[Federal Register Volume 63, Number 8 (Tuesday, January 13, 1998)]
[Rules and Regulations]
[Pages 2094-2133]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-541]



[[Page 2093]]

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Part IV





Federal Communications Commission





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47 CFR Parts 36, 54, and 69



Universal Service; Final Rule

  Federal Register / Vol. 63, No. 8 / Tuesday, January 13, 1998 / Rules 
and Regulations  

[[Page 2094]]



FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 36, 54, and 69

[CC Docket Nos. 96-45, 96-262, 94-1, 91-213, 95-72; FCC 97-420]


Universal Service

AGENCY: Federal Communications Commission.

ACTION: Final rule; petition for reconsideration.

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SUMMARY: The Fourth Order on Reconsideration and Report and Order 
addresses issues that were raised in petitions for reconsideration of 
the Universal Service Report and Order. The Fourth Reconsideration 
Order also makes several technical corrections to the Commission's 
universal service rules. In addition, the order clarifies or makes 
further findings regarding: the rules governing the eligibility of 
carriers and other providers of supported services; methods for 
determining levels of universal service support for carriers in rural, 
insular and high cost areas; support for low-income consumers; the 
rules governing the receipt of universal service support under the 
schools and libraries and rural health care programs; the 
determinations of who must contribute to the new universal service 
support mechanisms; and administration of the support mechanisms. The 
intended effect of these rules is to implement the universal service 
provisions of the Telecommunications Act of 1996.

DATES: Effective February 12, 1998.

FOR FURTHER INFORMATION CONTACT: Sheryl Todd, Common Carrier Bureau, 
(202) 418-7400.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Fourth 
Order on Reconsideration in CC Docket No. 96-45 and Report and Order in 
CC Docket Nos. 96-45, 96-262, 94-1, 91-213, 95-72 (Fourth Order on 
Reconsideration), adopted and released December 30, 1997. In addition, 
the amendments to the Commission's rules reflect the changes included 
in errata released December 3, 1997. The full text of the Fourth Order 
on Reconsideration and the errata are 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, Mar. 14, 1996), a Recommended 
Decision on November 8, 1996 (61 FR 63778, Dec. 2, 1996), a Public 
Notice on November 18, 1996 (61 FR 63778, Dec. 2, 1996), and a Report 
and Order that was adopted on May 7, 1997 and released on May 8, 1997 
(62 FR 32862, June 17, 1997) implementing sections 254 and 214(e) of 
the Act relating to universal service. The Commission released an Order 
on Reconsideration on July 10, 1997 (62 FR 40742, July 30, 1997) and a 
related Report and Order on July 18, 1997 (62 FR 41294, Aug. 1, 1997) 
making certain modifications and additions to the Commission's 
universal service rules. As required by the Regulatory Flexibility Act 
(RFA) the Fourth Order on Reconsideration contains a Final Regulatory 
Flexibility Analysis. Pursuant to section 604 of the RFA, the 
Commission performed a comprehensive analysis of the Fourth Order on 
Reconsideration with regard to small entities and small incumbent local 
exchange carriers. The Fourth Order on Reconsideration also contains 
new information collection requirements subject to the Paperwork 
Reduction Act (PRA).

Summary of the Fourth Order on Reconsideration

I. Introduction

    1. In the Telecommunications Act of 1996, Public Law No. 104-104, 
110 Stat. 56 (the 1996 Act), Congress amended the Communications Act of 
1934, 47 U.S.C. Secs. 151, et seq. (the Act), by, among other things, 
adding a new section 254 to the Act. In section 254, Congress directed 
the Commission and states to take the steps necessary to establish 
support mechanisms to ensure the delivery of affordable 
telecommunications service to all Americans, including low-income 
consumers, eligible schools and libraries, and rural health care 
providers. Specifically, Congress directed the Commission and the 
states to devise methods to ensure that ``[c]onsumers in all regions of 
the Nation, including low-income consumers and those in rural, insular, 
and high cost areas * * * have access to telecommunications and 
information services * * * at rates that are reasonably comparable to 
rates charged for similar services in urban areas,'' 47 U.S.C. 
Sec. 254(b)(3), and 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, health care providers, and libraries,'' 47 U.S.C. 
Sec. 254(h)(2)(A). On May 8, 1997, the Commission released the 
Universal Service Report and Order, implementing section 254 of the Act 
and establishing a universal service support system that becomes 
effective on January 1, 1998 and that will be sustainable in an 
increasingly competitive marketplace. See Federal-State Joint Board on 
Universal Service, Report and Order, CC Docket No. 96-45, FCC 97-157, 
12 FCC Rcd 8776 (rel. May 8, 1997) (62 FR 32862, June 17, 1997) 
(Order).
    2. In the Order, the Commission adopted rules that reflect 
virtually all of the recommendations of the Federal-State Joint Board 
on Universal Service and meet the four critical goals set forth for the 
new universal service program: (1) that all of the universal service 
objectives established by the Act, including those for low-income 
individuals, for consumers in rural, insular, and high cost areas, and 
for schools, libraries, and rural health care providers, be 
implemented; (2) that rates for basic residential service be maintained 
at affordable levels; (3) that universal service funding mechanisms be 
explicit; and (4) that the benefits of competition be brought to as 
many consumers as possible. Recognizing that, as circumstances change, 
further Commission action may be needed to ensure that we create 
sustainable and harmonious federal and state methods of continuously 
fulfilling universal service goals, the Commission also committed 
itself to work in close partnership with the states to create 
complimentary federal and state universal service support mechanisms. 
These efforts are ongoing.
    3. Through the Order and the accompanying orders reforming the 
Commission's access charge rules, the Commission established the 
definition of services to be supported by federal universal service 
support mechanisms and the specific timetable for implementation. The 
Commission set in place rules that will identify and convert existing 
federal universal service support in the interstate high cost fund, the 
dial equipment minutes (DEM) weighting program, Long Term Support 
(LTS), Lifeline, Link Up, and interstate access charges to explicit 
competitively neutral federal universal service support mechanisms. The 
Commission also modified the funding methods for the existing federal 
universal service support mechanisms so that such support is not 
generated, as at present, entirely through charges imposed on long 
distance carriers. Instead, as the statute requires, equitable

[[Page 2095]]

and non-discriminatory contributions will be required from all 
providers of interstate telecommunications service. The Commission took 
other steps to make federal universal service support mechanisms 
consistent with the development of local service competition, and 
established a program to provide schools and libraries with discounts 
on all commercially available telecommunications services, Internet 
access, and internal connections. The Commission also established 
mechanisms to provide support for telecommunications services for all 
public and not-for-profit health care providers located in rural areas.
    4. The Commission also named the National Exchange Carrier 
Association (NECA) the temporary Administrator of the universal service 
support mechanisms on the condition that NECA agree to make changes to 
its governance that would render it more representative of non-
incumbent local exchange carrier (LEC) interests. As a condition of its 
appointment as temporary Administrator, the Commission subsequently 
directed NECA to establish the Universal Service Administrative Company 
(USAC), an independently functioning subsidiary corporation that will 
perform the billing, collection, and disbursement functions for all of 
the universal service support mechanisms. See Changes to the Board of 
Directors of the National Exchange Carrier Association, Inc. and 
Federal-State Board on Universal Service, Report and Order and Second 
Order on Reconsideration, CC Docket Nos. 97-21 and 96-45, FCC 97-253 
(rel. July 18, 1997) (62 FR 41294, Aug. 1, 1997) (NECA Report and 
Order). The Commission further directed NECA to create the Schools and 
Libraries Corporation and Rural Health Care Corporation to perform all 
functions associated with administering the schools and libraries and 
rural health care programs, respectively, except those directly related 
to billing and collecting universal service contributions and 
disbursing support.
    5. On July 10, 1997, the Commission released a reconsideration 
order on its own motion in this proceeding. See Federal-State Joint 
Board on Universal Service, Order on Reconsideration, CC Docket No. 96-
45, FCC 97-246 (rel. July 19, 1997) (62 FR 40742, July 30, 1997) (July 
10 Order). Among other things, the July 10 Order (1) clarified certain 
issues relating to contracts for services to schools and libraries; (2) 
modified the formula for recovery of corporate operations expense from 
high loop cost support mechanisms; and (3) clarified issues concerning 
coordination between the Commission staff and the state staff of the 
Joint Board in CC Docket No. 96-45 in implementing the new monitoring 
program.
    6. Sixty-one parties have filed petitions for reconsideration and/
or clarification of the Order and the July 10 Order. In this Fourth 
Order on Reconsideration, we address issues raised by petitioners that 
either must or should be addressed before the new universal service 
program begins. We will address the remaining issues in one or more 
subsequent reconsideration orders in this docket.
    7. In this order, we clarify or make further findings regarding: 
(1) the rules governing the eligibility of carriers and other providers 
of supported services; (2) methods for determining levels of universal 
service support for carriers in rural, insular and high cost areas; (3) 
support for low-income consumers; (4) the rules governing the receipt 
of universal service support under the schools and libraries and rural 
health care programs; (5) the determinations of who must contribute to 
the new universal service support mechanisms; and (6) administration of 
the support mechanisms.

II. Definition of Universal Service: Services That Are Eligible for 
Support

A. Local Calling Provided by Satellite Companies

    8. We grant AMSC's request and conclude that calls to and from a 
satellite company's fixed-site subscribers, for which such subscribers 
pay a non-distance and non-usage sensitive rate, constitute local 
calling for purposes of determining whether a carrier is eligible for 
federal universal service support. We find that, consistent with the 
principles of competitive and technological neutrality established in 
the Order, non-landline telecommunications providers should be eligible 
to receive universal service support even though their local calls are 
completed via satellite. We conclude that any call for which a 
satellite company's subscribers are not charged on a distance- or 
usage-sensitive basis constitutes a local call.

B. Provision of E911 by MSS Providers

    9. In response to AMSC's petition, we clarify that MSS providers, 
like other wireless providers in localities that have implemented E911 
service, may petition their state commission for permission to receive 
universal service support for the designated period during which they 
are completing the network upgrades required to offer access to E911. 
To receive federal universal service support, however, MSS providers 
must satisfy the eligibility requirements we previously established. We 
rely on state commissions to ensure that providers that are not 
currently able to provide access to E911 service are making the network 
upgrades necessary to provide access to E911 service as quickly as 
possible.

C. Voice Grade Access to the Public Switched Network

    10. We reconsider, on our own motion, the Commission's 
specification of a bandwidth for voice grade access to the PSTN and 
conclude that bandwidth for voice grade access should be, at a minimum, 
300 Hertz to 3,000 Hertz. In the Order, the Commission determined that 
voice grade access bandwidth be approximately 500 Hertz to 4,000 Hertz. 
We reconsider that determination based on our recognition that the 500 
Hertz to 4,000 Hertz bandwidth established in the Order would require 
eligible carriers to comply with a voice grade access standard that is 
more exacting than current industry standards, a result that we did not 
intend. We note that AT&T operating principles recommend that voice 
grade access bandwidth be 200 Hertz to 3,500 Hertz, while Bellcore 
recommends a range of 200 Hertz to 3,200 or 3,400 Hertz. American 
National Standards Institute (ANSI) defines voice grade access 
bandwidth as 300 Hertz to 3,000 Hertz. We did not intend to impose a 
more onerous definition of voice grade access than those generally 
established under existing industry standards, and conclude that our 
decision here will ensure that consumers receive voice grade access at 
levels that are consistent with Commission rules and that are not 
incompatible with current industry guidelines. We do not adopt the 
broader voice grade access bandwidth specified in the AT&T and Bellcore 
operating principles. To the extent that the bandwidth recommended in 
the AT&T and Bellcore operating principles exceeds the bandwidth 
established in the ANSI definition of voice grade access, we are 
concerned that a substantial number of otherwise eligible carriers may 
be unable to qualify for universal service support if we were to 
require all carriers to meet this standard as a condition of 
eligibility. Moreover, networks utilizing loading coils may experience 
difficulty operating properly at bandwidths exceeding 3,400 Hertz. 
Carriers that meet current AT&T and Bellcore guidelines, however, will 
be able to satisfy our definition of voice grade access.

[[Page 2096]]

III. Carriers Eligible for Universal Service Support

A. Designation of Eligible Carriers

    11. We read Sandwich Isles' petition to contend that the DHHL, 
rather than the Hawaii Public Utilities Commission (PUC), should have 
authority to designate eligible telecommunications carriers on the 
Hawaiian Home Lands. Section 153(41) defines ``[s]tate commission'' as 
``the commission, board, or official (by whatever name designated) 
which under the laws of any State has regulatory jurisdiction with 
respect to intrastate operations of carriers.'' 47 U.S.C. Sec. 153(41). 
Based on the record before us, it is unclear whether the DHHL meets the 
Act's definition of ``state commission.'' Based on further information 
provided by the parties, it now appears that the issue here is not 
whether there is a state commission with jurisdiction to designate 
eligible carriers, but which of the state agencies should be considered 
to be the ``state commission'' for purposes of designating Sandwich 
Isles. Before undertaking to develop the record further and to 
interpret the term ``state commission,'' we encourage Sandwich Isles 
and the relevant state agencies to resolve this dispute. If they are 
unable to do so, we encourage Sandwich Isles and the relevant state 
agencies to bring that fact to our attention so that we may complete 
action on the pending petitions.

B. Eligibility Designation Date

    12. In light of section 254's directive that only carriers 
designated as eligible pursuant to section 214(e) shall be eligible to 
receive universal service support, we affirm our previous conclusion 
that, as of January 1, 1998, the temporary Administrator may not 
disburse support to carriers that have not been designated as eligible 
under section 214(e). Thus, if a carrier has not been designated as 
eligible by January 1, 1998, it may not receive support until such time 
as it is designated an eligible telecommunications carrier. This 
applies to all carriers, including those that currently receive 
universal service support under the existing support mechanisms. We 
agree with USTA, however, that a state commission that is unable to 
designate as an eligible telecommunications carrier, by January 1, 
1998, a carrier that sought such designation before January 1, 1998, 
should be permitted, once it has designated such carrier, to file with 
the Commission a petition for waiver requesting that the carrier 
receive universal service support retroactive to January 1, 1998. A 
state commission filing such a petition must explain why it did not 
designate such carrier as eligible by January 1, 1998 and provide a 
justification for why providing support retroactive to January 1, 1998 
serves the public interest. We encourage relevant carriers to file 
information demonstrating that they took reasonable steps to be 
designated as eligible telecommunications carriers by January 1, 1998. 
We find that it is in the public interest to permit telecommunications 
carriers that were eligible to receive universal service support on 
January 1, 1998, but that were not designated as eligible by their 
state commission by that date, to be permitted to seek retroactive 
support. Allowing retroactive support will permit consumers served by 
those carriers to benefit from the support to which those carriers 
would have been entitled, but for circumstances that prevented the 
state commission from designating the carriers as eligible for receipt 
of universal service support prior to January 1, 1998. Regarding NECA's 
concern that the Order does not specify a date by which state 
commissions must make their eligible carrier determinations, we note 
that the Bureau's August 14 and September 29 Public Notices notified 
state commissions to submit their eligible carrier designations to the 
temporary Administrator no later than December 31, 1997.

IV. High Cost Support

A. Indexed Cap on High Cost Loop Fund

    13. We affirm the Commission's decision to retain the indexed cap 
on high cost loop support until all carriers receive support based on a 
forward-looking economic cost mechanism. Much of petitioners' concern 
about the sufficiency of the modified existing system of universal 
service support appears to be based on their misapprehension that the 
indexed cap will operate after January 1, 1998 not merely to limit the 
growth of the high cost loop fund, but also to limit the growth of the 
modified DEM weighting and LTS programs. In light of this apparent 
confusion, we clarify here that the indexed cap on the high cost loop 
fund will not operate to cap support under the modified DEM weighting 
or LTS programs. Rather, local switching support and LTS will be 
calculated and permitted to increase based on the formulas provided in 
sections 54.301 and 54.303, respectively.
    14. Section 36.601(c) of our rules sets forth the method for 
calculating the indexed cap and clearly provides that this limitation 
applies only to loop-related costs, not local switching support or long 
term support. In addition, section 36.601(a) states that:

[t]he term Universal Service Fund in subpart F refers only to the 
support for loop-related costs included in Sec. 36.621. The term 
Universal Service in part 54 refers to the comprehensive discussion 
of the Commission's rules implementing section 254 of the 
Communications Act of 1934, as amended * * * .''

This clarification should alleviate any concern that the cap may result 
in insufficient support to the extent that these concerns are based on 
the erroneous premise that the indexed cap's limitation on growth of 
the high cost loop fund will limit the growth of the modified support 
programs adopted pursuant to part 54 of our rules. Absent specific 
evidence that the cap as modified in response to implementation of 
section 254 will likely result in insufficient support, which 
petitioners have not offered, we conclude that the cap is consistent 
with our obligation to ensure that support is sufficient.
    15. Contrary to RTC's assertion that the indexed cap does not take 
account of cost increases due to the addition of new high cost loops or 
new eligible carriers, we note that our rules provide for annual 
adjustments that will reflect such growth. Specifically, section 
36.601(c) provides:

    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 
[preceding] calendar year * * *.

Thus, both new high cost loops that eligible rural carriers add during 
the previous calendar year as well as high cost loops of newly eligible 
carriers that did not qualify as rural carriers in the previous 
calendar year will be factored into the calculation of the rate of 
change in the total number of working loops of rural carriers, pursuant 
to section 36.601(c). Accordingly, we find no basis for making 
additional adjustments to the indexed cap, beyond those already 
required by section 36.601(c).
    16. We agree with Bell Atlantic that petitioners' claims of harm by 
operation of the cap under the new system of support are speculative. 
As noted by AT&T, a waiver process has been and remains available to 
carriers that may experience a significant adverse impact by operation 
of the cap. We note again that the fact that no carrier has applied for 
relief under the Commission's waiver process or otherwise sought relief 
from the cap since it was first

[[Page 2097]]

implemented in 1994 suggests that carriers have not experienced undue 
hardship because of the cap.
    17. We therefore affirm the Commission's previous finding that the 
cap is a reasonable means of limiting the overall growth of the high 
cost loop fund, and thus protecting contributors from excessive 
universal service contribution requirements, while allowing the high 
cost loop fund to grow to support the growth in lines served by 
carriers in high cost areas.

B. DEM Weighting Assistance (Local Switching Support)

1. Calculation of Local Switching Support Based on Projections of Costs
    18. Although the Commission removed the DEM weighting assistance 
program from the access charge system and transferred it to the new 
universal service system of support, the Commission did not alter 
significantly the level of support received by carriers under this 
program. Indeed, in adopting the modifications to the existing support 
mechanisms, the Commission was persuaded that it should act more 
cautiously with respect to small rural carriers. Therefore, the DEM 
weighting assistance program will continue to be administered and 
calculated separately from the existing high cost loop fund. 
Specifically, support payments for these local switching costs will be 
based on projections of annual costs, and, therefore, payments will not 
be lagged in the manner prescribed by our rules governing the existing 
high cost loop fund.
    19. Under the modified DEM weighting assistance program, a carrier 
will be eligible to receive local switching support based on the 
carrier's projected annual unseparated local switching revenue 
requirement for the upcoming calendar year, beginning January 1, 1998, 
and each year thereafter that DEM weighting assistance continues. We 
amend section 54.301 by adding the word ``projected'' to the first 
sentence of that rule to clarify that support for local switching costs 
will be based on projections of costs and not historical cost data. As 
reflected in the rule changes, section 54.301 is amended to read in 
relevant part:

    Beginning January 1, 1998, an incumbent local exchange carrier 
that has been designated an eligible telecommunications carrier and 
that serves a study area with 50,000 or fewer access lines shall 
receive support for local switching costs using the following 
formula: the carrier's projected annual unseparated local switching 
revenue requirement shall be multiplied by the local switching 
support factor.

Thus, the Commission's determination to remove the DEM weighting 
assistance program from the access charge system and transfer it to the 
new universal service system of support will not create a two-year lag 
in the recovery of local switching investment, as argued by 
petitioners.

    20. We also, on our own motion, amend section 54.301 to clarify 
that, to receive local switching support, an incumbent LEC must satisfy 
the requirements of an eligible telecommunications carrier.
2. Calculating the Annual Unseparated Local Switching Revenue 
Requirement
    21. We adopt the method of calculating the annual unseparated local 
switching revenue requirement proposed in NECA's ex parte letters 
because it provides the most accurate calculation of the local 
switching revenue requirement. Under this method, a carrier's annual 
unseparated local switching revenue requirement will be calculated 
pursuant to a formula that relies upon specified account and cost data 
that carriers maintain pursuant to the Commission's part 32 rules. 
Thus, as reflected in our amendments to part 54 in the rule changes, we 
direct the Administrator to use the part 32 account data as specified 
in NECA's October 30th, 1997 and December 4, 1997 letters to determine 
the unseparated local switching revenue requirement. Consistent with 
our adoption of a methodology that relies upon part 32 account data, we 
authorize the Administrator to issue a data request annually to the 
carriers that serve study areas with 50,000 or fewer access lines but 
that are not members of the NECA traffic sensitive pool in order to 
obtain the relevant part 32 data from these carriers. Because the 
Administrator requires data to calculate local switching support in 
1998 from carriers that do not participate in the NECA common line 
pool, we direct the Administrator to issue a data request to those 
carriers as soon as practicable after the release of this Order. We 
note that, as with all high cost support, a competitive local exchange 
carrier will receive the same amount of local switching support 
formerly received by an incumbent LEC if the competitive local exchange 
carrier begins to serve a customer formerly served by an incumbent LEC 
receiving local switching support for that customer.
    22. We conclude that the approach suggested by NECA, because it 
allocates local switching expenses and related investment in a manner 
that is consistent with the allocation methods prescribed under parts 
36 and 69 of our rules, provides a more accurate method for calculating 
the unseparated local switching revenue requirement. Because all 
carriers, including small carriers, already maintain the information 
necessary to calculate the local switching revenue requirement and 
because carriers must already submit similar information to the 
Administrator for high cost loop support, we conclude that any 
additional burden placed on carriers will be small, and that the 
benefits of using a more accurate method will outweigh any additional 
burden placed on carriers.
    23. In its October 31, 1997 report containing projections of demand 
for the modified DEM weighting assistance program, USAC reported that 
NECA had devised a formula for calculating the unseparated local 
switching revenue requirement for average schedule companies. For 
average schedule companies, local switching support will be calculated 
in accordance with a formula that the Administrator will submit 
annually to the Commission for review and approval. The formula 
submitted by the Administrator will be designed to produce 
disbursements to an average schedule company to simulate the 
disbursements that would be received pursuant to section 54.301 by a 
company that is representative of average schedule companies. We 
delegate to the Chief, Common Carrier Bureau the authority to review, 
modify, and approve the formula submitted by the Administrator.
3. True-up Mechanism for Adjusting Local Switching Revenue Requirement
    24. We agree with NECA that the Administrator should adjust DEM 
weighting support levels to correct errors that may result from the use 
of projected local switching costs. Accordingly, we direct the 
Administrator to adjust annually the levels of local switching support 
projected for each study period to reflect the historical support 
requirements determined from the data filed by the carrier for that 
study period. As a result, a carrier's local switching support will not 
be delayed until historical data are available, but, after the 
adjustment, such support will accurately reflect a carrier's historical 
costs. As proposed by NECA, we conclude that all such adjustments must 
be made within 15 months of the conclusion of the relevant study 
period. We emphasize that, unlike the current high cost loop data 
submissions, all carriers must submit accurate, historical data when 
they become available and that the Administrator must increase or 
decrease a carrier's subsequent

[[Page 2098]]

payments by the amount that the cost projection for that carrier 
differs from the costs which are in fact incurred.
    25. We note that local switching support also may be affected by 
changes in the weighting factor resulting from the number of lines 
served by a carrier. As provided in section 54.301 of the Commission's 
rules, ``[i]f 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 . . . 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.''

C. Long Term Support (LTS)

1. Technical Amendments to Section 54.303 Governing Calculation of LTS
    26. In response to GVNW's petition, we amend section 54.303 of our 
rules, as set forth below, to specify how LTS will be calculated for 
1998. First, we clarify that currently, and until January 1, 1998, LTS 
support is based on the difference between the NECA common line pool 
revenue requirement and the sum of the revenues obtained from charging 
a nationwide CCL rate calculated pursuant to section 69.105(b)(2) and 
the revenues obtained through SLCs. This clarification is necessary 
because the Order and section 54.303 failed to account for the portion 
of the common line revenue requirement that is recovered through end 
user common line charges, or SLCs. We therefore amend section 54.303 to 
include ``end user common line charges.'' We also clarify the procedure 
by which LTS support will be calculated after January 1, 1998. Prior to 
the modifications adopted in the Order, NECA calculated LTS using 
revenue requirement projections calculated pursuant to section 
69.105(b)(2) of our rules. After January 1, 1998 we will no longer use 
these annual projections. Instead, we will index 1997 levels of support 
to reflect annual changes in loop costs. Specifically, in 1998 and 1999 
LTS support will be calculated by adjusting previous support levels by 
the annual percentage change in the actual nationwide average cost per 
loop, and beginning January 1, 2000, LTS will be adjusted to reflect 
the annual percentage change in the Department of Commerce's GDP-CPI. 
Thus, under the modified LTS program adopted in the Order, the 
Administrator will make an initial, one-time calculation of projected 
1997 LTS revenue requirements of eligible carriers in service areas 
served by incumbent LECs that currently participate in the NECA common 
line pool. These projected 1997 LTS revenue requirements will be 
adjusted according to a rate of change that will reflect annual changes 
in loop costs as prescribed by section 54.303.
    27. Because LTS levels for 1998 and beyond will be based on 1997 
projections, we conclude that the methodology for calculating the NECA 
CCL charge contained in section 69.105(b)(2) should be used only for 
the 1997 projections. Therefore, section 54.303 now directs the 
Administrator to calculate only the base-level of LTS using the 
projected revenue recovered by the CCL charge in 1997 as calculated 
pursuant to section 69.105(b)(2) of our rules. Consistent with these 
clarifications, we amend section 54.303 to specify that the 
Administrator will calculate the unadjusted base-level of LTS for 1998 
by calculating the difference between the projected Common Line revenue 
requirement of NECA Common Line tariff participants projected to be 
recovered in 1997 and the sum of end user common line charges and the 
1997 projected revenue recovered by the CCL charge as calculated 
pursuant to section 69.105(b)(2) of our rules. As reflected in the rule 
changes, section 54.303 is amended to read in relevant part:

    To calculate the unadjusted base-level of Long Term Support for 
1998 the Administrator shall calculate the difference between the 
projected Common Line revenue requirement of association Common Line 
tariff participants projected to be recovered in 1997 and the sum of 
end user common line charges and the 1997 projected revenue 
recovered by the association Carrier Common Line charge as 
calculated pursuant to Sec. 69.105(b)(2) of this chapter.

