreted to prohibit us from revising our
rules establishing the Lifeline program, we could, pursuant to section
254, establish new low-income universal service support mechanisms and
then, acting pursuant to sections 1, 4(i), and 201, simply abolish the
Lifeline program as duplicative.
197. Section 254(j) indicates that Congress did not intend to
require a change to the Lifeline program in adopting the new universal
service principles. Presumably, Congress did not want to be viewed as
mandating modifications to this worthy and popular program. Congress
did not intend, however, to prevent the Commission from making changes
to Lifeline that are sensible and clearly in the public interest. Thus,
we agree with the Joint Board that it ``has the authority to recommend,
and the Commission has authority to adopt, changes to the Lifeline
program to make it more consistent with Congress's mandates in section
254 if such changes would serve the public interest.''
198. In this section, we make changes to the Lifeline program that
we believe are necessary, are in the public interest, and advance
universal service. We emphasize that, in doing so, we are relying
principally upon our preexisting authority under Titles I and II of the
Communications Act (particularly sections 1, 4(i), 201, and 205). To
the extent that we act on the basis of the principles of section
254(b), however, we rely on the authority of that section as well.
199. We share the Joint Board's concern over the low subscribership
levels among low-income consumers and agree that changes in the current
Lifeline program are warranted. We are particularly concerned that two
factors deter subscribership among low-income consumers. First, several
states do not participate in the Lifeline program, and therefore low-
income consumers in those regions do not have access to Lifeline.
Second, some low-income consumers in states that participate in the
Lifeline program receive no assistance because not all carriers in
those areas are obligated to offer Lifeline. We find that the
unavailability of Lifeline to low-income consumers in these areas runs
counter to our duty to ``make available, so far as possible, to all the
people of the United States * * * a rapid, efficient Nationwide * * *
wire and radio communication service.'' The unavailability of Lifeline
to many low-income consumers also conflicts with the statutory
principle that access to telecommunications services should be extended
to ``(c)onsumers in all regions of the Nation, including low-income
consumers.'' For these reasons, we revise the Lifeline program pursuant
to our authority under sections 1, 4(i), 201, 205, and 254 to promote
access to
[[Page 32891]]
telecommunications service for all consumers.
200. Carriers' Obligation to Offer Lifeline
We concur with the Joint Board's conclusion that, to increase
subscribership among low-income consumers, we should modify the
Lifeline program so that qualifying low-income consumers can receive
Lifeline service from all eligible telecommunications carriers. Our
determination arises from a concern that, in certain regions of the
nation, carriers may not offer Lifeline service unless compelled to do
so. In requiring all eligible telecommunications carriers to offer
Lifeline service to qualifying low-income consumers, we make Lifeline
part of our universal service support mechanisms. We emphasize that in
imposing this obligation, we are acting under our general authority in
sections 1, 4(i), 201, and 205 of the Act, as well as our authority
under section 254.
201. Expanding Lifeline to Every State and Modifying Matching
Requirements
We also agree with the Joint Board that the Lifeline program should
be amended so that qualifying low-income consumers throughout the
nation can receive Lifeline service. Presently, only 44 states
(including the District of Columbia and the U.S. Virgin Islands)
participate in Lifeline. Because the Lifeline program currently
requires states to make a matching reduction in intrastate rates in
order to qualify for the SLC waiver, a state's decision not to
participate means that federal support will not be available in that
state. We agree with the Joint Board that a baseline amount of federal
support should be available in all states irrespective of whether the
state generates support from the intrastate jurisdiction. We agree with
the Joint Board, however, that state participation in Lifeline
historically has been an important aspect of the program. As a result,
we agree with the Joint Board that matching incentives should not be
eliminated entirely. We will provide a baseline federal support amount
to qualifying low-income consumers in all states, with a matching
component above the baseline level.
202. Lifeline Support Amount
In determining the appropriate amount of support for Lifeline, the
Joint Board indicated that it was uncertain whether a federal support
amount equal to the level of the SLC (currently a maximum of $3.50),
absent any state support, would be a sufficient baseline federal
support amount. Although the Lifeline program currently provides
federal support in the form of a SLC waiver (i.e., up to $3.50), that
support must be matched by equal or greater reductions in intrastate
rates. Thus, Lifeline customers currently receive overall reductions in
their charges of $7.00 or more, depending upon state participation. Our
revised Lifeline program will be available in all states, irrespective
of state participation. Thus, the baseline support must provide a
sufficient level of support even in states that generate no support
from the intrastate jurisdiction. The Joint Board therefore proposed a
baseline amount of $5.25 in federal support, which is half-way between
the current maximum federal support level of $3.50 and the $7.00
reduction in charges that a Lifeline customer would receive assuming
full state matching. In general, we believe that the record supports
adopting the Joint Board's proposal. We conclude that the $5.25 amount
represents a sound compromise and a pragmatic balancing of the goals of
extending Lifeline to states that currently do not participate and
maintaining incentives for states to provide matching funds.
203. Lifeline consumers will continue to receive the $3.50 in
federal support that is currently available. Further, we will provide
for additional federal support in the amount of $1.75 above the current
$3.50 level. For Lifeline consumers in a given state to receive the
additional $1.75 in federal support, that state need only approve the
reduction in the portion of the intrastate rate paid by the end user;
no state matching is required. The requirement of state consent before
we make available federal Lifeline support in excess of the federal SLC
is consistent with our overall deference to the states in areas of
traditional state expertise and authority. Because the states need not
provide matching funds to receive this amount, but only approve the
reduction of $1.75 in the portion of the intrastate rate that is paid
by the end user, we believe that the states will participate in this
aspect of the program.
204. We also adopt the Joint Board's recommendation that we
``provide for additional federal support equal to one half of any
support generated from the intrastate jurisdiction, up to a maximum of
$7.00 in federal support.'' Thus, if a state provides the minimum
amount of matching support to receive the full federal support amount,
the total reduction in end user charges would increase from $7.00 under
the current system to $10.50. We believe that this increase in total
support will affect positively the low subscribership levels among low-
income consumers that concerned the Joint Board. As with the $1.75 in
federal support above $3.50, states will have to approve this reduction
in intrastate rates provided by the additional federal support amount.
205. The Joint Board observed that many states currently generate
their matching funds through the state rate-regulation process. These
states allow incumbent LECs to recover the revenue the carriers lose
from charging Lifeline customers less by charging other subscribers
more. Florida PSC points out that this method of generating Lifeline
support from the intrastate jurisdiction could result in some carriers
(i.e., ILECs) bearing an unreasonable share of the program's costs. We
see no reason at this time to intrude in the first instance on states'
decisions about how to generate intrastate support for Lifeline. We do
not currently prescribe the methods states must use to generate
intrastate Lifeline support, nor does this Order contain any such
prescriptions. Many methods exist, including competitively neutral
surcharges on all carriers or the use of general revenues, that would
not place the burden on any single group of carriers. We note, however,
that states must meet the requirements of section 254(e) in providing
equitable and non-discriminatory support for state universal service
support mechanisms.
206. We conclude that we must seek further guidance from the Joint
Board on how to ensure the integrity of the Lifeline program in light
of changes we make today to our access charge rules. In the Access
Charge Reform Order, as part of our effort to implement the Joint
Board's suggestion that the current per-minute CCL charge be modified
to reflect the non-traffic sensitive nature of loop costs, we implement
a flat charge per primary residential line that is to be assessed
against the PIC. If the customer does not select a PIC, however, the
presubscribed interexchange carrier charge (PICC) will be assessed
against the end user.
207. We wish to ensure that these changes to our Part 69 rules,
which were not contemplated when the Joint Board made its
recommendations, will not have an adverse impact on Lifeline customers.
Specifically, we are concerned that the PICC may be assessed against
Lifeline customers who elect to receive toll blocking (for which
federal support will now be provided) because they will have no PIC
associated with their lines. Accordingly, we seek further guidance from
the Joint Board on how to maintain the integrity of the Lifeline
program and ensure
[[Page 32892]]
competitive neutrality in light of these changes to our part 69 rules.
208. Making Lifeline Competitively Neutral
In this Order, we endorse the Joint Board's recommendation that we
adopt the principle of ``competitive neutrality'' and conclude that
universal service support mechanisms and rules should not unfairly
advantage one provider, nor favor one technology. Consistent with this
principle, we agree that the funding mechanisms for Lifeline should be
made more competitively neutral. We find no statutory justification for
continuing to fund the federal Lifeline program through charges levied
only on some IXCs. As required by section 254, all carriers that
provide interstate telecommunications service now will contribute on an
equitable and nondiscriminatory basis.
209. In addition, we concur with the Joint Board's recommendation
that all eligible telecommunications carriers, not just ILECs, should
be able to receive support for serving qualifying low-income consumers.
Currently, only ILECs, which charge SLCs and waive such charges for
low-income consumers, can receive support under most circumstances. We
find, however, that eligible telecommunications carriers other than
ILECs also should have the opportunity to compete to offer Lifeline
service to low-income consumers and in turn receive support in a manner
similar to the current program. Support will be provided directly to
carriers under administrative procedures determined by the universal
service administrator in direct consultation with the Commission.
210. We acknowledge that the distribution of support to non-ILEC
carriers cannot be achieved simply by waiving the SLC. Carriers other
than ILECs do not participate in the formal separations process that
our rules mandate for ILECs and hence do not charge SLCs nor
distinguish between the interstate and intrastate portion of their
charges and costs. With respect to these carriers, we conclude that
Lifeline support must be passed through directly to the consumer in the
form of a reduction in the total amount due. Indeed, sections 254(e)
and (k) require eligible telecommunications carriers to pass through
Lifeline support directly to consumers. Furthermore, we do not believe
that requiring carriers to pass through the support amount conflicts
with our desire to establish mechanisms that are respectful of
traditional state authority. Rather, we note that a portion of every
carrier's charge can be attributed to the interstate jurisdiction,
whether or not the carrier formally participates in the separations
procedure.
211. The interstate portion of ILECs' rates to recover loop costs
is, almost without exception, greater than the amount of the SLC cap
for residential subscribers; we are therefore confident that this
amount is a reasonable proxy for the interstate portion of other
eligible telecommunications carriers' costs. Thus, we conclude that we
may require an amount equal to the SLC cap for primary residential and
single-line business connections to be deducted from carriers' end-user
charges without infringing on state ratemaking authority. Furthermore,
we find that providing the same amount of Lifeline support to all
eligible telecommunications carriers, including those that do not
charge SLCs, advances competitive neutrality. In sum, we conclude that
breaking the link between Lifeline and the Commission's part 69 rules
will promote competitive neutrality by allowing eligible carriers that
are not required to charge SLCs, such as CLECs and wireless providers,
to receive federal support for providing Lifeline.
212. The precise mechanisms for distributing and collecting
Lifeline funds will be determined by the universal service
administrator in direct consultation with the Commission. In general,
however, any carrier seeking to receive Lifeline support will be
required to demonstrate to the public utility commission of the state
in which it operates that it offers Lifeline service in compliance with
the rules we adopt today. These rules require that carriers offer
qualified low-income consumers the services that must be included
within Lifeline service, as discussed more fully below, including toll-
limitation service. ILECs providing Lifeline service will be required
to waive Lifeline customers' federal SLCs and, conditioned on state
approval, to pass through to Lifeline consumers an additional $1.75 in
federal support. ILECs will then receive a corresponding amount of
support from the new support mechanisms. Other eligible
telecommunications carriers will receive, for each qualifying low-
income consumer served, support equal to the federal SLC cap for
primary residential and single-line business connections, plus $1.75 in
additional federal support conditioned on state approval. The federal
support amount must be passed through to the consumer in its entirety.
In addition, all carriers providing Lifeline service will be reimbursed
from the new universal service support mechanisms for their incremental
cost of providing toll-limitation services to Lifeline customers who
elect to receive them. The remaining services included in Lifeline must
be provided to qualifying low-income consumers at the carrier's lowest
tariffed (or otherwise generally available) rate for those services, or
at the state's mandated Lifeline rate, if the state mandates such a
rate for low-income consumers.
213. We believe that we have the authority under sections 1, 4(i),
201, 205, and 254 to extend Lifeline to include carriers other than
eligible telecommunications carriers. We agree with the Joint Board,
however, and decline to do so at the present time. Elsewhere in this
Order, we express our intention to incorporate Lifeline into our
broader universal service mechanisms adopted in this proceeding. We
believe that a single support mechanism with a single administrator
following similar rules will have significant advantages in terms of
administrative convenience and efficiency. Furthermore, in deciding
which carriers may participate in Lifeline, we note that section 254(e)
allows universal service support to be provided only to carriers deemed
eligible pursuant to section 214(e).
214. We further observe that a large class of carriers that will
not be eligible to receive universal service support--those providing
service purely by reselling another carrier's services purchased on a
wholesale basis pursuant to section 251(c)(4)--will nevertheless be
able to offer Lifeline service. The Local Competition Order provides
that all retail services, including below-cost and residential
services, are subject to wholesale rate obligations under section
251(c)(4). Resellers therefore could obtain Lifeline service at
wholesale rates that include the Lifeline support amounts and can pass
these discounts through to qualifying low-income consumers. We are
hopeful that states will take the steps required to ensure that low-
income consumers can receive Lifeline service from resellers. Further,
we find that we can rely on the states to ensure that at least one
eligible telecommunications carrier is certified in all areas. As a
result, low-income consumers always will have access to a Lifeline
program from at least one carrier. We will reassess this approach in
the future if it appears that the revised Lifeline program is not being
made available to low-income consumers nationwide.
[[Page 32893]]
215. Consumer Qualifications for Lifeline.
We agree with the Joint Board that the Commission should maintain
this basic framework for administering Lifeline qualification in states
that provide intrastate support for the Lifeline program. State
agencies or telephone companies currently determine consumer
qualifications for Lifeline pursuant to standards set by narrowly
targeted programs approved by the Commission. We believe such criteria
leave states sufficient flexibility to target support based on that
state's particular needs and circumstances. We also concur with the
recommendation that the Commission require states that provide
intrastate matching funds to base eligibility criteria solely on income
or factors directly related to income (such as participation in a low-
income assistance program). Currently, some states only make Lifeline
assistance available to low-income individuals who, for example, are
elderly or have disabilities. We agree that the goal of increasing low-
income subscribership will best be met if the qualifications to receive
Lifeline assistance are based solely on income or factors directly
related to income.
216. We also adopt the Joint Board's recommendation that the
Commission apply a specific means-tested eligibility standard, such as
participation in a low-income assistance program, in states that choose
not to provide matching support from the intrastate jurisdiction.
Specifically, we find that the default Lifeline eligibility standard in
non-participating states will be participation in Medicaid, food
stamps, Supplementary Security Income (SSI), federal public housing
assistance or section 8, or Low Income Home Energy Assistance Program
(LIHEAP). We find that, in the interest of administrative ease and
avoiding fraud, waste, and abuse, the named subscriber to the local
telecommunications service must participate in one of these assistance
programs to qualify for Lifeline. We specifically decline to base
eligibility solely on a program, such as Aid to Families with Dependent
Children (AFDC), that will be altered significantly by the recently-
enacted welfare reform law. Because we agree that individuals who are
eligible for assistance from low-income assistance programs also should
be eligible for Lifeline, participation in at least one of the programs
mentioned above shall be the federal eligibility standard applied in
states that do not participate in Lifeline. We conclude that basing
Lifeline eligibility on participation in any of these low-income
assistance programs will achieve our goal of wide Lifeline
participation by low-income consumers, because the eligibility criteria
for several of these programs vary. Therefore, basing Lifeline
eligibility on participation in any of these programs will reach more
low-income consumers than basing Lifeline eligibility solely on one of
the programs. We further conclude that if participation in Medicaid,
food stamps, SSI, public housing assistance or section 8, or LIHEAP
becomes an unworkable standard, as evidenced, for instance, by a
disproportionately low number of Lifeline consumers in states where
such a standard is used, the Commission shall revise the standard.
217. We clarify that the Joint Board's recommendation, which we
adopt, requires states to base eligibility on income or factors
directly related to income and merely suggests using participation in a
low-income assistance program as the criterion. Thus, states may choose
their eligibility criteria as long as those criteria measure income or
factors directly related to income. We have no reason to conclude, at
this time, that states will not take the required steps to reconcile
Lifeline qualification with changes in welfare laws. We have tied the
default Lifeline qualification standards (which will apply in states
that do not provide intrastate funds) to programs that commenters
believe to be unaffected or minimally affected by the new welfare
legislation. We will, however, continue to monitor the situation and
may make further changes in the future if it appears that changes to
other programs unduly limit Lifeline eligibility.
218. We agree that states providing matching intrastate Lifeline
support should continue to have the discretion to determine the
appropriateness of verification of Lifeline customers' qualification
for the program. Because these states are generating support from the
intrastate jurisdiction, they have an incentive to control fraud,
waste, and abuse of the support mechanism. Because states that are
generating matching intrastate support have a strong interest in
controlling the size of the support mechanism, we do not find at this
time that imposing stricter federal verification requirements is
necessary to ensure that the size of the support mechanisms remains at
reasonable levels. We will revisit this conclusion, however, to ensure
the sustainability and predictability of the sizing of the support
mechanisms. In light of these conclusions, we find it no longer
necessary to reduce the level of Lifeline support in states that choose
not to require that consumer qualification be verified.
219. With respect to verification in states in which the federal
default qualification criteria apply, we will require carriers to
obtain customers' signatures on a document certifying under penalty of
perjury that the customer is receiving benefits from one of the
programs included in the default standard, identifying the program or
programs from which the customer receives benefits, and agreeing to
notify the carrier if the customer ceases to participate in such
program or programs.
220. Link Up
We agree with the Joint Board that the Link Up funding mechanisms
should be removed from the jurisdictional separations rules and that
the program should be funded through equitable and non-discriminatory
contributions from all interstate telecommunications carriers. Funding
the program through contributions from all interstate carriers will
allow for explicit and competitively neutral support mechanisms.
221. We also adopt the Joint Board's recommendation that we amend
our Link Up program so that any eligible telecommunications carrier may
draw support from the new Link Up support mechanism if that carrier
offers to qualifying low-income consumers a reduction of its service
connection charges equal to one half of the carrier's customary
connection charge or $30.00, whichever is less. Support shall be
available only for the primary residential connection. When the carrier
offers eligible customers a deferred payment plan for connection
charges, we agree with the Joint Board that we should preserve the
current rule providing support to reimburse carriers for waiving
interest on the deferred charges. In the absence of evidence that
increasing the level of Link Up support for connecting each eligible
customer would significantly promote universal service goals, we will
maintain the present level of support for Link Up, as the Joint Board
recommended. To ensure that the opportunity for carrier participation
is competitively neutral, we adopt the Joint Board's recommendation to
eliminate the requirement that the commencement-of-service charges
eligible for support be filed in a state tariff.
222. For the sake of administrative simplicity, we revise our rules
to require that the same qualification requirements that apply to
Lifeline in each state, including its verification standards, also
shall apply to Link Up in that state. This step will advance
administrative
[[Page 32894]]
simplicity while states assess their approaches to universal service
and while we seek further recommendations from the Joint Board. We
further observe that this rule will change nothing in the majority of
states, which already use the same eligibility criteria for both
programs. This change, however, will base states' ability to set Link
Up eligibility criteria on whether they participate in Lifeline.
Accordingly, we eliminate the requirement that states verify Link Up
customers' qualifications for the program and instead rely on the
states to determine whether the costs of verification outweigh the
potential for fraud, waste, and abuse. Because only those states
generating intrastate Lifeline support will make this determination,
they will have an independent incentive to control fraud, waste, and
abuse. In states that do not participate in Lifeline, the federal
default Lifeline qualifications also will apply to Link Up.
223. We also adopt the Joint Board's recommendation that states
shall be prohibited from restricting the number of service connections
per year for which low-income consumers who relocate can receive Link
Up support. Commenters observe that this rule is vital for migrant
farmworkers and low-income individuals who have difficulty maintaining
a permanent residence, and we agree that this rule will help ensure
that consumers in all regions of the nation have access to affordable
telecommunications services and that rates for such services are
reasonable.
224. Services for Low-Income Consumers
We agree with the Joint Board that we should ensure, through
universal service support mechanisms, that low-income consumers have
access to certain services. The current Lifeline program does not
require that low-income consumers receive a particular level of
telecommunications services. Thus, we amend the Lifeline program to
provide that Lifeline service must include the following services:
Single-party service; voice grade access to the public switched
telephone network; DTMF or its functional digital equivalent; access to
emergency services; access to operator services; access to
interexchange service; access to directory assistance; and toll-
limitation services. In determining the specific services to be
provided to low-income consumers, we adopt the Joint Board's reasoning
that section 254(b)(3) calls for access to services for ``[c]onsumers
in all regions of the Nation, including low-income consumers'' and that
universal service principles may not be realized if low-income support
is provided for service inferior to those supported for other
subscribers. All these services, with the exception of toll limitation,
also will be supported by universal service support mechanisms for
rural, insular, and high cost areas, and we therefore find that low-
income consumers should receive support for these services.
225. We further agree with the Joint Board's recommendation that
Lifeline consumers also should receive, without charge, toll-limitation
services. Studies demonstrate that a primary reason subscribers lose
access to telecommunications services is failure to pay long distance
bills. Because voluntary toll blocking allows customers to block toll
calls, and toll control allows customers to limit in advance their toll
usage per month or billing cycle, these services assist customers in
avoiding involuntary termination of their access to telecommunications
services. The Joint Board concluded, however, that low-income consumers
may not be able to afford voluntary toll-limitation services in a
number of jurisdictions. Therefore, we are confident that providing
voluntary toll limitation without charge to low-income consumers,
should encourage subscribership among low-income consumers.
Furthermore, we find that toll-limitation services are ``essential to
education, public health or public safety'' and ``consistent with the
public interest, convenience, and necessity'' for low-income consumers
in that they maximize the opportunity of those consumers to remain
connected to the telecommunications network.
226. We also adopt the Joint Board's recommendation that carriers
providing voluntary toll limitation should be compensated from
universal service support mechanisms for the incremental cost of
providing toll-limitation services. We find that recovery of the
incremental costs of toll-limitation services is adequate cost recovery
that does not place an unreasonable burden on the support mechanisms.
By definition, incremental costs include the costs that carriers
otherwise would not incur if they did not provide toll-limitation
service to a given customer, and carriers will be compensated for their
costs in providing such service. Because low-income consumers may
otherwise be unlikely to purchase toll-limitation services, we do not
find it is necessary to support the full retail charge for toll-
limitation services the carrier would charge other consumers. We
therefore also conclude that universal service support should not
contribute to the service's joint and common costs. We require that
Lifeline subscribers receive toll-limitation services without charge.
227. We emphasize that Lifeline consumers' acceptance of toll
blocking is voluntary, and that Lifeline consumers are free to select
toll control, which limits rather than prevents consumers' ability to
place toll calls from carriers providing such a service. Both toll
blocking and toll control are forms of toll-limitation service that
would be supported by federal universal service mechanisms.
228. We will authorize state commissions to grant carriers that are
technically incapable of providing toll-limitation services a period of
time during which they may receive universal service support for
serving Lifeline consumers while they complete upgrading their switches
so that they can offer such services. The Joint Board observed that
most carriers currently are capable of providing toll-blocking service,
and some carriers are capable of providing toll control. Eligible
telecommunications carriers with deployed switches that are incapable
of providing toll-limitation services, however, shall not be required
to provide such services to customers served by those switches until
those switches are upgraded. We adopt the Joint Board's recommendation,
however, that, when they make any switch upgrades, eligible
telecommunications carriers currently incapable of providing toll-
limitation services must add the capability to their switches to
provide at least toll blocking in any switch upgrades (but Lifeline
support in excess of the incremental cost of providing toll blocking
shall not be provided for such switch upgrades). This is not an
exception to eligible telecommunications carriers' general obligation
to provide toll-limitation services; rather, it is a transitional
mechanism to allow eligible telecommunications carriers a reasonable
time in which to replace existing equipment that technically prevents
the provision of the service.
229. We concur with the Joint Board that support should not be
provided for toll-limitation services for consumers other than low-
income consumers. Subscribership levels fall well below the national
average only among low-income consumers, and, as the Joint Board
observed, a principal reason for this disparity appears to be service
termination due to failure to pay toll charges. Therefore, to the
extent carriers are capable of providing them, toll-limitation services
should be supported only for low-income consumers at this time.
[[Page 32895]]
230. No Disconnection of Local Service for Non-Payment of Toll Charges
We also adopt the Joint Board's recommendation that we should
prohibit eligible telecommunications carriers from disconnecting
Lifeline service for non-payment of toll charges. Studies suggest that
disconnection for non-payment of toll charges is a significant cause of
low subscribership rates among low-income consumers. Furthermore, the
no-disconnect rule advances the principles of section 254 that
``quality services should be available at just, reasonable, and
affordable rates'' and that access to telecommunications services
should be provided to ``consumers in all regions of the nation,
including low-income consumers.'' We therefore believe that such a rule
is within the ambit of our authority in section 254. We further find,
consistent with these principles, that an eligible telecommunications
carrier may not deny a Lifeline consumer's request for re-establishment
of local service on the basis that the consumer was previously
disconnected for non-payment of toll charges.
231. We also find that our adoption of a no-disconnect rule will
make the market for billing and collection of toll charges more
competitively neutral. Currently, the ILEC is the only toll charge
collection agent that can offer the penalty of disconnecting a
customer's local telephone service for non-payment of other charges.
ILECs have maintained this special prerogative, although the interstate
long distance market and the local exchange markets legally have been
separated for over a decade, and interstate billing and collection
activities have been deregulated since 1986. Because the practice of
disconnecting local service for non-payment of toll charges essentially
is a vestige of the monopoly era, we find our rule prohibiting that
practice will further advance the pro-competitive, deregulatory goals
of the 1996 Act.
232. We agree with several commenters and limit the federal rule to
Lifeline subscribers at this time, because only low-income consumers
experience dramatically lower subscribership levels that can be
attributed to toll charges. If we subsequently find that subscribership
levels among non-Lifeline subscribers begin to decrease, we will
consider whether this rule should apply to all consumers. In the
interest of comity, however, we leave to the states' discretion whether
such a rule should apply to other consumers at this time.
233. We further conclude that carriers offering Lifeline service
must apply partial payments received from Lifeline consumers first to
local service charges and then to toll charges, in keeping with our
goal of maintaining low-income consumers' access to local
telecommunications services. We find that this rule furthers the
principle in section 254 that access to telecommunications services
should be provided to ``consumers in all regions of the nation,
including low-income consumers'' and is within our authority in section
1 to make communications services available to as many people as
possible. Whether a Lifeline consumer's long distance and local service
providers are the same or different entities shall not affect the
application of this rule. While a carrier providing both local and long
distance service to the same consumer must be able to distinguish
between the services' respective charges to comply with our rule, we
find that any administrative burden this initially may cause is
outweighed by the benefit of maintaining Lifeline consumers' access to
local telecommunications services.
234. We also do not condition the rule prohibiting disconnection of
local service for non-payment of toll charges on the consumer's
agreement to accept toll-limitation services. Proponents of this
condition essentially argue that without this condition carriers will
experience higher levels of uncollectible toll expenses. We are not
convinced that toll limitation is necessary, however, because toll-
service providers already have available the functional equivalent of
toll limitation. That is, we observe that our rule prohibiting
disconnection of Lifeline service will not prevent toll-service
providers from discontinuing toll service to customers, including
Lifeline customers, who fail to pay their bills. Although this may have
been impossible with the switching technology used in the past, it is
achievable now. In virtually all cases, IXCs receive calling party
information with each call routed to them and could refuse to complete
calls from subscriber connections with arrearages.
235. Despite the benefits of a no-disconnect rule for Lifeline
consumers, we agree with the Joint Board that state utilities
regulators should have the ability, in the first instance, to grant
carriers a limited waiver of the requirement under limited, special
circumstances. Accordingly, we adopt the Joint Board's recommendation
that carriers may file waiver requests with their state commissions. To
obtain a waiver, the carrier must make a three-pronged showing. First,
the carrier must show that it would incur substantial costs in
complying with such a requirement. Such costs could relate to burdens
associated with technical or administrative issues, for example. For
example, some carriers providing both local and long distance service
to the same consumer may find it particularly burdensome to distinguish
between local and long distance charges. Second, the carrier must
demonstrate that it offers toll-limitation services to its Lifeline
subscribers. We find that, if a carrier is permitted by its state
commission to disconnect local service for non-payment of toll bills,
its Lifeline consumers should at least be able to control their toll
bills through toll limitation. Third, the carrier must show that
telephone subscribership among low-income consumers in its service area
in the state from which it seeks the waiver, is at least as high as the
national subscribership level for low-income consumers. Carriers must
make this showing because, we conclude, applying a no-disconnect policy
to carriers serving areas with subscribership levels below the national
average will help to improve such particularly low subscribership
levels. This waiver standard is therefore extremely limited, and a
carrier must meet a heavy burden to obtain a waiver. Furthermore, such
waivers should be for no more than two years, but they may be renewed.
If a party believes that a state commission has made an incorrect
decision regarding a waiver request, or if a state commission does not
make a decision regarding a waiver request within 30 days of its
submission, such party may file an appeal with the Commission. The
party must file the appeal with the Commission within 30 days of either
the state commission's decision or the date on which the state
commission should have rendered its decision. Furthermore, a state
commission choosing not to act on waiver requests promptly should refer
any such requests to the Commission. We agree with the Joint Board that
carriers must offer Lifeline customers toll limitation without charge
and without time restrictions in order to meet the second prong of the
waiver requirement.
236. Prohibition on Service Deposits
Pursuant to the Joint Board's recommendation and many commenters'
urging, we adopt a rule prohibiting eligible telecommunications
carriers from requiring a Lifeline subscriber to pay service deposits
in order to initiate service if the subscriber voluntarily elects to
receive toll blocking. We find that eliminating service deposits for
Lifeline customers upon their acceptance of toll blocking is
[[Page 32896]]
consistent with section 254(b) and within our general authority under
sections 1, 4(i), 201, and 205 of the Act. Section 201 of the Act gives
the Commission authority to regulate common carriers' rates and service
offerings, and section 1 directs that the Commission's regulations
provide as many people as possible with the ability to obtain
telecommunications services at reasonable rates. We find that, because
carriers' high service deposits deter subscribership among low-income
consumers, it is within our authority to prohibit carriers from
charging service deposits for Lifeline consumers who accept toll
blocking. Research suggests that carriers often require customers to
pay high service deposits in order to initiate service, particularly
when customers have had their service disconnected previously.
Therefore, we prohibit eligible telecommunications carriers from
requiring Lifeline service subscribers to pay service deposits in order
to initiate service if the subscriber voluntarily chooses to receive
toll blocking. As we have stated, universal service support shall be
provided so that toll blocking is made available to all Lifeline
consumers at no additional charge. During the period of time when
carriers incapable of providing toll-limitation services are permitted
to upgrade their switches to become capable of providing such services,
however, Lifeline subscribers may be required to pay service deposits.
237. Carriers may protect themselves against consumers' failure to
pay local charges by requesting advance payments in the amount of one
month's charges, as most ILECs currently do. We would consider an
advance-payment requirement exceeding one month to be an improper
deposit requirement, however. That is, while carriers could charge one
month's advance payment, they may take action against consumers only
after such charges have been incurred (through disconnection or
collection efforts, for example). Assessing charges on consumers before
any overdue payments are owed could make access to telecommunications
services prohibitively expensive for low-income consumers.
238. Other Services
In response to the NPRM, some commenters suggest that low-income
consumers should receive free access to information about telephone
service and that compensation for providing such information should
come from support mechanisms. These commenters appear to be concerned
that low-income consumers will be unable to place calls to gain
telephone service information if the calls otherwise would be an in-
region toll call, or if the state's Lifeline program allows only a
limited number of free calls. Similarly, NAD suggests that universal
service support mechanisms should provide support so that TTY users can
make free relay calls to numbers providing LEC service information. We
agree with the Joint Board's recommendation that the states are able to
determine, pursuant to section 254(f), whether to require carriers to
provide Lifeline customers with free access to information about
telephone service. The states are most familiar with the number of
consumers in their respective states affected by charges for these
calls and may impose such a requirement on carriers pursuant to section
254(f) through state universal service support mechanisms.
Additionally, we find that the record on free access to telephone
service information does not adequately explain how to support access
to such information in a competitively neutral way, so that consumers
are assured access to such information from all eligible service
providers. We agree with the Joint Board that the same concerns
militate against providing federal support for low-income consumers
with disabilities making relay calls to gain access to LEC service
information.
239. We concur with the Joint Board that, given the present
structure of residential interexchange rates, the record does not
support providing universal service support for usage of interexchange
and advanced services for low-income consumers. We will, however,
continue to monitor the interexchange services market to determine
whether additional measures are necessary for low-income consumers. We
observe that Lifeline services will be provided by telecommunications
carriers that have been certified as eligible for universal service
support pursuant to section 214(e). Such carriers will be obligated to
provide certain services, including access to interexchange service, to
consumers in rural, insular, and high cost areas, and we decline to
specify a different level of service for low-income consumers.
240. Some commenters disagree with the Joint Board's recommendation
that issues relating to special-needs equipment for consumers with
disabilities should not be addressed in this proceeding because
Congress provided for disabled individuals' access to
telecommunications services separately in section 255. We agree with
the Joint Board, however, that these matters are best addressed in a
proceeding to implement section 255. We observe that we have taken a
first step toward the implementation of section 255 with the release of
a Notice of Inquiry on September 19, 1996 and January 14, 1997.
Congress specifically identified other categories of users for whom
support should be provided pursuant to section 254, such as low-income
consumers, consumers in rural, insular, and high cost areas, schools
and libraries, and rural health care providers. Similarly, Congress
clearly addressed access by disabled individuals in section 255.
241. We generally agree with commenters that argue that low-income
subscribership levels might increase if there were more information
available to low-income consumers about the existence of assistance
programs. We agree with the Joint Board, however, that the states are
in a better position than the Commission to supply such information,
particularly given the flexibility states have to target low-income
universal service programs to the particular needs of their residents.
Furthermore, while we conclude that support from federal universal
service support mechanisms will not be given to carriers distributing
such information, we note that eligible telecommunications carriers
will be required to advertise the availability of, and charges for,
Lifeline pursuant to their obligations under section 214(e)(1).
242. Implementation of Revised Lifeline and Link Up Programs
Although we find that the changes to Lifeline and Link Up we now
adopt will make both programs consistent with the Act and our objective
of increasing subscribership among low-income consumers, we find that
the public interest would not be served by disrupting the existing
Lifeline and Link Up services that ILECs currently offer in most areas
of the country. We therefore must select a date on which the current
Lifeline and Link Up programs will terminate and the new programs
begin.
243. Because the new universal service support mechanisms must be
in place in order to fund the revised Lifeline and Link Up programs, we
conclude that the new Lifeline and Link Up funding mechanisms will
commence on January 1, 1998. Additionally, support for toll limitation
for Lifeline subscribers shall begin at that same time, because support
for this service also should come from the new support mechanisms.
Issues Unique to Insular
244. In the Recommended Decision, the Joint Board recognized the
special circumstances faced by carriers and
[[Page 32897]]
consumers in the insular areas of the United States, particularly the
Pacific Island territories. The Joint Board recommended that all of the
universal service mechanisms adopted in this proceeding should be
available in those areas. Thus, low-income residents living in insular
areas, such as American Samoa and the U.S. Virgin Islands, would
benefit from the Lifeline and Link-up programs, and schools, libraries,
and rural health care providers in insular areas would benefit from the
programs the Joint Board recommended for providing services to those
institutions pursuant to section 254(h). Likewise, carriers in insular
areas would be potentially eligible for universal service support if
they serve high cost areas. We agree and adopt these recommendations of
the Joint Board and conclude, in accordance with section 254, that
insular areas shall be eligible for the universal service programs
adopted in this Order.
245. The Joint Board also recommended that the Commission work with
an affected state if subscribership levels in that state fall from the
current levels on a statewide basis. The record indicates that
subscribership levels in insular areas are particularly low.
Accordingly, we will issue a Public Notice to solicit further comment
on the factors that contribute to the low subscribership levels that
currently exist in insular areas, and to examine ways to improve
subscribership in these areas.
246. Regarding support for toll-free access and access to
information services in insular areas, the Joint Board recommended that
the Commission take no specific action at this time, but revisit this
issue at a later date. The Joint Board's recommendation reflects the
fact that Guam and CNMI will be included in the NANP by July 1, 1997,
and that the Commission will require interstate carriers serving the
Pacific Island territories to integrate their rates with the rates for
services that they provide to other states no later than August 1,
1997. The Joint Board noted that those changes will affect decisions by
the carriers' business customers and information service providers on
whether to locate in a certain area or to provide toll-free access to
that area.
247. We agree with the Joint Board's recommendation that we take no
action regarding support for toll-free access and access to information
services for the Pacific Island territories now, but revisit whether we
should provide such support after those islands are included in NANP
and interexchange carriers have integrated the islands into their rate
structures. We agree with the Joint Board that it is too early to
assess whether there should be universal service support for toll-free
access and information services in the Pacific Island territories or
whether a decision not to provide support for these services would
violate either section 202 or section 254(b)(3).
248. We anticipate that, when final rate-integration plans are
filed, on or before June 1, 1997, the Pacific Island territories will
be included in the nationwide service offerings of toll-free access
service providers. Because they will be part of the NANP by the time
that the rate integration plans become effective in August, these
islands should be included in any nationwide service offering made
after that time. Subscribers to toll-free access service will, of
course, continue to be able to offer their customers toll-free access
to the subscribers' businesses on less than a nationwide basis, such as
in regional or statewide toll-free service areas. Thus we do not find
it necessary to adopt a specific requirement that carriers providing
toll-free access service include the Pacific Island territories in
their ``nation-wide'' service area, as suggested by the Governor of
Guam.
249. We agree with the commenters that there should be some period
in which residents of CNMI and Guam can continue to have access to
toll-free numbers while the market adjusts to the inclusion of those
islands in the NANP and rate integration. We note that under the
industry plan for introducing the new numbering plan areas (NPAs) for
CNMI and Guam there is a twelve-month ``permissive dialing'' period
during which callers may use either the NANP numbers or continue to use
the international numbering plan to place calls to and from the
islands. We find it in the public interest to permit the continued use
of 880 and 881 numbers by end users in the Pacific Island territories
to place toll-free calls during that ``permissive dialing'' period--
until July 1, 1998. We believe that such a period provides ample time
for toll-free access customers to evaluate the costs and benefits of
including the Pacific Island territories in their toll-free access
service areas and to decide whether to include the islands in their
area covered by the toll-free dialing service agreements with their
service providers. We also note that the islands will be included in
the NANP a month before the rate-integration plans must become
effective. Without this transition period, there would be a month
during which consumers could not use 880 or 881 numbers and during
which toll-free access customers might not have the benefit of
integrated rates to the islands.
250. Toll-free service is currently provided in CNMI and Guam as
inbound foreign-billed service. This service allows a calling party who
is in another NANP country to pay for a call from his or her location
to the United States, where the call is linked to the toll-free
service. For customers in CNMI and Guam, it means that they pay the
portion of the 880/881 call from their location to Hawaii, where it is
linked to the toll-free service.
251. According to a resolution of the Industry Numbering Committee
(INC), however, the use of 880 and 881 numbers for inbound foreign-
billed 800-type service was to be restricted to calls placed from
foreign locations within the NANP to toll-free dialing numbers in the
United States. Thus, consumers in CNMI and Guam would be unable to make
880/881 calls once those territories are included in the NANP. We find
that the circumstances in these territories warrant exercise of our
regulatory powers over numbering pursuant to section 251(e) of the Act
to supersede this industry agreement by providing for the transition
period described above that will allow end users in CNMI and Guam the
continued use of 880/881 numbers to place toll-free calls. This action
is related to the implementation of the 1996 Act, and is extremely
limited in scope--applying only to 880 and 881 calls from CNMI and Guam
and only until July 1, 1998, which will coincide with the permissive
dialing period established by the Administrator of the NANP. We also
note that none of the parties that filed comments in this proceeding
have objected to the proposal made by the Governor of Guam and CNMI to
continue the use of the 880/881 numbers from CNMI and Guam during this
period. We also find that this action is in keeping with the Joint
Board's intent that we allow the telecommunications markets in CNMI and
Guam time to adjust to the inclusion of the islands in the NANP before
we revisit whether to provide universal service support for toll-free
access services from those areas.
252. We also find that the use of 880 and 881 numbers for a limited
transition period does not violate section 228 of our rules regarding
pay-per-call services. Calls using 880 and 881 do not fall within the
definition of ``pay-per-call'' because they are not accessed through a
900 number, and the calling party is only charged for the transmission,
or part of the transmission, of the call. Although the 880 or 881
number provides a link to a toll-free number, it is not a toll-free
number itself. Those numbers are not
[[Page 32898]]
advertised as toll-free numbers and it is understood, particularly by
consumers in the Pacific Island territories who have been using the
numbers over the past few years, that there is a charge associated with
the use of the numbers. Therefore, we conclude that the use of an 880
or 881 number does not violate the restrictions on the use of toll-free
numbers in section 228 or our rules.
253. We thus agree with CNMI that there is no legal restriction on
using 880 and 881 numbers for calls from CNMI and Guam to toll-free
access numbers within the NANP. Indeed, because we find the temporary
use of those numbers for access to toll-free services in the Pacific
Island territories to be in the public interest, at least for a short
period, we shall permit carriers originating calls from the Pacific
Island territories to toll-free access services within the NANP to
continue using 880 and 881 numbers to provide access to those services
until July 1, 1998. Consumers on those islands should thus be able to
continue to use 880/881 to access toll-free numbers during that period.
We anticipate that by July 1, 1998, the businesses subscribing to toll-
free access services will have made a business decision as to whether
to include the Pacific Island territories in their toll-free access
service plans. As recommended by the Joint Board, we will then revisit
the issue of whether universal service support is needed for toll-free
access and access to information services from the Pacific Island
territories.
Schools and Libraries
254. Telecommunications Services
We adopt the Joint Board's recommendation to provide schools and
libraries with the maximum flexibility to purchase from
telecommunications carriers whatever package of commercially available
telecommunications services they believe will meet their
telecommunications service needs most effectively and efficiently.
255. The establishment of a single set of priorities for all
schools and libraries would substitute our judgment for that of
individual school administrators throughout the nation, preventing some
schools and libraries from using the services that they find to be the
most efficient and effective means for providing the educational
applications they seek to secure. Given the varying needs and
preferences of different schools and libraries and the relative
advantages and disadvantages of different technologies, we agree that
individual schools and libraries are in the best position to evaluate
the relative costs and benefits of different services and technologies.
We also agree that our actions should not disadvantage schools and
libraries in states that have already aggressively invested in
telecommunications technologies in their state schools and libraries.
Because we will require schools and libraries to pay a portion of the
costs of the services they select, we agree with the Joint Board that
allowing schools and libraries to choose the services for which they
will receive discounts is most likely to maximize the value to them of
universal service support and to minimize inefficient uses of services.
256. Permitting schools and libraries full flexibility to choose
among telecommunications services also eliminates the potential risk
that new technologies will remain unavailable to schools and libraries
until the Commission has completed a subsequent proceeding to review
evolving technological needs. Thus, in an environment of rapidly
changing and improving technologies, empowering schools and libraries,
regardless of wealth and location, to choose the telecommunications
services they will use as tools for educating their students will
enable them to use and teach students to use state-of-the-art
telecommunications technologies as those technologies become available.
257. We limit section 254(c)(3) telecommunications services to
those that are commercially available, and we find no reason to
interpret section 254(c)(3) to require us to adopt a more narrow
definition of eligible services. We observe that a state preferring a
program that targets a narrower or broader set of services may make
state funds available to schools or libraries that purchase those
services.
258. Eligible Services
We also follow the Joint Board's recommendation that schools and
libraries receive rate discounts from telecommunications carriers for
basic ``conduit'' access to the Internet. We conclude that sections
254(c)(3) and 254(h)(1), in the context of the broad policies set forth
in section 254(h)(2), authorize us to permit schools and libraries to
receive the telecommunications and information services provided by
telecommunications carriers needed to use the Internet at discounted
rates.
259. We observe that section 254(c)(3) grants us authority to
``designate additional services for support'' and section 254(h)(1)(B)
authorizes us to fund any section 254(c)(3) services. The generic
universal service definition in section 254(c)(1) and the rate
provision regarding special services for rural health care providers in
section 254(h)(1)(A) are both explicitly limited to telecommunications
services. In the education context, however, the statutory references
are to the broad class of ``services,'' rather than the narrower class
of ``telecommunications services.'' Specifically, section 254(c)(3)
refers to ``additional services,'' while section 254(h)(1)(B) refers to
``any of its services''; neither provision refers to the narrower class
of telecommunications services. In addition, sections 254 (a)(1) and
(a)(2) mandate that the Commission define the ``services that are
supported by Federal universal service support mechanisms'' but does
not limit support to telecommunications services. The use of the
broader term ``services'' in section 254(a) provides further validation
for the inclusion of services in addition to telecommunications
services in sections 254(c)(3) and 254(h)(1)(B).
260. We reject BellSouth's argument that the fact that section
254(h) is entitled ``Telecommunications Services for Certain
Providers'' leads to the conclusion that the only services covered by
that section are telecommunications services. To the contrary, within
section 254(h) Congress specified which services must be
``telecommunications services'' in order to be eligible for support. As
noted above, the rate provision regarding special services for rural
health care providers, section 254(h)(1)(A), is explicitly limited to
``telecommunications services.'' Thus, the term used in section
254(h)(1)(B), ``any of its services that are within the definition of
universal service under section (c)(3),'' cannot be read as a generic
reference to the heading of that section. Rather, the varying use of
the terms ``telecommunications services'' and ``services'' in sections
254(h)(1)(A) and 254(h)(1)(B) suggests that the terms were used
consciously to signify different meanings. In addition, the mandate in
section 254(h)(2)(A) to enhance access to ``advanced telecommunications
and information services,'' particularly when read in conjunction with
the legislative history as discussed below, suggests that Congress did
not intend to limit the support provided under section 254(h) to
telecommunications services. We conclude, therefore, that we can
include the ``information services,'' e.g., protocol conversion and
information storage, that are needed to access the Internet, as well as
internal connections, as ``additional services'' that section
[[Page 32899]]
254(h)(1)(B), through section 254(c)(3), authorizes us to support.
261. In this regard, section 254(h)(2)(A), which directs the
Commission to establish competitively neutral rules to enhance, to the
extent technically feasible and economically reasonable, access to
advanced telecommunications and information services, informs our
interpretation of sections 254(c)(3) and 254(h)(1)(B) as allowing
schools and libraries to receive discounts on rates from
telecommunications carriers for Internet access. Given the directive of
section 254(h)(2)(A) that the Commission enhance the access that
schools and libraries have to ``information services,'' as described in
the legislative history, i.e., actual educational content, we conclude
that there should be discounts for access to these services provided by
telecommunications carriers under the broad provisions of sections
254(c)(3) and 254(h)(1)(B).
262. We conclude that we are authorized to provide discounts on the
data links and associated services necessary to provide classrooms with
access to those educational materials, even though these functions meet
the statutory definition of ``information services'' because of their
inclusion of protocol conversion and information storage. Without the
use of these ``information service'' data links, schools and libraries
would not be able to obtain access to the ``research information, (and)
statistics'' available free of charge on the Internet. We note that
these information services are essential for effective transmission
service, i.e., ``conduit'' service; they are not elements of the
content services provided by information publishers. We conclude that
our authority under sections 254(c)(3) and 254(h)(1)(B) is broad enough
to achieve these section 254(h)(2)(A) goals.
263. We find that this approach of providing discounts for basic
conduit access to the Internet should not favor Internet access when
provided as pure conduit versus Internet access bundled with minimal
content; rather, this approach should simply encourage schools and
libraries to select the most cost-effective form of transmission
access, separate of content.
