Federal-State Joint Board on Universal Service

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 54 and 69

[CC Docket No. 96-45; FCC 98-120]

Federal-State Joint Board on Universal Service

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: This Order changes the funding year for the schools and

libraries universal service support mechanism from a calendar year

cycle to a fiscal year cycle. This Order also adjusts the amount of

money available for schools and libraries, and rural health care

providers for the period from January 1, 1998 through June 30, 1999. In

addition, this Order establishes rules of priority when a filing window

is in effect.

EFFECTIVE DATE: August 12, 1998.

FOR FURTHER INFORMATION CONTACT: Irene Flannery, Common Carrier Bureau,

(202) 418-7400 or Adrian Wright, Common Carrier Bureau, (202) 418-7400.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Fifth

Order on Reconsideration and Fourth Report and Order in CC Docket No.

96-45, adopted June 12, 1998 and released June 22, 1998. The full text

is available for inspection and copying during normal business hours in

the FCC Reference Center (Room 239), 1919 M St., N.W., Washington, D.C.

I. Summary of Fifth Order on Reconsideration and Fourth Report and

Order in CC Docket No. 96-45

A. Adjustment in Funding Year for Schools and Libraries Support

Mechanism

1. Upon reconsideration on our own motion, we find that it is in

the public interest to change the funding year for the schools and

libraries universal service support mechanism from a calendar year

cycle (January 1-December 31) to a fiscal year cycle that will run from

July 1-June 30. Moreover, we conclude that the transition to a fiscal

year should be implemented immediately. In order to accommodate the

transition to a fiscal year funding cycle, the first funding period

will be the 18-month period that runs from January 1, 1998 through June

30, 1999. The second funding cycle, therefore, will begin on July 1,

1999. Applications submitted during the initial 75-day filing window

and approved for funding by Schools and Libraries Corporation (SLC),

therefore, will be funded through June 30, 1999, to the extent

permitted by funding constraints. Parties seeking support for the

following fiscal year may begin to file applications on October 1,

1998. We direct SLC, in consultation with the Common Carrier Bureau, to

establish a filing window for the next fiscal year, to open no later

than October 1, 1998. We also conclude that SLC should determine the

length of that window and resolve other administrative matters

necessary to implement a filing window.

[[Page 43089]]

2. We decide to implement a fiscal year funding cycle for schools

and libraries, and to transition to this approach immediately, for

several reasons. The immediate transition to a fiscal year approach

will ameliorate the concerns of applicants seeking support for internal

connections that they will be unable to complete installation before

December 31, 1998, which marks the end of the funding year if

determined on a calendar year basis. We recognize that, because of the

delay in issuing funding commitments to schools and libraries, many

applicants may not be able to complete by this date the internal

connections for which they have sought universal service support. The

delay may be attributed to a variety of factors, including the

Commission's decision to implement an initial filing window, and the

Chairman's request to SLC to conduct an independent audit before

disbursing any funds, in order to protect against waste, fraud, and

abuse. In short, the schools and libraries support mechanism is being

implemented for the first time, and the Commission was not fully aware

of the amount of time necessary to establish administrative systems

that ensure program integrity and fair and orderly administration.

Applicants could not have anticipated these delays at the time they

conducted their technology needs assessments. Moreover, applicants

understandably have been reluctant to begin service or initiate the

installation of internal connections before receipt of a funding

commitment. Nevertheless, schools and libraries that have worked

diligently to comply with the Commission's requirements should not be

burdened unnecessarily by this delay. To further accommodate schools

and libraries affected by the delay in implementation, we note that

discounts will be available on eligible services effective January 1,

1998 or the date services begin pursuant to the contract, whichever is

later. Moreover, the transition to the fiscal year funding cycle

adopted herein will afford applicants that will receive support for

internal connections the flexibility to complete the installation of

internal connections through June of 1999.

3. Furthermore, adopting a fiscal year funding cycle will

synchronize the schools and libraries universal service support

mechanism with the budgetary and planning cycles of most schools and

libraries. This coordination of the support mechanism with the

applicants' internal administrative processes will enable schools and

libraries to plan their technology needs in a more efficient and

organized manner. In addition, using a fiscal year funding cycle will

align universal service contribution levels with the local exchange

carrier annual access tariff filing schedule. Under our rules, local

exchange carriers file their annual tariffs to be effective July 1 of

each year. One piece of information these companies require in order to

file their tariffs is the universal service contribution factors.

4. We recognize that, under the approach adopted herein, some

schools and libraries that did not file within the initial window in

1998 will not be eligible to receive funding until July 1999, rather

than January 1999. We find, however, that on balance, the benefits that

will be conferred on the approximately 30,000 applicants that filed

within the initial window outweigh the hardship caused by the potential

six-month delay in funding for some applicants. We also find that this

approach strikes the best balance between fulfilling the statutory

mandate to enhance access to advanced telecommunications and

information services for schools and libraries, and fulfilling the

statutory principle that ``[q]uality services should be available at

just, reasonable, and affordable rates.''

5. To accomplish this change, we conclude that the following

revisions in the funding cycle must be implemented. First, for

applications filed within the initial 75-day filing window seeking

discounts on telecommunications services and Internet access, the

Administrator shall make funding commitments effective for services

provided no earlier than January 1, 1998. These services will be funded

at the approved monthly level, consistent with the information included

on the school's or library's application, through June 30, 1999. We

conclude that this approach is reasonable because telecommunications

services and Internet access are generally provided at regular, monthly

intervals and are billed on a monthly, recurring basis.

6. Second, for applications filed within the initial 75-day filing

window seeking discounts on internal connections, the Administrator

shall commit the approved amount of support, but these funds may be

utilized during the remainder of 1998 as well as during the transition

period through June 30, 1999. We conclude that this approach is

reasonable because, unlike telecommunications services and Internet

access, internal connections generally entail nonrecurring rather than

recurring costs. Moreover, installation of internal connections

frequently requires that the projects be timed to occur during periods

when school is out of session and students are not present in

instructional buildings. Thus, the installation of internal wiring

might be completed in stages during winter and summer vacation periods.

Accordingly, we amend Sec. 54.507(b) of our rules.

7. The transition to a fiscal year funding cycle adopted herein

requires that we reconsider on our own motion the limitation on the

exemption from competitive bidding for voluntary extensions of

contracts. Our rules currently provide that voluntary extensions of

existing contracts are not exempt from the competitive bidding rules.

In order to accomplish an orderly transition to the fiscal year funding

cycle, however, we conclude that we must allow existing contracts that

have a termination date between December 31, 1998 and June 30, 1999 to

be voluntarily extended to a date no later than June 30, 1999. Although

voluntary extensions of contracts generally are not exempt from the

competitive bidding requirement, we adopt this limited exception for

voluntary extensions of contracts up to June 30, 1999. To hold

otherwise would result in schools and libraries either having to

participate in competitive bidding for only a six month service period

or not being eligible for support for that six month period. We

conclude that either result would be both administratively and

financially unworkable for schools and libraries. We find, therefore,

that it is in the public interest to amend the exemption (in

Sec. 54.511 of our rules) from the competitive bidding requirements, to

allow schools and libraries that filed applications within the 75-day

initial filing window to extend voluntarily, to a date no later than

June 30, 1999, existing contracts that otherwise would terminate

between December 31, 1998 and June 30, 1999.

