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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************** Before the Federal Communications Commission Washington, D.C. 20554 ) In the Matter of ) ) CC Docket No. 96-45) Federal-State Joint Board on ) (Report to Congress) Universal Service ) REPORT TO CONGRESS Adopted: April 10, 1998 Released: April 10, 1998 By the Commission: (Chairman Kennard and Commissioners Ness, Powell and Tristani issuing separate statements; Commissioner Furchtgott-Roth dissenting and issuing a statement) TABLE OF CONTENTS I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 II. EXECUTIVE SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . 7 A. Definitional Issues . . . . . . . . . . . . . . . . . . . 7 B. Application of Definitions. . . . . . . . . . . . . . . . 8 C. Who Contributes to Universal Service Mechanisms . . . . . 9 D. Who Receives Universal Service Support. . . . . . . . . . 9 E. Revenue Base and Percentage of Federal Funding. . . . . . 9 III. STATUTORY DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . 11 A. Overview. . . . . . . . . . . . . . . . . . . . . . . . . 11 B. Background. . . . . . . . . . . . . . . . . . . . . . . . 11 C. Discussion. . . . . . . . . . . . . . . . . . . . . . . . 16 IV. APPLICATION OF DEFINITIONS. . . . . . . . . . . . . . . . 28 A. Overview. . . . . . . . . . . . . . . . . . . . . . . . . 28 B. Mixed or Hybrid Services. . . . . . . . . . . . . . . . . 29 C. Background on Internet Services . . . . . . . . . . . . . 30 D. Discussion. . . . . . . . . . . . . . . . . . . . . . . . 32 V. WHO CONTRIBUTES TO UNIVERSAL SERVICE MECHANISMS. . . . . . . . . . 53 A. Overview. . . . . . . . . . . . . . . . . . . . . . . . . 53 B. Background. . . . . . . . . . . . . . . . . . . . . . . . 53 C. Discussion. . . . . . . . . . . . . . . . . . . . . . . . 60 VI. WHO RECEIVES UNIVERSAL SERVICE SUPPORT . . . . . . . . . . . . . . 72 A. Background. . . . . . . . . . . . . . . . . . . . . . . . 72 B. Discussion. . . . . . . . . . . . . . . . . . . . . . . . 76 VII. REVENUE BASE AND PERCENTAGE OF FEDERAL FUNDING. . . . . . 93 A. Revenue Base for Contributions. . . . . . . . . . . . . . 94 B. Percentage of Federal Funding . . . . . . . . . . . . . .102 C. Methodology for Assessing Contributions . . . . . . . . .108 VIII. CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . .109 APPENDIX A Parties Filing Comments APPENDIX B Parties Filing Reply Comments 1. On November 26, 1997, in a recent Appropriations Act, Congress directed the Commission to report to Congress on the Commission's implementation of certain provisions of the Telecommunications Act of 1996 regarding the universal service system. In response to this mandate, we have undertaken a thorough review of the Commission s interpretations of the relevant provisions of the 1996 Act with respect to each of the subjects identified in the Appropriations Act. 2. We are mindful of the fact that telecommunications is an industry characterized by extremely rapid changes, as technological advances lead to the introduction of revolutionary services. A few years ago, few consumers in this country were aware of the Internet and the notion that a packet-switched network could be used to complete a long distance call placed from a residential telephone probably would have been regarded as far- fetched. Today, millions of consumers, both in the United States and around the world, daily obtain access to the Internet for a wide variety of services. We can only speculate about the technologies and services that will be offered in the future. We must take care to preserve the vibrant growth of these new technologies and services. But we also must remain constant in our commitment to ensuring universal service. 3. In this Report, we find, under the framework of the 1996 Act, that universal service and the growth of new Internet-based information services are mutually reinforcing. The development and continued growth of information services depends upon the preservation and advancement of universal service. By connecting our nation s telecommunications networks to all citizens, we expand the potential customer basis for information services. At the same time, the growth of Internet-based information services greatly stimulates our country s use of telecommunications, and thereby the revenue base from which we now fund universal service. As we confirm below in our Report, the parties supplying the underlying interstate transmission services used by those information services contribute to universal service based on their telecommunications service revenues. Because Internet service providers are major users of telecommunications, they make substantial indirect contributions to universal service support in the charges they pay to their telecommunications suppliers. We also consider below the regulatory status of various forms of "phone-to-phone" IP telephony service mentioned generally in the record. The record currently before us suggests that certain of these services lack the characteristics that would render them information services within the meaning of the statute, and instead bear the characteristics of telecommunications services, but we do not believe it is appropriate to make any definitive pronouncements in the absence of a more complete record focused on individual service offerings. To the extent we conclude that the services should be characterized as "telecommunications services," the providers of those services would fall within the 1996 Act's mandatory requirement to contribute to universal service mechanisms. Thus, in general, continued growth in the information services industry will buttress, not hinder, universal service. 4. We recognize that we are in the midst of a transition from an outmoded system of universal service support that will be undermined by the emergence of local competition to one that is compatible with competitive local markets. We underscore that during and after this transition, it is our duty and intention to ensure that financial support for federal universal service support mechanisms is maintained. In carrying out those reponsibilities, we must think ahead, so that our policies are right not just for the present but for the future as well. Our rules should not create anomalies and loopholes that can be exploited by those seeking to avoid universal service obligations. 5. In this Report, we also commit to a reexamination of the issues regarding the respective federal and state responsibilities for maintaining and advancing universal service goals, including a full consideration of the specific alternatives to the Commission s decisions last May that parties have placed in the record before us. This will include a reevaluation of the decision regarding the federal share of high cost support (the "25-75" decision) prior to January 1, 1999. Section 254(b)(3) of the Act establishes the principle that federal and state universal service mechanisms be specific, predictable and sufficient. We plan to redouble our efforts to work with state commissions to ensure that this statutory principle is fully realized. Therefore, in full recognition of the importance of the mission given to us by Congress in the Appropriations Act, we respectfully submit this Report to Congress on universal service. I. INTRODUCTION 6. This Report to Congress focuses on the Commission's implementation of the 1996 Act's provisions regarding universal service. The universal service system is designed to ensure that low-income consumers can have access to local phone service at reasonable rates. Universal service also ensures that consumers in all parts of the country, even the most remote and sparsely populated areas, are not forced to pay prohibitively high rates for their phone service. 7. Before passage of the 1996 Act, universal service was promoted through a patchwork quilt of implicit and explicit subsidies at both the state and federal levels. Charges to long distance carriers and rates for certain intrastate services provided to carriers and to end users were priced above cost, which enabled local telephone companies to keep rates for basic local telephone service at affordable levels throughout the country. The effect of these subsidies was to increase subscribership levels nationwide by ensuring that residents in rural and high cost areas were not prevented from receiving phone service because of prohibitively high telephone rates. 8. Recognizing the vulnerability of these implicit subsidies to competition, Congress, in the 1996 Act, directed the Commission and the states to restructure their universal service support mechanisms to ensure the delivery of affordable telecommunications services to all Americans in an increasingly competitive marketplace. Congress specified that universal service support under the new federal system "should be explicit," and that "every telecommunications carrier that provides interstate telecommunications service shall contribute, on an equitable and non-discriminatory basis, to the specific, predictable, and sufficient mechanisms established by the Commission to preserve and advance universal service." In addition, Congress specified that a telecommunications carrier meeting the statutory requirements in section 214(e) of the Act would be eligible to receive federal universal service support and required states to designate more than one eligible telecommunications carrier for service areas other than those served by a rural telephone company. To sustain universal service in a competitive environment, Congress recognized that: (1) the appropriate amount of the universal subsidy must be identifiable; (2) all carriers (rather than only interexchange carriers) that provide telecommunications service should contribute to universal service, on an equitable basis; and (3) any carrier (rather than only the incumbent LEC) should receive the appropriate level of support for serving a customer in a high cost area. 9. In the 1996 Act, Congress codified the long-standing commitment to ensuring universal service first expressed in section 1 of the Act, and directed that "[c]onsumers . . . in rural, insular, and high cost areas should have access to telecommunications and information services . . . that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to [those] in urban areas." Congress also expanded the concept of universal service by requiring, for the first time, universal service support for eligible schools, libraries and rural health care providers. 10. Consistent with the timetable established in the 1996 Act, the Commission issued the Universal Service Order in May 1997 implementing the new universal service provisions and setting forth a plan that fulfills the universal service goals established by Congress. In the Universal Service Order, the Commission announced its plan for establishing a system of universal service support for rural, insular, and high cost areas that will replace the existing high cost programs and the implicit federal subsidies with explicit, competitively-neutral federal universal service support mechanisms. The Commission made some modifications to the existing high cost support mechanisms that took effect on January 1, 1998. Those changes were the first steps in moving to a support system that is sustainable in a competitive environment, as Congress has directed. For example, the Commission modified the funding methods for the existing federal universal service support programs, beginning January 1, 1998, so that such support is not generated exclusively through charges imposed on long distance carriers. Instead, as the statute requires, the new universal service rules require equitable and non-discriminatory contributions from all telecommunications carriers and require other providers of interstate telecommunications service to contribute when the Commission finds that the public interest so requires. In addition, the Commission modified the existing high cost support programs so that implicit subsidies previously recovered through interstate access charges will be recovered through the new explicit federal universal service funding mechanism. The Commission also adopted rules to implement the new programs created by Congress in the 1996 Act to encourage and promote universal service for eligible schools, libraries and health care providers. 11. The Commission's revised universal service rules seek to ensure that the Commission's long-standing commitment to maintaining affordable rates throughout the country, codified in the 1996 Act, is maintained in a competitive environment. Although the Commission has many decisions still before it that will affect the ultimate amount of universal service support that will be provided by federal mechanisms, there is no indication that the revised universal service rules will result in a reduction in federal support from the current level. The Commission also intends to continue to consult with the Universal Service Joint Board and other state regulators and take additional steps, if necessary, to ensure that rates remain affordable. At the same time, however, the Commission recognizes the 1996 Act's mandate that universal service reforms must accommodate and encourage competition. The Commission also is aware that affordable rates can best be maintained through support mechanisms that provide as much support as is necessary, but no more than is necessary. 12. We are mindful that the proper implementation of these provisions is critical to the success and survival of the nation's universal service system and, accordingly, have taken our obligations very seriously. In preparing this Report, we have sought and reviewed thousands of pages of public comments. We have considered more than 5,000 informal public comments filed via electronic mail. We have held two en banc hearings during which panels of experts -- including representatives of the Internet community, telecommunications companies, educators and state officials -- discussed their views with us concerning the interpretive issues surrounding the relevant provisions of the 1996 Act. Although many of the rules at issue have been in place for nearly a year, we have considered each rule and interpretation anew and without preconceptions, in light of both the plain language and overall purposes of the 1996 Act. II. EXECUTIVE SUMMARY A. Definitional Issues 13. Section 623(b)(1) of the Appropriations Act directs the Commission to review "the definitions of 'information service,' 'local exchange carrier,' 'telecommunications,' 'telecommunications service,' 'telecommunications carrier,' and 'telephone exchange service.'" In response to Congress's directive, we have revisited the Commission's findings with regard to the way the Commission interpreted these statutory terms when it implemented the universal service provisions of the 1996 Act. In particular, we have carefully evaluated the impact of those definitions on the treatment of Internet-based offerings under the universal service system. We conclude, as the Commission did in the Universal Service Order, that the categories of "telecommunications service" and "information service" in the 1996 Act are mutually exclusive. Reading the statute closely, with attention to the legislative history, we conclude that Congress intended these new terms to build upon frameworks established prior to the passage of the 1996 Act. Specifically, we find that Congress intended the categories of "telecommunications service" and "information service" to be mutally exclusive, like the definitions of "basic service" and "enhanced service" developed in our Computer II proceeding, and the definitions of "telecommunications" and "information service" developed in the Modification of Final Judgment that divested the Bell Operating Companies from AT&T. We recognize that the 1996 Act's explicit endorsement of the goals of competition and deregulation represents a significant break from the prior statutory framework. We find generally, however, that Congress intended to maintain a regime in which information service providers are not subject to regulation as common carriers merely because they provide their services "via telecommunications." B. Application of Definitions 14. The Appropriations Act also requires the Commission to review "the application of those definitions [set forth in section 623(b)(1)] to mixed or hybrid services and the impact of such application on universal service definitions and support, and the consistency of the Commission's application of those definitions, including with respect to Internet access under section 254(h)." Pursuant to that directive, we have reviewed various mixed or hybrid services, including those services that are commonly described as Internet telephony services. The record currently before us suggests that certain forms of "phone-to- phone" IP telephony services lack the characteristics that would render them information services within the meaning of the statute, and instead bear the characteristics of telecommunications services. We do not, however, believe it is appropriate to make any definitive pronouncements in the absence of a more complete record focused on individual service offerings. To the extent that we conclude that IP certain forms of "phone-to-phone" IP telephony services should be characterized as "telecommunications services," the providers of those services would fall within the 1996 Act's mandatory requirement to contribute to universal service mechanisms. 