Universal Service

SUMMARY: The Fourth Order on Reconsideration and Report and Order

addresses issues that were raised in petitions for reconsideration of

the Universal Service Report and Order. The Fourth Reconsideration

Order also makes several technical corrections to the Commission's

universal service rules. In addition, the order clarifies or makes

further findings regarding: the rules governing the eligibility of

carriers and other providers of supported services; methods for

determining levels of universal service support for carriers in rural,

insular and high cost areas; support for low-income consumers; the

rules governing the receipt of universal service support under the

schools and libraries and rural health care programs; the

determinations of who must contribute to the new universal service

support mechanisms; and administration of the support mechanisms. The

intended effect of these rules is to implement the universal service

provisions of the Telecommunications Act of 1996.

DATES: Effective February 12, 1998.

FOR FURTHER INFORMATION CONTACT: Sheryl Todd, Common Carrier Bureau,

(202) 418-7400.

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

Order on Reconsideration in CC Docket No. 96-45 and Report and Order in

CC Docket Nos. 96-45, 96-262, 94-1, 91-213, 95-72 (Fourth Order on

Reconsideration), adopted and released December 30, 1997. In addition,

the amendments to the Commission's rules reflect the changes included

in errata released December 3, 1997. The full text of the Fourth Order

on Reconsideration and the errata are available for inspection and

copying during normal business hours in the FCC Reference Center (Room

239), 1919 M St., NW, Washington, DC.

Pursuant to the Telecommunications Act of 1996, the Commission

released a Notice of Proposed Rulemaking and Order Establishing Joint

Board, Federal-State Joint Board on Universal Service, CC Docket No.

96-45 on March 8, 1996 (61 FR 10499, Mar. 14, 1996), a Recommended

Decision on November 8, 1996 (61 FR 63778, Dec. 2, 1996), a Public

Notice on November 18, 1996 (61 FR 63778, Dec. 2, 1996), and a Report

and Order that was adopted on May 7, 1997 and released on May 8, 1997

(62 FR 32862, June 17, 1997) implementing sections 254 and 214(e) of

the Act relating to universal service. The Commission released an Order

on Reconsideration on July 10, 1997 (62 FR 40742, July 30, 1997) and a

related Report and Order on July 18, 1997 (62 FR 41294, Aug. 1, 1997)

making certain modifications and additions to the Commission's

universal service rules. As required by the Regulatory Flexibility Act

(RFA) the Fourth Order on Reconsideration contains a Final Regulatory

Flexibility Analysis. Pursuant to section 604 of the RFA, the

Commission performed a comprehensive analysis of the Fourth Order on

Reconsideration with regard to small entities and small incumbent local

exchange carriers. The Fourth Order on Reconsideration also contains

new information collection requirements subject to the Paperwork

Reduction Act (PRA).

Summary of the Fourth Order on Reconsideration

I. Introduction

1. In the Telecommunications Act of 1996, Public Law No. 104-104,

110 Stat. 56 (the 1996 Act), Congress amended the Communications Act of

1934, 47 U.S.C. Secs. 151, et seq. (the Act), by, among other things,

adding a new section 254 to the Act. In section 254, Congress directed

the Commission and states to take the steps necessary to establish

support mechanisms to ensure the delivery of affordable

telecommunications service to all Americans, including low-income

consumers, eligible schools and libraries, and rural health care

providers. Specifically, Congress directed the Commission and the

states to devise methods to ensure that ``[c]onsumers in all regions of

the Nation, including low-income consumers and those in rural, insular,

and high cost areas * * * have access to telecommunications and

information services * * * at rates that are reasonably comparable to

rates charged for similar services in urban areas,'' 47 U.S.C.

Sec. 254(b)(3), and 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,'' 47 U.S.C.

Sec. 254(h)(2)(A). On May 8, 1997, the Commission released the

Universal Service Report and Order, implementing section 254 of the Act

and establishing a universal service support system that becomes

effective on January 1, 1998 and that will be sustainable in an

increasingly competitive marketplace. See Federal-State Joint Board on

Universal Service, Report and Order, CC Docket No. 96-45, FCC 97-157,

12 FCC Rcd 8776 (rel. May 8, 1997) (62 FR 32862, June 17, 1997)

(Order).

2. In the Order, the Commission adopted rules that reflect

virtually all of the recommendations of the Federal-State Joint Board

on Universal Service and meet the four critical goals set forth for the

new universal service program: (1) that all of the universal service

objectives established by the Act, including those for low-income

individuals, for consumers in rural, insular, and high cost areas, and

for schools, libraries, and rural health care providers, be

implemented; (2) that rates for basic residential service be maintained

at affordable levels; (3) that universal service funding mechanisms be

explicit; and (4) that the benefits of competition be brought to as

many consumers as possible. Recognizing that, as circumstances change,

further Commission action may be needed to ensure that we create

sustainable and harmonious federal and state methods of continuously

fulfilling universal service goals, the Commission also committed

itself to work in close partnership with the states to create

complimentary federal and state universal service support mechanisms.

These efforts are ongoing.

3. Through the Order and the accompanying orders reforming the

Commission's access charge rules, the Commission established the

definition of services to be supported by federal universal service

support mechanisms and the specific timetable for implementation. The

Commission set in place rules that will identify and convert existing

federal universal service support in the interstate high cost fund, the

dial equipment minutes (DEM) weighting program, Long Term Support

(LTS), Lifeline, Link Up, and interstate access charges to explicit

competitively neutral federal universal service support mechanisms. The

Commission also modified the funding methods for the existing federal

universal service support mechanisms so that such support is not

generated, as at present, entirely through charges imposed on long

distance carriers. Instead, as the statute requires, equitable

[[Page 2095]]

and non-discriminatory contributions will be required from all

providers of interstate telecommunications service. The Commission took

other steps to make federal universal service support mechanisms

consistent with the development of local service competition, and

established a program to provide schools and libraries with discounts

on all commercially available telecommunications services, Internet

access, and internal connections. The Commission also established

mechanisms to provide support for telecommunications services for all

public and not-for-profit health care providers located in rural areas.

4. The Commission also named the National Exchange Carrier

Association (NECA) the temporary Administrator of the universal service

support mechanisms on the condition that NECA agree to make changes to

its governance that would render it more representative of non-

incumbent local exchange carrier (LEC) interests. As a condition of its

appointment as temporary Administrator, the Commission subsequently

directed NECA to establish the Universal Service Administrative Company

(USAC), an independently functioning subsidiary corporation that will

perform the billing, collection, and disbursement functions for all of

the universal service support mechanisms. See Changes to the Board of

Directors of the National Exchange Carrier Association, Inc. and

Federal-State Board on Universal Service, Report and Order and Second

Order on Reconsideration, CC Docket Nos. 97-21 and 96-45, FCC 97-253

(rel. July 18, 1997) (62 FR 41294, Aug. 1, 1997) (NECA Report and

Order). The Commission further directed NECA to create the Schools and

Libraries Corporation and Rural Health Care Corporation to perform all

functions associated with administering the schools and libraries and

rural health care programs, respectively, except those directly related

to billing and collecting universal service contributions and

disbursing support.

5. On July 10, 1997, the Commission released a reconsideration

order on its own motion in this proceeding. See Federal-State Joint

Board on Universal Service, Order on Reconsideration, CC Docket No. 96-

45, FCC 97-246 (rel. July 19, 1997) (62 FR 40742, July 30, 1997) (July

10 Order). Among other things, the July 10 Order (1) clarified certain

issues relating to contracts for services to schools and libraries; (2)

modified the formula for recovery of corporate operations expense from

high loop cost support mechanisms; and (3) clarified issues concerning

coordination between the Commission staff and the state staff of the

Joint Board in CC Docket No. 96-45 in implementing the new monitoring

program.

6. Sixty-one parties have filed petitions for reconsideration and/

or clarification of the Order and the July 10 Order. In this Fourth

Order on Reconsideration, we address issues raised by petitioners that

either must or should be addressed before the new universal service

program begins. We will address the remaining issues in one or more

subsequent reconsideration orders in this docket.

7. In this order, we clarify or make further findings regarding:

(1) the rules governing the eligibility of carriers and other providers

of supported services; (2) methods for determining levels of universal

service support for carriers in rural, insular and high cost areas; (3)

support for low-income consumers; (4) the rules governing the receipt

of universal service support under the schools and libraries and rural

health care programs; (5) the determinations of who must contribute to

the new universal service support mechanisms; and (6) administration of

the support mechanisms.

II. Definition of Universal Service: Services That Are Eligible for

Support

A. Local Calling Provided by Satellite Companies

8. We grant AMSC's request and conclude that calls to and from a

satellite company's fixed-site subscribers, for which such subscribers

pay a non-distance and non-usage sensitive rate, constitute local

calling for purposes of determining whether a carrier is eligible for

federal universal service support. We find that, consistent with the

principles of competitive and technological neutrality established in

the Order, non-landline telecommunications providers should be eligible

to receive universal service support even though their local calls are

completed via satellite. We conclude that any call for which a

satellite company's subscribers are not charged on a distance- or

usage-sensitive basis constitutes a local call.

B. Provision of E911 by MSS Providers

9. In response to AMSC's petition, we clarify that MSS providers,

like other wireless providers in localities that have implemented E911

service, may petition their state commission for permission to receive

universal service support for the designated period during which they

are completing the network upgrades required to offer access to E911.

To receive federal universal service support, however, MSS providers

must satisfy the eligibility requirements we previously established. We

rely on state commissions to ensure that providers that are not

currently able to provide access to E911 service are making the network

upgrades necessary to provide access to E911 service as quickly as

possible.

C. Voice Grade Access to the Public Switched Network

10. We reconsider, on our own motion, the Commission's

specification of a bandwidth for voice grade access to the PSTN and

conclude that bandwidth for voice grade access should be, at a minimum,

300 Hertz to 3,000 Hertz. In the Order, the Commission determined that

voice grade access bandwidth be approximately 500 Hertz to 4,000 Hertz.

