PUBLIC NOTICE
	Federal Communications Commission 1919 - M Street, N.W. Washington, D.C. 20554	News media information 202 / 418-0500 Fax-On-Demand 202 / 418-2830 Internet: http://www.fcc.gov ftp.fcc.gov
	Released: August 18, 1998 DA 98-1649
	Proposed Fourth Quarter 1998 Universal Service Contribution Factors Announced CC Docket No. 96-45
	In this Public Notice, the Accounting Policy Division of the Common Carrier Bureau announces proposed universal service contribution factors for the fourth quarter of 1998.(1) On July 31, 1998, the Universal Service Administrative Company (USAC), Schools and Libraries Corporation (SLC), and Rural Health Care Corporation (RHCC) submitted the following projections of fourth quarter 1998 demand and administrative expenses: ($ millions) Program Program Demand Administrative Expenses Interest Income(2) Total Program Costs Schools and Libraries 320.1 4.9 (0.0)(3) 325.0 Rural Health Care 24.3 1.5 (0.8) 25.0 Subtotal 344.4 6.4 (0.8) 350.0 High Cost 422.5 1.9 (0.7) 423.7 Low Income 116.4 0.3 (1.0) 115.8 Subtotal 538.9 2.2 (1.7) 539.4 TOTAL 884.0 8.5 (2.5) 889.5 In the Fifth Order on Reconsideration, the Commission adjusted the 1998 collection amounts for the schools and libraries support mechanism.(4) Specifically, the Commission directed USAC to collect only as much as required by demand, but in no event more than $325 million per quarter for the third and fourth quarters of 1998 and the first and second quarters of 1999 to support the schools and libraries universal service support mechanism.(5) The Commission further directed SLC to approve applications totalling no more than $1.925 billion for disbursement during 1998 and the first half of 1999.(6) The Commission also directed USAC to collect for the rural health care support mechanism only as much as required by demand, but in no event more than $25 million per quarter for the third and fourth quarters of 1998.(7) Based on information contained in the Universal Service Worksheets, FCC Form 457, USAC submitted on July 31, 1998, end-user telecommunications revenue for the 1997 calendar year. Funding bases for the third and fourth quarters are determined by subtracting the revenues reported for January through June 1997 (on the September Worksheet) from the 1997 calendar year revenues reported on the March Worksheet. The amounts are as follows: Total Interstate, Intrastate, and International End-User Telecommunications Revenues from July 1, 1997 - December 31, 1997: $94.482 billion Total Interstate and International End-User Telecommunications Revenues from July 1, 1997 - December 31, 1997: $34.228 billion. To account for uncollectible contributions, we decrease by one percent the revenue estimates listed above.(8) In addition, we estimate quarterly revenues by dividing by two the six-month revenue estimates. Taking into account the one percent uncollectible factor, the proposed contribution factors for the fourth quarter of 1998 are as follows: Contribution factor for the schools and libraries and rural health care support mechanisms: Total Program Costs / Contribution Base (Interstate, International, and Intrastate) = $0.350 billion / ( $93.537 billion / 2) = 0.0075 Contribution factor for the high cost and low income support mechanisms: Total Program Costs / Contribution Base (Interstate and International) = $0.539 billion / ($33.885 billion / 2) = 0.0318 These factors are the proposed fourth quarter 1998 universal service contribution factors. If the Commission takes no action regarding these proposed factors within the 14-day period following release of this Public Notice, the projections shall be deemed approved by the Commission and shall be used by USAC to calculate third quarter universal service contributions.(9) For further information, contact Lori Wright, Accounting Policy Division, Common Carrier Bureau, at (202) 418-7400. -- Action by the Chief, Accounting Policy Division -- 1. See 47 C.F.R. § 54.709(a). 2. Because this table lists expenses, positive income flows are denoted with parentheses. 3. SLC reported that interest earned in the fourth quarter will depend on the size of collections and the amount and rate of disbursement in October. SLC made the conservative assumption that interest income would be zero. See Schools and Libraries Corporation Fund Program Size Projections for Fourth Quarter 1998 and Expenses for First Quarter 1998, CC Docket Nos. 96-45, 97-21, July 31, 1998, at 2, n.4. 4. Federal-State Joint Board on Universal Service, Fifth Order on Reconsideration and Fourth Report and Order in CC Docket No. 96-45, CC Docket No. 96-45, FCC 98-120 (rel. June 22, 1998) at paras. 20, 29 (Fifth Order on Reconsideration). 5. Id. at para. 20. 6. Id. at para. 29. 7. Id. at para. 21. 8. It has come to our attention that several carriers subject to the universal service contribution obligation have failed to meet this obligation. See Letter from Lisa Rosenblum, USAC, to Magalie Roman Salas, FCC, dated March 18, 1998 (USAC March 18 letter). See also Letter from Robert Haga, USAC, to Magalie Roman Salas, FCC, dated June 12, 1998 (USAC June 12 letter). See also Conquest Operator Services Corp. Apparent Liability for Forfeiture, Notice of Apparent Liability for Forfeiture, File No. ENF-98-06, NAL/Acct. No. 816EF0004 (rel. August 14, 1998); Operator Communications, Inc. Apparent Liability for Forfeiture, Notice of Apparent Liability for Forfeiture, File No. ENF-98-07, NAL/Acct. No. 816EF0005 (rel. August 14, 1998). To maintain the integrity of the universal service support mechanisms, pending enforcement of this obligation, we determine that we should account for uncollectible contributions at a rate of one percent. This is consistent with USAC's estimated rate of uncollectibles. See USAC June 12 letter. 9. In the Fifth Order on Reconsideration, the Commission revised section 54.709(a)(3) to eliminate the requirement that the proposed contribution factors be published in the Federal Register. The Commission concluded that, in the absence of further Commission action, the proposed contribution factors set forth in a Public Notice would be deemed approved 14 days after release of the Public Notice in which they are announced. Fifth Order on Reconsideration at paras. 49-50 and Appendix A.