15. Moreover, we clarify that the provision of transmission capacity to Internet access providers and Internet backbone providers is appropriately viewed as "telecommunications service" or telecommunications rather than "information service," and that the provision of such transmission should also generate contribution to universal service support mechanisms. Thus, we find, in general, that continued growth in the information services industry will buttress, not hinder, universal service. In those cases where an Internet service provider owns transmission facilities, and engages in data transport over those facilities in order to provide an information service, we do not currently require it to contribute to universal service mechanisms. We believe it is appropriate to reexamine that result, as one could argue that in such a case that the Internet service provider is furnishing raw transmission capacity to itself. We recognize, however, that there are significant operational difficulties associated with determining the amount of such an Internet service provider's revenues to be assessed for universal service purposes and with enforcing such requirements. We intend to consider these issues in an upcoming proceeding. Finally, we find that Internet service providers generally do not provide telecommunications. Our analysis, we believe, reflects a consistent approach that will safeguard the current and future provision of universal service to all Americans, and will achieve the Congressionally-specified goals of a "pro-competitive, deregulatory communications policy." C. Who Contributes to Universal Service Mechanisms 16. Section 623(b)(3) of the Appropriations Act requires the Commission to review "who is required to contribute to universal service under section 254(d) of the Communications Act . . . and related existing mechanisms, and of any exemption of providers or exclusion of any service that includes telecommunications from such requirement or support mechanisms." Accordingly, we have reviewed our decision regarding which entities must contribute to universal service support mechanisms, which entities should contribute, and which entities should be exempt from contributing. We affirm that the plain language of section 254(d), which mandates contributions from "every telecommunications carrier that provides interstate telecommunications services," requires the Commission to construe broadly the class of carriers that must contribute. In addition, we find that the Commission properly exercised the permissive authority granted by section 254(d) to include other providers of interstate telecommunications in the pool of universal service contributors. We have also re-examined the Commission's implementation of the limited authority set forth in section 254(d) to exempt de minimis contributors and affirm that the Commission has not exceeded the boundaries established by the statute. We conclude that the Commission appropriately exercised the flexibility that section 254(d) grants it to exempt those entities whose contributions would be de minimis and to include in the pool of contributors those providers of telecommunications whose contributions are required by the public interest. D. Who Receives Universal Service Support 17. Section 623(b)(4) of the Appropriations Act requires the Commission to review who is eligible under sections 254(e), 254(h)(1), and 254(h)(2) of the Communications Act ". . . to receive specific federal universal service support for the provision of universal service, and the consistency with which the Commission has interpreted each of those provisions of section 254." We have carefully evaluated the general standards of eligibility for support set forth in section 254(e) of the 1996 Act, as well as the eligibility standards for providers of services to schools and libraries under section 254(h)(1)(B) and for providers of services to health care providers under section 254(h)(1)(A). Although we observe that certain of the provisions of the 1996 Act appear to render the statute susceptible to more than one interpretation with respect to eligibility for the receipt of universal service support, we conclude that the Commission properly implemented eligibility rules that are consistent with both the language and the spirit of the 1996 Act. E. Revenue Base and Percentage of Federal Funding 18. Finally, as required by section 623(b)(5) the Appropriations Act, we reexamine "the Commission's decisions regarding the percentage of universal service support provided by federal mechanisms and the revenue base from which such support is derived." As explained in detail below, we find that the Commission's decisions with respect to the appropriate revenue base for universal service contributions are legally consistent with the 1996 Act and fulfill the intended goal of establishing an orderly transition from federal implicit subsidies to federal explicit subsidies. After analyzing the Commission's conclusions regarding the jurisdictional parameters placed on the Commission and on states, we agree that the Commission has the authority to assess universal service contributions on both the interstate and intrastate revenues of telecommunications providers. 19. With respect to the percentage of federal universal service funding, as discussed below, we regard the Commission's earlier decision as a place holder, an initial step in its plan for implementing section 254. States and other affected entities have raised serious concerns about the extent of federal support for high cost areas. In this Report, we commit to reconsidering those aspects of the Universal Service Order prior to fully implementing high cost universal service mechanisms. We conclude that a strict, across- the-board rule that provides 25 percent of unseparated high cost support to the larger LECs might provide some states with less total interstate universal service support than is currently provided. The Commission will work to ensure that states do not receive less funding as we implement the high cost mechanisms under the 1996 Act. We find that no state should receive less federal high cost assistance than it currently receives. The Commission decided to provide an evolving level of support and to revise funding mechanisms as necessary to maintain adequate support to ensure reasonable rates. Some of the larger LECs that have higher than average costs, however, currently recover more than 25 percent of their cost from the interstate jurisdiction. Beginning on January 1, 1999, this additional allocation above 25 percent is eliminated. At the same time, however, the basis for providing high cost support is fundamentally altered. We are mindful that the Commission's work in this regard is not yet complete. We are committed to issuing a reconsideration order in response to the petitions filed asking the Commission to reconsider the decision to fund 25 percent of the required support amount. In the course of that reconsideration, we will take all appropriate steps, including continued consultation with the states, to ensure that federal funding is adequate to achieve statutory goals. We also recognize that Congress assigned to the Commission, after consultation with the Joint Board, the ultimate responsibility for establishing policies that ensure that: 1) quality services are available at just, reasonable and affordable rates; 2) all consumers have "access to telecommunications and information services" at rates that are reasonably comparable to the rates charged for similar services in urban areas; and 3) there are "specific, predictable, and sufficient" federal and state mechanisms to preserve and advance universal service. We are committed to implementing section 254 consistent with these objectives. 20. We note that the discussion of the issue of federal support for high cost in this Report relates only to non-rural local exchange carriers. With respect to rural LECs, the Commission has determined that there shall be no change in the existing high cost support mechanisms until January 1, 2001 at the earliest. We do not revist that determination in this Report. Thus, the method of determining federal support for rural local exchange carriers will remain unchanged until at least January 1, 2001, meaning that the amount of universal service support for rural local exchange carriers will be maintained initially at existing levels and then should increase in accordance with specified factors, such as inflation, that have historically guided changes in such support. Any possible change in the support mechanism for rural local exchange carriers would require a separate rulemaking proceeding. III. STATUTORY DEFINITIONS A. Overview 21. All of the specific mandates of the 1996 Act depend on application of the statutory categories established in the definitions section. The 1996 Act added or modified several of the definitions found in the Communications Act of 1934, including those that apply to "telecommunications," "telecommunications service," "telecommunications carrier," "information service," "telephone exchange service," and "local exchange carrier." In section 623(b)(1) of the Appropriations Act, Congress directed us to review the Commission's interpretation of these definitions, and to explain how those interpretations are consistent with the plain language of the 1996 Act. Reading the statute closely, with attention to the legislative history, we conclude that Congress intended these new terms to build upon frameworks established prior to the passage of the 1996 Act. Specifically, we find that Congress intended the categories of "telecommunications service" and "information service" to parallel the definitions of "basic service" and "enhanced service" developed in our Computer II proceeding, and the definitions of "telecommunications" and "information service" developed in the Modification of Final Judgment breaking up the Bell system. We recognize that the 1996 Act's explicit endorsement of the goals of competition and deregulation represents a significant break from the prior statutory framework. We find generally, however, that Congress intended to maintain a regime in which information service providers are not subject to regulation as common carriers merely because they provide their services "via telecommunications." B. Background 22. The Communications Act of 1934. The Communications Act of 1934, as amended, gives the Commission extensive authority over all "common carriers," defined as all persons "engaged as a common carrier for hire, in interstate and foreign communication." Title II of the Act, derived from the federal Interstate Commerce Act, includes (among other things) requirements that common carriers provide service at just and reasonable prices, and subject to just and reasonable practices, classifications, and regulations; that they make no unjust or unreasonable discrimination; that they file tariffs, subject to Commission scrutiny; and that they obtain Commission approval before acquiring or constructing new lines. 23. Computer II. More than three decades ago, the Commission recognized that "the growing convergence and interdependence of communication and data processing technologies" threatened to strain its existing interpretations of Title II. It began an inquiry into the regulatory and policy problems posed by that confluence. In 1980, it issued the Computer II decision, embodying its thinking on how it could best advance its regulatory goals of "minimiz[ing] the potential for improper cross-subsidization, safeguard[ing] against anticompetitive behavior, and [protecting] the quality and efficiency of telephone service" while "foster[ing] a regulatory environment conducive to . . . the provision of new and innovative communications-related offerings" and "enabl[ing] the communications user to [take] advantage of the ever increasing market applications of computer . . . technology." 24. In Computer II, the Commission classified all services offered over a telecommunications network as either basic or enhanced. A basic service consisted of the offering, on a common carrier basis, of pure "transmission capacity for the movement of information." The Commission noted that it was increasingly inappropriate to speak of carriers offering discrete "services" such as voice telephone service. Rather, carriers offered communications paths that subscribers could use as they chose, by means of equipment located on subscribers' premises, for the analog or digital transmission of voice, data, video or other information. The Commission therefore defined basic transmission service to include the offering of "pure transmission capability over a communications path that is virtually transparent in terms of its interaction with customer supplied information." 25. An enhanced service, by contrast, was defined as "any offering over the telecommunications network which is more than a basic transmission service." Specifically, the Commission defined enhanced services to include services, offered over common carrier transmission facilities used in interstate communications, which employ computer processing applications that act on the format, content, code, protocol or similar aspects of the subscriber's transmitted information; provide the subscriber additional, different, or restructured information; or involve subscriber interaction with stored information. 