B. Collections During 1998 and the First Six Months of 1999

8. Consistent with section 254 of the Act, and the recommendations

of the Federal-State Joint Board on Universal Service, we remain

committed to providing support to eligible schools and libraries for

telecommunications services, Internet access, and internal connections.

We share the concerns of commenters that curtailing collections may

have adverse impacts on schools and libraries, particularly the

neediest of those entities. We, therefore, remain dedicated to

providing support in a manner that targets the most economically

disadvantaged schools and libraries. At the same time, we are cognizant

of the concerns of many legislators that we must balance the need to

provide support for schools and

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libraries against the need to continue to provide support for high cost

carriers, and to keep telephone rates affordable throughout the

country. We note that, pursuant to the 1996 Act, the Commission has

taken significant action to implement the universal service provisions

of the Act. At the present time, the rural, insular, and high cost

telephone subscribers continue to receive high cost support at the same

level that they have received for years. In addition, one of the first

steps in universal service reform was to make existing high cost

support explicit. Moreover, we have expanded the Commission's low-

income programs, Lifeline Assistance (Lifeline) and Lifeline Connection

Assistance (Link Up). For example, we adopted the Joint Board's

recommendation that Lifeline service should be provided to low-income

consumers nationwide, even in states that had not previously

participated in Lifeline, and that all eligible telecommunications

carriers should be required to provide Lifeline service. The Commission

remains committed, pursuant to section 254, to implementing all parts

of universal service.

9. We find, therefore, that it is prudent to begin funding

collections for a new mechanism at a reduced level, and allow for the

possibility of increased collections in the future. We note that this

phase-in approach to funding is consistent with the decision in the

Universal Service Order, 62 FR 32862 (June 17, 1997), and with the

initial funding for high cost support when the National Exchange

Carrier Association (NECA) began its high cost collection and

distribution efforts in 1986. In providing support for schools,

libraries, and rural health care providers, we strive to ensure a

smooth transition to the new universal service support mechanisms and

to minimize disruption to consumers. We find that our decision to

adjust the maximum amounts that may be collected or spent in 1998 is

consistent with these goals.

10. We therefore find that we should not increase the quarterly

collection amounts at this time with respect to the schools and

libraries and rural health care support mechanisms. We therefore

conclude that establishing quarterly collection rates for the schools

and libraries support mechanism of $325 million for each of the third

and fourth quarters of 1998 and the first and second quarters of 1999

will preserve the dual statutory mandates to maintain affordable rates

throughout the country and to ``enhance * * * access to advanced

telecommunications and information services for all public and non-

profit elementary and secondary school classrooms * * * and

libraries.'' These collection rates maintain current collection rate

levels and will not increase interstate telecommunications carriers'

costs of providing service. Moreover, these collection rate levels

should ensure that long distance rates, overall, will continue to

decline. On June 16, 1998, incumbent local exchange carriers will file

new access tariffs with rates to become effective on July 1, 1998.

Based on preliminary information filed by these carriers on April 2,

1998, we estimate their total access charge revenues to decline by

approximately $720 million below current levels, measured on an

annualized basis at current demand levels. The Third Quarter

Contribution Factors Public Notice, released by the Common Carrier

Bureau upon adoption of this Order, will produce a reduction in total

interexchange carrier payments of approximately $85 million. Based on

this, total interexchange carrier payments for access services and

universal service contributions should decrease by approximately $800

million on July 1, 1998. At the same time, based on the estimated

demand for support by schools and libraries that filed applications

during the initial 75-day filing window, these collection rates will be

sufficient to fully fund requests for support for telecommunications

services, and Internet access, and to fully fund requests by the

neediest schools and libraries for support for internal connections.

11. We further conclude that we should establish maximum collection

rates for the rural health care support mechanism at $25 million for

each of the third and fourth quarters of 1998. These collection rates

are consistent with projected demand and there is no evidence that

eligible health care providers will require additional funding this

year. Consistent with the Universal Service Order, we do not want the

Universal Service Administrative Company (USAC) to collect funds that

exceed demand. Because the rural health care support mechanism will

continue to be funded on a calendar, rather than a fiscal, year basis,

and because the mechanism is still in the very early stages, we find

that we should not adopt maximum collection rates beyond 1998. Instead,

we will evaluate the 1999 collection rates for the rural health care

support mechanism in the future.

12. The universal service support mechanisms will provide

substantial support to schools, libraries, and health care providers

without imposing unnecessary burdens on consumers, and the most

economically disadvantaged schools and libraries will receive the

greatest share of support, consistent with the discount matrix

contained in the Universal Service Order. We seek to provide support to

schools, libraries, and rural health care providers in a manner that

does not require consumers' rates to rise and without causing rate

churn. Some commenters assert that a certain amount of rate churn is to

be expected in a competitive marketplace. That may be true, but we

remain committed to ensuring that universal service does not exacerbate

any rate churn that may already exist in the marketplace. Excessive and

unnecessary rate churn would be disruptive to consumers, a result we

wish to avoid.

13. Numerous commenters take issue with the Commission's proposal

to revise collections for the schools and libraries and rural health

care universal service support mechanisms consistent with anticipated

reductions in access charges. We agree with the Alaska Commission that

funding for the new universal service support mechanisms ``must be

balanced against potential impact on rates and universal service,'' and

that is precisely the approach we are adopting. We conclude, therefore,

that a gradual phase-in of the schools, libraries, and rural health

care universal service support mechanisms that takes advantage, and

reflects the timing, of access charge reductions will provide

substantial support for eligible services ordered by eligible schools,

libraries and rural health care providers, and at the same time will

avoid disruption to consumers.

14. Many commenters note that schools and libraries have expended

substantial resources, in terms of both time and money, in applying for

discounted services, all with the expectation that a maximum of $2.25

billion in funding would be available. We share the concern of the U.S.

Department of Education and other commenters that schools and libraries

require predictability of funding to facilitate long-range technology

planning, and that our actions here should not discourage schools and

libraries from seeking universal service support. We agree that the

submission of over 30,000 applications demonstrates substantial demand

for universal service support for schools and libraries, and we applaud

the entities that have worked diligently to comply with our rules. We

are troubled by the disruption imposed on schools and libraries and we

hope to avoid this situation in the future. At the same time, we must

be mindful of the effects of the

[[Page 43091]]

schools and libraries and rural health care support mechanisms on

consumers. If we were to fund these support mechanisms to the full

amount of the caps adopted in the Universal Service Order, there would

be negative consequences for consumers. Congress mandated that

universal service has many components, including support for schools,

libraries, and rural health care providers, as well as the directive to

maintain rates at an affordable level. We conclude, therefore, that

reducing the collection rates for the schools and libraries and rural

health care support mechanisms during the initial implementation is

consistent with the Act and is the most prudent course to take at this

time.

