[Federal Register Volume 67, Number 250 (Monday, December 30, 2002)]
[Rules and Regulations]
[Pages 79525-79533]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-32925]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 54

[CC Docket Nos. 96-45, 98-171, 90-571, 92-237, 99-200, 95-116, 98-170; 
FCC 02-329]


Federal-State Joint Board on Universal Service

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: In this document, the Commission adopts several interim 
modifications to the existing federal universal service contribution 
system. The Commission concludes that these modifications to the 
current revenue-based contribution methodology will sustain the 
universal service fund and increase the predictability of support in 
the near term, while we continue to examine more fundamental reforms.

DATES: Effective January 29, 2003.

FOR FURTHER INFORMATION CONTACT: Diane Law Hsu, Acting Deputy Chief, 
Wireline Competition Bureau, Telecommunications Access Policy Division, 
(202) 418-7400.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Report 
and Order in CC Docket Nos. 96-45, 98-171, 90-571, 92-237, 99-200, 95-
116, and 98-170 released on December 13, 2002. The full text of this 
document is available for public inspection during regular business 
hours in the FCC Reference Center, Room CY-A257, 445 Twelfth Street, 
SW., Washington, DC 20554.

I. Introduction and Overview

    1. In this Report and Order, we take interim measures to maintain 
the viability of universal service in the near term--a fundamental goal 
of this Commission--while we consider further long-term reforms. First, 
we increase to 28.5 percent the current interim safe harbor that allows 
cellular, broadband Personal Communications Service (PCS), and certain 
Specialized Mobile Radio (SMR) providers to assume that 15 percent of 
their telecommunications revenues are interstate. We also require 
wireless telecommunications providers to make a single election whether 
to report actual revenues or to use the revised safe harbor for all 
affiliated entities within the same safe harbor category. In addition, 
we seek to improve competitive neutrality among contributors by 
modifying the existing revenue-based methodology to require universal 
service contributions based on contributor-provided projections of 
collected end-user interstate and international telecommunications 
revenues, instead of historical gross-billed revenues. These changes 
will be implemented with the FCC Form 499-Q filed on February 1, 2003. 
We conclude that our actions to modify the current revenue-based 
contribution methodology will sustain the universal service fund and 
increase the predictability of support in the near term, while we 
continue to examine more fundamental reforms.
    2. In light of these changes, we also conclude that 
telecommunications carriers may not recover their federal universal 
service contribution costs through a separate line item that includes a 
mark-up above the relevant contribution factor beginning April 1, 2003. 
Limiting the federal universal service line-item charge to an amount 
that does not exceed the contribution factor, set quarterly by the 
Commission, will increase billing transparency and decrease confusion 
for consumers about the amount of universal service contributions that 
are passed through by carriers. Carriers will continue to have the 
flexibility to recover legitimate administrative costs from consumers 
through other means.

[[Page 79526]]

II. Report and Order

    3. As noted above, we adopt several modifications to the current 
revenue-based system to ensure the sufficiency and predictability of 
universal service while we consider reforms to sustain the universal 
service fund for the long term. To address concerns raised in the 
record that the current interim safe harbor for mobile wireless 
providers is inappropriate in light of changing market conditions, we 
raise the safe harbor from 15 to 28.5 percent. We establish an all-or-
nothing rule for affiliated wireless telecommunications providers when 
determining whether to report actual interstate telecommunications 
revenues or to avail themselves of the wireless safe harbor 
percentages. We also modify the current revenue-based methodology by 
basing contributions on a percentage of projected collected, instead of 
historical gross-billed, interstate and international end-user 
telecommunications revenues reported by contributors on a quarterly 
basis. In light of the modifications adopted by the Commission, we 
conclude that carriers may not mark-up universal service line item 
amounts above the contribution assessment rate. Finally, we revise our 
Lifeline rules to prohibit all Eligible Telecommunications Carriers 
(ETCs) from recovering contribution costs from their Lifeline 
customers.