    28. In the Order, the Commission stated that an eligible carrier's 
LTS will be based on the LTS received for the preceding calendar year, 
adjusted in 1998 and 1999 to reflect the percentage increase in the 
nationwide ``average loop cost.'' We are persuaded by NECA's comments 
that the phrase ``average loop cost'' in section 54.303 could be 
misinterpreted and that it would be preferable to use the terminology 
used elsewhere in our rules, i.e., ``average unseparated loop cost per 
working loop.'' Accordingly, we also amend section 54.303 by striking 
the phrase ``average loop cost'' and replacing it with ``average 
unseparated loop cost per working loop.'' As reflected in the rule 
changes, section 54.303 is amended to instruct the Administrator to 
adjust the levels of LTS for 1998 and 1999 to ``reflect the annual 
percentage change in the actual nationwide average unseparated loop 
cost per working loop.''
    29. On our own motion, we also amend section 54.303 to clarify that 
an incumbent LEC that participates in the NECA common line pool also 
must satisfy the requirements of an eligible telecommunications carrier 
in order to receive LTS. Accordingly, section 54.303 is amended to read 
in relevant part:

    Beginning January 1, 1998, an eligible telecommunications 
carrier that participates in the association Common Line pool shall 
receive Long Term Support.
2. Calculation of LTS Levels Based on Projections of Costs
    30. The Commission's determination to remove the LTS program from 
the access charge system and transfer it to the new support system will 
not create a two-year lag in the recovery of LTS supported costs, as 
argued by petitioners. In 1998, support payments provided to eligible 
carriers under the modified LTS program will be based not on historical 
cost data, which is the method of calculating support under the 
existing high cost loop fund, but, instead, will be based on 1997 
projections. Section 54.303, as modified above, now explicitly states 
that LTS support in the first year will be calculated based on the 
difference between the 1997 projected common line revenue requirement 
of NECA pool participants and the projected revenue recovered by the 
1997 NECA CCL charge and SLCs. Beginning January 1, 1998, LTS payments 
will be adjusted for all recipients based on average rates of change as 
provided in section 54.303. Because support will be based on 
projections using a rate of change, historical data will no longer be 
used and there will be no basis for delaying LTS payments.
3. True-up Mechanism to Adjust Base-Level of LTS
    31. Pursuant to section 54.303, the unadjusted base-level of LTS 
initially will be calculated using 1997 projections. To ensure that the 
modified LTS program is funded at appropriate levels, however, we 
direct the Administrator to adjust the base-level of LTS to reflect 
historical 1997 costs once those data become available to the 
Administrator. As proposed by NECA, we conclude that this adjustment 
should be made within fifteen months of the conclusion of the 1997 
calendar year. We emphasize that, unlike the current high cost loop 
data submissions, all carriers must submit historical cost data for 
1997. We direct the Administrator to increase or decrease a carrier's 
LTS payment to reflect 1997 costs that in fact incurred no later than 
15 months after the end of the 1997 calendar year. We note that, unlike 
the DEM weighting assistance program, which will require ongoing 
adjustments, the adjustment that we direct the Administrator to make to 
the LTS program will be needed only to adjust the base-level of LTS.

[[Page 2099]]

4. Membership in NECA Common Line Pool a Requirement for LTS
    32. We reiterate that an incumbent LEC's continued membership in 
the NECA common line pool is required for the incumbent LEC or any 
competitive eligible telecommunications carrier serving that incumbent 
LEC's former customers to receive payment of support comparable to LTS 
in a given service area. As we stated in the Order, we ultimately 
intend to determine universal service support for all carriers using a 
forward-looking economic cost model because such a model will require 
carriers to operate efficiently and will facilitate the move to 
competition in all telecommunications markets. We decided, however, 
that we would ``retain many features of the current support 
mechanisms'' in order to provide rural LECs, generally the recipients 
of LTS, sufficient time to adjust to any changes in universal service 
support, particularly a move to a forward-looking economic cost model 
for determining universal service support. Although we made some 
adjustments to the calculation and distribution scheme of LTS in the 
Order, we specifically continued this support mechanism, finding that 
such payments would 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, we wish 
to maintain the current support structure, as modified, for recipients 
of LTS until we are able to devise a forward-looking economic cost 
model to determine universal service support appropriate for such 
carriers. We find that broadening the scope of the LTS mechanism at 
this time beyond the boundaries established in the Order would hinder 
the achievement of our goal to move toward competition in all 
telecommunications markets.
    33. In addition, we note that a number of companies that have 
chosen to leave the NECA common line pool in the past generally have 
done so because their costs have decreased such that they can charge a 
lower CCL interstate access rate than the NECA CCL rate and recover 
their costs without LTS support. Thus, it is not clear how providing 
those carriers with modified LTS would further the goal of universal 
service. Although we recognize that other considerations may influence 
a carrier's decision to exit the pool, we can only presume that any 
carrier that has left did so after balancing all factors and 
determining that it could forego the receipt of LTS. Accordingly, we 
decline to reinstate LTS to such carriers and we deny ALLTEL's petition 
to the extent that it asks that rural incumbent LECs that have left the 
NECA pool be eligible to receive LTS under the new LTS program.
    34. Moreover, as to the requests of current LTS recipients that 
they be allowed to continue to receive LTS upon exiting the NECA pool, 
we reiterate that we wish to maintain the current LTS program as 
modified until we move to the use of a forward-looking economic cost 
model for determining universal service support for such carriers. 
Further, providing such support to carriers that leave the NECA pool 
could undermine the pool's usefulness in permitting participants to 
share the risk of substantial cost increases related to the CCL charge 
by pooling their costs and, thereby, charging an averaged CCL rate 
close to that charged by other carriers. This operation of the pool, 
like LTS payments, serves section 254's goal of facilitating 
interexchange service in high cost areas. Accordingly, we decline to 
permit a carrier leaving the pool to continue to receive LTS in the 
future.
    35. Pursuant to section 54.307 of the Commission's rules, a 
competitive eligible telecommunications carrier is eligible to receive 
universal service support to the extent that it captures an incumbent 
LEC's subscriber lines or serves new subscribers in the incumbent LEC's 
service area. Having determined that an incumbent LEC exiting the NECA 
common line pool will lose LTS, we also determine that a competitive 
eligible telecommunications carrier that receives LTS for serving 
subscribers in an incumbent LEC's service area similarly will lose LTS 
when the incumbent LEC exits the NECA common line pool.

D. Support for Competitive Eligible Telecommunications Carriers

    36. We clarify the Commission's finding that, beginning January 1, 
1998, high cost loop support, DEM weighting assistance, and LTS will be 
portable to any competitive local exchange carrier that has been 
designated as an eligible telecommunications carrier. Section 
54.307(a)(1) of our rules, which encompasses all three types of support 
currently received by incumbent LECs, provides that ``[a] competitive 
eligible telecommunications carrier shall receive support for each line 
it serves based on the support the incumbent LEC receives for each 
line.'' Section 54.307(a)(2) sets forth the method for calculating per-
line support that will be paid to a competitive eligible 
telecommunications carrier for each line that it serves in an incumbent 
LEC's service area. Section 54.307(a)(3) provides the method for 
calculating the level of support that a competitive eligible 
telecommunications carrier that uses switching functionalities or loops 
that are purchased as unbundled network elements will receive. AirTouch 
correctly notes that section 54.303, which establishes the method for 
calculating LTS, explicitly states that a competitive eligible 
telecommunications carrier will receive LTS. In order to eliminate the 
apparent ambiguity in our rules governing portability, we amend the 
first sentence of section 54.303 to eliminate any reference in that 
section to competitive carriers' eligibility to receive LTS. We adopt 
this amendment based on our conclusion that section 54.307, which sets 
forth the method for calculating the amount of high cost loop support, 
DEM weighting assistance, and LTS that a competitive carrier may 
receive, specifies the support that competitive eligible 
telecommunications carriers are entitled to receive and, therefore, the 
reference to competitive carriers in section 54.303 is not needed.

E. Impact on Incumbent LEC of Losing Access Lines to Competitive 
Eligible Telecommunications Carriers

    37. We clarify here that, if an incumbent LEC loses a customer to a 
competitive eligible telecommunications carrier, the incumbent LEC will 
lose some or all of the per-line level of support that is associated 
with serving that customer. If the competitive eligible 
telecommunications carrier uses network elements purchased pursuant to 
section 51.307 to provide the supported services, the reduction in the 
amount of support received by the incumbent LEC is specified in section 
54.307(a)(3) of the Commission's rules. That section provides that 
``[t]he [incumbent] LEC * * * 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 [incumbent] LEC.'' Section 54.307(a)(4) of 
our rules provides that a competitive eligible telecommunications 
carrier that provides the supported services using neither unbundled 
network elements nor wholesale service purchased pursuant to section 
251(c)(4) will receive the full amount of universal service support 
previously provided to the incumbent LEC for that customer. That 
section, however, does not provide

[[Page 2100]]

a corresponding reduction in the amount of support received by the 
incumbent LEC. Accordingly, we amend section 54.307(a)(4) to clarify 
that, when a competitive eligible telecommunications carrier receives 
support for a customer pursuant to section 54.307(a)(4), the incumbent 
LEC will lose the support it previously received that was attributable 
to that customer.

F. Corporate Operations Expenses

1. Imposition of a Limitation
    38. In light of these challenges to the Commission's decision to 
limit recovery of corporate operations expenses, we take this 
opportunity to explain more fully the bases for this decision. 
Expenditures for corporate operations in many instances may be 
discretionary, in contrast, for example, to expenditures to maintain 
existing plant and equipment. Corporate operations expenses include, 
for example, travel, lodging and other expenses associated with 
attending industry conventions and corporate meetings. Although 
participation in such activities may be prudent, the levels of these 
expenditures are subject to managerial discretion. Carriers currently 
have little incentive to minimize these expenses because the current 
mechanism for providing support in high cost areas allows carriers to 
recover a large percentage of their corporate operations expenses. For 
companies with fewer than 200,000 lines, for example, the expenses 
attributed to the high cost expense adjustment are covered in full for 
companies with costs in excess of 150 percent of the national average. 
Smaller carriers possess even fewer incentives to minimize corporate 
operations expenses because the Commission has a limited ability to 
ensure, through audits, that smaller companies properly assign 
corporate operations expenses to appropriate accounts and that these 
expenses do not exceed reasonable levels. The Commission, and 
frequently state commissions, cannot justify auditing smaller carriers 
because the Commission's audit staff is small, there are many hundreds 
of small telephone companies, and the costs of full-scale audits are in 
many instances likely to exceed any expenses found to be improper. We, 
therefore, conclude that imposing a cap that is relatively generous to 
small carriers, but still imposes a limitation, is a reasonable method 
of encouraging carriers to assign corporate operations expenses to the 
proper accounts and discouraging carriers from incurring excessive 
expenditures. Under this approach, we provide carriers with an 
incentive to control their corporate operations expenses without 
requiring carriers to incur the costs associated with a full Commission 
audit. As the Commission stated in its Order and as explained further 
below, carriers that contend that the limitation provides insufficient 
support may request a waiver from the Commission. Therefore, only 
carriers whose expenses exceed the cap and who contend that the capped 
amount is insufficient will be required to provide additional 
justification for their expenditures. We, therefore, conclude that a 
cap on federal support for corporate operations expenses is a 
reasonable method of preventing the recovery of improperly assigned or 
excessive expenses from federal funds while minimizing the 
administrative burden on the Commission and on all carriers, including 
smaller carriers.
    39. We disagree with petitioners who assert that, because some 
corporate operations expenses are not discretionary, we should not 
impose any limit on the recovery of corporate operations expenses. We 
recognize that the expenses cited by petitioners and commenters may be 
necessary for the operation of a company, and that such expenditures 
are in some circumstances required by state or federal law or 
regulation. Most companies, however, fulfill all such state and federal 
requirements while incurring corporate operations expenses that are 
well below the limitation imposed by the Commission. No party has 
provided detailed data explaining the significant differences in 
corporate operations expenses for companies of similar sizes. Further, 
we are not excluding recovery of corporate operations expenses from 
universal service support, but instead are imposing a reasonable limit. 
We reject ITC's request to exclude all federal regulatory expenses from 
the limitation because, although some expenditures may be necessary to 
participate in the federal regulatory process, we see no reason to 
permit the unlimited recovery of such expenses. Moreover, individual 
companies that are required to incur unusually high corporate 
operations expenses, such as Alaskan or insular telephone companies, 
have the right to apply for a waiver with the Commission to demonstrate 
the necessity of these expenses for the provision of the supported 
services.
2. Adjustments to Limitation Formula
    40. In the July 10 Order, the Commission specified a minimum 
allowable corporate operations cost in order to ensure that carriers 
with small numbers of working loops would receive sufficient support to 
recover initial or fixed corporate operations expenses. This monthly 
cost minimum was estimated from a regression of total corporate 
operations expenses on the number of working loops. After performing 
this analysis, the Commission adopted a minimum monthly recovery of 
$9,505, which results in a minimum recovery of $114,071 per year. USTA 
and GVNW urge the Commission to increase this minimum recovery from 
$114,071 per year to $300,000 per year. USTA additionally advocates 
adopting a limitation equal to the greater of either $300,000 per year 
or $34.82 per line per month.
    41. We reconsider, to a limited extent, the limitation on recovery 
of corporate operations expenses and adopt a new minimum cap of 
$300,000 per year as advocated by USTA and GVNW. Although we are fully 
confident in the formula that calculates the cap, we adopt a minimum 
cap of $300,000 out of an abundance of caution for the smallest 
carriers. The increased minimum will reduce the need of the smallest 
carriers to seek a waiver of the cap. We intend to continue to monitor 
the effect of this limitation and the $300,000 minimum cap on smaller 
carriers. We note that, because the Commission has adopted an indexed 
cap for all high cost support, increases in the amount of support 
provided to some companies will reduce the amount of support provided 
to other companies. We find, however, that this change will result in a 
minimal increase in the total amount of universal service support 
provided to carriers. We will continue to monitor this issue closely 
and will take steps to ensure that only necessary and prudent 
expenditures are supported. We do not adopt USTA's alternative proposal 
to increase recovery to $34.82 per line per month for all carriers 
because we believe the minimum cap of $300,000 provides adequate 
protection for the smallest carriers while imposing the smallest 
corresponding decrease in high cost loop support for carriers overall.
    42. Upon reconsideration, we make an additional change in the 
limitation formula to address a small discontinuity in the formula that 
causes the total allowable corporate operations expense to be slightly 
lower in the range from 17,988 and 17,997 lines than the amount 
computed at 17,987 lines. To eliminate the anomaly caused by this 
discontinuity, we alter the second threshold for access lines from 
17,988 lines to 18,006 lines. Finally, to make our rules easier to 
apply, we

[[Page 2101]]

standardized general mathematical conventions in the formulas.
3. Methodology Used To Calculate the Limitation
    43. Western Alliance questions the methodology the Commission used 
to create the formula for the corporate operations expense limitation. 
Western Alliance asserts that the Order contained no discussion or 
reasoned explanation of: ``(a) why a regression analysis using a spline 
function technique was accurate and appropriate; (b) how or why the 115 
percent ceiling was selected; or (c) how or why the 1995 NECA data were 
representative.'' We address these arguments in turn. As detailed 
further in the July 10 Order, the Commission used a linear spline to 
estimate average corporate operations cost per loop, based on the 
number of loops served. To produce this formula, we used statistical 
regression techniques that focused on the relationship between expenses 
per loop, rather than total expense. We adopted this approach in order 
to establish a model under which the cap on corporate operations 
expense per line would decline as the number of loops increases for a 
range of smaller companies so that economies of scale, pursuant to 
which expenses per loop decline as carrier size increases, would be 
taken into account by the formula. Of the models studied, the linear 
spline was found to have the highest R\2\, a measure indicating that 
this model provides the best fit with the data. The relationship 
between corporate operations expense and lines served may reasonably be 
expected to change as carriers' size increases. The linear spline 
method used allows a different slope to be fitted for smaller carriers 
than for larger carriers. The Commission adopted the ``knot,'' or the 
point at which the two line segments of the linear spline model meet, 
at 10,000 loops because that point allowed the best fitting overall 
spline.
    44. Regarding the remaining issues raised by Western Alliance, the 
115 percent ceiling that limits recovery of corporate operations 
expenses is consistent with other Commission rules regarding universal 
service support under part 36 of our rules. The Commission has 
consistently considered carriers whose loop costs exceed the national 
average loop cost by more than 15 percent worthy of special treatment. 
In the present context, out of an abundance of caution, we have 
concluded that companies will be allowed to recover costs up to 15 
percent above average costs, rather than limiting recovery of such 
expenses to average costs. We also find that, before receiving 
corporate operations expenses in excess of 115 percent of the average, 
companies should undergo additional scrutiny by submitting a waiver 
request to the Commission. Finally, the data used in the estimation are 
the actual corporate operations expenses that companies filed with NECA 
for the calculation of universal service support. We used the most 
current NECA data available at the time we performed these 
calculations.
    45. Western Alliance claims that the Commission's corporate 
operations expense formula affects smaller companies more significantly 
than larger companies. It states that Figure 1 in the July 10 Order 
demonstrates that the data for LECs with more than 15,000 loops cluster 
more closely around the Commission's fitted line than the data for 
those LECs with fewer than 15,000 lines. This observation, however, 
does not undermine the Commission's conclusion. Because corporate 
operations expense per line varies more for smaller companies than 
larger ones, any line that we might adopt would fit the data for larger 
companies more closely than it would fit the data for smaller ones. 
Moreover, as explained above, we have raised the minimum cap out of an 
abundance of caution to address concerns that, without modification, 
our formula may not afford sufficient recovery of corporate operations 
expenses for the smallest companies.
    46. We reject GVNW's argument that it is not clear whether the 
corporate operations expense rule addresses amounts from Accounts 6710 
and 6720 or whether it addresses ``that portion assigned to loop cost 
in NECA's USF Algorithm (AL19).'' According to the Order, however, 
``[c]orporate operations expense are recorded in Account 6710 
(Executive and planning) and Account 6720 (General and 
administrative).'' Hence, the limitation applies to accounts 6710 and 
6720 and does not apply to NECA's USF algorithm.
    47. RTC asserts that the Commission's formula is a proxy model and 
therefore should be subject to the criteria the Commission adopted for 
forward-looking cost proxy models in the Order. Although the formula we 
adopted to limit recovery of corporate operations expenses is a model, 
it is not a model intended to estimate forward-looking economic costs. 
Therefore, most of the criteria adopted by the Commission concerning 
forward-looking cost proxy models are inapplicable to the corporate 
operations expense formula. Further, RTC is incorrect to the extent 
that it is arguing that the underlying data and assumptions for the 
formula are unavailable to the public. The data used to create the line 
were filed publicly with the Commission by NECA for calendar year 1995. 
The assumptions and method we used to compute the formula can be found 
in greatest detail in the July 10 Order. The Commission has not, as TCA 
alleges, contradicted its decision to base universal service support 
for rural telephone companies on embedded costs until January 1, 2001. 
The formula we have adopted imposes a limit on the recovery of embedded 
costs and is not a proxy model designed to calculate forward-looking 
economic costs.
    48. We find that our limitation on recovery of corporate operations 
expenses will not jeopardize the affordability of local services. 
Because, as discussed above, such expenditures and the level of such 
expenditures are in many cases discretionary, we believe that imposing 
some limits on corporate operations expenses serves the public 
interest. Moreover, if carriers have prudent corporate operations 
expenses that exceed the cap, they may seek a waiver of that cap.
    49. Based on the changes described above, we modify the formula to 
limit the amount of corporation operations expenses per working loop 
that a carrier may recover as follows:

for study areas with 6,000 or fewer working loops the amount per 
working loop shall be $31.188 - (.0023  x  the number of working 
loops), or, ($25,000  the number of working loops), 
whichever is greater;

for study areas with more than 6,000 but fewer than 18,006 working 
loops, the amount per working loop shall be $3.588 + (82,827.60 
 the number of working loops); and

for study areas with 18,006 or more working loops, the amount per 
working loop shall be $8.188.

We conclude that this modified formula will better serve our goal of 
ensuring that carriers use universal service support only to offer the 
supported services to their customers through prudent facility 
investment and maintenance consistent with their obligations under 
section 254(k).
4. Procedural Matters
    50. We conclude that the limitation on corporate operations 
expenses was adopted in compliance with the Administrative Procedure 
Act (APA). The Commission gave the public ample notice regarding the 
possibility of limiting or excluding recovery of corporate operations 
expenses. In a Notice of Inquiry released in 1994, the Commission 
sought comment on whether we should exclude all recovery of corporate 
operations expenses. In a Notice of Proposed Rulemaking released

[[Page 2102]]

in 1995, as the petitioners acknowledge, the Commission tentatively 
concluded that it should exclude recovery of all such expenses. In the 
Universal Service Notice, the Commission specifically sought comment on 
whether any proposals in Docket No. 80-286 were worthy of consideration 
in Docket No. 96-45 and specifically incorporated the record of that 
proceeding into the 96-45 docket. Moreover, in its Public Notice 
seeking further comment, the Common Carrier Bureau asked what 
modifications should be made to the high cost support mechanism if it 
were retained with respect to rural areas. In response to this Public 
Notice, several parties recommended that the Commission limit or 
exclude recovery of corporate operations expenses as it had previously 
proposed.
    51. Not only did the Commission provide notice of a potential limit 
on or exclusion of the recovery of corporate operations expenses, the 
approach adopted by the Commission takes into consideration the 
comments filed in response to these notices. The Commission initially 
proposed disallowing all recovery for corporate operations expenses. 
After considering the comments, however, the Commission concluded in 
the Order that it should limit such expenses to a reasonable level 
rather than excluding them altogether. The approach taken is 
conceptually similar to the one NECA proposed in response to the 1995 
Notice and again in response to the Public Notice. NECA proposed that 
high cost support recipients should recover only expenses that fall 
below a line that is two standard deviations above a regression line. 
Our limitation is based on a regression line that takes into account 
the size of the company when calculating an acceptable range of 
recoverable corporate operations expenses and, rather than allowing all 
expenses within two standard deviations of the line as proposed by 
NECA, allows recovery of expenses that are up to 115 percent of the 
typical costs of companies of similar size. Thus, because the corporate 
operations expense cap was within the scope of the proposal to 
eliminate recovery of all corporate operations expenses and was 
supported by record evidence, the requirements of the APA were met.
    52. We conclude that we are not barred from adopting this 
limitation because, although the Joint Board did not make a 
recommendation about limiting the recovery of corporate operations 
expenses, the Commission properly referred to the CC Docket No. 96-45 
Joint Board the question of whether proposals originating with the CC 
Docket No. 80-286 Joint Board should be adopted. We also conclude that 
Western Alliance incorrectly implies that the legislative history to 
the 1996 Act prohibits the Commission from adopting any proposal that 
was submitted in the record of the CC Docket No. 80-286 proceeding. 
Although the Joint Explanatory Statement explained that Congress did 
not view the CC Docket No. 80-286 proceeding as an appropriate basis 
for implementing section 254(a), nothing in the legislative history 
suggests that Congress, in enacting section 254, intended to preclude 
us from considering specific proposals from that docket in the separate 
proceeding undertaken to implement section 254. Indeed, the Commission, 
in the Universal Service Notice, sought comment on whether any 
proposals from the 80-286 docket were consistent with the 1996 Act so 
as to avoid duplication of previous Commission efforts. As described 
above, several commenters proposed elimination or limitation of the 
recovery of corporate operations expenses in the 96-45 docket, and the 
Commission adopted this limitation as part of the 96-45 docket.
    53. We also conclude that our adoption of a high standard for 
granting a waiver for corporate operations expense recovery is fully 
justified. Because corporate operations expenses are in many cases 
completely within a company's discretion, they are more likely to be 
susceptible to abuse than other types of expenditures such as plant 
maintenance expenditures. Accordingly, parties contending that they 
should recover unusually high amounts of such expenses should be 
required to meet a substantial burden. Additionally, because the 
limitation includes a buffer zone to accommodate companies that may 
have corporate operations expenses that are higher than average, but 
not extreme, we affirm our conclusion that the need for waivers should 
be limited to exceptional circumstances.
    54. We also reject petitioners' suggestions that the limitation on 
recovery of corporate operations expenses should be phased in over a 
lengthy transition period. Unlike other situations cited by the 
commenters, a transition period is not warranted in this instance. We 
conclude that we should not phase in a measure designed to prevent 
misallocation, manipulation, and abuse. Companies believing that they 
have reasonably incurred expenses in excess of the limitation may 
petition for a waiver from the Commission. We find that the 
availability of a waiver will sufficiently protect any company that 
legitimately incurred expenses in excess of the limitation, whether 
caused by activity mandated by the 1996 Act or for any other reason.
    55. Contrary to the position of some commenters, the Commission is 
fully authorized to adopt rules to implement section 254(k) in addition 
to codifying the statutory provision as it has already done. In fact, 
in the Section 254(k) Order, we concluded that we would ``from time to 
time, re-evaluate our rules to determine whether additional rule 
changes are necessary to meet the requirements of section 254(k).'' The 
Commission concluded in the Order and the July 10 Order that some 
recipients of federal universal service support may be receiving funds 
beyond those necessary to provide the supported services. Recovery of 
such expenditures may allow carriers to use these expenditures to 
subsidize competitive services in violation of section 254(k). In 
addition to limiting support for corporate operations expense in order 
to control spending that may be in excess of that allowed by the Act, 
the Commission correctly found that limiting corporate operations 
expenses would reduce the ability of incumbent LECs to subsidize 
competitive services with noncompetitive services by reducing the 
incumbent LECs' receipt of funds beyond those that may be necessary to 
provide the supported services. We therefore conclude that limiting 
recovery of corporate operations expenses is within the ambit of 
section 254(k).