264. We also offer a more precise definition of what ``information
services'' will be eligible for discounts under this program in
response to commenters who challenge the feasibility of using the
``basic, conduit'' Internet access terminology that the Joint Board
used to describe what aspects of Internet access are eligible for
support. We note that Congress described the conduit services we seek
to cover in another context in the 1996 Act. That is, in listing
exceptions to the definition of ``electronic publishing'' in section
274 of the Act, Congress described certain services that are precisely
the types of ``conduit'' services that we agree with the Joint Board
should be available to eligible schools and libraries at a discount. We
adopt the descriptions of those services here because we find that they
provide the additional clarification of conduit services that
commenters request. We conclude that eligible schools and libraries
will be permitted to apply their relevant discounts to information
services provided by entities that consist of:
(i) The transmission of information as a common carrier;
(ii) The transmission of information as part of a gateway to an
information service, where that transmission does not involve the
generation or alteration of the content of information but may include
data transmission, address translation, protocol conversion, billing
management, introductory information content, and navigational systems
that enable users to access information services that do not affect the
presentation of such information services to users; and
(iii) Electronic mail services [e-mail].
As recommended by the Joint Board, other information services, such as
voice mail, shall not be eligible for support at this time.
265. We also follow the Joint Board's recommendation to grant
schools and libraries discounts on access to the Internet but not on
separate charges for particular proprietary content or other
information services. The Joint Board recommended that we solve the
problem of bundling content and ``conduit'' (access) to the Internet by
not permitting schools and libraries to purchase a package including
content and conduit, unless the bundled package included minimal
content and provided a more cost-effective means of securing non-
content access to the Internet than other non-content alternatives. We
agree with this approach.
266. Therefore, consistent with the Joint Board's recommendation,
schools and libraries that purchase, from a telecommunications carrier,
access to the Internet including nothing more than the services listed
above will be eligible for support based on the purchase price. In
addition, if it is more cost-effective for it to purchase Internet
access provided by a telecommunications carrier that bundles a minimal
amount of content with such Internet access, a school or library may
purchase that bundled package and receive support for the portion of
the package price that represents the price for the services listed
above.
267. This approach will create three possible scenarios for schools
and libraries. First, if the telecommunications carrier bundles access
with a package of content that is otherwise available free of charge on
the Internet because the content is advertiser-supported, bundling that
content with Internet access will not permit the telecommunications
carrier to recover any additional remuneration other than the fee for
the access. Second, if the telecommunications carrier offers other
Internet users access to its proprietary content for a price, it may
treat the difference between that price and the price it charges for
its access only package as the price of non-content Internet access.
Third, if a telecommunications carrier providing Internet access offers
a bundled package of content that it does not offer on an unbundled
basis and thus, the fair price of the conduit element cannot be
ascertained readily, the school or library may receive support for such
an Internet access package only if it can affirmatively show that the
price of the carrier's Internet access package was still the most cost-
effective manner for the school or library to secure basic, conduit
access to the Internet.
268. Eligible Providers
Section 254(e) states that only an ``eligible telecommunications
carrier'' under section 214(e) may receive universal service support.
Section 254(h)(1)(B)(ii), however, states that telecommunications
carriers providing services to schools and libraries may receive
reimbursement from universal service support mechanisms,
notwithstanding the provisions of section 254(e). Consequently, we
agree in concluding that Congress intended that any telecommunications
carrier, even one that does not qualify as an ``eligible
telecommunications carrier,'' should be eligible for support for
services provided to schools and libraries.
269. Support for Internal Connections
Congress intended that telecommunications and other services be
provided directly to classrooms. Therefore, eligible schools and
libraries may, under sections 254(c)(3) and 254(h)(1), secure support
for installation and maintenance of internal connections, among other
services and
[[Page 32900]]
functionalities provided by telecommunications carriers.
270. We find that the Act permits universal service support for an
expanded range of services beyond telecommunications services.
Specifically, we conclude that the installation and maintenance of
internal connections fall within the broad scope of the universal
service support provisions of sections 254 (c)(3) and (h)(1)(B), in the
context of the broad goals of section 254(h)(2)(A). Nothing in section
254 excludes internal connections from the scope of ``additional
services'' for schools and libraries that can be designated for support
under section 254(c)(3) or the corresponding services for which schools
and libraries can receive discounts under section 254(h)(1)(B).
Consistent with our finding that a broad set of services should be
supported, we also find that we should not limit support to just those
services that are offered on a common carrier basis.
271. We agree with the Joint Board's response to those parties
arguing that the physical facilities providing intraschool and
intralibrary connections are ``goods'' or ``facilities'' rather than
section 254(c)(3) ``services.'' The Joint Board observed that not only
are the installation and maintenance of such facilities services, but
the cost of the actual facilities may be relatively small compared to
the cost of labor involved in installing and maintaining internal
connections. The Joint Board noted that the D.C. Circuit has repeatedly
referred to the installation and maintenance of inside wiring as
services. The Joint Board also noted that adopting the opposite view
would treat internal connections as a facility ineligible for support
if a school purchased it but as a service eligible for support if a
school leased the facility from a third party. Given that the provision
of internal connections is a service, we conclude that we have
authority to provide discounts on the installation and maintenance of
internal connections under sections 254(c)(3) and 254(h)(1)(B).
272. We find further that the broad purposes of section 254(h)(2)
support our authority for providing discounts for the installation and
maintenance of internal connections by telecommunications carriers
under sections 254(c)(3) and 254(h)(1)(B). As the Joint Board
explained, section 254(h)(2)(A) states that ``[t]he Commission shall
establish competitively neutral rules * * * to enhance, to the extent
technically feasible and economically reasonable, access to advanced
telecommunications and information services for all public and
nonprofit elementary and secondary school classrooms * * * and
libraries.'' The Joint Board recognized that a primary way to give
``classrooms'' access to advanced telecommunications and information
services is to connect computers in each classroom to a
telecommunications network. We interpret the scope of sections
254(c)(3) and 254(h)(1)(B) as broad enough to cover the provision of
discounts on internal connections provided by telecommunications
carriers. Telecommunications carriers might well, of course,
subcontract this business to non-telecommunications carriers.
273. We also agree with the Joint Board that the legislative
history supports our finding that the installation and maintenance of
internal connections are eligible for support. We note that, in its
Joint Explanatory Statement, Congress explicitly refers repeatedly to
``classrooms.'' Reading these references, we conclude that Congress
contemplated extending discounted service all the way to the individual
classrooms of a school, not merely to a single computer lab in each
school or merely to the schoolhouse door.
274. As the Joint Board recognized, finding internal connections
ineligible for support would skew the choices of schools and libraries
to favor technologies such as wireless, in which internal connections
are inseparable from external connection, over technologies such as
conventional wireline, in which a distinction can be (and for unrelated
reasons sometimes is) drawn, even when the latter would be the more
economically efficient choice. We conclude that schools, school
districts, and libraries are in the best position and should,
therefore, be empowered to make their own decisions regarding which
technologies would best accommodate their needs, how to deploy those
technologies, and how to best integrate these new opportunities into
their curriculum. Moreover, a situation in which certain technologies
were favored over others would violate the overall principle of
competitive neutrality adopted for purposes of section 254. Of course,
we by no means wish to discourage wireless technologies where they are
the efficient solution; data suggest that wireless connections would
already be the more efficient eligible ``telecommunications service''
for connecting schools to telephone carrier offices or Internet service
providers for more than 25 percent of public schools.
275. In addition to our direct coverage of non-telecommunications
carriers below, we expect non-telecommunications carriers to compete to
provide internal connections to schools and libraries by entering
partnerships and joint ventures with telecommunications carriers. Thus,
without regard to our decision below to provide discounts for services
to eligible schools and libraries provided by non-telecommunications
carriers, we conclude that our decision to provide discounts for
services to eligible schools and libraries provided by
telecommunications carriers is competitively neutral and will
facilitate, not impede, the development of the internal connections
market.
276. Extent of Support for Internal Connections
We agree that it is often difficult to distinguish between
``internal connections,'' which would be eligible for discounts, and
computers and other peripheral equipment, which would not be eligible.
We find that a given service 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. That is, if
the service is an essential element in the transmission of information
within the school or library, we will classify it as an element of
internal connections and will permit schools and libraries to receive a
discount on its installation and maintenance for which the
telecommunications carrier may be compensated from universal service
support mechanisms.
277. Applying this standard, we find that support should be
available to fund discounts on such items as routers, hubs, network
file servers, and wireless LANs and their installation and basic
maintenance because all are needed to switch and route messages within
a school or library. Their function is solely to transmit information
over the distance from the classroom to the Internet service provider,
when multiple classrooms share the use of a single channel to the
Internet service provider. We also find that ``internal connections''
would include the software that file servers need to operate and that
we should place no specific restrictions on the size, i.e., type, of
the internal connections network covered. We conclude that support
should be available to fund discounts on basic installation and
maintenance services necessary to the operation of the internal
connections network. We expressly deny support, however, to finance the
purchase of equipment that
[[Page 32901]]
is not needed to transport information to individual classrooms. A
personal computer in the classroom, for example, does not provide such
a necessary transmission function and would not be supported,
consistent with the Joint Board's recommendation. A personal computer
is not intended to transmit information over a distance, unless it is
programmed to operate as a network switch or network file server.
278. We recognize that some providers may offer a bundled package
of services and facilities, only some of which are eligible for
support. For example, some file servers may also be built to provide
storage functions to supplement personal computers on the network. We
do not intend to provide a discount on such CPE capabilities. We could
address the issue of bundling by allowing the bundling of eligible and
ineligible services, but requiring that reimbursement not be requested
for more than the fair market value of the eligible services. Such an
approach would be similar to our handling of discounts when eligible
schools and libraries and other, ineligible entities form consortia
through which to receive their telecommunications services. In the case
of service bundling, however, neither party to the transaction would
have any incentive to ensure that the allocation of costs established
in the contract was fair and nonarbitrary. In consortia, by contrast,
the members each have an incentive to ensure that they are assigned a
fair allocation of costs.
279. We conclude that eligible schools and libraries may not
receive support for contracts that provide only a single price for a
package that bundles services eligible for support with those that are
not eligible for support. Schools and libraries may contract with the
same entity for both supported and unsupported services and still
receive support only if any purchasing agreement covering eligible
services specifically prices those services separately from ineligible
services so that it will be easy to identify the purchase amount that
is eligible for a discount. Consequently, where the service provider
indicates separately what the prices of the eligible and ineligible
offerings would be if offered on an unbundled basis, the service
provider must indicate the ``price reduction'' that would apply if the
services are purchased together. The provider would then be able to
apply the appropriate universal service support discount to the price
for the eligible services after reducing the price to reflect a
proportional amount of the ``price reduction'' the provider applied.
280. Finally, we agree with those commenters asserting that schools
and libraries should not be forced by the provider of internal
connections to select a particular provider for other services. With
respect to wireline internal connections, or inside wiring, we have
previously addressed the rights of carriers and customers to carrier-
installed inside wiring. In the Detariffing Recon. Order (51 FR 8498
(March 12, 1986)), we restricted the carriers' ability to interfere
with customer access to inside wiring. We observe that the federal
antitrust laws prohibit any provider of internal connections with
monopoly power from using that power to distort competition in related
markets. Similarly, we agree with WinStar that, if a carrier does not
currently charge for the use of internal connections, it should not be
entitled to begin charging for such use if the school or library
selects an alternate service provider, because that would distort the
competitive neutrality supported strongly by both Congress and the
Joint Board.
281. Pre-Discount Price
The pre-discount price is the price of services to schools and
libraries prior to the application of a discount. That is, the pre-
discount price is the total amount that carriers will receive for the
services they sell to schools and libraries: the sum of the discounted
price paid by a school or library and the discount amount that the
carrier can recover from universal service support mechanisms for
providing such services.
282. Competitive Environment
As the Joint Board recognized, in a competitive marketplace,
schools and libraries will have both the opportunity and the incentive
to secure the lowest price charged to similarly situated non-
residential customers for similar services, and providers of
telecommunications services, Internet access, and internal connections
will face competitive pressures to provide that price.
283. We agree with the Joint Board that we should encourage schools
and libraries to aggregate their demand with others to create a
consortium with sufficient demand to attract competitors and thereby
negotiate lower rates or at least secure efficiencies, particularly in
lower density regions. We concur with the Joint Board's finding that
aggregation into consortia can also promote more efficient shared use
of facilities to which each school or library might need access.
284. Thus, we agree with the Joint Board's objectives in
recommending that eligible schools and libraries be permitted to
aggregate their telecommunications needs with those of both eligible
and ineligible entities, including health care providers and commercial
banks, because the benefits from such aggregation outweigh the
administrative difficulties. We are concerned, however, that permitting
large private sector firms to join with eligible schools and libraries
to seek prices below tariffed rates could compromise both the federal
and state policies of non-discriminatory pricing. Thus, although we
find congressional support for permitting eligible schools and
libraries to secure prices below tariffed rates, we find no basis for
extending that exception to enable all private sector firms to secure
such prices.
285. For this reason, we adopt a slightly modified version of the
Joint Board's recommendation. We conclude that eligible schools and
libraries will generally qualify for universal service discounts and
prices below tariffed rates for interstate services, only if any
consortia they join include only other eligible schools and libraries,
rural health care providers, and public sector (governmental)
customers. Eligible schools and libraries participating in consortia
that include ineligible private sector members will not be eligible to
receive universal service discounts unless the pre-discount prices of
any interstate services that such consortia receive from ILECs are
generally tariffed rates. We conclude that this approach satisfies both
the purpose and the intent of the Joint Board's recommendation because
it should allow the consortia containing eligible schools and libraries
to aggregate sufficient demand to influence existing carriers to lower
their prices and should promote efficient use of shared facilities.
This approach also includes the large state networks upon which many
schools and libraries rely for their telecommunications needs among the
entities eligible to participate in consortia. We recognize that state
laws may differ from federal law with respect to non-discriminatory
pricing requirements.
286. We adopt the Joint Board's finding that fiscal responsibility
compels us to require that eligible schools and libraries seek
competitive bids for all services eligible for section 254(h)
discounts. Competitive bidding is the most efficient means for ensuring
that eligible schools and libraries are informed about all of the
choices available to them. Absent competitive bidding, prices charged
to schools and
[[Page 32902]]
libraries may be needlessly high, with the result that fewer eligible
schools and libraries would be able to participate in the program or
the demand on universal service support mechanisms would be needlessly
great. We discuss, in greater detail below, the procedures for
undertaking the competitive bidding process.
287. Some commenters ask us to clarify a number of points regarding
competitive bidding. First, in response to a number of commenters, we
note that the Joint Board intentionally did not recommend that the
Commission require schools and libraries to select the lowest bids
offered but rather recommended that the Commission permit schools and
libraries ``maximum flexibility'' to take service quality into account
and to choose the offering or offerings that meets their needs ``most
effectively and efficiently,'' where this is consistent with other
procurement rules under which they are obligated to operate. We concur
with this policy, noting only that price should be the primary factor
in selecting a bid. When it specifically addressed this issue in the
context of Internet access, the Joint Board only recommended that the
Commission require schools and libraries to select the most cost-
effective supplier of access. By way of example, we also note that the
federal procurement regulations (which are inapplicable here) specify
that in addition to price, federal contract administrators may take
into account factors including the following: prior experience,
including past performance; personnel qualifications, including
technical excellence; management capability, including schedule
compliance; and environmental objectives. We find that these factors
form a reasonable basis on which to evaluate whether an offering is
cost-effective.
288. Although we do not impose bidding requirements, neither do we
exempt eligible schools or libraries from compliance with any state or
local procurement rules, such as competitive bidding specifications,
with which they must otherwise comply.
289. In response to the concerns of GTE and SBC that existing
Commission rules concerning interstate service prevent them from
offering rates below their generally available tariffed rates in
competitive bidding situations to establish pre-discount rates, we make
the following clarifications. First, our policies on ILEC pricing
flexibility apply only to interstate services. The ILECs' abilities to
offer intrastate services in competitive bidding situations will be
governed by the relevant state public utility commission policies.
Second, we find that ILECs will be free under sections 201(b) and 254
to participate in certain competitive bidding opportunities with rates
other than those in their generally tariffed offerings. More
specifically, they will be free, under sections 201(b) of the Act, to
offer different rates to consortia that consist solely of governmental
entities, eligible health care providers, and schools and libraries
eligible for preferential rates under section 254. Thus, we hereby
designate communications to organizations, such as schools and
libraries and eligible health care providers, eligible for preferential
rates under section 254 as a class of communications eligible for
different rates, notwithstanding the nondiscrimination requirements of
section202(a). Congress has expressly granted an exemption to section
202(a)'s prohibition against discrimination for these classes of
communications. Thus, ILECs will be free to offer differing, including
lower, rates to consortia consisting of section 254-eligible schools
and libraries, eligible health care providers, state schools and
universities, and state and local governments. These pre-discount rates
will be generally available to all eligible members of these classes
under tariffs filed with this Commission. The schools and libraries
eligible for discounts under section 254 would then receive the
appropriate universal service discount off these rates. Third, ILECs
may obtain further freedom to participate in competitive bidding
situations as a result of decisions we make in the Access Charge Reform
Proceeding. In the Third Report and Order in the Access Charge Reform
Proceeding, we will determine whether to permit ILECs to provide
targeted offerings in response to competitive bidding situations once
certain competitive thresholds are met. We conclude that this regime,
which includes a prohibition against resale of these services, best
furthers the explicit congressional directive of providing preferential
rates to eligible schools and libraries with a minimum of public
interest harm arising from limiting the availability of prediscount
rates to these classes.
290. Lowest Price Charged to Similarly Situated Non-Residential
Customers for Similar Services
In competitive markets, we anticipate that schools and libraries
will be offered competitive, cost-based prices that will match or beat
the cost-based prices paid by similarly situated customers for similar
services. We concur, however, with the Joint Board that, to ensure that
a lack of experience in negotiating in a competitive telecommunications
service market does not prevent some schools and libraries from
receiving such offers, we should require that a carrier offer services
to eligible schools and libraries at prices no higher than the lowest
price it charges to similarly situated non-residential customers for
similar services (hereinafter ``lowest corresponding price'').
291. We also adopt the Joint Board's recommendation to use the
lowest corresponding price as an upper limit on the price that carriers
can charge schools and libraries in non-competitive markets, as well as
competitive markets, so that eligible schools and libraries can take
advantage of any cost-based rates that other customers may have
negotiated with carriers during a period when the market was subject to
actual, or even potential, competition. We conclude that requiring
providers to charge their lowest corresponding price would impose no
unreasonable burden, even on non-dominant carriers, because all
carriers would be able to receive a remunerative price for their
services. We clarify that, for the purpose of determining the lowest
corresponding price, similar services would include those provided
under contract as well as those provided under tariff.
292. Section 254(h)(1)(B) requires telecommunications carriers to
make services available to all schools and libraries in any geographic
area the carriers serve. We share the Joint Board's concern that, if
``geographic area'' were interpreted to mean the entire state, any firm
providing telecommunications services to any school or library in a
state would have to be willing to serve any other school or library in
the state. We also agree with the Joint Board that an expansive
interpretation of geographic area might discourage new firms beginning
to offer service in one portion of a state from doing so due to concern
that they would have to serve all other areas in that state.
293. We concur, therefore, with the Joint Board's recommendation
that geographic area (hereinafter referred to as geographic service
area) be defined as the area in which a telecommunications carrier is
seeking to serve customers with any of its services covered by section
254(h)(1)(B). We do not limit here the area in which a
telecommunications carrier or a subsidiary or affiliate owned or
controlled by it can choose to provide service. We also agree with the
Joint Board that telecommunications carriers be required to offer
schools and libraries services at their lowest corresponding
[[Page 32903]]
prices throughout their geographic service areas. Moreover, we agree
with the Joint Board's recommendation that, as a condition of receiving
support, carriers be required to certify that the price they offer to
schools and libraries is no greater than the lowest corresponding price
based on the prices the carrier has previously charged or is currently
charging in the market. This obligation would extend, for example, to
competitive LECs, wireless carriers, or cable companies, to the extent
that they offer telecommunications for a fee to the public. We share
the Joint Board's conclusion that Congress intended schools and
libraries to receive the services they need from the most efficient
provider of those services.
294. We clarify that a provider of telecommunications services,
Internet access, and internal connections need not offer the same
lowest corresponding price to different schools and libraries in the
same geographic service area if they are not similarly situated and
subscribing to a similar set of services. Providers may not avoid the
obligation to offer the lowest corresponding price to schools and
libraries for interstate services, however, by arguing that none of
their non-residential customers are identically situated to a school or
library or that none of their service contracts cover services
identical to those sought by a school or library. Rather, we will only
permit providers to offer schools and libraries prices above the prices
charged to other similarly situated customers when those providers can
show that they face demonstrably and significantly higher costs to
serve the school or library seeking service.
295. If the services sought by a school or library include
significantly lower traffic volumes or their provision is significantly
different from that of another customer with respect to any other
factor that the state public service commission has recognized as being
a significant cost factor, then the provider will be able to adjust its
price above the level charged to the other customer to recover the
additional cost incurred so that it is able to recover a compensatory
pre-discount price. We also recognize that costs change over time and
thus, compensatory rates would not necessarily result if a provider
were required to charge the same price it had charged many years ago.
We will establish a rebuttable presumption that rates offered within
the previous three years are still compensatory. We also would not
require a provider to match a price it offered to a customer who is
receiving a special regulatory subsidy or that appeared in a contract
negotiated under very different conditions, if that would force the
provider to offer services at a rate below Total-Service Long-Run
Incremental Cost (TSLRIC).
296. We also adopt the Joint Board's recommendation that, if they
believe that the lowest corresponding price is unfairly high or low,
schools, libraries, and carriers should be permitted to seek recourse
from the Commission, regarding interstate rates, and from state
commissions, regarding intrastate rates. Eligible schools and libraries
may request a lower rate if they believe the rate offered by the
carrier is not the lowest corresponding price. Carriers may request
higher rates if they believe that the lowest corresponding price is not
compensatory.
297. We agree with the Joint Board's analysis that using TSLRIC
would not be practical, given the limited resources of schools and
libraries to participate in lengthy negotiations, arbitration, or
litigation. We also clarify that the tariffed rate would represent a
carrier's lowest corresponding price in a geographic area in which that
carrier has not negotiated rates that differ from the tariffed rate,
and that we are not requiring carriers to file new tariffs to reflect
the discounts we adopt here for schools and libraries.
298. Discounts
The Act requires the Commission, with respect to interstate
services, and the states, with respect to intrastate services, to
establish a discount on designated services provided to eligible
schools and libraries. Pursuant to section 254(h)(1)(B), the discount
must be an amount that is ``appropriate and necessary to ensure
affordable access to and use of'' the services pursuant to section
254(c)(3). The discount must take into account the principle set forth
in section 254(b)(5) and mandated in section 254(d) that the federal
universal service support mechanisms must be ``specific, predictable,
and sufficient.'' We agree with the Joint Board's recommendation that
we adopt a percentage discount mechanism, adjusted for schools and
libraries that are defined as economically disadvantaged and those
schools and libraries located in areas facing particularly high prices
for telecommunications service. In particular, we concur with the Joint
Board's recommendation that we adopt discounts from 20 percent to 90
percent for all telecommunications services, Internet access, and
internal connections, with the range of discounts correlated to
indicators of economic disadvantage and high prices for schools and
libraries.
299. We agree with the Joint Board's recommendation that we adopt
rules that provide support to eligible schools and libraries through a
percentage discount mechanism rather than providing a package of free
services or block grants to states because we find that discounts would
better assure efficiency and accountability. Requiring schools and
libraries to pay a share of the cost should encourage them to avoid
unnecessary and wasteful expenditures because they will be unlikely to
commit their own funds for purchases that they cannot use effectively.
A percentage discount also encourages schools and libraries to seek the
best pre-discount price and to make informed, knowledgeable choices
among their options, thereby building in effective fiscal constraints
on the discount fund.
300. Discounts in High Cost Areas
We also adopt the Joint Board's recommendation that, to make
service more affordable to schools and libraries, we offer greater
support to those located in high cost areas than to those in low cost
areas. Although the discount matrix we adopt do not make the prices
schools and libraries pay for telecommunications services in high and
low cost areas identical, we find that the matrix distribute
substantially more funds, particularly on a per-capita basis, to reduce
prices paid by schools and libraries in areas with higher
telecommunications prices than they do to reduce prices in areas in
which such prices are already relatively low. The greater price
reduction in terms of total dollar amounts for schools and libraries in
high cost areas results primarily because the discount rates are based
on percentages that lead proportionally to more funds flowing to those
schools and libraries facing proportionally higher prices.
301. Although the discount mechanism we adopt does not equalize
prices in all areas nationwide, it makes telecommunications service in
the areas with relatively high prices substantially more affordable to
the schools and libraries in those areas. We find that a mechanism that
may provide as much as 23 times more support per capita to a school or
library in a high cost area than it does to one in a low cost area is
providing substantially more of a discount to the former. We also note
that some eligible schools and libraries in high cost areas will
benefit, at least temporarily, from the high cost assistance that
eligible telecommunications carriers serving them will receive.
Although high cost support will only be targeted to a limited number of
services, none of
[[Page 32904]]
which are advanced telecommunications and information services, many
schools and libraries will connect to the Internet via voice-grade
access to the PSTN. Furthermore, whereas the Joint Board presumed that
such support would only be targeted to residential and single-line
businesses, in the short term, our decision diverges from that result
and permits support for multiline businesses. We agree with the Joint
Board that this position on support for schools and libraries in high
cost areas is consistent with our other goal of providing adequate
support to disadvantaged schools while keeping the size of the total
support fund no larger than necessary to achieve this goal. We agree
that the nominal percentage discount levels should be more sensitive to
how disadvantaged a school or library is than whether it is located in
a high cost service area. We conclude, therefore, that the additional
support for schools and libraries in high cost areas provided in the
matrix we adopt is ``appropriate and necessary to ensure affordable
access'' to schools and libraries as directed by section 254(h)(1)(B).
302. Discounts for Economically Disadvantaged Schools and Libraries
We adopt the Joint Board's recommendation that we establish
substantially greater discounts for the most economically disadvantaged
schools and libraries. We recognize that such discounts are essential
if we are to make advanced technologies equally accessible to all
schools and libraries. We agree, however, with the Joint Board and
several commenters that not even the most disadvantaged schools or
libraries should receive a 100 percent discount. We recognize that even
a 90 percent discount--and thus a 10 percent co-payment requirement--
might create an impossible hurdle for disadvantaged schools and
libraries that are unable to allocate any of their own funds toward the
purchase of eligible discounted services, and thus could increase the
resource disparity among schools. We conclude, however, that even if we
were to exempt the poorest schools from any co-payment requirement for
telecommunications services, a 100 percent discount would not have a
dramatically greater impact on access than would a 90 percent discount,
because we are not providing discounts on the costs of the additional
resources, including computers, software, training, and maintenance,
which constitute more than 80 percent of the cost of connecting schools
to the information superhighway. We share the Joint Board's belief that
the discount program must be structured to maximize the opportunity for
its cost-effective operation, and that, for the reasons noted above,
requiring a minimal co-payment by all schools and libraries will help
realize that goal.
303. Discount Matrix
The Joint Board considered the approximate size of the fund
resulting from a matrix assigning discounts to a school or library
based upon its level of economic disadvantage and its location. After
substantial deliberation, the Joint Board recommended the following
matrix of percentage discounts:
----------------------------------------------------------------------------------------------------------------
Discount matrix Cost of service (estimated % in category)
----------------------------------------------------------------------------------------------------------------
How disadvantaged?
-----------------------------------------------------------------
(Estimated % Low cost Mid-cost Highest cost
Based on % of students in the national school of U.S. (67%) (27%) (5%)
lunch program schools in
category)
----------------------------------------------------------------------------------------------------------------
< 1............................................. (3) 20 20 25
1-19............................................ (31) 40 45 50
20-34........................................... (19) 50 55 60
35-49........................................... (15) 60 65 70
50-74........................................... (16) 80 80 80
75-100.......................................... (16) 90 90 90
----------------------------------------------------------------------------------------------------------------
304. In fashioning a discount matrix, the Joint Board sought to
ensure that the greatest discounts would go to the most economically
disadvantaged schools and libraries, with an equitable progression of
discounts being applied to the other categories within the parameters
of 20 percent to 90 percent discounts.
305. Identifying High Price Areas
Recognizing that schools and libraries in high cost areas will
confront relatively higher barriers to connecting to the Internet and
maintaining other communications links, the Joint Board proposed a
discount matrix that granted schools and libraries located in higher
cost areas greater percentage discounts. Although its discount matrix
used low, mid, and high cost categories based on embedded cost ARMIS
data of carriers, the Joint Board did not recommend a way to identify
those schools and libraries facing higher costs, except to suggest that
we might consider the unseparated loop costs collected under ARMIS. The
Joint Board understood that, because such embedded cost data were
already maintained by the Commission, it would be relatively easy to
set thresholds that would divide areas into high and low cost based on
the cost data of the ILEC serving the area. The Joint Board also
recognized that unseparated loop costs were a good proxy for local
service prices.
306. The Joint Board suggested that other methods for determining
high cost might be appropriate and encouraged the Commission to seek
additional comment on the issue, which we did in the Recommended
Decision Public Notice. As a result, we have considered several
alternative methods, which were not before the Joint Board at the time
of its deliberations. These methods include the use of cost data
generated by the forward-looking cost methodologies that proponents
have filed for use in determining support for high cost areas; density
pricing zones; availability of advanced services; tariffed T-1 prices
for connections to an Internet service provider; and whether schools
and libraries are located in rural or urban areas. For the reasons
discussed below, we conclude that we will classify eligible schools and
libraries as high or low cost depending on whether they are located in
a rural or an urban area, respectively.
307. Given this set of reasonable but imperfect approaches to
determining high cost for schools and libraries, we conclude that we
should select the classification system that is least burdensome to
schools, libraries, and carriers. We will therefore identify high
[[Page 32905]]
cost schools and libraries as those located in rural, as opposed to
urban, areas. After careful consideration, we conclude that identifying
whether a school or library is located in a rural or urban area is a
relatively easy method for schools and libraries to use, reasonably
matches institutions facing the highest prices for telecommunications
services with the highest discounts, and imposes no burden on carriers.
Adoption of this approach is also consistent with the Joint Board's
intention that the method selected for determining high cost should
calibrate the cost of service in a ``reasonable, practical, and
minimally burdensome manner.'' We also conclude that, for purposes of
the schools and libraries discount program, rural areas should be
defined in accordance with the definition adopted by the Department of
Health and Human Services' Office of Rural Health Policy (ORHP/HHS).
ORHP/HHS uses the Office of Management and Budget's (OMB) Metropolitan
Statistical Area (MSA) designation of metropolitan and non-metropolitan
counties (or county equivalents), adjusted by the most currently
available Goldsmith Modification, which identifies rural areas within
large metropolitan counties.
308. Adoption of this definition of rural areas is consistent with
the approach adopted in the health care section of this Order and
represents a simple approach for schools and libraries to determine
eligibility for an incremental high cost discount. OMB's list of
metropolitan counties and the list of additional rural areas within
those counties identified by the Goldsmith Modification are readily
available to the public. Eligible schools and libraries will need only
to consult those lists to determine whether they are located in rural
areas for purposes of the universal service discount program. In
addition to being simple to administer, basing the high cost discount
on a school's or library's location in a rural area is a reasonable
approach for determining which entities should receive the high cost
discount. The distance between customers and central offices, and the
lower volumes of traffic served by central offices in rural areas,
combine to create less affordable telecommunications rates.
309. Because we adopt the use of categories of rural and urban to
determine a school's or library's eligibility for a high cost discount,
we conclude that there should be only two categories of schools and
libraries. Because schools and libraries will be categorized as either
rural (high cost) or urban (low cost), the ``mid-cost'' category
recommended by the Joint Board is no longer relevant. We find that a
matrix of two columns is also somewhat simpler to use and thus, we
modify the discount matrix recommended by the Joint Board to have two
columns (i.e., ``urban'' and ``rural'') as opposed to three.
310. Identifying Economically Disadvantaged Schools
We agree with the Joint Board's recommendation that we measure a
school's level of poverty in a manner that is minimally burdensome,
ideally using data that most schools already collect. Although the
Joint Board concluded that the national school lunch program meets this
standard, it suggested that the Commission also consider other
approaches that would be both minimally burdensome for schools and
accurate measures of poverty.
311. Based on our review of the comments filed in response to the
Recommended Decision Public Notice, we agree with the Joint Board that
using eligibility for the national school lunch program to determine
eligibility for a greater discount accurately fulfills the statutory
requirement to ensure affordable access to and use of
telecommunications and other supported services for schools. As noted
by commenters, the national school lunch program determines students'
eligibility for free or reduced-price lunches based on family income,
which is a more accurate measure of a school's level of need than a
model that considers general community income. In addition, the
national school lunch program has a well-defined set of eligibility
criteria, is in place nationwide, and has data-gathering requirements
that are familiar to most schools. We agree that use of an existing and
readily available model, such as the national school lunch program,
will be both relatively simple and inexpensive to administer.
312. We conclude that a school may use either an actual count of
students eligible for the national school lunch program or federally-
approved alternative mechanisms to determine the level of poverty for
purposes of the universal service discount program. Alternative
mechanisms may prove useful for schools that do not participate in the
national school lunch program or schools that participate in the lunch
program but experience a problem with undercounting eligible students
(e.g., high schools, rural schools, and urban schools with highly
transient populations). Schools that choose not to use an actual count
of students eligible for the national school lunch program may use only
the federally-approved alternative mechanisms contained in Title I of
the Improving America's Schools Act, which equate one measure of
poverty with another. These alternative mechanisms permit schools to
choose from among existing sources of poverty data a surrogate for
determining the number of students who would be eligible for the
national school lunch program. A school relying upon one of these
alternative mechanisms could, for example, conduct a survey of the
income levels of its students' families. We conclude that only
federally-approved alternative mechanisms, which rely upon actual
counts of low-income children, provide more accurate measures of
poverty and less risk of overcounting, than other methods suggested by
some commenters that merely approximate the percentage of low-income
children in a particular area.
313. Identifying Economically Disadvantaged Libraries
The Joint Board recommended that, in the absence of a better
proposal, a library's degree of poverty should be measured based on how
disadvantaged the schools are in the school district in which the
library is located. Under this plan, a library would receive a level of
discount representing the average discount, based on both public and
non-public schools, offered to the schools in the school district in
which it is located. Finding that this was ``a reasonable method of
calculation because libraries are likely to draw patrons from an entire
school district and this method does not impose an unnecessary
administrative burden on libraries,'' the Joint Board recommended that
the Commission seek additional comment on this and other measures of
poverty that would be minimally burdensome for libraries.
314. We adopt the Joint Board's recommendation and conclude that a
library's level of poverty be calculated on the basis of school lunch
eligibility in the school district in which the library is located,
with one modification. We conclude that it would be less
administratively burdensome and, therefore, would impose lower
administrative costs, to base a library's level of poverty on the
percentage of students eligible for the national school lunch program
only in the public school district in which the library is located. To
require the administrator to average the discounts applicable to both
public and non-public schools would impose an unnecessary
administrative burden without an offsetting benefit to libraries.
[[Page 32906]]
315. We agree with commenters that library service areas and school
districts often are not identical, and that libraries may not have
ready access to information that would allow them to coordinate their
service areas with the applicable school district lunch data. We are
not, however, requiring libraries to coordinate their service areas
with school districts. The procurement officer responsible for ordering
telecommunications and other supported services for a library or
library system need only obtain from the school district's
administrative office the percentage of students eligible for the
national school lunch program in the district in which the library is
located. We conclude, therefore, that adopting this approach will not
impose an unnecessary administrative burden on libraries.
316. ALA notes that residents of towns that do not have schools
generally must send their children to other towns to attend school. We
find that the discount for a library in such a circumstance would be
based on an average of the percentage of students eligible for the
school lunch program in each of the school districts in which the
town's children attend school.
317. We conclude that using school lunch eligibility to calculate
the poverty level of both schools and libraries addresses the concern
that equity exist between schools and libraries. That is, because
school lunch eligibility data measures the percentage of students
within 185 percent of the poverty line, the program that we adopt
herein will ensure that both schools and libraries are afforded
discounts based on the same measure of poverty. Under ALA's proposal,
however, libraries would have received discounts based on the
percentage of families at or below the poverty line, while schools
would have received discounts based on the percentage of students
within 185 percent of the poverty line. We conclude, therefore, that
libraries will not be disadvantaged by adoption of the Joint Board's
recommendation to use school lunch eligibility to determine the level
of poverty for both schools and libraries. We also conclude that using
the same measure of poverty for both schools and libraries will lower
the administrative costs associated with the discount program described
herein.
318. Levels of Poverty
We agree with the Joint Board's recommendation that we adopt a step
function to define the level of discount available to schools and
libraries, based on the level of poverty in the areas they serve. A
step function will define multiple levels of discount based on the
percentage of students eligible for the national school lunch program.
We also agree with the Joint Board's recommendation that the number of
steps for determining discounts applied to telecommunications and other
supported services should be based principally on the existing
Department of Education categorization of schools eligible for the
national school lunch program. We conclude that this approach is
reasonable because the national school lunch program is based on family
income levels.
319. For purposes of administering the school lunch program, the
Department of Education places schools in five categories, based on the
percentage of students eligible for free or reduced-price lunches: 0-19
percent; 20-34 percent; 35-49 percent; 50-74 percent; and 75-100
percent. Consistent with the Joint Board's recommendation, we adopt the
percentage categories used by the Department of Education for schools
and libraries, and we also establish a separate category for the least
economically disadvantaged schools and libraries, i.e., those with less
than one percent of their students eligible for the national school
lunch program. Schools and libraries in the ``less than one percent''
category should have comparatively greater resources within their
existing budgets to secure affordable access to services even with
lower discounted rates. We, therefore, adopt the following matrix for
schools and libraries:
----------------------------------------------------------------------------------------------------------------
Schools and libraries discount matrix Discount level
----------------------------------------------------------------------------------------------------------------
How disadvantaged?
-----------------------------------------------------------------------------
(Estimated % of Urban discount Rural discount
% of students eligible for national school lunch program U.S. schools in (%) (%)
category)
----------------------------------------------------------------------------------------------------------------
<1........................................................ 3 20 25
1-19...................................................... 31 40 50
20-34..................................................... 19 50 60
35-49..................................................... 15 60 70
50-74..................................................... 16 80 80
75-100.................................................... 16 90 90
----------------------------------------------------------------------------------------------------------------
320. Self-Certification Requirements
We agree with the Joint Board's recommendation that, when ordering
telecommunications and other supported services, the procurement
officer responsible for ordering such services for a school or library
must certify its degree of poverty to the universal service
administrator. For eligible schools ordering telecommunications and
other supported services at the individual school level, which we
anticipate will be primarily non-public schools, the procurement
officer ordering such services must certify to the universal service
administrator the percentage of students eligible in that school for
the national school lunch program. For eligible libraries ordering
telecommunications and other supported services at the individual
library level, which we anticipate will be primarily single-branch
libraries, the procurement officer ordering such services must certify
to the universal service administrator the percentage of students
eligible for the national school lunch program in the school district
in which the library is located.
321. For eligible schools ordering telecommunications and other
supported services at the school district or state level, we agree with
the Joint Board's recommendation that we minimize the administrative
burden on schools while at the same time ensuring that the individual
schools with the highest percentages of economically disadvantaged
students receive the deepest discounts for which they are eligible. We,
therefore, adopt the Joint Board's recommendation to require the
procurement officer for each school district or state applicant to
certify to the universal service administrator the percentage of
students in each of its schools that is eligible for the national
[[Page 32907]]
school lunch program, calculated either through an actual count of
eligible students or through the use of a federally-approved
alternative mechanism, as discussed above. If the level of discount
were instead calculated for the entire school district, a school
serving a large percentage of students eligible for the national school
lunch program that was located in a school district comprised primarily
of more affluent schools would not benefit from the level of discount
to which it would be entitled if discounts had been calculated on an
individual school basis. The school district or state may decide to
compute the discounts on an individual school basis or it may decide to
compute an average discount; in either case, the state or the district
shall strive to ensure that each school receives the full benefit of
the discount to which it is entitled.
322. For libraries ordering telecommunications and other supported
services at the library system level, we agree with commenters
asserting that library systems should be able to compute discounts on
either an individual branch basis or based on an average of all
branches within the system. Specifically, if individual branches within
a library system are located in different school districts, we conclude
that the procurement officer responsible for ordering
telecommunications and other supported services for the library system
must certify to the administrator the percentage of students eligible
for the national school lunch program in each of the school districts
in which its branches are located. The library system may decide to
compute the discounts on an individual branch library basis or it may
decide to compute an average discount; in either case, the library
system shall strive to ensure that each library receives the full
benefit of the discount to which it is entitled.
323. Similarly, for library consortia ordering telecommunications
and other supported services, we conclude that each consortium's
procurement officer must certify to the administrator the percentage of
students eligible for the national school lunch program for the school
district in which each of its members is located. Each library
consortium may compute the discounts on the basis of the school
district in which each consortium member is located or it may compute
an average discount; in either case, each library consortium shall
strive to ensure that each of its members receives the full benefit of
the discount to which it is independently entitled.
324. Additional Considerations
We agree that our priority must be to establish the basic schools
and libraries discount program. Whether a hardship appeals process is
necessary can be addressed when the Joint Board reviews the discount
program in 2001 or sooner, if necessary. In the interim, we are
satisfied that the discount program that we adopt, reaching as high as
90 percent for the most disadvantaged schools and libraries, will
provide sufficient support.
325. Finally, we adopt Ameritech's suggestion that information
about the universal service discounts for which individual schools and
libraries are eligible, based on their level of poverty and rural
status, be posted on the same website as that on which schools' and
libraries' RFPs will be posted, as discussed below. We conclude that
posting this information on the website created by the universal
service administrator for the schools and libraries discount program
may assist providers seeking to provide eligible services to a school
or library by providing potentially useful information about a
prospective customer. If a school district submits school lunch
eligibility information for each school, or a library system submits
school lunch eligibility information for each branch, then the
universal service administrator is instructed to post that information.
If a school district chooses to submit only district-wide poverty
information or a library system chooses to provide only system-wide
poverty information, then that is the information that will be posted
by the universal service administrator. We also adopt Ameritech's
suggestion that the actual discounts be calculated and posted on the
website, as discussed below.
326. Cap Level
We adopt the Joint Board's recommendation that there be an annual
cap of $2.25 billion on universal service support for schools and
libraries at this time. We also adopt the Joint Board's determination
that, if the annual cap is not reached due to limited demand from
eligible schools and libraries, the unspent funds will be available to
support discounts for schools and libraries in subsequent years. We
modify the Joint Board's recommendation slightly, however, to limit
collection and spending for the period through June 1998, in light of
both the need to implement the necessary administrative processes and
the need to make the fund sufficiently flexible to respond to demand.
Thus, for the funding period beginning January 1, 1998 and ending June
1998, the administrator will only collect as much as required by
demand, but in no case more than $1 billion. Furthermore, if less than
$2.25 billion is spent in calendar year 1998, then no more than half of
the unused portion of the funding authority for calendar year 1998
shall be spent in calendar year 1999. Similarly, if the amount
allocated in calendar years 1998 and 1999 is not spent, no more than
half of the unused portion of the funding authority for these two years
shall be spent in calendar year 2000.
327. We lack sufficient historical data to estimate accurately
demand for the first year of this program. In the past when the
Commission has established similar funding mechanisms, the Commission
or the administrator has had access to information upon which to base
an estimate of necessary first-year contribution levels. We direct the
administrator to report to the Commission on a quarterly basis, on both
the total amount of payments made to entities providing services and
facilities to schools and libraries to finance universal service
support discounts, and its determination regarding contribution
assessments for the next quarter.
328. Timing of Funding Requests
As discussed above, we adopt the Joint Board's recommendation that
universal service spending for eligible schools and libraries be capped
at $2.25 billion annually. We also adopt the Joint Board's
recommendation that such support be committed on a first-come-first-
served basis. We further conclude that the funding year will be the
calendar year and that requests for support will be accepted beginning
on the first of July for the following year. For the first year only,
requests for support will be accepted as soon as the schools and
libraries website is open and applications are available. Eligible
schools and libraries will be permitted to submit funding requests once
they have made agreements for specific eligible services, and, as the
Joint Board recommended, the administrator will commit funds based on
those agreements until total payments committed during a funding year
have exhausted any funds carried over from previous years and there are
only $250 million in funds available for the funding year. Thereafter,
the Joint Board's proposed system of priorities will govern the
distribution of the remaining $250 million.
329. The administrator shall measure commitments against the
funding caps and trigger points based on the
[[Page 32908]]
contractually-specified non-recurring expenditures, such as for
internal connection services, and recurring flat-rate charges for
telecommunications services and other supported services that a school
or library has agreed to pay and the commitment of an estimated
variable usage charge, based on documentation from the school or
library of the estimated expenditures that it has budgeted to pay for
its share of usage charges. Schools and libraries must file their
contracts either electronically or by paper copy. Moreover, schools and
libraries must file new funding requests for each funding year. Such
requests will be placed in the funding queue based on the date and time
they are received by the administrator.
330. We conclude that these rules will give schools the certainty
they need for budgeting, while avoiding the need for the administrator
to accumulate, prioritize, and allocate all discounts at the beginning
of each funding year, as some commenters suggest. Some uncertainty may
remain about whether an institution will receive the same level of
discount from one year to the next because demand for funds may exceed
the funds available. If that does occur, we cannot guarantee discounts
in the subsequent year without placing institutions that have not
formulated their telecommunications plans in the previous year at a
disadvantage, possibly preventing such entities from receiving any
universal service support--a concern raised by some commenters. We
acknowledge that requiring annual refiling for recurring charges places
an additional administrative burden on eligible institutions. We find,
however, that allowing funding for recurring charges to carry forward
from one funding year to the next would favor those who are already
receiving funds and might deny any funding to those who had never
received funding before.
331. Therefore, we find that, if the administrator estimates that
the $2.25 billion cap will be reached for the current funding year, it
shall recommend to the Commission a reduction in the guaranteed
percentage discounts necessary to permit all expected requests in the
next funding year to be fully funded as discussed in more detail,
below. Because educational institutions' funding needs will vary
greatly, we find that a per-institution cap, as proposed by AT&T, is
likely to lead to arbitrary results and be difficult to administer. For
example, if the per-institution cap were tied to factors such as number
of students and the level of discount for which the institution is
eligible, as AT&T suggests, this would limit eligible high schools to
the same level of support as eligible elementary schools of equal size,
even if the former had substantially greater needs for support. We are
not aware of any practical way to make fair and equitable adjustments
for such varying needs. We also agree with the Joint Board's decision
and rationale for rejecting the concept of setting fund levels for each
state, and thus reject BANX's proposal for establishing a cap on funds
flowing to each state.
332. Effect of the Trigger
We adopt the Joint Board's recommendation that, once there is only
$250 million in funds available to be committed in a given funding
year, ``only those schools and libraries that are most economically
disadvantaged and ha[ve] not yet received discounts from the universal
service mechanism in the previous year would be granted guaranteed
funds, until the cap [is] reached.'' The Joint Board recommended that
``[o]ther economically disadvantaged schools and libraries'' should
have second priority, followed by ``all other eligible schools and
libraries.'' Although, as the Joint Board recommended, the priority
system should give first priority to the most economically
disadvantaged institutions that have received no discounts in the
previous funding year, we are also concerned that the prioritization
process not disrupt institutions' ongoing programs that depend upon the
discounts.
333. To achieve the Joint Board's goals, we establish a priority
system that will operate as follows. The administrator shall ensure, as
explained below, that the total level of the administrator's
commitments, as well as the day that only $250 million remains
available under the cap in a funding year, are made publicly available
on the administrator's website on at least a weekly basis. If the
trigger is reached, the administrator will ensure that a message is
posted on the website, notify the Commission, and take reasonable steps
to notify the educational and library communities that commitments for
allocating the remaining $250 million of support will be made only to
the most disadvantaged eligible schools and libraries for the next 30
days (or the remainder of the funding year, whichever is shorter). That
is, during the 30-day period, applications from schools and libraries
will continue to be accepted and processed, but the administrator will
only commit funds to support discount requests from schools and
libraries that are in the two most-disadvantaged categories on the
discount matrix and that did not receive universal service supported
discounts in the previous or current funding years. We provide,
however, that schools and libraries that received discounts only for
basic telephone service in the current or prior year shall not be
deemed to have received discounts for purposes of the trigger
mechanism. For this purpose, we will ignore support for basic telephone
service, because we do not want to discourage disadvantaged schools and
libraries from seeking support for this service to avoid forfeiting
their priority status for securing support for more advanced services.
