BNUMBER:  B-278820 
DATE:  February 10, 1998
TITLE: [Letter], B-278820, February 10, 1998
**********************************************************************

B-278820

February 10, 1998

The Honorable Ted Stevens
United States Senate

Dear Senator Stevens:

This letter is in response to your request dated November 28, 1997, 
asking us to review the Federal Communications Commission's 
implementation of section 254(h) of the Communications Act of 1934, as 
amended.  47 U.S.C.  sec.  254(h).  Subsection 254(h) provides the 
authority for the Commission to authorize universal service support 
benefits for eligible schools and libraries and rural health care 
providers.  

Your request concerns those provisions of the Commission's orders 
implementing subsection 254(h) that led to the incorporation in 
Delaware of two not-for-profit corporations.  These corporations were 
formed to administer certain functions of the universal service 
programs for schools and libraries and rural health care providers.  
The Chairman of the Commission selects or approves the board of 
directors for these entities and the operating expenses of the 
corporations are recovered from industry fees assessed to support 
universal service.  You asked whether the Commission has the legal 
authority to establish such corporations.  In addition, you asked us 
to describe the federal laws (for example, the Federal Advisory 
Committee Act), employment rules, and congressional oversight that 
govern the operation of the corporations.

We sought the views of the Commission about these and other questions, 
and by letter of January 5, 1998, the Commission provided its legal 
opinion.  

Question 1:  Was the Commission authorized to establish the Schools 
and Libraries Corporation and the Rural Health Care Corporation?

Answer:  As explained more fully below, the Commission exceeded its 
authority when it directed the National Exchange Carriers Association, 
Inc. (NECA) to create the Schools and Libraries Corporation and the 
Rural Health Care Corporation.  The Government Corporation Control Act 
specifies that "[a]n agency may establish or acquire a corporation to 
act as an agency only by or under a law of the United States 
specifically authorizing the action."  31 U.S.C.  sec.  9102.   These 
entities act as the agents of the Commission and, therefore, could 
only be created pursuant to specific statutory authority.  Because the 
Commission has not been provided such authority, creation of the two 
corporations violated the Government Corporation Control Act.

Because the Commission has argued that it did not "establish or 
acquire" the corporations, we provide some background about the 
establishment of the corporations.  More detail is contained in the 
attached Appendix.

     Establishment of the Corporations
             
Section 254, as added by the Telecommunications Act of 1996[1], among 
other things, made the Commission's universal service mandate more 
explicit and extended the reach of universal service support to 
schools, libraries, and rural health care providers.  The section 
requires the Commission, acting on the recommendations of a 
Federal-State Joint Board, to define universal service and develop 
specific, predictable, and equitable support mechanisms.  The 
provision expands both the base of companies that contribute to the 
universal service fund and the category of customers who benefit from 
the universal service support programs.  

Section 254 is silent on how the Commission is to administer the 
universal service programs, including the programs for schools and 
libraries and rural health care providers.  In the Universal Service 
Order released on May 8, 1997, the Commission, consistent with the 
Joint Board's recommendation, determined that it would create a 
Federal Advisory Committee to recommend a neutral, third-party 
permanent administrator of the universal service programs.  In the 
interim, the Commission appointed the National Exchange Carrier 
Association, Inc. (NECA) the temporary administrator, subject to 
changes in NECA's governance.[2]  NECA was established in 1983, at the 
direction of the Commission, as an association of local exchange 
carriers (LECs) to administer the interstate access tariff and revenue 
distribution process.[3]  Prior to that time, AT&T had acted as a 
tariff filing agent for the entire industry and had also performed 
most of the administrative functions in connection with the 
settlements pooling arrangement.[4]  Since NECA's creation, the 
Commission has assigned it the responsibilities for administering the 
existing universal service fund and other explicit support mechanisms.  

On July 18, 1997, the Commission released NECA's Governance Order and 
directed NECA to create an independently functioning not-for-profit 
subsidiary to be designated the Universal Service Administrative 
Company (USAC) that would temporarily administer the universal service 
support program for high-cost areas and low-income consumers, as well 
as perform billing and collection functions for all of the universal 
service programs, including the programs for schools and libraries and 
the rural health care providers.[5]

The Commission also directed NECA to create two unaffiliated, 
not-for-profit corporations to be designated the Schools and Libraries 
Corporation and the Rural Health Care Corporation.  The Commission 
concluded that such entities were critical to the successful 
implementation of the schools and libraries and rural health care 
programs.  Moreover, to ensure continuity in and efficient 
administration of these programs, the Commission concluded that the 
corporations should continue to perform their designated functions 
even after the date on which the permanent administrator is appointed.  
Thus, the Commission removed these entities from the scope of the 
functions that will be performed by the temporary and permanent 
administrator.  

