Federal Communications Commission

FCC 98-67

Before theFederal Communications Commission
Washington, D.C. 20554

In the Matter ofFederal-State Joint Board on
Universal Service

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CC Docket No. 96-45(Report to Congress)

REPORT TO CONGRESS
Adopted: April 10, 1998

Released: April 10, 1998

By the Commission: (Chairman Kennard and Commissioners Ness, Powell and Tristaniissuing separate statements; Commissioner Furchtgott-Roth dissenting and issuing astatement)
TABLE OF CONTENTSI.

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

II.

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A.
Definitional Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B.
Application of Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C.
Who Contributes to Universal Service Mechanisms . . . . . . . . . . . . . . . . . .
D.
Who Receives Universal Service Support . . . . . . . . . . . . . . . . . . . . . . . . .
E.
Revenue Base and Percentage of Federal Funding . . . . . . . . . . . . . . . . . . .

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III.

STATUTORY DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A.
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B.
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C.
Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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IV.

APPLICATION OF DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A.
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B.
Mixed or Hybrid Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C.
Background on Internet Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D.
Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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V.

WHO CONTRIBUTES TO UNIVERSAL SERVICE MECHANISMS . . . . . . . . 53
A.
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
B.
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

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C.

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Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

VI.

WHO RECEIVES UNIVERSAL SERVICE SUPPORT . . . . . . . . . . . . . . . . . . . . 72
A.
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
B.
Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

VII.

REVENUE BASE AND PERCENTAGE OF FEDERAL FUNDING . . . . . . . . . 93
A.
Revenue Base for Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
B.
Percentage of Federal Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
C.
Methodology for Assessing Contributions . . . . . . . . . . . . . . . . . . . . . . . . 108

VIII.

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

APPENDIX A Parties Filing Comments
APPENDIX B Parties Filing Reply Comments2Federal Communications Commission

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1.
On November 26, 1997, in a recent Appropriations Act,1 Congress directed
the Commission to report to Congress on the Commission's implementation of certain
provisions of the Telecommunications Act of 19962 regarding the universal service system.
In response to this mandate, we have undertaken a thorough review of the Commission’s
interpretations of the relevant provisions of the 1996 Act with respect to each of thesubjects identified in the Appropriations Act.
2.
We are mindful of the fact that telecommunications is an industry
characterized by extremely rapid changes, as technological advances lead to the introduction

1

Departments of Commerce, Justice, and State, the Judiciary, and Related Agencies Appropriations
Act, 1998, Pub. L. No. 105-119, 111 Stat. 2440, 2521-2522, § 623 (the "Appropriations Act"). Specifically,
the Appropriations Act requires the Commission to submit a report to Congress, no later than April 10, 1998,
providing:a detailed description of the extent to which the Commission's interpretations [identified
below] are consistent with the plain language of the Communications Act of 1934 (47 U.S.C.
151 et seq.), as amended by the Telecommunications Act of 1996, and shall include a reviewof -(1) the definitions of "information service", "local exchange carrier", "telecommunications","telecommunications service", "telecommunications carrier", and "telephone exchange service"that were added to section 3 of the Communications Act of 1934 (47 U.S.C. 153) by the
Telecommunications Act of 1996 and the impact of the Commission's interpretation of thosedefinitions on the current and future provision of universal service to consumers in all areasof the Nation, including high cost and rural areas;(2) the application of those definitions to mixed or hybrid services and the impact of suchapplication on universal service definitions and support, and the consistency of theCommission's application of those definitions, including with respect to Internet access under
section 254(h) of the Communications Act of 1934 (47 U.S.C. 254(h));(3) who is required to contribute to universal service under section 254(d) of theCommunications Act of 1934 (47 U.S.C. 254(d)) and related existing Federal universal
service support mechanisms, and of any exemption of providers or exclusion of any service
that includes telecommunications from such requirement or support mechanisms;(4) who is eligible under sections 254(e), 254(h)(1), and 254(h)(2) of the Communications
Act of 1934 (47 U.S.C. 254(e), 254(h)(1), and 254(h)(2)) to receive specific Federal universal
service support for the provision of universal service, and the consistency with which theCommission has interpreted each of those provisions of section 254; and(5) the Commission's decisions regarding the percentage of universal service support
provided by Federal mechanisms and the revenue base from which such support is derived.
Id.
2

Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996 Act), codified at 47
U.S.C. §§ 151 et seq. (Hereinafter, all citations to the 1996 Act will be to the 1996 Act as it is codified in the
United States Code.) The 1996 Act amended the Communications Act of 1934 (the Act).

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of revolutionary services. A few years ago, few consumers in this country were aware of
the Internet and the notion that a packet-switched network could be used to complete a long
distance call placed from a residential telephone probably would have been regarded as farfetched. Today, millions of consumers, both in the United States and around the world,daily obtain access to the Internet for a wide variety of services. We can only speculate
about the technologies and services that will be offered in the future. We must take care topreserve the vibrant growth of these new technologies and services. But we also mustremain constant in our commitment to ensuring universal service.
3.
In this Report, we find, under the framework of the 1996 Act, that universal
service and the growth of new Internet-based information services are mutually reinforcing.
The development and continued growth of information services depends upon thepreservation and advancement of universal service. By connecting our nation’s
telecommunications networks to all citizens, we expand the potential customer basis for
information services. At the same time, the growth of Internet-based information services
greatly stimulates our country’s use of telecommunications, and thereby the revenue basefrom which we now fund universal service. As we confirm below in our Report, the parties
supplying the underlying interstate transmission services used by those information services
contribute to universal service based on their telecommunications service revenues.
Because Internet service providers are major users of telecommunications, they makesubstantial indirect contributions to universal service support in the charges they pay to theirtelecommunications suppliers. We also consider below the regulatory status of various
forms of "phone-to-phone" IP telephony service mentioned generally in the record. The
record currently before us suggests that certain of these services lack the characteristics thatwould render them “information services” within the meaning of the statute, and insteadbear the characteristics of “telecommunications services,” but we do not believe it isappropriate to make any definitive pronouncements in the absence of a more complete
record focused on individual service offerings. To the extent we conclude that the services
should be characterized as "telecommunications services," the providers of those services
would fall within the 1996 Act's mandatory requirement to contribute to universal service
mechanisms. Thus, in general, continued growth in the information services industry will
buttress, not hinder, universal service.
4.
We recognize that we are in the midst of a transition from an outmoded
system of universal service support that will be undermined by the emergence of local
competition to one that is compatible with competitive local markets. We underscore thatduring and after this transition, it is our duty and intention to ensure that financial support
for federal universal service support mechanisms is maintained. In carrying out those
reponsibilities, we must think ahead, so that our policies are right not just for the present
but for the future as well. Our rules should not create anomalies and loopholes that can be
exploited by those seeking to avoid universal service obligations.
5.
In this Report, we also commit to a reexamination of the issues regarding therespective federal and state responsibilities for maintaining and advancing universal service
goals, including a full consideration of the specific alternatives to the Commission’s
decisions last May that parties have placed in the record before us. This will include a
reevaluation of the decision regarding the federal share of high cost support (the "25-75"
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decision) prior to January 1, 1999. Section 254(b)(3) of the Act establishes the principlethat federal and state universal service mechanisms be “specific, predictable and sufficient.”
We plan to redouble our efforts to work with state commissions to ensure that this statutory
principle is fully realized. Therefore, in full recognition of the importance of the mission
given to us by Congress in the Appropriations Act, we respectfully submit this Report toCongress on universal service.
I.

INTRODUCTION

6.
This Report to Congress focuses on the Commission's implementation of the1996 Act's provisions regarding universal service. The universal service system is designed
to ensure that low-income consumers can have access to local phone service at reasonablerates. Universal service also ensures that consumers in all parts of the country, even themost remote and sparsely populated areas, are not forced to pay prohibitively high rates fortheir phone service.
7.
Before passage of the 1996 Act, universal service was promoted through apatchwork quilt of implicit and explicit subsidies at both the state and federal levels.3
Charges to long distance carriers and rates for certain intrastate services provided to carriers
and to end users were priced above cost, which enabled local telephone companies to keep
rates for basic local telephone service at affordable levels throughout the country. The
effect of these subsidies was to increase subscribership levels nationwide by ensuring that
residents in rural and high cost areas were not prevented from receiving phone service
because of prohibitively high telephone rates.
8.
Recognizing the vulnerability of these implicit subsidies to competition,
Congress, in the 1996 Act, directed the Commission and the states to restructure their
universal service support mechanisms to ensure the delivery of affordable
telecommunications services to all Americans in an increasingly competitive marketplace.
Congress specified that universal service support under the new federal system "should be
explicit," and that "every telecommunications carrier that provides interstate
telecommunications service shall contribute, on an equitable and non-discriminatory basis,to the specific, predictable, and sufficient mechanisms established by the Commission topreserve and advance universal service."4 In addition, Congress specified that atelecommunications carrier meeting the statutory requirements in section 214(e) of the Act
would be eligible to receive federal universal service support and required states todesignate more than one eligible telecommunications carrier for service areas other than3

See 47 U.S.C. § 151. The Commission's specific programs pursuant to the 1934 Act's mandate
include the high cost loop fund, the dial equipment minutes (DEM) weighting program, long term support,
Lifeline, and Link-Up. In addition, the Commission's interstate access charge system provided implicit
subsidies for universal service support.
4

47 U.S.C. § 254(d)-(e).

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those served by a rural telephone company.5 To sustain universal service in a competitiveenvironment, Congress recognized that: (1) the appropriate amount of the universal subsidy
must be identifiable; (2) all carriers (rather than only interexchange carriers) that provide
telecommunications service should contribute to universal service, on an equitable basis;and (3) any carrier (rather than only the incumbent LEC) should receive the appropriate
level of support for serving a customer in a high cost area.
9.
In the 1996 Act, Congress codified the long-standing commitment to ensuring
universal service first expressed in section 1 of the Act,6 and directed that "[c]onsumers . . .
in rural, insular, and high cost areas should have access to telecommunications andinformation services . . . that are reasonably comparable to those services provided in urban
areas and that are available at rates that are reasonably comparable to [those] in urban
areas."7 Congress also expanded the concept of universal service by requiring, for the firsttime, universal service support for eligible schools, libraries and rural health care providers.8
10.
Consistent with the timetable established in the 1996 Act, the Commission
issued the Universal Service Orderin May 1997 implementing the new universal service
provisions and setting forth a plan that fulfills the universal service goals established by
Congress.9 In the Universal Service Order, the Commission announced its plan for5

47 U.S.C. § 214(e); see also 47 U.S.C. § 153(37), which provides that:
The term "rural telephone company" means a local exchange carrier operating entity to the extent thatsuch entity -(A) provides common carrier service to any local exchange carrier study area that does notinclude either -(i) any incorporated place of 10,000 inhabitants or more, or any part thereof, basedon the most recently available population statistics of the Bureau of the Census; or(ii) any territory, incorporated or unincorporated, included in an urbanized area, as
defined by the Bureau of the Census as of August 10, 1993;(B) provides telephone exchange service, including exchange access, to fewer than 50,000
access lines;(C) provides telephone exchange service to any local exchange carrier study area with fewer
than 100,000 access lines; or(D) has less than 15 percent of its access lines in communities of more than 50,000 on thedate of enactment of the Telecommunications Act of 1996.

6

47 U.S.C. § 151.

7

47 U.S.C. § 254(b)(3).

847 U.S.C. § 254(h).

9Federal-State Joint Board on Universal Service, CC Docket No. 96-45 , Report and Order, 12 FCC
Rcd 8776 (1997) ( Universal Service Order), as corrected by Federal-State Joint Board on Universal Service,
Errata, CC Docket No. 96-45, FCC 97-157 (rel. June 4, 1997), appeal pending in Texas Office of Public
Utility Counsel v. FCC and USA, No. 97-60421 (5th Cir. 1997); Federal-State Joint Board on Universal
Service, Order on Reconsideration, CC Docket No. 96-45, 12 FCC Rcd 10095 (rel. July 10, 1997); Changes
to the Board of Directors of the National Exchange Carrier Association Inc., Federal-State Joint Board on
Universal Service, Report and Order and Second Order on Reconsideration, 12 FCC Rcd 18400 (1997), as

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establishing a system of universal service support for rural, insular, and high cost areas thatwill replace the existing high cost programs and the implicit federal subsidies with explicit,
competitively-neutral federal universal service support mechanisms. The Commission madesome modifications to the existing high cost support mechanisms that took effect onJanuary 1, 1998. Those changes were the first steps in moving to a support system that issustainable in a competitive environment, as Congress has directed. For example, theCommission modified the funding methods for the existing federal universal service support
programs, beginning January 1, 1998, so that such support is not generated exclusively
through charges imposed on long distance carriers. Instead, as the statute requires, the new
universal service rules require equitable and non-discriminatory contributions from all
telecommunications carriers and require other providers of interstate telecommunications
service to contribute when the Commission finds that the public interest so requires. In
addition, the Commission modified the existing high cost support programs so that implicit
subsidies previously recovered through interstate access charges will be recovered throughthe new explicit federal universal service funding mechanism. The Commission also
adopted rules to implement the new programs created by Congress in the 1996 Act toencourage and promote universal service for eligible schools, libraries and health careproviders.
11.
The Commission's revised universal service rules seek to ensure that theCommission's long-standing commitment to maintaining affordable rates throughout thecountry, codified in the 1996 Act,10 is maintained in a competitive environment. Although
the Commission has many decisions still before it that will affect the ultimate amount of
universal service support that will be provided by federal mechanisms,11 there is no
indication that the revised universal service rules will result in a reduction in federal support
from the current level. The Commission also intends to continue to consult with thecorrected by Federal-State Joint Board on Universal Service, Errata, CC Docket No. 96-45, DA 97-2477 (rel.
Dec. 3, 1997); Changes to the Board of Directors of the National Exchange Carrier Association Inc., FederalState Joint Board on Universal Service, Order on Reconsideration, Second Report and Order and Further
Notice of Proposed Rulemaking, CC Docket Nos. 97-21, 96-45, FCC 97-292, 12 FCC Rcd 12437 (rel. Aug.
15, 1997); Federal-State Joint Board on Universal Service, Third Report and Order, 12 FCC Rcd 22480(1997), as corrected by Federal-State Joint Board on Universal Service, Erratum, CC Docket Nos. 96-45 and97-160 (rel. Oct. 15, 1997); Changes to the Board of Directors of the National Exchange Carrier Association,Inc., Federal-State Joint Board on Universal Service, Second Order on Reconsideration in CC Docket 97-21,
12 FCC Rcd 22423 (1997); Federal-State Joint Board on Universal Service, Third Order on Reconsideration,
12 FCC Rcd 22801 (1997); Federal-State Joint Board on Universal Service, Access Charge Reform, Price Cap
Performance Review for Local Exchange Carriers, Transport Rate Structure and Pricing, End User Common
Line Charge, Fourth Order on Reconsideration, CC Docket Nos. 96-45, 96-262, 94-1, 91-213, 95-72, FCC
97-420 (rel. Dec. 30, 1997), as corrected by Federal-State Joint Board on Universal Service, Errata, CC
Docket Nos. 96-45, 96-262, 94-1, 91-213, 95-72, DA 98-158 (rel. Jan 29, 1998) ( "Fourth Order on
Reconsideration"), appeal pending in Alenco Communications, Inc., et al. v. FCC and USA, No. 98-1064 (D.C.
Cir. 1998).
10

47 U.S.C. § 254.

11

For example, the Commission must select a mechanism to determine non-rural carriers' forwardlooking cost to provide the supported services and determine the relevant benchmark against which to compare
cost to determine support levels.

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Universal Service Joint Board and other state regulators and take additional steps, if
necessary, to ensure that rates remain affordable. At the same time, however, theCommission recognizes the 1996 Act's mandate that universal service reforms must
accommodate and encourage competition. The Commission also is aware that affordable
rates can best be maintained through support mechanisms that provide as much support asis necessary, but no more than is necessary.
12.
We are mindful that the proper implementation of these provisions is criticalto the success and survival of the nation's universal service system and, accordingly, havetaken our obligations very seriously. In preparing this Report, we have sought andreviewed thousands of pages of public comments. We have considered more than 5,000
informal public comments filed via electronic mail. We have held two en banc hearings
during which panels of experts -- including representatives of the Internet community,
telecommunications companies, educators and state officials -- discussed their views with us
concerning the interpretive issues surrounding the relevant provisions of the 1996 Act.
Although many of the rules at issue have been in place for nearly a year, we haveconsidered each rule and interpretation anew and without preconceptions, in light of boththe plain language and overall purposes of the 1996 Act.
II.

EXECUTIVE SUMMARY
A.

Definitional Issues

13.
Section 623(b)(1) of the Appropriations Act directs the Commission to review"the definitions of 'information service,' 'local exchange carrier,' 'telecommunications,''telecommunications service,' 'telecommunications carrier,' and 'telephone exchange
service.'" In response to Congress's directive, we have revisited the Commission's findings
with regard to the way the Commission interpreted these statutory terms when it
implemented the universal service provisions of the 1996 Act. In particular, we havecarefully evaluated the impact of those definitions on the treatment of Internet-based
offerings under the universal service system. We conclude, as the Commission did in the
Universal Service Order, that the categories of "telecommunications service" and"information service" in the 1996 Act are mutually exclusive. Reading the statute closely,with attention to the legislative history, we conclude that Congress intended these newterms to build upon frameworks established prior to the passage of the 1996 Act.
Specifically, we find that Congress intended the categories of "telecommunications service"and "information service" to be mutally exclusive, like the definitions of "basic service" and"enhanced service" developed in our Computer II proceeding, and the definitions of"telecommunications" and "information service" developed in the Modification of Final
Judgment that divested the Bell Operating Companies from AT&T.12 We recognize that the
1996 Act's explicit endorsement of the goals of competition and deregulation represents asignificant break from the prior statutory framework. We find generally, however, that
Congress intended to maintain a regime in which information service providers are not

12

United States v. American Tel. & Tel. Co., 552 F. Supp. 131, 229 (D.D.C. 1982), aff'd sub nom.
Maryland v. United States, 460 U.S. 1001 (1983).

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subject to regulation as common carriers merely because they provide their services "viatelecommunications."13
B.

Application of Definitions

14.
The Appropriations Act also requires the Commission to review "theapplication of those definitions [set forth in section 623(b)(1)] to mixed or hybrid services
and the impact of such application on universal service definitions and support, and theconsistency of the Commission's application of those definitions, including with respect toInternet access under section 254(h)." Pursuant to that directive, we have reviewed various
mixed or hybrid services, including those services that are commonly described as Internet
telephony services. The record currently before us suggests that certain forms of "phone-tophone" IP telephony services lack the characteristics that would render them “information
services” within the meaning of the statute, and instead bear the characteristics of“telecommunications services.” We do not, however, believe it is appropriate to make any
definitive pronouncements in the absence of a more complete record focused on individual
service offerings. To the extent that we conclude that IP certain forms of "phone-to-phone"
IP telephony services should be characterized as "telecommunications services," theproviders of those services would fall within the 1996 Act's mandatory requirement tocontribute to universal service mechanisms.
15.
Moreover, we clarify that the provision of transmission capacity to Internet
access providers and Internet backbone providers is appropriately viewed as"telecommunications service" or “telecommunications” rather than "information service,"and that the provision of such transmission should also generate contribution to universal
service support mechanisms. Thus, we find, in general, that continued growth in theinformation services industry will buttress, not hinder, universal service. In those cases
where an Internet service provider owns transmission facilities, and engages in datatransport over those facilities in order to provide an information service, we do not currently
require it to contribute to universal service mechanisms. We believe it is appropriate toreexamine that result, as one could argue that in such a case that the Internet service
provider is furnishing raw transmission capacity to itself. We recognize, however, that there
are significant operational difficulties associated with determining the amount of such an
Internet service provider's revenues to be assessed for universal service purposes and with
enforcing such requirements. We intend to consider these issues in an upcoming
proceeding. Finally, we find that Internet service providers generally do not provide
telecommunications. Our analysis, we believe, reflects a consistent approach that will
safeguard the current and future provision of universal service to all Americans, and willachieve the Congressionally-specified goals of a "pro-competitive, deregulatorycommunications policy."C.

13

Who Contributes to Universal Service Mechanisms

47 U.S.C. § 153(20).

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16.
Section 623(b)(3) of the Appropriations Act requires the Commission toreview "who is required to contribute to universal service under section 254(d) of theCommunications Act . . . and related existing mechanisms, and of any exemption ofproviders or exclusion of any service that includes telecommunications from suchrequirement or support mechanisms." Accordingly, we have reviewed our decision
regarding which entities must contribute to universal service support mechanisms, which
entities should contribute, and which entities should be exempt from contributing. We
affirm that the plain language of section 254(d), which mandates contributions from "every
telecommunications carrier that provides interstate telecommunications services," requires
the Commission to construe broadly the class of carriers that must contribute.14 In addition,
we find that the Commission properly exercised the permissive authority granted by section
254(d) to include other providers of interstate telecommunications in the pool of universal
service contributors. We have also re-examined the Commission's implementation of thelimited authority set forth in section 254(d) to exempt de minimis contributors and affirm
that the Commission has not exceeded the boundaries established by the statute. We
conclude that the Commission appropriately exercised the flexibility that section 254(d)grants it to exempt those entities whose contributions would be de minimis and to include in
the pool of contributors those providers of telecommunications whose contributions are
required by the public interest.
D.

Who Receives Universal Service Support

17.
Section 623(b)(4) of the Appropriations Act requires the Commission toreview who is eligible under sections 254(e), 254(h)(1), and 254(h)(2) of theCommunications Act ". . . to receive specific federal universal service support for theprovision of universal service, and the consistency with which the Commission has
interpreted each of those provisions of section 254." We have carefully evaluated thegeneral standards of eligibility for support set forth in section 254(e) of the 1996 Act, as
well as the eligibility standards for providers of services to schools and libraries under
section 254(h)(1)(B) and for providers of services to health care providers under section
254(h)(1)(A). Although we observe that certain of the provisions of the 1996 Act appear torender the statute susceptible to more than one interpretation with respect to eligibility forthe receipt of universal service support, we conclude that the Commission properly
implemented eligibility rules that are consistent with both the language and the spirit of the1996 Act.
E.

Revenue Base and Percentage of Federal Funding

18.
Finally, as required by section 623(b)(5) the Appropriations Act, we
reexamine "the Commission's decisions regarding the percentage of universal service
support provided by federal mechanisms and the revenue base from which such support isderived." As explained in detail below, we find that the Commission's decisions withrespect to the appropriate revenue base for universal service contributions are legallyconsistent with the 1996 Act and fulfill the intended goal of establishing an orderly

14

See Universal Service Order, 12 FCC Rcd at 9177, para. 783.

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transition from federal implicit subsidies to federal explicit subsidies. After analyzing theCommission's conclusions regarding the jurisdictional parameters placed on the Commission
and on states, we agree that the Commission has the authority to assess universal service
contributions on both the interstate and intrastate revenues of telecommunications providers.
19.
With respect to the percentage of federal universal service funding, as
discussed below, we regard the Commission's earlier decision as a place holder, an initial
step in its plan for implementing section 254. States and other affected entities have raised
serious concerns about the extent of federal support for high cost areas. In this Report, we
commit to reconsidering those aspects of the Universal Service Order prior to fully
implementing high cost universal service mechanisms. We conclude that a strict, acrossthe-board rule that provides 25 percent of unseparated high cost support to the larger LECs
might provide some states with less total interstate universal service support than iscurrently provided. The Commission will work to ensure that states do not receive lessfunding as we implement the high cost mechanisms under the 1996 Act. We find that nostate should receive less federal high cost assistance than it currently receives. The
Commission decided to provide an evolving level of support and to revise funding
mechanisms as necessary to maintain adequate support to ensure reasonable rates. Some of
the larger LECs that have higher than average costs, however, currently recover more than
25 percent of their cost from the interstate jurisdiction. Beginning on January 1, 1999, thisadditional allocation above 25 percent is eliminated. At the same time, however, the basis
for providing high cost support is fundamentally altered. We are mindful that theCommission's work in this regard is not yet complete. We are committed to issuing areconsideration order in response to the petitions filed asking the Commission to reconsider
the decision to fund 25 percent of the required support amount. In the course of thatreconsideration, we will take all appropriate steps, including continued consultation with thestates, to ensure that federal funding is adequate to achieve statutory goals. We also
recognize that Congress assigned to the Commission, after consultation with the Joint
Board, the ultimate responsibility for establishing policies that ensure that: 1) quality
services are available at just, reasonable and affordable rates; 2) all consumers have "accessto telecommunications and information services" at rates that are reasonably comparable to
the rates charged for similar services in urban areas; and 3) there are "specific, predictable,
and sufficient" federal and state mechanisms to preserve and advance universal service. We
are committed to implementing section 254 consistent with these objectives.
20.
We note that the discussion of the issue of federal support for high cost in
this Report relates only to non-rural local exchange carriers. With respect to rural LECs,
the Commission has determined that there shall be no change in the existing high cost
support mechanisms until January 1, 2001 at the earliest. We do not revist that
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Report. Thus, the method of determining federal support for rural local exchange carriers
will remain unchanged until at least January 1, 2001, meaning that the amount of universal
service support for rural local exchange carriers will be maintained initially at existinglevels and then should increase in accordance with specified factors, such as inflation, thathave historically guided changes in such support. Any possible change in the support
mechanism for rural local exchange carriers would require a separate rulemaking
proceeding.

III.

STATUTORY DEFINITIONSA.

Overview

21.
All of the specific mandates of the 1996 Act depend on application of thestatutory categories established in the definitions section. The 1996 Act added or modified
several of the definitions found in the Communications Act of 1934, including those that
apply to "telecommunications," "telecommunications service," "telecommunications carrier,""information service," "telephone exchange service," and "local exchange carrier." In
section 623(b)(1) of the Appropriations Act, Congress directed us to review theCommission's interpretation of these definitions, and to explain how those interpretations
are consistent with the plain language of the 1996 Act.15 Reading the statute closely, withattention to the legislative history, we conclude that Congress intended these new terms tobuild upon frameworks established prior to the passage of the 1996 Act. Specifically, we
find that Congress intended the categories of "telecommunications service" and "information
service" to parallel the definitions of "basic service" and "enhanced service" developed in
our Computer II proceeding, and the definitions of "telecommunications" and "information
service" developed in the Modification of Final Judgment breaking up the Bell system. We
recognize that the 1996 Act's explicit endorsement of the goals of competition andderegulation represents a significant break from the prior statutory framework. We findgenerally, however, that Congress intended to maintain a regime in which information
service providers are not subject to regulation as common carriers merely because they
provide their services "via telecommunications."16
B.

Background22.
The Communications Act of 1934. The Communications Act of 1934, as
amended, gives the Commission extensive authority over all "common carriers," defined as
all persons "engaged as a common carrier for hire, in interstate and foreign

15

Appropriations Act, § 623(b)(1).

16

47 U.S.C. § 153(20).

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communication."17 Title II of the Act, derived from the federal Interstate Commerce Act,18
includes (among other things) requirements that common carriers provide service at just andreasonable prices, and subject to just and reasonable practices, classifications, andregulations;19 that they make no unjust or unreasonable discrimination;20 that they filetariffs, subject to Commission scrutiny;21 and that they obtain Commission approval before
acquiring or constructing new lines.22
23.
Computer II. More than three decades ago, the Commission recognized that"the growing convergence and interdependence of communication and data processing
technologies" threatened to strain its existing interpretations of Title II.23 It began an
inquiry into the regulatory and policy problems posed by that confluence. In 1980, it issued
the Computer II decision,24 embodying its thinking on how it could best advance its
regulatory goals of "minimiz[ing] the potential for improper cross-subsidization,
safeguard[ing] against anticompetitive behavior, and [protecting] the quality and efficiencyof telephone service" while "foster[ing] a regulatory environment conducive to . . . theprovision of new and innovative communications-related offerings" and "enabl[ing] thecommunications user to [take] advantage of the ever increasing market applications ofcomputer . . . technology."25
24.
In Computer II, the Commission classified all services offered over atelecommunications network as either basic or enhanced. A basic service consisted of theoffering, on a common carrier basis, of pure "transmission capacity for the movement of17

Id. § 153(10). Section 2(a) of the Act makes plain that the Commission has authority only overcommunication, and persons engaged in communication, "by wire or radio." Id. § 152(a).
18Interstate Commerce Act of 1887, 24 Stat. 379 (1887).

19

47 U.S.C. § 201(b).

20

Id. § 202(a).

21

Id. §§ 203-05.

22

Id. § 214.

23

Regulatory & Policy Problems Presented by the Interdependence of Computer and Communications
Services & Facilities ( Computer I), 7 FCC 2d 11, 13 (1966) ( Notice of Proposed Rulemaking); 28 FCC 291(1970) ( Tentative Decision); 28 FCC 2d 267 (1971) ( Final Decision), aff'd in part sub nom. GTE Service
Corp. v. FCC, 474 F.2d 724 (2d Cir. 1973), decision on remand, 40 FCC 2d 293 (1973).
24

Amendment of Section 64.702 of the Commission's Rules and Regulations ( Computer II), Tentative
Decision and Further Notice of Inquiry and Rulemaking, 72 FCC 2d 358 (1979) ( Tentative Decision), 77 FCC
2d 384 (1980) ( Final Decision), recon., 84 FCC 2d 50 (1980) ( Reconsideration Order), further recon., 88
FCC 2d 512 (1981) ( Further Reconsideration Order), affirmed sub nom. Computer and Communications
Industry Ass'n v. FCC, 693 F.2d 198 (D.C. Cir. 1982), cert. denied, 461 U.S. 938 (1983).
25

See Computer II Tentative Decision, 72 FCC 2d at 389-90.

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information."26 The Commission noted that it was increasingly inappropriate to speak ofcarriers offering discrete "services" such as voice telephone service. Rather, carriers offeredcommunications paths that subscribers could use as they chose, by means of equipment
located on subscribers' premises, for the analog or digital transmission of voice, data, video
or other information.27 The Commission therefore defined basic transmission service toinclude the offering of "pure transmission capability over a communications path that is
virtually transparent in terms of its interaction with customer supplied information."28
25.
An enhanced service, by contrast, was defined as "any offering over thetelecommunications network which is more than a basic transmission service."29Specifically, the Commission defined enhanced services to include
services, offered over common carrier transmission facilities used in interstate
communications, which employ computer processing applications that act on
the format, content, code, protocol or similar aspects of the subscriber'stransmitted information; provide the subscriber additional, different, or
restructured information; or involve subscriber interaction with stored
information.30
26.
Enhanced service providers, the Commission found, were not "common
carriers" within the meaning of the Communications Act of 1934, and hence were notsubject to regulation under Title II of that Act. Enhanced services involve "communications
and data processing technologies . . . intertwined so thoroughly as to produce a form
different from any explicitly recognized in the Communications Act of 1934."31 Seeking toregulate enhanced services, the Commission concluded, would only restrict innovation in a
fast-moving and competitive market.32
27.
The Commission stressed that the category of enhanced services covered awide range of different services, each with communications and data processing
components. Some might seem to be predominantly communications services; others mightseem to be predominantly data processing services. The Commission declined, however, tocarve out any subset of enhanced services as regulated communications services. It foundthat no regulatory scheme could "rationally distinguish and classify enhanced services as

26

Computer II Final Decision, 77 FCC 2d at 419, para. 93.

27

Id. at 419, para. 94.

28

Id. at 419-20, paras. 93, 96.

29

Id. at 420, para. 97.

30

47 C.F.R. § 64.702(a).

31Computer II Final Decision, 77 FCC 2d at 430, para. 120.

32

See id. at 434, para. 129.

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either communications or data processing,"33 and any dividing line the Commission drew
would at best "result in an unpredictable or inconsistent scheme of regulation" astechnology moved forward.34 Such an attempt would lead to distortions, as enhanced
service providers either artificially structured their offerings so as to avoid regulation, or
found themselves subjected to unwarranted regulation.35 The Commission therefore
determined that enhanced services, which are ofered "over common carrier transmission
facilities," were themselves not to be regulated under Title II of the Act, no matter how
extensive their communications components.36 The Commission reaffirmed its definition ofenhanced services in the Computer III proceeding.37
28.
The Modification of Final Judgment. On August 11, 1982, the District Court
for the District of Columbia entered a consent decree, commonly known as the Modificationof Final Judgment or MFJ, settling the United States Government's long-running antitrust
lawsuit against AT&T. Under the MFJ, AT&T was required to divest itself of the BellOperating Companies. The MFJ distinguished between "telecommunications" and"information" services: the Bell Operating Companies were to provide local exchange
telecommunications service, but were forbidden to provide interexchange
telecommunications service or information services.38
29.
The Telecommunications Act of 1996. On February 8, 1996, the 1996 Act
39
became law. Whereas historically the communications field had been dominated by a few,
heavily regulated providers, Congress sought to establish "a pro-competitive, deregulatory
national policy framework," making "advanced telecommunications and information

33

Id. at 428, para. 113.

34

Id. at 425, paras. 107-08.

35

See id. at 423-28, paras. 102-13.

36

See id. at 428, paras. 114.

37

See Amendment of Section 64.702 of the Commission's Rules and Regulations ( Computer III), Report
and Order, Phase II, 2 FCC Rcd 3072, 3081-82 (1987) ( Phase II Order), recon., 3 FCC Rcd 1150 (1988)( Phase II Recon. Order), further recon., 4 FCC Rcd 5927 (1989) ( Phase II Further Recon. Order), Phase II
Order vacated, California v. FCC, 905 F.2d 1217 (9th Cir. 1990) ( California I); Computer III Remand
Proceedings, 5 FCC Rcd 7719 (1990) ( ONA Remand Order), recon., 7 FCC Rcd 909 (1992), pets. for review
denied, California v. FCC, 4 F.3d 1505 (9th Cir. 1993) ( California II); Computer III Remand Proceedings:
Bell Operating Company Safeguards and Tier 1 Local Exchange Company Safeguards, 6 FCC Rcd 7571
(1991) ( BOC Safeguards Order), recon. dismissed in part, Order, CC Docket Nos. 90-623 and 92-256, 11
FCC Rcd 12513 (1996); BOC Safeguards Order vacated in part and remanded, California v. FCC, 39 F.3d
919 (9th Cir. 1994) ( California III), cert. denied, 115 S.Ct. 1427 (1995), on remand, 10 FCC Rcd 8360 (1995)( Computer III Further Remand Notice), Further Notice of Proposed Rulemaking, CC docket No 95-20, FCC
98-8 (rel. Jan. 30, 1998) ( Computer III Further Remand Proceedings).
38

See United States v. American Tel. & Tel. Co., 552 F. Supp. 131, 226-32 (D.D.C. 1982), aff'd subnom. Maryland v. United States, 460 U.S. 1001 (1983).
39

Pub. L. No. 104-104, 110 Stat. 46, codified at 47 U.S.C. §§ 151 et seq.

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technologies and services" available to all Americans, "by opening all telecommunications
markets to competition."4030.
Although the 1996 Act left intact most of the existing provisions of Title II, it
added new provisions referring to "telecommunications" and "information service." The1996 Act defined "telecommunications" to mean "the transmission, between or among
points specified by the user, of information of the user's choosing, without change in theform or content of the information as sent or received."41 It defined "telecommunications
service" to mean "the offering of telecommunications for a fee directly to the public, or tosuch classes of users as to be effectively available to the public, regardless of the facilities
used."42 It defined "telecommunications carrier" to include "any provider oftelecommunications services, except that such term does not include aggregators of
telecommunications services."43 It defined "information service" to mean
the offering of a capability for generating, acquiring, storing, transforming,
processing, retrieving, utilizing, or making available information via
telecommunications, and [such term] includes electronic publishing, but does
not include any use of any such capability for the management, control oroperation of a telecommunications system or the management of atelecommunications service.44
31.
The 1996 Act redefined "telephone exchange service" to include not only
"service within a telephone exchange, or within a connected system of telephone exchanges
within the same exchange area operated to furnish to subscribers interconnecting service ofthe character ordinarily furnished by a single exchange," but also "comparable service
provided through a system of switches, transmission equipment, or other facilities (orcombination thereof) by which a subscriber can originate and terminate atelecommunications service."45 It defined "local exchange carrier" to include "any personthat is engaged in the provision of telephone exchange service or exchange access." Thedefinition excludes persons "engaged in the provision of a commercial mobile service . . .

40

Joint Statement of Managers, S. Conf. Rep. No. 104-230, 104th Cong. 2d Sess. 1 (1996).

41

47 U.S.C. § 153(43).

42

Id. § 153(46).

43

Id. § 153(44). An aggregator is an entity that, in the ordinary course of its operations, makes
telephones available to the public or to transient users of its premises, for interstate telephone calls using
operator services. Id. § 226(a)(2). Restaurant owners who make pay telephones available to their customers,for example, are aggregators.
44

Id. § 153(20).

4547 U.S.C. § 153(47).

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except to the extent the Commission finds that such service should be included in thedefinition of such term."4632.
The 1996 Act imposes a wide variety of obligations on telecommunications
carriers, including, among other things, obligations relating to interconnection47 and privacyof subscriber information.48 One such obligation relates to universal service: section
254(d) dictates that every telecommunications carrier that provides interstate
telecommunications services must contribute to the mechanisms established by theCommission to preserve and advance universal service.49 The 1996 Act does not impose
obligations on telecommunications providers who do not provide interstate“telecommunications services” (and therefore are not "telecommunications carriers"), exceptthat the Commission may require any provider of interstate telecommunications tocontribute to universal service mechanisms if the public interest requires.50 The Act
imposes no regulatory obligations on information service providers as such.
C.

Discussion
1.

"Telecommunications," "Telecommunications Service,""Telecommunications Carrier" and "Information Service"
Definitions

33.
The proper interpretation of the terms "telecommunications" and"telecommunications service" in the 1996 Act raises difficult issues that are the subject ofheated debate. The Commission previously concluded that the 1996 Act's definitions oftelecommunications service and information service essentially correspond to the preexisting categories of basic and enhanced services, in that they were intended to refer toseparate categories of services. After finding in the Non-Accounting Safeguards Orderthat"the differently-worded definitions of 'information services' and 'enhanced services' . . .
should be interpreted to extend to the same functions,"51 the Commission ruled in the46

Id. § 153(26).

47

See id. §§ 251-52.

48

See id. § 222.

49

See id. § 254(d).

50Id.; see also Universal Service Order, 12 FCC Rcd at 9182-9184, paras. 793-96.

51

Implementation of the Non-Accounting Safeguards of Sections 271 and 272 of the Communications
Act of 1934, as amended, CC Docket No. 96-149, First Report and Order and Further Notice of Proposed
Rulemaking, 11 FCC Rcd 21905, 21955-56, para. 102 (1996) ( Non-Accounting Safeguards Order), Order on
Reconsideration, 12 FCC Rcd 2297 (1997), further recon. pending, Second Report and Order, 12 FCC Rcd
15756 (1997), aff'd sub nom. Bell Atlantic Telephone Companies v. FCC, 131 F.3d 1044 (D.C. Cir. 1997).
The Commission in the Non-Accounting Safeguards Order treated the category of information services as
distinct from telecommunications. It reaffirmed its conclusion that protocol processing services were
information services, rejecting the possibility of treating such services as telecommunications and thus

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Universal Service Orderthat entities providing enhanced or information services are notthereby providing "telecommunications service."52 It found that the 1996 Act's definition of
telecommunications, which "only includes transmissions that do not alter the form orcontent of the information sent," excludes Internet access services, which "alter the format
of information through computer processing applications such as protocol conversion andinteraction with stored data."53 In the Pole Attachments Telecommunications Rate Order,
we relied on the Commission's finding that Internet access service does not constitute a
telecommunications service,54 and in Use of Customer Proprietary Network Information
wesummarized Commission precedent as indicating that telecommunications services andinformation services are "separate, non-overlapping categories, so that information services
do not constitute 'telecommunications' within the meaning of the 1996 Act."55
34.
Senators Stevens and Burns, along with commenters including someincumbent local exchange carriers, urge in their comments that this approach is incorrect.
The 1996 Act's definition of "telecommunications," they state, creates a new category
unrelated to anything in the Commission's earlier regulatory approach.56 Senators Stevens
and Burns state that Congress, in defining "telecommunications" and "information service"in the 1996 Act, intended to replace the Commission's existing regulatory structure. As

potentially making them subject to Title II regulation. Id. at 21956-57, paras. 104-05.
52

Universal Service Order, 12 FCC Rcd at 9179-80, paras. 788-89.

53

Id. at 9180, para. 789. The Commission also noted that section 254(h)(2)(A) calls on it to enhance"access to advanced telecommunications and information services," and concluded that the phrase would be
redundant if "information services were a subset of advanced telecommunications." Id.
54

Amendment of the Commission's Rules and Regulations Governing Pole Attachments, Report andOrder, Further Notice of Proposed Rulemaking, CC Docket No. 97-151 (rel. Feb. 6, 1998), at para. 33 ( Pole
Attachments Telecommunications Rate Order).
55

Telecommunications Carriers' Use of Customer Proprietary Network Information and Other Customer
Information, Second Report and Order and Further Notice of Proposed Rulemaking CC Docket No. 96-115,
FCC 98-27 (rel. Feb. 26, 1998), at para. 46. In both the Pole Attachments Order and Use of Customer
Proprietary Network Information we noted the pendency of this Report, and we made clear that we did notintend to foreclose the Report's reexamination of the underlying issues:

We are currently seeking comment on whether
the 1996 Act's definition of "telecommunications service" should be interpreted to extend to
the same functions [covered by the Commission's "basic services" category, and] whether
there is any basis to conclude that, by using the term "telecommunications services,"
Congress intended a significant departure from the Commission's usage of "basic services."
Computer III Further Remand Proceedings, at para. 41. We have not yet received reply comments in thatproceeding.
56

See, e.g., Senators Stevens and Burns comments at 1-6, TDS comments at 2. See also, e.g., Low
Tech Designs comments at 1-3, RTC comments at 10-17, Reply Comments of Bell Atlantic at 7-9. But see
GTE Comments at 17.

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mentioned above, under the regulatory structure in place in 1996, a service could fall intoeither the "basic" or the "enhanced" category, but not both.57 An entity offering a service
with both communications and computer-processing components was deemed to beproviding an enhanced service, not a basic one.58 Senators Stevens and Burns state that
Congress rejected that approach, intending instead that a service could fall simultaneously
into both of the new categories created by the 1996 Act.59 Under this approach, an
information service provider is deemed a telecommunications carrier to the extent it engagesin "transmission" of the information it provides.60 In particular, Senators Stevens and Burns
indicate, an information service provider transmitting information to its users over common
carrier facilities such as the public switched telephone network is a "telecommunications
carrier."61
35.
In support of their position, Senators Stevens and Burns note that the terms"basic" and "enhanced" do not appear in the 1996 Act; rather, Congress defined new
categories.62 Their interpretation of the statute, they explain, flows naturally from thestatute's definition of "telecommunications" as "the transmission, between or among points
specified by the user, of information of the user's choosing, without change in the form orcontent of the information, as sent and received," its definition of "telecommunications
service" as "the offering of telecommunications for a fee directly to the public . . .
regardless of the facilities used," and its definition of telecommunications carrier as
including "any provider of telecommunications services."63 These definitions taken
together, they state, "make it plain that Congress intended [the term 'telecommunications
carrier'] to include anyone engaged in the transmission of 'information of the user's
choosing.'"64 Senators Stevens and Burns note that other language in the definition of"telecommunications carrier" makes clear that a given entity may simultaneously offer

57

See Computer II Final Decision, 77 FCC 2d at 419-22, paras. 93-97; supra Section II.B.

58

See Computer II Final Decision, 77 FCC Rcd at 420-21, 423-28, paras. 97, 102-13; see also id. at432, para. 125 (notwithstanding that enhanced services providers are not "common carriers" subject to Title II,they are subject to the Commission's jurisdiction because they provide "the electronic transmission of writing,signs, signals, pictures, etc., over the interstate telecommunications network"); id. at 435, para. 132 (enhanced
services have "a communications component"); supra Section II.B.
59

Senators Stevens and Burns comments at 3-6.

60

Id. at 4.

61

Id. at 5 & n. 19; see also, e.g., RTC comments at 12-13, TDS comments at 5.

62

Senators Stevens and Burns comments at 1-2; see also, e.g., TDS comments at 2.

63

47 U.S.C. § 153(43), (44), (46).

64

Senators Stevens and Burns comments at 4.

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telecommunications and other services.65 They also point out that Congress failed to adopt
language, included in the House version of the 1996 Act, providing that the term"'telecommunications service' . . . does not include an information service."66 Somewhat
similar language in the text of the Senate bill was deleted as well.67
36.
Finally, Senators Stevens and Burns assert that the Commission's current
understanding of the statutory terms could "seriously undermine the universal service,competitive neutrality, and local competition goals that were at the heart" of the 1996 Act.68
The regulatory provisions of the 1996 Act are addressed to "telecommunications carriers"and "telecommunications services."69 They explain that, to the extent that the categories oftelecommunications and information services are interpreted to be mutually exclusive, thescope of the "telecommunications carrier" and "telecommunications service" categories isaccordingly narrowed, and the reach of the 1996 Act is correspondingly limited.
37.
Other Senators and other interested parties, however, have filed comments inthis proceeding expressing a contrary view. Senator McCain urges that "[n]othing in the1996 Act or the legislative history supports the view that Congress intended to subject
information services providers to the current regulatory scheme applicable to common
carriers which is, if anything, too intrusive and burdensome."70 Rather, he explains, "[i]tcertainly was not Congress's intent in enacting the supposedly pro-competitive, deregulatory
1996 Act to extend the burdens of current Title II regulation to Internet services, which
historically have been excluded from regulation."71 Senator McCain states, in defining"telecommunications," "telecommunications service" and "information service," Congress"distinguished between information services and telecommunication services to reflect thedistinction set forth on the Modification of Final Judgment and the Commission's Second
Computer Inquiryproceeding between those services that offer pure transmission capacityand others that somehow enhance the transmission capacity."72 An information service, hecontinues, "is the offering of particular capabilities via telecommunications, but is itself not

65

Senators Stevens and Burns comments at 3-5; see 47 U.S.C. § 153(44): "A telecommunications
carrier shall be treated as a common carrier under this Act only to the extent that it is engaged in providing
telecommunications services . . .."66

See Senators Stevens and Burns comments at 5 ("Language that specifically stated that atelecommunications service did not include an information service was struck before the final definitions wereadopted."); see also February 19, 1998 en banc transcript at 24 (testimony of Mr. Comstock).
67

We discuss the Senate language below.