A. Modified Revenue-Based Assessment Methodology

1. Mobile Wireless Safe Harbor
    4. Based on the record before us, we raise the current safe harbor 
for mobile wireless providers from 15 percent to 28.5 percent. We 
conclude that a 15 percent interim mobile wireless safe harbor no 
longer reflects the extent to which mobile wireless consumers utilize 
their wireless phones for interstate calls, particularly in light of 
the increased substitution of wireless for traditional wireline 
service. According to revenue data included on the latest FCC Form 499-
Q, it appears that 43 percent of mobile wireless filers, representing 
78 percent of mobile wireless end-user telecommunications revenues, 
currently avail themselves of the mobile wireless safe harbor. As noted 
by several commenters, revising the mobile wireless safe harbor is 
appropriate because it is no longer based on actual market conditions. 
Increasing the interim mobile wireless safe harbor will, therefore, 
help to ensure that universal service contributions remain equitable 
and non-discriminatory. Such action also will improve the near-term 
viability of the universal service mechanisms by ensuring that the 
contribution base more accurately reflects today's marketplace.
    5. Mobile wireless providers availing themselves of the revised 
interim safe harbor will be required to report 28.5 percent of their 
telecommunications revenues as interstate beginning with fourth quarter 
2002 revenues reported on the February 1, 2003, FCC Form 499-Q. Mobile 
wireless providers will still have the option of reporting their actual 
interstate telecommunications revenues. We note that mobile wireless 
providers must provide documentation to support the reporting of actual 
interstate telecommunications revenues upon request.
    6. In order to ensure that contributions remain equitable and 
nondiscriminatory, we also adopt an all-or-nothing rule for wireless 
telecommunications providers seeking to avail themselves of the safe 
harbors. Under this rule, wireless providers will continue to be 
permitted to report revenues at either the legal entity level or on a 
consolidated basis, but will be required to decide whether to report 
either actual or safe harbor revenues for all of their affiliated legal 
entities within the same safe harbor category (i.e., 28.5 percent, 12 
percent or 1 percent). We conclude, in the interests of consistency, 
equity, and fairness, that such a contributor that chooses to determine 
actual interstate telecommunications revenues for one of its affiliated 
entities must do so for all affiliated entities within the same safe 
harbor category. Likewise, wireless telecommunications providers must 
use the safe harbor for all affiliated carriers within the same 
category if they choose to use it for one. If a wireless 
telecommunications provider can and does separate its interstate 
revenues from intrastate revenues for universal service contribution 
purposes, we find that it is reasonable to presume that its affiliates 
subject to the same safe harbor can employ the same measures to report 
their interstate revenues. It is inappropriate, therefore, to allow 
affiliated wireless providers to ``pick and choose'' which entities use 
the interim safe harbors.
    7. Beginning with the first Form 499-Q filing following the 
effective date of this Order, wireless providers, including mobile 
wireless providers, paging providers, and analog SMR providers, shall 
determine whether to report revenues based on the interim wireless safe 
harbors at the affiliated-company level, as opposed to the legal-entity 
level, as is the case today. Under this new requirement, if one 
wireless entity chooses to report and contribute based on actual 
interstate telecommunications revenues, all affiliated companies 
subject to the same safe harbor must do the same. Conversely, if one 
wireless entity chooses to utilize the interim safe harbors, all 
affiliated companies in the same safe harbor category must also use the 
safe harbor. For purposes of this requirement and consistent with 
section 3(1) of the Act, we define ``affiliate'' as a person that 
(directly or indirectly) owns or controls, is owned or controlled by, 
or is under common ownership or control with, another person.
    8. In addition to the universal service support mechanisms, 
consistent with existing Commission practice, revenues reported on the 
Form 499-A will continue to be used in administering the 
Telecommunications Relay Services, North American Numbering Plan, Local 
Number Portability programs, as well as the regulatory fees 
administration program for wireline telecommunications providers. We 
can see no reason to permit carriers to use a different safe harbor for 
revenue reporting for purposes of these other programs. Thus, we 
conclude that our actions taken here to revise the interim mobile 
wireless safe harbor and modify the reporting of data by wireless 
providers on the 499-A also will apply to assessments for the 
mechanisms established for Telecommunications Relay Services, the North 
American Numbering Plan, and the Local Number Portability programs.
2. Assessment on Projected Collected Revenues
    9. Based on our experience with the current collection methodology, 
we now find it appropriate to modify this aspect of the methodology to 
promote competitive neutrality and to simplify the assessment and 
recovery of universal service contributions for carriers and consumers. 
We therefore conclude that, instead of assessing universal service 
contributions based on revenues accrued as much as six months prior, 
the Universal Service Administrative Company (USAC) will assess 
contributions based on projections provided by contributors of their 
collected end-user interstate and international telecommunications 
revenues for the following quarter. Because contributors will be 
assessed in the period for which revenues are projected, the modified 
methodology will eliminate the interval between the accrual of revenues 
and the assessment of universal service contributions based on those 
revenues. The modified methodology also will result in minimal changes 
to current reporting requirements. The revised methodology

[[Page 79527]]

therefore will base assessments on revenue data that is more reflective 
of current market conditions, without significantly increasing 
administrative costs for contributors and USAC. We view this and other 
changes we make to the revenue-based system to be interim measures 
while we consider the approaches raised in the companion Second Further 
Notice of Proposed Rulemaking (Second Further NPRM) published elsewhere 
in the issue of the Federal Register.
    10. We also conclude that the revised contribution methodology 
ensures that contributions to universal service support mechanisms 
continue to operate in a competitively neutral manner. As noted by 
several commenters, the current contribution system based on historical 
revenues creates competitive advantages for new entrants and 
contributors with increasing interstate telecommunications revenues, 
while disadvantaging those carriers with declining revenues. 
Interexchange carriers, for example, which currently contribute more 
than 60 percent of universal service contributions, are particularly 
disadvantaged by the so-called ``lag'' that results because they have 
experienced sharp declines in their interstate revenues. Because 
contributions are assessed on revenues from six months prior, carriers 
with decreasing revenues must recover their contributions from a 
revenue base smaller than the one assessed. By basing contribution 
assessments on projected collected end-user interstate and 
international telecommunications revenues, as opposed to historical 
gross-billed revenues, the modified mechanism mitigates the anti-
competitive effects of the current system. This, in turn, helps to 
ensure the sufficiency and stability of the universal service fund.
    11. For purposes of our revised contribution methodology, 
``collected end-user'' revenues refers to gross-billed end-user 
interstate and international telecommunications revenues less estimated 
uncollectibles. We define uncollectibles as the percentage of 
interstate and international telecommunications revenues that the 
contributor anticipates will not be collected from end-user customers. 
Contributors must make best efforts to collect interstate and 
international telecommunications revenues, including any federal 
universal service pass-through charges, before characterizing revenues 
as uncollectible. As we discuss below, these projected uncollectibles 
will be trued up against actual uncollectibles reported on the FCC Form 
499-A. This percentage should be calculated in accordance with 
Generally Accepted Accounting Principles. Contributors will report 
their uncollectible percent on the Form 499 filings (i.e., Forms 499-Q 
and 499-A), which will be modified to collect additional information 
about uncollectibles consistent with the rules adopted in this Order.
    12. Consistent with our existing policy, contributors will continue 
to file a Form 499-Q on a quarterly basis and the Form 499-A on an 
annual basis. The Commission and USAC will also continue to set 
contribution factors on a quarterly basis using the same timeframes as 
the current methodology. Under the revised methodology, however, in 
addition to filing the Form 499-Q to report historical gross-billed 
revenues from the prior quarter, contributors also will project their 
gross-billed and collected end-user interstate and international 
telecommunications revenues for the upcoming quarter. We believe that 
this will not be burdensome for contributors, as they need to develop 
such projections for their own internal business purposes. Consistent 
with current procedures, contributors will have the option of 
certifying as to the confidential nature of such projections on the FCC 
Form 499-Q.
    13. We note that we retain the requirement for an officer to 
certify to the truthfulness and accuracy of the FCC Form 499-A 
submitted to the Administrator. We also will require an executive 
officer to certify that the projections of gross-billed and collected 
revenues included in the FCC Form 499-Q represent a good-faith estimate 
based on company policies and procedures. To ensure that contributors 
report correct information on the FCC Form 499-A, we require all 
contributors to maintain records and documentation to justify the 
information reported in the Form 499-A for three years. We also will 
require filers to maintain records detailing the methodology used to 
determine projections in the Form 499-Q for three years. Filers will be 
required to provide such records and documentation to the Commission 
and USAC upon request.
    14. Under the modified methodology, contributors will continue to 
include pass-through charges, if any, as part of their projection of 
collected end-user revenues. In order to eliminate circularity, 
however, the Administrator will reduce each provider's contribution 
obligation by a circularity discount factor representing the provider's 
projected contributions to universal service in the upcoming quarter. 
Prior to each quarter, we will announce a contribution factor equal to 
the projected universal service funding requirement for the upcoming 
quarter (projected revenue requirement) divided by an adjusted 
contribution base. As discussed below, carriers will be prohibited from 
marking up their federal universal service line item above this 
contribution factor. In order to calculate an individual provider's 
contribution, USAC then will reduce the provider's unadjusted 
contribution obligation (i.e., its projected collected end-user 
revenues times the contribution factor) by an amount equal to its 
contribution obligation times the circularity discount factor. The 
circularity discount factor will equal one minus an amount equal to the 
adjusted contribution base divided by total projected end-user 
interstate and international telecommunication revenues. USAC will send 
contributors a firm bill each month based on the above-described 
calculation. Therefore, we do not anticipate the need for a reserve 
fund, because contributors will be billed monthly based on their 
reported projected collected revenues, the same amounts used to 
calculate the contribution factor.
    15. Although our modified mechanism relies on the ability of 
contributors to project gross-billed and collected revenues on a 
quarterly basis, it only requires contributors to project for the 
upcoming quarter, which should minimize the potential for inaccurate 
estimates. Similar to existing policies, contributors will have an 
opportunity to correct their projections up to 45 days after the due 
date of each Form 499-Q filing and through the annual true-up process. 
We find it appropriate to modify the current requirement that revisions 
be filed by the due date of the next Form 499-Q (which effectively 
provides 90 days for revisions) in light of the changes to the 
methodology we adopt today. In particular, we believe it necessary to 
eliminate incentives for contributors to revise their revenue 
projections after the announcement of the contribution factor for the 
upcoming quarter in order to reduce their contribution obligations and 
to otherwise reduce the likelihood of a shortfall in universal service 
funding in a given calendar quarter. USAC will use the actual revenue 
data provided by contributors on the FCC Form 499-A to perform annual 
true-ups to the quarterly projected revenue data submitted by 
contributors during the prior calendar year. As necessary, USAC will 
then refund or collect from contributors any over-payments or under-
payments. If the combined quarterly projected

