Before the Federal Communications Commission Washington, D.C. 20554 Report in Response to ) Senate Bill 1768 and ) Conference Report on H.R. 3579 ) REPORT TO CONGRESS Adopted: May 8, 1998Released: May 8, 1998 By the Commission: Commissioner Ness issuing a statement; Commissioners Furchtgott- Roth and Powell dissenting and issuing separate statements. 1. In connection with supplemental appropriations legislation enacted on May 1, 1998, Congress requested that the Commission prepare a two-part report to Congress (the Report), addressing certain issues concerning the implementation of the federal universal service support mechanisms. Section 2005(b)(2) of the Senate bill directs the proposal of a single entity to administer the support mechanisms for schools and libraries and rural heath care providers, and further directs that the proposal be "pursuant to the findings of the GAO." In response to this directive, and based on the Commission's charge to ensure the effective delivery of universal service support to targeted recipients under the Communications Act of 1934 (the Act), the Commission proposes in Part I of this Report that the Universal Service Administrative Company (USAC), the current Administrator of the high cost and low income support mechanisms, also administer the universal service support mechanisms for schools and libraries and rural health care providers. As described below, this proposal would be responsive to the Senate bill's request and preserve the goals sought by the Commission in establishing the current structure, while minimizing disruption of the on-going administration of the universal service support mechanisms. 2. Part II of the following Report supplies information concerning funding and disbursements for the schools and libraries support mechanism. This information, as provided below, demonstrates the efficient, innovative, and effective administration of this important new support mechanism. I. REVISED ADMINISTRATIVE STRUCTURE A. Background 3. In the Telecommunications Act of 1996 (1996 Act), Congress directed the Commission and the states to take the steps necessary to establish universal service support mechanisms to ensure the delivery of affordable telecommunications services to all Americans. The 1996 Act codified long-standing federal rules and policies designed to make basic telephone service affordable throughout the nation. In addition, the 1996 Act included for the first time schools and libraries among the eligible beneficiaries of the federal universal service support mechanisms by providing that elementary schools, secondary schools, and libraries are entitled to receive, upon a bona fide request, any of the core universal services at discounted rates. Congress further directed the Commission to "establish competitively neutral rules . . . to enhance, to the extent technically feasible and economically reasonable, access to advanced telecommunications and information services for all public and non-profit elementary and secondary school classrooms, health care providers, and libraries." 4. On November 8, 1996, the Federal-State Joint Board on Universal Service (Joint Board) released a Recommended Decision, which included a proposal that the Commission appoint NECA as the temporary Administrator of the new universal service support mechanisms. The Joint Board also recommended that, prior to appointing NECA as temporary Administrator, the "Commission permit NECA to add significant, meaningful representation" for non-incumbent local exchange carrier (LEC) interests to the NECA Board of Directors. NECA was established in 1983 as an association of incumbent LECs to administer the interstate access tariff and revenue distribution processes. NECA's responsibilities subsequently included, among other things, administering the universal service high cost fund, the Lifeline Assistance program, the long term support program and the interstate Telecommunications Relay Services fund. Because of NECA's appearance of bias toward incumbent LECs based on the composition of its membership and Board of Directors, the Joint Board declined to recommend the appointment of NECA as the permanent Administrator of the universal support mechanisms, but did recommend that the Commission remove any regulatory barriers to NECA's rendering itself a neutral third party. 5. The Commission's Common Carrier Bureau issued a public notice generally seeking comment on the Joint Board's recommendations, and the Commission subsequently issued a Notice of Proposed Rulemaking and Notice of Inquiry specifically seeking comment on "how the Commission should amend its rules so that NECA can reform its Board of Directors in a manner that will enable it to become eligible to serve as the temporary administrator of the universal service support mechanisms." The Commission also sought guidance from the General Accounting Office (GAO) as to how to establish an appropriate administration for federal universal service. 6. In the Universal Service Order released on May 8, 1997, the Commission appointed NECA as the temporary Administrator of the universal service support mechanisms established under section 254 of the Act, consistent with the Joint Board's recommendation, subject to NECA's agreement to make changes to its governance that would render it more representative of the interests of entities other than incumbent local exchange carriers. The Commission recognized that NECA's membership and governance, comprised of incumbent local exchange carriers, was not sufficiently representative to ensure competitively neutral administration of the support mechanisms as required by the statute. Previously, NECA had submitted formal proposals expressing its interest in administering the universal service support mechanisms. In a January 10, 1997 letter, NECA proposed the creation of a wholly- owned subsidiary, designated as the Universal Service Administrative Company (USAC), for this purpose. In an order released on July 18, 1997, the Commission determined that NECA's January 10, 1997 proposal, with some modifications, would satisfy the conditions established in the Universal Service Order. Accordingly, the Commission directed NECA, as a condition of its appointment as the temporary Administrator, to establish an independent subsidiary, USAC, to administer temporarily the high cost and low income support mechanisms and to perform billing, collection, and disbursement functions for all of the universal service support mechanisms on a temporary basis. The Commission further determined to establish a universal service advisory committee, pursuant to the Federal Advisory Committee Act, that would recommend to the Commission a neutral third party to assume these functions on a permanent basis. The Commission also directed NECA, as a condition of its appointment as the temporary Administrator, to establish two independent corporations, the Schools and Libraries Corporation (SLC) and Rural Health Care Corporation (RHCC), to administer portions of the support mechanisms for schools and libraries, and rural health care providers, respectively. These corporations would serve as permanent administrators of those mechanisms. 