68

Senators Stevens and Burns comments at 1.

69

See supra Section II.B.

70

Senator McCain letter at 1.

71

Id. at 2 (emphasis in original).

72

Id. at 3.

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telecommunications or a telecommunications service."73 For the Commission to rule thatsome or all information service providers should simultaneously be deemed
telecommunications carriers would ignore a "clear distinction" drawn by Congress, andwould have "disastrous" results.74
38.
Senators Ashcroft, Ford, John F. Kerry, Abraham and Wyden emphasize that"[n]othing in the 1996 Act or its legislative history suggests that Congress intended to alter
the current classification of Internet and other information services or to expand traditional
telephone regulation to new and advanced services."75 Like Senator McCain, they state:"Rather than expand regulation to new service providers, a critical goal of the 1996 Act wasto diminish regulatory burdens as competition grew."76
39.
In addressing the difficult interpretation issues posed by the conflicting
positions, we start by observing that the 1996 Act effected landmark changes in a variety ofareas of communications policy. We recognize that the interpretation presented by Senator
Stevens would serve the goal of eliminating distinctions that result in different regulatory
treatment for firms that arguably provide similar functionalities based on whether firms
provide "telecommunications" or "information services." We find, however, that in defining"telecommunications" and "information services," Congress built upon the MFJ and theCommission's prior deregulatory actions in Computer II. After careful consideration of thestatutory language and its legislative history, we affirm our prior findings that the categoriesof "telecommunications service" and "information service" in the 1996 Act are mutually
exclusive.77 Under this interpretation, an entity offering a simple, transparent transmission
path, without the capability of providing enhanced functionality, offers“telecommunications.” By contrast, when an entity offers transmission incorporating the“capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing,or making available information,” it does not offer telecommunications. Rather, it offers an"information service" even though it uses telecommunications to do so. We believe that
this reading of the statute is most consistent with the 1996 Act's text, its legislative history,
and its procompetitive, deregulatory goals.
40.
We begin our analysis with the statutory text. Senators Stevens and Burns
contend that a service qualifies as a "telecommunications service" whenever the service
provider transports information over transmission facilities, without regard to whether theservice provider is using information-processing capabilities to manipulate that information

73

Id.

74

Id. at 4.

75

Senator Ashcroft, et al., letter at 1.

76

Id. at 2.

77

As we explain infra Secion IV.B, we interpret the Act to contemplate that a single entity can be botha telecommunications provider and an information services provider, but only in connection with its offeringof separate services; it cannot gain that dual status merely as a result of its offering of a single service.

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or provide new information.78 That approach, however, seems inconsistent with thelanguage Congress used to define "telecommunications." That language specifies that thetransmission be "without change in the form or content of the information as sent andreceived." It appears that the purpose of these words is to ensure that an entity is notdeemed to be providing "telecommunications," notwithstanding its transmission of user
information, in cases in which the entity is altering the form or content of that information.
41.
The statutory text suggests to us that an entity should be deemed to provide
telecommunications, defined as "the transmission, between or among points specified by theuser, of information of the user's choosing, without change in the form and content of theinformation," only when the entity provides a transparent transmission path, and does not"change . . . the form and content" of the information.79 When an entity offers subscribers
the "capability for generating, acquiring, storing, transforming, processing, retrieving,utilizing or making available information via telecommunications," it does not provide
telecommunications; it is using telecommunications.80
42.
We also find that the legislative history supports our initial conclusions drawn
from the statutory text. The 1996 Act's definition of "telecommunications" was closely

78

See Senators Stevens and Burns comments at 4-5. At one point, the comments of Senators Stevens
and Burns suggest a second argument: that a firm provides both a "telecommunications service" and an"information service" when it provides information content via the public switched telephone network. In that
context, the firm would be deemed to be providing transmission of its data, to the consumer, over the
telephone company's facilities. See Senators Stevens and Burns comments at 5 & n. 18 (describing it asirrelevant whether the information service provider "make[s] the transmission" over "the ISP's own facilities,
leased facilities, private lines, wireless facilities, cable facilities, broadcast facilities [or] common carrier
facilities"). The statutory definition of "telecommunications service," however, requires that the provider be"offering . . . to the public" the "transmission . . . of information of the user's choosing." Where users rely on
the public switched network to reach the information service provider, it is the telephone company, not the
information service provider, that is offering to the public transmission over the public switched network. The
information service provider, therefore, is not providing telecommunications service in those circumstances.
79

One might make the more limited argument that Congress, rejecting the Computer II approach,intended that a service qualify as both "telecommunications" and an "information service" if the service
provider transported information of the user's choosing over facilities it owns or leases, and did so "withoutchange in the form or content of the information as sent and received," but nonetheless offered a capability for"generating, acquiring, storing, transforming, processing, retrieving, utilizing or making available information."
It is difficult to determine, though, what services would fall in this category. A service that generates,
acquires, transforms, processes, retrieves, utilizes or makes available information is by definition not merelytransmitting the user's information without change. Arguably, a service involving simple storage of user
information could transmit it without change, and thus fall within both the "telecommunications service" and"information service" definitions. Our examination of the legislative history, however, convinces us that
Congress intended the two categories to be mutually exclusive, and did not contemplate any such overlap. See
infra paras. 39-42.
80See, e.g., CIX comments at 5-6; Compuserve comments at 3-4; Coalition comments at 4-9; ITI and
ITAA comments at 3-6; Reuters comments at 3-4; Worldcom comments at 3-5. But see TDS comments at 23; RTC reply comments at 5-10 (characterizing the distinction as an “irrational, disparate, discriminatory,
marketplace-distorting” fiction).

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patterned on the corresponding definition in the MFJ. The MFJ defined"telecommunications" as
the transmission, between or among points specified by the user, of
information of the user's choosing, without change in the form or content of
the information as sent and received, by means of electromagnetictransmission medium, including all instrumentalities, facilities, apparatus, andservices (including the collection, storage, forwarding, switching, and deliveryof such information) essential to such transmission.81
The Senate and House bills echoed that language. The House bill definedtelecommunications as
the transmission, between or among points specified by the subscriber, of
information of the subscriber's choosing, without change in the form orcontent of the information as sent and received, by means of anelectromagnetic transmission medium, including all instrumentalities,
facilities, apparatus, and services (including the collection, storage,
forwarding, switching, and delivery of such information) essential to suchtransmission,82
and the Senate bill truncated the definition to include
the transmission, between or among points specified by the user, of
information of the user's choosing, including voice, data, image, graphics, andvideo, without change in the form or content of the information, as sent andreceived, with or without benefit of any closed transmission medium.83
By contrast, the two bills took different approaches in defining "information service." The
House bill derived its definition of "information service" from the MFJ.84 The Senate,however, used the Commission's definition of enhanced services as its model.85

81

United States v. American Tel. & Tel. Co., 552 F. Supp. 131, 229 (D.D.C. 1982), aff'd sub nom.
Maryland v. United States, 460 U.S. 1001 (1983).
82

H.R. 1555, § 501(a)(48), reprinted in H.R. Rep. No. 204, 104th Cong., 1st Sess. 46 (1995) ( House
Report). The House Report explicitly noted that its definition was "based on the definition used in the
Modification of Final Judgment." Id. at 125.
83

S. 652, § 8(b), 104th Cong., 1st Sess. (1995).

84

See House Report at 125.

85

S. Rep. No. 23, 104th Cong., 1st Sess. 18 (1995) ( Senate Report). We note that Judge Greene, in theopinion approving the MFJ, referred to the enhanced-services and information-services categories as"essentially . . . equivalent." United States v. AT&T, 552 F. Supp. 131, 178 n. 198 (D.D.C. 1982), aff'd subnom. Maryland v. United States, 460 U.S. 1001 (1983); see also United States v. Western Electric Co., 673 F.
Supp. 525, 575 (D.D.C. 1987) (referring to "enhanced services, i.e., generally speaking, information services"),23Federal Communications Commission

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43.
The language and legislative history of both the House and Senate bills
indicate that the drafters of each bill regarded telecommunications services and information
services as mutually exclusive categories.86 The House bill explicitly stated in the statutory
text: "The term 'telecommunications service' . . . does not include an information service."87
The Senate Report stated in unambiguous terms that its definition of telecommunications"excludes those services . . . that are defined as information services."88 Information service
providers, the Report explained, "do not 'provide' telecommunications services; they areusers of telecommunications services."89 Accordingly, the Senate Report stated, thelegislation "does not require providers of information services to contribute to universal
service."90 We believe that these statements make explicit the intention of the drafters ofboth the House and Senate bills that the two categories be separate and distinct, and that
information service providers not be subject to telecommunications regulation.
44.
As noted above, however, proponents of the alternative interpretation findsupport in the legislative history for the position that Congress intended overlapping
categories. In particular, they point out that the following sentence was deleted from the
Senate bill's definition of telecommunications service: "'Telecommunications service' . . .
includes the transmission, without change in the form or content, of information services
and cable services, but does not include the offering of those services."91 At the February
19, 1998 en banc hearing, it was argued in support of the alternative interpretation that thesentence was deleted in conference so as to ensure that the "telecommunications" and"information service" definitions would not be viewed as mutually exclusive.92 The
amendment on its face can be read to support that inference. Our review of the legislative
history leads us to conclude, however, that the deletion of the language in question was notintended to expand the definition of telecommunications service so that it would overlap
with information services. Rather, the sentence was deleted on the Senate floor by amanager's amendment "intended to clarify that carriers of broadcast or cable services are notintended to be classed as common carriers under the Communications Act to the extent they

aff'd in part & rev'd in part, 900 F.2d 283 (D.C. Cir. 1990); CIX comments at 3-4.
86

Moreover, Judge Greene's opinion accompanying the MFJ appears to treat telecommunications andinformation services as mutually exclusive. See, e.g., 552 F. Supp. at 179-80 (differentiating between"information services" and "transmission facilities for those services").
87

H.R. 1555, § 501(a)(50), reprinted in House Report at 46-47.

88

Senate Report at 18.

89

Id. at 28.

90

Id.

91

Id. at 79 (text of the bill).

92

See Feb. 19, 1998 en banc transcript at 24 (testimony of Mr. Comstock).

24Federal Communications Commission

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provide broadcast services or cable services."93 That is, the managers appear to have been
concerned that the original language might lead courts to interpret "telecommunications
service" too broadly, and inappropriately classify cable systems and broadcasters as
telecommunications carriers. As a result, we believe that this amendment to the definitionof "telecommunications service" does not undercut the Senate Report's earlier declarationthat the bill's definition of "telecommunications" "excludes . . . information services."
Rather, it underlines the legislative determination that information service providers should
not be classified as telecommunications carriers.94 Moreover, given the explicit statementsin the House and Senate bills and the Senate Report, we believe it is significant that the
Joint Explanatory Statement (adopting the Senate version of "telecommunications" and"telecommunications service") does not appear to contain anything inconsistent with theview that "telecommunications" and "information service" are mutually exclusive categories.
45.
In addition, in considering the statutory history of the 1996 Act, we note thatat the time the statute was enacted, the Computer II framework had been in place forsixteen years. Under that framework, a broad variety of enhanced services were free from
regulatory oversight, and enhanced services saw exponential growth.95 Accordingly, adecision by Congress to overturn Computer II, and subject those services to regulatory
constraints by creating an expanded "telecommunications service" category incorporating
enhanced services, would have effected a major change in the regulatory treatment of thoseservices. While we would have implemented such a major change if Congress had requiredit, our review leads us to conclude that the legislative history does not demonstrate an intent
by Congress to do so.96 As a result, looking at the statute and the legislative history as awhole, we conclude that Congress intended the 1996 Act to maintain the Computer II
framework.
46.
We note that our interpretation of "telecommunications services" and"information services" as distinct categories is also supported by important policy
93

141 Cong. Rec. S7996 (June 8, 1995) (statement of Sen. Pressler).

94

A colloquy between Senator Pressler and Senator Kerrey, at the time the amendment was adopted,
states that the amendment was not intended to disturb the application of statutory provisions relating to"telecommunications service" to businesses engaged in the "transmission of information services." Id. Thatstatement was part of the Senate bill as reported; the bill had stated, in the deleted language, that"telecommunications service" included "the transmission, without change in the form or content, of
information services and cable services, but does not include the offering of those services." Thus, thecolloquy presents no reason to believe that the amendment was intended to expand the scope of the"telecommunications" definition beyond that expounded in the Senate Report. As a result, we have no reason
to question that various statements in that Report apply to the 1996 Act, as adopted by Congress: that the
telecommunications definition "excludes . . . information services"; that information service providers "do not'provide' telecommunications services"; and accordingly that the legislation "does not require providers of
information services to contribute to universal service." See supra paragraph 40.
95

Various commenters stress the efficacy of the Computer II regime. See, e.g., AOL comments at 6-8;
Compuserve comments at 10-11; Coalition comments at 16; Internet Service Providers reply comments at 5.
96Feb. 19, 1998 en banc transcript at 93-94; see also Compuserve comments at 8-9, IAC comments at

17-18.

25

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FCC 98-67

considerations. An approach in which a broad range of information service providers are
simultaneously classed as telecommunications carriers, and thus presumptively subject tothe broad range of Title II constraints, could seriously curtail the regulatory freedom that theCommission concluded in Computer II was important to the healthy and competitive
development of the enhanced-services industry.
47.
In response to this concern, Senators Stevens and Burns maintain that theCommission could rely on its forbearance authority under section 10 of the Act to resolve
any such problems.97 Under that provision, the Commission is required to forbear fromapplying any regulation or provision of the Act to a telecommunications carrier or service,or class of carriers or services, if it determines that enforcement of that regulation orprovision is not necessary to ensure that relevant charges, practices, classifications or
regulations are just, reasonable and nondiscriminatory; enforcement of that regulation orprovision is not necessary to protect consumers; and forbearance is consistent with the
public interest.98 That forbearance authority is important, and the Commission has relied on
it in the past.99 Notwithstanding the possibility of forbearance, we are concerned that
including information service providers within the "telecommunications carrier"classification would effectively impose a presumption in favor of Title II regulation of suchproviders. Such a presumption would be inconsistent with the deregulatory andprocompetitive goals of the 1996 Act. In addition, uncertainty about whether theCommission would forbear from applying specific provisions could chill innovation.100
48.
The classification of information service providers as telecommunications
carriers, moreover, could encourage states to impose common-carrier regulation on suchproviders. Although section 10(e) of the Act precludes a state from applying or enforcing
provisions of federal law where the Commission has determined to forbear, it does notpreclude a state from imposing requirements derived from state law.101 State requirements
for telecommunications carriers vary from jurisdiction to jurisdiction, but include

97

Senators Stevens and Burns comments at 3; see also TDS comments at 2.

98

47 U.S.C. § 10(a).

99See, e.g., Hyperion Telecommunications, Inc., 12 FCC Rcd 8596 (1997); Policy and Rules Concerning
the Interstate, Interexchange Marketplace, 11 FCC Rcd 20730 (1996), on reconsideration, 12 FCC Rcd 15014(1997), stayed sub nom. MCI Telecommunications Corp. v. FCC (Feb. 13, 1997).
100

See Senator McCain letter at 4: "[T]he state of permanent uncertainty that this approach would
unavoidably cause would chill future development of Internet-based services and thereby disserve the public
interest."
101

The Commission has preempted certain inconsistent state regulation of jurisdictionally mixed
enhanced services provided by the BOCs. See Computer III Remand Proceedings: Bell Operating Company
Safeguards and Tier I Local Exchange Company Safeguards, 6 FCC Rcd 7571, 7631 (1991) ( BOC Safeguards
Order), aff'd in relevant part, California v. FCC, 39 F.3d 919, 931-33 (9th Cir. 1994) ( California III), cert.
denied, 115 S.Ct. 1427 (1995). That preemption decision, however, does not address state regulation of
telecommunications services.

26Federal Communications Commission

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certification, tariff filing, and various reporting requirements and fees.102 Furthermore,
although the Commission has authority to forbear from unnecessary regulation, foreign
regulators may not have comparable deregulatory authority to avoid imposing the full rangeof telecommunications regulation on information services. If these countries were to adopt
an approach that classified information services as telecommunications, without the ability
to craft an appropriate regulatory framework, that approach could subject information
service providers to market access restrictions or above-cost accounting rates. Such a result
would inhibit growth of these procompetitive services, to the detriment of consumers in the
United States and abroad.
2.

Protocol Processing

49.
Senators Stevens and Burns urge that transmission services incorporating
protocol processing should be treated as telecommunications services, and not information
services. They note that, in enacting the 1996 Act, the conference committee declined toadopt the Senate version of the information services definition, derived from theCommission's definition of enhanced services, which explicitly referred to services that
"employ computer processing applications that act on the format, content, code, protocol orsimilar aspects of the subscribers transmitted information."103 Rather, the conference
committee adopted the House version, which made no explicit reference to protocol
processing. As a result, the fact that a service involves protocol processing, those parties
urge, should not lead to its classification as an information service.104
50.
The Commission reached a different result in the Non-Accounting Safeguards
Order, in which it concluded that the category of information services was essentially
identical to the pre-existing category of enhanced services. The Commission found thatthose protocol processing services that had qualified as "enhanced" should be treated as"information services," in part because they satisfy the statutory requirement of offering "acapability for . . . transforming [and] processing . . . information via telecommunications."105
It noted, however, that certain protocol processing services that result in no net protocol
conversion to the end user are classified as basic services; those services are deemed
telecommunications services.106

102

See AOL comments at 12-13, 15-16. Cf. Computer III Phase II Order, 2 FCC Rcd 3072, 3078
(1987) (treating protocol processing as an adjunct-to-basic service would introduce regulatory uncertainty,
since "even if we were to forbear from regulation on the federal level . . . a [provider] could be subject to state
regulation").
103

See Joint Explanatory Statement of the Committee of Conference, S. Rep. No. 104-230 (1996), at
114-16 ("Joint Explanatory Statement").
104

See Senators Stevens and Burns comments at 4, 6.

105

47 U.S.C. § 153(20); Non-Accounting Safeguards Order, 11 FCC Rcd at 21955-58, paras. 104-07.

106

In those services, while protocol conversion may take place internal to the call, there is no net
conversion between or among end users. The services fall into three categories: (1) protocol processing in
connction with communications between an end-user and the network itself ( e.g., for initiation, routing, and27

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51.
Senators Stevens and Burns raise a substantial point. The conference
committee's decision not to adopt language explicitly classifying services employing
protocol processing as information services supports the inference that the conferees did notintend that classification. We note, however, that the House language, adopted by theconference committee, was derived from the MFJ, and that services employing protocol
processing were treated as information services under the MFJ.107 Furthermore, as noted
above, services offering net protocol conversion appear to fall within the statutory language,
because they offer a capability for "transforming [and] processing" information. In light ofthese considerations, we recognize that the issue of the regulatory treatment of protocol
processing is a difficult one.
52.
We find, however, little to no discussion of this issue in the record.
Accordingly, we do not believe that we have an adequate basis for resolving this matter inthis Report. Moreover, we believe that we need not resolve the issue in order to address
the important issues raised by the Appropriations Act. The regulatory classification of
protocol processing is significant to the provision of universal service only to the extent that
it affects the appropriate classification of Internet access service and IP telephony. We find,however, for the reasons explained below, that Internet access services are appropriately
classed as information services without regard to our treatment of protocol processing.108
Similarly, our discussion of the regulatory status of phone-to-phone IP telephony is notaffected by our resolution of the protocol processing issue.109 The protocol processing thattakes place incident to phone-to-phone IP telephony does not affect the service's
classification, under the Commission's current approach, because it results in no net protocol
conversion to the end user.110 Finally, when a facilities owner provides leased lines to an
Internet access or backbone provider, it does not provide protocol processing.

termination of calls) rather than between or among users; (2) protocol processing in connection with theintroduction of a new basic network technology (which requires protocol conversion to maintain compatibility
with existing CPE); and (3) protocol procesing in connection with internetworking (conversions taking placesolely within the carrier's network to facilitate provision of a basic network service, that result in no net
conversion to the end-user). See Non-Accounting Safeguards Order, 11 FCC Rcd at 21958, para. 107;
Independent Data Communications Manufacturers Association, Inc. Petition for Declaratory Ruling that
AT&T's Interspan Frame Relay Service Is a Basic Service, Memorandum Opinion and Order, 10 FCC Rcd
13717, 13719 (1995) ( Frame Relay Order); Computer III Phase II Order, 2 FCC Rcd at 3081-82, paras. 6471. An example of the third type of protocol conversion occurs when a carrier converts from X.25 to X.75
formatted data at the originating end within the network, transports the data in X.75 format, and then converts
the data back to X.25 format at the terminating end.
107

See United States v. Western Electric Co., 673 F. Supp. 525 (D.D.C. 1987) (amending the MFJ toallow RBOCs to provide such services notwithstanding their classification as information services), 714 F.
Supp. 1 (D.D.C. 1988) (same), rev'd in part, 900 F.2d 283 (D.C. Cir. 1990).
108

See infra Section IV.D.2.

109

See infra Section IV.D.3.

110

See supra note 102.

28

Federal Communications Commission

3.

FCC 98-67"Telephone Exchange Service" and "Local Exchange Carrier"
Definitions

53.
The 1996 Act redefined "telephone exchange service" to include not only
"service within a telephone exchange, or within a connected system of telephone exchanges
within the same exchange area operated to furnish to subscribers interconnecting service ofthe character ordinarily furnished by a single exchange," but also "comparable service
provided through a system of switches, transmission equipment, or other facilities (orcombination thereof) by which a subscriber can originate and terminate atelecommunications service."111 It defined "local exchange carrier" to include "any personthat is engaged in the provision of telephone exchange service or exchange access." Thedefinition excludes persons "engaged in the provision of a commercial mobile service . . .
except to the extent the Commission finds that such service should be included in thedefinition of such term."11254.
Our review indicates that the legislative history does not provide guidance on
the meaning of these provisions. It appears from the legislative text that Congress'
redefinition of "telephone exchange service" was intended to include in that term not only
the provision of traditional local exchange service (via facilities ownership or resale), butalso the provision of alternative local loops for telecommunications services, separate fromthe public switched telephone network, in a manner "comparable" to the provision of local
loops by a traditional local telephone exchange carrier. The record contains very little
discussion of these definitions. We do not believe, however, that the 1996 Act's
modification of the "telephone exchange service" definition, or its addition of the "local
exchange carrier" definition, undercuts the analysis we present in this Report.
IV.

APPLICATION OF DEFINITIONSA.

Overview

55.
We have been directed by Congress to describe in detail the application of
the definitions considered in the previous section to "mixed or hybrid services."113 Congresshas also directed that we explain "the impact of such application on universal service
definitions and support, and the consistency of the Commission's application."114 Under the
statute, all "telecommunications carriers" that provide interstate telecommunications services
must contribute to federal universal service mechanisms, and any company that otherwise
provides interstate telecommunications may be required to contribute. Companies that use
other providers' telecommunications networks to provide the communications pathunderlying their own information services do not contribute directly, but they support

111

47 U.S.C. § 3(47).

112

Id. § 3(26).

113

Appropriations Act, § 623(b)(2).

114

Id.

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universal service indirectly through the telecommunications services they purchase. We
conclude that entities providing pure transmission capacity to Internet access or backbone
providers provide interstate "telecommunications." Internet service providers themselves
generally do not provide telecommunications. In those cases where an Internet service
provider owns transmission facilities, and engages in data transport over those facilities inorder to provide an information service, we do not currently require it to contribute touniversal service mechanisms. We believe it may be appropriate to reconsider that result,as it would appear in such a case that the Internet service provider is furnishing raw
transmission capacity to itself. Finally, we consider the regulatory status of various formsof "phone-to-phone IP telephony" service mentioned generally in the record. The record
currently before us suggests that certain of these services lack the characteristics that would
render them “information services” within the meaning of the statute, and instead bear thecharacteristics of “telecommunications services.” We do not believe, however, that it isappropriate to make any definitive pronouncements in the absence of a more complete
record focused on individual service offerings. Our analysis, we believe, reflects a
consistent approach that will safeguard the current and future provision of universal service
to all Americans, and will achieve the Congressionally-specified goals of a "procompetitive, deregulatory communications policy."
B.

Mixed or Hybrid Services

56.
We note that the phrase "mixed or hybrid services," as used in the
Appropriations Act, does not appear in the text of the 1996 Act. We understand this term
to refer to services in which a provider offers a capability for generating, acquiring, storing,transforming, processing, retrieving, utilizing or making available information via
telecommunications, and as an inseparable part of that service transmits information
supplied or requested by the user.
57.
It follows from the statutory analysis set out in Part III.C of this Report thathybrid services are information services, and are not telecommunications services.115
Because information services are offered "via telecommunications," they necessarily requirea transmission component in order for users to access information. Accordingly, if weinterpreted the statute as breaking down the distinction between information services andtelecommunications services, so that some information services were classed as
telecommunications services, it would be difficult to devise a sustainable rationale underwhich all, or essentially all, information services did not fall into the telecommunications
service category. As noted in the previous section, we find strong support in the text andlegislative history of the 1996 Act for the view that Congress intended "telecommunications
service" and "information service" to refer to separate categories of services.

115

See supra Section IV.C.

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58.
The Commission has considered the question of hybrid services sinceComputer I, when it first sought to distinguish "communications" from "data processing."116
Computer II provided a framework for classifying such services, under which the offeringof enhanced functionality led to a service being treated as "enhanced" rather than "basic."117
An offering that constitutes a single service from the end user's standpoint is not subject tocarrier regulation simply by virtue of the fact that it involves telecommunications
components.118 As we have explained above, we find that Congress intended to leave thisgeneral approach intact when it adopted the 1996 Act.
59.
This functional approach is consistent with Congress's direction that theclassification of a provider should not depend on the type of facilities used.119 A
telecommunications service is a telecommunications service regardless of whether it isprovided using wireline, wireless, cable, satellite, or some other infrastructure. Its
classification depends rather on the nature of the service being offered to customers. Statedanother way, if the user can receive nothing more than pure transmission, the service is atelecommunications service. If the user can receive enhanced functionality, such as
manipulation of information and interaction with stored data, the service is an information
service. A functional analysis would be required even were we to adopt an overlapping
definition of "telecommunications service" and "information service." If we decided thatany offering that "included telecommunications" was a telecommunications service, wewould need some test to determine whether the transmission component was "included" aspart of the service. Based on our analysis of the statutory definitions, we conclude that an
approach in which "telecommunications" and "information service" are mutually exclusive
categories is most faithful to both the 1996 Act and the policy goals of competition,
deregulation, and universal service.
60.
We recognize that the question may not always be straightforward whether,on the one hand, an entity is providing a single information service with communications
and computing components, or, on the other hand, is providing two distinct services, one ofwhich is a telecommunications service. It is plain, for example, that an incumbent local
exchange carrier cannot escape Title II regulation of its residential local exchange service
simply by packaging that service with voice mail.120 Since Computer II, we have made it
clear that offerings by non-facilities-based providers combining communications and116

Regulatory & Policy Problems Presented by the Interdependence of Computer and Communications
Services & Facilities ( Computer I), 7 FCC 2d 11, 13 (1966) ( Notice of Proposed Rulemaking); 28 FCC 291(1970) ( Tentative Decision); 28 FCC 2d 267 (1971) ( Final Decision), aff'd in part sub nom. GTE Service
Corp. v. FCC, 474 F.2d 724 (2d Cir. 1973), decision on remand, 40 FCC 2d 293 (1973).
117

See supra Section II.B.

118

See Computer II Final Decision, 77 FCC2d at 420-28, paras. 97-114.

119

See 47 U.S.C. § 3(46) (defining "telecommunications service" to include "the offering of
telecommunications for a fee directly to the public . . . regardless of the facilities used").
120

See Frame Relay Order, 10 FCC Rcd at 13722-23, paras. 40-46.

31Federal Communications Commission

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computing components should always be deemed enhanced.121 But the matter is more
complicated when it comes to offerings by facilities-based providers. We noted recently in
the Universal Service Fourth Order on Reconsideration, considering a related question, that"[t]he issue is whether, functionally, the consumer is receiving two separate and distinct
services."122C.

Background on Internet Services

61.
Congress explicitly directed us to consider Internet access in connection with
our implementation of section 254 of the Act.123 More generally, Internet-based offerings
represent perhaps the most significant category of "mixed or hybrid services" discussed in
the record. Therefore, we believe it appropriate to address in some detail the application of
the statutory definitions considered in the previous section to the Internet. We begin with abrief description of the Internet as a backdrop for the analysis in this section.
62.
The Internet is a a loose interconnection of networks belonging to many
owners. It is comprised of tens of thousands of networks that communicate using theInternet protocol (IP).124 For purposes of this report, we find it useful to distinguish five
types of entities: (1) end users; (2) access providers; (3) application providers; (4) content
providers; and (5) backbone providers.
63.
End users obtain access to and send information either through dial-up
connections over the public switched telephone network, or through dedicated data circuits
over wireline, wireless, cable, or satellite networks. Access providers, more commonly
known as Internet service providers, combine computer processing, information storage,
protocol conversion, and routing with transmission to enable users to access Internet content
and services.125 Major Internet access providers include America Online, AT&T WorldNet,
121

See, e.g., Computer II Phase II Recon. Order, 3 FCC Rcd at 1153 n. 23; Decreased Regulation of
Certain Basic Telecommunications Services, 2 FCC Rcd 645, 648, para. 21 (1987) (Notice of Proposed
Rulemaking).
122

Fourth Order on Reconsideration, at para. 282.

123

Appropriations Act, § 623(b)(2).

124

IP defines the structure of data, or "packets," transmitted over the Internet.

125

We will use the terms "Internet access providers" and "Internet service providers" interchangeably inthis Report.
Access services, as we describe them here, are similar to the "conduit services" we defined in the
Universal Service Order. We used "conduit services," which is not a statutorily-defined term, to describe
those services eligible for reimbursement as forms of "access to advanced information services" for schools,
libraries, and rural health care providers. As examples of such services, we cross-referenced language fromsection 274 of the Act concerning electronic publishing. See Universal Service Order, 12 FCC Rcd at 901213, paras. 443-44. We stated, however, that "our use of section 274 should not imply anything about theclassification of services in other contexts." Id., 12 FCC Rcd at 9013 n.159, para. 444. Despite thisadmonition, our use of language referring to services that are not electronic publishing under section 274 may

32

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Netcom, Earthlink, and the Microsoft Network. Application providersoffer users a discrete
end-to-end service rather than open-ended Internet connectivity. Examples include IP
telephony service providers such as IDT and Delta 3, and free electronic mail vendor Juno.
Content providersmake information available on "servers" connected to the Internet, where
it can be accessed by end users. Major content providers include Yahoo, Netscape, ESPNSportszone, and Time-Warner's Pathfinder service. Finally, backbone providers, such as
Worldcom, Sprint, AGIS, and PSINet, route traffic between Internet access providers, andinterconnect with other backbone providers. Many companies fall into more than one ofthese categories. For example, America Online offers Internet access as well as content(which can be purchased separately for a lower fee), and until recently owned backbone
provider ANS. In addition, many of the networks connected to the Internet are "intranets,"or private data networks, that offer better performance or security to a limited set of users,
but can still communicate with the Internet using IP.
64.
The Internet is a distributed packet-switched network, which means that
information is split up into small chunks or "packets" that are individually routed throughthe most efficient path to their destination. Even two packets from the same message may
travel over different physical paths through the network. Packet switching also enables
users to invoke multiple Internet services simultaneously, and to access information with noknowledge of the physical location of the server where that information resides.
65.
Internet usage has grown steadily and rapidly, especially since thedevelopment of the World Wide Web in 1989. According to one survey, there are currently
more than 4,000 Internet service providers and 40 national Internet backbones operating in
the United States.126 According to data presented at our en banc hearing on February 19,
1998, Internet service provider market revenues are projected to grow from under fourbillion dollars in 1996 to eighteen billion dollars in the year 2000.127
D.

Discussion
1.

Provision of Transmission Capacity to Internet Access andBackbone Providers

66.
Internet service providers typically utilize a wide range of telecommunications
inputs. Commenters have focused much attention on the fact that Internet service providers
purchase analog and digital lines from local exchange carriers to connect to their dial-in
subscribers, and pay rates incorporating those carriers' universal service obligations.128
What has received less attention is that Internet service providers utilize other, extensive

have caused some confusion. We emphasize that our intent was only to give examples of eligible services, notto somehow shift the legal classification of Internet access.
126

Boardwatch Magazine, Winter 1998 Directory of Internet Service Providers at 4, 25.

127

February 19, 1998 en banc transcript at 15 (testimony of Mr. Hyland).

128

See, e.g., USIPA comments at 4.

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telecommunications inputs. While a large Internet service provider engages in extensive
data transport, it may own no transmission facilities. To provide transport within its own
network, it leases lines (T1s, T3s and OC-3s)129 from telecommunications carriers.130 To
ensure transport beyond the edges of its network, it makes arrangements to interconnect
with one or more Internet backbone providers.131 We explain below, in Part IV.D.2, that
Internet service providers themselves provide information services, not telecommunications(and hence do not contribute to universal service mechanisms). But to the extent that anyof their underlying inputs constitutes interstate telecommunications, we have authority underthe 1996 Act to require that the providers of those inputs contribute to federal universal
service mechanisms.
67.
With regard to the lines leased by Internet service providers to provide theirown internal networks, the analysis is straightforward. We explain below that the Internet
service providers leasing the lines do not provide telecommunications to their subscribers,
and thus do not directly contribute to universal service mechanisms. The provision ofleased lines to Internet service providers, however, constitutes the provision of interstate
telecommunications.132 Telecommunications carriers offering leased lines to Internet service
providers must include the revenues derived from those lines in their universal service
contribution base.133 The record reveals that at least some leased-line providers are129

A T1 is a digital transmission link with a capacity of 1.544 million bits per second. A T3 has acapacity of 44.736 million bits per second. An OC-3 is a fiberoptic link with capacity of 155.52 million bits
per second.
130

America Online reports that it expects to spend roughly $1.2 billion for telecommunications services
in fiscal 1999. The prices it pays for those services incorporate universal service contributions. See AOL
comments at 17 & n.65; AOL reply comments at Attachment 7-8 (Jeffrey K. Mackie-Mason, "Layering for
Equity and Efficiency: A Principled Approach to Universal Service Policy"); see also, e.g., Coalitioncomments at 13-15; ITI and ITAA comments at 8; Worldcom comments at 8-9 & n.15.
131

One study indicates that transport costs, including incoming phone lines, leased lines andinterconnection at a network access point, currently amount to roughly 25% of an Internet service provider's
total costs. Lee W. McKnight & Brett A. Leida, "Internet Telephony: Costs, Pricing and Policy" (1997), at
14.
132

See Universal Service Order, 12 FCC Rcd at 9175, para. 780; 47 U.S.C. § 54.703.

133

We base universal service contributions on "end-user telecommunications revenues." 47 C.F.R. §54.703; Universal Service Order, 12 FCC Rcd at 9205-9212, paras. 842-57. Telecommunications revenues aretreated as end-user revenues and are included in the funding base, unless the associated telecommunications
offerings are provided to an entity that incorporates them into services that should generate their own universal
service contributions. See Instructions for Completing the Worksheet for Filing Contributions to the Universal
Service Support Mechanism, FCC Form 457, at 12. Because an Internet service provider is not such an entity,
entities providing interstate telecommunications to Internet service providers must include the associatedrevenues in their universal service funding base.

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complying with that requirement, and the prices paid by Internet service providers for theirleased lines reflect that universal service obligation.134
68.
Internet access, like all information services, is provided "viatelecommunications." To the extent that the telecommunications inputs underlying Internet
services are subject to the universal service contribution mechanism, that provides ananswer to the concern, expressed by some commenters, that "[a]s more and more traffic is'switched' to the Internet . . . there will no longer be enough money to support the
infrastructure needed to make universal access to voice or Internet communications
possible."135 To the extent that IP-based services grow, Internet service providers will havegreater needs for transport to accommodate that level of usage. Those needs will lead toincreased universal service contributions by providers of the leased lines that make upinternal Internet service provider networks.136 More generally, the Internet backbone iscurrently growing at an exponential rate, as Internet-based services gain popularity and newInternet-based services are developed, leading to increased overall universal service
support.137
69.
In those cases where an Internet service provider owns transmission facilities,
and engages in data transport over those facilities in order to provide an information
service, we do not currently require it to contribute to universal service mechanisms. We
believe it is appropriate to reexamine that result. One could argue that in such a case theInternet service provider is furnishing raw transmission capacity to itself.138 To the extent
134

See, e.g., Worldcom comments at 8 n. 15 ("when UUNET purchases network capacity, a basic
telecommunications service, from Worldcom Technologies, Inc., Worldcom reports those revenues to the
USAC as revenues earned from an end user").
135

Senators Stevens and Burns comments at 9; see also, e.g., Airtouch comments at 30-31.

136

McKnight & Leida indicate that movement from zero to moderate use of IP telephony will nearly
triple Internet service provider costs associated with purchasing transport. McKnight & Leida, supra note 126,
at 14 (for the modeled Internet service provider, projecting such costs at $7.37 million in the "baseline
scenario" and $21.56 million in the "IP telephony scenario").
137

See Jeff Sweat, "Internet Demand Is Moving Faster Than Technology, Panel Says," Information Week
(March 16, 1998), available at <http://www.techweb.com/wire/story/0398iwld/TWB19980316S0017>; Kate
Gerwig & Salvatore Salamone, "ISPs Mortgage the Farm for Bandwidth," Internet Week (Sept. 1, 1997),
available at <http://www.techweb.com/se/directlink.cgi?INW19970901S0068>.
138

This is not inconsistent with our conclusion, above, that the 1996 Act built on the Commission's
deregulatory actions in Computer II, so that "telecommunications" and "information service" are mutually
exclusive categories. See supra Section II.C.1; see also Section II.B (describing Computer II). Computer II
dealt with the relationship between an information service provider and its subscribers. Under Computer II,
and under our understanding of the 1996 Act, we do not treat an information service provider as providing atelecommunications service to its subscribers. The service it provides to its subscribers is not subject to Title
II, and is categorized as an information service. The information service provider, indeed, is itself a user oftelecommunications; that is, telecommunications is an input in the provision of an information service. Our
analysis here rests on the reasoning that under this framework, in every case, some entity must provide
telecommunications to the information service provider. When the information service provider owns theunderlying facilities, it appears that it should itself be treated as providing the underlying telecommunications.

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this means the Internet service provider is providing telecommunications as a non-common
carrier, it would not generally be subject to Title II, but it "may be required to contribute to
the preservation and advancement of universal service if the public interest so requires."139
As a theoretical matter, it may be advisable to exercise our discretion under the statute torequire such providers that use their own transmission facilities to contribute to universal
service. This approach would treat provision of transmission facilities to Internet service
providers similarly, for purposes of universal service, without regard to how the facilities
are provided. We recognize, however, that there are significant operational difficulties
associated with determining the amount of such an Internet service provider's revenues to beassessed for universal service purposes and with enforcing such requirements. There also
are issues relating to the extent to which Internet service providers would uneconomically
self-provide telecommunications because of a universal service assessment.140
70.
The Commission in the Universal Service Orderexpressly characterized
entities that "provide telecommunications solely to meet their internal needs" as
telecommunications providers subject to our permissive contribution authority. It found thatthose entities "should not be required to contribute to the support mechanisms at this time,
because telecommunications do not comprise the core of their business."141 Further, "itwould be administratively burdensome to assess a special non-revenues-based contribution
on these providers."142 We intend to consider, in an upcoming proceeding, the status ofentities that provide transmission to meet their internal needs. To the extent that weconclude that such entities provide telecommunications, we would consider, among otherthings, whether there are efficient, effective ways to require information service providers
that provide telecommunications to meet their own internal needs to contribute to universal
service support so that our regulations do not create an artificial incentive for information
service providers to integrate vertically. We also would consider whether, and to what
extent, our reasoning applies to entities other than information service providers that provide
interstate telecommunications to meet their own internal needs.

That conclusion, however, speaks only to the relationship between the facilities owner and the information
service provider (in some cases, the same entity); it does not affect the relationship between the information
service provider and its subscribers.
139

47 U.S.C. § 254(e).

140

We express no view in this Report on the applicability of this analysis to cable operators providing
Internet access service. The Act distinguishes between Title II and Title VI facilities, and we have not yet
established the regulatory classification of Internet services provided over cable television facilities. In the
Pole Attachments Telecommunications Rate Order, we expressly declined to rule on that issue, finding thatcable operators providing traditional cable services and Internet access services over the same facilities wereentitled to the 47 U.S.C. § 224(d)(3) pole attachment rate without regard to the regulatory classification of
their Internet-based services. See Pole Attachment Telecommunications Rate Order, at paras. 32-34.
141

Universal Service Order, 2 FCC Rcd at 9185, para. 799.

142

Id. See also April 8, 1998 letter from Representative White to Chairman Kennard, et al.

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71.
With respect to the facilities that make up the Internet backbone, the record
does not reveal the extent to which firms providing telecommunications facilities as part of
the Internet backbone are currently contributing to federal universal service mechanisms.
Yet it seems clear that, in one manner or another, firms are offering telecommunications
inputs in this context that underlie the ultimate provision of Internet services to theconsumer. We believe we would need to consider these offerings in order to ensure that thegoals of section 254 are fully realized.
72.
Our thinking relating to the Internet backbone points up some of thelimitations of our current approaches to implementing the universal service provisions of the1996 Act. The technology and market conditions relating to the Internet backbone areunusually fluid and fast-moving, and we are reluctant to impose any regulatory mandate that
relies on the persistence of a particular market model or market structure in this area. It
may be that the most successful approach in this context, maintaining universal service
revenues while avoiding the imposition of inefficient or innovation-discouraging obligations,would look to the actual facilities owners, requiring them to contribute to universal service
mechanisms on the revenues they receive. It is facilities owners that, in a real sense,
provide the crucial telecommunications inputs underlying Internet service. If universal
service contribution obligations, in the context of the Internet backbone, were based on
facilities ownership rather than end-user revenues, then firms purchasing capacity from thefacilities owners would still contribute indirectly, through prices that recover the facilities
owners' contributions. This matter deserves further consideration.
2.

Internet Access Services73.
We find that Internet access services are appropriately classed as information,rather than telecommunications, services. Internet access providers do not offer a puretransmission path; they combine computer processing, information provision, and othercomputer-mediated offerings with data transport. Senators Stevens and Burns suggest that
services provided by Internet access providers should be deemed to fall on thetelecommunications side of the line. When an Internet service provider transmits an email
message, they maintain, it transmits "information of the user's choosing, without change inthe form or content of the information as sent or received." Changes such as the additionof message headers, they argue, are inconsequential: "If the information chosen by the user
has the same form (e.g., typewritten English) and content (e.g., directions to Washington,
D.C.) as sent and received, then a 'telecommunication' has occurred."143 Senator McCain,by contrast, urges that electronic mail, voice mail and Internet access are information
services, because they furnish the capabilities to store, retrieve, or generate information.144
74.
In determining whether Internet access providers should be classed asproviding information services rather than telecommunications services, the text of the 1996

143

Senators Stevens and Burns comments at 4; see also, e.g., LTD comments at 1-2; RTC comments at

13-14.
144

Senator McCain letter at 3.

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Act requires us to determine whether Internet access providers merely offer transmission"between or among points selected by the user, of information of the user's choosing,
without change in the form or content of the information as sent and received,"145 orwhether they go beyond the provision of a transparent transmission path to offer end users
the "capability for generating, acquiring, storing, transforming, processing, retrieving,utilizing, or making available information."146 For the reasons that follow, we conclude thatthe latter more accurately describes Internet access service.
75.
We note that the functions and services associated with Internet access wereclassed as "information services" under the MFJ. Under that decree, the provision of
gateways (involving address translation, protocol conversion, billing management, and theprovision of introductory information content) to information services fell squarely withinthe "information services" definition.147 Electronic mail, like other store-and-forward
services, including voice mail, was similarly classed as an information service.148
Moreover, the Commission has consistently classed such services as "enhanced services"
under Computer II.149 In this Report, we address the classification of Internet access service
de novo, looking to the text of the 1996 Act. Various commenters have approached thisquestion by inquiring whether specific applications, such as e-mail, available to users with
Internet access, constitute “telecommunications.”150 As we explain below, we believe that
Internet access providers do not offer subscribers separate services -- electronic mail, Web
browsing, and others -- that should be deemed to have separate legal status. It is useful to
examine specific Internet applications, however, in order to understand the nature of thefunctionality that an Internet access provider offers.
76.
Internet access providers typically provide their subscribers with the ability to
run a variety of applications, including World Wide Web browsers, FTP clients,151 Usenet

145

47 U.S.C. § 153(43).

146

Id. § 153(20).

147

See United States v. Western Electric Co., 673 F. Supp. 525 (D.D.C. 1987) (amending the MFJ toallow RBOCs to provide such services notwithstanding their classification as information services), 714 F.
Supp. 1 (D.D.C. 1988) (same), rev'd in part, 900 F.2d 283 (D.C. Cir. 1990).
148

See United States v. Western Electric Co., 714 F. Supp. 1, 11, 19 n. 73 (D.D.C. 1988), rev'd in part,
900 F.2d 283 (D.C. Cir. 1990); see also id. at 18-24 (amending the MFJ to allow the RBOCs to provide"voice storage and retrieval services, including voice messaging and electronic mail services," notwithstanding
their classification as information services). The Telecommunications Resellers Association has filed a petition
seeking a declaratory ruling that voice mail is a telecommunications service and thus is subject to resale under
47 U.S.C. § 251. That petition is pending.
149

See, e.g., Computer II Final Decision, 77 FCC 2d at 420-21, paras. 97-98.