26. Enhanced service providers, the Commission found, were not "common carriers" within the meaning of the Communications Act of 1934, and hence were not subject to regulation under Title II of that Act. Enhanced services involve "communications and data processing technologies . . . intertwined so thoroughly as to produce a form different from any explicitly recognized in the Communications Act of 1934." Seeking to regulate enhanced services, the Commission concluded, would only restrict innovation in a fast-moving and competitive market. 27. The Commission stressed that the category of enhanced services covered a wide range of different services, each with communications and data processing components. Some might seem to be predominantly communications services; others might seem to be predominantly data processing services. The Commission declined, however, to carve out any subset of enhanced services as regulated communications services. It found that no regulatory scheme could "rationally distinguish and classify enhanced services as either communications or data processing," and any dividing line the Commission drew would at best "result in an unpredictable or inconsistent scheme of regulation" as technology moved forward. Such an attempt would lead to distortions, as enhanced service providers either artificially structured their offerings so as to avoid regulation, or found themselves subjected to unwarranted regulation. The Commission therefore determined that enhanced services, which are ofered "over common carrier transmission facilities," were themselves not to be regulated under Title II of the Act, no matter how extensive their communications components. The Commission reaffirmed its definition of enhanced services in the Computer III proceeding. 28. The Modification of Final Judgment. On August 11, 1982, the District Court for the District of Columbia entered a consent decree, commonly known as the Modification of Final Judgment or MFJ, settling the United States Government's long-running antitrust lawsuit against AT&T. Under the MFJ, AT&T was required to divest itself of the Bell Operating Companies. The MFJ distinguished between "telecommunications" and "information" services: the Bell Operating Companies were to provide local exchange telecommunications service, but were forbidden to provide interexchange telecommunications service or information services. 29. The Telecommunications Act of 1996. On February 8, 1996, the 1996 Act became law. Whereas historically the communications field had been dominated by a few, heavily regulated providers, Congress sought to establish "a pro-competitive, deregulatory national policy framework," making "advanced telecommunications and information technologies and services" available to all Americans, "by opening all telecommunications markets to competition." 30. Although the 1996 Act left intact most of the existing provisions of Title II, it added new provisions referring to "telecommunications" and "information service." The 1996 Act defined "telecommunications" to mean "the transmission, between or among points specified by the user, of information of the user's choosing, without change in the form or content of the information as sent or received." It defined "telecommunications service" to mean "the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available to the public, regardless of the facilities used." It defined "telecommunications carrier" to include "any provider of telecommunications services, except that such term does not include aggregators of telecommunications services." It defined "information service" to mean the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications, and [such term] includes electronic publishing, but does not include any use of any such capability for the management, control or operation of a telecommunications system or the management of a telecommunications service. 31. The 1996 Act redefined "telephone exchange service" to include not only "service within a telephone exchange, or within a connected system of telephone exchanges within the same exchange area operated to furnish to subscribers interconnecting service of the character ordinarily furnished by a single exchange," but also "comparable service provided through a system of switches, transmission equipment, or other facilities (or combination thereof) by which a subscriber can originate and terminate a telecommunications service." It defined "local exchange carrier" to include "any person that is engaged in the provision of telephone exchange service or exchange access." The definition excludes persons "engaged in the provision of a commercial mobile service . . . except to the extent the Commission finds that such service should be included in the definition of such term." 32. The 1996 Act imposes a wide variety of obligations on telecommunications carriers, including, among other things, obligations relating to interconnection and privacy of subscriber information. One such obligation relates to universal service: section 254(d) dictates that every telecommunications carrier that provides interstate telecommunications services must contribute to the mechanisms established by the Commission to preserve and advance universal service. The 1996 Act does not impose obligations on telecommunications providers who do not provide interstate telecommunications services (and therefore are not "telecommunications carriers"), except that the Commission may require any provider of interstate telecommunications to contribute to universal service mechanisms if the public interest requires. The Act imposes no regulatory obligations on information service providers as such. C. Discussion 1. "Telecommunications," "Telecommunications Service," "Telecommunications Carrier" and "Information Service" Definitions 33. The proper interpretation of the terms "telecommunications" and "telecommunications service" in the 1996 Act raises difficult issues that are the subject of heated debate. The Commission previously concluded that the 1996 Act's definitions of telecommunications service and information service essentially correspond to the pre- existing categories of basic and enhanced services, in that they were intended to refer to separate categories of services. After finding in the Non-Accounting Safeguards Order that "the differently-worded definitions of 'information services' and 'enhanced services' . . . should be interpreted to extend to the same functions," the Commission ruled in the Universal Service Order that entities providing enhanced or information services are not thereby providing "telecommunications service." It found that the 1996 Act's definition of telecommunications, which "only includes transmissions that do not alter the form or content of the information sent," excludes Internet access services, which "alter the format of information through computer processing applications such as protocol conversion and interaction with stored data." In the Pole Attachments Telecommunications Rate Order, we relied on the Commission's finding that Internet access service does not constitute a telecommunications service, and in Use of Customer Proprietary Network Information we summarized Commission precedent as indicating that telecommunications services and information services are "separate, non-overlapping categories, so that information services do not constitute 'telecommunications' within the meaning of the 1996 Act." 34. Senators Stevens and Burns, along with commenters including some incumbent local exchange carriers, urge in their comments that this approach is incorrect. The 1996 Act's definition of "telecommunications," they state, creates a new category unrelated to anything in the Commission's earlier regulatory approach. Senators Stevens and Burns state that Congress, in defining "telecommunications" and "information service" in the 1996 Act, intended to replace the Commission's existing regulatory structure. As mentioned above, under the regulatory structure in place in 1996, a service could fall into either the "basic" or the "enhanced" category, but not both. An entity offering a service with both communications and computer-processing components was deemed to be providing an enhanced service, not a basic one. Senators Stevens and Burns state that Congress rejected that approach, intending instead that a service could fall simultaneously into both of the new categories created by the 1996 Act. Under this approach, an information service provider is deemed a telecommunications carrier to the extent it engages in "transmission" of the information it provides. In particular, Senators Stevens and Burns indicate, an information service provider transmitting information to its users over common carrier facilities such as the public switched telephone network is a "telecommunications carrier." 35. In support of their position, Senators Stevens and Burns note that the terms "basic" and "enhanced" do not appear in the 1996 Act; rather, Congress defined new categories. Their interpretation of the statute, they explain, flows naturally from the statute's definition of "telecommunications" as "the transmission, between or among points specified by the user, of information of the user's choosing, without change in the form or content of the information, as sent and received," its definition of "telecommunications service" as "the offering of telecommunications for a fee directly to the public . . . regardless of the facilities used," and its definition of telecommunications carrier as including "any provider of telecommunications services." These definitions taken together, they state, "make it plain that Congress intended [the term 'telecommunications carrier'] to include anyone engaged in the transmission of 'information of the user's choosing.'" Senators Stevens and Burns note that other language in the definition of "telecommunications carrier" makes clear that a given entity may simultaneously offer telecommunications and other services. They also point out that Congress failed to adopt language, included in the House version of the 1996 Act, providing that the term "'telecommunications service' . . . does not include an information service." Somewhat similar language in the text of the Senate bill was deleted as well. 36. Finally, Senators Stevens and Burns assert that the Commission's current understanding of the statutory terms could "seriously undermine the universal service, competitive neutrality, and local competition goals that were at the heart" of the 1996 Act. The regulatory provisions of the 1996 Act are addressed to "telecommunications carriers" and "telecommunications services." They explain that, to the extent that the categories of telecommunications and information services are interpreted to be mutually exclusive, the scope of the "telecommunications carrier" and "telecommunications service" categories is accordingly narrowed, and the reach of the 1996 Act is correspondingly limited. 37. Other Senators and other interested parties, however, have filed comments in this proceeding expressing a contrary view. Senator McCain urges that "[n]othing in the 1996 Act or the legislative history supports the view that Congress intended to subject information services providers to the current regulatory scheme applicable to common carriers which is, if anything, too intrusive and burdensome." Rather, he explains, "[i]t certainly was not Congress's intent in enacting the supposedly pro-competitive, deregulatory 1996 Act to extend the burdens of current Title II regulation to Internet services, which historically have been excluded from regulation." Senator McCain states, in defining "telecommunications," "telecommunications service" and "information service," Congress "distinguished between information services and telecommunication services to reflect the distinction set forth on the Modification of Final Judgment and the Commission's Second Computer Inquiry proceeding between those services that offer pure transmission capacity and others that somehow enhance the transmission capacity." An information service, he continues, "is the offering of particular capabilities via telecommunications, but is itself not telecommunications or a telecommunications service." For the Commission to rule that some or all information service providers should simultaneously be deemed telecommunications carriers would ignore a "clear distinction" drawn by Congress, and would have "disastrous" results. 38. Senators Ashcroft, Ford, John F. Kerry, Abraham and Wyden emphasize that "[n]othing in the 1996 Act or its legislative history suggests that Congress intended to alter the current classification of Internet and other information services or to expand traditional telephone regulation to new and advanced services." Like Senator McCain, they state: "Rather than expand regulation to new service providers, a critical goal of the 1996 Act was to diminish regulatory burdens as competition grew." 39. In addressing the difficult interpretation issues posed by the conflicting positions, we start by observing that the 1996 Act effected landmark changes in a variety of areas of communications policy. We recognize that the interpretation presented by Senator Stevens would serve the goal of eliminating distinctions that result in different regulatory treatment for firms that arguably provide similar functionalities based on whether firms provide "telecommunications" or "information services." We find, however, that in defining "telecommunications" and "information services," Congress built upon the MFJ and the Commission's prior deregulatory actions in Computer II. After careful consideration of the statutory language and its legislative history, we affirm our prior findings that the categories of "telecommunications service" and "information service" in the 1996 Act are mutually exclusive. Under this interpretation, an entity offering a simple, transparent transmission path, without the capability of providing enhanced functionality, offers telecommunications. By contrast, when an entity offers transmission incorporating the capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information, it does not offer telecommunications. Rather, it offers an "information service" even though it uses telecommunications to do so. We believe that this reading of the statute is most consistent with the 1996 Act's text, its legislative history, and its procompetitive, deregulatory goals. 40. We begin our analysis with the statutory text. Senators Stevens and Burns contend that a service qualifies as a "telecommunications service" whenever the service provider transports information over transmission facilities, without regard to whether the service provider is using information-processing capabilities to manipulate that information or provide new information. That approach, however, seems inconsistent with the language Congress used to define "telecommunications." That language specifies that the transmission be "without change in the form or content of the information as sent and received." It appears that the purpose of these words is to ensure that an entity is not deemed to be providing "telecommunications," notwithstanding its transmission of user information, in cases in which the entity is altering the form or content of that information. 