After the initial 30-day period, if uncommitted funds remain, the
administrator will process any requests it received during that period
from eligible institutions in the two most disadvantaged categories
that had previously received funds. If funds still remain, the
administrator will allocate the remaining available funds to schools
and libraries in the order that their requests were received until the
$250 million is exhausted or the funding year ends.
334. Adjustments to Discount Matrix
We have established the discount levels in this Order based on the
Joint Board's estimate of the level of expenditures that schools and
libraries are likely to have. We do not anticipate that the cost of
funding discount requests will exceed the cap, and we do not want to
create incentives for schools and libraries to file discount requests
prematurely to ensure full funding. Furthermore, we will consider the
need to revise the cap in our three-year review proceeding, but if
estimated funding requests for the following funding year demonstrate
that the funding cap will be exceeded, we will consider lowering the
guaranteed percentage discounts available to all schools and libraries,
except those in the two most disadvantaged categories, by the uniform
percentage necessary to permit all requests in the next funding year to
be fully funded. We will direct the administrator to determine the
appropriate adjustments to the matrix based on the estimates schools
and libraries make of the funding they will request in the following
funding year. The administrator must then request the Commission's
approval of the recommended adjustments. After seeking public comment
on the administrator's recommendation, the Commission will then approve
any reduction in such guaranteed percentage discounts that it finds to
be in the public interest. If funds remain under the cap at the end of
a funding year in
[[Page 32909]]
which discounts have been reduced below those set in the matrix, the
administrator shall consult with the Commission to establish the best
way to distribute those funds.
335. Advance Payment for Multi-Year Contracts
We conclude that providing funding in advance for multiple years of
recurring charges could enable a wealthy school to guarantee that its
full needs over a multi-year period were met, even if other schools and
libraries that could not afford to prepay multi-year contracts were
faced with reduced percentage discounts if the administrator estimated
that the funding cap would be exceeded in a subsequent year. We are
also concerned that funds would be wasted if a prepaid service
provider's business failed before it had provided all of the prepaid
services. At the same time, we recognize that educators often will be
able to negotiate better rates for pre-paid/multi-year contracts,
reducing the costs that both they and the universal service support
mechanisms incur. Therefore, we conclude that while eligible schools
and libraries should be able to enter into pre-paid/multi-year
contracts for supported services, the administrator will only commit
funds to cover the portion of a long-term contract that is scheduled to
be delivered and installed during the funding year. Eligible schools
and libraries may structure their contracts so that payment is required
on at least a yearly basis, or they may enter into contracts requiring
advance payment for multiple years of service. If they choose the
advance payment method, eligible schools and libraries may use their
own funds to pay full price for the portion of the contract exceeding
one year (pro rata), and may request that the service provider seek
universal service support for the pro rata annual share of the pre-
payment. The eligible school or library may also request that the
service provider rebate the payments from the support mechanisms that
it receives in subsequent years to the school or library, to the extent
that the school or library secures approval of discounts in subsequent
years from the administrator.
336. Existing Contracts
We agree with the recommendation of the Joint Board and a number of
commenters that we should permit schools and libraries to apply the
relevant discounts we adopt in this order to contracts that they
negotiated prior to the Joint Board's Recommended Decision for services
that will be delivered and used after the effective date of our rules,
provided the expenditures are approved by the administrator according
to the procedures set forth above. No discount would apply, however, to
charges for any usage of telecommunications or information services or
installation or maintenance of internal connections prior to the
effective date of the rules promulgated pursuant to this Order. While
we will not require schools or libraries to breach existing contracts
to become eligible for discounts, this exemption from our competitive
bidding requirements shall not apply to voluntary extensions of
existing contracts.
337. We conclude that allowing discounts to be applied to existing
contract rates for future covered services is appropriate and necessary
to ensure schools and libraries affordable access to and use of the
services supported by the universal service program. As discussed above
and in the Recommended Decision, the concept of affordability contains
not only an absolute component, which takes into account, in this case,
a school or library's means to subscribe to certain services, but also
a relative component, which takes into account whether the school or
library is spending a disproportionate amount of its funds on those
services. Thus, although a school or library might have chosen to
devote funds to, for example, certain telecommunications services, it
might have done so at considerable hardship and thus at a rate that is
not truly affordable. Moreover, some schools and libraries might be
bound by contracts negotiated by the state, even though an individual
school or library in the state might not be able to afford to purchase
any services under the contract unless it is able to apply universal
service support discounts to the negotiated rate. Furthermore, allowing
discounts to be applied to existing contract rates will ensure
affordable access to and use of all the services Congress intended, not
just whatever services, however minimal, an individual school or
library might have contracted for before the discounts adopted herein
were available at a cost that might preclude it from being able to
afford to purchase other services now available at a discount.
338. We will not adopt, however, release schools and libraries from
their current negotiated contracts, or adopt a ``fresh look''
requirement that would obligate carriers with existing service
contracts with schools and libraries to participate in a competitive
bidding process, or that we create a ``rebuttable presumption'' that
existing rates for telecommunications services are reasonable, allowing
interested parties to submit objections to existing contracts based on
assertions of unreasonable prices, improper cross-subsidization, or
anti-competitive conduct by parties. We find that these proposals would
be administratively burdensome, would create uncertainty for those
service providers that had previously entered into contracts, and would
delay delivery of services to those schools and libraries that took the
initiative to enter into such contracts. In addition, we have no reason
to believe that the terms of these contracts are unreasonable. Indeed,
abrogating these contracts or adopting these other proposals would not
necessarily lead to lower pre-discount prices, due to the incentives
the states, schools, and libraries had when negotiating the contracts
to minimize costs. Finally, we note that there is no suggestion in the
statute or the legislative history that Congress anticipated abrogation
of existing contracts in this context. We find equally unpersuasive the
argument that we should deny schools and libraries the opportunity to
apply the discounts we adopt herein to previously negotiated contract
rates. Because schools and libraries are already bound to those
contracts regardless of whether discounts are provided, we see no way
in which ILECs will be unfairly advantaged.
339. We agree with the Joint Board that schools and libraries,
constrained by budgetary limitations and the obligation to pay 100
percent of the contract price, had strong incentives to secure the
lowest rates possible when they negotiated the contracts. Thus, we find
it appropriate to apply discounts to these presumptively low rates
rather than requiring negotiation of new rates. Furthermore, we
conclude that it would not be in the public interest to penalize
schools and libraries in states that have aggressively embraced
educational technologies and have signed long-term contracts for
service by refusing to allow them to apply discounts to their pre-
existing contract rates.
340. Interstate and Intrastate Discounts
We concur with the Joint Board's recommendation that we exercise
our authority to provide federal universal service support to fund
intrastate discounts. We also agree with the Joint Board's
recommendation that we adopt rules providing federal funding for
discounts for eligible schools and libraries on both interstate and
intrastate services to the levels discussed above and that we require
states to establish intrastate discounts at least equal to the
[[Page 32910]]
discounts on interstate services as a condition of federal universal
service support for schools and libraries in that state. While section
254(h)(1)(B) permits the states to determine the level of discount
available to eligible schools and libraries with respect to intrastate
services, the Act does nothing to prohibit the Commission from offering
to fund intrastate discounts or conditioning that funding on action the
Commission finds to be necessary to achieve the goal that the Snowe-
Rockefeller-Exon-Kerrey amendment sought to accomplish under this
section.
341. We agree that section 254(h)(1)(B) creates a partnership,
insofar as that section permits a state that wants to provide greater
discounts or discounts for additional services for schools to do so. We
note that states retain full discretion to require providers to set
pre-discount prices for intrastate services even lower than the market
might produce and to provide the support required, if any, from
intrastate support obligations. We would find such an arrangement
consistent with section 254(f)'s directive that ``[a] State may adopt
regulations not inconsistent with the Commission's rules to preserve
and advance universal service.'' Furthermore, we concur with the Joint
Board that it would also be permissible for states to choose not to
supplement the federal program and thus prohibit their schools and
libraries from purchasing services at special state-supported rates if
the schools and libraries intend to secure federal-supported discounts.
Finally, we note that, if a state wishes to provide an intrastate
discount mechanism that is less than the federal discount, it may seek
a waiver of the requirement that it match the federal discount levels,
although we would only expect to grant such waivers on a temporary
basis and only for states with unusually compelling cases.
342. Eligibility
The Joint Board concluded that, to be eligible for universal
service support, a school must meet the statutory definition of an
elementary or secondary school found in the Elementary and Secondary
Education Act of 1965, must not operate as a for-profit business, and
must not have an endowment exceeding $50 million. We agree and conclude
that all schools that fall within the definition contained in the
Elementary and Secondary Education Act of 1965 and meet the criteria of
section 254(h), whether public or private, will be eligible for
universal service support. Illinois Board of Education and Community
Colleges ask that we expand the definition of schools to include
entities that educate elementary and secondary school aged students,
and APTS asks that we permit discounts for educational television
station licensees as a way to support distance learning. We find,
however, consistent with the Joint Board and with SBC's observation,
that section 254(h)(5)(A) does not grant us discretion to expand the
statutory definition of schools.
343. Section 254(h)(5) does not include an explicit definition of
libraries eligible for support. Rather, in section 254(h)(4)'s
eligibility criteria, Congress cited LSCA. The Joint Board, therefore,
used the definition of library found in Title III of the LSCA. In late
1996, however, Congress amended section 254(h)(4) to replace citation
to the LSCA with a citation to the newly enacted LSTA. In light of this
amendment to section 254(h)(4), we find it necessary to look anew at
the definitions of library and library consortium and adopt definitions
that are consistent with the directives of section 254(h).
344. LSTA defines a library more broadly than did the former LSCA
and includes, for example, academic libraries and libraries of primary
and secondary schools. If, for purposes of determining entities
eligible for universal service support, we were to adopt a definition
that includes academic libraries, we are concerned that the
congressional intent to limit the availability of discounts under
section 254(h) could be frustrated. Specifically, in section 254(h)(5),
Congress limited eligibility for support to elementary and secondary
schools that meet certain criteria, choosing to target support to K-12
schools rather than attempting to cover the broader set of institutions
of higher learning. If we were to adopt the new expansive definition of
library, institutions of higher learning could assert that their
libraries, and thus effectively their entire institutions, were
eligible for support.
345. We, therefore, adopt the LSTA definition of library for
purposes of section 254(h), but we conclude that a library's
eligibility for universal service funding will depend on its funding as
an independent entity. That is, because institutions of higher
education are not eligible for universal service support, an academic
library will be eligible only if its funding is independent of the
funding of any institution of higher education. By ``independent,'' we
mean that the budget of the library is completely separate from any
institution of learning. This independence requirement is consistent
with both congressional intent and the expectation of the Joint Board
that universal service support would flow to an institution of learning
only if it is an elementary or secondary school. Similarly, because
elementary and secondary schools with endowments exceeding $50 million
are not eligible for universal service support, a library connected to
such a school will be eligible only if it is funded independently from
the school.
346. We adopt the independent library requirement because we are
also concerned that, in some instances where a library is attached, for
funding purposes, to an otherwise eligible school, the library could
attempt to receive support twice, first as part of the school and
second as an independent entity. We find that the independence
requirement will ensure that an elementary or secondary school library
cannot collect universal service support twice for the same services.
347. When Congress amended section 254(h)(4) in late 1996, it added
the term ``library consortium'' to the entities potentially eligible
for universal service support. We adopt the definition of library
consortium as it is defined in LSTA, with one modification. We
eliminate ``international cooperative association of library entities''
from our definition of library consortia eligible for universal service
support because we conclude that this modified definition is consistent
with the directives of section 254(h).
348. We conclude that community college libraries are eligible for
support only if they meet the definition above and other requirements
of section 254(h). We agree that all eligible schools and libraries
should be permitted to enter into consortia with other schools and
libraries.
349. The Joint Board concluded that entities not explicitly
eligible for support should not be permitted to gain eligibility for
discounts by participating in consortia with those who are eligible,
even if the former seek to further educational objectives for students
who attend eligible schools. We agree with, and therefore adopt, this
Joint Board recommendation. Nevertheless, we look to ineligible schools
and libraries to assume leadership roles in network planning and
implementation for educational purposes. Although we conclude that
Congress did not intend that we finance the costs of network planning
by ineligible schools and libraries through universal service support
mechanisms, we encourage universities and other repositories of
information to make their online facilities available to other schools
and libraries. We note that eligible schools and libraries will be
eligible for
[[Page 32911]]
discounts on any dedicated lines they purchase to connect themselves to
card catalogues or databases of scientific or other educational data
maintained by colleges or universities, databases of research materials
maintained by religious institutions, and any art or related materials
maintained by private museum archives. Connections between eligible and
ineligible institutions can be purchased by an eligible institution
subject to the discount as long as the connection is used for the
educational purposes of the eligible institution.
350. While those consortium participants ineligible for support
would pay the lower pre-discount prices negotiated by the consortium,
only eligible schools and libraries would receive the added benefit of
universal service discount mechanisms. Those portions of the bill
representing charges for services purchased by or on behalf of and used
by an eligible school, school district, library, or library consortia
for educational purposes would be reduced further by the discount
percentage to which the school or library using the services was
entitled under section 254(h). The service provider would collect that
discount amount from universal service support mechanisms. The prices
for services that were not actually used by eligible entities for
educational purposes would not be reduced below the contract price.
351. Finally, several commenters ask that universal service support
be targeted to schools and libraries serving individuals with
disabilities. We acknowledge the barriers faced by individuals with
disabilities in accessing telecommunications, and we note that
individuals with disabilities attending eligible schools and using the
resources of eligible libraries will benefit from universal service
support mechanisms to the extent that those institutions qualify for
universal service support. We agree with the Joint Board, however, that
the specific barriers faced by individuals with disabilities in
accessing telecommunications are best addressed in the proceeding to
implement section 255 of the Act.
352. Resale
Section 254(h)(3) bars entities that obtain discounts from
reselling the discounted services. We concur with the Joint Board's
recommendation that we not interpret the section 254(h)(3) bar to apply
only to resale for profit. We agree with the Joint Board's
recommendation that we interpret section 254(h)(3) to restrict any
resale whatsoever of services purchased pursuant to a section 254
discount to entities that are not eligible for support.
353. We agree, however, that the section 254(h)(3) prohibition on
resale does not prohibit an eligible entity from charging fees for any
services that schools or libraries purchase that are not subject to a
universal service discount. Thus, an eligible school or library may
assess computer lab fees to help defray the cost of computers or
training fees to help cover the cost of training because these
purchases are not subsidized by the universal service support
mechanisms. We also observe that, if eligible schools, libraries, or
consortia amend their approved service contracts to permit another
eligible school or library to share the services for which they have
already contracted, it would not constitute prohibited resale, as long
as the services used are only discounted by the amount to which the
eligible entity actually using the services is entitled.
354. We concur with the Joint Board's conclusion that, despite the
difficulties of allocating costs and preventing abuses, the benefits of
permitting schools and libraries to join in consortia with other
customers, as discussed above, outweigh the danger that such
aggregations will lead to significant abuse of the prohibition against
resale. The Joint Board reached this conclusion based on three
findings, and we concur with each of them. First, the Joint Board found
that the only way to avoid any possible misallocations by eligible
schools and libraries would be to limit severely all consortia, even
among eligible schools and libraries, because it is possible that
consortia including schools and libraries eligible for varying
discounts could allocate costs in a way that does not precisely reflect
each school's or library's designated discount level. We agree with the
Joint Board's conclusion that severely limiting consortia would not be
in the public interest because it would serve to impede schools and
libraries from becoming attractive customers or from benefiting from
efficiencies, such as those secured by state networks. Second, illegal
resale, whereby eligible schools and libraries use their discounts to
reduce the prices paid by ineligible entities, can be substantially
deterred by a rule requiring providers to keep and retain careful
records of how they have allocated the costs of shared facilities in
order to charge eligible schools and libraries the appropriate amounts.
These records should be maintained on some reasonable basis, either
established by the Commission or the administrator, and should be
available for public inspection. We concur with the Joint Board's
conclusion that reasonable approximations of cost allocations should be
sufficient to deter significant abuse. Third, we share the Joint
Board's expectation that the growing bandwidth requirements of schools
and libraries will make it unlikely that other consortia members will
be able to rely on using more than their paid share of the use of a
facility. This will make fraudulent use of services less likely to
occur. We also agree with the Joint Board's recommendation that state
commissions should undertake measures to enable consortia of eligible
and ineligible public sector entities to aggregate their purchases of
telecommunications services and other services being supported through
the discount mechanism, in accordance with the requirements set forth
in section 254(h).
355. Bona Fide Request for Educational Purposes
Section 254(h)(1)(B) limits discounts to services provided in
response to bona fide requests made for services to be used for
educational purposes. We concur with the Joint Board's finding that
Congress intended to require accountability on the part of schools and
libraries and, therefore, we concur with the Joint Board's
recommendation and the position of most commenters that eligible
schools and libraries be required to: (1) Conduct internal assessments
of the components necessary to use effectively the discounted services
they order; (2) submit a complete description of services they seek so
that it may be posted for competing providers to evaluate; and (3)
certify to certain criteria under penalty of perjury.
356. Because we find that the needs of educational institutions are
complex and substantially different from the needs of other entities
eligible for universal service support pursuant to this Order, we will
require the administrator, after receiving recommendations submitted by
the Department of Education, to select a subcontractor to manage
exclusively the application process for eligible schools and libraries,
including dissemination and review of applications for service and
maintenance of the website on which applications for service will be
posted for competitive bidding by carriers. The important criteria in
recommending eligible subcontractors are: Familiarity with the
telecommunications and technology needs of educational institutions and
libraries; low administrative costs; and familiarity with the
procurement processes of the states and school districts. Moreover, we
will consult
[[Page 32912]]
with the Department of Education in designing the applications for this
process. We will require those applications to include, at a minimum,
certain information and certifications.
357. First, we will require applications to include a technology
inventory/assessment. We expect that, before placing an order for
telecommunications or information services, the person authorized to
make the purchase for a school or library would need to review what
telecommunications-related facilities the school or library already has
or plans to acquire. In this regard, applicants must at a minimum
provide the following information, to the extent applicable to the
services requested:
(1) The computer equipment currently available or budgeted for
purchase for the current, next, or other future academic years, as well
as whether the computers have modems and, if so, what speed modems;
(2) The internal connections, if any, that the school or library
already has in place or has budgeted to install in the current, next,
or future academic years, or any specific plans relating to voluntary
installation of internal connections;
(3) The computer software necessary to communicate with other
computers over an internal network and over the public
telecommunications network currently available or budgeted for purchase
for the current, next, or future academic years;
(4) The experience of and training received by the relevant staff
in the use of the equipment to be connected to the telecommunications
network and training programs for which funds are committed for the
current, next, or future academic years;
(5) Existing or budgeted maintenance contracts to maintain
computers; and
(6) The capacity of the school's or library's electrical system to
handle simultaneous uses.
358. In addition, schools and libraries must prepare specific plans
for using these technologies, both over the near term and into the
future, and how they plan to integrate the use of these technologies
into their curriculum. Therefore, we concur with the Joint Board's
finding that it would not be unduly burdensome to require eligible
schools and libraries to ``do their homework'' in terms of preparing
these plans.
359. To ensure that these technology plans are based on the
reasonable needs and resources of the applicant and are consistent with
the goals of the program, we will also require independent approval of
an applicant's technology plan, ideally by a state agency that
regulates schools or libraries. We understand that many states have
already undertaken state technology initiatives, and we expect that
more will do so and will be able to certify the technology plans of
schools and libraries in their states. Furthermore, plans that have
been approved for other purposes, e.g., for participation in federal or
state programs such as ``Goals 2000'' and the Technology Literacy
Challenge, will be accepted without need for further independent
approval. With regard to schools and libraries with new or otherwise
approved plans, we will receive guidance from the Department of
Education and the Institute for Museum and Library Services as to
alternative approval measures. As noted below, we will also require
schools and libraries to certify that they have funds committed for the
current funding year to meet their financial obligations set out in
their technology plans.
360. Second, we will require the application to describe the
services that the schools and libraries seek to purchase in sufficient
detail to enable potential providers to formulate bids. Since we agree
with the Joint Board's conclusion that Congress intended schools and
libraries to avail themselves of the growing competitive marketplace
for telecommunications and information services, as discussed above, we
concur with the Joint Board's recommendation that schools and libraries
be required to obtain services through the use of competitive bidding.
Once the subcontractor selected by the administrator receives an
application and finds it complete, the subcontractor will post the
application, including the description of the services sought on a
website for all potential competing service providers to review and
submit bids in response, as if they were requests for proposals (RFPs).
Moreover, while schools and libraries may submit formal and detailed
RFPs to be posted, particularly if that is required or most consistent
with their own state or local acquisition requirements, we will also
permit them to submit less formal descriptions of services, provided
sufficient detail is included to allow providers to reasonably evaluate
the requests and submit bids. As the Joint Board recognized, many
schools and libraries are already required by their local government or
governing body to prepare detailed descriptions of any purchase they
make above a specified dollar amount, and they may be able to use those
descriptions for this purpose as well. We emphasize, however, that the
submission of a request for posting is in no way intended as a
substitute for state, local, or other procurement processes.
361. We will also require that applications posted on the website
by the administrator's subcontractor present schools' and libraries'
descriptions of services in a way that will enable providers to search
among potential customers by zip code, number of students (schools) or
patrons (libraries), number of buildings, and other data that the
administrator will receive in the applications. We believe that this
procedure should enable even potential service providers without direct
access to the website to rely on others to conduct searches for them.
We also note that schools will submit the percentage of their students
eligible for the national school lunch program and libraries will
submit the percentage of students eligible for the national school
lunch program in the school districts in which they are located to the
administrator's subcontractor, in order to enable the administrator to
calculate the amount of the applicable discount. This information will
also be posted by the administrator on the website to help providers
bidding on services to calculate the applicable discounts.
362. Third, we concur with the Joint Board's recommendation that
the request for services submitted to the Administrator's subcontractor
shall be signed by the person authorized to order telecommunications
and other supported services for the school or library, who will
certify the following under oath:
(1) The school or library is an eligible entity under sections
254(h)(4) and 254(h)(5) and the rules adopted herein;
(2) The services requested will be used solely for educational
purposes;
(3) The services will not be sold, resold, or transferred in
consideration for money or any other thing of value;
(4) If the services are being purchased as part of an aggregated
purchase with other entities, the identities of all co-purchasers and
the services or portion of the services being purchased by the school
or library;
(5) All of the necessary funding in the current funding year has
been budgeted and will have been approved to pay for the ``non-
discount'' portion of requested connections and services as well as any
necessary hardware, software, and to undertake the necessary staff
training required in time to use the services effectively; and
(6) They have complied, and will continue to comply, with all
applicable state and local procurement processes.
[[Page 32913]]
363. We conclude that, to permit all interested parties to respond
to those posted requests, schools, libraries, and consortia including
such entities should be required to wait four weeks after a description
of the services they seek has been posted on the school and library
website, before they sign any binding contracts for discounted
services. Once they have signed a contract for discounted services, the
school, library, or consortium including such entities shall send a
copy of that contract to the administrator's subcontractor with an
estimate of the funds that it expects to need for the current funding
year as well what it estimates it will request for the following
funding year. Assuming that there are sufficient funds remaining to be
committed, the subcontractor shall commit the necessary funds for the
future use of the particular requestor and notify the requestor that
its funding has been approved.
364. Once the school, library, or consortium including such
entities has received approval of its purchase order, it may notify the
provider to begin service, and once the former has received service
from the provider it must notify the administrator to approve the flow
of universal service support funds to the provider.
365. Auditing
We agree with the Joint Board recommendation that schools and
libraries, as well as carriers, be required to maintain appropriate
records necessary to assist in future audits. We share the Joint
Board's expectation that schools and libraries will be able to produce
such records at the request of any auditor appointed by a state
education department, the fund administrator, or any other state or
federal agency with jurisdiction that might, for example, suspect fraud
or other illegal conduct, or merely be conducting a routine, random
audit. We also agree with the Joint Board's recommendation and
Vanguard's comments that eligibility for support be conditioned on
schools' and libraries' consent to cooperate in future random
compliance audits to ensure that the services are being used
appropriately. The Commission, in consultation with the Department of
Education, will engage and direct an independent auditor to conduct
such random audits of schools and libraries as may be necessary. Such
information will permit the Commission to determine whether universal
service support policies require adjustment.
366. Annual Carrier Notification Requirement
We agree with the Joint Board's recommendation and decline to
impose a requirement that carriers annually notify schools and
libraries about the availability of discounted services. As the Joint
Board noted, many national representatives of school and library groups
are participating in this proceeding, and we believe that these
associations will inform their members of the opportunity to secure
discounted telecommunications and other covered services under this
program. We encourage these groups to notify their members of the
universal service programs through trade publications, websites, and
conventions. While we concur with the Joint Board and decline to
require provider notification to schools and libraries, we encourage
service providers to notify each school and library association and
state department of education in the states they serve of the
availability of discounted services annually.
367. Separate Funding Mechanisms
We concur with the Joint Board's recommendation that the universal
service administrator distribute support for schools and libraries from
the same source of revenues used to support other universal service
purposes under section 254 because we agree with the Joint Board's
conclusion that establishing separate funds would yield minimal, if
any, improvement in accountability, while imposing unnecessary
administrative costs. We share the concern that we must ensure proper
accountability for and targeting of the funds for schools and
libraries. We agree that this goal is achievable if the fund
administrator maintains separate accounting categories.
368. Offset versus Reimbursement
Section 254(h)(1)(B) requires that a telecommunications carrier
providing services to schools and libraries shall either apply the
amount of the discount afforded to schools and libraries as an offset
to its universal service contribution obligations or shall be
reimbursed for that amount from universal service support mechanisms.
We agree that section 254(h)(1)(B) requires that service providers be
permitted to choose either reimbursement or offset. For purposes of
administrative ease, we conclude that service providers, rather than
schools and libraries, should seek compensation from the universal
service administrator. Many telecommunications carriers will already be
receiving funds from the administrator for existing high cost and low-
income support, and the administrator would often be dealing with the
same entities for the schools and libraries program. To require schools
and libraries to seek direct reimbursement would also burden the
administrator because of the large number of new entities that would be
receiving funds.
369. Access to Advanced Telecommunications and Information Services
As discussed above, we concur with the Joint Board's recommendation
that we provide universal service support to eligible schools and
libraries for telecommunications services, Internet access, and
internal connections. We have, however, relied on sections 254(c)(3)
and 254(h)(1)(B), rather than section 254(h)(2)(A) as proposed by the
Joint Board, because we believe the former are the more pertinent
section. In addition to the support for such services provided by
telecommunications carriers under sections 254 (c)(3) and (h)(1)(B),
discussed in section X.B.2.b. and X.B.2.c. of the Order, we also agree
with the Joint Board's recommendation to provide discounts for Internet
access and internal connections provided by non-telecommunications
carriers, which we do under the authority of sections 254(h)(2)(A) and
4(i).
370. Many companies that are not themselves telecommunications
carriers will be eligible to provide supported non-telecommunications
services to eligible schools and libraries at a discount pursuant to
section 254(h)(1) because they have subsidiaries or affiliates owned or
controlled by them that are telecommunications carriers. In addition,
to take advantage of the discounts provided by section 254(h)(1), non-
telecommunications carriers can bid with telecommunications carriers
through joint ventures, partnerships, or other business arrangements.
They also have the option of establishing subsidiaries or affiliates
owned or controlled by them that are telecommunications carriers, even
if the scope of their telecommunications service activities is fairly
limited. Given the ways in which non-telecommunications carriers can be
reimbursed for providing discounts to eligible schools and libraries
under section 254(h)(1), we conclude that it would create an artificial
distinction to exclude those non-telecommunications carriers that do
not have telecommunications carrier subsidiaries or affiliates owned or
controlled by them, that choose not to create them, or
[[Page 32914]]
that do not bid together with telecommunications carriers. Accordingly,
pursuant to authority in sections 254(h)(2)(A) and 4(i) of the Act,
non-telecommunications carriers will be eligible to provide the
supported non-telecommunications services to schools and libraries at a
discount.
371. Section 254(h)(2), in conjunction with section 4(i),
authorizes the Commission to establish discounts and funding mechanisms
for advanced services provided by non-telecommunications carriers, in
addition to the funding mechanisms for telecommunications carriers
created pursuant to sections 254(c)(3) and 254(h)(1)(B). The language
of section 254(h)(2) grants the Commission broad authority to enhance
access to advanced telecommunications and information services,
constrained only by the concepts of competitive neutrality, technical
feasibility, and economical reasonableness. Thus, discounts and funding
mechanisms that are competitively neutral, technically feasible, and
economically reasonable that enhance access to advanced
telecommunications and information services fall within the broad
authority of section 254(h)(2).
372. Furthermore, unlike sections 254(h)(1) (A) and (B), section
254(h)(2)(A) does not limit support to telecommunications carriers.
Rather, section 254(h)(2)(A) supplements the discounts to
telecommunications carriers established by section 254(h)(1) by
expressly granting the Commission the authority and directing the
Commission to ``establish competitively neutral rules * * * to enhance,
to the extent technically feasible and economically reasonable, access
to advanced telecommunications and information services for all public
and non-profit elementary and secondary school classrooms * * * and
libraries.'' This language is notably broader than the other provisions
of section 254, including section 254(h) (1)(A) and (1)(B) and, unlike
these other sections, does not include the phrase ``telecommunications
carriers.'' Thus, contrary to arguments raised by many ILECs, we
conclude that section 254(e), which provides that ``only an eligible
telecommunications carrier designated under section 214(e) shall be
eligible to receive specific [f]ederal universal service support,'' is
inapplicable to section 254(h)(2).
373. In this regard, section 254(e) limits the provision of federal
universal service support to eligible telecommunications carriers
designated under section 214(e). Section 214(e) requires ``eligible
telecommunications carriers'' to ``offer the services that are
supported by [f]ederal universal service support mechanisms under
section 254(c).'' With respect to schools and libraries, the discount
mechanism for those services designated for support under section
254(c) (specifically (c)(3)), is established by section 254(h)(1)(B).
This statutory interrelationship demonstrates that the limitation set
forth in section 254(e) pertains only to section 254(c) services,
which, with respect to schools and libraries, is only relevant to
section 254(h)(1)(B). This interpretation is further bolstered by the
specific language set forth in section 254(h)(1)(B)(ii), which is an
express exemption from the section 254(e) requirement for certain
telecommunications carriers (i.e., those that are not ``eligible''
under section 214(e)). No such exemption language was required for
section 254(h)(2)(A) because section 254(e) does not apply to that
section.
374. We thus find that section 254(h)(2), in conjunction with
section 4(i), permits us to empower schools and libraries to take the
fullest advantage of competition to select the most cost-effective
provider of Internet access and internal connections, in addition to
telecommunications services, and allows us not to require schools and
libraries to procure these supported services only as a bundled package
with telecommunications services. This approach is consistent with the
requirement in section 254(h)(2) that the rules established under it be
``competitively neutral,'' as well as by the principle of competitive
neutrality that we have concluded should be among those overarching
principles shaping our universal service policies. The goal of
competitive neutrality would not be fully achieved if the Commission
only provided support for non-telecommunications services such as
Internet access and internal connections when provided by
telecommunications carriers. In that situation, service providers not
eligible for support because they are not telecommunications carriers
would be at a disadvantage in competing to provide these services to
schools and libraries, even if their services would be more cost-
efficient.
375. We thus conclude that the same non-telecommunications services
eligible for discounts if provided by telecommunications carriers under
section 254(h)(1)(B) are eligible for discounts if provided by non-
telecommunications carriers under section 254(h)(2)(A). Furthermore,
though the rules called for by section 254(h)(2)(A) are not required to
mirror the discount schedule in section 254(h)(1)(B), we have authority
to ``enhance access'' in this manner. Thus, the requirements that apply
to the discount program for services provided by telecommunications
carriers, discussed throughout this section, will apply to the discount
program for services provided by non-telecommunications carriers, with
one exception. Non-telecommunications carriers that are not required to
contribute to universal service support mechanisms will be entitled
only to reimbursement for the amount of the discount afforded to
eligible schools and libraries under section 254(h)(1)(B), whereas
telecommunications carriers will be entitled to either reimbursement or
an offset to their obligation to contribute to universal service
support mechanisms. Finally, we conclude that although sections
254(c)(3) and 254(h)(1)(B) on the one hand and sections 254(h)(2)(A)
and 4(i) on the other hand authorize funding mechanisms under separate
statutory authority, these funds can and should be combined into a
single fund as a matter of administrative convenience.
376. We recognize that sections 706 and 708 include requirements
that would complement the goal of widespread availability of advanced
telecommunications services. We concur with the Joint Board's
conclusion, however, that Congress contemplated that section 706 would
be the subject of a separate rulemaking proceeding. We agree with the
Joint Board and decline to consider section 706 in the context of this
proceeding. We agree with the Joint Board's recommendation that we not
rely on section 708 to provide advanced services to schools and
libraries within the context of this proceeding. We also agree with the
Joint Board and conclude that section 708 should be considered further
after implementation of section 254.
377. We concur with the Joint Board's recommendation and conclude
that we adopt rules implementing the schools and libraries discount
program at the start of the 1997-1998 school year. As discussed above,
we also conclude that the funding year will be the calendar year and
that support will begin to flow on January 1, 1998.
Health Care Providers
378. Medical Applications Eligible for Support
We agree with those commenters suggesting that health care
providers themselves are best able to determine those medical
applications that should
[[Page 32915]]
be provided by means of supported telecommunications services. We find
that ``public health services'' are ``health care services'' for
purposes of section 254(h), and as such, the associated
telecommunications services necessary to provide such services may be
supported by universal service support mechanisms, consistent with the
requirements of section 254(h). For purposes of section 254, we define
``public health services'' to mean health-related services, including
non-clinical, informational, and educational public health services,
that local public health departments or agencies are charged with
performing under federal and state laws.
379. We find that the phrase ``necessary for the provision of
health care services * * * including instruction relating to such
services'' means reasonably related to the provision of health care
services or instruction because we find that a broad reading of the
phrase is consistent with the purpose of section 254(h) which, as
Congress has stated, is, in part, ``to ensure that health care
providers for rural areas * * * have affordable access to modern
telecommunications services that will enable them to provide medical *
* * services to all parts of the nation.'' We emphasize that the
determination of what ``additional services'' should be eligible for
support is not expressly limited by the considerations listed in
section 254(c)(1). Those considerations are relevant to the
establishment of core universal services and are not determinative of
which ``additional'' services should receive support for health care
providers under the language of section 254(c)(3).
380. Bandwidth Limitations
We conclude that, within the limitations described below, universal
service support mechanisms for health care providers should support
commercially available services of bandwidths up to and including 1.544
Mbps, or the equivalent transmission speed, but not higher speeds. We
find that the weight of the record evidence demonstrates that higher
bandwidth services are not presently necessary for the ``provision of
health care services in a State.'' We also find that the record
indicates vastly higher costs implicated in supporting services that
employ bandwidths higher than 1.544 Mbps.
381. Services operating within the bandwidth limitation may be
carried over facilities capable of carrying services at higher
bandwidths, so long as the provisions for calculating support set forth
herein are followed. Accordingly, using for purposes of example some of
the services described by commenters, Frame Relay Service, Private Line
Transport Service, ISDN, satellite communications, unlicensed spread
spectrum, non-consumer, point-to-point services, and similar services,
when provided by a telecommunications carrier at speeds not exceeding
1.544 Mbps, and requested and certified as necessary by an eligible
health care provider, will be eligible for support.
382. Scope of Services Eligible for Support
We agree with and adopt the recommendation of the Joint Board,
unchallenged by any commenter, that terminating services should be
supported when they are billed to the eligible health care provider, as
in the case of wireless telephone air time charges, and should not be
supported otherwise. We adopt the recommendation of the Joint Board
that we not support health care providers' acquisition of customer
premises equipment such as computers and modems.
383. Like the Joint Board, we conclude that only telecommunications
services should be designated for support under section 254(h)(1)(A).
Section 254(e) states that only an ``eligible telecommunications
carrier'' under section 214(e) may receive universal service support.
Unlike section 254(h)(1)(B), section 254(h)(1)(A) does not contain an
exception to the eligibility requirements of section 254(e). Therefore,
we conclude that only eligible telecommunications carriers, as defined
in section 254(e), shall be eligible to receive support for providing
eligible services to health care providers under section 254(h)(1)(A).
We conclude that both eligible telecommunications carriers and
telecommunications carriers that do not qualify as eligible
telecommunications carriers under section 254(e) may receive support
for services provided to eligible health care providers under section
254(h)(2). We find that there is no need to extend eligibility beyond
telecommunications carriers because we are supporting only
telecommunications services.
384. Internet Access
The Joint Board concluded that the record contained insufficient
information about the costs of providing Internet access to health care
providers to justify a recommendation that such access be supported.
Consistent with the Joint Board recommendation, the Common Carrier
Bureau sought comment on the need for supporting Internet access for
rural health care providers. As discussed in the schools and libraries
section, sections 254(c)(3) and 254(h)(1)(B) of the Act authorize us to
permit schools and libraries to receive the telecommunications and
information services needed to use the Internet at discounted rates. In
contrast, section 254(h)(1)(A) explicitly limits supported services for
health care providers to telecommunications services. Accordingly, data
links and associated services that meet the statutory definition of
information services, because of their inclusion of protocol conversion
and information storage, are not eligible for support under section
254(h)(1)(A), as they are under section 254(h)(2)(A). The
telecommunications component of access to an Internet service provider,
however, provided by an eligible telecommunications carrier, is a
telecommunications service eligible for universal service support for
health care providers under section 254(h)(1)(A). That is, any
telecommunications service within the prescribed bandwidth limitations
used to obtain access to an Internet service provider is eligible for
support under section 254(h)(1)(A).
385. Infrastructure Development and Upgrade
As a preliminary matter, we note that several commenters
characterize infrastructure development as ``network buildout.'' As
other commenters note, however, providing additional support for
network buildout or other infrastructure building technologies may not
comport with the principle of competitive neutrality. We recognize that
non-wireline technologies may provide the most cost-effective manner of
providing services to areas currently underserved by, or receiving
unsatisfactory service from the use of, wireline technologies. For this
reason we will use the term ``infrastructure development'' instead of
``network buildout'' and will explore the use of non-wireline
technologies as part of the program described below.
386. We agree that infrastructure development is not a
``telecommunications service'' within the scope of section
254(h)(1)(A). We conclude that we have the authority to establish rules
to implement a program of universal service support for infrastructure
development as a method to enhance access to advanced
telecommunications and information services under section 254(h)(2)(A),
as long as such a program is competitively neutral, technically
feasible, and economically reasonable. Section
[[Page 32916]]
254(h)(2)(A) directs the Commission to establish competitively neutral
rules ``to enhance, to the extent technically feasible and economically
reasonable, access to advanced telecommunications and information
services for all * * * health care providers.'' Extending or upgrading
existing telecommunications infrastructure enhances access to the
advanced services that may be offered over that infrastructure. We will
issue a Public Notice regarding whether and how to support
infrastructure development needed to enhance public and not-for-profit
health care providers' access to advanced telecommunications and
information services.
387. Periodic Review
We have considered carefully the issue of how soon to review and
revise the description of supported services and adopt the Joint
Board's recommendation to revisit the list of supported services in
2001. We note that there are several advantages to the Joint Board
approach. The Joint Board's recommended review date is also the time we
have set to re-convene a new Joint Board on universal service, which
the statute contemplates will make recommendations to the Commission on
modifications to the definition of supported services.
388. Eligibility
Pursuant to section 254(h)(1)(A), ``any public or nonprofit health
care provider that serves persons who reside in rural areas in that
State'' is eligible for universal service support. As the Joint Board
acknowledged, because nearly all health care providers serve some rural
residents, the statute could be read to include nearly every health
care provider in the country. The intent of Congress to limit
eligibility under section 254(h)(1)(A) to health care providers located
in rural areas is demonstrated by the statutory directive that
calculation of the amount of support due a carrier for providing
services to a health care provider is to be based on the difference
between the ``rates for services provided to health care providers for
rural areas and the rates for similar services provided to other
customers in comparable rural areas.'' It would not be logical to
compare the rates paid by health care providers with those paid by
other customers in comparable rural areas if the health care provider
were not also located in a rural area. Thus, Congress contemplated that
an eligible health care provider would otherwise be paying the rates of
any other nonresidential customer located in a rural area.
389. We agree with the Joint Board that we should adopt ``a
mechanism that includes the largest reasonably practicable number of
health care providers that primarily serve rural residents and that,
because of their location, are prevented from obtaining
telecommunications services at rates available to urban customers.'' We
also agree, therefore, that eligibility to obtain telecommunications
services at urban rates should be limited to health care providers
located in rural areas. Accordingly, we conclude that all public and
nonprofit health care providers that are located in rural areas are
eligible to receive supported services pursuant to the mechanisms
established in this section.
390. Defining Rural Areas
As the Joint Board recognized, section 254(h)(1)(A) requires us to
adopt a definition of ``rural area'' both to determine the location of
health care providers and to determine the ``comparable rural areas''
needed for use in calculating the credit or reimbursement to a carrier
that provides services to those health care providers at reduced rates.
For both purposes, we adopt the recommendation of the Joint Board and
define ``rural area'' to mean a nonmetropolitan county or county
equivalent, as defined by OMB and identifiable from the most recent MSA
list released by OMB, or any census tract or block numbered area, or
contiguous group of such tracts or areas, within an MSA-listed
metropolitan county identified in the most recent Goldsmith
Modification published by ORHP/HHS. We agree that counties are units of
identification more easily used and administered than the Bureau of the
Census's density-based definition of rural and urban areas. We find
that it is consistent with the Joint Board's recommendation and
congressional intent to adopt ``a mechanism that includes the largest
reasonably practicable number of rural health care providers that,
because of their location, are prevented from obtaining
telecommunications services at rates available to urban customers.'' As
discussed above, because lists of MSA counties and Goldsmith-identified
census tracts and blocks already exist, updated to 1996, such an
approach is easily administered. We direct the Administrator to post on
a website the most recent versions of the MSA list, the Goldsmith
Modification list, and appropriate instructions for identifying the MSA
census tract or block numbered area in which a rural health care
provider's site is located. In addition, we direct the Administrator to
make that information available in hard copy to interested parties upon
request.
391. Definition of Health Care Provider
We adopt the Joint Board's recommendation that the Commission
attempt no further clarification of the term ``health care provider,''
because section 254(h)(5)(B) adequately describes those entities
Congress intended to be eligible for universal service support.
Commenters present no convincing justification for expanding the
categories of eligible providers beyond those delineated by Congress,
which are unambiguously described in section 254(h)(5)(B).
392. Implementing Support Mechanisms for Rural Health Care Providers
We adopt the recommendation of the Joint Board and conclude that
the rural rate shall be the average of the rates actually being charged
to commercial customers, other than rates reduced by universal service
programs, for identical or technically similar services provided by the
carrier providing the service in the rural area in which the health
care provider is located. In making this decision, we agree with the
Joint Board's conclusion that the approach is ``[m]indful of the
Commission's obligation to craft a mechanism that is `specific,
predictable and sufficient.' '' We define ``rural area'' to mean a
nonmetropolitan county or county equivalent, as defined by OMB and
identifiable from the most recent MSA list as released by OMB, or any
census tract or block numbered area, or contiguous group of such tracts
or areas, within an MSA-listed metropolitan county as identified in the
most recent Goldsmith Modification published by ORHP/HHS. We conclude
that including the discounted rates charged rural schools and libraries
for similar services among the rates averaged would deny the
telecommunications carrier full compensation for its services to a
rural health care provider. For this reason, like the Joint Board, we
conclude that the rates averaged to calculate the rural rate should
exclude any rates reduced by universal service programs. Excluding such
rates should help ensure that the rural rate more accurately reflects
the costs of providing similar services to other customers in rural
areas, so that the carrier providing services receives ``sufficient''
support, as contemplated by the Act.
393. Because we find it to be a reasonable procedure that minimizes
administrative burdens on health care providers and carriers, we also
adopt the Joint Board's recommendation on how to determine the rural
rate when
[[Page 32917]]
the providing carrier is providing no identical or technically similar
services to other commercial customers in the relevant rural area. The
rural rate must be determined by taking the average of the tariffed and
other publicly available rates, not including any rates reduced by
universal service programs, charged for the same or similar services in
that rural area by other carriers. As the Joint Board recommended, if
there are no such tariffed or publicly available rates for such
services in that rural area, or if the carrier considers the method
described here, as applied to the carrier, to be unfair for any reason,
the carrier may submit, for the state commission's approval, regarding
intrastate rates, or the Commission's approval, regarding interstate
rates, a cost-based rate for the provision of the service in the most
economically efficient, reasonably available manner. We also agree that
the rate determined under this procedure should be supported and
justified periodically, taking into account anticipated and actual
demand for telecommunications services by all customers who will make
use of the facilities over which services are being provided to
eligible health care providers.
394. Identifying the Applicable Urban Rate: Definition
We adopt the recommendation of the Joint Board with modifications
and designate as the rate ``reasonably comparable to rates charged for
similar services in urban areas in that State'' (the ``urban rate''), a
rate no higher than the highest tariffed or publicly available rate
actually being charged to a commercial customer within the
jurisdictional boundary of the nearest large city in the state,
calculated as described below. Accordingly, we adopt the Joint Board's
recommended definition of ``urban areas'' to be used to calculate the
rate ``reasonably comparable to rates charged * * * in urban areas.''
So that the urban rate would ``reflect to the greatest extent possible
reductions in rates based on large-volume, high-density factors that
affect telecommunications rates,'' the Joint Board recommended that the
Commission use the jurisdictional boundaries of the nearest ``large
city'' to define the relevant ``urban area.'' Consistent with the Joint
Board's recommendation that the Commission ``designate by regulation
the exact city population size to define the term `large city,' '' and
for the reasons described in the next paragraph, we define the phrase
``nearest large city'' to mean the city in the state with a population
of at least 50,000, nearest to the rural health care provider's site,
measured point-to-point, from the health care provider's location to
the closest point on that city's jurisdictional boundary. We agree with
the Joint Board's conclusion that in this context, `` `comparable' is
most reasonably defined to mean `no higher than the highest' rate
charged in the nearest large city (excluding distance-based charges).''
Subject to the limitations described below, a telecommunications
carrier may not charge a rural health care provider a rate higher than
the urban rate, as defined herein, for a requested service.
395. Like the Joint Board, we conclude that telecommunications
rates in the nearest large city are a reasonable proxy for the ``rates
* * * in urban areas in a State.'' We believe that cities with
populations of at least 50,000 are large enough that telecommunications
rates based on costs would likely reflect the economies of scale and
scope that can reduce such rates in densely populated urban areas. We
also choose the 50,000 city size because an MSA, as defined by OMB, is
based in part on counties with cities having a population of 50,000 or
more, and every state has at least one MSA with a city that size. If we
chose a city size larger than 50,000, we would be unable to apply this
standard to states with no cities of that size. In addition, because
the telecommunications services a rural health care provider uses in
connection with its provision of the health care services covered by
section 254(h) are likely to involve transmission facilities linking
that health care provider's premises to a point in that nearest large
city, using that location should provide more accurate and more
realistic comparable rates for specific services than using rates, or
average rates, from more distant urban areas. We agree with the Joint
Board that using the highest tariffed or publicly available rate
actually being charged to customers in the nearest city of 50,000 in
the state avoids any unfairness that would arise from using average
rates. The Joint Board stated that use of an average rate ``would
entitle some rural customers to rates below those paid by some urban
customers, creating fairness problems for those urban customers and
arguably going farther with this mechanism than Congress intended.''
The use of average rates could result in pricing telecommunications
services to rural health care providers at rates lower than those paid
by many nearby urban customers.
396. Rates and Distance-based Charges
We agree with the Advisory Committee that support for some
distance-based charges is necessary to ensure that rates charged to
rural health care providers are ``reasonably comparable'' to urban
rates. We define distance-based charges as charges based on a unit of
distance, such as mileage-based charges. We note that the term ``rate''
is not defined in section 254(h)(1)(A) or elsewhere in the 1996 Act.
Although several incumbent LECs and USTA contend that the term ``rate''
refers to the cost of each element or sub-element of a
telecommunications service, we conclude that, as used in section
254(h)(1)(A), the term ``rate'' refers to the entire cost or charge of
a service, end-to-end, to the customer.