We reconsider that determination based on our recognition that the 500

Hertz to 4,000 Hertz bandwidth established in the Order would require

eligible carriers to comply with a voice grade access standard that is

more exacting than current industry standards, a result that we did not

intend. We note that AT&T operating principles recommend that voice

grade access bandwidth be 200 Hertz to 3,500 Hertz, while Bellcore

recommends a range of 200 Hertz to 3,200 or 3,400 Hertz. American

National Standards Institute (ANSI) defines voice grade access

bandwidth as 300 Hertz to 3,000 Hertz. We did not intend to impose a

more onerous definition of voice grade access than those generally

established under existing industry standards, and conclude that our

decision here will ensure that consumers receive voice grade access at

levels that are consistent with Commission rules and that are not

incompatible with current industry guidelines. We do not adopt the

broader voice grade access bandwidth specified in the AT&T and Bellcore

operating principles. To the extent that the bandwidth recommended in

the AT&T and Bellcore operating principles exceeds the bandwidth

established in the ANSI definition of voice grade access, we are

concerned that a substantial number of otherwise eligible carriers may

be unable to qualify for universal service support if we were to

require all carriers to meet this standard as a condition of

eligibility. Moreover, networks utilizing loading coils may experience

difficulty operating properly at bandwidths exceeding 3,400 Hertz.

Carriers that meet current AT&T and Bellcore guidelines, however, will

be able to satisfy our definition of voice grade access.

[[Page 2096]]

III. Carriers Eligible for Universal Service Support

A. Designation of Eligible Carriers

11. We read Sandwich Isles' petition to contend that the DHHL,

rather than the Hawaii Public Utilities Commission (PUC), should have

authority to designate eligible telecommunications carriers on the

Hawaiian Home Lands. Section 153(41) defines ``[s]tate commission'' as

``the commission, board, or official (by whatever name designated)

which under the laws of any State has regulatory jurisdiction with

respect to intrastate operations of carriers.'' 47 U.S.C. Sec. 153(41).

Based on the record before us, it is unclear whether the DHHL meets the

Act's definition of ``state commission.'' Based on further information

provided by the parties, it now appears that the issue here is not

whether there is a state commission with jurisdiction to designate

eligible carriers, but which of the state agencies should be considered

to be the ``state commission'' for purposes of designating Sandwich

Isles. Before undertaking to develop the record further and to

interpret the term ``state commission,'' we encourage Sandwich Isles

and the relevant state agencies to resolve this dispute. If they are

unable to do so, we encourage Sandwich Isles and the relevant state

agencies to bring that fact to our attention so that we may complete

action on the pending petitions.

B. Eligibility Designation Date

12. In light of section 254's directive that only carriers

designated as eligible pursuant to section 214(e) shall be eligible to

receive universal service support, we affirm our previous conclusion

that, as of January 1, 1998, the temporary Administrator may not

disburse support to carriers that have not been designated as eligible

under section 214(e). Thus, if a carrier has not been designated as

eligible by January 1, 1998, it may not receive support until such time

as it is designated an eligible telecommunications carrier. This

applies to all carriers, including those that currently receive

universal service support under the existing support mechanisms. We

agree with USTA, however, that a state commission that is unable to

designate as an eligible telecommunications carrier, by January 1,

1998, a carrier that sought such designation before January 1, 1998,

should be permitted, once it has designated such carrier, to file with

the Commission a petition for waiver requesting that the carrier

receive universal service support retroactive to January 1, 1998. A

state commission filing such a petition must explain why it did not

designate such carrier as eligible by January 1, 1998 and provide a

justification for why providing support retroactive to January 1, 1998

serves the public interest. We encourage relevant carriers to file

information demonstrating that they took reasonable steps to be

designated as eligible telecommunications carriers by January 1, 1998.

We find that it is in the public interest to permit telecommunications

carriers that were eligible to receive universal service support on

January 1, 1998, but that were not designated as eligible by their

state commission by that date, to be permitted to seek retroactive

support. Allowing retroactive support will permit consumers served by

those carriers to benefit from the support to which those carriers

would have been entitled, but for circumstances that prevented the

state commission from designating the carriers as eligible for receipt

of universal service support prior to January 1, 1998. Regarding NECA's

concern that the Order does not specify a date by which state

commissions must make their eligible carrier determinations, we note

that the Bureau's August 14 and September 29 Public Notices notified

state commissions to submit their eligible carrier designations to the

temporary Administrator no later than December 31, 1997.

IV. High Cost Support

A. Indexed Cap on High Cost Loop Fund

13. We affirm the Commission's decision to retain the indexed cap

on high cost loop support until all carriers receive support based on a

forward-looking economic cost mechanism. Much of petitioners' concern

about the sufficiency of the modified existing system of universal

service support appears to be based on their misapprehension that the

indexed cap will operate after January 1, 1998 not merely to limit the

growth of the high cost loop fund, but also to limit the growth of the

modified DEM weighting and LTS programs. In light of this apparent

confusion, we clarify here that the indexed cap on the high cost loop

fund will not operate to cap support under the modified DEM weighting

or LTS programs. Rather, local switching support and LTS will be

calculated and permitted to increase based on the formulas provided in

sections 54.301 and 54.303, respectively.

14. Section 36.601(c) of our rules sets forth the method for

calculating the indexed cap and clearly provides that this limitation

applies only to loop-related costs, not local switching support or long

term support. In addition, section 36.601(a) states that:

[t]he term Universal Service Fund in subpart F refers only to the

support for loop-related costs included in Sec. 36.621. The term

Universal Service in part 54 refers to the comprehensive discussion

of the Commission's rules implementing section 254 of the

Communications Act of 1934, as amended * * * .''

This clarification should alleviate any concern that the cap may result

in insufficient support to the extent that these concerns are based on

the erroneous premise that the indexed cap's limitation on growth of

the high cost loop fund will limit the growth of the modified support

programs adopted pursuant to part 54 of our rules. Absent specific

evidence that the cap as modified in response to implementation of

section 254 will likely result in insufficient support, which

petitioners have not offered, we conclude that the cap is consistent

with our obligation to ensure that support is sufficient.

15. Contrary to RTC's assertion that the indexed cap does not take

account of cost increases due to the addition of new high cost loops or

new eligible carriers, we note that our rules provide for annual

adjustments that will reflect such growth. Specifically, section

36.601(c) provides:

Beginning January 1, 1999, the total loop cost expense

adjustment shall not exceed the total amount of the loop cost

expense adjustment provided to rural carriers for the immediately

preceding calendar year, adjusted to reflect the rate of change in

the total number of working loops of rural carriers during the

[preceding] calendar year * * *.

Thus, both new high cost loops that eligible rural carriers add during

the previous calendar year as well as high cost loops of newly eligible

carriers that did not qualify as rural carriers in the previous

calendar year will be factored into the calculation of the rate of

change in the total number of working loops of rural carriers, pursuant

to section 36.601(c). Accordingly, we find no basis for making

additional adjustments to the indexed cap, beyond those already

required by section 36.601(c).

16. We agree with Bell Atlantic that petitioners' claims of harm by

operation of the cap under the new system of support are speculative.

As noted by AT&T, a waiver process has been and remains available to

carriers that may experience a significant adverse impact by operation

of the cap. We note again that the fact that no carrier has applied for

relief under the Commission's waiver process or otherwise sought relief

from the cap since it was first

[[Page 2097]]

implemented in 1994 suggests that carriers have not experienced undue

hardship because of the cap.

17. We therefore affirm the Commission's previous finding that the

cap is a reasonable means of limiting the overall growth of the high

cost loop fund, and thus protecting contributors from excessive

universal service contribution requirements, while allowing the high

cost loop fund to grow to support the growth in lines served by

carriers in high cost areas.

B. DEM Weighting Assistance (Local Switching Support)

1. Calculation of Local Switching Support Based on Projections of Costs

18. Although the Commission removed the DEM weighting assistance

program from the access charge system and transferred it to the new

universal service system of support, the Commission did not alter

significantly the level of support received by carriers under this

program. Indeed, in adopting the modifications to the existing support

mechanisms, the Commission was persuaded that it should act more

cautiously with respect to small rural carriers. Therefore, the DEM

weighting assistance program will continue to be administered and

calculated separately from the existing high cost loop fund.

Specifically, support payments for these local switching costs will be

based on projections of annual costs, and, therefore, payments will not

be lagged in the manner prescribed by our rules governing the existing

high cost loop fund.

19. Under the modified DEM weighting assistance program, a carrier

will be eligible to receive local switching support based on the

carrier's projected annual unseparated local switching revenue

requirement for the upcoming calendar year, beginning January 1, 1998,

and each year thereafter that DEM weighting assistance continues. We

amend section 54.301 by adding the word ``projected'' to the first

sentence of that rule to clarify that support for local switching costs

will be based on projections of costs and not historical cost data. As

reflected in the rule changes, section 54.301 is amended to read in

relevant part:

Beginning January 1, 1998, an incumbent local exchange carrier

that has been designated an eligible telecommunications carrier and

that serves a study area with 50,000 or fewer access lines shall

receive support for local switching costs using the following

formula: the carrier's projected annual unseparated local switching

revenue requirement shall be multiplied by the local switching

support factor.

Thus, the Commission's determination to remove the DEM weighting

assistance program from the access charge system and transfer it to the

new universal service system of support will not create a two-year lag

in the recovery of local switching investment, as argued by

petitioners.

20. We also, on our own motion, amend section 54.301 to clarify

that, to receive local switching support, an incumbent LEC must satisfy

the requirements of an eligible telecommunications carrier.