15. Several commenters maintain that revising collections levels

for the schools and libraries and rural health care support mechanisms

to match projected reductions in access charges would impose an

unreasonable and disproportionate burden on CMRS and other wireless

providers that do not pay access charges, and that such an approach

would not be competitively neutral. One of the dissenting statements

similarly suggests that wireless carriers are being disproportionately

burdened because they do not pay access charges. We note first that we

are not here adopting our proposal in the Collection Public Notice, 63

FR 27542 (May 19, 1998), to increase schools and libraries funding to

levels that match projected reductions in access charges paid by long-

distance carriers. We are instead freezing for the next four quarters

the contribution levels in place during the second quarter of 1998.

Thus, no carrier will experience increased universal service

obligations as a result of an increase in funding for the schools and

libraries support mechanism. Second, we find that CMRS and other

wireless carriers are not disproportionately burdened because they pay

universal service obligations even though they do not benefit from

access charge reductions. Before passage of the 1996 Act, only

interstate long-distance carriers paid for universal service in the

interstate jurisdiction, either directly or through access charges. The

1996 Act, however changed that by requiring universal service to be

supported by all interstate telecommunications carriers, whether or not

they had previously paid access charges. The point of the 1996 Act in

this respect was to end the existing discriminatory treatment of long-

distance carriers, and impose universal service obligations as well on

other interstate carriers, including CMRS carriers. The 1996 Act also

established that universal service be funded in a competitively neutral

manner. To implement that, we have required that all interstate

telecommunications carriers contribute to universal service based on

end-user revenues. We continue to believe that to be a reasonable

approach to implementing the competitive neutrality requirements of the

Act. Finally, to the extent that the Collection Public Notice noted the

relation between universal service obligations and access charge

reductions, it was simply to note that overall the Commission's actions

have reduced the cost of providing long distance service--an issue of

significant public interest. We note similarly here that, since passage

of the 1996 Act, competition and changes in reciprocal compensation

arrangements between CMRS providers and local exchange carriers (LECs)

have helped provide for the lowest wireless prices for consumers in

history, despite wireless carriers' contributions to universal service.

16. The contention in one of the dissents that universal service

contributions, at least to the extent used to provide support for non-

telecommunications services, constitute an unlawful tax is neither new

nor correct. As the Commission has found previously, contributions to

the universal service mechanisms do not represent taxes enacted under

Congress's taxing authority. Rather, they constitute fees enacted

pursuant to Congress's Commerce power. We noted previously that the

contribution requirements do not violate the Origination Clause of the

Constitution because ``universal service contributions are not

commingled with government revenues raised through taxes,'' and

universal service support mechanisms therefore are not a ``general

welfare scheme'' of the type found by courts to be taxes. In United

States v. Munoz-Flores and elsewhere, the Supreme Court has held that

Congress does not exercise its taxing powers when funds are raised for

a specific government program. Universal service contributions are

deposited into a specific fund established as part of the universal

service mechanisms to provide money support for those mechanisms and

therefore do not constitute taxes.

17. Our conclusion that universal service contributions are not a

tax is not changed by the citation to Thomas v. Network Solutions, Inc.

There, the court found that part of the charge made by the National

Science Foundation's contractor for the registration of internet domain

names was a tax rather than a fee because it provided ``revenue for the

government for projects that did not directly benefit the payees or

otherwise apply to the purposes furthered by the [agreement between the

NSF and its contractor].'' Here, by contrast, universal service

contributions are not intended to raise general revenue as they are

placed in a segregated fund dedicated for a specific regulatory

purpose, and, as we have noted previously, all telecommunications

carriers required to contribute benefit from the ubiquitous

telecommunications network that universal service makes possible. Even

if this were not the case, Munoz-Flores rejects the proposition that a

charge is a tax unless the payees benefit from its payment.

18. Finally, we note that the argument that universal service

contributions for the schools and libraries mechanisms constitutes an

unlawful tax can be and has been made with respect to the entire

universal service program. This argument proves too much. If that

interpretation were correct, the entire universal service program,

including support for service to rural and high cost areas, would

constitute an unlawful tax. This interpretation is incorrect because,

as noted above, Congress need not exercise its taxing powers to fund a

specific government program through fees. This is precisely what

Congress has done with respect to universal service.

19. We find, therefore, that it serves the public interest to

adjust the amounts that the Commission directed the Administrator to

collect and spend for the second six months of 1998, as described

herein. We amend our previous decision, and direct USAC to collect 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 for the rural

health care universal service support mechanism. We direct 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. We also direct the Rural

Health Care Corporation (RHCC) to commit to applicants no more than

$100 million for disbursement during 1998, and direct SLC to commit to

applicants no more than $1.925 billion for disbursement during 1998 and

the first half of 1999. The adoption of these limits on disbursements

supersedes any prior restrictions on expenditures during 1998.

20. Furthermore, we conclude that the carryover of unused funding

authority

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will not apply for the funding period January 1, 1998 through June 30,

1999. That is, to the extent that the amounts collected in the funding

period January 1, 1998 through June 30, 1999 are less than $2.25

billion, the difference will not be carried over to subsequent funding

years. Consistent with the phased-in approach to funding for the

schools and libraries and rural health care support mechanisms that we

have adopted herein, we find it unnecessary to carry over unused

funding authority. To the extent that funds are collected but not

disbursed in the funding period January 1, 1998 through June 30, 1999,

however, those collected funds would be carried over to the next

funding period. Accordingly, we amend Secs. 54.507(a) and 54.623(a) of

our rules.

C. Rules of Priority for the Schools and Libraries and Rural Health

Care Support Mechanisms

21. Schools and Libraries Support Mechanism. Upon further

consideration, we find that we must adopt additional new rules of

priority to ensure that, when a filing window period is in effect,

support is directed toward the most economically disadvantaged schools

and libraries, as well as toward those located in rural areas.

Consistent with the statute and the recommendations of the Joint Board,

we have consistently focused on ensuring that the services eligible for

universal service support are affordable for all eligible schools and

libraries. Under the discount matrix, the most economically

disadvantaged schools and libraries are eligible for the greatest

levels of discount. For example, schools with between 75 and 100

percent of their students eligible for the national school lunch

program are eligible for 90 percent discounts on all eligible services.

In the Universal Service Order, we established a priority system under

which the most economically disadvantaged schools and libraries, those

with over 50 percent of their student populations eligible for the

national school lunch program, would have priority when only $250

million is available to be committed in a given funding year. The rules

of priority adopted in the Universal Service Order, however, were

premised on the assumption that support would be distributed on a first

come, first served basis. That is, the $250 million trigger was

established before the Commission adopted a window filing period. We

conclude that we must adopt additional new rules of priority premised

on the existence of a filing window period during which all

applications received within the window are treated as if filed

simultaneously. We also conclude that new rules of priority are

necessary to account for the fact that the support requested by schools

and libraries during the initial filing window exceeds the total

authorized support available for the funding period January 1, 1998

through June 30, 1999. Moreover, there is the possibility that support

requested by schools and libraries during subsequent filing windows may

exceed the total authorized support available in subsequent funding

years. Therefore, we adopt new rules of priority that will operate when

a filing window is in effect. We do not, however, alter the rules of

priority for applicants that request support when a filing window is

not in effect. Although, in this initial 18-month funding period, only

the applications filed during the initial 75-day filing window will

receive support, it is possible that in future funding years support

could be provided for applications filed outside of a filing window

period.

