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/ Tuesday, January 13, 1998
[Federal Register: January 13, 1998 (Volume 63, Number 8)]
[Rules and Regulations]
[Page 2093-2133]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13ja98-24]
[[Page 2093]]
_______________________________________________________________________
Part IV
Federal Communications Commission
_______________________________________________________________________
47 CFR Parts 36, 54, and 69
Universal Service; Final Rule
[[Page 2094]]
FEDERAL COMMUNICATIONS COMMISSION
47 CFR Parts 36, 54, and 69
[CC Docket Nos. 96-45, 96-262, 94-1, 91-213, 95-72; FCC 97-420]
Universal Service
AGENCY: Federal Communications Commission.
ACTION: Final rule; petition for reconsideration.
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SUMMARY: The Fourth Order on Reconsideration and Report and Order
addresses issues that were raised in petitions for reconsideration of
the Universal Service Report and Order. The Fourth Reconsideration
Order also makes several technical corrections to the Commission's
universal service rules. In addition, the order clarifies or makes
further findings regarding: the rules governing the eligibility of
carriers and other providers of supported services; methods for
determining levels of universal service support for carriers in rural,
insular and high cost areas; support for low-income consumers; the
rules governing the receipt of universal service support under the
schools and libraries and rural health care programs; the
determinations of who must contribute to the new universal service
support mechanisms; and administration of the support mechanisms. The
intended effect of these rules is to implement the universal service
provisions of the Telecommunications Act of 1996.
DATES: Effective February 12, 1998.
FOR FURTHER INFORMATION CONTACT: Sheryl Todd, Common Carrier Bureau,
(202) 418-7400.
SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Fourth
Order on Reconsideration in CC Docket No. 96-45 and Report and Order in
CC Docket Nos. 96-45, 96-262, 94-1, 91-213, 95-72 (Fourth Order on
Reconsideration), adopted and released December 30, 1997. In addition,
the amendments to the Commission's rules reflect the changes included
in errata released December 3, 1997. The full text of the Fourth Order
on Reconsideration and the errata are available for inspection and
copying during normal business hours in the FCC Reference Center (Room
239), 1919 M St., NW, Washington, DC.
Pursuant to the Telecommunications Act of 1996, the Commission
released a Notice of Proposed Rulemaking and Order Establishing Joint
Board, Federal-State Joint Board on Universal Service, CC Docket No.
96-45 on March 8, 1996 (61 FR 10499, Mar. 14, 1996), a Recommended
Decision on November 8, 1996 (61 FR 63778, Dec. 2, 1996), a Public
Notice on November 18, 1996 (61 FR 63778, Dec. 2, 1996), and a Report
and Order that was adopted on May 7, 1997 and released on May 8, 1997
(62 FR 32862, June 17, 1997) implementing sections 254 and 214(e) of
the Act relating to universal service. The Commission released an Order
on Reconsideration on July 10, 1997 (62 FR 40742, July 30, 1997) and a
related Report and Order on July 18, 1997 (62 FR 41294, Aug. 1, 1997)
making certain modifications and additions to the Commission's
universal service rules. As required by the Regulatory Flexibility Act
(RFA) the Fourth Order on Reconsideration contains a Final Regulatory
Flexibility Analysis. Pursuant to section 604 of the RFA, the
Commission performed a comprehensive analysis of the Fourth Order on
Reconsideration with regard to small entities and small incumbent local
exchange carriers. The Fourth Order on Reconsideration also contains
new information collection requirements subject to the Paperwork
Reduction Act (PRA).
Summary of the Fourth Order on Reconsideration
I. Introduction
1. In the Telecommunications Act of 1996, Public Law No. 104-104,
110 Stat. 56 (the 1996 Act), Congress amended the Communications Act of
1934, 47 U.S.C. Secs. 151, et seq. (the Act), by, among other things,
adding a new section 254 to the Act. In section 254, Congress directed
the Commission and states to take the steps necessary to establish
support mechanisms to ensure the delivery of affordable
telecommunications service to all Americans, including low-income
consumers, eligible schools and libraries, and rural health care
providers. Specifically, Congress directed the Commission and the
states to devise methods to ensure that ``[c]onsumers in all regions of
the Nation, including low-income consumers and those in rural, insular,
and high cost areas * * * have access to telecommunications and
information services * * * at rates that are reasonably comparable to
rates charged for similar services in urban areas,'' 47 U.S.C.
Sec. 254(b)(3), and to ``establish competitively neutral rules * * * to
enhance, to the extent technically feasible and economically
reasonable, access to advanced telecommunications and information
services for all public and non-profit elementary and secondary school
classrooms, health care providers, and libraries,'' 47 U.S.C.
Sec. 254(h)(2)(A). On May 8, 1997, the Commission released the
Universal Service Report and Order, implementing section 254 of the Act
and establishing a universal service support system that becomes
effective on January 1, 1998 and that will be sustainable in an
increasingly competitive marketplace. See Federal-State Joint Board on
Universal Service, Report and Order, CC Docket No. 96-45, FCC 97-157,
12 FCC Rcd 8776 (rel. May 8, 1997) (62 FR 32862, June 17, 1997)
(Order).
2. In the Order, the Commission adopted rules that reflect
virtually all of the recommendations of the Federal-State Joint Board
on Universal Service and meet the four critical goals set forth for the
new universal service program: (1) that all of the universal service
objectives established by the Act, including those for low-income
individuals, for consumers in rural, insular, and high cost areas, and
for schools, libraries, and rural health care providers, be
implemented; (2) that rates for basic residential service be maintained
at affordable levels; (3) that universal service funding mechanisms be
explicit; and (4) that the benefits of competition be brought to as
many consumers as possible. Recognizing that, as circumstances change,
further Commission action may be needed to ensure that we create
sustainable and harmonious federal and state methods of continuously
fulfilling universal service goals, the Commission also committed
itself to work in close partnership with the states to create
complimentary federal and state universal service support mechanisms.
These efforts are ongoing.
3. Through the Order and the accompanying orders reforming the
Commission's access charge rules, the Commission established the
definition of services to be supported by federal universal service
support mechanisms and the specific timetable for implementation. The
Commission set in place rules that will identify and convert existing
federal universal service support in the interstate high cost fund, the
dial equipment minutes (DEM) weighting program, Long Term Support
(LTS), Lifeline, Link Up, and interstate access charges to explicit
competitively neutral federal universal service support mechanisms. The
Commission also modified the funding methods for the existing federal
universal service support mechanisms so that such support is not
generated, as at present, entirely through charges imposed on long
distance carriers. Instead, as the statute requires, equitable
[[Page 2095]]
and non-discriminatory contributions will be required from all
providers of interstate telecommunications service. The Commission took
other steps to make federal universal service support mechanisms
consistent with the development of local service competition, and
established a program to provide schools and libraries with discounts
on all commercially available telecommunications services, Internet
access, and internal connections. The Commission also established
mechanisms to provide support for telecommunications services for all
public and not-for-profit health care providers located in rural areas.
4. The Commission also named the National Exchange Carrier
Association (NECA) the temporary Administrator of the universal service
support mechanisms on the condition that NECA agree to make changes to
its governance that would render it more representative of non-
incumbent local exchange carrier (LEC) interests. As a condition of its
appointment as temporary Administrator, the Commission subsequently
directed NECA to establish the Universal Service Administrative Company
(USAC), an independently functioning subsidiary corporation that will
perform the billing, collection, and disbursement functions for all of
the universal service support mechanisms. See Changes to the Board of
Directors of the National Exchange Carrier Association, Inc. and
Federal-State Board on Universal Service, Report and Order and Second
Order on Reconsideration, CC Docket Nos. 97-21 and 96-45, FCC 97-253
(rel. July 18, 1997) (62 FR 41294, Aug. 1, 1997) (NECA Report and
Order). The Commission further directed NECA to create the Schools and
Libraries Corporation and Rural Health Care Corporation to perform all
functions associated with administering the schools and libraries and
rural health care programs, respectively, except those directly related
to billing and collecting universal service contributions and
disbursing support.
5. On July 10, 1997, the Commission released a reconsideration
order on its own motion in this proceeding. See Federal-State Joint
Board on Universal Service, Order on Reconsideration, CC Docket No. 96-
45, FCC 97-246 (rel. July 19, 1997) (62 FR 40742, July 30, 1997) (July
10 Order). Among other things, the July 10 Order (1) clarified certain
issues relating to contracts for services to schools and libraries; (2)
modified the formula for recovery of corporate operations expense from
high loop cost support mechanisms; and (3) clarified issues concerning
coordination between the Commission staff and the state staff of the
Joint Board in CC Docket No. 96-45 in implementing the new monitoring
program.
6. Sixty-one parties have filed petitions for reconsideration and/
or clarification of the Order and the July 10 Order. In this Fourth
Order on Reconsideration, we address issues raised by petitioners that
either must or should be addressed before the new universal service
program begins. We will address the remaining issues in one or more
subsequent reconsideration orders in this docket.
7. In this order, we clarify or make further findings regarding:
(1) the rules governing the eligibility of carriers and other providers
of supported services; (2) methods for determining levels of universal
service support for carriers in rural, insular and high cost areas; (3)
support for low-income consumers; (4) the rules governing the receipt
of universal service support under the schools and libraries and rural
health care programs; (5) the determinations of who must contribute to
the new universal service support mechanisms; and (6) administration of
the support mechanisms.
II. Definition of Universal Service: Services That Are Eligible for
Support
A. Local Calling Provided by Satellite Companies
8. We grant AMSC's request and conclude that calls to and from a
satellite company's fixed-site subscribers, for which such subscribers
pay a non-distance and non-usage sensitive rate, constitute local
calling for purposes of determining whether a carrier is eligible for
federal universal service support. We find that, consistent with the
principles of competitive and technological neutrality established in
the Order, non-landline telecommunications providers should be eligible
to receive universal service support even though their local calls are
completed via satellite. We conclude that any call for which a
satellite company's subscribers are not charged on a distance- or
usage-sensitive basis constitutes a local call.
B. Provision of E911 by MSS Providers
9. In response to AMSC's petition, we clarify that MSS providers,
like other wireless providers in localities that have implemented E911
service, may petition their state commission for permission to receive
universal service support for the designated period during which they
are completing the network upgrades required to offer access to E911.
To receive federal universal service support, however, MSS providers
must satisfy the eligibility requirements we previously established. We
rely on state commissions to ensure that providers that are not
currently able to provide access to E911 service are making the network
upgrades necessary to provide access to E911 service as quickly as
possible.
C. Voice Grade Access to the Public Switched Network
10. We reconsider, on our own motion, the Commission's
specification of a bandwidth for voice grade access to the PSTN and
conclude that bandwidth for voice grade access should be, at a minimum,
300 Hertz to 3,000 Hertz. In the Order, the Commission determined that
voice grade access bandwidth be approximately 500 Hertz to 4,000 Hertz.
We reconsider that determination based on our recognition that the 500
Hertz to 4,000 Hertz bandwidth established in the Order would require
eligible carriers to comply with a voice grade access standard that is
more exacting than current industry standards, a result that we did not
intend. We note that AT&T operating principles recommend that voice
grade access bandwidth be 200 Hertz to 3,500 Hertz, while Bellcore
recommends a range of 200 Hertz to 3,200 or 3,400 Hertz. American
National Standards Institute (ANSI) defines voice grade access
bandwidth as 300 Hertz to 3,000 Hertz. We did not intend to impose a
more onerous definition of voice grade access than those generally
established under existing industry standards, and conclude that our
decision here will ensure that consumers receive voice grade access at
levels that are consistent with Commission rules and that are not
incompatible with current industry guidelines. We do not adopt the
broader voice grade access bandwidth specified in the AT&T and Bellcore
operating principles. To the extent that the bandwidth recommended in
the AT&T and Bellcore operating principles exceeds the bandwidth
established in the ANSI definition of voice grade access, we are
concerned that a substantial number of otherwise eligible carriers may
be unable to qualify for universal service support if we were to
require all carriers to meet this standard as a condition of
eligibility. Moreover, networks utilizing loading coils may experience
difficulty operating properly at bandwidths exceeding 3,400 Hertz.
