**Before the**

**Federal Communications Commission**

**Washington, D.C. 20554**

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FIRST REPORT AND ORDER

**Adopted:** June 13, 2002 **Released:** June 13, 2002

Before the Commission: Chairman Powell approving in part, concurring in
part, and issuing a statement; Commissioner Copps issuing a statement;
and Commissioner Martin approving in part, dissenting in part, and
issuing a statement.

# INTRODUCTION 

1.  In this Order, [^1] we adopt a framework for the treatment of funds
    collected for the schools and libraries support mechanism that have,
    through the normal operation of the program, not been disbursed.
    [^2] In taking this action today, we balance the statutory
    requirements in section 254 of providing eligible schools and
    libraries with access to discounted telecommunications services and
    of ensuring that the universal service support mechanisms are
    specific and predictable.[^3] This, in turn, will allow
    contributions to universal service to remain predictable for
    carriers and, ultimately, will inure to the benefit of their
    customers. [^4] We are committed to ensuring that eligible schools
    and libraries have access to sufficient universal service support
    consistent with the statute and therefore adopt a rule to ensure
    that unused schools and libraries funds are carried forward for
    disbursement in subsequent funding years. At the same time, we find
    that the public interest is best served by our action to stabilize
    contributions to universal service for the immediate future, while
    we consider fundamental reform to the way in which universal service
    contributions are assessed on contributors and recovered from
    consumers.[^5] As we explained in the *Contribution FNPRM,* numerous
    changes in the marketplace and the operation of the current
    assessment system have contributed to broad fluctuations in the
    contribution base of the universal service support mechanisms since
    our adoption of the current assessment methodology.[^6] These
    fluctuations require us to consider reform to ensure stability of
    the universal service fund, which should help ensure predictability
    in that fund.[^7] We conclude that our actions today strike an
    appropriate balance by helping to minimize and stabilize the
    contribution factor for the immediate future, [^8] while maintaining
    an appropriate level of support for all universal service support
    mechanisms, including the schools and libraries program.

2.  Consistent with the congressional mandate in section 254 that
    carriers contribute to the "specific \[and\] predictable" universal
    service support mechanisms, the Commission has endeavored to ensure
    that universal service contribution obligations remain predictable
    so that carriers anticipate their payments appropriately.[^9] Over
    the past several years, however, we have witnessed increasing upward
    pressure on contributions caused by a variety of events, including
    declining interstate revenues coupled with increased demand for
    universal service support. For example, consistent with section
    254(e) of the Act, the Commission recently took steps to replace
    implicit subsidies in interstate access charges with explicit
    universal service support.[^10] Implementation of these statutory
    requirements coupled with changes in the telecommunications
    marketplace have led to broad fluctuations in the contribution base
    and rising contribution obligations. For these reasons, we recently
    sought comment on whether and how to change the existing
    contribution methodology.[^11]

3.  While we are examining whether more fundamental reform of the basis
    for assessing universal service contributions is warranted, we
    believe it is important at this time to stabilize universal service
    contributions and maintain predictability for the universal service
    support mechanisms for the immediate future. [^12] This, in turn,
    will allow contributions to remain predictable for carriers, and,
    ultimately, benefit consumers. We therefore conclude that, in order
    to maintain fund predictability for the immediate future, unused
    funds from the schools and libraries support mechanism shall, in
    accordance with the public interest, be applied to stabilize or
    reduce the amount of contributions to the universal service fund for
    no more than the next three quarters, which should provide us
    sufficient time to complete our review of the contribution
    methodology and implement any changes adopted in that proceeding.
    Specifically, we shall apply unused funds to reduce the contribution
    factors for the third and fourth quarters of 2002, and first quarter
    2003, if necessary. We intend to complete our examination of the
    issues in the contribution methodology proceeding and implement
    appropriate rules no later than first quarter 2003. We will
    endeavor, however, to complete the proceeding at an earlier date. In
    that event, such unused funds from the schools and libraries support
    mechanism would be carried forward for use by eligible schools and
    libraries in subsequent funding years. Consistent with the
    requirement that carriers contribute to a specific and predictable
    universal service support mechanism, we expect any changes to the
    contribution methodology that are ultimately adopted to address
    these concerns regarding the current contribution assessment system.

4.  We take this action today with careful consideration of the effect
    of our decision on the schools and libraries support mechanism. For
    the last five years, the schools and libraries support mechanism has
    provided discounts that have enabled millions of school children and
    library patrons to obtain access to modern telecommunications and
    information services. In fact, as of May 2002, schools and libraries
    have received over \$8.25 billion in funding commitments.[^13]
    Although the successes of this program are impressive, we have been
    unable to fulfill the demands from all of the Nation's schools and
    libraries. For example, in order to fully fund current demand for
    Funding Year 5, we would have to more than double the existing
    \$2.25 billion funding cap on the schools and libraries mechanism.

5.  In light of this high demand for discounts, we believe that, at the
    close of this period for the Commission to consider the reforms that
    should be implemented to address carriers' contribution obligations,
    it is appropriate to carry forward unused funds to increase
    disbursements to schools and libraries program in subsequent funding
    years. Specifically, we direct that, effective no later than second
    quarter 2003, any unused funds from the schools and libraries
    support mechanism in any given year shall, consistent with the
    public interest, be carried forward for disbursement in subsequent
    funding years of the schools and libraries support mechanism. Such
    action would ensure that the funds that are unused by schools and
    libraries from prior years, through normal operation of the program,
    are available to schools and libraries in future years. We intend to
    develop specific rules implementing this policy not later than
    second quarter 2003 in order to maximize the availability of these
    funds for schools and libraries. We also will continue to explore
    procedural and programmatic changes to the schools and libraries
    support mechanism that may help reduce the amount of funds that are
    not disbursed. These actions together will help us to most
    effectively implement the goals of section 254(h) by providing for
    discounts as close as possible to the level of the annual \$2.25
    billion cap.

# BACKGROUND

**A. Contributions to Universal Service**

6.  In section 254 of the Act, Congress instructed the Commission to
    establish explicit universal service support mechanisms to help
    ensure the delivery of affordable telecommunications service to all
    Americans, including consumers in high-cost areas, low-income
    consumers, eligible schools and libraries, and rural health care
    providers.[^14] Pursuant to section 254 of the Act, these support
    mechanisms are funded through contributions made by
    telecommunications carriers and certain providers of interstate
    telecommunications.[^15] Specifically, section 254(d) requires that
    "\[e\]very telecommunications carrier that provides interstate
    telecommunications services shall contribute, on an equitable and
    nondiscriminatory basis, to the specific, predictable, and
    sufficient mechanisms established by the Commission to preserve and
    advance universal service."[^16] Section 254(d) provides further
    that "any other provider of interstate telecommunications may be
    required to contribute to the preservation and advancement of
    universal service if the public interest so requires."[^17]

7.  In the *Universal Service Order*, the Commission decided to assess
    contributions on carriers' end-user telecommunications
    revenues.[^18] The Commission did so after considering the
    Recommended Decision of the Federal-State Joint Board on Universal
    Service (Joint Board) and the record developed at that time.[^19]
    Specifically, the Commission concluded that assessment based on
    end-user telecommunications revenues would be competitively neutral,
    easy to administer, and would eliminate some economic distortions
    associated with an assessment based on gross telecommunications
    revenues.[^20]

8.  In the *Second Order on Reconsideration*, the Commission designated
    the Universal Service Administrative Company (USAC) as the entity
    responsible, in accord with the Commission's rules, decisions, and
    oversight, for administering the universal service support
    mechanisms, including billing contributors, collecting contributions
    on a quarterly basis, and disbursing universal service support
    funds.[^21] The Commission directed USAC to calculate an individual
    contributor's quarterly obligation by multiplying the contributor's
    universal service revenue base by the relevant universal service
    contribution factor.[^22] The universal service revenue base is an
    entity's quarterly interstate and international end-user
    telecommunications revenues from two quarters prior to
    assessment.[^23] The contribution factor is based "on the ratio of
    quarterly projected costs of the support mechanisms, including
    administrative expenses, to the applicable revenue base \[total
    interstate and international end-user telecommunications
    revenues\]." [^24] The Commission further directed USAC to "adjust
    the contribution factors for each quarter based on quarterly demand
    for services and administrative costs, subject to any funding caps
    established in the *Universal Service Order*."[^25]

9.  Carriers currently have significant flexibility to recover their
    contribution obligations in any manner that is equitable and
    nondiscriminatory.[^26] Most elect to recover their contributions
    from their customers through line-item charges. Therefore, although
    the contribution factor is uniform for all contributors, universal
    service line items to consumers vary widely among contributors.

