Telecommunications: FCC Lacked Authority to Create Corporations to
Administer Universal Service Programs (Testimony, 03/31/98,
GAO/T-RCED/OGC-98-84).

GAO discussed the Federal Communications Commission's (FCC)
implementation of the universal service provisions contained in the
Telecommunications Act of 1996.

GAO noted that: (1) FCC did not have the authority to create the
corporations to carry out government functions and operate under FCC's
rules; (2) under the Government Corporation Control Act, FCC needs
explicit statutory authority to establish or acquire such entities,
which the agency did not have; and (3) FCC's argument--that it did not
create the corporations but rather directed an intermediary to create
them--does not relieve FCC of the requirements of the Control Act.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED/OGC-98-84
     TITLE:  Telecommunications: FCC Lacked Authority to Create 
             Corporations to Administer Universal Service Programs
      DATE:  03/31/98
   SUBJECT:  Telecommunication industry
             Noncompliance
             Jurisdictional authority
             Agency missions
             Telephone
             Federal corporations
IDENTIFIER:  Universal Service Fund
             
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Cover
================================================================ COVER


Before the Subcommittee on Telecommunications, Trade and Consumer
Protection, Committee on Commerce, House of Representatives

For Release
on Deliver
Expected at
10.00 a.m.  EST
Tuesday
March 31, 1998

TELECOMMUNICATIONS - FCC LACKED
AUTHORITY TO CREATE CORPORATIONS
TO ADMINISTER UNIVERSAL SERVICE
PROGRAMS

Statement of Robert P.  Murphy, General Counsel

GAO/T-RCED/OGC-98-84

GAO/RCED/OGC-98-84T


(348088)


Abbreviations
=============================================================== ABBREV

  FCC -
  NECA -

============================================================ Chapter 0

Mr.  Chairman, Mr.  Markey, and Members of the Subcommittee: 

We are pleased to be here today to discuss the Federal Communications
Commission's implementation the universal service provisions
contained in the Telecommunications Act of 1996, which was enacted
into law 2 years ago.  The act required, among other things, that the
telecommunications industry continue support for persons living in
high-cost areas and persons with low incomes and provide support to
schools and libraries and rural health care providers.  As directed
by the act, the Commission convened a federal-state joint board to
recommend regulatory changes to implement this "universal service"
and adopted most of the joint board's recommendations.  In July 1997,
the Commission ordered that two independent nonprofit corporations be
established to administer universal service for schools and libraries
and rural health care providers.  The Commission approved the
incorporation documents in September 1997. 

After describing the Commission's adoption of the current mechanism
for administering universal service, our statement today reviews the
Commission's authority to create the nonprofit corporations to
administer universal service for schools and libraries and rural
health care providers.  This statement is based on work we did for
Senator Ted Stevens examining these and related issues. 

In summary, we have concluded that the Commission did not have the
authority to create the corporations to carry out government
functions and operate under the Commission's rules.  Under the
Government Corporation Control Act, the Commission needs explicit
statutory authority to "establish or acquire" such entities, which
the agency did not have.  The Commission's argument--that it did not
create the corporations but rather directed an intermediary to create
them--does not relieve the Commission of the requirements of the
Control Act. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

As you know, Mr.  Chairman, universal service historically has meant
providing access, nationwide, to basic telephone service.  The
Telecommunications Act of 1996 recognized an evolving concept of
universal service.  The act specifically identified as recipients for
universal service benefits individuals living in rural, insular, and
high-cost areas; low-income individuals; schools and libraries; and
rural health care providers.  It specifies that every
telecommunications carrier that provides interstate
telecommunications services must contribute to a universal service
fund, unless exempted by the Commission. 

The Telecommunications Act of 1996 did not prescribe a structure for
administering the universal service programs.  In November 1996, the
federal-state joint board created under the act recommended that, in
the interest of providing services to schools and libraries and
health care providers quickly, the Commission should appoint the
National Exchange Carrier Association (NECA) as the temporary
administrator of services to these groups, subject to changes in
NECA's governance to make it more representative of the
telecommunications industry as a whole.  NECA is an association of
incumbent local telephone companies which was established at the
Commission's direction in 1983, in anticipation of the breakup of the
Bell System, to administer interstate access tariffs and the revenue
distribution process for the nation's nearly 1,000 local telephone
companies.  Prior to the passage of the act, NECA had responsibility
for administering the existing mechanisms providing support for
high-cost areas and low-income individuals.  Under the joint board's
recommendation, NECA would continue this role until the permanent
administrator is appointed and ready to implement new programs. 

The joint board also recommended that the Commission establish an
advisory board to select and oversee a neutral third-party
administrator for all universal service programs and suggested
criteria to be used in that selection.  Although the joint board
recommended against the immediate selection of NECA as this
administrator, it recommended that the Commission allow NECA to
change its membership and governance in a manner that would allow it
to compete in the advisory board's selection process. 

On the basis of the joint board's recommendations, the Commission
agreed in a May 1997 order to appoint NECA as the temporary
administrator, subject to changes in its governance.  It also agreed
to create a federal advisory committee, whose sole responsibility
would be to recommend an administrator, and directed that the
administrator select a subcontractor to manage the application
process for schools and libraries. 