[[Page 79528]]

revenues reported by a contributor are greater than those reported on 
its annual revenue report (Form 499-A), then a refund will be provided 
to the contributor based on an average of the two lowest contribution 
factors for the year. If the combined quarterly revenues reported by a 
contributor are less than those reported on its annual revenue report 
(Form 499-A), then USAC will collect the difference from the 
contributor using an average of the two highest contribution factors 
from that year. This approach is consistent with the existing system.
    16. We direct USAC to begin implementation of the revised reporting 
requirements, consistent with our modifications to ensure that carriers 
begin contributing based on projected collected end-user revenues, in 
the next quarterly filing to occur on February 1, 2003. Therefore, the 
contribution factor for the second quarter of 2003 will be based on 
projected collected end-user interstate and international 
telecommunications revenues. As part of the transition to the modified 
contribution system, contributors must begin providing information 
concerning their projected collected end-user interstate and 
international telecommunications revenues (i.e., anticipated end-user 
revenues and estimated uncollectibles) for the upcoming quarter with 
the filing of the modified 499-Q on February 1, 2003, to reflect 
projections for the second quarter of 2003. In order to provide USAC 
with a full year of projected revenues with which to conduct the annual 
true up for 2003 revenues, contributors also will be required to 
include projected collected revenues for the first quarter of 2003 on 
the 499-Q that will be filed on February 1, 2003. As discussed above, 
subsequent 499-Qs will only include historical revenues from the prior 
calendar quarter and projected revenues for the upcoming quarter. The 
FCC Form 499-A, which must be filed on April 1, 2003, will include 
historical gross-billed revenues for the period of January 2002 through 
December 2002. Subsequent FCC Form 499-As will include historical 
gross-billed revenues and actual collected end-user interstate and 
international telecommunications revenues for the relevant reporting 
year.