150

See, e.g., Compuserve comments at 5 (e-mail); Senators Stevens and Burns comments at 4 (same);
Letter from Donna N. Lampert, Mintz, Levin, to Magalie Roman Salas, FCC, dated Feb. 27, 1998
(summarizing AOL's views).
151

FTP, or File Transfer Protocol, is a tool for accessing file archives linked to the Internet.

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newsreaders,152 electronic mail clients, Telnet applications,153 and others. When subscribers
store files on Internet service provider computers to establish "home pages" on the World
Wide Web, they are, without question, utilizing the provider's "capability for . . . storing . .
. or making available information" to others. The service cannot accurately be characterizedfrom this perspective as "transmission, between or among points specified by the user"; theproprietor of a Web page does not specify the points to which its files will be transmitted,
because it does not know who will seek to download its files. Nor is it "without change inthe form or content," since the appearance of the files on a recipient's screen depends inpart on the software that the recipient chooses to employ. When subscribers utilize theirInternet service provider's facilities to retrieve files from the World Wide Web, they are
similarly interacting with stored data, typically maintained on the facilties of either theirown Internet service provider (via a Web page "cache") or on those of another. Subscribers
can retrieve files from the World Wide Web, and browse their contents, because theirservice provider offers the "capability for . . . acquiring, . . . retrieving [and] utilizing . . .
information."154 Most of the data transport on the Internet relates to the World Wide Web
and file transfer.155
77.
The same is true when Internet service providers offer their subscribers accessto Usenet newsgroup articles.156 An Internet service provider receives and stores thesearticles (in 1996, about 1.2 gigabytes of new material each day)157 on its own computer
facilities. Each Internet service provider must choose whether to carry a full newsgroupfeed, or only a smaller subset of available newsgroups. Each Internet service provider must
decide how long it will store articles in each newsgroup, and at what point it will deletethem as outdated. A user can then select among the available articles, choosing those thatthe user will view or read; having read an article, the user may store or forward it; and theuser can post articles of his or her own, which will in turn be stored on the facilities of his
own Internet service provider and those of every other Internet service provider choosing to152

The Usenet is a gigantic computer bulletin board system that is operated mostly (although notentirely) over the Internet. There are more than 15,000 different Usenet "newsgroups," each devoted to asingle topic such as Peruvian culture, molecular physics and the television show "The X-Files."153

Telnet applications allow users to use other computers connected to the Internet as if they were using
terminals physically connected to those machines.
154

Several commenters stress these points. See, e.g., CIX comments at 7-9, Compuserve comments at 67; see also Worldcom comments at 5.
155

As of April 1995 (the last period in which the National Science Foundation collected the relevant
information), about half of all Internet data traffic, measured in bytes of traffic, related to the World Wide
Web. That proportion was rising sharply, having doubled in just the previous year. The second largest
category of traffic related to FTP file transfer. Electronic mail and Usenet news, combined, amounted to lessthan 15% of Internet data traffic, and that proportion was falling. See Merit, Inc. data files at<http://www.merit.edu/nsfnet/statistics/history.ports>.
156

See supra note 138.

157

See Chris Lewis, "How to Become a Usenet Site" (rev. 4/13/97), available at<ftp://rtfm.mit.edu/pub/usenet/news.answers/usenet/site-setup>.

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carry that portion of the newsgroup feed. In providing this service, the Internet service
provider offers "a capability for generating, acquiring, storing, . . . retrieving . . . andmaking available information through telecommunications."158 Its function seems
indistinguishable from that of the database proprietor offering subscribers access to
information it maintains on-site; such a proprietor offers the paradigmatic example of an
information service.
78.
As noted above, Senators Stevens and Burns state that electronic mailconstitutes a telecommunications service.159 They note that the provision of a transmission
path for the delivery of faxes constitutes telecommunications, and characterize electronic
mail as "nothing more or less than a paperless fax."160 We have carefully considered thisargument, but further analysis leads us to a different result. Like the World Wide Web andUsenet services described above, electronic mail utilizes data storage as a key feature of theservice offering.161 The fact that an electronic mail message is stored on an Internet service
provider's computers in digital form offers the subscriber extensive capabilities for
manipulation of the underlying data. The process begins when a sender uses a softwareinterface to generate an electronic mail message (potentially including files in text, graphics,
video or audio formats). The sender's Internet service provider does not send that message
directly to the recipient. Rather, it conveys it to a "mail server" computer owned by therecipient’s Internet service provider, which stores the message until the recipient chooses toaccess it. The recipient may then use the Internet service provider's facilities to continue tostore all or part of the original message, to rewrite it, to forward all or part of it to third
parties, or otherwise to process its contents -- for example, by retrieving World Wide Web
pages that were hyperlinked in the message. The service thus provides more than a simple
transmission path; it offers users the "capability for . . . acquiring, storing, transforming,
processing, retrieving, utilizing, or making available information throughtelecommunications."16279.
More generally, though, it would be incorrect to conclude that Internet accessproviders offer subscribers separate services -- electronic mail, Web browsing, and others -that should be deemed to have separate legal status, so that, for example, we might deem
electronic mail to be a "telecommunications service," and Web hosting to be an"information service." The service that Internet access providers offer to members of the158

47 U.S.C. § 153(20).

159

Senators Stevens and Burns comments at 4, 7.

160

Id. at 7.

161

Particular users may not exploit this feature of the service offering; indeed, two users with direct
Internet connections can communicate via electronic mail in close to real-time. Nonetheless, it is central to theservice offering that electronic mail is store-and-forward, and hence asynchronous; one can send a message toanother person, via electronic mail, without any need for the other person to be available to receive it at that
time.
162

See, e.g., CIX comments at 9, Compuserve comments at 5-6, NCTA comments at 5-7, AOL ex parte.

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public is Internet access.163 That service gives users a variety of advanced capabilities.
Users can exploit those capabilities through applications they install on their own
computers. The Internet service provider often will not know which applications a user has
installed or is using. Subscribers are able to run those applications, nonetheless, precisely
because of the enhanced functionality that Internet access service gives them.164
80.
The provision of Internet access service involves data transport elements: an
Internet access provider must enable the movement of information between customers' own
computers and the distant computers with which those customers seek to interact. But theprovision of Internet access service crucially involves information-processing elements aswell; it offers end users information-service capabilities inextricably intertwined with datatransport.165 As such, we conclude that it is appropriately classed as an "information
service."16681.
An Internet access provider, in that respect, is not a novel entity incompatible
with the classic distinction between basic and enhanced services, or the newer distinction
between telecommunications and information services. In essential aspect, Internet accessproviders look like other enhanced -- or information -- service providers. Internet accessproviders, typically, own no telecommunications facilities. Rather, in order to provide thosecomponents of Internet access services that involve information transport, they lease lines,
and otherwise acquire telecommunications, from telecommunications providers -interexchange carriers, incumbent local exchange carriers, competitive local exchange
carriers, and others.167 In offering service to end users, however, they do more than resell
those data transport services. They conjoin the data transport with data processing,information provision, and other computer-mediated offerings, thereby creating an
information service. Since 1980, we have classed such entities as enhanced service
providers. We conclude that, under the 1996 Act, they are appropriately classed as
information service providers.
82.
Our findings in this regard are reinforced by the negative policy consequencesof a conclusion that Internet access services should be classed as "telecommunications."
We have already described some of our concerns about the classification of information

163

In this respect, we distinguish Internet access providers from application providers such as Juno;electronic mail is the only functionality Juno offers.
164

We note that large corporate users with internal computer networks and direct connections to theirInternet access providers receive somewhat different functionality than do residential dial-up subscribers.
165

As GTE put it, “[t]he very core of the Internet and its associated services is the ability to ‘retrieve’and ‘utilize’ information.” GTE comments at 18.
166

But see Bell Atlantic reply comments at 7-9 (Internet access providers should make universal service
fund contributions to the extent of the telecommunications component of their services).
167

See supra Section IV.D.1.

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service providers generally as telecommunications carriers.168 Turning specifically to thematter of Internet access, we note that classifying Internet access services as
telecommunications services could have significant consequences for the global
development of the Internet.169 We recognize the unique qualities of the Internet, and do
not presume that legacy regulatory frameworks are appropriately applied to it.170
3.

IP Telephony

83.
Having concluded that Internet access providers do not offer"telecommunications service" when they furnish Internet access to their customers, we next
consider whether certain other Internet-based services might fall within the statutory
definition of "telecommunications." We recognize that new Internet-based services are
emerging, and that our application of statutory terms must take into account suchtechnological developments. We therefore examine in this section Internet-based services,known as IP telephony, that most closely resemble traditional basic transmission
offerings.171 The Commission to date has not formally considered the legal status of IP
telephony.172 The record currently before us suggests that certain "phone-to-phone IP
telephony" services lack the characteristics that would render them “information services”
within the meaning of the statute, and instead bear the characteristics of“telecommunications services.” We do not believe, however, that it is appropriate to makeany definitive pronouncements in the absence of a more complete record focused on
individual service offerings.
168

See supra Section II.C.1.

169

On a related point, we note that the European Commission has determined that extant IP telephonyservices should not be regulated as "voice telephony." Status of Voice Communications on Internet Under
Community Law and, in Particular, Under Directive 90/388/EEC, Official Journal of the European
Community OJ No C 6 (January 10, 1998) at 4.
170

The United States emphasized in the WTO Negotiations on Basic Telecommunications that countries
should not impose new regulatory burdens on Internet and online service providers that could stifle thedevelopment of new technologies and services. See The White House, A Framework for Global Electronic
Commerce 24 (July 1, 1997). As a general matter, the participants in those negotiations characterized as"basic" those services that involve end-to-end transmission of user-supplied information, such as voice
telephony, packet-switched and circuit-switched data transmission, telex, telegraph, fax, and leased lines.
Services such as the provision of online databases, electronic mail, and voice mail, by contrast, werecharacterized as "value-added." As part of the WTO Basic Telecom Agreement, however, WTO Members
enter their own schedule of commitments with regard to the extent of their liberalization efforts.
171

Several of the commenters discuss IP telephony as a service that, for legal and policy reasons, shouldbe treated as a "telecommunications service" under the Act. See AT&T comments at 12-13; Alaska comments
at 8-9; AirTouch comments at 30-31; Senators Stevens and Burns comments at 8; RTC comments at 13.
172

A petition for rulemaking by Americas Carriers Telecommunication Association (ACTA) asking that
IP telephony software and hardware providers be classified as common carriers is still pending. See Common
Carrier Bureau Clarifies and Extends Request for Comment on ACTA Petition Relating to "Internet Phone"
Software and Hardware -- RM 8775, Report No. CC 96-10 (March 25, 1996). Although the analysis in thisReport addresses many of the issues raised in the ACTA petition, we will be considering the petition in a
separate order.

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84.
"IP telephony" services enable real-time voice transmission using Internet
protocols.173 The services can be provided in two basic ways: through software andhardware at customer premises, or through "gateways" that enable applications originating
and/or terminating on the PSTN.174 Gateways are computers that transform the circuitswitched voice signal into IP packets, and vice versa, and perform associated signalling,
control, and address translation functions. The voice communications can be transmitted
along with other data on the "public" Internet, or can be routed through intranets or otherprivate data networks for improved performance. Several companies now offer commercial
IP telephony products. For example, VocalTec sells software that end users can install on
their personal computers to make calls to other users with similar equipment, and also
makes software used in gateways.175 Companies such as IDT and Qwest employ gateways
to offer users the ability to call from their computer to ordinary telephones connected to the
public switched network, or from one telephone to another.176 To use the latter category ofservices, a user first picks up an ordinary telephone handset connected to the public
switched network, then dials the phone number of a local gateway. Upon receiving asecond dialtone, the user dials the phone number of the party he or she wishes to call. The
call is routed from the gateway over an IP network, then terminated through anothergateway to the ordinary telephone at the receiving end.177

173

While these services are often referred to as "Internet telephony," the same technology is used bothover the public Internet and over separate private IP networks. This class of services includes both voice andfacsimile transmission using IP.
174

The two basic technical mechanisms described here can be used to create a broad range of IP
telephony service offerings. For example, gateways can be deployed on either the originating or theterminating end of the call, or both. Wherever a gateway is not deployed, premises-based equipment must be
available as an alternative.
175

To engage in a "computer-to-computer" call, a user must typically install IP telephony software on a
personal computer equipped with a sound card and microphone, connect to the Internet through an ISP, locate
another user who is running compatible IP telephony software and is also connected to the Internet at thatmoment, and then initiate a call to the other user. See Ashley Dunn, "More Phone, Less Computer, Behind
New Generation of Internet Phones," New York Times CyberTimes, January 7, 1998; Deborah Branscum, "A
Cheaper Way to Phone," Newsweek, March 16, 1998, at 80 (describing different forms of IP telephony).
176

Significant commercial phone-to-phone services have recently been announced by IDT, AT&T,
Qwest, Delta 3, and ICG. See Nicholas Denton, "Telecoms Set to Take Further Step into Cyberspace,"
Financial Times, March 13, 1998, at 6; Paul Festa, "Net Phone Market Heats Up," C|Net News.com, March
11, 1998 (http://www.news.com/News/Item/0,4,19977,00.html).
177

More specifically, the customer places a call over the public switched telephone network to a gateway,
which returns a second dial tone, and the signalling information necessary to complete the call is conveyed to
the gateway using standard in-band (i.e., DMTF) signals on an overdial basis. The customer's voice or fax
signal is sent to the gateway in unprocessed form (that is, not compressed and packetized). The service
provider compresses and packetizes the signal at the gateway, transmits it via IP to a gateway in a different
local exchange, reverses the processing at the terminating gateway, and sends the signal out over the public
switched telephone network in analog, or uncompressed digital, unpacketized form.

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85.
Commenters that discuss IP telephony are split on the appropriate treatmentof these services.178 Several parties, including Senators Rockefeller, Snowe, Stevens, andBurns, urge that IP telephony providers offer interstate telecommunications services and,
consequently, should contribute to universal service support mechanisms.179 Other parties,
including Senator McCain, Representative White and the National Telecommunications andInformation Administration, oppose application of Title II regulation.180 Some commentersargue that IP telephony is a nascent technology that is unlikely to generate significant
revenues in the foreseeable future.181 Regardless of the size of the market, we must still
decide as a legal matter whether any IP telephony providers meet the statutory definitions ofoffering "telecommunications" or "telecommunications service" in section 3 of the 1996
Act.
86.
As we have observed above in our general discussion of hybrid services, theclassification of a service under the 1996 Act depends on the functional nature of the enduser offering.182 Applying this test to IP telephony, we consider whether any company
offers a service that provides users with pure "telecommunications." We first note that"telecommunications" is defined as a form of "transmission."183 Companies that only
provide software and hardware installed at customer premises do not fall within thiscategory, because they do not transmit information. These providers are analogous to PBX
vendors, in that they offer customer premises equipment (CPE) that enables end users toengage in telecommunications by purchasing local exchange and interexchange service fromcarriers. These CPE providers do not, however, transport any traffic themselves.184
87.
In the case of "computer-to-computer" IP telephony, individuals use softwareand hardware at their premises to place calls between two computers connected to theInternet. The IP telephony software is an application that the subscriber runs, using Internet
access provided by its Internet service provider. The Internet service providers over whose
networks the information passes may not even be aware that particular customers are using

178

Compare AT&T comments at 12-13; Alaska comments at 8-9; Airtouch comments at 30-31; Senators
Stevens and Burns comments at 8; RTC comments at 13 (arguing that IP telephony services are"telecommunications") with AOL reply comments at 8-9; Comcast reply at 4 (claiming IP telephony services
should not be regulated under the Act at this time).
179

See, e.g., Senators Rockfeller and Snowe letter; Senators Stevens and Burns comments at 8.

180

See Senator McCain letter; Representative White letter; Assistant Secretary Irving letter.

181

See AOL reply comments at 8; Comcast reply comments at 4; Senator McCain letter at 4.

182

See supra Section III.D.1.

183

47 U.S.C. § 153(43).

184

We note that this argument applies to IP telephony services provided through both dial-up residential
connections to the public Internet, and to dedicated lines connected to corporate local area networks. The
critical distinction is that packetizing and depacketizing takes place at the customer premises, rather than
within the network.

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IP telephony software, because IP packets carrying voice communications areindistinguishable from other types of packets. As a general matter, Title II requirements
apply only to the "provi[sion] " or "offering" of telecommunications.185 Without regard towhether "telecommunications" is taking place in the transmission of computer-to-computer
IP telephony,186 the Internet service provider does not appear to be "provid[ing]"
telecommunications to its subscribers.187
88.
"Phone-to-phone" IP telephony services appear to present a different case. In
using the term "phone-to-phone" IP telephony, we tentatively intend to refer to services inwhich the provider meets the following conditions: (1) it holds itself out as providing voice
telephony or facsimile transmission service; (2) it does not require the customer to use CPE
different from that CPE necessary to place an ordinary touch-tone call (or facsimiletransmission) over the public switched telephone network; (3) it allows the customer to call
telephone numbers assigned in accordance with the North American Numbering Plan, andassociated international agreements; and (4) it transmits customer information without net
change in form or content.
89.
Specifically, when an IP telephony service provider deploys a gateway within
the network to enable phone-to-phone service, it creates a virtual transmission path between
points on the public switched telephone network over a packet-switched IP network. These
providers typically purchase dial-up or dedicated circuits from carriers and use those circuits
to originate or terminate Internet-based calls. From a functional standpoint, users of these
services obtain only voice transmission, rather than information services such as access tostored files.188 The provider does not offer a capability for generating, acquiring, storing,transforming, processing, retrieving, utilizing, or making available information. Thus, therecord currently before us suggests that this type of IP telephony lacks the characteristics
that would render them “information services” within the meaning of the statute, andinstead bear the characteristics of “telecommunications services.”90.
We do not believe, however, that it is appropriate to make any definitive
pronouncements in the absence of a more complete record focused on individual service
offerings. As stated above, we use in this analysis a tentative definition of "phone-to-185

See 47 U.S.C. §§ 153(46), 254(d).

186

It may be argued that the poor sound quality of such services when offered over the public Internet
effectively constitutes a "change in the form or content" of user information. Because of our conclusion that
IP telephony software companies do not "provide telecommunications," we need not resolve this question.
187

As we note in Section IV.D.1, the provider of underlying transmission facilities is "providing
telecommunications" to the Internet service provider. Further, if the customer uses a dial-up Internet
connection, there is of course a LEC that "provides telecommunications" regardless of what information
service that customer employs. This underlying telecommunications service is, however, distinguishable fromthe IP telephony functionality for the same reason it is distinguishable from the Internet access services offeredby Internet service providers.
188

Routing and protocol conversion within the network does not change this conclusion, because fromthe user's standpoint there is no net change in form or content.

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phone" IP telephony. Because of the wide range of services that can be provided using
packetized voice and innovative CPE, we will need, before making definitive
pronouncements, to consider whether our tentative definition of phone-to-phone IP
telephony accurately distinguishes between phone-to-phone and other forms of IP telephony,and is not likely to be quickly overcome by changes in technology. We defer a moredefinitive resolution of these issues pending the development of a more fully-developed
record because we recognize the need, when dealing with emerging services andtechnologies in environments as dynamic as today's Internet and telecommunications
markets, to have as complete information and input as possible.
91.
In upcoming proceedings with the more focused records, we undoubtedly will
be addressing the regulatory status of various specific forms of IP telephony, including theregulatory requirements to which phone-to-phone providers may be subject if we were toconclude that they are "telecommunications carriers." The Act and the Commission's rules
impose various requirements on providers of telecommunications, including contributing touniversal service mechanisms, paying interstate access charges, and filing interstate tariffs.189
We note that, to the extent we conclude that certain forms of phone-to-phone IP telephonyservice are "telecommunications services," and to the extent the providers of those services
obtain the same circuit-switched access as obtained by other interexchange carriers, andtherefore impose the same burdens on the local exchange as do other interexchange carriers,
we may find it reasonable that they pay similar access charges. On the other hand, we
likely will face difficult and contested issues relating to the assessment of access charges onthese providers. For example, it may be difficult for the LECs to determine whether
particular phone-to-phone IP telephony calls are interstate, and thus subject to the federal
access charge scheme, or intrastate. We intend to examine these issues more closely basedon the more complete records developed in future proceedings.
92.
With regard to universal service contributions, to the extent we conclude thatcertain forms of phone-to-phone IP telephony are interstate "telecommunications," and to
the extent that providers of such services are offering those services directly to the public
for a fee, those providers would be "telecommunications carriers." Accordingly, those
providers would fall within section 254(d)'s mandatory requirement to contribute touniversal service mechanisms. Finally, under section 10 of the Act, we have authority toforbear from imposing any rule or requirement of the Act on telecommunications carriers.190
We will need to consider carefully whether, pursuant to our authority under section 10 of
the Act, to forbear from imposing any of the rules that would apply to phone-to-phone IP
telephony providers as "telecommunications carriers."

189

Other requirements include, but are not limited to: customer proprietary network information (CPNI)
rules; section 214 authorization requirements for international service; interconnection provisions of section
251(a); TRS obligations; CALEA assistance capability requirements; compliance with standards promulgatedpursuant to sections 255 (access by persons with disabilities) and 256 (coordination for interconnectivity); andcertain fees, reporting, and filing requirements.
190

47 U.S.C. 160.

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93.
We recognize that our treatment of phone-to-phone IP telephony may have
implications for the international telephony market. In the international realm, theCommission has stated that IP telephony serves the public interest by placing significant
downward pressure on international settlement rates and consumer prices.191 In someinstances, moreover, IP telephony providers have introduced an alternative calling option inforeign markets that otherwise would face little or no competition. We continue to believethat alternative calling mechanisms are an important pro-competitive force in theinternational services market. We need to consider carefully the international regulatory
requirements to which phone-to-phone providers would be subject. For example, it may not
be appropriate to apply the international accounting rate regime to IP telephony.
4.

Policy Implications

94.
Congress directed us to explain in this Report "the impact of theCommission's interpretation . . . on the current and future provision of universal service,"192
and "the consistency of the Commission's application" of statutory definitions.193 Therefore,
we address in this section the policy consequences of the legal analysis described above.
We conclude that our reading of the statutory definitions reflects a consistent approach thatwill safeguard the current and future provision of universal service to all Americans, andwill achieve the 1996 Act's goals of a "pro-competitive, deregulatory communications
policy." Further, we are committed to monitoring closely developments in thetelecommunications industry to ensure that such changes do not undermine our obligation toensure universal service.
a.

Generally95.
The Internet and other enhanced services have been able to grow rapidly inpart because the Commission concluded that enhanced service providers were not common
carriers within the meaning of the Act.194 This policy of distinguishing competitivetechnologies from regulated services not yet subject to full competition remains viable.
Communications networks function as overlapping layers, with multiple providers often
leveraging a common infrastructure.195 As long as the underlying market for provision oftransmission facilities is competitive or is subject to sufficient pro-competitive safeguards,
191

See Rules and Policies on Foreign Participation in the U.S. Telecommunications Market and Market
Entry and Regulation of Foreign-Affiliated Entities, Report and Order and Order on Reconsideration, 12 FCC
Rcd 23,891 (1997), recon. pending.
192

Appropriations Act at §623(b)(1). We have also been directed to explain specifically how ourapplication of the statutory definition to "mixed or hybrid services" impacts on "universal service definitions
and support." Id. at § 623(b)(2).
193

Id. at § 623(b)(2).

194

AOL comments at 7-8; USIPA comments at 3; ITI and ITAA comments at 8; AOL reply comments
at Attachment 14-16.
195

See AOL reply comments at Attachment 2-7.

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we see no need to regulate the enhanced functionalities that can be built on top of thosefacilities. We believe that Congress, by distinguishing "telecommunications service" from
"information service," and by stating a policy goal of preventing the Internet from being
fettered by state or federal regulation, endorsed this general approach.196 Limiting carrier
regulation to those companies that provide the underlying transport ensures that regulation
is minimized and is targeted to markets where full competition has not emerged. As anempirical matter, the level of competition, innovation, investment, and growth in theenhanced services industry over the past two decades provides a strong endorsement forsuch an approach.
b.

Impact on Universal Service

96.
Congress has directed us to explain how our interpretation of the 1996 Act
promotes "the current and future provision of universal service to consumers in all areas of
the Nation, including high cost and rural areas."197 With regard to the current provision ofuniversal service, we have established programs under section 254 to fundtelecommunications services in high-cost areas and for low-income consumers, as well as
access to advanced services for schools, libraries, and rural health care providers.198 We
believe that these programs have been designed with a sufficiently broad contribution baseto support current universal service needs.199
97.
As we have explained, our interpretation of the terms "telecommunications"and "information service" reflect continuity with pre-existing legal categories.
Consequently, we do not believe that these interpretations would create significant shifts incontribution obligations based on the current configuration of the communications industry.

196

Several commenters observe that the 1996 Act states that it is the policy of the United States "topromote the continued development of the Internet and other interactive computer services and interactive
media . . . [and] to preserve the vibrant and competitive free market that presently exists for the Internet andother interactive computer services, unfettered by Federal or State regulation." 47 U.S.C. § 230(b)(1)-(2). See
CIX comments at 5; ITI and ITAA comments at 8; NCTA comments at 10; CIX reply at 1-2. See also
Senator McCain letter at 2 (claiming that imposition of new burdens on Internet services would be directly
contrary to the will of Congress).
197

Appropriations Act, § 623(b)(1).

198

See Universal Service Order, 12 FCC Rcd at 8888-8951, paras. 199-325 (addressing high cost
support); id. at 8952-8994, paras. 326-409 (addressing low-income support); id. at 9002-9092, paras. 424-607(establishing mechanisms to support access to advanced services for schools and libraries).
199

Commenters that expressed concern about the sufficiency of the current mechanisms generally did soon the basis of the split between federal and state support. Arguments about the effects of Internet-based
services generally focused on potential effects in the future. See, e.g., Senators Stevens and Burns comments
at 9 ("Federal and state universal service mechanisms, including access charges, currently collect enoughmoney to support the physical infrastructure today. However, if the current Commission exemptions fromuniversal service contributions and access charges remain unchanged, that will not be the case tomorrow.")48

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Retail revenues of Internet service providers -- approximately five billion dollars in 1997200-- are relatively small compared to the $100 billion in long-distance revenue reported in thelatest telecommunications relay service fund worksheet report.201 The fact that Internet
access is not considered a "telecommunications service" therefore does not have asignificant impact on the current universal service funding base. More importantly,
however, Internet access generates additional telecommunications revenue to support
universal service in the form of the thousands of business lines (with their associatedtariffed rates, subscriber line charges, and presubscribed interexchange carrier charges) that
Internet service providers must purchase in order to provide connectivity to their users, andthe high-capacity leased lines that they use to route data across their networks.202
98.
It is critical, however, to make sure that our interpretation of the statute, tothe extent legally possible, will continue to sustain universal service in the future. Someparties argue that, as new communications services such as Internet access and IP telephonygrow, traffic will shift away from conventional telecommunications services, thus draining
the support base for universal service.203 We are mindful that, in order to promote equity
and efficiency, we should avoid creating regulatory distinctions based purely on technology.
Congress did not limit "telecommunications" to circuit-switched wireline transmission, butinstead defined that term on the basis of the essential functionality provided to users.204

200

Coopers & Lybrand's New Media Group, Internet Service Provider Overview (presented at FCC enbanc hearing, Feb. 19, 1998) at 18.
201

Telecommunications Industry Revenue: TRS Fund Worksheet (FCC Common Carrier Bureau,
Industry Analysis Division, November 1997) at Figure 1. See also MCI reply comments at 1-2 (observing that
exclusion of Internet revenues has an insignificant effect on universal service funding). We note, however,data presented at our February 19, 1998 en banc hearing indicating that Internet service provider market
revenues are projected to grow to eighteen billion dollars in the year 2000. See supra Section IV.C.
We use the disparity between long distance market revenues and Internet service provider market
revenues to illustrate the relatively small size of the Internet service provision market. We note, however, thatthe total revenues subject to universal service mechanism substantially exceed the long distance revenues.
202

AOL comments at 17 n.65 (stating that AOL spent over $900 million on telecommunications services
in its most recent fiscal year). See also CIX comments at 10-11; Compuserve comments at 11; Coalitioncomments at 13; ITI and ITAA comments at 8-9; USIPA comments at 4; Internet Service Providers reply
comments at 4-5. But see AT&T reply comments at 12; RTC reply comments at 10 (asserting that indirect
ISP contributions are insufficient to support universal service in an equitable manner); but see also GTE reply
comments at 21-22 (arguing that current FCC interpretations favor self-provision of transmission by ISPs).
We acknowledge that such indirect contributions are different from direct contributions by telecommunications
carriers. The point is that Internet access does generate substantial support for universal service.
203

See AirTouch comments at 28-33; Alaska comments at 8-10; Ameritech comments at 2; AT&T
comments at 12-13; GTE comments at 15-17; Senators Stevens and Burns comments at 8-9; RTC comments
at 10-13; TDS comments at 3; WUTC comments at 5; AT&T reply comments at 11-12; Bell Atlantic reply
comments at 14.
204

See 47 U.S.C. § 153(46) ("The term 'telecommunications service' means the offering of
telecommunications for a fee directly to the public . . . regardless of the facilities used.") (emphasis added).
The Commission has followed the same approach in implementing Computer II. See, e.g., American

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Thus, for example, we have previously required paging providers to contribute to universal
service funding, because they are providers of "telecommunications service."205 We havealso required private carriers to contribute to federal universal service funding, even though
they are not common carriers.206 In this Report, we have further addressed providers ofpure transmission capacity used for Internet services, and have concluded that these entities
provide services that meet the legal definition of "telecommunications." We also haveconsidered the regulatory status of various forms of "phone-to-phone IP telephony" service
mentioned generally in the record. The record currently before us suggests that certain of
these services lack the characteristics that would render them “information services” within
the meaning of the statute, and instead bear the characteristics of “telecommunications
services.” We do not believe, however, that it is appropriate to make any definitive
pronouncements in the absence of a more complete record focused on individual service
offerings. As noted, to the extent we conclude that certain forms of phone-to-phone IP
telephony are "telecommunications," and to the extent that providers of such services areoffering those services directly to the public for a fee, those providers would be"telecommunications carriers." Accordingly, those providers would fall within section
254(d)'s mandatory requirement to contribute to universal service mechanisms. If suchproviders are exempt from universal service contribution requirements, users and carriers
will have an incentive to modify networks to shift traffic to Internet protocol and thereby
avoid paying into the universal service fund or, in the near term, the universal service
contributions embedded in interstate access charges. If that occurs, it could increase theburden on the more limited set of companies still required to contribute.207 Such a scenario,
if allowed to manifest itself, could well undermine universal service. At this time, however,there is no evidence that there is an immediate threat to the sufficiency of universal service
support.
99.
Several commenters urge us to subject Internet access providers and otherinformation service providers to universal service contribution requirements.208 The
potential future threat to universal service funding posed by use of the Internet derives fromservices that are functionally substitutable for telecommunications services at the same levelof the network hierarchy. An end user that shifts its local exchange service from anincumbent local exchange carrier (LEC) to a competitive LEC, or to a wireless carrier, isTelephone and Telegraph Company, For Authority under Section 214 of the Communications Act of 1934, as
amended, to Install and Operate Packet Switches at Specified Telephone Company Locations in the UnitedStates, Memorandum Opinion, Order and Authorization, 94 FCC 2d 48 (1983) ( BPSS) (classifying pure packet
switching as a basic service).
205

Universal Service Order, 12 FCC Rcd. at 9179, para. 787.

206

Universal Service Order, 12 FCC Rcd. at 9182-9184, paras. 793-96.

207

We recognize that there are other factors that could influence a carrier in deciding to shift its traffic.

208

AirTouch comments at 30; Alaska comments at 9; AT&T comments at 12-13; SBC comments at 2;
February 19, 1998 en banc transcript at 25 (testimony of Mr. Comstock); AT&T reply comments at 11, 14;
Bell Atlantic reply comments at 2, 10-11; Februay 19, 1998 en banc transcript at 88-89 (testimony of Mr. Dix,
LCI, Int'l).

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purchasing a functionally identical service using different providers or technologies. We
have designed the universal service regime so that shifting between such services does not
eliminate the contribution requirement. Substitutability in a particular case, however, is not
sufficient under the statute to require universal service contributions. Instead of making atelephone call or sending a fax, an end user could send an overnight letter. It is unlikely,
however, that anyone would argue that the overnight delivery service should contribute touniversal service funding. The key difference is that delivery service does not provide"telecommunications" as defined in the Act. Congress limited universal service contribution
obligations to providers of "telecommunications," because only those services are truly
substitutable in a functional sense.
100. Some parties argue that we should reclassify Internet service providers as
telecommunications carriers in order to address congestion of local exchange networks
caused by Internet usage.209 We note that the Commission addressed this argument last year
in the Access Reform proceeding, and decided to continue to treat Internet service providers
as end users for purposes of access charges.210 As the Commission stated in that Order,
although concerns about network congestion deserve serious consideration, imposition of
per-minute interstate access charges on Internet service providers is not an appropriate
solution. Commenters in this proceeding have raised many of the same arguments that we
considered in the Access Reform proceeding. We make no conclusions here as to whether
some alternate rate structure for Internet service providers would be more efficient. That is
an issue best addressed either on reconsideration of our Access Reform decision, or inconnection with the Notice of Inquiry on Internet and Information Services that Use the
Public Switched Telephone Network that we issued in the Access Reform proceeding.211
For purposes of this Report, we believe that the central issue is whether our decision that
Internet access is not a "telecommunications service" is likely to threaten universal service.
In other words, will Internet usage place such a strain on network resources that incumbent
LECs will be unable to provide adequate service? As we noted in the Access Reform
Order, both ILECs and the Network Reliability and Interoperability Council agreed that
Internet usage did not pose any threat to overall network reliability.212 Incumbent LECs areinvesting in network upgrades to handle Internet traffic, and our Notice of Inquirydocket
provides the appropriate forum to consider steps that we could take to ensure thatincumbent LECs have incentives to choose the most efficient technology.
101. We realize that, as technology evolves, new means of providing
telecommunications service may emerge. Although we conclude that Internet access is not

209

See, e.g., Bell Atlantic reply comments at 10-12.

210First Report and Order in the Matter of Access Charge Reform, 12 FCC Rcd 15982, 16133-16135,
paras. 344-48 (" Access Charge Reform Order").
211

Usage of the Public Switched Network by Information Service and Internet Access Providers, Noticeof Inquiry, 11 FCC Rcd 21354 (1996).
212

Access Charge Reform Order, 12 FCC Rcd at 16134, para. 347. See also Comcast reply comments at
4 (claiming that cable-based ISPs actually reduce demand on the PSTN).

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a "telecommunications service," we acknowledge that there may be telecommunications
services that can be provisioned through the Internet. We have singled out IP telephonyservices for discussion in this Report.213 As discussed above, users of certain forms ofphone-to-phone IP telephony appear to pay fees for the sole purpose of obtaining
transmission of information without change in form or content. Indeed, from the end-userperspective, these types of phone-to-phone IP telephony service providers seem virtually
identical to traditional circuit-switched carriers. The record currently before us suggests thatthese services lack the characteristics that would render them “information services” within
the meaning of the statute, and instead bear the characteristics of “telecommunications
services.”214 With respect to the provision of pure transmission capacity to Internet service
providers or Internet backbone providers, we have concluded that such provision is
telecommunications.
102. As some parties observe, our interpretation of the 1996 Act may mean that
information services such as Internet access are not eligible for subsidies outside of thelimited scope of schools and libraries under section 254(h).215 We believe Congress made a
policy decision to limit support for information services to schools and libraries.
"Telecommunications services" provide the basic transmission functionality that enables
customers in rural and high-cost areas to connect to the rest of America. These services
also enable users to reach Internet access providers, so reductions in the cost of basic
telephone service in rural areas will effectively reduce the cost of Internet access in thoseareas. The information services delivered over telecommunications networks are notsensitive to distance and density to the same extent as the telecommunications facilities
themselves. Therefore, the rationale for establishing a subsidy mechanism for these services
is far more attenuated.
103. At this early stage of Internet development, we cannot know whether market
and technological forces will result in Internet access being widely available in rural andhigh cost areas. Already, free electronic mail services such as Juno and low-cost Internet
access devices such as WebTV have made Internet-based services far more affordable. A
recent study found that at least 87% of the U.S. population has access to a commercial
Internet service provider through a local call, and that three-fourth of Americans live in
local calling areas with at least three Internet service provider points of presence.216

213

See supra Section IV.D.3.

214

As discussed above, however, we do not believe that it is appropriate to make any definitive
pronouncements in the absence of a more complete record focused on individual service offerings.
215

Senators Stevens and Burns comments at 9; TDS comments at 10-11. On section 254(h), see infra
Section VI.B.2.
216

Shane Greenstein, Universal Service in the Digital Age: The Commercialization and Geography of US
Internet Access (available at http://skew2.kellogg.nwu.edu/~greenstein/research/papers/ISPACCESS2.pdf) at
table 1. The author of the study notes that these numbers likely underestimate the true level of access. Id. at
22-23.

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America Online reports that seventeen percent of its local access nodes are in ruralcounties.217 Rural Internet service providers, especially smaller entrepreneurial companies,
will be able to provide more affordable and widely-available service if they are not subject
to unnecessary regulatory burdens.218 Finally, the support mechanism that will benefit
schools and libraries established pursuant to section 254(h) of the 1996 Act will enable rural
libraries to provide public access Internet terminals, and rural school districts to makeInternet access available to their students.
104. Congress did recognize that "telecommunications services" would evolve overtime, and that universal service should adapt to reflect those change. Thus, for example,
universal service today includes functionalities such as touchtone service and access to 911
that simply did not exist in previous decades.219 Other such innovations, as well as
improvements in voice transmission quality, will no doubt occur in the future, and we will
update our definition of universal service to account for those changes. For example, itappears that universal service funds could be used to ensure rural and high-cost areas haveaffordable access to high-speed data transmission services, such as xDSL, when thoseservices meet the criteria for support outlined in section 254(c).
c.

Consistency of Commission Decisions

105. We believe that the framework described in this Report, and in the May 8th,
1997 Universal Service Order, is entirely consistent, both internally and with the letter andspirit of the Act. Companies that are in the business of offering basic interstate
telecommunications functionality to end users are "telecommunications carriers," andtherefore are covered under the relevant provisions of sections 251 and 254 of the Act.
These rules apply regardless of the underlying technology those service providers employ,and regardless of the applications that ride on top of their services. Therefore, although wewill need to consider further the definition of "phone-to-phone" IP telephony, the record
currently before us suggests that certain of these services lack the characteristics that would
render them “information services” within the meaning of the statute, and instead bear thecharacteristics of “telecommunications services.” Further, we have found that providers ofpure transmission capacity to support Internet services are providers of"telecommunications." Internet service providers and other information service providers
also use telecommunications networks to reach their subscribers, but they are in a very
different business from carriers. Internet service providers provide their customers withvalue-added functionality by means of computer processing and interaction with stored data.
They leverage telecommunications connectivity to provide these services, but this makes
them customers of telecommunications carriers rather than their competitors.
106. Under our framework, Internet service providers are not treated as carriers forpurposes of interstate access charges, interconnection rights under section 251, and universal
217

AOL comments at 6 n.35.

218

Carolina Connection, Inc. comments at 1; CUIISP comments at 2; City of Norfolk comments at 1-2;
CIX comments at 11; Compuserve comments at 11-12.
219

See Universal Service Order, 12 FCC Rcd at 8814-8817, paras. 71-74.

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service contribution requirements. This treatment admittedly provides some benefits to suchcompanies, but it also imposes limitations. Internet service providers are not entitled under
section 251 to purchase unbundled network elements or discounted wholesale services fromincumbent LECs, they are not entitled to federal universal service support for serving highcost and rural areas, and they are not entitled to reciprocal compensation for terminating
local telecommunications traffic.220 As we discuss below, the one case in which Internet
service providers and carriers enjoy similar treatment is in the provision of certain services
to schools and libraries at discounted rates.221 In that case, Congress expressly directed theCommission to create "competitively neutral rules" to facilitate "access to advanced
telecommunications and information services."222 There is no necessary connection between
those who contribute to universal service funding and those entitled to receive support.223
For example, contributions to the fund are primarily derived from interexchange carriers,
but the companies that receive high-cost support are LECs. Paging providers are required
to contribute to universal service, but have limited opportunity to receive support. We
realize that Congress carefully balanced several competing concerns when it crafted theuniversal service provisions of the 1996 Act. After reviewing our implementation of those
provisions, and considering novel issues such as the status of IP telephony, we believe that
we are being faithful to the balance struck by Congress.
V.

WHO CONTRIBUTES TO UNIVERSAL SERVICE MECHANISMS
A.

Overview

220

The Commission has solicited comment on whether it should use its general rulemaking authority toextend to Internet service providers and other information service providers some or all of the rights accordedby section 251 to requesting telecommunications carriers. See Computer III Further Remand Proceeding, atpara. 96.
We make no determination here on the question of whether competitive LECs that serve
Internet service providers (or Internet service providers that have voluntarily become competitive LECs) areentitled to reciprocal compensation for terminating Internet traffic. That issue, which is now before theCommission, does not turn on the status of the Internet service provider as a telecommunications carrier orinformation service provider. See Pleading Cycle Established for Comments on Request by ALTS for
Clarification of the Commission's Rules Regarding Reciprocal Compensation for Information Service Provider
Traffic, Public Notice, CCB/CPD 97-30 (released July 2, 1997).
221

See infra Section V.B.2.

222

47 USC § 254(h)(2).

223

We note that while providers under the schools and libraries program receive support from the
Universal Service Fund, their suppliers do not receive a subsidy. The providers provide services to schools
and libraries at a price bid down, through a competitive bidding process, from the market rate. See 47 C.F.R.
§ 54.504(a),(b) (competitive bidding process), (d) (the Commission, or state commissions, may intervene if acarrier offers a rate higher than the "lowest corresponding price," that is, the lowest price that it charges
similarly situated non-residential customers, or if the lowest corresponding price is unfairly high). The federal
contribution then covers a portion of the payment that would otherwise be made by the school or library.

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107. In this section, we review our decision regarding which entities must
contribute to universal service support mechanisms, which entities should contribute, andwhich entities should be exempt from contributing. We affirm that the plain language ofsection 254(d), which mandates contributions from "every telecommunications carrier thatprovides interstate telecommunications services," requires the Commission to construe
broadly the class of carriers that must contribute.224 In addition, we find that theCommission properly exercised the permissive authority granted by section 254(d) toinclude other providers of interstate telecommunications in the pool of universal service
contributors. We have also re-examined the Commission's implementation of the limited
authority set forth in section 254(d) to exempt de minimis contributors and affirm that theCommission has not exceeded the boundaries established by the statute. We conclude that
the Commission appropriately exercised the flexibility that section 254(d) grants it toexempt those entities whose contributions would be de minimis and to include in the poolof contributors those providers of telecommunications whose contributions are required by
the public interest.
B.

Background108. The 1996 Act expands the class of entities that must contribute to federal
universal service support mechanisms. Prior to the 1996 Act, only interstate interexchange
carriers (IXCs) contributed to the universal service fund that subsidized the cost of local
exchange service in high cost areas and for low-income consumers.225 Under this earlier
approach, IXCs contributed through a tariffed interstate charge that was based on thenumber of subscriber lines presubscribed to the IXC.226 IXCs with fewer than .05 percentof the presubscribed lines nationwide were exempt from contributing.227
109. The Commission's current rules governing universal service contributions
stem from section 254(d) of the 1996 Act, which reads:[E]very telecommunications carrier that provides interstate
telecommunications services shall contribute, on an equitable andnondiscriminatory basis, to the specific, predictable, and sufficientmechanisms established by the Commission to preserve and advance
universal service. The Commission may exempt a carrier or class of carriers
from this requirement if the carrier's telecommunications activities are limited
to such an extent that the level of such carrier's contributions to thepreservation and advancement of universal service would be de minimis. Any

224

See Universal Service Order, 12 FCC Rcd at 9177, para. 783.

225

See 47 C.F.R. § 69.116(a). For a description of universal service as it existed prior to the 1996 Act,
see Common Carrier Bureau, FCC, "Preparation for Addressing Universal Service Issues: A Review ofCurrent Interstate Support Mechanisms," 90-97 (1996).
226

47 C.F.R. § 69.116(a).

227

Id.

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other provider of interstate telecommunications may be required to contributeto the preservation and advancement of universal service if the public interest
so requires.
Section 623(b)(3) of the Appropriations Act requires us to review "who is required tocontribute to universal service under section 254(d) . . . and related existing federal
universal service support mechanisms, and of any exemption of providers or exclusion of
any service that includes telecommunications from such requirement or support
mechanisms."
110. Based on the structure of section 254(d) of the 1996 Act, the Commission
identified two categories of contributors to universal service mechanisms. First, theCommission identified a group of "mandatory" contributors based on section 254(d)'s
mandate that "[e]very telecommunications carrier that provides interstate
telecommunications services shall contribute . . . to the . . . mechanisms established by theCommission."228 Second, the Commission exercised its "permissive" authority under section
254(d) to require "other provider[s] of interstate telecommunications to contribute" based ona finding that the public interest requires these entities to contribute "to the preservation andadvancement of universal service." In addition, consistent with section 254(d), theCommission exempted contributors whose contributions would be de minimis.229
111. Mandatory Contribution Requirement. The Commission, concurring with therecommendation of the Joint Board,230 recognized that the first sentence of section 254(d)requires that all telecommunications carriers that provide interstate telecommunications must
contribute to the support mechanisms.231 The Commission concluded that to be a
mandatory contributor to universal service under section 254(d): (1) a telecommunications
carrier must offer "interstate" "telecommunications"; (2) those interstate telecommunications
must be offered "for a fee"; and (3) those interstate telecommunications must be offered"directly to the public, or to such classes of users as to be effectively available to the
public."232 The Commission sought to construe the definition of "telecommunications" so as
to include a broad class of mandatory contributors.233

228

47 U.S.C. § 254(d).

229

Universal Service Order, 12 FCC Rcd at 9187, para. 802.