397. Such an interpretation is consistent with the language and
purpose of section 254(h)(1)(A). As discussed above, section
254(h)(1)(A) refers to ``rates for services provided to health care
providers'' and ``rates for similar services provided to other
customers,'' not rates for particular facilities or elements of a
service. As the record indicates, many, if not most, base rates for
telecommunications services are averaged across a state or study area.
It is often distance-based charges, not differences between base rates
for service elements, that create great disparities in the overall cost
of telecommunications services between urban and rural areas. Indeed,
distance-based charges are often a serious impediment to rural health
care providers' use of telemedicine. If, as several LECs contend, a
rural rate is ``reasonably comparable'' to an urban rate provided that
per-mile charges are the same for rural and urban areas, section
254(h)(1)(A) could do little to reduce the disparity between rural and
urban rates. Given that Congress emphasized the importance of making
telecommunications services affordable for rural health care providers,
it seems unlikely that Congress intended to adopt such a restrictive
definition of ``rate.'' Accordingly, we will support distance-based
charges incurred by rural health care providers, consistent with the
limitations described herein.
398. Support Mechanisms
We conclude that the universal service support mechanisms shall
support eligible telecommunications services for a distance not to
exceed the distance between the health care provider and the point on
the jurisdictional boundary of the city used to calculate the urban
rate that is most distant from the health care provider's location.
Because rural health care providers may select any commercially
available telecommunications service with bandwidths up to and
including
[[Page 32918]]
1.544 Mbps, such an approach is competitively neutral. Moreover, this
plan should suffice to connect a rural health care provider with a
health care provider in the nearest large city in the state or an
Internet service provider. We agree with those ILECs that contend that
establishing a maximum distance for which a rural health care provider
can receive support should ``protect against an otherwise natural
tendency for a subsidized rural provider to request telemedicine
connections to far flung areas in search of the real or imagined
`expert' in the field.'' Moreover, we agree with the group of ILECs
that limiting support to connections to the nearest large city in the
state is consistent with Congress's intent to make rural and urban
rates comparable, rather than making rural health care providers better
off than their urban counterparts.
399. As the group of ILECs indicate, urban health care providers
are not exempted from distance charges in connection with the purchase
of telecommunications services. To the extent that they connect with
other health care providers and Internet service providers within that
city, however, these urban health care providers would appear to be
less likely than their rural counterparts to incur distance-based
charges over a distance greater than the longest diameter of the city
in which they are located. Accordingly, we agree with the group of
ILECs that blanket subsidization of distance-based charges for rural
health care providers could result in inequalities between rural and
urban health care providers. Therefore, we adopt the ILECs' proposal to
adopt a standard urban distance on a state-wide basis that takes into
account the potential distance charges paid by urban health care
providers. To calculate that distance, however, we adopt a city size
consistent with our definition of ``nearest large city.'' Accordingly,
we conclude that the longest diameters of all cities with a population
of 50,000 or more within a state should be averaged to arrive at that
state's standard urban distance. We conclude that using a state-wide
distance figure should minimize the administrative burden on the
Administrator and carriers while establishing a reasonable estimation
of the distance charges that an urban health care provider might incur.
400. Consistent with that approach, if a rural health care provider
requests a service to be provided over a distance that is less than or
equal to the standard urban distance for the state in which it is
located, the urban rate for that service shall be no higher than the
highest tariffed or publicly available rate charged to a commercial
customer for a similar service provided over the same distance in the
nearest large city in the state, calculated as if the service were
provided between two points within the city. For purposes of
calculating the appropriate amount of universal service support, this
urban rate will then be compared with the rural rate for a similar
service over the same distance. If a rural health care provider
requests a service to be provided over a distance that is greater than
the standard urban distance for the state in which it is located, the
urban rate shall be no higher than the highest tariffed or publicly
available rate charged to a commercial customer for a similar service
provided over the standard urban distance in the nearest large city in
the state, calculated as if the service were provided between two
points within the city. This urban rate will then be compared to the
rural rate for the same or similar telecommunciations service provided
over a distance not to exceed the distance between the health care
provider and the point on the jurisdictional boundary of the city used
to calculate the urban rate that is most distant from the health care
provider's location.
401. InterLATA Charges
We decline to provide additional mechanisms to support what
commenters and the Joint Board referred to as LATA-crossing charges. To
the extent that this term refers to rates for interexchange services,
we note that, under the provisions of section 254(g), such rates
charged to health care providers in rural areas are to be no higher
than the rates charged to the IXC's subscribers in urban areas. To the
extent that the term LATA-crossing charges refers to access charges for
a service provided to a rural customer, the mechanisms that we adopt
will support such charges by supporting the difference between the
rural rate and the urban rate. We will re-examine this issue no later
than the next review of the services eligible for universal service
support in the year 2001.
402. Limiting Supported Services
The Act directs that universal service support mechanisms should be
specific, predictable, and sufficient. In order to establish such
mechanisms for a new and untried program, we conclude that we must
limit the services that a rural health care provider may receive. We
conclude that bandwidth transmission speeds above 1.544 Mbps are not
necessary for the provision of health care services at this time.
Accordingly, we conclude that, upon submitting a bona fide request to a
telecommunications carrier, a rural health care provider is eligible to
receive, for each separate site or location, the most cost-effective,
commercially-available telecommunications service with a bandwidth
capacity of 1.544 Mbps at a rate no higher than the urban rate, as
defined herein, provided over a distance not to exceed the distance
between the health care provider and the point on the jurisdictional
boundary of the city used to calculate the urban rate that is the most
distant from the health care provider's location (the allowable
distance). The most cost effective service is the service available at
the lowest cost after consideration of the features, quality of
transmission, reliability, and other factors the health care provider
deems necessary for the service adequately to transmit the health care
services the provider requires.
403. We conclude that allowing a rural health care provider to
purchase a service with a bandwidth capacity of 1.544 Mbps, at
distances up to the limit described above, should enable such a
provider to establish a connection with a health care provider located
in the nearest city or with an Internet service provider. The rural
health care provider may request any other service or combination of
services with transmission speeds slower than 1.544 Mbps, transmitted
over the same or shorter distance, so long as the total annual support
amount for all such services to that health care provider combined,
calculated as provided herein, does not exceed what the support amount
would have been for the most cost-effective service with a bandwidth
capacity of 1.544 Mbps at the allowable distance, calculated as
discussed above. Use of transmission speeds slower than 1.544 Mbps may
be required where no 1.544 Mbps service is commercially available or
may be the preference of a rural health care provider that desires more
than one supported service. For example, a rural health care provider
could request one or more ISDN connections to an urban health care
provider in the nearest large city, so long as the total amount of
support for all the requested services does not exceed the amount that
would have been necessary to support the most cost-effective service
with a bandwidth capacity of 1.544 Mbps connecting the rural health
care provider to the farthest point on the jurisdictional boundary of
the nearest large city. If the eligible health care provider is located
in a rural area in which a service with a
[[Page 32919]]
bandwidth capacity of 1.544 Mbps is not commercially available and the
rate for such a service is therefore unavailable, the maximum amount of
support available shall be the difference, if any, between the urban
rate and the rural rate, as defined herein, for the most cost-effective
service available using a bandwidth of 1.544 Mbps in another rural area
of the state.
404. Competitive Bidding
We conclude that eligible health care providers shall be required
to seek competitive bids for all services eligible for support pursuant
to section 254(h) by submitting their bona fide requests for services
to the Administrator. Such requests shall include a statement, signed
by an officer of the health care provider authorized to order
telecommunications services, certifying under oath to the bona fide
request requirements discussed below. The Administrator shall post the
descriptions of requested services on a website so that potential
providers can see and respond to them. As with schools and libraries,
the request may be as formal and detailed as the health care provider
desires or as required by any applicable federal or state laws or other
requirements. The request shall contain information sufficient to
enable the carrier to identify and contact the requester and to know
what services are being requested. The posting of a rural health care
provider's description of services will satisfy the competitive bidding
requirement for purposes of our universal service rules. We emphasize,
however, that the submission of a request for posting under our rules
is not a substitute for any additional and applicable state, local, or
other procurement requirements.
405. After selecting a telecommunications carrier, the rural health
care provider shall certify to the Administrator that the service
chosen is, to the best of the health care provider's knowledge, the
most cost-effective service available. Moreover, the health care
provider shall submit to the Administrator copies of the other
responses or bids received in response to its request for services. As
with schools and libraries, we are not requiring health care providers
to select the lowest bids offered, but rather will permit them to take
quality of service into account and to choose the offering or offerings
that they find most cost-effective, where this is consistent with other
procurement rules under which they are obligated to operate. After
being selected, the carrier shall certify to the Administrator the
urban rate, the rural rate, and the difference sought as an offset
against the carrier's universal service obligation.
406. Insular Areas and Alaska: Statutory Authority
We note that the provisions of section 254(h)(1)(A) apply to
insular areas, because the Act defines ``State'' to include all United
States ``Territories and possessions.'' We conclude, moreover, that
section 254(h)(2)(A) authorizes our adoption of special mechanisms by
which to calculate support for these territories. Section 254(h)(2)(A)
directs us, in part, to establish competitively neutral rules ``to
enhance, to the extent technically feasible and economically
reasonable, access to advanced telecommunications * * * services for
all public and nonprofit * * * health care providers.''
407. Insular Areas
Although the Common Carrier Bureau sought comment on whether
insular areas experience a disparity in telecommunications rates
between urbanized and non-urbanized areas, the record contains little
information on this point. The record does indicate, however, that the
unique geographic and demographic circumstances of CNMI and Guam--
including their uniformly rural character, their lack of a city with a
population as large as 50,000, or indeed any real urbanized population
centers, their lack of counties or county equivalents, and the
relatively small size and low density of their populations--render the
mechanisms we adopt under section 254(h)(1)(A) ill-suited to these
territories without modifications.
408. We note that the record contains no information about the
status and availability of health care services and telemedicine in
American Samoa, the U.S. Virgin Islands, or any other insular areas
except for CNMI, Guam, and Puerto Rico. Given the lack of comprehensive
information in the record regarding the telecommunications needs of
insular areas and the costs of supporting such services, we will issue
a Public Notice regarding these issues. We will seek additional
proposals for support mechanisms by which we could ensure that health
care providers located in these territories will have access to the
telecommunications services available in urban areas in the country, at
affordable rates, as Congress intended.
409. In this Order, we designate urban and rural areas in these
territories by which to set the ``urban rate'' and calculate the amount
of support under section 254(h)(1)(A) consistent with our general
approach to that section. Based on their status as the largest
population centers in the territories, we designate the following areas
as urban areas for purposes of setting the urban rate: for American
Samoa, the island of Tutuila; for CNMI, the island of Saipan; for Guam,
the town of Agana; and for the U.S. Virgin Islands, the town of
Charlotte Amalie. For purposes of calculating the ``rural rate,'' all
other areas in each of the above-listed territories are designated as
rural areas.
410. The ``urban rate'' shall be no higher than the highest
tariffed or publicly available rate charged for the requested service
in each territory's designated urban area. The ``rural rate,'' used to
calculate the support amount, shall be the average of tariffed and
other publicly available rates, not including rates reduced by
universal service mechanisms, charged for the same or similar services
in the rural areas of the territory. If no such services are available
in the rural areas of the territory, or, at the carrier's option, the
carrier may submit for the territorial commission's approval, a cost-
based rate for the provision of the service in the most economically
efficient, reasonably available manner. In addition to the support
outlined here, we will provide additional support for limited toll-free
access to an Internet service provider pursuant to section
254(h)(2)(A), as discussed below, which applies equally to health care
providers in insular areas.
411. Puerto Rico
We find it unnecessary to adopt measures beyond those adopted for
rural health care providers in other areas to ensure that rural health
care providers in Puerto Rico have access to affordable
telecommunications services that are necessary to provide health care
services. The record shows that Puerto Rico has a population of 3.74
million people and well-defined metropolitan and nonmetropolitan areas,
including 28 municipalities listed as MSAs. These facts suggest that
the universal service support mechanisms for rural health care
providers that we have adopted under section 254(h)(1)(A) can be
applied within the territorial limits of Puerto Rico.
412. Alaska
The record developed in response to the Recommended Decision
suggests that much of the difficulty of implementing telemedicine
programs in the vast frontier areas in Alaska arises from the lack of
basic telecommunications network infrastructure necessary to support
telemedicine. Alaska asserts that
[[Page 32920]]
because of the state's vast size, rugged terrain, harsh weather, and
sparse population, ``the major obstacle to providing telemedicine
services in Alaska is that the public switched network is not currently
capable of providing services in rural locations where there is
significant need.'' The Alaska PUC states that Alaska is ``heavily
dependent on satellite communications to provide links between the
majority of remote, rural health care providers and the few regional
hospitals,'' and affordable satellite connectivity is often limited to
bandwidth of 9.6 kbps. The need to ``hop'' satellite signals through
multiple earth stations and the use of antiquated analog earth stations
reduce transmission speed and reliability even further and often result
in the inability to use fax machines or computer modems.
413. To the extent that rural health care providers in Alaska
experience distance-sensitive telecommunications charges greater than
those faced in urban areas in that state, the mechanisms adopted in
this section should afford some relief to those health care providers
by reducing or eliminating such disparities. As discussed above,
however, we decline at this time to adopt support mechanisms for
infrastructure development, including infrastructure development in
Alaska, but encourage parties interested in obtaining such support for
Alaska to present comments in response to our Public Notice on this
issue.
414. Capping and Administering the Mechanisms
We will use a unified mechanism for eligible health care providers
and schools and libraries with separate accounting and allocation
systems for the funds collected for the two groups. We agree with the
Joint Board and the parties contending that separate funding mechanisms
would be expensive and unnecessary. We further agree that separate
accounting and allocation systems are necessary because the 1996 Act
establishes different requirements for calculating disbursements to
schools and libraries and to health care providers. Moreover, we find
that establishing two separate systems (within the single fund) will
facilitate monitoring for fraud, waste, and abuse and, if necessary,
amending the systems governing support to one group without necessarily
altering the systems for the other group.
415. Funding Cap
Although the Joint Board did not propose a funding cap on the
amount of universal service support for health care providers, we agree
with those commenters who advocate a total cap to control the size of
the support mechanisms. We note that there is no existing program to
help us estimate the cost of funding the support program for health
care providers that we adopt under sections 254(h)(1)(A) and
254(h)(2)(A), unlike our programs for high-cost and low-income
assistance for which we have historical data. Moreover, it is difficult
to estimate costs given that technologies are developing rapidly and
demand is inherently difficult to predict. Therefore, to fulfill our
statutory obligation to create specific, predictable, and sufficient
universal service support mechanisms, we establish an annual cap of
$400 million on the amount of funds available to health care providers.
Collection and distribution of the funding will begin in January 1998,
consistent with other universal service support mechanisms implemented
pursuant to this Order.
416. Timing of Funding Requests
We adopt an annual cap of $400 million for universal service
support for health care providers pursuant to sections 254(h)(1)(A) and
254(h)(2) of the Act. Support will be committed on a first-come-first-
served basis. Consistent with other universal service support
mechanisms implemented pursuant to this Order, the funding year for
health care providers will begin on January 1, with requests for
support accepted beginning on the first of July prior to each calendar
year. For the first year only, requests for support will be accepted as
soon as the health care website is open and the applications are
available. Health care providers will be permitted to submit funding
requests once they have made agreements for specific eligible services,
and the Administrator will commit funds based on those agreements until
the total payments committed during a funding year reach the amount of
the cap.
417. The Administrator shall measure commitments against the $400
million limit based on the contractually-specified expenditures for
recurring flat-rate charges for telecommunications services that a
health care provider has agreed to pay and the commitment of an
estimated variable usage charge, based on documentation from the health
care provider of the estimated expenditures that it has budgeted to pay
for its share of usage charges. Health care providers must file their
contracts with the Administrator either electronically or by paper
copy. Moreover, health care providers must file new funding requests
for each funding year. Such requests will be placed in the funding
queue based on the date and time they are received by the
Administrator.
418. Adjustments to Cap
We do not anticipate that the cost of funding eligible services
will exceed the cap, given the limits on the services that any one
health care provider may request, and we do not want to create
incentives for health care providers to file requests for services
prematurely to ensure funding. If the amount of support needed for
requested services exceeds the funding cap, this will indicate that our
estimates were less accurate than we expect and will suggest that we
must adjust the cap. We will consider the need to revise the cap in our
three-year review proceeding and sooner if we find it necessary to
ensure the sufficiency of the fund or to respond to requests from
interested parties for expedited review.
419. Advance Payment for Multi-Year Contracts
We conclude that providing funding in advance for multiple years of
recurring charges could enable an individual health care provider to
guarantee that its full needs over a multi-year period were met, even
if other health care providers were unable to obtain support due to
insufficient funds. Moreover, we are also concerned that funds would be
wasted if a prepaid service provider's business failed before it had
provided all of the prepaid services. At the same time, we recognize
that health care providers often will be able to negotiate better rates
for pre-paid/multi-year contracts, reducing the costs that both they
and the universal service support mechanisms incur. Therefore, we
conclude that while eligible health care providers should be permitted
to enter into pre-paid/multi-year contracts for supported services, the
Administrator will only commit funds to cover the portion of a long-
term contract that is scheduled to be delivered during the funding
year. Eligible health care providers may either structure their
contracts so that payment is required on at least a yearly basis or, if
they wish to enter into contracts requiring advance payment for
multiple years of service, they may use their own funds to pay full
price for the portion of the contract exceeding one year (pro rata),
and request that the service provider rebate the payments from the
support mechanism that it receives in subsequent years to the eligible
health care provider.
[[Page 32921]]
420. Collections
We lack sufficient historical data to estimate accurately the
funding demands for the first year of this program. In the past when
the Commission has established similar funding mechanisms, the
Commission or the Administrator has had access to information upon
which to base an estimate of necessary first-year contribution levels.
No unified mechanism exists to provide telecommunications and
information services to the nation's health care providers. We agree
with NYNEX and Bell Atlantic that funds should be collected for
assistance to health care providers on an as-needed basis, to meet
anticipated actual expenditures over time. Therefore, we direct the
Administrator to collect $100 million for the first three months of
1998 and to adjust future contribution assessments quarterly based on
its evaluation of health care provider demand for funds, within the
limits of the spending cap we establish here. We direct the
Administrator to report to the Commission, on a quarterly basis, both
the total amount of payments made to entities providing services to
health care providers to finance universal service support and its
determination regarding contribution assessments for the next quarter.
As with the schools and libraries mechanism, we find that adjustments
for any large reserve of remaining funds can be addressed in our review
in the year 2001. As part of its review in the year 2001, the Joint
Board likewise will review the appropriate level of funding of the
health care program.
421. Restrictions and Administration: Consortia
We agree with the Joint Board and those commenters observing that
aggregated purchase or network sharing arrangements can substantially
reduce costs and in some cases are necessary to sustain a rural
telecommunications network. As the Joint Board stated, and as we did
with schools and libraries, we recognize that aggregation into
consortia can promote efficient shared use of facilities to which each
consortium member might need access, but for which no single user needs
more than a small portion of the facilities' full capacity. We also
recognize, however, that allowing health care providers to aggregate
with other local customers, such as schools and libraries, may increase
the difficulty of enforcing the eligibility and resale limitations.
Nevertheless, as we did for schools and libraries, we conclude that the
benefits of aggregation outweigh the administrative difficulties
discussed below. Therefore, we adopt, with slight modification, the
Joint Board's recommendation to encourage health care providers to
enter into aggregate purchasing and maintenance agreements for
telecommunications services with other entities and individuals, as
long as the entities not eligible for universal service support pay
full rates for their portion of the services. Consistent with the
schools and libraries directive and reasoning regarding aggregated
purchase arrangements, however, eligible health care providers
participating in consortia that include private sector members will not
be eligible to receive universal service support, with one exception.
Eligible health care providers participating in such a consortium may
receive support, if the consortium is receiving tariffed rates or
market rates, from those providers who do not file tariffs. We find
that this prohibition will deter ineligible, private entities from
entering into aggregated purchase arrangements with rural health care
providers to receive below-tariff or below-market rates that they
otherwise would not be entitled to receive.
422. Consistent with our directives pertaining to support for
schools and libraries and the Joint Board's recommendation, we require
telecommunications carriers to carefully maintain complete records of
how they allocate the costs of shared facilities among consortium
participants in order to charge eligible health care providers the
appropriate amounts. We emphasize that under such arrangements, the
rural health care provider is eligible for reduced rates and the
telecommunications carrier is eligible for support only on that portion
of the services purchased and used by that eligible health care
provider. We adopt the Joint Board's recommendation that these
arrangements be subject to full disclosure requirements and closely
scrutinized under an audit program. Carriers shall also be required to
keep detailed records of services provided to rural health care
providers. These records shall be maintained by carriers and shall be
available for public inspection. The carriers must quantify and justify
the amount of support for which members of consortia are eligible.
Accordingly, a provider of telecommunications services to a health care
provider participating in a consortium must establish the applicable
rural rate for the health care provider's portion of the shared
telecommunications services, as well as the relevant urban rate. Absent
supporting documentation that quantifies and justifies the amount of
universal service support requested by an eligible telecommunications
carrier, the Administrator shall not allow that carrier to offset, or
receive reimbursement for, the costs of providing services to rural
health care providers participating in consortia.
423. Health care providers that belong to consortia that share
facilities should maintain their own records of use, in addition to the
records that service providers keep. Such records may be subject to an
audit or examination by the Administrator or other state or federal
agency with jurisdiction, as described below. Such monitoring should
reduce the opportunity for fraud or misappropriation of universal
service funds.
424. These requirements would not prevent state telecommunications
agencies like DOAS-IT or urban based health care providers from
aggregating demand and providing services to rural health care
providers participating in consortia at volume discounted rates or from
providing technical assistance, such as network management or
centralized administrative functions. We conclude that it is unlikely
that any of the entities providing services under such an arrangement
could be eligible for support under section 254(h)(1)(A), because rural
health care providers obtaining services at prices averaged throughout
the state are unlikely to be paying more than the urban rate.
Therefore, unless telecommunications carriers can demonstrate to the
Administrator that the average rate that members of a consortium pay is
greater than the applicable urban rate, such carriers will not be able
to receive universal service support under this provision. Health care
providers participating in consortia that are not eligible to receive
services supported under section 254(h)(1)(A) may be eligible to
receive limited toll-free access to an Internet service provider.
425. Use of Multi-purpose Telecommunications Connections
To reduce costs to health care providers, we also encourage the use
of shared lines. A health care provider may use a single line to
provide multiple services, not all of which are eligible for support.
An eligible health care provider, however, can be eligible for reduced
rates, and the telecommunications carrier can be eligible for support,
only on that portion of the telecommunications services purchased and
used by the health care provider for an eligible purpose. We
[[Page 32922]]
agree with that, in order to ensure that only eligible services receive
support, single health care providers that use lines for several
purposes must maintain records of use, which may be the subject of an
audit by the Administrator or other state or federal agency with
jurisdiction. Moreover, carriers must retain careful records regarding
how they have allocated the costs of shared facilities. We expect the
Administrator to work with rural health care providers to keep any
record keeping requirements to a minimum consistent with the need to
ensure the integrity of the program.
426. Certification Requirements
We adopt the Joint Board's recommendation, with modifications, to
require every health care provider that requests universal service
supported telecommunications services to submit to the carrier a
written request, signed by an officer of the health care provider
authorized to order telecommunications services, certifying under oath
to the first five conditions detailed below in order to establish a
bona fide request for services. We clarify, however, that a health care
provider requesting services eligible for support under section
254(h)(2)(A) need not establish that it is located in a rural area but
rather that it cannot obtain toll-free access to an Internet service
provider, as discussed below. We also impose an additional condition:
That the health care provider requesting telecommunications services
certify that it is ordering the most cost-effective method(s) of
providing the requested services. This is consistent with our
requirement that health care providers seek to minimize the cost to the
universal service support mechanisms by using a competitive bidding
process to secure the most cost-effective service arrangement. We
define the most cost-effective method of providing service as the
method available at the lowest cost, after consideration of features,
quality of transmission, reliability, and other factors that the health
care provider deems relevant to choosing an adequate method of
providing the required health care services. Consistent with the Joint
Board's recommendation, we require health care providers to renew their
certification annually. Health care providers are required to certify
to the following conditions:
(1) That the requester is a public or nonprofit entity that falls
within one of the seven categories set forth in the definition of
health care provider in section 254(h)(5)(B);
(2) Unless the requested service is supported under section
254(h)(2)(A), that the requester is physically located in a rural area
(OMB defined non-metro county or Goldsmith-defined rural section of an
OMB metro county); or, if the requested service is supported under
Sec. 254(h)(2)(A), that the requester cannot obtain toll-free access to
an Internet service provider;
(3) That the services requested will be used solely for purposes
reasonably related to the provision of health care services or
instruction that the health care provider is legally authorized to
provide under the law of the state in which they are provided;
(4) That the services will not be sold, resold, or transferred in
consideration of money or any other thing of value;
(5) If the services are being purchased as part of an aggregated
purchase with other entities or individuals, the full details of any
such arrangement governing the purchase, including the identities of
all co-purchasers and the portion of the services being purchased by
the health care provider;
(6) That it is ordering the most cost-effective method(s) of
providing the requested services.
427. Compliance Review
We adopt the Joint Board's recommendation that we require the
Administrator to establish and administer a monitoring and evaluation
program to oversee the use of supported services by health care
providers and the pricing of those services, and we adopt an approach
consistent with the requirements for schools and libraries. Like the
Joint Board, we conclude that a compliance program is necessary to
ensure that services are being used for the provision of lawful health
care, that requesters are complying with certification requirements,
that requesters are otherwise eligible to receive universal service
support, that rates charged comply with the statute and regulations,
and that the prohibitions against resale or transfer for profit are
strictly enforced.
428. Accordingly, we conclude that health care providers, as well
as telecommunications carriers, should maintain the same kind of
procurement records for purchases under this program as they now keep
for other purchases. We conclude that health care providers must be
able to produce these records at the request of any auditor appointed
by the Administrator or any other state or federal agency with
jurisdiction that might, for example, suspect fraud or other illegal
conduct, or merely be conducting a routine, random audit. We further
conclude that health care providers may be subject to random compliance
audits by any auditor appointed by the Administrator or any other state
or federal agency with jurisdiction to ensure that services are being
used for the provision of state authorized health care, that requesting
providers are complying with certification requirements, that
requesting providers are otherwise eligible to receive supported
services, that rates charged comply with the statute and regulations,
and that the prohibitions against resale or transfer for profit are
strictly enforced. The compliance audits will also be used to evaluate
what services health care providers are purchasing, the costs of such
services, and how such services are being used. Such information will
permit the Commission to determine whether universal service support
policies require adjustment.
429. The Administrator shall develop a method for obtaining
information from health care providers on what services they are
purchasing and how such services are being used and shall submit a
report to the Commission on the first business day in May of each year.
The Commission will use this report, in conjunction with any
information provided by the Joint Working Group on Telemedicine, to
monitor the progress of health care providers in obtaining access to
telecommunications and other information services. From such monitoring
activities, the Administrator should gather and report the following
data: (1) The number and nature of requests for supported services
submitted to the Administrator and posted by the Administrator; (2) the
number and kinds of services requested; (3) the number, locations, and
descriptions of health care providers requesting services; (4) the
number and nature of the requests that are filled, delayed, partially
filled, or unfilled, and the reasons therefore; (5) the number, nature,
and descriptions of carriers offering to provide or providing supported
services; (6) the requested services that are found ineligible for
support; (7) the rates, prices, and charges for services, including the
submissions of proposed urban and rural rates for each service; and (8)
the number and nature of rate submissions to state commissions and the
Commission.
430. Carrier Notification
We also adopt the Joint Board's recommendation to encourage
carriers across the country to notify all health care providers in
their service areas of the availability of lower rates resulting from
universal service support so that eligible health care providers can
take full advantage of the supported services.
[[Page 32923]]
We expect that carriers will market to health care providers. As with
schools and libraries, however, we decline to impose a requirement that
carriers notify health care providers about the availability of
supported services.
431. Selecting Between Offset or Reimbursement for Telecommunications
Carriers
Subject to the limitations on services previously described, a
telecommunications carrier shall receive support for providing an
eligible telecommunications service under section 254(h)(1)(A) equal to
the difference, if any, between the rural rate and the urban rate
charged for the service, as defined above. A telecommunications carrier
shall also receive support for providing services under section
254(h)(2)(A), as set forth below. With modifications, we adopt the
Joint Board's recommendation that we require carriers to receive this
support through offsets to the amount they would otherwise have to
contribute to federal universal service support mechanisms, rather than
through direct reimbursement. We conclude that allowing direct
compensation under some circumstances is consistent with both the
statutory language and sound public policy. We conclude that a
telecommunications carrier providing eligible services to rural health
care providers at reasonably comparable rates under the provisions of
section 254(h)(1)(A) should treat the amount eligible for support as an
offset against the carrier's universal service support obligation for
the year in which the costs were incurred. To the extent that the
amount of universal service support owed a carrier exceeds that
carrier's universal service obligation, calculated on an annual basis,
the carrier may receive a direct reimbursement in the amount of the
difference, as the majority of the state members of the Joint Board
recommend. Any reimbursement due a carrier will be made after the
offset is credited against that carrier's universal service obligation,
but in any event, no later than the first quarter of the calendar year
following the year in which the costs for services were incurred.
432. Advanced Telecommunications and Information Services
We agree with the Joint Board's conclusion that the rules we
establish for the provision of universal service support pursuant to
section 254(h)(1)(A) should significantly increase the availability and
deployment of telecommunications services for rural health care
providers. Moreover, we find that the additional support mechanisms
adopted in this proceeding, for example, those adopted for high cost
areas, also should enhance access to advanced telecommunications and
information services for these and other health care providers.
433. Nonetheless, we provide additional support under section
254(h)(2)(A) ``to enhance * * * access to advanced telecommunications
and information services for all public and nonprofit * * * health care
providers.'' For the reasons discussed below, we will provide universal
service support for a limited amount of toll-free access to an Internet
service provider. Although the Joint Board did not explicitly recommend
supporting toll charges imposed for connecting with an Internet service
provider under section 254(h)(2)(A), it did recommend that the
Commission seek comment and further information on the need for and
costs of providing advanced telecommunications and information services
for rural health care providers. In providing support for a limited
amount of toll-free Internet access under section 254(h)(2)(A), we
agree with the Joint Board's conclusion that all public and non-profit
health care providers shall benefit from the implementation of section
254(h)(2)(A). This conclusion is consistent with the plain language and
purpose of section 254(h)(2).
434. Toll-free Access to an Internet Service Provider
We agree with the Joint Board that securing access to the Internet
may be a more cost-effective method of meeting some telemedicine needs
than relying on other kinds of telecommunications services. We also
agree with those commenters that suggest that toll-free access to an
Internet service provider is important to provide cost-effective access
to and use of numerous sources of medical information and to facilitate
the flow of health care-related information.
435. We agree with the majority of the state members of the Joint
Board that the major cost for rural health care providers seeking
access to an Internet service provider is toll charges incurred by
providers who lack local dial-up access. Accordingly, we conclude that
each health care provider that cannot obtain toll-free access to an
Internet service provider is entitled to receive a limited amount of
toll-free access. Upon submitting a request to a telecommunications
carrier, each such health care provider may receive the lesser of the
toll charges incurred for 30 hours of access to an Internet service
provider or $180.00 per month in toll charge credits for toll charges
imposed for connecting to an Internet service provider. We clarify that
such support will fund toll charges but not distance-sensitive charges
for a dedicated connection to an Internet service provider.
436. Like the majority of the state members of the Joint Board, we
believe that a dollar cap on support for toll-free Internet access is
consistent with the Joint Board's objective to develop a cost-effective
program. We agree with Nebraska Hospitals that approximately $180.00 of
support for each eligible health care provider, each month, is a
reasonable amount of access to support and should create sufficient
mechanisms. While Nebraska Hospitals proposed support for 15 hours of
access at $.20 per minute, we adopt a dollar cap based on 30 hours of
use at a $.10 per minute toll charge. We find that this dollar cap per
provider on support for toll-free access to an Internet service
provider is a specific, sufficient, and predictable mechanism, as
required by section 254(b)(5) of the Act, because it limits the amount
of support that each health care provider may receive per month to a
reasonable level. This limit should also cause support for toll-free
access to an Internet service provider not to increase the size of the
fund significantly.
Interstate Subscriber Line Charges and Carrier Common Line Charges
437. LTS Payments
We agree with the Joint Board that LTS payments constitute a
universal service support mechanism. LTS payments reduce the access
charges of small, rural ILECs participating in the loop-cost pool by
raising the access charges of non-participating ILECs. Like the Joint
Board, we conclude that this support mechanism is inconsistent with the
Act's requirements that support be collected from all providers of
interstate telecommunications services on a non-discriminatory basis
and be available to all eligible telecommunications carriers.
Currently, only ILECs participating in the NECA CCL tariff receive LTS
support and only ILECs that do not participate in the NECA CCL tariff
make LTS payments. We further conclude that the Joint Board correctly
rejected some commenters' argument that the Act only requires new
universal service support mechanisms to comply with section 254. We
find that Congress also intended that we reform existing support
mechanisms, such as LTS, if necessary. We therefore adopt the Joint
Board's recommendation that LTS should be removed from access charges.
[[Page 32924]]
438. Although we conclude that the recovery of LTS revenue through
access charges represents an impermissibly discriminatory universal
service support mechanism, we agree with the Joint Board that LTS
payments serve the public interest by reducing the amount of loop cost
that high cost LECs must recover from IXCs through CCL charges and
thereby facilitating interexchange service in high cost areas
consistent with the express goals of section 254. Thus, although we
remove the LTS system from the access charge regime, we adopt the Joint
Board's recommendation that we enable rural LECs to continue to receive
payments comparable to LTS from the new universal service support
mechanisms.
439. SLC Caps
We agree with the Joint Board's conclusions that current rates
generally are affordable, and that the level of the SLC cap implicates
affordability concerns. We also concur with the Joint Board that
determination of the proper level of the SLC cap depends upon a number
of interdependent factors. The affordability of rates in coming years
will be affected by future Joint Board recommendations and Commission
action in this proceeding. The SLC also is part of the interstate
access charge system, which we are currently reviewing in the companion
access charge reform docket. As part of the recovery mechanism for
interstate-allocated loop costs, the SLC cap also may be affected by
the Separations Joint Board's recommendations. We therefore conclude
that it would be inappropriate to make significant changes to the SLC
cap for primary residential and single line business lines at this
time. In light of these considerations, we adopt the Joint Board's
recommendation that the SLC cap for primary residential and single-line
business lines should remain unchanged.
440. CCL Charges
In our Access Charge Reform Order, the Commission adopts the Joint
Board's suggestion that the CCL charge should be recovered in a more
efficient manner. Specifically, in the Access Charge Reform Order, we
create and implement a system of flat, per-line charges on the PIC.
Where an end user declines to select a PIC, we adopt the Joint Board's
suggestion that the PIC charge be assessed on the end user. As more
fully described in our Access Charge Reform Order, we contemplate that,
over time, all implicit subsidies will be removed from these flat-rate
charges and that any universal service costs will be borne explicitly
by our universal service support mechanisms.
441. Replacement of LTS
As we have stated, rural carriers' LTS payments will be replaced
with comparable, per-line payments from the new universal service
support mechanisms on January 1, 1998. Because current LTS payments
will cease on that date, our rules must be modified so that ILECs that
currently contribute to LTS also will stop making LTS payments on that
date. LTS contributors currently recover the revenue necessary for
their LTS contributions through their own CCL charges. Because current
LTS contributors will no longer be making such contributions after
January 1, 1998, their CCL charges should be adjusted to account for
this change. If we did not adjust CCL charges to reflect the
elimination of LTS payment obligations, ILECs would recover funds
through their access charges for which they incurred no corresponding
cost; the result would be an inappropriate transfer of funds from IXCs
or their customers to ILECs.
442. We also observe that the replacement of LTS with per-line
support from the new universal service support mechanisms will affect
our current rule that sets the NECA CCL tariff at the average of price-
cap LECs' CCL charges, as our rules currently provide. The elimination
of price-cap ILECs' LTS obligations will allow their CCL charges to
fall, but there is no corresponding reason for a reduction in the NECA
CCL tariff. Yet under our current rules, the NECA CCL charge would fall
simply because of our regulatory changes to price-cap ILECs' LTS
payment obligations. We must therefore establish a new method to set
the NECA CCL tariff. We address this question, too, in the access
charge reform proceeding.
Administration Of Support Mechanisms
443. Criteria for Mandatory Contribution
We agree with the Joint Board's recommendation that all
telecommunications carriers that provide interstate telecommunications
services must contribute to the support mechanisms. To be considered a
mandatory contributor to universal service under section 254(d): (1) A
telecommunications carrier must offer ``interstate''
``telecommunications''; (2) those interstate telecommunications must be
offered ``for a fee''; and (3) those interstate telecommunications must
be offered ``directly to the public, or to such classes of users as to
be effectively available to the public.''
444. Interstate
Telecommunications are ``interstate'' when the communication or
transmission originates in any state, territory, possession of the
United States, or the District of Columbia and terminates in another
state, territory, possession, or the District of Columbia (47 U.S.C.
153(22)). In addition, under the Commission's rules, if over ten
percent of the traffic carried over a private or WATS line is
interstate, then the revenues and costs generated by the entire line
are classified as interstate (47 CFR 36.154(a)). We agree with the
Joint Board's conclusion that interstate telecommunications services
include telecommunications services among U.S. territories and
possessions because such areas are expressly included within the
definition of ``interstate.''
445. We also agree that the base of contributors to universal
service should be construed broadly and should include international
communications revenues generated by carriers of interstate
telecommunications. Although we agree that by definition, foreign or
international telecommunications are not ``interstate'' because they
are not carried between states, territories, or possessions of the
United States, we find that, pursuant to our statutory authority to
assess contributions to universal service on an equitable and
nondiscriminatory basis, we shall include the foreign
telecommunications revenues of interstate carriers within the revenue
base. Contributors that provide international telecommunications
services benefit from universal service because they must either
terminate or originate telecommunications on the domestic PSTN.
Therefore, we find that contributors that provide international
telecommunications services should contribute to universal service on
the basis of revenues derived from those services. Foreign
communications are defined as a ``communication or transmission from or
to any place in the United States to or from a foreign country, or
between a station in the United States and a mobile station located
outside of the United States.'' (47 U.S.C. 153(17)). Communications
that are billed to domestic end users should be included in the revenue
base, including country direct calls when provided between the United
States and a foreign point. Revenues from communications between two
international points or foreign countries would not be included in the
universal service base, for example, if a domestic
[[Page 32925]]
end user used country direct calling between two foreign points. We
find that carriers that provide only international telecommunications
services are not required to contribute to universal service support
mechanisms because they are not ``telecommunications carriers that
provide interstate telecommunications services.''
446. Telecommunications
Telecommunications is defined as a ``transmission, between or among
points specified by the user, of information of the user's choosing,
without change in the form or content of the information as sent and
received.'' (47 U.S.C. 153(46). To provide more specific guidance as to
what services qualify as ``telecommunications,'' we adopt, with slight
modification, the Joint Board's list of examples and find that the
following services satisfy the above definition and are examples of
interstate telecommunications:
cellular telephone and paging services; mobile radio services;
operator services; PCS; access to interexchange service; special
access; wide area telephone service (WATS); toll-free services; 900
services; MTS; private line; telex; telegraph; video services;
satellite services; and resale services.
447. We also clarify the scope of contribution obligations for
``satellite'' and ``video'' services, which are among the services
listed in the exemplary list provided by the Joint Board. The Joint
Board recommended that the Commission adopt ``the TRS approach'' to
identifying providers of interstate telecommunications services. Under
our TRS rules, carriers must contribute to the TRS Fund based on their
gross telecommunications services revenues. Consistent with its
recommendation, the Joint Board concluded that satellite operators
should contribute to universal service to the extent that they provide
``telecommunications services.'' We adopt the Joint Board's approach
and clarify that satellite and video service providers must contribute
to universal service only to the extent that they are providing
interstate telecommunications services. Thus, for example, entities
providing, on a common carrier basis, video conferencing services,
channel service or video distribution services to cable head-ends would
contribute to universal service. Entities providing open video systems
(OVS), cable leased access, or direct broadcast satellite (DBS)
services would not be required to contribute on the basis of revenues
derived from those services. We agree with the Joint Board that this
list is not exhaustive. Other services not on the list or services that
may be developed may also qualify as interstate telecommunications.
448. For a Fee
We agree with the Joint Board's interpretation of the plain
language of section 3(46) and find that the plain meaning of the phrase
``for a fee'' means services rendered in exchange for something of
value or a monetary payment. We do not find persuasive UTC's argument
that ``for a fee'' means ``for-profit.'' We do not assume that Congress
intended to limit ``telecommunications services'' to those which are
offered ``for-profit'' when Congress could have, but did not, so state.
In response to LCRA's request, we note that cost sharing for the
construction and operation of private telecommunications networks does
not render participants ``telecommunications carriers'' because such
arrangements do not involve service ``directly to the public.''
449. Directly to the Public
We find that the definition of ``telecommunications services'' in
which the phrase ``directly to the public'' appears is intended to
encompass only telecommunications provided on a common carrier basis.
This conclusion is based on the Joint Explanatory Statement, which
explains that the term telecommunications service ``is defined as those
services and facilities offered on a `common carrier' basis,
recognizing the distinction between common carrier offerings that are
provided to the public * * * and private services.'' Federal precedent
holds that a carrier may be a common carrier if it holds itself out
``to service indifferently all potential users.'' Such users, however,
are not limited to end users. Common carrier services include services
offered to other carriers, such as exchange access service, which is
offered on a common carrier basis, but is offered primarily to other
carriers. Precedent further holds that a carrier will not be a common
carrier ``where its practice is to make individualized decisions in
particular cases whether and on what terms to serve.''
450. We conclude that only common carriers should be considered
mandatory contributors to the support mechanisms. We agree with the
Joint Board's recommendation that any entity that provides interstate
telecommunications to users other than significantly restricted classes
for a fee should contribute to the support mechanisms. We find,
however, that the statute supports reaching the Joint Board's goal
under our permissive authority rather than our mandatory authority. We
agree with the Joint Board that private network operators that lease
excess capacity on a non-common carrier basis should contribute to
universal service support; we do not, however, include them in the
category of mandatory contributors. We classify these service providers
as ``other providers of interstate telecommunications'' because we find
that private network operators that lease excess capacity on a non-
common carrier basis are not common carriers or mandatory contributors
under the first sentence of section 254(d). Nevertheless, we find that,
pursuant to our permissive authority, the public interest requires
them, as providers of interstate telecommunications, to contribute to
universal service because they compete against telecommunications
carriers in the provision of interstate telecommunications.
451. We agree with the Joint Board and find no reason to exempt
from contribution any of the broad classes of telecommunications
carriers that provides interstate telecommunications services,
including satellite operators, resellers, wholesalers, paging
companies, utility companies, or carriers that serve rural or high cost
areas, because the Act requires ``every telecommunications carrier that
provides interstate telecommunications services'' to contribute to the
support mechanisms. Thus, we agree with the Joint Board that any entity
that provides interstate telecommunications services, including
offering any of the services identified above for a fee directly to the
public or to such classes of users as to be effectively available
directly to the public, must contribute to the support mechanisms.
452. Furthermore, we agree with the Joint Board that information
service providers (ISP) and enhanced service providers are not required
to contribute to support mechanisms to the extent they provide such
services. The Act defines an ``information service'' as ``the offering
of a capability for generating, acquiring, storing, transforming,
processing, retrieving, utilizing, or making available information via
telecommunications * * * but does not include any use of any such
capability for the management, control, or operation of a
telecommunications system or the management of a telecommunications
service.'' (47 U.S.C. section 153(20). The Commission's rules define
``enhanced services'' as ``services offered over common carrier
transmission facilities used in interstate communications which employ
computer processing applications that act on the format, content, code,
[[Page 32926]]
protocol, or similar aspects of the subscriber's transmitted
information; provide the subscriber additional, different, or
restructured information; or involve subscriber interaction with stored
information.'' (47 CFR section 64.702). The definition of enhanced
services is substantially similar to the definition of information
services. In the Non-Accounting Safeguards First Report and Order (62
FR 2927 (January 21, 1997)) in which the Commission found that all
services previously considered ``enhanced services'' are ``information
services,'' the Commission indicated that, to ensure regulatory
certainty and continuity, it was preserving the definitional scheme by
which certain services (enhanced and information services) are exempted
from regulation under Title II of the Act. We have issued a Notice of
Inquiry (62 FR 4670 (January 31, 1997)) seeking comment on the
treatment of Internet access and other information services that use
the public switched network. We intend in that proceeding to review the
status of ISPs under the 1996 Act in a comprehensive manner.
453. With respect to the issue of whether states may require CMRS
providers to contribute to state universal service support mechanisms,
we agree with the Joint Board and find that section 332(c)(3) does not
preclude states from requiring CMRS providers to contribute to state
support mechanisms. Section 254(f) states that states may require
telecommunications carriers that provide intrastate telecommunications
services to make equitable and nondiscriminatory contributions to state
support mechanisms. Section 332(c)(3) prohibits states from regulating
the rates charged by CMRS providers. Section 332(c)(3) also states that
``[n]othing in this subparagraph shall exempt providers of commercial
mobile services (where such services are a substitute for land line
telephone exchange service for a substantial portion of the
communications within such [s]tate)'' from state universal service
requirements. Several commenters argue that section 332(c)(3) prohibits
states from requiring CMRS providers operating within a state to
contribute to state universal service programs unless the CMRS
provider's service is a substitute for land line service in a
substantial portion of the state. The Joint Board, however, disagreed.
California PUC has adopted this interpretation and has required CMRS
providers in California to contribute to the state's programs for
Lifeline and high cost small companies since January 1, 1995.
454. Other Providers of Interstate Telecommunications
We require all the entities identified by the Joint Board in its
Recommended Decision to contribute to the support mechanisms, subject
to the slight modification discussed above regarding carriers that
provide only international services. Because of the statutory language
and legislative history discussed above, however, we reach the result
recommended by the Joint Board in a slightly different manner. We find
under our permissive authority over ``other providers of
telecommunications'' that the public interest requires private service
providers that offer their services to others for a fee and payphone
aggregators to contribute to our support mechanisms.
455. We find that the principle of competitive neutrality,
recommended by the Joint Board and adopted by the Commission, suggests
that we should require certain ``providers of interstate
telecommunications'' to contribute to the support mechanisms. We find
that the public interest requires both private service providers that
offer interstate telecommunications to others for a fee and payphone
aggregators to contribute to the preservation and advancement of
universal service in the same manner as carriers that provide
``interstate telecommunications services'' because this approach
reduces the possibility that carriers with universal service
obligations will compete directly with carriers without such
obligations. In addition, the inclusion of such providers as
contributors to the support mechanisms will broaden the funding base,
lessening contribution requirements on telecommunications carriers or
any particular class of telecommunications providers.
456. Although some private service providers serve only their own
internal needs, some provide services or lease excess capacity on a
private contractual basis. The provision of services or the lease of
excess capacity on a private contractual basis alone does not render
these private service providers common carriers and thus mandatory
contributors. We find justification, however, pursuant to our
permissive authority, for requiring these providers that provide
telecommunications to others in addition to serving their internal
needs to contribute to federal universal service on the same basis as
telecommunications carriers. Without the benefit of access to the PSTN,
which is supported by universal service mechanisms, these providers
would be unable to sell their services to others for a fee.
Accordingly, these providers, like telecommunications or common
carriers, have built their businesses or a part of their businesses on
access to the PSTN, provide telecommunications in competition with
common carriers, and their non-common carrier status results solely
from the manner in which they have chosen to structure their
operations. Even if a private network operator is not connected to the
PSTN, if it provides telecommunications, it competes with common
carriers, and the principle of competitive neutrality dictates that we
should secure contributions from it as well as its competitors. Thus,
pursuant to our permissive authority, we find that the public interest
requires private service providers that offer services to others for a
fee on a non-common carrier basis to contribute to the support
mechanisms.
457. We agree with RBOC Payphone Coalition that payphone service
providers are not telecommunications carriers because they are
``aggregators.'' Payphone service providers do, however, provide
interstate telecommunications and thus are subject to our permissive
authority to require contributions if the public interest so requires.