Carriers that meet current AT&T and Bellcore guidelines, however, will
be able to satisfy our definition of voice grade access.
[[Page 2096]]
III. Carriers Eligible for Universal Service Support
A. Designation of Eligible Carriers
11. We read Sandwich Isles' petition to contend that the DHHL,
rather than the Hawaii Public Utilities Commission (PUC), should have
authority to designate eligible telecommunications carriers on the
Hawaiian Home Lands. Section 153(41) defines ``[s]tate commission'' as
``the commission, board, or official (by whatever name designated)
which under the laws of any State has regulatory jurisdiction with
respect to intrastate operations of carriers.'' 47 U.S.C. Sec. 153(41).
Based on the record before us, it is unclear whether the DHHL meets the
Act's definition of ``state commission.'' Based on further information
provided by the parties, it now appears that the issue here is not
whether there is a state commission with jurisdiction to designate
eligible carriers, but which of the state agencies should be considered
to be the ``state commission'' for purposes of designating Sandwich
Isles. Before undertaking to develop the record further and to
interpret the term ``state commission,'' we encourage Sandwich Isles
and the relevant state agencies to resolve this dispute. If they are
unable to do so, we encourage Sandwich Isles and the relevant state
agencies to bring that fact to our attention so that we may complete
action on the pending petitions.
B. Eligibility Designation Date
12. In light of section 254's directive that only carriers
designated as eligible pursuant to section 214(e) shall be eligible to
receive universal service support, we affirm our previous conclusion
that, as of January 1, 1998, the temporary Administrator may not
disburse support to carriers that have not been designated as eligible
under section 214(e). Thus, if a carrier has not been designated as
eligible by January 1, 1998, it may not receive support until such time
as it is designated an eligible telecommunications carrier. This
applies to all carriers, including those that currently receive
universal service support under the existing support mechanisms. We
agree with USTA, however, that a state commission that is unable to
designate as an eligible telecommunications carrier, by January 1,
1998, a carrier that sought such designation before January 1, 1998,
should be permitted, once it has designated such carrier, to file with
the Commission a petition for waiver requesting that the carrier
receive universal service support retroactive to January 1, 1998. A
state commission filing such a petition must explain why it did not
designate such carrier as eligible by January 1, 1998 and provide a
justification for why providing support retroactive to January 1, 1998
serves the public interest. We encourage relevant carriers to file
information demonstrating that they took reasonable steps to be
designated as eligible telecommunications carriers by January 1, 1998.
We find that it is in the public interest to permit telecommunications
carriers that were eligible to receive universal service support on
January 1, 1998, but that were not designated as eligible by their
state commission by that date, to be permitted to seek retroactive
support. Allowing retroactive support will permit consumers served by
those carriers to benefit from the support to which those carriers
would have been entitled, but for circumstances that prevented the
state commission from designating the carriers as eligible for receipt
of universal service support prior to January 1, 1998. Regarding NECA's
concern that the Order does not specify a date by which state
commissions must make their eligible carrier determinations, we note
that the Bureau's August 14 and September 29 Public Notices notified
state commissions to submit their eligible carrier designations to the
temporary Administrator no later than December 31, 1997.
IV. High Cost Support
A. Indexed Cap on High Cost Loop Fund
13. We affirm the Commission's decision to retain the indexed cap
on high cost loop support until all carriers receive support based on a
forward-looking economic cost mechanism. Much of petitioners' concern
about the sufficiency of the modified existing system of universal
service support appears to be based on their misapprehension that the
indexed cap will operate after January 1, 1998 not merely to limit the
growth of the high cost loop fund, but also to limit the growth of the
modified DEM weighting and LTS programs. In light of this apparent
confusion, we clarify here that the indexed cap on the high cost loop
fund will not operate to cap support under the modified DEM weighting
or LTS programs. Rather, local switching support and LTS will be
calculated and permitted to increase based on the formulas provided in
sections 54.301 and 54.303, respectively.
14. Section 36.601(c) of our rules sets forth the method for
calculating the indexed cap and clearly provides that this limitation
applies only to loop-related costs, not local switching support or long
term support. In addition, section 36.601(a) states that:
[t]he term Universal Service Fund in subpart F refers only to the
support for loop-related costs included in Sec. 36.621. The term
Universal Service in part 54 refers to the comprehensive discussion
of the Commission's rules implementing section 254 of the
Communications Act of 1934, as amended * * * .''
This clarification should alleviate any concern that the cap may result
in insufficient support to the extent that these concerns are based on
the erroneous premise that the indexed cap's limitation on growth of
the high cost loop fund will limit the growth of the modified support
programs adopted pursuant to part 54 of our rules. Absent specific
evidence that the cap as modified in response to implementation of
section 254 will likely result in insufficient support, which
petitioners have not offered, we conclude that the cap is consistent
with our obligation to ensure that support is sufficient.
15. Contrary to RTC's assertion that the indexed cap does not take
account of cost increases due to the addition of new high cost loops or
new eligible carriers, we note that our rules provide for annual
adjustments that will reflect such growth. Specifically, section
36.601(c) provides:
Beginning January 1, 1999, the total loop cost expense
adjustment shall not exceed the total amount of the loop cost
expense adjustment provided to rural carriers for the immediately
preceding calendar year, adjusted to reflect the rate of change in
the total number of working loops of rural carriers during the
[preceding] calendar year * * *.
Thus, both new high cost loops that eligible rural carriers add during
the previous calendar year as well as high cost loops of newly eligible
carriers that did not qualify as rural carriers in the previous
calendar year will be factored into the calculation of the rate of
change in the total number of working loops of rural carriers, pursuant
to section 36.601(c). Accordingly, we find no basis for making
additional adjustments to the indexed cap, beyond those already
required by section 36.601(c).
16. We agree with Bell Atlantic that petitioners' claims of harm by
operation of the cap under the new system of support are speculative.
As noted by AT&T, a waiver process has been and remains available to
carriers that may experience a significant adverse impact by operation
of the cap. We note again that the fact that no carrier has applied for
relief under the Commission's waiver process or otherwise sought relief
from the cap since it was first
[[Page 2097]]
implemented in 1994 suggests that carriers have not experienced undue
hardship because of the cap.
17. We therefore affirm the Commission's previous finding that the
cap is a reasonable means of limiting the overall growth of the high
cost loop fund, and thus protecting contributors from excessive
universal service contribution requirements, while allowing the high
cost loop fund to grow to support the growth in lines served by
carriers in high cost areas.
B. DEM Weighting Assistance (Local Switching Support)
1. Calculation of Local Switching Support Based on Projections of Costs
18. Although the Commission removed the DEM weighting assistance
program from the access charge system and transferred it to the new
universal service system of support, the Commission did not alter
significantly the level of support received by carriers under this
program. Indeed, in adopting the modifications to the existing support
mechanisms, the Commission was persuaded that it should act more
cautiously with respect to small rural carriers. Therefore, the DEM
weighting assistance program will continue to be administered and
calculated separately from the existing high cost loop fund.
Specifically, support payments for these local switching costs will be
based on projections of annual costs, and, therefore, payments will not
be lagged in the manner prescribed by our rules governing the existing
high cost loop fund.
19. Under the modified DEM weighting assistance program, a carrier
will be eligible to receive local switching support based on the
carrier's projected annual unseparated local switching revenue
requirement for the upcoming calendar year, beginning January 1, 1998,
and each year thereafter that DEM weighting assistance continues. We
amend section 54.301 by adding the word ``projected'' to the first
sentence of that rule to clarify that support for local switching costs
will be based on projections of costs and not historical cost data. As
reflected in the rule changes, section 54.301 is amended to read in
relevant part:
Beginning January 1, 1998, an incumbent local exchange carrier
that has been designated an eligible telecommunications carrier and
that serves a study area with 50,000 or fewer access lines shall
receive support for local switching costs using the following
formula: the carrier's projected annual unseparated local switching
revenue requirement shall be multiplied by the local switching
support factor.
Thus, the Commission's determination to remove the DEM weighting
assistance program from the access charge system and transfer it to the
new universal service system of support will not create a two-year lag
in the recovery of local switching investment, as argued by
petitioners.
20. We also, on our own motion, amend section 54.301 to clarify
that, to receive local switching support, an incumbent LEC must satisfy
the requirements of an eligible telecommunications carrier.
2. Calculating the Annual Unseparated Local Switching Revenue
Requirement
21. We adopt the method of calculating the annual unseparated local
switching revenue requirement proposed in NECA's ex parte letters
because it provides the most accurate calculation of the local
switching revenue requirement. Under this method, a carrier's annual
unseparated local switching revenue requirement will be calculated
pursuant to a formula that relies upon specified account and cost data
that carriers maintain pursuant to the Commission's part 32 rules.
Thus, as reflected in our amendments to part 54 in the rule changes, we
direct the Administrator to use the part 32 account data as specified
in NECA's October 30th, 1997 and December 4, 1997 letters to determine
the unseparated local switching revenue requirement. Consistent with
our adoption of a methodology that relies upon part 32 account data, we
authorize the Administrator to issue a data request annually to the
carriers that serve study areas with 50,000 or fewer access lines but
that are not members of the NECA traffic sensitive pool in order to
obtain the relevant part 32 data from these carriers. Because the
Administrator requires data to calculate local switching support in
1998 from carriers that do not participate in the NECA common line
pool, we direct the Administrator to issue a data request to those
carriers as soon as practicable after the release of this Order. We
note that, as with all high cost support, a competitive local exchange
carrier will receive the same amount of local switching support
formerly received by an incumbent LEC if the competitive local exchange
carrier begins to serve a customer formerly served by an incumbent LEC
receiving local switching support for that customer.
22. We conclude that the approach suggested by NECA, because it
allocates local switching expenses and related investment in a manner
that is consistent with the allocation methods prescribed under parts
36 and 69 of our rules, provides a more accurate method for calculating
the unseparated local switching revenue requirement. Because all
carriers, including small carriers, already maintain the information
necessary to calculate the local switching revenue requirement and
because carriers must already submit similar information to the
Administrator for high cost loop support, we conclude that any
additional burden placed on carriers will be small, and that the
benefits of using a more accurate method will outweigh any additional
burden placed on carriers.
23. In its October 31, 1997 report containing projections of demand
for the modified DEM weighting assistance program, USAC reported that
NECA had devised a formula for calculating the unseparated local
switching revenue requirement for average schedule companies. For
average schedule companies, local switching support will be calculated
in accordance with a formula that the Administrator will submit
annually to the Commission for review and approval. The formula
submitted by the Administrator will be designed to produce
disbursements to an average schedule company to simulate the
disbursements that would be received pursuant to section 54.301 by a
company that is representative of average schedule companies. We
delegate to the Chief, Common Carrier Bureau the authority to review,
modify, and approve the formula submitted by the Administrator.
3. True-up Mechanism for Adjusting Local Switching Revenue Requirement
24. We agree with NECA that the Administrator should adjust DEM
weighting support levels to correct errors that may result from the use
of projected local switching costs. Accordingly, we direct the
Administrator to adjust annually the levels of local switching support
projected for each study period to reflect the historical support
requirements determined from the data filed by the carrier for that
study period. As a result, a carrier's local switching support will not
be delayed until historical data are available, but, after the
adjustment, such support will accurately reflect a carrier's historical
costs. As proposed by NECA, we conclude that all such adjustments must
be made within 15 months of the conclusion of the relevant study
period. We emphasize that, unlike the current high cost loop data
submissions, all carriers must submit accurate, historical data when
they become available and that the Administrator must increase or
decrease a carrier's subsequent
[[Page 2098]]
payments by the amount that the cost projection for that carrier
differs from the costs which are in fact incurred.