7. This administrative structure was intended to accomplish three goals. First, the Commission concluded that specialized entities, comprised of individuals with particular expertise, would foster efficient and effective administration. Second, the Commission sought both to increase accountability to the Commission for the administration of schools, libraries, and rural health care support, and to provide adequate safeguards against waste, fraud, and abuse. Finally, in directing the establishment of SLC and RHCC as permanent entities, the Commission sought continuity in the administration of the support mechanisms for schools, libraries, and rural health care providers. B. Discussion 8. Revised Administrative Structure. Consistent with the directive of section 2005(2)(b)(2) of the Senate bill, to which Congress has requested that we respond, we propose to merge SLC and RHCC into USAC as the single entity responsible for the administration of the universal service support mechanisms for schools, libraries, and rural health care providers. In our view, vesting the consolidated USAC with the administrative responsibilities for all of the universal service support mechanisms, as described below, may best further the goals of efficient administration and accountability, and therefore would likely be the best option in accordance with the language of section 2005 to propose a single entity to administer the schools and libraries and rural health care support mechanisms. The USAC board includes individuals with the experience and expertise necessary to understand and implement the distinct missions of the schools and libraries and rural health care support mechanisms. The majority of the members of the boards of directors for SLC and RHCC, including representatives of schools and libraries and rural health care providers, also serve on the USAC board of directors. In addition, USAC is already responsible for collecting and disbursing funds for the schools, libraries, and rural health care support mechanisms and has put systems in place for this purpose. Accordingly, subject to the Commission adopting a plan of reorganization that satisfies the criteria for efficient and accountable administration described below, we tentatively conclude that such a unified entity would be uniquely qualified to assume responsibility for the administration of these support mechanisms. As described more fully below, to preserve the distinct missions, expertise, and integrity of the schools and libraries and rural health care support mechanisms, board committees or divisions within USAC may be appropriate. 9. The consolidated USAC will remain accountable to the Commission by virtue of the Commission's universal service rules, which provide detailed guidance on administration of the universal service support mechanisms, USAC's regular coordination with Commission staff, and its quarterly filing of projected administrative expenses and estimates of support mechanism demand. The Commission also oversees the structure and content of the annual independent audit that USAC is required to undertake. As explained to the General Accounting Office, the Commission retains ultimate authority over the operation of the support mechanisms. Parties that object to any action taken by the corporations can bring the matter to the Commission's attention and request remedial relief. As outlined in greater detail below, we also propose in this Report a procedure for administrative review of USAC's decisions by the Commission. Moreover, we believe that naming USAC as the permanent Administrator, as proposed in this Report, would provide continuity to support mechanism contributors and beneficiaries. As a permanent Administrator, USAC's development of expertise and operational success of the support mechanisms would be encouraged fully, and not undermined by the danger that its expertise would have to be rebuilt at some near date in the future. Such a midstream change could potentially be disruptive and wasteful. Finally, USAC satisfies the statutory requirement of competitively neutral administration because it includes significant industry-wide representation of both contributors and beneficiaries. 10. USAC's Reorganization Plan. In response to the directive of section 2005 of the Senate bill, we propose that the functions, assets, employees, rights, and liabilities of SLC and RHCC be transferred to USAC by January 1, 1999. To implement the transfer, USAC, SLC and RHCC would be required jointly to prepare and submit a plan of reorganization for approval by the Commission. Prior to taking final action consistent with any proposals, public comment on such proposals will be sought. In addition, after reviewing the reorganization plan, and any comments received, the Commission contemplates ultimately effectuating the unified structure proposed herein through issuing a reconsideration order. The reorganization plan must detail how USAC proposes to structure its organization and operations pursuant to established principles and requirements of corporate law, and the language of section 2005 of the Senate bill. 11. We contemplate that the specialized knowledge and expertise of SLC and RHCC would be maintained in the unified structure. The joint proposal must be responsive to the direction of the Conference Report that "any proposed administrative structure should take into account the distinct mission of providing universal service to rural health care providers, and include recommendations as necessary to assure the successful implementation of this program." To that end, the existing SLC and RHCC boards may become subsidiaries or committees of the USAC board. In addition, the reorganization plan must delineate how the administrative systems and expertise that RHCC and SLC have developed, which differ from those required to administer the high cost and low income support mechanisms, will be preserved in USAC. The plan may also include a proposed organizational framework for staffing within USAC involving divisions or other operational units charged with discrete or specialized duties. Finally, to provide continuity to the beneficiaries and recipients of the support mechanisms during the period of reorganization, the plan must address the transfer of employees' contractual rights, benefits, and obligations of SLC and RHCC, including the assumption of contracts for services that SLC and RHCC have entered into with subcontractors in connection with the performance of their administrative responsibilities. 12. USAC's Permanence and Divestiture. Given USAC's successful administration of the support mechanisms to date, we propose that the administrative structure set forth herein be made permanent, subject to the Commission's review and determination after one year that the new structure is administering the distribution of universal service support and benefits to eligible entities in an efficient, effective, and competitively neutral manner. Providing permanence to the proposed structure will ensure USAC's ability to continue to attract and maintain qualified personnel and to ensure the continued success of the administrative operations without unnecessary disruption to contributors and beneficiaries. 