Telecommunications carriers that provide payphone services must
contribute on the basis of their telecommunications revenues, including
the revenues derived from their payphone operations, because payphone
revenues are revenues derived from end users for telecommunications
services. If we did not exercise our permissive authority, aggregators
that provide only payphone service would not be required to contribute,
while their telecommunications carrier competitors would. We do not
want to create incentives for telecommunications carriers to alter
their business structures by divesting their payphone operations in
order to reduce their contributions to the support mechanisms. Thus, we
find that because payphone aggregators are connected to the PSTN and
because they directly compete with mandatory contributors to universal
service the public interest requires payphone providers to contribute
to the support mechanisms.
458. We do not wish, however, to require contributions from
payphone aggregators, such as beauty shop or grocery store owners,
retail establishment franchisees, restaurant owners, or schools that
provide payphones primarily as a convenience to the customers of their
primary business and do not provide payphone services as part of their
core business.
[[Page 32927]]
The provision of a payphone is merely incidental to their primary non-
telecommunications business and constitutes a minimal percentage of
their total annual business revenues. We anticipate that these entities
will qualify for the de minimis exemption and that they will not be
required to contribute because their contributions will be less than
$100.00 per year. If their contributions exceed the de minimis level,
however, they will be required to contribute.
459. Finally, we agree with the Joint Board that those ``other
providers of telecommunications'' that provide telecommunications
solely to meet their internal needs should not be required to
contribute to the support mechanisms at this time, because
telecommunications do not comprise the core of their business. Private
network operators that serve only their internal needs do not lease
excess capacity to others and do not charge others for use of their
network. Thus, we find that they have not structured their businesses
around the provision of telecommunications to others. In addition, it
would be administratively burdensome to assess a special non-revenues-
based contribution on these providers because they do not derive
revenues from the provision of services to themselves.
460. We note that cost-sharing for the construction and operation
of private networks would not render participants ``other providers of
telecommunications'' that must contribute to the support mechanisms
because the participants are a consortium of customers of a carrier.
If, however, a lead participant owned and operated its own
telecommunications network and received monetary payments for service
from other participants, the lead participant would be a provider of
telecommunications and, if it provided interstate telecommunications,
would be included within the group that we require to contribute to the
support mechanisms, subject to the de minimis exemption. We also find,
however, that government entities that purchase telecommunications
services in bulk on behalf of themselves, e.g., state networks for
schools and libraries, will not be considered ``other providers of
telecommunications'' that will be required to contribute. Such
government entities would be purchasing services for local or state
governments or related agencies. Therefore, we find that such
government agencies serve only their internal needs and should not be
required to contribute. Similarly, we conclude that public safety and
local governmental entities licensed under subpart B of part 90 of our
rules will not be required to contribute because of the restrictive
eligibility requirements for these services and because of the
important public safety and welfare functions for which these services
are used. Similarly, if an entity exclusively provides interstate
telecommunications to public safety or government entities and does not
offer services to others, that entity will not be required to
contribute.
461. The De Minimis Exemption
We adopt the Joint Board's view that contributors whose
contributions are less than the administrator's administrative costs of
collection should be exempt from reporting and contribution
requirements. Section 254(d) itself does not provide specific guidance
on how the Commission should exercise its authority to exempt carriers
whose contributions would be de minimis. The Joint Explanatory
Statement, however, states the congressional expectation that ``this
authority would only be used in cases where the administrative cost of
collecting contributions from a carrier or carriers would exceed the
contribution that carrier would otherwise have to make under the
formula for contributions selected by the Commission.'' Thus, we find
that the legislative history of section 254(d) clarifies Congress's
intent that this exemption be narrowly construed. It also clarifies
that the purpose of the de minimis exemption is to prevent waste
resulting from requiring contributions when the administrative costs of
collecting them will exceed the amounts collected. Thus, we adopt the
Joint Board's recommendation and reject commenters' arguments in
support of other factors for determining when a carrier providing
interstate telecommunications services should be exempt from the
statutory obligation to contribute to federal universal service support
mechanisms.
462. We agree with the Joint Board which advocates basing the
exemption on the administrator's and contributors' costs, and conclude
that the cost of collection should encompass only the administrator's
costs to bill and collect individual carrier contributions. Although we
agree that a de minimis exemption, as defined above, will serve the
public interest, commenters did not submit data regarding the
incremental cost of collection for the record. We will adopt the
$100.00 minimum contribution requirement used for TRS contribution
purposes because we assume that the administrator's administrative
costs of collection could possibly equal as much as $100.00. Therefore,
if a contributor's contribution would be less than $100.00, it will not
be required to contribute or comply with reporting requirements. We
instruct the administrator to re-evaluate incremental administrative
costs, taking into account inflation, after the contribution mechanisms
have been implemented.
463. We reject the argument that requiring contributions by paging
carriers represents an unconstitutional tax because paging carriers do
not derive any benefit from universal service. First, we note that
although some paging carriers may be ineligible to receive support, all
telecommunications carriers benefit from a ubiquitous
telecommunications network. Customers who receive pages would not be
able to receive or respond to those pages absent use of the PSTN.
Second, as we explained above, our contribution requirements do not
constitute a tax. Some commenters also argue that carriers ineligible
to receive support should be allowed to make reduced contributions to
universal service. Because section 254(d) states that ``every
telecommunications carrier that provides interstate telecommunications
services'' must contribute to universal service and does not limit
contributions to ``eligible carriers,'' we agree with the Joint Board
and reject these arguments. Thus, we find that the de minimis exemption
cannot and should not be interpreted to allow reduced contributions or
contribution exemptions for ineligible carriers.
464. General Jurisdiction Over Universal Service Support
We conclude that the Commission has jurisdiction to assess
contributions for the universal service support mechanisms from
intrastate as well as interstate revenues and to require carriers to
seek state (and not federal) authority to recover a portion of the
contribution in intrastate rates. Although we expressly decline to
exercise the entirety of this jurisdiction, we believe it is important
to set forth the contours of our authority.
465. Our authority over the universal service support mechanisms is
derived first and foremost from the plain language of section 254.
First, section 254(a) provides that rules ``to implement'' the section
are to be recommended by the Joint Board, and those recommendations, in
turn, are to be implemented by the Commission. Thus, the Commission has
the ultimate responsibility to effectuate section 254. Further,
Congress reemphasized the
[[Page 32928]]
Commission's authority independent of the Joint Board by directing in
section 254(c)(2) that the concept of universal service is an
``evolving level of telecommunications that the Commission shall
establish periodically.'' Thus, Congress expressly authorized the
Commission to define the parameters of universal service.
466. Section 254(d) also mandates that interstate
telecommunications carriers ``shall contribute, on an equitable and
nondiscriminatory basis, to the specific, predictable, and sufficient
mechanisms established by the Commission to preserve and advance
universal service.'' In thus prescribing that the support mechanisms be
``sufficient,'' Congress obligated the Commission to ensure that the
support mechanisms satisfy section 254's goal of ``preserving and
advancing universal service,'' consistent with the principles set forth
in section 254(b), including the principle that quality services should
be available at ``just, reasonable, and affordable rates.'' In so
doing, Congress expressly granted the Commission jurisdiction to
establish support mechanisms of a sufficient size adequately to support
universal service.
467. In section 254(b), Congress made affordable basic service a
goal of federal universal service, by that determination, Congress
meant that both interstate and intrastate services should be
affordable. Congress also directed the Commission and the states to
strive to make implicit support mechanisms explicit. We have found
nothing in the statute or legislative history to show that,
notwithstanding Congress's mandate to make universal service subsidies
explicit, Congress intended to alter the current arrangement by
requiring interstate services to assume the entire burden of providing
for universal service. Accordingly, the section 254 mandate covers both
interstate and intrastate services and therefore it is also reasonable
that the Commission, in ensuring that the overall amount of the
universal support mechanisms is ``specific, predictable, and
sufficient,'' may also mandate that contributions be based on carriers'
provision of intrastate services. As discussed below, however, we
decline to exercise the full extent of this authority out of respect
for the states and the Joint Board's expertise in protecting universal
service.
.
468. We have concluded that we will assess contributions for the
support mechanisms for eligible schools, libraries, and rural health
care providers from intrastate and interstate revenues. We also
conclude that, when we assess contributions based on intrastate as well
as interstate revenues, we have the authority to refer carriers to the
states to seek authority to recover a portion of their intrastate
contribution from intrastate rates. We have not adopted this approach
in this Order. In section 254(f) Congress expressly allowed only for
those state universal service mechanisms that are not ``inconsistent
with the Commission's rules to preserve and advance universal
service.'' Thus, the statutory scheme of section 254 demonstrates that
the Commission ultimately is responsible for ensuring sufficient
support mechanisms, that the states are encouraged to become partners
with the Commission in ensuring sufficient support mechanisms, and that
the states may prescribe additional, supplemental mechanisms.
469. Section 2(b) of the Communications Act is not implicated in
this jurisdictional analysis. Section 2(b) provides that ``nothing in
(the Communications Act) shall be construed to apply or give the
Commission jurisdiction with respect to * * * charges, classifications,
practices, services, facilities, or regulations for or in connection
with intrastate communications service by wire or radio.'' Even when
the Commission exercises jurisdiction to assess contributions for
universal service support from intrastate as well as interstate
revenues (i.e., for eligible schools and libraries and rural health
care providers), such an approach does not constitute rate regulation
of those services or regulation of those services so as to violate
section 2(b). Instead, the Commission merely is supporting those
services, as expressly required by Congress in section 254.
470. Moreover, although the Commission is not adopting this
approach, section 2(b) would not be implicated even if the Commission
were to refer carriers to the states to obtain authorization to recover
their intrastate contributions via intrastate rates, which it is not
doing, because the Commission would still be referring the matter to
the states' authority over changes in intrastate rates and the
Commission itself would not be regulating those rates. In any event, to
the extent that section 2(b) would be implicated in either of these
approaches (assessment or recovery), section 254's express directive
that universal service support mechanisms be ``sufficient'' ameliorates
any section 2(b) concerns because, as a rule of construction section
2(b) only is implicated where the statutory provision is ambiguous.
Section 254 is unambiguous in that the services to be supported have
intrastate as well as interstate characteristics and in that the
Commission is to promulgate regulations implementing federal support
mechanisms covering the intrastate and interstate characteristics of
the supported services. Therefore, the unambiguous language of section
254 overrides section 2(b)'s otherwise-applicable rule of construction.
471. Further, to the extent that commenters assert that the
Communications Act generally divides the world into two spheres--
Commission jurisdiction over interstate carriers and interstate
revenues and state jurisdiction over intrastate carriers and intrastate
revenues--section 254 blurs any perceived bright line between
interstate and intrastate matters. The services that will be supported
pursuant to this Order include both intrastate and interstate services.
Although section 254 anticipates a federal-state universal service
partnership, section 254 grants the Commission primary responsibility
for defining the parameters of universal service. Indeed, the
recognition of this fact presumably led Congress to require Joint Board
involvement in that Congress recognized that it was important for the
Commission to consider the states' recommendations because the
regulations ultimately adopted inevitably would affect the states'
traditional universal service programs. The new requirements in the
statute to consider the needs of schools, libraries, and health care
providers in and of themselves require a fresh look at universal
service. The legislative history also indicates that the Commission, in
consultation with the Joint Board, was not to be bound by mechanisms
used currently. Therefore, we conclude that section 254 grants us the
authority to assess contributions for the universal service support
mechanisms from intrastate as well as interstate revenues and to refer
carriers to seek state (and not federal) authorization to recover a
portion of the contribution in intrastate rates. We see no need at this
time to exercise the full extent of our jurisdiction.
472. Scope of the Revenue Base for the High Cost and Low-Income Support
Mechanisms
We have determined that we will assess and permit recovery of
contributions to the rural, insular, and high cost and low-income
support mechanisms based only on interstate revenues. We will seek
further guidance on this subject from the Joint Board because the Joint
Board makes a recommendation as to whether the revenue base for the
high cost and low-
[[Page 32929]]
income mechanisms should include intrastate as well as interstate
revenues.
473. Recovery of Carriers' Contributions to the High Cost and Low-
Income Support Mechanisms
We have determined to continue our historical approach to recovery
of universal service support mechanisms, that is, to permit carriers to
recover contributions to universal service support mechanisms through
rates for interstate services only. In discussing recovery we are
referring to the process by which carriers' recoup the amount of their
contributions to universal service. Although the Joint Board did not
address this issue, the Joint Board concluded that the ``role of
complementary state and federal universal service mechanisms require[d]
further reflection'' before the Joint Board could recommend that we
assess contributions based on intrastate as well as interstate
revenues. Therefore, we believe that our decision to provide for
recovery based only on rates for interstate services is not
inconsistent with the Joint Board Recommended Decision.
474. Under our recovery mechanism, carriers will be permitted, but
not required, to pass through their contributions to their interstate
access and interexchange customers. We note that, if some carriers
(e.g., IXCs) decide to recover their contribution costs from their
customers, the carriers may not shift more than an equitable share of
their contributions to any customer or group of customers. We also have
determined that the interstate contributions will constitute the
substantial cause that would provide a public interest justification
for filing federal tariff changes or making contract adjustments.
475. We have determined that ILECs subject to our price cap rules
may treat their contributions for the new universal service support
mechanisms as an exogenous cost change. We outline the precise contours
of the exogenous change available to federal price cap carriers in our
Access Charge Reform Order, adopted contemporaneously with this Order.
For carriers not subject to federal price caps (e.g., other ILECs), we
have determined to permit recovery of universal service contributions
by applying a factor to increase their carrier common line charge
revenue requirement. Of course, LECs and their affiliates that provide
interLATA interstate services each will have their own universal
service obligations and, therefore, the affiliates will be required to
recover their own universal service contributions.
476. Assessment of the Revenue Base for the High Cost and Low-Income
Support Mechanisms
In addition to the recovery mechanisms, we also consider whether we
should assess contributions to the universal service support mechanisms
based solely on interstate revenues or on both interstate and
intrastate revenues. To promote comity between the federal and state
governments, we have decided to follow our approach to the recovery
issues and thus to assess contributions for the high cost and low
income support mechanisms based solely on interstate revenues.
477. The approach we adopt today is consistent with the approach
taken by the Joint Board. Specifically, the Joint Board concluded that
the ``decision as to whether intrastate revenues should be used to
support the high cost and low income assistance programs should be
coordinated with the establishment of the scope and magnitude of the
proxy-based fund, as well as with state universal service support
mechanisms.'' Although the Joint Board may have anticipated that these
decisions all would be made in this Order, the crux of the Joint
Board's analysis is that the question of interstate/intrastate
contribution should be coordinated with the issues of appropriate
forward-looking mechanisms and appropriate revenue benchmarks. Because
those issues will be resolved in the future, we believe it would be
premature for us to assess contributions on intrastate as well as
interstate revenues.
478. Our assessment procedure is as follows. Between January 1,
1998 and January 1, 1999, contributions for the existing high cost
support mechanisms and low-income support programs will be assessed
against interstate end-user telecommunications revenues. Beginning on
January 1, 1999, the Commission will modify universal service
assessments to fund 25 percent of the difference between cost of
service defined by the applicable forward-looking economic cost method
less the national benchmark, through a percentage contribution on
interstate end-user telecommunications revenues. We have decided to
institute this approach to assessment on January 1, 1999 to coordinate
it with the shift of universal service support for rural, insular, and
high cost areas served by large LECs from the access charge regime to
the section 254 universal service mechanisms.
479. In response to COMSAT's comments, we clarify that carriers
that provide interstate services must include all revenues derived from
interstate and international telecommunications services. Thus,
international telecommunications services billed to a domestic end user
will be included in the contribution base of a carrier that provides
interstate telecommunications services. Section 2(b) of the Act grants
states the authority to regulate intrastate rates, but in contrast
section 2(a) grants the Commission sole jurisdiction over interstate
and foreign communications. Foreign communications are defined as a
``communication or transmission from or to any place in the United
States to or from a foreign country, or between a station in the United
States and a mobile station located outside of the United States.'' We
find that it would serve the public interest to require carriers
providing interstate telecommunications services to base their
contributions on revenues derived from their interstate and foreign or
international telecommunications services. Contributors that provide
international telecommunications services benefit from universal
service because they must either terminate or originate
telecommunications on the domestic PSTN. Therefore, we find that
contributors that provide international telecommunications services
should contribute to universal service on the basis of revenues derived
from international communication services, although revenues from
communications between two international points would not be included
in the revenue base.
480. Scope of Revenue Base for the Support Mechanisms for Eligible
Schools, Libraries, and Rural Health Care Providers
We adopt the Joint Board's recommendation that ``universal support
mechanisms for schools and libraries and rural health care providers be
funded by contributions based on both the intrastate and interstate
revenues of providers of interstate telecommunications services.'' We
adopt this approach not only because the Joint Board recommended it,
but also because the eligible schools, libraries, and rural health care
mechanisms are new, unique support mechanisms that have not
historically been supported through a universal service funding
mechanism. Nonetheless, for now, we will provide for recovery of the
entirety of these contributions via interstate mechanisms.
481. We find that our approach minimizes any perceived
jurisdictional difficulties under section 2(b) because we do not
require carriers to seek state authorization to recover the
contributions attributable to intrastate
[[Page 32930]]
revenues. Nonetheless, carriers with interstate revenues far less than
their intrastate revenues assert that they will be required to recover
unfairly large contributions from their interstate customers and that
this outcome is inequitable. These carriers misinterpret the statute's
direction that contributions be ``equitable and non-discriminatory.''
``Equitable'' does not mean ``equal.'' In the past, telecommunications
subsidies have been raised by assessing greater amounts from services
other than basic residential dialtone services. Competition in the
telecommunications marketplace, however, should drive prices for
services closer to cost and eliminate the viability of shifting costs
from residential to business or from basic local service to long
distance. Congress did direct that contributions be non-discriminatory.
This we accomplish by making the formula for calculating contributions
the same for all competitors competing in the same market segment.
482. As to the assessment of contributions for the support
mechanisms for eligible schools, libraries, and rural health care
providers, the Commission is adopting the Joint Board's recommendation
that these contributions be based upon both interstate and intrastate
revenues. We have selected this approach because these are new and
unique federal programs and states have not supported these initiatives
to the same extent that they have supported other universal service
support mechanisms. In contrast to the high cost mechanisms, many
states do not already have programs in place that would guarantee
sufficient support mechanisms for eligible schools, libraries, and
rural health care providers. Therefore, we are not as confident that a
federal-state partnership would sufficiently support these new and
unique support mechanisms, particularly in the early years of the
program. Because section 254 obligates the Commission to ensure the
sufficiency of this support program, we deem it necessary to adopt an
approach that will guarantee that this statutory mandate is satisfied.
In addition, assessing both intrastate and interstate revenues to fund
the support mechanisms for eligible schools, libraries, and rural
health care providers is more feasible than for the other mechanisms
because the amount of the new support mechanisms will be smaller than
the other mechanisms (i.e., the combined amounts of the federal and
state high cost and low-income support mechanisms will be greater than
the total amount of the schools, libraries, and rural health care
mechanisms). Therefore, we believe that it is appropriate for us to
assess a contributor based upon its intrastate and interstate revenues
for the schools, libraries, and rural health care support mechanisms.
483. Basis for Assessing Contributions
We agree with the Joint Board's recommendation that we must assess
contributions in a manner that eliminates the double payment problem,
is competitively neutral and is easy to administer. We find that
contributions should be based on end-user telecommunications revenues.
Based on new information in the record, we find that this basis for
assessing contributions represents a basis for our universal service
support mechanisms more administratively efficient than the net
telecommunications revenues method recommended by the Joint Board while
still advancing the goals embraced by the Joint Board. We note that we
will assess contributions, i.e., raise sufficient funds to cover
universal service's funding needs, only after we have determined the
total size of the support mechanisms.
484. We will assess contributions based on telecommunications
revenues derived from end users for several reasons, including
administrative ease and competitive neutrality. The net
telecommunications revenues and end-user telecommunications revenues
methods are relatively equivalent because they assess contributions
based on substantially similar pools of revenues. Therefore, we
conclude that contributions will be based on revenues derived from end
users for telecommunications and telecommunications services, or
``retail revenues.'' Unlike retail revenues, however, end-user
telecommunications revenues include revenues derived from SLCs. End-
user revenues would also include revenues derived from other carriers
when such carriers utilize telecommunications services for their own
internal uses because such carriers would be end users for those
services. This methodology is both competitively neutral and relatively
easy to administer.
485. Basing contributions on end-user revenues, rather than gross
revenues, is competitively neutral because it eliminates the problem of
counting revenues derived from the same services twice. The double
counting of revenues distorts competition because it disadvantages
resellers.
486. We seek to avoid a contribution assessment methodology that
distorts how carriers choose to structure their businesses or the types
of services that they provide. Basing contributions on end-user
revenues eliminates the double-counting problem and the market
distortions assessments based on gross revenues create because
transactions are only counted once at the end-user level. Although it
will relieve wholesale carriers from contributing directly to the
support mechanisms, the end-user method does not exclude wholesale
revenues from the contribution base of carriers that sell to end users
because wholesale charges are built into retail rates.
487. Calculating assessments based upon end-user telecommunications
revenues also will be administratively easy to implement. Like the net
telecommunications revenues approach, the end-user telecommunications
revenues approach will require carriers to track their sales to end
users; carriers, however, must already track their sales for billing
purposes. Although the end-user telecommunications revenues method will
require carriers to distinguish sales to end users from sales to
resellers, we do not foresee that this will be difficult because
resellers will have an incentive to notify wholesalers that they are
purchasing services for resale in order to get a lower price that does
not reflect universal service contribution requirements. Although the
end-user telecommunications revenues approach requires that a
distinction be made between retail and wholesale revenues, using end-
user telecommunications revenues will still be easier to administer and
less burdensome than the net telecommunications revenues approach
because it will not require wholesale carriers to submit annual or
monthly contributions directly to the administrator, as they would
under the net telecommunications revenues approach.
488. Another reason we adopt an end-user telecommunications
revenues method of assessing contributions rather than a net
telecommunications revenues method is that, although the two methods
are theoretically equivalent, the former method eliminates some
economic distortions associated with the latter method that can occur
in practice. As an initial matter, we observe that, contrary to some
commenters' assertions, both methods are competitively neutral because
they both eliminate double-counting of revenues and assess the same
total amount of contributions.
489. Although the two assessment methods are theoretically
equivalent, we conclude that, in practice, the net telecommunications
revenues approach
[[Page 32931]]
is likely to cause distortions that could be avoided by using the end-
user telecommunications revenues approach. For example, the theoretical
equivalence of the two methods assumes that all carriers will be able
to recover fully their contributions from their customers. Some
carriers, however, particularly those with long-term contracts, may be
unable to recover fully those costs. If contributions are assessed on
the basis of net telecommunications revenues and some intermediate
carriers cannot incorporate their contributions into their prices,
uneconomic substitution could result because other carriers would have
an incentive to purchase services from those intermediate carriers,
rather than to provide those services with their own facilities, to
reduce their direct contribution to universal service. Basing
contributions on end-user telecommunications revenues eliminates this
potential economic distortion because contributions will be assessed at
the end-user level, not at the wholesale and end-user level.
Contributors will not have more of an incentive to build their own
facilities or purchase services for resale in order to reduce their
contribution because, regardless of how the services are provided,
their contributions will be assessed only on revenues derived from end
users.
490. We state that ILECs are prohibited from incorporating
universal service support into rates for unbundled network elements
because universal service contributions are not part of the forward-
looking costs of providing unbundled network elements. Although we do
not mandate that carriers recover contributions in a particular manner,
we note that carriers are permitted to pass through their contribution
requirements to all of their customers of interstate services in an
equitable and nondiscriminatory fashion. Furthermore, we find that
universal service contributions constitute a sufficient public interest
rationale to justify contract adjustments. Section 254 gives the
Commission authority to require new contributions to the universal
service support mechanisms from telecommunications carriers that
provide interstate telecommunications services and other providers of
interstate telecommunications. Contributions will be assessed against
revenues derived from end users for telecommunications or
telecommunications services. Some of those revenues will be derived
from private contractual agreements. By assessing a new contribution
requirement, we create an expense or cost of doing business that was
not anticipated at the time contracts were signed. Thus, we find that
it would serve the public interest to allow telecommunications carriers
and providers to make changes to existing contracts for service in
order to adjust for this new cost of doing business. We clarify,
however, that this finding is not intended to pre-empt state contract
laws.
491. Furthermore, we agree with the Joint Board and reject
commenters' suggestions that the Commission mandate that carriers
recover contributions through an end-user surcharge. The state Joint
Board members also assert that state commissions ``should have the
discretion to determine if the imposition of an end-user surcharge
would render local rates unaffordable.'' A federally prescribed end-
user surcharge would dictate how carriers recover their contribution
obligations and would violate Congress's mandate and the wish of the
state members of the Joint Board.
492. To the extent that carriers seek to pass all or part of their
contributions on to their customers in customer bills, we wish to
ensure that carriers include complete and truthful information
regarding the contribution amount. We do not assume that contributors
will provide false or misleading statements, but we are concerned that
consumers receive complete information regarding the nature of the
universal service contribution. Unlike the SLC, the universal service
contribution is not a federally mandated direct end-user surcharge. We
believe that it would be misleading for a carrier to characterize its
contribution as a surcharge. Specifically, we believe that
characterizing the mechanism as a surcharge would be misleading because
carriers retain the flexibility to structure their recovery of the
costs of universal service in many ways, including creating new pricing
plans subject to monthly fees. As competition intensifies in the
markets for local and interexchange services in the wake of the 1996
Act, it will likely lessen the ability of carriers and other providers
of telecommunications to pass through to customers some or all of the
former's contribution to the universal service mechanisms. If
contributors, however, choose to pass through part of their
contributions and to specify that fact on customers' bills,
contributors must be careful to convey information in a manner that
does not mislead by omitting important information that indicates that
the contributor has chosen to pass through the contribution or part of
the contribution to its customers and that accurately describes the
nature of the charge.
493. In addition, we agree with the Joint Board that, if carriers
provide services eligible for support from universal service support
mechanisms at a discount or below cost, carriers may receive credits
against their contributions. Contributions to the support mechanisms
may be made in cash. In addition, carriers that provide services to
eligible schools, libraries, or rural health care providers may offset
their required contribution by an amount equal to the difference
between the pre-discount price for service and the amount charged to
the eligible institution. Allowing or requiring an offset will not
prevent carriers from recovering the full, pre-offset contribution due
on its revenues in the manner in which the carrier chooses.
494. Finally, we agree with SNET that carriers should not include
support mechanisms payments when calculating their contributions. We
find that payments received from the universal service support
mechanisms do not qualify as revenues derived from end users for
telecommunications revenues and should not be included in the
assessment base. Finally, in response to Excel's comments that
resellers should receive credits against their universal service
contributions for the provision of supported services, we note that
``pure'' resellers may not be designated as ``eligible carriers'' under
section 214(e) and may not receive universal service support payments.
Carriers selling supported services to resellers, however, may be
eligible to receive universal service support. In addition, carriers
that offer supported services through the use of unbundled network
elements, in whole or in part, may be eligible to receive universal
service support.
495. Administration of the Support Mechanisms
Based on the Joint Board's recommendation and the record in this
proceeding, we will create a Federal Advisory Committee (Committee),
pursuant to the FACA, whose sole responsibility will be to recommend to
the Commission through a competitive process a neutral, third-party
administrator to administer the support mechanisms. We adopt the Joint
Board's recommendation and conclude that administration by a central
administrator would be most efficient and would ensure uniform
application of the rules governing the collection and distribution of
funding for universal service support mechanisms
[[Page 32932]]
nationwide. We also adopt the Joint Board's recommendation that NECA be
appointed the temporary administrator of the support mechanisms.
496. Like the Joint Board, we believe that broad participation by
representatives of contributors, support recipients, state PUCs, and
other interested parties in the administrator selection process, as
required by the FACA, will eliminate concerns that the chosen
administrator will not be neutral. A Federal Advisory Committee may be
established only after consultation with the Office of Management and
Budget and the General Services Administration and the filing of a
charter with Congress. The Commission has initiated this process and
will solicit nominations to the Committee as soon as possible.
497. We agree with the Joint Board's recommendation and adopt their
four proposed requirements. As a result, the administrator must: (1) Be
neutral and impartial; (2) not advocate specific positions to the
Commission in proceedings not related to the administration of the
universal service support mechanisms; (3) not be aligned or associated
with any particular industry segment; and (4) not have a direct
financial interest in the support mechanisms established by the
Commission.
498. We clarify the Joint Board's criteria as follows. First, the
administrator must not advocate positions before the Commission in non-
universal service administration proceedings related to common carrier
issues, although membership in a trade association that advocates
positions before the Commission will not render an entity ineligible to
serve as the administrator. Second, the administrator may not be an
affiliate of any provider of ``telecommunications services.'' An
``affiliate'' is a ``person that (directly or indirectly) owns or
controls, is owned or controlled by, or is under common ownership or
control with, another person.'' A person shall be deemed to control
another if such person possesses, directly or indirectly, (1) an equity
interest by stock, partnership (general or limited) interest, joint
venture participation, or member interest in the other person equal to
ten (10%) percent or more of the total outstanding equity interests in
the other person, or (2) the power to vote ten (10%) percent or more of
the securities (by stock, partnership (general or limited) interest,
joint venture participation, or member interest) having ordinary voting
power for the election of directors, general partner, or management of
such other person, or (3) the power to direct or cause the direction of
the management and policies of such other person, whether through the
ownership of or right to vote, voting rights attributable to the stock,
partnership (general or limited) interest, joint venture participation,
or member interest) of such other person, by contract (including but
not limited to stockholder agreement, partnership (general or limited))
agreement, joint venture agreement, or operating agreement), or
otherwise. Third, the administrator and any affiliate thereof may not
issue a majority of its debt to, nor may it derive a majority of its
revenues from any provider(s) of telecommunications services. Fourth,
if the administrator has a Board of Directors that contains members
with direct financial interests in entities that contribute to or
benefit from the support mechanisms, no more than a third of the Board
members may represent interests from any one segment of contributing
carriers or support recipients, and the Board's composition must
reflect the broad base of contributors to and recipients of universal
service support. An individual does not have a direct financial
interest in the support mechanisms if he or she is not an employee of a
telecommunications carrier, provider of telecommunications, or a
recipient of support mechanisms funds, does not own equity interests in
bonds or equity instruments issued by any telecommunications carrier,
and does not own mutual funds that specialize in the telecommunications
industry. We also create a de minimis exemption from this rule. We will
define an individual's ownership interest in the telecommunications
industry as de minimis if in aggregate the individual, spouse, and
minor children's impermissible interests do not exceed $5,000.00.
499. To ensure the administrator's neutrality and appearance of
neutrality, we conclude that we must require that no one in a position
of influence within the administrator's organization have a direct
financial interest in the support mechanisms, subject to the Board of
Directors' standard above. Any candidate must also have the ability to
process large amounts of data efficiently and quickly and to bill large
numbers of carriers. The administrator's costs will be added to the
support mechanisms and will be funded by the contributing carriers.
500. Even though NECA has administered the existing high cost
assistance fund and the TRS fund, many commenters question NECA's
ability to act as a neutral arbitrator among contributing carriers
because NECA's membership is restricted to ILECs, its Board of
Directors is composed primarily of representatives of ILECs, and it has
taken advocacy positions in several Commission proceedings. Given that
the appearance of impartiality for the new administrator is essential,
and considering the importance and magnitude of the universal service
support programs, we agree with the Joint Board and find that NECA
would not be qualified to be the permanent administrator. If, however,
changes to its Board of Directors or its corporate structure render it
able to satisfy the neutrality criteria discussed above, NECA would be
permitted to participate in the permanent administrator selection
process. Finally, in the interest of speedy implementation of the
support mechanisms, we adopt the Joint Board's recommendation that NECA
be appointed the temporary administrator of the support mechanisms,
subject to changes in NECA's governance that render it more
representative of non-ILEC interests. We note that the temporary
administrator may not spend universal service support mechanisms' funds
until it is appointed by the Commission.
501. We require in this Order that the Committee recommend a
neutral, third-party administrator through a competitive process no
later than six months after the Committee's first meeting. Within the
six-month period, the Committee must create a document describing what
the administrator of the support mechanisms will be required to do and
the criteria by which candidates will be evaluated, solicit
applications from qualifying entities, and recommend the most qualified
candidate. We intend to act upon the Committee's recommendation within
six months. The administrator will be appointed for a five-year term,
beginning on the date that the Commission selects it as the
administrator. We also require the chosen administrator to be prepared
to administer all facets of the universal service support mechanisms
within six months of its appointment. The Commission will review the
administrator's performance to ensure that it is fulfilling its
responsibilities in an acceptable and impartial manner two years after
its appointment. At any time prior to the end of the administrator's
five-year term, the Commission may re-appoint the administrator for up
to another five years. Otherwise, the Commission will create another
Federal Advisory Committee to recommend another neutral, third-party
administrator.
[[Page 32933]]
502. The Commission will direct the chosen administrator to report
annually to the Commission an itemization of monthly administrative
costs that shall consist of all expenses, receipts, and payments
associated with the administration of the universal service support
mechanisms. The administrator shall file a cost allocation manual (CAM)
with the Commission, and shall provide the Commission full access to
all data collected pursuant to the administration of the universal
service support mechanisms. We further require that the administrator
shall be subject to a yearly audit by an independent accounting firm
and an additional yearly audit by the Commission, if the Commission so
requests. The administrator is further required to keep the universal
service support mechanisms separate from all other funds under the
control of the administrator.
503. The administrator is directed to maintain and report to the
Commission detailed records relating to the determination and amounts
of payments made and monies received in the universal service support
mechanisms. Information based on these reports should be made public at
least once a year as part of a Monitoring Report. Because the current
Monitoring Program in CC Docket No. 87-339, which monitors the current
Universal Service Fund, will end with the May 1997 report and because
NARUC has petitioned the Commission to continue this Monitoring
Program, we delegate to the Common Carrier Bureau, in consultation with
the state staffs of the Joint Boards in CC Docket No. 96-45 and CC
Docket No. 80-286, the creation of a new monitoring program to serve as
a vehicle for these Monitoring Reports. We also delegate to the Bureau
the details of the exact content and timing of release of these
reports.
Final Regulatory Flexibility Analysis
504. As required by section 603 of the Regulatory Flexibility Act
(RFA), 5 U.S.C. section 603, an Initial Regulatory Flexibility Analysis
(IRFA) was incorporated in the Notice of Proposed Rulemaking and Order
Establishing Joint Board. In addition, the Commission prepared an IFRA
in conjunction with the Recommended Decision, seeking written public
comment on the proposals in the NPRM and Recommended Decision. The
Commission's Final Regulatory Flexibility Analysis (FRFA) in this
Report and Order conforms to the RFA, as amended.
505. To the extent that any statement contained in this FRFA is
perceived as creating ambiguity with respect to our rules or statements
made in preceding sections of this Order, the rules and statements set
forth in those preceding sections shall be controlling. We also note
that future revisions of the rules may alter our analysis of the
potential economic impact upon some small entities.
A. Need for and Objectives of This Report and Order and the Rules
Adopted Herein
506. The Commission is required by sections 254(a)(2) and 410(c) of
the Act, as amended by the 1996 Act, to promulgate these rules to
implement promptly the universal service provisions of section 254. The
principal goal of these rules is to reform our system of universal
service support mechanisms so that universal service is preserved and
advanced as markets move toward competition.
507. The rules adopted in this Order establish universal service
support mechanisms to preserve and advance universal service support.
The rules are designed to implement as quickly and effectively as
possible the national telecommunications policies embodied in the 1996
Act and to promote access to advanced telecommunications and
information technologies to all Americans in all regions of the nation.
B. Summary and Analysis of the Significant Issues Raised by Public
Comments in Response to the IRFA
508. Summary of the Initial Regulatory Flexibility Analysis. The
Commission performed an IRFA in the NPRM and an IRFA in connection with
the Recommended Decision. In the IRFAs, the Commission sought comment
on possible exemptions from the proposed rules for small
telecommunications companies and measures to avoid significant economic
impact on small business entities, as defined by section 601(3) of the
RFA. The Commission also sought comment on the type and number of small
entities, such as schools, libraries, and health care providers,
potentially affected by the recommendations set forth in the
Recommended Decision.
Comments
509. General Comments
Comments were filed in response to both the NPRM and Recommended
Decision IRFAs. Although it agrees that no IRFA was required for the
Recommended Decision, the SBA contends that the IRFA issued in
connection with the Recommended Decision was untimely and did not
adequately take into consideration the impact of the Joint Board
recommendations upon small entities. The SBA also contends that the
NPRM's lack of specificity concerning rules and reporting requirements
made it difficult to evaluate the impact upon small business.
510. Businesses With Single Connections
Many commenters oppose the recommendation to reduce universal
service support for businesses with single connections. The SBA
contends that reduced levels of support would discourage or prohibit
small businesses from utilizing telecommunications services. The SBA
also contends that the Joint Board's recommendation to restrict support
to businesses with a single connection effectively would define a small
business in violation of the Small Business Act. The SBA proposes that
entities with $5 million or less in annual gross revenue be exempt from
any reduction of universal service support and that all other
businesses receive support for up to five lines. The SBA asserts that
restricting support to a single connection would adversely affect small
government jurisdictions, including fire and police departments, that
currently receive full universal service support. Some commenters
contend that universal service support should not be extended to any
business customers.
511. Businesses With Multiple Connections
Several commenters contend that universal service support should be
extended to businesses with multiple connections. They cite the
importance of multiple-connections for small businesses, the potential
negative impact upon rural areas of excluding such support, and the
principles of the Act that provide for affordable access to
telecommunications services to all consumers, including reasonably
comparable rates and access by rural consumers to telecommunications
services. The SBA cites the vulnerability of small businesses to
substantial rate increases. The SBA contends that the Recommended
Decision construes the reference to ``consumers'' in section 254(b)(3)
too narrowly by excluding support to small businesses. The SBA also
contends that exclusion of universal service support for small
businesses would violate the universal service mandate that rates be
affordable and discourage access to advanced telecommunications
services by small businesses.
[[Page 32934]]
512. Forward-Looking Cost Methodology
A few commenters state that forward-looking cost methodologies may
not have the ability to accurately predict costs for small, rural
telephone companies. Others contend that small, rural carriers in the
continental United States should be exempt from forward-looking cost
methodologies in the same manner as Alaska and insular areas because
they face similar challenges.
513. Schools and Libraries
In response to the NPRM IRFA, NSBA II comments that the proposals
in the NPRM would have a significant effect on a substantial number of
small government entities, including 38,000 small government
jurisdictions with school and library districts, in addition to the
``small telecommunications service providers'' mentioned in the NPRM.
It contends that the bona fide request for service and applicable
procedures may result in significant paperwork burdens on small
government agencies and that restrictions on the resale or transfer of
telecommunications services and network capacity may impose significant
fiscal burdens on schools and libraries. In response to the Recommended
Decision, Vermont PSB contends that a waiver from the processing and
reporting requirements should be adopted for schools and libraries with
fewer than 10 lines to avoid discouraging such organizations from
applying for available discounts.
514. Some commenters contend that any entity that provides eligible
services to a school or library should be eligible for universal
service support. They state that such eligibility is provided under
section 254(h) and that Congress sought to expand deployment of
telecommunications and information services to schools and libraries.
Small Cable II is concerned that the competitive bidding process for
educational telecommunications services may provide ILECs with an
unfair advantage. It contends that small businesses, such as small
cable operators, must be allowed to compete for the opportunity to
provide services supported by universal service on a level playing
field. PageMart expresses concern that inclusion of such things as
support for internal connections for schools and libraries may
negatively affect small carriers by increasing the size of the
universal service support mechanisms.
515. Other
California SBA asserts that small businesses will only benefit when
competition is opened to all entities in the telecommunications
industry. United Utilities contends that requiring carriers to treat
the amount eligible for support to eligible health care providers as an
offset to carriers' universal service support obligation is anti-
competitive for small carriers whose funding obligations are
insufficient to allow them to receive the full offset in the current
year. A few commenters state that ``small'' carriers should be either
exempt from contribution to universal support mechanisms or should be
allowed to make discounted contributions.
Discussion
516. General
We disagree with the SBA's general criticisms of our IRFAs
procedure. Although under no obligation to do so, the Commission
prepared a second IRFA in connection with the Recommended Decision to
expand upon and seek comment upon issues relating to small entities.
These IRFAs sought comment on the many alternatives discussed in the
body of the NPRM and Recommended Decision, including statutory
exemptions for certain small companies. The numerous general public
comments concerning the impact of our proposal on small entities,
including comments filed directly in response to the IRFAs, as
discussed above, lead us to conclude that the IRFAs were sufficiently
timely and detailed to enable parties to comment meaningfully on the
proposed rules and to enable us to prepare this FRFA. We have been
working with, and will continue to work with, the SBA to ensure that
both our IRFAs and the FRFA fully meet the requirements of the RFA.
517. Business Connections
We make no change in the existing support mechanisms to business
connections until a forward-looking cost methodology is established to
determine universal service support. All residential and business
connections that are currently supported will continue to be supported.
The Joint Board's recommendation will be revisited as we establish a
forward-looking cost methodology, and, therefore, we do not find it
necessary to address comments relating to the Joint Board's
recommendation on the extent of support for business connections at
this time.
518. Forward-Looking Cost Methodology
We have taken into consideration the concerns of Harris and others
that forward-looking cost methodologies do not have the ability to
predict costs for small, rural telephone companies. To minimize the
financial impact of this change on small entities, we shall permit
small, rural carriers to shift to a forward-looking cost methodology
more gradually than larger carriers. We believe that upon development
of an appropriate forward-looking cost methodology, the Commission's
mechanism for calculating support for small, rural carriers will
minimize the adverse effects of an immediate shift to a forward-looking
cost methodology. In 1998 and 1999, small, rural carriers will continue
to receive high cost loop support based on the existing system. We will
revisit the issue of support for small, rural companies and the
conversion to an alternative methodology when we adopt a forward-
looking cost methodology for rural carriers. Small, rural carriers in
Alaska and insular areas will not be required to transition to a
forward-looking cost methodology until further review.
519. Schools and Libraries
Despite the concerns of some commenters that the IRFAs performed in
conjunction with the NPRM and Recommended Decision overlooked small
government jurisdictions, we note that the IRFA that was adopted
pursuant to the Recommended Decision specifically acknowledged the
112,314 public and private schools and 15,904 libraries potentially
affected by the recommendations made by the Joint Board. We also reject
NSBA II's assertion that the Commission should not impose reporting
requirements and restrictions upon resale of telecommunications
services. In section 254(h)(3), Congress clearly prohibits eligible
public institutions from reselling supported telecommunications
services to ensure that only eligible institutions can purchase
services at a discount.
520. To foster vigorous competition for serving schools and
libraries, we conclude that non-telecommunications carriers must also
be permitted to compete to provide these services in conjunction with
telecommunications carriers or even on their own. Therefore, we
encourage non-telecommunications carriers, many of which may be small
businesses, either to enter into partnerships or joint ventures with
telecommunications carriers that are not currently serving the areas in
which the
[[Page 32935]]
libraries and schools are located or to offer services on their own. We
have also made every effort to ensure that all entities, including
small entities, are allowed to participate and compete in the universal
service program on an equal basis by adopting the additional principle
of competitive neutrality in the requirement for contribution, and
distribution of, and the determination of eligibility for universal
service support.
521. We share the concerns of PageMart that the size of the fund
not infringe upon the ability of small entities to participate and
utilize telecommunications services by unduly increasing the expense of
such services. We have made every effort to implement the mandate
established by Congress to provide discounted access to
telecommunications services to schools and libraries in the most cost-
effective and economical manner possible including, imposing a cap on
the schools and libraries fund.
522. Other
We acknowledge the concern of United Utilities that requiring
carriers to treat the support amount to eligible health care providers
as an offset may be burdensome to small carriers whose funding
obligations may be insufficient to allow recovery of the full offset in
the current year. Although we agree with the Joint Board's
recommendation initially to limit carriers to offsets, we also
expressly agree that small carriers should not be required to carry
forward such offset credits beyond one year. Accordingly, we conclude
that telecommunications carriers providing services to rural health
care providers at reasonably comparable rates under section
254(h)(1)(A) should treat the support amount as an offset toward the
carrier's universal service support obligation for the year in which
the expenses were incurred. To the extent that the amount of universal
service support due to a carrier exceeds the carrier's universal
service obligation, calculated on an annual basis, the carrier may
receive a direct reimbursement in the amount of the difference. We
believe allowing carriers to receive direct reimbursement on those
terms should help ensure that they have adequate resources to cover the
costs of providing supported services. Small carriers may find it
difficult to sustain such costs absent prompt reimbursement.
523. We disagree with Florida PSC and others that suggest that
``small'' carriers should be treated differently from ``large''
carriers for purposes of assessing contributions to universal service.
Section 254(d) requires that ``every telecommunications carrier that
provides interstate telecommunications service shall contribute, on an
equitable and non-discriminatory basis'' to preserve and advance
universal service. This section makes no distinction between large and
small carriers. While some commenters contend that the de minimis
exemption should be applied to small carriers, we find the de minimis
exemption should be limited to cases in which a carrier's contribution
to universal service in any given year is less than $100.00.
C. Description and Estimates of the Number of Small Entities to Which
the Rules Adopted in This Report and Order Will Apply
524. The RFA generally defines ``small entity'' as having the same
meaning as the terms ``small business,'' ``small organization,'' and
``small governmental jurisdiction'' and the same meaning as the term
``small business concern'' under the Small Business Act, 15 U.S.C. 632,
unless the Commission has developed one or more definitions that are
appropriate to its activities. Under the Small Business Act, a ``small
business concern'' is one that: (1) Is independently owned and
operated; (2) is not dominant in its field of operation; and (3) meets
any additional criteria established by the Small Business
Administration (SBA). The RFA also applies to nonprofit organizations
and to governmental organizations such as governments of cities,
counties, towns, townships, villages, school districts, or special
districts with populations of less than 50,000. As of 1992, the most
recent figures available, there were 85,006 governmental entities in
the United States.
525. The SBA has defined a small business for Standard Industrial
Classification (SIC) categories 4812 (Radiotelephone Communications)
and 4813 (Telephone Communications, Except Radiotelephone) to be small
entities having fewer than 1,500 employees. This FRFA first discusses
generally the total number of small telephone companies falling within
both of those SIC categories. Then, we discuss other small entities
potentially affected and attempt to refine those estimates pursuant to
this Report and Order.
526. Small incumbent LECs subject to these rules are either
dominant in their field of operation or are not independently owned and
operated, and, consistent with our prior practice, they are excluded
from the definition of ``small entity'' and ``small business
concerns.'' Accordingly, our use of the terms ``small entities'' and
``small business'' does not encompass small incumbent LECs. Out of an
abundance of caution, however, for regulatory flexibility analysis
purposes, we will consider small incumbent LECs within this analysis
and use the term ``small incumbent LECs'' to refer to any incumbent
LECs that arguably might be defined by the SBA as ``small business
concerns.''
527. We note that our analysis of the entities affected by the
rules promulgated in this Order is subject to change as future
revisions are made in the universal service rules. Moreover, we note
that section XIII.B of the Order discusses specific examples of some of
the entities affected by our rules but is not to be considered an
exhaustive list of all of the entities potentially affected. We also
note that our analysis as to the impact of the rules upon small
entities may be revised pending any revision of the rules.
I. Telephone Companies (SIC 4813)
528. Total Number of Telephone Companies Affected
Many of the decisions and rules adopted herein may have a
significant effect on a substantial number of the small telephone
companies identified by the SBA. The United States Bureau of the Census
(``the Census Bureau'') reports that, at the end of 1992, there were
3,497 firms engaged in providing telephone services, as defined
therein, for at least one year. This number contains a variety of
different categories of carriers, including local exchange carriers,
interexchange carriers, competitive access providers, cellular
carriers, mobile service carriers, operator service providers, pay
telephone operators, PCS providers, covered SMR providers, and
resellers. It seems certain that some of those 3,497 telephone service
firms may not qualify as small entities or small incumbent LECs because
they are not ``independently owned and operated.'' For example, a PCS
provider that is affiliated with an interexchange carrier having more
than 1,500 employees would not meet the definition of a small business.
It seems reasonable to conclude, therefore, that fewer than 3,497
telephone service firms would qualify as small entity telephone service
firms or small incumbent LECs, as defined above, that may be affected
by this Order.