    **B. Unused Funds Collected for the Schools and Libraries Support
    Mechanism**

10. The Commission established an annual funding cap of \$2.25 billion
    on federal universal service support for schools and libraries in
    the *Universal Service Order*.[^27] When the annual funding cap was
    initially adopted, the Commission did not have historical data upon
    which to estimate with certainty the demand for services in the
    initial months of the schools and libraries support mechanism. The
    Commission stated that "if the annual cap is not reached due to
    limited demand from eligible schools and libraries, the unspent
    funds will be available to support discounts for schools and
    libraries in subsequent years."[^28] Further, the Commission also
    stated that unused funds will be carried forward and added to the
    annual cap, if demand exists.[^29]

11. Section 54.507(a) of the Commission's rules codifies the annual
    \$2.25 billion cap on the schools and libraries support
    mechanism.[^30] Further, the rule provides that "all *funding
    authority* for a given funding year that is unused in that funding
    year shall be carried forward into subsequent funding years for use
    in accordance with demand."[^31]

12. The Commission's rules and policies provide additional guidance
    regarding the treatment of unused funds from Funding Year 1 of the
    schools and libraries mechanism. In 1998, the Commission amended its
    funding rules and provided that unused funds that were collected but
    not disbursed in Funding Year 1 would be carried forward to the next
    funding period.[^32] In May 1999, in the *Twelfth Order on
    Reconsideration*, the Commission further amended its funding rules
    and made clear that for Funding Year 2, the \$2.25 billion funding
    cap would remain undisturbed.[^33] Therefore, unused funds that were
    carried forward from Funding Year 1 could not be disbursed because
    that would result in a disbursement in excess of the \$2.25 billion
    that was authorized to be collected and disbursed in Funding Year 2.
    The Commission amended section 54.507(a) of its rules to reflect
    these changes.[^34] Subsequently, after USAC provided an estimate of
    unused funds from Funding Year 1, the Common Carrier Bureau directed
    USAC to apply a portion of that unused balance to reduce the
    collection requirement for the first quarter of 2000 when it
    released its Public Notice announcing the proposed contribution
    factor for the first quarter of 2000.[^35] The Common Carrier Bureau
    released similar public notices for the subsequent four
    quarters.[^36] In the *Notice and Order*, we confirmed that it was
    appropriate to reduce contributions to the universal service support
    mechanism in subsequent funding years with unused funds from Funding
    Year 1.[^37]

13. We recently initiated a rulemaking to consider, among other things,
    whether we should amend our rules regarding the treatment of unused
    funds from the schools and libraries support mechanism.[^38] In
    particular, we sought comment on two options relating to the
    treatment of unused funds.[^39] First, we asked whether to modify
    the rule to require expressly that unused funds from the schools and
    libraries support mechanism should be applied to reduce the amount
    of contributions to the universal service fund.[^40] Alternatively,
    we asked whether to modify the rule to require expressly the
    distribution of the unused funds in subsequent years of the schools
    and libraries support mechanism.[^41]

# DISCUSSION

14. After consideration of the two proposals relating to the treatment
    of unused funds collected for the schools and libraries mechanism,
    we conclude that unused funds from the schools and libraries support
    mechanism shall, consistent with the public interest, be applied to
    stabilize the universal service contribution factor for a period not
    to exceed the next three quarters, beginning with third quarter
    2002, while the Commission considers reform of the contribution
    system. [^42] We direct the Wireline Competition Bureau and USAC to
    apply such unused funds to stabilize or reduce universal service
    contributions in accordance with the public interest for the third
    and fourth quarters of 2002, and first quarter 2003, in a manner
    consistent with the Commission's prior treatment of unused funds
    from Funding Year 1.[^43] Thereafter, we find that any unused funds
    from the schools and libraries support mechanism shall be carried
    forward to increase disbursements to schools and libraries in
    subsequent years. We find that such action is consistent with
    section 254 and the public interest by ensuring that contributions
    to universal service remain predictable, without jeopardizing the
    sufficiency of any of the universal service support mechanisms.
    Accordingly, we amend section 54.507 of our rules, as provided in
    Appendix A.[^44]

15. We find that this framework will benefit contributors, and
    ultimately their customers, by stabilizing the contribution factor
    in the short term, while also maintaining an appropriate level of
    support for all of the universal service support mechanisms,
    including the schools and libraries support mechanism. When
    considering issues relating to funding for the schools and libraries
    support mechanism, we must also consider the funding requirements of
    the other universal service programs and their cumulative impact on
    contributors and consumers. We conclude that the framework adopted
    today reflects a careful balance between providing sufficient
    support for all the universal service support mechanisms and keeping
    contributions at a predictable level for the immediate future, while
    we consider the need for reform of our contribution assessment
    methodology.

16. Over the last four years, overall demand on the universal service
    fund has grown considerably, in large part as a result of
    implementation of the statute's requirements to ensure that support
    is explicit and sufficient. [^45] In 1997, about \$1.9 billion was
    disbursed from the universal service fund.[^46] We estimate that
    approximately \$5.5 billion will be disbursed from the universal
    service fund in 2002.[^47] At the same time, the universal service
    revenue base has become smaller, and interstate revenues have
    declined for interexchange carriers.[^48] Several factors may be
    responsible for the diminishing revenue base, including the
    migration of traditional long distance services to new technologies,
    bundled wireless service packages, and price competition due to Bell
    entry into the long distance marketplace.[^49] Accordingly, the
    contribution factor and therefore carrier contribution obligations
    have increased,[^50] and carriers have generally passed through much
    of these increases to consumers.[^51] In light of these changes in
    the market and their impact on carrier contributions and consumers,
    we recently sought comment on whether and how to modify the current
    contribution assessment methodology.[^52] We recognized there that
    these changes in the marketplace, coupled with our current
    contribution methodology, have caused broad fluctuations in the
    contribution base. This, in turn, raises the issue of stability and
    predictability of the universal service fund. Thus, until we
    complete our assessment of the current contribution methodology, we
    believe that it is appropriate to stabilize or lower the
    contributions to universal service. In this way, we will be better
    able to ensure in the near term that the fund remains predictable
    for contributors and consumers. [^53]

17. Some commenters argue that using unused funds to reduce the
    contribution factor would not necessarily benefit consumers by
    reducing the line-items on consumers' bills.[^54] While carriers
    currently have the flexibility to recover from their customers the
    contributions to universal service, contributors may not shift more
    than an equitable share of their contributions to any customer or
    group of customers, and must provide accurate, truthful, and
    complete information regarding the nature of the charge.[^55] We
    would therefore expect that our efforts to stabilize the
    contribution factor would be reflected in any charges passed through
    to consumers. Several large contributors to universal service
    indicate in their comments to the Commission that a reduction in the
    contribution factor would be passed on to consumers.[^56] Therefore,
    we find that it is reasonable to conclude that consumers will
    ultimately benefit from actions that stabilize the steady growth in
    the contribution factor.

18. In addition, we do not agree with commenters that suggest that our
    actions in the short term would contravene the intent of the schools
    and libraries support mechanism.[^57] Indeed, as of May 2002,
    schools and libraries have received over \$8.25 billion in funding
    commitments.[^58] Our action to utilize unused funds for a period
    not longer than the next three quarters does not alter the \$2.25
    billion cap in any way, and such funds will continue to be made
    available annually to schools and libraries in a manner that is
    consistent with section 254 of the Act.

19. Although we believe our actions strike an appropriate balance today,
    Commission action in the contribution methodology proceeding will
    need to address concerns regarding fund predictability. We intend to
    take action in the contribution methodology proceeding and implement
    any changes adopted in that proceeding no later than April 1, 2003.
    Thus, once this window for action closes, we conclude it will serve
    the public interest to carry forward unused funds from the schools
    and libraries support mechanism for use by eligible schools and
    libraries in subsequent funding years.