NECA was directed to incorporate the corporations under the laws of 
Delaware and to take such steps as are necessary under Delaware and 
federal law to make the corporations independent of, and unaffiliated 
with, NECA and USAC.  NECA was further required to submit to the 
Commission for approval the proposed articles of incorporation, 
bylaws, and any documents necessary to incorporate the independent 
corporations in order for the Commission to determine prior to their 
establishment that the requirements of the Order had been satisfied.

This Order and the subsequent incorporation documents provide that the 
corporations were organized by the Commission to carry out functions 
connected with the provision of universal service support to schools, 
libraries, and rural health care providers.  These functions include 
the administration of the application process for schools and 
libraries and rural health care providers and the establishment of a 
website on which applications will be posted. See 47 C.F.R.  sec.  
69.618(a), 69.619(a). 

The certificate of incorporation of the Rural Health Care Corporation 
specifies that the purpose of the corporation ". . . is defined in the 
Federal Communications Commission's . . . rules at 47 C.F.R.  sec.  69.618, 
as it exists today and as it may be amended."  The certificate of 
incorporation further states that the corporation may engage in other 
activities "so long as it is consistent with FCC Orders and Rules."[6]  
In its letter to our Office of January 5, the Commission stated that 
it did not envision these entities "operating outside the scope of the 
activities set forth in the Commission's orders."  Commission letter 
at 9.

Under Commission rules the boards of directors of these entities are 
comprised of members either selected or approved by the Chairman of 
the Commission.  The size and composition of the boards is set by the 
Commission, as is the term of office.  The Commission Chairman must 
approve the removal of any director as well as a resolution to 
dissolve the Corporation.  The Chief Executive Officer (CEO) of these 
corporations must be approved by the Chairman of the Commission.  
Authority to enter into contracts must be in compliance with 
Commission rules.  All of these requirements have been included in the 
corporations' by-laws.

     Authority to Establish the Corporations

It is the Commission's view that it has authority to establish the 
Schools and Libraries Corporation and the Rural Health Care 
Corporation under sections 4(i) and 254 of the Communications Act of 
1934, as amended.  Section 4(i) of the Act provides that:

     "The Commission may perform any and all acts, make such rules and 
     regulations, and issue such orders, not inconsistent with this 
     chapter, as may be necessary in the execution of its functions."  
     47 U.S.C.  sec.  154(i).

Although we recognize the breadth of section 4(i),[7] the provision is 
constrained by the later passage of the Government Corporation Control 
Act.  Under the Control Act:

     "[a]n agency may establish or acquire a corporation to act as an 
     agency only by or under a law of the United States specifically 
     authorizing the action."  31 U.S.C.  sec.  9102.
 
Section 4(i) does not provide the specific statutory authority needed 
by the Commission to meet the requirements of the Control Act.  Nor do 
we find that section 254 provides this authority.[8]  Indeed, the 
Commission does not suggest that either of these provisions is broad 
enough to overcome the requirement of the Control Act.  Rather, in a 
letter to our office dated January 5, 1998, the Commission contends 
that the Control Act is not implicated because the Commission did not 
"establish or acquire" the Schools and Libraries Corporation or the 
Rural Health Care Corporation in this case.  According to the 
Commission, NECA established these corporations as a condition of 
becoming the temporary administrator. 

We disagree.  The Control Act requirement that a Federal agency 
possess specific authorization to "establish or acquire" a corporation 
to act as an agency could not be avoided by directing another 
organization to act as the incorporator.   In our view, the Control 
Act prohibits an agency from creating or causing creation of a 
corporation to carry out government programs without explicit 
statutory authorization.

Prior to enactment of the Government Corporation Control Act in 1945, 
there was no requirement for specific authority to create 
corporations.  As the Supreme Court noted in Lebron v. National 
Railroad Passenger Corporation, "[b]y the end of World War II, 
Government-created and -controlled corporations had gotten out of 
hand, in both their number and their lack of accountability."  Lebron 
v. National Railroad Passenger Corporation, 513 U.S. 374, 389 (1995).
  