529. Wireline Carriers and Service Providers
The SBA has developed a definition of small entities for
telecommunications
[[Page 32936]]
companies other than radiotelephone (wireless) companies (Telephone
Communications, Except Radiotelephone). The Census Bureau reports that
there were 2,321 such telephone companies in operation for at least one
year at the end of 1992. According to the SBA's definition, a small
business telephone company other than a radiotelephone company is one
employing fewer than 1,500 persons. Of the 2,321 non-radiotelephone
companies listed by the Census Bureau, 2,295 were reported to have
fewer than 1,000 employees. Thus, at least 2,295 non-radiotelephone
companies might qualify as small entities or small incumbent LECs or
small entities based on these employment statistics. As it seems
certain that some of these carriers are not independently owned and
operated, however, this figure necessarily overstates the actual number
of non-radiotelephone companies that would qualify as ``small business
concerns'' under the SBA's definition. Consequently, we estimate using
this methodology that there are fewer than 2,295 small entity telephone
communications companies (other than radiotelephone companies) that may
be affected by the proposed decisions and rules adopted in this Order.
530. Local Exchange Carriers
According to the most recent data, 1,347 companies reported that
they were engaged in the provision of local exchange services. As some
of these carriers have more than 1,500 employees, we are unable at this
time to estimate with greater precision the number of LECs that would
qualify as small business concerns under the SBA's definition.
Consequently, we estimate that there are fewer than 1,347 small
incumbent LECs that may be affected by the decisions and rules adopted
in this Order.
531. Interexchange Carriers
According to the most recent data, 130 companies reported that they
were engaged in the provision of interexchange services. As some of
these carriers have more than 1,500 employees, we are unable at this
time to estimate with greater precision the number of IXCs that would
qualify as small business concerns under the SBA's definition.
Consequently, we estimate that there are fewer than 130 small entity
IXCs that may be affected by the decisions and rules adopted in this
Order.
532. Competitive Access Providers
According to the most recent data, 57 companies reported that they
were engaged in the provision of competitive access services. We have
no information on the number of carriers that are not independently
owned and operated, nor on those that have more than 1,500 employees,
and thus are unable at this time to estimate with greater precision the
number of CAPs that would qualify as small business concerns under the
SBA's definition. Consequently, we estimate that there are fewer than
57 small entity CAPs that may be affected by the decisions and rules
adopted in this Order.
533. Operator Service Providers
According to the most recent data, 25 companies reported that they
were engaged in the provision of operator services. We do not have
information on the number of carriers that are not independently owned
and operated, nor have more than 1,500 employees, and thus are unable
at this time to estimate with greater precision the number of operator
service providers that would qualify as small business concerns under
the SBA's definition. Consequently, we estimate that there are fewer
than 25 small entity operator service providers that may be affected by
the decisions and rules adopted in this Order.
534. Pay Telephone Operators
According to the most recent data, 271 companies reported that they
were engaged in the provision of pay telephone services. We have no
information on the number of carriers that are not independently owned
and operated, nor on those that have more than 1,500 employees, and
thus are unable at this time to estimate with greater precision the
number of pay telephone operators that would qualify as small business
concerns under the SBA's definition. Consequently, we estimate that
there are fewer than 271 small entity pay telephone operators that may
be affected by the decisions and rules adopted in this Order.
535. Radiotelephone (Wireless) Carriers
We do not have information on the number of carriers that are not
independently owned and operated, and thus are unable at this time to
estimate with greater precision the number of radiotelephone carriers
and service providers that would qualify as small business concerns
under the SBA's definition. Consequently, we estimate that there are
fewer than 1,164 small entity radiotelephone companies that may be
affected by the decisions and rules adopted in this Order.
536. Cellular Service Carriers
According to the most recent data, 792 companies reported that they
were engaged in the provision of cellular services. We have no
information on the number of carriers that are not independently owned
and operated, nor on those that have more than 1,500 employees, and
thus are unable at this time to estimate with greater precision the
number of cellular service carriers that would qualify as small
business concerns under the SBA's definition. Consequently, we estimate
that there are fewer than 792 small entity cellular service carriers
that may be affected by the decisions and rules adopted in this Order.
537. Mobile Service Carriers
According to the most recent data, 117 companies reported that they
were engaged in the provision of mobile services. We have no
information on the number of carriers that are not independently owned
and operated, nor on those that have more than 1,500 employees, and
thus are unable at this time to estimate with greater precision the
number of mobile service carriers that would qualify under the SBA's
definition. Consequently, we estimate that there are fewer than 117
small entity mobile service carriers that may be affected by the
decisions and rules adopted in this Order.
538. Broadband Personal Communications Service (PCS) Licensees
No small businesses within the SBA-approved definition bid
successfully for licenses in Blocks A and B. There were 90 winning
bidders that qualified as small entities in the Block C auctions. A
total of 93 small and very small business bidders won approximately 40%
of the 1,479 licenses for Blocks D, E, and F. However, licenses for
Blocks C through F have not been awarded fully, therefore there are
few, if any, small businesses currently providing PCS services. Based
on this information, we conclude that the number of small broadband PCS
licensees will include the 90 winning bidders and the 93 qualifying
bidders in the D, E, and F Blocks, for a total of 183 small PCS
providers as defined by the SBA and the Commission's auction rules.
539. Narrowband PCS
The Commission has auctioned nationwide and regional licenses for
narrowband PCS. There are 11 nationwide and 30 regional licensees for
[[Page 32937]]
narrowband PCS. The Commission does not have sufficient information to
determine whether any of these licensees are small businesses within
the SBA-approved definition. At present, there have been no auctions
held for the major trading area (MTA) and basic trading area (BTA)
narrowband PCS licenses. The Commission anticipates a total of 561 MTA
licenses and 2,958 BTA licenses will be awarded in the auctions.
540. Rural Radiotelephone Service
The Commission has not adopted a definition of small business
specific to the Rural Radiotelephone Service, which is defined in
Sec. 22.99 of the Commission's Rules. A subset of the Rural
Radiotelephone Service is BETRS, or Basic Exchange Telephone Radio
Systems. Accordingly, we will use the SBA's definition applicable to
radiotelephone companies, i.e., an entity employing fewer than 1,500
persons. There are approximately 1,000 licensees in the Rural
Radiotelephone Service, and we estimate that almost all of them qualify
as small under the SBA's definition of a small business.
541. Public Safety Radio Services
Public Safety Radio Services include police, fire, local
government, forestry conservation, highway maintenance, and emergency
medical services. There are a total of approximately 127,540 licensees
within these services. Governmental entities as well as private
businesses comprise the licensees for these services. As we indicated,
all governmental entities with populations of less than 50,000 fall
within the definition of a small business. There are approximately
37,566 governmental entities with populations of less than 50,000.
542. Specialized Mobile Radio (SMR) Licensees
The Commission recently held auctions for geographic area licenses
in the 900 MHz SMR band. There were 60 winning bidders who qualified as
small entities in the 900 MHz auction. Based on this information, we
conclude that the number of geographic area SMR licensees affected by
the rule adopted in this Order includes these 60 small entities. No
auctions have been held for 800 MHz geographic area SMR licenses.
Therefore, no small entities currently hold these licenses. A total of
525 licenses will be awarded for the upper 200 channels in the 800 MHz
geographic area SMR auction. The Commission has not yet determined how
many licenses will be awarded for the lower 230 channels in the 800 MHz
geographic area SMR auction.
543. Resellers
According to our most recent data, 260 companies reported that they
were engaged in the resale of telephone services. We have no
information on the number of carriers that are not independently owned
and operated, nor on those that have more than 1,500 employees, and
thus are unable at this time to estimate with greater precision the
number of resellers that would qualify as small business concerns under
the SBA's definition. Consequently, we estimate that there are fewer
than 260 small entity resellers that may be affected by the decisions
and rules adopted in this Order.
544. 900 Service
According to our most recent data, 68 carriers reported that they
were engaged in 900 service. Consequently, we estimate that there are
fewer than 68 small entity 900 service providers that may be affected
by the decisions and rules adopted in this Order.
545. Private Line Service
According to our most recent data, 635 LECs and other carriers
reported that they were engaged in private line service. Consequently,
we estimate that there are fewer than 635 LECs and other carriers
providing private line service that may be affected by the decisions
and rules adopted in this Order.
546. Telegraph
According to our most recent data, 4 facilities based and 1 resale
provider reported that they engaged in international telegraph service.
According to the Census Bureau, there were 286 total telegraph firms
and 247 had less than $5 million in annual revenue. Consequently, we
estimate that there are less than 247 small telegraph firms that may be
affected by the decisions and rules adopted in this Order.
547. Telex
According to our most recent data, 5 facilities based and 2 resale
provider reported that they engaged in telex service. Consequently, we
estimate that there are fewer than 7 telex providers that may be
affected by the decisions and rules adopted in this Order.
548. Message Telephone Service
According to our most recent data, 1,092 carriers reported that
they engaged in message telephone service. Consequently, we estimate
that there are fewer than 1,092 message telephone service providers
that may be affected by the decisions and rules adopted in this Order.
549. 800 Subscribers
According to our most recent data, the number of 800 numbers in use
was 6,987,063. We do not have information on the number of carriers not
independently owned and operated, nor having more than 1,500 employees,
and thus are unable to estimate with greater precision the number of
800 subscribers that would qualify as small business concerns under the
SBA's definition. Consequently, we estimate that there are fewer than
6,987,063 small entity 800 subscribers.
II. Cable System Operators (SIC 4841)
550. The SBA has developed a definition of small entities for cable
and other pay television services that includes all such companies
generating less than $11 million in revenue annually. This definition
includes cable systems operators, closed circuit television services,
direct broadcast satellite services, multipoint distribution systems,
satellite master antenna systems, and subscription television services.
According to the Census Bureau, there were 1,758 total cable and other
pay television services and 1,423 had less than $11 million in revenue.
We note that cable system operators are included in our analysis due to
their ability to provide telephony.
551. The Commission has developed with the SBA's approval our own
definition of a small cable system operator for the purposes of rate
regulation. Under the Commission's rules, a ``small cable company,'' is
one serving fewer than 400,000 subscribers nationwide. Based on our
most recent information, we estimate that there were 1,439 cable
operators that qualified as small cable system operators at the end of
1995. Since then, some of those companies may have grown to serve over
400,000 subscribers, and others may have been involved in transactions
that caused them to be combined with other cable operators.
Consequently, we estimate that there are less than 1,439 small entity
cable system operators that may be affected by the decisions and rules
adopted in this Order. We conclude that only a small percentage of
these entities currently provide qualifying ``telecommunications
services'' required by the Act and, therefore, estimate that the number
of such entities affected are significantly fewer than noted.
552. The Act also contains a definition of small cable system
[[Page 32938]]
operator, which is ``a cable operator that, directly or through an
affiliate, serves in the aggregate fewer than 1 percent of all
subscribers in the United States and is not affiliated with any entity
or entities whose gross annual revenues in the aggregate exceed
$250,000,000.'' The Commission has determined that there are 61,700,000
subscribers in the United States. Therefore, we found that an operator
serving fewer than 617,000 subscribers shall be deemed a small
operator, if its annual revenues, when combined with the total annual
revenues of all of its affiliates, do not exceed $250 million in the
aggregate. Based on available data, we find that the number of cable
operators serving 617,000 subscribers or less total 1,450. We do not
request nor do we collect information concerning whether cable system
operators are affiliated with entities whose gross annual revenues
exceed $250,000,000, and thus are unable at this time to estimate with
greater precision the number of cable system operators that would
qualify as small cable operators under the definition in the Act.
553. Direct Broadcast Satellites (DBS)
As of December 1996, there were eight DBS licensees. The
Commission, however, does not collect annual revenue data for DBS and,
therefore, is unable to ascertain the number of small DBS licensees
that could be impacted by these rules.
554. International Services
According to the Census Bureau, there were a total of 848
communications services, NEC in operation in 1992, and a total of 775
had annual receipts of less than $9,999 million. We note that those
entities providing only international service will not be affected by
our rules. We do not, however, have sufficient data to estimate with
greater detail those providing both international and interstate
services. Consequently, we estimate that there are fewer than 775 small
international service entities potentially impacted by our rules.
555. International Broadcast Stations
Commission records show that there are 20 international broadcast
station licensees. We do not request nor collect annual revenue
information, and thus are unable to estimate the number of
international broadcast licensees that would constitute a small
business under the SBA definition. We note that those entities
providing only international service will not be affected by our rules.
We do not, however, have sufficient data to estimate with greater
detail those providing both international and interstate services.
Consequently, we estimate that there are fewer than 20 international
broadcast stations potentially impacted by our rules.
III. Municipalities
556. The term ``small government jurisdiction'' is defined as
``government of . . . districts with populations of less than 50,000.''
The most recent figures indicate that there are 85,006 governmental
entities in the United States. This number includes such entities as
states, counties, cities, utility districts and school districts. Of
the 85,006 governmental entities, 38,978 are counties, cities and
towns. The remainder are primarily utility districts, school districts,
and states. Of the 38,978 counties, cities, and towns, 37,566 or 96%,
have populations of fewer than 50,000. Consequently, we estimate that
there are 37,566 ``small government jurisdictions'' that will be
affected by our rules.
IV. Rural Health Care Providers
557. Section 254(h)(5)(B) defines the term ``health care provider''
and sets forth the seven categories of health care providers eligible
to receive universal service support. We estimate that there are: (1)
625 ``post-secondary educational institutions offering health care
instruction, teaching hospitals, and medical schools,'' including 403
rural community colleges, 124 medical schools with rural programs, and
98 rural teaching hospitals; (2) 1,200 ``community health centers or
health centers providing health care to migrants;'' (3) 3,093 ``local
health departments or agencies'' including 1,271 local health
departments and 1,822 local boards of health; (4) 2,000 ``community
mental health centers;'' (5) 2,049 ``not-for-profit hospitals;'' and
(6) 3,329 ``rural health clinics.'' We do not have sufficient
information to make an estimate of the number of consortia of health
care providers at this time. The total of these categorical numbers is
12,296. Consequently, we estimate that there are fewer than 12,296
health care providers potentially affected by the rules in this Order.
According to the SBA definition, hospitals must have annual gross
receipts of $5 million or less to qualify as a small business concern.
There are approximately 3,856 hospital firms, of which 294 have gross
annual receipts of $5 million or less. Although some of these small
hospital firms may not qualify as rural health care providers, we are
unable at this time to estimate with greater precision the number of
small hospital firms which may be affected by this Order. Consequently,
we estimate that there are fewer than 294 hospital firms affected by
this Order.
V. Schools (SIC 8211) and Libraries (SIC 8231)
558. The SBA has established a definition of small elementary and
secondary schools and small libraries as those with under $5 million in
annual revenues. The most reliable source of information regarding the
total number of kindergarten through 12th grade (K-12) schools and
libraries nationwide of which we are aware appears to be data collected
by the United States Department of Education and the National Center
for Educational Statistics. Based on that information, it appears that
there are approximately 86,221 public and 26,093 private K-12 schools
in the United States (SIC 8211). It further appears that there are
approximately 15,904 libraries, including branches, in the United
States (SIC 8231). Consequently, we estimate that there are fewer than
86,221 public and 26,093 private schools and fewer than 15,904
libraries that may be affected by the decisions and rules adopted in
this Order.
D. Summary Analysis of the Projected Reporting, Recordkeeping, and
Other Compliance Requirements and Significant Alternatives and Steps
Taken to Minimize the Significant Economic Impact on a Substantial
Number of Small Entities Consistent With Stated Objectives
559. Structure of the Analysis
In this section of the FRFA, we analyze the projected reporting,
recordkeeping, and other compliance requirements that may apply to
small entities and small incumbent LECs as a result of this Order. As a
part of this discussion, we mention some of the types of skills that
will be needed to meet the new requirements. We also describe the steps
taken to minimize the economic impact of our decisions on small
entities and small incumbent LECs, including the significant
alternatives considered and rejected.
Summary Analysis: Section III
Principles
Summary of Projected Reporting, Recordkeeping, and Other Compliance
Requirements
560. There are no reporting or other compliance requirements
relating directly to the principles enumerated in section 254(b) or
relating directly to the additional principle of competitive
neutrality, as adopted by the
[[Page 32939]]
Commission pursuant to section 254(b)(7).
Significant Alternatives and Steps Taken to Minimize Significant
Economic Impact on a Substantial Number of Small Entities Consistent
With Stated Objectives
561. As set forth in section III.C, we conclude that a fair and
reasonable application of the principles enumerated by Congress in
section 254(b) and the additional principle of competitive neutrality
will favorably impact all business entities, including smaller
entities, and promote universal service. By adopting the additional
principle of competitive neutrality, we seek to ensure that all
entities, including smaller entities, are treated on an equal basis so
that contributions to and disbursements from the universal service
support mechanisms will not be unfairly biased either in favor of or
against any entity or group. We acknowledge the comments of certain
rural telephone carriers, many of whom may be small entities, who
contend that promotion of competition must be considered only secondary
to the advancement of universal service. These commenters contend that
certain provisions of the 1996 Act are intended to provide ``rural
safeguards'' such as eligibility determinations for rural telephone
carriers under section 214(e)(2). We balance these interests by
acknowledging that a principal purpose of section 254 is to create
mechanisms that will sustain universal service as competition emerges.
We expect that applying the policy of competitive neutrality will
promote the most efficient technologies that, over time, may provide
competitive alternatives in rural areas and thereby benefit rural
consumers. We also recognize technological neutrality as a concept
encompassed by competitive neutrality. In doing so, the Commission has
expanded universal service support to many small entities, both as
providers and consumers of telecommunications services, in accordance
with congressional intent to promote competition and provide affordable
access to telecommunications and information services.
Summary Analysis: Section IV
Definition of Universal Service
Summary of Projected Reporting, Recordkeeping, and Other Compliance
Requirements
562. All eligible carriers will be required to provide each of the
core services designated for universal service support pursuant to
section 254(c)(1) in order to receive universal service support,
subject to certain enumerated exceptions. Upon a showing by an
otherwise eligible carrier that exceptional circumstances prevent that
carrier from providing single-party service, access to E911 service, or
toll limitation services, a state commission may grant petitions by
carriers for a period of time during which otherwise eligible carriers
that are unable to provide those services can still receive universal
service support while they make the network upgrades necessary to offer
these services.
Significant Alternatives and Steps Taken to Minimize Significant
Economic Impact on a Substantial Number of Small Entities Consistent
With Stated Objectives
563. As set forth in section IV.B.2, we find that universal service
support should be provided for eligible carriers that provide each of
the designated services. In addition, we define the services designated
for support in a competitively neutral manner, which permits wireless
and other potential competing carriers to offer each of the designated
services. This approach will permit cellular and other wireless
carriers and non-incumbent providers, many of which may be small
businesses, to compete in high cost areas.
564. In section IV.C, we seek to strike a reasonable balance
between the need for single-party service, access to E911, and toll
limitation services for low-income consumers, and the recognition that
exceptional circumstances may prevent some carriers, particularly
smaller carriers, from offering these services at present. Thus, we
take a number of actions in this section to minimize the burdens on
smaller entities wishing to receive universal service support. For
example, state commissions will be permitted to approve an eligible
carrier's requests for periods of time during which the carrier can
receive universal service support while making the network upgrades
needed to offer single-party service, access to E911, or toll
limitation service. To the extent that this class of carriers includes
smaller carriers, this approach reduces the burden on these small
carriers by permitting additional time to comply with the requirement
to provide all universal services prior to receiving support.
565. Although commenters suggest other services for inclusion in
the definition of the supported core services, as set forth in section
IV.B.2, we decline to expand the definition to include additional
services at this time. We conclude that an overly broad definition of
the Sec. 254(c)(1) core services might have the unintended effect of
creating a barrier to entry for some carriers, many of which may be
small entities, because these carriers might be technically unable to
provide the additional services.
566. As set forth in section IV.D, we acknowledge the many comments
both in favor of and opposed to the Joint Board's recommendation to
restrict support to businesses with a single connection. We note,
however, that we are adopting a plan for implementing the new universal
service mechanisms that includes extending the existing support
mechanisms until such time as a forward-looking cost methodology is
established. Under this approach, all residential and business
connections that are currently supported will continue to receive
support. This approach will benefit small telecommunications carriers
and, tangentially, small businesses located in rural areas. We will,
however, re-examine whether to adopt the Joint Board's recommendation
to limit support for designated services to single residential
connections and businesses with a single connection during the course
of implementing a forward-looking cost methodology. As we currently
make no change in the existing support mechanisms and will revisit this
issue at a later date, we find that comments relating to this issue
will be addressed at that time.
567. We do not establish service quality standards in section IV.E.
Rather, we find that, to the extent possible, the Commission should
rely on existing data, including the ARMIS data filed by price-cap
LECs, to monitor service quality. We find that creating federal service
quality standards would burden carriers, including small carriers, and
would be inconsistent with the 1996 Act's goal of a ``pro-competitive,
de-regulatory national policy framework.''
Summary Analysis: Section V
Affordability
Summary of Projected Reporting, Recordkeeping, and Other Compliance
Requirements
568. The 1996 Act does not require, and we did not adopt, any new
reporting, recordkeeping or other compliance requirements in this
section.
[[Page 32940]]
Significant Alternatives and Steps Taken to Minimize Significant
Economic Impact on a Substantial Number of Small Entities Consistent
With Stated Objectives
569. As set forth in section V.B, we agree with commenters that
consumer income levels should be among the factors considered when
assessing rate affordability. We find that a rate that is affordable to
most consumers in affluent areas may not be affordable to lower income
consumers. We conclude, in light of the significant disparity in income
levels throughout the country, that per capita income of a local or
regional area, and not a national median, should be considered in
determining affordability. In doing so, we decline to adopt proposals
to establish nationwide standards for measuring the impact of consumer
income levels on affordability. We find that establishing a formula
based on percentage of consumers' disposable income dedicated to
telecommunications services would over-emphasize income levels in
relation to other non-rate factors that may affect affordability and
fail to reflect the effect of local circumstances on the affordability
of a particular rate. We similarly reject proposals to define
affordability based on a percentage of national median income and
because such a standard would tend to overestimate the price at which
service is affordable when applied to a service area where income level
is significantly below the national median. We conclude that this
approach will benefit small businesses located in rural areas by taking
into consideration the economic factors relating to local areas rather
than applying uniform national standards in making determinations
relating to affordability.
570. Small entities will be impacted by our determination, as set
forth in section V.B, that the states should have primary
responsibility for monitoring the affordability of telephone service
rates and in working in concert with the Commission to ensure the
affordability of such rates. The Commission will work with affected
states to determine the causes of both declining statewide
subscribership levels and below average statewide subscribership
levels. We conclude that small businesses, as well as other
telecommunications consumers, will benefit from the joint effort of the
states and Commission to monitor the affordability of telephone service
rates and identify potential corrective measures.
Summary Analysis: Section VI
Carriers Eligible for Universal Service Support
Summary of Projected Reporting, Recordkeeping, and Other Compliance
Requirements
571. To receive most types of universal service support, the Act
requires that a carrier must demonstrate to the relevant state
commission that it has complied with criteria that Congress established
in section 214(e), implemented by this Order. The statutory criteria
require that a telecommunications carrier be a common carrier and
offer, throughout a service area designated by the state commission,
the services supported by federal universal service support mechanisms,
either using its own facilities or a combination of its own facilities
and resale of another carrier's services. A carrier must also advertise
the availability of and charges for these services throughout its
service area. An eligible telecommunications carrier that seeks to
relinquish its eligible telecommunications carrier designation for an
area served by more than one eligible telecommunications carrier shall
give advanced notice to the state commission of such relinquishment.
Applying for designation as an eligible carrier and demonstrating
fulfillment of the statutory criteria may require administrative and
legal skills.
572. Pursuant to section 214(e)(5), a state commission must seek
the Commission's concurrence before a new definition of a rural service
area may be adopted. The state commission or the affected carrier must
submit the proposal to the Commission, which may require legal and
administrative skills.
Significant Alternatives and Steps Taken to Minimize Significant
Economic Impact on a Substantial Number of Small Entities Consistent
With Stated Objectives
573. As set forth in section VI.B, we adopt no additional federal
criteria for eligibility, requiring only that carriers meet the
eligibility criteria established by Congress in the 1996 Act. We reject
arguments calling for more stringent eligibility rules, such as
requiring new entrants to comply with any state rules applicable to the
incumbent carrier, that could have imposed additional burdens on new
entrants, many of which may be small entities. We conclude that a
carrier can use any technology to meet the eligibility criteria, thus
preserving the competitive neutrality of the eligibility requirements,
and protecting all providers, including small providers. Our
interpretation of the section 214(e) facilities requirement promotes
the universal service policies adopted by Congress and avoids imposing
undue burdens on all eligible carriers, including small carriers. This
interpretation enables small competitive carriers to become eligible
telecommunications carriers. We also conclude that any burdens that
might be placed on small incumbent LECs facing competition from
competitive LECs may be avoided or mitigated by the states when they
consider petitions for exemptions, suspensions or modifications of the
requirements of section 251(c) by rural telephone companies and when
they consider designating multiple eligible carriers pursuant to
section 214(e)(3).
574. Additionally, as discussed in section VI.C, where states alone
are responsible for designating a carrier's service area, we encourage
states to adopt service areas that are not unreasonably large because
unreasonably large service areas might discourage competitive entry or
favor some carriers, including large carriers. We also indicate that,
if a state commission agrees and the Commission does not disagree, the
service area served by a rural telephone company (which is likely to be
a small company), should be the study area in which they currently
provide service. This requirement minimizes any burdens rural telephone
companies would face from needing to recalculate costs over a
differently-sized area. This requirement also protects small incumbent
LECs from competitors that may target only the most financially
lucrative customers in an area. We find that these provisions should
minimize burdens on small entities.
575. We also conclude that the ``pro-competitive, de-regulatory''
intent of the 1996 Act would be furthered if we take action to minimize
any procedural delay caused by the need for federal-state coordination
to redefine rural service areas. Under the procedures we adopt, after a
state has concluded that a service area definition different from a
rural telephone company's study area is appropriate, either the state
or a carrier must seek the agreement of the Commission. Upon the
receipt of the proposal, the Commission will issue a public notice on
the proposal. If the Commission does not act upon the proposal within
90 days of the public notice release date, the proposal will be deemed
approved by the Commission and may take effect according to state
procedure without further action on the part of the Commission. This
procedure minimizes the burden on all parties,
[[Page 32941]]
including small parties, that might seek to alter the definition of a
rural service area.
Summary Analysis: Section VII
High Cost Support
Summary of Projected Reporting, Recordkeeping, and Other Compliance
Requirements
576. Small, rural carriers comprise the specific class of small
entities that are subject to high cost reporting requirements. We
define ``rural'' as those carriers that meet the statutory definition
of a ``rural telephone company'' set forth at 47 U.S.C. 153(37).
577. To receive high cost support small, rural carriers have been
required, under previous rules, to report the number of lines they
serve and their embedded costs at the end of each year. Because small,
rural carriers will receive support based on their embedded costs from
1998 until a forward-looking cost methodology is chosen, their
reporting and recordkeeping requirements will remain the same. These
requirements should not affect small entities disproportionately
because in order to receive support, large, non-rural carriers must
also report the number of lines they serve and their embedded costs.
Significant Alternatives and Steps Taken to Minimize Significant
Economic Impact on a Substantial Number of Small Entities Consistent
With Stated Objectives
578. Currently, an ILEC is eligible for support if its embedded
loop costs, as reported annually, exceed 115 percent of the national
average loop cost. We anticipate that we will adopt a forward-looking
cost methodology for large, non-rural carriers to take effect on
January 1, 1999. Until a forward-looking cost methodology for non-rural
carriers takes effect, large, non-rural carriers will continue to
receive high cost loop support and LTS based on the mechanisms in place
for small, rural carriers.
579. To minimize the financial impact of this rule change on small
entities, however, we shall permit small, rural carriers to shift to a
forward-looking cost methodology more gradually than the large
carriers. We believe that the Commission's mechanism for calculating
support for small, rural carriers will minimize the adverse effects of
an immediate shift to a forward-looking cost methodology. In 1998 and
1999, small, rural carriers will continue to receive high cost loop
support based on the existing system. Beginning on January 1, 2000, the
nationwide average loop costs, on which carriers' high cost loop
support is currently based, will be indexed to changes in the GDP-CPI.
Starting January 1, 1998, DEM weighting for small, rural carriers will
continue to be calculated under the existing prescribed formulas, but
the interstate allocation factor will be maintained at 1996 levels. LTS
support for rural carriers will be indexed to changes in the nationwide
average loop costs starting in 1998. We will revisit the issue of
support for small, rural companies and the conversion to an alternative
methodology when we adopt a forward-looking cost methodology for rural
carriers. We find that a gradual shift for rural carriers should enable
these carriers to adjust their operations in preparation for the use of
a forward-looking cost methodology.
580. All carriers' high cost loop support for corporate operations
expense, however, will be limited to 115 percent of an amount defined
by a formula based upon a statistical study that predicts corporate
operations based on the number of access lines. Because we will
determine the benchmark for corporate and overhead expenses based on a
carrier's number of lines, any limitation on corporate expenses would
not disproportionately impact small carriers. We will also continue the
current cap limiting growth of the high cost loop support mechanism. In
order to ensure that the index accurately represents small carriers'
loop growth, we will reset the cap based on small carriers' cost
studies once large carriers move to a forward-looking cost methodology.
In addition, carriers may petition the Commission for a waiver to
receive additional support should they experience unusual circumstances
that require support in excess of the amount distributed.
581. Some commenters support the Joint Board's recommendation to
place rural carriers on a protected support mechanism pending the
adoption of a forward-looking cost methodology. Many commenters also
advocate continuing the existing high cost support mechanisms according
to the existing rules. Other commenters, however, offered alternative
proposals to modify the existing system based on embedded costs. The
proposals included: capping support levels; changing the benchmark for
high cost loop support to an indexed nationwide average loop cost;
maintaining the interstate DEM allocation factor to a historic level;
and calculating LTS based on the percentage of the common line pool
represented by LTS in 1996. A few commenters, however, suggest placing
rural carriers on a forward-looking mechanism immediately.
582. We decline to adopt the Joint Board's recommendation to
calculate support for each line based on protected historical amounts
at this time because we conclude that such a mechanism would not
provide rural carriers adequate support for providing universal service
because carriers would not be able to afford prudent facility upgrades.
Instead, we adopt the proposal to calculate high cost loop support
based on an inflation adjusted nationwide loop cost. We also adopt the
proposal to calculate DEM weighting assistance by maintaining the
interstate allocation factor defined by the weighted DEM at 1996 levels
for each of their study areas. We find, however, that the proposal to
calculate LTS based on the percentage of the common line pool
represented by LTS in 1996 will not work because we will no longer be
able to determine a nationwide CCL charge once the non-pooling carriers
switch to per-line, rather than a per-minute, CCL charge. Instead, we
adopt a modified form of the Joint Board's recommendation regarding LTS
by calculating a rural carrier's LTS support based on the percentage of
increase of the nationwide average loop cost because increases in LTS
support shall be tied to changes in common line revenue requirements.
In order to control the growth of the support mechanisms without
impacting an individual carrier disproportionately, we adopt the
proposal to cap support levels by continuing to cap the high cost loop
support mechanism. We conclude that we should not convert small, rural
carriers to an alternative forward-looking cost methodology immediately
because the carriers may not be able to absorb a significant change in
support levels.
Summary Analysis: Section VIII
Support for Low-Income Consumers
Summary of Projected Reporting, Recordkeeping, and Other Compliance
Requirements
583. The state commission shall file or require the carrier to file
information with the Administrator demonstrating that the carrier's
Lifeline plan meets the criteria set forth in the federal rules, and
stating the number of qualifying low-income consumers and the amount of
state assistance. These recommended reporting and recordkeeping
requirements may require clerical and administrative skills.
584. Consumers in participating states who seek to receive Lifeline
support shall follow state consumer
[[Page 32942]]
qualification guidelines. Consumers in non-participating states who
seek to receive Lifeline support shall sign a document, provided by the
carrier offering Lifeline service, certifying under penalty of perjury
that the consumer receives benefits from one of the programs included
in the federal default qualification standard. Carriers in non-
participating states shall provide consumers seeking Lifeline service
with such forms.
585. Carriers can request from their state utilities regulator a
period of time during which they may receive universal service support
for serving Lifeline consumers while they complete upgrading their
switches in order to be able to offer toll-limitation. Carriers may
also request from their state utilities regulator a waiver of the
requirement prohibiting disconnection of local service for non-payment
of toll charges.
Significant Alternatives and Steps Taken to Minimize Significant
Economic Impact on a Substantial Number of Small Entities Consistent
With Stated Objectives
586. Based on the Commission's prior experience administering
Lifeline, we find that requiring carriers to keep track of the number
of their Lifeline consumers and to file information with the federal
universal service Administrator will not impose a significant burden on
small carriers since little information is required and the information
is generally accessible. Accordingly, we do not anticipate that this
requirement will impose a significant burden on small carriers.
Summary Analysis: Section IX
Insular Areas
Summary of Projected Reporting, Recordkeeping, and Other Compliance
Requirements
587. Section 254(b)(3) establishes the principle that consumers in
insular areas should have access to telecommunications and information
services that are reasonably comparable, and at rates that are
reasonably comparable, to those provided in urban areas. The 1996 Act
does not require and we did not establish any new reporting or
recordkeeping requirements in this section.
Significant Alternatives and Steps Taken to Minimize Significant
Economic Impact on a Substantial Number of Small Entities Consistent
With Stated Objectives
588. As set forth in section IX.C, we find that residents and
carriers in the insular areas, including the Pacific Island
territories, should have access to all the universal service programs,
including those for high cost support, low-income assistance, schools,
libraries, and rural health care providers. To the extent that they
qualify, we conclude that small entities in insular areas will benefit,
both as consumers and providers of telecommunications and information
services, from such support.
Summary Analysis: Section X
Schools and Libraries
Summary of Projected Reporting, Recordkeeping, and Other Compliance
Requirements
589. We will require service providers to certify to the
Administrator that the price offered to schools, libraries, library
consortia, or consortia that include schools or libraries is no more
than the lowest corresponding price. This requirement is designed to
ensure that schools, libraries, and library consortia receive the
lowest possible pre-discount price. We also require service providers
to keep and retain careful records of how they have allocated the costs
of shared facilities used by consortia to ensure that only eligible
schools, libraries, and library consortia derive the benefits of
discounts under Sec. 254(h) and to ensure that no prohibited resale
occurs.
590. We will require, for schools and school districts, that the
person responsible for ordering telecommunications and other supported
services and facilities certify to the Administrator the percentage of
students eligible for the national school lunch program. We also permit
schools to use federally approved alternative mechanisms to compute the
percentage of students eligible for the national school lunch program.
This latter option is particularly helpful to schools that either do
not participate in the school lunch program or that have a tradition of
undercounting eligible students (e.g., secondary schools, urban schools
with highly transient populations, and some rural schools). We require
libraries to certify to the percentage of students eligible for the
national school lunch program in the school district in which the
library is located or to which children would attend public school.
This requirement is necessary to enable the Administrator to determine
how disadvantaged the entity is and, thus, its eligibility for the
greater discounts provided to more disadvantaged entities.
591. We will also require that schools and libraries secure a
certification from their state or an independent entity approved by the
Commission that they have a technology plan for using the services
ordered pursuant to section 254(h). Moreover, we will also require them
to certify that they have budgeted sufficient funds, and that such
funding will have been approved prior to the start of service, to
support all of the costs they will face to use effectively all of the
purchases they make under this program. This requirement will help to
ensure that schools and libraries avoid the waste that might arise if
schools and libraries ordered expensive services before they had other
resources needed to use those services effectively.
592. We will require schools, libraries, library consortia, and
consortia that include schools or libraries to send a description of
the services they are requesting to a subcontractor of the
Administrator. The subcontractor will then post a description of the
services sought on an Internet website for all potential competing
service providers to review. We conclude that this requirement will
help achieve Congress's intent that schools and libraries take
advantage of the potential for competitive bids. We conclude that the
request for service should be signed by the person authorized to order
telecommunications and other supported services and facilities for the
school, library, or library consortium, certifying the following under
oath: (1) The school or library is an eligible entity under section
254(h)(4); (2) the services requested will be used solely for
educational purposes; and (3) the services will not be sold, resold, or
transferred in consideration for money or any other thing of value. If
the services are being purchased as part of an aggregated purchase with
other entities, schools, libraries, and library consortia will also be
required to list the identities of all consortium members. Requiring
schools, libraries, library consortia and consortia that include
schools or libraries to disclose the identities of consortia members
should be minimally burdensome because we only require the institutions
to provide basic information, such as the names of all consortia
members, addresses, and telephone numbers.
593. We will require schools and libraries, as well as carriers, to
maintain records for their purchases of telecommunications and other
supported services and facilities at discounted rates, similar to the
kinds of procurement records that they already keep for other
purchases. We expect that schools and libraries should be able to
produce such records at the request of any auditor appointed by a state
education department, the
[[Page 32943]]
Administrator, or any other state or federal agency with jurisdiction
to review such records for possible misuse. We conclude carriers should
provide notification on the availability of discounts. We find that
these reporting and recordkeeping requirements are necessary to ensure
that schools and libraries use the discounted telecommunications
services for the purposes intended by Congress. For all of these
requirements described in this section some administrative, accounting,
and clerical skills may be required.
Significant Alternatives and Steps Taken to Minimize Significant
Economic Impact on a Substantial Number of Small Entities Consistent
With Stated Objectives.
594. The requirement that service providers certify to the
Administrator that the prices they charge to eligible schools,
libraries, library consortia, and consortia that include schools or
libraries are no more than the lowest corresponding price should be
minimally burdensome, given that service providers could be expected to
review the prices they charge to similarly situated customers when they
set the price for schools and libraries. We reject suggestions to
require all carriers to offer services at total service long-run
incremental cost levels because of the burdens it would create.
Similarly, because schools and libraries that form consortia with non-
eligible entities will need to inform the service provider of what
portion of shared facilities purchased by the consortia should be
charged to eligible schools and libraries (and discounted by the
appropriate amounts), it should not be burdensome for carriers to
maintain records of those allocations for some appropriate amount of
time.
595. With respect to service providers, we reject the suggestion to
interpret ``geographic area'' to mean the entire state in which a
service provider serves. This could force service providers to serve
areas in a state that they were not previously serving, thereby
unreasonably burdening small carriers that were only prepared to serve
some small segment of a state. We also reject an annual carrier
notification requirement. We conclude that we should only require that
carriers provide notification on availability of discounts.
596. Schools and libraries should not be significantly burdened by
the requirement that they certify the following: (1) That they are
eligible for support under sections 254(h)(4) and 254(h)(5); (2) that
the services purchased at a discount are used for educational services;
and (3) that those services will not be resold. Assuming that schools
and libraries will need to inform carriers about what discount they are
eligible to receive, there should be no significant burden imposed by
requiring them to certify that they will satisfy the statutory
requirements imposed by Congress. Requiring schools, libraries, library
consortia and consortia that include schools or libraries to disclose
the identities of consortia members should be minimally burdensome
because we only require the institutions to provide basic information,
such as the names of all consortia members, addresses, and telephone
numbers. This information should be readily available to schools,
libraries, and library consortia and will be necessary for the
Administrator to compile in the event of an audit designed to prevent
waste, fraud, and abuse. We note, however, that schools and libraries
need not participate in consortia for purposes of the universal service
discount program. We conclude that by purchasing as a consortium,
individual schools and libraries would be in a better position to take
advantage of any price discounts a provider may offer as a result of
either efficiencies that it may enjoy from supplying services to a
large customer, or from the natural incentives for sellers in a
competitive market to offer quantity discounts to large users. We find
that the possibility of reaping such benefits will often lead schools
and libraries to join consortia despite any attendant administrative
burdens.
597. The requirement that schools and libraries submit a
description of the services and facilities that they are requesting to
the subcontractor of the Administrator should also be minimally
burdensome. School and library boards generally require schools and
libraries to seek competitive bids for substantial purchases; this
forces them to create a description of their purchase needs. We find
that it will be minimally burdensome to require schools, libraries, and
library consortia to submit a copy of that description to the
subcontractor. We further find that this requirement will be much less
burdensome than requiring schools and libraries to submit a description
of their requests to all telecommunications carriers in their state, as
proposed by one commenter. It also will be less burdensome than a
requirement that schools and libraries demonstrate that they have
participated in a more formal competitive bidding process.
598. We conclude that it will not be unreasonably burdensome to
require schools and libraries to secure certification from their state
or an independent entity approved by the Commission, that they have
undertaken a technology assessment/inventory and adopted a plan for
deploying any resources necessary to use their discounted services and
facilities effectively. We expect that few schools or libraries will
propose to spend their own money for discounted services until they
believe that they could use the services effectively. Therefore,
requiring them to secure a certification from an independent expert
source that they had done such planning and conducted a technology
assessment will be a minimally burdensome way to ensure that schools
and libraries are aware of the other resources they need to procure
before ordering discounted telecommunications and other supported
services and facilities. Furthermore, we observe that the Commission
will provide information to schools and libraries lacking information
about what resources they may need through a Department of Education
website. Although this alternative is more burdensome than the use of a
self-certification standard, we find that it is necessary to provide
the level of accountability that is in the public interest.
599. We also conclude that the least burdensome manner for schools
to demonstrate that they are disadvantaged will be to certify to the
Administrator the percentage of students eligible for the national
school lunch program in the individual schools or school district
because the vast majority of schools already participate in the
national student lunch program. We also conclude that allowing schools
to use federally approved proxies as a method for computing the
percentage of eligible students lessens the administrative burden for
schools that either do not participate in the national school lunch
program or have a tradition of undercounting eligible students. We also
find that requiring libraries to demonstrate their level of
disadvantage by relying on national school lunch data for the school
district in which they are located provides a reasonable result with a
minimal burden. Many libraries urged that they be allowed to use census
poverty data, rather than the student lunch eligibility standard. In
fact, the ALA volunteered to provide every library with the appropriate
poverty level figures, based on the use of a commercially available
software program for calculating poverty levels for a 1-mile radius
around each library from census data. Those parties, however, failed to
provide support for
[[Page 32944]]
us to conclude that the poverty level in a 1-mile radius of the library
was a reasonable approximation of the poverty level for the library's
entire service area. Meanwhile, eligible schools and libraries that
prefer not to provide information on their levels of economic
disadvantage will still qualify for the minimum 20 percent discount on
eligible purchases.
600. To foster vigorous competition for serving schools and
libraries, we conclude that non-telecommunications carriers must also
be permitted to compete to provide these services in conjunction with
telecommunications carriers or even their own. Therefore, we encourage
non-telecommunications carriers either to enter into partnerships or
joint ventures with telecommunications carriers that are not currently
serving the areas in which the libraries and schools are located or to
offer services on their own. We encourage small businesses both to form
such joint ventures and compete on their own.
Summary Analysis: Section XI
Health Care Providers
Summary of Projected Reporting, Recordkeeping and Other Compliance
Requirements
601. Section 254(h)(1)(A) provides that a telecommunications
carrier shall be required to provide rural health care providers with
services at rates reasonably comparable to those charged for similar
services in urban areas of their state. The providing
telecommunications carrier shall then be entitled to universal service
support based on the difference, if any, between the rate charged to
the health care provider and the rate for similar services provided to
other customers in comparable rural areas of the state. We find that
every health care provider, including small entities, that makes a
request for universal service support for telecommunications services
shall be required to submit to the Administrator a written request,
signed by an authorized officer of the health care provider, certifying
under oath information designed to ensure that universal service
support to eligible health care providers is used for its intended
purpose and not abused. These requirements may require some
administrative, accounting, and legal skills.
602. To minimize the administrative burden on health care providers
to the extent consistent with section 254, we adopt the least
burdensome certification plan that will provide safeguards that are
adequate to ensure that the supported services will be obtained
lawfully and for their intended purpose.
603. We are requiring the Administrator to establish and administer
a monitoring and evaluation program to oversee the use of supported
services by health care providers and the pricing of those services by
carriers. Accordingly, health care providers, as well as carriers, will
be required to maintain the same kind of procurement records for
purchases under this program as they now keep for other purchases
involving government programs or third-party payors. Health care
providers must be able to produce such records at the request of any
auditor appointed by the Administrator or any state or federal agency
with jurisdiction that might conduct audits. Health care providers may
be subject to random compliance audits to ensure that services are
being used for the provision of state authorized health care, that they
are complying with other certification requirements, that they are
otherwise eligible to receive universal service support, that rates
charged comply with the statute and regulations and that prohibitions
against resale or transfer for profit are strictly enforced,
particularly with respect to consortia. Such information will permit
the Commission to determine whether universal service support policies
require adjustment. The Administrator shall also develop a method for
obtaining information from health care providers regarding which
services they are purchasing and how such services are being used, and
shall submit an annual report to the Commission. This report will
enable the Commission to monitor the progress of health care providers
in obtaining access to telecommunications and other information
services.
604. We encourage carriers across the country to notify eligible
health care providers in their service areas of the availability of
lower rates resulting from universal service support so that rural
health care providers are able to take full advantage of the supported
services.
Significant Alternatives and Steps Taken to Minimize Significant
Economic Impact on a Substantial Number of Small Entities Consistent
With Stated Objectives
605. We have considered several certification plans suggested by
commenters. We seek to adopt the least burdensome certification plan
that will provide adequate safeguards to ensure that the supported
services are being used for their intended purpose. We reject a
suggestion that certification include verification of the existence of
a technology plan and a checklist of other information for tracking
universal service. Although such plans might be useful in a discount
plan where disincentives to overpurchasing are needed, we find that
such a requirement will be unnecessarily burdensome where health care
providers, many of whom may be small entities, would be required to
invest substantial resources in order to pay urban rates for these
services. We also reject, for similar reasons, suggestions that health
care providers be required to certify that hardware, wiring, on-site
networking, and training would be deployed simultaneously with the
service. Finally, we reject a proposal that the financial officers of
health care provider organizations be required to attest under oath
that funds have been used as intended by the 1996 Act, because we find
that the pre-expenditure certification described above, which will be
submitted to the carrier along with the request for services, is
sufficient under these circumstances.
606. To minimize the administrative burden on regulators and
carriers, to the extent consistent with section 254, we find that the
urban rate should be based on the rates charged for similar services in
the urban area with a population of at least 50,000 closest to the
health care provider's location. We conclude that this one-step process
will be easy to use and understand and will, therefore, be less
administratively burdensome than other possible approaches. This method
is also preferable to one that would require information about private
contract rates, which are proprietary and cannot be obtained without
elaborate confidentiality safeguards.
607. We acknowledge the concern of some commenters that requiring
carriers to treat the amount of support for health care providers as an
offset to the carrier's universal service obligation is anti-
competitive for small carriers that have such small funding obligations
that they would not receive the full offset to which they were entitled
in the current year. Therefore, while we adopt the Joint Board's
recommendation to limit carriers to offsets rather than direct
reimbursement for the first year's service, we also adopt modifications
to reflect these concerns. Although we disagree with NYNEX's suggestion
that the statute precludes a mandatory offset rule, we conclude that
allowing direct compensation under some circumstances is consistent
with the statutory language and sound policy. We conclude that
telecommunications carriers providing services to health care providers
at reasonably comparable rates under the provisions of section
[[Page 32945]]
254(h)(1)(A) should treat the amount eligible for support as an offset
toward the carrier's universal service support obligation for the year
in which the expenses were incurred. To the extent that the amount of
universal service support due to a carrier exceeds the carrier's
universal service obligation, calculated on an annual basis, however,
we find that the carrier may receive a direct reimbursement in the
amount of the difference.
608. This approach should address the potential problem when the
total amount of a carrier's rate reductions exceed its universal
service obligation in any one year. Moreover, allowing carriers to
receive direct reimbursements should help ensure that they have
adequate resources to cover the costs of providing supported services.
As some commenters suggest, small carriers will find it difficult to
sustain such costs absent prompt reimbursement. Pursuant to this
approach, those small carriers who do not contribute to the universal
service fund because they are subject to the de minimis exemption may
receive direct reimbursement as well. We agree with the Joint Board
that an offset mechanism is both less vulnerable to manipulation and
more easily administered and monitored than direct reimbursement. We
conclude, however, that the approach we adopt appropriately balances
the concerns of carriers whose rate reductions exceed their
contributions in a given year against the need to adopt a reimbursement
method that may be easily administered and monitored.