20. We recognize that the current demand for discounts in Funding Year 5
    significantly exceeds the \$2.25 billion funding cap.[^59] In fact,
    in order to fully fund current demand for Funding Year 5, we would
    have to more than double the existing cap on the schools and
    libraries mechanism. In light of this high demand for discounts and
    based on the record, we believe that, not later than second quarter
    of 2003, unused schools and libraries funds should be carried
    forward to increase disbursements to schools and libraries program
    in subsequent years. [^60]

21. Furthermore, because unused funds remain, as a result of normal
    program operation and, at least partially, for reasons out of
    applicants' control, we conclude that it will be appropriate in the
    future to carry forward unused funds from the schools and libraries
    mechanism for use in subsequent years. To that end, in conjunction
    with seeking comment as to the treatment of unused funds in the
    *Notice and Order*, we also sought comment on why applicants and
    providers may fail to fully use committed funds and whether other
    operational changes could be made to reduce the amount of unused
    funds. [^61] We are considering the record and the types of program
    changes that may decrease the amount of unused funds from the
    schools and libraries support program in the future. In addition, we
    note that USAC recently developed, in coordination with the
    Commission staff, new procedures for service provider changes that
    increase the amount of funds disbursed each year and a new Form 500
    that allows applicants to reduce or cancel funding commitments so
    that those funds can be made available to applicants during the same
    funding year.[^62] This action, in combination with our decision to
    carry forward unused funds in the schools and libraries support
    mechanism in the future, will help us to ensure that schools and
    libraries make maximum use of the funding available under \$2.25
    billion annual cap.[^63]

# Effective Date of the Rules 

22. We revise section 54.507(a) of the Commission's rules to provide
    that unused funds from the schools and libraries support mechanism
    may be applied to stabilize the amount of such contributions to the
    universal service fund for no more than the next three quarters,
    beginning third quarter 2002. We conclude that the amendments to our
    rules adopted herein shall be effective upon publication in the
    Federal Register. The final rules must take effect prior to 30 days
    after their publication in the Federal Register in order for the
    Wireline Competition Bureau to announce the contribution factor for
    third quarter 2002. Such action will serve the public interest
    because the final rules allow for stabilization in the contribution
    factor.[^64] Accordingly, pursuant to the Administrative Procedure
    Act, we find good cause to depart from the general requirement that
    final rules take effect not less than 30 days after their
    publication in the Federal Register.[^65]

# PROCEDURAL MATTERS

A.  **Paperwork Reduction Act Analysis**

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23. This Report and Order does not contain any new or modified
    information collection(s) subject to the PRA of 1995, Public Law
    104‑13.

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B.  **Final Regulatory Flexibility Analysis**

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24. As required by the Regulatory Flexibility Act of 1980, as amended
    (RFA),[^66] an Initial Regulatory Flexibility Analysis (IRFA) was
    incorporated in the Notice of Proposed Rule Making and Order
    (*Notice and Order*).[^67] The Commission sought written public
    comment on the proposals in the *Notice and Order*, including
    comment on the IRFA. This present Final Regulatory Flexibility
    Analysis (FRFA) conforms to the RFA.[^68]

### Need for, and Objectives of, the First Report and Order

25. The Commission recently initiated a review of our rules governing
    the schools and libraries universal service support mechanism.[^69]
    Among other things,[^70] the Commission sought comment on whether it
    should amend its rules regarding the treatment of unused funds from
    the schools and libraries mechanism.[^71] In this Order, we revise
    section 54.507(a) of the Commission's rules to provide that unused
    funds from the schools and libraries support mechanism may be
    applied to stabilize the amount of contributions to the universal
    service fund for no more than the next three quarters, beginning
    with the third quarter 2002. Thereafter, unused funds from the
    schools and libraries mechanism shall be carried forward for use in
    subsequent funding years of the schools and libraries program. Our
    actions today strike an appropriate balance by helping to minimize
    and stabilize the contribution factor for the immediate future,
    while maintaining support for the schools and libraries program.

### Summary of Significant Issues Raised by Public Comments in Response to the IRFA

26. There were no comments filed that specifically addressed the rules
    and policies presented in the IRFA.

### Description and Estimate of the Number of Small Entities to Which Rules Will Apply

27. 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 proposed rules, if adopted herein.[^72] The RFA
    generally defines the term "small entity" as having the same meaning
    as the terms "small business," "small organization," and "small
    governmental jurisdiction."[^73] In addition, the term "small
    business" has the same meaning as the term "small business concern"
    under the Small Business Act.[^74] A "small business concern" is one
    which: (1) is independently owned and operated; (2) is not dominant
    in its field of operation; and (3) satisfies any additional criteria
    established by the Small Business Administration (SBA).[^75] A small
    organization is generally "any not-for-profit enterprise which is
    independently owned and operated and is not dominant in its
    field."[^76]

28. Nationwide, as of 1992, there were approximately 275,801 small
    organizations.[^77] The term "small governmental jurisdiction" is
    defined as "governments of cities, counties, towns, townships,
    villages, school districts, or special districts, with a population
    of less than fifty thousand."[^78] As of 1997, there were
    approximately 87,453 government jurisdictions in the United
    States.[^79] This number includes 39,044 counties, municipal
    governments, and townships, of which 27,546 have populations of
    fewer than 50,000 and 11,498 counties, municipal governments, and
    townships have populations of 50,000 or more. Thus, we estimate that
    the number of small government jurisdictions must be 75,955 or
    fewer. Many such small government jurisdictions contain and
    administer programs and funds for schools and libraries. Small
    entities potentially affected by the proposals herein include
    eligible schools and libraries and the eligible service providers
    offering them discounted services, including telecommunications
    service providers, Internet Service Providers (ISPs) and vendors of
    internal connections.[^80]

#### Schools and Libraries

29. Under the schools and libraries universal service support mechanism,
    which provides support for elementary and secondary schools and
    libraries, an elementary school is generally "a non-profit
    institutional day or residential school that provides elementary
    education, as determined under state law."[^81] A secondary school
    is generally defined as "a non-profit institutional day or
    residential school that provides secondary education, as determined
    under state law," and not offering education beyond grade 12.[^82]
    For-profit schools and libraries, and schools and libraries with
    endowments in excess of \$50,000,000, are not eligible to receive
    discounts under the program, nor are libraries whose budgets are not
    completely separate from any schools.[^83] Certain other statutory
    definitions apply as well.[^84] The SBA has defined as small
    entities elementary and secondary schools and libraries having \$6
    million or less in annual receipts.[^85] In funding year 2 (July 1,
    1999 to June 20, 2000) approximately 83,700 schools and 9,000
    libraries received funding under the schools and libraries universal
    service mechanism. Although we are unable to estimate with precision
    the number of these entities that would qualify as small entities
    under SBA's definition, we estimate that fewer than 83,700 schools
    and 9,000 libraries would be affected annually by the rules adopted
    in this Order, under current operation of the program.[^86]

#### Telecommunications Service Providers

30. 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."[^87] 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.[^88] We have therefore included small incumbent
    local exchange carriers in this RFA analysis, although we emphasize
    that this RFA action has no effect on Commission analyses and
    determinations in other, non-RFA contexts.

31. *Local Exchange Carriers.* Neither the Commission nor the SBA has
    developed a definition for small providers of local exchange
    services. The closest applicable definition under the SBA rules is
    for wired telecommunications carriers.[^89] This provides that a
    wired telecommunications carrier is a small entity if it employs no
    more than 1,500 employees.[^90] According to our most recent data
    report, 1,335 carriers classified themselves as incumbent local
    exchange carriers. [^91] We do not have data specifying the number
    of these carriers that are either dominant in their field of
    operations, are not independently owned and operated, or have more
    than 1,500 employees, and thus are unable at this time to estimate
    with greater precision the number of local exchange carriers that
    would qualify as small business concerns under the SBA\'s
    definition. Of the 1,335 incumbent carriers, 13 entities are price
    cap carriers that are not subject to these rules.[^92] Consequently,
    we estimate that fewer than 1,322 providers of local exchange
    service are small entities or small incumbent local exchange
    carriers that may be affected by the decisions adopted in this
    Order.

32. *Interexchange Carriers*. Neither the Commission nor the SBA has
    developed a definition of small entities specifically applicable to
    providers of interexchange services (IXCs). The closest applicable
    definition under the SBA rules is for wired telecommunications
    carriers.[^93] This provides that a wired telecommunications carrier
    is a small entity if it employs no more than 1,500 employees.[^94]
    According to the most recent Trends Report, 204 companies reported
    that they were engaged in the provision of interexchange
    services.[^95] As some of these carriers have more than 1,500
    employees, we are unable at this time to estimate with greater
    precision the number of IXCs that would qualify as small business
    concerns under the SBA\'s definition. Consequently, we estimate that
    there are fewer than 204 small entity IXCs that may be affected by
    the decisions adopted in this Order.

33. *Competitive Access Providers*. Neither the Commission nor the SBA
    has developed a definition of small entities specifically applicable
    to competitive access services providers (CAPs). The closest
    applicable definition under the SBA rules is for wired
    telecommunications carriers.[^96] This provides that a wired
    telecommunications carrier is a small entity if it employs no more
    than 1,500 employees.[^97] According to our most recent data, there
    are 349 CAPs.[^98] We do not have data specifying the number of
    these carriers that are not independently owned and operated, or
    have more than 1,500 employees, and thus are unable at this time to
    estimate with greater precision the number of CAPs that would
    qualify as small business concerns under the SBA\'s definition.
    Consequently, we estimate that there are less than 349 small entity
    CAPs that that may be affected by the decisions adopted in this
    Order.