2. Calculating the Annual Unseparated Local Switching Revenue

Requirement

21. We adopt the method of calculating the annual unseparated local

switching revenue requirement proposed in NECA's ex parte letters

because it provides the most accurate calculation of the local

switching revenue requirement. Under this method, a carrier's annual

unseparated local switching revenue requirement will be calculated

pursuant to a formula that relies upon specified account and cost data

that carriers maintain pursuant to the Commission's part 32 rules.

Thus, as reflected in our amendments to part 54 in the rule changes, we

direct the Administrator to use the part 32 account data as specified

in NECA's October 30th, 1997 and December 4, 1997 letters to determine

the unseparated local switching revenue requirement. Consistent with

our adoption of a methodology that relies upon part 32 account data, we

authorize the Administrator to issue a data request annually to the

carriers that serve study areas with 50,000 or fewer access lines but

that are not members of the NECA traffic sensitive pool in order to

obtain the relevant part 32 data from these carriers. Because the

Administrator requires data to calculate local switching support in

1998 from carriers that do not participate in the NECA common line

pool, we direct the Administrator to issue a data request to those

carriers as soon as practicable after the release of this Order. We

note that, as with all high cost support, a competitive local exchange

carrier will receive the same amount of local switching support

formerly received by an incumbent LEC if the competitive local exchange

carrier begins to serve a customer formerly served by an incumbent LEC

receiving local switching support for that customer.

22. We conclude that the approach suggested by NECA, because it

allocates local switching expenses and related investment in a manner

that is consistent with the allocation methods prescribed under parts

36 and 69 of our rules, provides a more accurate method for calculating

the unseparated local switching revenue requirement. Because all

carriers, including small carriers, already maintain the information

necessary to calculate the local switching revenue requirement and

because carriers must already submit similar information to the

Administrator for high cost loop support, we conclude that any

additional burden placed on carriers will be small, and that the

benefits of using a more accurate method will outweigh any additional

burden placed on carriers.

23. In its October 31, 1997 report containing projections of demand

for the modified DEM weighting assistance program, USAC reported that

NECA had devised a formula for calculating the unseparated local

switching revenue requirement for average schedule companies. For

average schedule companies, local switching support will be calculated

in accordance with a formula that the Administrator will submit

annually to the Commission for review and approval. The formula

submitted by the Administrator will be designed to produce

disbursements to an average schedule company to simulate the

disbursements that would be received pursuant to section 54.301 by a

company that is representative of average schedule companies. We

delegate to the Chief, Common Carrier Bureau the authority to review,

modify, and approve the formula submitted by the Administrator.

3. True-up Mechanism for Adjusting Local Switching Revenue Requirement

24. We agree with NECA that the Administrator should adjust DEM

weighting support levels to correct errors that may result from the use

of projected local switching costs. Accordingly, we direct the

Administrator to adjust annually the levels of local switching support

projected for each study period to reflect the historical support

requirements determined from the data filed by the carrier for that

study period. As a result, a carrier's local switching support will not

be delayed until historical data are available, but, after the

adjustment, such support will accurately reflect a carrier's historical

costs. As proposed by NECA, we conclude that all such adjustments must

be made within 15 months of the conclusion of the relevant study

period. We emphasize that, unlike the current high cost loop data

submissions, all carriers must submit accurate, historical data when

they become available and that the Administrator must increase or

decrease a carrier's subsequent

[[Page 2098]]

payments by the amount that the cost projection for that carrier

differs from the costs which are in fact incurred.

25. We note that local switching support also may be affected by

changes in the weighting factor resulting from the number of lines

served by a carrier. As provided in section 54.301 of the Commission's

rules, ``[i]f the number of a study area's access lines increases such

that, under Sec. 36.125(f) of this chapter, the weighted interstate DEM

factor . . . would be reduced, that lower weighted interstate DEM

factor shall be applied to the carrier's 1996 unweighted interstate DEM

factor to derive a new local switching support factor.''

C. Long Term Support (LTS)

1. Technical Amendments to Section 54.303 Governing Calculation of LTS

26. In response to GVNW's petition, we amend section 54.303 of our

rules, as set forth below, to specify how LTS will be calculated for

1998. First, we clarify that currently, and until January 1, 1998, LTS

support is based on the difference between the NECA common line pool

revenue requirement and the sum of the revenues obtained from charging

a nationwide CCL rate calculated pursuant to section 69.105(b)(2) and

the revenues obtained through SLCs. This clarification is necessary

because the Order and section 54.303 failed to account for the portion

of the common line revenue requirement that is recovered through end

user common line charges, or SLCs. We therefore amend section 54.303 to

include ``end user common line charges.'' We also clarify the procedure

by which LTS support will be calculated after January 1, 1998. Prior to

the modifications adopted in the Order, NECA calculated LTS using

revenue requirement projections calculated pursuant to section

69.105(b)(2) of our rules. After January 1, 1998 we will no longer use

these annual projections. Instead, we will index 1997 levels of support

to reflect annual changes in loop costs. Specifically, in 1998 and 1999

LTS support will be calculated by adjusting previous support levels by

the annual percentage change in the actual nationwide average cost per

loop, and beginning January 1, 2000, LTS will be adjusted to reflect

the annual percentage change in the Department of Commerce's GDP-CPI.

Thus, under the modified LTS program adopted in the Order, the

Administrator will make an initial, one-time calculation of projected

1997 LTS revenue requirements of eligible carriers in service areas

served by incumbent LECs that currently participate in the NECA common

line pool. These projected 1997 LTS revenue requirements will be

adjusted according to a rate of change that will reflect annual changes

in loop costs as prescribed by section 54.303.

27. Because LTS levels for 1998 and beyond will be based on 1997

projections, we conclude that the methodology for calculating the NECA

CCL charge contained in section 69.105(b)(2) should be used only for

the 1997 projections. Therefore, section 54.303 now directs the

Administrator to calculate only the base-level of LTS using the

projected revenue recovered by the CCL charge in 1997 as calculated

pursuant to section 69.105(b)(2) of our rules. Consistent with these

clarifications, we amend section 54.303 to specify that the

Administrator will calculate the unadjusted base-level of LTS for 1998

by calculating the difference between the projected Common Line revenue

requirement of NECA Common Line tariff participants projected to be

recovered in 1997 and the sum of end user common line charges and the

1997 projected revenue recovered by the CCL charge as calculated

pursuant to section 69.105(b)(2) of our rules. As reflected in the rule

changes, section 54.303 is amended to read in relevant part:

To calculate the unadjusted base-level of Long Term Support for

1998 the Administrator shall calculate the difference between the

projected Common Line revenue requirement of association Common Line

tariff participants projected to be recovered in 1997 and the sum of

end user common line charges and the 1997 projected revenue

recovered by the association Carrier Common Line charge as

calculated pursuant to Sec. 69.105(b)(2) of this chapter.

28. In the Order, the Commission stated that an eligible carrier's

LTS will be based on the LTS received for the preceding calendar year,

adjusted in 1998 and 1999 to reflect the percentage increase in the

nationwide ``average loop cost.'' We are persuaded by NECA's comments

that the phrase ``average loop cost'' in section 54.303 could be

misinterpreted and that it would be preferable to use the terminology

used elsewhere in our rules, i.e., ``average unseparated loop cost per

working loop.'' Accordingly, we also amend section 54.303 by striking

the phrase ``average loop cost'' and replacing it with ``average

unseparated loop cost per working loop.'' As reflected in the rule

changes, section 54.303 is amended to instruct the Administrator to

adjust the levels of LTS for 1998 and 1999 to ``reflect the annual

percentage change in the actual nationwide average unseparated loop

cost per working loop.''

29. On our own motion, we also amend section 54.303 to clarify that

an incumbent LEC that participates in the NECA common line pool also

must satisfy the requirements of an eligible telecommunications carrier

in order to receive LTS. Accordingly, section 54.303 is amended to read

in relevant part:

Beginning January 1, 1998, an eligible telecommunications

carrier that participates in the association Common Line pool shall

receive Long Term Support.

2. Calculation of LTS Levels Based on Projections of Costs

30. The Commission's determination to remove the LTS program from

the access charge system and transfer it to the new support system will

not create a two-year lag in the recovery of LTS supported costs, as

argued by petitioners. In 1998, support payments provided to eligible

carriers under the modified LTS program will be based not on historical

cost data, which is the method of calculating support under the

existing high cost loop fund, but, instead, will be based on 1997

projections. Section 54.303, as modified above, now explicitly states

that LTS support in the first year will be calculated based on the

difference between the 1997 projected common line revenue requirement

of NECA pool participants and the projected revenue recovered by the

1997 NECA CCL charge and SLCs. Beginning January 1, 1998, LTS payments

will be adjusted for all recipients based on average rates of change as

provided in section 54.303. Because support will be based on

projections using a rate of change, historical data will no longer be

used and there will be no basis for delaying LTS payments.

3. True-up Mechanism to Adjust Base-Level of LTS

31. Pursuant to section 54.303, the unadjusted base-level of LTS

initially will be calculated using 1997 projections. To ensure that the

modified LTS program is funded at appropriate levels, however, we

direct the Administrator to adjust the base-level of LTS to reflect

historical 1997 costs once those data become available to the

Administrator. As proposed by NECA, we conclude that this adjustment

should be made within fifteen months of the conclusion of the 1997

calendar year. We emphasize that, unlike the current high cost loop

data submissions, all carriers must submit historical cost data for

1997. We direct the Administrator to increase or decrease a carrier's

LTS payment to reflect 1997 costs that in fact incurred no later than

15 months after the end of the 1997 calendar year. We note that, unlike

the DEM weighting assistance program, which will require ongoing

adjustments, the adjustment that we direct the Administrator to make to

the LTS program will be needed only to adjust the base-level of LTS.

