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A. 1. a.(1)(a) i) a) 1. 1. i.(1)(a)(i) 1) a) XX   ! yO-X` hp x (#%'0*,.8135@8:"(#L 4  X-XxPII.xEXECUTIVE SUMMARY p>"(#L 7  X-XxX` ` xA.` ` Definitional Issues ` p>"(#L 7  X|-XxX` ` xB.` ` Application of Definitions ` p>"(#L 8  Xe-XxX` ` xC.` ` Who Contributes to Universal Service Mechanisms ` p>"(#L 9  XN-XxX` ` xD.` ` Who Receives Universal Service Support ` p>"(#L 9  X7-XxX` ` xE.` ` Revenue Base and Percentage of Federal Funding ` p>"(#L 9  X -XxPIII.xSTATUTORY DEFINITIONS p"(#I 11  X-XxX` ` xA.` ` Overview ` p"(#I 11  X-XxX` ` xB.` ` Background ` p"(#I 11  X -XxX` ` xC.` ` Discussion ` p"(#I 16  X"-XxPIV. xAPPLICATION OF DEFINITIONS p"(#I 28  X#-XxX` ` xA.` ` Overview ` p"(#I 28  Xh$-xB.` ` Mixed or Hybrid Servicesp"(#I 29  XQ%-x` ` xC.` ` Background on Internet Services(#` p"(#I 30  X:&-XxX` ` xD.` ` Discussion ` p"(#I 32  X (-XxPV.xWHO CONTRIBUTES TO UNIVERSAL SERVICE MECHANISMS p"(#I 53  X(-XxX` ` xA.` ` Overview ` p"(#I 53  X)-XxX` ` xB.` ` Background ` p"(#I 53  X*-XxX` ` xC.` ` Discussion ` p"(#I 60"*.x,x,y,"Ԍ X-ԙXxPVI. xWHO RECEIVES UNIVERSAL SERVICE SUPPORT p"(#I 72  X-XxX` ` xA.` ` Background ` p"(#I 72  X-XxX` ` xB.` ` Discussion ` p"(#I 76  X-XxPVII. xREVENUE BASE AND PERCENTAGE OF FEDERAL FUNDING p"(#I 93  X-XxX` ` xA.` ` Revenue Base for Contributions ` p"(#I 94  Xv-XxX` ` xB.` ` Percentage of Federal Funding ` p!(#F102  X_-XxX` ` xC. ` ` Methodology for Assessing Contributions ` p!(#F108  X1-XxPVIII.xCONCLUSION p!(#F109 APPENDIX A Parties Filing Comments APPENDIX B Parties Filing Reply Comments  X-x1. ` ` On November 26, 1997, in a recent Appropriations Act, 8  yO -ЍxDepartments of Commerce, Justice, and State, the Judiciary, and Related Agencies Appropriations Act, 1998, Pub. L. No. 105119, 111 Stat. 2440, 25212522,  623 (the "Appropriations Act"). Specifically, the Appropriations Act requires the Commission to submit a report to Congress, no later than April 10, 1998, providing: Xxa detailed description of the extent to which the Commission's interpretations [identified below] are consistent with the plain language of the Communications Act of 1934 (47 U.S.C. 151 et seq.), as amended by the Telecommunications Act of 1996, and shall include a review of  Xx(1) the definitions of "information service", "local exchange carrier", "telecommunications", "telecommunications service", "telecommunications carrier", and "telephone exchange service" that were added to section 3 of the Communications Act of 1934 (47 U.S.C. 153) by the Telecommunications Act of 1996 and the impact of the Commission's interpretation of those definitions on the current and future provision of universal service to consumers in all areas of the Nation, including high cost and rural areas;  Xx(2) the application of those definitions 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) of the Communications Act of 1934 (47 U.S.C. 254(h));  Xx(3) who is required to contribute to universal service under section 254(d) of the Communications Act of 1934 (47 U.S.C. 254(d)) and related existing Federal universal service support mechanisms, and of any exemption of providers or exclusion of any service that includes telecommunications from such requirement or support mechanisms;  Xx(4) who is eligible under sections 254(e), 254(h)(1), and 254(h)(2) of the Communications Act of 1934 (47 U.S.C. 254(e), 254(h)(1), and 254(h)(2)) to receive specific Federal universal service support for the provision of universal service, and the consistency with which the Commission has interpreted each of those provisions of section 254; and  "y(.**XX)"ԌXx(5) the Commission's decisions regarding the percentage of universal service support provided by Federal mechanisms and the revenue base from which such support is derived.   {M-Id. Congress directed the".**" Commission to report to Congress on the Commission's implementation of certain provisions  X-of the Telecommunications Act of 1996\X yOJ-ԍxTelecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996 Act), codified at 47 U.S.C.  151 et seq. (Hereinafter, all citations to the 1996 Act will be to the 1996 Act as it is codified in the United States Code.) The 1996 Act amended the Communications Act of 1934 (the Act).\ regarding the universal service system. In response to this mandate, we have undertaken a thorough review of the Commissions interpretations of the relevant provisions of the 1996 Act with respect to each of the subjects identified in the Appropriations Act.  