609. To identify rural health care providers, we adopt the Office
of Management and Budget's Metropolitan Statistical Area method of
designating rural areas along with the Goldsmith Modification because
it will meet the ``ease of administration'' criterion. Since lists of
MSA counties and Goldsmith-identified census blocks and tracts already
exist, updated to 1995, it should be relatively easy for any health
care provider to determine if it is located in a rural area and,
therefore, whether it will meet the test of eligibility for support.
Summary Analysis: Section XII
Subscriber Line Charges and Carrier Common Line Charges
Summary of Projected Reporting, Recordkeeping, and Other Compliance
Requirements
610. The Commission's universal service rules regarding the
interstate subscriber line charge and carrier common line charges will
not impose any additional reporting requirements on any entities,
including small entities. Although we changed the amount of the
charges, the changes will have no impact on the information collection
requirement, and will not extend the charges to additional carriers.
Some accounting skills may be necessary to modify the charges.
Significant Alternatives and Steps Taken to Minimize Significant
Economic Impact on a Substantial Number of Small Entities Consistent
With Stated Objectives
611. Because the SLC and CCL charges will recover ILECs' costs for
portions of their network, reporting requirements were deemed necessary
to track the costs and allow for their recovery. No alternatives were
presented that would have eliminated or substantially reduced those
reporting requirements. The Commission's findings have no impact on the
information collection requirement and will not extend the charges to
any additional carriers.
612. We note, in section XII.C, that some commenters suggest that
the SLC cap for businesses with single connections be raised above the
$3.50 cap. We reject this suggestion noting that the SLC charge is
assessed directly on local telephone subscribers and, therefore, has an
impact on universal service concerns such as affordability of rates. We
do not agree with the SBA that the SLC should be reduced for businesses
with multiple connections. While not all businesses with multiple
connections may be large corporations, we conclude that such businesses
have demonstrated that telecommunication services are affordable by
subscribing to multiple connections. We are also concerned that a
reduction in SLC caps would have a negative impact on the economic
efficiency of the Commission's common line recovery regime. We conclude
that a reduction in the SLC cap for businesses with multiple
connections is not warranted at this time.
Summary Analysis: Section XIII
Administration
Summary of Projected Reporting, Recordkeeping, and Other Compliance
Requirements
613. Section 254(d) states ``that all telecommunications carriers
that provide interstate telecommunications services shall make
equitable and nondiscriminatory contributions'' toward the preservation
and advancement of universal service. We shall require all
telecommunications carriers that provide interstate telecommunications
services and some providers of interstate telecommunications to
contribute to the universal service support mechanisms. Contributions
for support for programs for high cost areas and low-income consumers
will be assessed on the basis of interstate and international end-user
telecommunications revenues. Contributions for support for programs for
schools, libraries, and rural health care providers will be assessed on
the basis of interstate, intrastate, and international end-user
telecommunications revenues. Contributors will be required to submit
information regarding their end-user telecommunications revenues.
Approximately 5,000 telecommunications carriers and providers will be
required to submit contributions. These tasks may require some
administrative, accounting, and legal skills.
Significant Alternatives and Steps Taken to Minimize Significant
Economic Impact on a Substantial Number of Small Entities Consistent
With Stated Objectives
614. We reject the suggestion of some commenters that CMRS
providers, many of whom may qualify as small businesses, should not be
required to contribute, or should be allowed to contribute at a reduced
rate, due to their contention that they will not be eligible to receive
universal service support. We note that section 254(d) provides that
``every telecommunications carrier that provides interstate
telecommunications services shall contribute on an equitable and
nondiscriminatory basis'' with no such exemption for any CMRS providers
or ineligible carriers. We find, however, that entities that provide
only international telecommunications services are not required to
contribute to universal service support because they are not
``telecommunications carriers that provide interstate
telecommunications.'' To the extent that small carriers provide only
international telecommunications service, they will not be required to
contribute to the universal service support mechanisms.
615. As set forth in section XIII.D, we conclude that small
carriers should not be given preferential treatment in the
determination of contributions to the universal service support
mechanisms solely on the basis of being small entities because of
section 254(d)'s explicit directive that every telecommunications
carrier that provides interstate telecommunications services shall
contribute to the preservation and advancement of
[[Page 32946]]
universal service. We have considered the suggestions of commenters
regarding various graduated contribution schemes that would favor small
entities. We reject these suggestions based on the language of the
statute, legislative history, and the regulatory burdens that such
graduated schemes would entail. We have considered commenter
suggestions that small carriers be exempted from contribution on the
basis of the de minimis provision of section 254(d). We reject these
suggestions on the basis of the legislative history surrounding section
254(d) that provides that the de minimis exemption should be limited to
those carriers for whom the cost of collecting the contribution exceeds
the amount of the contribution. As set forth in section XIII.D, we find
that if a contributor's contribution to universal service in any given
year is less than $100.00, that contributor will not be required to
submit a contribution for that year. We conclude that expanding the
definition of de minimis to include ``small'' carriers would violate
the ``pro-competitive'' intent of the 1996 Act and require complex
administration and regulation to determine and monitor eligibility for
the exemption. We believe that small entities may benefit under the de
minimis exemption as interpreted in the Order without an explicit
exemption for all small entities. We also believe that small payphone
aggregators, such as grocery store owners, will be exempt from
contribution requirements pursuant to our de minimis exemption.
E.Report to Congress
616. The Commission shall send a copy of this FRFA, along with this
Report and Order, in a report to Congress pursuant to the Small
Business Regulatory Enforcement Fairness Act of 1996, 5 U.S.C.
801(a)(1)(A). A summary of this FRFA will also be published in the
Federal Register.
Ordering Clauses
Accordingly, it is ordered that, pursuant to the authority
contained in sections 1-4, 201-205, 218-220, 214, 254, 303(r), 403, and
410 of the Communications Act of 1934, as amended, 47 U.S.C. 151-154,
201-205, 218-220, 214, 254, 303(r), 403, and 410, the Report and order
is Adopted, including the collection of information provisions
contained herein, effective July 17, 1997.
It is further ordered that part 54 of the Commission's rules, 47
CFR part 54 is added as set forth below, effective July 17, 1997;
except for subpart E which will become effective January 1, 1998.
It is further ordered that part 36 of the Commission's rules, 47
CFR part 36 is amended as set forth below, effective July 17, 1997.
It is further ordered that part 69 of the Commission's rules, 47
CFR part 69 is amended as set forth below, effective July 17, 1997.
It is further ordered that, pursuant to section 5(c)(1) of the
Communications Act of 1934, as amended, 47 U.S.C. 155(c)(1), authority
is delegated to the Chief, Common Carrier Bureau, to perform the
following functions: (1) To propose, approve, or deny a new definition
of a service area of a rural telephone company pursuant to 47 U.S.C.
214(e)(5) and 47 CFR 54.307; (2) to review an appeal filed by a carrier
contending that a state commission has improperly denied a request for
waiver of the rule prohibiting disconnection of Lifeline service for
non-payment of toll charges; and (3) to resolve a carrier's request for
a waiver of the rule prohibiting disconnection of Lifeline service for
non-payment of toll charges when the relevant state commission chooses
not to act on such a request.
It is further ordered that if any portion of this Order or any
regulation implementing this Order is held invalid, either generally or
as applied to particular persons or circumstances, the remainder of the
Order or regulations, or their application to other persons or
circumstances, shall not be affected.
List of Subjects
47 CFR Part 36
Communications common carriers, Reporting and recordkeeping
requirements, Telephone, Uniform System of Accounts.
47 CFR Part 54
Health facilities, Libraries, Reporting and recordkeeping
requirements, Schools, Telecommunications, Telephone.
47 CFR Part 69
Communications common carriers, Reporting and recordkeeping
requirements, Telephone.
Federal Communications Commission.
William F. Caton,
Acting Secretary.
Parts 36 and 69 of Title 47 of the Code of Federal Regulations are
amended as follows:
PART 36--JURISDICTIONAL SEPARATIONS PROCEDURES; STANDARD PROCEDURES
FOR SEPARATING TELECOMMUNICATIONS PROPERTY COSTS, REVENUES,
EXPENSES, TAXES AND RESERVES FOR TELECOMMUNICATIONS COMPANIES
1. The authority citation for part 36 is revised to read as
follows:
Authority: 47 U.S.C. Secs. 151, 154 (i) and (j), 205, 221(c),
254, 403 and 410.
2. Section 36.125 is amended by removing and reserving paragraphs
(c), (d), and (e), adding paragraphs (a)(3), (a)(4) and (a)(5), and
revising paragraphs (b) and (f) to read as follows:
Sec. 36.125 Local Switching Equipment--Category 3.
(a) * * *
(3) Dial equipment minutes of use (DEM) is defined as the minutes
of holding time of the originating and terminating local switching
equipment. Holding time is defined in the Glossary.
(4) The interstate allocation factor is the percentage of local
switching investment apportioned to the interstate jurisdiction.
(5) The interstate DEM factor is the ratio of the interstate DEM to
the total DEM. A weighted interstate DEM factor is the product of
multiplying a weighting factor, as defined in paragraph (f) of this
section, to the DEM factor. The state DEM factor is the ratio of the
state DEM to the total DEM.
(b) Beginning January 1, 1993, Category 3 investment for study
areas with 50,000 or more access lines is apportioned to the interstate
jurisdiction on the basis of the interstate DEM factor. Category 3
investment for study areas with 50,000 or more access lines is
apportioned to the state jurisdiction on the basis of the state DEM
factor.
(c) [Reserved]
(d) [Reserved]
(e) [Reserved]
(f) Beginning January 1, 1993 and ending December 31, 1997, for
study areas with fewer than 50,000 access lines, Category 3 investment
is apportioned to the interstate jurisdiction by the application of an
interstate allocation factor that is the lesser of either .85 or the
product of the interstate DEM factor specified in paragraph (a)(5) of
this section multiplied by a weighting factor, as determined by the
table below. Beginning January 1, 1998, for study areas with fewer than
50,000 access lines, Category 3 investment is apportioned to the
interstate jurisdiction by the application of an interstate allocation
factor that is the lesser of either .85 or the sum of the interstate
[[Page 32947]]
DEM factor specified in paragraph (a)(5) of this section and the
difference between the 1996 weighted interstate DEM factor and the 1996
interstate DEM factor. The Category 3 investment that is not assigned
to the interstate jurisdiction pursuant to this paragraph is assigned
to the state jurisdiction.
------------------------------------------------------------------------
Weighting
Number of access lines in service in study area factor
------------------------------------------------------------------------
0-10,000..................................................... 3.0
10,001-20,000................................................ 2.5
20,001-50,000................................................ 2.0
50,001-or above.............................................. 1.0
------------------------------------------------------------------------
* * * * *
3. Section 36.601 is amended by revising paragraphs (a) and (c) to
read as follows:
Sec. 36.601 General.
(a) The term Universal Service Fund in this subpart refers only to
the support for loop-related costs included in Sec. 36.621. The term
Universal Service in part 54 of this chapter refers to the
comprehensive discussion of the Commission's rules implementing section
254 of the Communications Act of 1934, as amended, 47 U.S.C. 254, which
addresses universal service support for rural, insular, and high cost
areas, low-income consumers, schools and libraries, and health care
providers. The expense adjustment calculated pursuant to this subpart F
shall be added to interstate expenses and deducted from state expenses
after expenses and taxes have been apportioned pursuant to subpart D of
this part.
* * * * *
(c) The annual amount of the total nationwide loop cost expense
adjustment calculated pursuant to this subpart F shall not exceed the
amount of the total loop cost expense adjustment for the immediately
preceding calendar year, increased by a rate equal to the rate of
increase in the total number of working loops during the calendar year
preceding the July 31st filing. The total loop cost expense adjustment
shall consist of the loop cost expense adjustments, including amounts
calculated pursuant to Secs. 36.612(a) and 36.631. The rate of increase
in total working loops shall be based upon the difference between the
number of total working loops on December 31 of the calendar year
preceding the July 31st filing and the number of total working loops on
December 31 of the second calendar year preceding that filing, both
calculated pursuant to Sec. 36.611(a)(8). Beginning January 1, 1999,
non-rural carriers shall no longer receive support pursuant to this
subpart F. Beginning January 1, 1999, the total loop cost expense
adjustment shall not exceed the total amount of the loop cost expense
adjustment provided to rural carriers for the immediately preceding
calendar year, adjusted to reflect the rate of change in the total
number of working loops of rural carriers during the calendar year
preceding the July filing. In addition, effective on January 1 of each
year, beginning January 1, 1999, the maximum annual amount of the total
loop cost expense adjustment for rural carriers must be further
increased or decreased to reflect:
(1) The addition of lines served by carriers that were classified
as non-rural in the prior year but which, in the current year, meet the
definition of ``rural telephone company;'' and
(2) The deletion of lines served by carriers that were classified
as rural in the prior year but which, in the current year, no longer
meet the definition of ``rural telephone company.'' A rural carrier is
defined as a carrier that meets the definition of a ``rural telephone
company'' in Sec. 51.5 of this chapter. Limitations imposed by this
subsection shall apply only to amounts calculated pursuant to this
subpart F.
4. Section 36.611 is revised to read as follows:
Sec. 36.611 Submission of information to the National Exchange Carrier
Association (NECA).
In order to allow determination of the study areas that are
entitled to an expense adjustment, each incumbent local exchange
carrier (ILEC) must provide the National Exchange Carrier Association
(NECA) (established pursuant to part 69 of this chapter) with the
information listed below for each of its study areas. This information
is to be filed with the Association by July 31st of each year. The
information filed on July 31st of each year will be used in the
jurisdictional allocations underlying the cost support data for the
access charge tariffs to be filed the following October. An incumbent
local exchange carrier is defined as a carrier that meets the
definition of an ``incumbent local exchange carrier'' in Sec. 51.5 of
this chapter.
(a) Unseparated, i.e., state and interstate, gross plant investment
in Exchange Line Cable and Wire Facilities (C&WF) Subcategory 1.3 and
Exchange Line Central Office (CO) Circuit Equipment Category 4.13. This
amount shall be calculated as of December 31st of the calendar year
preceding each July 31st filing.
(b) Unseparated accumulated depreciation and noncurrent deferred
federal income taxes, attributable to Exchange Line C&WF Subcategory
1.3 investment, and Exchange Line CO Circuit Equipment Category 4.13
investment. These amounts shall be calculated as of December 31st of
the calendar year preceding each July 31st filing, and shall be stated
separately.
(c) Unseparated depreciation expense attributable to Exchange Line
C&WF Subcategory 1.3 investment, and Exchange Line CO Circuit Equipment
Category 4.13 investment. This amount shall be the actual depreciation
expense for the calendar year preceding each July 31st filing.
(d) Unseparated maintenance expense attributable to Exchange Line
C&WF Subcategory 1.3 investment and Exchange Line CO Circuit Equipment
Category 4.13 investment. This amount shall be the actual repair
expense for the calendar year preceding each July 31st filing.
(e) Unseparated corporate operations expenses, operating taxes, and
the benefits and rent portions of operating expenses. The amount for
each of these categories of expense shall be the actual amount for that
expense for the calendar year preceding each July 31st filing. The
amount for each category of expense listed shall be stated separately.
(f) Unseparated gross telecommunications plant investment. This
amount shall be calculated as of December 31st of the calendar year
preceding each July 31st filing.
(g) Unseparated accumulated depreciation and noncurrent deferred
federal income taxes attributable to total unseparated
telecommunications plant investment. This amount shall be calculated as
of December 31st of the calendar year preceding each July 31st filing.
(h) The number of working loops for each study area. For universal
service support purposes, working loops are defined as the number of
working Exchange Line C&WF loops used jointly for exchange and message
telecommunications service, including C&WF subscriber lines associated
with pay telephones in C&WF Category 1, but excluding WATS closed end
access and TWX service. This figure shall be calculated as of December
31st of the calendar year preceding each July 31st filing.
5. Section 36.612 is amended by revising the introductory text of
paragraph (a) to read as follows:
Sec. 36.612 Updating information submitted to the National Exchange
Carrier Association.
(a) Any telecommunications company may update the information
submitted
[[Page 32948]]
to the National Exchange Carrier Association pursuant to
Sec. 36.611(a)(1) through (a)(8) of this part one or more times
annually on a rolling year basis. Carriers wishing to update the
preceding calendar year data filed July 31st may:
* * * * *
6. Section 36.613 is amended by revising the first sentence of the
introductory text of paragraph (a) to read as follows:
Sec. 36.613 Submission of information by the National Exchange Carrier
Association.
(a) On October 1 of each year, the National Exchange Carrier
Association shall file with the Commission and any other party
designated as the Permanent Administrator the information listed below.
* * *
7. Section 36.621 is amended by revising paragraph (a)(4) to read
as follows:
Sec. 36.621 Study area total unseparated loop cost.
(a) * * *
(4) Corporate Operations Expenses, Operating Taxes and the benefits
and rent portions of operating expenses, as reported in
Sec. 36.611(a)(5) attributable to investment in C&WF Category 1.3 and
COE Category 4.13. This amount is calculated by multiplying the total
amount of these expenses and taxes by the ratio of the unseparated
gross exchange plant investment in C&WF Category 1.3 and COE Category
4.13, as reported in Sec. 36.611(a)(1), to the unseparated gross
telecommunications plant investment, as reported in Sec. 36.611(a)(6).
Total Corporate Operations Expense, for purposes of calculating
universal service support payments beginning January 1, 1998, shall be
limited to the lesser of:
(i) The actual average monthly per-line Corporate Operations
Expense; or
(ii) A per-line amount computed according to paragraphs
(a)(4)(ii)(A) and (a)(4)(ii)(B) of this section. To the extent that
some carriers' corporate operations expenses are disallowed pursuant to
these limitations, the national average unseparated cost per loop shall
be adjusted accordingly.
(A) For study areas of 10,000 or fewer working loops; [$27.12 minus
(.002 times the number of working loops)] times 1.15.
(B) For study areas of more than 10,000 working loops; $7.12 times
1.15, which equals $8.19.
8. Section 36.622 is amended by revising paragraph (c) and adding
paragraph (d) to read as follows:
Sec. 36.622 National and study area average unseparated loop costs.
* * * * *
(c) The National Average Unseparated Loop Cost per Working Loop
shall be the greater of:
(1) The amount calculated pursuant to the method described in
paragraph (a) of this section; or
(2) An amount calculated to produce the maximum total Universal
Service Fund allowable pursuant to Sec. 36.601(c).
(d) Beginning January 1, 2000, the National Average Unseparated
Loop Cost per Working Loop shall be the greater of:
(1) The 1997 national-average unseparated loop cost per working
loop plus an annual inflation adjustment. The annual inflation
adjustment shall be based on the Gross Domestic Product Chained Price
Index (GDP-CPI) of the year which the loop costs are reported pursuant
to Sec. 36.611. As an example, the inflation-adjusted nationwide
average loop cost for the year 2000 shall be calculated in the
following manner:
1998 GDP-CPI 1997 GDP-CPI x 1997 nationwide average loop
cost = 2000 inflation-adjusted nationwide average loop cost.
or
(2) An amount calculated to produce the maximum total Universal
Service Fund allowable pursuant to Sec. 36.601(c).
9. In Sec. 36.701, paragraph (c) is added to read as follows:
Sec. 36.701 General
* * * * *
(c) This subpart shall be effective through December 31, 1997. On
January 1, 1998, Lifeline Connection Assistance shall be provided in
accordance with part 54, subpart E of this chapter.
10. Part 54 of Title 47 of the Code of Federal Regulations is added
to read as follows:
PART 54--UNIVERSAL SERVICE
Subpart A--General Information
Sec.
54.1 Basis and purpose.
54.5 Terms and definitions.
54.7 Intended use of federal universal service support.
Subpart B--Services Designated for Support
54.101 Supported services for rural, insular and high cost areas.
Subpart C--Carriers Eligible for Universal Service Support
54.201 Designation of eligible telecommunications carriers,
generally.
54.203 Designation of eligible telecommunications carriers for
unserved areas.
54.205 Relinquishment of universal service.
54.207 Service areas.
Subpart D--Universal Service Support for High Cost Areas
54.301 Local switching support.
54.303 Long term support.
54.305 Sale or transfer of exchanges.
54.307 Support to a competitive eligible telecommunications
carrier.
Subpart E--Universal Service Support for Low Income Consumers
54.400 Terms and definitions.
54.401 Lifeline defined.
54.403 Lifeline support amount.
54.405 Carrier obligation to offer Lifeline.
54.407 Reimbursement for offering Lifeline.
54.409 Consumer qualification for Lifeline.
54.411 Link up program defined.
54.413 Reimbursement for revenue forgone in offering a Link Up
program.
54.415 Consumer qualification for Link Up.
54.417 Transition to the new Lifeline and Link Up programs.
Subpart F--Universal Service Support for Schools and Libraries
54.500 Terms and definitions.
54.501 Eligibility for services provided by telecommunications
carriers.
54.502 Supported telecommunications services.
54.503 Other supported special services.
54.504 Requests for service.
54.505 Discounts.
54.507 Cap.
54.509 Adjustments to the discount matrix.
54.511 Ordering services.
54.513 Resale.
54.515 Distributing support.
54.516 Auditing.
54.517 Services provided by non-telecommunications carriers.
Subpart G--Universal Service Support for Health Care Providers
54.601 Eligibility.
54.603 Competitive bidding.
54.605 Determining the urban rate.
54.607 Determining the rural rate.
54.609 Calculating support.
54.611 Distributing support.
54.613 Limitations on supported services for rural health care
providers.
54.615 Obtaining services.
54.617 Resale.
54.619 Audit program.
54.621 Access to advanced telecommunications and
informationservices.
54.623 Cap.
Subpart H--Administration
54.701 Administrator of universal service support mechanisms.
54.703 Contributions.
54.705 De minimis exemption.
54.707 Audit controls.
Authority: 47 U.S.C. 1, 4(i), 201, 205, 214, and 254 unless
otherwise noted.
Subpart A--General Information
Sec. 54.1 Basis and purpose.
(a) Basis. These rules are issued pursuant to the Communications
Act of 1934, as amended.
[[Page 32949]]
(b) Purpose. The purpose of these rules is to implement section 254
of the Communications Act of 1934, as amended, 47 USC 254.
Sec. 54.5 Terms and definitions.
Terms used in this part have the following meanings:
Act. The term ``Act'' refers to the Communications Act of 1934, as
amended.
Administrator. The ``administrator'' is the entity that administers
the universal service support mechanisms in accord with subpart H of
this part.
Competitive eligible telecommunications carrier. A ``competitive
eligible telecommunications carrier'' is a carrier that meets the
definition of an ``eligible telecommunications carrier'' below and does
not meet the definition of an ``incumbent local exchange carrier'' in
Sec. 51.5 of this chapter.
Eligible telecommunications carrier. ``Eligible telecommunications
carrier'' means a carrier designated as such by a state commission
pursuant to Sec. 54.201.
Incumbent local exchange carrier. ``Incumbent local exchange
carrier'' or ``ILEC'' has the same meaning as that term is defined in
Sec. 51.5 of this chapter.
Information service. ``Information service'' is the offering of a
capability for generating, acquiring, storing, transforming,
processing, retrieving, utilizing, or making available information via
telecommunications, and includes electronic publishing, but does not
include any use of any such capability for the management, control, or
operation of a telecommunications system or the management of a
telecommunications service.
Internet access. ``Internet access'' includes the following
elements:
(1) The transmission of information as common carriage;
(2) The transmission of information as part of a gateway to an
information service, when that transmission does not involve the
generation or alteration of the content of information, but may include
data transmission, address translation, protocol conversion, billing
management, introductory information content, and navigational systems
that enable users to access information services, and that do not
affect the presentation of such information to users; and
(3) Electronic mail services (e-mail).
Interstate telecommunication. ``Interstate telecommunication'' is a
communication or transmission:
(1) From any State, Territory, or possession of the United States
(other than the Canal zone), or the District of Columbia, to any other
State, Territory, or possession of the United States (other than the
Canal Zone), or the District of Columbia,
(2) From or to the United States to or from the Canal Zone, insofar
as such communications or transmission takes place within the United
States, or
(3) Between points within the United States but through a foreign
country.
Interstate transmission. ``Interstate transmission'' is the same as
interstate telecommunication.
Intrastate telecommunication. ``Intrastate telecommunication'' is a
communication or transmission from within any State, Territory, or
possession of the United States, or the District of Columbia to a
location within that same State, Territory, or possession of the United
States, or the District of Columbia.
Intrastate transmission. ``Intrastate transmission'' is the same as
intrastate telecommunication.
LAN. ``LAN'' is a local area network, which is a set of high-speed
links connecting devices, generally computers, on a single shared
medium, usually on the user's premises.
Rural area. A ``rural area'' is a nonmetropolitan county or county
equivalent, as defined in the Office of Management and Budget's (OMB)
Revised Standards for Defining Metropolitan Areas in the 1990s and
identifiable from the most recent Metropolitan Statistical Area (MSA)
list released by OMB, or any contiguous non-urban Census Tract or Block
Numbered Area within an MSA-listed metropolitan county identified in
the most recent Goldsmith Modification published by the Office of Rural
Health Policy of the U.S. Department of Health and Human Services.
Rural telephone company. ``Rural telephone company'' has the same
meaning as that term is defined in Sec. 51.5 of this chapter.
State commission. The term ``state commission'' means the
commission, board or official (by whatever name designated) that, under
the laws of any state, has regulatory jurisdiction with respect to
intrastate operations of carriers.
Technically feasible. ``Technically feasible'' means capable of
accomplishment as evidenced by prior success under similar
circumstances. For example, preexisting access at a particular point
evidences the technical feasibility of access at substantially similar
points. A determination of technical feasibility does not consider
economic, accounting, billing, space or site except that space and site
may be considered if there is no possibility of expanding available
space.
Telecommunications. ``Telecommunications'' is the transmission,
between or among points specified by the user, of information of the
user's choosing, without change in the form or content of the
information as sent and received.
Telecommunications carrier. A ``telecommunications carrier'' is any
provider of telecommunications services, except that such term does not
include aggregators of telecommunications services as defined in
section 226 of the Act. A telecommunications carrier shall be treated
as a common carrier under the Act only to the extent that it is engaged
in providing telecommunications services, except that the Commission
shall determine whether the provision of fixed and mobile satellite
service shall be treated as common carriage. This definition includes
cellular mobile radio service (CMRS) providers, interexchange carriers
(IXCs) and, to the extent they are acting as telecommunications
carriers, companies that provide both telecommunications and
information services. Private mobile radio service (PMRS) providers are
telecommunications carriers to the extent they provide domestic or
international telecommunications for a fee directly to the public.
Telecommunications channel. ``Telecommunications channel'' means a
telephone line, or, in the case of wireless communications, a
transmittal line or cell site.
Telecommunications service. ``Telecommunications service'' is the
offering of telecommunications for a fee directly to the public, or to
such classes of users as to be effectively available directly to the
public, regardless of the facilities used.
Sec. 54.7 Intended use of federal universal service support.
A carrier that receives federal universal service support shall use
that support only for the provision, maintenance, and upgrading of
facilities and services for which the support is intended.
Subpart B--Services Designated for Support
Sec. 54.101 Supported services for rural, insular and high cost areas.
(a) Services designated for support. The following services or
functionalities shall be supported by Federal universal service support
mechanisms:
(1) Voice grade access to the public switched network. ``Voice
grade access'' is defined as a functionality that enables a user of
telecommunications services to
[[Page 32950]]
transmit voice communications, including signalling the network that
the caller wishes to place a call, and to receive voice communications,
including receiving a signal indicating there is an incoming call. For
purposes of this part, voice grade access shall occur within the
frequency range of between approximately 500 Hertz and 4,000 Hertz, for
a bandwidth of approximately 3,500 Hertz;
(2) Local usage. ``Local usage'' means an amount of minutes of use
of exchange service, prescribed by the Commission, provided free of
charge to end users;
(3) Dual tone multi-frequency signaling or its functional
equivalent. ``Dual tone multi-frequency'' (DTMF) is a method of
signaling that facilitates the transportation of signaling through the
network, shortening call set-up time;
(4) Single-party service or its functional equivalent. ``Single-
party service'' is telecommunications service that permits users to
have exclusive use of a wireline subscriber loop or access line for
each call placed, or, in the case of wireless telecommunications
carriers, which use spectrum shared among users to provide service, a
dedicated message path for the length of a user's particular
transmission;
(5) Access to emergency services. ``Access to emergency services''
includes access to services, such as 911 and enhanced 911, provided by
local governments or other public safety organizations. 911 is defined
as a service that permits a telecommunications user, by dialing the
three-digit code ``911,'' to call emergency services through a Public
Service Access Point (PSAP) operated by the local government.
``Enhanced 911'' is defined as 911 service that includes the ability to
provide automatic numbering information (ANI), which enables the PSAP
to call back if the call is disconnected, and automatic location
information (ALI), which permits emergency service providers to
identify the geographic location of the calling party. ``Access to
emergency services'' includes access to 911 and enhanced 911 services
to the extent the local government in an eligible carrier's service
area has implemented 911 or enhanced 911 systems;
(6) Access to operator services. ``Access to operator services'' is
defined as access to any automatic or live assistance to a consumer to
arrange for billing or completion, or both, of a telephone call;
(7) Access to interexchange service. ``Access to interexchange
service'' is defined as the use of the loop, as well as that portion of
the switch that is paid for by the end user, or the functional
equivalent of these network elements in the case of a wireless carrier,
necessary to access an interexchange carrier's network;
(8) Access to directory assistance. ``Access to directory
assistance'' is defined as access to a service that includes, but is
not limited to, making available to customers, upon request,
information contained in directory listings; and
(9) Toll limitation for qualifying low-income consumers. Toll
limitation for qualifying low-income consumers is described in subpart
E of this part.
(b) Requirement to offer all designated services. An eligible
telecommunications carrier must offer each of the services set forth in
paragraph (a) of this section in order to receive Federal universal
service support.
(c) Additional time to complete network upgrades. A state
commission may grant the petition of a telecommunications carrier that
is otherwise eligible to receive universal service support under
Sec. 54.201 requesting additional time to complete the network upgrades
needed to provide single-party service, access to enhanced 911 service,
or toll limitation. If such petition is granted, the otherwise eligible
telecommunications carrier will be permitted to receive universal
service support for the duration of the period designated by the state
commission. State commissions should grant such a request only upon a
finding that exceptional circumstances prevent an otherwise eligible
telecommunications carrier from providing single-party service, access
to enhanced 911 service, or toll limitation. The period should extend
only as long as the relevant state commission finds that exceptional
circumstances exist and should not extend beyond the time that the
state commission deems necessary for that eligible telecommunications
carrier to complete network upgrades. An otherwise eligible
telecommunications carrier that is incapable of offering one or more of
these three specific universal services must demonstrate to the state
commission that exceptional circumstances exist with respect to each
service for which the carrier desires a grant of additional time to
complete network upgrades.
Subpart C--Carriers Eligible for Universal Service Support
Sec. 54.201 Designation of eligible telecommunications carriers,
generally.
(a) Carriers eligible to receive support.
(1) Beginning January 1, 1998, only eligible telecommunications
carriers designated under paragraphs (b) through (d) of this section
shall receive universal service support distributed pursuant to part 36
and part 69 of this chapter, and subparts D and E of this part.
(2) Only eligible telecommunications carriers designated under
paragraphs (b) through (d) of this section shall receive universal
service support distributed pursuant to subpart G of this part. This
paragraph does not apply to support distributed pursuant to
Sec. 54.621(a).
(3) This paragraph does not apply to support distributed pursuant
to subpart F of this part.
(b) A state commission shall upon its own motion or upon request
designate a common carrier that meets the requirements of paragraph (d)
of this section as an eligible telecommunications carrier for a service
area designated by the state commission.
(c) Upon request and consistent with the public interest,
convenience, and necessity, the state commission may, in the case of an
area served by a rural telephone company, and shall, in the case of all
other areas, designate more than one common carrier as an eligible
telecommunications carrier for a service area designated by the state
commission, so long as each additional requesting carrier meets the
requirements of paragraph (d) of this section. Before designating an
additional eligible telecommunications carrier for an area served by a
rural telephone company, the state commission shall find that the
designation is in the public interest.
(d) A common carrier designated as an eligible telecommunications
carrier under this section shall be eligible to receive universal
service support in accordance with section 254 of the Act and shall,
throughout the service area for which the designation is received:
(1) Offer the services that are supported by federal universal
service support mechanisms under subpart B of this part and section
254(c) of the Act, either using its own facilities or a combination of
its own facilities and resale of another carrier's services (including
the services offered by another eligible telecommunications carrier);
and
(2) Advertise the availability of such services and the charges
therefore using media of general distribution.
(e) For the purposes of this section, the term facilities means any
physical components of the telecommunications network that are used in
the transmission or routing of the services
[[Page 32951]]
that are designated for support pursuant to subpart B of this part.
(f) For the purposes of this section, the term ``own facilities''
includes, but is not limited to, facilities obtained as unbundled
network elements pursuant to part 51 of this chapter, provided that
such facilities meet the definition of the term ``facilities'' under
this subpart.
(g) A state commission shall not require a common carrier, in order
to satisfy the requirements of paragraph (d)(1) of this section, to use
facilities that are located within the relevant service area, as long
as the carrier uses facilities to provide the services designated for
support pursuant to subpart B of this part within the service area.
(h) A state commission shall designate a common carrier that meets
the requirements of this section as an eligible telecommunications
carrier irrespective of the technology used by such carrier.
(i) A state commission shall not designate as an eligible
telecommunications carrier a telecommunications carrier that offers the
services supported by federal universal service support mechanisms
exclusively through the resale of another carrier's services.
Sec. 54.203 Designation of eligible telecommunications carriers for
unserved areas.
(a) If no common carrier will provide the services that are
supported by federal universal service support mechanisms under section
254(c) of the Act and subpart B of this part to an unserved community
or any portion thereof that requests such service, the Commission, with
respect to interstate services, or a state commission, with respect to
intrastate services, shall determine which common carrier or carriers
are best able to provide such service to the requesting unserved
community or portion thereof and shall order such carrier or carriers
to provide such service for that unserved community or portion thereof.
(b) Any carrier or carriers ordered to provide such service under
this section shall meet the requirements of section 54.201(d) and shall
be designated as an eligible telecommunications carrier for that
community or portion thereof.
Sec. 54.205 Relinquishment of universal service.
(a) A state commission shall permit an eligible telecommunications
carrier to relinquish its designation as such a carrier in any area
served by more than one eligible telecommunications carrier. An
eligible telecommunications carrier that seeks to relinquish its
eligible telecommunications carrier designation for an area served by
more than one eligible telecommunications carrier shall give advance
notice to the state commission of such relinquishment.
(b) Prior to permitting a telecommunications carrier designated as
an eligible telecommunications carrier to cease providing universal
service in an area served by more than one eligible telecommunications
carrier, the state commission shall require the remaining eligible
telecommunications carrier or carriers to ensure that all customers
served by the relinquishing carrier will continue to be served, and
shall require sufficient notice to permit the purchase or construction
of adequate facilities by any remaining eligible telecommunications
carrier. The state commission shall establish a time, not to exceed one
year after the state commission approves such relinquishment under this
section, within which such purchase or construction shall be completed.
Sec. 54.207 Service areas.
(a) The term service area means a geographic area established by a
state commission for the purpose of determining universal service
obligations and support mechanisms. A service area defines the overall
area for which the carrier shall receive support from federal universal
service support mechanisms.
(b) In the case of a service area served by a rural telephone
company, service area means such company's ``study area'' unless and
until the Commission and the states, after taking into account
recommendations of a Federal-State Joint Board instituted under section
410(c) of the Act, establish a different definition of service area for
such company.
(c) If a state commission proposes to define a service area served
by a rural telephone company to be other than such company's study
area, the Commission will consider that proposed definition in
accordance with the procedures set forth in this paragraph.
(1) A state commission or other party seeking the Commission's
agreement in redefining a service area served by a rural telephone
company shall submit a petition to the Commission. The petition shall
contain:
(i) The definition proposed by the state commission; and
(ii) The state commission's ruling or other official statement
presenting the state commission's reasons for adopting its proposed
definition, including an analysis that takes into account the
recommendations of any Federal-State Joint Board convened to provide
recommendations with respect to the definition of a service area served
by a rural telephone company.
(2) The Commission shall issue a Public Notice of any such petition
within fourteen (14) days of its receipt.
(3) The Commission may initiate a proceeding to consider the
petition within ninety (90) days of the release date of the Public
Notice.
(i) If the Commission initiates a proceeding to consider the
petition, the proposed definition shall not take effect until both the
state commission and the Commission agree upon the definition of a
rural service area, in accordance with paragraph (b) of this section
and section 214(e)(5) of the Act.
(ii) If the Commission does not act on the petition within ninety
(90) days of the release date of the Public Notice, the definition
proposed by the state commission will be deemed approved by the
Commission and shall take effect in accordance with state procedures.
(d) The Commission may, on its own motion, initiate a proceeding to
consider a definition of a service area served by a rural telephone
company that is different from that company's study area. If it
proposes such different definition, the Commission shall seek the
agreement of the state commission according to this paragraph.
(1) The Commission shall submit a petition to the state commission
according to that state commission's procedures. The petition submitted
to the relevant state commission shall contain:
(i) The definition proposed by the Commission; and
(ii) The Commission's decision presenting its reasons for adopting
the proposed definition, including an analysis that takes into account
the recommendations of any Federal-State Joint Board convened to
provide recommendations with respect to the definition of a service
area served by a rural telephone company.
(2) The Commission's proposed definition shall not take effect
until both the state commission and the Commission agree upon the
definition of a rural service area, in accordance with paragraph (b) of
this section and section 214(e)(5) of the Act.
(e) The Commission delegates its authority under paragraphs (c) and
(d) of this section to the Chief, Common Carrier Bureau.
Subpart D--Universal Service Support for High Cost Areas
Sec. 54.301 Local switching support.
Beginning January 1, 1998, eligible rural telephone company study
areas
[[Page 32952]]
with 50,000 or fewer access lines shall receive support for local
switching costs, defined as Category 3 local switching costs under part
36 of this chapter, using the following formula: the carrier's annual
unseparated local switching revenue requirement shall be multiplied by
the local switching support factor. The local switching support factor
shall be defined as the difference between the 1996 weighted interstate
DEM factor, calculated pursuant to Sec. 36.125(f) of this chapter, and
the 1996 unweighted interstate DEM factor. If the number of a study
area's access lines increases such that, under Sec. 36.125(f) of this
chapter, the weighted interstate DEM factor for 1997 or any successive
year would be reduced, that lower weighted interstate DEM factor shall
be applied to the carrier's 1996 unweighted interstate DEM factor to
derive a new local switching support factor. Beginning January 1, 1998,
the sum of the unweighted interstate DEM factor and the local switching
support factor shall not exceed .85. If the sum of those two factors
would exceed .85, the local switching support factor must be reduced to
a level that would reduce the sum of the factors to .85.
Sec. 54.303 Long term support.
Beginning January 1, 1998, eligible telephone companies that
participate in the NECA Carrier Common Line pool and competitive
eligible local telecommunications carriers will receive Long Term
Support. Long Term Support shall be the equivalent of the difference
between the projected Carrier Common Line revenue requirement of
association Common Line tariff participants and the projected revenue
recovered by the association Common Carrier Line charge as calculated
pursuant to Sec. 69.105(b)(1) of this chapter. For calendar years 1998
and 1999, the Long Term Support for each eligible service area shall be
adjusted each year to reflect the annual percentage change in the
actual nationwide average loop cost as filed by the fund administrator
in the previous calendar year, pursuant to Sec. 36.622 of this chapter.
Beginning January 1, 2000, the Long Term Support shall be adjusted each
year to reflect the annual percentage change in the Department of
Commerce's Gross Domestic Product-Chained Price Index (GDP-CPI).
Sec. 54.305 Sale or transfer of exchanges.
A carrier that acquires telephone exchanges from an unaffiliated
carrier shall receive universal service support for the acquired
exchanges at the same per-line support levels for which those exchanges
were eligible prior to the transfer of the exchanges. A carrier that
has entered into a binding commitment to buy exchanges prior to May 7,
1997 will receive support for the newly acquired lines based upon the
average cost of all of its lines, both those newly acquired and those
it had prior to execution of the sales agreement.
Sec. 54.307 Support to a competitive eligible telecommunications
carrier.
(a) Calculation of support. A competitive eligible
telecommunications carrier shall receive universal service support to
the extent that the competitive eligible telecommunications carrier
captures an incumbent local exchange carrier's (ILEC) subscriber lines
or serves new subscriber lines in the ILEC's service area.
(1) A competitive eligible telecommunications carrier shall receive
support for each line it serves based on the support the ILEC receives
for each line.
(2) The ILEC's per-line support shall be calculated by dividing the
ILEC's universal service support by the number of loops served by that
ILEC at its most recent annual loop count.
(3) A competitive eligible telecommunications carrier that uses
switching functionalities purchased as unbundled network elements
pursuant to Sec. 51.307 of this chapter to provide the supported
services shall receive the lesser of the unbundled network element
price for switching or the per-line DEM support of the ILEC, if any. A
competitive eligible telecommunications carrier that uses loops
purchased as unbundled network elements pursuant to Sec. 51.307 of this
chapter to provide the supported services shall receive the lesser of
the unbundled network element price for the loop or the ILEC's per-line
payment from the high cost loop support and LTS, if any. The ILEC
providing nondiscriminatory access to unbundled network elements to
such competitive eligible telecommunications carrier shall receive the
difference between the level of universal service support provided to
the competitive eligible telecommunications carrier and the per-
customer level of support previously provided to the ILEC.
(4) A competitive eligible telecommunications carrier that provides
the supported services using neither unbundled network elements
purchased pursuant to Sec. 51.307 of this chapter nor wholesale service
purchased pursuant to section 251(c)(4) of the Act will receive the
full amount of universal service support previously provided to the
ILEC for that customer.
(b) Submission of information to the Administrator. In order to
receive universal service support, a competitive eligible
telecommunications carrier must provide the Administrator on or before
July 31st of each year the number of working loops it serves in a
service area. For universal service support purposes, working loops are
defined as the number of working Exchange Line C&WF loops used jointly
for exchange and message telecommunications service, including C&WF
subscriber lines associated with pay telephones in C&WF Category 1, but
excluding WATS closed end access and TWX service. This figure shall be
calculated as of December 31st of the year preceding each July 31st
filing.
Subpart E--Universal Service Support for Low-Income Consumers
Sec. 54.400 Terms and definitions.
As used in this subpart, the following terms shall be defined as
follows:
(a) Qualifying low-income subscriber. A ``qualifying low-income
subscriber'' is a subscriber who meets the low-income eligibility
criteria established by the state commission, or, in states that do not
provide state Lifeline support, a subscriber who participates in one of
the following programs: Medicaid; food stamps; supplemental security
income; federal public housing assistance; or Low-Income Home Energy
Assistance Program.
(b) Toll blocking. ``Toll blocking'' is a service provided by
carriers that lets consumers elect not to allow the completion of
outgoing toll calls from their telecommunications channel.
(c) Toll control. ``Toll control'' is a service provided by
carriers that allows consumers to specify a certain amount of toll
usage that may be incurred on their telecommunications channel per
month or per billing cycle.
(d) Toll limitation. ``Toll limitation'' denotes both toll blocking
and toll control.
Sec. 54.401 Lifeline defined.
(a) As used in this subpart, Lifeline means a retail local service
offering:
(1) That is available only to qualifying low-income consumers;
(2) For which qualifying low-income consumers pay reduced charges
as a result of application of the Lifeline support amount described in
Sec. 54.403; and
(3) That includes the services or functionalities enumerated in
Sec. 54.101 (a)(1) through (a)(9). The carriers shall offer toll
limitation to all qualifying low-
[[Page 32953]]
income consumers at the time such consumers subscribe to Lifeline
service. If the consumer elects to receive toll limitation, that
service shall become part of that consumer's Lifeline service.
(b) Eligible telecommunications carriers may not disconnect
Lifeline service for non-payment of toll charges.
(1) State commissions may grant a waiver of this requirement if the
local exchange carrier can demonstrate that:
(i) It would incur substantial costs in complying with this
requirement;
(ii) It offers toll limitation to its qualifying low-income
consumers without charge; and
(iii) Telephone subscribership among low-income consumers in the
carrier's service area is greater than or equal to the national
subscribership rate for low-income consumers. For purposes of this
paragraph, a low-income consumer is one with an income below the
poverty level for a family of four residing in the state for which the
carrier seeks the waiver. The carrier may reapply for the waiver.
(2) A carrier may file a petition for review of the state
commission's decision with the Commission within 30 days of that
decision. If a state commission has not acted on a petition for a
waiver of this requirement within 30 days of its filing, the carrier
may file that petition with the Commission on the 31st day after that
initial filing.
(c) Eligible telecommunications carriers may not collect a service
deposit in order to initiate Lifeline service, if the qualifying low-
income consumer voluntarily elects toll blocking from the carrier,
where available. If toll blocking is unavailable, the carrier may
charge a service deposit.
(d) The state commission shall file or require the carrier to file
information with the Administrator demonstrating that the carrier's
Lifeline plan meets the criteria set forth in this subpart and stating
the number of qualifying low-income consumers and the amount of state
assistance. Lifeline assistance shall be made available to qualifying
low-income consumers as soon as the Administrator certifies that the
carrier's Lifeline plan satisfies the criteria set out in this Subpart.
Sec. 54.403 Lifeline support amount.
(a) The federal baseline Lifeline support amount shall equal $3.50
per qualifying low-income consumer. If the state commission approves an
additional reduction of $1.75 in the amount paid by consumers,
additional federal Lifeline support in the amount of $1.75 will be made
available to the carrier providing Lifeline service to that consumer.
Additional federal Lifeline support in an amount equal to one-half the
amount of any state Lifeline support will be made available to the
carrier providing Lifeline service to a qualifying low-income consumer
if the state commission approves an additional reduction in the amount
paid by that consumer equal to the state support multiplied by 1.5. The
federal Lifeline support amount shall not exceed $7.00 per qualifying
low-income consumer.
(b) Eligible carriers that charge federal End-User Common Line
charges or equivalent federal charges shall apply the federal baseline
Lifeline support to waive Lifeline consumers' federal End-User Common
Line charges. Such carriers shall apply any additional federal support
amount to a qualifying low-income consumer's intrastate rate, if the
state has approved of such additional support. Other carriers shall
apply the federal baseline Lifeline support amount, plus the additional
support amount, where applicable, to reduce their lowest tariffed (or
otherwise generally available) residential rate for the services
enumerated in Sec. 54.101(a)(1) through (a)(9), and charge Lifeline
consumers the resulting amount.
(c) Lifeline support for providing toll limitation shall equal the
eligible telecommunications carrier's incremental cost of providing
either toll blocking or toll control, whichever is selected by the
particular consumer.
Sec. 54.405 Carrier obligation to offer Lifeline.
All eligible telecommunications carriers shall make available
Lifeline service, as defined in Sec. 54.401, to qualifying low-income
consumers.
Sec. 54.407 Reimbursement for offering Lifeline.
(a) Universal service support for providing Lifeline shall be
provided directly to the eligible telecommunications carrier, based on
the number of qualifying low-income consumers it serves, under
administrative procedures determined by the Administrator.
(b) The eligible telecommunications carrier may receive universal
service support reimbursement for each qualifying low-income consumer
served. For each consumer receiving Lifeline service, the reimbursement
amount shall equal the federal support amount, including the support
amount described in Sec. 54.403(c). The eligible telecommunications
carrier's universal service support reimbursement shall not exceed the
carrier's standard, non-Lifeline rate.
(c) In order to receive universal service support reimbursement,
the eligible telecommunications carrier must keep accurate records of
the revenues it forgoes in providing Lifeline in conformity with
Sec. 54.401. Such records shall be kept in the form directed by the
Administrator and provided to the Administrator at intervals as
directed by the Administrator or as provided in this Subpart.
Sec. 54.409 Consumer qualification for Lifeline.
(a) To qualify to receive Lifeline service in states that provide
state Lifeline service support, a consumer must meet the criteria
established by the state commission. The state commission shall
establish narrowly targeted qualification criteria that are based
solely on income or factors directly related to income.