[[Page 2099]]

4. Membership in NECA Common Line Pool a Requirement for LTS

32. We reiterate that an incumbent LEC's continued membership in

the NECA common line pool is required for the incumbent LEC or any

competitive eligible telecommunications carrier serving that incumbent

LEC's former customers to receive payment of support comparable to LTS

in a given service area. As we stated in the Order, we ultimately

intend to determine universal service support for all carriers using a

forward-looking economic cost model because such a model will require

carriers to operate efficiently and will facilitate the move to

competition in all telecommunications markets. We decided, however,

that we would ``retain many features of the current support

mechanisms'' in order to provide rural LECs, generally the recipients

of LTS, sufficient time to adjust to any changes in universal service

support, particularly a move to a forward-looking economic cost model

for determining universal service support. Although we made some

adjustments to the calculation and distribution scheme of LTS in the

Order, we specifically continued this support mechanism, finding that

such payments would serve the public interest ``by reducing the amount

of loop cost that high cost LECs must recover from IXCs through CCL

charges and thereby facilitating interexchange service in high cost

areas consistent with the express goals of section 254.'' Thus, we wish

to maintain the current support structure, as modified, for recipients

of LTS until we are able to devise a forward-looking economic cost

model to determine universal service support appropriate for such

carriers. We find that broadening the scope of the LTS mechanism at

this time beyond the boundaries established in the Order would hinder

the achievement of our goal to move toward competition in all

telecommunications markets.

33. In addition, we note that a number of companies that have

chosen to leave the NECA common line pool in the past generally have

done so because their costs have decreased such that they can charge a

lower CCL interstate access rate than the NECA CCL rate and recover

their costs without LTS support. Thus, it is not clear how providing

those carriers with modified LTS would further the goal of universal

service. Although we recognize that other considerations may influence

a carrier's decision to exit the pool, we can only presume that any

carrier that has left did so after balancing all factors and

determining that it could forego the receipt of LTS. Accordingly, we

decline to reinstate LTS to such carriers and we deny ALLTEL's petition

to the extent that it asks that rural incumbent LECs that have left the

NECA pool be eligible to receive LTS under the new LTS program.

34. Moreover, as to the requests of current LTS recipients that

they be allowed to continue to receive LTS upon exiting the NECA pool,

we reiterate that we wish to maintain the current LTS program as

modified until we move to the use of a forward-looking economic cost

model for determining universal service support for such carriers.

Further, providing such support to carriers that leave the NECA pool

could undermine the pool's usefulness in permitting participants to

share the risk of substantial cost increases related to the CCL charge

by pooling their costs and, thereby, charging an averaged CCL rate

close to that charged by other carriers. This operation of the pool,

like LTS payments, serves section 254's goal of facilitating

interexchange service in high cost areas. Accordingly, we decline to

permit a carrier leaving the pool to continue to receive LTS in the

future.

35. Pursuant to section 54.307 of the Commission's rules, a

competitive eligible telecommunications carrier is eligible to receive

universal service support to the extent that it captures an incumbent

LEC's subscriber lines or serves new subscribers in the incumbent LEC's

service area. Having determined that an incumbent LEC exiting the NECA

common line pool will lose LTS, we also determine that a competitive

eligible telecommunications carrier that receives LTS for serving

subscribers in an incumbent LEC's service area similarly will lose LTS

when the incumbent LEC exits the NECA common line pool.

D. Support for Competitive Eligible Telecommunications Carriers

36. We clarify the Commission's finding that, beginning January 1,

1998, high cost loop support, DEM weighting assistance, and LTS will be

portable to any competitive local exchange carrier that has been

designated as an eligible telecommunications carrier. Section

54.307(a)(1) of our rules, which encompasses all three types of support

currently received by incumbent LECs, provides that ``[a] competitive

eligible telecommunications carrier shall receive support for each line

it serves based on the support the incumbent LEC receives for each

line.'' Section 54.307(a)(2) sets forth the method for calculating per-

line support that will be paid to a competitive eligible

telecommunications carrier for each line that it serves in an incumbent

LEC's service area. Section 54.307(a)(3) provides the method for

calculating the level of support that a competitive eligible

telecommunications carrier that uses switching functionalities or loops

that are purchased as unbundled network elements will receive. AirTouch

correctly notes that section 54.303, which establishes the method for

calculating LTS, explicitly states that a competitive eligible

telecommunications carrier will receive LTS. In order to eliminate the

apparent ambiguity in our rules governing portability, we amend the

first sentence of section 54.303 to eliminate any reference in that

section to competitive carriers' eligibility to receive LTS. We adopt

this amendment based on our conclusion that section 54.307, which sets

forth the method for calculating the amount of high cost loop support,

DEM weighting assistance, and LTS that a competitive carrier may

receive, specifies the support that competitive eligible

telecommunications carriers are entitled to receive and, therefore, the

reference to competitive carriers in section 54.303 is not needed.

E. Impact on Incumbent LEC of Losing Access Lines to Competitive

Eligible Telecommunications Carriers

37. We clarify here that, if an incumbent LEC loses a customer to a

competitive eligible telecommunications carrier, the incumbent LEC will

lose some or all of the per-line level of support that is associated

with serving that customer. If the competitive eligible

telecommunications carrier uses network elements purchased pursuant to

section 51.307 to provide the supported services, the reduction in the

amount of support received by the incumbent LEC is specified in section

54.307(a)(3) of the Commission's rules. That section provides that

``[t]he [incumbent] LEC * * * shall receive the difference between the

level of universal service support provided to the competitive eligible

telecommunications carrier and the per-customer level of support

previously provided to the [incumbent] LEC.'' Section 54.307(a)(4) of

our rules provides that a competitive eligible telecommunications

carrier that provides the supported services using neither unbundled

network elements nor wholesale service purchased pursuant to section

251(c)(4) will receive the full amount of universal service support

previously provided to the incumbent LEC for that customer. That

section, however, does not provide

[[Page 2100]]

a corresponding reduction in the amount of support received by the

incumbent LEC. Accordingly, we amend section 54.307(a)(4) to clarify

that, when a competitive eligible telecommunications carrier receives

support for a customer pursuant to section 54.307(a)(4), the incumbent

LEC will lose the support it previously received that was attributable

to that customer.

F. Corporate Operations Expenses

1. Imposition of a Limitation

38. In light of these challenges to the Commission's decision to

limit recovery of corporate operations expenses, we take this

opportunity to explain more fully the bases for this decision.

Expenditures for corporate operations in many instances may be

discretionary, in contrast, for example, to expenditures to maintain

existing plant and equipment. Corporate operations expenses include,

for example, travel, lodging and other expenses associated with

attending industry conventions and corporate meetings. Although

participation in such activities may be prudent, the levels of these

expenditures are subject to managerial discretion. Carriers currently

have little incentive to minimize these expenses because the current

mechanism for providing support in high cost areas allows carriers to

recover a large percentage of their corporate operations expenses. For

companies with fewer than 200,000 lines, for example, the expenses

attributed to the high cost expense adjustment are covered in full for

companies with costs in excess of 150 percent of the national average.

Smaller carriers possess even fewer incentives to minimize corporate

operations expenses because the Commission has a limited ability to

ensure, through audits, that smaller companies properly assign

corporate operations expenses to appropriate accounts and that these

expenses do not exceed reasonable levels. The Commission, and

frequently state commissions, cannot justify auditing smaller carriers

because the Commission's audit staff is small, there are many hundreds

of small telephone companies, and the costs of full-scale audits are in

many instances likely to exceed any expenses found to be improper. We,

therefore, conclude that imposing a cap that is relatively generous to

small carriers, but still imposes a limitation, is a reasonable method

of encouraging carriers to assign corporate operations expenses to the

proper accounts and discouraging carriers from incurring excessive

expenditures. Under this approach, we provide carriers with an

incentive to control their corporate operations expenses without

requiring carriers to incur the costs associated with a full Commission

audit. As the Commission stated in its Order and as explained further

below, carriers that contend that the limitation provides insufficient

support may request a waiver from the Commission. Therefore, only

carriers whose expenses exceed the cap and who contend that the capped

amount is insufficient will be required to provide additional

justification for their expenditures. We, therefore, conclude that a

cap on federal support for corporate operations expenses is a

reasonable method of preventing the recovery of improperly assigned or

excessive expenses from federal funds while minimizing the

administrative burden on the Commission and on all carriers, including

smaller carriers.

39. We disagree with petitioners who assert that, because some

corporate operations expenses are not discretionary, we should not

impose any limit on the recovery of corporate operations expenses. We

recognize that the expenses cited by petitioners and commenters may be

necessary for the operation of a company, and that such expenditures

are in some circumstances required by state or federal law or

regulation. Most companies, however, fulfill all such state and federal

requirements while incurring corporate operations expenses that are

well below the limitation imposed by the Commission. No party has

provided detailed data explaining the significant differences in

corporate operations expenses for companies of similar sizes. Further,

we are not excluding recovery of corporate operations expenses from

universal service support, but instead are imposing a reasonable limit.

We reject ITC's request to exclude all federal regulatory expenses from

the limitation because, although some expenditures may be necessary to

participate in the federal regulatory process, we see no reason to

permit the unlimited recovery of such expenses. Moreover, individual

companies that are required to incur unusually high corporate

operations expenses, such as Alaskan or insular telephone companies,

have the right to apply for a waiver with the Commission to demonstrate

the necessity of these expenses for the provision of the supported

services.

2. Adjustments to Limitation Formula

40. In the July 10 Order, the Commission specified a minimum

allowable corporate operations cost in order to ensure that carriers

with small numbers of working loops would receive sufficient support to

recover initial or fixed corporate operations expenses. This monthly

cost minimum was estimated from a regression of total corporate

operations expenses on the number of working loops. After performing

this analysis, the Commission adopted a minimum monthly recovery of

$9,505, which results in a minimum recovery of $114,071 per year. USTA

and GVNW urge the Commission to increase this minimum recovery from

$114,071 per year to $300,000 per year. USTA additionally advocates

adopting a limitation equal to the greater of either $300,000 per year

or $34.82 per line per month.