230

Pursuant to section 254(a)(1), the Commission convened a federal-state Joint Board to makerecommendations to the Commission regarding the implementation of sections 214(e) and 254 of the 1996
Act. 47 U.S.C. § 254(a)(1). The Joint Board made its recommendations to the Commission on November 8,
1996. Recommended Decision, 12 FCC Rcd 87 (1996).
231

Universal Service Order, 12 FCC Rcd at 9173, para. 777 citing Recommended Decision, 12 FCC Rcd
at 481, para. 484.
232

Id ., 12 FCC Rcd at 9173, para. 777 citing 47 U.S.C. §§ 153(22), 153(43), and 153(46).

233

See Id ., 12 FCC Rcd at 9173, 9177, paras. 779, 783.

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112. The Commission concluded that telecommunications are "interstate" when thecommunication or transmission originates in any state, territory, possession of the UnitedStates, or the District of Columbia and terminates in another state, territory, possession, or
the District of Columbia.234 Further, the Commission determined that interstate
telecommunications include telecommunications services among U.S. territories andpossessions.235 The Commission also found that private or WATS lines will be consideredentirely interstate when more than ten percent of the traffic they carry is interstate.236
113. In the Universal Service Order, the Commission further concluded thatinterstate telecommunications carriers that also provide international telecommunications
services must contribute to universal service support mechanisms based on revenues fromboth their interstate and international services.237 The Commission found that the statuteprecludes it from assessing contributions on the revenues of purely international carriers
providing service in the United States, but sought a legislative change that would allow it toreach the international revenues of all carriers providing service in the United States.238
114. Based on the statutory definition of the term "telecommunications,"239 theCommission adopted the following list of services that satisfy the definition of"telecommunications" and are examples of interstate telecommunications:cellular telephone and paging services; mobile radio services; operator
services; PCS; access to interexchange service; special access; wide area
telephone service (WATS); toll-free services; 900 services; MTS; private line;
telex; telegraph; video services; satellite services; and resale services.240
The Commission also included among contributors those entities providing, on a common
carrier basis, video conferencing services, channel service, or video distribution services tocable head-ends.241 It expressly excluded entities providing services via open video systems

234

Id ., 12 FCC Rcd at 9173, para. 778.

235

Id ., 12 FCC Rcd at 9173, para. 778 citing 47 U.S.C. § 153(22) and Recommended Decision, 12 FCC
Rcd at 481.
236

Id ., 12 FCC Rcd at 9173, para. 778 citing 47 C.F.R. § 36.154(a).

237

Id ., 12 FCC Rcd at 9173-9175, para. 779.

238

Id ., 12 FCC Rcd at 9173-9175, para. 779.

239

See 47 U.S.C. § 153(43).

240

Universal Service Order, 12 FCC Rcd at 9175, para. 780.

241

Id ., 12 FCC Rcd at 9176, para. 781.

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FCC 98-67(OVS), cable leased access, or direct broadcast satellite (DBS) from contributing on thebasis of revenues derived from those services.242
115. In interpreting the phrase "for a fee" in the definition of "telecommunications
service," the Commission concluded that the plain language of section 153(46) means
services rendered in exchange for something of value or a monetary payment.243 The
Commission did not exempt from contribution any broad class of telecommunications
carriers that provides interstate telecommunications services in light of the 1996 Act's
mandate that "every telecommunications carrier that provides interstate telecommunications
services" contribute to the support mechanisms.244 Further, the Commission found that,
because it contains the phrase "directly to the public," the statutory definition of"telecommunications services" is intended to encompass only telecommunications provided
on a common carrier basis.245 Therefore, the Commission concluded that only common
carriers should be considered statutorily mandated contributors to universal service support
mechanisms.246 In addition, the Commission concluded that common carrier services
include services offered to other carriers, such as exchange access service, and not justservices provided to end users.247
116. Permissive Contribution Authority. The Commission observed that section
254(d) also confers "permissive authority" to require "other providers of interstate
telecommunications" to contribute if the public interest so requires.248 The Commission,
citing the statutory definition, concluded that providers of interstate telecommunications,unlike providers of interstate telecommunications services, do not offer telecommunications
on a common carrier basis.249 In support of this conclusion, the Commission referred to thelegislative history in which Congress noted the distinction between providers of interstate
telecommunications and providers of interstate telecommunications services when it statedthat an entity can offer telecommunications on a private-service basis without incurring
obligations as a common carrier.250

242

Id., 12 FCC Rcd at 9176, para. 781.

243

Id., 12 FCC Rcd at 9177, para. 784 citing 47 U.S.C. § 153(46).

244

Id., 12 FCC Rcd at 9179, para. 787 citing 47 U.S.C. § 254(d). The Commission did, however,
exempt Internet service providers and enhanced service providers from contributing. See supra II.C.1.
245

Id., 12 FCC Rcd at 9177-9178, para. 785.

246

Id., 12 FCC Rcd at 9178, para. 786.

247

Id., 12 FCC Rcd at 9178, para. 786.

248

Id., 12 FCC Rcd at 9182-9183, paras. 793-794.

249

Id., 12 FCC Rcd at 9182, para. 793 citing 47 U.S.C. § 153(46).

250

Id., 12 FCC Rcd at 9182, para. 793 citing Joint Explanatory Statement at 115.

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117. The Commission found that private network operators that lease excess
capacity on a non-common carrier basis for interstate transmissions should contribute touniversal service support mechanisms because they are "other providers of interstate
telecommunications."251 Similarly, the Commission concluded that payphone aggregators
fall within the Commission's permissive authority and that the public interest requires thatthey contribute.252 The Commission sought to adopt an approach under which contribution
obligations neither affect business decisions nor discourage carriers from offering services
on a common carrier basis.253 Accordingly, the Commission found that the public interest
requires both private service providers that offer interstate telecommunications to others fora fee and payphone aggregators to contribute to the preservation and advancement of
universal service in the same manner as carriers that provide "interstate telecommunications
services."254
118. The Commission also found that "other providers of telecommunications" thatfurnish telecommunications solely to meet their internal needs, including governmental
entities such as state networks, should not be required to contribute at this time.255 In
addition, the Commission held that cost-sharing for the construction and operation of private
networks would not render participants "other providers of telecommunications" that could
be required to contribute, although the lead participant in such a venture would be required
to contribute if it provided interstate telecommunications.256 The Commission also foundthat neither public safety and local governmental entities licensed under Subpart B of Part
90 of its rules nor entities that provide interstate telecommunications solely to public safetyor government entities will be required to contribute.257
119. In its Fourth Order on Reconsideration, the Commission affirmed its
conclusion that private service providers that provide interstate telecommunications on a
non-common carrier basis must contribute to universal service pursuant to its permissive
authority over "providers of interstate telecommunications."258 In that Order, theCommission concluded that it should not exercise its permissive authority to require
systems integrators, broadcasters, and non-profit schools, universities, libraries, and rural

251

Id., 12 FCC Rcd at 9178, 9184, paras. 786, 796.

252

Id., 12 FCC Rcd at 9183, 9184-9185, paras. 794, 797-798.

253

Id., 12 FCC Rcd at 9183-9184, para. 795.

254

Id., 12 FCC Rcd at 9183-9184, para. 795.

255

Id., 12 FCC Rcd at 9185-9186, paras. 799-800.

256

Id., 12 FCC Rcd at 9185-9186, para. 800.

257

Id., 12 FCC Rcd at 9185-9186, para. 800.

258

Fourth Order on Reconsideration at para. 276.

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health care providers to contribute to universal service.259 Specifically, the Commission
found that systems integrators that do not provide services over their own facilities and are
non-common carriers that obtain a de minimis amount of their revenues from the resale oftelecommunications are not required to contribute to universal service.260 In addition, theCommission concluded that the public interest would not be served if it were to exercise its
permissive authority to require broadcasters that engage in non-common carrier interstate
telecommunications to contribute to universal service.261 The Commission also determinedthat it is not in the public interest for the Commission to exercise its permissive authority torequire non-profit schools, colleges, universities, libraries and health care providers tocontribute to universal service.262
120. In the Fourth Order on Reconsideration, the Commission also affirmed its
finding that satellite providers that provide interstate telecommunications services orinterstate telecommunications to others for a fee must contribute to universal service.263 The
Commission explained that satellite providers that provide transmission services on acommon carrier basis are mandatory contributors pursuant to section 254(d), while satellite
providers that provide interstate telecommunications on a non-common carrier basis must
contribute based on the Commission's permissive authority.264 The Commission concluded,
however, that satellite providers are not required to contribute to universal service on thebasis of revenues derived from the lease of bare transponder capacity because the lease ofbare transponder capacity does not involve transmitting information and, therefore, it is not"telecommunications."265 The Commission rejected arguments that satellite providers thatare ineligible to receive universal service support should not be required to contribute.266
121. De Minimis Exemption. Section 254(d) provides that the Commission may
exempt a carrier or class of carriers from contributing to universal service mechanisms "if
the carrier's telecommunications activities are limited to such an extent that the level ofsuch carrier's contribution to the preservation and advancement of universal service would
be de minimis."267 The Commission, adopting the Joint Board's recommendation, initiallyconcluded that contributors whose contributions would be less than the administrator's

259

Id., at para. 277.

260

Id., at para. 278.

261

Id., at para. 283.

262

Id., at para. 284.

263

Id., at para. 288.

264

Id., at para. 288.

265

Id., at para. 290.

266

Id., at para. 289.

267

47 U.S.C. § 254(d).

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administrative costs of collection should be exempt from reporting and contribution
requirements.268 The Commission found that the legislative history indicates that the deminimis exemption was to be narrowly construed.269 As a result of its conclusion that theexemption should be based on the administrator's costs to bill and collect individual carrier
contributions, the Commission, in the Universal Service Order, adopted the $100.00
minimum contribution requirement used for TRS contribution270 purposes.271 In its Fourth
Order on Reconsideration, however, the Commission revised its approach to setting athreshold for the de minimis exemption and concluded that the de minimis threshold should
be increased to $10,000.00.272
122. In the Universal Service Order, the Commission agreed with the Joint Board
that the de minimis exemption was the only basis upon which to exempt contributors.273
The Commission explicitly rejected arguments that paging carriers should be exempted
because it found that the statutory language unambiguously requires "every
telecommunications carrier that provides interstate telecommunications services" tocontribute.274 The Commission concluded that Congress required all telecommunications
carriers to contribute to universal service support mechanisms but provided that in most
instances only "eligible" carriers should receive support, and gave no direction to theCommission to establish preferential treatment for carriers that are ineligible for support.275
The Commission reaffirmed this conclusion in its Fourth Order on Reconsideration.
Rejecting arguments from paging companies, the Commission reiterated that section 254(d)does not limit the class of carriers that must contribute to those that are eligible to receive
universal service support.276
C.

Discussion
1.

268

Mandatory and Permissive Authority

Universal Service Order, 12 FCC Rcd at 9187, para. 802 citing Recommended Decision, 12 FCC Rcd

at 489.
269

Id., 12 FCC Rcd at 9187, para. 802.

270

See 47 C.F.R. § 64.604(c)(4)(iii)(B).

271

Universal Service Order, 12 FCC Rcd at 9187-9188, para. 803.

272

Fourth Order on Reconsideration at paras. 295-297.

273

Universal Service Order, 12 FCC Rcd at 9188, para. 804 citing Recommended Decision, 12 FCC Rcd

at 490.
274

Id., 12 FCC Rcd at 9188-9189, para. 805 citing 47 U.S.C. § 254(d).

275Id., 12 FCC Rcd at 9188, para. 804.

276

Fourth Order on Reconsideration at para. 263.

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123. The Commission's approach to determining who should contribute touniversal service support mechanisms is guided by the plain language of section 254(d).
The first clause in this section unequivocally requires that "[e]very telecommunications
carrier that provides interstate telecommunications servicesshall contribute . . . to the . . .
mechanisms established by the Commission" [emphasis added]. The third sentence gives
the Commission the discretion to determine whether requiring "[a]ny other provider oftelecommunications" to contribute is consistent with the public interest [emphasis added].
An analysis of the statutory definitions of the terms "telecommunications services" and"telecommunications" identifies those entities that must contribute to universal service andthose entities over which the Commission may exercise its permissive authority. The
statutory language offers no exceptions to these rules, aside from the de minimis exemptionthat is also found in section 254(d). The Commission has adhered to the statutory mandatethat "all" providers of interstate telecommunications services contribute to universal service
mechanisms, and has ensured that a broad class of telecommunications providers contributeas well.
a.

Mandatory Contribution Requirement.

124. Section 153(46) defines "telecommunications service" as "the offering of
telecommunications for a fee directly to the public or to such classes of users as to beeffectively available directly to the public, regardless of the facilities used."277 The
Commission has determined that inclusion of the term "directly to the public" is intended toencompass only telecommunications provided on a common carrier basis.278 Common
carriers can be distinguished from private network operators, which serve the internal
telecommunications needs of, for example, a large corporation, rather than selling
telecommunications to the general public. The Commission explained that federal
precedent holds that a carrier may be a common carrier if it holds itself out "to service
indifferently all potential users."279
125. The 1996 Act does not use the term "common carrier." This term is definedin the 1934 Communications Act and encompasses the entities that are governed by that
Act's Title II regulation. The statutory language in the 1996 Act refers to"telecommunications carriers." Specifically, section 153(44) states that "atelecommunications carrier shall be treated as common carrier only to the extent that it isengaged in providing telecommunications services . . . ."280277

47 U.S.C. § 153(46).

278

Universal Service Order, 12 FCC Rcd at 9177-9178, para. 785.

279

Id., 12 FCC Rcd at 9178, para. 786 citing National Association of Regulatory Utility Commissioners
v. FCC, 553 F.2d 601 (D.C. Cir. 1976).
280

47 U.S.C. § 153(44).

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126. There is some dispute as to whether the term "telecommunications carrier"means substantially the same as the pre-1996 Act term "common carrier."281 The
Commission's conclusion that the phrase "directly to the public" means only
telecommunications provided on a common carrier basis is based on the legislative history.
The Joint Explanatory Statement explains that the term telecommunications service "isdefined as those services and facilities offered on a 'common carrier' basis, recognizing thedistinction between common carrier offerings that are provided to the public . . . and private
services."282 Several commenters generally contend that the Commission's interpretation andimplementation of the statutory terms were consistent with the letter and intent of the 1996
Act.283 Senator McCain states: "The provision of telecommunications on a common carrier
basis -- that is, to all users indifferently or to such segments of the public as to beeffectively available to the public indifferently -- is 'telecommunications service.'"284
Senators Stevens and Burns, however, argue that Congress intended the term"'telecommunications carrier' to define a class broader than the pre-Telecommunications Act'common carrier' regime."285
127. We are aware of the concerns of Senators Stevens and Burns that providers ofInternet service should be among the pool of universal service contributors.286 The
concerns expressed by Senators Stevens and Burns go largely to the Commission's
determination that telecommunications services and information services are distinct
categories.287 Considering universal service contributions in more general terms, we notethat the Commission has repeatedly stated,288 and several commenters agree,289 that section
254(d) should be construed broadly to encompass an expansive class of contributors.
Because we endorse this approach, it is clear that we concur fully with Senators Stevens
and Burns when they state: "The statutory language of section 254(d) is unambiguous andclear -- all telecommunications carriers must contribute."290

281

See section III.C, above.

282

Joint Explanatory Statement at 115.

283

See, e.g., TCG comments at 2; State Members comments at 3; Comcast comments at 8; Colorado
PUC comments at 2; Texas PUC comments at 2.
284

Senator McCain letter at 3.

285

Senators Stevens and Burns comments at 3.

286

See section IV.D, above.

287

We discuss these terms in section III.C, above.

288

See Universal Service Order, 12 FCC Rcd at 9177, 9183, paras. 783, 795; Fourth Order on
Reconsideration at para. 263.
289

See, e.g., PA PUC comments at 7; RTC comments at 9; GVNW reply comments at 4.

290

Senators Stevens and Burns comments at 10.

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128. The Commission's implementation of the mandatory contribution clause of
section 254(d) has adhered to the tenet that the class of entities required to contribute touniversal service should be broad. For example, the Commission, agreeing with theconclusion of the Joint Board, found that the international revenues generated by carriers ofinterstate telecommunications should be included in the base of mandatory contributors touniversal service.291 The Commission concluded that contributors that provide international
telecommunications services benefit from universal service because they must either
terminate or originate telecommunications on the domestic PSTN.292 This rationale
demonstrates the Commission's agreement with Senators Stevens and Burns, who state:"Congress intended to cast this net widely in order to ensure that all of those who make useof the network, and in particular the physical infrastructure needed to provide universal
service, contribute to its upkeep."293 In fact, the Commission sought a legislative changethat would allow it to reach the international revenues of all carriers providing service in the
United States who benefit from universal service.294 The Commission found that section
254(d) does not permit us to require carriers that provide only international
telecommunications services to contribute because these carriers are not providing"interstate telecommunications services."295 Providers of purely international
telecommunications compete against carriers that provide interstate as well as international
telecommunications services, and, thus, benefit competitively by incurring no universal
service contribution obligation. We would prefer to include these telecommunications
carriers within the class of mandatory contributors in order to treat all providers ofinternational telecommunications similarly and to further broaden the class of contributors.
129. Some parties have urged the Commission to exempt certain entities fromcontributing to universal service.296 The plain language of section 254(d), however, affords
the Commission no discretionary authority to exempt any telecommunications carriers thatprovide interstate telecommunications services, and several commenters agree with thisconclusion.297 Section 254(d) provides a limited exemption for mandatory contributors

291

Universal Service Order, 12 FCC Rcd at 9173-9174, para. 779 citing Recommended Decision at 12
FCC 481. Accord AT&T reply comments at 8.
292

Id., 12 FCC Rcd at 9173-9175, para. 779.

293

Senators Stevens and Burns comments at 10.

294

Universal Service Order, 12 FCC Rcd at 9173-9175, para. 779.

295

Id., 12 FCC Rcd at 9173-9175, para. 779.

296

See, e.g., TRA comments at 11 (non-facilities based resale carriers should be relieved of the obligation
to contribute to universal service).
297

See USTA comments at 5-6 (the Commission lacks authority to exempt any provider that otherwise
meets the section 3 definition of a telecommunications provider); Bell Atlantic comments at 12-13; Bell
Atlantic reply comments at 2, 6 (the Commission properly rejected claims of exemptions from contribution
requirements). See also AT&T comments at 8 (objects to all claims for exemption).

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whose contributions would be de minimis.298 The Commission has consistently rejectedarguments that attempt to create a broader exemption.299 For example, the Commission
determined that paging carriers fall within the section 254(d) class of mandatory
contributors and, thus, must contribute to universal service, regardless of their ability toreceive universal service support.300 Senators Stevens and Burns concur with theCommission's conclusion that CMRS and paging service providers are telecommunications
carriers and, thus, are required to contribute.301 We agree that paging companies have failed
to advance arguments that overcome the Congressional requirement that the Commission
create a broad base of support for universal service mechanisms.302 Similarly, we find nobasis for exempting non-facilities-based resale carriers, as advocated by TRA.303 To theextent they are telecommunications carriers that provide interstate telecommunications
services, resellers are mandatory contributors under section 254(d).304
130. We view the mandatory contribution requirement set forth in section 254(d)as absolute and find that the Commission has consistently abided by this mandate. We
agree with AT&T's statement that "if the Commission exempts a class of contributors, thenthe obligations of all remaining contributors increase."305 In instances where298

See section V.C.2, infra for a discussion of the de minimis exemption.

299

See, e.g., Universal Service Order, 12 FCC Rcd at 9179, para. 787 (we "find no reason to exempt
from contribution any of the broad classes of telecommunications carriers that provides interstate
telecommunications services, including satellite operators, resellers, wholesalers, paging companies, utility
companies, or carriers that serve rural or high cost areas. . .. ").
300

Fourth Order on Reconsideration at paras. 262-254. As a general matter, several wireless carriers
raise concerns that the mechanisms used for determining which revenues are derived from intrastate service
and which are derived from interstate service are not appropriate for allocating the revenues of wirelesscarriers. See, e.g., CTIA comments at n.6; Vanguard comments at 4; AMTA reply comments at 5-6; Nextel
reply comments at 5-6. We will address such issues in the petitions for reconsideration pertaining to this issue
that are pending before the Commission.
301

Senators Stevens and Burns comments at 3 n.8.

302

Fourth Order on Reconsideration at para. 263. See also PA Agencies comments at 11; PA PUC
comments at 7 (the Commission must ensure that all telecommunications carriers, especially CMRS providers,
contribute to universal service).
303

TRA comments at 11. To the extent a resale carrier's contribution would not exceed the de minimis
threshold, however, it would be exempted from the requirement to contribute. See the discussion of the deminimis exemption, Section V.C.2, infra.
304

Both the Joint Board and the Commission have found that resellers are mandatory contributors. See
Recommended Decision at para. 787; Universal Service Order, 12 FCC Rcd at 9175, para. 780. To the extent
that a resale carrier is not offering telecommunications on a common carrier basis or offering interstate
telecommunications services and, thus, does not fall within section 254(d)'s mandatory contribution
requirement, the Commission would determine whether, pursuant to its permissive authority, it would be in the
public interest for the reseller to contribute. See the discussion of permissive contributors, below.
305

AT&T comments at 8.

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telecommunications carriers derive revenues from certain activities that fall outside thedefinition of "telecommunications services," the Commission has not exempted these
entities from their contribution requirements, but, instead, has simply excluded thoserevenues from the contribution base. For example, entities providing OVS, cable leased
access, and DBS services, as well as satellite providers leasing bare transponder capacity are
excluded from contributing on the basis of revenues derived from those services, but are notexempted to the extent they otherwise provide interstate telecommunications services.306
This approach recognizes that the statute does not permit any mandatory contributors to be
exempted from the contribution requirement.
b.

Permissive Contribution Authority.

131. The third sentence of section 254(d) conveys what the Commission refers to
as its "permissive" contribution authority. In contrast to the mandate that "[e]very
telecommunications carrier that provides interstate telecommunications services shallcontribute," this sentence authorizes the Commission to determine whether the public
interest requires that "other providers of interstate telecommunications" should contribute[emphasis added].307 Section 153(43) defines "telecommunications" as "the transmission,
between or among points specified by the user, of information of the user's choosing,
without change in the form or content of the information as sent and received."308 Thisdefinition is significantly broader than that of "telecommunications services," which areprovided "for a fee directly to the public."309 As discussed above, this distinction represents
the difference between carriers that offer their services on a common carrier basis (i.e., "fora fee directly to the public") and private network operators.310 Private network operators do
not sell their services to the public. Traditionally, non-common carriers such as private
network operators have not been the subject of regulation. Because these service providers
do not serve the public, there is no need to ensure that they offer services based on just,reasonable and nondiscriminatory rates and conditions, as Title II regulations applicable tocommon carriers are designed to accomplish. The language of section 254(d), however, isunique among the other provisions of the 1996 Act because it permits the Commission to306

See Universal Service Order, 12 FCC Rcd at 9176, para. 781; Fourth Order on Reconsideration atpara. 290.
307

47 U.S.C. § 254(d).

308

47 U.S.C. § 153(43).

309

See 47 U.S.C. § 153(46).

310

The Joint Explanatory Statement explains that the term telecommunications service "is defined as
those services and facilities offered on a 'common carrier' basis, recognizing the distinction between common
carrier offerings that are provided to the public . . . and private services." Joint Explanatory Statement at 115.
See also UTC comments at 5-6 (in light of the plain language of the Act, as well as the Joint Explanatory
Statement, "[t]he FCC correctly recognized that the inclusion of this requirement that the service be provided
directly to the public evidenced clear Congressional intent that telecommunications services only encompass
services provided on a 'common carrier' basis.").

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require, if a public interest standard is met, that non-common carriers should contribute touniversal service mechanisms along with common carriers.
132. We conclude that the Commission's decisions concerning whichtelecommunications providers should contribute to universal service mechanisms, and which
ones should be spared from contributing, are consistent with the intent of Congress. Section
254(d) requires the Commission to consider the public interest when determining which
providers of interstate telecommunications should contribute to universal service. We
reaffirm the rationales the Commission has established for weighing public interest
considerations. First, the public interest requires a broad contribution base so that theburden on each contributor will be lessened.311 As discussed above with respect tomandatory contributors, Congress intended that section 254(d) would be broadly construed.
Requiring certain providers of interstate telecommunications to contribute broadens thefunding base, which lessens the impact of the contribution obligation imposed on mandatory
contributors. We also reaffirm the conclusion that the public interest requires private
service providers and payphone aggregators to contribute in order to broaden the fundingbase.312
133. Second, the public interest requires that, to the extent possible, carriers with
universal service contribution obligations should not be at a competitive disadvantage in
relation to providers on the basis that they do not have such obligations.313 This approachis consistent with the Commission's principle of competitive neutrality, which states in part:"universal service support mechanisms and rules [should] neither unfairly advantage nor
disadvantage one provider over another . . . ."314 It may be appropriate to require certain
providers of telecommunications to contribute in order to reduce the possibility that carriers
with universal service obligations will compete directly with carriers without suchobligations. For example, the Commission held that operators of interstate private networks
that lease excess capacity on a non-common carrier basis should contribute to universal
service.315 These private network operators compete against telecommunications carriers in
the provision of interstate telecommunications. Similarly, the Commission determined that

311

See, e.g., Universal Service Order, 12 FCC Rcd at 9177, 9183, paras. 783, 795; Fourth Order on
Reconsideration at para. 263.
312

Universal Service Order, 12 FCC Rcd at 9183, para. 795. See also Reuters comments at 7-8(requiring private network operators that offer services to others for a fee on a non-common carrier basis isconsistent with the law).
313

See, e.g., Fourth Order on Reconsideration at para. 276.

314

Universal Service Order, 12 FCC Rcd at 8801, para. 47. In addition to the principles set forth in the1996 Act, section 254(b)(7) permits the Joint Board and the Commission to base policies for the preservation
and advancement of universal service on "such other principles as the Joint Board and Commission determine
are necessary and appropriate for the protection of the public interest, convenience and necessity and areconsistent with this Act." 47 U.S.C. § 254(b)(7). See also Recommended Decision, 12 FCC Rcd at 101,
paras. 22-23; Universal Service Order, 12 FCC Rcd at 8801-8803, paras. 46-51.
315

Id., 12 FCC Rcd at 9178, para. 786.

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payphone aggregators should be contributors to universal service.316 This conclusion is also
justified by competitive concerns because interstate telecommunications carriers that also
provide payphone services would have an incentive to alter their business structures bydivesting their payphone operations in order to reduce their universal service contribution if
payphone aggregators that provide only payphone services were not required to contribute.
134. Third, in some cases, absent the exercise of the permissive contribution
authority, a service provider might choose to offer service on a non-common carrier basis
solely to circumvent the obligation to contribute that is imposed on all telecommunications
carriers providing interstate telecommunications service. In our view, the public interest
dictates that universal service contributions should not cause providers to offer services on a
non-common carrier basis.317 We are convinced that the Commission's actions promote thisimportant public interest concern.
135. Finally, the public interest suggests that certain telecommunications providers
should contribute because they utilize the PSTN, which is supported by universal service
mechanisms.318 The Commission concluded, in general, that telecommunications carriers
that are mandatory contributors should not be the sole supporters of the PSTN from which
other telecommunications providers benefit.319 Although there may be situations in which
competing public interest reasons compel us to conclude that certain providers of interstate
telecommunications that benefit from access to the PSTN should not contribute, we are
persuaded that it is generally consistent with the public interest for those who benefit fromthe PSTN to contribute to support the network. We note that some parties argue that the
public interest does not require contributions from telecommunications providers that are
not interconnected with the public switched network.320 We find, however, that thestatutory goal of a broad contribution base requires that these entities contribute to ensure
the preservation and advancement of universal service mechanisms.
136. The Commission also determined that the public interest requires that several
providers of interstate telecommunications should not contribute to universal service
mechanisms. In some instances, the Commission determined that competitive neutrality

316

Id., 12 FCC Rcd at 9183-9185, paras. 795-797.

317

See Id., 12 FCC Rcd at 9183, para. 795.

318

See, e.g., Id., 12 FCC Rcd at 9184, para. 796.

319

See, e.g., Id., 12 FCC Rcd at 9184, para. 796 (private service providers that sell excess capacity
should contribute because they benefit from access to the PSTN); id. at 9184-9185, para. 797 (payphoneaggregators should contribute because they are connected to the PSTN).
320

Business Networks reply comments at 2 (providers of private line services generally are not connectedto the public switched network and derive no benefit from it); US Satellite Companies reply comments at 1(the public interest does not require contributions from telecommunications that are not interconnected with the
public switched network); American Mobile Telecommunications Association reply comments at 3 (there is no
public policy rationale for requiring commercial dispatch systems that have little nexus to the PSTN tocontribute).

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concerns warrant refraining from imposing contribution requirements on certain providers
that fall within the permissive contribution authority set forth in section 254(d).321 For
example, the Commission found that systems integrators that do not provide services overtheir own facilities, are not common carriers, and obtain a de minimis amount of theirrevenues from the resale of telecommunications are not required to contribute to universal
service.322 We note that commenters are divided over this conclusion,323 but we agree thatsystems integrators that derive less than five percent of their revenues relative to systems
integration from the resale of telecommunications do not significantly compete with
common carriers that are required to contribute to universal service.324 The provision ofinterstate telecommunications is generally only one of a wide range of services that systems
integrators provide for their customers.325 Requiring systems integrators that obtain lessthan five percent of systems integration revenues from the sale of interstate
telecommunications to contribute to universal service mechanisms could dissuade thesecompanies from offering interstate telecommunications and we do not want theCommission's decisions to distort business decisions. Accordingly, we find no compelling
public interest reason for including this limited category of telecommunications providers in
the pool of contributors.326

321

See, e.g., Fourth Order on Reconsideration at para. 283 (broadcasters that engage in non-common
carrier interstate telecommunications should not contribute to universal service because broadcasters generallycompete with cable, OVS and DBS providers, which are not required to contribute on the basis of therevenues derived from these services, rather than with common carriers).
322

Fourth Order on Reconsideration at para. 278. In this context, the term de minimis is used by theCommission to describe the small amount of revenue a systems integrator can derive from telecommunications
without having to contribute to universal service mechanisms. This term is also used in the statutory language
to refer to contributors whose contributions would be less than the administrative costs of collecting them. We
discuss this provision separately in Section V.C.2.
323

Compare AT&T comments at 6-7 (systems integrators with resale telecommunication revenues below
five percent of the firm's total revenues and non-common carrier transponders potentially compete with carriers
that are required to contribute because they all sell telecommunications services and, thus, they should be
required to contribute) with Ad Hoc comments at 3 (systems integrators who obtain only a de minimis amountof revenues from the resale of telecommunications services should be exempted from contributing).
324

Fourth Order on Reconsideration at para. 279. The Commission concluded that systems integrators'
telecommunications revenues will be considered de minimis if they constitute less than five percent ofrevenues derived from providing systems integration services. Id. at 280.
325

See Fourth Order on Reconsideration at para. 278 ("systems integrators provide integrated
telecommunications packages of services and products that may include, for example, the provision ofcomputer capabilities, data processing, and telecommunications.").
326

In its comments, Amtrak analogizes its situation to those of both non-profit educational and healthinstitutions and systems integrators and argues that it should not be required to contribute to universal service
mechanisms because the small amount of excess capacity for interstate telecommunications that it sells on a
private carrier basis is only incidental to its core transportation business. Amtrak contends that it does not
significantly compete with common carriers and obtains a de minimis amount of its revenues from the resaleof telecommunications. Moreover, Amtrak states that it must resell its excess capacity pursuant to Congress's
mandate that it take measures to be self-supporting and non-reliant on federal operating support by the year

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137. We note that Bell South asserts that the Commission's approach results indisparate treatment for carriers, for which the de minimis threshold is $10,000,327 and noncarrier systems integrators, which can derive telecommunications revenues that would
otherwise result in a universal service contribution in excess of $10,000 and still be exempt
if their telecommunications revenues are less than five percent of their total systems
integration revenues.328 Because we determine that these systems integrators do notcompete significantly with common carriers, however, we find that it is appropriate torequire systems integrators to contribute only to the extent their telecommunications
revenues exceed five percent of their total revenues derived from systems integration, evenif five percent exceeds the $10,000 threshold established for mandatory contributors. The
Commission recognized that the primary business of such systems integrators is notproviding interstate telecommunictions, but rather performing services such as integrating
their customers' computer and other informational systems.329 The Commission also
recognized that customers chose systems integrators for their systems integration expertise,not for their competitive provision of telecommunications.330 Further, as the Commission
has concluded, the limited nature of this exemption will ensure that systems integrators thatare significantly engaged in the provision of telecommunications do not receive an unfair
competitive advantage over common carriers or other carriers that are required to contributeto universal service.331 Finally, we are unpersuaded that this approach will significantly
reduce the contribution base because the Commission has determined that revenues received
by common carriers for the minimal amounts of telecommunications provided to systems
integrators will be included in the contribution base of underlying common carriers.332
138. In other cases, the public interest analysis requires a more expansive
examination of the goals of universal service. For example, we have concluded that it
would be contrary to the public interest to require colleges, universities, schools, libraries,
and health care providers to contribute to universal service even though, in some instances,these institutions could be considered providers of interstate telecommunications.333 Unlike

2002. See Amtrak comments at 2-9.
327

See discussion of the de minimis exemption, Section V.C.2, infra.

328

BellSouth comments at 7-8.

329

Fourth Order on Reconsideration at paras. 278-279.

330

Id., at paras. 278-279.

331

Id., at para. 280.

332

Id., at para. 281. The record in the underlying universal service proceeding, CC Docket 96-45,
indicates that including this small group of systems integrators in the contribution pool would reduce the perprovider contribution percentage by less than 1/100th of one percent. See Ad Hoc reply comments at 3-4
citing comments of International Business Machines Corporation in Support of Petition for Reconsideration, at
12-13 (Aug. 18, 1997).
333

Fourth Order on Reconsideration at para. 284.

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other recipients of universal service such as carriers serving high cost areas, schools,
libraries, and health care providers that receive the benefits of universal service areprohibited from reselling the supported services they receive.334 Thus, they are effectively
prohibited from competing with common carriers with respect to the connections theypurchase at supported rates. Although the record demonstrates some opposition to thisconclusion,335 we are convinced that this approach is in the public interest. Further, we are
persuaded that it would be inconsistent with the educational goals of universal service
support mechanisms to require colleges and universities to contribute to universal service.336
Nevertheless, in order to maintain the sufficiency of universal service mechanisms, we willtreat non-profit schools, colleges, universities, libraries, and health care providers as
telecommunications end users for contribution purposes.337
139. Further, in the Universal Service Order, the Commission found that entities
that "provide telecommunications solely to meet their internal needs" as telecommunications
providers are subject to our permissive contribution authority. The Commission concluded,
however, that those entities "should not be required to contribute to the [universal service]support mechanisms at this time, because telecommunications do not comprise the core of
their business."338 The Commission recognized that "it would be administratively
burdensome to assess a special non-revenues-based contribution on these providers because
they do not derive revenues from the provision of services to themselves."339 As discussed
above,340 one could argue that an Internet service provider that owns transmission facilities
and engages in data transport over those facilities in order to provide an information service
is providing telecommunications to itself. As a theoretical matter, it may be advisable toexercise our discretion under the statute to require such providers to contribute to universal
service. We recognize, however, that there are significant operational difficulties associatedwith determining the amount of such an Internet service provider's revenues to be assessed
for universal service purposes and with enforcing such requirements. We intend to consider
these issues in an upcoming proceeding.
2.

334

The De Minimis Exemption

47 U.S.C. § 254(h)(3).

335

See AT&T comments at 6-7 (educational institutions that are not K-12 schools are not recipients ofsupport and are likely to resell telecommunications services to their students, thus competing with otherproviders of telecommunications; even educational institutions and health care providers potentially competewith carriers to the extent that they sell telecommunications services, and, thus, eligible schools and libraries,
as recipients of support, should be not exempted from contributing).
336

See Fourth Order on Reconsideration at para. 284.

337

Id., at para. 284.

338

Universal Service Order, 12 FCC Rcd at 9185, para. 799.

339

Id.

340

See section IV.D.1, supra.

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140. The second sentence of section 254(d) reads: "The Commission may exempt
a carrier or class of carriers from this [contribution] requirement if the carrier's
telecommunications activities are limited to such an extent that the level of such carrier's
contribution to the preservation and advancement of universal service would be deminimis."341 This clause provides the only statutory authority for exempting a carrier orclass of carriers that would otherwise be required to contribute to universal service
mechanisms.342 The legislative history indicates that the de minimis exemption is extremely
limited. Specifically, the Joint Explanatory Statement states that "this authority would only
be used in cases where the administrative cost of collecting contributions from a carrier or
carriers would exceed the contribution that carrier would otherwise have to make under theformula for contributions selected by the Commission."343
141. We recently set a $10,000.00 threshold for the de minimis exemption.344
Initially, the Commission had established a $100.00 threshold, which was based on an
estimate of the administrator's costs to collect the minimum contribution requirement used
for the TRS program.345 It is appropriate, however, as we concluded, to consider thecontributor's administrative costs, as well as the costs incurred by the administrator.346 In
addition, exempting contributors whose annual contribution would be less than $10,000.00
will significantly reduce the administrator's collection costs.347 Therefore, we conclude that
entities whose contributions would be less than $10,000.00 should be exempted from thecontribution requirement. We recognize that some commenters object to the Commission's
implementation of the de minimis exemption.348 Although we are mindful of the need toestablish clear and competitively neutral rules, we nevertheless conclude that our341

47 U.S.C. § 254(d). Thus, AT&T's contention that "no carrier -- regardless of its size -- should be
exempt" is inconsistent with the clear language of 254(d). See AT&T comments at 8.
342

See SBC comments at 2-3 (the Commission's authority to exempt contributors is limited to de minimis
contributors).
343

Joint Explanatory Statement at 131.

344

Fourth Order on Reconsideration at para. 295.

345

Universal Service Order, 12 FCC Rcd at 9187-9188, para. 803.

346

Fourth Order on Reconsideration at para. 295.

347

Id., at para. 297.

348

See, e.g., PCIA comments at 7-11 (the decision to require underlying facilities-based carriers toconsider resellers that qualify for the de minimis exemption as end users for contribution purposes places anuntenable billing burden on facilities-based carriers); BellSouth comments at 7-8 (the reclassification ofrevenues is not competitively neutral because the Commission is shifting the reseller's universal service
obligation to the underlying carrier). We note that the Commission has several petitions for reconsideration
under consideration, many of which address the implementation of the de minimis threshold. Rather than
prejudge those petitions in this Report, we will address the specific issues they raise in a future reconsideration
order.

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implementation of the de minimis exemption is consistent with Congressional intent andwith the goals of universal service in general.
142. The statute and legislative history support the conclusion that the de minimis
exemption may not be used to exempt any other class of contributors. In addition, we findno evidence that exempting contributors whose contributions would be less than $10,000.00
will result in a shortage of monies or otherwise strain the universal service support
mechanisms. Further, we disagree with AT&T's contention that the $10,000.00 de minimis
threshold creates a loophole for customers of small carriers and creates unfair marketing
advantages for small, new entrants.349 We are persuaded that the Commission's conclusion
does not extend beyond the very limited parameters of this statutory exemption.
3.

Exclusions and Exemptions

143. Congress directed us to explain "any exemption of providers or exclusion of
any service that includes telecommunications" from universal service contribution
requirements under section 254, or from existing universal service support mechanisms.350
144. Under section 254(d), only telecommunications carriers that provide"interstate telecommunications services" are required to contribute to federal universal
service funding and other providers of interstate telecommunications may be required tocontribute if the Commission finds that the public interest so requires.351 We have noted
above in our discussion of "telecommunications" and "information service" that all
information services by definition are provided "via telecommunications." As we interpretthe statute, that fact that an information service such as Internet access rides on top of
telecommunications networks does not mean that the Internet access itself is a"telecommunications service." All information services "include telecommunications" insome sense, but we have "excluded" them from universal service contribution requirements
based on the plain language of section 254(d). We do not consider this determination to be
an "exemption," because we find no requirement in the Act that all services that "include
telecommunications" be required to contribute to universal service.
145. For example, Microsoft's Expedia site allows customers to purchase airline
tickets through the World Wide Web. Because access over telecommunications networks isnecessary in order to reach the Expedia site, Microsoft can be said to offer a service that"includes telecommunications." We do not believe, however, that Congress intended
Microsoft to contribute a portion of the revenues it receives for airline tickets to theuniversal service fund. End users do not access Expedia in order to obtaintelecommunications service. Rather, those users obtain telecommunications service fromlocal exchange carriers, and then use information services provided by their Internet service

349

AT&T comments at 8.

350

Appropriations Act, §623(b)(3).

351

47 U.S.C 254(d).

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provider and Microsoft in order to access Expedia. Phrased another way, Microsoft arguably
offers a service that "includes telecommunications," but it does not "provide"
telecommunications to customers.
146. We have also been asked to address exemptions or exclusions from existing
universal service support mechanisms. Contributions to existing explicit mechanisms, suchas long-term support and telecommunications relay service, have always been limited tocarriers. Enhanced and information service providers have never been required tocontribute to these mechanisms, and therefore no "exemption" or "exclusion" exists. Not allexisting universal service support, however, is explicit. Interstate access charges, forinstance, have traditionally been set above the economic cost of access, which has permitted
ILECs to charge lower rates for local service in high-cost areas. At the state level, rates forbusiness lines and vertical features also have often been set above cost in order to keep
residential rates lower. When it established the interstate access charge regime in the early
1980s, the Commission determined that enhanced service providers, even though they used
local exchange networks to originate and terminate interstate services, would not be subject
to access charges. Instead, enhanced service providers pay local business rates to LECs fortheir connections to the LEC network. This exemption from interstate access charges thus
might be construed as an "exemption" from an "existing federal universal service support
mechanism."147. We believe that permitting enhanced service providers to purchase these
services from incumbent LECs under the same intrastate tariffs available to end users, rather
than requiring them to pay interstate access charges, comports with the plain language ofthe 1996 Act and with the public interest. The 1996 Act makes a decisive break from theexisting practice of implicit universal service subsidy structures. Rather than preserve theinefficient mechanisms designed for an industry characterized by local monopolies, the1996 Act directs the Commission to make universal service funding explicit andcompetitively-neutral. We have implemented this Congressional requirement in our
Universal Serviceand Access Reform proceedings. In particular, since January 1, 1998,
high cost support has been collected through the new federal universal service support
mechanism, funded by equitable and non-discriminatory contributions from all
telecommunications providers. We have also restructured interstate access charges so that,after a transition, interstate non-traffic-sensitive local loop costs will no longer be recovered
through per-minute long-distance rates.352 We increased caps on end-user subscriber line
charges, and created presubscribed interexchange carrier charges, to recover these costs in amore efficient manner.
VI.
WHO RECEIVES UNIVERSAL SERVICE SUPPORTA.

Background148. Section 623(b)(4) of the Appropriations Act directs the Commission to review"who is eligible under sections 254(e), 254(h)(1), and 254(h)(2) . . . to receive specificfederal universal service support for the provision of universal service, and the consistency

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with which the Commission has interpreted each of those provisions of section 254." With
respect to these particular provisions of the 1996 Act, the Commission, after seeking publiccomment, issued a series of rules concerning the eligibility of telecommunications carriers
and other providers of services to receive support under universal service mechanisms. As
discussed in greater detail below, we believe that the Commission's interpretations ofsections 254(e), 254(h)(1) and 254(h)(2) are consistent with the plain language of theseprovisions and with Congress's stated goals in passing the 1996 Act.
149. General Eligibility Under 254(e). Section 254(e) of the 1996 Act imposed a
new set of eligibility criteria for the receipt of universal service support. Section 254(e)states in part, that "[a]fter the date on which Commission regulations regarding
implementing this section take effect, only an eligible telecommunications carrier designatedunder section 214(e) shall be eligible to receive specific Federal universal service
support."353 Section 214(e)(1) provides that[a] common carrier designated as an eligible telecommunications carrier . . .
shall be eligible to receive universal service support in accordance withsection 254 and shall, throughout the service area for which the designation isreceived - (A) offer the services that are supported by Federal universal
service mechanisms under section 254(c), either using its own facilities or a
combination of its own facilities and resale of another carrier's services . . .
and (B) advertise the availability of such services and the charges therefor
using media of general distribution.354
150.
The Commission adopted without expansion the criteria set forth in section
254(e) as the rules governing eligibility for universal service support in general. Those
rules, the Commission concluded, allow only carriers designated as "eligible
telecommunications carriers" under section 214(e) to be eligible for universal service
support, and allow only common carriers to be designated as eligible telecommunications
carriers for this purpose.355 The Commission also concluded that, under section 254(e), any
telecommunications carrier using any technology is eligible to receive support as long as itmeets the criteria set forth in section 214(e).356 The Commission also found that carriers
that use unbundled network elements, in whole or in part, to provide supported services
meet the "facilities" requirement of subsection 214(e)(1)(A) and, therefore, can be eligible
for universal service support.357 The Commission concluded, however, that carriers thatprovide their services entirely through resale of another carrier's services are not eligible for353

47 U.S.C. § 254(e).

354

47 U.S.C. § 214(e)(1).

355

Universal Service Order, 12 FCC Rcd at 8850-8851, para. 134.

356

Id. at 8858-8859, paras. 145-146.

357

Id . at 8862-8870, paras. 154-168.