34. *Cellular and Wireless Telephony*. Neither the Commission nor the
    SBA has developed a definition of small entities specifically for
    wireless telephony. The closest definition is the SBA definition for
    cellular and other wireless telecommunications or paging. Under that
    SBA definition, such a business is small if it has 1,500 or fewer
    employees.[^99] According to the Commission\'s most recent Telephone
    Trends Report data, 1,495 companies reported that they were engaged
    in the provision of wireless service.[^100] Of these 1,495
    companies, 989 reported that they have 1,500 or fewer employees and
    506 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 thus are unable at this time to estimate with greater
    precision the number of wireless service providers that would
    qualify as small business concerns under the SBA\'s definition.
    Consequently, we estimate that there are 989 or fewer small wireless
    service providers that may be affected by the decisions adopted in
    this Order.

35. *Other Wireless Services*. Neither the Commission nor the SBA has
    developed a definition of small entities specifically applicable to
    wireless services other than wireless telephony.[^101] The closest
    applicable definition under the SBA rules is again that of cellular
    and other wireless telecommunications, under which a service
    provider is a small entity if it employs no more than 1,500
    employees.[^102] According to the most recent Trends Report, 477
    providers classified themselves as paging services, wireless data
    carriers or other mobile service providers.[^103] We do not have
    data specifying the number of these carriers that are not
    independently owned and operated or have more than 1,500 employees,
    and thus are unable at this time to estimate with greater precision
    the number of wireless service providers that would qualify as small
    business concerns under the SBA\'s definition. Consequently, we
    estimate that there are fewer than 477 wireless service providers
    that that may be affected by the decisions adopted in this Order.

#### Internet Service Providers

36. Under the new NAICS codes, SBA has developed a small business size
    standard for \"On-line Information Services,\" NAICS Code
    514191.[^104] According to SBA regulations, a small business under
    this category is one having annual receipts of \$21 million or
    less.[^105] According to SBA\'s most recent data, there are a total
    of 2,829 firms with annual receipts of \$9,999,999 or less, and an
    additional 111 firms with annual receipts of \$10,000,000 or
    more.[^106] Thus, the number of On-line Information Services firms
    that are small under the SBA\'s \$21 million size standard is
    between 2,829 and 2,940. Further, some of these Internet Service
    Providers (ISPs) might not be independently owned and operated.
    Consequently, we estimate that there are fewer than 2,940 small
    entity ISPs that may be affected by the decisions and rules of the
    present action.

#### Vendors of Internal Connections

37. The Commission has not developed a definition of small entities
    applicable to the manufacturers of internal network connections. The
    most applicable definitions of these kinds of small entities are the
    definitions under the SBA rules applicable to manufacturers of
    \"Radio and Television Broadcasting and Communications Equipment\"
    (RTB) and "Other Communications Equipment."[^107] According to the
    SBA\'s regulations, manufacturers of RTB or other communications
    equipment must have 750 or fewer employees in order to qualify as a
    small business.[^108] The most recent available Census Bureau data
    indicates that there are 1,187 companies with fewer than 1,000
    employees in the United States that manufacture radio and television
    broadcasting and communications equipment, and 271 companies with
    less than 1,000 employees that manufacture other communications
    equipment.[^109] Some of these manufacturers might not be
    independently owned and operated. Consequently, we estimate that
    there are fewer than 1,458 small entity internal connections
    manufacturers that may be affected by the decisions in this Order.

### Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements for Small Entities

38. There are no additional reporting or other new compliance
    requirements relating directly to the decisions in this Order.
    Additional reporting or compliance requirements relating to the
    implementation of the carryover of unused funds from the schools and
    libraries mechanism will be addressed at the time such
    implementation procedures are adopted.

### Steps Taken to Minimize the Significant Economic Impact on Small Entities, and Significant Alternatives Considered

39. The RFA requires an agency to describe any significant alternatives
    that it has considered in developing its approach, which may include
    the following four alternatives (among others: "(1) 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 and
    reporting requirements under the rule for such 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 such
    small entities."[^110]

40. In each funding year of the schools and libraries mechanism, a
    portion of the \$2.25 billion available under the program cap has
    gone unused, largely because some applicants do not fully use the
    funds committed to them in the same funding year. In this Order, we
    revise section 54.507(a) of the Commission's rules to provide that
    unused funds from the schools and libraries support mechanism may be
    applied to stabilize the amount of such contributions by carriers to
    the universal service fund for no more than the next three quarters,
    beginning with third quarter 2002. We believe that applying unused
    funds from the schools and libraries mechanism to stabilize or
    reduce contributions has the same impact on both small and large
    entities. In addition, we believe that the action that we take today
    will be beneficial for both large and small entities that contribute
    to the universal service fund by stabilizing or reducing
    contribution requirements. Furthermore, we believe that the
    carryover of unused funds from the schools and libraries mechanism
    will be beneficial to both small and large entities by providing
    additional funds that may be committed to schools and libraries
    pursuant to the schools and libraries support mechanism. There are
    no reporting or other compliance requirements resulting from our
    action, and no possible exemptions that might assist small entities.

41. **[Report to Congress:]{.underline}** The Commission will send a
    copy of the First Report and Order**,** including this FRFA, in a
    report to be sent to Congress pursuant to the Congressional Review
    Act, *see* 5 U.S.C. § 801(a)(1)(A). In addition, the Commission will
    send a copy of the First Report and Order, including the FRFA, to
    the Chief Counsel for Advocacy of the Small Business Administration.
    A copy of the First Report and Order and FRFA (or summaries thereof)
    will also be published in the Federal Register.[^111]

    **VI. ORDERING CLAUSES**

42. Accordingly, IT IS ORDERED that, pursuant to the authority contained
    in sections 1-4, 254, and 303(r) of the Communications Act of 1934,
    as amended, 47 U.S.C. §§ 151-154, 254, 303(r), this First Report and
    Order in CC Docket No. 02-6 IS ADOPTED.

43. IT IS FURTHER ORDERED, pursuant to section 553(d) of Administrative
    Procedure Act, 5 U.S.C. § 553 (d), that THIS ORDER IS EFFECTIVE UPON
    PUBLICATION IN THE FEDERAL REGISTER.

44. IT IS FURTHER ORDERED that 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.

    FEDERAL COMMUNICATIONS COMMISSION

Marlene H. Dortch

Secretary

[APPENDIX A]{.underline}

FINAL RULE

Part 54 of Title 47 of the Code of Federal Regulations is amended as
follows:

**Part 54 -- UNIVERSAL SERVICE**

**Subpart F -- Universal Service Support for Schools and Libraries**

1\. Section 54.507 is amended by revising paragraph (a) and deleting
paragraphs (a)(1) and (a)(2) to read as follows:

§ 54.507 Cap.

\(a\) *Amount of the annual cap.* The annual funding cap on federal
universal service support for schools and libraries shall be \$2.25
billion per funding year.  All funding authority for a given funding
year that is unused in that funding year shall be carried forward into
subsequent funding years for use in accordance with demand.  All funds
collected that are unused shall be applied to stabilize universal
service contributions in accordance with the public interest and
consistent with § 54.709(b) for no more than three quarters, beginning
with third quarter 2002. Beginning no later than second quarter 2003,
all funds collected that are unused shall be carried forward into
subsequent funding years for use in the schools and libraries support
mechanism in accordance with the public interest and notwithstanding the
annual cap.

\*\*\*\* *Delete (a)(1)*

\*\*\*\* *Delete (a)(2)*

#  {#section .unnumbered}

**[APPENDIX B]{.underline}**

**List of Parties Filing Comments**

**CC Docket No. 02-6**

**[Commenter]{.underline} [Abbreviation]{.underline}**

Access Living of Metropolitan Chicago AL

Alaska State of Alaska

Alaska Telephone Association, The ATA

American Association of School Administrators AASA

American Library Association ALA

The State of Arkansas E-rate Workgroup AEWG

AT&T Corp. AT&T

AT&T Wireless Services, Inc. AWS

Avella Area School District Avella

Bakersfield School District Bakersfield

BellSouth and SBC Comm., Inc. BellSouth/SBC

Benton Foundation Benton

Cabrini College Cabrini

California Department of Education, The CDE

Carnegie Library of Pittsburgh

Cellular Telecommunications & Internet Association CTIA

Central Susquehanna Intermediate Unit

City of Boston

Cleveland Municipal School District Cleveland

Coalition for E-Rate Reform Coalition

Colorado Department of Education Colorado

Community Technology Centers' Network CTCNet

Council of Chief State School Officers CCSSO

Council of the Great City Schools, The The Council

Delaware Center for Educational Technology DCET

Dell Computer Corporation Dell

Echalk LLC eChalk

Edison Schools, Inc. Edison

Education and Library Networks Coalition EdLINC

E-Rate Elite Services, Inc. E-Rate Elite

Excaliber Internet Corp. Excaliber

Florida State of Dept. of Ed. Florida

Florida Division of Library and Information Services

Florida Public Service Commission Florida PSC

Funds For Learning, LLC

General Communications, Inc. GCI

Harvey ESD Harney

Harris, Jim Harris

Hawaii State Public Library Hawaii

Illinois State Board of Education ISBE

Inclusive Technologies Inclusive

Information Institute

Information Renaissance Info Ren

Integrity Networking Systems, Inc. Integrity

Intelenet Commission, Indiana Department of

Education and Indiana State Library Intelenet

Iowa Communications Network

Iowa Department of Education

Kellogg Consulting, LLC Kellogg

Kentucky Department of Education

Kentucky Department for Libraries and Archives

Kila School District #20

Lebanon School District

Los Angeles Unified School District

Madison School District

Maine Public Utilities Commission MPUC

Marian High School

Memphis City Schools

Michigan Information Network, The MIN

Merit Network, Inc.