41. We reconsider, to a limited extent, the limitation on recovery

of corporate operations expenses and adopt a new minimum cap of

$300,000 per year as advocated by USTA and GVNW. Although we are fully

confident in the formula that calculates the cap, we adopt a minimum

cap of $300,000 out of an abundance of caution for the smallest

carriers. The increased minimum will reduce the need of the smallest

carriers to seek a waiver of the cap. We intend to continue to monitor

the effect of this limitation and the $300,000 minimum cap on smaller

carriers. We note that, because the Commission has adopted an indexed

cap for all high cost support, increases in the amount of support

provided to some companies will reduce the amount of support provided

to other companies. We find, however, that this change will result in a

minimal increase in the total amount of universal service support

provided to carriers. We will continue to monitor this issue closely

and will take steps to ensure that only necessary and prudent

expenditures are supported. We do not adopt USTA's alternative proposal

to increase recovery to $34.82 per line per month for all carriers

because we believe the minimum cap of $300,000 provides adequate

protection for the smallest carriers while imposing the smallest

corresponding decrease in high cost loop support for carriers overall.

42. Upon reconsideration, we make an additional change in the

limitation formula to address a small discontinuity in the formula that

causes the total allowable corporate operations expense to be slightly

lower in the range from 17,988 and 17,997 lines than the amount

computed at 17,987 lines. To eliminate the anomaly caused by this

discontinuity, we alter the second threshold for access lines from

17,988 lines to 18,006 lines. Finally, to make our rules easier to

apply, we

[[Page 2101]]

standardized general mathematical conventions in the formulas.

3. Methodology Used To Calculate the Limitation

43. Western Alliance questions the methodology the Commission used

to create the formula for the corporate operations expense limitation.

Western Alliance asserts that the Order contained no discussion or

reasoned explanation of: ``(a) why a regression analysis using a spline

function technique was accurate and appropriate; (b) how or why the 115

percent ceiling was selected; or (c) how or why the 1995 NECA data were

representative.'' We address these arguments in turn. As detailed

further in the July 10 Order, the Commission used a linear spline to

estimate average corporate operations cost per loop, based on the

number of loops served. To produce this formula, we used statistical

regression techniques that focused on the relationship between expenses

per loop, rather than total expense. We adopted this approach in order

to establish a model under which the cap on corporate operations

expense per line would decline as the number of loops increases for a

range of smaller companies so that economies of scale, pursuant to

which expenses per loop decline as carrier size increases, would be

taken into account by the formula. Of the models studied, the linear

spline was found to have the highest R\2\, a measure indicating that

this model provides the best fit with the data. The relationship

between corporate operations expense and lines served may reasonably be

expected to change as carriers' size increases. The linear spline

method used allows a different slope to be fitted for smaller carriers

than for larger carriers. The Commission adopted the ``knot,'' or the

point at which the two line segments of the linear spline model meet,

at 10,000 loops because that point allowed the best fitting overall

spline.

44. Regarding the remaining issues raised by Western Alliance, the

115 percent ceiling that limits recovery of corporate operations

expenses is consistent with other Commission rules regarding universal

service support under part 36 of our rules. The Commission has

consistently considered carriers whose loop costs exceed the national

average loop cost by more than 15 percent worthy of special treatment.

In the present context, out of an abundance of caution, we have

concluded that companies will be allowed to recover costs up to 15

percent above average costs, rather than limiting recovery of such

expenses to average costs. We also find that, before receiving

corporate operations expenses in excess of 115 percent of the average,

companies should undergo additional scrutiny by submitting a waiver

request to the Commission. Finally, the data used in the estimation are

the actual corporate operations expenses that companies filed with NECA

for the calculation of universal service support. We used the most

current NECA data available at the time we performed these

calculations.

45. Western Alliance claims that the Commission's corporate

operations expense formula affects smaller companies more significantly

than larger companies. It states that Figure 1 in the July 10 Order

demonstrates that the data for LECs with more than 15,000 loops cluster

more closely around the Commission's fitted line than the data for

those LECs with fewer than 15,000 lines. This observation, however,

does not undermine the Commission's conclusion. Because corporate

operations expense per line varies more for smaller companies than

larger ones, any line that we might adopt would fit the data for larger

companies more closely than it would fit the data for smaller ones.

Moreover, as explained above, we have raised the minimum cap out of an

abundance of caution to address concerns that, without modification,

our formula may not afford sufficient recovery of corporate operations

expenses for the smallest companies.

46. We reject GVNW's argument that it is not clear whether the

corporate operations expense rule addresses amounts from Accounts 6710

and 6720 or whether it addresses ``that portion assigned to loop cost

in NECA's USF Algorithm (AL19).'' According to the Order, however,

``[c]orporate operations expense are recorded in Account 6710

(Executive and planning) and Account 6720 (General and

administrative).'' Hence, the limitation applies to accounts 6710 and

6720 and does not apply to NECA's USF algorithm.

47. RTC asserts that the Commission's formula is a proxy model and

therefore should be subject to the criteria the Commission adopted for

forward-looking cost proxy models in the Order. Although the formula we

adopted to limit recovery of corporate operations expenses is a model,

it is not a model intended to estimate forward-looking economic costs.

Therefore, most of the criteria adopted by the Commission concerning

forward-looking cost proxy models are inapplicable to the corporate

operations expense formula. Further, RTC is incorrect to the extent

that it is arguing that the underlying data and assumptions for the

formula are unavailable to the public. The data used to create the line

were filed publicly with the Commission by NECA for calendar year 1995.

The assumptions and method we used to compute the formula can be found

in greatest detail in the July 10 Order. The Commission has not, as TCA

alleges, contradicted its decision to base universal service support

for rural telephone companies on embedded costs until January 1, 2001.

The formula we have adopted imposes a limit on the recovery of embedded

costs and is not a proxy model designed to calculate forward-looking

economic costs.

48. We find that our limitation on recovery of corporate operations

expenses will not jeopardize the affordability of local services.

Because, as discussed above, such expenditures and the level of such

expenditures are in many cases discretionary, we believe that imposing

some limits on corporate operations expenses serves the public

interest. Moreover, if carriers have prudent corporate operations

expenses that exceed the cap, they may seek a waiver of that cap.

49. Based on the changes described above, we modify the formula to

limit the amount of corporation operations expenses per working loop

that a carrier may recover as follows:

for study areas with 6,000 or fewer working loops the amount per

working loop shall be $31.188 - (.0023 x the number of working

loops), or, ($25,000 the number of working loops),

whichever is greater;

for study areas with more than 6,000 but fewer than 18,006 working

loops, the amount per working loop shall be $3.588 + (82,827.60

the number of working loops); and

for study areas with 18,006 or more working loops, the amount per

working loop shall be $8.188.

We conclude that this modified formula will better serve our goal of

ensuring that carriers use universal service support only to offer the

supported services to their customers through prudent facility

investment and maintenance consistent with their obligations under

section 254(k).

4. Procedural Matters

50. We conclude that the limitation on corporate operations

expenses was adopted in compliance with the Administrative Procedure

Act (APA). The Commission gave the public ample notice regarding the

possibility of limiting or excluding recovery of corporate operations

expenses. In a Notice of Inquiry released in 1994, the Commission

sought comment on whether we should exclude all recovery of corporate

operations expenses. In a Notice of Proposed Rulemaking released

[[Page 2102]]

in 1995, as the petitioners acknowledge, the Commission tentatively

concluded that it should exclude recovery of all such expenses. In the

Universal Service Notice, the Commission specifically sought comment on

whether any proposals in Docket No. 80-286 were worthy of consideration

in Docket No. 96-45 and specifically incorporated the record of that

proceeding into the 96-45 docket. Moreover, in its Public Notice

seeking further comment, the Common Carrier Bureau asked what

modifications should be made to the high cost support mechanism if it

were retained with respect to rural areas. In response to this Public

Notice, several parties recommended that the Commission limit or

exclude recovery of corporate operations expenses as it had previously

proposed.

51. Not only did the Commission provide notice of a potential limit

on or exclusion of the recovery of corporate operations expenses, the

approach adopted by the Commission takes into consideration the

comments filed in response to these notices. The Commission initially

proposed disallowing all recovery for corporate operations expenses.

After considering the comments, however, the Commission concluded in

the Order that it should limit such expenses to a reasonable level

rather than excluding them altogether. The approach taken is

conceptually similar to the one NECA proposed in response to the 1995

Notice and again in response to the Public Notice. NECA proposed that

high cost support recipients should recover only expenses that fall

below a line that is two standard deviations above a regression line.

Our limitation is based on a regression line that takes into account

the size of the company when calculating an acceptable range of

recoverable corporate operations expenses and, rather than allowing all

expenses within two standard deviations of the line as proposed by

NECA, allows recovery of expenses that are up to 115 percent of the

typical costs of companies of similar size. Thus, because the corporate

operations expense cap was within the scope of the proposal to

eliminate recovery of all corporate operations expenses and was

supported by record evidence, the requirements of the APA were met.

52. We conclude that we are not barred from adopting this

limitation because, although the Joint Board did not make a

recommendation about limiting the recovery of corporate operations

expenses, the Commission properly referred to the CC Docket No. 96-45

Joint Board the question of whether proposals originating with the CC

Docket No. 80-286 Joint Board should be adopted. We also conclude that

Western Alliance incorrectly implies that the legislative history to

the 1996 Act prohibits the Commission from adopting any proposal that

was submitted in the record of the CC Docket No. 80-286 proceeding.

Although the Joint Explanatory Statement explained that Congress did

not view the CC Docket No. 80-286 proceeding as an appropriate basis

for implementing section 254(a), nothing in the legislative history

suggests that Congress, in enacting section 254, intended to preclude

us from considering specific proposals from that docket in the separate

proceeding undertaken to implement section 254. Indeed, the Commission,

in the Universal Service Notice, sought comment on whether any

proposals from the 80-286 docket were consistent with the 1996 Act so

as to avoid duplication of previous Commission efforts. As described

above, several commenters proposed elimination or limitation of the

recovery of corporate operations expenses in the 96-45 docket, and the

Commission adopted this limitation as part of the 96-45 docket.