25. We note that local switching support also may be affected by
changes in the weighting factor resulting from the number of lines
served by a carrier. As provided in section 54.301 of the Commission's
rules, ``[i]f the number of a study area's access lines increases such
that, under Sec. 36.125(f) of this chapter, the weighted interstate DEM
factor . . . would be reduced, that lower weighted interstate DEM
factor shall be applied to the carrier's 1996 unweighted interstate DEM
factor to derive a new local switching support factor.''
C. Long Term Support (LTS)
1. Technical Amendments to Section 54.303 Governing Calculation of LTS
26. In response to GVNW's petition, we amend section 54.303 of our
rules, as set forth below, to specify how LTS will be calculated for
1998. First, we clarify that currently, and until January 1, 1998, LTS
support is based on the difference between the NECA common line pool
revenue requirement and the sum of the revenues obtained from charging
a nationwide CCL rate calculated pursuant to section 69.105(b)(2) and
the revenues obtained through SLCs. This clarification is necessary
because the Order and section 54.303 failed to account for the portion
of the common line revenue requirement that is recovered through end
user common line charges, or SLCs. We therefore amend section 54.303 to
include ``end user common line charges.'' We also clarify the procedure
by which LTS support will be calculated after January 1, 1998. Prior to
the modifications adopted in the Order, NECA calculated LTS using
revenue requirement projections calculated pursuant to section
69.105(b)(2) of our rules. After January 1, 1998 we will no longer use
these annual projections. Instead, we will index 1997 levels of support
to reflect annual changes in loop costs. Specifically, in 1998 and 1999
LTS support will be calculated by adjusting previous support levels by
the annual percentage change in the actual nationwide average cost per
loop, and beginning January 1, 2000, LTS will be adjusted to reflect
the annual percentage change in the Department of Commerce's GDP-CPI.
Thus, under the modified LTS program adopted in the Order, the
Administrator will make an initial, one-time calculation of projected
1997 LTS revenue requirements of eligible carriers in service areas
served by incumbent LECs that currently participate in the NECA common
line pool. These projected 1997 LTS revenue requirements will be
adjusted according to a rate of change that will reflect annual changes
in loop costs as prescribed by section 54.303.
27. Because LTS levels for 1998 and beyond will be based on 1997
projections, we conclude that the methodology for calculating the NECA
CCL charge contained in section 69.105(b)(2) should be used only for
the 1997 projections. Therefore, section 54.303 now directs the
Administrator to calculate only the base-level of LTS using the
projected revenue recovered by the CCL charge in 1997 as calculated
pursuant to section 69.105(b)(2) of our rules. Consistent with these
clarifications, we amend section 54.303 to specify that the
Administrator will calculate the unadjusted base-level of LTS for 1998
by calculating the difference between the projected Common Line revenue
requirement of NECA Common Line tariff participants projected to be
recovered in 1997 and the sum of end user common line charges and the
1997 projected revenue recovered by the CCL charge as calculated
pursuant to section 69.105(b)(2) of our rules. As reflected in the rule
changes, section 54.303 is amended to read in relevant part:
To calculate the unadjusted base-level of Long Term Support for
1998 the Administrator shall calculate the difference between the
projected Common Line revenue requirement of association Common Line
tariff participants projected to be recovered in 1997 and the sum of
end user common line charges and the 1997 projected revenue
recovered by the association Carrier Common Line charge as
calculated pursuant to Sec. 69.105(b)(2) of this chapter.
28. In the Order, the Commission stated that an eligible carrier's
LTS will be based on the LTS received for the preceding calendar year,
adjusted in 1998 and 1999 to reflect the percentage increase in the
nationwide ``average loop cost.'' We are persuaded by NECA's comments
that the phrase ``average loop cost'' in section 54.303 could be
misinterpreted and that it would be preferable to use the terminology
used elsewhere in our rules, i.e., ``average unseparated loop cost per
working loop.'' Accordingly, we also amend section 54.303 by striking
the phrase ``average loop cost'' and replacing it with ``average
unseparated loop cost per working loop.'' As reflected in the rule
changes, section 54.303 is amended to instruct the Administrator to
adjust the levels of LTS for 1998 and 1999 to ``reflect the annual
percentage change in the actual nationwide average unseparated loop
cost per working loop.''
29. On our own motion, we also amend section 54.303 to clarify that
an incumbent LEC that participates in the NECA common line pool also
must satisfy the requirements of an eligible telecommunications carrier
in order to receive LTS. Accordingly, section 54.303 is amended to read
in relevant part:
Beginning January 1, 1998, an eligible telecommunications
carrier that participates in the association Common Line pool shall
receive Long Term Support.
2. Calculation of LTS Levels Based on Projections of Costs
30. The Commission's determination to remove the LTS program from
the access charge system and transfer it to the new support system will
not create a two-year lag in the recovery of LTS supported costs, as
argued by petitioners. In 1998, support payments provided to eligible
carriers under the modified LTS program will be based not on historical
cost data, which is the method of calculating support under the
existing high cost loop fund, but, instead, will be based on 1997
projections. Section 54.303, as modified above, now explicitly states
that LTS support in the first year will be calculated based on the
difference between the 1997 projected common line revenue requirement
of NECA pool participants and the projected revenue recovered by the
1997 NECA CCL charge and SLCs. Beginning January 1, 1998, LTS payments
will be adjusted for all recipients based on average rates of change as
provided in section 54.303. Because support will be based on
projections using a rate of change, historical data will no longer be
used and there will be no basis for delaying LTS payments.
3. True-up Mechanism to Adjust Base-Level of LTS
31. Pursuant to section 54.303, the unadjusted base-level of LTS
initially will be calculated using 1997 projections. To ensure that the
modified LTS program is funded at appropriate levels, however, we
direct the Administrator to adjust the base-level of LTS to reflect
historical 1997 costs once those data become available to the
Administrator. As proposed by NECA, we conclude that this adjustment
should be made within fifteen months of the conclusion of the 1997
calendar year. We emphasize that, unlike the current high cost loop
data submissions, all carriers must submit historical cost data for
1997. We direct the Administrator to increase or decrease a carrier's
LTS payment to reflect 1997 costs that in fact incurred no later than
15 months after the end of the 1997 calendar year. We note that, unlike
the DEM weighting assistance program, which will require ongoing
adjustments, the adjustment that we direct the Administrator to make to
the LTS program will be needed only to adjust the base-level of LTS.
[[Page 2099]]
4. Membership in NECA Common Line Pool a Requirement for LTS
32. We reiterate that an incumbent LEC's continued membership in
the NECA common line pool is required for the incumbent LEC or any
competitive eligible telecommunications carrier serving that incumbent
LEC's former customers to receive payment of support comparable to LTS
in a given service area. As we stated in the Order, we ultimately
intend to determine universal service support for all carriers using a
forward-looking economic cost model because such a model will require
carriers to operate efficiently and will facilitate the move to
competition in all telecommunications markets. We decided, however,
that we would ``retain many features of the current support
mechanisms'' in order to provide rural LECs, generally the recipients
of LTS, sufficient time to adjust to any changes in universal service
support, particularly a move to a forward-looking economic cost model
for determining universal service support. Although we made some
adjustments to the calculation and distribution scheme of LTS in the
Order, we specifically continued this support mechanism, finding that
such payments would serve the public interest ``by reducing the amount
of loop cost that high cost LECs must recover from IXCs through CCL
charges and thereby facilitating interexchange service in high cost
areas consistent with the express goals of section 254.'' Thus, we wish
to maintain the current support structure, as modified, for recipients
of LTS until we are able to devise a forward-looking economic cost
model to determine universal service support appropriate for such
carriers. We find that broadening the scope of the LTS mechanism at
this time beyond the boundaries established in the Order would hinder
the achievement of our goal to move toward competition in all
telecommunications markets.
33. In addition, we note that a number of companies that have
chosen to leave the NECA common line pool in the past generally have
done so because their costs have decreased such that they can charge a
lower CCL interstate access rate than the NECA CCL rate and recover
their costs without LTS support. Thus, it is not clear how providing
those carriers with modified LTS would further the goal of universal
service. Although we recognize that other considerations may influence
a carrier's decision to exit the pool, we can only presume that any
carrier that has left did so after balancing all factors and
determining that it could forego the receipt of LTS. Accordingly, we
decline to reinstate LTS to such carriers and we deny ALLTEL's petition
to the extent that it asks that rural incumbent LECs that have left the
NECA pool be eligible to receive LTS under the new LTS program.
34. Moreover, as to the requests of current LTS recipients that
they be allowed to continue to receive LTS upon exiting the NECA pool,
we reiterate that we wish to maintain the current LTS program as
modified until we move to the use of a forward-looking economic cost
model for determining universal service support for such carriers.
Further, providing such support to carriers that leave the NECA pool
could undermine the pool's usefulness in permitting participants to
share the risk of substantial cost increases related to the CCL charge
by pooling their costs and, thereby, charging an averaged CCL rate
close to that charged by other carriers. This operation of the pool,
like LTS payments, serves section 254's goal of facilitating
interexchange service in high cost areas. Accordingly, we decline to
permit a carrier leaving the pool to continue to receive LTS in the
future.
35. Pursuant to section 54.307 of the Commission's rules, a
competitive eligible telecommunications carrier is eligible to receive
universal service support to the extent that it captures an incumbent
LEC's subscriber lines or serves new subscribers in the incumbent LEC's
service area. Having determined that an incumbent LEC exiting the NECA
common line pool will lose LTS, we also determine that a competitive
eligible telecommunications carrier that receives LTS for serving
subscribers in an incumbent LEC's service area similarly will lose LTS
when the incumbent LEC exits the NECA common line pool.
D. Support for Competitive Eligible Telecommunications Carriers
36. We clarify the Commission's finding that, beginning January 1,
1998, high cost loop support, DEM weighting assistance, and LTS will be
portable to any competitive local exchange carrier that has been
designated as an eligible telecommunications carrier. Section
54.307(a)(1) of our rules, which encompasses all three types of support
currently received by incumbent LECs, provides that ``[a] competitive
eligible telecommunications carrier shall receive support for each line
it serves based on the support the incumbent LEC receives for each
line.'' Section 54.307(a)(2) sets forth the method for calculating per-
line support that will be paid to a competitive eligible
telecommunications carrier for each line that it serves in an incumbent
LEC's service area. Section 54.307(a)(3) provides the method for
calculating the level of support that a competitive eligible
telecommunications carrier that uses switching functionalities or loops
that are purchased as unbundled network elements will receive. AirTouch
correctly notes that section 54.303, which establishes the method for
calculating LTS, explicitly states that a competitive eligible
telecommunications carrier will receive LTS. In order to eliminate the
apparent ambiguity in our rules governing portability, we amend the
first sentence of section 54.303 to eliminate any reference in that
section to competitive carriers' eligibility to receive LTS. We adopt
this amendment based on our conclusion that section 54.307, which sets
forth the method for calculating the amount of high cost loop support,
DEM weighting assistance, and LTS that a competitive carrier may
receive, specifies the support that competitive eligible
telecommunications carriers are entitled to receive and, therefore, the
reference to competitive carriers in section 54.303 is not needed.
E. Impact on Incumbent LEC of Losing Access Lines to Competitive
Eligible Telecommunications Carriers
37. We clarify here that, if an incumbent LEC loses a customer to a
competitive eligible telecommunications carrier, the incumbent LEC will
lose some or all of the per-line level of support that is associated
with serving that customer. If the competitive eligible
telecommunications carrier uses network elements purchased pursuant to
section 51.307 to provide the supported services, the reduction in the
amount of support received by the incumbent LEC is specified in section
54.307(a)(3) of the Commission's rules. That section provides that
``[t]he [incumbent] LEC * * * shall receive the difference between the
level of universal service support provided to the competitive eligible
telecommunications carrier and the per-customer level of support
previously provided to the [incumbent] LEC.'' Section 54.307(a)(4) of
our rules provides that a competitive eligible telecommunications
carrier that provides the supported services using neither unbundled
network elements nor wholesale service purchased pursuant to section
251(c)(4) will receive the full amount of universal service support
previously provided to the incumbent LEC for that customer. That
section, however, does not provide
[[Page 2100]]
a corresponding reduction in the amount of support received by the
incumbent LEC. Accordingly, we amend section 54.307(a)(4) to clarify
that, when a competitive eligible telecommunications carrier receives
support for a customer pursuant to section 54.307(a)(4), the incumbent
LEC will lose the support it previously received that was attributable
to that customer.