22. The additional new rules of priority described below will

equitably provide the greatest assurance of support to the schools and

libraries with the greatest levels of economic disadvantage while

ensuring that all applicants filing during a window receive at least

some support in the event that the amounts requested for support

submitted during the filing window exceed the total support available

in a funding year. Because these rules of priority utilize the discount

matrix, which provides higher discounts for schools and libraries in

rural areas, they also equitably provide greater support to schools and

libraries in rural areas. These rules, therefore, further implement the

Commission's prior decisions to allocate support for schools and

libraries in a manner that provides higher levels of support for rural

areas and areas with greater economic disadvantage, while recognizing

that every eligible school and library should receive some assistance.

Further, these rules of priority are consistent with the suggestions of

several commenters. Upon further consideration, we conclude that these

new rules of priority will best promote the universal service goals of

the Communications Act. Accordingly, we amend Sec. 54.507(g) of our

rules.

23. The additional new rules of priority for the schools and

libraries universal service support mechanism shall operate as

described herein for applicants that submit a request for support

within an established filing window. When the filing window closes, SLC

shall calculate the total demand for support submitted by applicants

during the filing window. If total demand exceeds the total support

available in that funding year, SLC shall take the following steps. SLC

shall first calculate the demand for telecommunications services and

Internet access for all discount categories. These services shall

receive first priority for the available funding. SLC shall then

calculate the amount of available funding remaining after providing

support for all requests for telecommunications services and Internet

access. SLC shall allocate the remaining funds to the requests for

support for internal connections, beginning with the most economically

disadvantaged schools and libraries, as determined by the schools and

libraries discount matrix. That is, schools and libraries eligible for

a 90 percent discount shall receive first priority for the remaining

funds, and those funds will be applied to their requests for internal

connections. To the extent that funds remain, SLC shall next allocate

funds toward the requests for internal connections submitted by schools

and libraries eligible for an 80 percent discount, then for a 70

percent discount, and shall continue committing funds for internal

connections in the same manner to the applicants at each descending

discount level until there are no funds remaining.

24. If the remaining funds are not sufficient to support all of the

funding requests that comply with the Commission's rules and

eligibility requirements within a particular discount level, SLC shall

divide the total amount of remaining support available by the amount of

support requested within the particular discount level to produce a

pro-rata factor. Thus, for example, if all applicants eligible for

discounts of 90 percent may be fully funded, but there are not

sufficient funds remaining to fully fund internal connections for

applicants eligible for discounts of 80 percent, SLC shall reduce the

support level for each applicant that is eligible for an 80 percent

discount by multiplying the appropriate requested amount of support by

the pro-rata factor. SLC shall then allocate funds to each applicant

within the 80 percent discount category based on this reduced discount

level. SLC shall commit support to all applicants consistent with the

calculations described herein. We expect that, for the initial 18-month

funding period, the collection levels established in this Order will

enable all of the applicants eligible for discounts of 90 percent to

receive full support for

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internal connections, and that at least a substantial portion, if not

all, of the support requested for internal connections by applicants

eligible for discounts of 80 percent will be provided.

25. In light of our decision to reduce the collection levels for

schools and libraries at this time, we find that our revised method of

prioritization is the best way to provide substantial and predictable

support for schools and libraries. We conclude that, to the extent that

we are unable at this time to fund demand fully, the best approach is

to provide full support for recurring services, and to direct support

for internal connections to the neediest schools and libraries. We

agree with commenters who state that it would be the most economically

disadvantaged schools and libraries that would suffer the most if

internal connections were not funded. The data received from the

applications submitted during the initial filing window also support

this revision in our rules of priority.

26. Rural Health Care Support Mechanism. The Commission concluded

in the Universal Service Order that support for health care providers

should be allocated on a first-come, first-served basis. Unlike the

schools and libraries support mechanism, however, the Commission did

not adopt rules that allocate support among health care providers on

the basis of their economic circumstances. We determine that we should

adopt rules that will take effect in the event that the support

requested by health care providers during a filing window exceeds the

total authorized support in a funding year. As with the schools and

libraries mechanism, our decisions to adjust the maximum collection

amounts during 1998 and to adopt a filing window for the rural health

care support mechanism lead us to conclude that we should establish

rules to allocate funds in the event that all of the available funds

will be requested before the window period closes. Several commenters

suggested various means by which to prioritize the need of health care

providers. We conclude, however, that the complexity of the proposals

outweighs their utility. We are not convinced that the administrative

burden and the costs associated with any of the proposals outweighs the

benefits that would accrue to health care providers.

27. We conclude, therefore, that we should not adopt, at this time,

a method by which to prioritize health care providers in the event that

demand requested during a filing window exceeds available support. We

conclude instead that we should adopt a pro-rata rule that will reduce

each applicant's level of support by an equal amount in the event that

demand exceeds the total fund allocated for a given funding year. This

approach will ensure fairness and equity to each health care provider

applying for universal service support and will not impose an undue

administrative burden upon either the applicants or the Administrator.

If, however, parties submit specific prioritization methods that can be

implemented without substantial expense, administrative burden, or

complexity, and that ensure equitable distribution of funds as well or

better than the pro-rata rule we adopt herein, we will consider

modifying this approach in the future.

28. When the filing window closes, RHCC shall calculate the total

demand for support submitted by all eligible applicants. If the total

demand submitted during the filing window exceeds the total funding

available for the funding year, RHCC shall take the following steps.

RHCC shall divide the total funds available for the funding year by the

total amount of support requested to produce a pro-rata factor. RHCC

shall multiply the pro-rata factor by the total amount of support

requested by each applicant that has filed during the filing window.

RHCC shall then commit funds to each applicant consistent with this

calculation. For example, if at the close of the filing window $125

million has been requested in 1998, RHCC would calculate the pro-rata

factor by dividing $100 million by $125 million to produce a factor of

four-fifths (.8). RHCC would then multiply the total dollar amount

requested by each applicant by .8 and would commit such reduced dollar

amount to each applicant. We, therefore, add section 54.623(f) to our

rules.

29. We conclude that the amendments to our rules adopted herein

shall be effective upon publication in the Federal Register. Prior to

their publication in the Federal Register, the Commission will submit a

report on the amended rules adopted herein to Congress and the GAO, as

required by the Contract with America Advancement Act (CWAAA). Pursuant

to the CWAAA, the amended rules may take effect following that

submission. Contrary to the suggestion in Commissioner Furchtgott-

Roth's dissent, the CWAAA does not require that the Commission wait 60

days after this submission is made for the rules to go into effect.

Such a delay in the effective date is required only for major rules,

and by definition ``major rules'' do ``not include any rule promulgated

under the Telecommunications Act of 1996 and the amendments made by

that Act.'' We have confirmed with the Office of Management and Budget,

which is responsible for determining whether or not a rule is major,

that the amended rules adopted herein are promulgated under the

Telecommunications Act of 1996 because they are part of the

Commission's continuing implementation of section 254 as added by the

1996 Act and therefore are non-major rules. Despite the Order's

citation in the ordering paragraphs to other provisions of the

Communications Act as subsidiary sources of authority, it could not be

clearer that the amended rules adopted herein implement the 1996 Act

because explicit statutory authorization for the universal service

mechanism for schools and libraries did not exist prior to addition of

section 254 by the 1996 Act. We find that we have good cause to take

such action, pursuant to the Administrative Procedure Act, because

compliance with these amendments requires preparation only by USAC,

SLC, and RHCC, each of which is able to comply with these amendments in

a short amount of time. Compliance with these amendments does not

require preparation by other affected entities, such as schools,

libraries, or health care providers. To the extent that contributors

are affected, their burdens are lessened.