V. Support for Low-Income Consumers

A. Obligation To Provide Toll-Limitation Services

    56. We believe that low-income consumers eventually should have the 
choice of selecting either toll blocking or toll control to restrict 
their toll usage. We conclude, however, that giving consumers such an 
option is not viable at this time. Based on the record before us, we 
find that an overwhelming number of carriers are technically incapable 
of providing both toll-limitation services, particularly toll-control 
services, at this time. Under our current rules, carriers technically 
incapable of providing both types of toll-limitation services must seek 
from their state commissions a time-limited waiver of their obligation 
to provide both toll blocking and toll control. Given that a large 
number of carriers are technically incapable of providing both toll 
blocking and toll control at this time, we believe that requiring 
carriers

[[Page 2103]]

to provide both would result in an unnecessarily burdensome process for 
state commissions required to act on a large number of waiver 
proceedings.
    57. In light of these concerns, we believe that requiring carriers 
to provide at least one type of toll-limitation service is sufficient 
to provide low-income consumers a means by which to control their toll 
usage and thereby maintain their ability to stay connected to the 
public switched telephone network. Weighing the burdens on the states 
and the need to have carriers designated in a short time frame against 
the goal of giving low-income consumers a full range of options for 
controlling toll usage, we define toll-limitation services as either 
toll blocking or toll control and require telecommunications carriers 
to offer only one, and not necessarily both, of those services at this 
time in order to be designated as eligible telecommunications carriers. 
We note, however, that if, for technical reasons, a carrier cannot 
provide any toll-limitation service at this time, the carrier must seek 
a time-limited waiver of this requirement to be designated as eligible 
for support during the period it takes to make the network changes 
needed to provide one of those toll-limitation services. In addition, 
if a carrier is capable of providing both toll blocking and toll 
control, it must offer qualifying low-income consumers a choice between 
toll blocking and toll control. Because we agree with Catholic 
Conference that all qualifying low income consumers ideally should be 
offered their choice of toll blocking or toll control, we plan to 
monitor and revisit this issue if we determine that technological 
impediments to carriers' ability to offer toll limitation have been 
reduced or eliminated. We also encourage carriers to develop and 
investigate cost-effective ways to provide toll-control services.
    58. We further conclude that carriers offering Lifeline service 
will not be required to provide toll-limitation services other than 
those specifically identified in the Order. The Commission defined toll 
blocking as a service that allows customers to block outgoing toll 
calls, and defined toll control as a service that allows customers to 
limit in advance their toll usage per month or billing cycle. 
Therefore, carriers offering Lifeline service will not be required to 
offer, for example, international toll-call-blocking or toll blocking 
that allows callers with a Personal Identification Number (PIN) to make 
toll calls, as suggested by the Florida Commission. While we encourage 
carriers to offer Lifeline consumers, free of charge, toll-limitation 
services that include functions and capabilities beyond those described 
in the Order, we are persuaded by USTA that most carriers currently are 
technically incapable of providing these additional services. 
Furthermore, regarding the issue of whether toll control must limit 
collect calls, we conclude that, like toll blocking, toll control only 
must allow consumers to limit outgoing calls.
    59. In response to the Texas Commission's request, we reiterate 
that toll-limitation services for qualifying low-income subscribers are 
included in the definition of the ``core'' or ``designated'' services 
that will receive universal service support. A carrier must provide 
these core services throughout its entire service area in order to be 
designated an eligible telecommunications carrier. We further clarify 
that, compliance with the no disconnect rule and the prohibition on 
deposit rule are not specific preconditions to being designated an 
eligible telecommunications carrier. Once designated as an eligible 
telecommunications carrier, however, that carrier must offer all 
Lifeline and LinkUp services to qualifying low-income subscribers.

B. Recovery of PICC

    60. Consistent with our efforts to make toll-blocking service 
easily affordable to low-income consumers, we adopt our tentative 
conclusion in the Second Further Notice to waive the PICC for Lifeline 
customers who elect toll blocking. For the reasons discussed here and 
in succeeding paragraphs, we agree with SBC and AT&T and conclude that 
support for PICCs for Lifeline customers who have toll blocking, but 
nevertheless remain presubscribed to an IXC, will be provided by the 
universal service support mechanisms in addition to the support for 
Lifeline customers established in the Order. In the Order, the 
Commission noted that studies demonstrate that a primary reason 
subscribers terminate access to telecommunications services is failure 
to pay long-distance telephone bills. The Commission concluded that, 
because voluntary toll blocking allows customers to block toll calls, 
and toll-control service allows customers to ensure that they will not 
spend more than a predetermined amount on toll calls, these services 
assist Lifeline customers in avoiding involuntary termination of their 
access to telecommunications services. The Commission concluded that, 
in order to increase the use of toll-blocking and toll-control services 
by low income consumers, Lifeline customers should receive these 
services at no charge. It would make little sense, and would undermine 
the very basis for providing Lifeline customers free access to toll 
blocking, to assess the PICC on Lifeline customers who select toll 
blocking. In addition, in light of our decision herein to permit 
eligible carriers to offer either toll control or toll blocking, it 
would be particularly unfair to assess the PICC on Lifeline customers 
who do not have the option of selecting toll control, but that are 
limited to toll blocking. To do so would discriminate against Lifeline 
customers who may only select toll blocking, and thus would have no 
reason to presubscribe to an IXC. In contrast, a Lifeline subscriber 
who is able to select toll control likely will presubscribe to an IXC, 
because that subscriber's access to toll calling is limited, but not 
blocked entirely.
    61. We thus conclude that, because toll blocking for low-income 
consumers is a supported service that carriers must provide to such 
customers and the PICC payment issue arises as a direct result of the 
toll blocking requirement, the PICC, in these instances, is 
sufficiently related to the provision of toll blocking that it should 
be supported for low-income consumers. Thus, such costs should be 
recovered in a competitively neutral manner that is consistent with 
section 254 of the Act. Therefore, all interstate telecommunications 
carriers, not just IXCs, should bear the costs of the waived PICCs.
    62. Moreover, we agree with petitioners that the low-income program 
of the federal universal service support mechanisms should support 
PICCs attributable to all qualifying low-income consumers who have toll 
blocking. As stated above, we will support PICCs attributable to 
qualifying low-income consumers who have toll blocking but do not have 
a presubscribed IXC. We anticipate that most low-income consumers who 
receive toll blocking will do so voluntarily and that most will not 
have presubscribed IXCs. In the event, however, that a low-income 
consumer is required to elect toll blocking (e.g., as a condition of 
receiving local service) or in the event that a low-income consumer 
remains presubscribed to an IXC even though the consumer receives toll 
blocking, the federal low-income program also will support the PICCs 
attributable to consumers in those circumstances. Low-income consumers 
who elect toll blocking, but who remain presubscribed to an IXC, would 
not receive toll blocking free-of-charge unless we waive the PICC for 
the consumers. If an IXC were required to pay the PICC

[[Page 2104]]

attributable to a low-income consumer who elects toll blocking, that 
IXC would not be able to recover the PICC through per-minute charges 
associated with toll usage. Thus, absent changes to our rules, the IXC 
may seek to recover the PICC from the consumer in the form of a flat-
rate charge. As we have noted above, toll blocking helps consumers to 
control their toll usage and should be available free-of-charge to 
qualifying low-income consumers. Therefore, to ensure the availability 
of toll blocking to all qualifying low-income consumers free-of-charge, 
we conclude that the low-income program of the federal universal 
service support mechanisms should support PICC charges attributable to 
all low-income consumers who have toll blocking.
    63. All competitive eligible carriers that provide Lifeline service 
to customers who elect toll blocking should be able to recover an 
amount equal to the PICC that would be recovered by the incumbent LEC 
in that area from the low-income program of the federal universal 
service support mechanisms even though such carriers are not required 
to charge PICCs. Competitive eligible carriers should be able to 
receive support amounts equal to the PICCs because, like incumbent 
LECs, they will be unable to recover any portion of their costs 
associated with a toll-blocked customer from IXCs originating 
interexchange traffic on that customer's line. To avoid creating 
incentives for carriers to pass additional costs to low-income 
consumers through increased rates, we conclude that competitors should 
receive this additional support for Lifeline customers who elect to 
receive toll blocking. In addition, in order to ensure competitive 
neutrality, a competing local carrier serving a Lifeline customer 
should be able to receive the same amount of universal service support 
that an incumbent LEC would receive for serving the same customer. 
Because an incumbent LEC serving a low-income customer who elected toll 
blocking would receive support for the PICC associated with that 
customer, in order to ensure that competing local carriers are not 
operating at an unfair advantage, competing local carriers should be 
eligible to receive the same amount of support that the incumbent LEC 
would receive.

C. Florida Commission's Petition Pertaining to State Lifeline 
Participation

    64. Consistent with the Commission's earlier finding that we should 
not prescribe the methods that states use to generate intrastate 
Lifeline support in order to qualify for federal support, we conclude 
that, although all carriers are not required to contribute to Florida's 
Lifeline support mechanisms, Florida's Lifeline program nevertheless 
qualifies as providing intrastate matching funds. We, however, 
encourage states to develop Lifeline matching programs that are 
competitively neutral and emphasize that, as noted in the Order, states 
must meet the requirements of section 254(e) in providing equitable and 
non-discriminatory support for state universal service support 
mechanisms. Because we find that Florida's Lifeline program qualifies 
as state participation, we need not address the Florida Commission's 
request for a waiver of the federal default Lifeline qualification 
standard. For the same reason, we also decline to address the Florida 
Commission's request for a waiver allowing it to set eligibility 
requirements or implement a grandfather provision for certain Lifeline 
recipients.

VI. Schools, Libraries, and Rural Health Care Providers

A. Lowest Corresponding Price

    65. Neither USTA nor any other party offers persuasive evidence 
that the three-year ``look back'' provision for determining the lowest 
corresponding price is either unnecessarily burdensome or will unfairly 
delay a service provider's participation in the bidding process. 
Commenters do not assert that the relevant records are not maintained 
or are not accessible. We note that the universe of records that the 
provider must review to determine the lowest corresponding price is 
limited to charges involving similarly situated, non-residential 
customers for similar services.
    66. We do not agree with USTA that the three-year ``look back'' 
provision violates the principle of competitive neutrality by 
disadvantaging larger providers. We note that this requirement applies 
equally to all providers and that, although larger providers may have a 
greater number of records to review for purposes of determining the 
lowest corresponding price, these providers also likely have greater 
resources and more sophisticated methods of recordkeeping.
    67. We agree with USTA, however, that we should modify our earlier 
holding to clarify the application of our lowest corresponding price 
requirement. We conclude that, for purposes of calculating the lowest 
corresponding price, a provider will not be required to match a price 
it offered to a customer under a special regulatory subsidy or that 
appeared in a contract negotiated under very different conditions. For 
example, we previously concluded that service providers will be 
permitted to charge schools and libraries prices higher than those 
charged to other similarly situated customers if the services sought by 
a school or library include significantly different traffic volumes or 
the provision of such services 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. 
Under our modified rules, a service provider will not be required to 
demonstrate further that matching such a price would force the provider 
to offer service at a rate below the compensatory rate for that 
service. The use of a rate below the compensatory rate would not be 
practical, given the limited resources of schools and libraries to 
participate in lengthy negotiations, arbitration, or litigation. 
Regarding Bell Atlantic's concern that special regulatory rates 
established by states for schools and libraries should not be treated 
as the pre-discount prices, we reiterate that special regulatory 
subsidies need not be considered in determining the lowest 
corresponding price. Consistent with our findings above, we conclude 
that each such situation should be examined on a case-by-case basis to 
determine whether the rate is a special regulatory subsidy or is 
generally available to the public. We also note that the universal 
service discount mechanism is not funding the difference between 
generally available rates and special school rates, as suggested by 
Bell Atlantic, but is applied to the price at which the service 
provider agrees to provide the service to eligible schools and 
libraries.
    68. We disagree with USTA that earlier versions of tariffs that 
have been modified by regulators should be excluded from the comparable 
rates upon which the lowest corresponding price is determined. Unless a 
regulatory agency has found that the tariffed rate should be changed, 
and affirmatively ordered such change, or absent a showing that the 
rate is not compensatory, we find no reason to conclude that former 
tariffed rates do not represent a fair and reasonable basis for 
establishing the lowest comparable rate.
    69. We decline to adopt GTE's proposal to exclude all promotional 
offerings from the comparable rates upon which a provider must 
determine the lowest corresponding price. Instead, we conclude that 
only promotions offered for a period not exceeding 90 days may be 
excluded from the

[[Page 2105]]

comparable rates upon which the lowest corresponding price must be 
determined. This conclusion is consistent with the decision of the U.S. 
Court of Appeals for the 8th Circuit upholding the portion of the 
Commission's interconnection decision finding that discounted and 
promotional offerings are telecommunications services that are subject 
to the resale requirement of section 251(c)(4), and that promotional 
prices lasting more than 90 days qualify as retail rates subject to 
wholesale discount. Excluding shorter term promotional rates from 
consideration here balances the need to provide compensatory rates to 
providers while ensuring that eligible schools and libraries receive 
competitive, cost-based rates that are comparable to rates paid by 
similarly situated non-residential customers for similar services. 
Consistent with the Commission's rationale in the Implementation of 
Section 254(g) Order, we agree that a 90-day period in which customers 
may receive discounted rates as part of a promotion is sufficient time 
for a targeted promotional offering to attract interest in new or 
revised services, but not so long as to undermine the requirement that 
the price offered to schools and libraries be no greater than the 
lowest corresponding price the carrier has charged in the last three 
years or is currently charging in the market.
    70. As previously noted, providers and eligible schools and 
libraries will have the opportunity to seek recourse from the 
Commission, regarding interstate rates, and from state commissions, 
regarding intrastate rates if they believe that the lowest 
corresponding price is unreasonably low or unreasonably high. We 
decline to adopt the suggestion of USTA that we impose limits on a 
customer's ability to challenge the pre-discount price it has been 
offered. We have no basis in this record for assuming that the 
possibility of such abuse by schools and libraries is greater than the 
potential for service providers to assert frivolously that the rates 
are too low. We will monitor parties' use of the dispute process and, 
if we find a pattern of frivolous challenges by schools, libraries, or 
service providers, we will take steps to remedy any such abuse at that 
time.

B. Reporting Requirements for Schools and Libraries

    71. We conclude that the reporting requirements established in the 
Order for eligible schools and libraries are not unreasonably 
burdensome, and that they represent a reasonable means of ensuring that 
schools and libraries are capable of utilizing the requested services 
effectively. Section 254(h)(1)(B) provides for discounts on services 
that are used for educational purposes and that are provided in 
response to a bona fide request. In the Order, the Commission agreed 
with the Joint Board that Congress intended to require accountability 
on the part of schools and libraries and therefore, consistent with 
section 254(h)(1)(B), required eligible schools and libraries to 
conduct an internal assessment of the components necessary to use 
effectively the discounted services they order. We note that the 
application requirements established in the Order were recommended by 
the Joint Board and supported by a majority of commenters on this 
issue. We affirm our decision, because we find that it is in the public 
interest to ensure that funds are distributed only to support eligible 
services that serve the needs to the school or library requesting 
support. We find that the mere submission of a bona fide request is not 
an adequate substitute to ensure that these public interest goals are 
met.
    72. The Commission determined in the Order that it would not be 
unduly burdensome to require eligible schools and libraries to conduct 
a technology assessment, prepare a plan for using these technologies, 
and receive independent approval of such plans. Moreover, the 
Commission took steps to eliminate unnecessary burdens, and prevent the 
need for duplicative review of technology plans. The Commission noted 
that many states have already undertaken state technology initiatives 
and that plans that have been approved for other purposes, e.g., for 
participation in federal or state programs, such as ``Goals 2000,'' 
will be accepted without need for further independent approval. We also 
note that the reporting requirements have been reviewed and approved by 
the Office of Management and Budget (OMB) pursuant to the Paperwork 
Reduction Act of 1995. Because we conclude that the reporting 
requirements are not unduly burdensome, help ensure that funds are 
allocated in a manner that serves the policy goals set forth in section 
254(b)(6) and section 254(h), and do not violate section 254(h)(1)(B), 
we deny Global's petition for reconsideration of those requirements.
    73. We also deny Florida Department of Management Services' request 
to apply, during the first year of the federal support mechanisms, for 
universal service discounts using a form created by the state of 
Florida. We find that requiring all applicants to use the same forms 
serves several important purposes. First, the forms were designed to 
ensure accountability, and protect against fraud and abuse. For 
example, the forms require applicants to provide information designed 
to ensure that each school or library receives the discount to which it 
is entitled under the Commission's rules. The forms also are designed 
to ensure that support is provided only with respect to eligible 
entities, and only for services eligible for support, and that 
applicants are otherwise in compliance with all applicable Commission 
requirements. Second, the forms were designed to facilitate the use of 
competitive bidding. In addition, the forms were designed to be 
competitively neutral, so that no potential provider is precluded from 
offering service to a school or library. Third, the use of a single set 
of forms will substantially ease burdens of administering the support 
mechanism, and thereby minimize the costs of administration. Moreover, 
if funds are allocated pursuant to a single set of forms, it may be 
easier to audit the administrative processes of the Schools and 
Libraries Corporation. Fourth, the use of a single set of forms will 
facilitate tracking of the schools and libraries support mechanism over 
time. For example, it will make it easier to determine what types of 
services schools and libraries need, and how those needs change over 
time. Such information is useful for deciding what if any adjustments 
should be made with respect to the schools and libraries mechanism. 
Congress expressly provided for such adjustments.
    74. We note that the Commission invited, and received, substantial 
input on the application forms as they were developed. The Commission, 
in conjunction with the Schools and Libraries Corporation, held a 
public workshop, and draft application forms were posted on the 
Commission's website. The application forms reflect comments and 
suggestions from schools and library representatives, service 
providers, the Department of Education and the Schools and Libraries 
Corporation. We anticipate that, as parties begin to use the 
application forms, they will discover ways to improve them, and we 
encourage suggestions for modifying and improving the application 
forms. For the reasons set forth above, however, we conclude that 
requiring all applicants to use the same application forms will serve 
the public interest. We find that it is particularly important, in the 
first year of implementation, to take all reasonable steps to make sure 
the

[[Page 2106]]

Schools and Libraries Corporation is able to administer the support 
mechanism as efficiently and effectively as possible. We therefore deny 
Florida Department of Management Services' request to use its own 
application form.

C. Non-Public Schools and Libraries

    75. It is our expectation that states will approve technology plans 
in a reasonably timely manner. As noted above, however, the Schools and 
Libraries Corporation has authority to review and certify the 
technology plans of schools and libraries if the applicant provides 
evidence that a state agency is unwilling or unable to do so in a 
reasonably timely fashion. We here conclude that a school or library 
may apply directly to the Schools and Libraries Corporation for 
technology plan approval if the school or library is not required by 
state or local law to obtain approval for technology plans and 
telecommunications expenditures. The Schools and Libraries Corporation 
has stated its intent to create a process for reviewing technology 
plans of private schools and other eligible entities whose states are 
unable to review their plans. The Schools and Libraries Corporation may 
structure the review process in any manner it deems necessary to 
complete review in a timely fashion, consistent with the purposes of 
the review. We emphasize, however, that schools and libraries that are 
subject to a state review process by state or local law may not 
circumvent the state process by submitting plans directly to the 
Schools and Libraries Corporation for review. Eligible schools and 
libraries that are required by state or local law to obtain approval 
for technology plans and telecommunications expenditures will be 
allowed to submit technology plans to the Schools and Libraries 
Corporation for review only when the state is unwilling or unable to 
review such plans in a reasonably timely fashion. In addition, if a 
technology plan is rejected at the state level, a school or library may 
not then submit the plan to the Schools and Libraries Corporation in an 
attempt to circumvent the state review process.
    76. In addition, FCC Forms 470 and 471 will allow applicants to 
indicate that their technology plans either have been approved or will 
be approved by a state, Schools and Libraries Corporation, or by 
another authorized body. This provision will allow schools and 
libraries that are required to obtain technology plan approval from an 
entity other than a state agency to submit both FCC Forms 470 and 471 
without any delay due to a lack of technology plan approval. Schools 
and libraries will not be able to receive actual discounts, however, 
until their technology plans are approved.
    77. Given the Schools and Libraries Corporation plan to institute 
an approval process that ``will occur in sufficient time to meet the 
needs of those schools that choose to apply under the 75 day window,'' 
we see no need to adopt the suggestion of the National Association of 
Independent Schools that we waive the technology plan approval 
requirement for all schools and libraries for the first six to twelve 
months of the schools and libraries program in order to provide 
sufficient time to develop alternative approval mechanisms. We 
understand that the Schools and Libraries Corporation is moving forward 
with due diligence to ensure that their technology plan review process 
is put into place as quickly as possible. We reiterate that approval of 
an applicant's technology plan will assist in ensuring that technology 
plans are based on the reasonable needs and resources of the applicant 
and are consistent with the goals of the program.

D. Option to Post Requests for Proposals on Websites

    78. In light of the concerns expressed by the Working Group and 
NECA, including significant costs and potential delays associated with 
requiring the administrative companies to post RFPs on the school and 
library and rural health care provider websites, we reconsider the 
Commission's requirement that the administrative companies post on the 
websites RFPs submitted by applicants. An RFP is a detailed request for 
the services and facilities that an entity is interested in procuring. 
RFPs may vary greatly in length, numbering over a hundred pages in some 
cases, including diagrams and specifications of the procurement of 
facilities. FCC Form 470, submitted by school and library applicants, 
and FCC Form 465, submitted by eligible health care applicants, will 
instruct applicants to describe the services they seek and to include 
information sufficient to enable service providers to identify 
potential customers. We conclude that this information is adequate to 
serve the purposes underlying the website posting requirement by 
allowing schools and libraries to take advantage of the competitive 
marketplace. We conclude that any additional information contained in 
an RFP that is not submitted for posting on the website under FCC Forms 
470 and 465 can be made available to interested service providers at 
the election of the school, library, or rural health care provider 
applicant. We encourage eligible school, library, and rural health care 
provider applicants to make RFPs available upon request to interested 
service providers. We do not, however, require the Schools and 
Libraries Corporation or the Rural Health Care Corporation to post RFPs 
on the websites, but instead require the administrative companies to 
post FCC Forms 470 and 465, respectively.

E. State Telecommunications Networks and Wide Area Network

    79. We conclude that state telecommunications networks that procure 
supported telecommunications and make them available to schools and 
libraries constitute consortia that will be permitted to secure 
discounts on such telecommunications on behalf of eligible schools and 
libraries. We further conclude that, with respect to Internet access 
and internal connections, state telecommunications networks may either 
secure discounts on such telecommunications on behalf of schools and 
libraries, or receive direct reimbursement from the universal service 
support mechanisms, pursuant to section 254(h)(2)(A), for providing 
such services. Finally, we conclude, on our own motion, that to the 
extent schools and libraries build and purchase wide area networks to 
provide telecommunications, such networks will not be eligible for 
universal service discounts.
a. State Telecommunications Networks
    1. Procuring Telecommunications
    80. We conclude that state telecommunications networks that procure 
supported telecommunications and make them available to eligible 
schools and libraries constitute consortia that will be permitted to 
secure discounts on such services on behalf of their eligible members. 
We recognize the significant benefits that state telecommunications 
networks provide to schools and libraries in terms of, among other 
things, purchasing services in bulk and passing on volume discounts to 
schools and libraries. In order for eligible schools and libraries to 
receive discounts pursuant to the universal service support mechanisms 
for schools and libraries and to continue to receive the benefits 
currently provided by state telecommunications networks, such networks, 
consistent with the universal service rules, may obtain discounts on 
telecommunications from the universal service support mechanisms on 
behalf of eligible schools and libraries and pass on such discounts to 
the eligible entities. We emphasize that, with respect to 
telecommunications, state

[[Page 2107]]

telecommunications networks only will be permitted to pass on discounts 
for such services to eligible schools and libraries, but will not, as 
discussed below, be able to receive direct reimbursement from the 
universal service support mechanisms for providing such services. We 
conclude that a state telecommunications network itself will not 
qualify for discounts on telecommunications. Because it does not meet 
the definition of an eligible school or library as set forth in the 
Order, a state telecommunications network only may secure such 
discounts on behalf of the schools and libraries it serves and pass 
through the discounts to those schools and libraries. Because schools 
and libraries will benefit from both the universal service discounts 
and the ability of state telecommunications networks to aggregate 
demand and secure prices based on volume discounts, the approach we 
adopt here will be advantageous to eligible schools and libraries. 
Furthermore, this approach will help maintain the integrity of the 
universal service support mechanisms, because eligible schools and 
libraries will be able to secure pre-discount prices for 
telecommunications that are lower than the prices for such 
telecommunications if they had not been purchased in bulk.
    81. In order to receive and pass through discounts on supported 
telecommunications for eligible schools and libraries, state 
telecommunications networks must make a good faith effort to ensure 
that each eligible school or library receives a proportionate share of 
shared services. State telecommunications networks must take reasonable 
steps to ensure that service providers apply appropriate discount 
amounts on the portion of the supported telecommunications used by each 
eligible school or library. The service providers will submit to the 
state telecommunications network a bill that includes the appropriate 
discounts on eligible telecommunications rendered to eligible entities. 
The state telecommunications network then will direct the eligible 
consortium members to pay the discounted prices. Eligible consortium 
members may pay the discounted prices to their state telecommunications 
network, which will then remit the discounted amount to the service 
providers. Service providers will receive direct reimbursement from the 
support mechanisms in an amount equal to the difference between the 
pre-discount price of the eligible telecommunications and the 
discounted amount. We emphasize that state telecommunications networks 
purchasing services on behalf of schools and libraries are required to 
comply with the applicable competitive bid requirements established in 
the Order.
    82. We note that, even where state telecommunications networks have 
procured telecommunications on behalf of schools and libraries through 
competitive bidding or are exempt from the competitive bid requirement, 
it may be advantageous for schools and libraries themselves to seek 
competitive bids on their requested services. In so doing, schools and 
libraries may be better able to ensure that they obtain the best price 
on the services that are most closely tailored to meet their needs. We 
have attempted to design the universal mechanisms so that schools, 
libraries, and rural health care providers utilize, and obtain the 
advantages of, competition, to the fullest extent possible. The 
competitive bidding process is a key component of the Commission's 
effort to ensure that universal service funds support services that 
satisfy the precise needs of an institution, and that the services are 
provided at the lowest possible rates. We recognize that schools, 
libraries, and health care providers may need to transition to the new 
universal service mechanisms, and we have made reasonable accommodation 
for eligible entities that have preexisting contracts for 
telecommunications, internal connections, or access to the Internet. We 
intend to continue to monitor our decision to exempt certain 
preexisting contracts from the competitive bidding requirement, to 
ensure that the exemption does not reduce the benefits that competitive 
bidding will provide. We thus encourage schools and libraries to seek 
competitive bids on their requests for services in order to obtain the 
best price for the desired services. We note that schools and libraries 
have an incentive to obtain the best price for services, because such 
schools and libraries will be responsible for paying a portion of the 
cost. We also note that, after seeking competitive bids, schools and 
libraries may nevertheless decide to obtain telecommunications that are 
procured by a state telecommunications network.
    83. Because it appears that state telecommunications networks 
generally make telecommunications available to both eligible and 
ineligible entities, we emphasize that, pursuant to section 254(h)(4), 
such networks may obtain and pass through universal service discounts 
only with respect to schools and libraries that are eligible to receive 
such discounts. In order to protect the integrity of the schools and 
libraries program, we direct state telecommunications networks to 
develop and retain records listing eligible schools and libraries and 
showing the basis on which the eligibility determinations were made. 
Such networks also must keep careful records demonstrating the discount 
amount to which each eligible entity is entitled and the basis on which 
such a determination was made. Additionally, consistent with the Order, 
service providers must develop and retain detailed records showing how 
they have allocated the costs of facilities shared by eligible and 
ineligible entities in order to charge such entities the correct 
amounts.
    84. We disagree with parties that argue that state 
telecommunications networks should be able to receive direct 
reimbursement from the support mechanisms for providing schools and 
libraries with services other than access to the Internet and internal 
connections. Because they do not meet the definition of 
``telecommunications carrier,'' state telecommunications networks are 
not eligible to receive direct reimbursement from the support 
mechanisms pursuant to section 254(h)(1)(B). Section 254(h)(1)(B) 
provides that only telecommunications carriers may receive support for 
providing schools and libraries with the telecommunications supported 
under section 254(h)(1)(B). Based on the record before us, we agree 
with USTA that, because they do not offer telecommunications ``for a 
fee directly to the public, or to such classes of users as to be 
directly available to the public,'' state telecommunications networks 
do not meet the definition of ``telecommunications carrier.'' As the 
Commission determined in the Order, the definition of 
``telecommunications service'' is intended to encompass only 
telecommunications provided on a common carrier basis. The Commission 
further noted that ``* * * precedent holds that a carrier may be a 
common carrier if it holds itself out `to service indifferently all 
potential users' '' and 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.' ''
    85. We are not persuaded by the record before us that state 
telecommunications networks offer service ``indifferently [to] all 
potential users.'' Rather, the evidence indicates that state 
telecommunications networks offer services to specified classes of 
entities. Because the record does not contain any credible evidence 
that a