B. Recovery of Universal Service Contributions

1. Recovery Limitations
    17. In this Order, consistent with the goals of the Act and this 
Commission for universal service, we adopt rules related to 
contribution recovery that will ensure that federal universal service 
line items on customer bills accurately reflect the extent of a 
carrier's contribution obligations, while at the same time maximizing 
fairness and flexibility for carriers. We conclude that 
telecommunications carriers may not recover their federal universal 
service contribution costs through a separate line item that includes a 
mark up above the relevant contribution factor. Contributing carriers 
still will have the flexibility to recover their contribution costs 
through their end-user rates if they so choose and to recover any 
administrative or other costs they currently recover in a universal 
service line-item through their customer rates or through another line 
item. Contributors will also have the flexibility to express the line 
item either as a flat amount or a percentage, as long as the line item 
does not exceed the total amount associated with the contribution 
factor, or the actual percentage thereof.
    18. Based on our experience over the course of the last three 
years, we believe it is necessary to provide greater clarity about the 
practices we deem reasonable to protect consumers. In light of the 
changes to the contribution methodology adopted herein, we conclude 
that the practice of marking up federal universal service line-item 
charges above the relevant assessment amount will be prohibited 
prospectively. Any carrier that applies a federal universal service 
line-item charge above the relevant assessment amount could be subject 
to enforcement action for violating the rules we adopt in the Order.
    19. The elimination of mark-ups in carrier universal service line 
items will alleviate end-user confusion regarding the universal service 
line item. Specifically, the amount of a carrier's federal universal 
service line item will not exceed the relevant interstate 
telecommunications portion of the bill times the relevant contribution 
factor. This result should eliminate a significant portion of the 
consumer frustration and confusion pertaining to universal service line 
items. This requirement also should foster a more competitive market by 
better enabling customers to comparison shop among carriers. This 
furthers our goal of promoting transparency for the end user in order 
to facilitate informed customer choice.
    20. Therefore, beginning April 1, 2003, carriers that elect to 
recover their contribution costs through a separate line item may not 
mark up the line item above the relevant contribution factor. To the 
extent that a carrier recovers its contribution costs through a line 
item, that line item may not exceed the relevant assessment rate. So, 
for example, if the contribution factor is 7.28 percent, a carrier's 
federal universal service line-item cannot exceed 7.28 percent of the 
total amount of the interstate portion of charges for 
telecommunications service on each customer's bill. Likewise, if a 
carrier chooses to express its federal universal service line-item 
charge as a flat amount, that amount may not exceed the interstate 
telecommunications portion of the bill times the relevant contribution 
factor. In addition, we no longer will permit carriers--whether 
wireline or wireless--to average contribution costs across all end-user 
customers when establishing federal universal service line-item 
amounts. Similarly, because customers of Lifeline services do not 
generate assessable interstate telecommunications revenues for ETCs, 
the relevant assessment rate and contribution amounts recovered from 
such customers would be zero.
    21. We recognize that these changes may require modifications in 
billing practices for certain carriers. Accordingly, this requirement 
will not become effective until April 1, 2003. We will monitor closely 
carrier compliance with these new requirements and will take 
appropriate action if it appears carriers are not complying with our 
rules.
    22. We stress that this rule only applies to carriers that choose 
to recover their contribution costs through a line item. Carriers will 
continue to have flexibility to recover their contribution costs 
through their rates or through a line item. In this way, we accommodate 
entities such as payphone and prepaid wireless providers that are 
unable, for practical or business reasons, to recover universal service 
contribution costs through a line item. In addition, carriers will have 
the flexibility to express the line item either as a flat amount or as 
a percentage, as long as the line item does not exceed the interstate 
telecommunications portion of a customer's bill times the relevant 
contribution factor.
    23. Carriers that are not rate-regulated by this Commission, namely 
interexchange carriers, CMRS providers, and competitive local exchange 
carriers, will have the same flexibility that exists today to recover 
legitimate administrative and other related costs. In particular, such 
costs can always be recovered through these carriers' rates or through 
other line items. The rule that we adopt today does not prevent any 
legitimate cost recovery. Administrative costs of incumbent local 
exchange carriers (ILECs) subject to rate-of-return regulation solely 
related to

[[Page 79529]]

implementation and compliance with the contribution methodology will be 
included in their cost accounting and therefore will be part of their 
end-user revenue requirement. As for carriers subject to price cap 
regulation, we do not anticipate that administrative costs associated 
with our contribution methodology will be extraordinary. Nothing in 
this Order modifies our existing Truth-in-Billing requirements.
    24. We emphasize that the rules we adopt today do not require the 
filing of new tariffs, but may result in revisions to existing tariffs. 
We note that the Commission has detariffed most interstate services 
offered by interexchange carriers. Further, CLECs and CMRS providers do 
not tariff their federal universal service line items with the 
Commission.
    25. Because carriers cannot include mark ups in their federal 
universal service line item, we need not address whether such charges 
should be uniform across customer classes. We also need not adopt an 
interim safe harbor for mark ups.
    26. Consistent with the record developed in this proceeding, we 
prohibit all eligible telecommunications carriers from recovering 
contribution costs from their Lifeline customers. Under our current 
rules, ILECs may not recover universal service contributions from 
Lifeline customers, while other carriers may do so. We find that 
extending the prohibition on recovery of universal service 
contributions from Lifeline customers to all ETCs, including CLECs and 
CMRS providers designated as ETCs, will promote equitable and 
nondiscriminatory contributions, consistent with section 254 of the 
Act. Prohibiting recovery of universal service contributions from 
Lifeline customers also helps to increase subscribership by reducing 
qualifying low-income consumers' monthly basic local service charges, 
consistent with our rules. We also conclude that our actions here 
further the universal service goals of the Act by helping to ensure 
that low-income consumers have access to telecommunications and 
information services.
    27. While we believe that the adoption of rules in this Order will 
greatly reduce the amount of customer confusion surrounding 
contribution recovery issues, the Consumer and Governmental Affairs 
Bureau will continue to monitor complaints and consumer calls received 
on this topic. In addition, the Consumer and Governmental Affairs 
Bureau will continue its educational and outreach programs regarding 
federal universal service. We expect the Consumer and Governmental 
Affairs Bureau will educate consumers about the new rules adopted in 
this order. In this way we can monitor whether the policy goal of 
fostering competition through consumer choice is being met. If we 
observe a sustained marked increase in consumer complaints regarding 
the recovery of carrier contribution costs, we may revisit this issue 
at that time.
2. Labeling of Line-Item Charges
    28. At this time, we decline to mandate a specific label for 
federal universal service line-items pursuant to our Truth-in-Billing 
rules. We will monitor how the reforms we adopt today affect carrier 
recovery practices and will take further action if necessary.