F. Corporate Operations Expenses
1. Imposition of a Limitation
38. In light of these challenges to the Commission's decision to
limit recovery of corporate operations expenses, we take this
opportunity to explain more fully the bases for this decision.
Expenditures for corporate operations in many instances may be
discretionary, in contrast, for example, to expenditures to maintain
existing plant and equipment. Corporate operations expenses include,
for example, travel, lodging and other expenses associated with
attending industry conventions and corporate meetings. Although
participation in such activities may be prudent, the levels of these
expenditures are subject to managerial discretion. Carriers currently
have little incentive to minimize these expenses because the current
mechanism for providing support in high cost areas allows carriers to
recover a large percentage of their corporate operations expenses. For
companies with fewer than 200,000 lines, for example, the expenses
attributed to the high cost expense adjustment are covered in full for
companies with costs in excess of 150 percent of the national average.
Smaller carriers possess even fewer incentives to minimize corporate
operations expenses because the Commission has a limited ability to
ensure, through audits, that smaller companies properly assign
corporate operations expenses to appropriate accounts and that these
expenses do not exceed reasonable levels. The Commission, and
frequently state commissions, cannot justify auditing smaller carriers
because the Commission's audit staff is small, there are many hundreds
of small telephone companies, and the costs of full-scale audits are in
many instances likely to exceed any expenses found to be improper. We,
therefore, conclude that imposing a cap that is relatively generous to
small carriers, but still imposes a limitation, is a reasonable method
of encouraging carriers to assign corporate operations expenses to the
proper accounts and discouraging carriers from incurring excessive
expenditures. Under this approach, we provide carriers with an
incentive to control their corporate operations expenses without
requiring carriers to incur the costs associated with a full Commission
audit. As the Commission stated in its Order and as explained further
below, carriers that contend that the limitation provides insufficient
support may request a waiver from the Commission. Therefore, only
carriers whose expenses exceed the cap and who contend that the capped
amount is insufficient will be required to provide additional
justification for their expenditures. We, therefore, conclude that a
cap on federal support for corporate operations expenses is a
reasonable method of preventing the recovery of improperly assigned or
excessive expenses from federal funds while minimizing the
administrative burden on the Commission and on all carriers, including
smaller carriers.
39. We disagree with petitioners who assert that, because some
corporate operations expenses are not discretionary, we should not
impose any limit on the recovery of corporate operations expenses. We
recognize that the expenses cited by petitioners and commenters may be
necessary for the operation of a company, and that such expenditures
are in some circumstances required by state or federal law or
regulation. Most companies, however, fulfill all such state and federal
requirements while incurring corporate operations expenses that are
well below the limitation imposed by the Commission. No party has
provided detailed data explaining the significant differences in
corporate operations expenses for companies of similar sizes. Further,
we are not excluding recovery of corporate operations expenses from
universal service support, but instead are imposing a reasonable limit.
We reject ITC's request to exclude all federal regulatory expenses from
the limitation because, although some expenditures may be necessary to
participate in the federal regulatory process, we see no reason to
permit the unlimited recovery of such expenses. Moreover, individual
companies that are required to incur unusually high corporate
operations expenses, such as Alaskan or insular telephone companies,
have the right to apply for a waiver with the Commission to demonstrate
the necessity of these expenses for the provision of the supported
services.
2. Adjustments to Limitation Formula
40. In the July 10 Order, the Commission specified a minimum
allowable corporate operations cost in order to ensure that carriers
with small numbers of working loops would receive sufficient support to
recover initial or fixed corporate operations expenses. This monthly
cost minimum was estimated from a regression of total corporate
operations expenses on the number of working loops. After performing
this analysis, the Commission adopted a minimum monthly recovery of
$9,505, which results in a minimum recovery of $114,071 per year. USTA
and GVNW urge the Commission to increase this minimum recovery from
$114,071 per year to $300,000 per year. USTA additionally advocates
adopting a limitation equal to the greater of either $300,000 per year
or $34.82 per line per month.
41. We reconsider, to a limited extent, the limitation on recovery
of corporate operations expenses and adopt a new minimum cap of
$300,000 per year as advocated by USTA and GVNW. Although we are fully
confident in the formula that calculates the cap, we adopt a minimum
cap of $300,000 out of an abundance of caution for the smallest
carriers. The increased minimum will reduce the need of the smallest
carriers to seek a waiver of the cap. We intend to continue to monitor
the effect of this limitation and the $300,000 minimum cap on smaller
carriers. We note that, because the Commission has adopted an indexed
cap for all high cost support, increases in the amount of support
provided to some companies will reduce the amount of support provided
to other companies. We find, however, that this change will result in a
minimal increase in the total amount of universal service support
provided to carriers. We will continue to monitor this issue closely
and will take steps to ensure that only necessary and prudent
expenditures are supported. We do not adopt USTA's alternative proposal
to increase recovery to $34.82 per line per month for all carriers
because we believe the minimum cap of $300,000 provides adequate
protection for the smallest carriers while imposing the smallest
corresponding decrease in high cost loop support for carriers overall.
42. Upon reconsideration, we make an additional change in the
limitation formula to address a small discontinuity in the formula that
causes the total allowable corporate operations expense to be slightly
lower in the range from 17,988 and 17,997 lines than the amount
computed at 17,987 lines. To eliminate the anomaly caused by this
discontinuity, we alter the second threshold for access lines from
17,988 lines to 18,006 lines. Finally, to make our rules easier to
apply, we
[[Page 2101]]
standardized general mathematical conventions in the formulas.
3. Methodology Used To Calculate the Limitation
43. Western Alliance questions the methodology the Commission used
to create the formula for the corporate operations expense limitation.
Western Alliance asserts that the Order contained no discussion or
reasoned explanation of: ``(a) why a regression analysis using a spline
function technique was accurate and appropriate; (b) how or why the 115
percent ceiling was selected; or (c) how or why the 1995 NECA data were
representative.'' We address these arguments in turn. As detailed
further in the July 10 Order, the Commission used a linear spline to
estimate average corporate operations cost per loop, based on the
number of loops served. To produce this formula, we used statistical
regression techniques that focused on the relationship between expenses
per loop, rather than total expense. We adopted this approach in order
to establish a model under which the cap on corporate operations
expense per line would decline as the number of loops increases for a
range of smaller companies so that economies of scale, pursuant to
which expenses per loop decline as carrier size increases, would be
taken into account by the formula. Of the models studied, the linear
spline was found to have the highest R\2\, a measure indicating that
this model provides the best fit with the data. The relationship
between corporate operations expense and lines served may reasonably be
expected to change as carriers' size increases. The linear spline
method used allows a different slope to be fitted for smaller carriers
than for larger carriers. The Commission adopted the ``knot,'' or the
point at which the two line segments of the linear spline model meet,
at 10,000 loops because that point allowed the best fitting overall
spline.
44. Regarding the remaining issues raised by Western Alliance, the
115 percent ceiling that limits recovery of corporate operations
expenses is consistent with other Commission rules regarding universal
service support under part 36 of our rules. The Commission has
consistently considered carriers whose loop costs exceed the national
average loop cost by more than 15 percent worthy of special treatment.
In the present context, out of an abundance of caution, we have
concluded that companies will be allowed to recover costs up to 15
percent above average costs, rather than limiting recovery of such
expenses to average costs. We also find that, before receiving
corporate operations expenses in excess of 115 percent of the average,
companies should undergo additional scrutiny by submitting a waiver
request to the Commission. Finally, the data used in the estimation are
the actual corporate operations expenses that companies filed with NECA
for the calculation of universal service support. We used the most
current NECA data available at the time we performed these
calculations.
45. Western Alliance claims that the Commission's corporate
operations expense formula affects smaller companies more significantly
than larger companies. It states that Figure 1 in the July 10 Order
demonstrates that the data for LECs with more than 15,000 loops cluster
more closely around the Commission's fitted line than the data for
those LECs with fewer than 15,000 lines. This observation, however,
does not undermine the Commission's conclusion. Because corporate
operations expense per line varies more for smaller companies than
larger ones, any line that we might adopt would fit the data for larger
companies more closely than it would fit the data for smaller ones.
Moreover, as explained above, we have raised the minimum cap out of an
abundance of caution to address concerns that, without modification,
our formula may not afford sufficient recovery of corporate operations
expenses for the smallest companies.
46. We reject GVNW's argument that it is not clear whether the
corporate operations expense rule addresses amounts from Accounts 6710
and 6720 or whether it addresses ``that portion assigned to loop cost
in NECA's USF Algorithm (AL19).'' According to the Order, however,
``[c]orporate operations expense are recorded in Account 6710
(Executive and planning) and Account 6720 (General and
administrative).'' Hence, the limitation applies to accounts 6710 and
6720 and does not apply to NECA's USF algorithm.
47. RTC asserts that the Commission's formula is a proxy model and
therefore should be subject to the criteria the Commission adopted for
forward-looking cost proxy models in the Order. Although the formula we
adopted to limit recovery of corporate operations expenses is a model,
it is not a model intended to estimate forward-looking economic costs.
Therefore, most of the criteria adopted by the Commission concerning
forward-looking cost proxy models are inapplicable to the corporate
operations expense formula. Further, RTC is incorrect to the extent
that it is arguing that the underlying data and assumptions for the
formula are unavailable to the public. The data used to create the line
were filed publicly with the Commission by NECA for calendar year 1995.
The assumptions and method we used to compute the formula can be found
in greatest detail in the July 10 Order. The Commission has not, as TCA
alleges, contradicted its decision to base universal service support
for rural telephone companies on embedded costs until January 1, 2001.
The formula we have adopted imposes a limit on the recovery of embedded
costs and is not a proxy model designed to calculate forward-looking
economic costs.
48. We find that our limitation on recovery of corporate operations
expenses will not jeopardize the affordability of local services.
Because, as discussed above, such expenditures and the level of such
expenditures are in many cases discretionary, we believe that imposing
some limits on corporate operations expenses serves the public
interest. Moreover, if carriers have prudent corporate operations
expenses that exceed the cap, they may seek a waiver of that cap.
49. Based on the changes described above, we modify the formula to
limit the amount of corporation operations expenses per working loop
that a carrier may recover as follows:
for study areas with 6,000 or fewer working loops the amount per
working loop shall be $31.188 - (.0023 x the number of working
loops), or, ($25,000 <divide> the number of working loops),
whichever is greater;
for study areas with more than 6,000 but fewer than 18,006 working
loops, the amount per working loop shall be $3.588 + (82,827.60
<divide> the number of working loops); and
for study areas with 18,006 or more working loops, the amount per
working loop shall be $8.188.
We conclude that this modified formula will better serve our goal of
ensuring that carriers use universal service support only to offer the
supported services to their customers through prudent facility
investment and maintenance consistent with their obligations under
section 254(k).