13. Because we propose in this Report that USAC be named the permanent Administrator, we further propose that, pending Commission review of USAC's performance after one year, USAC be divested from NECA. This proposal is consistent with NECA's suggestion in its January 10, 1997 letter that, if USAC were selected as the permanent Administrator, USAC should be divested from its affiliation with NECA. As recognized by both commenters and the Federal-State Joint Board on Universal Service, NECA's membership and governance, which are composed primarily of incumbent local exchange carriers, may render NECA insufficiently representative of the diverse set of contributors to, and beneficiaries of, the support mechanisms either to serve as permanent Administrator or to warrant a continuing structural affiliation between NECA and USAC. Insofar as USAC will have been successfully operating for nearly two years, there will be no continuing need for USAC to remain affiliated with NECA to facilitate the sharing of resources and personnel. This proposal to divest USAC from NECA would not prevent USAC from entering into contracts with NECA for the performance of particular administrative functions. 14. USAC's Administrative Responsibilities and Accountability. In its administration of the support mechanisms for schools and libraries and rural health care providers, we expect that USAC would apply its expertise to interpreting and applying existing decisional principles, but would not make policy or create the equivalent of new guidelines, or interpret the intent of Congress, without appropriate consultation and guidance from the Commission. Consistent with these principles, we propose to establish a procedure under which administrative decisions made by USAC would be reviewable by the Commission. Under this procedure, an administrative decision of USAC could be appealed by affected parties to the Commission. We will seek comment on exactly how this procedure should operate. In addition, the Commission would maintain the authority to review the decisions of USAC at any time on the Commission's own motion. Moreover, to foster greater accountability of the new USAC entity to Congress as well as the Commission, we propose that, in connection with its annual audit, USAC prepare and file with Congress and the Commission an annual report describing all significant aspects of its structure and operations for the preceding year. 15. Congressional Authorization. We understand that the Senate bill's directive to propose a revised administrative structure was sparked in part by the GAO's letter concerning the establishment of SLC and RHCC. We welcome action by Congress to resolve the issues raised by the GAO's letter. At the same time, we believe, contrary to the GAO's analysis, that the Commission acted lawfully in directing that NECA establish SLC and RHCC as a condition of its appointment as temporary Administrator. In response to the direction in section 2005(b)(2) of the Senate bill, that the unified structure we propose be "pursuant to the findings of the GAO," we respectfully request from Congress specific statutory authority, similar to that provided in connection with numbering administration, to create or designate, on or before January 1, 1999, one or more entities, such as the Universal Service Administrative Company, to administer the federal universal service support mechanisms. Such authorization would eliminate any question concerning the Commission's authority generally, and under the Government Corporation Control Act, to vest administrative responsibilities for the schools and libraries and rural health care support mechanisms in USAC and provide certainty to universal service contributors and beneficiaries. Similarly, we request that Congress enact legislation authorizing NECA to perform the administrative functions currently assigned to it under the Commission's rules. Finally, we ask that Congress specify that the body selected by the Commission, as well as NECA, would not be considered governmental agencies, government owned corporations, or government controlled corporations, subject to the requirements of federal laws governing the conduct and operations of federal agencies. II. FUNDING FOR SCHOOLS AND LIBRARIES SUPPORT MECHANISM 16. To ensure that the benefits of the Telecommunications Act of 1996 extend to all Americans, Congress expanded universal service under the Act to provide, among other things, support to eligible schools and libraries. In so doing, Congress recognized that, by facilitating the deployment of advanced technologies to America's classrooms, the schools and libraries support mechanism represents a direct and vital investment in the community. As described more fully below, consistent with Congress' mandate, the Commission has taken steps to assure both that the schools and libraries support mechanism is adequately funded and that the expenditures made on behalf of eligible schools and libraries are delivered effectively and efficiently. A. Funds Collected for Schools and Libraries Support Mechanism. 17. The Senate bill directs three inquiries concerning contributions to the schools and libraries support mechanism. Explanations are requested, first, for the contribution mechanisms for schools and libraries support and as to whether any direct end-user charges on consumers are appropriate; and second, for the interstate and intrastate basis for such contributions consistent with section 254(d). Third, an accounting is requested of the contributions available for use to support schools and libraries for the second quarter of 1998, in total and as broken down by contributing entity. 18. Contribution Mechanism. The Commission concluded in the Universal Service Order that contributions to the universal service support mechanisms should be based on end- user telecommunications revenues. The Commission found that assessing contributions based on telecommunications revenues derived from end users is competitively neutral and relatively easy to administer. The Commission also found that this approach satisfied the statutory requirement that support be explicit, because carriers will know exactly how much they are contributing to the support mechanisms. The Commission did not mandate in the Universal Service Order that carriers recover contributions through an end-user surcharge, but did not prohibit such surcharges, and we reaffirm that conclusion herein. The Commission further stated that, in declining to mandate an end-user surcharge, it sought to allow carriers the flexibility to decide how they should recover their contributions. 