Partly in response to this proliferation of corporations, a Joint 
Committee of Congress conducted a 2-year study and issued a "Report on 
Government Corporations" in 1944.[9]  The report concluded that from 
simple beginnings the government corporation concept had evolved into 
a rationale for a maze of quasi-governmental corporations with little 
accountability.  The inevitable results of this growth, noted the 
report, was the impairment of control by the Congress.  Id. at 2.  The 
report went on to find that the corporations had little congressional 
or executive branch supervision, few fiscal controls, and in many 
instances were in competition with the private sector.  Specifically, 
the report stated: "There is no effective over-all control.  Alone, or 
in certain groups, these corporations are autonomous."[10]  The 
Committee called for over-all public control to be established.[11]

Legislative control of government corporations actually occurred in 
two stages during 1945.  In February of that year, legislation 
required the General Accounting Office (GAO) to audit the financial 
transactions of all government corporations.[12]  In December, the 
more comprehensive Government Corporation Control Act superseded these 
audit requirements.[13]

The Act was intended to make the corporations accountable to the 
Congress for their operations while allowing them the flexibility and 
autonomy needed for their commercial activities.  Under the Act, the 
Bureau of the Budget (now Office of Management and Budget) controlled 
the corporations' budgets, Treasury controlled financial transactions, 
and GAO performed financial auditing.[14]  

The Act also specified that without explicit congressional 
authorization, no corporation should be acquired or created by "any 
officer or agency of the Federal Government or by any Government 
corporation for the purpose of acting as an agency or instrumentality 
of the United States . . . ."  sec.  304(a), 59 Stat. 602.  In addition, 
the Act required that all corporations then operating under state 
charters were to be dissolved and reincorporated under federal law.  
The House Report accompanying the legislation stated:

     "The committee does not consider the practices of chartering 
     wholly owned Government corporations without prior authorization 
     by the Congress or under State charters to be desirable.  It 
     believes that all such corporations should be authorized and 
     chartered under Federal statute.  The bill provides that in the 
     future all corporations which are to be established for the 
     purpose of acting as agencies or instrumentalities of the United 
     States must be established by act of Congress or pursuant to an 
     act of Congress specifically authorizing such action." H.R. Rep. 
     No. 79-856, at 11 (1945).

The Congress enacted legislation whose applicability was to be 
encompassing.  The requirement for specific legislative foundation for 
corporations to act as agents of the United States was not to be 
thwarted by having another party act as the incorporator.  In fact, 
the identity of the incorporator was not the determinant of the 
statue's applicability; the act expressly prohibits the "acquisition" 
of corporations to act as instrumentalities of the United States.  As 
the Supreme Court noted in Lebron, the purpose for providing that 
government corporations could not be established  (or acquired) 
without specific legislation ". . . was evidently intended to restrict 
the creation of all Government-controlled policy-implementing 
corporations, and not just some of them."  Id. at 396.  Thus, if an 
entity was to be established for the purpose of carrying out 
government functions under the control of an agency, legislation would 
be necessary.  In other words, an agency on its own could not create 
or cause to be created a "captive corporation" to carry out government 
functions and designate such an entity as "private."

As discussed above and detailed in the attached Appendix, the Schools 
and Libraries Corporation and the Rural Health Care Corporation were 
clearly created to carry out governmental functions in connection with 
the Commission's responsibilities under section 254.  We note that 
even the corporations, themselves, do not deny that they were 
established by the Commission.  For example, the Rural Health Care 
Corporation, in its Request for Proposals for Program Administration 
Services defined itself as:

 ". . . a not-for-profit organization created by the Federal 
 Communications Commission (FCC) to administer funds allocated to 
 rural health care providers to aid in improving the telecommunication 
 infrastructure at rates reasonable and acceptable to urban health 
 care providers." (emphasis added).

NECA simply acted as the incorporator for the convenience of the 
Commission.  There is no nexus between NECA's role as temporary 
administrator and the creation of these corporations.  By the 
Commission's own rules, these entities were removed from the mandates 
of both the temporary and permanent administrator.  Under the 
circumstances, we conclude that the Commission violated the Government 
Corporation Control Act by directing the establishment of the Schools 
and Libraries Corporation and the Rural Health Care Corporation to act 
as its agents in carrying out functions assigned by statute to the 
Commission.  

Question 2:  What federal laws (for example the Federal Advisory 
Committee Act), employment rules, and congressional oversight apply to 
the operation of the corporations?

Answer 2:  The Commission's Order required that private corporations 
be established.  As such, they are not subject to statutes that impose 
obligations on federal entities and federal employees in the areas of 
employment practices, procurement, lobbying and political activity, 
ethics, and disclosure of information to the public.  On the other 
hand, each of the corporations is subject to federal statutes 
applicable to private corporations, unless outside the coverage of the 
statute. For example, we note that the Federal Advisory Committee Act 
(FACA) would not apply to these corporations since these entities are 
primarily operational in nature.[15]

Finally, as established by the Commission, Congress has no direct 
oversight over the corporations.  The corporations  do not provide 
budget information directly to Congress, but rather are accountable to 
the Commission, which in turn, is accountable to the Congress.[16]

We trust this is responsive to your inquiry.