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universal service support. The Commission's rules regarding general eligibility are codified
in Part 54, Subpart C of volume 47 of the Code of Federal Regulations.358
151. Providers of Services to Schools and Libraries. With section 254(h)(1)(B) of
the 1996 Act, Congress created a new universal service support mechanism specifically forthe benefit of schools and libraries. Section 254(h)(1)(B) states, in part, that atelecommunications carrier providing supported services to schools and libraries "shall - (i)have an amount equal to the amount of the discount treated as an offset to its obligation tocontribute to the mechanisms to preserve and advance universal service, or (ii)notwithstanding the provisions of subsection (e) of this section, receive reimbursement
utilizing the support mechanisms to preserve and advance universal service."359 Section
254(c)(3) of the Act provides that "[t]he Commission may designate additional services forsuch support mechanisms for schools, libraries, and health care providers for the purposesof subsection (h)."360 In addition, section 254(h)(2) states in part: "The Commission shallestablish competitively neutral rules (A) to enhance, to the extent technically feasible andeconomically reasonable, access to advanced telecommunications and information services
for all public and non-profit elementary and secondary school classrooms, health careproviders, and libraries . . . ."361
152.
The Commission interpreted subsection 254(h)(1)(B) to allow any
telecommunications carrier, not just eligible telecommunications carriers, to receive
reimbursements from universal service mechanisms for providing telecommunications
service, Internet access and the installation and maintenance of internal connections toeligible schools and libraries.362 The Commission also found that firms other thantelecommunications carriers can receive support under sections 254(h)(2) and 4(i) for
providing Internet access and the installation and maintenance of internal connections.363 In
its Fourth Order on Reconsideration, the Commission added that, because state
telecommunications networks are not "telecommunications carriers," as defined by thestatute, they are not eligible to receive direct reimbursement from universal service support
mechanisms for providing telecommunications services to eligible schools and libraries.364
On the other hand, the Commission also found that, as firms other than telecommunications
carriers, they are still eligible to receive direct reimbursement for providing Internet access

358

47 C.F.R. §§ 54.201-54.207.

359

47 U.S.C. § 254(h)(1)(B).

360

47 U.S.C. § 254(c)(3).

361

47 U.S.C. § 254(h)(2).

362

Universal Service Order, 12 FCC Rcd at 9015, para. 449.

363

See 47 C.F.R. §§ 54.503, 54.517(b).

364

Fourth Order on Reconsideration at paras. 187-189.

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and internal connections to eligible schools and libraries under section 254(h)(2)(A).365 The
Commission's rules regarding the eligibility of providers of services to schools and libraries
are codified in Part 54, Subpart F of volume 47 of the Code of Federal Regulations.366
153. Providers of Services to Health Care Providers. With section 254(h)(1)(A),
Congress also added a new universal service support mechanism for the benefit of healthcare providers. Section 254(h)(1)(A) provides, in part, that a telecommunications carrier
providing supported services to health care providers in rural areas "shall be entitled to havean amount equal to the difference, if any, between the rates for services provided to healthcare providers for rural areas in a State and the rates for similar services provided to othercustomers in comparable rural areas in that State treated as a service obligation as a part ofits obligation to participate in the mechanisms to preserve and advance universal service."
As with the program for schools and libraries, however, section 254(c)(3) of the Act adds
that "[t]he Commission may designate additional services for such support mechanisms forschools, libraries, and health care providers for the purposes of subsection (h)."367 Also,
section 254(h)(2) directs the Commission to "establish competitively neutral rules (A) toenhance, to the extent technically feasible and economically reasonable, access to advanced
telecommunications and information services for all public and non-profit elementary andsecondary school classrooms, health care providers, and libraries . . . ."368
154. The Commission found that section 254(h)(1)(A) is explicitly limited to"telecommunications services."369 The Commission also determined that only carriers
designated as "eligible telecommunications carriers" shall be eligible to receive support forproviding services to health care providers under section 254(h)(1)(A).370 The Commission
found further that these services include the telecommunications services that health careproviders may purchase to gain access to an Internet service provider.371 The Commission
thus concluded that any telecommunications carrier can receive limited support forproviding any health care provider, whether rural or not, with toll-free access to an Internet
service.372 The Commission's rules regarding eligibility of providers of services to health365

Id . at paras. 190-191.

366

47 C.F.R. §§ 54.500-54.517.

367

47 U.S.C. § 254(c)(3).

368

47 U.S.C. § 254(h)(2).

369

Universal Service Order, 12 FCC Rcd at 9009, 9010, paras. 437, 439.

370

Id. at 9105, para. 627.

371

Id. at 9106-9107, para. 630.

372

Id. at 9087-9088, paras. 596; id. at 9157-9159, paras. 742-745.

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care providers are codified in Part 54, Subpart G of volume 47 of the Code of Federal
Regulations.373
B.

Discussion
1.

General Eligibility under section 254(e).

155. As noted above, section 254(e) provides that "only an eligible
telecommunications carrier designated under section 214(e) shall be eligible to receive
specific Federal universal service support."374 Section 214(e), in turn, provides that:[a] common carrier designated as an eligible telecommunications carrier under[subsection 214(e)(2)] or [subsection 214(e)(3)] shall be eligible to receive universal
service support in accordance with section 254 and shall, throughout the service area
for which the designation is received -(A) offer the services that are supported by Federal universal service
support mechanisms under section 254(c), either using its own
facilities or a combination of its own facilities and resale of anothercarrier's services (including the services offered by another eligible
telecommunications carrier); and (B) advertise the availability of suchservices and the charges therefor using media of general distribution.375
156. In the Universal Service Order, the Commission, consistent with therecommendation of the Joint Board, found that these sections constitute the entirety of therules governing eligibility for universal service support generally, and that the statute does
not permit the Commission or states to adopt any additional criteria. We believe that theplain language of the statute fully supports the Commission's conclusion in this regard, andthat the Commission properly construed the statute with respect to each of the rules set
forth in sections 254(e) and 214(e).
a.

The "Eligible Telecommunications Carrier" Requirement.

157. The Commission first concluded that, under section 254(e), only a carrier thatis designated an "eligible telecommunications carrier" pursuant to section 214(e) can beeligible for the receipt of universal service support.376 The relevant language of the statute,which states that "only an eligible telecommunications carrier designated under section

373

47 C.F.R. §§ 54.601-54.623.

374

47 U.S.C. § 254(e).

375

47 U.S.C. § 214(e)(1).

376

47 C.F.R. § 54.201(a).

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214(e) shall be eligible to receive specific Federal universal service support,"377 is plain on
its face and fully supports the Commission's conclusion.
158. The Commission also found that only a common carrier may be designated asan "eligible telecommunications carrier" for purposes of section 254(e). We find that this,
too, is consistent with the language of the statute. For example, section 214(e)(2) directs
state commissions to designate "common carrier[s]" as eligible telecommunications carriers
for receipt of support.378 Similarly, section 214(e)(1) refers only to "[a] common carrier" as
eligible for support in accordance with section 254.379 These provisions, we believe, clearly
indicate Congress's intention that only a common carrier may be designated as an "eligible
telecommunications carrier."b.

The "Facilities" Requirement.

159. Section 214(e)(1) requires each eligible carrier, throughout its service area: (1)to offer the services that are supported by federal universal service support mechanisms
under section 254(c); (2) to offer such services using its own facilities or a combination of
its own facilities and resale of another carrier's services, including the services offered byanother eligible telecommunications carrier; and (3) to advertise the availability of andcharges for such services using media of general distribution.380 The 1996 Act, however,does not define the term "facilities." Accordingly, the Commission, in an effort toeffectuate the intent of Congress, established a definition of "facilities" for purposes ofdetermining the eligibility requirements of section 214(e)(1).
160. The Commission interpreted the term "facilities" in section 214(e)(1) to mean
any physical components of the telecommunications network that are used in thetransmission or routing of the services designated for universal service support.381 This
interpretation is mandated by the statutory langauge which requires that at least some
portion of the supported services offered by a carrier be offered using the carrier's "ownfacilities."382 Although the Joint Board made no recommendation regarding the type of
facilities that an eligible carrier must provide, it recommended that carriers who offer
universal service exclusively through the resale of another carrier's service should not be
eligible for universal service support.383 Because resold services are not physicalcomponents of the network, the Commission's interpretation of the term "facilities" excludes
377

47 U.S.C. § 254(e).

378

47 U.S.C. § 254(e)(2).

379

47 U.S.C. § 214(e)(1).

380

See 47 U.S.C. § 214(e)(1); 47 C.F.R. § 54.201(d).

381

See 47 C.F.R. § 54.201(e).

382

47 U.S.C. § 214(e)(1)(A).

383

See Recommended Decision, 12 FCC Rcd at 173, para. 161.

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pure resellers from eligibility for universal service support and therefore fulfills the aim ofboth Congress and the Joint Board.
161. We note, however, that the Commission's interpretation does not dictate thespecific facilities that a carrier must provide and, therefore, does not impose entry barriers
that would unduly restrict the class of carriers that may be designated as eligible foruniversal service support. In our view, therefore, the Commission's interpretation of"facilities" strikes an appropriate balance that gives the facilities requirement sufficient
meaning to exclude pure resellers from eligibility, but remains competitively neutral insofar
as it does not dictate the specific facilities or entry strategy that any other carrier mustuse.384c.

Unbundled Network Elements as "Own Facilities".

162.
As noted above, section 214(e)(1) requires an eligible carrier to provide
supported services "either using its own facilities or a combination of its own facilities andresale of another carrier's services . . . ."385 An issue that arises in interpreting this language
is the treatment of the use of unbundled network elements; specifically, whether use of
unbundled elements constitutes a carrier's "own facilities." In addressing this issue, theCommission concluded that unbundled network elements qualify as a carrier's "ownfacilities" for purposes of section 214(e)(1).386 Under this interpretation, a carrier that offers
any of the services designated for universal service support, either in whole or in part, overfacilities that are obtained as unbundled network elements pursuant to section 251(c)(3)satisfies the facilities requirement of section 214(e)(1)(A). Although Congress did not
expressly refer to unbundled network elements in section 214(e)(1)(A), we find that theCommission's conclusion is consistent with both the language and overall purposes of thestatute.387

384

Although the Commission defined "facilities" to require physical components of the network, it did
not construe section 214(e) to require that those facilities be physically located in the service area at issue.
We believe that this is an appropriate construction of the statute. First, nothing in the statute mandates that thefacilities be located in the service area. See 47 U.S.C. § 214(e). Second, where a carrier can offer supported
services in one area through the use of facilities in another area, it is most economically efficient to afford thecarrier flexibility to offer its services in this manner. To hold otherwise would require the addition of
redundant facilities within the service area for no purpose related to the effective provision of universal
service. Moreover, the Commission's interpretation is competitively neutral, as it accomodates various
technologies and entry strategies that carriers may employ to compete in high-cost areas.
385

47 U.S.C. § 214(e)(1)(A).

386

47 C.F.R. § 54.201(f).

387

We note that, based on the text of section 271(c)(1)(A), the legislative history of that provision, andthe overall statutory scheme of the 1996 Act, the Commission interpreted the phrase "own telephone exchange
service facilities" in section 271(c)(1)(A) to include unbundled network elements that a competing provider has
obtained from a Bell Operating Company. See Application of Ameritech Michigan Pursuant to Section 271 of
the Communications Act of 1934, as amended, to Provide In-Region, InterLATA Services in Michigan, Order,
CC Docket No. 97-137, 12 FCC Rcd 20543, 20589-20598, paras. 86-101 (1997), petitions for recon. pending.

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163. The principal purpose of the 1996 Act was to increase competition in thelocal telephone markets.388 To this end, Congress sought to allow potential competitors toenter local telephone markets by using the incumbent carriers' own networks in three ways:(1) interconnection of the competitor's network to that of an incumbent, (2) use of
unbundled elements of the incumbent's network, and (3) resale of the incumbent's retailservices.389 The use of unbundled network elements, as one of only three primary paths ofentry into local markets, clearly lies at the heart of the 1996 Act. Given this central roleassigned to the use of unbundled network elements in the 1996 Act as a whole, it seems
highly unlikely that Congress intended, in section 214(e)(1)(A), to deny universal service
support to a carrier that relies on unbundled network elements, whether in whole or in part,to provide supported services, when it excluded only those carriers relying entirely on"resale"-- a separate entry strategy.
164. Indeed, Congress has made clear that all three forms of local entry must betreated in a competitively neutral manner, notwithstanding section 214(e)(1)(A), which
prevents pure resellers from becoming eligible telecommunications carriers.390 If the "ownfacilities" requirement were interpreted to preclude services provided through unbundled
network elements from eligibility for universal service support, carriers using unbundled
network elements would be at a competitive disadvantage to carriers using other entry
strategies, as only those carriers employing other entry strategies would be eligible forsupport, even if the carriers were all providing the same services. Such a result would be atvariance with the principles of competitive neutrality underlying the Act and would serve asa significant disincentive for entry into high-cost areas through the use of unbundled
elements, thus defeating Congress's intent to bring the fullest range of telecommunications
services "to all regions of the Nation."391
165. Moreover, the use of unbundled network elements falls within the definitionof a carrier's "own facilities," in the ordinary sense of the term. For example, when acarrier obtains an unbundled network element from an incumbent carrier, the requesting
carrier obtains exclusive use of that element for a period of time and pays the full cost of its
use to the incumbent.392 Because the ordinary meaning of the word "own" includes not

388

See, e.g., Reno v. ACLU, 117 S. Ct. 2329, 2337-2338 (1997) (the 1996 Act is "an unusually importantlegislative enactment" whose "major components . . . were designed to promote competition in the local
telephone service market.").
389

See 47 U.S.C. § 251(c).

390

47 U.S.C. § 214(e)(1)(A) (An eligible telecommunications carrier must "offer the services that aresupported by Federal universal service support mechanisms under section 254(c), either using its own facilities
or a combination of its own facilities and resale of another carrier's services . . . .").
391

47 U.S.C. § 254(b)(3).

392

See Local Competition Order, 11 FCC Rcd 15499, 15635 para. 268 (1996).

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only title holders, but those enjoying beneficial use of property,393 a user of unbundled
network elements is fairly viewed under these circumstances to be using his "own facilities"
to provide service. The Commission's decision to include unbundled network elements
within the scope of a carrier's "own facilities," therefore, comports with this common
understanding of the term.394 We note, however, that this issue is the subject of substantial
disagreement and is currently before the Commission on petitions for reconsideration.395
Thus, while we report here that we believe the Commission's interpretation of the "ownfacilities" requirement to be reasonable, we do not wish to prejudge the pending petitions
for reconsideration and remain open to the arguments of those who disagree.
d.

Eligibility of All Technologies.

166. The Commission concluded that any telecommunications carrier using any
technology, including wireless technology, is eligible to receive universal service support,
provided that it meets the criteria set forth in section 214(e).396 We find that thisconclusion, which the Joint Board recommended, is the proper reading of the statute.
Neither section 254(e) nor 214(e) contains language that would favor one technology overanother for purposes of eligibility for support. To the contrary, the statute mandates
eligibility for any common carrier that meets the requirements of 214(e), without reference
to the type of technology employed. Any wholesale exclusion of a class of carriers from
eligibility for support, therefore, would be inconsistent with the plain language of the statuteas well as the principle of competitive neutrality embodied in the Act. The Commission's
decision to allow any technology as eligible for support is thus fully supported by thelanguage and purpose of the statute.
e.

Ineligibility of Resellers.

167. The Commission determined that a carrier that provides supported services
exclusively through the resale of another carrier's services cannot be designated an eligible393

See Universal Service Order, 12 FCC Rcd at 8865, para. 158 n.405(citing Black's Law Dictionary,1105 (6th ed. 1990)); id. at 8865 n.407, para. 158 (citing cases).
394

See, e.g., Walters v. Metropolitan Educational Enterprises, Inc., 117 S. Ct. 660, 664 (1997) ("In theabsence of an indication to the contrary, words in a statute are assumed to bear their 'ordinary, contemporary,common meaning.'") (quoting Pioneer Investment Services Co. v. Brunswick Associates Ltd. Partnership, 507
U.S. 380, 388 (1993)).
395

See, e.g., RTC comments at 7-8, 24-25 (allowing unbundled network elements to satisfy "ownfacilities" test guts statutory safeguard against giving high cost support to a carrier that does not incur highcosts or invest in infrastructure of the high cost area); NARUC comments at 6-7 (Commission had noauthority to define "owned facilities" and service area considerations, as these roles are clearly assigned tostates under section 214(e)(5)); TDS comments at 10 (allowing use of unbundled network elements where
underlying carrier's facilities are not high cost or located in high cost area conflicts with section 254(e)); State
Members comments at 7 (states, not Commission, have authority under section 214(e) to define "ownfacilities" and to establish geographic areas).
396

47 C.F.R. § 54.201(h).

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telecommunications provider for purposes of section 214(e).397 This, too, in our view, is areasonable reading of the statute. As noted above, both Congress and the Joint Board
expressed an intention to exclude pure resellers from universal service support.398 In
particular, section 214(e)(1)(A) requires an eligible carrier to provide supported services
only "either using its own facilities or a combination of its own facilities and resale ofanother carrier's services . . . ."399 Because pure resale is not an option under this provision,
the Commission's rule denying eligibility to pure resellers comports with the plain languageof the statute.
168. Moreover, pure resellers already receive the benefit of universal service
support when they purchase wholesale services at a price based on the retail price, a pricethat already includes the universal service support received by the incumbent provider. If
pure resellers were eligible for additional support payments directly to themselves, theywould effectively receive a "double recovery" of support.400 Such a result would not only
be inefficient, but it would violate the principle of competitive neutrality by favoring
resellers over other carriers. We believe, therefore, that the Commission's interpretation is areasonable construction of the statute. We note, however, that this issue is also before theCommission on petitions for reconsideration.401 To avoid prejudging those petitions, weunderscore that, based upon our review of the record in this proceeding, our opinion on thisissue is simply that the Commission's decision to exclude pure resellers is a reasonableinterpretation of the statute.
f.

Exclusivity of Statutory Rules.

169. Section 214(e)(2) states that "[a] state commission shall . . . designate acommon carrier that meets the [eligibility] requirements of [section 214(e)(1)] as an eligible
telecommunications carrier . . . ." 47 U.S.C. § 214(e)(2) (emphasis added). Similarly,
section 214(e)(1) provides that carriers designated as eligible telecommunications carriers
pursuant to the statute "shall be eligible to receive universal service support . . . ." 47
U.S.C. § 214(e)(1) (emphasis added). These provisions clearly leave no room for discretion
and require that carriers meeting the statutory eligibility requirements be provided with
universal service support. We agree, therefore, that the statute does not permit theCommission to impose additional criteria for eligibility.
397

See 47 C.F.R. § 54.201(i).

398

See Recommended Decision, 12 FCC Rcd at 173, para. 161; 47 U.S.C. § 214(e)(1)(A).

399

47 U.S.C. § 214(e)(1)(A).

400

AMSC contends that resellers should not be excluded from eligibility where their services were notobtained from carriers that are already receiving universal service support for the same facilities. See AMSC
comments at 4. In such cases, AMSC contends, support for the reseller does not create a "double recovery."
Id . Regardless, AMSC's point cannot overcome the statutory language of section 214(e)(1)(A), which does notallow universal service support for the pure resale of supported services.
401

See, e.g., BellSouth Petition for Reconsideration at 3-4 (filed); RTC Petition for Reconsideration at 56 (filed).

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170. Furthermore, even if the statute permitted the imposition of additional
conditions on eligibility, such conditions would be unnecessary. Although somecommenters in the initial rulemaking proceeding argued that additional criteria are needed
to prevent unreasonable practices by other carriers, the statutory rules are sufficient toprotect against such practices.402 For example, by limiting eligibility to only common
carriers, section 214(e) prevents eligible carriers from cherry-picking only the most desirable
customers. The requirement that eligible carriers must serve their entire service area
similarly protects against such practices. Moreover, the imposition of additional criteria for
eligibility would raise potential market participants' costs of entry, thereby discouraging thecompetition intended by the 1996 Act. In addition to the plain language of the statute,
therefore, these practical concerns justify the Commission's decision to adopt the statutory
criteria for eligibility without additional criteria.403
2.

Eligibility for Support for Providing Service to Schools andLibraries under section 254(h)171. The Commission concluded that, pursuant to section 254(h)(1)(B), alltelecommunications carriers may receive support for providing eligible schools and libraries
with any commercially available telecommunications service they need404 as well as forproviding them with basic "conduit" Internet access and the installation and maintenance ofinternal connections.405 The Commission also determined that, pursuant to sections 4(i) and254(h)(2)(A), firms other than telecommunications carriers can receive support for providing
eligible schools and libraries with basic conduit Internet access and the installation andmaintenance of internal connections.406
a.

Telecommunications Carriers

172. The Commission concluded that section 254(h)(1)(B)(ii) allows any
telecommunications carrier, not just those designated as "eligible telecommunications
carriers" under section 214(e), to receive universal service support for providing supported
services to schools and libraries.407 This interpretation is, in our view, well-grounded in theplain language of the statute.

402

See Universal Service Order, 12 FCC Rcd at 8856, para. 143 n.347 (citing comments).

403

Although one commenter in the initial proceeding sought modification of section 214(e)(1)'s
requirement that eligible carriers provide service to, and advertise throughout, their entire service areas, theterms of section 214(e) clearly do not allow us to alter these duties. We cannot, therefore, modify therequirements of section 214(e) to accomodate those carriers whose technology limits their ability to provide
service throughout a state-wide service area. See Universal Service Order, 12 FCC Rcd at 8855, para. 141.
404

See 47 C.F.R. §§ 54.501(a), 54.502.

405

See 47 C.F.R. § 54.503.

406

See 47 C.F.R. §§ 54.503, 54.517(b); Universal Service Order, 12 FCC Rcd at 9013, para. 444.

407

See 47 C.F.R. § 54.501(a); Universal Service Order, 12 FCC Rcd at 9015, para. 449.

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173. As noted above, section 254(e) provides that only a carrier designated as an"eligible telecommunications carrier" under section 214(e) may receive universal service
support.408 Section 254(h)(1)(B)(ii), however, contains an express exemption from thislimitation, allowing telecommunications carriers to receive universal support for providing
eligible services to schools and libraries, "notwithstanding the provisions of [section 254(e)]. . . ."409 We find that, as Senators Stevens and Burns have observed, Congress intended
section 254(h)(1)(B) to "waive the statutory limitation in section 254(e) so that any
telecommunications carrier could receive support for universal service to schools andlibraries."410 We believe that the language of the statute thus fully supports theCommission's conclusion that any telecommunications carrier, whether or not designated asan "eligible telecommunications carrier," is eligible for support for providing
telecommunications services to schools and libraries.411
174. Moreover, as the Commission explained in its Fourth Order on
Reconsideration, the term "telecommunications carrier" in section 254(h)(1)(B) includes
only those carriers that provide telecommunications services on a common carrier basis.412
In turn, this means that only those carriers who hold themselves out "to service indifferently
all potential users" can be considered telecommunications carriers.413 Therefore,
notwithstanding the objections of some commenters,414 the plain language of the statuteappears to render state telecommunications networks ineligible to receive universal service
support for providing telecommunications services to eligible schools and libraries.415
Because the evidence in the record indicates that state telecommunications networks offer
services to a specified class of users rather than directly to the public, these entities do notservice all potential users indifferently and thus would not qualify as telecommunications
carriers. Because, as noted above, section 254(h)(1)(B) provides that only
telecommunications carriers may receive support for providing schools and libraries with408

47 U.S.C. § 254(e).

409

47 U.S.C. § 254(h)(1)(B)(ii).

410

Senators Stevens and Burns comments at 10.

411

See also NCTA comments at 14-15 (section 254(h)(1)(B) specifically authorizes support for noncommon carriers).
412

Fourth Order on Reconsideration at paras. 187-188.

413

Universal Service Order, 12 FCC Rcd at 9177-78, paras. 784-786.

414

See, e.g., Washington DIS reply comments at 1-3 (ineligibility of state networks providing services topublic entities to receive discounts directly precludes schools and libraries from obtaining discounts on
significant administrative costs included in state-provided services and creates disincentives to use stateaggregated telecommunications services); NASTD reply comments at 1-3 (state networks should be permitted
to receive support for costs "not directly attributable to readily identifiable costs" of providing local and long
distance voice telecommunications to schools and libraries). See also Washington State Department ofInformation Services, Petition for Reconsideration, CC Docket No. 96-45 (filed Feb. 12, 1998).
415

Fourth Order on Reconsideration at paras. 187-189.

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telecommunications services, we believe that the Commission correctly concluded that state
telecommunications networks are not eligible for universal service support under section
254(h)(1)(B). We note, however, that the Iowa Telecommunications and Technology
Commission filed with the Commission a request for determination that the Iowa
Communications Network it operates is a provider of telecommunications services toschools, libraries and rural health care providers and, thus, should be eligible to receive
universal service support for serving these entities.416 We will consider this request in an
upcoming proceeding.
b.

Firms Other Than Telecommunications Carriers Providing
Internet Access and Internal Connections

175. We have attempted to interpret sections 254(h)(2) and 254(e) in a mannermost consistent with the context provided by other statutory language and the Congressional
intent expressed in that language.417 Under such analysis below, which is similar to theanalysis provided by the Commission in the Universal Service Order, we conclude that,
despite some statutory ambiguity, the stronger position is that section 254 authorizes theCommission to provide support to firms other than telecommunications carriers under
section 254(h)(2).418 We recognize that some would find it incongruous that entities that do
not contribute to universal service support mechanisms may draw funds from thosemechanisms if those entities provide competitively priced Internet access or internal
connections to eligible schools and libraries. We reach this interpretation of section
254(h)(2), however, because we find that the consequences of reading the statute to denysupport to firms other than telecommunications carriers creates more apparent statutory
inconsistencies than reading the statute to permit such support.
176. At the outset, we note that the Commission interpreted section 254(h)(2) topermit support not only for telecommunications services, but also for internal connections inschools and libraries, which are not telecommunications services. This conclusion waspremised on the statute's specific requirement that "classrooms," as opposed to "schools,"
have access to advanced telecommunications and information services.419 If theCommission had found that the statute did not permit support for internal connections, only
wireless telecommunications service providers would have been eligible to receive support

416

Iowa Communications Network Eligibility for Universal Service Payments, CC Docket 96-45 (filed
Feb. 4, 1998); Iowa Telecommunications and Technology Commission Seeks Determination that the Iowa
Communications Network is a Provider of Telecommunications Services to Schools, Libraries, and Rural
Health Care Providers, Public Notice, DA 98-294 (rel. Feb. 13, 1998).
417

Bell Atlantic Telephone Companies v. FCC, 131 F.3d 1044 (D.C. Cir. 1997).

418

We note that this issue is the subject of a pending appeal. See Brief for Petitioners GTE Entities,
Southwestern Bell Tel. Co. and BellSouth Corp., Texas Office of Pub. Util. Counsel v. FCC, No. 97-60421(5th Cir.) at 85-88.
419

See 47 U.S.C. § 254(h)(2)(A).

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for the provision of telecommunications and information services to classrooms. Because
limiting eligibility solely to wireless carriers would have been contrary to the Commission's
obligations to "establish competitively neutral rules to enhance . . . access to advanced
telecommunications and information services for all . . . classrooms,420 we concluded that
Congress intended to permit support for internal connections in schools and libraries.
177. Further, at least three major inconsistencies arise from interpreting section
254(e) to limit our authority under section 254(h)(2). First, reading section 254(e) to limit
section 254(h)(2), when it does not apply to section 254(h)(1)(B), appears inconsistent withthe relative directives of those provisions. Congress explicitly chose to permit theCommission to provide support to all telecommunications carriers -- including those thatwere not designated under section 214(e) -- for services eligible for support under section
254(h)(1)(B). While 254(h)(1)(B) did not emphasize competitive neutrality, the exemption
from section 254(e) implicitly provided competitive neutrality among all
telecommunications carriers. Reading section 254(e) to limit section 254(h)(2), however,would imply that Congress intended section 254(h)(2) to be less competitively neutral thansection 254(h)(1)(B), for Congress would be prohibiting competitive neutrality between alltelecommunications carriers: those designated under section 214(e) would be preferred tothose that were not. That is, that while Congress explicitly required "competitive neutrality"
under section 254(h)(2), it intended to prohibit even the lesser form of competitive
neutrality that it adopted implicitly in section 254(h)(1)(B). This does not appear to be atenable conclusion.
178. Second, denying support to firms other than telecommunications carriers
would be inconsistent with Congress's goal, stated in section 254(h)(2)(A), to "enhance . . .
access to advanced telecommunications and information services" for schools andlibraries.421 To allow support for Internet access and internal connections only whenprovided by a telecommunications carrier would reduce the sources from which schools andlibraries could obtain these services at a discount which, in turn, would reduce competitive
pressures on providers to lower their costs, potentially leaving schools and libraries toconfront unduly high pre-discount prices. This would appear contrary to the statutory goalof providing schools and libraries with services in the most cost-effective manner possible,
which would minimize the total cost and thus the total amount of universal service
contributions that would need to be collected.422

420

47 U.S.C. § 254(h)(2)(A).

421

47 U.S.C. § 254(h)(2)(A).

422

See, e.g., Comcast reply comments at 5-7 (support for non-telecommunications carriers promotes
competition and drives prices of Internet access down for schools and libraries); EDLINC comments at 4-5(without competition from ISPs, ILECs will continue to charge schools and libraries high rates, thereby
depleting universal service fund); NCTA comments at 13 (competitive neutrality requires support for all
entities; cable is cost-effective choice for schools and libraries); CIX reply comments at 2-3 (schools andlibraries should be permitted to select from a wide range of vendors); PA Agencies comments at 12-15(support for non-telecommunications carriers promotes competition and technological neutrality).

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179. Third, as the Universal Service Orderrecognized, limiting direct support totelecommunications carriers would not fully deny support to firms other thantelecommunications carriers; it would only deny support to firms that did not affiliate with
telecommunications carriers.423 As the Universal Service Ordernoted, to take advantage ofthe discounts provided by section 254(h)(1), firms other than telecommunications carriers
would be able to bid with telecommunications carriers through joint ventures, partnerships,
or other business arrangements, and receive support indirectly. They would also have theoption of establishing telecommunications carrier subsidiaries or affiliates, even if the scopeof their telecommunications service activities was fairly limited. Thus, the Order found that
limiting direct support to telecommunications carriers would not prevent support from going
indirectly to other firms, but that it would frustrate the Commission's effort to achieve its
goal of competitive neutrality,424 because it would treat firms other than telecommunications
carriers less favorably than telecommunications carriers.
180. Therefore, the Commission concluded that firms that are nottelecommunications carriers are eligible to compete to receive support under 254(h)(2) for
providing Internet access and internal connections to schools and libraries, a position that a
number of commenters have challenged.425 It bears emphasis that such firms would only
receive such support if they were able to offer the requested services on more favorable
terms than those offered by telecommunications carriers. Upon reexamination of this issue
we observe that certain statutory provisions render the Act susceptible to more than one
reasonable interpretation. Specifically, we find that there is tension between section 254(e)'s
requirement that we limit support to telecommunications carriers and section 254(h)(2)'scommand that we establish competitively neutral rules. Section 254(e) states that "only an
eligible telecommunications carrier designated under section 214(e) shall be eligible toreceive specific federal universal service support." Therefore, if we treated it as controlling,
we would conclude that section 254(h)(2) can only authorize support for section 214(e)eligible telecommunications carriers. On the other hand, section 254(h)(2) states that "theCommission shall establish competitively neutral rules," under 254(h), and so if we treated
it as controlling, we would read it to prohibit the Commission from establishing rules thatare not competitively neutral, and thus require that we find that section 254(e)'s exclusion ofbroad classes of potential competitors does not apply to rules established under 254(h)(2).

423

Universal Service Order, 12 FCC Rcd at 9085, para. 590.

424

Universal Service Order, 12 FCC Rcd at 9085, para. 590. See also, e.g., CIX comments at 14-16(limiting support only to telecommunications carriers would disserve goal of competitive pricing and would
favor a small number of Internet service providers that happen to be affiliated with telecommunications
carriers); NCTA comments at 11-12 (cable companies can claim eligibility by virtue of ownership or affiliation
with telecommuncations carrier).
425

See e.g., BellSouth comments at 8; Senators Stevens and Burns comments at 10 (sections 254(c) and254(e) limit support to telecommunications carriers); TCG comments at 3, 4-5, 7-8 (support for firms otherthan telecommunications carriers goes beyond plain language of statute); RTC reply comments at 12-14(same).

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181. As the Universal Service Orderrecognized, however, there is a reasonablestatutory basis for concluding that section 254(e) does not apply to section 254(h)(2).
Although sections 254(e) and 254(h)(1)(A) and (B) limit support only to eligible
telecommunications carriers, the Commission's decision to allow support to firms other thantelecommunications carriers was based on the broader provisions of section 254(h)(2)(A), in
conjunction with section 4(i), and is therefore not subject to this same restriction. Indeed,
the structure of the Act indicates that section 254(h)(2)(A) operates as a separate grant ofauthority that is independent of the narrower provisions of sections 254(e) and 254(h)(1)(A)and (B). For example, section 254(e) limits eligibility of universal service support only tothose carriers designated as "eligible telecommunications carriers" under section 214(e).
Section 214(e), in turn, requires such carriers to offer the services that are designated forsupport under section 254(c). With respect to schools and libraries, the only incorporationof section 254(c) (and thus sections 254(e) and 214(e) by reference) is made by section
254(h)(1)(B). Section 254(h)(2)(A), which grants additional authority to the Commission
with regard to schools and libraries, makes no reference to the support mechanisms
established through section 254(c) and thus operates independently of them. We conclude
that because section 254(h)(2)(A) makes no reference to section 254(c)(3), which in turnincorporates section 214(e)'s eligible telecommunications carrier limitation, support under
section 254(h)(2)(A) is not restricted to eligible telecommunications carriers. The
independence of section 254(h)(2)(A) from these narrower provisions is further
demonstrated by the difference between section 254(h)(1)(A), which applies only to healthcare providers that serve "persons who reside in rural areas," and section 254(h)(2)(A),426
which applies to "all . . . health care providers . . . ."427
182. In contrast to the more limited provisions of sections 254(e) and 254(h)(1)(A)and (B), section 254(h)(2)(A) employs broader language that separately grants theCommission authority to establish rules to enhance access to advanced telecommunications
and information services, constrained only by the principles of competitive neutrality,
technical feasibility and economic reasonableness.428 Unlike the narrower provisions,section 254(h)(2)(A) does not refer to "telecommunications carriers" and, therefore, does not
require us to exclude other firms from competing to provide eligible services.429 The
Commission's reading of the statue, which permits firms that are not telecommunications
carriers to compete to receive support under section 254(h)(2) for providing Internet accessand internal connections, therefore, is, in our view, a reasonable interpretation of section
254(h)(2)(A), notwithstanding the objections of some commenters.430

426

47 U.S.C. § 254(h)(1)(A).

427

47 U.S.C. § 254(h)(2)(A) (emphasis added). See also, e.g., Comcast reply comments at 3 (restrictionsof section 214 do not apply to section 254(h)(2)(A)'s mandate to promote access to advanced services).
428

See 47 U.S.C. § 254(h)(2)(A); Universal Service Order, 12 FCC Rcd at 9085, para. 591.

429

See 47 U.S.C. § 254(h)(2)(A).

430

See Senators Stevens and Burns comments at 12-13 (section 4(i) does not permit the Commission to
waive explicit statutory restrictions of section 254(e)).

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183. Furthermore, section 4(i) of the Act permits the Commission to "perform any
and all acts, make such rules and regulations, and issue such orders, not inconsistent withthis Act, as may be necessary in the execution of its functions."431 Under this section, theCommission may take action that is not expressly permitted by the Communications Act, solong as the action is not expressly prohibited by the Act and is necessary to theCommission's effective performance of its statutorily specified functions.432 Here, a rulethat allows both telecommunications carriers and other firms to compete to receive support
for providing eligible services under section 254(h)(2) is necessary to fulfill the
Commission's explicit statutory obligation under that statutory provision to promulgate"competitively neutral" rules, as it allows all carriers to compete effectively in the market
for providing Internet access and internal connections to schools and libraries. The
Commission's decision, therefore, is authorized by section 4(i), as it is "necessary in theexecution of [the Commission's] functions" under section 254(h)(2).
184. Some commenters contend that providing support to firms other thantelecommunications carriers violates the competitive neutrality requirement of section
254(h)(2)(A) because firms other than telecommunications carriers can benefit from support
while only telecommunications carriers are required to contribute to that support.433
According to these commenters, telecommunications carriers that contribute to the universal
service fund cannot fairly compete with firms that bear no such burden.434 There is norequirement, however, that contributors to universal service mechanisms must also be
permitted to receive support. Moreover, under the Commission's rules, contribution
obligations are to be based solely on revenues from telecommunications services.435
Because neither Internet access nor internal connections are telecommunications services, noprovider of these services -- whether a telecommunications carrier or not -- will be required
to contribute to federal universal service support based on revenues they earn fromproviding these services. Contributions made by telecommunications carriers based on thetelecommunications services they provide, therefore, will not place those carriers at acompetitive disadvantage vis-a-vis the supported non-telecommunications services.436 On

431

47 U.S.C. § 4(i).

432See, e.g., Mobile Communications Corp. of America v. FCC, 77 F.3d 1399, 1404-07 (D.C. Cir.), cert.
denied, 117 S. Ct. 81 (1996).
433

See, e.g., GTE comments at 9-10, 21, 23 (objecting to inconsistency between those who contributeand those eligible to receive); Bell Atlantic reply comments at 2, 10-11 (objecting to unfairness of allowing
ISPs to receive support without contribution); AT&T reply comments at 10-11 (ISPs should be required tocontribute to the extent that they are eligible for support); USTA comments at 6 (requiring telecommunications
carriers to contribute for the benefit and support of non-contributors is not competitively neutral).
434

Id.

435

See 47 C.F.R. § 54.703.

436

See, e.g., AOL comments at 21 (contribution obligations are clearly distinct from the right toparticipate in the universal service program); EDLINC comments at 6 (no competitive disparity as to provisionof Internet access); cf. Comcast comments at 8-9 (analogizing to property taxes funding public schools, where90Federal Communications Commission

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the other hand, if firms other than telecommunications carriers did not receive funding forInternet access and internal connections for schools and libraries, those service providers
would be competitively disadvantaged, even if their services would be more cost-efficient.
Contrary to the claim of these commenters, therefore, the principle of competitive neutrality
supports the Commission's decision to allow both telecommunications carriers and otherfirms to compete to receive support for providing Internet access and internal connections.437
185. In summary, we are faced with statutory directives that apparently bothcommand and forbid us to provide support to firms other than telecommunications carriers
who seek to provide schools and libraries with support to provide Internet access andinstallation and maintenance of internal connections. After a careful analysis of theconsequences of providing and denying such support, however, we find that providing suchsupport produces results more consistent with the statutory framework. In light of theseresults, we conclude that we should affirm the decision of both the Commission and theFederal-State Joint Board to provide support to firms other than telecommunications carriers
who offer schools and libraries more cost effective Internet access or installation andmaintenance of internal connections.
3.

Eligibility for Support for Providing Service to Health Care
Providers under section 254(h)186. The Commission concluded in its Universal Service Orderthat, under section
254(h)(1)(A) of the Act, all public and non-profit health care providers that are located inrural areas and meet the statutory definition set forth in section 254(h)(5)(B) of the Act are
eligible for universal service support.438 Based on the recommendation of health careexperts, the Commission also determined that any telecommunications service of abandwidth up to and including 1.544 Mbps that is necessary for the provision of health careservices is eligible for support.439 Thus, where a carrier designated under section 214(e) as
an "eligible telecommunications carrier" provides such services to rural health careproviders at the comparable urban rate, the carrier may recover the difference, if any,
between the rate for similar services provided to other customers in comparable rural areasof the state and the rate charged to the rural health care provider for such services. In

some pay taxes without benefit and others benefit without paying taxes).
437

Accord, e.g., State Members comments at 4 (competitively neutral rules mandated under 254(h)(2)(A)are applicable to all service providers); AOL reply comments at 3, 20 (if telecommunications carriers receive
universal support for providing information services, so too must firms other than telecommunications
providers of the same services; support for ISPs fosters competitive neutrality and affords schools and libraries
broader choices); CIX reply comments at 14-16 (limiting support only to telecommunications carriers would
not be competitively neutral); USIPA comments at 4 (it would be illogical to assume that Congress did notintend that the entities that constructed the Internet would not be permitted to participate in a program
designed to bring the Internet to schools and libraries).
438

Universal Service Order, 12 FCC Rcd at 9093, para. 608.

439

See Id., 12 FCC Rcd at 9101, para. 620 n.1605 (citing FCC Advisory Committee on
Telecommunications and Health Care, Finding and Recommendations at 1-2).

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addition to ensuring that rural health care providers benefit from universal service support,
the Commission determined that, pursuant to section 254(h)(2)(A), all telecommunications
carriers, whether or not designated as an "eligible telecommunications carrier" under section
214(e), that provide health care providers with toll-free access to an Internet service
provider can receive a limited amount of universal service support.440a.

Eligible Providers of Telecommunications Services to Rural
Health Care Providers

187. Eligible Telecommunications Carriers. The Commission concluded that only
telecommunications services provided by "eligible telecommunications carriers," designatedas such pursuant to section 254(e), should be eligible for universal service support under
section 254(h)(1)(A). We recognize that this issue is the subject of substantial disagreement
among commenters441 and, indeed, is currently before the Commission on petitions forreconsideration of the Universal Service Order.442 We do not wish to prejudge thosepetitions in this Report and remain committed to taking a fresh look at this issue in thereconsideration proceedings. Without expressing any opinion on the merits of the pending
petitions for reconsideration, we believe that the Commission's conclusion was a reasonable
construction of the statute. As noted above, section 254(e) provides that "only an eligible
telecommunications carrier designated under section 214(e)" may receive universal service
support.443 Although section 254(h)(1)(B)(ii) provides an exception to this eligibility
requirement for carriers serving schools and libraries, no such exception appears in section
254(h)(1)(A).444 It appears from the plain language of the statute, therefore, that only
"eligible telecommunications carriers" as defined in section 254(e) are eligible to receive
universal service support for providing eligible services to health care providers under
section 254(h)(1)(A). We note, however, that this statutory constraint will limit theflexibility of rural health care providers because they are limited to purchasing supported
services from designated "eligible telecommunications carriers." It also appears that thissection of the Act reduces competition in rural areas because only eligible
telecommunications carriers can receive support for serving eligible rural health careproviders. We would prefer a more competitive result. We will be considering this issue

440

See Universal Service Order, 12 FCC Rcd at 9106, para. 628; 47 C.F.R. § 54.621(b).

441

See, e.g., GCI comments at 14-16 (all carriers, whether or not designated as "eligible
telecommunications carriers," should be able to receive support under section 254(h)(1)(A)); Nebraska PSC
comments at 1-2 (limiting support only to "eligible telecommunications carriers" will preclude support to rural
health care providers that have already contracted with ineligible carriers); State Members comments at 8
(Congress should consider a "technical correction" to the statute to exempt health care providers from
eligibility requirements of section 254(e)); Arizona CC reply comments at 4 (same); ALTS reply comments at
1-3 (same).
442

See Alaska Petition for Reconsideration at 9-12; Alaska PUC Petition for Reconsideration at 9-10; GE
Americom Petition for Reconsideration at 1-2; GCI Petition for Reconsideration at 1-4.
443

47 U.S.C. § 254(e).

444Compare 47 U.S.C. § 254(h)(1)(A) with 47 U.S.C. § 254(h)(1)(B)(ii).

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futher in ruling on the petition for reconsideration filed with the Commission in which
parties allege that in Alaska only telecommunications carriers that will not be designated as
eligible telecommunications carriers are able to provide the services that are needed by rural
health care providers.445 We note that if the requirements of section 10 of the 1996 Act aremet, the Commission could exercise forbearance authority in order to broaden the categoryof telecommunications carriers that may receive support for serving eligible rural health careproviders as appropriate.
188. Rural Health Care Providers Only. Although section 254(h)(1)(A) authorizes
support for the provision of telecommunications services to "any public or non-profit healthcare provider that serves persons who reside in rural areas of that state,"446 the statute does
not specify whether the health care provider itself -- as opposed to the persons it serves -must be physically located in a rural area to obtain the supported services. The
Commission concluded, as did the Joint Board, that a health care provider must be locatedin a rural area in order for its service provider to be eligible for universal service support.447
We believe that this is a reasonable interpretation of the statute.
189. Although the statute is not explicit on this point, the discount provision in
254(h)(1)(A) provides strong evidence that Congress intended to limit the provision of
supported services to rural health care providers only. Specifically, section 254(h)(1)(A)calculates the amount of support due a carrier as the difference between the "rates forservices provided to health care providers for rural areas and the rates for similar services
provided to other customers in comparable rural areas."448 If the health care provider werein an urban area, there would be no method of calculating the amount of support under thisprovision, as it contemplates a comparison only of the rates charged to customers in "rural
areas." The Commission's decision to limit support only to providers of services to rural
health care providers, therefore, follows logically from the language of the statute.
190. The legislative history also indicates that Congress, in enacting section
254(h)(1)(A), was concerned primarily with ensuring telecommunications access to healthcare providers located in rural areas. For example, in the Joint Explanatory Statement,
Congress explained that section 254(h) was intended "to ensure that health care providers
for rural areas . . . have affordable access to modern telecommunications services that will
enable them to provide medical . . . services to all parts of the Nation."449 Similarly,
Congress expressed particular concern for the ability of "rural health care providersto

445

See, e.g., Alaska comments to Petition for Reconsideration at 9-12; GCI comments to Petition for
Reconsideration at 1-3.
446

47 U.S.C. § 254(h)(1)(A).

447

See 47 C.F.R. § 54.601(a)(4).

448

Universal Service Order, 12 FCC Rcd at 9111, para. 641.