41. The statutory text suggests to us that an entity should be deemed to provide telecommunications, defined as "the transmission, between or among points specified by the user, of information of the user's choosing, without change in the form and content of the information," only when the entity provides a transparent transmission path, and does not "change . . . the form and content" of the information. When an entity offers subscribers the "capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing or making available information via telecommunications," it does not provide telecommunications; it is using telecommunications. 42. We also find that the legislative history supports our initial conclusions drawn from the statutory text. The 1996 Act's definition of "telecommunications" was closely patterned on the corresponding definition in the MFJ. The MFJ defined "telecommunications" as the transmission, between or among points specified by the user, of information of the user's choosing, without change in the form or content of the information as sent and received, by means of electromagnetic transmission medium, including all instrumentalities, facilities, apparatus, and services (including the collection, storage, forwarding, switching, and delivery of such information) essential to such transmission. The Senate and House bills echoed that language. The House bill defined telecommunications as the transmission, between or among points specified by the subscriber, of information of the subscriber's choosing, without change in the form or content of the information as sent and received, by means of an electromagnetic transmission medium, including all instrumentalities, facilities, apparatus, and services (including the collection, storage, forwarding, switching, and delivery of such information) essential to such transmission, and the Senate bill truncated the definition to include the transmission, between or among points specified by the user, of information of the user's choosing, including voice, data, image, graphics, and video, without change in the form or content of the information, as sent and received, with or without benefit of any closed transmission medium. By contrast, the two bills took different approaches in defining "information service." The House bill derived its definition of "information service" from the MFJ. The Senate, however, used the Commission's definition of enhanced services as its model. 43. The language and legislative history of both the House and Senate bills indicate that the drafters of each bill regarded telecommunications services and information services as mutually exclusive categories. The House bill explicitly stated in the statutory text: "The term 'telecommunications service' . . . does not include an information service." The Senate Report stated in unambiguous terms that its definition of telecommunications "excludes those services . . . that are defined as information services." Information service providers, the Report explained, "do not 'provide' telecommunications services; they are users of telecommunications services." Accordingly, the Senate Report stated, the legislation "does not require providers of information services to contribute to universal service." We believe that these statements make explicit the intention of the drafters of both the House and Senate bills that the two categories be separate and distinct, and that information service providers not be subject to telecommunications regulation. 44. As noted above, however, proponents of the alternative interpretation find support in the legislative history for the position that Congress intended overlapping categories. In particular, they point out that the following sentence was deleted from the Senate bill's definition of telecommunications service: "'Telecommunications service' . . . includes the transmission, without change in the form or content, of information services and cable services, but does not include the offering of those services." At the February 19, 1998 en banc hearing, it was argued in support of the alternative interpretation that the sentence was deleted in conference so as to ensure that the "telecommunications" and "information service" definitions would not be viewed as mutually exclusive. The amendment on its face can be read to support that inference. Our review of the legislative history leads us to conclude, however, that the deletion of the language in question was not intended to expand the definition of telecommunications service so that it would overlap with information services. Rather, the sentence was deleted on the Senate floor by a manager's amendment "intended to clarify that carriers of broadcast or cable services are not intended to be classed as common carriers under the Communications Act to the extent they provide broadcast services or cable services." That is, the managers appear to have been concerned that the original language might lead courts to interpret "telecommunications service" too broadly, and inappropriately classify cable systems and broadcasters as telecommunications carriers. As a result, we believe that this amendment to the definition of "telecommunications service" does not undercut the Senate Report's earlier declaration that the bill's definition of "telecommunications" "excludes . . . information services." Rather, it underlines the legislative determination that information service providers should not be classified as telecommunications carriers. Moreover, given the explicit statements in the House and Senate bills and the Senate Report, we believe it is significant that the Joint Explanatory Statement (adopting the Senate version of "telecommunications" and "telecommunications service") does not appear to contain anything inconsistent with the view that "telecommunications" and "information service" are mutually exclusive categories. 45. In addition, in considering the statutory history of the 1996 Act, we note that at the time the statute was enacted, the Computer II framework had been in place for sixteen years. Under that framework, a broad variety of enhanced services were free from regulatory oversight, and enhanced services saw exponential growth. Accordingly, a decision by Congress to overturn Computer II, and subject those services to regulatory constraints by creating an expanded "telecommunications service" category incorporating enhanced services, would have effected a major change in the regulatory treatment of those services. While we would have implemented such a major change if Congress had required it, our review leads us to conclude that the legislative history does not demonstrate an intent by Congress to do so. As a result, looking at the statute and the legislative history as a whole, we conclude that Congress intended the 1996 Act to maintain the Computer II framework. 46. We note that our interpretation of "telecommunications services" and "information services" as distinct categories is also supported by important policy considerations. An approach in which a broad range of information service providers are simultaneously classed as telecommunications carriers, and thus presumptively subject to the broad range of Title II constraints, could seriously curtail the regulatory freedom that the Commission concluded in Computer II was important to the healthy and competitive development of the enhanced-services industry. 47. In response to this concern, Senators Stevens and Burns maintain that the Commission could rely on its forbearance authority under section 10 of the Act to resolve any such problems. Under that provision, the Commission is required to forbear from applying any regulation or provision of the Act to a telecommunications carrier or service, or class of carriers or services, if it determines that enforcement of that regulation or provision is not necessary to ensure that relevant charges, practices, classifications or regulations are just, reasonable and nondiscriminatory; enforcement of that regulation or provision is not necessary to protect consumers; and forbearance is consistent with the public interest. That forbearance authority is important, and the Commission has relied on it in the past. Notwithstanding the possibility of forbearance, we are concerned that including information service providers within the "telecommunications carrier" classification would effectively impose a presumption in favor of Title II regulation of such providers. Such a presumption would be inconsistent with the deregulatory and procompetitive goals of the 1996 Act. In addition, uncertainty about whether the Commission would forbear from applying specific provisions could chill innovation. 48. The classification of information service providers as telecommunications carriers, moreover, could encourage states to impose common-carrier regulation on such providers. Although section 10(e) of the Act precludes a state from applying or enforcing provisions of federal law where the Commission has determined to forbear, it does not preclude a state from imposing requirements derived from state law. State requirements for telecommunications carriers vary from jurisdiction to jurisdiction, but include certification, tariff filing, and various reporting requirements and fees. Furthermore, although the Commission has authority to forbear from unnecessary regulation, foreign regulators may not have comparable deregulatory authority to avoid imposing the full range of telecommunications regulation on information services. If these countries were to adopt an approach that classified information services as telecommunications, without the ability to craft an appropriate regulatory framework, that approach could subject information service providers to market access restrictions or above-cost accounting rates. Such a result would inhibit growth of these procompetitive services, to the detriment of consumers in the United States and abroad. 2. Protocol Processing 49. Senators Stevens and Burns urge that transmission services incorporating protocol processing should be treated as telecommunications services, and not information services. They note that, in enacting the 1996 Act, the conference committee declined to adopt the Senate version of the information services definition, derived from the Commission's definition of enhanced services, which explicitly referred to services that "employ computer processing applications that act on the format, content, code, protocol or similar aspects of the subscribers transmitted information." Rather, the conference committee adopted the House version, which made no explicit reference to protocol processing. As a result, the fact that a service involves protocol processing, those parties urge, should not lead to its classification as an information service. 50. The Commission reached a different result in the Non-Accounting Safeguards Order, in which it concluded that the category of information services was essentially identical to the pre-existing category of enhanced services. The Commission found that those protocol processing services that had qualified as "enhanced" should be treated as "information services," in part because they satisfy the statutory requirement of offering "a capability for . . . transforming [and] processing . . . information via telecommunications." It noted, however, that certain protocol processing services that result in no net protocol conversion to the end user are classified as basic services; those services are deemed telecommunications services. 51. Senators Stevens and Burns raise a substantial point. The conference committee's decision not to adopt language explicitly classifying services employing protocol processing as information services supports the inference that the conferees did not intend that classification. We note, however, that the House language, adopted by the conference committee, was derived from the MFJ, and that services employing protocol processing were treated as information services under the MFJ. Furthermore, as noted above, services offering net protocol conversion appear to fall within the statutory language, because they offer a capability for "transforming [and] processing" information. In light of these considerations, we recognize that the issue of the regulatory treatment of protocol processing is a difficult one. 52. We find, however, little to no discussion of this issue in the record. Accordingly, we do not believe that we have an adequate basis for resolving this matter in this Report. Moreover, we believe that we need not resolve the issue in order to address the important issues raised by the Appropriations Act. The regulatory classification of protocol processing is significant to the provision of universal service only to the extent that it affects the appropriate classification of Internet access service and IP telephony. We find, however, for the reasons explained below, that Internet access services are appropriately classed as information services without regard to our treatment of protocol processing. Similarly, our discussion of the regulatory status of phone-to-phone IP telephony is not affected by our resolution of the protocol processing issue. The protocol processing that takes place incident to phone-to-phone IP telephony does not affect the service's classification, under the Commission's current approach, because it results in no net protocol conversion to the end user. Finally, when a facilities owner provides leased lines to an Internet access or backbone provider, it does not provide protocol processing. 