[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  

[[Page 32862]]


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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