449

Joint Explanatory Statement at 132 (emphasis added).

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obtain access to advanced telecommunications services"450 and that "the rural health careprovider receive an affordable rate for the services necessary for the purposes oftelemedicine and instruction relating to such services."451 These statements further support
the Commission's interpretation of section 254(h)(1)(A) to limit the provision of supported
services only to health care providers located in rural areas.
b.

Providers of Toll-Free Internet Access to
Health Care Providers Regardless of Location

191.
Consistent with its authority to enhance access to advanced
telecommunications and information services for health care providers pursuant to section
254(h)(2)(A), the Commission authorized support for toll charges incurred by health careproviders that cannot obtain toll-free access to an Internet service provider. The
Commission also concluded that any telecommunications carrier, whether or not designatedas "eligible" pursuant to section 254(e), may receive universal service support for providing
this service to any health care provider, regardless of location.
192. No Eligibility Restriction. We believe that the Commission properly
concluded that both eligible and non-eligible telecommunications carriers under section
254(e) may receive universal service support for the provision of toll-free access to an
Internet service provider to eligible health care providers. As noted above, section
254(h)(1)(A) is subject to the requirement in section 254(e) that, to receive support, a carrier
must be designated as an "eligible telecommunications carrier" under section 214(e).452 The
Commission did not designate toll-free Internet access for support under section
254(h)(1)(A), however, but did so instead under section 254(h)(2)(A).453 As we explained
above, section 254(h)(2)(A), unlike section 254(h)(1)(A), is an independent grant ofauthority and thus is not subject to section 254(e)'s eligibility requirement.454 In our view,
therefore, the Commission's decision to allow both eligible and non-eligible
telecommunications carriers to receive support for providing toll-free Internet access toeligible health care providers is consistent with the language of the statute and with thestatutory requirement to develop competitively neutral rules to enhance access to advanced
telecommunications and information services for health care providers.
193. Rural and Non-Rural Health Care Providers. We also find that theCommission's decision to allow support for providers of toll-free Internet access, regardlessof whether the health care provider to which they provide this service is located in a ruralor non-rural area, is a reasonable construction of the statute. As we discussed above,450

Id. (emphasis added).

451

Id. (emphasis added).

452

See 47 U.S.C. §§ 254(e) and (h)(1)(A).

453

See Universal Service Order, 12 FCC Rcd at 9157-9160, paras. 742-748.

454

See supra at section VI.B.2.b.

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section 254(h)(1)(A) requires that a health care provider must be located in a rural area inorder for its provider of telecommunications services to be eligible for universal service
support.455 Again, however, the Commission did not rely on section 254(h)(1)(A) toauthorize support for toll-free Internet access; rather, it relied on section 254(h)(2)(A).456
Whereas section 254(h)(1)(A) is concerned with the provision of service to "persons who
reside in rural areas,"457 section 254(h)(2)(A), in contrast, seeks to enhance access toadvanced services for "all . . . health care providers . . . ."458 Section 254(h)(2)(A) is thus
independent of section 254(h)(1)(A) and its limitations and, further, provides the broader
authority to promulgate rules for the benefit of "all health care providers," not just rural
ones. In our view, the Commission's decision to extend support for the provision of tollfree Internet access to non-rural health care providers is entirely consistent with thislanguage.
VII.

REVENUE BASE AND PERCENTAGE OF FEDERAL FUNDING

194. In this section, we examine first certain Commission decisions regarding therevenue base on which contributors' universal service contributions are assessed. After
analyzing the Commission's conclusions regarding the jurisdictional parameters placed on
the Commission and on the states, we agree that the Commission has the authority to assess
universal service contributions on both telecommunications providers' interstate andintrastate revenues.
195. We examine, second, the Commission's previous decisions regarding the levelof interstate high cost support. At the onset, we believe it is important to make two
observations to place this issue in context. First, the discussion of the issue in this Report
relates only to non-rural local exchange carriers. With respect to rural local exchange
carriers, the Commission has determined that there shall be no change in the existing highcost support mechanisms until January 1, 2001 at the earliest. We do not revisit that
determination in this Report. Thus, the method of determining federal support for rural
local exchange carriers will remain unchanged until at least January 1, 2001, meaning thatthe amount of universal service support for rural local exchange carriers will be maintained
initially at existing levels and then should increase in accordance with specified factors,
such as inflation, that have historically guided changes in such support. Any possible
change in the support mechanism for rural local exchange carriers would require a separate
rulemaking proceeding.
196. Second, we note that the pre-May 8, 1997 regulatory scheme created a defacto allocation of responsibility between the Commission and state commissions withrespect to support for service to rural and high cost areas. That allocation of responsibility

455

See supra at section VI.B.3.A.

456

See Universal Service Order, 12 FCC Rcd at 9157-9160, paras. 742-748; see note 434, supra.

457

47 U.S.C. § 254(h)(1)(A).

458

47 U.S.C. § 254(h)(2)(A) (emphasis added).

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was defined by the separations rules, which placed 25 percent of booked loop costs in theinterstate jurisdiction for most of the loop plant used by the non-rural LECs. In addition,
the aggregate amount of LEC network investment in the interstate jurisdiction isapproximately 25 percent. Through the operation of an explicit universal service support
mechanism, however, greater than 25 percent of booked loop costs were placed in theinterstate jurisdiction in those areas where loop costs were particularly high. As a result,some of the non-rural LECs did have slightly more than 25 percent of their booked loop
costs in the interstate jurisdiction, and many rural LECs had substantially more than 25
percent in the federal jurisdiction.
197. As discussed below, we conclude that a strict, across-the-board rule thatprovides 25 percent of unseparated high cost support to the larger LECs might provide
some states with less total interstate universal service support than is currently provided
through aggregate implicit and explicit federal subsidies. The Commission will work toensure that states do not receive less funding as we implement the high cost mechanisms
under the 1996 Act. We find that no state should receive less federal high cost assistancethan it currently receives. We are mindful that the Commission's work in this regard is not
yet complete. We are committed to issuing a reconsideration order in response to thepetitions filed asking the Commission to reconsider the decision to fund 25 percent of therequired support amount. In the course of that reconsideration, we will take all appropriate
steps, including continued consultation with the states, to ensure that federal funding isadequate to achieve statutory goals. We also recognize that Congress assigned to theCommission, after consultation with the Joint Board, the ultimate responsibility forestablishing policies that ensure that: 1) quality services are available at just, reasonable
and affordable rates; 2) all consumers have "access to telecommunications and information
services" at rates that are reasonably comparable to the rates charged for similar services inurban areas; and 3) there are "specific, predictable, and sufficient" federal and statemechanisms to preserve and advance universal service. We are committed to implementing
section 254 consistent with these objectives.
A.

Revenue Base for Contributions
1.

Background198. Section 623(b)(5) of the Appropriations Act requires the Commission toreview its "decisions regarding the percentage of universal service support provided byfederal mechanisms and the revenue base from which such support is derived." Thisrequirement implicates several important determinations made by the Commission,
including what is referred to as the "25/75" approach to sharing responsibility for universal
service support between the state and federal jurisdictions. In addition, we must address
Commission decisions regarding: the scope of the Commission's jurisdiction in assessing
and recovering contributions; the scope of the revenue base for, and the method of recoveryof, contributions to the support mechanisms for high cost areas and low income consumers
and for eligible schools, libraries, and rural health care providers; and the methodology forassessing contributions to the support mechanisms. We review each of these issues below.

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199. In the Universal Service Order, the Commission analyzed the scope of theCommission's jurisdiction with respect to the assessment and recovery of universal service
support mechanisms.459 The Commission concluded that it has jurisdiction to assess
contributions for the universal service support mechanisms from intrastate as well asinterstate revenues and to require carriers to seek state (and not federal) authority to recovera portion of the contribution in intrastate rates.460 The Commission expressly declined toexercise the entirety of its jurisdiction with respect to the assessment and recovery ofcontributions to the universal service mechanisms for rural, insular, and high cost areas, andlow income consumers.461 Instead, the Commission assessed contributions to thosemechanisms based solely on interstate revenues.462 With respect to the recovery of thosecontributions, the Commission continued its historical approach to recovery of universal
service support mechanisms, thereby permitting carriers to recover contributions to these
universal service support mechanisms through rates for interstate services only.463
200. With respect to the universal service support mechanisms for schools andlibraries and rural health care providers, the Commission adopted the Joint Board's
recommendation that these mechanisms be funded by contributions based on both theintrastate and interstate revenues of providers of interstate telecommunications services.464
The Commission concluded, however, that it will permit recovery of the entirety of thesecontributions solely via rates for interstate services for the present time.465
201. In the Universal Service Order, the Commission concluded that, beginning
January 1, 1999, the federal universal service mechanism for large local exchange carriers
serving rural, insular, and high cost areas will support 25 percent of the difference between
the forward-looking economic cost of providing the supported service and the revenue
benchmark.466 After considering various methodologies for calculating contributions to theuniversal service mechanism, the Commission determined that carriers should calculate
contributions to the universal service mechanisms using end-user telecommunications
revenues.467

459

Universal Service Order, 12 FCC Rcd at 9192, paras. 813-823.

460

Id. at 9192, para. 813.

461

Id. at 9192, para. 813.

462

Id. at 9200, para. 831.

463

Id. at 9198, para. 825.

464

Id. at 9203, para. 837.

465

Id. at 9203, paras. 837-838.

466

Id. at 9201, para. 833.

467

Id. at 9205-06, para. 842-843.

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Discussiona.

Commission Authority With Respect to the Assessment andRecovery of Contributions to Universal Service Support
Mechanisms

202. In the Universal Service Order, the Commission determined that Section 254
provides the Commission with the jurisdiction to assess contributions for universal service
support mechanisms from both interstate and intrastate revenues, as well as to require
carriers to seek authority from states to recover a portion of the contribution in intrastate
rates.468 Some parties argue that the Commission's decisions overstep the traditional
relationship between the federal and state jurisdictions.469 Other commenters argue that theCommission should exercise its full authority to assess contributions for high cost support
mechanisms on both intrastate and interstate revenues.470 Our review of the issue forpurposes of this Report, however, leads us to the conclusion that the Commission's
jurisdictional analysis in the Universal Service Orderis sound.
203. As the Commission stated in the Universal Service Order, the Commission's
authority over universal service support mechanisms stems from the plain language ofsection 254.471 Specifically, although the statute contemplates the establishment of federal
and state high cost support mechanisms that are consistent with the objectives of section
254, that section imposes on the Commission the ultimate responsibility to implement theuniversal service mandate of section 254.472 Section 254(c)(1) likewise authorizes theCommission to define the parameters of universal service.473 Moreover, section 254(b)(5)
anticipates that the Commission will establish support mechanisms that are "specific,
predictable and sufficient."474 These provisions indicate that the Commission has theprimary responsibility and authority to ensure that universal service mechanisms are"specific, predictable, and sufficient" to meet the statutory principle of "just, reasonable, andaffordable rates." This interpretation is complementary to the states' independent
obligations to ensure that support mechanisms are "specific, predictable, and sufficient" and468

Id. at 9197, para. 823.

469

See, e.g., Iowa comments at 3; Nevada PUC comments at 3-8. This issue has also been raised on
appeal. See Brief of Petitioner Cincinnati Bell Tel. Co., Texas Office of Pub. Util. Counsel v. FCC, No. 9760421 (5th Cir.) at 11-25.
470

See, e.g., GTE comments at 29; JSI comments at 6; RTC comments at 5-6.

471

Universal Service Order, 12 FCC Rcd at 9192, para. 814.

472

Section 254(a) provides that rules "to implement" the section are to be recommended by the Joint
Board and those recommendations are to be implemented by the Commission. 47 U.S.C. § 254(a).
473Section 254(c)(1) directs that the concept of universal service is an "evolving level oftelecommunications that the Commission shall establish periodically." 47 U.S.C. § 254(c)(1).
474

47 U.S.C. § 254(b)(5).

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that rates are "just, reasonable, and affordable," because the statute provides that state
universal service mechanisms must be consistent with, and may not conflict with, thefederal mechanisms.475
204. The Commission's conclusion regarding the scope of its jurisdiction is also
supported by several provisions of section 254 that indicate that Congress intended
universal service support mechanisms to include both intrastate and interstate services.
Specifically, section 254(b)(3) establishes that the Commission's rules and policies mustensure that "consumers in all regions of the Nation . . . have access to telecommunications
and information services."476 This language supports a finding that universal service should
include more than access to interstate services, which previously has generally been thefocus of federal telecommunications law. Moreover, because the traditional core goal ofuniversal service is ensuring affordable basic residential telephone service, which isprimarily an intrastate service, it is clear that section 254(b)'s goal of affordable basic
service indicates that Congress intended that both intrastate and interstate services should beaffordable. It is significant that the Joint Board agreed with this conclusion byrecommending that the services eligible for universal service support pursuant to section
254(c) include intrastate services.477
205. As the Commission concluded in the Universal Service Order, the ability ofstates to create separate support mechanisms covering intrastate carriers pursuant to section
254(f) does not suggest that the amount of a carrier's contributions to such a support
mechanism should be based on the type of telecommunications service, intrastate orinterstate, provided by the carrier.478 We find no support for such an inference in thelegislative history. Rather, the legislative history indicates that states continue to havejurisdiction over implementing universal service mechanisms for intrastate services
supplemental to the federal mechanisms as long as "the level of universal service provided
by each state meets the minimum definition of universal service established [under section254] and a State does not take any action inconsistent with the obligation for all
telecommunications carriers to contribute to the preservation and advancement of universal
service" established under section 254.479
206. Similarly, section 2(b), which provides that nothing in the Act should beconstrued to give the Commission jurisdiction with respect to “charges, classifications,practices, services, facilities, or regulations for or in connection with intrastate
communications services by wire or radio," does not preclude the Commission from475

See 47 U.S.C. §§ 254(b)(5) & (f).

476

47 U.S.C. § 254(b)(3).

477

Recommended Decision, 12 FCC Rcd at 112, para. 46.

478

Universal Service Order, 12 FCC Rcd at 9195, para. 819.

479

Joint Explanatory Statement at 128.

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assessing contributions based on a percentage of a carrier's intrastate revenues.480
Determining such contributions for universal service support on intrastate, as well asinterstate, revenues constitutes neither rate regulation of those services nor regulation of
those services in violation of section 2(b). Rather, this method of assessment supports
intrastate services, as expressly required by section 254 of the Act and as recommended by
the Joint Board. Indeed, in assessing contributions in this way, the Commission is
calculating a federal charge based on both interstate and intrastate revenues, but is in noway regulating the rates and conditions of intrastate service.
207. Further, section 254's express directive that universal service mechanisms be"sufficient" ameliorates any section 2(b) concerns. As a rule of statutory construction,section 2(b) only is implicated where the competing statutory provision is ambiguous.481 As
discussed above, section 254 unambiguously establishes that the services to be supported
have intrastate as well as interstate characteristics and permits the Commission to establish
regulations implementing federal support mechanisms for the supported intrastate services.
208. Moreover, various provisions of section 254, some of which are discussed
above, have blurred the traditional distinction between the interstate and intrastatejurisdictional spheres. For example, although section 254 establishes a federal-state
partnership, it grants the Commission primary responsibility for defining the parameters ofuniversal service, and for ensuring that universal service mechanisms are "specific,
predictable, and sufficient" to meet the statutory goal of "just, reasonable, and affordable
rates." Indeed, section 254 envisions that the Commission would not be bound by the priorsystem of universal service mechanisms, which was based on the traditional jurisdictional
spheres.482
209. For all of the foregoing reasons, we concur with the Commission's earlier
conclusion that section 254 of the 1996 Act grants the Commission the authority to assess
contributions to universal service support mechanisms from intrastate as well as interstaterevenues and to refer carriers to seek state (and not federal) authorization to recover a
portion of the contribution in intrastate rates, although the Commission has not exercised
this authority. We note that this issue is the subject of pending petitions for reconsideration
which we will address in a forthcoming order. Further, we have previously expressed
willingness to work with states and we affirm that commitment.483

480

47 U.S.C. § 152(b).

481

See Universal Service Order, 12 FCC Rcd at 9196, para. 822 n.2094 citing 47 U.S.C. § 601.

482

See Joint Explanatory Statement at 131 (indicating against reliance on current methodologies bystating that support mechanisms should be "explicit, rather than implicit as many support mechanisms aretoday."); Senate Report on S. 652 (stating that "the bill does not presume that any particular existingmechanism for universal service support must be maintained or discontinued").
483

See, eg. Universal Service Order, 12 FCC Rcd at 9191, para. 809.

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Revenue Base For, and Recovery of, Contributions to Support
Mechanisms for Eligible Schools, Libraries and Rural HealthCare Providers210. Initially, we note that few parties commented on the issues of the assessment
and recovery of contributions to the support mechanism for eligible schools, libraries andrural health care providers.484 After consideration of these important issues, we conclude
that the Commission's decisions are consistent with the letter and spirit of the 1996 Act.
211. Assessment. With respect to the assessment of contributions, we conclude it
was reasonable for the Commission to adopt the Joint Board's recommendation that"universal support mechanisms for schools and libraries and rural health care providers be
funded by contributions based on both the intrastate and interstate revenues of providers ofinterstate telecommunications services."485 As the Commission concluded in the Universal
Service Order, this approach is reasonable in light of the fact that the schools, libraries, andrural health care mechanisms are "new, unique support mechanisms that have nothistorically been supported through a universal service funding mechanism."486212.
Recovery. Similarly, we reaffirm the Commission's decision to permit
carriers to recover contributions for the support mechanisms for eligible schools, libraries,
and rural health care providers solely via rates for interstate services.487 Limiting recovery
to the interstate jurisdiction for the support mechanism for the schools, libraries and rural
health care providers will ameliorate the concern that carriers would recover the portion of
their intrastate contributions attributable to intrastate services through increases in rates forbasic residential dialtone service. The Commission's approach is consistent with theaffordability principle contained in section 254(b)(1).488 Additionally, we are persuaded that
the Commission's approach minimizes any perceived jurisdictional difficulties under section
2(b) because carriers are not required to seek state authorizations to recover contributions
attributable to intrastate revenues.489 Therefore, we find that permitting recovery ofcontributions for the support mechanisms for eligible schools, libraries, and rural health careproviders solely via rates for interstate services is consistent with section 254.490

484

TDS comments at 10 (supporting the decision to use total, unseparated interstate and intrastate end
user revenues as the basis for support contributions designed to benefit schools, libraries and rural health careproviders).
485

Universal Service Order, 12 FCC Rcd at 9203, para. 837 citing Recommended Decision, 12 FCC Rcd
at 499, para. 817.
486

Id. at 9203, para. 837.

487

Id. at 9203, para. 838.

488

Id. at 9203, para. 838.

489

Id. at 9204, para. 839.

490

Id. at 9203-9204, paras. 838-840.

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Revenue Base For, and Recovery of, Contributions to Support
Mechanisms for High Cost Areas and Low Income Consumers

213. Assessment. As stated above, the Commission declined to exercise its
authority to assess contributions to the high cost and low income support mechanisms on
both intrastate and interstate revenues. Instead, the Commission elected to base thosecontributions solely on interstate revenues.491 We find that the Commission's decision was
reasonable and appropriate in light of the statutory goals.
214. In its Recommended Decision, the Joint Board concluded that the "decision as
to whether intrastate revenues should be used to support the high cost and low income
assistance programs should be coordinated with the establishment of the scope andmagnitude of the proxy-based fund, as well as with state universal service support
mechanisms."492 Thus, the Joint Board did not submit a recommendation as to whether
intrastate revenues should be used to support the high cost and low income mechanisms.493
Rather, as the Commission noted in the Universal Service Order, the Joint Board's analysis
essentially concluded that the determination of whether contributions should be based on
intrastate as well as interstate revenues should be coordinated with the implementation of an
appropriate forward-looking economic cost mechanism and revenue benchmark.494 Because
the mechanism and benchmark were not established, and therefore, the total amount of
support requirement was unknown, it would have been premature for the Commission toassess contributions on intrastate as well as interstate revenues.
215. In addition, shortly before the Universal Service Orderwas issued, the state
members of the Joint Board filed a report in which the majority recommended that theCommission assess contributions for all support mechanisms on intrastate and interstaterevenues.495 The majority report also supported the Commission's approach to assessing
only interstate revenues for the high cost and low income support mechanisms on aninterim basis until a forward-looking economic cost methodology is developed.496
Accordingly, the Commission's decision to base contributions to the high cost and lowincome support mechanisms solely on interstate revenues was consistent with the Majority
State Members' report.

491

Id. at 9200, para. 831.

492

Recommended Decision, 12 FCC Rcd at 499, para. 817.

493

Universal Service Order, 12 FCC Rcd at 9198, para 824.

494

Id. at 9200, para. 832 citing Recommended Decision, 12 FCC Rcd at 501, para. 821.

495

Majority Opinion of the State Members of the Joint Board on the Funding of Universal Service, filed
April 23, 1997 ("Majority State Members' Report").
496

Majority State Members' Report.

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216. Indeed, by declining to base those contributions on intrastate revenues, theCommission promoted comity between the federal and state regulators, and allowed thestate commissions to continue to work together to reach consensus on this issue. Because
we are still in the process of adopting a forward-looking economic cost mechanism and arevenue benchmark, we conclude that assessing contributions on interstate revenues alone,
at least until a unified federal-state approach is developed for the high cost and low-income
support mechanisms, is consistent with the public interest.
217. We note that some commenters raise related issues on which the Commission
continues to deliberate. For example, members of the wireless industry are concerned about
the difficulty of distinguishing their interstate revenues from their intrastate revenues, given
the mobile nature of wireless technologies, the inability to determine precisely the point oforigin of calls, and the difficulty of matching phone numbers with points of origin.497
Wireless carriers have also raised issues regarding revenue reporting requirements,498
including issues perceived to be particular to their industry concerning itemizing roaming
revenues, special resale issues, bundled offerings, and fraud-related uncollectibles.499 We
also note that wireless providers have challenged state decisions that they should be subject
to state universal service mechanisms.500 These are difficult issues, and we are committed
to working with the wireless industry and the state commissions to resolve these issues.501
218. Recovery. For similar reasons, we conclude that it is appropriate to allow
carriers to recover contributions to the support mechanisms for high cost areas and lowincome consumers through rates for interstate services only. The Joint Board concluded
that the "role of complementary state and federal universal service mechanisms require[d]further reflection," but did not address the issue of the recovery of these contributions.
Accordingly, we reaffirm the conclusion that this approach to recovery promotes comity
between the federal and state governments because it allows the Commission and the states
to develop compatible universal service mechanisms. This approach also promotes thestatutory goal of affordable basic residential service because it avoids a blanket increase incharges for basic residential dialtone service. We find that it is reasonable and in the public
interest to maintain, for the present time, the historical approach to recovering universal
service support contributions for high cost areas and low-income consumers. We note,

497

See, e.g., Comcast comments at 10-11; CTIA comments at 2-3; PCIA comments at 14; Vanguard
comments at 6; Nextel reply comments at 5.
498

Some wireless providers are concerned that the Commission's "good faith" estimation process will
result in competitive inequities. See, e.g., Comcast comments at 11-15; CTIA comments at 3; Comcast reply
comments at 7. See also Order on Reconsideration, Second Report and Order, and Further Notice of
Proposed Rulemaking, CC Docket No. 97-21 and No. 96-45 at para. 21 (rel. August 15, 1997).
499

See, e.g., CTIA comments at 2; Comcast comments at 11-12; PCIA comments at 13-16.

500

See Cellular Telecommunications Industry Association v. FCC, et al., Case No. 97-160 andconsolidated cases.
501

We note that these issues are before the Commission on reconsideration and we do not wish toprejudge those petitions.

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however, that the Commission concluded in its Fourth Order on Reconsideration thatCMRS providers may recover their universal service contributions through rates charged forall services.502 The Commission concluded that the reasons that generally warrant
permitting contributors to recover contributions to the federal universal service mechansisms
through rates on interstate services, such as ensuring the the continued affordability ofresidential dialtone services and promoting comity between the federal and state
governments, do not apply to CMRS providers.503
B.

Percentage of Federal Funding

219. As noted above, the Commission is responsible for ensuring that there are
specific, predictable, and sufficient federal and state mechanisms to preserve and advance
universal service. Upon further review, we conclude that a strict, across-the-board rule thatprovides 25 percent of unseparated high cost support to the larger LECs may have the resultof withdrawing some federal explicit universal service support from some areas. The
Commission will work to ensure that states do not receive less funding as we implement thehigh cost support mechanisms under the 1996 Act. We find that no state should receive
less federal high cost assistance than it currently receives. We emphasize again that thefollowing discussion concerns only non-rural local exchange carriers. High cost support forrural carriers will continue to be provided in accordance with the plan adopted in the
Universal Service Order, which contemplates no changes earlier than January 1, 2001.
1.

Background220. Section 254(b)(5) establishes the principle that "[t]here should be specific,
predictable and sufficient Federal and State mechanisms to preserve and advance universal
service."504 Additionally, section 254(i) provides that "the Commission and the Statesshould ensure that universal service is available at rates that are just, reasonable andaffordable."505 The Commission has stated that section 254 continues the historicalpartnership between the federal and state jurisdictions in advancing and preserving universal
service mechanisms.506 Similarly, the Joint Board stated in its Recommended Decisionthat

502

Fourth Order on Reconsideration at para. 309.

503

Fourth Order on Reconsideration at para. 309 ("Because section 332(c)(3) of the Act alters the'traditional' federal-state relationship with respect to CMRS by prohibiting states from regulating rates for
intrastate commercial mobile services, allowing recovery through rates on intrastate as well as interstate CMRS
services would not encroach on state prerogatives. Further, allowing recovery of universal service
contributions through rates on all CMRS services will avoid conferring a competitive advantage on CMRS
providers that offer more interstate than intrastate services.").
504

47 U.S.C. § 254(b)(5).

505

47 U.S.C. § 254(i).

506Universal Service Order, 12 FCC Rcd at 9194, para. 818.

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the 1996 Act "reflects the continued partnership among the states and the Commission inpreserving and advancing universal service.507
221. The Commission, in its Universal Service Order, decided initially to fund 25
percent of the difference between a carrier's forward-looking economic cost of providing
supported services and a revenue benchmark in order to approximate the portion of the costof providing the supported network facilities that historically have been recovered by local
telephone companies from their charges for interstate services.508 The current separations
rules, which were developed through a Federal-State Joint Board process and have been inplace since 1984, allocate 25 percent of loop costs to the federal jurisdiction and 75 percent
to the states.509 Because local loop costs are likely to be the predominant cost that varies
between high cost and non-high cost areas, the Commission determined, on a preliminary
basis, that this factor approximated the interstate portion of universal service costs.510
Consistent with the decisions to fund 25 percent of total universal service high cost support
from the assessment and recovery from interstate revenue alone and to eliminate the special
jurisdictional separations rules implementing the pre-1996 Act universal service
mechanisms, the Commission also directed incumbent LECs in the companion Access
Reform Order to use federal universal service support received under the new mechanisms
to reduce interstate access charges. In that way, the Commission rendered explicit theuniversal service support formerly implicit in interstate access charges that has traditionallyhelped keep local rates affordable. In addition, the Commission decided to delay thetransition to a universal service mechanism based on forward looking economic costs forrural LECs until no sooner than January 1, 2001.511 Until that time, eligible rural LECs
will continue to receive support based on existing mechanisms.
222. This issue has generated extensive attention including a significant number ofcomments in this proceeding. Some commenters argue that the high cost universal service
program should be 100 percent federally funded.512 In general, these parties contend that
section 254(e) refers only to the federal responsibility for ensuring sufficient mechanisms,
without imposing parallel state funding obligations.513 Several parties argue that thediscretionary language in section 254(f) permits, but does not compel, the states to choose

507

Id. at 9189, para. 806 citing Recommended Decision, 12 FCC Rcd at 500, para. 819.

508

Universal Service Order, 12 FCC Rcd at 8925, para. 269.

509

Id. at 8925, para. 270.

510

Id. at 8926, para. 271.

511

Id. at 8889, paras. 203-204.

512

Alabama, Alaska, et. al comments at 4; Alaska comments at 11-15; Colorado PUC comments at 1-4;
Local and State Gov't Advisory Committee comments at 2-3; USWEST comments at 6.
513

47 U.S.C. § 254(e).

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whether or not to establish their own universal service funds.514 Many commenters express
concern that the proposed 25-75 split between federal and state funding will not be
sufficient to ensure that rural rates are affordable or reasonably comparable with urban
rates.515 Most of these concerns are based on the assumption that the 25 percent funding
level will reduce the amount of existing support.516
223. In addition to the comments, the Commission heard a broad range ofviewpoints from presenters at an en banc meeting on this issue held on March 6, 1998.517
In particular, the Commission heard presentations from proponents of alternatives to the 2575 approach. The state of Maine has proposed, and the states of Vermont and New York
have expressed support for, an approach under which federal support would only beprovided to states that have average costs that exceed a national average.518 In addition, US
West has proposed a plan that would retain the Commission's 25-75 split for providing
support needed between a basic benchmark and a "super-benchmark," but would require allcosts above this higher benchmark to be assigned to the federal jurisdiction.519 These andother proposals are on record before the Commission and are under active review. These
two proposals are the product of significant effort on the part of many state commissions

514

47 U.S.C Section 254(f) ("a State may adopt. . ." a universal service program.).

515

See, e.g., Alabama, Alaska, et. al. comments at 3; Alaska comments at 5-6; Colorado PUC
comments at 2; Iowa comments at 4-5; Kansas CC comments at 1; Mississippi comments at 2; Nebraska
PSC comments at 3; New Mexico AG comments at 1, 2-4; North Dakota PSC comments at 1-2; North
Dakota RRRC comments at 1; Oregon PUC comments at 1; Richland Economic Development comments at
1; South Dakota PUC comments at 2; Texas PUC comments at 3; Transportation Committee of the
Nebraska Legislature comments at 1; US West comments at 4- 6; Utah comments at 1-2; Washington UTC
comments at 7, 11-13; Western Governors' Association at 1; Wyoming PSC comments at 2-3; Arizona CC
reply comments at 5; Iowa Telecom Ass'n. reply comments at 4; Wyoming PSC reply comments at 1-4. See
also Letter from Secretary Larry Irving, NTIA to Chairman Kennard (April 9, 1998) ("We are simply notconvinced that this approach will provide funding sufficient to achieve the desired result.").
516

See, e.g., Alaska comments at 11-13; Colorado PUC comments at 3; Local State and Gov't Advisory
Committee at 2-3; New Mexico AG comments at 2; North Dakota RRRC comments at 1; Oregon PUC at 1;
Richland Economic Development comments at 1; RTC comments at 3-5 (25 percent ignores the existing
implicit support from averaging access costs and high cost fund, Long Term Support, and DEM Weighting);
SBC comments at 5-6 (existing mechanisms often assist rural telephone companies with a larger share ofuniversal service cost recovery).
517

The first panel of government officials consisted of North Dakota Public Service Commissioner Bruce
Hagen, District of Columbia Public Service Chairperson Marlene Johnson, Maine Public Utilities Commission
Chairman Thomas L. Welch, and Christopher McLean, deputy administrator of the Rural Utilities Service.
The second panel of industry representatives consisted of: Thomas Tauke, Senior VP-government relations at
Bell Atlantic, Joan Mandeville, assistant manager at Blackfoot Telephone Cooperative in Missoula, Montana,
Joel Lubin, Regulatory VP-AT&T Corp. Law and Public Policy, Jim Smiley, Regional VP-US West
Communications, Inc., and Haynes Griffin, chairman of Vanguard Cellular Systems, Inc.
518

See Statement of Thomas Welch, Maine Public Utilities Commission, at March 6, 1998 en bancCommission meeting, transcript at 24-25.
519

US West submission at March 6, 1998 en banc Commission meeting.

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and the industry to develop a modified approach to high cost funding. It is also possible
that, in the coming weeks, the Commission will be presented with variations on these
proposals or other possible methods of funding high cost areas. Because we will conduct areconsideration of the high cost funding mechanism prior to its implementation, scheduled
to go into effect on January 1, 1999, we do not evaluate here the merits of possible
alternative high cost funding proposals. Nonetheless, we wish to commend the spirit ofcooperation and compromise that has characterized the development of these proposals.
Those efforts encourage us to redouble our efforts to work with states and others toward asolution to the high cost funding problem that serves the interests of all affected parties.
We are committed to building on the ideas and proposals expressed in the comments and at
the en banc hearing to work toward a consensus on this issue. We believe that additional
dialogue among the Commission, the states, and the affected industries will lead to an
approach that both fulfills the mandates of section 254 and is acceptable to the various
interested parties.
224. Specifically, we are in the process of taking several important steps to further
review the suitability of the 25-75 approach. First, we are committed to issuing areconsideration order in response to the petitions filed asking the Commission to reconsider
the decision to fund 25 percent of the required support amount. This reconsideration order
will be issued prior to the date that the Commission begins providing high cost support tonon-rural carriers based on forward-looking economic costs. In addition, we will consult
with the Joint Board to address the viability of the 25-75 approach as well as thealternatives that are on record with the Commission, including the holding of an en banchearing with participation by the Federal-State Joint Board commissioners. The
Commission has anticipated that the Joint Board would play a continuing role in assessing
the mechanisms established to ensure the preservation and advancement of universal
service.520
2.

Discussion

225. Although there appears to be no consensus among the states as to analternative to the Commission's so-called 25-75 approach,521 there is substantial oppositionin this record to this approach.522 This issue is currently pending before the Commission on

520

See, e.g., Federal-State Joint Board on Universal Service , Order on Reconsideration, CC
Docket No. 96-45, 12 FCC Rcd 10095, para. 28 (rel. July 10, 1997) ( July 10th Reconsideration Order).
521

See, e.g., Alaska comments at 11-15 (federal fund should at least provide support sufficient tomaintain current rates and should preferably provide 100 percent funding); Colorado PUC comments at 3-5(100 percent federal funding would be the simplest solution, 75 percent would be acceptable, but other options
could be viable to address varying circumstances among states); North Dakota PSC comments at 1 (joint
federal and state fund to cover at least 75 percent); PSC of Wisconsin comments at 1-4 (any level of federal
support can be justified, proper amount should be based on impact).
522

See, e.g., Iowa Utilities Board comments at 4; Kansas CC comments at 1-2; Mississippi PSC
comments at 1-2; Nebraska PSC comments at 3; New Mexico AG comments at 2-4; PRTC comments at 811; RTC comments at 3-6; Senator Burns and Stevens comments at 12; State Members comments at 9;
Texas PUC comments at 3-4; USTA comments at 7-9; Utah Governor's office comments at 1-2; Western107Federal Communications Commission

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reconsideration and has been appealed.523 Further, this issue, along with the related issuesof the use of explicit federal universal service support to reduce implicit federal support andof the formulation and distribution of universal service support among the states, is raised ina recent petition filed by the state members of the Joint Board requesting that these issues
be referred to the Joint Board for further recommendations.524 Without prejudging theseongoing proceedings, we here examine, as required by section 623(b)(5) of theAppropriations Act, the Commission's initial decision to provide 25 percent of the required
support amount through federal support mechanisms. Since the May 8, 1997 Universal
Service Order was released, the Commission has repeatedly articulated its intent to continue
to work with the states to ensure that support amounts are sufficient.525 We believe that thisCommission decision is aptly characterized as a "place holder" to which we must return.
226. One of the overriding goals of section 254 is to make universal service
support explicit. Section 254(b)(5) provides that: “There should be specific, predictable
and sufficient Federal and State mechanisms to preserve and advance universal service.”
The Commission has attempted to make explicit the collection and distribution of existingfederal universal service support provided through the interstate high cost loop fund, dialequipment minutes weighting, Long-Term Support, and Lifeline and Link Up programs.
The Commission also proposed a mechanism to identify implicit universal service support
currently in interstate access charges and to make that support explicit and portable among
competing eligible carriers. Similarly, states should take actions to make intrastatemechanisms compatible with competitive local markets by making those support
mechanisms explicit and portable.
227. A state may require greater assistance than it presently receives frominterstate explicit and implicit mechanisms in order to maintain affordable rates. As statesdevelop plans to make existing intrastate implicit mechanisms explicit, additional federal
support may be required to ensure that quality services remain “available at just, reasonable,
and affordable rates.” For example, where a state proposes to reform its own universal
service mechanisms and would collect as much of what is currently implicit intrastate
universal service support as is possible consistent with maintaining affordable rates,
additional federal universal service support should be provided to any high cost areas wherestate mechanisms, in combination with baseline federal support, are not sufficient tomaintain rates at affordable levels. In the pending reconsideration proceeding, theGovernors' Association comments at 1-3; Wyoming PSC comments 1-7; Arizona CC reply comments at 5;
Wyoming PSC reply comments at 1-5.
523

Texas Office of Public Utility Counsel et al. v. FCC, No. 97-60421 (5th Cir.) (filed June 25, 1997).

524

Formal Request for Referral of Designated Items by the State Members of the section 254 FederalState Joint Board on Universal Service, filed March 11, 1998 (by Commissioners Johnson, Schoenfelder, andBaker and consumer advocate Hogerty).
525

For example, in its sua sponte reconsideration order, the Commission noted that the issue of shared
responsibility for ensuring the sufficiency of universal service support is critical to the preservation andadvancement of universal service and will be an important subject in future consultations between theCommission and the Joint Board. July 10 Reconsideration Order at para. 28.

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Commission will consider any other circumstances under which additional federal support
would be appropriate. This approach will permit the Commission to fulfill its responsibility
to ensure support is sufficient.
228. Further, we expect to consult with the Joint Board regarding the sufficiency
of universal service support mechanisms. We are confident that the state commissions will
work with us to ensure that "specific, predictable and sufficient" universal service support
mechanisms are established, consistent with Congressional intent.526 We recognize that thestate commissions themselves are not aligned on one side of this issue. For example, theState Joint Board Members indicated that all Joint Board members "have concerns witheither the inclusion of intrastate revenues in the proposed funding sources or the 75-25%
split proposed" by the Commission.527 In addition, NARUC is involved in an ongoing
effort to develop a plan for high cost and rural areas that differs from the 25-75 proposal.528
NARUC has not endorsed any specific proposal, but has identified six principles as a basisof future action.529 We encourage NARUC members in their efforts in this regard andwelcome the submission of an alternative that is supported by so-called "high-cost" statesand "low-cost" states alike. We remain committed to working with proponents of every
viewpoint.
229. In our efforts to reform universal service, we and the state commissions must
be mindful that only the minimum amount of support necessary to achieve statutory goals
should be collected. Just as collecting insufficient support would threaten the availability ofuniversal service, collecting more support than is necessary would increase rates for all
subscribers, creating a similar threat to universal service principles. In addition, in order toenhance competition, both federal and state support mechanisms should collect contributions
in a competitively neutral manner. Moreover, federal and state universal service support
mechanisms should encourage efficient investment in new plant and technologies by all
eligible telecommunications carriers and should promote service to historically underserved
areas. We are convinced that following these principles will guide this Commission and thestates to achieve the goals Congress has set out in the 1996 Act.
230. We note that there appears to be some confusion about the Commission's
decision in the Access Reform Orderto require incumbent local exchange carriers to reduce
the revenues they receive from interstate access charges by an amount equal to the support
they receive from federal high cost universal service support. As noted above, the plan
adopted by the Commission in the Universal Service Orderis designed to remove federalhigh cost support from implicit interstate mechanisms and recover that support from an
explicit support mechanism. In that event, a carrier would no longer need to recover that
support from implicit mechanisms. Since implicit interstate high cost assistance has been

526

Universal Service Order, 12 FCC Rcd at 9198, para. 824.

527

State Joint Board Members comments at 9.

528

NARUC comments at 8-9.

529

NARUC comments at 8-9.

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provided by incumbent local exchange carriers through interstate access charges, theCommission directed those carriers to remove from those charges the support received fromthe new universal service support mechanism. Otherwise, carriers would recover high cost
assistance twice: from both implicit mechanisms, as well as the new explicit mechanisms.
Thus, it is not the case that the explicit support is being used to lower access charges.
Rather, the support is still being used to support high cost lines, but now the support iscoming from explicit high-cost mechanisms and, accordingly, no longer needs to beobtained from implicit access charge subsidies. To the extent that, upon reexamination, we
decide upon a new or different allocation of universal service funding responsibilities
between the two jurisdictions, we would plan to modify that directive accordingly.
231. The Commission's initial decision to fund 25 percent of the total requirement
was tied to the shift of universal service support for high cost areas from the access charge
regime to the new section 254 support mechanisms.530 The total support requirement will
be determined by a revenue benchmark and a forward-looking economic cost methodologythat have not yet been established.531 As we and the state commissions evaluate these newmechanisms, we will be able to determine the amount of support needed to maintainaffordable rates. We emphasize that the Commission's implementation of section 254 is
progressing and we pledge to continue to work with the states to address this important
issue.
C.

Methodology for Assessing Contributions

232. Section 254(d) states that "[e]very telecommunications carrier that provides
interstate telecommunications service shall contribute on an equal and non-discriminatory
basis, to the specific, predictable, and sufficient mechanisms established by the Commission
to preserve and advance universal service."532 The Joint Board recommended that
contributions be based on gross revenues derived from telecommunications services net ofpayments to other carriers for telecommunications services.533 In recommending thisapproach, the Joint Board sought to resolve three concerns: (1) avoiding double-payment
problems; (2) assessing contributions on a value-added basis, and; (3) finding a method thatis familiar to the Commission and the industry.534 In the Universal Service Order, theCommission deviated from the Joint Board's recommendation and concluded that
contributions should be based on end-user telecommunications revenues.535 Nevertheless,
530

Universal Service Order, 12 FCC Rcd at 8792, para. 26.

531

See, e.g., Ameritech comments at 4-5; BellAtlantic comments at 1, 7-8; BellAtlantic reply comments
at 1-3; Vanguard reply comments at 1-3.
532

47 U.S.C. §254(d). See also 47 U.S.C. §254(b)(4).

533

Recommended Decision, 12 FCC Rcd at 495, para. 807.

534

Universal Service Order, 12 FCC Rcd at 9206, para. 842 citing Recommended Decision, 12 FCC Rcd
at 495, para. 807.
535

Universal Service Order, 12 FCC Rcd at 9206, para. 843.

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the Commission found that its decision addressed each of the Joint Board concerns, wasbased on information that had not been available to the Joint Board, and was moreadministratively efficient than the Joint Board's recommendation.536
233. Basing universal service contributions on end-user telecommunications
revenues is competitively neutral because it eliminates the problem of counting revenues
derived the same services twice.537 This approach also eliminates the double-counting
problem and the market distortions created by assessing based on gross revenues because
transactions are counted only once at the end user level. Moreover, the Commission's
method is easy to implement. Carriers already keep track of their revenues, and, although
they would have to distinguish between sales to end-users and sales to resellers, doing soshall not be complicated because resellers have an incentive -- reduced rates -- to identify
themselves.538
234. Some commenters argue in general that universal service support should beassessed as a flat charge on all end users.539 This argument, however, does not consider the
problem articulated by the State Joint Board members that "state commissions should havethe discretion to determine if the imposition of an end-use surcharge would render local
rates unaffordable."540 The Commission correctly concluded that a federally prescribed enduser surcharge would impermissibly dictate how carriers recover their contributions andwould violate Congress' mandate and the wish of the state members of the Joint Board."541
Carriers are not precluded from attempting to recover their contributions from end users, but
may not make false, inaccurate, or misleading statements regarding their contribution
obligations. Further, because carriers will know exactly how much they are contributing to
the support mechanism, basing contributions on end-user telecommunications revenues
satisfies the requirement in Section 254 that support mechanisms be "explicit."542

536

Universal Service Order, 12 FCC Rcd at 9206, para. 843.

537

Double counting occurs when resellers buy and sell service. Assuming a 10 percent contribution rate,
if X sells $200.00 worth of telecommunications services directly to a customer its contribution would be$20.00. IF reseller buys $180.00 of wholesale service from A, adds value, and sells the same service for$200.00 in competition with A, then B would have to contribute $20.00 for selling $200.00 of service andwould probably also be required to recover a portion of the $18.00 contribution that A would most likely passon. See Order, 12 FCC Rcd at 9207, para. 845.
538

Universal Service Order, 12 FCC Rcd at 9208, para. 848.

539

See, e.g., Airtouch comments at 23-24; Sprint comments at 3; AT&T reply comments at 3.

540

Universal Service Order, 12 FCC Rcd at 9210, para. 853 (citing State Members of the Federal-State
Joint Board on Universal Service Comments on Recovery Mechanism for Universal Service Contributions,
dated April 8, 1997, at 1).
541

Id. at 9210, para. 853.

542

Id. at 9211, para. 854.

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VIII. CONCLUSION
235. At the direction of Congress, we have reviewed many of the major decisions
related to the implementation of the universal service provisions of the 1996 Act. We
appreciate the enormous importance of our decisions; no less than the preservation andadvancement of the nation's universal service system is at stake. We have attempted tobalance competing concerns, predict how new and emerging technologies will affectuniversal service in the near and distant futures, and forecast universal service support
requirements, while at all times adhering strictly to the statutory language. We have delved
into the complex technological structure of the Internet and the Internet industry. This
examination leads us to conclude that excluding from the universal service contribution poolrevenues derived from the provision of pure transmission capacity to Internet service
providers does not comport with the language and goals of the 1996 Act. Similarly, should
we conclude that specific "phone-to-phone" IP telephony services qualify as"telecommunications services," providers of such services would fall within section 254(d)'s
requirement to contribute to universal service mechanisms.
236. This Report represents the result of deliberate consideration of the issues andextensive public feedback in the form of thousands of pages of comments and two
Commission en banc meetings. We recognize, however, that additional outreach, especiallyconsultation with state commissions, is essential. We and the states must ensure thatjurisdictional issues, including the 25-75 issue, are resolved in a manner that guarantees that
universal service mechanisms are specific, predictable, and sufficient. We view theissuance of this Report as a turning point in our efforts to engage states in a sustained andmeaningful dialogue.