4. Procedural Matters
50. We conclude that the limitation on corporate operations
expenses was adopted in compliance with the Administrative Procedure
Act (APA). The Commission gave the public ample notice regarding the
possibility of limiting or excluding recovery of corporate operations
expenses. In a Notice of Inquiry released in 1994, the Commission
sought comment on whether we should exclude all recovery of corporate
operations expenses. In a Notice of Proposed Rulemaking released
[[Page 2102]]
in 1995, as the petitioners acknowledge, the Commission tentatively
concluded that it should exclude recovery of all such expenses. In the
Universal Service Notice, the Commission specifically sought comment on
whether any proposals in Docket No. 80-286 were worthy of consideration
in Docket No. 96-45 and specifically incorporated the record of that
proceeding into the 96-45 docket. Moreover, in its Public Notice
seeking further comment, the Common Carrier Bureau asked what
modifications should be made to the high cost support mechanism if it
were retained with respect to rural areas. In response to this Public
Notice, several parties recommended that the Commission limit or
exclude recovery of corporate operations expenses as it had previously
proposed.
51. Not only did the Commission provide notice of a potential limit
on or exclusion of the recovery of corporate operations expenses, the
approach adopted by the Commission takes into consideration the
comments filed in response to these notices. The Commission initially
proposed disallowing all recovery for corporate operations expenses.
After considering the comments, however, the Commission concluded in
the Order that it should limit such expenses to a reasonable level
rather than excluding them altogether. The approach taken is
conceptually similar to the one NECA proposed in response to the 1995
Notice and again in response to the Public Notice. NECA proposed that
high cost support recipients should recover only expenses that fall
below a line that is two standard deviations above a regression line.
Our limitation is based on a regression line that takes into account
the size of the company when calculating an acceptable range of
recoverable corporate operations expenses and, rather than allowing all
expenses within two standard deviations of the line as proposed by
NECA, allows recovery of expenses that are up to 115 percent of the
typical costs of companies of similar size. Thus, because the corporate
operations expense cap was within the scope of the proposal to
eliminate recovery of all corporate operations expenses and was
supported by record evidence, the requirements of the APA were met.
52. We conclude that we are not barred from adopting this
limitation because, although the Joint Board did not make a
recommendation about limiting the recovery of corporate operations
expenses, the Commission properly referred to the CC Docket No. 96-45
Joint Board the question of whether proposals originating with the CC
Docket No. 80-286 Joint Board should be adopted. We also conclude that
Western Alliance incorrectly implies that the legislative history to
the 1996 Act prohibits the Commission from adopting any proposal that
was submitted in the record of the CC Docket No. 80-286 proceeding.
Although the Joint Explanatory Statement explained that Congress did
not view the CC Docket No. 80-286 proceeding as an appropriate basis
for implementing section 254(a), nothing in the legislative history
suggests that Congress, in enacting section 254, intended to preclude
us from considering specific proposals from that docket in the separate
proceeding undertaken to implement section 254. Indeed, the Commission,
in the Universal Service Notice, sought comment on whether any
proposals from the 80-286 docket were consistent with the 1996 Act so
as to avoid duplication of previous Commission efforts. As described
above, several commenters proposed elimination or limitation of the
recovery of corporate operations expenses in the 96-45 docket, and the
Commission adopted this limitation as part of the 96-45 docket.
53. We also conclude that our adoption of a high standard for
granting a waiver for corporate operations expense recovery is fully
justified. Because corporate operations expenses are in many cases
completely within a company's discretion, they are more likely to be
susceptible to abuse than other types of expenditures such as plant
maintenance expenditures. Accordingly, parties contending that they
should recover unusually high amounts of such expenses should be
required to meet a substantial burden. Additionally, because the
limitation includes a buffer zone to accommodate companies that may
have corporate operations expenses that are higher than average, but
not extreme, we affirm our conclusion that the need for waivers should
be limited to exceptional circumstances.
54. We also reject petitioners' suggestions that the limitation on
recovery of corporate operations expenses should be phased in over a
lengthy transition period. Unlike other situations cited by the
commenters, a transition period is not warranted in this instance. We
conclude that we should not phase in a measure designed to prevent
misallocation, manipulation, and abuse. Companies believing that they
have reasonably incurred expenses in excess of the limitation may
petition for a waiver from the Commission. We find that the
availability of a waiver will sufficiently protect any company that
legitimately incurred expenses in excess of the limitation, whether
caused by activity mandated by the 1996 Act or for any other reason.
55. Contrary to the position of some commenters, the Commission is
fully authorized to adopt rules to implement section 254(k) in addition
to codifying the statutory provision as it has already done. In fact,
in the Section 254(k) Order, we concluded that we would ``from time to
time, re-evaluate our rules to determine whether additional rule
changes are necessary to meet the requirements of section 254(k).'' The
Commission concluded in the Order and the July 10 Order that some
recipients of federal universal service support may be receiving funds
beyond those necessary to provide the supported services. Recovery of
such expenditures may allow carriers to use these expenditures to
subsidize competitive services in violation of section 254(k). In
addition to limiting support for corporate operations expense in order
to control spending that may be in excess of that allowed by the Act,
the Commission correctly found that limiting corporate operations
expenses would reduce the ability of incumbent LECs to subsidize
competitive services with noncompetitive services by reducing the
incumbent LECs' receipt of funds beyond those that may be necessary to
provide the supported services. We therefore conclude that limiting
recovery of corporate operations expenses is within the ambit of
section 254(k).
V. Support for Low-Income Consumers
A. Obligation To Provide Toll-Limitation Services
56. We believe that low-income consumers eventually should have the
choice of selecting either toll blocking or toll control to restrict
their toll usage. We conclude, however, that giving consumers such an
option is not viable at this time. Based on the record before us, we
find that an overwhelming number of carriers are technically incapable
of providing both toll-limitation services, particularly toll-control
services, at this time. Under our current rules, carriers technically
incapable of providing both types of toll-limitation services must seek
from their state commissions a time-limited waiver of their obligation
to provide both toll blocking and toll control. Given that a large
number of carriers are technically incapable of providing both toll
blocking and toll control at this time, we believe that requiring
carriers
[[Page 2103]]
to provide both would result in an unnecessarily burdensome process for
state commissions required to act on a large number of waiver
proceedings.
57. In light of these concerns, we believe that requiring carriers
to provide at least one type of toll-limitation service is sufficient
to provide low-income consumers a means by which to control their toll
usage and thereby maintain their ability to stay connected to the
public switched telephone network. Weighing the burdens on the states
and the need to have carriers designated in a short time frame against
the goal of giving low-income consumers a full range of options for
controlling toll usage, we define toll-limitation services as either
toll blocking or toll control and require telecommunications carriers
to offer only one, and not necessarily both, of those services at this
time in order to be designated as eligible telecommunications carriers.
We note, however, that if, for technical reasons, a carrier cannot
provide any toll-limitation service at this time, the carrier must seek
a time-limited waiver of this requirement to be designated as eligible
for support during the period it takes to make the network changes
needed to provide one of those toll-limitation services. In addition,
if a carrier is capable of providing both toll blocking and toll
control, it must offer qualifying low-income consumers a choice between
toll blocking and toll control. Because we agree with Catholic
Conference that all qualifying low income consumers ideally should be
offered their choice of toll blocking or toll control, we plan to
monitor and revisit this issue if we determine that technological
impediments to carriers' ability to offer toll limitation have been
reduced or eliminated. We also encourage carriers to develop and
investigate cost-effective ways to provide toll-control services.
58. We further conclude that carriers offering Lifeline service
will not be required to provide toll-limitation services other than
those specifically identified in the Order. The Commission defined toll
blocking as a service that allows customers to block outgoing toll
calls, and defined toll control as a service that allows customers to
limit in advance their toll usage per month or billing cycle.
Therefore, carriers offering Lifeline service will not be required to
offer, for example, international toll-call-blocking or toll blocking
that allows callers with a Personal Identification Number (PIN) to make
toll calls, as suggested by the Florida Commission. While we encourage
carriers to offer Lifeline consumers, free of charge, toll-limitation
services that include functions and capabilities beyond those described
in the Order, we are persuaded by USTA that most carriers currently are
technically incapable of providing these additional services.
Furthermore, regarding the issue of whether toll control must limit
collect calls, we conclude that, like toll blocking, toll control only
must allow consumers to limit outgoing calls.
59. In response to the Texas Commission's request, we reiterate
that toll-limitation services for qualifying low-income subscribers are
included in the definition of the ``core'' or ``designated'' services
that will receive universal service support. A carrier must provide
these core services throughout its entire service area in order to be
designated an eligible telecommunications carrier. We further clarify
that, compliance with the no disconnect rule and the prohibition on
deposit rule are not specific preconditions to being designated an
eligible telecommunications carrier. Once designated as an eligible
telecommunications carrier, however, that carrier must offer all
Lifeline and LinkUp services to qualifying low-income subscribers.
B. Recovery of PICC
60. Consistent with our efforts to make toll-blocking service
easily affordable to low-income consumers, we adopt our tentative
conclusion in the Second Further Notice to waive the PICC for Lifeline
customers who elect toll blocking. For the reasons discussed here and
in succeeding paragraphs, we agree with SBC and AT&T and conclude that
support for PICCs for Lifeline customers who have toll blocking, but
nevertheless remain presubscribed to an IXC, will be provided by the
universal service support mechanisms in addition to the support for
Lifeline customers established in the Order. In the Order, the
Commission noted that studies demonstrate that a primary reason
subscribers terminate access to telecommunications services is failure
to pay long-distance telephone bills. The Commission concluded that,
because voluntary toll blocking allows customers to block toll calls,
and toll-control service allows customers to ensure that they will not
spend more than a predetermined amount on toll calls, these services
assist Lifeline customers in avoiding involuntary termination of their
access to telecommunications services. The Commission concluded that,
in order to increase the use of toll-blocking and toll-control services
by low income consumers, Lifeline customers should receive these
services at no charge. It would make little sense, and would undermine
the very basis for providing Lifeline customers free access to toll
blocking, to assess the PICC on Lifeline customers who select toll
blocking. In addition, in light of our decision herein to permit
eligible carriers to offer either toll control or toll blocking, it
would be particularly unfair to assess the PICC on Lifeline customers
who do not have the option of selecting toll control, but that are
limited to toll blocking. To do so would discriminate against Lifeline
customers who may only select toll blocking, and thus would have no
reason to presubscribe to an IXC. In contrast, a Lifeline subscriber
who is able to select toll control likely will presubscribe to an IXC,
because that subscriber's access to toll calling is limited, but not
blocked entirely.
61. We thus conclude that, because toll blocking for low-income
consumers is a supported service that carriers must provide to such
customers and the PICC payment issue arises as a direct result of the
toll blocking requirement, the PICC, in these instances, is
sufficiently related to the provision of toll blocking that it should
be supported for low-income consumers. Thus, such costs should be
recovered in a competitively neutral manner that is consistent with
section 254 of the Act. Therefore, all interstate telecommunications
carriers, not just IXCs, should bear the costs of the waived PICCs.
62. Moreover, we agree with petitioners that the low-income program
of the federal universal service support mechanisms should support
PICCs attributable to all qualifying low-income consumers who have toll
blocking. As stated above, we will support PICCs attributable to
qualifying low-income consumers who have toll blocking but do not have
a presubscribed IXC. We anticipate that most low-income consumers who
receive toll blocking will do so voluntarily and that most will not
have presubscribed IXCs. In the event, however, that a low-income
consumer is required to elect toll blocking (e.g., as a condition of
receiving local service) or in the event that a low-income consumer
remains presubscribed to an IXC even though the consumer receives toll
blocking, the federal low-income program also will support the PICCs
attributable to consumers in those circumstances. Low-income consumers
who elect toll blocking, but who remain presubscribed to an IXC, would
not receive toll blocking free-of-charge unless we waive the PICC for
the consumers. If an IXC were required to pay the PICC
[[Page 2104]]
attributable to a low-income consumer who elects toll blocking, that
IXC would not be able to recover the PICC through per-minute charges
associated with toll usage. Thus, absent changes to our rules, the IXC
may seek to recover the PICC from the consumer in the form of a flat-
rate charge. As we have noted above, toll blocking helps consumers to
control their toll usage and should be available free-of-charge to
qualifying low-income consumers. Therefore, to ensure the availability
of toll blocking to all qualifying low-income consumers free-of-charge,
we conclude that the low-income program of the federal universal
service support mechanisms should support PICC charges attributable to
all low-income consumers who have toll blocking.