III. Procedural Matters

A. Final Regulatory Flexibility Analysis

    29. As required by the Regulatory Flexibility Act of 1980, as 
amended (RFA), an Initial Regulatory Flexibility Analysis (IRFA) was 
incorporated in the First Notice of Proposed Rulemaking (First Further 
NPRM), 67 FR 1125, March 13, 2002. The Commission sought written public 
comment on the proposals in the First Further NPRM, including comment 
on the IRFA. This present Final Regulatory Flexibility Analysis (FRFA) 
conforms to the RFA. To the extent that any statement 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.
1. Need for, and Objectives of, the Report and Order
    30. In this Order, we take interim measures to maintain the 
viability of universal service in the near term--a fundamental goal of 
this Commission--while we consider further long-term reforms. First, we 
increase to 28.5 percent the current interim safe harbor that allows 
cellular, broadband PCS, and certain specialized SMRS providers to 
assume that 15 percent of their telecommunications revenues are 
interstate. We also will require wireless telecommunications providers 
to make a single election whether to report actual revenues or to use 
the revised safe harbor for all affiliated entities within the same 
safe harbor category. In addition, we seek to improve competitive 
neutrality among contributors by modifying the existing revenue-based 
methodology to require universal service contributions based on 
contributor provided projections of collected end-user interstate 
telecommunications revenues, instead of historical gross-billed 
revenues. We conclude that our actions to modify the current revenue-
based contribution methodology will sustain the universal service fund 
and increase the predictability of support in the near term, while we 
continue to examine more fundamental reforms.
    31. We also take steps to protect consumers from unjust and 
unreasonable universal service contribution recovery practices. 
Specifically, we conclude that telecommunications carriers may not 
recover their federal universal service contribution costs through a 
separate line item that includes a mark up above the relevant 
contribution factor. Limiting the federal universal service line-item 
charge to an amount that does not exceed the contribution factor, set 
quarterly by the Commission, will increase billing transparency and 
decrease confusion for consumers about the amount of universal service 
contributions that are passed through by carriers. Carriers will 
continue to have the flexibility to recover legitimate administrative 
costs from consumers through other means. We find that our modified 
contribution methodology will simplify the assessment and recovery of 
universal service contributions for all carriers and consumers, 
including small entities.
2. Summary of Significant Issues Raised by Public Comments in Response 
to the IRFA
    32. The Commission received no comments specifically addressing the 
IRFA. We did receive, however, some general small entity-related 
comments. Some commenters, for example, asserted that a connection-
based methodology would be inequitable and burdensome for small 
businesses, particularly with respect to assessment of multi-line 
business connections based on the proposed tiers of capacity outlined 
in the First Further NPRM. Commenters also expressed general concerns 
about carrier recovery practices. Other commenters maintained that a de 
minimis exemption was essential to any contribution system adopted by 
the Commission. In this Order, we modify the existing methodology; 
therefore, issues raised with respect to the impact of a connection-
based assessment on small entity concerns are not directly implicated 
by our actions taken today. We do note, however, that the Commission, 
concurrent with the issuance of the Order adopted a companion Second 
Further NPRM that seeks comment on specific aspects of

[[Page 79530]]

three connection-based proposals in the record. To the extent that 
commenters continue to have small entity-related concerns, they may 
submit comments in response to the Second Further NPRM.
    33. In the Order, we adopt certain modifications to the existing 
methodology. As noted in the Order, we, among other things, have 
adopted rules related to contribution recovery that will increase 
billing transparency and decrease confusion for all consumers, 
including small entities, about the amount of universal service 
contributions that are passed through by carriers, while maximizing 
fairness and flexibility for carriers. By allowing carriers to 
contribute based on projections of their collected end-user revenues, 
we eliminate one of the major reasons for carriers to recover amounts 
in excess of the relevant assessment rate. We prohibit carriers from 
marking up federal universal service line items above the contribution 
factor. These actions address small entity concerns regarding recovery 
practices. We have also retained the de minimis exemption to ensure 
that compliance costs associated with contributing to universal service 
do not exceed actual contribution amounts.
3. Description and Estimate of the Number of Small Entities to which 
Rules will Apply
    34. The RFA directs agencies to provide a description of, and, 
where feasible, an estimate of the number of small entities that may be 
affected by the rules adopted herein. The RFA generally defines the 
term ``small entity'' as having the same meaning as the terms ``small 
business,'' ``small organization,'' and ``small governmental 
jurisdiction.'' A small organization is generally ``any not-for-profit 
enterprise which is independently owned and operated and is not 
dominant in its field.'' Nationwide, as of 1992, there were 
approximately 275,801 small organizations. ``Small governmental 
jurisdiction'' generally means ``governments of cities, counties, 
towns, townships, villages, school districts, or special districts, 
with a population of less than 50,000.'' As of 1992, there were 
approximately 85,006 governmental entities, total, in the United 
States. This number includes 38,978 cities, counties, and towns; of 
these, 37,566, or 96%, have populations of fewer than 50,000. The 
Census Bureau estimates that this ratio is approximately accurate for 
all governmental entities. Thus, of the 85,006 governmental entities, 
we estimate that 81,600 (96%) are small entities. In addition, the term 
``small business'' has the same meaning as the term ``small business 
concern'' under the Small Business Act, unless the Commission has 
developed one or more definitions that are appropriate to its 
activities. Under the Small Business Act, a ``small business concern'' 
is one that: (1) Is independently owned and operated; (2) is not 
dominant in its field of operation; and (3) meets any additional 
criteria established by the Small Business Administration (SBA).
    35. We have included small incumbent local exchange carriers in 
this present RFA analysis. As noted above, a ``small business'' under 
the RFA is one that, inter alia, meets the pertinent small business 
size standard (e.g., a telephone communications business having 1,500 
or fewer employees), and ``is not dominant in its field of operation.'' 
The SBA's Office of Advocacy contends that, for RFA purposes, small 
incumbent local exchange carriers are not dominant in their field of 
operation because any such dominance is not ``national'' in scope. We 
have therefore included small incumbent local exchange carriers in this 
FRFA analysis, although we emphasize that this RFA action has no effect 
on Commission analyses and determinations in other, non-RFA contexts.
    36. Wireline Carriers and Service Providers (Wired 
Telecommunications Carriers). The SBA has developed a small business 
size standard for Wired Telecommunications Carriers, which consists of 
all such companies having 1500 or fewer employees. According to Census 
Bureau data for 1997, there were 2,225 firms in this category, total, 
that operated for the entire year. Of this total, 2,201 firms had 
employment of 999 or fewer employees, and an additional 24 firms had 
employment of 1,000 employees or more. Thus, under this size standard, 
the great majority of firms can be considered small.
    37. Local Exchange Carriers, Interexchange Carriers, Competitive 
Access Providers, Operator Service Providers, Payphone Providers, and 
Resellers. Neither the Commission nor SBA has developed a definition 
particular to small local exchange carriers (LECs), interexchange 
carriers (IXCs), competitive access providers (CAPs), operator service 
providers (OSPs), payphone providers or resellers. The closest 
applicable definition for these carrier-types under SBA rules is for 
Wired Telecommunications Carriers. Under that SBA definition, such a 
business is small if it has 1,500 or fewer employees. According to our 
most recent data, there are 1,329 incumbent LECs, 532 CAPs, 229 IXCs, 
22 OSPs, 936 payphone providers and 710 resellers. Of these, an 
estimated 1,024 incumbent LECs, 411 CAPs, 181 IXCs, 20 OSPs, 933 
payphone providers, and 669 resellers reported that they have 1,500 or 
fewer employees; 305 incumbent LECs, 121 CAPs, 48 IXCs, 2 OSPs, 3 
payphone providers, and 41 resellers reported that, alone or in 
combination with affiliates, they have more than 1,500 employees. We do 
not have data specifying the number of these carriers that are not 
independently owned and operated, and therefore we are unable to 
estimate with greater precision the number of these carriers that would 
qualify as small business concerns under SBA's definition. 
Consequently, most incumbent LECs, IXCs, CAPs, OSPs, payphone providers 
and resellers are small entities that may be affected by the decisions 
and rules adopted in this Order.
    38. Wireless Service Providers. The SBA has size standards for 
wireless small businesses within the two separate Economic Census 
categories of Paging and of Cellular and Other Wireless 
Telecommunications. For both of those categories, the SBA considers a 
business to be small if it has 1,500 or fewer employees. According to 
the most recent Trends in Telephone Report data, 1,761 companies 
reported that they were engaged in the provision of wireless service. 
Of these 1,761 companies, an estimated 1,175 reported that they have 
1,500 or fewer employees and 586 reported that, alone or in combination 
with affiliates, they have more than 1,500 employees. Consequently, we 
estimate that most wireless service providers are small entities that 
may be affected by the rules adopted herein.
    39. Broadband Personal Communications Service (PCS). The broadband 
PCS spectrum is divided into six frequency designated A through F, and 
the Commission has held auctions for each block. The Commission defined 
``small entity'' for Blocks C and F as an entity that has average gross 
revenues of $40 million or less in the three previous calendar years. 
For Block F, an additional classification for ``very small business'' 
was added and is defined as an entity that, together with affiliates, 
has average gross revenues of not more than $15 million for the 
preceding three calendar years. These standards defining ``small 
entity'' in the context of broadband PCS auctions have been approved by 
the SBA. No small businesses within the SBA-approved definition bid 
successfully for licenses in Blocks A and B. There were 90 winning 
bidders that qualified as small entities in the Block C auctions. A 
total