Missouri Research and Education Network MOREnet

Missouri Office of the Public Counsel MOPC

Montana Independent Telecommunications Systems MTIS

Nassau-Suffolk School Boards Association N-SSBA

National Council on Disability NCD

National Education Association, the International

Society for Technology in Education and

The Consortium for School Networking NEA, ISTE and COSN

New York City Board of Education, The NYCBOE

New York Public Library, The NYPL

New York State Education Department, The

New Jersey Library Association, The

Nextel Communications, Inc. Nextel

North Attleborough Public Schools

North of Boston Library Exchange NOBLE

North Carolina Department of Cultural Resources

Office of Information Technology Services

of North Carolina, The ITS

Pennsylvania Department of Education

Philadelphia School District

Quaker Valley School District

Queens Borough Public Library

Richardson Associates Electronics

Rural School and Community Trust

Scanton Public Library

Lackawanna County Library System

Seattle Public Library

Shirley Bauer

Software & Information Industry Association SIIA

Spectrum Communications Cabling Services, Inc. Spectrum

Sprint Corporation Sprint

St. Louis Public Library

Southwest Virginia Education and Training Network SVETB

TAMSCO Telecommunications Division TAMSCO

Tel/Logic Inc.

Telecommunications for the Deaf, Inc. TDI

Three Rivers RLSS

Trillion's Digital Communications, Inc. Trillion

Universal Service Administrative Company USAC

Verizon Telephone Companies Verizon

Warwick Communications, Inc. Warwick

Weisiger, Greg Weisiger

Western Wireless Corp. Western Wireless

West Virginia Department of Education WVDE

Wisconsin Department of Public Instruction, The WDPI

WiscNet

WorldCom, Inc. WorldCom

York County Library System

Martin Library Association

**[APPENDIX C]{.underline}**

**List of Parties Filing Reply Comments**

**CC Docket No. 02-6**

**[Commenter]{.underline} [Abbreviation]{.underline}**

Alaska Department of Education

and Early Development, State of EED

American Association of School Administrators AASA

American Library Association ALA

Arkansas E-rate Workgroup, State of AEWG

AT&T Wireless Services, Inc. AWS

Council of Chief State School Officers CCSSO

Cox Communications, Inc. COX

Dell Computer Corporation Dell

Education and Library Networks Coalition EdLiNC

Florida Public Service Commission FPSC

Funds For Learning, LLC

Information Technology Industry Council ITI

Iowa, State Library

Merit Network, Inc. Merit

National Association of State Telecommunications

Directors NASTD

National Education Association,

The International Society for Technology in Education,

and the Consortium for School Networking NEA, ISTE and COSN

New York State Education Department New York

Nextel Communications, Inc. Nextel

Qwest Communications International Inc. Qwest

Siemens Enterprise Networks Siemens

Sprint Corporation Sprint

Verizon Verizon

Weisiger, Greg

WorldCom, Inc. WorldCom

SEPARATE STATEMENT OF

CHAIRMAN MICHAEL K. POWELL

APPROVING IN PART AND CONCURRING IN PART

*Re: Schools and Libraries Universal Service Support Mechanism, First
Report and Order, CC Docket No. 02-6*

I wholeheartedly support the Commission's decision to use monies that
were left unclaimed by successful applicants of the Schools and
Libraries program to stabilize the universal service contribution factor
through the first quarter of 2003. All of our universal service programs
serve important statutory goals, and I remain as committed as ever to
achieving those goals. We must always recognize, however, that the cost
of these programs is ultimately borne by American consumers.
Accordingly, as the *Order* explains in detail, we must balance the
needs of funding these programs against the real burden that our
contribution requirements could impose on consumers if we do not manage
those requirements carefully.

Lasting minimization of the impact on consumers will require long term
universal service contribution reform. The Commission remains committed
to moving forward with such reform as quickly as possible. But reform
cannot be rushed; it requires thorough assessment of the legal, economic
and technical options and careful coordination with related proceedings.
Further, reform requires time for a healthy dialogue with state utility
commissions, as two of my colleagues have insisted. In that regard, for
the last few months, the Commission and our state commission colleagues
have been planning a public forum to discuss long term reform, which
will take place on June 21, 2002.

That said, I would have preferred to leave open the question whether we
would, after the first quarter of 2003, use unclaimed funds to reduce
future contributions. In particular, I think it would have been more
prudent to answer that question with fuller knowledge of how
contribution reform will play out and with a clearer sense of the degree
to which such reform actually does improve fund stability. Thus, I
concur only as to that small aspect of this *Order.* I consider this
concern slight, however, juxtaposed to the beneficial compromise that I
have been able to reach with my colleagues, under unavoidably tight time
constraints, to prevent unnecessary disruption to carriers, consumers
and the integrity of our universal service programs.

SEPARATE STATEMENT OF

COMMISSIONER MICHAEL J. COPPS

*Re:* *Schools and Libraries Universal Service Support Mechanism, First
Report and Order, CC Docket No. 02-6*

The action we take today benefits our children and communities because
it eliminates all ambiguity and ensures that, at an imminent date
certain, all unused E-Rate funds will be available to connect our
schools and libraries to the Internet. This is something I have wanted
to see happen since I arrived at the Commission one year ago. My
interpretation has always been that our rules were already clear that
unspent funds could be moved into the following year's program. Today's
action removes any doubts that may previously have existed.

Although the Commission has given itself until the first quarter of
2003, I see no reason why we cannot complete our work and implement any
new rules by the end of this year. I am pleased that the item now
expresses hope for earlier action. Our children, our communities, and
our country deserve no less.

In the current fifth year of the E-Rate program, schools and libraries
have requested more than double the available funds to help bring
information age tools to communities across our country. All funds are
not disbursed, however \-- for a variety of administrative reasons or
because individual schools and libraries do not fully use the money
committed to them. Our action today ensures that E-Rate funds will stay
in the E-Rate program and that one year's undisbursed funds will be
disbursed, in their entirety, for their intended purpose of connecting
America's schools and libraries.

This Order also benefits consumers by ensuring that they will not be
asked to foot what could have been significantly increased universal
service contribution levels at the exact same time that they will face
increases to the subscriber line charges on their bills. By stabilizing
the universal service fund, this Order opens a window of opportunity to
consider the future method for assessing contributions to universal
service. The benefits of this Order will only be fully realized,
however, if we take advantage of this opportunity to complete the full
proceeding. If we waste this chance, consumers will rightfully be angry
when they face higher bills. And those who receive universal service
support \-- including those living in rural areas, those with low
incomes, and schools, libraries and rural health care providers \-- will
rightfully be angry that we have failed to ensure a specific,
predictable and sufficient universal service mechanism that is
sustainable into the future. So we have our work cut out for us, but we
also have the opportunity to put universal service on a sounder footing.
It's an opportunity we dare not lose.

**SEPARATE STATEMENT OF**

**COMMISSIONER KEVIN J . MARTIN**

**APPROVING IN PART AND DISSENTING IN PART**

*Re: Schools and Libraries Universal Service Support Mechanism, First
Report and Order, CC Docket No. 02-6*

At the outset, I want to reaffirm my support for the universal service
program and the critical function it serves to ensure access for
consumers in rural and high cost areas, and promote access to advance
services for schools, libraries, and health care service providers in
rural areas.

I am pleased that the Commission has clarified that effective no later
than second quarter 2003 any unused funds from the schools and libraries
support mechanism in any given year will be carried forward for
disbursement in subsequent funding years. The schools and libraries
program has been instrumental in facilitating access to advanced
services. Today's action will help us ensure that schools and libraries
will be able to use the funding available under the existing \$2.25
billion annual cap.