19. The Commission emphasized in the Universal Service Order, however, that to the extent that carriers pass all or part of their contributions on to their customers on customer bills, carriers should include complete and truthful information regarding the contribution amount. Such carriers, the Commission made clear, "must be careful to convey information in a manner that does not mislead by omitting important information that indicates that the contributor has chosen to pass through the contribution or part of the contribution to its customers and that accurately describes the nature of the charge." The Commission noted that, unlike the subscriber line charge, the universal service contribution is not a federally mandated direct end-user surcharge. The Commission observed that it would be misleading for a carrier to characterize its contribution as a surcharge, because carriers retain the flexibility to structure their recovery of the costs of universal service in many ways, including creating new pricing plans subject to monthly fees. The Commission also pointed out that, as competition intensifies in the markets for local and interexchange services, it will likely lessen the ability of carriers and other providers of telecommunications to increase rates to customers. 20. We recognize that, in the near term, consumers' bills will undergo some change as companies adjust to the pro-competitive mandates of the Act. The Commission anticipates that consumers should benefit from these adjustments in that rates should continue to fall, all Americans will continue to have affordable access to telephone service, and the costs of providing telephone service will be recovered in a manner that is more straightforward than that used in the monopoly era. We continue to be concerned that carriers provide clear and accurate information to subscribers. We intend to seek comment on the extent to which carriers that pass on to their customers all or part of their universal service contribution obligation are not including complete and truthful information regarding the contribution amount. We will also seek comment on actions the Commission may take to reduce any confusion that consumers may experience with regard to universal service surcharges on their bills. 21. Revenue Base. The Commission also explained in the Universal Service Order that contributions to fund the schools and libraries support mechanism would be based on both interstate as well as intrastate revenues, consistent with the provisions of section 254(d). More recently, in the Report to Congress submitted by the Commission on April 10, 1998, we examined certain Commission decisions regarding the revenue base on which contributors' universal service contributions are assessed. After analyzing the Commission's conclusions regarding the jurisdictional parameters placed on the Commission and on states, we concluded that we have the authority to assess universal service contributions on telecommunications providers' interstate and intrastate revenues. The April 10th Report concluded that the Commission's decision to base contributions to the high cost and low-income support mechanisms solely on interstate revenues and to base contributions to the schools, libraries, and rural health care support mechanisms on intrastate and interstate revenues was consistent with section 254 of the Act. For convenience, we append the relevant portions of the April 10th Report, as Attachment A hereto. 22. Contributions for Schools and Libraries. As reflected in the May 8, 1998 letter from USAC, appended hereto as Attachment B, we estimate that approximately $619 million will be available for use to fund the schools and libraries support mechanism through the end of the second quarter of 1998. Also reflected in Attachment B, the following represent the total estimated contributions for each category of contributors for the first and second quarters of 1998 that will be available to fund the schools and libraries support mechanism for the second quarter of 1998: (i) incumbent local exchange carriers will contribute approximately $179 million; (ii) interexchange carriers will directly contribute approximately $266 million; (iii) information service providers, which are not obligated by the statute to contribute, will make no direct contribution; information service providers, however, will contribute significant amounts indirectly, as high-volume purchasers of telecommunications, as explained in the Commission's April 10th Report; (iv) commercial mobile radio service providers will contribute approximately $87 million; and (v) other providers (e.g., competitive local exchange providers, private carriers) will contribute approximately $92.5 million. B. Disbursements for Schools and Libraries Support. 23. Pursuant to Congress' mandate to establish adequate funding for the schools and libraries support mechanism, the Commission in the Universal Service Order set an annual cap for schools and libraries funding, basing its decision on the recommendations of the Joint Board and a record consisting of more than 100,000 pages of comments, expert testimony, and other submissions. Because of the effective administration of the support mechanism, and the public's corresponding interest, the schools and libraries support will likely reach thousands of schools and libraries, and thereby offer meaningful, vital access to these communities. Indeed, the response and interest in the schools and libraries support mechanism attests to its tremendous success. During the initial 75-day window for filing applications, more than 30,000 completed applications were received from schools and libraries in every state in the union. As of May 1, 1998, SLC projected that $2.02 billion in discounts have been requested by applicants who have filed through April 28, 1998. 24. The Senate bill directs three specific inquiries concerning disbursements for schools and libraries support. First, an estimate is requested of the costs of providing schools and libraries support, based on the applications for funding received as of April 15, disaggregated by the eligible services and facilities. Second, a justification is sought of the amount, if any, by which the total requested disbursements from the fund may exceed the amount of available contributions for the second quarter. Finally, an estimate is requested for the amount of contributions that will be required for the program in the third and fourth quarters of 1998. 25. In response, the costs, disaggregated by eligible services and facilities are reflected in SLC's May 7, 1998 letter appended hereto as Attachment D. Although the total requested disbursements from the fund described above exceed the amount of available contributions described in Attachment B, the explanation for this difference is that the disbursements reflect the amount requested for a twelve month period, while the contributions reported cover only a six month period. The contributions required in the third and fourth quarter will be determined after soliciting public comment in public notices that will be released early next week. In particular, we intend to seek comment on whether the amount collected for universal service support for schools and libraries in 1998 should equal the demand reported by SLC or be limited to an amount that does not cause long distance rates to increase. C. Access Charge Reductions. 