3. "Telephone Exchange Service" and "Local Exchange Carrier" Definitions 53. The 1996 Act redefined "telephone exchange service" to include not only "service within a telephone exchange, or within a connected system of telephone exchanges within the same exchange area operated to furnish to subscribers interconnecting service of the character ordinarily furnished by a single exchange," but also "comparable service provided through a system of switches, transmission equipment, or other facilities (or combination thereof) by which a subscriber can originate and terminate a telecommunications service." It defined "local exchange carrier" to include "any person that is engaged in the provision of telephone exchange service or exchange access." The definition excludes persons "engaged in the provision of a commercial mobile service . . . except to the extent the Commission finds that such service should be included in the definition of such term." 54. Our review indicates that the legislative history does not provide guidance on the meaning of these provisions. It appears from the legislative text that Congress' redefinition of "telephone exchange service" was intended to include in that term not only the provision of traditional local exchange service (via facilities ownership or resale), but also the provision of alternative local loops for telecommunications services, separate from the public switched telephone network, in a manner "comparable" to the provision of local loops by a traditional local telephone exchange carrier. The record contains very little discussion of these definitions. We do not believe, however, that the 1996 Act's modification of the "telephone exchange service" definition, or its addition of the "local exchange carrier" definition, undercuts the analysis we present in this Report. IV. APPLICATION OF DEFINITIONS A. Overview 55. We have been directed by Congress to describe in detail the application of the definitions considered in the previous section to "mixed or hybrid services." Congress has also directed that we explain "the impact of such application on universal service definitions and support, and the consistency of the Commission's application." Under the statute, all "telecommunications carriers" that provide interstate telecommunications services must contribute to federal universal service mechanisms, and any company that otherwise provides interstate telecommunications may be required to contribute. Companies that use other providers' telecommunications networks to provide the communications path underlying their own information services do not contribute directly, but they support universal service indirectly through the telecommunications services they purchase. We conclude that entities providing pure transmission capacity to Internet access or backbone providers provide interstate "telecommunications." Internet service providers themselves generally do not provide telecommunications. In those cases where an Internet service provider owns transmission facilities, and engages in data transport over those facilities in order to provide an information service, we do not currently require it to contribute to universal service mechanisms. We believe it may be appropriate to reconsider that result, as it would appear in such a case that the Internet service provider is furnishing raw transmission capacity to itself. Finally, we consider the regulatory status of various forms of "phone-to-phone IP telephony" service mentioned generally in the record. The record currently before us suggests that certain of these services lack the characteristics that would render them information services within the meaning of the statute, and instead bear the characteristics of telecommunications services. We do not believe, however, that it is appropriate to make any definitive pronouncements in the absence of a more complete record focused on individual service offerings. Our analysis, we believe, reflects a consistent approach that will safeguard the current and future provision of universal service to all Americans, and will achieve the Congressionally-specified goals of a "pro- competitive, deregulatory communications policy." B. Mixed or Hybrid Services 56. We note that the phrase "mixed or hybrid services," as used in the Appropriations Act, does not appear in the text of the 1996 Act. We understand this term to refer to services in which a provider offers a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing or making available information via telecommunications, and as an inseparable part of that service transmits information supplied or requested by the user. 57. It follows from the statutory analysis set out in Part III.C of this Report that hybrid services are information services, and are not telecommunications services. Because information services are offered "via telecommunications," they necessarily require a transmission component in order for users to access information. Accordingly, if we interpreted the statute as breaking down the distinction between information services and telecommunications services, so that some information services were classed as telecommunications services, it would be difficult to devise a sustainable rationale under which all, or essentially all, information services did not fall into the telecommunications service category. As noted in the previous section, we find strong support in the text and legislative history of the 1996 Act for the view that Congress intended "telecommunications service" and "information service" to refer to separate categories of services. 58. The Commission has considered the question of hybrid services since Computer I, when it first sought to distinguish "communications" from "data processing." Computer II provided a framework for classifying such services, under which the offering of enhanced functionality led to a service being treated as "enhanced" rather than "basic." An offering that constitutes a single service from the end user's standpoint is not subject to carrier regulation simply by virtue of the fact that it involves telecommunications components. As we have explained above, we find that Congress intended to leave this general approach intact when it adopted the 1996 Act. 59. This functional approach is consistent with Congress's direction that the classification of a provider should not depend on the type of facilities used. A telecommunications service is a telecommunications service regardless of whether it is provided using wireline, wireless, cable, satellite, or some other infrastructure. Its classification depends rather on the nature of the service being offered to customers. Stated another way, if the user can receive nothing more than pure transmission, the service is a telecommunications service. If the user can receive enhanced functionality, such as manipulation of information and interaction with stored data, the service is an information service. A functional analysis would be required even were we to adopt an overlapping definition of "telecommunications service" and "information service." If we decided that any offering that "included telecommunications" was a telecommunications service, we would need some test to determine whether the transmission component was "included" as part of the service. Based on our analysis of the statutory definitions, we conclude that an approach in which "telecommunications" and "information service" are mutually exclusive categories is most faithful to both the 1996 Act and the policy goals of competition, deregulation, and universal service. 60. We recognize that the question may not always be straightforward whether, on the one hand, an entity is providing a single information service with communications and computing components, or, on the other hand, is providing two distinct services, one of which is a telecommunications service. It is plain, for example, that an incumbent local exchange carrier cannot escape Title II regulation of its residential local exchange service simply by packaging that service with voice mail. Since Computer II, we have made it clear that offerings by non-facilities-based providers combining communications and computing components should always be deemed enhanced. But the matter is more complicated when it comes to offerings by facilities-based providers. We noted recently in the Universal Service Fourth Order on Reconsideration, considering a related question, that "[t]he issue is whether, functionally, the consumer is receiving two separate and distinct services." C. Background on Internet Services 61. Congress explicitly directed us to consider Internet access in connection with our implementation of section 254 of the Act. More generally, Internet-based offerings represent perhaps the most significant category of "mixed or hybrid services" discussed in the record. Therefore, we believe it appropriate to address in some detail the application of the statutory definitions considered in the previous section to the Internet. We begin with a brief description of the Internet as a backdrop for the analysis in this section. 62. The Internet is a a loose interconnection of networks belonging to many owners. It is comprised of tens of thousands of networks that communicate using the Internet protocol (IP). For purposes of this report, we find it useful to distinguish five types of entities: (1) end users; (2) access providers; (3) application providers; (4) content providers; and (5) backbone providers. 63. End users obtain access to and send information either through dial-up connections over the public switched telephone network, or through dedicated data circuits over wireline, wireless, cable, or satellite networks. Access providers, more commonly known as Internet service providers, combine computer processing, information storage, protocol conversion, and routing with transmission to enable users to access Internet content and services. Major Internet access providers include America Online, AT&T WorldNet, Netcom, Earthlink, and the Microsoft Network. Application providers offer users a discrete end-to-end service rather than open-ended Internet connectivity. Examples include IP telephony service providers such as IDT and Delta 3, and free electronic mail vendor Juno. Content providers make information available on "servers" connected to the Internet, where it can be accessed by end users. Major content providers include Yahoo, Netscape, ESPN Sportszone, and Time-Warner's Pathfinder service. Finally, backbone providers, such as Worldcom, Sprint, AGIS, and PSINet, route traffic between Internet access providers, and interconnect with other backbone providers. Many companies fall into more than one of these categories. For example, America Online offers Internet access as well as content (which can be purchased separately for a lower fee), and until recently owned backbone provider ANS. In addition, many of the networks connected to the Internet are "intranets," or private data networks, that offer better performance or security to a limited set of users, but can still communicate with the Internet using IP. 64. The Internet is a distributed packet-switched network, which means that information is split up into small chunks or "packets" that are individually routed through the most efficient path to their destination. Even two packets from the same message may travel over different physical paths through the network. Packet switching also enables users to invoke multiple Internet services simultaneously, and to access information with no knowledge of the physical location of the server where that information resides. 65. Internet usage has grown steadily and rapidly, especially since the development of the World Wide Web in 1989. According to one survey, there are currently more than 4,000 Internet service providers and 40 national Internet backbones operating in the United States. According to data presented at our en banc hearing on February 19, 1998, Internet service provider market revenues are projected to grow from under four billion dollars in 1996 to eighteen billion dollars in the year 2000. D. Discussion 1. Provision of Transmission Capacity to Internet Access and Backbone Providers 66. Internet service providers typically utilize a wide range of telecommunications inputs. Commenters have focused much attention on the fact that Internet service providers purchase analog and digital lines from local exchange carriers to connect to their dial-in subscribers, and pay rates incorporating those carriers' universal service obligations. What has received less attention is that Internet service providers utilize other, extensive telecommunications inputs. While a large Internet service provider engages in extensive data transport, it may own no transmission facilities. To provide transport within its own network, it leases lines (T1s, T3s and OC-3s) from telecommunications carriers. To ensure transport beyond the edges of its network, it makes arrangements to interconnect with one or more Internet backbone providers. We explain below, in Part IV.D.2, that Internet service providers themselves provide information services, not telecommunications (and hence do not contribute to universal service mechanisms). But to the extent that any of their underlying inputs constitutes interstate telecommunications, we have authority under the 1996 Act to require that the providers of those inputs contribute to federal universal service mechanisms. 67. With regard to the lines leased by Internet service providers to provide their own internal networks, the analysis is straightforward. We explain below that the Internet service providers leasing the lines do not provide telecommunications to their subscribers, and thus do not directly contribute to universal service mechanisms. The provision of leased lines to Internet service providers, however, constitutes the provision of interstate telecommunications. Telecommunications carriers offering leased lines to Internet service providers must include the revenues derived from those lines in their universal service contribution base. The record reveals that at least some leased-line providers are complying with that requirement, and the prices paid by Internet service providers for their leased lines reflect that universal service obligation. 68. Internet access, like all information services, is provided "via telecommunications." To the extent that the telecommunications inputs underlying Internet services are subject to the universal service contribution mechanism, that provides an answer to the concern, expressed by some commenters, that "[a]s more and more traffic is 'switched' to the Internet . . . there will no longer be enough money to support the infrastructure needed to make universal access to voice or Internet communications possible." To the extent that IP-based services grow, Internet service providers will have greater needs for transport to accommodate that level of usage. Those needs will lead to increased universal service contributions by providers of the leased lines that make up internal Internet service provider networks. More generally, the Internet backbone is currently growing at an exponential rate, as Internet-based services gain popularity and new Internet-based services are developed, leading to increased overall universal service support. 69. In those cases where an Internet service provider owns transmission facilities, and engages in data transport over those facilities in order to provide an information service, we do not currently require it to contribute to universal service mechanisms. We believe it is appropriate to reexamine that result. One could argue that in such a case the Internet service provider is furnishing raw transmission capacity to itself. To the extent this means the Internet service provider is providing telecommunications as a non-common carrier, it would not generally be subject to Title II, but it "may be required to contribute to the preservation and advancement of universal service if the public interest so requires." As a theoretical matter, it may be advisable to exercise our discretion under the statute to require such providers that use their own transmission facilities to contribute to universal service. This approach would treat provision of transmission facilities to Internet service providers similarly, for purposes of universal service, without regard to how the facilities are provided. We recognize, however, that there are significant operational difficulties associated with determining the amount of such an Internet service provider's revenues to be assessed for universal service purposes and with enforcing such requirements. There also are issues relating to the extent to which Internet service providers would uneconomically self-provide telecommunications because of a universal service assessment. 70. The Commission in the Universal Service Order expressly characterized entities that "provide telecommunications solely to meet their internal needs" as telecommunications providers subject to our permissive contribution authority. It found that those entities "should not be required to contribute to the support mechanisms at this time, because telecommunications do not comprise the core of their business." Further, "it would be administratively burdensome to assess a special non-revenues-based contribution on these providers." We intend to consider, in an upcoming proceeding, the status of entities that provide transmission to meet their internal needs. To the extent that we conclude that such entities provide telecommunications, we would consider, among other things, whether there are efficient, effective ways to require information service providers that provide telecommunications to meet their own internal needs to contribute to universal service support so that our regulations do not create an artificial incentive for information service providers to integrate vertically. We also would consider whether, and to what extent, our reasoning applies to entities other than information service providers that provide interstate telecommunications to meet their own internal needs. 