Xv-x2. ` ` 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 packetswitched network could be used to complete a long distance call placed from a residential telephone probably would have been regarded as farfetched. Today, millions of consumers, both in the United States and around the world, daily obtain access to the Internet for a wide variety of services. We can only speculate about the technologies and services that will be offered in the future. We must take care to preserve the vibrant growth of these new technologies and services. But we also must remain constant in our commitment to ensuring universal service.  Xy-x3. ` ` In this Report, we find, under the framework of the 1996 Act, that universal service and the growth of new Internetbased 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 nations telecommunications networks to all citizens, we expand the potential customer basis for information services. At the same time, the growth of Internetbased information services greatly stimulates our countrys 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 "phonetophone" 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.  X-x4. ` ` 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.  X -x5.` ` 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 Commissions 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 "2575" 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.  X- I. xINTRODUCTION   X-x6.` ` 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 lowincome 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.  X -x7.` ` Before passage of the 1996 Act, universal service was promoted through a  X-patchwork quilt of implicit and explicit subsidies at both the state and federal levels." {Ok!-ԍx#X\  P6G;ɒP#See  47 U.S.C.  151. The Commission's specific programs pursuant to the 1934 Act's mandate include the high cost loop fund, the dial equipment minutes (DEM) weighting program, long term support, Lifeline, and LinkUp. In addition, the Commission's interstate access charge system provided implicit subsidies for universal service support. 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. "h$.**F#"Ԍ X-ԙx8. ` ` 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 nondiscriminatory basis, to the specific, predictable, and sufficient  X_-mechanisms established by the Commission to preserve and advance universal service."_ yO-#C\  P3QɒP#Ѝx47 U.S.C.  254(d)(e). 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  X -service areas other than those served by a rural telephone company.  X {O -#C\  P4QɒP# 1. 1. i.(1)(a)(i) 1) a) I. A. 1. a.(1)(a) i) a)Ѝx47 U.S.C.  214(e); see also 47 U.S.C.  153(37), which provides that: XxThe term "rural telephone company" means a local exchange carrier operating entity to the extent that such entity (# XxX` ` (A) provides common carrier service to any local exchange carrier study area that does not include either (#` XxX` ` X (i) any incorporated place of 10,000 inhabitants or more, or any part thereof, based on the most recently available population statistics of the Bureau of the Census; or(# XxX` ` X (ii) any territory, incorporated or unincorporated, included in an urbanized area, as defined by the Bureau of the Census as of August 10, 1993;(# XxX` ` (B) provides telephone exchange service, including exchange access, to fewer than 50,000 access lines;(#` XxX` ` (C) provides telephone exchange service to any local exchange carrier study area with fewer(#` x` ` than 100,000 access lines; or XxX` ` (D) has less than 15 percent of its access lines in communities of more than 50,000 on the date of enactment of the Telecommunications Act of 1996. (#`  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.  Xb-x9. ` ` In the 1996 Act, Congress codified the longstanding commitment to ensuring  XK-universal service first expressed in section 1 of the Act,DK yO"-ԍx47 U.S.C.  151.D 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  X-are available at rates that are reasonably comparable to [those] in urban areas."2 yO&-#C\  P5QɒP# 1. 1. i.(1)(a)(i) 1) a) I. A. 1. a.(1)(a) i) a)Ѝx47 U.S.C.  254(b)(3).  Congress".**" also expanded the concept of universal service by requiring, for the first time, universal  X-service support for eligible schools, libraries and rural health care providers. yOb-#C\  P6QɒP# 1. 1. i.(1)(a)(i) 1) a) I. A. 1. a.(1)(a) i) a)Ѝx47 U.S.C.  254(h).  X-x 10.` ` Consistent with the timetable established in the 1996 Act, the Commission  X-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  Xx-Congress. TxX {O -#C\  P7QɒP# 1. 1. i.(1)(a)(i) 1) a) I. A. 1. a.