26. The Senate bill also seeks information relating to access charges. Specifically, it directs that an "estimate of the expected reductions in interstate access charges anticipated on July 1, 1998" be provided, as well as "an explanation as to whether access charge reductions should be passed through on a dollar-for-dollar basis to each customer class on a proportionate basis." Although the local exchange carriers will not file their access tariffs until June 16, 1998, based on preliminary information provided by the local exchange carriers, we estimate that the July 1, 1998 access charge reductions will be approximately $700 million below current levels. Given this projected access charge reduction, we estimate that the quarterly collection rate for schools and libraries could rise from $325 million (the second quarter collection rate) to approximately $524 million without increasing total access and universal service payments by long distance carriers. Accordingly, schools and libraries could be funded at approximately $1.67 billion for the 1998 calendar year without increasing total access and universal service payment by long distance carriers. 27. In January 1998, the Commission began the process of removing funding for universal service from access charges. Instead of this implicit funding, we began funding universal service through explicit contributions from a broader array of telecommunications providers. In addition, in January 1998, the Commission implemented access charge reductions, and began collection of contributions for the schools and libraries and rural health care mechanisms. We have found that changes in universal service support that were implemented January 1, 1998 did not increase the overall costs of long-distance carriers or the costs that local telephone companies need to collect in local rates. For CMRS customers, we are finding that consumers have been seeing, and are continuing to see, significant reductions in prices even though the 1996 Act required for the first time that wireless carriers contribute to the support of universal service. 28. Access charges have been a significant portion of the total cost of providing long-distance service for all facilities-based long distance carriers. The Commission has previously found that the interstate long distance market is substantially competitive. Because past experience indicates that long distance carriers tend to compete on the basis of per-minute rates, among other things, this competition creates strong incentives for carriers to reflect reductions in their costs through lower rates. Therefore, we would expect long distance companies to pass through access charge reductions, and especially reductions in per- minute access charges, to their customers. CONCLUSION 29. The interest in and success of the schools and libraries and rural health care support mechanisms to date attests to Congress' vision in extending universal service support to these important missions. This Report responds to the directives of the Senate bill. It proposes a revised structure for the administration of schools and libraries and rural health care support, and additionally provides documentation of the funding and disbursements for the schools and libraries mechanism, in particular. As described above, this Report seeks Congress' support and continuing partnership in discharging our obligations under the Act, and bringing the full benefits of a free and open telecommunications marketplace to all Americans. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary Separate Statement of Commissioner Susan Ness Re: Report in Response to Senate Bill 1768 and Conference Report on H.R. 3579 I welcome today's opportunity for the Commission to respond to concerns that have been expressed by Congress. We have no greater responsibility, or challenge, than to implement successfully the Telecommunications Act of 1996. An active and continuing dialogue between the FCC and Congress is important to keeping implementation on track. We do our best to follow the statute as Congress wrote it, but, to the extent that we receive additional congressional guidance on ways in which our implementation decisions can be improved, I am happy to be responsive. In particular, there have been significant congressional concerns about the administrative structures that were established to administer various universal service support mechanisms. Although I firmly believe that the structures previously established were suited to the goals of efficiency and accountability, and consistent with our statutory authority, it is clear that Congress believes the job can be done better if, at a minimum, the Schools and Library Corporation and the Rural Health Care Corporation are combined in a single entity. I believe we should follow this guidance and that the best way to do so probably is to fold both SLC and RHCC into the Universal Service Administrative Corporation. A final decision, of course, should await the development of a specific proposal, the opportunity for deliberations by the Commission and the state members of the Federal-State Joint Board on universal service, and confirmation from Congress that the revised structure will meet with approval. It is my sincere hope that this approach will not only receive congressional support but also meet the needs of the intended beneficiaries of the universal service provisions of the Telecommunications Act. Similarly, if Congress has concerns about the salaries paid to the senior employees of SLC, RHCC, USAC, or NECA, then it is our responsibility to take responsive action. Funds used for administration of the high-cost, low-income, or school, library, and rural health support mechanisms necessarily diminish, to some degree, the funds that will be available for the beneficiaries of the programs. Although these corporations require capable administrators, and the boards of directors of each of these associations have made independent decisions about the salaries they pay their executives, the unambiguous wishes of Congress must be respected -- and followed. This report also provides valuable information about the manner in which universal service support is being collected. The key point this report demonstrates is that universal service funding for schools, libraries, and rural health care is being collected without necessitating increases in the costs of services to telecommunications consumers. Access charge reductions, in particular, coupled with growth in the industry, declining costs, increased competition, and the elimination of deadweight losses, enable the new universal service support mechanisms to be initiated -- and the low-income and high-cost programs to be maintained -- while aggregate prices to consumers continue to decline. There is, to be sure, a growing amount of confusion about various line-items that are appearing on consumers' bills, and I believe we should be forceful in acting to ensure that these charges are not misleading or inappropriate. But the line on the bill that matters most is the bottom line, and that's the line we are working hardest to reduce. I want to work with Congress to ensure that the Telecommunications Act is a resounding success. I strongly believe that Congress acted wisely in deciding to expand the traditional notion of universal service by supporting the connection of