[[Page 2108]]

state telecommunications network offers or plans to offer service 
indifferently to any requesting party, we find that state 
telecommunications networks do not offer service ``directly to the 
public or to such classes of users as to be directly available to the 
public'' and thus will not be eligible for reimbursement from the 
support mechanisms pursuant to section 254(h)(1). We further find that 
prohibiting state telecommunications networks from receiving direct 
reimbursement from the support mechanisms pursuant to section 254(h)(1) 
is consistent with the Commission's determination in the Order that 
consortia of schools and libraries may receive discounts on eligible 
services, but that such consortia will not be permitted to receive 
direct reimbursement from the support mechanisms.
    86. We recognize that it may be more administratively burdensome 
for state telecommunications networks to obtain and pass through 
discounts on behalf of schools and libraries, rather than to receive 
direct reimbursement from the support mechanisms for procuring 
telecommunications and making such telecommunications available to 
schools and libraries. As discussed above, however, state 
telecommunications networks do not meet the definition of 
``telecommunications carrier'' and thus will not be permitted to 
receive direct reimbursement for the provision of telecommunications. 
Additionally, parties have not suggested any reason why state 
telecommunications networks should be treated differently from other 
consortia and thus be allowed to receive support directly from the 
universal service support mechanisms for providing telecommunications 
other than Internet access and internal connections. Furthermore, even 
if they were able to receive direct reimbursement from the support 
mechanisms for providing telecommunications, state telecommunications 
networks would still need to determine which entities are eligible for 
discounts and the discount rate to which each eligible entity is 
entitled. Therefore, any additional administrative burden created by 
requiring state telecommunications networks to pass through the 
discount amounts, rather than allowing them to receive direct 
reimbursement from the support mechanisms, may not be as significant as 
some parties suggest.
2. Internet Access and Internal Connections
    87. With respect to Internet access and internal connections, we 
conclude that state telecommunications networks may either secure 
discounts on the purchase of such telecommunications purchased from 
other providers on behalf of schools and libraries in the manner 
discussed above with regard to telecommunications, or receive direct 
reimbursement from the support mechanisms for providing Internet access 
and internal connections to schools and libraries, pursuant to section 
254(h)(2)(A). As the Commission concluded in the Order, section 
254(h)(2)(A), in conjunction with section 4(i), authorizes the 
Commission to permit discounts and funding mechanisms to enhance access 
to advanced services provided by non-telecommunications carriers. On 
this basis, the Commission stated that it would permit discounts for 
Internet access and internal connections provided by non-
telecommunications carriers. Thus, although we conclude that state 
telecommunications networks do not constitute telecommunications 
carriers that are eligible for reimbursement for making available 
telecommunications pursuant to section 254(h)(1)(B), we do find that 
networks that make Internet access and internal connections available 
to schools and libraries are eligible, under the Order and section 
54.517 of our rules, as non-telecommunications carriers for direct 
reimbursement from the support mechanisms for providing these services.
    88. NASTD suggests that the Commission's statement in the Order 
that it was ``constrained only by the concepts of competitive 
neutrality, technical feasibility, and economic reasonableness'' in 
implementing section 254(h)(2)(A) means that state telecommunications 
networks should be eligible for reimbursement from the support 
mechanisms for providing ``bundled service packages'' that include 
telecommunications and access to the Internet and internal connections. 
As explained above, however, the Act defines ``telecommunications 
carrier'' as any provider of ``telecommunications service'' and does 
not equate ``telecommunications'' (the term used in section 
254(h)(2)(A)) with ``telecommunications service.'' Therefore, because 
state telecommunications networks do not provide ``telecommunications 
service,'' they do not meet the definition of ``telecommunications 
carrier'' and will not be permitted to receive direct reimbursement for 
the provision of services other than Internet access and internal 
connections. To the extent that they make available Internet access and 
internal connections, state telecommunications networks are non-
telecommunications carriers. As non-telecommunications carriers, they 
are eligible, as we determined in the Order, pursuant to section 
254(h)(2)(A), for direct reimbursement from the support mechanisms when 
they make available to eligible entities Internet access and internal 
connections.
    89. Finally, we emphasize that, consistent with the Order, eligible 
schools and libraries will be required to seek competitive bids for all 
services eligible for section 254(h) discounts, including those 
services that state telecommunications networks provide using their own 
facilities. Thus, schools and libraries in Iowa may not obtain support 
from the universal service support mechanisms if they select ICN as 
their provider of access to the Internet and internal connections 
without first seeking competitive bids. Schools and libraries are not 
required to select the lowest bids offered, although the Commission 
stated that price should be the ``primary factor.'' If eligible schools 
and libraries in Iowa choose ICN as their provider of access to the 
Internet and internal connections, we conclude that ICN may receive 
reimbursement from the support mechanisms for providing such services.
b. Wide Area Networks
    On our own motion, we further conclude that, to the extent that 
states, schools, or libraries build and purchase wide area networks to 
provide telecommunications, the cost of purchasing such networks will 
not be eligible for universal service discounts. We reach this 
conclusion because, from a legal perspective, wide area networks 
purchased by schools and libraries and designed to provide 
telecommunications do not meet the definition of services eligible for 
support under the universal service discount program. First, the 
building and purchasing of a wide area network is not a 
telecommunications service because the building and purchasing of 
equipment and facilities do not meet the statutory definition of 
``telecommunications.'' Moreover, as the Commission determined in the 
Order, the definition of ``telecommunications service'' is intended to 
encompass only telecommunications provided on a common carrier basis. 
Second, wide area networks are not internal connections because they do 
not provide connections within a school or library. We herein establish 
a rebuttable presumption that a connection does not constitute an 
internal connection if it crosses a public right-of-way. Third, wide 
area networks built and purchased

[[Page 2109]]

by schools and libraries do not appear to fall within the narrow 
provision that allows support for access to the Internet because wide 
area networks provide broad-based telecommunications. For these 
reasons, therefore, we conclude that the purchase of wide area networks 
to provide telecommunications services will not be eligible for 
universal service discounts.

F. State Support

    91. We conclude that, for services provided to eligible schools and 
libraries, federal universal service discounts should be based on the 
price of the service to regular commercial customers or, if lower than 
the price of the service to regular commercial customers, the 
competitively bid price offered by the service provider to the school 
or library that is purchasing eligible services, prior to the 
application of any state-provided support for schools or libraries. To 
find otherwise would penalize states that have implemented support 
programs for schools and libraries by reducing the level of federal 
support that those schools and libraries would receive. We anticipate 
that our conclusion will encourage states to implement or expand their 
own universal service support programs for schools and libraries.
    92. Our determination to calculate discounts on the price of a 
service to eligible schools and libraries prior to the reduction of any 
state support will not require an adjustment in the $2.25 billion in 
annual support that the Commission estimated was necessary to fulfill 
the statutory obligation to create sufficient universal service support 
mechanisms for schools and libraries. In estimating the level of 
universal service support needed to serve schools and libraries, the 
Commission purposefully did not take into consideration state universal 
service support to schools and libraries. Thus, our determination to 
calculate federal universal service support levels on the price of 
service to schools and libraries prior to the application of any state-
provided support should not threaten the sufficiency of the federal 
support mechanisms for schools and libraries.
    93. Finally, we do not agree with USTA that allowing federal 
support levels to be based upon the price of service to schools and 
libraries prior to the application of any state-provided support for 
schools or libraries will force all telecommunications carriers to 
subsidize state-wide networks. Pursuant to section 254(h), universal 
service support for schools, libraries, and rural health care providers 
can be provided only to designated educational and health care 
providers. Moreover, USTA has not explained why applying the federal 
discount rate before applying any state discounts would reduce the 
overall amount that a carrier will receive for providing a supported 
service.

G. Aggregate Discount Rates

    94. Our current rules require consortia to calculate the discount 
level by using a weighted average that is based on the share of the 
pre-discount price for which each school or library agrees to be 
``financially liable.'' Our rules also provide that each ``eligible 
school, school district, library, or library consortium will be 
credited with the discount to which it is entitled.'' We hereby adopt a 
modified version of the Working Group's proposal regarding the 
application of discounts for schools and libraries that apply through 
consortia, including school districts, rather than on an individual 
basis. Because the discount is determined based on the weighted average 
of the amount for which each individual school or library agrees to be 
financially liable, we conclude that the amount of support likewise 
should be determined, where possible, on the discount rate to which 
each individual school or library is entitled. In other words, both the 
discount rate and the provision of support should be determined for 
each individual school or library if it is not unreasonably burdensome 
to do so. We therefore agree with the Working Group that, for services 
that will be used only by an individual institution, the applicable 
discount rate for the services should be determined based on the 
applicable discount rate for the individual school or library, not the 
consortium. Thus, for example, if a school applies for support as part 
of a consortium, but seeks support for internal connections that it 
alone will use, the amount of support for that internal connection 
should be calculated based on the specific discount rate applicable for 
that school. We find that this decision is consistent with our earlier 
decision that the level of support should be based on the economic 
level and geographic location of the institution seeking support.
    95. We recognize, however, that we must balance the desire for 
equitable distribution of support against the need to keep the 
application process as simple and efficient as possible. Thus, while we 
require the state, school district, or library system to ``strive to 
ensure'' that each school and library in a consortium receives the full 
benefit of the discount on shared services to which it is entitled, we 
will not require school districts or library systems to compute their 
discount rate for shared services based on estimates of the actual 
usage that each of their schools or library branches will make and the 
respective discounts that these individual units are entitled to 
receive. Shared services are those that cannot, without substantial 
difficulty, be identified with particular users or be allocated 
directly to particular entities. We conclude that the administrative 
burden of such a requirement would not be justified by the benefit in 
light of existing rules in this area. We recognize that states already 
prohibit unreasonable discrimination against disadvantaged schools in 
the state, and that the courts have upheld such rules of equity, even 
against the state itself. Although we do not mandate consortia to adopt 
a particular methodology for distributing shared services, we seek to 
ensure that economically disadvantaged institutions receive the 
discounts to which they are entitled. Accordingly, we require that 
consortia certify that each individual institution listed as a member 
of a consortium and included in determining the discount rate will 
receive a proportionate share of the shared services within each year 
in which the institution is used to calculate the aggregate discount 
rate. Consortia may, for example, satisfy this obligation by keeping 
track of the usage level of shared services with respect to each 
institution that was included in calculating the discount rate, or they 
may adopt other methods to ensure that each institution receives a 
proportionate share of shared services. This requirement is appropriate 
because the discount rate for calculating support for shared services 
will be based on all entities listed in the request for services. By 
the same token, this requirement is not unduly burdensome because it 
does not require applicants to develop complex weighting methodologies 
or to calculate different discount rates for different entities that 
use shared services. Our determination that the state or district must 
``strive to ensure'' that each school or library receives the full 
benefit of the discount to which it is entitled will help ensure that 
this goal is met. Moreover, the Schools and Libraries Corporation, 
pursuant to its obligation to review and approve schools' and 
libraries' applications and service providers' bills, is developing 
cost allocation procedures to further ensure that schools and libraries 
receive the discounts to which they are entitled.
    96. Finally, we agree with the Working Group that an applicant that 
is

[[Page 2110]]

comprised of multiple eligible schools and libraries must keep adequate 
records showing how the distribution of funds was made, and the basis 
for distribution. Our rules currently require such records.

H. Limiting Internal Connections to Instructional Buildings

    97. We take this opportunity to make clear, on our own motion, that 
the Order limits support for internal connections to those essential to 
providing connections within instructional buildings. Thus, discounts 
are not available for internal connections in non-instructional 
buildings of a school district or administrative buildings of a library 
unless those internal connections are essential for the effective 
transport of information to an instructional building or library. 
Hence, discounts would be available for routers and hubs in a school 
district office if individual schools in the school district were 
connected to the Internet through the district office. The Order stated 
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.'' This focus on 
access to classrooms followed from the Commission's conclusion that 
``Congress intended that telecommunications and other services be 
provided directly to classrooms.'' The Commission reached this 
conclusion based on its analysis of the statute (where classrooms are 
explicitly mentioned) and of the legislative history (where Congress 
explicitly refers repeatedly to classrooms). Similarly, to the extent 
that a library system has separate administrative buildings, support is 
not available for internal connections in those buildings. Sections 
254(h)(1)(B) and (h)(2) provide for universal service support for 
``libraries.'' Imposing this restriction on support to non-
administrative library facilities is consistent with the approach to 
support for internal connections to instructional school buildings 
discussed above.
    98. Consistent with this clarification, we modify our rules to 
reflect that support is not available for internal connections in non-
instructional buildings used by a school district unless those internal 
connections are essential for the effective transport of information 
within instructional buildings or buildings used by a library for 
strictly administrative functions.
    Thus, discounts would be available for the internal connections 
installed in a school district office if that office were used as the 
hub of a local area network (LAN) and all schools in the district 
connect to the Internet through the internal connections in that 
office. We further hold that ``internal connections'' include 
connections between or among multiple instructional buildings that 
comprise a single school campus or multiple non-administrative 
buildings that comprise a single library branch, but do not include 
connections that extend beyond that single school campus or library 
branch. Thus, for example, connections between two instructional 
buildings on a single school campus would constitute internal 
connections eligible for universal service support, whereas connections 
between instructional buildings located on different campuses would not 
constitute internal connections eligible for such support.

I. Existing Contracts

    99. We reconsider our earlier finding that contracts signed on or 
after November 8, 1996 are not eligible for universal service support 
after December 31, 1998. We conclude that a contract of any duration 
signed on or before July 10, 1997 will be considered an existing 
contract under our rules and therefore exempt from the competitive bid 
requirement for the life of the contract. Discounts will be provided 
for eligible services that are the subject of such contracts on a 
going-forward basis beginning on the first date that schools and 
libraries are eligible for discounts. We further conclude that 
contracts signed after July 10, 1997 and before the date on which the 
Schools and Libraries Corporation website is fully operational will be 
eligible for support and exempt from the competitive bid requirement 
for services provided through December 31, 1998. Contracts that are 
signed after July 10, 1997 are only eligible for support for services 
received between January 1 and December 31, 1998, regardless of the 
term or duration of the contract as a whole. In reconsidering our prior 
determination, we seek to avoid penalizing schools and libraries that 
were reasonably uncertain of their rights pursuant to the Order and to 
allow greater flexibility for schools and libraries to obtain the 
benefits of longer-term contracts, including potentially lower prices. 
The Order permitted schools and libraries to apply the relevant 
discounts to only those ``contracts that they negotiated prior to the 
Joint Board's Recommended Decision [November 8, 1996] for services that 
will be delivered and used after the effective date of our rules.'' We 
agree with commenters, however, that section 54.511(c) did not make 
clear that only contracts that were entered into prior to the date of 
the Joint Board's Recommended Decision would be eligible for discounts. 
The July 10 Order, by contrast, clearly established that discounts 
would be provided only for those contracts that either complied with 
the competitive bid requirement or qualified as ``existing'' contracts 
under our rules.
    100. We also clarify on our own motion that, if parties take 
service under or pursuant to a master contract, the date of execution 
of that master contract represents the applicable date for purposes of 
determining whether and to what extent the contract is exempt from the 
competitive bid requirement. For example, if a state signed a master 
contract for service prior to July 10, 1997, such contract would 
qualify as an existing contract. If an eligible school subsequently 
elects to obtain services pursuant to that contract, that school will 
be exempt from the competitive bid requirement because it is receiving 
service pursuant to an existing contract. This clarification is 
consistent with our rules regarding competitive bidding for master 
contracts set forth in section VI.J, infra. Nevertheless, as discussed 
in sections VI.E. and VI.J. herein, we believe that schools and 
libraries may benefit from soliciting competitive bid even in cases 
where they are exempt from such competitive bidding requirements.
    101. We further conclude that we should extend our rules regarding 
support for existing contracts to eligible rural health care providers. 
Members of the health care community have expressed concern that they 
will face the same difficulties as those faced by members of the school 
and library communities, including negotiating lower prices through 
longer term contracts and avoiding penalties in terminating existing 
contracts. For generally the same reasons noted above regarding schools 
and libraries, we also conclude that an eligible health care provider 
that entered into a contract prior to the date on which the websites 
are operational would be unfairly penalized by requiring that provider 
to comply with the competitive bid requirement. We thus extend the same 
treatment with regard to existing contracts to eligible rural health 
care providers as we have extended to eligible schools and libraries. 
An eligible rural health care provider will not be required to comply 
with the competitive bid requirement for any contract for eligible 
telecommunications services that it signed on or before July 10, 1997, 
regardless of the duration of the agreement. In addition, such 
providers will be eligible to receive reduced rates for services 
provided

[[Page 2111]]

through December 31, 1998 for any contract for telecommunications 
services signed after July 10, 1997 and before the website is 
operational. Although the July 10 Order addressed the issue of existing 
contracts for only schools and libraries, we believe that establishing 
July 10, 1997 as the date relevant to our existing contracts rule for 
rural health care providers is reasonable. We note that this 
determination is consistent with the request of rural health care 
providers to be treated in the same manner as schools and libraries. In 
addition, we anticipate that adopting the same existing contract rules 
for schools, libraries, and rural health care providers should be 
administratively simpler and reduce potential confusion on the part of 
program participants and providers regarding the existing contracts 
eligible for universal service support. We note that no existing 
contract exception from the competitive bid requirement previously had 
been adopted for rural health care providers and that this modification 
will serve to benefit rural health care providers.
    102. We reject the suggestion of EdLiNC that we eliminate any 
limitation on the duration of discounts for contracts executed before 
the website for schools and libraries is fully operational. Although we 
agree with EdLiNC that schools and libraries have a strong incentive to 
negotiate contracts at the lowest possible pre-discount price in an 
effort to reduce their costs, we affirm our initial finding that 
competitive bidding is the most efficient means for ensuring that 
eligible schools and libraries are informed about the choices available 
to them and receive the lowest prices. Allowing eligible schools, 
libraries, and rural health care providers to receive discounts 
indefinitely on contracts entered into after July 10, 1997 without 
requiring participation in the competitive bid process would hinder the 
competitive provision of services for the reasons discussed above.
    103. Schools, libraries, and rural health care providers that 
qualify for the ``existing contract'' exemption from the competitive 
bid process described herein will continue to be required to file 
applications each year with the Schools and Libraries Corporation and 
Rural Health Care Corporation, respectively, in order to receive 
universal service discounts. We note that approval of discounts in one 
year should not be construed as a guarantee of future coverage or 
assurance that the same level of support will be available in 
subsequent years. We will continue to monitor the existing contract 
rule and will make further modifications if necessary.

J. Competitive Bid Requirements for Schools, Libraries, and Rural 
Health Care Providers

1. Minor Modifications to Contracts
    104. We agree with USTA that requiring a competitive bid for every 
minor contract modification would place an undue burden upon eligible 
schools, libraries, and rural health care providers. Such eligible 
entities should not be required to undergo an additional competitive 
bid process for minor modifications such as adding a few additional 
lines to an existing contract. We, therefore, conclude that an eligible 
school, library, or rural health care provider will be entitled to make 
minor modifications to a contract that the Schools and Libraries 
Corporation or the Rural Health Care Corporation previously approved 
for funding without completing an additional competitive bid process. 
We note that any service provided pursuant to a minor contract 
modification also must be an eligible supported service as defined in 
the Order to receive support or discounts.
    105. In the Order, the Commission explained that the universal 
service competitive bid process is not intended to be a substitute for 
state, local, or other procurement processes. Consistent with this 
observation, we conclude that eligible schools, libraries, and rural 
health care providers should look to state or local procurement laws to 
determine whether a proposed contract modification would be considered 
minor and therefore exempt from state or local competitive bid 
processes. If a proposed modification would be exempt from state or 
local competitive bid requirements, the applicant likewise would not be 
required to undertake an additional competitive bid process in 
connection with the applicant's request for discounted services under 
the federal universal service support mechanisms. Similarly, if a 
proposed modification would have to be rebid under state or local 
competitive bid requirements, then the applicant also would be required 
to comply with the Commission's universal service competitive bid 
requirements before entering into an agreement adopting the 
modification.
    106. Where state and local procurement laws are silent or are 
otherwise inapplicable with respect to whether a proposed contract 
modification must be rebid under state or local competitive bid 
processes, we adopt the ``cardinal change'' doctrine as the standard 
for determining whether the contract modification requires rebidding. 
The cardinal change doctrine has been used by the Comptroller General 
and the Federal Circuit in construing the Competition in Contracting 
Act (CICA) as implemented by the Federal Acquisition Regulations. The 
CICA requires executive agencies procuring property or services to 
``obtain full and open competition through the use of competitive 
procedures.''
    107. Because CICA does not contain a standard for determining 
whether a modification falls within the scope of the original contract, 
the Federal Circuit has drawn an analogy to the cardinal change 
doctrine. The cardinal change doctrine is used in connection with 
contractors' claims that the Government has breached its contracts by 
ordering changes that were outside the scope of the changes clause. The 
cardinal change doctrine looks at whether the modified work is 
essentially the same as that for which the parties contracted. In 
determining whether the modified work is essentially the same as that 
called for under the original contract, factors considered are the 
extent of any changes in the type of work, performance period, and cost 
terms as a result of the modification. Ordinarily a modification falls 
within the scope of the original contract if potential offerors 
reasonably could have anticipated it under the changes clause of the 
contract.
    108. The cardinal change doctrine recognizes that a modification 
that exceeds the scope of the original contract harms disappointed 
bidders because it prevents those bidders from competing for what is 
essentially a new contract. Because we believe this standard reasonably 
applies to contracts for supported services arrived at via competitive 
bidding, we adopt the cardinal change doctrine as the test for 
determining whether a proposed modification will require rebidding of 
the contract, absent direction on this question from state or local 
procurement rules. If a proposed modification is not a cardinal change, 
there is no requirement to undertake the competitive bid process again.
    109. An eligible school, library, or rural health care provider 
seeking to modify a contract without undertaking a competitive bid 
process should file FCC Form 471 or 466, ``Services Ordered and 
Certification,'' with the School and Libraries Corporation or the Rural 
Health Care Corporation, respectively, indicating the value of the 
proposed contract modification so that the administrative companies can 
track contract performance. The school,

[[Page 2112]]

library, or rural health care provider also must demonstrate on FCC 
Form 471 or 466 that the modification is within the original contract's 
change clause or is otherwise a minor modification that is exempt from 
the competitive bid process. The school, library, or rural health care 
provider's justification for exemption from the competitive bid process 
will be subject to audit and will be used by the Schools and Libraries 
Corporation and Rural Health Care Corporation to determine whether the 
applicant's request is, in fact, a minor contract modification that is 
exempt from the competitive bid process. We emphasize that, even though 
minor modifications will be exempt from the competitive bidding 
requirement, parties are not guaranteed support with respect to such 
modified services. A commitment of funds pursuant to an initial FCC 
Form 471 or Form 466 does not ensure that additional funds will be 
available to support the modified services. We conclude that this 
approach is reasonable and is consistent with our effort to adopt the 
least burdensome application process possible while maintaining the 
ability of the administrative companies and the Commission to perform 
appropriate oversight.
2. Master Contracts
    110. We find that eligible schools, libraries, and rural health 
care providers seeking discounted services or reduced rates should be 
allowed to purchase services from a master contract negotiated by a 
third party. In the Order, the Commission found that the competitive 
bid requirement would minimize the universal service support required 
by ensuring that schools, libraries, and rural health care providers 
are aware of cost-effective alternatives. The Commission concluded 
that, like the language of section 254(h)(1) that targets support to 
public and nonprofit rural health care providers, this approach 
``ensures that the universal service fund is used wisely and 
efficiently.'' Insofar as an independent third party negotiating a 
master contract may be able to secure lower rates than an eligible 
entity negotiating on its own behalf, we conclude that allowing 
schools, libraries, and rural health care providers to order eligible 
telecommunications services from a master contract negotiated by a 
third party is consistent with our goal of minimizing universal service 
costs and therefore is also consistent with section 254(h)(1).
    111. We wish to emphasize, however, that for eligible schools and 
libraries to receive discounted services, and for rural health care 
providers to receive reduced rates, the third party initiating a master 
contract either must have complied with the competitive bid requirement 
or qualify for the existing contract exemption before entering into a 
master contract. An eligible school, library, or rural health care 
provider shall not be required to satisfy the competitive bid 
requirement if the eligible entity takes service from a master contract 
that has been competitively bid under the Commission's competitive bid 
requirement. If a third party has negotiated a master contract without 
complying with the competitive bid requirement, then an eligible entity 
must comply with the competitive bid requirement before it may receive 
discounts or reduced rates for services purchased from that master 
contract.
    112. As noted above, the date of execution of a master contract 
represents the applicable date for purposes of determining whether and 
to what extent the contract is exempt from the competitive bid 
requirement under the existing contract exemption. For example, if a 
state signed a master contract for service prior to July 10, 1997 that 
qualifies as an existing contract under our rules, and a school elects 
to take service pursuant to that contract at a date after the website 
is operational, that school will be exempt from the competitive bid 
requirement because it is receiving service pursuant to an existing 
contract. As we stated above, we strongly encourage schools and 
libraries to engage in competitive bidding even if they are exempt from 
such requirement pursuant to Commission rules. Schools and libraries 
may well be able to obtain more favorable terms if they issue new 
requests for bids designed to accommodate their specific needs, rather 
than obtain service under the terms of the master contract. For 
instance, a master contract that was put out for bid several years ago 
but has not yet expired might not reflect the cost reductions resulting 
from recent entry into the local exchange market, for example, by 
wireless carriers. Although we have provided for certain exemptions 
from competitive bidding requirements, to enable schools and libraries 
to transition to the Commission's procedures implementing the new 
universal service mechanisms, we believe that even institutions subject 
to the exemptions may obtain substantial benefit from soliciting 
competitive bids. Moreover, those institutions may ultimately obtain 
service pursuant to the master contract, if they determine that the 
master contract is the most cost effective provider. We intend to 
monitor the impact of the competitive bid exemptions on an ongoing 
basis.
    113. Furthermore, even if eligible schools, libraries, and health 
care providers are obligated by the school district or a consortium, 
for example, to purchase from a master contract, the third party 
nevertheless must have complied with the competitive bid process in 
order for an eligible entity to receive discounts or reduced rates on 
services ordered from the master contract. If the third party has not 
complied with the competitive bid requirement before entering into a 
master contract, then an eligible school, library, or rural health care 
provider itself must undertake the competitive bid process before it 
may receive discounts or reduced rates on services purchased from the 
master contract. These requirements will ensure that the eligible 
entity is receiving the most cost-effective service.