(b) To qualify to receive Lifeline in states that do not provide
state Lifeline support, a consumer must participate in one of the
following programs: Medicaid; food stamps; Supplemental Security
Income; federal public housing assistance; or Low-Income Home Energy
Assistance Program. In states not providing state Lifeline support,
each carrier offering Lifeline service to a consumer must obtain that
consumer's signature on a document certifying under penalty of perjury
that consumer receives benefits from one of the programs mentioned in
this paragraph and identifying the program or programs from which that
consumer receives benefits. On the same document, a qualifying low-
income consumer also must agree to notify the carrier if that consumer
ceases to participate in the program or programs.
Sec. 54.411 Link Up program defined.
(a) For purposes of this subpart, the term ``Link Up'' shall
describe the following assistance program for qualifying low-income
consumers, which an eligible telecommunications carrier shall offer as
part of its obligation set forth in Secs. 54.101(a)(9) and 54.101(b):
(1) A reduction in the carrier's customary charge for commencing
telecommunications service for a single telecommunications connection
at a consumer's principal place of residence. The reduction shall be
half of the customary charge or $30.00, whichever is less; and
(2) A deferred schedule for payment of the charges assessed for
commencing service, for which the consumer does not pay interest. The
interest charges not assessed to the consumer shall be
[[Page 32954]]
for connection charges of up to $200.00 that are deferred for a period
not to exceed one year. Charges assessed for commencing service include
any charges that the carrier customarily assesses to connect
subscribers to the network. These charges do not include any
permissible security deposit requirements.
(b) A qualifying low-income consumer may choose one or both of the
programs set forth in paragraph (a) of this section.
(c) A carrier's Link Up program shall allow a consumer to receive
the benefit of the Link Up program for a second or subsequent time only
for a principal place of residence with an address different from the
residence address at which the Link Up assistance was provided
previously.
Sec. 54.413 Reimbursement for revenue forgone in offering a Link Up
program.
(a) Eligible telecommunications carriers may receive universal
service support reimbursement for the revenue they forgo in reducing
their customary charge for commencing telecommunications service and
for providing a deferred schedule for payment of the charges assessed
for commencing service for which the consumer does not pay interest, in
conformity with Sec. 54.411.
(b) In order to receive universal service support reimbursement for
providing Link Up, eligible telecommunications carriers must keep
accurate records of the revenues they forgo in reducing their customary
charge for commencing telecommunications service and for providing a
deferred schedule for payment of the charges assessed for commencing
service for which the consumer does not pay interest, in conformity
with Sec. 54.411. Such records shall be kept in the form directed by
the Administrator and provided to the Administrator at intervals as
directed by the Administrator or as provided in this subpart. The
forgone revenues for which the eligible telecommunications carrier may
receive reimbursement shall include only the difference between the
carrier's customary connection or interest charges and the charges
actually assessed to the participating low-income consumer.
Sec. 54.415 Consumer qualification for Link Up.
(a) In states that provide state Lifeline service, the consumer
qualification criteria for Link Up shall be the same criteria that the
state established for Lifeline qualification in accord with
Sec. 54.409(a).
(b) In states that do not provide state Lifeline service, the
consumer qualification criteria for Link Up shall be the same as the
criteria set forth in Sec. 54.409(b).
Sec. 54.417 Transition to the new Lifeline and Link Up programs.
The rules in this subpart shall take effect on January 1, 1998.
Subpart F--Universal Service Support for Schools and Libraries
Sec. 54.500 Terms and definitions.
Terms used in this subpart have the following meanings:
(a) Elementary school. An ``elementary school'' is a non-profit
institutional day or residential school that provides elementary
education, as determined under state law.
(b) Internal connections. A given service is eligible for support
as a component of the institution's internal connections only if it is
necessary to transport information to individual classrooms. Thus,
internal connections includes items such as routers, hubs, network file
servers, and wireless LANs and their installation and basic maintenance
because all are needed to switch and route messages within a school or
library.
(c) Library. A ``library'' includes:
(1) A public library;
(2) A public elementary school or secondary school library;
(3) An academic library;
(4) A research library, which for the purposes of this definition
means a library that:
(i) Makes publicly available library services and materials
suitable for scholarly research and not otherwise available to the
public; and
(ii) Is not an integral part of an institution of higher education;
and
(5) A private library, but only if the state in which such private
library is located determines that the library should be considered a
library for the purposes of this definition.
(d) Library consortium. A ``library consortium'' is any local,
statewide, regional, or interstate cooperative association of libraries
that provides for the systematic and effective coordination of the
resources of school, public, academic, and special libraries and
information centers, for improving services to the clientele of such
libraries. For the purposes of these rules, references to library will
also refer to library consortium.
(e) Lowest corresponding price. ``Lowest corresponding price'' is
the lowest price that a service provider charges to non-residential
customers who are similarly situated to a particular school, library,
or library consortium for similar services.
(f) National school lunch program. The ``national school lunch
program'' is a program administered by the U.S. Department of
Agriculture and state agencies that provides free or reduced price
lunches to economically disadvantaged children. A child whose family
income is between 130 percent and 185 percent of applicable family size
income levels contained in the nonfarm poverty guidelines prescribed by
the Office of Management and Budget is eligible for a reduced price
lunch. A child whose family income is 130 percent or less of applicable
family size income levels contained in the nonfarm income poverty
guidelines prescribed by the Office of Management and Budget is
eligible for a free lunch.
(g) Pre-discount price. The ``pre-discount price'' means, in this
subpart, the price the service provider agrees to accept as total
payment for its telecommunications or information services. This amount
is the sum of the amount the service provider expects to receive from
the eligible school or library and the amount it expects to receive as
reimbursement from the universal service support mechanisms for the
discounts provided under this subpart.
(h) Secondary school. A ``secondary school'' is a non-profit
institutional day or residential school that provides secondary
education, as determined under state law. A secondary school does not
offer education beyond grade 12.
Sec. 54.501 Eligibility for services provide by telecommunications
carriers.
(a) Telecommunications carriers shall be eligible for universal
service support under this subpart for providing supported services to
eligible schools, libraries, and consortia including those entities.
(b) Schools.
(1) Only schools meeting the statutory definitions of ``elementary
school,'' as defined in 20 U.S.C. 8801(14), or ``secondary school,'' as
defined in 20 U.S.C. 8801(25), and not excluded under paragraphs (a)(2)
or (a)(3) of this section shall be eligible for discounts on
telecommunications and other supported services under this subpart.
(2) Schools operating as for-profit businesses shall not be
eligible for discounts under this subpart.
(3) Schools with endowments exceeding $50,000,000 shall not be
eligible for discounts under this subpart.
(c) Libraries:
[[Page 32955]]
(1) Only libraries eligible for assistance from a State library
administrative agency under the Library Services and Technology Act
(Pub. L. 104-208) and not excluded under paragraphs (b)(2) or (b)(3) of
this section shall be eligible for discounts under this subpart.
(2) A library's eligibility for universal service funding shall
depend on its funding as an independent entity. Only libraries whose
budgets are completely separate from any schools (including, but not
limited to, elementary and secondary schools, colleges, and
universities) shall be eligible for discounts as libraries under this
subpart.
(3) Libraries operating as for-profit businesses shall not be
eligible for discounts under this subpart.
(d) Consortia:
(1) For purposes of seeking competitive bids for telecommunications
services, schools and libraries eligible for support under this subpart
may form consortia with other eligible schools and libraries, with
health care providers eligible under subpart G of this part, and with
public sector (governmental) entities, including, but not limited to,
state colleges and state universities, state educational broadcasters,
counties, and municipalities, when ordering telecommunications and
other supported services under this subpart. With one exception,
eligible schools and libraries participating in consortia with
ineligible private sector members shall not be eligible for discounts
for interstate services under this subpart. A consortium may include
ineligible private sector entities if the pre-discount prices of any
services that such consortium receives from ILECs are generally
tariffed rates.
(2) For consortia, discounts under this subpart shall apply only to
the portion of eligible telecommunications and other supported services
used by eligible schools and libraries.
(3) State agencies may receive discounts on the purchase of
telecommunications and information services that they make on behalf of
and for the direct use of eligible schools and libraries, as through
state networks.
(4) Service providers shall keep and retain records of rates
charged to and discounts allowed for eligible schools and libraries--on
their own or as part of a consortium. Such records shall be available
for public inspection.
Sec. 54.502 Supported telecommunications services.
For the purposes of this subpart, supported telecommunications
services provided by telecommunications carriers include all
commercially available telecommunications services.
Sec. 54.503 Other supported special services.
For the purposes of this subpart, other supported special services
provided by telecommunications carriers include Internet access and
installation and maintenance of internal connections.
Sec. 54.504 Requests for service.
(a) Competitive bidding requirement. All eligible schools,
libraries, and consortia including those entities shall participate in
a competitive bidding process, pursuant to the requirements established
in this subpart, but this requirement shall not preempt state or local
competitive bidding requirements.
(b) Posting of requests for service. (1) Schools, libraries, and
consortia including those entities wishing to receive discounts for
eligible services under this subpart shall submit requests for services
to a subcontractor designated by the administrator for this purpose.
Requests for services shall include, at a minimum, the following
information, to the extent applicable to the services requested:
(i) The computer equipment currently available or budgeted for
purchase for the current, next, or other future academic years, as well
as whether the computers have modems and, if so, what speed modems;
(ii) The internal connections, if any, that the school or library
has in place or has budgeted to install in the current, next, or future
academic years, or any specific plans for an organized voluntary effort
to connect the classrooms;
(iii) The computer software necessary to communicate with other
computers over an internal network and over the public
telecommunications network currently available or budgeted for purchase
for the current, next, or future academic years;
(iv) The experience of, and training received by, the relevant
staff in the use of the equipment to be connected to the
telecommunications network and training programs for which funds are
committed for the current, next, or future academic years;
(v) Existing or budgeted maintenance contracts to maintain
computers; and
(vi) The capacity of the school's or library's electrical system in
terms of how many computers can be operated simultaneously without
creating a fire hazard.
(2) The request for services shall be signed by the person
authorized to order telecommunications and other supported services for
the school or library and shall include that person's certification
under oath that:
(i) The school or library is an eligible entity under
Secs. 254(h)(4) and 254(h)(5) of the Act and the rules adopted under
this subpart;
(ii) The services requested will be used solely for educational
purposes;
(iii) The services will not be sold, resold, or transferred in
consideration for money or any other thing of value;
(iv) If the services are being purchased as part of an aggregated
purchase with other entities, the request identifies all co-purchasers
and the services or portion of the services being purchased by the
school or library;
(v) All of the necessary funding in the current funding year has
been budgeted and approved to pay for the ``non-discount'' portion of
requested connections and services as well as any necessary hardware,
software, and to undertake the necessary staff training required to use
the services effectively;
(vi) The school, library, or consortium including those entities
has complied with all applicable state and local procurement processes;
and
(vii) The school, library, or consortium including those entities
has a technology plan that has been certified by its state or an
independent entity approved by the Commission.
(3) After posting a description of services from a school, library,
or consortium of these entities on the school and library website, the
administrator's subcontractor shall send confirmation of the posting to
the entity requesting services. That entity shall then wait at least
four weeks from the date on which its description of services is posted
on the website before making commitments with the selected providers of
services. The confirmation from the administrator shall include the
date after which the requestor may sign a contract with its chosen
provider(s).
(c) Rate disputes. Schools, libraries, and consortia including
those entities, and service providers may have recourse to the
Commission, regarding interstate rates, and to state commissions,
regarding intrastate rates, if they reasonably believe that the lowest
corresponding price is unfairly high or low.
(1) Schools, libraries, and consortia including those entities may
request lower rates if the rate offered by the carrier does not
represent the lowest corresponding price.
(2) Service providers may request higher rates if they can show
that the lowest corresponding price is not compensatory, because the
relevant school, library, or consortium including those entities is not
similarly situated to
[[Page 32956]]
and subscribing to a similar set of services to the customer paying the
lowest corresponding price.
Sec. 54.505 Discounts.
(a) Discount mechanism. Discounts for eligible schools and
libraries shall be set as a percentage discount from the pre-discount
price.
(b) Discount percentages. The discounts available to eligible
schools and libraries shall range from 20 percent to 90 percent of the
pre-discount price for all eligible services provided by eligible
providers, as defined in this subpart. The discounts available to a
particular school, library, or consortium of only such entities shall
be determined by indicators of poverty and high cost.
(1) For schools and school districts, the level of poverty shall be
measured by the percentage of their student enrollment that is eligible
for a free or reduced price lunch under the national school lunch
program or a federally-approved alternative mechanism. School districts
applying for eligible services on behalf of their individual schools
may calculate the district-wide percentage of eligible students using a
weighted average. For example, a school district would divide the total
number of students in the district eligible for the national school
lunch program by the total number of students in the district to
compute the district-wide percentage of eligible students.
Alternatively, the district could apply on behalf of individual schools
and use the respective percentage discounts for which the individual
schools are eligible.
(2) For libraries and library consortia, the level of poverty shall
be based on the percentage of the student enrollment that is eligible
for a free or reduced price lunch under the national school lunch
program or a federally-approved alternative mechanism in the public
school district in which they are located. If the library is not in a
school district then its level of poverty shall be based on an average
of the percentage of students eligible for the national school lunch
program in each of the school districts that children living in the
library's location attend. Library systems applying for discounted
services on behalf of their individual branches shall calculate the
system-wide percentage of eligible families using an unweighted average
based on the percentage of the student enrollment that is eligible for
a free or reduced price lunch under the national school lunch program
in the public school district in which they are located for each of
their branches or facilities.
(3) The administrator shall classify schools and libraries as
``urban'' or ``rural'' based on location in an urban or rural area,
according to the following designations.
(i) Schools and libraries located in metropolitan counties, as
measured by the Office of Management and Budget's Metropolitan
Statistical Area method, shall be designated as urban, except for those
schools and libraries located within metropolitan counties identified
by census block or tract in the Goldsmith Modification.
(ii) Schools and libraries located in non-metropolitan counties, as
measured by the Office of Management and Budget's Metropolitan
Statistical Area method, shall be designated as rural. Schools and
libraries located in rural areas within metropolitan counties
identified by census block or tract in the Goldsmith Modification shall
also be designated as rural.
(c) Matrix. The administrator shall use the following matrix to set
a discount rate to be applied to eligible interstate services purchased
by eligible schools, school districts, libraries, or library consortia
based on the institution's level of poverty and location in an
``urban'' or ``rural'' area.
----------------------------------------------------------------------------------------------------------------
Schools and Libraries discount matrix Discount level
----------------------------------------------------------------------------------------------------------------
How disadvantaged?
--------------------------------------------------------------------------- Urban discount Rural discount
% of students eligible for national school lunch program
----------------------------------------------------------------------------------------------------------------
<1........................................................................ 20 25
1-19...................................................................... 40 50
20-34..................................................................... 50 60
35-49..................................................................... 60 70
50-74..................................................................... 80 80
75-100.................................................................... 90 90
----------------------------------------------------------------------------------------------------------------
(d) Consortia. Consortia applying for discounted services on behalf
of their members shall calculate the portion of the total bill eligible
for a discount using a weighted average based on the share of the pre-
discount price for which each eligible school or library agrees to be
financially liable. Each eligible school, school district, library or
library consortia will be credited with the discount to which it is
entitled.
(e) Interstate and intrastate services. Federal universal service
support for schools and libraries shall be provided for both interstate
and intrastate services.
(1) Federal universal service support under this subpart for
eligible schools and libraries in a state is contingent upon the
establishment of intrastate discounts no less than the discounts
applicable for interstate services.
(2) A state may, however, secure a temporary waiver of this latter
requirement based on unusually compelling conditions.
Sec. 54.507 Cap.
(a) Amount of the annual cap. The annual cap on federal universal
service support for schools and libraries shall be $2.25 billion per
funding year, and all funding authority for a given funding year that
is unused shall be carried forward into subsequent years for use in
accordance with demand, as determined by the administrator, with two
exceptions. First, no more than $1 billion shall be collected or spent
for the funding period from January 1, 1998 through June 30, 1998.
Second, no more than half of the unused portion of the funding
authority for calendar year 1998 shall be spent in calendar year 1999,
and no more than half of the unused funding authority from calendar
years 1998 and 1999 shall be used in calendar year 2000.
(b) Funding year. The funding year for purposes of the schools and
libraries cap shall be the calendar year.
(c) Requests. Funds shall be available to fund discounts for
eligible schools and libraries and consortia of such eligible entities
on a first-come-first-served basis, with requests accepted beginning on
the first of July prior to each funding year. The administrator's
subcontractor shall maintain a running tally of the funds that the
administrator has already committed for the existing
[[Page 32957]]
funding year on the school and library website.
(d) Annual filing requirement. Schools and libraries, and consortia
of such eligible entities shall file new funding requests for each
funding year no sooner than the July 1 prior to the start of that
funding year.
(e) Long term contracts. If schools and libraries enter into long
term contracts for eligible services, the administrator shall only
commit funds to cover the pro rata portion of such a long term contract
scheduled to be delivered during the funding year for which universal
service support is sought.
(f) Rules of priority. When expenditures in any funding year reach
the level where only $250 million remains before the cap will be
reached, funds shall be distributed in accordance to the following
rules of priority:
(1) The administrator's subcontractor shall post a message on the
school and library website, notify the Commission, and take reasonable
steps to notify the educational and library communities that
commitments for the remaining $250 million of support will only be made
to the most economically disadvantaged schools and libraries (those in
the two most disadvantaged categories) for the next 30 days or the
remainder of the funding year, whichever is shorter.
(2) The most economically disadvantaged schools and libraries
(those in the two most disadvantaged categories) that have not received
discounts from the universal service support mechanism in the previous
or current funding years shall have exclusive rights to secure
commitments for universal service support under this subpart for a 30-
day period or the remainder of the funding year, whichever is shorter.
If such schools and libraries have received universal service support
only for basic telephone service in the previous or current funding
years, they shall remain eligible for the highest priority once
spending commitments leave only $250 million remaining before the
funding cap is reached.
(3) Other economically disadvantaged schools and libraries (those
in the two most disadvantaged categories) that have received discounts
from the universal service support mechanism in the previous or current
funding years shall have the next highest priority, if additional funds
are available at the end of the 30-day period or the funding year,
whichever is shorter.
(4) If funds still remain after all requests submitted by schools
and libraries described in paragraphs (f)(2) and (f)(3) of this section
during the 30-day period have been met, the administrator shall
allocate the remaining available funds to all other eligible schools
and libraries in the order in which their requests have been received,
until the $250 million is exhausted or the funding year ends.
Sec. 54.509 Adjustments to the discount matrix.
(a) Estimating future spending requests. When submitting their
requests for specific amounts of funding for a funding year, schools,
libraries, library consortia, and consortia including such entities
shall also estimate their funding requests for the following funding
year to enable the administrator to estimate funding demand for the
following year.
(b) Reduction in percentage discounts. If the estimates schools and
libraries make of their future funding needs lead the Administrator to
predict that total funding requests for a funding year will exceed the
available funding then the Administrator shall calculate the percentage
reduction to all schools and libraries, except those in the two most
disadvantaged categories, necessary to permit all requests in the next
funding year to be fully funded. The administrator must then request
the Commission's approval of the recommended adjustments.
(c) Remaining funds. If funds remain under the cap at the end of
the funding year in which discounts have been reduced below those set
in the matrices above, the administrator shall consult with the
Commission to establish the best way to distribute those funds.
Sec. 54.511 Ordering services.
(a) Selecting a provider of eligible services. In selecting a
provider of eligible services, schools, libraries, library consortia,
and consortia including any of those entities shall carefully consider
all bids submitted and may consider relevant factors other than the
pre-discount prices submitted by providers.
(b) Lowest corresponding price. Providers of eligible services
shall not charge schools, school districts, libraries, library
consortia, and consortia including any of those entities a price above
the lowest corresponding price for supported services, unless the
Commission, with respect to interstate services or the state commission
with respect to intrastate services, finds that the lowest
corresponding price is not compensatory.
(c) Schools and libraries bound by existing contracts. Schools and
libraries bound by existing contracts for service shall not be required
to breach those contracts in order to qualify for discounts under this
subpart during the period for which they are bound. This exemption from
competitive bidding requirements, however, shall not apply to voluntary
extensions of existing contracts.
Sec. 54.513 Resale.
(a) Prohibition on resale. Eligible services purchased at a
discount under this subpart shall not be sold, resold, or transferred
in consideration of money or any other thing of value.
(b) Permissible fees. This prohibition on resale shall not bar
schools, school districts, libraries, and library consortia from
charging either computer lab fees or fees for classes in how to
navigate over the Internet. There is no prohibition on the resale of
services that are not purchased pursuant to the discounts provided in
this subpart.
Sec. 54.515 Distributing support.
(a) A telecommunications carrier providing services eligible for
support under this subpart to eligible schools and libraries shall
treat the amount eligible for support under this subpart as an offset
against the carrier's universal service support obligation for the year
in which the costs for providing eligible services were incurred.
(b) If the total amount of support owed to a carrier, as set forth
in paragraph (a) of this section, exceeds its universal service
obligation, calculated on an annual basis, the carrier may receive a
direct reimbursement in the amount of the difference.
(c) Any reimbursement due a carrier shall be made after the offset
is credited against that carrier's universal service obligation.
(d) Any reimbursement due a carrier shall be submitted to that
carrier no later than the end of the first quarter of the calendar year
following the year in which the costs were incurred and the offset
against the carrier's universal service obligation was applied.
Sec. 54.516 Auditing.
(a) Recordkeeping requirements. Schools and libraries shall be
required to maintain for their purchases of telecommunications and
other supported services at discounted rates the kind of procurement
records that they maintain for other purchases.
(b) Production of records. Schools and libraries shall produce such
records at the request of any auditor appointed by a state education
department, the administrator, or any state or federal agency with
jurisdiction.
(c) Random audits. Schools and libraries shall be subject to random
[[Page 32958]]
compliance audits to evaluate what services they are purchasing and how
such services are being used.
Sec. 54.517 Services provided by non-telecommunications carriers.
(a) Non-telecommunications carriers shall be eligible for universal
service support under this subpart for providing covered services for
eligible schools, libraries and consortia including those entities.
(b) Supported services. Non-telecommunications carriers shall be
eligible for universal service support under this subpart for providing
Internet access and installation and maintenance of internal
connections.
(c) Requirements. Such services provided by non-telecommunications
carriers shall be subject to all the provisions of this subpart, except
Secs. 54.501(a), 54.502, 54.503, 54.515.
Subpart G--Universal Service Support for Health Care Providers
Sec. 54.601 Eligibility.
(a) Health care providers. (1) Only an entity meeting the
definition of ``health care provider'' as defined in this section shall
be eligible to receive supported services under this subpart.
(2) For purposes of this subpart, a ``health care provider'' is
any:
(i) Post-secondary educational institution offering health care
instruction, including a teaching hospital or medical school;
(ii) Community health center or health center providing health care
to migrants;
(iii) Local health department or agency;
(iv) Community mental health center;
(v) Not-for-profit hospital;
(vi) Rural health clinic; or
(vii) Consortium of health care providers consisting of one or more
entities described in paragraphs (a)(2)(i) through (a)(2)(vi) of this
section.
(3) Only public or non-profit health care providers shall be
eligible to receive supported services under this subpart.
(4) Except with regard to those services provided under
Sec. 54.621, only a rural health care provider shall be eligible to
receive supported services under this subpart. A ``rural health care
provider'' is a health care provider located in a rural area, as
defined in this part.
(5) Each separate site or location of a health care provider shall
be considered an individual health care provider for purposes of
calculating and limiting support under this subpart.
(b) Consortia. (1) An eligible health care provider may join a
consortium with other eligible health care providers; with schools,
libraries, and library consortia eligible under Subpart F; and with
public sector (governmental) entities to order telecommunications
services. With one exception, eligible health care providers
participating in consortia with ineligible private sector members shall
not be eligible for supported services under this subpart. A consortium
may include ineligible private sector entities if such consortium is
only receiving services at tariffed rates or at market rates from those
providers who do not file tariffs.
(2) For consortia, universal service support under this subpart
shall apply only to the portion of eligible services used by an
eligible health care provider.
(3) Telecommunications carriers shall carefully maintain complete
records of how they allocate the costs of shared facilities among
consortium participants in order to charge eligible health care
providers the correct amounts. Such records shall be available for
public inspection.
(4) Telecommunications carriers shall calculate and justify with
supporting documentation the amount of support for which each member of
a consortium is eligible.
(c) Services. (1) Any telecommunications service of a bandwidth up
to and including 1.544 Mbps that is the subject of a properly completed
bona fide request by a rural health care provider shall be eligible for
universal service support, subject to the limitations described in this
subpart. The length of a supported telecommunications service may not
exceed the distance between the health care provider and the point
farthest from that provider on the jurisdictional boundary of the
nearest large city as defined in Sec. 54.605(c).
(2) Limited toll-free access to an Internet service provider shall
be eligible for universal service support under Sec. 54.621.
Sec. 54.603 Competitive bidding.
(a) Competitive bidding requirement. To select the
telecommunications carriers that will provide services eligible for
universal service support to it under this subpart, each eligible
health care provider shall participate in a competitive bidding process
pursuant to the requirements established in this subpart and any
additional and applicable state, local, or other procurement
requirements.
(b) Posting of requests for service. (1) Health care providers
seeking to receive telecommunications services eligible for universal
service support under this subpart shall submit a description of the
services requested. Requests shall be signed by the person authorized
to order telecommunications services for the health care provider and
shall include that person's certification under oath that:
(i) The requester is a public or non-profit entity that falls
within one of the seven categories set forth in the definition of
health care provider, listed in Sec. 54.601(a);
(ii) The requester is physically located in a rural area, unless
the health care provider is requesting services provided under
Sec. 54.621;
(iii) If the health care provider is requesting services provided
under Sec. 54.621, that the requester cannot obtain toll-free access to
an Internet service provider;
(iv) The requested service or services will be used solely for
purposes reasonably related to the provision of health care services or
instruction that the health care provider is legally authorized to
provide under the law in the state in which such health care services
or instruction are provided;
(v) The requested service or services will not be sold, resold or
transferred in consideration of money or any other thing of value; and
(vi) If the service or services are being purchased as part of an
aggregated purchase with other entities or individuals, the full
details of any such arrangement, including the identities of all co-
purchasers and the portion of the service or services being purchased
by the health care provider.
(2) The Administrator shall post each request for eligible services
that it receives from an eligible health care provider on its website
designated for this purpose.
(3) After posting a description of services from a health care
provider on the website, the Administrator shall send confirmation of
the posting to the entity requesting services. That health care
provider shall then wait at least 28 days from the date on which its
description of services is posted on the website before making
commitments with the selected telecommunications carrier(s).
(4) After selecting a telecommunications carrier, the health care
provider shall certify to the Administrator that it is selecting the
most cost-effective method of providing the requested service or
services, where the most cost-effective method of providing a service
is defined as the method that costs the least after consideration of
the features, quality of transmission, reliability, and other factors
that the health care provider deems relevant to choosing a method of
[[Page 32959]]
providing the required health care services. The health care provider
shall submit to the Administrator paper copies of other responses or
bids received in response to the request for services.
(5) The confirmation from the Administrator shall include the date
after which the requester may sign a contract with its chosen
telecommunications carrier(s).
Sec. 54.605 Determining the urban rate.
(a) If a rural health care provider requests an eligible service to
be provided over a distance that is less than or equal to the
``standard urban distance,'' as defined in paragraph (d) of this
section, for the state in which it is located, the urban rate for that
service shall be a rate no higher than the highest tariffed or
publicly-available rate charged to a commercial customer for a similar
service provided over the same distance in the nearest large city in
the state, calculated as if it were provided between two points within
the city.
(b) If a rural health care provider requests an eligible service to
be provided over a distance that is greater than the ``standard urban
distance'' for the state in which it is located, the urban rate shall
be no higher than the highest tariffed or publicly-available rate
charged to a commercial customer for a similar service provided over
the standard urban distance in the nearest large city in the state,
calculated as if the service were provided between two points within
the city.
(c) The ``nearest large city'' is the city located in the eligible
health care provider's state, with a population of at least 50,000,
that is nearest to the health care provider's location, measured point
to point, from the health care provider's location to the point on that
city's jurisdictional boundary closest to the health care provider's
location.
(d) The ``standard urban distance'' for a state is the average of
the longest diameters of all cities with a population of 50,000 or more
within the state, calculated by the Administrator.
Sec. 54.607 Determining the rural rate.
(a) The rural rate shall be the average of the rates actually being
charged to commercial customers, other than health care providers, for
identical or similar services provided by the telecommunications
carrier providing the service in the rural area in which the health
care provider is located. The rates included in this average shall be
for services provided over the same distance as the eligible service.
The rates averaged to calculate the rural rate must not include any
rates reduced by universal service support mechanisms. The ``rural
rate'' shall be used as described in this subpart to determine the
credit or reimbursement due to a telecommunications carrier that
provides eligible telecommunications services to eligible health care
providers.
(b) If the telecommunications carrier serving the health care
provider is not providing any identical or similar services in the
rural area, then the rural rate shall be the average of the tariffed
and other publicly available rates, not including any rates reduced by
universal service programs, charged for the same or similar services in
that rural area over the same distance as the eligible service by other
carriers. If there are no tariffed or publicly available rates for such
services in that rural area, or if the carrier reasonably determines
that this method for calculating the rural rate is unfair, then the
carrier shall submit for the state commission's approval, for
intrastate rates, or the Commission's approval, for interstate rates, a
cost-based rate for the provision of the service in the most
economically efficient, reasonably available manner.
(1) The carrier must provide, to the state commission, or
intrastate rates, or to the Commission, for interstate rates, a
justification of the proposed rural rate, including an itemization of
the costs of providing the requested service.
(2) The carrier must provide such information periodically
thereafter as required, by the state commission for intrastate rates or
the Commission for interstate rates. In doing so, the carrier must take
into account anticipated and actual demand for telecommunications
services by all customers who will use the facilities over which
services are being provided to eligible health care providers.
Sec. 54.609 Calculating support.
(a) Except with regard to services provided under Sec. 54.621 and
subject to the limitations set forth in this Subpart, the amount of
universal service support for an eligible service provided to a rural
health care provider shall be the difference, if any, between the urban
rate and the rural rate charged for the service, as defined herein.
(b) Except with regard to services provided under Sec. 54.621, a
telecommunications carrier that provides telecommunications service to
a rural health care provider participating in an eligible health care
consortium must establish the applicable rural rate for the health care
provider's portion of the shared telecommunications services, as well
as the applicable urban rate. Absent documentation justifying the
amount of universal service support requested for health care providers
participating in a consortium, the Administrator shall not allow
telecommunications carriers to offset, or receive reimbursement for,
the amount eligible for universal service support.
Sec. 54.611 Distributing support.
(a) A telecommunications carrier providing services eligible for
support under this subpart to eligible health care providers shall
treat the amount eligible for support under this subpart as an offset
against the carrier's universal service support obligation for the year
in which the costs for providing eligible services were incurred.
(b) If the total amount of support owed to a carrier, as set forth
in paragraph (a) of this section, exceeds its universal service
obligation, calculated on an annual basis, the carrier may receive a
direct reimbursement in the amount of the difference.
(c) Any reimbursement due a carrier shall be made after the offset
is credited against that carrier's universal service obligation.
(d) Any reimbursement due a carrier shall be submitted to that
carrier no later than the end of the first quarter of the calendar year
following the year in which the costs were incurred and the offset
against the carrier's universal service obligation was applied.
Sec. 54.613 Limitations on supported services for rural health care
providers.
(a) Upon submitting a bona fide request to a telecommunications
carrier, each eligible rural health care provider is entitled to
receive the most cost-effective, commercially-available
telecommunications service using a bandwidth capacity of 1.544 Mbps, at
a rate no higher than the highest urban rate, as defined in this
subpart, at a distance not to exceed the distance between the eligible
health care provider's site and the farthest point from that site that
is on the jurisdictional boundary of the nearest large city, as defined
in Sec. 54.605(c).
(b) The rural health care provider may substitute any other service
or combination of services with transmission capacities of less than
1.544 Mbps transmitted over the same or a shorter distances, so long as
the total annual support amount for all such services combined,
calculated as provided in this subpart, does not exceed what the
support amount would have been for the service described in paragraph
(a) of this section. If the rural health care provider is located in an
area where a service using a bandwidth
[[Page 32960]]
capacity of 1.544 Mbps is not available, then the total annual support
amount for that provider shall not exceed what the support amount would
have been under paragraph (a) of this section, calculated using the
rural rate for a service of that capacity in another area of the state.
(c) This section shall not affect a rural health care provider's
ability to obtain supported services under Sec. 54.621.
Sec. 54.615 Obtaining services.
(a) Selecting a provider. In selecting a telecommunications
carrier, a health care provider shall consider all bids submitted and
select the most cost-effective alternative.
(b) Receiving supported rate. Except with regard to services
provided under Sec. 54.621, upon receiving a bona fide request for an
eligible service from an eligible health care provider, as set forth in
paragraph (c) of this section, a telecommunications carrier shall
provide the service at a rate no higher than the urban rate, as defined
in Sec. 54.605, subject to the limitations set forth in this Subpart.
(c) Bona fide request. In order to receive services eligible for
universal service support under this subpart, an eligible health care
provider must submit a request for services to the telecommunications
carrier, Signed by an authorized officer of the health care provider,
and shall include that person's certification under oath that:
(1) The requester is a public or non-profit entity that falls
within one of the seven categories set forth in the definition of
health care provider, listed in Sec. 54.601(a);
(2) The requester is physically located in a rural area, unless the
health care provider is requesting services provided under Sec. 54.621;
(3) If the health care provider is requesting services provided
under Sec. 54.621, that the requester cannot obtain toll-free access to
an Internet service provider;
(4) The requested service or services will be used solely for
purposes reasonably related to the provision of health care services or
instruction that the health care provider is legally authorized to
provide under the law in the state in which such health care services
or instruction are provided;
(5) The requested service or services will not be sold, resold or
transferred in consideration of money or any other thing of value;
(6) If the service or services are being purchased as part of an
aggregated purchase with other entities or individuals, the full
details of any such arrangement, including the identities of all co-
purchasers and the portion of the service or services being purchased
by the health care provider; and
(7) The requester is selecting the most cost-effective method of
providing the requested service or services, where the most cost-
effective method of providing a service is defined as the method that
costs the least after consideration of the features, quality of
transmission, reliability, and other factors that the health care
provider deems relevant to choosing a method of providing the required
health care services.
(d) Annual renewal. The certification set forth in paragraph (c) of
this section shall be renewed annually.
Sec. 54.617 Resale.
(a) Prohibition on resale. Services purchased pursuant to universal
service support mechanisms under this subpart shall not be sold,
resold, or transferred in consideration for money or any other thing of
value.
(b) Permissible fees. The prohibition on resale set forth in
paragraph (a) of this section shall not prohibit a health care provider
from charging normal fees for health care services, including
instruction related to such services rendered via telecommunications
services purchased under this subpart.
Sec. 54.619 Audit program.
(a) Recordkeeping requirements. Health care providers shall
maintain for their purchases of services supported under this subpart
the same kind of procurement records that they maintain for other
purchases.
(b) Production of records. Health care providers shall produce such
records at the request of any auditor appointed by the Administrator or
any other state or federal agency with jurisdiction.
(c) Random audits. Health care providers shall be subject to random
compliance audits to ensure that requesters are complying with the
certification requirements set forth in Sec. 54.615(c) and are
otherwise eligible to receive universal service support and that rates
charged comply with the statute and regulations.
(d) Annual report. The Administrator shall use the information
obtained under paragraph (a) of this section to evaluate the effects of
the regulations adopted in this subpart and shall report its findings
to the Commission on the first business day in May of each year.
Sec. 54.621 Access to advanced telecommunications and information
services.
(a) Each eligible health care provider that cannot obtain toll-free
access to an Internet service provider shall be entitled to receive the
lesser of the toll charges incurred for 30 hours of access per month to
an Internet service provider or $180 per month in toll charge credits
for toll charges imposed for connecting to an Internet service
provider.
(b) Both telecommunications carriers designated as eligible
telecommunications carriers pursuant to Sec. 54.201(d) and
telecommunications carriers not so designated that provide services
described in paragraph (a) of this section shall be eligible for
universal service support under this section.
Sec. 54.623 Cap.
(a) Amount of the annual Cap. The annual cap on federal universal
service support for health care providers shall be $400 million per
funding year.
(b) Funding year. The funding year for purposes of the health care
providers cap shall be the calendar year.
(c) Requests. Funds shall be available to eligible health care
providers on a first-come-first-served basis, with requests accepted
beginning on the first of July prior to each funding year.
(d) Annual filing requirement. Health care providers shall file new
funding requests for each funding year.
(e) Long term contracts. If health care providers enter into long
term contracts for eligible services, the Administrator shall only
commit funds to cover the portion of such a long term contract
scheduled to be delivered during the funding year for which universal
service support is sought.
Subpart H--Administration
Sec. 54.701 Administrator of universal service support mechanisms.
(a) A Federal Advisory Committee (Committee) shall recommend a
neutral, third-party administrator of the universal service support
programs to the Commission within six months of the Committee's first
meeting. The Commission shall act upon that recommendation within six
months. The Administrator must:
(1) Be neutral and impartial;
(2) Not advocate specific positions before the Commission in non-
universal service administration proceedings related to common carrier
issues, except that membership in a trade association that advocates
positions before the Commission will not render it ineligible to serve
as the Administrator;
(3) Not be an affiliate of any provider of telecommunications
services; and
(4) Not issue a majority of its debt to, nor derive a majority of
its revenues from any provider(s) of
[[Page 32961]]
telecommunications services. This prohibition also applies to any
affiliates of the Administrator.
(b) If the Administrator has a Board of Directors that includes
members with direct financial interests in entities that contribute to
or receive support from the universal service support programs, no more
than a third of the Board members may represent any one category (e.g.,
local exchange carriers, interexchange carriers, wireless carriers,
schools, libraries) of contributing carriers or support recipients, and
the Board's composition must reflect the broad base of contributors to
and recipients of universal service.
(1) An individual does not have a direct financial interest in
entities that contribute to or receive support from the universal
service support programs if he or she is not an employee of a
telecommunications carrier or of a recipient of universal service
support programs funds, does not own equity interests in bonds or
equity instruments issued by any telecommunications carrier, and does
not own mutual funds that specialize in the telecommunications
industry. If a mutual fund invests more than 50 percent of its money in
telecommunications stocks and bonds, then it specializes in the
telecommunications industry.
(2) An individual's ownership interest in entities that contribute
to or receive support from the universal service support programs is de
minimis if in aggregate the individual, spouse, and minor children's
impermissible interests do not exceed $5,000.
(c) The Administrator chosen by the Committee shall begin
administering the support programs within six months of its
appointment. The Administrator's performance shall be reviewed by the
Commission after two years. The Administrator shall serve an initial
term of five years. At any time prior to nine months before the end of
the Administrator's five-year term, the Commission may re-appoint the
Administrator for another term of not more than five years. Otherwise,
nine months before the end of the Administrator's term, the Commission
will create another Federal Advisory Committee to recommend another
neutral, third-party administrator.
(d) The Committee's, Administrator's, and Temporary Administrator's
reasonable administrative projected annual costs shall be included
within the universal service support programs' projected expenses.
(e) The Administrator and Temporary Administrator shall keep the
universal service support program funds separate from all other funds
under the control of the Administrator or Temporary Administrator.
(f) The Administrator and Temporary Administrator shall be subject
to a yearly audit by an independent accounting firm and may be subject
to an additional audit by the Commission, if the Commission so
requests.
(1) The Administrator and the Temporary Administrator shall report
annually to the Commission an itemization of monthly administrative
costs that shall include all expenses, receipts, and payments
associated with the administration of the universal service support
programs and shall provide the Commission full access to the data
collected pursuant to the administration of the universal service
support programs.
(2) Pursuant to Sec. 64.903 of this chapter, the Administrator
shall file with the Commission a cost allocation manual (CAM), that
describes the accounts and procedures the Administrator will use to
allocate the shared costs of administering the universal service
support programs and its other operations.
(3) Information based on the Administrator's and Temporary
Administrator's reports will be made public at least once a year as
part of a Monitoring Report.
(g) The Administrator and Temporary Administrator shall report
quarterly to the Commission on the disbursement of universal service
support program funds. The Administrator and Temporary Administrator
shall keep separate accounts for the amounts of money collected and
disbursed for eligible schools and libraries, rural health care
providers, low-income consumers, and high cost and insular areas.
(h) The Administrator and Temporary Administrator shall be subject
to close-out audits at the end of their terms.
Sec. 54.703 Contributions.
(a) Entities that provide interstate telecommunications to the
public, or to such classes of users as to be effectively available to
the public, for a fee will be considered telecommunications carriers
providing interstate telecommunications services and must contribute to
the universal service support programs. Interstate telecommunications
include, but are not limited to:
(1) Cellular telephone and paging services;
(2) Mobile radio services;
(3) Operator services;
(4) Personal communications services (PCS);
(5) Access to interexchange service;
(6) Special access service;
(7) WATS;
(8) Toll-free service;
(9) 900 service;
(10) Message telephone service (MTS);
(11) Private line service;
(12) Telex;
(13) Telegraph;
(14) Video services;
(15) Satellite service;
(16) Resale of interstate services; and
(17) Payphone services.
(b) Every telecommunications carrier that provides interstate
telecommunications services, every provider of interstate
telecommunications that offers telecommunications for a fee on a non-
common carrier basis, and payphone providers that are aggregators shall
contribute to the programs for eligible schools, libraries, and health
care providers on the basis of its interstate, intrastate, and
international end-user telecommunications revenues. Entities providing
open video systems (OVS), cable leased access, or direct broadcast
satellite (DBS) services are not required to contribute on the basis of
revenues derived from those services.
(c) Every telecommunications carrier that provides interstate
telecommunications services, every provider of interstate
telecommunications that offers telecommunications for a fee on a non-
common carrier basis, and payphone providers that are aggregators shall
contribute to the programs for high cost, rural and insular areas, and
low-income consumers on the basis of its interstate and international
end-user telecommunications revenues. Entities providing OVS, cable
leased access, or DBS services are not required to contribute on the
basis of revenues derived from those services.
Sec. 54.705 De minimis exemption.
If a contributor's contribution to universal service in any given
year is less than $100, that contributor will not be required to submit
a contribution or Universal Service Worksheet for that year. If a
contributor improperly claims exemption from the contribution
requirement, it will subject to the criminal provisions of sections 220
(d) and (e) of the Act regarding willful false submissions and will be
required to pay the amounts withheld plus interest.
Sec. 54.707 Audit controls.
The Administrator shall have authority to audit contributors and
carriers reporting data to the administrator. The Administrator shall
establish procedures to verify discounts, offsets, and support amounts
provided
[[Page 32962]]
by the universal service support programs, and may suspend or delay
discounts, offsets, and support amounts provided to a carrier if the
carrier fails to provide adequate verification of discounts, offsets,
or support amounts provided upon reasonable request, or if directed by
the Commission to do so. The Administrator shall not provide
reimbursements, offsets or support amounts pursuant to part 36 and
Sec. 69.116 through 69.117 of this chapter, and subparts D, E, and G of
this part to a carrier until the carrier has provided to the
Administrator a true and correct copy of the decision of a state
commission designating that carrier as an eligible telecommunications
carrier in accordance with Sec. 54.201.
PART 69--ACCESS CHARGES
11. The authority citation for part 69 is revised to read as
follows:
Authority: 47 U.S.C. Secs. 154(i) and (j), 201, 202, 203, 205,
18, 254, and 403.
12. Section 69.2(y) is revised to read as follows:
Sec. 69.2 Definitions.
* * * * *
(y) Long Term Support (LTS) means funds that are provided pursuant
to Sec. 54.303 of part 54.
* * * * *
13. Section 69.104 is amended by revising paragraphs (j), (k), and
(l) to read as follows:
Sec. 69.104 End user common line.
* * * * *
(j) Until December 31, 1997, the End User Common Line charge for a
residential subscriber shall be 50% of the charge specified in
Sec. 69.104(c) and (d) if the residential local exchange service rate
for such subscribers is reduced by an equivalent amount, provided, That
such local exchange service rate reduction is based upon a means test
that is subject to verification.
(k) Paragraphs (k)(1) through (2) of this section are effective
until December 31, 1997. * * *
(l) Until December 31, 1997, in connection with the filing of
access tariffs pursuant to Sec. 69.3(a), telephone companies shall
calculate for the association their projected revenue requirements
attributable to the operation of paragraphs (j) through (k) of this
section. The projected amount will be adjusted by the association to
reflect the actual lifeline assistance benefits paid in the previous
period. If the actual benefits exceeded the projected amount of that
period, the differential will be added to the projection for the
ensuing period. If the actual benefits were less than the projected
amount for that period, the differential will be subtracted from the
projection for the ensuing period. Until December 31, 1997, the
association shall so adjustamounts to the Lifeline Assistance revenue
requirement, bill and collect such amounts from interexchange carriers
pursuant to Sec. 69.117 and distribute the funds to qualifying
telephone companies pursuant to Sec. 69.603(d).
* * * * *
14. Section 69.116 is amended by revising the introductory text to
read as follows:
Sec. 69.116 Universal service fund.
Effective August 1, 1988 through December 31, 1997:
* * * * *
15. Section 69.117 is amended by revising the introductory text to
read as follows:
Sec. 69.117 Lifeline assistance.
Effective August 1, 1988 through December 31, 1997:
* * * * *
16. Section 69.203 is amended by revising paragraph (f) and adding
a sentence before the first sentence of paragraph (g)(l) to read as
follows:
Sec. 69.203 Transitional end user common line charges.
* * * * *
(f) Until December 31, 1997, the End User Common Line charge for a
residential subscriber shall be 50% of the charge specified in
paragraphs (d) and (e) if the residential local exchange rate for such
subscribers is reduced by an equivalent amount, provided that such
local exchange service rate reduction is based upon a means test that
is subject to verification.
(g)(1) Paragraphs (g)(1) and (g)(2) are effective until December
31, 1997.* * *
* * * * *
17. Section 69.612 is amended by revising the introductory text and
paragraph (a) to read as follows:
Sec. 69.612 Long term and transitional support.
A telephone company that does not participate in the association
Common Line tariff shall have computed by the association:
(a) Long term support obligation. (1) Beginning July 1, 1994 and
until December 31, 1997, the Long Term Support payment obligation of
telephone companies that do not participate in the NECA Common Line
tariff shall equal the difference between the projected Carrier Common
Line revenue requirement of association Common Line tariff participants
and the projected revenue recovered by the association Carrier Common
Line charge as calculated pursuant to Sec. 69.105(b)(1).
(2) For the period from April 1, 1989 through June 30, 1994, the
Long Term Support payment obligation shall be funded by all telephone
companies that are not association Common Line tariff participants and
do not receive transitional support pursuant to Sec. 69.612(b). The
percentage of the total annual Long Term Support requirement paid by
each telephone company in this group that is not a Level I or Level II
Contributor shall equal the number of its common lines divided by the
total number of common lines of all telephone companies paying Long
Term Support. The remaining amount of Long Term Support requirement
shall be allocated among Level I and Level II Contributors based upon
the amount of each Level I and Level II Contributor's 1988
contributions to the association Common Line pool in relation to the
total amount of 1988 Common Line pool contributions of all other Level
I and Level II Contributors. The association shall inform each
telephone company about its mandatory Long Term Support obligations
within a reasonable time prior to the filing of each telephone
company's annual Common Line tariff revisions or other similar filing
ordered by the Commission. Such amounts shall represent a negative net
balance due to the association that it shall bill, collect, and
distribute pursuant to Sec. 69.603(e).
(3) Beginning July 1, 1994, and thereafter, the Long Term Support
payment obligation shall be funded by each telephone company that files
its own Carrier Common Line tariff does not receive transitional
support. The percentage of the total annual Long Term Support
requirement paid by each of these companies shall equal the number of
its common lines divided by the total number of common lines of all
telephone companies paying Long Term Support. The association shall
inform each telephone company about its Long Term Support obligation
within a reasonable time prior to the filing of each telephone
company's annual Common Line tariff revisions or other similar filing
ordered by the Commission. Such amounts shall represent a negative net
balance due to the association that it shall bill, collect, and
distribute pursuant to Sec. 69.603(f).
* * * * *
[FR Doc. 97-15081 Filed 6-16-97; 8:45 am]
BILLING CODE 6712-01-P