classrooms and libraries to the information superhighway. I will continue to work to ensure that this vision -- which is so crucial to our success as a nation in the 21st century -- is successfully implemented, with congressional guidance and support. DISSE NTING STATEMENT OF COMMISSIONER HAROL D FURCHTGOTT-ROTH Re: Universal Service Report to Congress in Response to Senate bill 1768 and Conference Report on HR 3579. Introduction I regretfully dissent from the majority's Report to Congress on universal service. I remain concerned that the Commission fails to address the underlying frustration that many members of Congress, and the general public feel, as a result of the Commission's misguided Universal Service Order last May. As I stated only a month ago in this Commission's last report to Congress: priorities matter. I remain convinced that rural, high-cost universal service is not just one of many objectives of Section 254; it should be the highest priority. The federal government has had universal service programs for rural, high-cost areas and for low-income Americans for many years. Section 254 embodied these ideals and set forth goals that emphasize rural, high-cost support as well as low-income support and other objectives. Instead of such an emphasis, we have made costly promises for some services without making promises for increases in rural, high-cost programs. Rural, high-cost universal service issues should not be resolved and implemented in some dim and distant future after all other universal service issues have been resolved; rural, high-cost universal service issues should be resolved and implemented first. Rural, high-cost universal service should not be viewed as the residual after enormous amounts for other federal universal service obligations have been promised; rural, high-cost universal service should receive the lion's share of any increase in the federal universal service fund. This Report provides another missed opportunity, and the accompanying structural changes to the Schools and Libraries Corporation that are required by it provide another reason, for the Commission to put on hold its plans to implement a far-reaching schools and libraries program until after it has finished implementing the rural, high-cost fund issues. I also object to the majority's continued refusal to allow any of the benefits of reduced access charges to actually flow to consumers. For these and other reasons explained below, I must reluctantly and respectfully dissent from the majority opinion today. I. Public Funds Should Not Be Allocated for Schools and Libraries Until the Proposed Restructuring Has Been Completed. The proposal for consolidating the three corporations is a good first step in reaching a more rational, efficient, and legal structure to administer universal service. I have several reservations, however, with the specifics of the proposal. First, I am concerned that the proposal merely perpetuates too much of the current bureaucracy. For example, it appears that the majority would simply fold the current Schools and Libraries and Rural Health Care Corporations into USAC in their entirety, with the new "operational units" maintaining virtual autonomy as they would have the power to bind the USAC Board regarding matters within their expertise. I am concerned that the ultimate reorganization/streamlining plan obtain the benefits of economies of scale and consolidate the ultimate responsibility for universal service into one decision-maker. The consolidation of the ultimate decision-making authority is also important for accountability. I am concerned that adequate safeguards may not have been implemented to prevent fraud and abuse. Recently, there have been complaints that some schools and libraries are basing their award of contracts on the amount of ineligible items that the bidder is willing to provide at "no cost." Such actions could encourage bidders to inflate the cost of eligible services, to provide ineligible services for free. This is the type of behavior that the Commission must ensure is not taking place prior to the disbursement of any public funds. I also remain concerned that the majority fails to address fully the issues raised by the GAO report regarding the legality of the Commission creating these corporations without specific statutory authority. I commend the majority for seeking Congressional guidance regarding this issue. I remain convinced, however, that the Commission should explicitly acknowledge the legitimacy of GAO's conclusions regarding the legality of these corporations, and wait for Congressional approval of the revised structure prior to further expenditure of any funds. I fail to see how the Commission can direct that these corporations continue to act without first receiving the requisite authorization from Congress. In addition, I would take this opportunity to clarify that the full Commission must take a more active role in the direct oversight of these quasi-public companies. Congress clearly favors a more efficient organization of only limited administrative functions, without the ability to "interpret the intent of Congress" or "any rule promulgated by the Commission." Yet, the majority indicates that the revised entity might be able to apply its expertise to interpreting and applying existing "decisional principles." I am concerned that, while a good start, the majority does not go far enough in delineating specific means of ensuring full Commission involvement in all budgetary decisions and the policy-making process. As it will take some time to restructure the universal service corporations, it would be prudent and in the taxpayers interest to suspend further expenditures on schools and libraries. II. The Excessive Funding Proposed for Schools and Libraries Will Harm Consumers and Increase Telecommunication Rates I also object to the majority's conclusions regarding the funding that has been provided to the schools and libraries program. For the following reasons, I disagree with the majority's conclusion that the steps the Commission has taken thus far were necessary to assure that the schools and libraries funding mechanism was adequately funded and the program delivered efficiently. First, as I have stated previously, the size and scope of the current schools and libraries program is in excess of what was envisioned by Congress, and thus beyond the Commission's authority to establish. Nothing in the statute or the legislative history indicates that Congress contemplated substantial new taxes on interstate or other telecommunications services as a result of the Telecommunications Act of 1996, nor did it envision price increases -- much less substantial price increases -- in any telecommunications market. The Schools and Libraries Corporation projected that, as of May 1, 1998, $2.02 billion in discounts has been requested by applicants. Although current Commission rules cap the program at $2.25 billion or demand, the report indicates that the Commission will seek comment on whether the amount collected this year should equal demand or "be limited to an amount that does not cause long distance rates to increase." While I