K. Reimbursement for Telecommunications Carriers

    114. We do not anticipate that the cost of funding eligible 
services will exceed the cap on universal service funding for schools, 
libraries, and rural health care providers. An applicant's ``place in 
line,'' or seniority for the purposes of allocating funding will be 
determined by the date on which an applicant submits FCC Form 471 or 
466 to the applicable administrative corporation. Because eligible 
entities will enter into contracts with service providers prior to the 
submission of requests for commitment of funds (FCC Form 466 or 471, 
``Services Ordered and Certification''), such a request could be denied 
in the unlikely event that funds prove to be insufficient. In light of 
this possibility, and because charges incurred for eligible 
telecommunications services remain the responsibility of the eligible 
entity, we agree with USTA and again urge schools, libraries, and rural 
health care providers to include clauses in their contracts that make 
implementation of the agreements contingent on the commitment of 
universal service funding.
    115. USTA asks for clarification regarding the types of charges 
associated with the purchase or termination of an eligible 
telecommunications service that will be covered by the federal support 
mechanisms. We conclude that the universal service support mechanisms 
will cover all reasonable charges, including federal and state taxes, 
that are incurred by obtaining an eligible

[[Page 2113]]

telecommunications service. Charges for termination liability, penalty 
surcharges, and other charges not included in the cost of obtaining the 
eligible service will not be covered by the universal service support 
mechanisms. We do not include among the costs supported by the support 
mechanisms charges associated with terminating a service because we 
conclude that such charges are avoidable. The imposition of such 
charges typically results from a party's failure to discharge its duty 
of performance under a contract and supporting such charges does not 
advance program goals.

L. Universal Service Support for Intrastate Telecommunications Services 
Provided to Rural Health Care Providers

    116. The Commission clarifies that the federal universal service 
support mechanisms will support reduced rates on intrastate services 
provided to eligible rural health care providers. As set forth in 
section 54.601(c)(1) of the Commission's rules, 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 an eligible health 
care provider is eligible for universal service support, subject to 
distance limitations. These eligible telecommunications services may be 
intrastate or interstate in nature. In addition, limited toll free 
access to an Internet service provider is eligible for universal 
service support under section 54.621 of the Commission's rules for 
health care providers that are unable to obtain such access.

M. Support for Services Beyond the Maximum Supported Distance for Rural 
Health Care Providers

    117. Although the Commission limited universal service support to 
an amount that would cover an eligible telecommunications service 
provided over a maximum allowable distance, nothing in the Order 
precludes a health care provider from purchasing an eligible 
telecommunications service carried over a distance that exceeds this 
limitation. We clarify that we do not intend to restrict a rural health 
care provider from purchasing an eligible telecommunications service 
that is provided over a distance that is longer than the maximum 
supported distance, that is, from the health care provider to the 
farthest point on the boundary of the nearest large city. Rural health 
care providers, however, must pay the applicable price for the distance 
that such service is carried beyond the maximum supported distance. 
This approach is consistent with Congress's intent to make rural and 
urban rates comparable while affording the eligible rural health care 
provider that chooses to connect to a city that is farther than the 
nearest large city in that state the flexibility to make such a 
decision without jeopardizing the provider's entitlement to receive a 
discount on services carried within the maximum supported distance.

N. Establishing the Standard Urban Distance and Maximum Supported 
Distance for Rural Health Care Providers

    118. We amend section 54.605(d) of our rules to provide that the 
Rural Health Care Corporation will be responsible for calculating the 
standard urban distance (and, by definition, the maximum supported 
distance) applicable to eligible rural health care providers. Section 
54.605(d) of the Commission's rules currently requires the 
``Administrator'' to establish the standard urban distance. 
Specifically, the NECA Report and Order assigned to USAC and to the 
entity ultimately selected to serve as the permanent Administrator, 
responsibility for performing the billing, collection and disbursement 
functions associated with all of the universal service support 
mechanisms, including the support mechanisms for rural health care 
providers. The NECA Report and Order assigned to the Rural Health Care 
Corporation the remaining administrative functions associated with 
administering the rural health care program. Consistent with this 
division of administrative responsibilities set forth in the NECA 
Report and Order, we conclude that the Rural Health Care Corporation 
rather than USAC or the permanent Administrator should perform the 
calculations necessary to establish the standard urban distance 
pursuant to section 54.605(d).
    119. We also grant USTA's request that the calculation of the 
standard urban distance for each state be posted on a website. 
Accordingly, we direct the Rural Health Care Corporation to post such 
information to the Rural Health Care Corporation's website.

VII. Administration of Support Mechanisms

    120. Universal service contribution requirements pursuant to 
section 254 of the Act will take effect on January 1, 1998. In the 
Order, the Commission found that requiring a broad range of providers 
to contribute to universal service was consistent with the statute. 
Numerous parties have asked us to reconsider, prior to January 1, 1998, 
our decisions requiring certain providers to contribute to universal 
service pursuant to section 254. We herein reconsider those decisions. 
We note, however, that we will conduct a thorough reevaluation of who 
is required to contribute to universal service, pursuant to Congress' 
direction to issue a report on this issue by April 10, 1998. That 
report to Congress may serve as the basis for subsequent Commission 
action on this issue.

A. Paging Carriers

    121. We affirm our conclusion in the Order that all 
telecommunications carriers, including paging carriers, are required by 
section 254(d) to contribute to universal service. Petitioners offer no 
compelling arguments to alter the Commission's earlier decision. We 
find that universal service contributions do not constitute a tax. As 
noted in the Order, the U.S. Court of Appeals for the D.C. Circuit has 
held that ``a regulation is a tax only when its primary purpose judged 
in legal context is raising revenue.'' The fact that section 254 
permits discounts to be provided to schools and libraries for certain 
services provided by non-telecommunications carriers also does not 
convert universal service contributions into a revenue-raising ``tax'' 
because the primary purpose of the contributions is not to raise 
general revenues. Rather, the primary purpose of the universal service 
contribution requirements is the preservation and advancement of 
universal service in furtherance of the principles set forth in section 
254(b). Universal service contributions are not commingled with 
government revenues raised through taxes. Furthermore, contrary to 
ProNet's assertions, requiring contributions to universal service 
confers a benefit on paging carriers because such contributions help 
preserve the universal availability of service over the public switched 
telephone network. Without the public switched telephone network, 
subscribers of paging carriers would not be able to receive pages, 
retrieve pages, or respond to messages. We find that the benefits of 
universal service accrue to all paging carriers, regardless of whether 
they serve high-income or low-income customers.
    122. Section 254(d) requires ``[e]very telecommunications carrier'' 
to contribute to universal service. It does not limit contributions to 
carriers eligible for universal service support. In fact, as RTC notes, 
IXCs, payphone service providers, private service providers, and CMRS 
providers are required to contribute to universal service, even though 
they might not

[[Page 2114]]

receive support from the high cost mechanisms. The petitioning paging 
companies have not advanced any credible evidence that would justify 
exempting them from the Congressional requirement that we create a 
broad base of support for universal service programs. The fact that the 
Commission may treat paging carriers differently than other CMRS 
providers in the context of regulatory fees is not relevant to the 
treatment of paging carriers under section 254(d).
    123. Although some two-way carriers that compete with paging 
carriers may be eligible to receive universal service support, such 
telecommunications carriers will receive support only for those 
services included within the core definition of universal service 
(e.g., voice-grade access, single-party service, and access to 
emergency services). Eligible telecommunications carriers that provide 
paging services will not receive support for their paging services. 
Thus, eligible telecommunications carriers that provide paging services 
will not have an unfair advantage over paging carriers.
    124. As we found in the Order, basing contributions from all 
telecommunications carriers on their gross end-user telecommunications 
revenues best satisfies our goals of competitive neutrality and ease of 
administration, as well as the statutory requirement that support be 
explicit. Payments received from the universal service support 
mechanisms are not counted as end-user telecommunications revenues in 
the assessment base, because such funds are derived from the federal 
support mechanisms, not end users of telecommunications. Furthermore, 
high-cost support does not ``offset'' eligible telecommunications 
carriers' contributions. Support is provided to offset in part the cost 
of serving high cost areas. Moreover, it would be counter-productive to 
universal service goals to require carriers eligible for support to 
make a contribution based on support amounts. That approach would 
increase the level of contributions needed to provide adequate support 
to carriers that serve high cost areas.
    125. It is well established that access to the interstate 
interexchange network is an interstate service that brings paging 
carriers within the coverage of section 254(c). An interstate 
telecommunication is defined as a communication or transmission that 
originates in one state and terminates in another. A page that 
originates in one state and terminates in another meets the statutory 
definition of ``interstate telecommunication.'' Therefore, even if a 
paging carrier's service area does not cross state boundaries, if a 
paging carrier enables paging customers to receive out-of-state pages, 
i.e., be paged by someone located in another state, then that paging 
carrier provides an interstate service and must contribute to universal 
service.

B. Other Providers of Interstate Telecommunications

    126. We affirm our decision that private service providers that 
provide interstate telecommunications on a non-common carrier basis 
must contribute to universal service, pursuant to our permissive 
authority over ``providers of interstate telecommunications.'' In the 
Order, we found that the public interest requires private service 
providers that furnish interstate telecommunications to others for a 
fee to contribute to universal service on the same basis as common 
carriers. We concluded that this approach (1) was consistent with the 
principle of competitive neutrality because it will reduce the 
possibility that carriers with universal service obligations will be 
placed at an unfair competitive disadvantage in relation to carriers 
that do not have such obligations; (2) will avoid creating a 
disincentive for carriers to offer services on a common carrier basis; 
and (3) will broaden the funding base, thereby lessening contribution 
requirements of any particular class of telecommunications providers. 
We affirm each of these findings.
    127. We conclude that the Commission was not required to find that 
private networks constitute a significant means of bypassing the public 
switched telephone network before exercising our permissive authority 
to apply the universal service contribution requirements to non-common 
carriers. Section 254(d) grants the Commission explicit and unambiguous 
authority to require ``other providers of interstate 
telecommunications'' to contribute to universal service if the public 
interest so requires. On this issue, the Joint Explanatory Statement 
merely states that this section ``preserves the Commission's authority 
to require all providers of interstate telecommunications to 
contribute, if the public interest requires it to preserve and advance 
universal service.'' There is no mention of a network bypass 
requirement in either the Act or the Joint Explanatory Statement. Thus, 
we find that the plain language of section 254(d) allows the Commission 
to require non-common carriers to contribute if the Commission 
concludes that doing so serves the public interest and furthers the 
goals of universal service. We conclude, however, for the reasons 
discussed below that we should not exercise our permissive authority to 
require systems integrators, broadcasters, and non-profit schools, 
universities, libraries, and rural health care providers to contribute 
to universal service.
    128. Systems Integrators. We are persuaded by systems integrators' 
arguments that the public interest would not be served if we were to 
exercise our permissive authority to require entities that do not 
provide services over their own facilities and are non-common carriers 
that obtain a de minimis amount of their revenues from the resale of 
telecommunications to contribute to universal service. Systems 
integrators provide integrated packages of services and products that 
may include, for example, the provision of computer capabilities, data 
processing, and telecommunications. Systems integrators purchase 
telecommunications from telecommunications carriers and resell those 
services to their customers. They do not purchase unbundled network 
elements from telecommunications carriers and do not own any physical 
components of the telecommunications networks that are used to transmit 
systems integration customers' information. In other words, systems 
integrators provide telecommunications solely through reselling another 
carrier's service. We conclude that systems integrators that satisfy 
these criteria, as discussed below, should not be required to 
contribute to the federal universal service support mechanisms.
    129. In our view, systems integrators that obtain a de minimis 
amount of their revenues from the resale of telecommunications do not 
significantly compete with common carriers that are required to 
contribute to universal service. Systems integrators are in the 
business of integrating customers' computer and other informational 
systems, not providing telecommunications. Occasionally, systems 
integrators may provide interstate telecommunications along with their 
traditional integration services, but the provision of 
telecommunications is incidental to their core business. Systems 
integration customers who receive telecommunications from systems 
integrators choose systems integrators for their systems integration 
expertise, not for their competitive provision of telecommunications.
    130. In determining what constitutes a de minimis amount of 
revenues, we could compare the amount of revenues

[[Page 2115]]

derived from telecommunications to overall business revenues, revenues 
derived from systems integration, or revenues derived from systems 
integration contracts that also contain telecommunications. We conclude 
that the second approach, telecommunications revenues relative to 
systems integration revenues, is the best method to determine whether 
systems integrators derive a de minimis amount of revenues from 
telecommunications. Overall business revenues are irrelevant to the 
determination of whether telecommunications revenues constitute a small 
part of the systems integration business. Similarly, evaluating only 
systems integration contracts that contain telecommunications will not 
provide an accurate account of the systems integration business as a 
whole. IBM and EDS suggest that de minimis should be defined as 
revenues that are less than five percent of systems integration 
revenues. Based on this record, we conclude that systems integrators' 
telecommunications revenues will be considered de minimis if they 
constitute less than five percent of revenues derived from providing 
systems integration services. A systems integrator would not be 
required to file a Universal Service Worksheet if, over the requisite 
reporting period, its total revenues derived from telecommunications 
represent less than five percent of its total revenues derived from 
systems integration. Systems integrators that derive more than a de 
minimis amount of revenues from telecommunications will be required to 
contribute to the federal universal service support mechanisms and 
comply with universal service reporting requirements. We conclude that 
the limited nature of this exclusion from the obligation to contribute 
will ensure that systems integrators that are significantly engaged in 
the provision of telecommunications do not receive an unfair 
competitive advantage over common carriers or other carriers that are 
required to contribute to universal service.
    131. To maintain the sufficiency of the support mechanisms, we find 
that systems integrators that are excluded from contribution 
requirements constitute end users for universal service contribution 
purposes. In addition, systems integrators that obtain a de minimis 
amount of their revenues from the resale of telecommunications must 
notify the underlying facilities-based carriers from which they 
purchase telecommunications that they are excluded from the universal 
service contribution requirements. We conclude that excluding systems 
integrators that obtain a de minimis amount of their revenues from the 
resale of telecommunications from the obligation to contribute will not 
significantly reduce the universal service contribution base because 
revenues received by common carriers for minimal amounts of 
telecommunications provided to systems integrators will be included in 
the contribution bases of underlying common carriers. We anticipate 
that, by providing this exclusion from the obligation to contribute, 
the total contribution base will be reduced only by systems 
integrators' mark-up on telecommunications.
    132. We disagree with ITAA's contention that, because systems 
integrators provide both basic telecommunications services as well as 
enhanced services for a single price, systems integrators are engaged 
exclusively in the provision of enhanced or information services. 
Traditionally, the Commission has not regulated value-added networks 
(VANs) because VANs provide enhanced services. VAN offerings are 
treated as enhanced services because the enhanced component of the 
offering, i.e., the protocol conversions, ``contaminates'' the basic 
component of the offering, thus rendering the entire offering enhanced. 
Citing the Commission's position that all enhanced services are 
information services, ITAA argues that, because systems integrators 
offer information and telecommunications services for a single price, 
the information services ``taint'' the telecommunications services, 
thereby rendering the entire package an information service for 
purposes of applying the universal service contribution requirements. 
The Commission's treatment of VANs, however, does not imply that 
combining an enhanced service with a basic service for a single price 
constitutes a single enhanced offering. The issue is whether, 
functionally, the consumer is receiving two separate and distinct 
services. A contrary interpretation would create incentives for 
carriers to offer telecommunications and non-telecommunications for a 
single price solely for the purpose of avoiding universal service 
contributions. Thus, a private service provider that provides 
information services along with a basic interstate voice-grade 
telecommunications service is not relieved of its statutory obligation 
to contribute to universal service. To the extent that a provider is 
offering basic voice-grade interstate telephone service and is not 
otherwise exempt, it is required to contribute to universal service.
    133. Broadcasters. The deadline for filing petitions for 
reconsideration in a notice and comment rulemaking proceeding are 
prescribed in section 405 of the Communications Act of 1934, as 
amended. The Commission lacks discretion to waive this statutory 
requirement. The filing deadline for petitions for reconsideration of 
the Order was July 17, 1997. Therefore, to the extent that AAPTS' 
petition, filed September 2, 1997, seeks reconsideration of the Order, 
we will treat it as an informal comment. We agree with AAPTS and 
reconsider, on our own motion, our determination that all providers of 
interstate telecommunications must contribute to universal service. For 
the reasons described below, we find that the public interest would not 
be served if we were to exercise our permissive authority to require 
broadcasters, including ITFS licensees, that engage in non-common 
carrier interstate telecommunications to contribute to universal 
service. In the Order, we found that, in order to ensure that our 
contribution rules do not confer a competitive advantage to non-common 
carriers, non-common carriers should contribute to universal service 
pursuant to our permissive authority over ``other providers of 
interstate telecommunications.'' On further reconsideration, however, 
we agree with AAPTS that broadcasters do not compete to any meaningful 
degree with common carriers that are required to contribute to 
universal service because broadcasters primarily transmit video 
programming, a service that is not generally provided by common 
carriers. Moreover, we conclude that broadcasters' primary competitors 
for programming distribution are cable, OVS, and DBS providers. Because 
cable, OVS, and DBS providers are not required to contribute to 
universal service, the exclusion from the obligation to contribute for 
broadcasters will ensure that broadcasters are not competitively 
disadvantaged in the video distribution industry by our contribution 
requirements. As broadcasters begin to offer digital television, 
however, they may choose to provide interstate telecommunications that 
are not used to distribute video programming. We will, therefore, 
monitor broadcasters' provision of interstate telecommunications on a 
non-common carrier basis. If we determine that broadcasters compete 
with common carriers that are required to contribute to universal 
service, we will revisit our

[[Page 2116]]

exclusion of broadcasters from the contribution requirements.
    134. Non-profit Schools, Colleges, Universities, Libraries, and 
Health Care Providers. We also find, on our own motion, that non-profit 
schools, colleges, universities, libraries, and health care providers 
should not be made subject to universal service contribution 
requirements. To the extent these non-profit entities provide 
interstate telecommunications on a non-common carrier basis, our rules 
require them to contribute to universal service, pursuant to our 
permissive authority over ``other providers of interstate 
telecommunications.'' We conclude, however, that the public interest 
would not be served if we were to exercise our permissive authority to 
require these entities to contribute to universal service. Many of 
these entities will be eligible to receive support pursuant to sections 
54.501(b), (c), and (d) and 54.601(a) and (b). We conclude that it 
would be counter-productive to the goals of universal service to 
require non-common carrier program recipients of support to contribute 
to universal service support because such action effectively would 
reduce the amount of universal service support they receive. In 
addition, we find that it would be inconsistent with the educational 
goals of the universal service support mechanisms to require 
universities to contribute to universal service. To maintain the 
sufficiency of the federal support mechanisms, we have determined to 
treat non-profit schools, colleges, universities, libraries, and health 
care providers as telecommunications end users for universal service 
contribution purposes.

C. Providers of Bare Transponder Capacity

    135. We affirm the Commission's finding that satellite providers 
that provide interstate telecommunications services or interstate 
telecommunications to others for a fee must contribute to universal 
service. We conclude that GE Americom's assertion that the Commission 
found that satellite and video service providers need only contribute 
to universal service if they are operating as common carriers 
misconstrues that passage of the Order. As discussed in the Order, the 
sentence in section 254(d) that requires all telecommunications 
carriers to contribute to universal service applies only to common 
carriers. Thus, the Commission concluded that only common carriers fall 
within the category of mandatory contributors. Accordingly, satellite 
operators that provide transmission services on a common carrier basis 
are mandatory contributors to the universal service support mechanisms. 
Pursuant to section 254(d), the Commission also exercised its 
permissive authority to impose contribution obligations on other 
providers of interstate telecommunications. The Commission's statement 
that satellite providers must contribute to universal service only to 
the extent that they are providing interstate telecommunications 
services described satellite providers' mandatory contribution 
obligation as set forth in section 254(d). The Commission further 
concluded that satellite providers that provide interstate 
telecommunications on a non-common carrier basis must contribute to 
universal service as ``other providers of interstate 
telecommunications'' under section 254(d). The obligation of satellite 
providers to contribute to universal service as mandatory contributors 
does not relieve them of their obligation to contribute as other 
providers of interstate telecommunications. Therefore, if a satellite 
provider offers interstate telecommunications on a common carrier or 
non-common carrier basis, it must contribute to universal service, 
unless otherwise excluded.
    136. We are not persuaded by petitioners' assertions that satellite 
providers that are ineligible to receive universal service support 
should not be required to contribute to universal service. As discussed 
in the Order, section 254 does not limit contributions to eligible 
telecommunications carriers. Section 254(b)(4) provides that the 
Commission should be guided by the principle that ``all providers of 
telecommunications services'' should contribute to universal service. 
Because not all providers of telecommunications services may be 
eligible to receive universal service support, we believe that the 
plain text of the statute contemplates that the universe of 
contributors will not necessarily be identical to the universe of 
potential recipients.
    137. Several parties ask us to clarify that satellite providers do 
not transmit information to the extent that they merely lease bare 
transponder capacity to others. According to PanAmSat,

[w]hen a satellite operator enters into a bare transponder agreement 
with a customer, the satellite operator is merely providing its 
customer with the exclusive right to transmit to a specified piece 
of hardware on the satellite. That, essentially, is the extent of 
the operator's obligation.

Based on the descriptions by PanAmSat and other commenters of the very 
limited activity that satellite providers engage in when they lease 
bare transponder capacity, it appears that, for purposes of the 
contribution requirements under section 254 of the Act, satellite 
providers do not transmit information when they lease bare transponder 
capacity. Satellite providers, therefore, are not required to 
contribute to universal service on the basis of revenues derived from 
the lease of bare transponder capacity. We emphasize that this 
conclusion is premised on the accuracy of the uncontested 
representations by satellite providers of what is involved in the lease 
of bare transponder capacity. We might reconsider our determination if 
presented with different factual evidence. Satellite providers must, 
however, contribute to universal service to the extent they provide 
interstate telecommunications services and interstate 
telecommunications.
    138. We are not persuaded by AT&T's assertion that, because the 
lease of bare transponder capacity may be provided pursuant to tariff, 
it necessarily constitutes the provision of telecommunications. Because 
the definition of ``telecommunications'' was added to the Act in 1996, 
the fact that bare transponder capacity may be provided or was provided 
pursuant to tariff is not dispositive.

D. Universal Service Report to Congress

    139. Congress has instructed the Commission to review our decisions 
regarding who is required to contribute to the federal universal 
service support mechanisms and to submit our findings to Congress. 
Consistent with the statutory deadline, the Commission will submit such 
a report to Congress by April 10, 1998.