53. We also conclude that our adoption of a high standard for

granting a waiver for corporate operations expense recovery is fully

justified. Because corporate operations expenses are in many cases

completely within a company's discretion, they are more likely to be

susceptible to abuse than other types of expenditures such as plant

maintenance expenditures. Accordingly, parties contending that they

should recover unusually high amounts of such expenses should be

required to meet a substantial burden. Additionally, because the

limitation includes a buffer zone to accommodate companies that may

have corporate operations expenses that are higher than average, but

not extreme, we affirm our conclusion that the need for waivers should

be limited to exceptional circumstances.

54. We also reject petitioners' suggestions that the limitation on

recovery of corporate operations expenses should be phased in over a

lengthy transition period. Unlike other situations cited by the

commenters, a transition period is not warranted in this instance. We

conclude that we should not phase in a measure designed to prevent

misallocation, manipulation, and abuse. Companies believing that they

have reasonably incurred expenses in excess of the limitation may

petition for a waiver from the Commission. We find that the

availability of a waiver will sufficiently protect any company that

legitimately incurred expenses in excess of the limitation, whether

caused by activity mandated by the 1996 Act or for any other reason.

55. Contrary to the position of some commenters, the Commission is

fully authorized to adopt rules to implement section 254(k) in addition

to codifying the statutory provision as it has already done. In fact,

in the Section 254(k) Order, we concluded that we would ``from time to

time, re-evaluate our rules to determine whether additional rule

changes are necessary to meet the requirements of section 254(k).'' The

Commission concluded in the Order and the July 10 Order that some

recipients of federal universal service support may be receiving funds

beyond those necessary to provide the supported services. Recovery of

such expenditures may allow carriers to use these expenditures to

subsidize competitive services in violation of section 254(k). In

addition to limiting support for corporate operations expense in order

to control spending that may be in excess of that allowed by the Act,

the Commission correctly found that limiting corporate operations

expenses would reduce the ability of incumbent LECs to subsidize

competitive services with noncompetitive services by reducing the

incumbent LECs' receipt of funds beyond those that may be necessary to

provide the supported services. We therefore conclude that limiting

recovery of corporate operations expenses is within the ambit of

section 254(k).

V. Support for Low-Income Consumers

A. Obligation To Provide Toll-Limitation Services

56. We believe that low-income consumers eventually should have the

choice of selecting either toll blocking or toll control to restrict

their toll usage. We conclude, however, that giving consumers such an

option is not viable at this time. Based on the record before us, we

find that an overwhelming number of carriers are technically incapable

of providing both toll-limitation services, particularly toll-control

services, at this time. Under our current rules, carriers technically

incapable of providing both types of toll-limitation services must seek

from their state commissions a time-limited waiver of their obligation

to provide both toll blocking and toll control. Given that a large

number of carriers are technically incapable of providing both toll

blocking and toll control at this time, we believe that requiring

carriers

[[Page 2103]]

to provide both would result in an unnecessarily burdensome process for

state commissions required to act on a large number of waiver

proceedings.

57. In light of these concerns, we believe that requiring carriers

to provide at least one type of toll-limitation service is sufficient

to provide low-income consumers a means by which to control their toll

usage and thereby maintain their ability to stay connected to the

public switched telephone network. Weighing the burdens on the states

and the need to have carriers designated in a short time frame against

the goal of giving low-income consumers a full range of options for

controlling toll usage, we define toll-limitation services as either

toll blocking or toll control and require telecommunications carriers

to offer only one, and not necessarily both, of those services at this

time in order to be designated as eligible telecommunications carriers.

We note, however, that if, for technical reasons, a carrier cannot

provide any toll-limitation service at this time, the carrier must seek

a time-limited waiver of this requirement to be designated as eligible

for support during the period it takes to make the network changes

needed to provide one of those toll-limitation services. In addition,

if a carrier is capable of providing both toll blocking and toll

control, it must offer qualifying low-income consumers a choice between

toll blocking and toll control. Because we agree with Catholic

Conference that all qualifying low income consumers ideally should be

offered their choice of toll blocking or toll control, we plan to

monitor and revisit this issue if we determine that technological

impediments to carriers' ability to offer toll limitation have been

reduced or eliminated. We also encourage carriers to develop and

investigate cost-effective ways to provide toll-control services.

58. We further conclude that carriers offering Lifeline service

will not be required to provide toll-limitation services other than

those specifically identified in the Order. The Commission defined toll

blocking as a service that allows customers to block outgoing toll

calls, and defined toll control as a service that allows customers to

limit in advance their toll usage per month or billing cycle.

Therefore, carriers offering Lifeline service will not be required to

offer, for example, international toll-call-blocking or toll blocking

that allows callers with a Personal Identification Number (PIN) to make

toll calls, as suggested by the Florida Commission. While we encourage

carriers to offer Lifeline consumers, free of charge, toll-limitation

services that include functions and capabilities beyond those described

in the Order, we are persuaded by USTA that most carriers currently are

technically incapable of providing these additional services.

Furthermore, regarding the issue of whether toll control must limit

collect calls, we conclude that, like toll blocking, toll control only

must allow consumers to limit outgoing calls.

59. In response to the Texas Commission's request, we reiterate

that toll-limitation services for qualifying low-income subscribers are

included in the definition of the ``core'' or ``designated'' services

that will receive universal service support. A carrier must provide

these core services throughout its entire service area in order to be

designated an eligible telecommunications carrier. We further clarify

that, compliance with the no disconnect rule and the prohibition on

deposit rule are not specific preconditions to being designated an

eligible telecommunications carrier. Once designated as an eligible

telecommunications carrier, however, that carrier must offer all

Lifeline and LinkUp services to qualifying low-income subscribers.

B. Recovery of PICC

60. Consistent with our efforts to make toll-blocking service

easily affordable to low-income consumers, we adopt our tentative

conclusion in the Second Further Notice to waive the PICC for Lifeline

customers who elect toll blocking. For the reasons discussed here and

in succeeding paragraphs, we agree with SBC and AT&T and conclude that

support for PICCs for Lifeline customers who have toll blocking, but

nevertheless remain presubscribed to an IXC, will be provided by the

universal service support mechanisms in addition to the support for

Lifeline customers established in the Order. In the Order, the

Commission noted that studies demonstrate that a primary reason

subscribers terminate access to telecommunications services is failure

to pay long-distance telephone bills. The Commission concluded that,

because voluntary toll blocking allows customers to block toll calls,

and toll-control service allows customers to ensure that they will not

spend more than a predetermined amount on toll calls, these services

assist Lifeline customers in avoiding involuntary termination of their

access to telecommunications services. The Commission concluded that,

in order to increase the use of toll-blocking and toll-control services

by low income consumers, Lifeline customers should receive these

services at no charge. It would make little sense, and would undermine

the very basis for providing Lifeline customers free access to toll

blocking, to assess the PICC on Lifeline customers who select toll

blocking. In addition, in light of our decision herein to permit

eligible carriers to offer either toll control or toll blocking, it

would be particularly unfair to assess the PICC on Lifeline customers

who do not have the option of selecting toll control, but that are

limited to toll blocking. To do so would discriminate against Lifeline

customers who may only select toll blocking, and thus would have no

reason to presubscribe to an IXC. In contrast, a Lifeline subscriber

who is able to select toll control likely will presubscribe to an IXC,

because that subscriber's access to toll calling is limited, but not

blocked entirely.

61. We thus conclude that, because toll blocking for low-income

consumers is a supported service that carriers must provide to such

customers and the PICC payment issue arises as a direct result of the

toll blocking requirement, the PICC, in these instances, is

sufficiently related to the provision of toll blocking that it should

be supported for low-income consumers. Thus, such costs should be

recovered in a competitively neutral manner that is consistent with

section 254 of the Act. Therefore, all interstate telecommunications

carriers, not just IXCs, should bear the costs of the waived PICCs.

62. Moreover, we agree with petitioners that the low-income program

of the federal universal service support mechanisms should support

PICCs attributable to all qualifying low-income consumers who have toll

blocking. As stated above, we will support PICCs attributable to

qualifying low-income consumers who have toll blocking but do not have

a presubscribed IXC. We anticipate that most low-income consumers who

receive toll blocking will do so voluntarily and that most will not

have presubscribed IXCs. In the event, however, that a low-income

consumer is required to elect toll blocking (e.g., as a condition of

receiving local service) or in the event that a low-income consumer

remains presubscribed to an IXC even though the consumer receives toll

blocking, the federal low-income program also will support the PICCs

attributable to consumers in those circumstances. Low-income consumers

who elect toll blocking, but who remain presubscribed to an IXC, would

not receive toll blocking free-of-charge unless we waive the PICC for

the consumers. If an IXC were required to pay the PICC

[[Page 2104]]

attributable to a low-income consumer who elects toll blocking, that

IXC would not be able to recover the PICC through per-minute charges

associated with toll usage. Thus, absent changes to our rules, the IXC

may seek to recover the PICC from the consumer in the form of a flat-

rate charge. As we have noted above, toll blocking helps consumers to

control their toll usage and should be available free-of-charge to

qualifying low-income consumers. Therefore, to ensure the availability

of toll blocking to all qualifying low-income consumers free-of-charge,

we conclude that the low-income program of the federal universal

service support mechanisms should support PICC charges attributable to

all low-income consumers who have toll blocking.