certainly agree that the Commission should not collect any revenues that would cause long distance rates to "increase," I remain frustrated that the majority assumes that any reduction in access charges should be "used" for new universal service programs, instead of turning any of the reductions back to consumers. Unfortunately, the majority indicates its intention to use the entire $700 million in access charge reductions estimated for July to increase the quarterly contributions to the schools and libraries program from $325 million to approximately $524 million for a fund of $1.67 billion for 1998. This amount is not only excessive but prevents consumers from receiving any of the benefits of deregulation. Chairman Kennard's letter to Chairman Bliley, Attachment E to this Report, entirely misses this point. The issue is not whether, despite massive tax increases that just offset decreases in federal access fee and charges, IXCs have no net differences in costs. The issue is whether, absent massive new taxes, consumers would be better off. By the Bureau's own analysis, consumers are bearing $2.4 billion in new costs in 1998 alone. How much lower might prices have been? How much more might the promise of the 1996 Act of lower prices for consumers been fulfilled? How many more businesses might have been spawned? Professor J. Hausman has estimated that consumers lose more than $2 for every $1 paid in taxes on long-distance services. Thus, the FCC had an opportunity to put more than $5 billion back in the pockets of ordinary Americans. But the FCC has chosen not to. There is implicit in the Bureau's calculations a set of new taxes that just balances a reduction in federal charges and fees. Is this balance coincidental or the artifact of a private deal between industry and the Commission? The promise of the 1996 Act was that rates would come down, not that they would remain the same as the result of secret deals in which one set of federal taxes goes down and another goes up, while citizens are none the worse for the regulatory sleight of hand. Are we left to believe that if access charges and other fees had been reduced by only $200 million, that new universal service taxes would have been only $200 million? Or that if fee reductions had been $5 billion that new taxes would have been $5 billion? Moreover, there is no assurance that the consumers who benefit from access reductions will be the same consumers who will bear the new universal service burden. For example, business consumers could disproportionately benefit from the access charge reduction while residential consumers pay for new universal service fees. Second, I am concerned that the majority continues to use all access reductions for new universal service fees while the high-cost program has not been fully implemented. As I argued in our previous report to Congress, "the potential pot of revenue that the FCC can collect for universal service from fees on interstate services is limited." Some potential universal service beneficiaries have been "promised" enormous and unending benefits, long before there are actual revenues for these programs and long before other potential universal service beneficiaries (rural, high-cost programs) have voiced all of their concerns. Third, the plan outlined in the Report not only uses every cent of access charge reduction for new universal service programs, it will actually cause an increase in fees for some telecommunication services. Buried in the Report is the proposition that a $700 million reduction in access charges will yield $848 million in additional funds for schools and libraries. How is this possible? Because the majority anticipates increasing all contribution rates equally, even though almost 20% of the schools and libraries contributors will not benefit from reduced access charges. Thus, for example, wireless carriers will be required to pay proportionately higher costs, despite the fact that they have received no access charge reduction. Fourth, I also note that this entire dilemma has been caused, at least in part, by the Commission's misguided and unlawful decision to fund inside wiring and other non- telecommunications services. As I explained in the April 10th report to Congress, the Commission has no statutory basis to provide direct financial support for non- telecommunications services and to non-telecommunications carriers. According to the Schools and Libraries Corporations own estimates, the vast majority of the program's demand is for non-telecommunications services and facilities. The vast majority of demand is for funds to provide inside wiring -- what should be an ineligible facility. Indeed, the amount already collected this year would almost fully fund the demand for telecom services. At a minimum, I believe the Commission should reduce the current quarterly contribution rate for schools and libraries from $325 million to a mere $25 million. Such a reduction would allow previous access charge reductions and those contemplated for this July to flow to consumers directly, while still providing more than sufficient funds -- $675 million for 1998 -- to pay for all of the telecommunications services that have been requested by any school this year. The Commission would then have until January 1, 1999 to reevaluate the scope and scale of the schools and libraries program, while also finishing what should have been its first priority, namely, the rural and high-cost program. In addition, I am concerned with the report's suggestion that carriers should conceal their universal service contributions from consumers. As I have stated previously, no carrier should have its billing information restricted or limited by the Commission. The Commission has explicitly provided carriers with the flexibility to decide how to recover their payments, including as charges on consumers bills, and I am concerned by implications that such charges are fraudulent or misrepresentations. Indeed, section 254(e) requires that funding mechanisms for universal service be explicit. Consumers have a right to know what federal charges they are paying; the Commission should not discourage companies from placing universal service charges on their bills. Finally, I continue to believe that the Commission erred in assessing contributions to the schools and libraries and rural health care programs based on intrastate revenues. Any federal assessment on intrastate revenues is beyond the Commission's authority. Section 2(b) of the Communications Act creates a system of dual federal-state regulation for telecommunications. In essence, the Act establishes federal authority over interstate communications services while protecting state jurisdiction over intrastate services. I believe that the Commission's decision to look to intrastate revenues to determine federal universal service support and to establish a minimum discount for intrastate telecommunications services for schools and libraries impermissibly encroaches on state's rights and violates the Act's fundamental federal-state dichotomy. Conclusion Section 254 is an integral part of the Telecommunications Act of 1996. The Commission has yet to