71. With respect to the facilities that make up the Internet backbone, the record does not reveal the extent to which firms providing telecommunications facilities as part of the Internet backbone are currently contributing to federal universal service mechanisms. Yet it seems clear that, in one manner or another, firms are offering telecommunications inputs in this context that underlie the ultimate provision of Internet services to the consumer. We believe we would need to consider these offerings in order to ensure that the goals of section 254 are fully realized. 72. Our thinking relating to the Internet backbone points up some of the limitations of our current approaches to implementing the universal service provisions of the 1996 Act. The technology and market conditions relating to the Internet backbone are unusually fluid and fast-moving, and we are reluctant to impose any regulatory mandate that relies on the persistence of a particular market model or market structure in this area. It may be that the most successful approach in this context, maintaining universal service revenues while avoiding the imposition of inefficient or innovation-discouraging obligations, would look to the actual facilities owners, requiring them to contribute to universal service mechanisms on the revenues they receive. It is facilities owners that, in a real sense, provide the crucial telecommunications inputs underlying Internet service. If universal service contribution obligations, in the context of the Internet backbone, were based on facilities ownership rather than end-user revenues, then firms purchasing capacity from the facilities owners would still contribute indirectly, through prices that recover the facilities owners' contributions. This matter deserves further consideration. 2. Internet Access Services 73. We find that Internet access services are appropriately classed as information, rather than telecommunications, services. Internet access providers do not offer a pure transmission path; they combine computer processing, information provision, and other computer-mediated offerings with data transport. Senators Stevens and Burns suggest that services provided by Internet access providers should be deemed to fall on the telecommunications side of the line. When an Internet service provider transmits an email message, they maintain, it transmits "information of the user's choosing, without change in the form or content of the information as sent or received." Changes such as the addition of message headers, they argue, are inconsequential: "If the information chosen by the user has the same form (e.g., typewritten English) and content (e.g., directions to Washington, D.C.) as sent and received, then a 'telecommunication' has occurred." Senator McCain, by contrast, urges that electronic mail, voice mail and Internet access are information services, because they furnish the capabilities to store, retrieve, or generate information. 74. In determining whether Internet access providers should be classed as providing information services rather than telecommunications services, the text of the 1996 Act requires us to determine whether Internet access providers merely offer transmission "between or among points selected by the user, of information of the user's choosing, without change in the form or content of the information as sent and received," or whether they go beyond the provision of a transparent transmission path to offer end users the "capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information." For the reasons that follow, we conclude that the latter more accurately describes Internet access service. 75. We note that the functions and services associated with Internet access were classed as "information services" under the MFJ. Under that decree, the provision of gateways (involving address translation, protocol conversion, billing management, and the provision of introductory information content) to information services fell squarely within the "information services" definition. Electronic mail, like other store-and-forward services, including voice mail, was similarly classed as an information service. Moreover, the Commission has consistently classed such services as "enhanced services" under Computer II. In this Report, we address the classification of Internet access service de novo, looking to the text of the 1996 Act. Various commenters have approached this question by inquiring whether specific applications, such as e-mail, available to users with Internet access, constitute telecommunications. As we explain below, we believe that Internet access providers do not offer subscribers separate services -- electronic mail, Web browsing, and others -- that should be deemed to have separate legal status. It is useful to examine specific Internet applications, however, in order to understand the nature of the functionality that an Internet access provider offers. 76. Internet access providers typically provide their subscribers with the ability to run a variety of applications, including World Wide Web browsers, FTP clients, Usenet newsreaders, electronic mail clients, Telnet applications, and others. When subscribers store files on Internet service provider computers to establish "home pages" on the World Wide Web, they are, without question, utilizing the provider's "capability for . . . storing . . . or making available information" to others. The service cannot accurately be characterized from this perspective as "transmission, between or among points specified by the user"; the proprietor of a Web page does not specify the points to which its files will be transmitted, because it does not know who will seek to download its files. Nor is it "without change in the form or content," since the appearance of the files on a recipient's screen depends in part on the software that the recipient chooses to employ. When subscribers utilize their Internet service provider's facilities to retrieve files from the World Wide Web, they are similarly interacting with stored data, typically maintained on the facilties of either their own Internet service provider (via a Web page "cache") or on those of another. Subscribers can retrieve files from the World Wide Web, and browse their contents, because their service provider offers the "capability for . . . acquiring, . . . retrieving [and] utilizing . . . information." Most of the data transport on the Internet relates to the World Wide Web and file transfer. 77. The same is true when Internet service providers offer their subscribers access to Usenet newsgroup articles. An Internet service provider receives and stores these articles (in 1996, about 1.2 gigabytes of new material each day) on its own computer facilities. Each Internet service provider must choose whether to carry a full newsgroup feed, or only a smaller subset of available newsgroups. Each Internet service provider must decide how long it will store articles in each newsgroup, and at what point it will delete them as outdated. A user can then select among the available articles, choosing those that the user will view or read; having read an article, the user may store or forward it; and the user can post articles of his or her own, which will in turn be stored on the facilities of his own Internet service provider and those of every other Internet service provider choosing to carry that portion of the newsgroup feed. In providing this service, the Internet service provider offers "a capability for generating, acquiring, storing, . . . retrieving . . . and making available information through telecommunications." Its function seems indistinguishable from that of the database proprietor offering subscribers access to information it maintains on-site; such a proprietor offers the paradigmatic example of an information service. 78. As noted above, Senators Stevens and Burns state that electronic mail constitutes a telecommunications service. They note that the provision of a transmission path for the delivery of faxes constitutes telecommunications, and characterize electronic mail as "nothing more or less than a paperless fax." We have carefully considered this argument, but further analysis leads us to a different result. Like the World Wide Web and Usenet services described above, electronic mail utilizes data storage as a key feature of the service offering. The fact that an electronic mail message is stored on an Internet service provider's computers in digital form offers the subscriber extensive capabilities for manipulation of the underlying data. The process begins when a sender uses a software interface to generate an electronic mail message (potentially including files in text, graphics, video or audio formats). The sender's Internet service provider does not send that message directly to the recipient. Rather, it conveys it to a "mail server" computer owned by the recipient s Internet service provider, which stores the message until the recipient chooses to access it. The recipient may then use the Internet service provider's facilities to continue to store all or part of the original message, to rewrite it, to forward all or part of it to third parties, or otherwise to process its contents -- for example, by retrieving World Wide Web pages that were hyperlinked in the message. The service thus provides more than a simple transmission path; it offers users the "capability for . . . acquiring, storing, transforming, processing, retrieving, utilizing, or making available information through telecommunications." 79. More generally, though, it would be incorrect to conclude that Internet access providers offer subscribers separate services -- electronic mail, Web browsing, and others -- that should be deemed to have separate legal status, so that, for example, we might deem electronic mail to be a "telecommunications service," and Web hosting to be an "information service." The service that Internet access providers offer to members of the public is Internet access. That service gives users a variety of advanced capabilities. Users can exploit those capabilities through applications they install on their own computers. The Internet service provider often will not know which applications a user has installed or is using. Subscribers are able to run those applications, nonetheless, precisely because of the enhanced functionality that Internet access service gives them. 80. The provision of Internet access service involves data transport elements: an Internet access provider must enable the movement of information between customers' own computers and the distant computers with which those customers seek to interact. But the provision of Internet access service crucially involves information-processing elements as well; it offers end users information-service capabilities inextricably intertwined with data transport. As such, we conclude that it is appropriately classed as an "information service." 81. An Internet access provider, in that respect, is not a novel entity incompatible with the classic distinction between basic and enhanced services, or the newer distinction between telecommunications and information services. In essential aspect, Internet access providers look like other enhanced -- or information -- service providers. Internet access providers, typically, own no telecommunications facilities. Rather, in order to provide those components of Internet access services that involve information transport, they lease lines, and otherwise acquire telecommunications, from telecommunications providers -- interexchange carriers, incumbent local exchange carriers, competitive local exchange carriers, and others. In offering service to end users, however, they do more than resell those data transport services. They conjoin the data transport with data processing, information provision, and other computer-mediated offerings, thereby creating an information service. Since 1980, we have classed such entities as enhanced service providers. We conclude that, under the 1996 Act, they are appropriately classed as information service providers. 82. Our findings in this regard are reinforced by the negative policy consequences of a conclusion that Internet access services should be classed as "telecommunications." We have already described some of our concerns about the classification of information service providers generally as telecommunications carriers. Turning specifically to the matter of Internet access, we note that classifying Internet access services as telecommunications services could have significant consequences for the global development of the Internet. We recognize the unique qualities of the Internet, and do not presume that legacy regulatory frameworks are appropriately applied to it. 3. IP Telephony 83. Having concluded that Internet access providers do not offer "telecommunications service" when they furnish Internet access to their customers, we next consider whether certain other Internet-based services might fall within the statutory definition of "telecommunications." We recognize that new Internet-based services are emerging, and that our application of statutory terms must take into account such technological developments. We therefore examine in this section Internet-based services, known as IP telephony, that most closely resemble traditional basic transmission offerings. The Commission to date has not formally considered the legal status of IP telephony. The record currently before us suggests that certain "phone-to-phone IP telephony" services lack the characteristics that would render them information services within the meaning of the statute, and instead bear the characteristics of telecommunications services. We do not believe, however, that it is appropriate to make any definitive pronouncements in the absence of a more complete record focused on individual service offerings. 