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August 18, 1998

Re:	Proposed Fourth Quarter 1998 Universal Service Contribution Factors Announced; (CC Docket No. 96-45).

Today, the Common Carrier Bureau releases a Public Notice announcing the proposed universal service contribution factors for the fourth quarter of 1998 that will automatically go into effect if the Federal Communications Commission takes no action within 14 days. For the reasons described below, I object to the proposed contribution levels.

First, I continue to object to the exorbitant and unjustified administrative expenses of the Schools and Libraries Corporation and the further increase in their budget proposed by this Public Notice. Under today's scheme proposed by the Common Carrier Bureau, the administrative expenses of the Schools and Libraries Corporation will increase again from $4.4 million per quarter to $4.9 million per quarter. These administrative expenses continue to be more than twice that of those for either the rural health care program or the high cost/low income programs; the administrative expenses for schools and libraries exceeds the administrative expenses for all of the other universal service programs combined by more than a million dollars. Indeed, these administrative expenses on annualized basis would equal almost 25% of the total demand of Internet Services requested by all of the 30,000 applications received for the first year of this program.⁽¹⁾

In objecting to the second quarter contribution factors, I noted that SLC was allocated almost four times as much money for administrative expenses as the high-cost/low income funds and that the administrative budget increased from $2.7 million to $4.4 million or by 65% in just that one quarter. These increased administrative expenses continued in the third quarter, despite the fact that, at that time, the Schools and Libraries Corporation could not even provide an accurate estimate of all its administrative costs for the first quarter.⁽²⁾ In their filing precipitating this proceeding, the Schools and Libraries Corporation now calculates their actual First Quarter administrative expenses -- with no offset for interest income earned -- as $4.4 million.⁽³⁾ This amount is well in excess of the $2.7 million that was actually budgeted, and does not even include the additional 1.9 million which was paid to NECA during the first quarter for additional start-up expenses.⁽⁴⁾

I cannot endorse the disparity -- and certainly not one of this magnitude -- between the administrative expenses of the Schools and Libraries and those of the other universal service corporations. I believe there is a need for more adequate safeguards against excessive administrative spending by this program.

Second, as I have described on several occasions, the size and scope of the current schools and libraries program is far in excess of what was envisioned by Congress and thus beyond the Commission's authority to establish.⁽⁵⁾ I believe that the universal service contributions, at least to the extent they are providing support for non-telecommunications services to non-telecommunications carriers, may not be fairly characterized as mere "fees." Some have argued that there is only one section of the act that provides funding for universal service and that any challenge to universal service necessarily sweeps in all of the programs.⁽⁶⁾ I point out, however, that the contributions for the schools, libraries, and rural health care support mechanisms are based not only on interstate but intrastate revenues, while the contributions for the high cost program are based solely on interstate revenues. Thus, there are separate rates to fund separate programs.

In addition, as I have described on several occasions, the legality of this approach to calculating contributions is highly questionable.⁽⁷⁾ As I read the Communications Act, it does not permit the Commission to assess contributions for universal service support mechanisms based on intrastate revenues. Rather, the Act makes clear that the power to collect charges based on such revenues rests within the exclusive province of the States.

Finally, I question whether the Commission's current plan to differentiate among bona fide applications -- as will be necessary with these contribution levels -- is legal. The Commission's rules already consider a schools' economic status in determining the level of support to which they may qualify. The Commission also takes economic status into account to determine whether the schools are even eligible for participation in the inside wiring aspect of the school and libraries program. I do not see how the Commission has the discretion to prioritize among bona fide applications. The universal service provisions of section 254(h)(1) mandate that "upon a bona fide request" the "telecommunications carriers ...shall" provide a discount.⁽⁸⁾

All of the applications that met our previous rules are bona fide requests, and I question the propriety and legality of differentiating among them. In addition, I note that there is no such mandatory language under section 254(h)(2). Thus, I believe that the Commission must ensure that applications that have sought funding under 254(h)(1) are separated from those seeking funding 254(h)(2), and that the Commission ensure that the 254(h)(1) applications for legal services are fully funded. To the extent that an application seeks funding under section 254(h)(2), the Commission must set those applications aside until it has ensure adequate funding for all of the 254(h)(1) applications.

Conclusion

I reiterate my desire that the Commission delay further implementations of this new universal service program until we have addressed all aspects of universal service -- including rural and high cost issues. Such a delay would provide us the opportunity to reconsider some of our legal conclusions related to the implementation of this new program, as I believe we must do.