63. All competitive eligible carriers that provide Lifeline service
to customers who elect toll blocking should be able to recover an
amount equal to the PICC that would be recovered by the incumbent LEC
in that area from the low-income program of the federal universal
service support mechanisms even though such carriers are not required
to charge PICCs. Competitive eligible carriers should be able to
receive support amounts equal to the PICCs because, like incumbent
LECs, they will be unable to recover any portion of their costs
associated with a toll-blocked customer from IXCs originating
interexchange traffic on that customer's line. To avoid creating
incentives for carriers to pass additional costs to low-income
consumers through increased rates, we conclude that competitors should
receive this additional support for Lifeline customers who elect to
receive toll blocking. In addition, in order to ensure competitive
neutrality, a competing local carrier serving a Lifeline customer
should be able to receive the same amount of universal service support
that an incumbent LEC would receive for serving the same customer.
Because an incumbent LEC serving a low-income customer who elected toll
blocking would receive support for the PICC associated with that
customer, in order to ensure that competing local carriers are not
operating at an unfair advantage, competing local carriers should be
eligible to receive the same amount of support that the incumbent LEC
would receive.
C. Florida Commission's Petition Pertaining to State Lifeline
Participation
64. Consistent with the Commission's earlier finding that we should
not prescribe the methods that states use to generate intrastate
Lifeline support in order to qualify for federal support, we conclude
that, although all carriers are not required to contribute to Florida's
Lifeline support mechanisms, Florida's Lifeline program nevertheless
qualifies as providing intrastate matching funds. We, however,
encourage states to develop Lifeline matching programs that are
competitively neutral and emphasize that, as noted in the Order, states
must meet the requirements of section 254(e) in providing equitable and
non-discriminatory support for state universal service support
mechanisms. Because we find that Florida's Lifeline program qualifies
as state participation, we need not address the Florida Commission's
request for a waiver of the federal default Lifeline qualification
standard. For the same reason, we also decline to address the Florida
Commission's request for a waiver allowing it to set eligibility
requirements or implement a grandfather provision for certain Lifeline
recipients.
VI. Schools, Libraries, and Rural Health Care Providers
A. Lowest Corresponding Price
65. Neither USTA nor any other party offers persuasive evidence
that the three-year ``look back'' provision for determining the lowest
corresponding price is either unnecessarily burdensome or will unfairly
delay a service provider's participation in the bidding process.
Commenters do not assert that the relevant records are not maintained
or are not accessible. We note that the universe of records that the
provider must review to determine the lowest corresponding price is
limited to charges involving similarly situated, non-residential
customers for similar services.
66. We do not agree with USTA that the three-year ``look back''
provision violates the principle of competitive neutrality by
disadvantaging larger providers. We note that this requirement applies
equally to all providers and that, although larger providers may have a
greater number of records to review for purposes of determining the
lowest corresponding price, these providers also likely have greater
resources and more sophisticated methods of recordkeeping.
67. We agree with USTA, however, that we should modify our earlier
holding to clarify the application of our lowest corresponding price
requirement. We conclude that, for purposes of calculating the lowest
corresponding price, a provider will not be required to match a price
it offered to a customer under a special regulatory subsidy or that
appeared in a contract negotiated under very different conditions. For
example, we previously concluded that service providers will be
permitted to charge schools and libraries prices higher than those
charged to other similarly situated customers if the services sought by
a school or library include significantly different traffic volumes or
the provision of such services is significantly different from that of
another customer with respect to any other factor that the state public
service commission has recognized as being a significant cost factor.
Under our modified rules, a service provider will not be required to
demonstrate further that matching such a price would force the provider
to offer service at a rate below the compensatory rate for that
service. The use of a rate below the compensatory rate would not be
practical, given the limited resources of schools and libraries to
participate in lengthy negotiations, arbitration, or litigation.
Regarding Bell Atlantic's concern that special regulatory rates
established by states for schools and libraries should not be treated
as the pre-discount prices, we reiterate that special regulatory
subsidies need not be considered in determining the lowest
corresponding price. Consistent with our findings above, we conclude
that each such situation should be examined on a case-by-case basis to
determine whether the rate is a special regulatory subsidy or is
generally available to the public. We also note that the universal
service discount mechanism is not funding the difference between
generally available rates and special school rates, as suggested by
Bell Atlantic, but is applied to the price at which the service
provider agrees to provide the service to eligible schools and
libraries.
68. We disagree with USTA that earlier versions of tariffs that
have been modified by regulators should be excluded from the comparable
rates upon which the lowest corresponding price is determined. Unless a
regulatory agency has found that the tariffed rate should be changed,
and affirmatively ordered such change, or absent a showing that the
rate is not compensatory, we find no reason to conclude that former
tariffed rates do not represent a fair and reasonable basis for
establishing the lowest comparable rate.
69. We decline to adopt GTE's proposal to exclude all promotional
offerings from the comparable rates upon which a provider must
determine the lowest corresponding price. Instead, we conclude that
only promotions offered for a period not exceeding 90 days may be
excluded from the
[[Page 2105]]
comparable rates upon which the lowest corresponding price must be
determined. This conclusion is consistent with the decision of the U.S.
Court of Appeals for the 8th Circuit upholding the portion of the
Commission's interconnection decision finding that discounted and
promotional offerings are telecommunications services that are subject
to the resale requirement of section 251(c)(4), and that promotional
prices lasting more than 90 days qualify as retail rates subject to
wholesale discount. Excluding shorter term promotional rates from
consideration here balances the need to provide compensatory rates to
providers while ensuring that eligible schools and libraries receive
competitive, cost-based rates that are comparable to rates paid by
similarly situated non-residential customers for similar services.
Consistent with the Commission's rationale in the Implementation of
Section 254(g) Order, we agree that a 90-day period in which customers
may receive discounted rates as part of a promotion is sufficient time
for a targeted promotional offering to attract interest in new or
revised services, but not so long as to undermine the requirement that
the price offered to schools and libraries be no greater than the
lowest corresponding price the carrier has charged in the last three
years or is currently charging in the market.
70. As previously noted, providers and eligible schools and
libraries will have the opportunity to seek recourse from the
Commission, regarding interstate rates, and from state commissions,
regarding intrastate rates if they believe that the lowest
corresponding price is unreasonably low or unreasonably high. We
decline to adopt the suggestion of USTA that we impose limits on a
customer's ability to challenge the pre-discount price it has been
offered. We have no basis in this record for assuming that the
possibility of such abuse by schools and libraries is greater than the
potential for service providers to assert frivolously that the rates
are too low. We will monitor parties' use of the dispute process and,
if we find a pattern of frivolous challenges by schools, libraries, or
service providers, we will take steps to remedy any such abuse at that
time.
B. Reporting Requirements for Schools and Libraries
71. We conclude that the reporting requirements established in the
Order for eligible schools and libraries are not unreasonably
burdensome, and that they represent a reasonable means of ensuring that
schools and libraries are capable of utilizing the requested services
effectively. Section 254(h)(1)(B) provides for discounts on services
that are used for educational purposes and that are provided in
response to a bona fide request. In the Order, the Commission agreed
with the Joint Board that Congress intended to require accountability
on the part of schools and libraries and therefore, consistent with
section 254(h)(1)(B), required eligible schools and libraries to
conduct an internal assessment of the components necessary to use
effectively the discounted services they order. We note that the
application requirements established in the Order were recommended by
the Joint Board and supported by a majority of commenters on this
issue. We affirm our decision, because we find that it is in the public
interest to ensure that funds are distributed only to support eligible
services that serve the needs to the school or library requesting
support. We find that the mere submission of a bona fide request is not
an adequate substitute to ensure that these public interest goals are
met.
72. The Commission determined in the Order that it would not be
unduly burdensome to require eligible schools and libraries to conduct
a technology assessment, prepare a plan for using these technologies,
and receive independent approval of such plans. Moreover, the
Commission took steps to eliminate unnecessary burdens, and prevent the
need for duplicative review of technology plans. The Commission noted
that many states have already undertaken state technology initiatives
and that plans that have been approved for other purposes, e.g., for
participation in federal or state programs, such as ``Goals 2000,''
will be accepted without need for further independent approval. We also
note that the reporting requirements have been reviewed and approved by
the Office of Management and Budget (OMB) pursuant to the Paperwork
Reduction Act of 1995. Because we conclude that the reporting
requirements are not unduly burdensome, help ensure that funds are
allocated in a manner that serves the policy goals set forth in section
254(b)(6) and section 254(h), and do not violate section 254(h)(1)(B),
we deny Global's petition for reconsideration of those requirements.
73. We also deny Florida Department of Management Services' request
to apply, during the first year of the federal support mechanisms, for
universal service discounts using a form created by the state of
Florida. We find that requiring all applicants to use the same forms
serves several important purposes. First, the forms were designed to
ensure accountability, and protect against fraud and abuse. For
example, the forms require applicants to provide information designed
to ensure that each school or library receives the discount to which it
is entitled under the Commission's rules. The forms also are designed
to ensure that support is provided only with respect to eligible
entities, and only for services eligible for support, and that
applicants are otherwise in compliance with all applicable Commission
requirements. Second, the forms were designed to facilitate the use of
competitive bidding. In addition, the forms were designed to be
competitively neutral, so that no potential provider is precluded from
offering service to a school or library. Third, the use of a single set
of forms will substantially ease burdens of administering the support
mechanism, and thereby minimize the costs of administration. Moreover,
if funds are allocated pursuant to a single set of forms, it may be
easier to audit the administrative processes of the Schools and
Libraries Corporation. Fourth, the use of a single set of forms will
facilitate tracking of the schools and libraries support mechanism over
time. For example, it will make it easier to determine what types of
services schools and libraries need, and how those needs change over
time. Such information is useful for deciding what if any adjustments
should be made with respect to the schools and libraries mechanism.
Congress expressly provided for such adjustments.
74. We note that the Commission invited, and received, substantial
input on the application forms as they were developed. The Commission,
in conjunction with the Schools and Libraries Corporation, held a
public workshop, and draft application forms were posted on the
Commission's website. The application forms reflect comments and
suggestions from schools and library representatives, service
providers, the Department of Education and the Schools and Libraries
Corporation. We anticipate that, as parties begin to use the
application forms, they will discover ways to improve them, and we
encourage suggestions for modifying and improving the application
forms. For the reasons set forth above, however, we conclude that
requiring all applicants to use the same application forms will serve
the public interest. We find that it is particularly important, in the
first year of implementation, to take all reasonable steps to make sure
the
[[Page 2106]]
Schools and Libraries Corporation is able to administer the support
mechanism as efficiently and effectively as possible. We therefore deny
Florida Department of Management Services' request to use its own
application form.
C. Non-Public Schools and Libraries
75. It is our expectation that states will approve technology plans
in a reasonably timely manner. As noted above, however, the Schools and
Libraries Corporation has authority to review and certify the
technology plans of schools and libraries if the applicant provides
evidence that a state agency is unwilling or unable to do so in a
reasonably timely fashion. We here conclude that a school or library
may apply directly to the Schools and Libraries Corporation for
technology plan approval if the school or library is not required by
state or local law to obtain approval for technology plans and
telecommunications expenditures. The Schools and Libraries Corporation
has stated its intent to create a process for reviewing technology
plans of private schools and other eligible entities whose states are
unable to review their plans. The Schools and Libraries Corporation may
structure the review process in any manner it deems necessary to
complete review in a timely fashion, consistent with the purposes of
the review. We emphasize, however, that schools and libraries that are
subject to a state review process by state or local law may not
circumvent the state process by submitting plans directly to the
Schools and Libraries Corporation for review. Eligible schools and
libraries that are required by state or local law to obtain approval
for technology plans and telecommunications expenditures will be
allowed to submit technology plans to the Schools and Libraries
Corporation for review only when the state is unwilling or unable to
review such plans in a reasonably timely fashion. In addition, if a
technology plan is rejected at the state level, a school or library may
not then submit the plan to the Schools and Libraries Corporation in an
attempt to circumvent the state review process.