84. "IP telephony" services enable real-time voice transmission using Internet protocols. The services can be provided in two basic ways: through software and hardware at customer premises, or through "gateways" that enable applications originating and/or terminating on the PSTN. Gateways are computers that transform the circuit- switched voice signal into IP packets, and vice versa, and perform associated signalling, control, and address translation functions. The voice communications can be transmitted along with other data on the "public" Internet, or can be routed through intranets or other private data networks for improved performance. Several companies now offer commercial IP telephony products. For example, VocalTec sells software that end users can install on their personal computers to make calls to other users with similar equipment, and also makes software used in gateways. Companies such as IDT and Qwest employ gateways to offer users the ability to call from their computer to ordinary telephones connected to the public switched network, or from one telephone to another. To use the latter category of services, a user first picks up an ordinary telephone handset connected to the public switched network, then dials the phone number of a local gateway. Upon receiving a second dialtone, the user dials the phone number of the party he or she wishes to call. The call is routed from the gateway over an IP network, then terminated through another gateway to the ordinary telephone at the receiving end. 85. Commenters that discuss IP telephony are split on the appropriate treatment of these services. Several parties, including Senators Rockefeller, Snowe, Stevens, and Burns, urge that IP telephony providers offer interstate telecommunications services and, consequently, should contribute to universal service support mechanisms. Other parties, including Senator McCain, Representative White and the National Telecommunications and Information Administration, oppose application of Title II regulation. Some commenters argue that IP telephony is a nascent technology that is unlikely to generate significant revenues in the foreseeable future. Regardless of the size of the market, we must still decide as a legal matter whether any IP telephony providers meet the statutory definitions of offering "telecommunications" or "telecommunications service" in section 3 of the 1996 Act. 86. As we have observed above in our general discussion of hybrid services, the classification of a service under the 1996 Act depends on the functional nature of the end- user offering. Applying this test to IP telephony, we consider whether any company offers a service that provides users with pure "telecommunications." We first note that "telecommunications" is defined as a form of "transmission." Companies that only provide software and hardware installed at customer premises do not fall within this category, because they do not transmit information. These providers are analogous to PBX vendors, in that they offer customer premises equipment (CPE) that enables end users to engage in telecommunications by purchasing local exchange and interexchange service from carriers. These CPE providers do not, however, transport any traffic themselves. 87. In the case of "computer-to-computer" IP telephony, individuals use software and hardware at their premises to place calls between two computers connected to the Internet. The IP telephony software is an application that the subscriber runs, using Internet access provided by its Internet service provider. The Internet service providers over whose networks the information passes may not even be aware that particular customers are using IP telephony software, because IP packets carrying voice communications are indistinguishable from other types of packets. As a general matter, Title II requirements apply only to the "provi[sion] " or "offering" of telecommunications. Without regard to whether "telecommunications" is taking place in the transmission of computer-to-computer IP telephony, the Internet service provider does not appear to be "provid[ing]" telecommunications to its subscribers. 88. "Phone-to-phone" IP telephony services appear to present a different case. In using the term "phone-to-phone" IP telephony, we tentatively intend to refer to services in which the provider meets the following conditions: (1) it holds itself out as providing voice telephony or facsimile transmission service; (2) it does not require the customer to use CPE different from that CPE necessary to place an ordinary touch-tone call (or facsimile transmission) over the public switched telephone network; (3) it allows the customer to call telephone numbers assigned in accordance with the North American Numbering Plan, and associated international agreements; and (4) it transmits customer information without net change in form or content. 89. Specifically, when an IP telephony service provider deploys a gateway within the network to enable phone-to-phone service, it creates a virtual transmission path between points on the public switched telephone network over a packet-switched IP network. These providers typically purchase dial-up or dedicated circuits from carriers and use those circuits to originate or terminate Internet-based calls. From a functional standpoint, users of these services obtain only voice transmission, rather than information services such as access to stored files. The provider does not offer a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information. Thus, the record currently before us suggests that this type of IP telephony lacks the characteristics that would render them information services within the meaning of the statute, and instead bear the characteristics of telecommunications services. 90. We do not believe, however, that it is appropriate to make any definitive pronouncements in the absence of a more complete record focused on individual service offerings. As stated above, we use in this analysis a tentative definition of "phone-to- phone" IP telephony. Because of the wide range of services that can be provided using packetized voice and innovative CPE, we will need, before making definitive pronouncements, to consider whether our tentative definition of phone-to-phone IP telephony accurately distinguishes between phone-to-phone and other forms of IP telephony, and is not likely to be quickly overcome by changes in technology. We defer a more definitive resolution of these issues pending the development of a more fully-developed record because we recognize the need, when dealing with emerging services and technologies in environments as dynamic as today's Internet and telecommunications markets, to have as complete information and input as possible. 91. In upcoming proceedings with the more focused records, we undoubtedly will be addressing the regulatory status of various specific forms of IP telephony, including the regulatory requirements to which phone-to-phone providers may be subject if we were to conclude that they are "telecommunications carriers." The Act and the Commission's rules impose various requirements on providers of telecommunications, including contributing to universal service mechanisms, paying interstate access charges, and filing interstate tariffs. We note that, to the extent we conclude that certain forms of phone-to-phone IP telephony service are "telecommunications services," and to the extent the providers of those services obtain the same circuit-switched access as obtained by other interexchange carriers, and therefore impose the same burdens on the local exchange as do other interexchange carriers, we may find it reasonable that they pay similar access charges. On the other hand, we likely will face difficult and contested issues relating to the assessment of access charges on these providers. For example, it may be difficult for the LECs to determine whether particular phone-to-phone IP telephony calls are interstate, and thus subject to the federal access charge scheme, or intrastate. We intend to examine these issues more closely based on the more complete records developed in future proceedings. 92. With regard to universal service contributions, to the extent we conclude that certain forms of phone-to-phone IP telephony are interstate "telecommunications," and to the extent that providers of such services are offering those services directly to the public for a fee, those providers would be "telecommunications carriers." Accordingly, those providers would fall within section 254(d)'s mandatory requirement to contribute to universal service mechanisms. Finally, under section 10 of the Act, we have authority to forbear from imposing any rule or requirement of the Act on telecommunications carriers. We will need to consider carefully whether, pursuant to our authority under section 10 of the Act, to forbear from imposing any of the rules that would apply to phone-to-phone IP telephony providers as "telecommunications carriers." 93. We recognize that our treatment of phone-to-phone IP telephony may have implications for the international telephony market. In the international realm, the Commission has stated that IP telephony serves the public interest by placing significant downward pressure on international settlement rates and consumer prices. In some instances, moreover, IP telephony providers have introduced an alternative calling option in foreign markets that otherwise would face little or no competition. We continue to believe that alternative calling mechanisms are an important pro-competitive force in the international services market. We need to consider carefully the international regulatory requirements to which phone-to-phone providers would be subject. For example, it may not be appropriate to apply the international accounting rate regime to IP telephony. 4. Policy Implications 94. Congress directed us to explain in this Report "the impact of the Commission's interpretation . . . on the current and future provision of universal service," and "the consistency of the Commission's application" of statutory definitions. Therefore, we address in this section the policy consequences of the legal analysis described above. We conclude that our reading of the statutory definitions reflects a consistent approach that will safeguard the current and future provision of universal service to all Americans, and will achieve the 1996 Act's goals of a "pro-competitive, deregulatory communications policy." Further, we are committed to monitoring closely developments in the telecommunications industry to ensure that such changes do not undermine our obligation to ensure universal service. a. Generally 95. The Internet and other enhanced services have been able to grow rapidly in part because the Commission concluded that enhanced service providers were not common carriers within the meaning of the Act. This policy of distinguishing competitive technologies from regulated services not yet subject to full competition remains viable. Communications networks function as overlapping layers, with multiple providers often leveraging a common infrastructure. As long as the underlying market for provision of transmission facilities is competitive or is subject to sufficient pro-competitive safeguards, we see no need to regulate the enhanced functionalities that can be built on top of those facilities. We believe that Congress, by distinguishing "telecommunications service" from "information service," and by stating a policy goal of preventing the Internet from being fettered by state or federal regulation, endorsed this general approach. Limiting carrier regulation to those companies that provide the underlying transport ensures that regulation is minimized and is targeted to markets where full competition has not emerged. As an empirical matter, the level of competition, innovation, investment, and growth in the enhanced services industry over the past two decades provides a strong endorsement for such an approach. b. Impact on Universal Service 96. Congress has directed us to explain how our interpretation of the 1996 Act promotes "the current and future provision of universal service to consumers in all areas of the Nation, including high cost and rural areas." With regard to the current provision of universal service, we have established programs under section 254 to fund telecommunications services in high-cost areas and for low-income consumers, as well as access to advanced services for schools, libraries, and rural health care providers. We believe that these programs have been designed with a sufficiently broad contribution base to support current universal service needs. 97. As we have explained, our interpretation of the terms "telecommunications" and "information service" reflect continuity with pre-existing legal categories. Consequently, we do not believe that these interpretations would create significant shifts in contribution obligations based on the current configuration of the communications industry. Retail revenues of Internet service providers -- approximately five billion dollars in 1997 -- are relatively small compared to the $100 billion in long-distance revenue reported in the latest telecommunications relay service fund worksheet report. The fact that Internet access is not considered a "telecommunications service" therefore does not have a significant impact on the current universal service funding base. More importantly, however, Internet access generates additional telecommunications revenue to support universal service in the form of the thousands of business lines (with their associated tariffed rates, subscriber line charges, and presubscribed interexchange carrier charges) that Internet service providers must purchase in order to provide connectivity to their users, and the high-capacity leased lines that they use to route data across their networks. 98. It is critical, however, to make sure that our interpretation of the statute, to the extent legally possible, will continue to sustain universal service in the future. Some parties argue that, as new communications services such as Internet access and IP telephony grow, traffic will shift away from conventional telecommunications services, thus draining the support base for universal service. We are mindful that, in order to promote equity and efficiency, we should avoid creating regulatory distinctions based purely on technology. Congress did not limit "telecommunications" to circuit-switched wireline transmission, but instead defined that term on the basis of the essential functionality provided to users. Thus, for example, we have previously required paging providers to contribute to universal service funding, because they are providers of "telecommunications service." We have also required private carriers to contribute to federal universal service funding, even though they are not common carriers. In this Report, we have further addressed providers of pure transmission capacity used for Internet services, and have concluded that these entities provide services that meet the legal definition of "telecommunications." We also have considered the regulatory status of various forms of "phone-to-phone IP telephony" service mentioned generally in the record. The record currently before us suggests that certain of these services lack the characteristics that would render them information services within the meaning of the statute, and instead bear the characteristics of telecommunications services. We do not believe, however, that it is appropriate to make any definitive pronouncements in the absence of a more complete record focused on individual service offerings. As noted, to the extent we conclude that certain forms of phone-to-phone IP telephony are "telecommunications," and to the extent that providers of such services are offering those services directly to the public for a fee, those providers would be "telecommunications carriers." Accordingly, those providers would fall within section 254(d)'s mandatory requirement to contribute to universal service mechanisms. If such providers are exempt from universal service contribution requirements, users and carriers will have an incentive to modify networks to shift traffic to Internet protocol and thereby avoid paying into the universal service fund or, in the near term, the universal service contributions embedded in interstate access charges. If that occurs, it could increase the burden on the more limited set of companies still required to contribute. Such a scenario, if allowed to manifest itself, could well undermine universal service. At this time, however, there is no evidence that there is an immediate threat to the sufficiency of universal service support. 