[[Page 79531]]

of 93 small and very small business bidders won approximately 40 
percent of the 1,479 licenses for Blocks D, E, and F. On March 23, 
1999, the Commission re-auctioned 347 C, D, E, and F Block licenses; 
there were 48 small business winning bidders. On January 26, 2001, the 
Commission completed the auction of 422 C and F Broadband PCS licenses 
in Auction No. 35. Of the 35 winning bidders in this auction, 29 
qualified as ``small'' or ``very small businesses.'' Based on this 
information, we conclude that the number of small broadband PCS 
licensees will include the 90 winning C Block bidders, the 93 
qualifying bidders in the D, E, and F blocks, the 48 winning bidders in 
the 1999 re-auction, and the 29 winning bidders in the 2001 re-auction, 
for a total of 260 small entity broadband PCS providers, as defined by 
the SBA small business size standards and the Commission's auction 
rules. Consequently, we estimate that 260 broadband PCS providers are 
small entities that may be affected by the rules and policies adopted 
herein.
    40. Narrowband PCS. To date, two auctions of narrowband PCs 
licenses have been conducted. Through these auctions, the Commission 
has awarded a total of 41 licenses, out of which 11 were obtained by 
small businesses. For purposes of the two auctions that have already 
been held, small businesses were defined as entities with average gross 
revenues for the prior three calendar years of $40 million or less. To 
ensure meaningful participation of small business entities in the 
auctions, the Commission adopted a two-tiered definition of small 
businesses in the Narrowband PCS Second Report and Order, 65 FR 35843, 
June 6, 2000. A small business is an entity that, together with 
affiliates and controlling interests, has average gross revenues for 
the three preceding years of not more than $40 million. A very small 
business is an entity that, together with affiliates and controlling 
interests, has average gross revenues for the three preceding years of 
not more than $15 million. These definitions have been approved by the 
SBA. In the future, the Commission will auction 459 licenses to serve 
MTAs and 408 response channel licenses. There is also one megahertz of 
narrowband PCS spectrum that has been held in reserve and that the 
Commission has not yet decided to release for licensing. The Commission 
cannot predict accurately the number of licenses that will be awarded 
to small entities in future auctions. However, four of the 16 winning 
bidders in the two previous narrowband PCS auctions were small 
businesses, as that term was defined under the Commission's Rules. The 
Commission assumes, for purposes of this FRFA, that a large portion of 
the remaining narrowband PCS licenses will be awarded to small 
entities. The Commission also assumes that at least some small 
businesses will acquire narrowband PCS licenses by means of the 
Commission's partitioning and disaggregation rules.
    41. Specialized Mobile Radio (SMR). The Commission awards ``small 
entity'' and ``very small entity'' bidding credits in auctions for 
Specialized Mobile Radio (SMR) geographic area licenses in the 800 MHz 
and 900 MHz bands to firms that had revenues of no more than $15 
million in each of the three previous calendar years, or that had 
revenues of no more than $3 million in each of the three previous 
calendar years, respectively. In the context of both the 800 MHz and 
900 MHz SMR service, the definitions of ``small entity'' and ``very 
small entity'' have been approved by the SBA. These bidding credits 
apply to SMR providers in the 800 MHz and 900 MHz bands that either 
hold geographic area licenses or have obtained extended implementation 
authorizations. We do not know how many firms provide 800 MHz or 900 
MHz geographic area SMR service pursuant to extended implementation 
authorizations, nor how many of these providers have annual revenues of 
no more than $15 million. One firm has over $15 million in revenues. We 
assume, for our purposes here, that all of the remaining existing 
extended implementation authorizations are held by small entities, as 
that term is defined by the SBA. The Commission has held auctions for 
geographic area licenses in the 800 MHz and 900 MHz SMR bands. There 
were 60 winning bidders that qualified as small and very small entities 
in the 900 MHz auctions. Of the 1,020 licenses won in the 900 MHz 
auction, bidders qualifying as small and very small entities won 263 
licenses. In the 800 MHz SMR auction, 38 of the 524 licenses won were 
won by small and very small entities. Consequently, we estimate that 
there are 301 or fewer small entity SMR licensees in the 800 MHz and 
900 MHz bands that may be affected by the rules and policies adopted 
herein.
    42. Rural Radiotelephone Service. The Commission has not adopted a 
definition of small entity specific to the Rural Radiotelephone 
Service. A significant subset of the Rural Radiotelephone Service is 
the Basic Exchange Telephone Radio Systems (BETRS). For purposes of 
this FRFA, we will use the SBA's size standard applicable to wireless 
service providers, supra--an entity employing no more than 1,500 
persons. There are approximately 1,000 licensees in the Rural 
Radiotelephone Service, and the Commission estimates that almost all of 
them qualify as small entities under the SBA's size standard. 
Consequently, we estimate that there are 1,000 or fewer small entity 
licensees in the Rural Radiotelphone Service that may be affected by 
the rules and policies adopted herein.
    43. Air-Ground Radiotelephone Service. The Commission has not 
adopted a definition of small entity specific to the Air-Ground 
Radiotelephone Service. For purposes of this FRFA, we will use the 
SBA's size standard applicable to wireless service providers, supra--an 
entity employing no more than 1,500 persons. There are approximately 
100 licensees in the Air-Ground Radiotelephone Service, and we estimate 
that almost all of them qualify as small under the SBA definition.
4. Description of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements
    44. Pursuant to the Order, contributions to the Commission's 
universal service will be based on projections provided by contributors 
of their collected end-user interstate and international 
telecommunications revenues (i.e., end-user telecommunications revenues 
less estimated uncollectibles). As noted in the Order, the modified 
methodology will result in minimal changes to current reporting 
requirements. Because the projected collection approach we adopt is 
similar to the existing contribution methodology, it will be relatively 
easy for both USAC and contributors to administer and implement this 
modification to our current methodology while we consider other reforms 
to the current system. Consistent with our existing policy, 
contributors will continue to file a Form 499-Q on a quarterly basis 
and the Form 499-A on an annual basis. The Commission and USAC will 
also continue to set contribution factors on a quarterly basis using 
the same timeframes as the current methodology. Under the revised 
methodology, however, in addition to filing the Form 499-Q to report 
historical gross-billed revenues from the prior quarter, contributors 
also will project their gross-billed and collected end-user interstate 
and international telecommunications revenues for the upcoming quarter. 
We believe that this will not be burdensome for contributors, as they 
need to develop such projections for their own internal business 
purposes. Consistent with