To address the concerns raised about NECA's governance, the
Commission requested comments in January 1997 on a proposal from NECA
to expand the representation on its board to permit representation of
the interests of other providers of telecommunications services and
thereby make it eligible to compete to be the permanent universal
service administrator.  In addition, NECA asked the Commission in
January 1997 to allow it to establish a separate subsidiary--a single
corporation--to administer universal service because NECA believed
that developing a satisfactory board structure might not be possible. 

It was in the context of the Commission's review of NECA's proposals
that, in July 1997, the Commission issued an order directing NECA to
create two independent nonprofit corporations--one to administer the
program for schools and libraries (the Schools and Libraries
Corporation) and one to administer the program for rural health care
providers (the Rural Health Care Corporation).  The Commission's
order further specified that these corporations would continue to
administer those programs even after the appointment of a permanent
administrator.  To carry out billing, collecting, and disbursement
activities for these programs, the Commission directed NECA to create
a nonprofit subsidiary.  The Commission further directed that the
subsidiary create a special committee of its board of directors to
administer the universal service programs for high-cost areas and
low-income individuals.  NECA created the Universal Service
Administrative Company as the subsidiary, which in turn created the
High Cost and Low Income Committee. 

Explaining its rationale for directing the creation of the Schools
and Libraries and Rural Health Care corporations, the Commission
discussed in the July order its (1) belief that the programs they
administer needed special expertise and that continuity or permanency
was important to attract and retain that expertise, (2) belief that
smaller organizations may facilitate decision-making, and (3) desire
for direct accountability to the Commission.  In that July order and
in subsequent letters responding to congressional inquiries, the
Commission stated that it considered other structures for
administering universal service to schools and libraries and rural
health care providers and concluded that independent corporations
would provide this expertise, continuity, efficiency, and
accountability. 


   COMMISSION'S AUTHORITY TO
   CREATE THE TWO CORPORATIONS
---------------------------------------------------------- Chapter 0:2

The Government Corporation Control Act requires that agencies have
specific legislative authority in order to "establish or acquire" a
corporation to act as a government agency.  As noted by the United
States Supreme Court, the purpose of this requirement was to restrict
the creation of all government-controlled, policy-implementing
corporations.  According to the Court, government-created and
-controlled corporations had gotten out of hand in both their number
and lack of accountability prior to the passage of the Control Act. 
Our review of the legislative history of the act indicates that the
Congress sought to make the corporations accountable to it for their
operations while allowing them the flexibility and autonomy needed
for their commercial activities.  One way to ensure this
accountability was to require that such entities come into existence
only by or under specific statutory authority. 

The Commission contends that it had the authority to order the
creation of the Schools and Libraries and the Rural Health Care
corporations under sections 4(i) and 254 of the Communications Act of
1934, as amended.  Section 4(i) provides that the Commission may
"perform any and all acts, not inconsistent with the act, as may be
necessary to carry out its statutory obligations" while section 254
directs the Commission to implement the agreed-upon elements of
universal service.  According to the Commission, the Control Act is
not implicated because the agency itself did not establish or acquire
the corporations.  Rather, the Commission argues that it conditioned
its approval of NECA as the temporary administrator of universal
service on NECA's formation of the corporations. 

We do not believe that the Control Act's requirement can be avoided
by directing another entity to act as the incorporator.  Nor do we
believe that either section 4(i) or section 254 provides the specific
statutory authority needed to meet the requirement of the Control
Act.  These corporations were created to carry out government
functions.  They operate under the Commission's orders and are
directly accountable to the Commission.  The Chairman of the
Commission selects or approves the board of directors and specifies
the functions of the corporations.  The corporations cannot remove a
board member or dissolve themselves without the approval of the
Commission.  Under the Control Act, such government-controlled,
policy-implementing entities cannot be established without statutory
authority, which the Commission did not have. 

As you know, we provided our detailed legal opinion on this issue to
Senator Ted Stevens on February 10, 1998.  A copy of that opinion is
appended to this statement. 


   APPLICATION OF FEDERAL LAWS
---------------------------------------------------------- Chapter 0:3

Other questions are what federal laws, employment rules, and
congressional oversight apply to the corporations.  If these entities
had been authorized by statute, the Congress would have specified
their mission and determined in the first instance what federal laws
apply or what discretion should be left to the Commission.  However,
as our opinion noted, these entities were established by the
Commission as private corporations and thus are not subject to the
statutes that impose obligations on federal entities and federal
employees in the areas of employment practices, procurement, lobbying
and political activity, ethics, and the disclosure of information. 
Moreover, as the corporations are envisioned by the Commission, the
Congress has no direct oversight over the corporations. 

Since the Commission acted in violation of the Government Corporation
Control Act in establishing these two corporations, we believe that
the Commission should either seek specific statutory authority to
create one or more corporations to administer universal service or
restructure the administration of these programs in a manner
consistent with the law.  Recently, an amendment was added to the
Emergency Supplemental Appropriations bill (S.  1768) that would
require the Commission to report to Congress on a proposed revised
structure for the universal service programs by May 8, 1998. 


-------------------------------------------------------- Chapter 0:3.1

That concludes my prepared statement, Mr.  Chairman.  My colleagues
and I would be pleased to respond to any questions from you or other
Members of the Subcommittee. 




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GAO LEGAL OPINION
============================================================ Chapter 0



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