D. Level of Compensation for Officers and Employees of the

Administrative Corporations

30. We conclude that Congress's intent regarding the level of

compensation for officers and employees of SLC and RHCC was clearly

stated in both section 2005(c) of the Senate bill and in the Conference

Report. The Senate and the House-Senate conferees expressly stated that

there should be limits on the level of compensation afforded to the

officers and employees of the two independent corporations. We

conclude, therefore, consistent with the will of Congress, that,

effective July 1, 1998, the administrator must, as a condition of its

continued service, compensate all officers and employees of SLC and

RHCC at an annual rate of pay, including any non-regular payments,

bonuses, or other compensation, that does not exceed the rate of basic

pay in effect for Level I of the Executive Schedule under section 5312

of Title 5 of the United States Code. This level of compensation will

apply to all officers and employees of SLC and RHCC, as currently

organized, as well as to all such officers and employees in the

[[Page 43094]]

consolidated administrative corporation following reorganization on

July 1, 1998. Accordingly, we amend section 69.620(a) of our rules.

E. Publications of Quarterly Contribution Factors in the Federal

Register

31. The existing rule has caused some confusion because it requires

publication of the proposed contribution factors in the Federal

Register, but at the same time states that those proposed factors will

become effective within 14 days of the date on which the Public Notice

is released. Because an item is not published in the Federal Register

immediately upon release, and because it is not possible to predict

with certainty when an item will be published in the Federal Register,

the existing rule creates uncertainty about the date on which the

contribution factors are deemed approved.

32. We, therefore, amend our rule to clarify that the proposed

contribution factors will be deemed approved, in the absence of further

Commission action, 14 days after release of the Public Notice in which

they are announced. We conclude that the public is given adequate

notice of release of the proposed contribution factors because they are

posted on the Commission's website immediately upon release. Moreover,

this change will eliminate any ambiguity in the rules and will create

certainty about when the proposed contribution factors are deemed

approved. Accordingly, we amend section 54.709(a)(3) of our rules.

F. Conclusion

33. In conclusion, we note that our colleagues' statements

dissenting from this Order raise several issues that are well beyond

the scope of this Order. Although we believe it would be inappropriate

to include here a point-by-point analysis of issues that are not

presented in the matters before the Commission in this Order, we do not

wish our silence to be construed as acquiescence. We are, therefore,

compelled to note that several of the issues raised in dissent have

been addressed at length in the context of prior Commission orders,

after due consideration and based on complete records. For example,

although one of the dissenting statements questions the legal basis for

providing support to schools and libraries for internal connections,

the legal basis for that decision was thoroughly established in both

the Universal Service Order and the April 10, 1998 Report to Congress.

It was further addressed in the Joint Board's Recommended Decision in

which the Joint Board unanimously recommended that universal service

support be provided to schools and libraries for internal connections.

Similarly, as noted above, the Commission previously has established

that universal service contributions do not constitute an unlawful tax.

34. One of the dissenting statements also remarks on proposed

regulation of carriers' billing practices. We are indeed concerned

that, when the Commission takes action to reduce carriers' costs of

providing service, carriers' bills are creating the false impression

that the opposite is true. We note that these matters are not pending

before the Commission, and therefore we do not find it practical or

appropriate to comment in this context on specific proposals. We do

intend to issue in the near future a notice of proposed rulemaking

seeking comment on issues relating to the manner in which carriers

include billing statements regarding charges relating to universal

service support mechanisms. We intend to use that proceeding to develop

a complete record on all the relevant issues, including those raised by

our dissenting colleague. Only then, after full consideration, would

the Commission be able to determine whether it is necessary and

appropriate to take any action on these issues, and if so, what action

should be taken. Although we remain committed to ensure that carriers

include complete and truthful information regarding the contribution

amount, we await further consideration of these matters.

35. Finally, our dissenting colleagues suggest that the Commission

has not acted to fulfill the Act's requirements regarding support for

high cost carriers and low-income consumers. Pursuant to the 1996 Act,

the Commission has taken significant action to implement the universal

service provisions of the Act. As we noted earlier, rural, insular, and

high cost telephone subscribers continue to receive high cost support

at the same level that they have received for years. In addition, one

of the first steps in universal service reform was to make existing

high cost support explicit. With respect to low-income consumers, we

substantially expanded the reach of the Commission's Lifeline and Link

Up programs. We are considering petitions for reconsideration of some

aspects of our actions, as well as requests from the Joint Board that

we refer some issues to it, including the so-called ``25/75'' issue. We

believe that a second referral to the Joint Board, if clearly defined

in terms of issues and timing, could be extremely valuable. We are also

actively developing an economic model that will assist us in

determining the level of high cost support due to carriers in a way

that produces neither a windfall for carriers at the expense of

consumers nor a spike in local telephone rates. We are confident that

in this manner we will fulfill Congress's goals embodied in section

254. These actions demonstrate the Commission's firm commitment to

implementing all parts of universal service. We look forward to working

with Congress, the States, the industry, consumers, and our dissenting

colleagues, as we move forward in achieving this goal.

II. Supplemental Final Regulatory Flexibility Analysis

36. In compliance with the Regulatory Flexibility Act (RFA) and the

Initial Regulatory Flexibility Analysis (IRFA) that accompanied the

Collection Public Notice in the Federal Register, this Supplemental

Final Regulatory Flexibility Analysis (SFRFA) supplements the Final

Regulatory Flexibility Analysis (FRFA) included in the Universal

Service Order, only to the extent that changes to that Order adopted

here on reconsideration require changes in the conclusions reached in

the FRFA. As required by section 603 RFA, 5 USC 603, the FRFA was

preceded by an Initial Regulatory Flexibility Analysis (IRFA)

incorporated in the Notice of Proposed Rulemaking and Order

Establishing the Joint Board (NPRM), and an IRFA, prepared in

connection with the Recommended Decision, which sought written public

comment on the proposals in the NPRM and the Recommended Decision.