(1)(a) i) a)ЍxFederalState Joint Board on Universal Service, CC Docket No. 9645, Report and Order, 12 FCC Rcd  {OK -8776 (1997) (Universal Service Order), as corrected by FederalState Joint Board on Universal Service, Errata,  {O -CC Docket No. 9645, FCC 97157 (rel. June 4, 1997), appeal pending in Texas Office of Public Utility Counsel  {O -v. FCC and USA, No. 9760421 (5th Cir. 1997); FederalState Joint Board on Universal Service, Order on  {O -Reconsideration, CC Docket No. 9645, 12 FCC Rcd 10095 (rel. July 10, 1997); Changes to the Board of Directors of the National Exchange Carrier Association Inc., FederalState Joint Board on Universal Service,  {O;-Report and Order and Second Order on Reconsideration, 12 FCC Rcd 18400 (1997), as corrected by Federal {O-State Joint Board on Universal Service, Errata, CC Docket No. 9645, DA 972477 (rel. Dec. 3, 1997); Changes to the Board of Directors of the National Exchange Carrier Association Inc., FederalState Joint Board on  {O-Universal Service, Order on Reconsideration, Second Report and Order and Further Notice of Proposed  {Oa-Rulemaking, CC Docket Nos. 9721, 9645, FCC 97292, 12 FCC Rcd 12437 (rel. Aug. 15, 1997); FederalState  {O+-Joint Board on Universal Service, Third Report and Order, 12 FCC Rcd 22480 (1997), as corrected by Federal {O-State Joint Board on Universal Service, Erratum, CC Docket Nos. 9645 and 97160 (rel. Oct. 15, 1997); Changes to the Board of Directors of the National Exchange Carrier Association, Inc., FederalState Joint Board  {O-on Universal Service, Second Order on Reconsideration in CC Docket 9721, 12 FCC Rcd 22423 (1997);  {OQ-FederalState Joint Board on Universal Service, Third Order on Reconsideration, 12 FCC Rcd 22801 (1997); FederalState Joint Board on Universal Service, Access Charge Reform, Price Cap Performance Review for Local  {O-Exchange Carriers, Transport Rate Structure and Pricing, End User Common Line Charge, Fourth Order on  {O-Reconsideration, CC Docket Nos. 9645, 96262, 941, 91213, 9572, FCC 97420 (rel. Dec. 30, 1997), as  {Ow-corrected by FederalState Joint Board on Universal Service, Errata, CC Docket Nos. 9645, 96262, 941, 91 {OA-213, 9572, DA 98158 (rel. Jan 29, 1998) ("Fourth Order on Reconsideration"), appeal pending in Alenco  {O -Communications, Inc., et al. v. FCC and USA, No. 981064 (D.C. Cir. 1998). 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, competitivelyneutral 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 nondiscriminatory 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."t .**s"Ԍ X-ԙx 11. ` ` The Commission's revised universal service rules seek to ensure that the Commission's longstanding commitment to maintaining affordable rates throughout the  X-country, codified in the 1996 Act,=  yOK-ԍ 47 U.S.C.  254.= is maintained in a competitive environment. Although the Commission has many decisions still before it that will affect the ultimate amount of universal  X-service support that will be provided by federal mechanisms, XX yO-ԍxFor example, the Commission must select a mechanism to determine nonrural carriers' forwardlooking cost to provide the supported services and determine the relevant benchmark against which to compare cost to determine support levels. 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.  X -x 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  Xy-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.  X- II.xEXECUTIVE SUMMARY  X-x A.` ` Definitional Issues   Xg-x 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 Internetbased offerings under the universal  X -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"#x .**"" 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  X-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  X-AT&T.  {O-ԍxUnited States v. American Tel. & Tel. Co., 552 F. Supp. 131, 229 (D.D.C. 1982), aff'd sub nom.  {O-Maryland v. United States, 460 U.S. 1001 (1983). 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  X3-services "via telecommunications."H 3$ yO -ԍx47 U.S.C.  153(20).H  X -x B.` ` Application of Definitions   X -x 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 "phonetophone" 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 "phonetophone" 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.  Xg-x15.` ` 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"j$ .**d#" 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 Congressionallyspecified goals of a "procompetitive, deregulatory communications policy."  X_-x C.` ` Who Contributes to Universal Service Mechanisms   X1-x16.` ` 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  Xb-the class of carriers that must contribute.~b {O-ԍxSee Universal Service Order, 12 FCC Rcd at 9177, para. 783.~ 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 reexamined the Commission's implementation of the limited authority set forth in section  X-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  X-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.  X-x D.` ` Who Receives Universal Service Support   XR-x17. ` ` 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.  X''-x E.` ` Revenue Base and Percentage of Federal Funding "'' Z.**%"Ԍ X-ԙx18.` ` 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