[[Page 79532]]

current procedures, contributors will have the option of certifying as 
to the confidential nature of such projections on the FCC Form 499-Q.
    45. As noted in the Order, we retain the requirement for an officer 
to certify to the truthfulness and accuracy of the FCC Form 499-A 
submitted to the Administrator. We also will require an officer to 
certify that the projections of revenue and uncollectibles included in 
the FCC Form 499-Q represent a good-faith estimate based on company 
policies and procedures. To ensure the contributors report correct 
information on the FCC Form 499-A, we require all contributors to 
maintain records and documentation to justify the information reported 
in the Form 499-A for three years. We also will require filers to 
maintain records detailing the methodology used to determine 
projections in the Form 499-Q for three years. Filers will be required 
to provide such records and documentation to the Commission and USAC 
upon request.
5. Steps Taken to Minimize Significant Economic Impact on Small 
Entities, and Significant Alternatives Considered
    46. The RFA requires an agency to describe any significant 
alternatives that it has considered in reaching its proposed approach, 
which may include the following four alternatives (among others): ``(1) 
The establishment of differing compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) the clarification, consolidation, or simplification of 
compliance or reporting requirements under the rule for small entities; 
(3) the use of performance, rather than design, standards; and (4) an 
exemption from coverage of the rule, or any part thereof, for small 
entities.''
    47. The Commission has taken numerous steps to minimize significant 
economic impact on small entities in adopting modifications to the 
revenue-based methodology for assessing and recovering contributions to 
the federal universal service mechanisms. In modifying the existing 
contribution system, we have adopted rules related to contribution 
recovery that will increase billing transparency and decrease confusion 
for consumers about the amount of universal service contributions that 
are passed through by carriers, while ensuring that carriers continue 
to have the flexibility to recover legitimate administrative costs from 
consumers through other means. By allowing carriers to contribute based 
on projected collected end-user revenues, we eliminate one of the major 
reasons for carriers to recover amounts in excess of the relevant 
assessment rate. In light of these changes, we prohibit carriers from 
marking up federal universal service line items above the contribution 
factor. These actions address small entity concerns regarding recovery 
practices. We have also retained the de minimis exemption to ensure 
that compliance costs associated with contributing to universal service 
do not exceed actual contribution amounts. Consistent with the views 
expressed by many commenters, including small entity commenters, we 
find that the alternatives to revise or eliminate the de minimis 
exemption are not supported by the record developed at this time.
    48. As discussed in the Order, we have also considered various 
alternative proposals on how to reform the universal service 
contribution system. We conclude that the modifications to the current 
revenue-based contribution methodology, as adopted in the Order will 
maintain the viability of universal service in the near term, while we 
continue to examine reforms that are more fundamental based on 
proposals submitted in the record in this proceeding.
6. Report to Congress
    49. The Commission will send a copy of the Order, including the 
FRFA, in a report to be sent to Congress pursuant to the Congressional 
Review Act. In addition, the Commission will send a copy of the Order, 
including this FRFA, to the Chief Counsel for Advocacy of the Small 
Business Administration. A copy of this Order and FRFA (or summaries 
thereof) will also be published in the Federal Register.
B. Paperwork Reduction Act Analysis
    50. The action contained herein has been analyzed with respect to 
the Paperwork Reduction Act of 1995 and found to impose new or modified 
reporting and recordkeeping requirements or burdens on the public. 
Implementation of these new or modified reported and recordkeeping 
requirements will be subject to approval by the Office of Management 
and Budget (OMB) as prescribed by the Act, and will go into effect upon 
announcement in the Federal Register of OMB approval.