Sincerely yours,

Robert P. Murphy
General Counsel

                    APPENDIX

Universal Service

Historically, universal service has meant access to basic telephone 
service, sometimes called "plain old telephone service" or "POTS."  As 
evidence of the importance of providing universal service, the 
Commission points to section 1 of the Communications Act of 1934, 
which provides that the purpose of the Act is to:

     ". . . make available, so far as possible, to all the people of 
     the United States . . . a rapid, efficient, Nation-wide, and 
     world-wide wire and radio communication service with adequate 
     facilities and reasonable charges. . .."  47 U.S.C.  sec.  151.
 
Universal service has been achieved through a combination of implicit 
and explicit subsidies at the federal and state levels.  Implicit 
subsidies are provided through elevated interstate and intrastate 
access charges, elevated prices for business services, average rates 
over broad geographic areas, and elevated prices for advanced 
services, such as Caller ID and call forwarding.[1]  In addition to 
implicit subsidies, the Commission and some states also provide 
explicit support mechanisms directed at increasing network 
subscribership by reducing rates in high-cost areas and at making 
basic telephone services available for low-cost consumers.[2]
Section 254, as added by the Telecommunications Act of 1996[3], for 
the first time provided explicit statutory support for the 
Commission's responsibility to assure universal service.  Universal 
service is defined as:

     ". . . an evolving level of telecommunications services that the 
     Commission shall establish periodically . . . , taking into 
     account advances in telecommunications and information 
     technologies and services."  47 U.S.C.  sec.  254(c)(1).

The Joint Board in recommending and the Commission in defining the 
services that are to be supported by universal support mechanisms are 
to consider the extent to which such telecommunications services (a) 
are essential to education, public health, or public safety; (b) have, 
through the operation of market choices, been subscribed to by a 
substantial majority of residential customers; (c) are being deployed 
in public telecommunications networks by telecommunications carriers; 
and (d) are consistent with the public interest, convenience, and 
necessity.  47 U.S.C.  sec.  254(c)(1).  Under the Universal Service Order, 
the Commission defined the "core" or "designated" services that will 
be supported by universal service support mechanisms as: single-party 
service; voice grade access to the public switched network; Dual Tone 
Multifrequency signaling or its functional equivalent; access to 
emergency services; access to operator services; access to 
interexchange service; access to directory assistance; and toll 
limitation for qualifying low-income consumers.

In addition to the services included in the general definition, 
section 254 authorizes the Commission to designate additional services 
for schools, libraries, and health care providers for the purposes of 
subsection 254(h).  Subsection 254(h) has two main parts.  Subsection 
254(h)(1) provides that any public or nonprofit health care provider 
that serves rural areas is entitled to receive upon a bona fide 
request "telecommunications services which are necessary for the 
provision of health care services" at rates comparable to those 
charged in urban areas of the same state.  47 U.S.C.  sec.  254(h)(1)(A).  
Schools and libraries, on the other hand, are entitled to receive upon 
a bona fide request services "at rates less than the amounts charged 
for similar services to other parties."  47 U.S.C.  sec.  254(h)(1)(B).

Subsection 254(h)(2) directs the Commission to establish competitively 
neutral rules to enhance, to the extent technically feasible and 
economically reasonable, access to advanced telecommunications and 
information services for all public and nonprofit elementary and 
secondary school classrooms, health care providers, and libraries.  In 
addition, the rules are to define the circumstances under which a 
telecommunications carrier may be required to connect its network to 
qualified elementary and secondary schools, libraries, and health care 
providers.  47 U.S.C.  sec.  254(h)(2).

The legislative history of the provision sheds some light on the 
intended scope of the programs.  The Conference Report provides that:

     "For example, the Commission could determine that 
     telecommunications and information services that constitute 
     universal service for classrooms and libraries shall include 
     dedicated data links and the ability to obtain access to 
     educational materials, research information, statistics, 
     information on Government services, reports developed by Federal, 
     State, and local governments, and information services which can 
     be carried over the Internet."  S. Rep. No. 104-230, at 133 
     (1996); H.R. Rep. No. 104-458, at 133 (1996).

On May 8, 1997, the Commission released its Universal Service Order 
that, among other things, outlined a plan to implement subsection 
254(h).  With respect to schools and libraries, the plan provided 
discounts ranging from 20 to 90 percent on all commercially available 
telecommunications services, Internet access, and internal 
connections.  The level of discounts would be based on a school's or 
library's level of economic disadvantage and its location in an urban 
or rural area.  The Commission concluded that there should be 
established an annual cap of $2.25 billion on universal service 
expenditures for eligible schools and libraries.  