63. All competitive eligible carriers that provide Lifeline service

to customers who elect toll blocking should be able to recover an

amount equal to the PICC that would be recovered by the incumbent LEC

in that area from the low-income program of the federal universal

service support mechanisms even though such carriers are not required

to charge PICCs. Competitive eligible carriers should be able to

receive support amounts equal to the PICCs because, like incumbent

LECs, they will be unable to recover any portion of their costs

associated with a toll-blocked customer from IXCs originating

interexchange traffic on that customer's line. To avoid creating

incentives for carriers to pass additional costs to low-income

consumers through increased rates, we conclude that competitors should

receive this additional support for Lifeline customers who elect to

receive toll blocking. In addition, in order to ensure competitive

neutrality, a competing local carrier serving a Lifeline customer

should be able to receive the same amount of universal service support

that an incumbent LEC would receive for serving the same customer.

Because an incumbent LEC serving a low-income customer who elected toll

blocking would receive support for the PICC associated with that

customer, in order to ensure that competing local carriers are not

operating at an unfair advantage, competing local carriers should be

eligible to receive the same amount of support that the incumbent LEC

would receive.

C. Florida Commission's Petition Pertaining to State Lifeline

Participation

64. Consistent with the Commission's earlier finding that we should

not prescribe the methods that states use to generate intrastate

Lifeline support in order to qualify for federal support, we conclude

that, although all carriers are not required to contribute to Florida's

Lifeline support mechanisms, Florida's Lifeline program nevertheless

qualifies as providing intrastate matching funds. We, however,

encourage states to develop Lifeline matching programs that are

competitively neutral and emphasize that, as noted in the Order, states

must meet the requirements of section 254(e) in providing equitable and

non-discriminatory support for state universal service support

mechanisms. Because we find that Florida's Lifeline program qualifies

as state participation, we need not address the Florida Commission's

request for a waiver of the federal default Lifeline qualification

standard. For the same reason, we also decline to address the Florida

Commission's request for a waiver allowing it to set eligibility

requirements or implement a grandfather provision for certain Lifeline

recipients.

VI. Schools, Libraries, and Rural Health Care Providers

A. Lowest Corresponding Price

65. Neither USTA nor any other party offers persuasive evidence

that the three-year ``look back'' provision for determining the lowest

corresponding price is either unnecessarily burdensome or will unfairly

delay a service provider's participation in the bidding process.

Commenters do not assert that the relevant records are not maintained

or are not accessible. We note that the universe of records that the

provider must review to determine the lowest corresponding price is

limited to charges involving similarly situated, non-residential

customers for similar services.

66. We do not agree with USTA that the three-year ``look back''

provision violates the principle of competitive neutrality by

disadvantaging larger providers. We note that this requirement applies

equally to all providers and that, although larger providers may have a

greater number of records to review for purposes of determining the

lowest corresponding price, these providers also likely have greater

resources and more sophisticated methods of recordkeeping.

67. We agree with USTA, however, that we should modify our earlier

holding to clarify the application of our lowest corresponding price

requirement. We conclude that, for purposes of calculating the lowest

corresponding price, a provider will not be required to match a price

it offered to a customer under a special regulatory subsidy or that

appeared in a contract negotiated under very different conditions. For

example, we previously concluded that service providers will be

permitted to charge schools and libraries prices higher than those

charged to other similarly situated customers if the services sought by

a school or library include significantly different traffic volumes or

the provision of such services is significantly different from that of

another customer with respect to any other factor that the state public

service commission has recognized as being a significant cost factor.

Under our modified rules, a service provider will not be required to

demonstrate further that matching such a price would force the provider

to offer service at a rate below the compensatory rate for that

service. The use of a rate below the compensatory rate would not be

practical, given the limited resources of schools and libraries to

participate in lengthy negotiations, arbitration, or litigation.

Regarding Bell Atlantic's concern that special regulatory rates

established by states for schools and libraries should not be treated

as the pre-discount prices, we reiterate that special regulatory

subsidies need not be considered in determining the lowest

corresponding price. Consistent with our findings above, we conclude

that each such situation should be examined on a case-by-case basis to

determine whether the rate is a special regulatory subsidy or is

generally available to the public. We also note that the universal

service discount mechanism is not funding the difference between

generally available rates and special school rates, as suggested by

Bell Atlantic, but is applied to the price at which the service

provider agrees to provide the service to eligible schools and

libraries.

68. We disagree with USTA that earlier versions of tariffs that

have been modified by regulators should be excluded from the comparable

rates upon which the lowest corresponding price is determined. Unless a

regulatory agency has found that the tariffed rate should be changed,

and affirmatively ordered such change, or absent a showing that the

rate is not compensatory, we find no reason to conclude that former

tariffed rates do not represent a fair and reasonable basis for

establishing the lowest comparable rate.

69. We decline to adopt GTE's proposal to exclude all promotional

offerings from the comparable rates upon which a provider must

determine the lowest corresponding price. Instead, we conclude that

only promotions offered for a period not exceeding 90 days may be

excluded from the

[[Page 2105]]

comparable rates upon which the lowest corresponding price must be

determined. This conclusion is consistent with the decision of the U.S.

Court of Appeals for the 8th Circuit upholding the portion of the

Commission's interconnection decision finding that discounted and

promotional offerings are telecommunications services that are subject

to the resale requirement of section 251(c)(4), and that promotional

prices lasting more than 90 days qualify as retail rates subject to

wholesale discount. Excluding shorter term promotional rates from

consideration here balances the need to provide compensatory rates to

providers while ensuring that eligible schools and libraries receive

competitive, cost-based rates that are comparable to rates paid by

similarly situated non-residential customers for similar services.

Consistent with the Commission's rationale in the Implementation of

Section 254(g) Order, we agree that a 90-day period in which customers

may receive discounted rates as part of a promotion is sufficient time

for a targeted promotional offering to attract interest in new or

revised services, but not so long as to undermine the requirement that

the price offered to schools and libraries be no greater than the

lowest corresponding price the carrier has charged in the last three

years or is currently charging in the market.

70. As previously noted, providers and eligible schools and

libraries will have the opportunity to seek recourse from the

Commission, regarding interstate rates, and from state commissions,

regarding intrastate rates if they believe that the lowest

corresponding price is unreasonably low or unreasonably high. We

decline to adopt the suggestion of USTA that we impose limits on a

customer's ability to challenge the pre-discount price it has been

offered. We have no basis in this record for assuming that the

possibility of such abuse by schools and libraries is greater than the

potential for service providers to assert frivolously that the rates

are too low. We will monitor parties' use of the dispute process and,

if we find a pattern of frivolous challenges by schools, libraries, or

service providers, we will take steps to remedy any such abuse at that

time.

B. Reporting Requirements for Schools and Libraries

71. We conclude that the reporting requirements established in the

Order for eligible schools and libraries are not unreasonably

burdensome, and that they represent a reasonable means of ensuring that

schools and libraries are capable of utilizing the requested services

effectively. Section 254(h)(1)(B) provides for discounts on services

that are used for educational purposes and that are provided in

response to a bona fide request. In the Order, the Commission agreed

with the Joint Board that Congress intended to require accountability

on the part of schools and libraries and therefore, consistent with

section 254(h)(1)(B), required eligible schools and libraries to

conduct an internal assessment of the components necessary to use

effectively the discounted services they order. We note that the

application requirements established in the Order were recommended by

the Joint Board and supported by a majority of commenters on this

issue. We affirm our decision, because we find that it is in the public

interest to ensure that funds are distributed only to support eligible

services that serve the needs to the school or library requesting

support. We find that the mere submission of a bona fide request is not

an adequate substitute to ensure that these public interest goals are

met.

72. The Commission determined in the Order that it would not be

unduly burdensome to require eligible schools and libraries to conduct

a technology assessment, prepare a plan for using these technologies,

and receive independent approval of such plans. Moreover, the

Commission took steps to eliminate unnecessary burdens, and prevent the

need for duplicative review of technology plans. The Commission noted

that many states have already undertaken state technology initiatives

and that plans that have been approved for other purposes, e.g., for

participation in federal or state programs, such as ``Goals 2000,''

will be accepted without need for further independent approval. We also

note that the reporting requirements have been reviewed and approved by

the Office of Management and Budget (OMB) pursuant to the Paperwork

Reduction Act of 1995. Because we conclude that the reporting

requirements are not unduly burdensome, help ensure that funds are

allocated in a manner that serves the policy goals set forth in section

254(b)(6) and section 254(h), and do not violate section 254(h)(1)(B),

we deny Global's petition for reconsideration of those requirements.

73. We also deny Florida Department of Management Services' request

to apply, during the first year of the federal support mechanisms, for

universal service discounts using a form created by the state of

Florida. We find that requiring all applicants to use the same forms

serves several important purposes. First, the forms were designed to

ensure accountability, and protect against fraud and abuse. For

example, the forms require applicants to provide information designed

to ensure that each school or library receives the discount to which it

is entitled under the Commission's rules. The forms also are designed

to ensure that support is provided only with respect to eligible

entities, and only for services eligible for support, and that

applicants are otherwise in compliance with all applicable Commission

requirements. Second, the forms were designed to facilitate the use of

competitive bidding. In addition, the forms were designed to be

competitively neutral, so that no potential provider is precluded from

offering service to a school or library. Third, the use of a single set

of forms will substantially ease burdens of administering the support

mechanism, and thereby minimize the costs of administration. Moreover,

if funds are allocated pursuant to a single set of forms, it may be

easier to audit the administrative processes of the Schools and

Libraries Corporation. Fourth, the use of a single set of forms will

facilitate tracking of the schools and libraries support mechanism over

time. For example, it will make it easier to determine what types of

services schools and libraries need, and how those needs change over

time. Such information is useful for deciding what if any adjustments

should be made with respect to the schools and libraries mechanism.

Congress expressly provided for such adjustments.