A. Need for and Objectives of This Report and Order and the Rules

Adopted Herein

37. The Commission is required by section 254 of the Act to

promulgate rules to implement promptly the universal service provisions

of section 254. On May 8, 1997, the Commission adopted rules whose

principle goal is to reform our system of universal service support

mechanisms so that universal service is preserved and advanced as

markets move toward competition. In this Order, we reconsider five

aspects of those rules. First, to ameliorate the concerns of applicants

seeking support for internal connections that they will be unable to

complete installation before December 31, 1998, we reconsider, on our

own motion, the funding cycle for schools and libraries. We conclude

that it is in the public interest to change the funding year for the

schools and libraries universal service support mechanism from a

[[Page 43095]]

calendar year cycle to a fiscal year cycle running from July 1 to June

30. Moreover, this change to a fiscal year funding cycle will

synchronize the schools and libraries universal service support

mechanism with the budgetary and planning cycles of most schools and

libraries and will align universal service contribution levels with

projected reductions in access charges. Second, in order to reduce

financial burdens on all contributors to universal service, we

reconsider, on our own motion, the amounts that will be collected

during the second six months of 1998 and the first six months of 1999

for the schools and libraries support mechanism, and the amounts that

will be collected during the second six months of 1998 for the rural

health care support mechanism. Third, we modify the rules of priority

for the schools and libraries mechanism to provide for the greatest

assurance of support to schools and libraries with the greatest levels

of economic disadvantage while ensuring that all applicants filing

during a filing window period receive at least some support in the

event that the amounts requested for support submitted during the

filing window exceed the total support available in a funding year. In

addition, we adopt a rule to pro-rate the distribution of support to

health care providers if demand by health care providers exceeds the

total support allocated for a given funding year. Fourth, we conclude,

consistent with the will of Congress, that the universal service

administrator must, as a condition of continued service, compensate all

officers and employees of SLC and RHCC at an annual rate of pay,

including any non-regular payments, bonuses, or other compensation,

that does not exceed the rate of basic pay in effect for Level I of the

Executive Schedule under section 5312 of Title 5 of the United States

Code, effective July 1, 1998. Fifth, we amend our rule regarding

publication of the proposed universal service contribution factors to

state that the proposed contribution factors will be deemed approved,

in the absence of further Commission action, 14 days after release of

the Public Notice in which they are announced. We conclude that this

rule change will eliminate ambiguity regarding publication requirements

currently existing in our rules.

B. Summary and Analysis of the Significant Issues Raised by Public

Comments in Response to the IRFA

38. No entities commented directly in response to either the

September 10 Public Notice or the Collection Public Notice, although

some commenters urged the Commission to modify the rules of priority to

ensure that applicants in all states, including small applicants, would

receive some opportunity to receive funding. In response to the

Collection Public Notice, some commenters urged the Commission to

ensure that schools and libraries that filed applications within the

initial 75-day filing window are fully funded, and to ensure that

schools and libraries have a predictable level of funding. Other

commenters disagreed with the Commission's proposal to link access

charge reductions with universal service funding for schools,

libraries, and rural health care providers.

C. Description and Estimates of the Number of Small Entities to Which

the Rules Adopted in This Report and Order Will Apply

39. In the FRFA at paragraphs 890-925 of the Universal Service

Order, we described and estimated the number of small entities that

would be affected by the new universal service rules. The rules adopted

herein may apply to the same entities affected by the universal service

rules. We therefore incorporate by reference paragraphs 890-925 of the

Universal Service Order.

D. Summary Analysis of the Projected Reporting, Recordkeeping, and

Other Compliance Requirements and Significant Alternatives

40. In the FRFA to the Universal Service Order, we described the

projected reporting, recordkeeping, and other compliance requirements

and significant alternatives associated with the Schools and Libraries

section, the Rural Health Care Provider section, and the Administration

section of the Universal Service Order. Because the rules adopted

herein may only affect those requirements in a marginal way, we

incorporate by reference paragraphs 956-60, 968-71, and 980 of the

Universal Service Order, which describe those requirements and provide

the following analysis of the new requirements adopted herein.

41. Under the rules adopted herein, we revise the funding year for

the schools and libraries support mechanism from a calendar year cycle

(January 1--December 31) to a fiscal year cycle (July 1--June 30). This

revision will benefit schools and libraries in three ways: (1) it will

ameliorate the concerns of applicants seeking support for internal

connections that they will be unable to complete installation before

December 31, 1998; (2) it will synchronize the schools and libraries

support mechanism with the budgetary and planning cycles of most

schools and libraries; and (3) it will align universal service

contribution levels with projected reductions in access charges. These

changes will not have a significant impact on the reporting,

recordkeeping, and other compliance requirements for the schools and

libraries and rural health care universal service support mechanisms.

42. In addition, we do not revise the annual caps adopted in the

Universal Service Order, but we do adjust the maximum amounts that may

be collected and spent during the initial eighteen months of

implementation for the schools and libraries support mechanism and

during the initial year of implementation for the rural health care

provider support mechanism. The Administrator is instructed to collect

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 to

support the rural health care universal service support mechanism and

no 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. We also

direct the Administrator neither to commit nor disburse more than $100

million for the rural health care support mechanism for 1998 and no

more than $1.925 billion for the schools and libraries support

mechanism for the eighteen month period from January 1, 1998 through

June 30, 1999. These changes will not have a significant impact on the

reporting, recordkeeping, and other compliance requirements for the

schools and libraries and rural health care universal service support

mechanisms.

43. In addition, we modify the rules of priority for the schools

and libraries support mechanism to equitably provide the greatest

assurance of support to the schools and libraries with the greatest

level of economic disadvantage while ensuring that all applicants

filing during a filing window period receive at least some support in

the event that the amounts requested for support submitted during the

filing window exceed the total support available in a funding year. We

also adopt a rule to pro-rate the distribution of support to health

care providers if demand by health care providers exceeds the total

fund allocated for a given funding year. These changes will not have a

significant impact on the reporting, recordkeeping, and other

compliance requirements for the schools and libraries and rural health

care universal service support mechanisms.

[[Page 43096]]

44. Moreover, consistent with the will of Congress, we conclude

that the universal service Administrator must, as a condition of

continued service, compensate all officers and employees of SLC and

RHCC at an annual rate of pay, including any non-regular payments,

bonuses, or other compensation, that does not exceed the rate of basic

pay in effect for Level I of the Executive Schedule under section 5312

of Title 5 of the United States Code, effective July 1, 1998. We also

amend our rule regarding publication of the proposed universal service

contribution factors to state that the proposed contribution factors

will be deemed approved, in the absence of further Commission action,

14 days after release of the Public Notice in which they are announced.

Neither of these changes will have a significant impact on the

reporting, recordkeeping, and other compliance requirements for the

schools and libraries and rural health care universal service support

mechanisms.

E. Steps Taken to Minimize the Significant Economic Impact on a

Substantial Number of Small Entities, and Significant Alternatives

Considered

45. In the FRFA to the Universal Service Order, we described the

steps taken to minimize the significant economic impact on a

substantial number of small entities consistent with stated objectives

associated with the Schools and Libraries section, the Rural Health

Care Provider section, and the Administration section of the Universal

Service Order. Because the rules adopted herein may only affect those

requirements in a marginal way, we incorporate by reference paragraphs

961-67, 972-76, and 981-82 of the Universal Service Order, which

describe those requirements and provide the following analysis of the

new requirements adopted herein.

46. As described above, our decision to change to a fiscal year

funding cycle will benefit schools and libraries, as well as their

chosen service providers, who may be small entities, by equitably

providing the greatest assurance of support to the schools and

libraries with the greatest levels of economic disadvantage while

ensuring that all applicants filing during a window receive at least

some support in the event that the amounts requested for support

submitted during the filing window exceed the total support available

in a funding year. Some schools and libraries that did not file within

the initial window in 1998 will not be eligible to receive funding

until July 1999, rather than January 1999. We find, however, that on

balance, the benefits that will be conferred on the approximately

30,000 applicants that filed within the initial window outweigh this

potential six-month delay in funding for some applicants. We also find

that this approach strikes the best balance between fulfilling the

statutory mandate to enhance access to advanced telecommunications and

information services for schools and libraries, and fulfilling the

statutory principle of providing quality services at ``just,

reasonable, and affordable rates,'' without imposing unnecessary

burdens on schools and libraries or service providers, including small

entities.