IV. Ordering Clauses

    51. It is ordered that, pursuant to the authority contained in 
sections 1-4, 201-205, 214, 218-220, 254, 403, and 405 of the 
Communications Act of 1934, as amended, this Report and Order is 
adopted.
    52. Part 54 of the Commission's rules, is amended, effective 
January 29, 2003.
    53. The Commission's Consumer and Governmental Affairs Bureau, 
Reference Information Center, 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 in 47 CFR Part 54

    Reporting and recordkeeping requirements, Telecommunications, 
Telephone.

Federal Communications Commission.
William F. Caton,
Deputy Secretary.

Final Rules

    For the reasons discussed in the preamble, the Federal 
Communications Commission amends 47 CFR part 54 as follows:

PART 54--UNIVERSAL SERVICE

    1. The authority citations continue to read as follows:

    Authority: 47 U.S.C. 1, 4(i), 201, 205, 214, 254 unless 
otherwise noted.

    2. Amend Sec.  54.706 by revising paragraphs (b) and (c) to read as 
follows:


Sec.  54.706  Contributions.

* * * * *
    (b) Prior to April 1, 2003, except as provided in paragraph (c) of 
this section, every telecommunications carrier that provides interstate 
telecommunications services, every provider of interstate 
telecommunications that offers telecommunications for a fee on a non-
common carrier basis, and every payphone provider that is an aggregator 
shall contribute to the federal universal service support mechanisms on 
the basis of its interstate and international end-user 
telecommunications revenues, net of prior period actual contributions. 
Beginning April 1, 2003, except as provided in paragraph (c) of this 
section, every such provider shall contribute on the basis of its 
projected collected interstate and international end-user 
telecommunications revenues, net of projected contributions.
    (c) Prior to April 1, 2003, any entity required to contribute to 
the federal universal service support mechanisms whose interstate end-
user telecommunications revenues comprise less than 12 percent of its 
combined interstate and international end-user telecommunications 
revenues shall contribute to the federal universal service support 
mechanisms for high cost areas, low-income consumers,

[[Page 79533]]

schools and libraries, and rural health care providers based only on 
such entity's interstate end-user telecommunications revenues, net of 
prior period actual contributions. Beginning April 1, 2003, any entity 
required to contribute to the federal universal service support 
mechanisms whose projected collected interstate end-user 
telecommunications revenues comprise less than 12 percent of its 
combined projected collected interstate and international end-user 
telecommunications revenues shall contribute based only on such 
entity's projected collected interstate end-user telecommunications 
revenues, net of projected contributions. For purposes of this 
paragraph, an ``entity'' shall refer to the entity that is subject to 
the universal service reporting requirements in Sec.  54.711 and shall 
include all of that entity's affiliated providers of telecommunications 
services.
* * * * *
    2. Amend Sec.  54.709 by revising paragraphs (a) introductory text, 
and (a)(1), and by removing the first sentence of paragraph (a)(2) and 
adding two sentences in its place to read as follows:


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

    (a) Prior to April 1, 2003, contributions to the universal service 
support mechanisms shall be based on contributors' end-user 
telecommunications revenues and on a contribution factor determined 
quarterly by the Commission. Contributions to the mechanisms beginning 
April 1, 2003 shall be based on contributors' projected collected end-
user telecommunications revenues, and on a contribution factor 
determined quarterly by the Commission.
    (1) For funding the federal universal service support mechanisms 
prior to April 1, 2003, the subject revenues will be contributors' 
interstate and international revenues derived from domestic end users 
for telecommunications or telecommunications services, net of prior 
period actual contributions. Beginning April 1, 2003, the subject 
revenues will be contributors' projected collected interstate and 
international revenues derived from domestic end users for 
telecommunications or telecommunications services, net of projected 
contributions. (2) Prior to April 1, 2003, the quarterly universal 
service contribution factor shall be determined by the Commission based 
on the ratio of total projected quarterly expenses of the universal 
service support mechanisms to the total end-user interstate and 
international telecommunications revenues, net of prior period actual 
contributions. Beginning April 1, 2003, the quarterly universal service 
contribution factor shall be determined by the Commission based on the 
ratio of total projected quarterly expenses of the universal service 
support mechanisms to the total projected collected end-user interstate 
and international telecommunications revenues, net of projected 
contributions. * * *
* * * * *
    3. Amend Sec.  54.711 by revising paragraph (a) to read as follows:


Sec.  54.711  Contributor reporting requirements.

    (a) Contributions shall be calculated and filed in accordance with 
the Telecommunications Reporting Worksheet which shall be published in 
the Federal Register. The Telecommunications Reporting Worksheet sets 
forth information that the contributor must submit to the Administrator 
on a quarterly and annual basis. The Commission shall announce by 
Public Notice published in the Federal Register and on its website the 
manner of payment and dates by which payments must be made. An 
executive officer of the contributor must certify to the truth and 
accuracy of historical data included in the Telecommunications 
Reporting Worksheet, and that any projections in the Telecommunications 
Reporting Worksheet represent a good-faith estimate based on the 
contributor's policies and procedures. The Commission or the 
Administrator may verify any information contained in the 
Telecommunications Reporting Worksheet. Contributors shall maintain 
records and documentation to justify information reported in the 
Telecommunications Reporting Worksheet, including the methodology used 
to determine projections, for three years and shall provide such 
records and documentation to the Commission or the Administrator upon 
request. Inaccurate or untruthful information contained in the 
Telecommunications Reporting Worksheet may lead to prosecution under 
the criminal provisions of Title 18 of the United States Code. The 
Administrator shall advise the Commission of any enforcement issues 
that arise and provide any suggested response.
* * * * *
    4. Add Sec.  54.712 to subpart H to read as follows:


Sec.  54.712  Carrier recovery of universal service costs from end-
users.

    (a) Federal universal service contribution costs may be recovered 
through interstate telecommunications-related charges to end users. If 
a telecommunications carrier chooses to recover its federal universal 
service contribution costs through a line item on a customer's bill, as 
of April 1, 2003, the amount of the federal universal service line-item 
charge may not exceed the interstate telecommunications portion of that 
customer's bill times the relevant contribution factor.
    (b) Eligible telecommunications carriers may not recover federal 
universal service contribution costs from Lifeline customers.

[FR Doc. 02-32925 Filed 12-27-02; 8:45 am]
BILLING CODE 6712-01-P