E. De Minimis Exemption

    140. Based on petitioners' arguments, we reconsider our previous 
determination and conclude that the de minimis exemption should be 
based on the Administrator's costs of collecting contributions and 
contributors' costs of complying with the reporting requirements. In 
reaching its finding that the de minimis exemption should only exempt 
contributors whose contributions would be less than the Administrator's 
administrative costs of collection, the Commission looked to the Joint 
Explanatory Statement for guidance. Specifically, the Joint Explanatory 
Statement observes that ``this [de minimis] 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

[[Page 2117]]

selected by the Commission.'' In the Order, the Commission found that 
this statement indicated that the Commission should look only to the 
Administrator's costs of collecting contributions and not the carrier's 
cost of determining contribution obligations. We find, however, that 
``the administrative cost of collecting contributions'' can include 
both the Administrator's as well as contributors' administrative costs. 
We agree with Ad Hoc that the public interest would not be served if 
compliance costs associated with contributing to universal service were 
to exceed actual contribution amounts. We decline to exclude from the 
contribution requirement all entities that claim compliance costs in 
excess of their contribution amounts, however, based on our concern 
that such a rule may encourage contributors to report artificially high 
administrative compliance costs in order to avoid their contribution 
obligation. Rather, we adopt a substantially increased de minimis 
threshold that takes into account contributors' compliance costs in 
addition to the Administrators' administrative costs of collection 
based on our view that this increased threshold will accommodate a 
reasonable level of reporting compliance costs for all contributors.
    141. We also agree with ITAA that the contribution collection costs 
incurred by the Administrator in many cases will exceed $100 per 
contributor. We find that in determining the Administrator's 
administrative costs, we should include the costs associated with 
identifying contributors, processing and collecting contributions, and 
providing guidance on how to complete the Universal Service Worksheet.
    142. Therefore, we conclude that the de minimis contribution 
threshold should be raised to $10,000. If a contributor's annual 
contribution would be less than $10,000, it will not be required to 
contribute to universal service. We find that this exclusion will 
reduce significantly the Administrator's collection costs. Based on 
Universal Service Worksheets, we estimate that approximately 1,600 
entities will qualify for the de minimis exemption. Therefore, the 
Administrator will have to collect and process 1,600 fewer Worksheets 
and will have to identify and collect contributions from 1,600 fewer 
entities. Additionally, by exempting entities whose annual 
contributions would be less than $10,000 from contribution and 
Worksheet reporting requirements, we anticipate that we will reduce 
reporting burdens on many small entities.
    143. To maintain the sufficiency of the universal service support 
mechanisms, we conclude that entities that qualify for the de minimis 
exemption should be considered end users for Universal Service 
Worksheet reporting purposes. Entities that resell telecommunications 
and qualify for the de minimis exemption must notify the underlying 
facilities-based carriers from which they purchase telecommunications 
that they are exempt from contribution requirements and must be 
considered end users for universal service contribution purposes. Thus, 
underlying carriers should include revenues derived from providing 
telecommunications to entities qualifying for the de minimis exemption 
in lines 34-47, where appropriate, of their Universal Service 
Worksheets.

F. Requirement that CMRS Providers Contribute to State Universal 
Service Support Mechanisms

    144. The Commission recently addressed, in Pittencrieff 
Communications, Inc., Memorandum Opinion and Order, File No. WTB/POL 
96-2, FCC 97-343 (rel. October 2, 1997) (recon. pending), the issue of 
whether section 332(c)(3)(A) limits the ability of states to require 
CMRS providers to contribute to state universal service support 
mechanisms. The issues raised on reconsideration in this proceeding 
were resolved in Pittencrieff. In Pittencrieff, the Commission 
explicitly affirmed the finding made in the Order that section 
332(c)(3)(A) does not preclude states from requiring CMRS providers to 
contribute to state support mechanisms. The Commission concluded that a 
state's requirement that CMRS providers contribute on an equitable and 
nondiscriminatory basis to its universal service support mechanisms is 
neither rate nor entry regulation but instead is a permissible 
regulation on ``other terms and conditions'' under section 
332(c)(3)(A). The Commission also stated:

    We believe [the second sentence of section 332(c)(3)(A)] applies 
only to a state's authority to impose requirements that would 
otherwise constitute regulation of rates or entry. In that 
situation, a state would have to comply with section 332(c)(3) by 
showing that CMRS is ``a substitute for land line telephone exchange 
service for a substantial portion of the communications within such 
State.'' The state is not required to demonstrate that CMRS is a 
substitute for land line service, however, when it requires a CMRS 
provider to contribute to the state's universal service mechanisms 
on an equitable and nondiscriminatory basis, in compliance with 
section 254(f).

Finally, the Commission noted that, if section 332(c)(3) were 
interpreted to conflict with section 254(f), section 254(f) would take 
precedence over section 332(c)(3). Section 254(f), which requires all 
telecommunications carriers that provide intrastate telecommunications 
services, including CMRS providers, to contribute to state universal 
service programs, was enacted later in time and speaks directly to the 
contribution issue. Reconsideration petitions to this proceeding do not 
raise issues that were not addressed in Pittencrieff. We find that our 
order in Pittencrieff resolves the issues that have been raised by the 
reconsideration petitions in this proceeding and we find no basis in 
this record for reaching a different determination.
    145. We do not anticipate that state contribution requirements will 
violate section 253. Section 253(a) prohibits state and local 
governments from enacting any statute, regulation or legal requirement 
that prohibits or has the effect of prohibiting the ability of any 
entity to provide any interstate or intrastate telecommunications 
service. Section 253(b), among other things, protects state authority 
to impose universal service requirements, as long as they are done ``on 
a competitively neutral basis and consistent with section 254 * * *.'' 
Section 254(f) of the Act allows states to adopt universal service 
regulations ``not inconsistent with the Commission's rules * * *.'' To 
demonstrate that state universal service contribution requirements for 
CMRS providers violate section 253, there must be a showing that the 
state universal service programs act as a barrier to entry for CMRS 
providers and are not competitively neutral.
    146. We reject the argument that state universal service mechanisms 
should not apply to CMRS providers because CMRS services should be 
considered jurisdictionally ``interstate.'' Data submitted to the 
Commission by CMRS carriers in connection with their TRS reporting for 
the year 1995 reveal that interstate revenues amounted to only 5.6 
percent of total revenues for cellular and personal communications 
service carriers, and 24 percent of total revenues for paging and other 
mobile service carriers. Thus, we find that it would be inappropriate 
to classify all CMRS services as ``interstate.'' CMRS providers that 
offer intrastate CMRS services cannot shield themselves from state 
universal service contributions.
    147. We also reject ProNet's argument that the Commission's 
consideration of this issue in the Order violates the notice provisions 
of the APA. The general requirement of notice contained

[[Page 2118]]

in section 553(b) of the APA does not apply ``to interpretive rules, 
general statements of policy, or rules of agency organization, 
procedure or practice * * *.'' Although the courts have recognized that 
the distinction between those agency rules that are subject to the 
notice requirement and those that are exempt is not always easy to 
discern, the relevant law here is clear. As the U.S. Court of Appeals 
for the D.C. Circuit stated:

    Ultimately, an interpretive statement simply indicates an 
agency's reading of a statute or a rule. It does not intend to 
create new rights or duties, but only `` `reminds'' affected parties 
of existing duties.'' A statement seeking to interpret a statutory 
or regulatory term is, therefore, the quintessential example of an 
interpretive rule.

At issue here is the correct interpretation of the second sentence of 
section 332(c)(3)(A) of the Act. The Commission's statement on this 
issue, as expressed in the Order, created neither new rights nor new 
obligations that did not exist before. Therefore, the Commission did 
not violate the notice provisions of the APA by addressing this issue.
    148. ProNet argues that, because the Commission's interpretation of 
the statute ``has immediate, direct impact on universal service 
contributions at the state level,'' it cannot be exempt from the APA's 
notice requirement, and that notice was required because ``the 
Commission's interpretation of Sections 332(c)(3) and 254(f) of the Act 
operates as an instruction to the states regarding their ability to 
fund universal services, and creates immediate burdens on CMRS 
carriers. * * *'' We disagree. No burdens on CMRS carriers are created 
as a result of the Commission's statement on this issue in the Order. 
Individual states must determine whether to exercise their authority 
under section 254(f) to require universal service contributions from 
CMRS carriers. Even if our interpretation had a substantial impact, the 
mere fact that a rule may have a substantial impact, however, ``does 
not transform it into a legislative rule.'' If not, the exemption for 
interpretative rules from the APA's notice requirement would have 
little practical application. We therefore reaffirm our conclusion that 
the Commission's interpretation of sections 332(c)(3)(A) and 254(f) in 
the Order is exempt from the notice requirement of the APA.

G. Recovery of Universal Service Contributions by CMRS Providers

    149. The Commission permitted contributors to recover contributions 
to the federal universal service support mechanisms through rates on 
interstate services, in order to ensure the continued affordability of 
residential dialtone service and to promote comity between the federal 
and state governments. We agree with petitioners that these 
considerations do not apply to CMRS providers. Because section 
332(c)(3) of the Act alters the ``traditional'' federal-state 
relationship with respect to CMRS by prohibiting states from regulating 
rates for intrastate commercial mobile services, allowing recovery 
through rates on intrastate as well as interstate CMRS services would 
not encroach on state prerogatives. Further, allowing recovery of 
universal service contributions through rates on all CMRS services will 
avoid conferring a competitive advantage on CMRS providers that offer 
more interstate than intrastate services. If CMRS carriers were 
permitted to recover contributions through their interstate services 
only, carriers that offer mostly intrastate services would be required 
to recover a higher percentage of interstate revenues from their 
customers than carriers that offer mostly interstate services. We 
therefore will permit CMRS providers to recover their contributions 
through rates charged for all their services.

H. Technical Corrections Regarding Calculation of Contribution Factors

    150. Consistent with the Commission's findings in the NECA Report 
and Order, we issue a technical clarification to section 54.709(a) of 
our rules. We clarify that the Commission, not USAC, shall be 
responsible for calculating the quarterly universal service 
contribution factors. We also clarify that, based on Universal Service 
Worksheets, USAC must submit the total contribution bases, interstate 
and international and interstate, intrastate, and international end-
user telecommunications revenues, to the Commission at least sixty days 
before the start of each quarter.

I. NECA/USAC Affiliate Transactions Rules

    151. NECA is not a local exchange carrier subject to part 32 and 
USAC is not a nonregulated affiliate engaged in a competitive business. 
NECA and USAC, however, must file annual cost accounting manuals with 
the Commission identifying their administrative costs. We find that it 
is not practical to require NECA to follow the affiliate transactions 
rules as they are applied to local exchange carriers subject to part 
32. Because NECA does not provide services pursuant to tariff and does 
not provide more than 50 percent of its services to third parties, if 
NECA were subject to the affiliate transactions rules, it would be 
required to determine the fair market value of the services provided to 
USAC. We find that the burden of making such a determination outweighs 
the benefit of imposing this requirement. On our own motion, we clarify 
that NECA is subject to the affiliate transactions rules only to the 
extent necessary to ensure that transactions between NECA and USAC are 
recorded fairly. We conclude that NECA would satisfy this requirement 
by valuing and recording transactions with USAC at fully distributed 
cost in accordance with its Cost Accounting and Procedures Manual on 
file with the Commission. Consistent with this finding, we conclude 
that section 32.27 of the Commission's rules, to the extent that it 
requires regulated carriers to record transactions with affiliates at 
the tariffed rate, if a tariffed rate exists, at the prevailing market 
rate, if a prevailing market rate exists, or at the higher of estimated 
fair market value or cost, is not applicable to transactions between 
NECA and USAC.

Final Regulatory Flexibility Analysis

    152. As required by the Regulatory Flexibility Act (RFA), see 5 
U.S.C. Sec. 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 IRFA 
in connection with the Recommended Decision, seeking written public 
comment on the proposals in the NPRM and Recommended Decision. A Final 
Regulatory Flexibility Analysis (FRFA) was included in the previous 
Order. The Commission's Final Regulatory Flexibility Analysis (FRFA) in 
this order conforms to the RFA, as amended.
    153. 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.

A. Need for and Objectives of this Report and Order and the Rules 
Adopted Herein

    154. The Commission is required by section 254 of the Act, as 
amended by the 1996 Act, to promulgate rules to implement promptly the 
universal service provisions of section 254. On May 8, 1997, the 
Commission adopted rules whose principle goal is to reform our system 
of universal service support so that universal service is preserved and 
advanced as markets move toward

[[Page 2119]]

competition. In this order, we clarify and reconsider those rules.

B. Summary and Analysis of the Significant Issues Raised by Public 
Comments in Response to the IRFA

    155. 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 entities, as defined by 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.
    156. No comments in response to the IRFAs, other than those 
described in the Order, were filed. In response to the FRFA, RTC argues 
that the Commission did not satisfy the requirements of the RFA by 
considering alternatives to the cap on recovery of corporate operations 
expenses. We note that the majority of commenters in the Order 
generally supported limiting the amount of corporate operations expense 
that can be recovered through the universal service support mechanisms. 
Some commenters suggested that universal service support should not be 
allowed at all for corporate operating expenses; however, the 
Commission found that the amount of corporate operating expense per 
line that is supported through the universal service support mechanisms 
should fall within a range of reasonableness. The Commission weighed 
all alternatives relating to corporate operating expenses in the Order 
and the previous FRFA in reaching its conclusion.

C. Description and Estimates of the Number of Small Entities to Which 
the Rules Adopted in This Report and Order Will Apply

    157. In the FRFA to the Order, we described and estimated the 
number of small entities that would be affected by the new universal 
service rules. The rules adopted here will apply to the same 
telecommunications carriers and entities affected by the universal 
service rules. We therefore incorporate by reference paragraphs 890-925 
of the Order, which describe and estimate the number of affected 
telecommunications carriers and other entities affected by the 
universal service rules. We summarize that analysis as follows:
1. Telephone Companies (SIC 4813)
    158. 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.
    159. Wireless (Radiotelephone) Carriers. SBA has developed a 
definition of small entities for radiotelephone (wireless) 
communications companies. The Census Bureau reports that there were 
1,176 such companies in operation for at least one year at the end of 
1992. According to SBA's definition, a small business radiotelephone 
company is one employing no more than 1,500 persons. The Census Bureau 
also reported that 1,164 of those radiotelephone companies had fewer 
than 1,000 employees. Thus, even if all of the remaining 12 companies 
had more than 1,500 employees, there would still be 1,164 
radiotelephone companies that might qualify as small entities if they 
are independently owned and operated.
2. Cable System Operators (SIC 4841)
    160. 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.
3. Municipalities
    161. 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.
4. Rural Health Care Providers
    162. Neither the Commission nor the SBA has developed a definition 
of small, rural health care providers. 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 
migrant;'' (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.
5. Schools (SIC 8211) and Libraries (SIC 8231)
    163. 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.

[[Page 2120]]

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

    164. 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. Section 
numbers correspond to the sections of the order.
Summary Analysis: Section II, Definition of Universal Service

Summary of Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    165. We conclude that Mobile Satellite Service (MSS) providers in 
localities that have implemented E911 service, like other wireless 
providers, may petition their state commission for permission to 
receive universal service support for the designated period during 
which they are completing the network upgrades required to offer access 
to E911. We also affirm that MSS providers in localities that have 
implemented E911 service must demonstrate that ``exceptional 
circumstances'' prevent them from offering access to E911. We note that 
we are not imposing any new reporting requirements beyond those 
established in the May 8, 1997 Order.

Significant Alternatives and Steps Taken to Minimize Significant 
Economic Impact on a Substantial Number of Small Entities Consistent 
with Stated Objectives

    166. We recognize that exceptional circumstances may prevent some 
carriers, such as MSS providers, from offering access to E911. To 
promote competitive and technological neutrality, however, we permit 
MSS providers that are incapable of providing access to E911 service, 
but that wish to receive universal service support, to demonstrate to 
their state commissions that ``exceptional circumstances'' prevent them 
from offering such access.
Summary Analysis: Section III, Carriers Eligible for Universal Service 
Support
    Summary of Projected Reporting, Recordkeeping, and Other Compliance 
Requirements. 167. As of January 1, 1998, the temporary Administrator 
may not disburse support to carriers that have not been designated as 
eligible under section 214(e). Thus, if a carrier has not been 
designated as eligible by its state commission by January 1, 1998, it 
may not receive support until such time as it is designated an eligible 
telecommunications carrier. Additionally, we encourage Sandwich Isles 
and the relevant Hawaiian state agencies to resolve their dispute over 
which entity should designate eligible telecommunications carriers to 
serve the Hawaiian Home Lands. If they are unable to do so, we 
encourage them to bring this fact to our attention so that we may 
complete action on the pending petitions on this matter. Neither of 
these determinations impose any new reporting, recordkeeping, or other 
compliance requirements on small entities.
    Significant Alternatives and Steps Taken to Minimize Significant 
Economic Impact on a Substantial Number of Small Entities Consistent 
with Stated Objectives. 168. In the Order and subsequent public 
notices, we have emphasized to state commissions that they must 
designate eligible telecommunications carriers by January 1, 1998, so 
that carriers that are eligible for universal service support may 
receive such support beginning January 1, 1998. State commissions that 
are unable to designate any eligible telecommunications carrier in a 
service area by January 1, 1998 may, upon completion of the 
designation, file with the Commission a petition for a waiver 
requesting that the designated carrier receive universal service 
support retroactive to January 1, 1998.
Summary Analysis: Section IV, High Cost, Rural, and Insular Support
    Summary of Projected Reporting, Recordkeeping, and Other Compliance 
Requirements. 169. Section 54.303 of the Commission's rules provides 
the method by which the Administrator will calculate and distribute DEM 
weighting assistance (or local switching support). Although that 
section sets forth the method for calculating the local switching 
support factor, it does not specify the method for calculating the 
annual unseparated local switching revenue requirement. Accordingly, we 
amend the Commission's part 54 rules to provide the method by which the 
Administrator will calculate the unseparated local switching revenue 
requirement. Specifically, we direct the Administrator to use part 32 
account data as suggested by NECA to determine the unseparated local 
switching revenue requirement. Consistent with our adoption of a 
methodology that relies upon part 32 account data, we authorize the 
Administrator to issue a data request annually to the carriers that 
serve study areas with 50,000 or fewer access lines. We anticipate that 
of the approximately 1,288 carriers that will be required to file part 
32 account data with the Administrator in order to receive DEM 
weighting assistance, all but approximately 192 already provide this 
information to NECA.
    170. We adopt no additional reporting, recordkeeping, or other 
compliance requirements with respect to the remaining high cost, DEM 
weighting and LTS issues addressed in this order.
    Significant Alternatives and Steps Taken to Minimize Significant 
Economic Impact on a Substantial Number of Small Entities Consistent 
with Stated Objectives. 171. We considered an alternative method of 
calculating the unseparated local switching revenue requirement that 
would not have imposed an additional reporting requirement on those 
carriers that currently do not file part 32 account data with NECA. We 
concluded, however, that GVNW's proposal to calculate the local 
switching revenue requirement by dividing the interstate local 
switching revenue requirement by the interstate DEM weighting factor 
that is used to assign the local switching investment to the interstate 
jurisdiction under part 36 of our rules would not provide an accurate 
measure of the unseparated local switching revenue requirement. If all 
local switching expenses and investment used to determine the revenue 
requirement for the local switching rate element were allocated between 
the interstate and intrastate jurisdictions on the basis of weighted 
DEM, the formula suggested by GVNW would result in an accurate 
calculation of the unseparated local switching revenue requirement. 
Weighted DEM, however, is only one of several mechanisms used to 
allocate local switching expenses and investment between the interstate 
and intrastate jurisdictions for purposes of determining local 
switching access charges. The Commission's rules prescribe different 
allocators for other local switching expenses and related investment, 
such as those associated with general support facilities. We conclude 
that the approach adopted in this order, to the extent that it 
allocates

[[Page 2121]]

local switching expenses and related investment in a manner that is 
consistent with the allocation methods prescribed under parts 36 and 69 
of our rules, provides a more accurate method for calculating the 
unseparated local switching revenue requirement.
    172. Although we adopt no additional reporting, recordkeeping, or 
other compliance requirements with respect to the cap on recovery of 
corporate operations expenses, we note that several petitioners 
challenged the Commission's decision to limit recovery of corporate 
operations expenses. These petitioners argue that the Commission's 
decision in the Order to limit such expenses ignores Congress's intent 
to limit or reduce burdens on small, rural, and insular carriers and, 
in fact, disproportionately burdens smaller incumbent LECs. ITC argues 
that federal regulatory expenses should not be included within the 
limitation to ensure that small companies will be able to participate 
in the federal regulatory process.
    173. In general, the Commission's decision to limit recovery of 
corporate operations expenses carefully considers the needs of smaller 
carriers. The Commission concludes that all carriers currently have 
little incentive to minimize these expenses because the current 
mechanism allows carriers to recover a large percentage of their 
corporate operations expenses. Smaller carriers possess even fewer 
incentives to minimize corporate operations expenses because the 
Commission has a limited ability to ensure, through audits, that 
smaller companies properly assign corporate operations expenses to 
appropriate accounts and that carriers do not spend at excessive 
levels. The Commission, and frequently state commissions, cannot 
justify auditing smaller carriers because the cost of a full-scale 
audit is likely to exceed any expenses found to be improper by that 
audit. We therefore conclude that imposing a cap that is relatively 
generous to small carriers but still imposes a limitation is a prudent 
way to encourage correct allocation of expenditures and to discourage 
excessive expenditures. Under this approach, we are providing carriers 
with an incentive to control their corporate operations expenses 
without requiring all carriers, including small carriers, to incur the 
costs associated with a full Commission audit. As the Commission 
indicated in its Order and as explained above, carriers that contend 
that the limitation provides insufficient support may request a waiver 
from the Commission. Therefore, only carriers whose expenses are 
significantly above the average and who contend that the capped amount 
is insufficient will be required to provide additional justification 
for their expenditures. We therefore conclude that this limitation 
deters improper recovery of universal service funds while minimizing 
the administrative burden on the Commission and on all carriers, 
including smaller carriers. Moreover, individual companies that are 
required to incur unusually high corporate operations expenses, such as 
small companies, Alaskan companies, or insular companies, are able to 
apply for a waiver with the Commission to demonstrate that these 
expenses are necessary to the provision of the supported services.
    174. In adopting the limitation on corporate operations expenses, 
the Commission considered whether to exclude recovery of all corporate 
operations expenses, as it had originally proposed in 1995. The 
Commission concluded, however, that it should limit recovery of such 
expenses, in part to protect smaller recipients of high cost universal 
service support. When developing the formula that will calculate the 
limit on recovery of corporate operations expense, the Commission took 
into account the lesser economies of scale of smaller carriers and 
adopted a limit that is more generous to smaller carriers. 
Additionally, the Commission adopted an industry proposal to add a 
minimum annual cap of $300,000 that is favored, among others, by 
petitioners representing smaller, rural carriers. This minimum cap will 
assist the smallest carriers--those with fewer than approximately 600 
lines. Further, when developing the formula to limit recovery of 
corporate operations expenses, the Commission chose not to limit 
recovery to the average corporate operations expenses, but instead 
added a 15 percent ``buffer'' to protect all carriers, including 
smaller carriers, with expenses that are slightly higher than average. 
We reject ITC's request to exclude all federal regulatory expenses from 
the limitation because, while some expenditures may be necessary to 
participate in the federal regulatory process, the need for such 
expenditures are not without limit and many carriers, including smaller 
carriers, fulfill legal and regulatory requirements and participate in 
the federal regulatory process while incurring costs below the 
Commission's limit.
Summary Analysis: Section V, Support for Low-income Consumers
    Summary of Projected Reporting, Recordkeeping, and Other Compliance 
Requirements. 175. There are no new reporting, recordkeeping, or 
compliance requirements required by this section. Significant 
Alternatives and Steps Taken to Minimize Significant Economic Impact on 
a Substantial Number of Small Entities Consistent with Stated 
Objectives.
    176. We reconsider the Commission's decision that eligible 
telecommunications carriers must provide both toll blocking and toll 
control to qualifying low-income consumers. We find that eligible 
telecommunications carriers that cannot provide both toll blocking and 
toll control may provide either toll blocking or toll control to 
qualifying low-income consumers. Small carriers that are not capable of 
providing both toll blocking and toll control will benefit from this 
decision by remaining eligible for universal service when providing one 
but not both of these services to qualifying low-income consumers.
Summary Analysis: Section VI, Schools and Libraries and Rural Health 
Care Providers
    Summary of Projected Reporting, Recordkeeping, and Other Compliance 
Requirements. 177. In the order, we affirm the Commission's previous 
decision to require service providers to ``look back'' three years to 
determine the lowest corresponding price charged for similarly situated 
non-residential customers. We also affirm the Commission's previous 
decision to require schools and libraries to conduct an internal 
assessment of the components necessary to use effectively the 
discounted services they order, submit a complete description of the 
services they seek, and certify to certain criteria under penalty of 
perjury. We also affirm the Commission's previous decision to require 
schools and libraries to obtain independent approval of their 
technology plans. We note that we are not imposing any new reporting 
requirements beyond those established in the May 8, 1997 Order.
    178. We do not require that the Schools and Libraries Corporation 
and the Rural Health Care Corporation post RFPs submitted by schools, 
libraries, and rural health care providers on the websites. Instead, 
schools and libraries will submit FCC Form 470 and rural health care 
providers will submit FCC Form 465, containing a description of 
services requested, and the Schools and Libraries Corporation and Rural 
Health Care Corporation will post only the information contained in 
these forms on the websites. We affirm the Commission's prior decision 
that the Schools and Libraries Corporation may