99. Several commenters urge us to subject Internet access providers and other information service providers to universal service contribution requirements. The potential future threat to universal service funding posed by use of the Internet derives from services that are functionally substitutable for telecommunications services at the same level of the network hierarchy. An end user that shifts its local exchange service from an incumbent local exchange carrier (LEC) to a competitive LEC, or to a wireless carrier, is purchasing a functionally identical service using different providers or technologies. We have designed the universal service regime so that shifting between such services does not eliminate the contribution requirement. Substitutability in a particular case, however, is not sufficient under the statute to require universal service contributions. Instead of making a telephone call or sending a fax, an end user could send an overnight letter. It is unlikely, however, that anyone would argue that the overnight delivery service should contribute to universal service funding. The key difference is that delivery service does not provide "telecommunications" as defined in the Act. Congress limited universal service contribution obligations to providers of "telecommunications," because only those services are truly substitutable in a functional sense. 100. Some parties argue that we should reclassify Internet service providers as telecommunications carriers in order to address congestion of local exchange networks caused by Internet usage. We note that the Commission addressed this argument last year in the Access Reform proceeding, and decided to continue to treat Internet service providers as end users for purposes of access charges. As the Commission stated in that Order, although concerns about network congestion deserve serious consideration, imposition of per-minute interstate access charges on Internet service providers is not an appropriate solution. Commenters in this proceeding have raised many of the same arguments that we considered in the Access Reform proceeding. We make no conclusions here as to whether some alternate rate structure for Internet service providers would be more efficient. That is an issue best addressed either on reconsideration of our Access Reform decision, or in connection with the Notice of Inquiry on Internet and Information Services that Use the Public Switched Telephone Network that we issued in the Access Reform proceeding. For purposes of this Report, we believe that the central issue is whether our decision that Internet access is not a "telecommunications service" is likely to threaten universal service. In other words, will Internet usage place such a strain on network resources that incumbent LECs will be unable to provide adequate service? As we noted in the Access Reform Order, both ILECs and the Network Reliability and Interoperability Council agreed that Internet usage did not pose any threat to overall network reliability. Incumbent LECs are investing in network upgrades to handle Internet traffic, and our Notice of Inquiry docket provides the appropriate forum to consider steps that we could take to ensure that incumbent LECs have incentives to choose the most efficient technology. 101. We realize that, as technology evolves, new means of providing telecommunications service may emerge. Although we conclude that Internet access is not a "telecommunications service," we acknowledge that there may be telecommunications services that can be provisioned through the Internet. We have singled out IP telephony services for discussion in this Report. As discussed above, users of certain forms of phone-to-phone IP telephony appear to pay fees for the sole purpose of obtaining transmission of information without change in form or content. Indeed, from the end-user perspective, these types of phone-to-phone IP telephony service providers seem virtually identical to traditional circuit-switched carriers. The record currently before us suggests that these services lack the characteristics that would render them information services within the meaning of the statute, and instead bear the characteristics of telecommunications services. With respect to the provision of pure transmission capacity to Internet service providers or Internet backbone providers, we have concluded that such provision is telecommunications. 102. As some parties observe, our interpretation of the 1996 Act may mean that information services such as Internet access are not eligible for subsidies outside of the limited scope of schools and libraries under section 254(h). We believe Congress made a policy decision to limit support for information services to schools and libraries. "Telecommunications services" provide the basic transmission functionality that enables customers in rural and high-cost areas to connect to the rest of America. These services also enable users to reach Internet access providers, so reductions in the cost of basic telephone service in rural areas will effectively reduce the cost of Internet access in those areas. The information services delivered over telecommunications networks are not sensitive to distance and density to the same extent as the telecommunications facilities themselves. Therefore, the rationale for establishing a subsidy mechanism for these services is far more attenuated. 103. At this early stage of Internet development, we cannot know whether market and technological forces will result in Internet access being widely available in rural and high cost areas. Already, free electronic mail services such as Juno and low-cost Internet access devices such as WebTV have made Internet-based services far more affordable. A recent study found that at least 87% of the U.S. population has access to a commercial Internet service provider through a local call, and that three-fourth of Americans live in local calling areas with at least three Internet service provider points of presence. America Online reports that seventeen percent of its local access nodes are in rural counties. Rural Internet service providers, especially smaller entrepreneurial companies, will be able to provide more affordable and widely-available service if they are not subject to unnecessary regulatory burdens. Finally, the support mechanism that will benefit schools and libraries established pursuant to section 254(h) of the 1996 Act will enable rural libraries to provide public access Internet terminals, and rural school districts to make Internet access available to their students. 104. Congress did recognize that "telecommunications services" would evolve over time, and that universal service should adapt to reflect those change. Thus, for example, universal service today includes functionalities such as touchtone service and access to 911 that simply did not exist in previous decades. Other such innovations, as well as improvements in voice transmission quality, will no doubt occur in the future, and we will update our definition of universal service to account for those changes. For example, it appears that universal service funds could be used to ensure rural and high-cost areas have affordable access to high-speed data transmission services, such as xDSL, when those services meet the criteria for support outlined in section 254(c). c. Consistency of Commission Decisions 105. We believe that the framework described in this Report, and in the May 8th, 1997 Universal Service Order, is entirely consistent, both internally and with the letter and spirit of the Act. Companies that are in the business of offering basic interstate telecommunications functionality to end users are "telecommunications carriers," and therefore are covered under the relevant provisions of sections 251 and 254 of the Act. These rules apply regardless of the underlying technology those service providers employ, and regardless of the applications that ride on top of their services. Therefore, although we will need to consider further the definition of "phone-to-phone" IP telephony, the record currently before us suggests that certain of these services lack the characteristics that would render them information services within the meaning of the statute, and instead bear the characteristics of telecommunications services. Further, we have found that providers of pure transmission capacity to support Internet services are providers of "telecommunications." Internet service providers and other information service providers also use telecommunications networks to reach their subscribers, but they are in a very different business from carriers. Internet service providers provide their customers with value-added functionality by means of computer processing and interaction with stored data. They leverage telecommunications connectivity to provide these services, but this makes them customers of telecommunications carriers rather than their competitors. 106. Under our framework, Internet service providers are not treated as carriers for purposes of interstate access charges, interconnection rights under section 251, and universal service contribution requirements. This treatment admittedly provides some benefits to such companies, but it also imposes limitations. Internet service providers are not entitled under section 251 to purchase unbundled network elements or discounted wholesale services from incumbent LECs, they are not entitled to federal universal service support for serving high- cost and rural areas, and they are not entitled to reciprocal compensation for terminating local telecommunications traffic. As we discuss below, the one case in which Internet service providers and carriers enjoy similar treatment is in the provision of certain services to schools and libraries at discounted rates. In that case, Congress expressly directed the Commission to create "competitively neutral rules" to facilitate "access to advanced telecommunications and information services." There is no necessary connection between those who contribute to universal service funding and those entitled to receive support. For example, contributions to the fund are primarily derived from interexchange carriers, but the companies that receive high-cost support are LECs. Paging providers are required to contribute to universal service, but have limited opportunity to receive support. We realize that Congress carefully balanced several competing concerns when it crafted the universal service provisions of the 1996 Act. After reviewing our implementation of those provisions, and considering novel issues such as the status of IP telephony, we believe that we are being faithful to the balance struck by Congress. V. WHO CONTRIBUTES TO UNIVERSAL SERVICE MECHANISMS A. Overview 107. In this section, we review our decision regarding which entities must contribute to universal service support mechanisms, which entities should contribute, and which entities should be exempt from contributing. We affirm that the plain language of section 254(d), which mandates contributions from "every telecommunications carrier that provides interstate telecommunications services," requires the Commission to construe broadly the class of carriers that must contribute. In addition, we find that the Commission properly exercised the permissive authority granted by section 254(d) to include other providers of interstate telecommunications in the pool of universal service contributors. We have also re-examined the Commission's implementation of the limited authority set forth in section 254(d) to exempt de minimis contributors and affirm that the Commission has not exceeded the boundaries established by the statute. We conclude that the Commission appropriately exercised the flexibility that section 254(d) grants it to exempt those entities whose contributions would be de minimis and to include in the pool of contributors those providers of telecommunications whose contributions are required by the public interest. B. Background 108. The 1996 Act expands the class of entities that must contribute to federal universal service support mechanisms. Prior to the 1996 Act, only interstate interexchange carriers (IXCs) contributed to the universal service fund that subsidized the cost of local exchange service in high cost areas and for low-income consumers. Under this earlier approach, IXCs contributed through a tariffed interstate charge that was based on the number of subscriber lines presubscribed to the IXC. IXCs with fewer than .05 percent of the presubscribed lines nationwide were exempt from contributing. 109. The Commission's current rules governing universal service contributions stem from section 254(d) of the 1996 Act, which reads: [E]very telecommunications carrier that provides interstate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, to the specific, predictable, and sufficient mechanisms established by the Commission to preserve and advance universal service. The Commission may exempt a carrier or class of carriers from this requirement if the carrier's telecommunications activities are limited to such an extent that the level of such carrier's contributions to the preservation and advancement of universal service would be de minimis. Any other provider of interstate telecommunications may be required to contribute to the preservation and advancement of universal service if the public interest so requires. Section 623(b)(3) of the Appropriations Act requires us to review "who is required to contribute to universal service under section 254(d) . . . and related existing federal universal service support mechanisms, and of any exemption of providers or exclusion of any service that includes telecommunications from such requirement or support mechanisms." 110. Based on the structure of section 254(d) of the 1996 Act, the Commission identified two categories of contributors to universal service mechanisms. First, the Commission identified a group of "mandatory" contributors based on section 254(d)'s mandate that "[e]very telecommunications carrier that provides interstate telecommunications services shall contribute . . . to the . . . mechanisms established by the Commission." Second, the Commission exercised its "permissive" authority under section 254(d) to require "other provider[s] of interstate telecommunications to contribute" based on a finding that the public interest requires these entities to contribute "to the preservation and advancement of universal service." In addition, consistent with section 254(d), the Commission exempted contributors whose contributions would be de minimis. 111. Mandatory Contribution Requirement. The Commission, concurring with the recommendation of the Joint Board, recognized that the first sentence of section 254(d) requires that all telecommunications carriers that provide interstate telecommunications must contribute to the support mechanisms. The Commission concluded that to be a mandatory contributor to universal service under section 254(d): (1) a telecommunications carrier must offer "interstate" "telecommunications"; (2) those interstate telecommunications must be offered "for a fee"; and (3) those interstate telecommunications must be offered "directly to the public, or to such classes of users as to be effectively avai