47. As described above, we adopt the decision to adjust the amount

of money to be collected in 1998 and the first and second quarters of

1999 for the schools and libraries universal service support mechanism

and in 1998 for the rural health care support mechanism because we do

not want to impose unnecessary financial requirements on service

provider contributors to universal service, including contributors that

are small entities. We find that our decision to adjust the maximum

collectible amounts provides substantial support to schools, libraries,

and rural health care providers without imposing unnecessary burdens on

carriers or subscribers, including small entities.

48. Moreover, our conclusion that the universal service

Administrator must, as a condition of continued service, compensate all

officers and employees of SLC and RHCC at an annual rate of pay that

does not exceed the rate of basic pay in effect for Level I of the

Executive Schedule under section 5312 of Title 5 of the United States

Code, effective July 1, 1998 will not have a significant impact on the

reporting, recordkeeping, and other compliance requirements for the

schools and libraries and rural health care universal service support

mechanisms on any entities other than SLC and RHCC. For those entities,

compliance with the amended rule will have a significant impact on the

level of compensation afforded some of their employees, but we conclude

that this decision is consistent with the intent of Congress. Our

decision to amend our rule regarding publication of the proposed

universal service contribution factors will not have a significant

impact on the reporting, recordkeeping, and other compliance

requirements for the schools and libraries and rural health care

universal service support mechanisms.

III. Ordering Clauses

49. Accordingly, it is ordered that, pursuant to the authority

contained in sections 1-4, 201-205, 218-220, 254, 303(r), 403, and 405

of the Communications Act of 1934, as amended, 47 USC 151-154, 201-205,

218-220, 254, 303(r), 403, and 405, section 1.108 of the Commission's

rules, 47 CFR 1.108, the Fifth Order on Reconsideration in CC Docket

No. 96-45 is adopted.

50. It is further ordered that, pursuant to the authority contained

in sections 1-4, 201-205, 218-220, 254, 303(r), 403, and 405 of the

Communications Act of 1934, as amended, 47 USC 151-154, 201-205, 218-

220, 254, 303(r), 403, and 405, section 1.108 of the Commission's

rules, 47 CFR 1.108, the Fourth Report and Order in CC Docket No. 96-45

is adopted.

51. It is further ordered that, pursuant to the authority contained

in sections 1-4, 201-205, 218-220, 254, 303(r), 403, and 405 of the

Communications Act of 1934, as amended, 47 USC 151-154, 201-205, 218-

220, 254, 303(r), 403, and 405, section 1.108 of the Commission's

rules, 47 CFR 1.108, Part 54 of the Commission's rules, 47 CFR Part 54,

and Part 69 of the Commission's rules, 47 CFR Part 69, are amended.

52. It is further ordered that, pursuant to the authority contained

in sections 1-4, 201-205, 218-220, 254, 303(r), 403, and 405 of the

Communications Act of 1934, as amended, 47 USC 151-154, 201-205, 218-

220, 254, 303(r), 403, and 405, section 1.108 of the Commission's

rules, 47 CFR 1.108, effective July 1, 1998, Universal Service

Administrative Company shall compensate all officers and employees of

Schools and Libraries Corporation and Rural Health Care Corporation at

an annual rate of pay, including any non-regular payments, bonuses, or

other compensation, that does not exceed the rate of basic pay in

effect for Level I of the Executive Schedule under section 5312 of

title 5 of the United States Code.

53. It is further ordered that, because the Commission has found

good cause, the rule changes are effective August 12, 1998.

54. It is further ordered that the Commission's Office of Public

Affairs, Reference Operations Division, shall send a copy of this Fifth

Order on Reconsideration and Fourth Report and Order, including the

Final Regulatory Flexibility Analysis, to the Chief Counsel for

Advocacy of the Small Business Administration.

List of Subjects

47 CFR Part 54

Healthcare providers, Libraries, Reporting and recordkeeping

[[Page 43097]]

requirements, Schools, Telecommunications, Telephone.

47 CFR Part 69

Communications common carriers, Reporting and recordkeeping

requirements, Telephone.

Federal Communications Commission

Magalie Roman Salas,

Secretary.

Rule Changes

Parts 54 and 69 of Title 47 of the Code of Federal Regulations are

amended as follows:

PART 54--UNIVERSAL SERVICE

1. The authority citation for part 54 continues to read as follows:

Authority: 47 U.S.C. Secs. 1, 4(i), 201, 205, 214, and 254

unless otherwise noted.

2. Section 54.507 is amended by revising paragraphs (a), (b) and

(g) to read as follows:

Sec. 54.507 Cap.

(a) Amount of the annual cap. The annual cap on federal universal

service support for schools and libraries shall be $2.25 billion per

funding year, and all funding authority for a given funding year that

is unused in that funding year shall be carried forward into subsequent

funding years for use in accordance with demand, with the following

exceptions:

(1) No more than $625 million shall be collected or spent for the

funding period from January 1, 1998 through June 30, 1998. No more than

$325 million shall be collected for the funding period from July 1,

1998 through September 30, 1998. No more than $325 million shall be

collected for the funding period from October 1, 1998 through December

31, 1998. No more than $325 million shall be collected for the funding

period from January 1, 1999 through March 31, 1999. No more than $325

million shall be collected for the funding period from April 1, 1999

through June 30, 1999. No more than $1.925 billion shall be collected

or disbursed during the eighteen month period from January 1, 1998

through June 30, 1999.

(2) The carryover of unused funding authority will not apply for

the funding period January 1, 1998 through June 30, 1999. To the extent

that the amounts collected in the funding period January 1, 1998

through June 30, 1999 are less than $2.25 billion, the difference will

not be carried over to subsequent funding years. Carryover of funds

will occur only to the extent that funds are collected but not

disbursed in the funding period January 1, 1998 through June 30, 1999.

(b) Funding year. A funding year for purposes of the schools and

libraries cap shall be the period July 1 through June 30. For the

initiation of the mechanism only, the eighteen month period from

January 1, 1998 to June 30, 1999 shall be considered a funding year.

Schools and libraries filing applications within the initial 75-day

filing window shall receive funding for requested services through June

30, 1999.

* * * * *

(g) Rules of priority. Schools and Libraries Corporation shall act

in accordance with paragraph (g)(1) of this section with respect to

applicants that file a Form 471, as described in Sec. 54.504(c) of this

part, when a filing period described in paragraph (c) of this section

is in effect. Schools and Libraries Corporation shall act in accordance

with paragraph (g)(2) of this section with respect to applicants that

file a Form 471, as described in Sec. 54.504(c) of this part, at all

times other than within a filing period described in paragraph (c) of

this section.