With respect to public or nonprofit rural health care providers, the 
Commission's Order provided that these entities would be eligible to 
receive universal service support not to exceed an annual cap of $400 
million.  A health care provider may obtain telecommunications 
services at rates comparable to those paid for similar services in the 
nearest urban area with more than 50,000 residents, within the state 
in which the rural health provider is located.  Rural health care 
providers will receive support for both distance-based charges and a 
toll-free connection to an Internet service provider.  Each health 
care provider that lacks toll-free access to an Internet service 
provider may also receive the lesser of 30 hours of Internet access at 
local calling rates per month or $180 per month in toll charge credits 
for toll charges imposed for connecting to the Internet.

Administration

Section 254 is silent on how the Commission is to administer the 
universal service programs, including the programs noted above for 
schools and libraries and for rural health care providers.  In its 
March 1996 Notice of Proposed Rulemaking and Order Establishing the 
Federal-State Joint Board on Universal Service, the Commission sought 
comment on the best approach to administer the universal service 
mechanisms fairly.  The Commission noted that the fund could be 
administered by a non-governmental entity or the funds could be 
collected and disbursed through state public utility commissions.[4]  

Consistent with the Joint Boards' recommendations that were released 
in November 1996,[5] and the record in the proceeding, the Commission 
decided to create a Federal Advisory Committee (Committee), pursuant 
to the Federal Advisory Committee Act (FACA), 5 U.S.C. App. 2,  sec.   sec.   
4(a) and 3(2)(c), whose sole responsibility would be to recommend to 
the Commission through a competitive process a neutral, third-party 
administrator to administer the universal service program.  The 
Commission also noted that because the needs of educational 
institutions are complex and substantially different from the needs of 
other entities eligible for universal support, it would require the 
administrator, after receiving recommendations submitted by the 
Department of Education, to select a subcontractor to manage 
exclusively the application process for eligible schools and 
libraries.  Additionally, the Commission adopted the Joint Board's 
recommendation that the National Exchange Carrier Association, Inc. 
(NECA), be appointed the temporary administrator, subject to changes 
in NECA's governance that would make it more representative of the 
telecommunications industry as a whole.

NECA was established in 1983, at the direction of the Commission, as 
an association of local exchange carriers (LECs) to administer the 
interstate access tariff and revenue distribution process.[6]  Prior 
to that time, AT&T had acted as a tariff filing agent for the entire 
industry and had also performed most of the administrative functions 
in connection with the settlements pooling arrangement.[7]  Since 
NECA's creation, the Commission has assigned it the responsibilities 
for administering the existing high-cost and low income support 
mechanisms.  

The Joint Board noted that NECA's current membership of incumbent 
local exchange carriers, its board of directors composed primarily of 
representatives of incumbent local exchange carriers, and its advocacy 
positions in several Commission proceedings may appear to non-LEC 
carriers as evidence of NECA's bias toward ILECs.  Accordingly, the 
Board recommended that prior to appointing NECA the temporary 
administrator, the Commission should permit NECA to add significant, 
meaningful representation for non-incumbent LEC carrier interests to 
the NECA's Board of Directors.  The Joint Board also recommended that 
NECA be eligible to compete in the process for selecting a permanent 
administrator if changes to NECA's membership and governance rendered 
NECA a neutral, third party.

The Commission conducted a separate proceeding to deal with the issue 
of NECA's governance.  By a letter dated October 18, 1996, NECA 
requested that the Commission modify the size and composition of 
NECA's Board of Director by adding six directors from groups that 
would have a substantial stake in the new universal service 
programs.[8]  On January 10, 1997, the Commission issued a Notice of 
Proposed Rulemaking and Notice of Inquiry addressing NECA's proposal 
and the Joint Board's recommendation that NECA be allowed to alter its 
governance structure. The NPRM tentatively concluded that in order for 
NECA to be eligible to serve as temporary administrator, NECA's Board 
must become more representative of the telecommunication industry as a 
whole.[9]  

Also, on January 10, 1997, NECA requested that the Commission consider 
a revised proposal based on NECA's finding that it might not be 
possible to develop a satisfactory governance proposal within the 
context of a single administrative organization.  Under NECA's January 
proposal, NECA recommended establishing a separate subsidiary to 
administer the universal support programs.  As envisioned by NECA, 
this wholly owned subsidiary, designated as the Universal Service 
Administrative Company, would have a representative board of directors 
based on the Commission's recommendation and would include some 
representation from the current NECA Board.[10]