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Appendix A
PARTIES FILING COMMENTS
ON REPORT TO CONGRESS
CC: 96-45
Commenter

Abbreviation

Access Authority, Inc.
AirTouch Communications, Inc.
Alabama, Alaska, Arkansas, Georgia, Idaho, Kentucky
Maine, Montana, New Hampshire, New Mexico,
North Carolina, South Carolina, Vermont andWest Virginia State Regulatory Agencies
Alaska, State of
Aliant Communications Co.
America Online, Inc.
Ameritech
AMSC Subsidiary Corporation
AT&T Corp.
Beehive Telephone Companies
Bell Atlantic Telephone Companies
BellSouth Corporation
Business Networks of New York
Bybee, Dennis L., PhD.
Carolina Connection, Inc.
Cellular Telecommunications Industry Association
City Council and Mayor of the City of Norfolk Nebraska
Coalition of Independent Internet Service Providers of Utah
Colorado Public Utilities Commission
Comcast Corporation
Commercial Internet Exchange Association
Community Internet Systems, Inc.
CompuServe Incorporated
American Council on Education
American Association of Community Colleges
Association of American Universities
Association of College University Telecommunications
Council of Chief State School Officers
Education and Library Networks Coalition
Florida Department of Management Services
General Communications, Inc.
GTE Service Corporation
Internet Access Coalition
Information Technology Industry Council andInformation Technology of Association of America
Iowa Utilities Board

Access
AirTouchAlabama, Alaska et al.

113

AlaskaAliant
AOL
AMSC
AT&T
Beehive
Bell Atlantic
BellSouth
Business Networks
CTIA
City of Norfolk
CUIISP
Colorado PUC
ComcastCIX
CompuServe
Education PartiesCCSSO
EDLINC
Florida DMS
GCIGTEInternet Access Coalition
ITI/ITAA
Iowa

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John Staurulakis, Inc.
JSI
Kansas City Corporation Commission
Kansas CC
Local and State Government Advisory Committee
LSGAC
Low Tech Designs, Inc.
LTD
MCI Telecommunications Corp.
MCI
Mississippi Public Service Commission
Mississippi PSC
Missouri Public Service Commission
Missouri PSC
National Association of Regulatory Utility Commissioners
NARUC
National Cable Television Association
NCTA
National Railroad Passenger Corporation
AmtrakNebraska Public Service Commission
Nebraska PSC
Nevada, Public Utilities Commission
Nevada PUC
New Mexico Attorney General
New Mexico AG
Nielsen, Mary
North Dakota Public Service Commission
North Dakota PSC
North Dakota Regulatory Reform Review Commission
North Dakota RRRC
Oregon Public Utility Commission
Oregon PUC
Pennyslvania Public Utility Commission
Pennsylvania PUC
Pennsylvania Public Utility Commission,
Pennsylvania Department of Education,
Office of Information Technology,
Pennsylvania Rural Development Council,
Office of Rural Health of Pennsylvania State University Pennsylvania Agencies
Personal Communications Industry Association
PCIA
Puerto Rico Telephone Company
PRTC
Reuters America, Inc.
Reuters
Richland Economic Development
Rural Telephone Coalition
RTC
SBC Communications
SBC
SmarTalk TeleServices, Inc.
SmarTalkSouth Dakota Public Utilities Commission
South Dakota PUCSouthwest Microwave, Inc.
Sprint Corporation
SprintSprint Spectrum L.P.
Sprint PCS
State Members of the Federal-State Joint Board
State Members
on Universal Service
TDS Telecommunications Corporation
TDS
Telecommunications Resellers Association
TRA
Teleport Communications Group, Inc.
TCG
Texas Public Utility Commission
Texas PUC
Transportation Committee of the Nebraska Legislature
United States Internet Providers Association
USIPA
United States Telephone Association
USTA
United States Senate, Senators Snowe, Rockefeller
and Kerrey
United States Senate, Senators Stevens and Burns
U S WEST, Inc.
US WEST
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UTC, The Telecommunications Association
Utah, State ofVanguard Cellular Systems, Inc.
Washington Utilities and Transportation Commission
Western Governors' Association
Wisconsin Public Service Commission
WorldCom, Inc.
Wyoming Public Service Commission

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UTC
Vanguard
Washington UTC
Wisconsin PSC
WorldCom
Wyoming PSC

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Appendix B
PARTIES FILING REPLYCOMMENTS ON REPORT TO CONGRESSCC DKT. 96-45

Commenter

Abbreviation

Ad Hoc Telecommunications Users Committee
America Online, Inc.
American Mobile Telecommunications Association, Inc.
American Public Power Association
Ameritech
Arizona Corporation Commission
Association for Local Telecommunications Services
AT&T
Bell Atlantic
BellSouth Corporation
Business Networks of New York, Inc.
Comcast Corporation
Commercial Internet Exchange Association
Education and Library Networks Coalition
GTE Service Corporation
GVNW, Inc./Management
Internet Service Providers Consortium
Iowa Telecommunications Association
MCI Telecommunications Corporation
National Association of State Telecommunications Directors
NEXTEL Communications Corporation
National Telecommunications and Information
Administration
Rural Telephone Coalition
Sprint Corporation
Telecommunications Resellers Association
United States House of Representatives, Rep. White
United States Senate, Senators Ashcroft, FordJohn F. Kerry, Abraham and Wyden
United States Senate, Senator McCain
United States Senate, Senators Rockefeller and Snowe
US Satellite Companies
US West, Inc.
Vanguard Cellular Systems, Inc.
Washington State Department of Information Services
Wyoming Public Service Commission

Ad Hoc
AOL
AMTA
APPA

116

Arizona CC
ALTS
BellSouth
Business Networks
ComcastCIXEDLINCGTE
GVNWInternet Service Providers
Iowa Telecom. Assoc.
MCI
NASTD
NextelNTIA
RTC
SprintTRA

US WestVanguard
Washington DIS
Wyoming PUC

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April 10, 1998
Separate Statement of Chairman William E. Kennard
Universal service is an American success story. For the better part of this century,
our commitment to universal service has made telephone service affordable for Americans
living in all corners of the Nation. And indeed about 95% of American households havebasic local telephone service. While it is easy to take this level of penetration for granted,
it is, by world standards, a remarkable achievement. Our responsibility is to sustain andimprove upon this record, especially in areas and for portions of our communities that do
not have or cannot afford service.
To be sure, the notion of universal service must continue to change, to keep pacewith the technology that it supports. In the Telecommunications Act of 1996, Congressdescribed universal service as "an evolving level of telecommunications that theCommission shall establish . . ., taking into account advances in telecommunications andinformation technologies and services."1 In the 1996 Act, Congress also included within theconcept of universal service discounted services to schools, libraries, and rural health careproviders. The evolving nature of universal service is essential to keeping our Nation
connected as technology, innovation, and investment produce ever greater, faster, and more
efficient media of communications.
As we enter the twenty-first century, our duty is to maintain and improve upon the
successes of universal service in an environment that differs markedly, in any number ofways, from the communications world of the past. The new communications world isdifferent not only because of stunning advances in technology, but also because of a shift in
the competitive and regulatory paradigms, as foretold by the 1996 Act. These changes
present us with some formidable challenges.
First and foremost, this Commission and our colleagues at the various statecommissions must reform universal service mechanisms that were designed to work in anenvironment of regulated monopolies, but that must now be adapted if we are to pave theway for robust competition while continuing to safeguard and advance universal service. In
the world of the regulated monopolist, it was easy enough to keep basic residential phoneservice affordable, even if it meant pricing that service below the carrier's cost of providing
it, since the monopolist could be permitted to make up the difference in other ways, such as
through higher rates for long distance and business services. In this way, phone companies
could earn a reasonable overall return, while basic residential phone service was kept
affordable even in high cost, hard-to-serve areas.
Such implicit forms of universal service support must be reformed at the federal andstate levels if competition is to succeed without sacrificing universal service. The first1

47 U.S.C. § 254(c)(1).

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impact of competition will be to put downward pressure on the above-cost rates that now
subsidize residential local phone service. This Commission has set into motion a process
for removing universal service support that is implicit in the interstate access charges thatlong distance carriers pay to local exchange carriers, and replacing that form of support withan explicit universal service support recovery mechanism. I am encouraged by those Statesthat have begun the same process within their jurisdictions, and I pledge my full support
and cooperation.
We have the ultimate responsibility to assure affordable rates throughout the country.
When this Commission first undertook to reform universal service last year, we observed
that, through the process of separations, approximately 25% of universal service support
historically had been funded through federal support mechanisms. What was not expressly
recognized, however, was that some areas of our country currently receive much more than
25% federal universal service support. In these areas, it makes little sense to limit federal
support to 25%. Even beyond these baseline levels, I believe we all recognize that in someinstances the proportion of federal support will have to increase. It is my intention to see toit that such additional support is forthcoming. The hard question this Commission must
step up to in the coming months, in close cooperation with the States, is what is the bestmanner in which to proceed to ensure that these are "specific, predicable and sufficient
Federal and State mechanisms to preserve and advance universal service."2
I believe that we will all be better off if both we and the States act expeditiously topreserve existing sources of universal service support by converting existing implicit
sources of support into explicit sources of support. Rates today are affordable and universal
service today is supported. States and the FCC together ought to be able to restructure
today's support to continue to ensure affordable rates. But doing this will mean that States
determine the extent to which existing, implicit intrastate subsidies can be converted to
explicit subsidies. This process of reform by the States should not increase the amount of
universal service support that the States raise within their own jurisdictions. When a statecannot restructure existing universal service support and maintain affordable rates, weshould further help maintain affordability. I do not envision that States complete theirreform efforts before additional federal support is provided. Nor do I mean to imply that
States must raise local phone rates in order for additional federal support to be available.
Indeed, I seek only to follow the principle articulated by Congress that "[t]here should bespecific, predictable and sufficient Federal and State mechanisms to preserve and advance
universal service."3 And where a State can demonstrate that, despite reasonable efforts, itwill be unable to convert its existing intrastate support system into a specific andpredictable universal support mechanism that will maintain affordable rates, the difference
must and will be made up from the federal support mechanism.
As we pursue this reform, it is also our responsibility to ensure that all
telecommunications carriers contribute to the universal service support in the manner

2

47 U.S.C. § 254 (b)(5).

3

47 U.S.C. § 254(b)(5).

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contemplated by the Communications Act.4 As our Report to Congress shows, applicationof the statutory terms "telecommunications carrier"5 and "telecommunications service,"6
which we must undertake if we are to identify those whom the statute directs to makeuniversal service contributions, will not always be an easy task. And as our Report further
shows, there are those who believe it is in this regard that our maintenance of a robust
universal support mechanisms poses a threat to another American success story, the Internet.
I disagree. For I believe that the continuing success of universal service can not only coexist with the maintenance of a "hands off" regulatory approach to the Internet, I believethat universal service support can and will benefit from such an approach.
We already have witnessed the symbiotic relationship between universal service andthe Internet. Universal service has given millions of Americans affordable access to the
public switched telephone network and, through that network, access to all of the wonders
and knowledge of the Internet. In this way the Internet benefits from the maintenance ofuniversal service. By the same token, the growth of the Internet leads to increased supportof universal service. This is because an enormous amount of pure telecommunications ispurchased by the businesses that make the Internet available to the 40 million American
homes with personal computers. While Internet service providers, for example, do notincur, or pass on to their subscribers, direct universal service obligations, their purchase of
telecommunications does lead to an increase in universal service support from the providers
from whom they purchase telecommunications services. Thus, as we refrain from treating
Internet service providers as telecommunications providers, we promote the growth ofInternet services; this growth in turn sparks demand for telecommunications, which thenincreases the amount of universal support.
In sum, I view the relationship between universal service and the Internet like acouple at the beginning of a long-lasting marriage -- inevitably there will be occasionalsigns of tension, but in the end they will always need each other.
I believe our Report to Congress exemplifies this approach. I have yet to see anInternet service that appears to fall within the definition of a telecommunications service.
As the Report indicates, however, there are other services that seem to do so. In theReport, we discuss IP telephony, a service that seems virtually indistinguishable fromtraditional long distance telephone services. While a more definitive determination demands
that we have a better factual record, I note that even in this regard we are not proposing thepossibility of "regulating the Internet" or imposing universal service contribution obligations
on Internet service providers. We are simply identifying a very narrow category of service-- IP telephony -- that shares many of the characteristics of a telecommunications service.

4

47 U.S.C. § 254(d).

5

47 U.S.C. § 153(44).

647 U.S.C. § 153(46).

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I do not seek to understate the concern of some that the migration of traffic from thepublic switched network to other networks could threaten the viability of universal service.
I am committed to ensuring that no such threat materializes, whatever its source. Simply
put, this Commission can have no higher priority than the preservation and enhancement of
universal service. As I have outlined above, I believe that services provided by the Internet
and IP telephony have provided, and will continue to provide, support for universal service,even as we avoid regulation of the former and begin to examine the telecommunication-likecharacteristics of the latter. But this Report is in some respects simply a snapshot. Our
federally-mandated commitment to preserve and protect universal service did not begin withthe 1996 Act and it does not end with this Report. It is ongoing. I look forward tocontinuing to work with the state commissions and with Congress to honor thiscommitment.
The very first sentence of our organic law states that the fundamental mission of thisCommission is "to make available, so far as possible, to the all the people of the UnitedStates, without discrimination on the basis of race, color, religion, national origin, or sex, a
rapid, efficient, Nation-wide, and world-wide wire and radio communication service withadequate facilities at reasonable charges."7 The Commission has fulfilled this mission forthe last seven decades of the twentieth century, and will continue to do so as it enters thetwenty-first century.

7

47 U.S.C. § 151.

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April 10, 1998

Separate StatementofCommissioner Susan Ness

Re: Report to Congress on Universal Service
Today's Report to Congress reaffirms the institutional commitment of the Commission to
the statutory goals of universal service. For me, this is a matter of personal commitment as
well.
Americans are a heterogeneous people, but we comprise one nation. Rich or poor, black orwhite, rural or urban, each of us benefits from the availability of affordable telephoneservice -- not just for ourselves but for everyone else. That's why Congress made universal
service a cornerstone of the Telecommunications Act of 1996, and that's why theCommission has worked so diligently with the state commissions, our partners, to promotetelecommunications access for low-income consumers and consumers in remote, insular,
and high-cost areas, as well as for eligible schools, libraries, and rural health care providers.
Universal telephone service has long been a national goal, and it is a goal we havegenerally achieved. Today, having the opportunity to use the telephone network is moreessential than ever before for participation in our nation's society, culture, and economy.
That's why Congress has so clearly stated its intention that telephone service beubiquitously available and affordable. To achieve this goal in a marketplace in which
additional competition is developing, and desirable, Congress called for universal service
support that is "specific," "predictable," "sufficient," "explicit," and collected in an"equitable and nondiscriminatory" manner.
This Report is far from a final answer to all of the questions surrounding universal service.
The Commission has devoted a great deal of time to universal service over the past two
years, and it will continue to do so in the future. Major issues remain to be worked
through, but our work on this Report to Congress has moved us forward.
I have appreciated the opportunity to take a fresh look at these critical issues. Preparationof this Report has afforded all of us an opportunity to concentrate intensively on the vital
importance of universal service -- enabling a new group of Commissioners to evaluate, on a
fresh record, the decisions of the former Commission members, to assess present
circumstances, and to lay the groundwork for the decisions that will be necessary in the
future. And, of course, this Report will assist Congress in its oversight of the Commission,and facilitate informed judgments about whether to provide

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additional legislative guidance on any of the myriad issues that have arisen in theimplementation of the Telecommunications Act of 1996.
High-Cost Support
On universal service support for consumers in high-cost areas, the most important message
we are sending today is one of reassurance. Contrary to the impression that may have beencreated by elements of the decision last May, the Commission does not contemplate
diminishing the support that currently is provided from the interstate jurisdiction to maintainaffordable telephone service. Although the statute calls for "Federal and State mechanisms
to preserve and advance universal service," we don't yet have the answer to all the questions
about how best to coordinate the respective roles of the state and federal commissions. But
we can and do make clear that this Commission is not contemplating any precipitous action
to reduce the high-cost support that is currently supplied by the interstate jurisdiction.
Rural telephone companies will operate essentially under the existing support system foryears to come. The large telephone companies will continue to receive many billions ofdollars of intrastate and interstate support, though implicit mechanisms will be converted to
explicit ones. The specifics need to be worked through in partnership with the states,
including universal service "contributor" states and "recipient" states, to forge a mutuallyagreeable solution that will be enduring. I will redouble my efforts to bring to a successful
conclusion the long-pending efforts to forge a workable consensus. In doing so, it is my
firm intention to continue to deliberate, and strive for consensus, with state commissioners
and staff, through the Joint Board, the NARUC Communications Committee, and all otheravailable channels.
Telecommunications Services and Information Services
This Report has given us an opportunity to review the legal analysis, and the practicalconsequences, of our prior determinations regarding the statutory definitions of"telecommunications," "information services," and related terms. As a legal matter, theCommission is renewing its determination that the Telecommunications Act should be readto affirm the unregulated status of information services, including Internet access services.
I firmly believe that this decision is supported by the statute and the legislative history, andthat it has stimulated and will continue to promote desirable investment and innovation. Asa practical matter, the Commission has learned that the relationship between information
services and telecommunications is symbiotic. The explosion in information services ingeneral, and Internet usage in particular, is stimulating demand for underlying
telecommunications services, thereby ensuring the sufficiency of sources for universal
service support.
The relationship between telecommunications and information services is a topic that will
require further rulemakings or adjudications, for example, to examine such matters as IPbased telephone services (as distinguished from Internet access services which we have notregulated and do not intend to regulate). We need to make sure we have all the facts, andhave considered all of the potential ramifications, before we make any particularized122

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determinations. We will also need to consider issues relating to "bundled" offerings that
include both telecommunications services and other services. Definitive answers on these
topics are not at hand. But, because of the continuing growth of the telecommunications
market and the success of the policy of non-regulation of information services, I am
confident that it will in fact be possible to (1) safeguard universal service support,
including that needed for high-cost areas, and simultaneously (2) avoid stifling thedevelopment or deployment of innovative new information services.
Schools, Libraries, and Rural Health Care Providers
This Report does not address the low-income support mechanism, but it is important to notethat this mechanism -- like pre-existing high-cost support -- is continuing; in fact, federal
support has been increased. Meanwhile, the Commission has launched the new support
mechanisms called for by the Snowe-Rockefeller-Kerrey-Exon provisions (Sec. 254(h)) of
the statute, for schools, libraries, and rural health care providers. As a result, all phases ofuniversal service support -- high-cost, low-income, and Snowe-Rockefeller -- are now
operational.
I remain convinced that implementation of Section 254(h) will bring extraordinary benefits
to children, to rural health care patients, and to library patrons across the nation. I know
there have been criticisms of certain decisions that have been made in the course of
implementing this visionary, but in some respects ambiguous, provision of the law. I standready to work with Congress to explain our past decisions, or to assist in assessing
alternatives. If new legislative guidance is to be provided, I hope that it can be effectuated
without unduly disrupting the plans of thousands of schools, libraries, and rural health careproviders across the nation who are eager to seize the opportunities the legislation created.
I look forward to an active and constructive dialogue with Congress, as well as with thestate commissions, as we continue our efforts to implement the universal service provisionsof the Telecommunications Act of 1996 for the benefit of all.

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April 10, 1998
SEPARATE STATEMENT OFCOMMISSIONER MICHAEL K. POWELL, CONCURRING
Re:

Report to Congress, Federal-State Joint Board on Universal Service (CC Docket No.
96-45).

I welcome the opportunity provided by this Report to Congress, both to underscoremy strong support for the goals of the universal service provisions of the 1996 Act and toshare my current views regarding some of the principles I believe should guide theCommission's implementation of these provisions. I write separately (1) to highlight thechallenges the Commission and Congress face as technological convergence erodes thefoundations of our balkanized regulatory framework, and (2) to express my growing concernthat we need to modify our universal service programs, particularly the Schools andLibraries (S&L) program, in order to more accurately meet demand and to limit theirdistorting effect on competition and consumer prices.
I.

Internet Protocols and the Strain on Our Statutory and Regulatory Framework.
A. The Problem of Convergence

Congress has asked that we re-examine our interpretation of the critical terms"telecommunications," "telecommunications carriers," and "information service providers"contained within the universal service section of the 1996 Act.1 At bottom, the question iswhether these terms are mutually exclusive. That is, can a single service provider beoffering both "telecommunications services" and "information services"? Or, as theCommission has previously held with respect to its treatment of "basic" and "enhanced"
services, is a provider either one or the other.
I believe the Report rightly concludes that Congress intended to maintain the
dichotomy between telecommunications services and information services that originated in
the Commission's Computer decisions and was utilized in large measure by the court in thecontext of the divestiture of AT&T. Though I concede that there is merit in the views
advocated by some that Congress intended to redefine telecommunications so as to capture
information service providers within the snare of Title II and other regulation, I believe theexpress language of the Act and its legislative history prove otherwise, as the Reportdemonstrates.
Clearly, how the Commission chooses to categorize a provider under the statutesignificantly affects its regulatory treatment. A telecommunications carrier is subject to thefull panoply of common carrier regulation and must contribute to universal service. A
provider of telecommunications (one not offering telecommunications on a common carrier1

See 47 U.S.C. § 254.
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basis) may have to contribute to universal service if the Commission finds that it is in the
public interest to do so. And, finally, an information service provider is neither subject toregulation nor, in my current view, should it be required to contribute to universal service.
Even though we are convinced that Congress in fact adopted a categorical "either/or"
scheme in 1996, we are left with the difficult task of categorizing service offerings that do
not fit neatly in either category, unless and until Congress makes a change in this scheme.
This difficulty arises because the definitional dichotomy does not fully account for the
explosion in innovation brought about by the Internet and its underlying networkarchitecture. That dichotomy is premised on a network in which the nature of the service
and the underlying infrastructure are highly integrated. Basic voice service was (and largely
still is) distributed on networks constructed and optimized for that service, and the brains ofthat network resides within the central switches, signalling systems, and databases of theintelligent network owned by the operator, usually a Bell Operating Company (BOC). The
Internet and the Internet protocol (IP) represent a dramatic paradigm shift in networkarchitecture. A variety of services can be overlaid on an IP network and the intelligence of
those services rests not centrally, but at the edges of the network -- in the case of theInternet, in the computers owned by the millions of users and information service providers
throughout the world. Anyone with the right computer and software can offer and distributenew and innovative goods and services.
The advent of IP networks has placed great strain on the categorical definitions first
set out by the Commission and adopted by Congress. Previously, we assumed that one
could categorize a service by the degree to which the transmission was "processed" oraltered by computers on the network. Basic service (assumed to be voice) traveled without
manipulation or change in form to its destination. Thus, it was said to flow on a"transparent transmission path." This definition is being strained today even for voice
networks. For example, in modern digital voice networks, such as the new cellular and
PCS networks, advanced digital signal processing means the voice signal is being processed
and manipulated between origin and destination. More importantly, information service(assumed to be data) involved the additional manipulation by computer of the transmitted
information.
The infinite flexibility of IP switched-packet networks, has blurred these distinctions,making them difficult, if not impossible, to maintain. As we are seeing, one now cantransmit voice, in addition to data, using a protocol that allows for a significant degree ofcomputer processing and other advanced capabilities. Yet, from the perspective of a user
who does not use those capabilities, the service may look nearly identical to traditional
basic service. Were such a service to be classified permanently as an information service itshould not, in my current view, be required to contribute to universal service. If innovative
new IP services were all thrown into the bucket of telecommunications carriers, we would
drop a mountain of regulations, and their attendant costs, on these services and perhaps
stifle innovation and competition in direct contravention of the Act.
Therefore, the challenge we face is how to categorize the growing number of hybrid
services, in light of the Act's twin objectives of promoting competition and advancing
universal service. Hybrid services are those that have components of both a basic service
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and an information service (as traditionally defined). On one end of the spectrum, forexample, may be some forms of IP telephony that resemble traditional basic service innearly every way, except that they have at their core a network and protocol that makes it
possible to substantially enhance the basic voice service (for example, speak French andhave it come out in English or have some users choose higher fidelity sound than others).
On the other end of the spectrum are service providers whose fundamental function is tooffer access to information to its customers using computer intelligence, but whose service
rests on a transmission network fully capable of providing a clear path for basic
transmission (same thing in, same thing out). Sorting hybrid services into their appropriate
regulatory bin is difficult, yet something we will be forced to do more and more as new andinnovative services explode from the fuel of IP networks. This reflects the growing
challenge of adapting a balkanized regulatory structure to a world of technologicalconvergence.
Congress is right to be both buoyed and fearful of this development. On the up-side,
the arrival of digital technology and IP networks mean infinite possibilities for new andinnovative services. The arrival of broadband digital networks promise to connect theworld to an endless sea of information, significantly advancing how we buy and sell,communicate, create, and educate. Moreover, this technology will produce morecompetitive choice for consumers by eroding the traditional barriers between services andlowering the costs of entry. This hopeful state of affairs was born and has flourished in aderegulated and competitive atmosphere, the very type we are striving to achieve incommunications services generally. On the down-side, these alternative network systems
may present a threat to our universal service goals. Carriers that presently pay to support
universal service may migrate more of their traffic to IP networks in a rational effort toavoid the cost of government regulation. Congress, will have to watch these developments
vigilantly and take action if it becomes necessary, but until that day, what is an agency todo?
B. A Call for Case-By-Case Evaluation
As long as our universal service obligations require us to consider whether difficultto-classify entities are "telecommunications carriers," provide "telecommunications," or are"information service providers" I think we should resolve those questions on a case-by-casebasis. If the Commission is to preserve the dichotomy between information services andtelecommunications, as the statute and legislative history appear to require, we will need tomake highly fact-specific inquiries about whether particular entities provide transmission of
information "without a change in the form or content" or whether the entities offer thecapability of manipulating that information.
Attempts by this agency to set down its own prophylactic rules for categorizingclasses of IP-based service will be, in my current view, futile if not dangerous for a numberof reasons: First, the English language is no match for the infinite flexibility andinnovation potential of an IP network. I am confident that any attempt to craft a rule tocover a class of IP-based service will be almost immediately frustrated by innovativechanges to the service and technology that these advanced networks allow. I fear we wouldfind ourselves in a never-ending chase for regulatory clarity. Second, adopting a rule that126

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invades on a broad front the Internet field and its underlying technology is likely to chill, if
not freeze, innovation in broadband digital services, and constrain the flow of capital
investment in these growth industries, out of fear that the regulator and the tax-man cometh.
Third, any rule will likely be over-inclusive and mire the Commission in waiverproceedings. What will undoubtedly result is a perforated rule -- one besieged by
exceptions. Fourth, if we adopt broad rules, we wrong-headedly move in the direction of
expanding the onerous body of regulations, rather than staying on the path of deregulation
the Act commands us to take. Fifth, we risk serious loss of credibility internationally,
having fought hard to win world trade concessions (e.g., international settlements,
classifying the Internet as an information service).
These considerations favor resolving these matters (which I believe encompass theclassification of Internet and IP telephony) on a case-by-case basis, rather than throughrulemaking. It is for these reasons, I question the wisdom of even suggesting conclusions
in the Report. Such conclusions, no matter how gingerly or narrowly drawn, signal a movetoward developing a body of rules for classifying Internet-based services. I urge theCommission to seek comment on the appropriate method of designating new contributors touniversal funds in the context of a future proceeding.
C. The Pitfalls of Competitive Neutrality Analysis
Some will argue that it is competitively unfair to subject competing communications
services to regulation and not Internet companies. I constantly hear the mantra that wemust "level the playing field," because exempting Internet service providers constitutes a
massive subsidy. While this argument has some superficial appeal, I strongly caution
against extending regulations solely on this basis.
I simply disagree with those who argue we are massively subsidizing the Internet byletting it operate in a free market while other companies labor under the yolk of government
regulation. That seems to be an ironic characterization in light of the Act's stated goal of
fostering a pro-competitive, deregulatory environment. The way to level this disparity, if at
all necessary, is not to extend government imposed costs and regulations to the Internet, it
is to take further actions to liberate those subject to regulation.
Moreover, competition is not a game of equally matched players. Competitors havedifferent mixes of competitive advantages and burdens. It is too simple to focus on a single
competitive inequity and then declare the game unfair, without examining the totality ofadvantages and disadvantages among competitors. Let me be clear: I believe it is entirely
appropriate for the Commission to consider the extent to which its decisions will have a
distorting effect on the market. We should not lose sight, however, of the fact that we cannever avoid all such distortions so long as we regulate the market.
Further, we should recognize that competitive advantages are not limited to whether
or not companies must contribute to universal service support. For example, while
telecommunications carriers must contribute to universal service, they also enjoy significant
benefits under sections 251 and 252 of the Act. Likewise, incumbents often havesignificant advantages over new entrants, such as capital, business and marketing savvy and127

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technical expertise, such that declining to require new entrants to contribute to universal
service may not give the new entrants an appreciable advantage over the incumbent.
Leveling the playing field, when the players do not start from the same place, only
institutionalizes the advantage of the stronger, better equipped, experienced players. We
and the Congress regularly and consciously provide incentives for innovation and market
entry.
Again, we should recognize that competitive advantage is not always an evil to be
stamped out; the market is designed to reward companies for finding and exploiting theircompetitive advantages over other companies. Our goal should be to ensure that ourpolicies do not have a significant impact on the overall competition between entities.
For these reasons, I am troubled by the discussions in which the Report suggests thatnew types of entities (e.g., ISPs that use their own transmission facilities, phone-to-phone
Internet telephony providers) should be required to contribute to universal service based, atleast in part, on "competitive neutrality." I am concerned that these discussions, among
other things, may overstate the potential effect of declining to designate new contributors touniversal service support and, in any event, oversimplify the competitive context. The
danger here is that, as new technological and marketing innovations bring new entrants tothe market, we will continue to expand the pool of contributors, whether or not we needadditional contributors to keep the fund sufficient. Even worse, by continuously expanding
the pool of contributors to encompass new entrants, we may discourage such entry.
I want to emphasize that we do have a duty to maintain a sufficient base of funds tosupport universal service. We can and will do so. As I explain below, however, we also
must not throw our net out farther than is necessary, because unnecessarily expanding thescope or size of the contribution base for universal service would distort and inhibit
competition and would put significant pressure on consumer prices for services subject tothe government levy. In short, we should address these issues with a surgeon's scalpel andnot a butcher's cleaver.
II.

Tailoring Universal Service Programs to Sufficiency

One of the hallmarks of the Commission's implementation of the Act's universal
service mandate should be that the funds must become and remain "sufficient" within themeaning of section 254(e). Section 254(b) requires that the Commission preserve andadvance universal service and the Commission must establish mechanisms to meet that
goal. At the same time, it would defy common sense, as well as the pro-competitive,
deregulatory thrust of the Act, for the Commission to expand either the size or the scope ofuniversal service programs unless necessary to fully-fund these programs or to otherwise
satisfy the requirements of the Act. Thus, "sufficiency" under the statute is in essence aquestion of balance: our universal service funds must be sufficient to preserve and advance
universal service, but these funds must not become larger than is necessary to achieve thosegoals. If we do not balance these contending objectives, we will unduly distort competition
and add to the cost of service, which will likely result in higher rates to consumers.
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I am concerned that the Report does not focus directly enough on the importance of
maintaining the sufficiency of universal service funding. As the Report indicates, theCommission does not yet know how much any of the programs will cost; we will not know
the demand for the Schools and Libraries program until the window for filing applications
closes later this month, and we will not even decide the method for determining high cost
support until later this year. With respect to Schools and Libraries, in particular, I am
troubled that we continue to operate and collect based on initial assumptions about thedemand and scope of the program. I fear the eagerness to keep this program moving,which I fully understand, may lead us inadvertently to overcollect or unnecessarily expand
the program.
I am concerned that, by not squarely re-evaluating the question of sufficiency, we
exacerbate a perception among many critics of our universal service implementation thatsomehow these programs are out of balance. This perception, paradoxically, is perhaps themost significant threat to the sufficiency of universal service funding. If we cannot find away to make critics in Congress and elsewhere believe that we are working to preserve andadvance universal service in a prudent and responsible manner -- that the funds will be
sufficient but not too large -- I fear that support for these beneficial programs will erode in
the minds of both legislators and consumers.
With respect to the Report's review of Commission actions taken in and subsequent
to the Universal Service Order,2 questions of sufficiency and, conversely, overcollection are
central. Congress has expressed its concern regarding the sufficiency of universal service
programs in the Appropriations Amendment, which required the Commission to review its
determinations regarding who is required to contribute to universal service, as well as therevenue base from which universal service support is derived. More generally, concern forsufficiency and overcollection are evidenced in several critiques of current universal service
programs.
Specifically, in my current view, much of the concern regarding the size and scopeof the S&L program centers around the perception that, intentionally or not, theCommission has cast its net broadly to capture substantial funding and taken more andquicker steps to ensure that that program will be sufficient than it has taken with respect tothe high cost and other programs. Indeed, one could argue that the S&L program may bepoised to overcollect: First, the Commission concluded that, despite the fact that States
may establish their own S&L programs, the federal S&L program would be funded out ofboth interstate and intrastate revenues, whereas high cost and low income support would bebased only on the former.3 Second, the Commission set the cap for the S&L program at$2.25 billion, even though projected first-year demand for the program is substantially less2

See In re Federal-State Joint Board on Universal Service, Report & Order, CC
Docket No. 96-45, FCC 97-157 (rel. May 8, 1997) (hereinafter "Universal Service Order").
3

See Universal Service Order, ¶ 823; compare id., ¶ 831.
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than that amount.4 Third, the Commission directed the establishment of a separate
corporation to administer aspects of the S&L program, rather than allowing the fundadministrator to run the entire program, as is the case for the high cost and low income
funds.5 Fourth, as a general matter, critics point out that the S&L program is alreadycollecting funds, whereas the high cost program will not be fully fleshed out until later thisyear and will not begin collecting money until next January. Indeed, many states clamor,
and the Report concedes, that the percentage of federal funding adopted by the Commission
6in the Universal Service Order,
if not modified on reconsideration, would ensure that somehigh cost states will receive substantially less federal support than they do currently.
While these decisions, taken individually, constitute a reasonable exercise of theCommission's discretion, the overall picture sketched by these decisions suggests to somecritics that the Commission has taken more pains to ensure that the S&L program issufficient than it has taken with respect to the high cost and low income programs. It is not
lost on these critics that section 254 provides no basis for the Commission to favor certainclasses of recipients over others with respect to the level or timing of universal service
support flows.7 Thus, I have become increasingly concerned that, from the standpoint ofsufficiency, the S&L program is, or at least appears to be, out of balance.
I support a vigilant approach to ensuring that the sufficiency of universal service be
kept in balance, as a general matter and with respect to particular programs, such as the
S&L program. As general matter, the Commission should establish an "early warning
system," whereby we regularly assess whether the funds and the pool of available
contributors are sufficient to satisfy statutory requirements. These efforts could build on thework already begun by the Common Carrier Bureau pursuant to the monitoring authority
8
delegated to it in the Universal Service Order.
In establishing such a monitoring system,
we could request comment on whether specific new technologies or types of providers arecontributing indirectly to the funds by, for example, generating new revenues for carriers
that are required to pay into the funds.
With respect to Schools and Libraries, I believe that the Commission must quickly
commit itself to a modest modification of the program if it wishes to maintain crucial
political support for it. To be blunt, I fear that if we do not move quickly to modify ourapproach to implementation of this and other programs, we will fail to carry out adequately
our universal service duties, endanger the pro-competitive and deregulatory goals of the Act
and make it necessary for Congress to step in to show us what the public interest requires.

4

See id., ¶ 425.

5

See NECA Report & Order, ¶ 57.

6

See Universal Service Order, ¶ 269.

7

See generally 47 U.S.C. § 254.

8

See Universal Service Order, ¶ 869.
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With respect to the S&L program, some have raised substantial questions regarding whether
the Commission has jurisdiction to assess contributions based on intrastate revenues, as wellas important policy concerns. On this basis, and in light of the perception that theCommission has somehow favored the S&L program, I would support limiting that program
to assessment of contributions based on interstate revenues only. Likewise, I would favor
reducing the cap on the S&L program so as to bring it down to current demand levels.
Further, I would support moving the functions performed by the S&L Corporation to thefund administrator, both to remove the appearance that the Commission is favoring the S&L
program and to resolve serious questions raised by the General Accounting Office regardingwhether the Commission was authorized to direct the establishment of the S&L
Corporation.9
III.

Conclusion

In closing, I remind my colleagues that the Commission is not alone in the effort topromote universal service. I, for one, believe that if we reach a point where there is apotential shortfall in universal service funds, Congress could craft additional legislation
narrowly tailored to assess universal service contributions without the accompanying risk ofheavy regulation (perhaps to include express preemption of State efforts to regulate theInternet). In the meantime, I urge the Commission to be mindful of the threats tocompetition and innovation if we do not keep the sufficiency of universal service funds "inbalance" both as to their size and scope. By following some of the approaches I havedescribed here, I believe we would greatly benefit the development of competition andinnovation by refraining from imposing contribution obligations on entities that do not fit
neatly into the traditional categories. Just as importantly, by taking swift action to ensurethat the funds are sufficient to preserve and advance universal service, but are no larger thanis necessary, we will do much to quell the criticisms that threaten to undermine support forthese beneficial programs.

9

See Feb. 10, 1998 Letter from Robert P. Murphy, General Counsel, General
Accounting Office to Senator Ted Stevens.
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April 10, 1998
Separate Statement of Commissioner Gloria TristaniRe:

Federal-State Joint Board on Universal Service, Report to Congress

Today's Report to Congress makes a number of important observations regarding thepreservation and enhancement of universal service. I write separately to identify several
areas of particular interest to me.
While I support this Report, I have not yet concluded whether last year's decision
concerning the share of federal high cost funding (the 25/75 issue) is the best approach.
Many people, especially a number of state commissioners, have worked diligently since
adoption of last year's Universal ServiceOrder to consider how the FCC and statecommissions could achieve our shared goals in ways that may vary the current approach.
The participants in those efforts have actively sought to build consensus among those withdifferent viewpoints on the 25/75 issue. I strongly support those efforts and encourage allinterested parties, especially state commissions, to participate in this dialogue over the next
few months. The thinking on this issue continues to advance, and all parties would be wellserved by re-engaging the Commission and each other in this dialogue. Disagreement overpolicy is expected, but I would hope that criticism of the current approach will beaccompanied by alternative solutions.
I also support the manner in which the Report addresses phone-to-phone IP
telephony and the issue of self-provisioned telecommunications. The Commission has
historically favored policies aimed at fostering the growth of enhanced services, includingInternet access. The Commission's decisions affecting the Internet -- most notably the ESP
exemption and the Computer Inquiryline of decisions -- have to be considered among theagency's greatest contributions to the public interest. As we continue our evaluation of thisissue in the near future, I will keep firmly in mind the enormous benefits that have resulted
from the philosophy underlying those decisions. I am confident that the Commission cancontinue that philosophy while being faithful to the letter and spirit of the universal service
provisions of the Act.
I believe this proceeding has been a valuable undertaking by the Commission. I
believe the Commission's understanding of IP telephony as it relates to the framework of
the Telecommunications Act of 1996 has been greatly enhanced by our work on thisReport. And as a result of this Report, the Commission expects to take additional action in
the near future that would address whether specific types of IP telephony fall within the
Act's definition of "telecommunications service." In addition, as a result of this Report, wehave opened an important discussion that will consider whether entities that self-provide
telecommunications should be required to impute the value of that telecommunications andcontribute to universal service based on those revenues. These are important steps in
fulfilling the goals of section 254.
###
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April 10, 1998
DISSENTING STATEMENT OF COMMISSIONERHAROLD FURCHTGOTT-ROTH
Re: Federal-State Joint Board on Universal Service, Report to Congress, CC Docket 96-45.
Introduction
The majority has worked hard to make this report a success. Comments have been
received from the public. En banc hearings have been held. Many staff members haveinvested countless hours in preparing this report. Everyone involved has had the best ofintentions.
I wish that there were a way that I could vote with the majority on this report.
Efforts and intentions are commendable. They were also commendable in the May 1997
order on universal service. But efforts and intentions alone are not sufficient to lead to agood order or a good report on universal service.
Priorities matter. Rural, high-cost universal service is not just one of many
objectives of Section 254; it is the highest priority. Rural, high-cost universal service issues
should not be resolved and implemented in some dim and distant future after all otheruniversal service issues have been resolved; rural, high-cost universal service issues should
be resolved and implemented first. Rural, high-cost universal service should not be viewed
as the residual after enormous amounts for other federal universal service obligations havebeen promised; rural, high-cost universal service should receive the lion's share of any
increase in the federal universal service fund.
New federal universal service policy should not discard prior programs through arevolutionary process; new federal universal service programs should develop through acareful evolutionary process. Federal universal service programs should not be funded byunlimited, hidden taxes and fees, negotiated behind closed doors, that harm all consumers of
telecommunications services through ever increasing prices; federal universal service
programs must be funded by prudent mechanisms that allow for lower, and consequently
more affordable, telecommunications rates for all Americans. Federal universal service
programs should not stifle innovation and competition; they must encourage them. Federal
universal service programs should not be based on creative and expansive readings of thelaw; they should be based on narrow readings of the law. Federal universal service
programs should not ignore Congressional intent; they must reflect it.
For these and other reasons explained below, I must reluctantly and respectfully
dissent from the majority opinion today.
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Congressional Intent Regarding Federal Universal Service Programs
For many years, a universal service funding mechanism, based on federal collectionof fees from interstate service revenues, has defrayed the costs of service in rural, high-costareas. It has been a system of subsidies with neither great efficiencies nor great excesses.
It has evolved with little fanfare or controversy.
The Telecommunications Act of 1996 placed in statute what had largely evolved byregulation. Section 254 is an evolution of preexisting programs, not a revolution that
endangers those programs to create entirely new ones. The clear emphasis of Section 254
is to preserve and enhance universal service in rural, high-cost areas of the country. There
are other goals of Section 254, but it is difficult to read Section 254 in its entirety andunderstand how a federal universal service fund program could have as its primaryemphasis anything other than rural, high-cost support; and it is even more difficult tounderstand how any portion of this section could proceed piecemeal before the rural, highcosts issues are resolved and in a fashion that jeopardizes support for rural, high-cost areas.
And it is still further difficult to read Section 254 to lead to funding mechanisms that maketelecommunications services less affordable to all Americans on the pretext of supporting
non-telecommunications plant, equipment, and peripheral services. Even a few
conversations with Members and staff reveal that Congress intended primarily to maketelecommunications services more -- not less -- affordable through support of rural, highcost areas under Section 254; many conversations make the point more forcefully.
Somewhere between Capitol Hill and 1919 M Street, N.W., the intention ofCongress seems to have been lost. Last May, the Commission issued an order on universal
service that was more revolutionary than evolutionary. Much thought and care went into
this revolutionary order; it was intellectually sophisticated and established novel
interpretations of the law and Commission authority; but, in the process, it seems to have
inadvertently lost sight of both the intent and the letter of the law.
The failure of the Commission on universal service was not lost on Congress; it
decided to give the FCC a second chance to redeem itself. Congress requested a reportfrom the FCC not because Congress was pleased with the earlier universal decision;
Congress requested the report precisely because it was displeased.
The report that the Commission submits to Congress is a missed opportunity. We
could correct past mistakes, but we do not. We could affirm a commitment toCongressional intent, but we do not. Senator Dorgan eloquently suggested that, if the FCC
has made a mistake, it should now make a "U-turn."1 Instead, we largely reaffirm pastdecisions.

1Statement of Sen. Byron Dorgan at a Hearing before the Subcommittee on Communications of the
Senate Committee on Commerce, Science, and Transportation, March 25, 1998.