(1) When the filing period described in paragraph (c) of this

section closes, Schools and Libraries Corporation shall calculate the

total demand for support submitted by applicants during the filing

period. If total demand exceeds the total support available for that

funding year, Schools and Libraries Corporation shall take the

following steps:

(i) Schools and Libraries Corporation shall first calculate the

demand for telecommunications services and Internet access for all

discount categories, as determined by the schools and libraries

discount matrix in Sec. 54.505(c) of this part. These services shall

receive first priority for the available funding.

(ii) Schools and Libraries Corporation shall then calculate the

amount of available funding remaining after providing support for all

telecommunications services and Internet access for all discount

categories. Schools and Libraries Corporation shall allocate the

remaining funds to the requests for support for internal connections,

beginning with the most economically disadvantaged schools and

libraries, as determined by the schools and libraries discount matrix

in Sec. 54.505(c) of this part. Schools and libraries eligible for a 90

percent discount shall receive first priority for the remaining funds,

and those funds will be applied to their requests for internal

connections.

(iii) To the extent that funds remain after the allocation

described in Secs. 54.507(g)(1) (i) and (ii), Schools and Libraries

Corporation shall next allocate funds toward the requests for internal

connections submitted by schools and libraries eligible for an 80

percent discount, then for a 70 percent discount, and shall continue

committing funds for internal connections in the same manner to the

applicants at each descending discount level until there are no funds

remaining.

(iv) If the remaining funds are not sufficient to support all of

the funding requests within a particular discount level, Schools and

Libraries Corporation shall divide the total amount of remaining

support available by the amount of support requested within the

particular discount level to produce a pro-rata factor. Schools and

Libraries Corporation shall reduce the support level for each applicant

within the particular discount level, by multiplying each applicant's

requested amount of support by the pro-rata factor.

(v) Schools and Libraries Corporation shall commit funds to all

applicants consistent with the calculations described herein.

(2) When a filing period described in paragraph (c) of this section

is not in effect, and when expenditures in any funding year reach the

level where only $250 million remains before the cap will be reached,

funds shall be distributed in accordance with the following rules of

priority:

3. Section 54.511 is amended by revising paragraph (d) to read as

follows:

Sec. 54.511 Ordering services.

* * * * *

(d) The exemption from the competitive bid requirements set forth

in paragraph (c) of this section shall not apply to voluntary

extensions of existing contracts, with the exception that an eligible

school or library as defined under Sec. 54.501 or consortium that

includes an eligible school or library, that filed an application

within the 75-day initial filing window (January 30, 1998-April 15,

1998) may voluntarily extend, to a date no later than June 30, 1999, an

existing contract that otherwise would terminate between December 31,

1998 and June 30, 1999.

4. Section 54.623 is amended by revising paragraph (a) and adding

paragraph (f) to read as follows:

Sec. 54.623 Cap.

(a) Amount of the annual cap. The annual cap on federal universal

service support for health care providers shall be $400 million per

funding year, with the following exceptions. No more than $50 million

shall be collected for the

[[Page 43098]]

funding period from January 1, 1998 through June 30, 1998. No more than

$25 million shall be collected for the funding period from July 1, 1998

through September 30, 1998. No more than $25 million shall be collected

for the funding period from October 1, 1998 through December 31, 1998.

No more than $100 million shall be committed or disbursed for the 1998

funding year.

* * * * *

(f) Pro-rata reductions. Rural Health Care Corporation shall act in

accordance with this paragraph when a filing period described in

paragraph (c) of this section is in effect. When a filing period

described in paragraph (c) of this section closes, Rural Health Care

Corporation shall calculate the total demand for support submitted by

all applicants during the filing window. If the total demand exceeds

the total support available for the funding year, Rural Health Care

Corporation shall take the following steps:

(1) Rural Health Care Corporation shall divide the total funds

available for the funding year by the total amount of support requested

to produce a pro-rata factor.

(2) Rural Health Care Corporation shall calculate the amount of

support requested by each applicant that has filed during the filing

window.

(3) Rural Health Care Corporation shall multiply the pro-rata

factor by the total dollar amount requested by each applicant. Rural

Health Care Corporation shall then commit funds to each applicant

consistent with this calculation.

5. Section 54.709 is amended by revising paragraph (a)(3) to read

as follows:

Sec. 54.709 Computations of required contributions to universal

service support mechanisms.

(a) * * *

(3) Total projected expenses for universal service support programs

for each quarter must be approved by the Commission before they are

used to calculate the quarterly contribution factors and individual

contribution. For each quarter, the High Cost and Low Income Committee

or the permanent Administrator once the permanent Administrator is

chosen and the Schools and Libraries and Rural Health Care Corporations

must submit their projections of demand for the high cost and low-

income programs, the school and libraries program, and rural health

care program, respectively, and the basis for those projections, to the

Commission and the Common Carrier Bureau at least 60 calendar days

prior to the start of that quarter. For each quarter, the Administrator

and the Schools and Libraries and Rural Health Care Corporations must

submit their projections of administrative expenses for the high cost

and low-income programs, the schools and libraries program and the

rural health care program, respectively, and the basis for those

projections to the Commission and the Common Carrier Bureau at least 60

calendar days prior to the start of that quarter. Based on data

submitted to the Administrator on the Universal Service Worksheets, the

Administrator must submit the total contribution bases to the Common

Carrier Bureau at least 60 days before the start of each quarter. The

projections of demand and administrative expenses and the contribution

factors shall be announced by the Commission in a public notice and

shall be made available on the Commission's website. The Commission

reserves the right to set projections of demand and administrative

expenses at amounts that the Commission determines will serve the

public interest at any time within the 14-day period following release

of the Commission's public notice. If the Commission takes no action

within 14 days of the date of release of the public notice announcing

the projections of demand and administrative expenses, the projections

of demand and administrative expenses, and contribution factors shall

be deemed approved by the Commission. Once the projections and

contribution factors are approved, the Administrator shall apply the

quarterly contribution factors to determine individual contributions.

* * * * *

PART 69--ACCESS CHARGES

6. The authority citation for part 69 continues to read as follows:

Authority: 47 U.S.C. 154, 201, 202, 203, 205, 218, 220, 254, and

403 unless otherwise noted.

7. Section 69.620 is amended by revising paragraph (a) to read as

follows:

Sec. 69.620 Administrative expenses of independent subsidiary, Schools

and Libraries Corporation, and Rural Health Care Corporation.

(a) The annual administrative expenses of the independent

subsidiary, Schools and Libraries Corporation and Rural Health Care

Corporation, should be commensurate with the administrative expenses of

programs of similar size, with the exception of the salary levels for

officers and employees of the corporations. The annual administrative

expenses may include, but are not limited to, salaries of officers and

operations personnel, the costs of borrowing funds, equipment costs,

operating expenses, directors' expenses, and costs associated with

auditing contributors of support recipients.

(1) All officers and employees of the independent subsidiary,

Schools and Libraries Corporation and Rural Health Care Corporation,

may be compensated at an annual rate of pay, including any non-regular

payments, bonuses, or other compensation, in an amount not to exceed

the rate of basic pay in effect for Level I of the Executive Schedule

under section 5312 of title 5 of the United States Code.

(2) The level of compensation described in Sec. 69.620(a)(1) shall

be effective July 1, 1998.

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[FR Doc. 98-21588 Filed 8-11-98; 8:45 am]

BILLING CODE 6712-01-P