In June, subsequent to the Commission's Universal Service Order, NECA 
filed a discussion paper with the Commission that highlighted the 
advantages of single over multiple subsidiary approach.  NECA proposed 
the creation of board committees that would have specific program 
responsibilities, including a committee for the high cost and low 
income program, a committee for the schools and libraries program, and 
a committee for the rural health care program.  As proposed by NECA, 
these committees would have final decision-making authority with 
respect to defined aspects of program administration.[11]

On July 18, 1997, the Commission released its NECA's Governance Order 
that created a three-company structure for administration of new 
universal service programs.  Under this Order, the Commission directed 
NECA to create an independently functioning not-for-profit subsidiary 
to be designated the Universal Service Administrative Company (USAC) 
that would temporarily administer the universal service support 
program for high-cost areas and low-income consumers, as well as 
perform billing and collection functions for all of the universal 
service programs, including the programs for schools and libraries and 
the rural health care providers.[12]  The Commission also 
reconsidered, on its own motion, its decision in the Universal Service 
Order that a subcontractor manage the application process for schools 
and libraries.[13]  Instead, the Commission directed NECA to create 
two unaffiliated, not-for-profit corporations to be designated the 
Schools and Libraries Corporation and Rural Health Care Corporation to 
administer portions of the schools and libraries and rural health care 
universal service programs (collectively referred to as the 
corporations).[14]  The Commission also reconsidered the scope of 
functions that will be performed by the temporary administrator and 
the permanent administrator, by concluding that the corporations 
should continue to perform their designated functions even after the 
date on which the permanent administrator is appointed.[15]  

The Commission argued that the creation of the two non-profit 
corporations was critical to the successful implementation of the 
schools and libraries and rural health care support mechanisms.  This 
was because the programs were new and involved potentially large 
number of participants and beneficiaries and could require special 
expertise.  

Establishment of the Corporations

Under the NECA Governance Order, the Commission outlined the functions 
of the corporations and designated the size and composition of their 
respective boards.  The Commission directed that the Board of 
Directors of the Schools and Libraries Corporation will consist of 
seven members, including three schools representatives, one libraries 
representative, one service provider representative, one independent 
director, and the CEO of the corporation.  Similarly, the Commission 
directed that the Board of Directors of the Rural Health Care 
Corporation will consist of five members, including two rural health 
care representatives, one service provider representative, one 
independent director, and a CEO.

The Chairman of the Commission selects or approves all of the members 
of the board of directors for the universal service corporations.  The 
Chairman of the Commission will select the independent board member 
for the Schools and Libraries Corporation.  In addition, under the 
Commission's Order, the three directors on the USAC Board of Directors 
representing schools and the one director representing libraries will 
be appointed to the Schools and Libraries Board of Directors.  The 
USAC Board will also select the service provider from its board of 
directors to serve on the Schools and Libraries Board of Directors.  
The six board members of the Schools and Libraries Corporation will 
submit a CEO candidate to the Chairman for approval.  The CEO will 
also sit on the board of directors. 

A similar process was mandated for the selection of the board of 
directors of the Rural Health Care Corporation.  The Chairman of the 
Commission will select, based on nominations, one of the two board 
member to represent rural health care providers.  Additionally, the 
Chairman of the Commission will select an independent board member. 
The USAC Board of Directors is to select from its members the other 
director representing rural health care providers and a service 
provider.   These four board member will submit a CEO candidate to the 
Chairman of the Commission for approval.  The chosen CEO will serve on 
the board of directors.

Not only does the Commission direct the USAC Board to appoint certain 
of its board members to serve on the independent corporations' boards 
of directors but these USAC Board members are, in the first instance, 
also selected by the Chairman of the Commission.  Under the NECA 
Governance Order, the Commission directed that USAC's Board will be 
comprised of: three directors representing ILECs; two directors 
representing long distance carriers (IXCs), one director representing 
commercial mobile radio service providers, which includes cellular, 
Personal Communications Services, paging, and Specialized Mobile Radio 
companies; one director representing Competitive Local Exchange 
Carriers; one director representing cable operators; one director 
representing information service providers; three directors 
representing eligible schools; one director representing eligible 
libraries; one director representing eligible rural health care 
providers; one director representing low-income consumers; one 
director representing state telecommunications regulators; and one 
director representing state consumer  advocates.  