[[Page 2122]]

review technology plans when a state agency is unable or unwilling to 
do so within a reasonable time. In an effort to ensure that eligible 
schools and libraries are not penalized by this requirement, we will 
allow such entities to indicate on FCC Form 470 that their technology 
plan has either been approved, will be approved by a state or other 
authorized body, or will be submitted to the Schools and Libraries 
Corporation for approval. Applicants will be required to certify on FCC 
Form 471 that they will strive to ensure that the most disadvantaged 
schools and libraries will receive the full benefit of the discounts to 
which they are entitled. These reporting requirements were set forth in 
either the Order or the July 10 Order. These tasks may require some 
administrative, accounting, clerical, and legal skills.
    179. We conclude that state telecommunications networks that 
procure telecommunications from service providers and make such 
services available to consortia of schools and libraries will be 
permitted to secure discounts on eligible telecommunications from 
service providers on behalf of eligible schools and libraries. In 
addition, we conclude that state telecommunications networks that 
provide access to the Internet and internal connections may either 
secure discounts on such telecommunications and pass on such discounts 
to eligible schools and libraries, or receive direct reimbursement from 
universal service support mechanisms for providing Internet access and 
internal connections. In order to receive universal service discounts 
that will be passed through to eligible schools and libraries, state 
telecommunications networks will request that service providers apply 
appropriate discount amounts on eligible telecommunications. The 
service providers will submit to the state telecommunications network a 
bill that includes the appropriate discounts on the portion of eligible 
telecommunications rendered to eligible entities. The state 
telecommunications network then will direct the eligible consortia 
members to pay the discounted price. Eligible consortia members may pay 
the discounted price to their state telecommunications network, which 
will then pay the discounted amount to the service providers. State 
telecommunications networks should retain records listing eligible 
schools and libraries and showing the basis on which the eligibility 
determinations were made. Such networks also must keep careful records 
demonstrating the discount amount to which each eligible entity is 
entitled and the basis for such a determination. We note that this is 
not a new reporting requirement. In addition, we require consortia to 
certify that each individual institution listed as a member of the 
consortia and included in determining the discount rate will receive an 
appropriate share of the shared services within five years of the 
filing of the consortium application. We further conclude that, to the 
extent schools and libraries build and purchase wide area networks to 
provide telecommunications, the cost of purchasing such networks will 
not be eligible for universal service discounts.
    Significant Alternatives and Steps Taken To Minimize Significant 
Economic Impact on a Substantial Number of Small Entities Consistent 
With Stated Objectives. 
    180. We affirm the Commission's decision to require service 
providers to ``look back'' three years to determine the lowest 
corresponding price charged for similarly situated non-residential 
customers. In doing so, we do not adopt the proposal of GTE to reduce 
this requirement to one year. We note that we do not consider this 
provision to be unduly burdensome on providers, some of whom may 
qualify as small entities, as the records to be reviewed are limited to 
those relating to similarly situated non-residential customers for 
similar services. Moreover, we expect that providers would voluntarily 
perform such a review in most cases to determine the rate to charge in 
a competitive environment.
    181. We affirm the Commission's decision to require schools and 
libraries to comply with certain reporting requirements including 
conducting an internal assessment of the components necessary to use 
effectively the discounted services they order, submit a complete 
description of the services they seek, and certify to certain criteria 
under penalty of perjury. We do not find these requirements to be 
unduly burdensome on schools and libraries and believe that they will 
assist schools and libraries in obtaining and utilizing supported 
services in an efficient and effective manner. We also affirm the 
Commission's decision to require schools and libraries to submit and 
receive approval of technology plans. We do not adopt the suggestion of 
a few petitioners that we postpone or eliminate this requirement in an 
effort to equalize the ability of non-public schools and libraries to 
obtain independent approval. We do, however, adopt measures to assist 
non-public entities, many of whom may qualify as small entities, from 
being disadvantaged by this requirement. For example, we authorize the 
Schools and Libraries Corporation to review technology plans when the 
state is unwilling or unable to do so in a reasonable time. Eligible 
entities that are not required by state or local law to obtain state 
approval for technology plans and telecommunications expenditures may 
apply directly to the Schools and Libraries Corporation for review of 
their technology plan. In addition, FCC Form 470 will allow applicants 
to indicate that their technology plans either have been approved, will 
be approved by a state or other entity, or will be submitted to the 
Schools and Libraries Corporation for approval. This will allow non-
public schools and libraries to proceed with the application process in 
a timely manner while obtaining approval of their technology plans. 
Support will not, however, be provided prior to approval of the 
technology plan.
    182. We reconsider the definition of existing contracts established 
in the July 10 Order that are exempt from the competitive bid 
requirement. We conclude that any contract signed on or before July 10, 
1997 will be considered an existing contract. Contracts signed after 
July 10, 1997 but before the websites are fully operational will be 
considered existing contracts for those services provided through 
December 31, 1998. We extend the existing contract exemption that we 
establish in this Order to rural health care providers, many of whom 
identify themselves as small entities. We believe that this 
determination will assist many small entities by allowing them to 
negotiate lower rates through long-term contracts and avoid penalties 
associated with breaking contracts that they entered into prior to the 
date that the website is fully operational. We do not adopt the 
suggestion that we eliminate all restrictions on contracts signed prior 
to the date that the schools and libraries websites become fully 
operational. Although schools and libraries have a strong incentive to 
negotiate contracts at the lowest possible pre-discount prices in an 
effort to reduce their costs, we affirm our initial finding that 
competitive bidding is the most efficient means of ensuring that 
eligible schools and libraries are informed about the choices available 
to them and receive the lowest prices.
    183. Requiring state telecommunications networks to retain records 
listing eligible schools and libraries should be minimally burdensome 
because we require such networks to gather and retain basic

[[Page 2123]]

information, such as the names of consortia members, addresses, and 
telephone numbers. Requiring state networks to keep records 
demonstrating the discount amount to which each eligible entity is 
entitled and the basis on which such a determination was made should be 
minimally burdensome, because such information should be readily 
available from the eligible entities. Additionally, consistent with the 
Order, service providers must keep and retain careful records showing 
how they have allocated the costs of facilities shared by eligible and 
ineligible entities in Order to charge such entities the correct 
amounts. As we determined in the Order, this should be minimally 
burdensome, because state networks will be required 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). We find that these 
recordkeeping and reporting requirements described above are necessary 
to provide the level of accountability that is in the public interest.
Summary Analysis: Section VII, Administration
    Summary of Projected Reporting, Recordkeeping, and Other Compliance 
Requirements. 184. 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 continue to 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. As provided in the Order, contributors 
will be required to submit information regarding their end-user 
telecommunications revenues. Approximately 4,500 telecommunications 
carriers and providers will be required to submit contributions. We 
note that we do not impose any new reporting requirements beyond those 
established in the Order. 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. 185. In accordance with section 254(d), we 
affirm the Commission's decision that all telecommunications carriers 
that provide interstate telecommunications services shall make 
equitable and nondiscriminatory contributions toward universal service. 
We reject the contention of various telecommunications carriers that 
they should not be required to contribute or should be allowed to 
contribute at a reduced rate. For example, we reject the suggestion of 
some petitioners 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 may 
not be eligible to receive universal service support. We note that 
section 254(d) provides no such exemption for CMRS providers or other 
carriers regardless of whether they receive universal service support. 
We affirm the Commission's decision, 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 
services. We also clarify that the lease of space segment capacity by 
satellite providers does not constitute the provision of 
telecommunications and therefore does not trigger universal service 
contribution requirements.
    186. We exempt from the contribution requirement systems 
integrators that obtain a de minimis amount of their revenues from the 
resale of telecommunications. We exempt from the contribution 
requirement schools, libraries, and rural health care providers that 
are eligible to receive universal service support. We also agree with 
petitioners' suggestions that the de minimis exemption take into 
account the Administrator's collection costs and contributor's 
reporting compliance costs. We find that if a contributor's 
contribution to universal service in any given year is less than 
$10,000, that contributor will not be required to submit a contribution 
for that year. We believe that small entities will benefit under the de 
minimis exemption as interpreted in the Order. 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

    187. 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. 
Sec. 801(a)(1)(A). A copy or summary of the Report and Order and this 
FRFA will also be published in the Federal Register, see 5 U.S.C. 
Sec. 604(b), and will be sent to the Chief Counsel for Advocacy of the 
Small Business Administration.

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. Secs. 151-
154, 201-205, 218-220, 214, 254, 303(r), 403, and 410, the FOURTH ORDER 
ON RECONSIDERATION IS ADOPTED, effective 30 days after publication of 
the text in the Federal Register. The collections of information 
contained within are contingent upon approval by the Office of 
Management and Budget.
    It is further ordered that parts 36, 54, and 69 of the Commission's 
rules, 47 CFR 36, 54, and 69, are amended as set forth in the rule 
changes, effective 30 days after publication of the text thereof in the 
Federal Register.
    It is further ordered that, pursuant to section 5(c)(1) of the 
Communications Act of 1934, as amended, 47 U.S.C. Sec. 155(c)(1), 
authority is delegated to the Chief, Common Carrier Bureau, to review, 
modify, and approve the formula submitted by the Administrator pursuant 
to section 54.303(f) of the Commission's rules, 47 CFR 54.303(f).
    It is further ordered that United States Telephone Association's 
Petition for Clarification is DISMISSED AS MOOT.
    It is further ordered that Florida Public Service Commission's 
Petition for Declaratory Statement is GRANTED. It is further determined 
that the Florida Commission's state Lifeline program qualifies as a 
program that provides intrastate matching funds and, therefore, the 
Florida Commission may set its own consumer qualification standards. It 
is further ordered that Florida Public Service Commission's Petitions 
for Waiver are DISMISSED AS MOOT, and that its Request for Expedited 
Ruling and Petition for Clarification are GRANTED.
    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

[[Page 2124]]

particular persons or circumstances, the remainder of the Order or 
regulations, or their application to other persons or circumstances, 
shall not be affected.
    It is further ordered that the Commission's Office of Public 
Affairs, Reference Operations Division, SHALL SEND a copy of this 
Report and Order, including the Final Regulatory Flexibility Analysis, 
to the Chief Counsel for Advocacy of the Small Business Administration.

List of Subjects

47 CFR Part 36

    Communications common carriers, Reporting and recordkeeping 
requirements, Telephone, Uniform system of accounts.

47 CFR 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.
Magalie Roman Salas,
Secretary.

Rule Changes

    Parts 36, 54 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 continues to read as follows:

    Authority: 47 U.S.C. 151, 154(i) and (j), 205, 221(c), 254, 403 
and 410.

    2. Amend Sec. 36.125 by revising paragraph (a)(5) to read as 
follows:


Sec. 36.125  Local switching equipment--Category 3.

    (a) * * *
    (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 interstate DEM factor. The state DEM factor is the 
ratio of the state DEM to the total DEM.
* * * * *
    3. Amend Sec. 36.601 by revising paragraph (c) to read as follows:


Sec. 36.601  General.

* * * * *
    (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 
determined by the company's submission pursuant to Sec. 36.611. 
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 
paragraph shall apply only to amounts calculated pursuant to this 
subpart F.
    4. Amend Sec. 36.612 by revising paragraph (a) introductory text 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 to the National Exchange Carrier Association pursuant to 
Sec. 36.611 (a) through (h) one or more times annually on a rolling 
year basis. Carriers wishing to update the preceding calendar year data 
filed July 31st may:
* * * * *
    5. Amend Sec. 36.613 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 Administrator the 
information listed below. * * *
* * * * *
    6. Amend Sec. 36.621 by revising the second sentence of paragraph 
(a)(1), paragraph (a)(2) and (a)(3), the first and second sentences of 
paragraph (a)(4) introductory text and paragraphs (a)(4)(ii)(A) through 
(a)(4)(ii)(C) to read as follows:


Sec. 36.621  Study area total unseparated loop cost.

    (a) * * *
    (1) * * * This amount is calculated by deducting the accumulated 
depreciation and noncurrent deferred Federal income taxes attributable 
to C&WF subcategory 1.3 investment and Exchange Line Category 4.13 
circuit investment reported pursuant to Sec. 36.611(b) from the gross 
investment in Exchange Line C&WF subcategory 1.3 and CO Category 4.13 
reported pursuant to Sec. 36.611(a) to obtain the net unseparated C&WF 
subcategory 1.3 investment, and CO Category 4.13 investment. * * *
    (2) Depreciation expense attributable to C&WF subcategory 1.3 
investment, and CO Category 4.13 investment as reported in 
Sec. 36.611(c).
    (3) Maintenance expense attributable to C&WF subcategory 1.3 
investment, and CO Category 4.13 investment as reported in 
Sec. 36.611(d).
    (4) Corporate Operations Expenses, Operating Taxes and the benefits 
and rent portions of operating expenses, as reported in Sec. 36.611(e) 
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), to the unseparated gross telecommunications

[[Page 2125]]

plant investment, as reported in Sec. 36.611(f). * * *
* * * * *
    (ii) * * *
    (A) For study areas with 6,000 or fewer working loops the amount 
per working loop shall be $31.188-(.0023  x  the number of working 
loops), or, $25,000the number of working loops, whichever is 
greater;
    (B) for study areas with more than 6,000 but fewer than 18,006 
working loops, the amount per working loop shall be $3.588 + 
(82,827.60the number of working loops); and
    (C) for study areas with 18,006 or more working loops, the amount 
per working loop shall be $8.188.
    7. Amend Sec. 36.622 by revising the introductory text of 
paragraphs (a) and (b) to read as follows:


Sec. 36.622  National and study area average unseparated loop costs.

    (a) National Average Unseparated Loop Cost per Working Loop. Except 
as provided in paragraph (c) of this section, this is equal to the sum 
of the Loop Costs for each study area in the country as calculated 
pursuant to Sec. 36.621(a) divided by the sum of the working loops 
reported in Sec. 36.611(h) for each study area in the country. The 
national average unseparated loop cost per working loop shall be 
calculated by the National Exchange Carrier Association.
* * * * *
    (b) Study Area Average Unseparated Loop Cost per Working Loop. This 
is equal to the unseparated loop costs for the study area as calculated 
pursuant to Sec. 36.621(a) divided by the number of working loops 
reported in Sec. 36.611(h) for the study area.
* * * * *
    8. Amend Sec. 36.631 by revising paragraphs (a) through (d) to read 
as follows:


Sec. 36.631  Expense adjustment.

    (a) Until December 31, 1997, for study areas reporting 50,000 or 
fewer working loops pursuant to Sec. 36.611(h), the expense adjustment 
(additional interstate expense allocation) is equal to the sum of the 
following:
    (1) Fifty percent of the study area average unseparated loop cost 
per working loop as calculated pursuant to Sec. 36.622(b) in excess of 
115 percent of the national average for this cost but not greater than 
150 percent of the national average for this cost as calculated 
pursuant to Sec. 36.622(a) multiplied by the number of working loops 
reported in Sec. 36.611(h) for the study area; and
    (2) Seventy-five percent of the study area unseparated loop cost 
per working loop as calculated pursuant to Sec. 36.622(b) in excess of 
150 percent of the national average for this cost as calculated 
pursuant to Sec. 36.622(a) multiplied by the number of working loops 
reported in Sec. 36.611(h) for the study area.
    (b) Until December 31, 1987, for study areas reporting more than 
50,000 working loops pursuant to Sec. 36.611(h), the expense adjustment 
(additional interstate expense allocation) is equal to the sum of the 
following:
    (1) Twenty-five percent of the study area average unseparated loop 
cost per working loop as calculated pursuant to Sec. 36.622(b) in 
excess of 115 percent of the national average for this cost but not 
greater than 150 percent of the national average for this cost as 
calculated pursuant to Sec. 36.622(a) multiplied by the number of 
working loops reported in Sec. 36.611(h) for the study area; and
    (2) The amount calculated pursuant to Sec. 36.631(a)(2).
    (c) Beginning January 1, 1988, for study areas reporting 200,000 or 
fewer working loops pursuant to Sec. 36.611(h), the expense adjustment 
(additional interstate expense allocation) is equal to the sum of the 
following:
    (1) Sixty-five percent of the study area average unseparated loop 
cost per working loop as calculated pursuant to Sec. 36.622(b) in 
excess of 115 percent of the national average for this cost but not 
greater than 150 percent of the national average for this cost as 
calculated pursuant to Sec. 36.622(a) multiplied by the number of 
working loops reported in Sec. 36.611(h) for the study area; and
    (2) Seventy-five percent of the study area average unseparated loop 
cost per working loop as calculated pursuant to Sec. 36.622(b) in 
excess of 150 percent of the national average for this cost as 
calculated pursuant to Sec. 36.622(a) multiplied by the number of 
working loops reported in Sec. 36.611(h) for the study area.
    (d) Beginning January 1, 1988, for study areas reporting more than 
200,000 working loops pursuant to Sec. 36.611(h), the expense 
adjustment (additional interstate expense allocation) is equal to the 
sum of the following:
    (1) Ten percent of the study area average unseparated loop cost per 
working loop cost per working loop as calculated pursuant to 
Sec. 36.622(b) in excess of 115 percent of the national average for 
this cost but not greater than 160 percent of the national average for 
this cost as calculated pursuant to Sec. 36.622(a) multiplied by the 
number of working loops reported in Sec. 36.611(h) for the study area;
    (2) Thirty percent of the study area average unseparated loop cost 
per working loop as calculated pursuant to Sec. 36.622(b) in excess of 
160 percent of the national average for this cost but not greater than 
200 percent of the national average for this cost as calculated 
pursuant to Sec. 36.622(a) multiplied by the number of working loops 
reported in Sec. 36.611(h) for the study area;
    (3) Sixty percent of the study area average unseparated loop cost 
per working loop as calculated pursuant to Sec. 36.622(b) in excess of 
200 percent of the national average for this cost but not greater than 
250 percent of the national average for this cost as calculated 
pursuant to Sec. 36.622(a) multiplied by the number of working loops 
reported in Sec. 36.611(h) for the study area; and
    (4) Seventy-five percent of the study area average unseparated loop 
cost per working loop as calculated pursuant to Sec. 36.622(b) in 
excess of 250 percent of the national average for this cost as 
calculated pursuant to Sec. 36.622(a) multiplied by the number of 
working loops reported in Sec. 36.611(h) for the study area.
* * * * *

PART 54--UNIVERSAL SERVICE

    9. The authority citation for part 54 continues to read as follows:

    Authority: 47 U.S.C. 151, 154(i), 201, 205, 214 and 254.

    10. Amend Sec. 54.101 by revising paragraph (a) introductory text, 
the last sentence of paragraph (a)(1) and paragraph (b) to read as 
follows:


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) * * * For the purposes of this part, bandwidth for voice grade 
access should be, at a minimum, 300 to 3,000 Hertz.
* * * * *
    (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.
* * * * *
    11. Amend Sec. 54.201 by revising the section heading, 
redesignating paragraphs (a)(2) and (a)(3) as paragraphs (a)(3) and 
(a)(4) and adding new paragraph (a)(2) to read as follows:


Sec. 54.201  Definition of eligible telecommunications carriers, 
generally.

    (a) * * *
    (2) A state commission that is unable to designate as an eligible

[[Page 2126]]

telecommunications carrier, by January 1, 1998, a carrier that sought 
such designation before January 1, 1998, may, once it has designated 
such carrier, file with the Commission a petition for waiver of 
paragraph (a)(1) of this section requesting that the carrier receive 
universal service support retroactive to January 1, 1998. The state 
commission must explain why it did not designate such carrier as 
eligible by January 1, 1998, and provide a justification for why 
providing support retroactive to January 1, 1998, serves the public 
interest.
* * * * *
    12. Revise Sec. 54.301 to read as follows:


Sec. 54.301  Local switching support.

    (a) Calculation of local switching support.
    (1) Beginning January 1, 1998, an incumbent local exchange carrier 
that has been designated an eligible telecommunications carrier and 
that serves a study area with 50,000 or fewer access lines shall 
receive support for local switching costs using the following formula: 
the carrier's projected annual unseparated local switching revenue 
requirement, calculated pursuant to paragraph (d) of this section, 
shall be multiplied by the local switching support factor. For purposes 
of this section, local switching costs shall be defined as Category 3 
local switching costs under part 36 of this chapter.
    (2) Local switching support factor.
    (i) 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.
    (ii) 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.
    (3) Beginning January 1, 1998, the sum of the unweighted interstate 
DEM factor, as defined in Sec. 36.125(a)(5) of this chapter, and the 
local switching support factor shall not exceed 0.85. If the sum of 
those two factors would exceed 0.85, the local switching support factor 
shall be reduced to a level that would reduce the sum of the factors to 
0.85.
    (b) Submission of data to the Administrator. Each incumbent local 
exchange carrier that has been designated an eligible 
telecommunications carrier and that serves a study area with 50,000 or 
fewer access lines shall, for each study area, provide the 
Administrator with the projected total unseparated dollar amount 
assigned to each account listed below for the calendar year following 
each filing. This information must be provided to the Administrator no 
later than October 1 of each year. The Administrator shall use this 
information to calculate the projected annual unseparated local 
switching revenue requirement pursuant to paragraph (d) of this 
section.


                                    I                                   
                                                                        
Telecommunications Plant in    Account 2001                             
 Service (TPIS).                                                        
Telecommunications Plant--     Accounts 2002, 2003, 2005                
 Other.                                                                 
General Support Assets.......  Account 2110                             
Central Office Assets........  Accounts 2210, 2220, 2230                
Central Office--switching,     Account 2210, Category 3                 
 Category 3 (local switching).                                          
Information Origination/       Account 2310                             
 Termination Assets.                                                    
Cable and Wire Facilities      Account 2410                             
 Assets.                                                                
Amortizable Tangible Assets..  Account 2680                             
Intangibles..................  Account 2690                             
                                                                        
                                    II                                  
                                                                        
Rural Telephone Bank (RTB)     Included in Account 1402                 
 Stock.                                                                 
Materials and Supplies.......  Account 1220.1                           
Cash Working Capital.........  Defined in 47 CFR 65.820(d)              
                                                                        
                                   III                                  
                                                                        
Accumulated Depreciation.....  Account 3100                             
Accumulated Amortization.....  Accounts 3400, 3500, 3600                
Net Deferred Operating Income  Accounts 4100, 4340                      
 Taxes.                                                                 
Network Support Expenses.....  Account 6110                             
General Support Expenses.....  Account 6120                             
Central Office Switching,      Accounts 6210, 6220, 6230                
 Operator Systems, and                                                  
 Central Office Transmission                                            
 Expenses.                                                              
Information Origination/       Account 6310                             
 Termination Expenses.                                                  
Cable and Wire Facilities      Account 6410                             
 Expenses.                                                              
Other Property, Plant and      Account 6510                             
 Equipment Expenses.                                                    
Network Operations Expenses..  Account 6530                             
Access Expense...............  Account 6540                             
Depreciation and Amortization  Account 6560                             
 Expense.                                                               
Marketing Expense............  Account 6610                             
Services Expense.............  Account 6620                             
Corporate Operations Expense.  Accounts 6710, 6720                      
Operating Taxes..............  Accounts 7230, 7240                      
Federal Investment Tax         Accounts 7210                            
 Credits.                                                               
Provision for Deferred         Account 7250                             
 Operating Income Taxes--Net.                                           
Allowance for Funds Used       Account 7340                             
 During Construction.                                                   
Charitable Contributions.....  Included in Account 7370                 
Interest and Related Items...  Account 7500                             
                                                                        
                                   IV                                   
                                                                        
Other Non-Current Assets.....  Account 1410                             
Deferred Maintenance and       Account 1438                             
 Retirements.                                                           
Deferred Charges.............  Account 1439                             
Other Jurisdictional Assets    Accounts 1500, 4370                      
 and Liabilities.                                                       

[[Page 2127]]

                                                                        
Customer Deposits............  Account 4040                             
Other Long-Term Liabilities..  Account 4310                             
                                                                        

    (c) Allocation of accounts to switching. The Administrator shall 
allocate to local switching, the accounts reported pursuant to 
paragraph (b) of this section as prescribed in this paragraph.
    (1) General Support Assets (Account 2110); Amortizable Tangible 
Assets (Account 2680); Intangibles (Account 2690); and General Support 
Expenses (Account 6120) shall be allocated according to the following 
factor:

Account 2210 Category3 (Account 2210 + Account 2220 + Account 
2230 + Account 2310 + Account 2410).

    (2) Telecommunications Plant--Other (Accounts 2002, 2003, 2005); 
Rural Telephone Bank (RTB) Stock (included in Account 1402); Materials 
and Supplies (Account 1220.1); Cash Working Capital (Sec. 65.820(d) of 
this chapter); Accumulated Amortization (Accounts 3400, 3500, 3600); 
Net Deferred Operating Income Taxes (Accounts 4100, 4340); Network 
Support Expenses (Account 6110); Other Property, Plant and Equipment 
Expenses (Account 6510); Network Operations Expenses (Account 6530); 
Marketing Expense (Account 6610); Services Expense (Account 6620); 
Operating Taxes (Accounts 7230, 7240); Federal Investment Tax Credits 
(Accounts 7210); Provision for Deferred Operating Income Taxes--Net 
(Account 7250); Interest and Related Items (Account 7500); Allowance 
for Funds Used During Construction (Account 7340); Charitable 
Contributions (included in Account 7370); Other Non-current Assets 
(Account 1410); Other Jurisdictional Assets and Liabilities (Accounts 
1500, 4370); Customer Deposits (Account 4040); Other Long-term 
Liabilities (Account 4310); and Deferred Maintenance and Retirements 
(Account 1438) shall be allocated according to the following factor:

Account 2210 Category 3Account 2001.

    (3) Accumulated Depreciation for Central Office--switching (Account 
3100 associated with Account 2210) and Depreciation and Amortization 
Expense for Central Office--switching (Account 6560 associated with 
Account 2210) shall be allocated according to the following factor:

Account 2210 Category 3Account 2210.

    (4) Accumulated Depreciation for General Support Assets (Account 
3100 associated with Account 2110) and Depreciation and Amortization 
Expense for General Support Assets (Account 6560 associated with 
Account 2110) shall be allocated according to the following factor:

Account 2210 Category 3  Account 2001.

    (5) Corporate Operations Expenses (Accounts 6710, 6720) shall be 
allocated according to the following factor:

{[Account 2210 Category 3  (Account 2210 + Account 2220 + 
Account 2230)]  x  (Account 6210 + Account 6220 + 6230)}  
(Account 6210 + Account 6220 + Account 6230 + Account 6310 + Account 
6410 + Account 6530 + Account 6610 + Account 6620).

    (6) Central Office Switching, Operator Systems, and Central Office 
Transmission Expenses (Accounts 6210, 6220, 6230) shall be allocated 
according to the following factor:

Account 2210 Category 3  (2210 + 2220 + 2230).

    (d) Calculation of the local switching revenue requirement. The 
Administrator shall calculate the local switching revenue requirement 
summing the components listed in this paragraph.
    (1) The return component for COE Category 3 shall be obtained by 
multiplying the projected unseparated local switching average net 
investment by the authorized interstate rate of return. Unseparated 
local switching net investment shall be calculated as of each December 
31 by deducting the accumulated reserves, deferrals and customer 
deposits attributable to the COE Category 3 investment from the gross 
investment attributable to COE Category 3. The projected unseparated 
local switching average net investment shall be calculated by summing 
the projected unseparated local switching net investment as of December 
31 of the calendar year following the filing and the projected 
unseparated local switching net investment as of December 31 of the 
filing year and dividing by 2.
    (2) Depreciation expense attributable to COE Category 3 investment, 
allocated pursuant to paragraph (c) of this section.
    (3) All expenses collected in paragraph (b) of this section, 
allocated pursuant to paragraph (c) of this section.
    (4) Federal income tax shall be calculated using the following 
formula:

[Return on Investment - Account 7340 - Account 7500--Account 7210)]  x  
[Federal Income Tax Rate  (1 - Federal Income Tax Rate)].