76. In addition, FCC Forms 470 and 471 will allow applicants to
indicate that their technology plans either have been approved or will
be approved by a state, Schools and Libraries Corporation, or by
another authorized body. This provision will allow schools and
libraries that are required to obtain technology plan approval from an
entity other than a state agency to submit both FCC Forms 470 and 471
without any delay due to a lack of technology plan approval. Schools
and libraries will not be able to receive actual discounts, however,
until their technology plans are approved.
77. Given the Schools and Libraries Corporation plan to institute
an approval process that ``will occur in sufficient time to meet the
needs of those schools that choose to apply under the 75 day window,''
we see no need to adopt the suggestion of the National Association of
Independent Schools that we waive the technology plan approval
requirement for all schools and libraries for the first six to twelve
months of the schools and libraries program in order to provide
sufficient time to develop alternative approval mechanisms. We
understand that the Schools and Libraries Corporation is moving forward
with due diligence to ensure that their technology plan review process
is put into place as quickly as possible. We reiterate that approval of
an applicant's technology plan will assist in ensuring that technology
plans are based on the reasonable needs and resources of the applicant
and are consistent with the goals of the program.
D. Option to Post Requests for Proposals on Websites
78. In light of the concerns expressed by the Working Group and
NECA, including significant costs and potential delays associated with
requiring the administrative companies to post RFPs on the school and
library and rural health care provider websites, we reconsider the
Commission's requirement that the administrative companies post on the
websites RFPs submitted by applicants. An RFP is a detailed request for
the services and facilities that an entity is interested in procuring.
RFPs may vary greatly in length, numbering over a hundred pages in some
cases, including diagrams and specifications of the procurement of
facilities. FCC Form 470, submitted by school and library applicants,
and FCC Form 465, submitted by eligible health care applicants, will
instruct applicants to describe the services they seek and to include
information sufficient to enable service providers to identify
potential customers. We conclude that this information is adequate to
serve the purposes underlying the website posting requirement by
allowing schools and libraries to take advantage of the competitive
marketplace. We conclude that any additional information contained in
an RFP that is not submitted for posting on the website under FCC Forms
470 and 465 can be made available to interested service providers at
the election of the school, library, or rural health care provider
applicant. We encourage eligible school, library, and rural health care
provider applicants to make RFPs available upon request to interested
service providers. We do not, however, require the Schools and
Libraries Corporation or the Rural Health Care Corporation to post RFPs
on the websites, but instead require the administrative companies to
post FCC Forms 470 and 465, respectively.
E. State Telecommunications Networks and Wide Area Network
79. We conclude that state telecommunications networks that procure
supported telecommunications and make them available to schools and
libraries constitute consortia that will be permitted to secure
discounts on such telecommunications on behalf of eligible schools and
libraries. We further conclude that, with respect to Internet access
and internal connections, state telecommunications networks may either
secure discounts on such telecommunications on behalf of schools and
libraries, or receive direct reimbursement from the universal service
support mechanisms, pursuant to section 254(h)(2)(A), for providing
such services. Finally, we conclude, on our own motion, that to the
extent schools and libraries build and purchase wide area networks to
provide telecommunications, such networks will not be eligible for
universal service discounts.
a. State Telecommunications Networks
1. Procuring Telecommunications
80. We conclude that state telecommunications networks that procure
supported telecommunications and make them available to eligible
schools and libraries constitute consortia that will be permitted to
secure discounts on such services on behalf of their eligible members.
We recognize the significant benefits that state telecommunications
networks provide to schools and libraries in terms of, among other
things, purchasing services in bulk and passing on volume discounts to
schools and libraries. In order for eligible schools and libraries to
receive discounts pursuant to the universal service support mechanisms
for schools and libraries and to continue to receive the benefits
currently provided by state telecommunications networks, such networks,
consistent with the universal service rules, may obtain discounts on
telecommunications from the universal service support mechanisms on
behalf of eligible schools and libraries and pass on such discounts to
the eligible entities. We emphasize that, with respect to
telecommunications, state
[[Page 2107]]
telecommunications networks only will be permitted to pass on discounts
for such services to eligible schools and libraries, but will not, as
discussed below, be able to receive direct reimbursement from the
universal service support mechanisms for providing such services. We
conclude that a state telecommunications network itself will not
qualify for discounts on telecommunications. Because it does not meet
the definition of an eligible school or library as set forth in the
Order, a state telecommunications network only may secure such
discounts on behalf of the schools and libraries it serves and pass
through the discounts to those schools and libraries. Because schools
and libraries will benefit from both the universal service discounts
and the ability of state telecommunications networks to aggregate
demand and secure prices based on volume discounts, the approach we
adopt here will be advantageous to eligible schools and libraries.
Furthermore, this approach will help maintain the integrity of the
universal service support mechanisms, because eligible schools and
libraries will be able to secure pre-discount prices for
telecommunications that are lower than the prices for such
telecommunications if they had not been purchased in bulk.
81. In order to receive and pass through discounts on supported
telecommunications for eligible schools and libraries, state
telecommunications networks must make a good faith effort to ensure
that each eligible school or library receives a proportionate share of
shared services. State telecommunications networks must take reasonable
steps to ensure that service providers apply appropriate discount
amounts on the portion of the supported telecommunications used by each
eligible school or library. The service providers will submit to the
state telecommunications network a bill that includes the appropriate
discounts on eligible telecommunications rendered to eligible entities.
The state telecommunications network then will direct the eligible
consortium members to pay the discounted prices. Eligible consortium
members may pay the discounted prices to their state telecommunications
network, which will then remit the discounted amount to the service
providers. Service providers will receive direct reimbursement from the
support mechanisms in an amount equal to the difference between the
pre-discount price of the eligible telecommunications and the
discounted amount. We emphasize that state telecommunications networks
purchasing services on behalf of schools and libraries are required to
comply with the applicable competitive bid requirements established in
the Order.
82. We note that, even where state telecommunications networks have
procured telecommunications on behalf of schools and libraries through
competitive bidding or are exempt from the competitive bid requirement,
it may be advantageous for schools and libraries themselves to seek
competitive bids on their requested services. In so doing, schools and
libraries may be better able to ensure that they obtain the best price
on the services that are most closely tailored to meet their needs. We
have attempted to design the universal mechanisms so that schools,
libraries, and rural health care providers utilize, and obtain the
advantages of, competition, to the fullest extent possible. The
competitive bidding process is a key component of the Commission's
effort to ensure that universal service funds support services that
satisfy the precise needs of an institution, and that the services are
provided at the lowest possible rates. We recognize that schools,
libraries, and health care providers may need to transition to the new
universal service mechanisms, and we have made reasonable accommodation
for eligible entities that have preexisting contracts for
telecommunications, internal connections, or access to the Internet. We
intend to continue to monitor our decision to exempt certain
preexisting contracts from the competitive bidding requirement, to
ensure that the exemption does not reduce the benefits that competitive
bidding will provide. We thus encourage schools and libraries to seek
competitive bids on their requests for services in order to obtain the
best price for the desired services. We note that schools and libraries
have an incentive to obtain the best price for services, because such
schools and libraries will be responsible for paying a portion of the
cost. We also note that, after seeking competitive bids, schools and
libraries may nevertheless decide to obtain telecommunications that are
procured by a state telecommunications network.
83. Because it appears that state telecommunications networks
generally make telecommunications available to both eligible and
ineligible entities, we emphasize that, pursuant to section 254(h)(4),
such networks may obtain and pass through universal service discounts
only with respect to schools and libraries that are eligible to receive
such discounts. In order to protect the integrity of the schools and
libraries program, we direct state telecommunications networks to
develop and retain records listing eligible schools and libraries and
showing the basis on which the eligibility determinations were made.
Such networks also must keep careful records demonstrating the discount
amount to which each eligible entity is entitled and the basis on which
such a determination was made. Additionally, consistent with the Order,
service providers must develop and retain detailed records showing how
they have allocated the costs of facilities shared by eligible and
ineligible entities in order to charge such entities the correct
amounts.
84. We disagree with parties that argue that state
telecommunications networks should be able to receive direct
reimbursement from the support mechanisms for providing schools and
libraries with services other than access to the Internet and internal
connections. Because they do not meet the definition of
``telecommunications carrier,'' state telecommunications networks are
not eligible to receive direct reimbursement from the support
mechanisms pursuant to section 254(h)(1)(B). Section 254(h)(1)(B)
provides that only telecommunications carriers may receive support for
providing schools and libraries with the telecommunications supported
under section 254(h)(1)(B). Based on the record before us, we agree
with USTA that, because they do not offer telecommunications ``for a
fee directly to the public, or to such classes of users as to be
directly available to the public,'' state telecommunications networks
do not meet the definition of ``telecommunications carrier.'' As the
Commission determined in the Order, the definition of
``telecommunications service'' is intended to encompass only
telecommunications provided on a common carrier basis. The Commission
further noted that ``* * * precedent holds that a carrier may be a
common carrier if it holds itself out `to service indifferently all
potential users' '' and that ``a carrier will not be a common carrier
`where its practice is to make individualized decisions in particular
cases whether and on what terms to serve.' ''
85. We are not persuaded by the record before us that state
telecommunications networks offer service ``indifferently [to] all
potential users.'' Rather, the evidence indicates that state
telecommunications networks offer services to specified classes of
entities. Because the record does not contain any credible evidence
that a
[[Page 2108]]
state telecommunications network offers or plans to offer service
indifferently to any requesting party, we find that state
telecommunications networks do not offer service ``directly to the
public or to such classes of users as to be directly available to the
public'' and thus will not be eligible for reimbursement from the
support mechanisms pursuant to section 254(h)(1). We further find that
prohibiting state telecommunications networks from receiving direct
reimbursement from the support mechanisms pursuant to section 254(h)(1)
is consistent with the Commission's determination in the Order that
consortia of schools and libraries may receive discounts on eligible
services, but that such consortia will not be permitted to receive
direct reimbursement from the support mechanisms.
86. We recognize that it may be more administratively burdensome
for state telecommunications networks to obtain and pass through
discounts on behalf of schools and libraries, rather than to receive
direct reimbursement from the support mechanisms for procuring
telecommunications and making such telecommunications available to
schools and libraries. As discussed above, however, state
telecommunications networks do not meet the definition of
``telecommunications carrier'' and thus will not be permitted to
receive direct reimbursement for the provision of telecommunications.
Additionally, parties have not suggested any reason why state
telecommunications networks should be treated differently from other
consortia and thus be allowed to receive support directly from the
universal service support mechanisms for providing telecommunications
other than Internet access and internal connections. Furthermore, even
if they were able to receive direct reimbursement from the support
mechanisms for providing telecommunications, state telecommunications
networks would still need to determine which entities are eligible for
discounts and the discount rate to which each eligible entity is
entitled. Therefore, any additional administrative burden created by
requiring state telecommunications networks to pass through the
discount amounts, rather than allowing them to receive direct
reimbursement from the support mechanisms, may not be as significant as
some parties suggest.
2. Internet Access and Internal Connections
87. With respect to Internet access and internal connections, we
conclude that state telecommunications networks may either secure
discounts on the purchase of such telecommunications purchased from
other providers on behalf of schools and libraries in the manner
discussed above with regard to telecommunications, or receive direct
reimbursement from the support mechanisms for providing Internet access
and internal connections to schools and libraries, pursuant to section
254(h)(2)(A). As the Commission concluded in the Order, section
254(h)(2)(A), in conjunction with section 4(i), authorizes the
Commission to permit discounts and funding mechanisms to enhance access
to advanced services provided by non-telecommunications carriers. On
this basis, the Commission stated that it would permit discounts for
Internet access and internal connections provided by non-
telecommunications carriers. Thus, although we conclude that state
telecommunications networks do not constitute telecommunications
carriers that are eligible for reimbursement for making available
telecommunications pursuant to section 254(h)(1)(B), we do find that
networks that make Internet access and internal connections available
to schools and libraries are eligible, under the Order and section
54.517 of our rules, as non-telecommunications carriers for direct
reimbursement from the support mechanisms for providing these services.