Members of the industry or non-industry groups that will be 
represented on the USAC Board submit nominees selected by consensus to 
the Chairman of the Commission.  The Chairman will review the 
nominations and select the members of the USAC Board.  If a group 
fails to reach consensus and submits more than one nominee, the 
Chairman will select the individual to represent the group.  
Similarly, if no nomination is submitted, the Chairman will select the 
individual from the appropriate industry or non-industry group.

1. Pub. L. 104-104, 110 Stat. 56 (1996).

2. Federal-State Joint Board on Universal Service, First Report and 
Order, CC Docket No. 96-45, FCC 97-157 (rel. May 8, 1996) (Universal 
Service Order).

3. MTS and WATS Market Structure, Third Report and Order, CC Docket 
No. 78-72, Phase I, FCC 82-579 (rel. February 28, 1983). 

4. With the imminent breakup of AT&T, the Commission believed that 
AT&T could no longer perform this function in the post-divestiture 
environment.

5. Changes to the Board of Directors of the National Exchange Carrier 
Association, Inc. and Federal-State Joint Board on Universal Service, 
Report and Order and Second Order on Reconsideration, CC Docket No. 
97-21 and No. 96-45, FCC 97-253 (rel. July 18, 1997)(NECA Governance 
Order).

6. A similar provision is contained in the Schools and Libraries 
Certificate of Incorporation. See 47 C.F.R.  sec.   69.619(a).

7. Courts have characterized this section as analogous to Article 1, 
Section 8, Clause 18 of the Constitution, which authorizes Congress to 
make all laws that "shall be necessary and proper" for carrying out 
its enumerated powers and "all other powers" vested in the federal 
government.  Mobile Communications Corp. of America v. FCC, 77 F.3d 
1399, 1404 (D.C. Cir. 1996), cert. denied, 117 S. Ct. 81 (1996);  New 
England Tel. & Tel. v. FCC, 826 F.2d 1101, 1107-08 (D.C. Cir. 1987); 
North American Telecommunications Ass'n v. FCC, 772 F.2d 1282, 1292 
(7th Cir. 1985);  see also United States v. Southwestern Cable Co., 
392 U.S. 157, 181 (1968).

8. The Telecommunications Act of 1996 did provide the Commission with 
specific authority "to create or designate" one or more impartial 
entities to administer telecommunications numbering and to make such 
numbers available on an equitable basis.  47 U.S.C.  sec.  251(e)(1).  It 
also established a body corporate to be known as the 
Telecommunications Development Fund.  This fund provides grants to 
small businesses to enhance competition in the telecommunications 
industry, among other things.  The provision establishing the fund 
specifies the composition of the board of directors, as well as its 
meetings and functions.  47 U.S.C.  sec.  614.   However, with respect to 
the provision of universal service, Congress provided no authority to 
establish such entities.

9. U.S. Congress, Joint Committee on Reduction of Nonessential Federal 
Expenditures, Report on Government Corporations, Senate Doc. 227, 78th 
Cong.,  2d Sess. (Washington: U.S. Govt. Print. Off., 1944).

10. Id. at p. 27.

11. For a complete history of the Control Act, see, Managing the 
Public's Business: Federal Government Corporations prepared for the 
Senate Committee on Governmental Affairs by the Congressional Research 
Service by Ronald C. Moe, S. Prt. 104-18 (April 1995).

12. Public Law 4,  sec.  5, 59 Stat. 5 (1945).

13. In 1982, Pub.L. 97-258 codified the 1945 Act's provisions.  See 31 
U.S.C.  sec.  9101-9110.

14. Primary auditing responsibilities were shifted in 1990 (Pub.L. 
101-576) from GAO to the individual corporate Inspectors General 
appointed under the Inspector General Act of 1978.

15. The Federal Advisory Committee Act (FACA) was enacted to control 
the establishment of advisory committees to the federal government and 
to allow the public to monitor their existence, activities and costs.  
FACA's legislative history, relevant court cases, and General Services 
Administration regulations suggest that coverage is limited to those 
committees that provide advice and are not operational in nature. See, 
H.R. Rep. No. 92-1017, at 4 (1972); S. Rep. No. 92-1098, at 8 (1972); 
Judicial Watch, Inc. v. Clinton, 76 F.3d 1232 (D.C. Cir. 1996); and 41 
C.F.R.  sec.  101-6.10004(g).