    (e) True-up adjustment.
    (1) Submission of true-up data. Each incumbent local exchange 
carrier that has been designated an eligible telecommunications carrier 
and that serves a study area with 50,000 or fewer access lines shall, 
for each study area, provide the Administrator with the historical 
total unseparated dollar amount assigned to each account listed in 
paragraph (b) of this section for each calendar year no later than 12 
months after the end of such calendar year.
    (2) Calculation of true-up adjustment.
    (i) The Administrator shall calculate the historical annual 
unseparated local switching revenue requirement for each carrier when 
historical data for each calendar year are submitted.
    (ii) The Administrator shall calculate each carrier's local 
switching support payment, calculated pursuant to 54.301(a), using its 
historical annual unseparated local switching revenue requirement.
    (iii) For each carrier receiving local switching support, the 
Administrator shall calculate the difference between the support 
payment calculated pursuant to paragraph (e)(2)(ii) of this section and 
its support payment calculated using its projected annual unseparated 
local switching revenue requirement.
    (iv) The Administrator shall adjust each carrier's local switching 
support payment by the difference calculated in paragraph (e)(2)(iii) 
of this section no later than 15 months after the end of the calendar 
year for which historical data are submitted.
    (f) Calculation of the local switching revenue requirement for 
average schedule companies.
    (1) The local switching revenue requirement for average schedule 
companies, as defined in Sec. 69.605(c) of this chapter, shall be 
calculated in accordance with a formula approved or modified by the 
Commission. The Administrator shall submit to the Commission and the 
Common Carrier Bureau for review and approval a formula that simulates 
the disbursements that would be received pursuant to this section by a 
company that is representative of average schedule companies. For each 
annual period, the Administrator shall submit the formula, any proposed 
revisions of such formula, or a certification that no revisions to the 
formula are warranted on or before December 31 of each year.
    (2) The Commission delegates its authority to review, modify, and

[[Page 2128]]

approve the formula submitted by the Administrator pursuant to this 
paragraph to the Chief, Common Carrier Bureau.
    13. Revise Sec. 54.303 to read as follows:


Sec. 54.303  Long term support.

    (a) Beginning January 1, 1998, an eligible telecommunications 
carrier that participates in the association Common Line pool shall 
receive Long Term Support.
    (b) Long Term Support shall be calculated as prescribed in this 
paragraph.
    (1) To calculate the unadjusted base-level of Long Term Support for 
1998, the Administrator shall calculate the difference between the 
projected Common Line revenue requirement of association Common Line 
pool participants projected to be recovered in 1997 and the sum of end-
user common line charges and the 1997 projected revenue recovered by 
the association Carrier Common Line charge as calculated pursuant to 
Sec. 69.105(b)(2) of this chapter.
    (2) To calculate Long Term Support for calendar year 1998, the 
Administrator shall adjust the base-level of Long Term Support 
calculated in paragraph (b)(1) of this section to reflect the annual 
percentage change in the actual nationwide average unseparated loop 
cost per working loop as filed by the Administrator in the previous 
calendar year, pursuant to Sec. 36.622 of this chapter.
    (3) To calculate Long Term Support for calendar year 1999, the 
Administrator shall adjust the level of support calculated in paragraph 
(b)(2) of this section to reflect the annual percentage change in the 
actual nationwide average unseparated loop cost per working loop as 
filed by the Administrator in the previous calendar year, pursuant to 
Sec. 36.622 of this chapter.
    (4) Beginning January 1, 2000, the Administrator shall calculate 
Long Term Support annually by adjusting the previous year's level of 
support to reflect the annual percentage change in the Department of 
Commerce's Gross Domestic Product-Consumer Price Index (GDP-CPI).
    14. Revise Sec. 54.307(a)(4) to read as follows:


Sec. 54.307  Support to a competitive eligible telecommunications 
carrier.

    (a) * * *
    (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 
incumbent local exchange carrier for that customer. The amount of 
universal service support provided to such incumbent local exchange 
carrier shall be reduced by an amount equal to the amount provided to 
such competitive eligible telecommunications carrier.
* * * * *
    15. Amend Sec. 54.400 by revising paragraphs (a) and (d) to read as 
follows:


Sec. 54.400  Terms and definitions.

    (a) Qualifying low-income consumer. A ``qualifying low-income 
consumer'' is a consumer who meets the low-income eligibility criteria 
established by the state commission, or, in states that do not provide 
state Lifeline support, a consumer 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.
* * * * *
    (d) Toll limitation. ``Toll limitation'' denotes either toll 
blocking or toll control for eligible telecommunications carriers that 
are incapable of providing both services. For eligible 
telecommunications carriers that are capable of providing both 
services, ``toll limitation'' denotes both toll blocking and toll 
control.
    16. Amend Sec. 54.401 by revising the last sentence of paragraph 
(d) to read as follows:


Sec. 54.401  Lifeline defined.

* * * * *
    (d) * * * 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.
    17. Amend Sec. 54.403 by adding a new paragraph (d) to read as 
follows:


Sec. 54.403  Lifeline support amount.

* * * * *
    (d) In addition to the $7.00 per qualifying low-income consumer 
described in paragraph (a) of this section, eligible incumbent local 
exchange carriers that serve qualifying low-income consumers who have 
toll blocking shall receive federal Lifeline support in amounts equal 
to the presubscribed interexchange carrier charge that incumbent local 
exchange carriers would be permitted to recover from such low-income 
consumers pursuant to Sec. 69.153(b) of this chapter. Eligible 
incumbent local exchange carriers that serve qualifying low-income 
consumers who have toll blocking shall apply this support to waive 
qualifying low-income consumers' presubscribed interexchange carrier 
charges. A competitive eligible telecommunications carrier that serves 
qualifying low-income consumers who have toll blocking shall receive 
federal Lifeline support in an amount equal to the presubscribed 
interexchange carrier charge that the incumbent local exchange carrier 
in that area would be permitted to recover, if it served those 
consumers.
    18. Revise Sec. 54.500 to read as follows:


Sec. 54.500  Terms and definitions.

    (a) Billed entity. A ``billed entity'' is the entity that remits 
payment to service providers for services rendered to eligible schools 
and libraries.
    (b) Elementary school. An ``elementary school'' is a non-profit 
institutional day or residential school that provides elementary 
education, as determined under state law.
    (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 purpose of this section 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 schools, 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) Master contract. A ``master contract'' is a contract negotiated 
with a service provider by a third party, the

[[Page 2129]]

terms and conditions of which are then made available to an eligible 
school, library, rural health care provider, or consortium that 
purchases directly from the service provider.
    (g) Minor contract modification. A ``minor contract modification'' 
is a change to a universal service contract that is within the scope of 
the original contract and has no effect or merely a negligible effect 
on price, quantity, quality, or delivery under the original contract.
    (h) 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.
    (i) 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.
    (j) 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.
    (k) State telecommunications network. A ``state telecommunications 
network'' is a state government entity that procures, among other 
things, telecommunications offerings from multiple service providers 
and bundles such offerings into packages available to schools, 
libraries, or rural health care providers that are eligible for 
universal service support, or a state government entity that provides, 
using its own facilities, such telecommunications offerings to such 
schools, libraries, and rural health care providers.
    (l) Wide area network. For purposes of this subpart, a ``wide area 
network'' is a voice or data network that provides connections from one 
or more computers within an eligible school or library to one or more 
computers or networks that are external to such eligible school or 
library. Excluded from this definition is a voice or data network that 
provides connections between or among instructional buildings of a 
single school campus or between or among non-administrative buildings 
of a single library branch.
    19. Amend Sec. 54.501 by revising the section heading and 
paragraphs (b)(1), (c)(1), and (d) to read as follows:


Sec. 54.501  Eligibility for services provided by telecommunications 
carriers.

* * * * *
    (b) * * *
    (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 (b)(2) 
or (b)(3) of this section shall be eligible for discounts on 
telecommunications and other supported services under this subpart.
* * * * *
    (c) * * *
    (1) Only libraries eligible for assistance from a State library 
administrative agency under the Library Services and Technology Act 
(Public Law 104-208) and not excluded under paragraphs (c)(2) or (c)(3) 
of this section shall 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, 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) 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.
    20. Revise Sec. 54.502 to read as follows:


Sec. 54.502  Supported telecommunications services.

    For purposes of this subpart, supported telecommunications services 
provided by telecommunications carriers include all commercially 
available telecommunications services in addition to all reasonable 
charges that are incurred by taking such services, such as state and 
federal taxes. Charges for termination liability, penalty surcharges, 
and other charges not included in the cost of taking such service shall 
not be covered by the universal service support mechanisms.
    21. Revise Sec. 54.503 to read as follows:


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 in addition to all 
reasonable charges that are incurred by taking such services, such as 
state and federal taxes. Charges for termination liability, penalty 
surcharges, and other charges not included in the cost of taking such 
services shall not be covered by the universal service support 
mechanisms.
    22. Amend Sec. 54.504 by revising the section heading, paragraph 
(a), the heading of paragraph (b), paragraphs (b)(1), (b)(2) 
introductory text and (b)(2)(v), redesignating paragraph (b)(3) as 
paragraph (b)(4) and revising the first sentence, adding new paragraph 
(b)(3), redesignating paragraph (c) as paragraph (d), and adding new 
paragraph (c) to read as follows:


Sec. 54.504  Requests for services.

    (a) Competitive bid requirements. Except as provided in 
Sec. 54.511(c), an eligible school, library, or consortium that 
includes an eligible school or library shall seek competitive bids, 
pursuant to the requirements established in this subpart, for all 
services eligible for support under Secs. 54.502 and 54.503. These 
competitive bid requirements apply in addition to state and local 
competitive bid requirements and are not intended to preempt such state 
or local requirements.
    (b) Posting of FCC Form 470.
    (1) An eligible school, library, or consortium that includes an 
eligible

[[Page 2130]]

school or library seeking to receive discounts for eligible services 
under this subpart, shall submit a completed FCC Form 470 to the 
Schools and Libraries Corporation. FCC Form 470 shall include, at a 
minimum, the following information, to the extent applicable with 
respect to the services requested:
* * * * *
    (2) FCC Form 470 shall be signed by the person authorized to order 
telecommunications and other supported services for the eligible 
school, library, or consortium and shall include that person's 
certification under oath that:
* * * * *
    (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 or 
software, and to undertake the necessary staff training required to use 
the services effectively;
* * * * *
    (3) The Schools and Libraries Corporation shall post each FCC Form 
470 that it receives from an eligible school, library, or consortium 
that includes an eligible school or library on its website designated 
for this purpose.
    (4) After posting on the schools and libraries website an eligible 
school's, library's, or consortium's FCC Form 470, the Schools and 
Libraries Corporation shall send confirmation of the posting to the 
entity requesting service. * * *
    (c) Filing of FCC Form 471. An eligible school, library, or 
consortium that includes an eligible school or library seeking to 
receive discounts for eligible services under this subpart, shall, upon 
signing a contract for eligible services, submit a completed FCC Form 
471 to the Schools and Libraries Corporation. A commitment of support 
is contingent upon the filing of FCC Form 471.
* * * * *
    23. Amend Sec. 54.505 by adding paragraphs (b)(4) and (f) and 
removing and reserving paragraph (d) to read as follows:


Sec. 54.505  Discounts.

* * * * *
    (b) * * *
    (4) School districts, library systems, or other billed entities 
shall calculate discounts on supported services described in 
Sec. 54.502 or other supported special services described in 
Sec. 54.503 that are shared by two or more of their schools, libraries, 
or consortia members by calculating an average based on the applicable 
discounts of all member schools and libraries. School districts, 
library systems, or other billed entities shall ensure that, for each 
year in which an eligible school or library is included for purposes of 
calculating the aggregate discount rate, that eligible school or 
library shall receive a proportionate share of the shared services for 
which support is sought. For schools, the average discount shall be a 
weighted average of the applicable discount of all schools sharing a 
portion of the shared services, with the weighting based on the number 
of students in each school. For libraries, the average discount shall 
be a simple average of the applicable discounts to which the libraries 
sharing a portion of the shared services are entitled.
* * * * *
    (d) [Reserved]
* * * * *
    (f) State support. Federal universal service discounts shall be 
based on the price of a service prior to the application of any state 
provided support for schools or libraries.
    24. Add Sec. 54.506 to subpart F to read as follows:


Sec. 54.506  Internal connections.

    A service is eligible for support as a component of an 
institution's internal connections if such service is necessary to 
transport information within one or more instructional buildings of a 
single school campus or within one or more non-administrative buildings 
that comprise a single library branch. Discounts are not available for 
internal connections in non-instructional buildings of a school or 
school district, or in administrative buildings of a library, to the 
extent that a library system has separate administrative buildings, 
unless those internal connections are essential for the effective 
transport of information to an instructional building of a school or to 
a non-administrative building of a library. Internal connections do not 
include connections that extend beyond a single school campus or single 
library branch. There is a rebuttable presumption that a connection 
does not constitute an internal connection if it crosses a public 
right-of-way.
    25. Amend Sec. 54.507 by revising paragraphs (e), (f) and the first 
sentence of (g)(4) to read as follows:


Sec. 54.507  Cap.

* * * * *
    (e) Long term contracts. If schools and libraries enter into long 
term contracts for eligible services, the Schools and Libraries 
Corporation 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) Date services must be supplied. The Schools and Libraries 
Corporation shall not approve funding for services received by a school 
or library before January 1, 1998.
    (g) * * *
    (4) The Administrator shall notify the Schools and Libraries 
Corporation of any funds still remaining after all requests submitted 
by schools and libraries described in paragraphs (g)(2) and (g)(3) of 
this section during the 30-day period have been met. * * *
    26. Amend Sec. 54.511 by revising paragraphs (b) and (c) and adding 
new paragraph (d) to read as follows:


Sec. 54.511  Ordering services.

* * * * *
    (b) Lowest corresponding price. Providers of eligible services 
shall not charge schools, school districts, libraries, library 
consortia, or consortia including any of these 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. Promotional rates offered by a 
service provider for a period of more than 90 days must be included 
among the comparable rates upon which the lowest corresponding price is 
determined.
    (c) Existing contracts.
    (1) A signed contract for services eligible for discounts pursuant 
to this subpart between an eligible school or library as defined under 
Sec. 54.501 or consortium that includes an eligible school or library 
and a service provider shall be exempt from the competitive bid 
requirements set forth in Sec. 54.504(a) as follows:
    (i) A contract signed on or before July 10, 1997 is exempt from the 
competitive bid requirements for the life the contract; or
    (ii) A contract signed after July 10, 1997, but before the date on 
which the universal service competitive bid system described in 
Sec. 54.504 is operational, is exempt from the competitive bid 
requirements only with respect to services that were provided under 
such contract between January 1, 1998 and December 31, 1998.
    (2) For a school, library, or consortium that includes an eligible 
school or library that takes service under or pursuant to a master 
contract, the date of execution of that master contract represents the 
applicable date for purposes of determining whether and to what extent 
the school, library,

[[Page 2131]]

or consortium is exempt from the competitive bid requirements.
    (3) The competitive bid system will be deemed to be operational 
when the Schools and Libraries Corporation is ready to accept and post 
FCC Form 470 from schools and libraries on a website and that website 
is available for use by service providers.
    (d) The exemption from the competitive bid requirements set forth 
in paragraph (c) shall not apply to voluntary extensions of existing 
contracts.
    27. Amend Sec. 54.517 by revising paragraph (a) to read as follows:


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 the supported services 
described in paragraph (b) of this section for eligible schools, 
libraries, and consortia including those entities.
* * * * *
    28. Add Sec. 54.518 to subpart F to read as follows:


Sec. 54.518  Wide area networks.

    To the extent that states, schools, or libraries build or purchase 
a wide area network to provide telecommunications services, the cost of 
such wide area networks shall not be eligible for universal service 
discounts provided under this subpart.
    29. Add Sec. 54.519 to subpart F to read as follows:


Sec. 54.519  State telecommunications networks.

    (a) Telecommunications services. State telecommunications networks 
may secure discounts under the universal service support mechanisms on 
supported telecommunications services (as described in Sec. 54.502) on 
behalf of eligible schools and libraries (as described in Sec. 54.501) 
or consortia that include an eligible school or library. Such state 
telecommunications networks shall pass on such discounts to eligible 
schools and libraries and shall:
    (1) Maintain records listing each eligible school and library and 
showing the basis for each eligibility determination;
    (2) Maintain records demonstrating the discount amount to which 
each eligible school and library is entitled and the basis for such 
determination;
    (3) Make a good faith effort to ensure that each eligible school or 
library receives a proportionate share of the shared services;
    (4) Request that service providers apply the appropriate discount 
amounts on the portion of the supported services used by each school or 
library;
    (5) Direct eligible schools and libraries to pay the discounted 
price; and
    (6) Comply with the competitive bid requirements set forth in 
Sec. 54.504(a).
    (b) Internet access and installation and maintenance of internal 
connections. State telecommunications networks either may secure 
discounts on Internet access and installation and maintenance of 
internal connections in the manner described in paragraph (a) of this 
section with regard to telecommunications, or shall be eligible, 
consistent with Sec. 54.517(b), to receive universal service support 
for providing such services to eligible schools, libraries, and 
consortia including those entities.
    30. Amend Sec. 54.603 by revising the section heading and 
paragraphs (b)(1) introductory text, (b)(2) and (b)(3) to read as 
follows:


Sec. 54.603  Competitive bid requirements.

* * * * *
    (b) Posting of FCC Form 465.
    (1) An eligible health care provider seeking to receive 
telecommunications services eligible for universal service support 
under this subpart shall submit a completed FCC Form 465 to the Rural 
Health Care Corporation. FCC Form 465 shall be signed by the person 
authorized to order telecommunications services for the health care 
provider and shall include, at a minimum, that person's certification 
under oath that:
* * * * *
    (2) The Rural Health Corporation shall post each FCC Form 465 that 
it receives from an eligible health care provider on its website 
designated for this purpose.
    (3) After posting an eligible health care providers FCC Form 465 on 
the Rural Health Care Corporation website, the Rural Health Care 
Corporation shall send confirmation of the posting to the entity 
requesting services. The health care provider shall wait at least 28 
days from the date on which its FCC Form 465 is posted on the website 
before making commitments with the selected telecommunications 
carrier(s).
* * * * *
    31. Add Sec. 54.604 to subpart G to read as follows:


Sec. 54.604  Existing contracts.

    (a) Existing contract. A signed contract for services eligible for 
support pursuant to this subpart between an eligible health care 
provider as defined under Sec. 54.601 and a service provider shall be 
exempt from the competitive bid requirements set forth in 
Sec. 54.603(a) as follows:
    (1) A contract signed on or before July 10, 1997 is exempt from the 
competitive bid requirement for the life of the contract; or
    (2) A contract signed after July 10, 1997 but before the date on 
which the universal service competitive bid system described in 
Sec. 54.603 is operational is exempt from the competitive bid 
requirements only with respect to services that will be provided under 
such contract between January 1, 1998 and December 31, 1998.
    (b) For rural health care providers that take service under or 
pursuant to a master contract, as defined in Sec. 54.500(f), the date 
of execution of that master contract represents the applicable date for 
purposes of determining whether and to what extent the rural health 
care provider is exempt from the competitive bid requirements.
    (c) The competitive bid system will be deemed to be operational 
when the Rural Health Care Corporation is ready to accept and post FCC 
Form 465 from rural health care providers on a website and that website 
is available for use by service providers.
    (d) The exemption from competitive bid requirements set forth in 
paragraph (a) shall not apply to voluntary extensions of existing 
contracts.
    32. Amend Sec. 54.605 by revising paragraph (d) and adding 
paragraph (e) to read as follows:


Sec. 54.605  Determining the urban rate.

* * * * *
    (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.
    (e) The Rural Health Care Corporation shall calculate the 
``standard urban distance'' and shall post the ``standard urban 
distance'' and the maximum supported distance for each state on its 
website.
    33. Amend Sec. 54.609 by revising paragraph (a) and adding 
paragraph (c) to read as follows:


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. In 
addition, all reasonable charges that are incurred by taking such 
services, such as state and federal taxes shall be eligible for 
universal service support. Charges for termination liability, penalty 
surcharges, and other charges not

[[Page 2132]]

included in the cost of taking such service shall not be covered by the 
universal service support mechanisms.
* * * * *
    (c) The universal service support mechanisms shall cover reduced 
rates on intrastate telecommunications services, as set forth in 
Sec. 54.101(a), provided to rural health care providers as well as 
interstate telecommunications services.
    34. Amend Sec. 54.619 by revising paragraphs (b) and (d) to read as 
follows:


Sec. 54.619  Audit program.

* * * * *
    (b) Production of records. Health care providers shall produce such 
records at the request of any auditor appointed by the Rural Health 
Care Corporation or any other state or federal agency with 
jurisdiction.
* * * * *
    (d) Annual report. The Rural Health Care Corporation 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.
    35. Amend Sec. 54.623 by revising paragraph (e) to read as follows:


Sec. 54.623  Cap.

* * * * *
    (e) Long term contracts. If health care providers enter into long 
term contracts for eligible services, the Rural Health Care Corporation 
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.
    36. Add Sec. 54.625 to subpart G to read as follows:


Sec. 54.625  Support for services beyond the maximum supported distance 
for rural health care providers.

    (a) The maximum support distance is the distance from the health 
care provider to the farthest point on the boundary of the nearest 
large city, as calculated by the Rural Health Care Corporation.
    (b) An eligible rural health care provider may purchase an eligible 
telecommunications service, as defined in Sec. 54.601(c)(1) through 
(c)(2), that is provided over a distance that exceeds the maximum 
supported distance.
    (c) If an eligible rural health care provider purchases an eligible 
telecommunications service, as defined in Sec. 54.601(c)(1) through 
(c)(2), that exceeds the maximum supported distance, the health care 
provider must pay the applicable rural rate for the distance that such 
service is carried beyond the maximum supported distance.
    37. Amend Sec. 54.703 by adding a new last sentence to paragraphs 
(b) and (c) to read as follows:


Sec. 54.703  Contributions.

* * * * *
    (b) * * * The following entities will not be required to contribute 
on the basis of revenues derived from the provision of interstate 
telecommunications: non-profit schools, non-profit colleges, non-profit 
universities, non-profit libraries, and non-profit health care 
providers; broadcasters of video programming; systems integrators that 
derive less than five percent of their systems integration revenues 
from the resale of telecommunications.
    (c) * * * The following entities will not be required to contribute 
on the basis of revenues derived from the provision of interstate 
telecommunications: non-profit schools, non-profit colleges, non-profit 
universities, non-profit libraries, and non-profit health care 
providers; broadcasters of video programming, systems integrators that 
derive less than five percent of their systems integration revenues 
from the resale of telecommunications.
    38. Revise Sec. 54.705 to read as follows:


Sec. 54.705  De minimis exemption.

    If a contributor's contribution to universal service in any given 
year is less than $10,000 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.
    39. Amend Sec. 54.709 by revising paragraph (a) introductory text, 
and paragraph (a)(3) to read as follows:


Sec. 54.709  Computations of required contributions to universal 
service support mechanisms.

    (a) Contributions to the universal service support mechanisms shall 
be based on contributors' end-user telecommunications revenues and 
contribution factors determined quarterly by the Commission.
* * * * *
    (3) Total projected expenses for universal service support programs 
for each quarter must be approved by the Commission before they are 
used to calculate the quarterly contribution factors and individual 
contributions. For each quarter, the High Cost and Low Income Committee 
or the permanent Administrator once the permanent Administrator is 
chosen and the Schools and Libraries and Rural Health Care Corporations 
must submit their projections of demand for the high cost and low-
income programs, the schools and libraries program, and rural health 
care program, respectively, and the basis for those projections, to the 
Commission and the Common Carrier Bureau at least 60 calendar days 
prior to the start of that quarter. For each quarter, the Administrator 
and the Schools and Libraries and Rural Health Care Corporations must 
submit their projections of administrative expenses for the high cost 
and low-income programs, the schools and libraries program and the 
rural health care program, respectively, and the basis for those 
projections to the Commission and the Common Carrier Bureau at least 60 
calendar days prior to the start of that quarter. Based on data 
submitted to the Administrator on the Universal Service Worksheets, the 
Administrator must submit the total contribution bases to the 
Commission and the Common Carrier Bureau at least 60 days before the 
start of each quarter. The projections of demand and administrative 
expenses and the contribution factors shall be announced by the 
Commission in a Public Notice published in the Federal Register and 
shall be made available on the Commission's website. The Commission 
reserves the right to set projections of demand and administrative 
expenses at amounts that the Commission determines will serve the 
public interest at any time within the 14-day period following 
publication of the Commission's Public Notice. If the Commission takes 
no action within 14 days of the Public Notice announcing projections of 
demand and administrative expenses, the projections of demand and 
administrative expenses, and contribution factors shall be deemed 
approved by the Commission. Once the projections are approved, the 
Administrator shall apply the quarterly contribution factors to 
determine individual contributions.
* * * * *

PART 69--ACCESS CHARGES

    40. The authority citation for part 69 continues to read as 
follows:

    Authority: 47 U.S.C. 154, 201, 202, 203, 205, 218, 254, and 403.

    41. Amend Sec. 69.153 by adding paragraph (h) to read as follows:

[[Page 2133]]

Sec. 69.153  Presubscribed interexchange carrier charge (PICC).

* * * * *
    (h) If a local exchange carrier receives low income universal 
service support on behalf of a customer under Sec. 54.403(d) of this 
chapter, then the local exchange carrier shall not recover a 
residential presubscribed interexchange carrier charge from that end-
user customer or its presubscribed interexchange carrier. Any amounts 
recovered under Sec. 54.403(d) of this chapter by the local exchange 
carrier shall be treated as if they were recovered through the 
presubscribed interexchange carrier charge.
    42. Amend Sec. 69.612 by revising the first sentence of paragraph 
(a)(3) to read as follows:


Sec. 69.612  Long term and transitional support.

* * * * *
    (a) * * *
    (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 and does not receive transitional 
sup port. * * *
* * * * *
    45. Amend Sec. 69.616 by revising the third sentence of paragraph 
(d) to read as follows:


Sec. 69.616  Independent subsidiary functions.

* * * * *
    (d) * * * The independent subsidiary may borrow start-up funds from 
the association. Such funds may not be drawn from the 
Telecommunications Relay Services (TRS) fund or TRS administrative 
expense accounts. * * *
    46. Amend Sec. 69.619 by revising paragraph (b) to read as follows:


Sec. 69.619  Schools and Libraries Corporation functions.

* * * * *
    (b) The Schools and Libraries Corporation shall implement the rules 
of priority in accordance with Sec. 54.507(g) of this chapter.
* * * * *
[FR Doc. 98-541 Filed 1-12-98; 8:45 am]
BILLING CODE 6712-01-P