implement it properly, despite repeated opportunities. The proper implementation of section 254 should be of the highest priority. SEPARATE STATEMENT OF COMMISSIONER MICHAEL K. POWELL, DISSENTING Re: Report in Response to Senate Bill 1768 and Conference Report on H.R. 3579. I write separately to explain why I am dissenting from this Report to Congress. The Common Carrier Bureau has done an admirable job of drafting the text of this Report over the last several weeks despite uncertainties regarding whether Congress would ultimately request the Report and what that request would entail. As a result of poor internal Commission processing, however, I have not been given a full opportunity to consider and influence the content of this Report. Because I do have some concerns with the content of the Report, I feel I have no choice but to dissent. In the interest of being responsive to Congress, however, I briefly describe below some of my concerns regarding the Report and our universal service programs generally:  I am increasingly troubled by the suggestion, evidenced in the Report, that carriers should conceal their universal service contributions or not allow carriers to recover such contributions from consumers. Section 254(e) of the Act expressly mandates that universal service support be "explicit." 47 U.S.C.  254(e). Further, as the Report recognizes, carriers have the flexibility to decide how they will recover their universal service contributions, and I doubt the Commission has authority to prevent carriers from recovering from their customers. My fear is that, rather than accept our apparent lack of authority to prevent carriers from passing their contributions on to their customers, the Commission will continue down the road, as evidenced in the Report, of suggesting that politically-unpopular methods of recovering such contributions (i.e., line items on consumer telephone bills) somehow amount to fraud or misrepresentation. Clearly, carriers should not be allowed to commit fraud or misrepresentation. Yet I am hesitant to suggest that carriers are guilty of these offenses simply because they inform their customers that a component of their bills will be used to recover contributions mandated by the government. To the extent we are, as a practical matter, scrutinizing statements and line items on bills to pressure carriers into hiding from the customer support mechanisms that the Act requires be made explicit, I must respectfully object. I also must object to the notion, implicit in some calls for scrutiny of carriers' bills, that carriers commit misrepresentation if they do not indicate that they have benefited from access reductions at the same time they make their recovery of universal service contributions explicit on customer bills.  I seriously question the Report's suggestion that the starting point for determining the appropriate level of funding for the Schools and Libraries program should be an assumption that all reductions in access charges be used to fund that program. The Commission should acknowledge that the Act's addition of various universal service programs to the traditional high cost, low income and other programs will require the overall amount of universal service subsidies to rise relative to the sum of implicit and other subsidies that existed prior to the Act's passage. At the very least, we should expect that carriers will seek to recover their contributions to these additional, new programs from their customers. Indeed, I believe it would be inconsistent with the statutory mandate that universal service support be made explicit if the Commission were to -- formally or informally -- attempt to force carriers to conceal from customers the recovery of costs attributable to government-mandated programs. The Act mandates that we compensate for reductions in implicit access charges by adding explicit universal service subsidies. Consequently, "access charge reductions" cannot be viewed as a quid pro quo for lowering or eliminating the amounts carriers recover as explicit line items on customers bills. Moreover, I seriously question the validity of tying the funding level of any of our universal service programs to reductions in access charges.  I also am concerned that a sizeable portion of demand for the Schools and Libraries program is attributable to discounts for internal connections and Internet access, which the Commission is not required to fund as advanced services pursuant to section 254(h); rather, the Commission could decide to postpone funding internal connection and Internet access discounts temporarily or indefinitely. (It is noteworthy that, had the Commission decided not to fund internal connections and Internet access at this time, funds collected for the first 6 months of 1998 would likely cover the demand by schools and libraries for discounted telecommunications services.)  I would support limiting the revenue base of the Schools and Libraries program to interstate revenues. I remain unconvinced that there is a principled basis for assessing contributions based on both intrastate and interstate revenues for that program, while limiting assessment of contributions for other universal service programs to interstate revenues.  I am not yet persuaded that, contrary to the analysis of the General Accounting Office, the Commission acted lawfully in directing that NECA establish the Schools and Libraries Corporation and the Rural Health Care Corporation as a condition of its appointment as temporary administrator. Under the Government Corporation Control Act, "[a]n agency may establish or acquire a corporation to act as an agency only by or under a law of the United States specifically authorizing the action." 31 U.S.C.  9102. To my knowledge, no law specifically authorizes the Commission to establish corporations, and I find arguments that the Commission merely directed the establishment of the corporations as a condition of appointment unavailing. If there is a distinction between directing the establishment of the corporations as a condition of appointment and establishing the corporations outright, it appears to be a distinction without a meaningful difference. I also note that Commissioner Furchtgott-Roth raises additional, serious concerns in his statement dissenting from this Report. Had the Commission's internal processes afforded me more of an opportunity to engage with my colleagues regarding the contents of this Report, I might have been persuaded that there are equally valid arguments in opposition to the criticisms I highlight above. Regrettably, that opportunity was never presented. As I stated in my statement for the April 10, 1998 Report to Congress, I fear that support for these beneficial programs will erode among both legislators and the general public if we cannot find a way to make critics in Congress and elsewhere believe that we are working to preserve and advance universal service in a prudent and responsible manner. With the issuance of this Report, I regret that we pass up yet another opportunity to foster such belief, in part, because we failed to allow for full consideration of this matter by the entire Commission.