I am also pleased that the Commission is moving forward today to take
action to stabilize the universal service contribution factor for
consumers. I agree with the majority's decision to blunt the impact of
spikes in the universal service contribution factor. I have concerns,
however, regarding the methodology used to achieve this result. I would
have taken a different path to achieve relief for consumers while
providing greater market certainty and ensuring that we achieve our
mutual goal of protecting the continuing health and sustainability of
the universal service fund.

Some of the systemic problems of our universal service contribution
methodology are not new. Back in April 2001, the Commission outlined
these issues and sought comment on various potential solutions. For
example, the Commission acknowledged the inequities in the universal
service contribution system of declining revenues for certain wireline
interexchange carriers, as well as the potential impact that the growth
in the wireless telecommunications sector may be having on the fund.

At that time, the Commission adopted a Notice of Proposed Rulemaking
that acknowledged the inequities of the current system and sought
comment on specific proposals to address comprehensive reform of the
universal service contribution system. Eight months later, with no
permanent relief in sight, AT&T presented this Commission with a request
to help level the playing field on contributions to the universal
service fund made by its over 50 million long distance customers. For
example, AT&T customers now face a monthly federal universal service
fund surcharge that stands at over 11%, while customers of new entrant
long-distance providers pay at or below the FCC contribution rate set
within the 7% range. I supported taking action on their petition at that
time and today.[^112]

I support the Commission's efforts to address the long-term issues
created by a converging and competitive marketplace. I look forward to
working with my colleagues to establish an equitable and
nondiscriminatory contribution system that provides for specific,
predictable and sufficient funding to preserve and advance universal
service.

At its heart, today's decision takes unused money from the schools and
libraries program to stem the growth of the contribution factor while
the Commission grapples with long term solutions.

I would have preferred to put in place medium term remedies to address
some of these contribution methodology issues (e.g., declining revenues
and the potential impact that growth of the wireless telecommunications
sector has on the fund). While we continue to address the long term
issues, I believe we should address the various inequities that require
certain service providers and their customers to bear a disproportionate
share of funding the universal service system. Especially since demand
for the school and libraries program has always exceeded the cap, I
believe we should have taken these steps first before taking any unused
monies.

I believe it is incumbent upon us to have taken steps immediately
available that could both minimize the impact of any increase on
consumers and address potential inequities in our current system prior
to taking some of today's actions.

Accordingly, I approve in part and dissent in part from the order.

[^1]: *See* *Schools and Libraries Universal Service Support Mechanism*,
    CC Docket No. 02-6, Notice of Proposed Rulemaking and Order, 17 FCC
    Rcd 1914 (2002) (*Notice and Order*). In the *Notice and Order*, the
    Commission sought comment on a wide range of issues relating to the
    schools and libraries mechanism, including the treatment of unused
    funds. Other issues raised in the *Notice and Order* will be
    addressed in subsequent orders. For unabbreviated names of parties
    filing comments and reply comments, *see* Appendix B and C to this
    First Report and Order.

[^2]: In prior quarterly submissions, the Universal Service
    Administrative Company (USAC) estimated the portion of funds from
    the schools and libraries support mechanism that have gone unused in
    a given funding year. *See, e.g.,* *Proposed First Quarter 2000
    Universal Service Contribution Factors and Proposed Actions*, CC
    Docket No. 96-45, Public Notice, DA 99-2780 (rel. Dec. 10, 1999).
    According to USAC, this balance occurred because: 1) although USAC
    made funding commitments to certain schools and libraries, it
    received no indication that the services were or would be provided;
    2) some schools and libraries used only a portion of the funds
    committed to them; and 3) a portion of the funds reserved for
    appeals would not be needed.

[^3]: *See* 47 U.S.C. §§ 254(h)(1)(B) and 254(d); *see also* 47 U.S.C. §
    254(b)(5).

[^4]: Congress codified the Commission's historical commitment to
    ensuring universal service in the Telecommunications Act of 1996.
    *See* Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat.
    56 (1996). In section 254, Congress directed the Commission to take
    the steps necessary to establish support mechanisms to ensure the
    delivery of affordable telecommunications service to all Americans,
    including rural and high cost areas, low-income consumers, eligible
    schools and libraries, and rural health care providers. *See* 47
    U.S.C. § 254.

[^5]: *See Federal-State Joint Board on Universal Service, 1998 Biennial
    Regulatory Review - Streamlined Contributor Reporting Requirements
    Associated with Administration of Telecommunications Relay Service,
    North American Numbering Plan, Local Number Portability, and
    Universal Service Support Mechanisms, Telecommunications Services
    for Individuals with Hearing and Speech Disabilities, and the
    Americans With Disabilities Act of 1990, Administration of the North
    American Numbering Plan and North American Numbering Plan Cost
    Recovery Contribution Factor and Fund Size, Number Resource
    Optimization, Telephone Number Portability, Truth-in-Billing
    Format*, CC Docket Nos. 96-45, 98-171, 90-571, 92-237, 99-200,
    95-116, 98-170, Further Notice of Proposed Rulemaking and Report and
    Order, FCC 02-43, 67 FR 11268, paras. 15, 71 (rel. Feb. 26, 2002)
    (*Contribution FNPRM*).

[^6]: *Id.* at paras. 7-13.

[^7]: *Id.* at para. 15.

[^8]: Carriers currently contribute a percentage of interstate and
    international end user telecommunications revenues to universal
    service. This percentage is known as the "contribution factor." The
    contribution factor is the ratio of total projected quarterly costs
    of the universal service support mechanisms to total end-user
    interstate and international telecommunications revenues.

[^9]: 47 U.S.C. § 254(d).

[^10]: *See, e.g., Multi-Association Group (MAG) Plan for Regulation of
    Interstate Service of Non-Price Cap Incumbent Local Exchange
    Carriers and Interexchange Carriers, Federal-State Joint Board on
    Universal Service, Access Charge Reform for Incumbent Local Exchange
    Carriers Subject to Rate-of-Return Regulation, Prescribing the
    Authorized Rate of Return for Interstate Service of Local Exchange
    Carriers,* CC Docket Nos. 00-256, 96-45, 98-77, 98-166, Second
    Report and Order and Further Notice of Proposed Rulemaking in CC
    Docket No. 00-256, Fiftheenth Report and Order in CC Docket No.
    96-45, Report and Order in CC Docket Nos. 98-77 and 98-166, 16 FCC
    Rcd 19613 (2001) (*MAG Order*); *Access Charge Reform, Price Cap
    Performance Review for Local Exchange Carriers, Low-Volume
    Long-Distance Users, Federal-State Joint Board on Universal
    Service,* CC Docket Nos. 96-262, 94-1, 99-249, and 96-45, Sixth
    Report and Order in CC Docket Nos. 96-262 and 94-1, Report and Order
    in CC Docket No. 99-249, Eleventh Report and Order in CC Docket No.
    96-45, 15 FCC Rcd 12962 (2000) (CALLS Order), *aff\'d in part,
    rev\'d in part, and remanded in part*, *Texas Office of Public Util.
    Counsel et al. v. FCC*, 265 F.3d 313 (5th Cir. 2001), *cert. denied,
    Nat\'l Ass\'n of State Util. Consumer Advocates v. FCC,* 70 U.S.L.W.
    3444 (U.S. Apr. 15, 2002) (*CALLS Order*). The additional funding
    requirements for these new mechanisms (Interstate Common Line
    Support and Interstate Access Support) alone are projected to be
    over \$1 billion in the next year. *See also* Federal Universal
    Service Support Mechanisms Fund Size Quarterly Contribution Base for
    the Third Quarter 2002, available at
    \<[http://www.universalservice.org/overview/filings]{.underline}\>
    (filed May 2, 2002) (USAC Filing for Third Quarter 2002 Contribution
    Base).

[^11]: *See Contribution FNPRM*, paras. 7-13.

[^12]: For example, absent the action we take today, we would need to
    increase significantly the contribution factor for third quarter
    2002. *See* Federal Universal Service Support Mechanisms Fund Size
    Projections for the Third Quarter 2002, available at
    \<[http://www.universalservice.org/overview/ filings]{.underline}\>
    (filed May 31, 2002).

[^13]: *See* Universal Service Administrative Company, Schools and
    Libraries Division website,
    [\<http://www.sl.universalservice.org/funding/y1/national.asp](http://www.sl.universalservice.org/funding/y1/national.asp)\>
    (1998
    data);  [\<http://www.sl.universalservice.org/funding/y2/national.asp](http://www.sl.universalservice.org/funding/y2/national.asp)\>
    (1999 data);
    [\<http://www.sl.universalservice.org/funding/y3/national.asp](http://www.sl.universalservice.org/funding/y3/national.asp)\>
    (2000 data);
    [\<http://www.sl.universalservice.org/funding/y4/national.asp](http://www.sl.universalservice.org/funding/y4/national.asp)\>
    (2001 data).