88. NASTD suggests that the Commission's statement in the Order
that it was ``constrained only by the concepts of competitive
neutrality, technical feasibility, and economic reasonableness'' in
implementing section 254(h)(2)(A) means that state telecommunications
networks should be eligible for reimbursement from the support
mechanisms for providing ``bundled service packages'' that include
telecommunications and access to the Internet and internal connections.
As explained above, however, the Act defines ``telecommunications
carrier'' as any provider of ``telecommunications service'' and does
not equate ``telecommunications'' (the term used in section
254(h)(2)(A)) with ``telecommunications service.'' Therefore, because
state telecommunications networks do not provide ``telecommunications
service,'' they do not meet the definition of ``telecommunications
carrier'' and will not be permitted to receive direct reimbursement for
the provision of services other than Internet access and internal
connections. To the extent that they make available Internet access and
internal connections, state telecommunications networks are non-
telecommunications carriers. As non-telecommunications carriers, they
are eligible, as we determined in the Order, pursuant to section
254(h)(2)(A), for direct reimbursement from the support mechanisms when
they make available to eligible entities Internet access and internal
connections.
89. Finally, we emphasize that, consistent with the Order, eligible
schools and libraries will be required to seek competitive bids for all
services eligible for section 254(h) discounts, including those
services that state telecommunications networks provide using their own
facilities. Thus, schools and libraries in Iowa may not obtain support
from the universal service support mechanisms if they select ICN as
their provider of access to the Internet and internal connections
without first seeking competitive bids. Schools and libraries are not
required to select the lowest bids offered, although the Commission
stated that price should be the ``primary factor.'' If eligible schools
and libraries in Iowa choose ICN as their provider of access to the
Internet and internal connections, we conclude that ICN may receive
reimbursement from the support mechanisms for providing such services.
b. Wide Area Networks
On our own motion, we further conclude that, to the extent that
states, schools, or libraries build and purchase wide area networks to
provide telecommunications, the cost of purchasing such networks will
not be eligible for universal service discounts. We reach this
conclusion because, from a legal perspective, wide area networks
purchased by schools and libraries and designed to provide
telecommunications do not meet the definition of services eligible for
support under the universal service discount program. First, the
building and purchasing of a wide area network is not a
telecommunications service because the building and purchasing of
equipment and facilities do not meet the statutory definition of
``telecommunications.'' Moreover, as the Commission determined in the
Order, the definition of ``telecommunications service'' is intended to
encompass only telecommunications provided on a common carrier basis.
Second, wide area networks are not internal connections because they do
not provide connections within a school or library. We herein establish
a rebuttable presumption that a connection does not constitute an
internal connection if it crosses a public right-of-way. Third, wide
area networks built and purchased
[[Page 2109]]
by schools and libraries do not appear to fall within the narrow
provision that allows support for access to the Internet because wide
area networks provide broad-based telecommunications. For these
reasons, therefore, we conclude that the purchase of wide area networks
to provide telecommunications services will not be eligible for
universal service discounts.
F. State Support
91. We conclude that, for services provided to eligible schools and
libraries, federal universal service discounts should be based on the
price of the service to regular commercial customers or, if lower than
the price of the service to regular commercial customers, the
competitively bid price offered by the service provider to the school
or library that is purchasing eligible services, prior to the
application of any state-provided support for schools or libraries. To
find otherwise would penalize states that have implemented support
programs for schools and libraries by reducing the level of federal
support that those schools and libraries would receive. We anticipate
that our conclusion will encourage states to implement or expand their
own universal service support programs for schools and libraries.
92. Our determination to calculate discounts on the price of a
service to eligible schools and libraries prior to the reduction of any
state support will not require an adjustment in the $2.25 billion in
annual support that the Commission estimated was necessary to fulfill
the statutory obligation to create sufficient universal service support
mechanisms for schools and libraries. In estimating the level of
universal service support needed to serve schools and libraries, the
Commission purposefully did not take into consideration state universal
service support to schools and libraries. Thus, our determination to
calculate federal universal service support levels on the price of
service to schools and libraries prior to the application of any state-
provided support should not threaten the sufficiency of the federal
support mechanisms for schools and libraries.
93. Finally, we do not agree with USTA that allowing federal
support levels to be based upon the price of service to schools and
libraries prior to the application of any state-provided support for
schools or libraries will force all telecommunications carriers to
subsidize state-wide networks. Pursuant to section 254(h), universal
service support for schools, libraries, and rural health care providers
can be provided only to designated educational and health care
providers. Moreover, USTA has not explained why applying the federal
discount rate before applying any state discounts would reduce the
overall amount that a carrier will receive for providing a supported
service.
G. Aggregate Discount Rates
94. Our current rules require consortia to calculate the discount
level by using a weighted average that is based on the share of the
pre-discount price for which each school or library agrees to be
``financially liable.'' Our rules also provide that each ``eligible
school, school district, library, or library consortium will be
credited with the discount to which it is entitled.'' We hereby adopt a
modified version of the Working Group's proposal regarding the
application of discounts for schools and libraries that apply through
consortia, including school districts, rather than on an individual
basis. Because the discount is determined based on the weighted average
of the amount for which each individual school or library agrees to be
financially liable, we conclude that the amount of support likewise
should be determined, where possible, on the discount rate to which
each individual school or library is entitled. In other words, both the
discount rate and the provision of support should be determined for
each individual school or library if it is not unreasonably burdensome
to do so. We therefore agree with the Working Group that, for services
that will be used only by an individual institution, the applicable
discount rate for the services should be determined based on the
applicable discount rate for the individual school or library, not the
consortium. Thus, for example, if a school applies for support as part
of a consortium, but seeks support for internal connections that it
alone will use, the amount of support for that internal connection
should be calculated based on the specific discount rate applicable for
that school. We find that this decision is consistent with our earlier
decision that the level of support should be based on the economic
level and geographic location of the institution seeking support.
95. We recognize, however, that we must balance the desire for
equitable distribution of support against the need to keep the
application process as simple and efficient as possible. Thus, while we
require the state, school district, or library system to ``strive to
ensure'' that each school and library in a consortium receives the full
benefit of the discount on shared services to which it is entitled, we
will not require school districts or library systems to compute their
discount rate for shared services based on estimates of the actual
usage that each of their schools or library branches will make and the
respective discounts that these individual units are entitled to
receive. Shared services are those that cannot, without substantial
difficulty, be identified with particular users or be allocated
directly to particular entities. We conclude that the administrative
burden of such a requirement would not be justified by the benefit in
light of existing rules in this area. We recognize that states already
prohibit unreasonable discrimination against disadvantaged schools in
the state, and that the courts have upheld such rules of equity, even
against the state itself. Although we do not mandate consortia to adopt
a particular methodology for distributing shared services, we seek to
ensure that economically disadvantaged institutions receive the
discounts to which they are entitled. Accordingly, we require that
consortia certify that each individual institution listed as a member
of a consortium and included in determining the discount rate will
receive a proportionate share of the shared services within each year
in which the institution is used to calculate the aggregate discount
rate. Consortia may, for example, satisfy this obligation by keeping
track of the usage level of shared services with respect to each
institution that was included in calculating the discount rate, or they
may adopt other methods to ensure that each institution receives a
proportionate share of shared services. This requirement is appropriate
because the discount rate for calculating support for shared services
will be based on all entities listed in the request for services. By
the same token, this requirement is not unduly burdensome because it
does not require applicants to develop complex weighting methodologies
or to calculate different discount rates for different entities that
use shared services. Our determination that the state or district must
``strive to ensure'' that each school or library receives the full
benefit of the discount to which it is entitled will help ensure that
this goal is met. Moreover, the Schools and Libraries Corporation,
pursuant to its obligation to review and approve schools' and
libraries' applications and service providers' bills, is developing
cost allocation procedures to further ensure that schools and libraries
receive the discounts to which they are entitled.
96. Finally, we agree with the Working Group that an applicant that
is
[[Page 2110]]
comprised of multiple eligible schools and libraries must keep adequate
records showing how the distribution of funds was made, and the basis
for distribution. Our rules currently require such records.
H. Limiting Internal Connections to Instructional Buildings
97. We take this opportunity to make clear, on our own motion, that
the Order limits support for internal connections to those essential to
providing connections within instructional buildings. Thus, discounts
are not available for internal connections in non-instructional
buildings of a school district or administrative buildings of a library
unless those internal connections are essential for the effective
transport of information to an instructional building or library.
Hence, discounts would be available for routers and hubs in a school
district office if individual schools in the school district were
connected to the Internet through the district office. The Order stated
that ``a given service is eligible for support as a component of the
institution's internal connections only if it is necessary to transport
information all the way to individual classrooms.'' This focus on
access to classrooms followed from the Commission's conclusion that
``Congress intended that telecommunications and other services be
provided directly to classrooms.'' The Commission reached this
conclusion based on its analysis of the statute (where classrooms are
explicitly mentioned) and of the legislative history (where Congress
explicitly refers repeatedly to classrooms). Similarly, to the extent
that a library system has separate administrative buildings, support is
not available for internal connections in those buildings. Sections
254(h)(1)(B) and (h)(2) provide for universal service support for
``libraries.'' Imposing this restriction on support to non-
administrative library facilities is consistent with the approach to
support for internal connections to instructional school buildings
discussed above.
98. Consistent with this clarification, we modify our rules to
reflect that support is not available for internal connections in non-
instructional buildings used by a school district unless those internal
connections are essential for the effective transport of information
within instructional buildings or buildings used by a library for
strictly administrative functions.
Thus, discounts would be available for the internal connections
installed in a school district office if that office were used as the
hub of a local area network (LAN) and all schools in the district
connect to the Internet through the internal connections in that
office. We further hold that ``internal connections'' include
connections between or among multiple instructional buildings that
comprise a single school campus or multiple non-administrative
buildings that comprise a single library branch, but do not include
connections that extend beyond that single school campus or library
branch. Thus, for example, connections between two instructional
buildings on a single school campus would constitute internal
connections eligible for universal service support, whereas connections
between instructional buildings located on different campuses would not
constitute internal connections eligible for such support.
I. Existing Contracts
99. We reconsider our earlier finding that contracts signed on or
after November 8, 1996 are not eligible for universal service support
after December 31, 1998. We conclude that a contract of any duration
signed on or before July 10, 1997 will be considered an existing
contract under our rules and therefore exempt from the competitive bid
requirement for the life of the contract. Discounts will be provided
for eligible services that are the subject of such contracts on a
going-forward basis beginning on the first date that schools and
libraries are eligible for discounts. We further conclude that
contracts signed after July 10, 1997 and before the date on which the
Schools and Libraries Corporation website is fully operational will be
eligible for support and exempt from the competitive bid requirement
for services provided through December 31, 1998. Contracts that are
signed after July 10, 1997 are only eligible for support for services
received between January 1 and December 31, 1998, regardless of the
term or duration of the contract as a whole. In reconsidering our prior
determination, we seek to avoid penalizing schools and libraries that
were reasonably uncertain of their rights pursuant to the Order and to
allow greater flexibility for schools and libraries to obtain the
benefits of longer-term contracts, including potentially lower prices.
The Order permitted schools and libraries to apply the relevant
discounts to only those ``contracts that they negotiated prior to the
Joint Board's Recommended Decision [November 8, 1996] for services that
will be delivered and used after the effective date of our rules.'' We
agree with commenters, however, that section 54.511(c) |