16. A Memorandum of Understanding between the Department of Treasury, 
the Commission, and NECA, dated April 1997, provides the concepts and 
guidelines for reporting cash transactions and accrual-based balances 
of the Universal Service Fund to meet the fiscal needs of the U.S. 
Treasury.  The Congressional Budget Office and the Office of 
Management and Budget have interpreted the language of the 
Telecommunications Act of 1996 to mean that payments into the 
Universal Service Fund should be counted as federal revenues and 
payments from the fund as federal outlays.  This is because the 
transfers of income between various classes of telephone users would 
not occur but for the exercise of the sovereign power of the federal 
government.  Furthermore, portions of the Universal Service Fund, most 
notably its Lifeline and Linkup Programs, have already been included 
in the federal budget.  "Federal Subsidies of Advanced 
Telecommunications for Schools, Libraries, and Health Care Providers" 
prepared by the Congressional Budget Office (January 1998).

1. FCC has defined "implicit subsidies" to mean that a single company 
is expected to obtain revenues from sources at levels above "costs" 
(i.e., above competitive prices levels), and to price other services 
allegedly below costs.  Such intra-company subsidies are typically 
regulated by states.  On the federal level, the primary implicit 
subsidies are the geographic averaging of interstate long distance 
rates and interstate access charges.  In section 254(g) of the 
Communications Act, as added by the Telecommunications Act of 1996, 47 
U.S.C.  sec.  254(g), Congress expressly directed that the geographic 
averaging of interstate long distance rates continue.  See 
Federal-State Joint Board on Universal Service, First Report and 
Order, CC Docket No. 96-45, FCC 97-157 (rel. May 8, 1996) (Universal 
Service Order).

2."Telephone Subscribership in the United States," a 1998 report by 
the FCC's Common Carrier Bureau that was based on Census Bureau 
figures for November 1997 found that almost 94% of households have 
telephone services.  However, the rates vary based on income, age, 
household size, race, geographic location, and other factors. See also 
Common Carrier Bureau, FCC, Preparation for Addressing Universal 
Service Issues: A Review of Current Interstate Support Mechanisms 
(Feb. 23, 1996).

3. Pub. L. 104-104, 110 Stat. 56 (1996).

4. Federal-State Joint Board on Universal Service, Notice of Proposed 
Rulemaking and Order Establishing a Joint Board, CC Docket No. 96-45, 
FCC 96-93 (rel. Mar. 8, 1996) (Universal Service NPRM).

5. Federal-State Joint Board on Universal Service, Recommended 
Decision, CC Docket No. 96-45, FCC 96J-3 (rel. Nov. 8, 1996) 
(Recommended Decision).

6. MTS and WATS Market Structure, Third Report and Order, CC Docket 
No. 78-72, Phase I, FCC 82-579 (rel. February 28, 1983). 

7. However, with the imminent breakup of AT&T, the Commission believed 
that AT&T could no longer perform this function in the 
post-divestiture environment.

8. Letter from  Bruce Baldwin, NECA, to Reed Hundt, Chairman, FCC, 
October 18, 1996.

9. Changes to the Board of Directors of the National Exchange Carrier 
Association, Inc., Notice of Proposed Rulemaking and Notice of 
Inquiry, CC Docket No. 97-21, FCC 97-2 (rel. Jan. 10, 1997), errata, 
mimeo 71784, CC Docket No. 97-21 (rel. Jan. 15, 1997) (NECA NPRM and 
NOI).

10. Letter from Bruce Baldwin, NECA, to Reed Hundt, Chairman, FCC, 
January 10, 1997.

11. Letter from Robert Haga to William F. Caton, Acting Secretary, 
FCC, June 23, 1997, recording an ex parte meeting between NECA 
personnel and Commissioner Quello and Commission staff.

12. The Commission agreed that expanding NECA's board would not assure 
neutrality.  The Commission noted the concern expressed by commenters 
that NECA may be precluded from confining authority of newly added 
non-ILEC directors to matters relating solely to the administration of 
universal service support programs.  Alternatively, if non-ILEC 
directors were allowed to participate in ILEC matters, there might be 
an issue of the duty owed by non-ILEC and non-carrier directors to 
NECA's membership on LEC issues unrelated to universal service.

13. The Commission stated that the creation of private corporations ". 
. . will provide for greater accountability and more efficient 
administration of the schools and libraries and rural health care 
programs than would the approach adopted earlier because a 
subcontractor, unlike the Corporations, would not be directly 
accountable to the Commission." (emphasis added).

14. The Commission stated that it was unpersuaded by NECA's argument 
that a single structure would be more efficient, avoid duplication of 
functions, or produce greater cost savings.

15. Changes to the Board of Directors of the National Exchange Carrier 
Association, Inc., and Federal-State Joint Board on Universal Service, 
Report and Order and Second Order on Reconsideration, CC Docket No. 
97-21 and No. 96-45, FCC 97-253 (rel. July 18, 1997)(NECA Governance 
Order).