[^14]: 47 U.S.C. § 254. *See also* Telecommunications Act of 1996, Pub.
    L. No. 104-104, 110 Stat. 56 (1996).

[^15]: 47 U.S.C. § 254(d).

[^16]: *Id.*

[^17]: *Id.*

[^18]: *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Report and Order, 12 FCC Rcd 8776, 9206, at para. 844 (1997)
    (*Universal Service Order*), as corrected by *Federal‑State Joint
    Board on Universal Service*, CC Docket No. 96‑45, Errata, FCC 97‑157
    (rel. June 4, 1997), *affirmed in part*, *Texas Office of Public
    Utility Counsel v. FCC*, 183 F.3d 393 (5th Cir. 1999) (affirming
    *Universal Service Order* in part and reversing and remanding on
    unrelated grounds), *cert. denied, Celpage, Inc. v. FCC*, 120 S. Ct.
    2212 (May 30, 2000), *cert. denied,* *AT&T Corp. v. Cincinnati Bell
    Tel. Co*., 120 S. Ct. 2237 (June 5, 2000*), cert. dismissed,* *GTE
    Service Corp. v. FCC*, 121 S. Ct. 423 (November 2, 2000).

[^19]: *Federal-State Joint Board on Universal Service*, Recommended
    Decision, CC Docket No. 96-45, 12 FCC Rcd 87 (1996).

[^20]: *Universal Service Order*, 12 FCC Rcd at 9206-09, paras. 844-50.

[^21]: *Changes to the Board of Directors of the National Exchange
    Carrier Association Inc., Federal-State Joint Board on Universal
    Service*, CC Docket Nos. 97-21, 96-45, Report and Order and Second
    Order on Reconsideration, 12 FCC Rcd 18400, 18427, para. 49 (1997)
    (*Second Order on Reconsideration*).

[^22]: *See* 47 C.F.R. 54.709(a)(2). *See also* *Federal-State Joint
    Board on Universal Service Access Charge Reform*, Sixteenth Order on
    Reconsideration in CC Docket No. 96-45, Eighth Report and Order in
    CC Docket No. 96-45, Sixth Report and Order in CC Docket No. 96-262,
    15 FCC Rcd 1679 (2000).

[^23]: *See* Federal-State Joint Board on Universal Service, Petition
    for Reconsideration filed by AT&T, CC Docket No. 96-45, Report and
    Order and Order on Reconsideration, 16 FCC Rcd 5748 (2001).

[^24]: *See Second Order on Reconsideration,* 12 FCC Rcd at 18425, para.
    45.

[^25]: *Id.*

[^26]: *See Universal Service Order*, 12 FCC Rcd at 9210-11, para 853.

[^27]: *Id.* at 9054, para. 529.

[^28]: *Id.*

[^29]: *Universal Service Order*, 12 FCC Rcd at 9052, para. 526.

[^30]: 47 C.F.R. § 54.507(a).

[^31]: *Id.*

[^32]: *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Fifth Order on Reconsideration and Fourth Report and Order in
    CC Docket No. 96-45, 13 FCC Rcd 14915, 14934, para. 30 (1998)
    (*Fifth Order on Reconsideration*).

[^33]: *Federal-State Joint Board on Universal Service*, CC Docket No.
    96-45, Twelfth Order on Reconsideration in CC Docket No. 96-45, 64
    Fed. Reg. 30440, para. 9 (1999) (*Twelfth Order on
    Reconsideration*).

[^34]: *See* 47 C.F.R. § 54.507(a)(1).

[^35]: *Proposed First Quarter 2000 Universal Service Contribution
    Factor*, CC Docket No. 96-45, Public Notice, DA 99-2780 (rel. Dec.
    10, 1999).

[^36]: *See Proposed Second Quarter 2000 Universal Service Contribution
    Factor,* CC Docket No. 96-45, Public Notice, DA 00-517 (rel. March
    7, 2000); *Proposed Third Quarter 2000 Universal Service
    Contribution Factor*, CC Docket No. 96-45, Public Notice, DA 00-1272
    (rel. June 9, 2000); *Proposed Fourth Quarter 2000 Universal Service
    Contribution Factor,* CC Docket No. 96-45, Public Notice, DA 00-2065
    (rel. Sept. 8, 2000); *Proposed First Quarter 2001 Universal Service
    Contribution Factor*, CC Docket No. 96-45, Public Notice, DA 00-2764
    (rel. Dec. 8, 2000).

[^37]: *Notice and Order*, 17 FCC Rcd at 1941-1945.

[^38]: *Id.* at 1940-1941.

[^39]: *Id.*

[^40]: *Id.*

[^41]: *Id.*

[^42]: *See* *Notice and Order.*

[^43]: *See* *Proposed First Quarter 2000 Universal Service Contribution
    Factor*, CC Docket No. 96-45, Public Notice, DA 99-2780 (rel. Dec.
    10, 1999); *Proposed Second Quarter 2000 Universal Service
    Contribution Factor,* CC Docket No. 96-45, Public Notice, DA 00-517
    (rel. March 7, 2000); *Proposed Third Quarter 2000 Universal Service
    Contribution Factor*, CC Docket No. 96-45, Public Notice, DA 00-1272
    (rel. June 9, 2000); *Proposed Fourth Quarter 2000 Universal Service
    Contribution Factor,* CC Docket No. 96-45, Public Notice, DA 00-2065
    (rel. Sept. 8, 2000); *Proposed First Quarter 2001 Universal Service
    Contribution Factor*, CC Docket No. 96-45, Public Notice, DA 00-2764
    (rel. Dec. 8, 2000). *See also Notice and Order*, 17 FCC Rcd
    1941-1945.

[^44]: *See* Appendix A.

[^45]: 47 U.S.C. § 254(e).

[^46]: Universal Service Administrative Company, 1998 Annual Report
    (1999).

[^47]: We anticipate that the total program collection in the third and
    fourth quarters of 2002 will be similar to or greater than the total
    program collection in the first quarter. *See* *Proposed First
    Quarter 2002 Universal Service Contribution Factor*, CC Docket No.
    96-45, Public Notice, 16 FCC Rcd 21334 (2001)(*First Quarter 2002
    Contribution Factor*)(\$1.378 billion); *Proposed Second Quarter
    2002 Universal Service Contribution Factor*, CC Docket No. 96-45,
    Public Notice, DA 02-562 (rel. Mar. 8, 2002)(*Second Quarter 2002
    Contribution Factor*)(\$1.385 billion).

[^48]: *See, e.g*., AT&T Corp., S.E.C. Form 10-Q, filed May 15, 2002
    (consumer services revenue declined 22.0%, or \$0.9 billion, for the
    first quarter of 2002 compared with the corresponding period in
    2001); WorldCom Inc., S.E.C. Form 10-Q, filed May 15, 2002 (consumer
    revenues, which include domestic voice communications service for
    consumer customers, for the first quarter of 2002 decreased 11.7%
    over the prior year period).

[^49]: *See Contribution FNPRM*, paras. 7-13.

[^50]: *Compare* *Second Quarter 2002 Contribution Factor* (0.072805)
    *with First Quarter 2002 Contribution Factor* (0.068086) *with
    Proposed Fourth Quarter 2001 Universal Service Contribution Factor*,
    CC Docket No. 96-45, Public Notice, 16 FCC Rcd 16281 (2001)
    (0.069187).

[^51]: *See* Jonathan Cox, *Sprint Will Raise Phone Subsidy Fee; AT&T
    May Follow*, Bloomberg Newswire, May 31, 2002 (reporting that Sprint
    plans to increase its residential universal service line item from
    9.9% to 11.3% and AT&T may increase its residential universal
    service line item from 11.5% to 12.4%).

[^52]: *See Contribution FNPRM* at paras. 7-13.

[^53]: *See, e.g*., WorldCom comments at 14-15 ("WorldCom estimates that
    these proposals would increase universal service funding
    requirements from the current size of \$5.5 billion to \$8
    billion.") Applying unused funds from the schools and libraries
    support mechanism to reduce the contribution factor would make the
    fund more predictable for contributors and consumers by stabilizing
    or reducing contributions.

[^54]: *See, e.g.,* Boston Public Schools and Boston Public Library
    Comments at 9 ("The BPS and BPL fell that history would suggest that
    funds returned to carriers are unlikely to get returned to
    consumers."); Intelenet, Indiana Department of Education, and
    Indiana State Library Comments at 13; Wisconsin comments at 3.