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Untenable Taxes
The federal government has had universal service programs for rural, high-cost areas
and for low-income Americans for many years. These programs have been quietly met witha tax of approximately 3 percent on interstate telecommunications services.
Section 254 sets forth goals that emphasize rural, high-cost support as well as lowincome support and other objectives. The Commission must be nimble and energetic tomeet all of those goals. Instead, we have made costly promises for some services without
making promises for increases in rural, high-cost programs. How much will all of thesepromises cost? No one can say with certainty.
Commission orders last year set caps of $2.25 billion annually for schools andlibraries. For the second quarter of 1997, we have imposed a 0.71 percent tax on alltelecomm services, both interstate and intrastate, to support schools and libraries programs
for an amount of $1.3 billion annual rate. The $2.25 billion annual rate would require a
1.22 percent tax on all telecommunications. Moreover, as I explain below, I havesubstantial doubts about our authority to tax intrastate services directly or even to use themas a basis for taxes. To support fully the promised schools and libraries program with justinterstate telecommunications service revenue would require a tax rate of 3.2 percent.
The Commission has thus set about to promise a schools and libraries program thatcan only be funded with a 3.2 percent tax. New programs for rural health care providers
and for low-income programs add another 1 billion, or a tax rate of 1.4 percent on interstateservices for a cumulative incremental tax rate of 4.6 percent on interstate
telecommunications services. These promises have been made before any incremental
expansion of the federal high-cost program is decided. It is difficult for me to imagine how
Congress intended the FCC to spend less on any incremental new rural, high-cost support
than on the other universal service programs. It is thus possible that, to meet Congressional
intent without reducing the promises already made for other universal service programs will
require an incremental federal tax rate of 10 percent on interstate telecommunications
services on top of the preexisting 3 percent tax.
The specific parameters in the preceding paragraph are only illustrative. They may
be higher or lower than actual values, but any incremental rate close to 5 percent, much less10 percent, would be punitive as it would lead to substantial price increases in interstate
telecommunications services and would harm the very consumers that universal service isintended to help. The interstate telecommunications service market would shrink in
response to over-taxation. Fewer firms would invest in the industry; fewer firms would
innovate; American leadership in world markets would erode. The greater the taxes oninterstate telecommunications services, the greater the economic pressures for bothconsumers and businesses to seek to avoid these taxes through unregulated technologies.
Congress did not envision substantial new taxes on interstate or othertelecommunications services as a result of the Telecommunications Act of 1996, nor did it
envision price increases -- much less substantial price increases -- in any
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telecommunications market.2 The harm to consumers from increases in universal service
taxes is not just the direct expense of the taxes themselves. Prof. J. Hausman of MIT has
estimated that consumers lose a total of more than $2 in consumer benefits for every dollar
paid in taxes on long-distance services.3 Do American households really want to lose
approximately $14 billion annually in consumer benefits -- or approximately $140 annually
per household -- to support Section 254?4
Preserving Universal Service
The proper path for the FCC to interpret Section 254 is not an easy one. But weshould begin with the old adage: Do no harm. We should seek to do no harm to theconsumers who currently benefit from federal universal service programs, and we should
build on that program in a prudent manner that does not overtax and harm
telecommunications consumers.
The Commission has compounded untenable policy and taxes with untenablepromises. Some potential universal service beneficiaries have been "promised" enormousand unending benefits, long before there are actual revenues for these programs and long
before other potential universal service beneficiaries have voiced their concerns. What hasensued is an unfortunate confrontation among various potential beneficiaries from universal
service. Simply stated, the potential pot of revenue that the FCC can collect for universal
service from fees on interstate services is limited. And the potential beneficiaries are locked
in a struggle to see who will receive the lion's share of the benefits. Yet some parties havebeen promised in advance large and unsustainable amounts of money to the exclusion ofother parties.
Authority To Establish The Size And Funding Mechanisms For Universal Service
The May 1997 universal service order promises the Schools and Libraries
Corporation, an entity of questionable legal status,5 $2.25 billion annually. This target is
not written in statute nor is it an amount that was demonstrably contemplated by Congress.
Moreover, it is an arbitrary target, one that the FCC could equally well, and with equal2

See for example, the comments of Sen. Slade Gorton, at a Hearing before the Subcommittee on
Communications of the Senate Committee on Commerce, Science, and Transportation, March 25, 1998; andthe comments of Rep. Michael Oxley at a Hearing before the Telecommunications, Trade, and Consumer
Protection Subcommittee of the House Committee on Commerce, March 31, 1998.
3

Jerry Hausman, "Taxation by Telecommunications Regulation," National Bureau for Economic
Research, Working Paper Series 6260, November 1997.
4

These figures are based on an incremental tax rate of 10 percent applied to a $70 billion dollar basefor interstate services, and a $2 loss in consumer welfare for each dollar of tax.
5

Letter from Robert P. Murphey, General Counsel, United States General Accounting Office (GAO), to
The Honorable Ted Stevens, United States Senate, February 10, 1998.

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legal authority, have set at $22.5 million, or $225 million, or $22.5 billion, or $225 billion.6
Does the FCC acting alone have the legal authority to set arbitrary targets for SLC spending
and then establish tax schemes to fund those targets? Sadly, despite the enormous
political, economic, and technological consequences of these decisions, the answer appears
to be "yes."
These decisions would be large ones even for Congress, much more for the FCC, tomake. The FCC must be prudent in making these decisions, and extraordinarily cautious
about making promises. Our only legal means of fulfilling large promises is to impose
devastating "fees" on the interstate telecommunications markets. Congress, in contrast, hasother means of financing programs and fulfilling large promises. In many ways, perhaps it
would be better for Congress rather than the FCC to make many of the large decisions
about the contours of universal service. Current law, however, appears to place thesedecisions with the FCC. We should work within the law of Section 254, prudently, andwith the close advise of Congress. Only in that way can Section 254 work.
The FCC has enormous power under Section 254. The wisest exercise of power,
whether in this section, or in other areas of law, is self-restraint rather than profligacy. We
must have a plan to implement Section 254 that makes sense. It must preserve universal
service without imposing devastating taxes. It must focus on high-cost, rural issues. It
must have clearly more benefits than harm. All of this the FCC can and should do on its
own. To the extent that more ambitious and costly programs are required, the FCC should
work with Congress to find appropriate funding mechanisms rather than developing them on
our own.

Specific Legal Concerns
Before elaborating on my legal concerns with the majority's universal service plan, I
would like to make one point clear. I am committed to the full and proper implementationof all sections of the Communications Act, including Section 254. I understand the greatinterest of Congress and the American people in universal service. I am not persuaded,
however, that the steps the Commission has taken to date meet all of the requirements ofSection 254.
Below I describe in more detail a few of my specific concerns about how theCommission has not fully met the requirements of Section 254. The discussion below is
not intended to be exhaustive of all of the shortcomings of past Commission interpretationsof Section 254. The discussion, however, is a sample of issues that should be -- but are not

6

Rep. Joe Barton has suggested that a substantially smaller fund of approximately $40 million annuallywould be adequate. See comments of Rep. Barton at a Hearing before the Telecommunications, Trade, andConsumer Protection Subcommittee of the House Committee on Commerce, March 31, 1998.

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FCC 98-67-- addressed in the report to Congress. The specific topics below answer, in part, one ormore of the questions the Commission is required to answer in its report to Congress.
I.

THE DEFINITION OF TELECOMMUNICATIONS -- FLOATING"UNSINKABLE" PROPOSALSIn the current report, the majority introduces vague proposals to increase the numberof entities that would be required to contribute to universal service. Not only are thesesuggestions -- each of which involves the Internet -- not based on a thorough record, they
are inherently premature given the FCC's inadequate treatment of broad universal service
policies and the nascent state of IP telephony. Further, each suggestion is problematic in its
own right; they have been floated, and now they will sink.
There is merit, of course, to the concern that the Internet could affect universal
service and our general regulatory policies. The FCC must, however, first develop a viable
plan for universal service and, then, work closely with Congress to implement long-term
public policy solutions that take the Internet into account.
Specifically, the FCC suggests that contributions could be collected from someproviders of so-called "phone-to-phone" IP telephony service and self-providers of Internet
backbone transmission capacity. These proposed "solutions," however, are mere band-aids
for a dying patient. I am concerned that such rules, could be technically infeasible, could
discourage further facilities build-out, and could seriously undermine our international
telecommunications policies.
Under one suggestion, the Commission implies that it would classify providers ofphone-to-phone IP telephony as telecommunications carriers. Such a regulatory framework
is not only artificial and fragile, but also exposes the futility of assessing fees on specificInternet content. Because this framework would be inconsistent with current treatment ofsimilar services, consumers and industry quickly would develop methods to avoid any newfees.
In the first place, the Commission's definitions of "phone-to-phone" IP telephony(which would be subject to the tax) and "computer-to-computer" IP telephony (which would
go tax-free) beg the question: what is a phone and what is a computer? On one hand, the
FCC suggests that the key criterion would be transparency to the consumer: if a consumer
believes he is using a phone and making a phone call, then it's a phone and he's making aphone call. This analysis ignores, however, the fact that devices that look and function like
telephones already are capable of converting voice to IP packets; a conversion that, under
the FCC's proposed framework, would make these devices "computers." In essence, thesenew "phones" are computers on the inside. But it is absurd to impute to consumers
knowledge of the technology inside CPE. Consumers buy for function, not internal
technology.
At base, the Commission's analysis hinges on where the conversion to IP packets
takes place. Neither can this construct withstand close scrutiny. A "conversion" already138Federal Communications Commission

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occurs in ordinary phones: sound energy is converted into electrical energy. In mostphones, the signal exiting the phone varies analogously to variations in the input sound. In
ISDN phones, the signal is further converted from an analog electrical signal into a PCM
encoded digital bit stream before being sent to the network. As noted above, it would be atrivial technical matter for a new breed of phones to convert the analog signals to IP
packets, instead of a PCM encoded digital bit stream. Such phones could look like and, forthe consumer, behave exactly like ordinary ISDN telephones. Under the FCC's definition,
however, these new IP packet devices would be "computers."
Thus, if it emits a PCM encoded digital bit stream, it's a phone and it's taxed; if itemits a stream of IP digital packets, it's a computer and it's not taxed.
The results of rules based on this framework are easy to predict. A new market for
IP phones will spring up and replace today's phone-to-phone IP telephony service, which
relies on remote "gateways" to make the voice-to-IP conversion. The proposed rules simply
would force the conversion to IP packets further out in the network, from a limited numberof gateways to all CPE.
Are these results inherently bad? Perhaps not, if they had been reached throughconsumer choice in the market. Consumers simply would have spoken in favor of
distributed IP protocol conversion in much the same way they spoke in favor of distributed
computing a decade ago. But in this case, arbitrary FCC policy and regulatory fiat, notconsumer choice, would control.
The majority also suggests that the FCC might require universal service
contributions from ISPs that build their own backbone facilities. The Commission,
however, has questionable statutory authority to reach this result. The Act says that only
"telecommunications carriers" or "other providers of interstate telecommunications" may berequired to contribute, but ISPs -- which are not carriers -- are not in the not in the businessof selling telecommunications capabilities to third parties and, thus, it is difficult tounderstand how they could be required to contribute.
From an international telecommunications perspective, assessing specifictelecommunications service fees on IP telephony would have severe consequences for ourinternational policy and market goals. Not only would we invite burdensome Internet
regulation from all over the world, we would destroy our most powerful weapon against
excessive settlement rates.
For over a year now, the United States has made it a matter of national policy toencourage other nations to eschew Internet regulation and taxation. Ira Magaziner, on
behalf of President Clinton, won broad bipartisan support for the report in which heconcluded that the Internet should remain free of such burdens. To introduce our own formof Internet regulation and fees at this point would be the height of hypocrisy and would set
a terrible precedent for other countries to follow.
Almost immediately, IP telephony would be eliminated as a competitor to foreign
telecommunications monopolies that hold international settlement rates so high in so many139

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countries. Like international call-back, IP telephony could have drive down costs much
faster than inter-government negotiations and would have been perhaps the best lever tobring rates down to benchmark levels. The United States sends billions of dollars abroad asa result of unfavorable international settlement rates. IP telephony could save American
rate-payers billions of dollars, possibly a significant portion of the size of a federal universal
service fund.
In sum, serious issues have been raised regarding the impact that Internet
applications have on public policy regulation that should be explored more fully. But the
majority's plans for IP telephony regulation would not be technically feasible, and would
have a serious detrimental effect on our international telecommunications agenda. Similarly
unfounded, the majority's plan to assess fees on the self-provisioning of capacity would
discourage transmission capacity build-out and would cause administrative burdens. I am
concerned that what motivates the majority to these conclusions is a desire to prevent
industries from "escaping their obligations" to be regulated. Majority Report, at 4. As I
have indicated elsewhere, concerns of competitive neutrality should urge us to further
deregulate the burdened industries already before us. This report is not a call for thisagency to slap its old regulations on new technologies but, rather -- as a matter of utmost
urgency -- to reevaluate seriously its universal service policies to meet all legal, policy, andtechnical requirements.
II.

IN ESTABLISHING THE CURRENT UNIVERSAL SERVICE STRUCTURE, THE
COMMISSION HAS FAILED TO MEET ITS STATUTORY MANDATE AND
HAS EXCEEDED ITS LEGAL AUTHORITY.

Under the 1996 Act, the Commission's primary universal service responsibility wasto establish an explicit and sufficient universal service fund for rural America. The
Commission's failure to establish such a fund while creating a complex administrative
structure for the schools and libraries and rural health care programs violated the Act's clear
focus and intent. Moreover, the Commission exceeded its legal authority by creating the
Schools and Libraries and Rural Health Care Corporations.
A. In their zeal to implement a new universal service program for schools andlibraries, the Commission failed to meet its statutory mandate of developing an
explicit and sufficient support system for rural and high cost telephone users in atimely manner.
Under the 1996 Act, the Commission's primary universal service responsibility was
to develop an "explicit and sufficient" support system that would ensure support for local
telephone users in high cost and rural areas to replace the complex system of implicit
subsidies that could exist in a world without local competition.7 The expeditious creation ofa new subsidy system was not only critical for preserving the goals of universal service, but

7

See 47 USC 254(e) (establishing that universal service support devised by the Commission "should be
explicit and sufficient to achieve the purposes of this section.")140

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also necessary to provide for a fair transition to competition in the local markets. As such,
Congress set a strict time-frame for developing this plan -- the Joint Board was required tomake a recommendation within 9 months of enactment, and the Commission was thenrequired to complete its "proceeding to implement the recommendations" within 15 months
after enactment.8
Despite this strict timetable, the Commission decided it needed further time toaddress this aspect of universal service. The Commission needed more time to develop
complex models and complicated plans to provide federal support, postponing until January
1, 1999, the start of any new subsidy system. In so doing, the Commission also failed tomake explicit all implicit support. Indeed, in this proceeding, the majority now refer to theCommission's somewhat arbitrary decision to provide federal support for only 25% of costs
as merely a "placeholder" and announce their intention to initiate a new proceeding, seeking
additional proposals and comments on alternatives to the 25/75 high cost regime. I support
the Commission's acknowledgement that this placeholder, and the accompanying complex
modeling process in which we have been engaged, is not tenable. I also support
reexamining these issues. But I fault the majority for failing to acknowledge that the priorCommission's adoption of this mere "placeholder" and the ensuing commitment of thisCommission to continue to work with the states to develop a plan and our openness to new
options more than two years after the passage of the Act was not what Congress envisionedor required. Rather, Congress intended -- and the 1996 Act required -- the Commission to
focus their efforts on resolving this problem first, as opposed to finding sufficient support
for new programs.
Indeed, this problem has only been made worse by the Commission's emphasis onother pieces of the universal service puzzle. It would be bad enough if the FCC had simply
failed to address all universal service issues in the time frame required by Congress. But
instead, the Commission has addressed some universal service issues but not others, andcertainly not the pieces of universal service that were of primary concern to Congress. For
example, the Commission has earmarked $2.25 billion for the new schools and libraries
program and has ensured that that program start at the "earliest feasible date."9 In contrast,
the FCC has yet to finalize new rules addressing the larger and more complicated universal
service program for all high-cost areas.
By implementing these entirely new programs before establishing the explicit
support mechanisms, the Commission has increased the pressure on the current implicit
subsidy system without justification. I believe that the Commission's desire to establish theschools and libraries program, but not the other aspects of universal service, as quickly as
possible was at best arbitrary. While having certain political benefits, it was certainly notwhat the 1996 Act required or what Congress intended.

8

47 USC section 254(a)(2).

9Chairman Kennard's response to Chairman Bliley, December 3, 1997.

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In effect, I believe that the Commission may have "put the cart before the horse" byfailing to address the rural, high cost issues in a timely manner. The failure of theCommission to address these high cost issues may also have adverse market effects. By
failing to make all subsidies explicit, the Commission continues to hinder the developmentof local competition. Moreover, to the extent that competition in the local markets erodes
the implicit state subsidies prior to the Commission implementing a final universal service
fund, it will place unintended additional pressure on some local rates.
In that vein, I also remain concerned that some of the actions that the Commission
has taken have not only failed to address the rural, high cost issues, but may have may havethreatened the integrity of the high cost fund. In responding to the first two quarters
contribution rates, I objected to the Commission's continued failure to take into account thereality of uncollectibles. Since the first of the year, the Universal Service Administrative
Company ("USAC") has had difficulty collecting all of its billed amounts for universal
service. In a memorandum to the USAC Board of Directors dated February 24, 1998, Ed
English, USAC Secretary and Treasurer estimated that, based on collections received
through February 23, 1998, there was a shortfall for the high cost fund distribution to bemade on Friday, February 27, 1998, in excess of $10,000,000.10 This shortfall was
primarily due to some instances of nonpayment and the Common Carrier Bureau's decision
last December to reduce the estimate of uncollectibles to zero. USAC originally
recommended, and the contribution factors initially set forth in the Common Carrier
Bureau's November 13 Public Notice included, an adjustment for possible uncollectible
contributions. Such a minor adjustment was reasonable for these new programs. The final
Order released December 16, 1997, however, included no adjustments for uncollectibles.
Despite the fact that the First Quarter has had total uncollectibles in excess of $12 million,
the Bureau's Second Quarter recommendations followed the December First Quarter Orderthat expressly "includ[ed] no adjustments for uncollectibles."Why would the Commission continue with this fallacy of 0% uncollectibles?
Because the reduction of uncollectibles to zero was part of a larger scheme by theCommission to "reduce the [universal service] charges after the carriers said the fee could
lead to higher rates and after AT&T and MCI threatened to specify the charge on the bills
they send to customers."11 I am concerned that, in the Commission's zeal to implement theschools and libraries program on January 1, 1998, despite specific Congressional requests
that we delay commencement until the impact of our actions could be more fully assessed,
the Commission has taken actions that have adversely impacted the high cost fund.
In conclusion, I would agree with one recent commentator who observed, that, theCommission "should set a majority of the universal service funds aside for furnishing basic
telephone service to areas of high cost and poverty. It is more important for all Americans

10

Later estimates placed the shortfall for the high cost fund at closer to $5 million.

11

Fund to Aid Technology in Schools Facing Big FCC Cuts, New York Times, December 15, 1997 at

D-1.

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to have access to basic telephone services than for a student to have limited Internet
capabilities."12
B. The Commission exceeded its legal authority and the intent of Congress bycreating the Schools and Libraries and Rural Health Care Corporations.
On February 10th, 1997 in response to a request from Senator Stevens, the General
Accounting Office ("GAO") released an analysis of the Commission's actions in establishing
the Schools and Libraries and Rural Health Care Corporations.13 GAO concluded that theCommission lacked the statutory authority to create these corporations and that, by requiring
NECA to establish these corporations without specific statutory authority, the Commission
violated the procedural requirements of the Government Corporation Control Act.
The Government Corporation Control Act requires that agencies have specificlegislative authority in order to "establish or acquire" a corporation to act as an agent. The
purpose of this requirement was to restrict the creation of all government-controlled, policyimplementing corporations.14 According to GAO, the legislative history indicates that
Congress was attempting to make all such corporations more accountable.15
There can be little doubt that the schools and libraries and rural health care entities
act as agents for and at the direction of the Commission. The Commission ordered thatthese entities be created and established their specific purpose; the Chairman of theCommission selects or approves the entities' boards of directors; the size and composition of
the board and the terms of office for its members are set by the Commission; the FCC
Chairman must approve the removal of any director as well as a resolution to dissolve thecorporations; the CEO must be approved by the Chairman; and the authority to enter into
contracts must be in compliance with Commission rules.
The Commission unsuccessfully attempted to persuade GAO that it did not actuallycreate these corporations, but merely directed another entity to do so pursuant to its generalauthority under section 4(i) of the Act. As GAO concluded, however, "the Control Act's
requirements cannot be avoided by directing another entity to act as incorporator."16
Moreover, I would point out that it is this type of expansive reading of section 4(i) that
seems to lead this Commission astray from its clear statutory duties and limitations. If
12Christine Mason, "Universal Service in the Schools: One Step too Far?" 50 Fed. Comm. L. J. 1, at
252 (1997).
13

Letter from Robert P. Murphey, General Counsel, United States General Accounting Office, to The
Honorable Ted Stevens, United States Senate, February 10, 1998.
14

Lebron v. National Railroad Passenger Corporation, 513 US 374 (1995).

15

GAO Report at 6-7.

16

Statement of Robert Murphey, General Counsel of GAO, Before the Subcommittee on
Telecommunications, Trade and consumer Protection, Committee on Commerce, House of Representatives,
March 31, 1998.

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section 4(i) provided such a general exemption from the Control Act, then what limitations
on the Commission's authority would the Control Act provide -- or could the Commission
merely delegate any of its functions to a separate corporation without explicit Congressional
approval?
Finally, GAO also noted that, as private corporations, these entities are not subject tothe types of federal obligations imposed on other entities in such areas as employment
practices, procurement and contracting, lobbying and political activities, ethics, and thedisclosure of public information. If these entities had been authorized by statute, Congress
would have had the opportunity to specify which federal laws should apply. But, without
such an opportunity, Congress has no direct oversight over these corporations.17 It was justthis type of lack of accountability that lead Congress to enact the Control Act. Recently,
the House Judiciary Committee also expressed its concerns about whether the corporations
were established legally, and whether the administration of these programs "raises questionsof accountability."18
In addition, a revised administrative structure would be administratively more
efficient. In the most recent Public Notice announcing the Second Quarter contribution
factors, the Commission also released the administrative expenses proposed by the USAC,
the Schools and Libraries Corporation ("SLC") and the Rural Health Care Corporation("RHCC"). In objecting to the December Contribution Order, I noted that in the firstquarter SLC and RHCC "were each allocated more than twice as much money to administercertain aspects of those support mechanisms than is allocated to administer the substantiallylarger high cost fund." In the current Notice, this disparity continues to grow, with the SLC
being allocated almost four times as much money for administrative expenses. Indeed, the
SLC's administrative budget increases from $2.7 million to $4.4 million or by 65% in justone quarter. This change is the equivalent of an additional $18,000 every day for the next
90 days. I cannot endorse this disparity, or this magnitude, while knowing that manymembers of Congress are equally concerned with high cost areas as with schools andlibraries and rural health care.
In conclusion, I believe that the Commission should have acknowledged alreadythese problems with its current administrative structure and moved to restructure theadministration of universal service to comply with the law.
C. To the extent that the universal service program is requiring contributions basedon telecommunications service revenues but using the funds raised to provide
support for non-telecommunications services (i.e. inside wiring and internet services),17

It is also unclear to what extent the Commission even has direct oversight over these corporations.
For example, in response to questions before the House Telecommunications Subcommittee, it was unclear
whether or not the Commission had authority to approve -- and also disapprove -- of these entities budgets
including the salaries of specific positions. See Transcript of Hearing before the Telecommunications, Trade,
and Consumer Protection Subcommittee of the House Committee on Commerce, March 31, 1998.
18

Letter from Members of the Judiciary Committee's Subcommittee on Commercial and Administrative
Law to Chairman Bliley, March 31, 1998.

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the Commission has established a fee to promote the general welfare (i.e. a "tax")
and in so doing has exceeded its legal authority.
I am concerned that the universal service contributions, at least to the extent they areproviding support for non-telecommunications services, may not even be fairly characterized
as mere "fees." In general, taxes can be distinguished from administrative fees by thedetermining who is the recipient of the ultimate benefit. Taxes are levied in disregard of
the benefits they may bestow on the taxpayer. As the Supreme Court has held, and the
D.C. Circuit has further explained, a "fee" is a payment "incident to a voluntary act, e.g., arequest that a public agency permit an applicant to practice law or medicine or construct ahouse or run a broadcast station. The public agency performing those services normally
may exact a fee for a grant which, presumably, bestows a benefit on the applicant, notshared by other members of society."19
To the extent that the telephone network can be considered a single
telecommunications system, all users benefit from that system being capable of serving
others. What good is it to be able to make calls if no one can receive them? There are nosuch direct benefits to telephone customers, however, from the provision of Internet services
to and inside wiring of schools and libraries. With respect to the schools and libraries
program, the funds raised may be used to support general services that are not classified as
telecommunications. Given the lack of a quid pro quo between the service providers andthe Government in the context of universal service, there may not be a "sufficient nexus
between the agency service for which the fee is charged and the individuals who areassessed."20 In addition, these contributions do not meet the traditional definition of a fee
because they are premised not on the use of some identifiable government service but rather
purely on ability to pay. According to the Supreme Court, taxation is marked by thecalculation of liability "solely on ability to pay, based on property or income."21 Here, ofcourse, the contribution amounts are based entirely on revenues. In addition, because they
are not related to any benefits conferred, they carry the Commission "far from its customary
orbit and puts it in search of revenue in the manner of an Appropriations Committee of theHouse."2219

National Cable TV Ass'n v. United States, 415 U.S. 336, 340-41 (1974)(construing Independent
Offices Appropriations Act); see also National Cable TV Ass'n v. FCC, 554 F.2d 1094, 1106 & n.42 (D.C.
Cir. 1976) ("A 'fee' is a payment for a special privilege or service rendered, and not a revenue measure.")(citing cases).
20

National Cable TV Ass'n v. FCC, 554 F.2d at 1104.

21

National Cable TV Ass'n v. United States, 415 U.S. at 340; see also National Cable TV Ass'n v. FCC,
554 F.2d at 1107 ("[A] fee, in order not to be a tax, cannot be justified by the revenues received. . . .").
22

National Cable TV Ass'n v. United States, 415 U.S. at 341.

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The Supreme Court has stated that only Congress may levy taxes.23 I agree with theconcerns recently expressed by several members of the House Judiciary Committee that
Congress retain "direct authority over and responsibility for any tax burden on the public."24
III.

THE COMMISSION ERRED BY ALLOWING UNIVERSAL SERVICE SUPPORTTO BE PROVIDED FOR NON-TELECOMMUNICATIONS SERVICES AND TO
NON-TELECOMMUNICATIONS CARRIERS.

The majority's opinion affirms the prior Commission's finding that, under the Act,
direct financial support can be provided for non-telecommunications services, such as insidewiring and Internet service. Such an interpretation is at odds with the clear reading of thestatute. The 1996 Act defines universal service in general as "an evolving level oftelecommunicationsservices."25 Although subsection c(3) does allow the Commission to
designate additional special services for support to schools and libraries, that provision isstill limited by the overriding definition of c(1). Moreover, subsection c(3) expressly limits
these additional designations as only applicable "for the purposes of subsection (h)."26 As
subsection (h) is itself entitled "Telecommunications Services For Certain Providers,"27 theAct's intention to limit universal service discounts to some form of telecommunications
service seems self-evident.28 In addition, one of the fundamental principles that Congress
identified as necessary for the preservation of universal service was "Access to Advanced
Telecommunications Services for Schools, Health Care, and Libraries."29 Thus the clearest
reading of the statute is that Congress intended that the subsequent reference to "services"in section 254(c)(3) refers to the general reference to "telecommunications service" in b(6),c(1) and (h).30

23

See National Cable TV v. United States, 415 U.S. at 340 ("Taxation is a legislative function, andCongress . . . is the sole organ for levying taxes."); see also Air Transport Ass'n of America v. Civil
Aeronautics Board, 732 F.2d 219, 220 (D.C. Cir. 1984)("[T]axes . . . generally may be levied only by
Congress.").
24

Letter from Members of the Judiciary Committee's Subcommittee on Commercial and Administrative
Law to Chairman Bliley, March 31, 1998.
25

47 USC 254(c)(1) (emphasis added).

26

47 USC section 254(c)(3).

27

47 USC section 254(h).

28See, United States v. Wallington, 889 F.2d 573, 577 (5th Cir. 1989) ("section heading enacted by
Congress in conjunction with statutory text is considered to `come up with the statute's clear and total
meaning.'") (citations omitted).
29

47 USC section 254(b)(6).

30

See also, 47 USC 254(c)(1) ("The Joint Board in recommending, and the Commission inestablishing, the definition of the services that are supported by Federal universal service support mechanisms
shall consider the extent to which such telecommunications services . . .")146

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I acknowledge that the definition of universal service for schools and libraries isbroader pursuant to section c(3) than for other aspects of universal service. But even thisbroader definition must still come within the rubric of telecommunicationsservices. Thus,
for example, the Commission could designate ISDN lines or other types of advanced
telecommunications facilities that include expanded bandwidth as a telecommunications
service that would not qualify for general universal service support, but might come within
the special telecommunications services contemplated by Congress for schools and libraries
under section (c)(3).
In addition, limiting the Commission's discount program to telecommunications
services is consistent with Commission regulatory precedent. Internal connections are
owned and maintained by the customer -- the telecommunications carrier is not responsible
for them. The Commission has previously indicated that such internal connections are nottelecommunications services and deregulated these facilities -- including their purchase,
installation, and maintenance.31 Similarly, as I discussed earlier, Internet access has been
traditionally treated as an information service by the Commission.
Similarly, the Commission erred by allowing non-telecommunications carrier toreceive support payments from the discount program established under sections 254(h)(1)(B)and 254(h)(2). The Commission's decision violates the plain language of the statute.
Section 254(h)(1)(B) unambiguously states that "a telecommunications carrier providing
service under this paragraph shall . . ." offset the discount from their universal service
contribution obligation or receive reimbursement.32 Thus, Congress expressly specified that
only telecommunications carriers could receive support for providing discounted services toschools and libraries. Some have argued that not allowing other entities who can provide asimilar service to receive support is inequitable. Congress explicitly adopted this
distinction, however, and for good reason -- because Congress only obligatedtelecommunications providers to contribute to the discounted service program in the firstplace.
The majority also argues that the competitive neutrality demands of 254(h)(2), alongwith section 4(i), require that the Commission allow non-telecommunications carriers toreceive support. There are several problems with this argument. First, typical statutory
construction requires that specific directions in a statute trump any general admonitions.
Section 254(h)(1)(B) expressly limits recipients of the schools and libraries fund totelecommunications carriers, and as it is more specific than 254(h)(2) it direction shouldtake precedence. In addition, the provisions of section 254(e) -- which require that only
eligible telecommunications carriers be able to receive federal universal service support -apply fully to section 254(h)(2). Thus, the requirements for being able to receive funds in

31

See, Detariffing Customer Premises Equipment and Customer Provided Cable/Wiring, 48 Fed. Reg.
50534 (FCC 1983); Detariffing and the Installation and Maintenance of Inside Wiring, 51 Fed. Reg. 8498
(FCC 1986), recon. 3 FCC Rcd. 1719 (1988). See also, NARUC v. FCC, 880 f.2d 422 (D.C. Cir. 1989).
32

47 USC section 254 (h)(1)(B).

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conjunction with section 254(h)(2) are actually stricter -- a recipient would have to be
designated an eligible telecommunications carrier.
In addition, the majority argues that reading section 254(e) to limit section 254(h)(2),
when it does not apply to section 254(h)(1)(B), appears inconsistent with the relative
directives of those provisions. The majority further argues that to "allow support forInternet access and internal connections only when provided by a telecommunications
carrier would reduce the sources from which schools and libraries could obtain these
services at a discount." However, the majority's entire competitive neutrality argument isbuilt upon a misreading of section 254(h)(2)(a)'s mandate. That provision permits theCommission to establish competitively neutral rules "to enhance, to the extent technicallyfeasible and economically reasonable, access to advanced telecommunications andinformation services."33 It does not provide for an explicit discount program like the one
envisioned in section 254(h)(1)(B). Indeed, if both provisions were meant to establish asingle discount program for both telecommunications and non-telecommunications providers
for telecommunications and non-telecommunications services, Congress would not havedifferentiated between the two. Instead, Congress specifically provided for something lessthan a discount program -- competitively neutral rules for enhanced access -- in section
254(h)(2)(A).
IV.

IN ESTABLISHING THE REVENUE BASE FOR CONTRIBUTIONS TO THE
UNIVERSAL SERVICE FUND AND DICTATING THE DISCOUNT RATE, THE
COMMISSION IMPERMISSIBLY ENCROACHED ON STATES' RIGHTS ANDOBLIGATIONS.

Section 2(b) of the Communications Act creates a system of dual federal-state
regulation for telecommunications. In essence, the Act establishes federal authority overinterstate communications services while protecting state jurisdiction over intrastate services.
I believe that the Commission's decision to look to intrastate revenues to determine federal
universal service support and to establish a minimum discount for intrastate
telecommunications services for schools and libraries impermissibly encroaches on state's
rights and violates the Act's federal-state dichotomy.
A.

The Commission erred in assessing contributions to the schools and libraries
and rural health care programs based on intrastate revenues because any
federal assessment on intrastate revenues is beyond the Commission's
authority.

I object to the majority's decision to endorse the disparate funding of schools andlibraries over the high cost fund. I cannot support the fact that the contributions for theschools, libraries, and rural health care support mechanisms are based not only on interstate
but also on intrastate revenues. The legality of this approach to calculating contributions ishighly questionable. As I read the Communications Act, it does not permit the Commission
to assess contributions for universal service support mechanisms based on intrastate33

47 USC section 254(h)(2)(A).

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revenues. Rather, the Act makes clear that charges based on such revenues are within the
exclusive province of the States.
In the Communications Act, Congress explicitly set forth a jurisdictional principle togovern its application. Section 2(b) of the Act provides that "nothing in this Act shall be
construed to apply or to give the Commission jurisdiction with respect to . . . charges,
classifications, practices, services, facilities, or regulations for or in connection withintrastate communication service by wire or radio of any carrier."34 The Supreme Court has
explained that by this section the Act "not only imposes jurisdictional limits on the powerof a federal agency, but also . . . provides its own rule of statutory construction."35
By "fenc[ing] off from FCC reach or regulation intrastate matters,"36 section
2(b)works, together with other provisions, to establish the Act's system of dual federal-state
regulation for telecommunications. In essence, the Act creates federal authority overinterstate communications services while protecting state jurisdiction over intrastateservices.37 To be sure, there are exceptions to section 2(b)'s jurisdictional limitation.38
These exceptions are explicit. Section 254, however, is not included in that group andnothing else in the Act exempts section 254 from the operations of 2(b).39 The statutory
prohibition against federal jurisdiction over intrastate communications thus fully applies tosection 254.
The Supreme Court has squarely held that the specific limit on the Commission's
jurisdiction contained in section 2(b) trumps other parts of the Act that confer
undifferentiated grants of substantive authority to the Commission. In Louisiana PSC v.
FCC, the Commission argued that, notwithstanding section 2(b), it could require states tofollow federal depreciation rules for purposes of intrastate ratemaking because section 220
authorized the Commission to set depreciation rates and did not expressly prohibit theapplication of such rates to intrastate pricing.

34

47 U.S.C. section 152(b)(emphasis added).

35

Louisiana PSC v. FCC, 476 U.S. 355, 377 n.5 (1986).

36

Id. at 370.

37

See id., at 359 (internal citations omitted) ("[T]he Act grants to the FCC the authority to regulate'interstate and foreign commerce in wire and radio communication' while expressly denying that agency'jurisdiction with respect to . . . intrastate communications service.").
38

See 47 U.S.C. section 152(b) ("Except as provided in sections 223 through 227, inclusive, and section
332, and subject to the provisions of section 301 and title VI . . .").
39

In fact, as the dissenting state members of the Joint Board explained, Congress considered and rejectedlanguage that would have added section 254 and neighboring provisions to the list of exceptions to 2(b). See
Dissenting Statement of Commissioners Kenneth McClure, Missouri Public Service Commission and Laska
Schoenfelder, South Dakota Public Utilities Commission, April 21, 1997, at 2.

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The Court disagreed. It ruled that the Commission was powerless to extend its rules
into the intrastate context: "While it is, no doubt, possible to find some support in the broad
language of the [depreciation provision] for [the Commission's] position, we do not find themeaning of the section so unambiguous or straightforward as to override the command ofsection 152(b) that 'nothing in this chapter shall be construed to apply to or give theCommission jurisdiction' over intrastate service."40
The analogy to this situation is clear. Just as section 220's general grant of authority
over depreciation rates did not empower the Commission to regulate intrastate aspects ofdepreciation, neither does section 254's authorization to establish a universal service fundallow the Commission to assert jurisdiction over intrastate revenues in implementing that
fund. In short, it is irrelevant, under Louisiana PSC, that section 254 does not itself forbid
the Commission from reaching into matters relating to intrastate service. That is why
Congress included section 2(b) in the Act.
Nothing in section 254 of the Act, the provision that deals with the substance ofuniversal service, trumps the express limitation on the Commission's authority in section
2(b). Quite the contrary, section 254 replicates the general scheme of dual federal-state
power that characterizes the Act as a whole.
Section 254(d) speaks to federal authority over universal service, authorizing theCommission to establish a federal universal service fund subsidized by interstate carriers:"Every telecommunications carrier that provides interstate telecommunications services shallcontribute on an equitable and nondiscriminatory basis, to the specific, predictable, andsufficient mechanisms established by the Commission to preserve and advance universal
service."41 Section 254(f), in turn, addresses the role of the states in universal service. It
carefully preserves state authority to create support mechanisms not inconsistent with any
federal program and leaves to the states the regulation of intrastate carriers: "Every
telecommunications carrier that provides intrastate telecommunications services shallcontribute, on an equitable and nondiscriminatory basis, in a manner determined by theState to the preservation and advancement of universal service in that State."42 Both thelanguage and the structure of sections 254(d) and 254(f) clearly indicate that Congress
intended that both federal and state governments have complementary, but separate, roles inproviding universal service.
This view of dual federal and state roles is further supported by section 254(h). That
provision expressly provides states with the responsibility of determining the rates schools
and libraries would pay for discounted intrastate services: "The discount shall be an amountthat the Commission, with respect to interstate services, and the States, with respect tointrastate services, determine is appropriate and necessary to ensure affordable access to and40

Louisiana PSC v. FCC, 476 U.S. at 377.

41

47 U.S.C. section 254(d).

42

Id. section 254(f).

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use of such services by such entities."43 Section 254(h) provides no specific authority tooverturn section 2(b)'s general federal-state division; nor does it contemplate a separate
federal fund that draws on intrastate revenue. Rather, 254(h) indicates that Congressenvisioned a separate state fund, which must draw on intrastate revenues, to provide thediscounted rates for intrastate telecommunications services to schools and libraries.44
Nowhere in section 254 did Congress require carriers providing intrastate services tocontribute to any federal support mechanism. Thus, section 254, read in light of the express
directive of section 2(b), precludes the Commission from asserting jurisdiction overrevenues based on intrastate activities. Although section 254 does not explicitly prohibit
the Commission from calculating the contributions of interstate service providers based on
intrastate revenues, such a practice would undermine the dual scheme established in section
254 and, in any event, violate section 2(b).
The assertion of federal authority over intrastate revenues impinges upon the states'
ability to establish their own universal service funds, which Congress expressly provided forin section 254(f) and envisioned in Section 254(h). If the federal government has first rights
to intrastate revenues, there will be a smaller pool of resources for the states to draw uponin establishing their own universal service programs. Although in theory federal and state
regulatory bodies could tax away all intrastate revenues in order to support universal
service, the reality is that the amount of intrastate revenue that can be allocated for thispurpose is limited. When Congress went to the trouble to authorize state universal service
plans, it clearly meant for those plans to be fiscally viable and, therefore, to have an
independent funding base.
Conversely, as long as the federal program applies to intrastate revenues, any stateplan that relies on that source of funding would violate section 254(f). That section
requires that state plans cannot "rely on or burden federal universal service mechanisms."
Surely Congress did not mean to prohibit states from drawing on intrastate revenue; indeed,
they expressly authorized it in Section 254(f). But as long as there is overlap between
funding sources for federal and state service plans, any state plan interferes with one of thefederal sources of revenue, thus "burdening" the federal mechanisms. Limiting theCommission to interstate revenues and eliminating the overlap, however, solves thisproblem.
Apart from undermining the purpose of section 254 to allow for viable state plansthat complement federal universal service efforts, as described above, the Commission's
exercise of jurisdiction over intrastate revenues contravenes the plain language of section
2(b).

43

47 U.S.C. section 254(h).

44Section 254(k) similarly provides an express division of authority between "the Commission, with respect
to interstate services, and the States, with respect to intrastate services" regarding cost allocation rules andaccounting safeguards. 47 U.S.C. section 254(k).

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B.

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The Commission's decision to assess contributions to the schools and libraries
and rural health care programs based on intrastate revenues, but allow
recovery only on interstate services, is also in error as it fails to meet theCommission's mandate of equity and nondiscrimination.

In addition, I believe that the manner in which the FCC has implemented theseprovisions violates the statutory requirement that the funding mechanisms for universal
service be equitable and nondiscriminatory. Section 254(b)(4) embodies the generalprinciple that contributions to universal service must be equitable and nondiscriminatory.
But the federal assessment of intrastate revenues creates a competitive disadvantage forinterstate telecommunications carriers that provide intrastate services. It does so in two
ways.
First, these carriers also compete, in local markets, against purely intrastate carriers.
The interstate carriers, however, are forced to pay more in universal service fees because
they have federal obligations that their intrastate competitors do not. As the dissenting state
members of the Joint Board explained, "a carrier with intrastate revenues of a billion dollars
a year would be subject to no federal USF assessment at all, while a carrier with
$999,999,999.00 of intrastate revenue and one dollar of interstate revenue would be subject
to assessment for the whole billion dollars of its revenue."45
In addition, the carriers that have both interstate and intrastate revenues are also at acompetitive disadvantage vis-a-vis their purely interstate competitors. While theCommission bases the universal service contribution on both interstate and intrastaterevenues, it limits a carrier to recovering the entire contribution through interstate revenues.
As it has no jurisdiction over intrastate rates, the Commission cannot ensure that carriers
would be able to recover the intrastate portion of the contribution in their intrastate rates.
Thus, a carrier is required to recover assessments on its intrastate revenues in its prices forinterstate services. This recovery mechanism discriminates against carriers who derive asignificant amount of their revenues from intrastate activities, as their recovery rates forinterstate services would be higher than their purely interstate counterparts.
Thus, the scheme that the FCC has established adversely effects the ability ofinterstate providers of intrastate services to compete with purely intrastate providers andwith purely interstate providers. Such disparities cannot meet the section 254 requirementsthat contributions to universal service be equitable and nondiscriminatory.
In conclusion, I reiterate my support for the need to find funding sufficient tosupport the federal universal service fund. I recognize that respecting State authority overintrastate revenues may make this responsibility more difficult; the ends, however, cannot
justify the means.

45

Dissenting Statement of Commissioners Kenneth McClure, Missouri Public Service Commission andLaska Schoenfelder, South Dakota Public Utilities Commission, April 21, 1997.

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C.

FCC 98-67

The Commission impermissibly encroached on the rights of states to set
discounts for intrastate telecommunications services.

Section 251(h)(1)(B) unambiguously places the role of establishing discounts for
eligible intrastate telecommunications services in the hands of the states:
The discount shall be an amount that . . . the States, with respect to intrastateservices, determine is appropriate and necessary to ensure affordable access toand use of such services by such entities.46
Congress plainly envisioned the continued federal-state jurisdictional divide embodied in
section 2(b) to be followed in establishing discount rates for telecommunications services toschools and libraries. Never the less, the Commission has mandated a particular discountthat states are required to adopt.
In the May 7, 1997, Order, the previous Commission required "states to establish
intrastate discounts at least equal to the discounts on interstate services as a condition offederal universal service support for schools and libraries in that state."47 Section 254 does
not provide this Commission with such express authority. Indeed, the explicit language ofthe statute reserves this authority to the states. Moreover, such a reservation of stateauthority to establish intrastate discounts is the best policy, for it is the states, not
Washington bureaucrats, who are in the best position to determine what discounts areneeded to address each state's educational needs and goals.
I believe the previous Commission acted illegally in coercing states into adopting afederal discount schedule and would have redressed that issue here. I would favor allowing
states to exercise the authority Congress clearly provided to them.
V.

THE COMMISSION ERRED IN ESTABLISHING A PROCESS THATINEVITABLY LED TO THE ISSUE OF A 25/75 SPLIT FOR THE PERCENTAGE
OF FEDERAL FUNDING.

Neither Section 254 nor Section 214 requires the Commission to establish a national
cost model for high-cost support. Such a model inescapably invites the question of who
should cover those costs: local customers, state universal service mechanisms, or federal
universal service mechanisms. As long as a national cost model remains the central
analytical tool for high-cost support under Section 254, disputes will arise about
responsibilities for covering those costs. Any allocation of those costs to the federal
government not covered by local consumers is inherently arbitrary, whether 25 percent, 100
percent, or 0 percent.

46

47 U.S.C. section 251(h)(1)(B).

47

Universal Service Order at Para. 550.

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These allocation disputes are in addition to the unending debate about whether andwhat form of forward-looking cost assumptions to use. Costs models are simply estimatesand approximations of actual costs. Cost models are useful tools for many purposes, but I
am deeply concerned about relying on such models as the primary, if not only, basis toallocate federal universal service funds. Models may approximate accurately the costs ofservice for the vast majority of Americans, but approximate poorly for Americans living in
unusual, low-density, geographic areas. Yet it is precisely the unusual circumstances -- thetundra of Alaska, the bayous of Louisiana, the remote reaches of Montana and North
Dakota, -- that may most likely require universal service support.
A better starting basis for federal high-cost, universal support may well be past
specific federal universal support. Past support may not have been perfect or efficient;indeed, it may well have been arbitrary. But past support has, in its own way, worked
quietly and well. The current Commission order starts with past support as a safety net, but
only for a few years after which all carriers are to be placed on a national model with all of
the associated allocation disputes. Past support need not and should not last into perpetuity
independent of changed circumstances of technology, markets, and competition. But carriers
may reasonably seek greater certainty than is currently offered by an impending end ofcurrent support to be replaced by cost models and allocation schemes shrouded in mystery,legal risks, and financial uncertainty.
I am also concerned that the prior Commission's decision to limit federal support to
25% is insufficiently supported. As I have stated earlier, one of the guiding principles inany universal service reform is that all states should be held harmless -- i.e., no state should
receive less from the new universal service plan than it currently receives in support fromthe High Cost Fund and implicit subsidies in access charges. At least in somecircumstances, however, there may be states that receive significantly higher than the 25%of federal support the Commission has committed to providing. Thus, by arbitrarily
limiting the federal funding mechanism without relating it on a state-by-state basis to theamount of funds currently received, the Commission has failed to meet its statutory mandatethat universal service funds be sufficient.
I believe the majority's opinion should have more fully addressed this issue. In
addition, we should have made sure that states understand that this Commission does not -and indeed in my opinion it cannot -- require them to rebalance or alter their local rates inany way prior to receiving additional federal universal service support.
Conclusion
The issuance of this report to Congress today is not the final chapter in thedevelopment of universal service. It is but an early chapter in a long book. It will takesome time to correct many of the anomalies that I have addressed here. In addition, theCommission will need to work more closely with Congress and the States. Perhaps the
Joint Universal Service Board needs to be reconvened to consider these issues in a timely
fashion; I support the request by the state members of the Joint Board to refer at least154

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certain designated issues back to that body for consideration. But, in whatever forum, I
look forward to working with my colleagues to preserve and to advance universal service inthe months and years ahead.

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