[^55]: *Universal Service Order*, 12 FCC Rcd at 9199, para 829, 9211,
    para. 855.

[^56]: *See, e.g*., AT&T Comments at 2 ("...application of these unused
    funds to reduce the factor would avoid carriers having to increase
    their USF line-item recovery rate against customers."); BellSouth
    and SBC Comments at 37 ("Any reduction in contributions would, of
    course, be reflected in lower universal service related charges to
    end users."); Sprint Comments at 17 (Refunding unused SLD funds to
    contributing carriers, or offsetting next-year funding requirements,
    would enable contributing carriers to lower the USF surcharges
    assessed on their customers.")

[^57]: *See, e.g.,* Edison Schools Comments at 2; Integrity Comments at
    4 ("The program does not seem to be ambiguous to us but instead
    seems to be very clear that the intent is to use all of these funds
    to provide network services to our schools and libraries."); NEA
    Comments at 31 ("By continuing to provide credits to contributing
    providers, the Commission is...thwarting the purpose of the E-Rate
    program").

[^58]: *See supra* note 9.

[^59]: USAC notified the Wireline Competition Bureau (formerly the
    Common Carrier Bureau) that estimated demand for Funding Year 5
    (July 1, 2002 to June 30, 2003) is \$5.736 billion. *See* Letter
    from George McDonald, President, Universal Service Administrative
    Company, Schools and Libraries Division, to Dorothy Attwood, Chief,
    Common Carrier Bureau, Federal Communications Commission, dated
    February 28, 2002.

[^60]: *See, e.g*., American Library Association Comments at 32
    ("Clearly, the demand for these funds exists."); Colorado Department
    of Education Comments at 11; Council of Chief State School Officers
    Comments at 63 ("Since demand consistently outstrips available
    funding, it is not appropriate to offset collections with unspent
    E-Rate funds to the telecommunications carriers."); Maine Public
    Utilities Commission Comments at 6; York County Library and Martin
    Library System Comments at 15.

[^61]: *Notice and Order*, 17 FCC Rcd at 1939-1940.

[^62]: *See* Schools and Libraries Universal Service, Adjustment to
    Funding Commitment and Modification to Receipt of Service
    Confirmation Form, OMB 3060-0853 (April 2000) (Form 500).

[^63]: *See Notice and Order*, 17 FCC Rcd at 1940. We note that our
    decision to carry forward unused funds from the schools and
    libraries support mechanism from prior funding years, in conjunction
    with our maintenance of the existing \$2.25 billion cap, could
    result in disbursements in excess of \$2.25 billion in a given year.

[^64]: *See* 5 U.S.C. § 553(d).

[^65]: *Id.*

[^66]: *See* 5 U.S.C. § 603. The RFA, see 5 U.S.C. § 601 et. seq., has
    been amended by the Contract With America Advancement Act of 1996,
    Pub. L. No. 104-121, 110 Stat. 847 (1996) (CWAAA).

[^67]: *Notice and Order*, 17 FCC Rcd at 1946.

[^68]: *See* 5 U.S.C. § 604.

[^69]: *See Notice and Order*.

[^70]: *See supra* note 1.

[^71]: *Notice and Order*, 17 FCC Rcd at 1940-1941.

[^72]: 5 U.S.C. § 603(a)(3).

[^73]: 5 U.S.C. § 601(6).

[^74]: 5 U.S.C. § 601(3) (incorporating by reference the definition of
    "small-business concern" in the Small Business Act, 15 U.S.C. §
    632). Pursuant to 5 U.S.C. § 601(3), the statutory definition of a
    small business applies "unless an agency, after consultation with
    the Office of Advocacy of the Small Business Administration and
    after opportunity for public comment, establishes one or more
    definitions of such term which are appropriate to the activities of
    the agency and publishes such definition(s) in the Federal
    Register."

[^75]: 15 U.S.C. § 632.

[^76]: 5 U.S.C. § 601(4).

[^77]: 1992 Economic Census, U.S. Bureau of the Census, Table 6 (special
    tabulation of data under contract to Office of Advocacy of the U.S.
    Small Business Administration).

[^78]: 5 U.S.C. § 601(5).

[^79]: 1995 Census of Governments, U.S. Census Bureau, United States
    Department of Commerce, Statistical Abstract of the United States
    (2000).

[^80]: 47 C.F.R. §§ 54.502, 54.503, 54.517(b).

[^81]: 47 C.F.R. § 54.500(b).

[^82]: 47 C.F.R. § 54.500(j).

[^83]: 47 C.F.R. § 54.501.

[^84]: *See* *id.*

[^85]: 13 C.F.R. § 121.201, North American Industry Classification
    System (NAICS) Codes 611110, 514120.

[^86]: The number of small entities affected by these rules may also be
    affected by a determination of which entities may make the required
    certification, which is an issue on which this Notice seeks comment,
    see ¶ 8. For example, if a school district may certify on behalf of
    all of its schools, that district may well have annual receipts in
    excess of \$5 million and therefore would not be a small entity
    under SBA's definition, whereas an individual school in that
    district might be a small entity with annual receipts of less than
    \$5 million, and thus would be affected by these rules.

[^87]: 15 U.S.C. § 632.

[^88]: Letter from Jere W. Glover, Chief Counsel for Advocacy, SBA, to
    William E. Kennard, Chairman, FCC (May 27, 1999). The Small Business
    Act contains a definition of "small-business concern," which the RFA
    incorporates into its own definition of "small business." *See* 15
    U.S.C. § 632(a) (Small Business Act); 5 U.S.C. § 601(3) (RFA). SBA
    regulations interpret "small business concern" to take into account
    the concept of dominance on a national basis. 13 C.F.R. §
    121.102(b).

[^89]: 13 C.F.R. § 121.201, NAICS Code 513310.

[^90]: *Id.*

[^91]: *See* FCC, Common Carrier Bureau, Industry Analysis Division,
    *Trends in Telephone Service*, Table 5.3 (August 2001) (*Telephone
    Trends Report*).

[^92]: *Id.*

[^93]: 13 C.F.R. § 121.201, North American Industry Classification
    System (NAICS) Code 513310.

[^94]: *Id.*

[^95]: FCC, Common Carrier Bureau, Industry Analysis Division, *Trends
    in Telephone Service*, Table 5.3 (August 2001) (*Telephone Trends
    Report*).

[^96]: 13 C.F.R. § 121.201, NAICS Code 513310.

[^97]: *Id.*

[^98]: *See* FCC, Common Carrier Bureau, Industry Analysis Division,
    *Trends in Telephone Service*, Table 5.3 (August 2001) (*Telephone
    Trends Report*). The category for CAPs also includes competitive
    local exchange carriers (CLECs).

[^99]: 13 C.F.R. § 121.210, NAICS Code 513322.

[^100]: *Telephone Trends Report*, Table 5.3.

[^101]: The Commission has adopted a number of service-specific
    definitions of small businesses for various categories of wireless
    service, principally in the context of the Commission's rules
    governing spectrum auctions. *See* *Assessment and Collection of
    Regulatory Fees for Fiscal Year 2001*, MD Docket No. 01-76, FCC
    01-196, Attachment A, paras. 31-54 (rel. July 2, 2001). For purposes
    of administering the schools and libraries universal service
    program, however, we find that it is appropriate to address the
    various non-telephony wireless services as a group.

[^102]: 13 C.F.R. § 121.201, NAICS Code 513322.

[^103]: FCC, Common Carrier Bureau, Industry Analysis Division, *Trends
    in Telephone Service*, Table 16.3 (Dec. 2000),
    \<<http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/IAD/trend200.pdf>\>.

[^104]: 13 C.F.R. § 121.201, NAICS Code 514191.

[^105]: *Id*.

[^106]: *1997 Economic Census*, at 18.

[^107]: 13 C.F.R. § 121.201, NAICS Code 334220, 334290.

[^108]: *Id.*

[^109]: 1997 Economic Census, Manufacturing, Industry Series, Radio and
    Television Broadcasting and Wireless Communications Equipment
    Manufacturing, Document No. E97M-3342B (August 1999), at 14; 1997
    Economic Census, Manufacturing, Industry Series, Other
    Communications Equipment Manufacturing, Document No. EC97M-3342C
    (September 1999), at 14 (both available at
    \<[http://www.census.gov/prod/www/abs/97ecmani.html]{.underline}\>).

[^110]: 5 U.S.C. § 603(c)(1)-(4).

[^111]: *See* 5 U.S.C. § 604(b).

[^112]: See Separate Statement of Commissioner Kevin J. Martin,
    Federal-State Joint Board on Universal Service: CC Docket No. 96-45
    (rel. June 13, 2002).