74. We note that the Commission invited, and received, substantial

input on the application forms as they were developed. The Commission,

in conjunction with the Schools and Libraries Corporation, held a

public workshop, and draft application forms were posted on the

Commission's website. The application forms reflect comments and

suggestions from schools and library representatives, service

providers, the Department of Education and the Schools and Libraries

Corporation. We anticipate that, as parties begin to use the

application forms, they will discover ways to improve them, and we

encourage suggestions for modifying and improving the application

forms. For the reasons set forth above, however, we conclude that

requiring all applicants to use the same application forms will serve

the public interest. We find that it is particularly important, in the

first year of implementation, to take all reasonable steps to make sure

the

[[Page 2106]]

Schools and Libraries Corporation is able to administer the support

mechanism as efficiently and effectively as possible. We therefore deny

Florida Department of Management Services' request to use its own

application form.

C. Non-Public Schools and Libraries

75. It is our expectation that states will approve technology plans

in a reasonably timely manner. As noted above, however, the Schools and

Libraries Corporation has authority to review and certify the

technology plans of schools and libraries if the applicant provides

evidence that a state agency is unwilling or unable to do so in a

reasonably timely fashion. We here conclude that a school or library

may apply directly to the Schools and Libraries Corporation for

technology plan approval if the school or library is not required by

state or local law to obtain approval for technology plans and

telecommunications expenditures. The Schools and Libraries Corporation

has stated its intent to create a process for reviewing technology

plans of private schools and other eligible entities whose states are

unable to review their plans. The Schools and Libraries Corporation may

structure the review process in any manner it deems necessary to

complete review in a timely fashion, consistent with the purposes of

the review. We emphasize, however, that schools and libraries that are

subject to a state review process by state or local law may not

circumvent the state process by submitting plans directly to the

Schools and Libraries Corporation for review. Eligible schools and

libraries that are required by state or local law to obtain approval

for technology plans and telecommunications expenditures will be

allowed to submit technology plans to the Schools and Libraries

Corporation for review only when the state is unwilling or unable to

review such plans in a reasonably timely fashion. In addition, if a

technology plan is rejected at the state level, a school or library may

not then submit the plan to the Schools and Libraries Corporation in an

attempt to circumvent the state review process.

76. In addition, FCC Forms 470 and 471 will allow applicants to

indicate that their technology plans either have been approved or will

be approved by a state, Schools and Libraries Corporation, or by

another authorized body. This provision will allow schools and

libraries that are required to obtain technology plan approval from an

entity other than a state agency to submit both FCC Forms 470 and 471

without any delay due to a lack of technology plan approval. Schools

and libraries will not be able to receive actual discounts, however,

until their technology plans are approved.

77. Given the Schools and Libraries Corporation plan to institute

an approval process that ``will occur in sufficient time to meet the

needs of those schools that choose to apply under the 75 day window,''

we see no need to adopt the suggestion of the National Association of

Independent Schools that we waive the technology plan approval

requirement for all schools and libraries for the first six to twelve

months of the schools and libraries program in order to provide

sufficient time to develop alternative approval mechanisms. We

understand that the Schools and Libraries Corporation is moving forward

with due diligence to ensure that their technology plan review process

is put into place as quickly as possible. We reiterate that approval of

an applicant's technology plan will assist in ensuring that technology

plans are based on the reasonable needs and resources of the applicant

and are consistent with the goals of the program.

D. Option to Post Requests for Proposals on Websites

78. In light of the concerns expressed by the Working Group and

NECA, including significant costs and potential delays associated with

requiring the administrative companies to post RFPs on the school and

library and rural health care provider websites, we reconsider the

Commission's requirement that the administrative companies post on the

websites RFPs submitted by applicants. An RFP is a detailed request for

the services and facilities that an entity is interested in procuring.

RFPs may vary greatly in length, numbering over a hundred pages in some

cases, including diagrams and specifications of the procurement of

facilities. FCC Form 470, submitted by school and library applicants,

and FCC Form 465, submitted by eligible health care applicants, will

instruct applicants to describe the services they seek and to include

information sufficient to enable service providers to identify

potential customers. We conclude that this information is adequate to

serve the purposes underlying the website posting requirement by

allowing schools and libraries to take advantage of the competitive

marketplace. We conclude that any additional information contained in

an RFP that is not submitted for posting on the website under FCC Forms

470 and 465 can be made available to interested service providers at

the election of the school, library, or rural health care provider

applicant. We encourage eligible school, library, and rural health care

provider applicants to make RFPs available upon request to interested

service providers. We do not, however, require the Schools and

Libraries Corporation or the Rural Health Care Corporation to post RFPs

on the websites, but instead require the administrative companies to

post FCC Forms 470 and 465, respectively.

E. State Telecommunications Networks and Wide Area Network

79. We conclude that state telecommunications networks that procure

supported telecommunications and make them available to schools and

libraries constitute consortia that will be permitted to secure

discounts on such telecommunications on behalf of eligible schools and

libraries. We further conclude that, with respect to Internet access

and internal connections, state telecommunications networks may either

secure discounts on such telecommunications on behalf of schools and

libraries, or receive direct reimbursement from the universal service

support mechanisms, pursuant to section 254(h)(2)(A), for providing

such services. Finally, we conclude, on our own motion, that to the

extent schools and libraries build and purchase wide area networks to

provide telecommunications, such networks will not be eligible for

universal service discounts.

a. State Telecommunications Networks

1. Procuring Telecommunications

80. We conclude that state telecommunications networks that procure

supported telecommunications and make them available to eligible

schools and libraries constitute consortia that will be permitted to

secure discounts on such services on behalf of their eligible members.

We recognize the significant benefits that state telecommunications

networks provide to schools and libraries in terms of, among other

things, purchasing services in bulk and passing on volume discounts to

schools and libraries. In order for eligible schools and libraries to

receive discounts pursuant to the universal service support mechanisms

for schools and libraries and to continue to receive the benefits

currently provided by state telecommunications networks, such networks,

consistent with the universal service rules, may obtain discounts on

telecommunications from the universal service support mechanisms on

behalf of eligible schools and libraries and pass on such discounts to

the eligible entities. We emphasize that, with respect to

telecommunications, state

[[Page 2107]]

telecommunications networks only will be permitted to pass on discounts

for such services to eligible schools and libraries, but will not, as

discussed below, be able to receive direct reimbursement from the

universal service support mechanisms for providing such services. We

conclude that a state telecommunications network itself will not

qualify for discounts on telecommunications. Because it does not meet

the definition of an eligible school or library as set forth in the

Order, a state telecommunications network only may secure such

discounts on behalf of the schools and libraries it serves and pass

through the discounts to those schools and libraries. Because schools

and libraries will benefit from both the universal service discounts

and the ability of state telecommunications networks to aggregate

demand and secure prices based on volume discounts, the approach we

adopt here will be advantageous to eligible schools and libraries.

Furthermore, this approach will help maintain the integrity of the

universal service support mechanisms, because eligible schools and

libraries will be able to secure pre-discount prices for

telecommunications that are lower than the prices for such

telecommunications if they had not been purchased in bulk.

81. In order to receive and pass through discounts on supported

telecommunications for eligible schools and libraries, state

telecommunications networks must make a good faith effort to ensure

that each eligible school or library receives a proportionate share of

shared services. State telecommunications networks must take reasonable

steps to ensure that service providers apply appropriate discount

amounts on the portion of the supported telecommunications used by each

eligible school or library. The service providers will submit to the

state telecommunications network a bill that includes the appropriate

discounts on eligible telecommunications rendered to eligible entities.

The state telecommunications network then will direct the eligible

consortium members to pay the discounted prices. Eligible consortium

members may pay the discounted prices to their state telecommunications

network, which will then remit the discounted amount to the service

providers. Service providers will receive direct reimbursement from the

support mechanisms in an amount equal to the difference between the

pre-discount price of the eligible telecommunications and the

discounted amount. We emphasize that state telecommunications networks

purchasing services on behalf of schools and libraries are required to

comply with the applicable competitive bid requirements established in

the Order.

82. We note that, even where state telecommunications networks have

procured telecommunications on behalf of schools and libraries through

competitive bidding or are exempt from the competitive bid requirement,

it may be advantageous for schools and libraries themselves to seek

competitive bids on their requested services. In so doing, schools and

libraries may be better able to ensure that they obtain the best price

on the services that are most closely tailored to meet their needs. We

have attempted to design the universal mechanisms so that schools,

libraries, and rural health care providers utilize, and obtain the

advantages of, competition, to the fullest extent possible. The

competitive bidding process is a key component of the Commission's

effort to ensure that universal service funds support services that

satisfy the precise needs of an institution, and that the services are

provided at the lowest possible rates. We recognize that schools,

libraries, and health care providers may need to transition to the new

universal service mechanisms, and we have made reasonable accommodation

for eligible entities that have preexisting contracts for

telecommunications, internal connections, or access to the Internet. We

intend to continue to monitor our decision to exempt certain

preexisting contracts from the competitive bidding requirement, to

ensure that the exemption does not reduce the benefits that competitive

bidding will provide. We thus encourage schools and libraries to seek

competitive bids on their requests for services in order to obtain the

best price for the desired services. We note that schools and libraries

have an incentive to obtain the best price for services, because such

schools and libraries will be responsible for paying a portion of the

cost. We also note that, after seeking competitive bids, schools and

libraries may nevertheless decide to obtain telecommunications that are

procured by a state telecommunications network.

83. Because it appears that state telecommunications networks

generally make telecommunications available to both eligible and

ineligible entities, we emphasize that, pursuant to section 254(h)(4),

such networks may obtain and pass through universal service discounts

only with respect to schools and libraries that are eligible to receive

such discounts. In order to protect the integrity of the schools and

libraries program, we direct state telecommunications networks to

develop and retain records listing eligible schools and libraries and

showing the basis on which the eligibility determinations were made.

Such networks also must keep careful records demonstrating the discount

amount to which each eligible entity is entitled and the basis on which

such a determination was made. Additionally, consistent with the Order,

service providers must develop and retain detailed records showing how

they have allocated the costs of facilities shared by eligible and

ineligible entities in order to charge such entities the correct

amounts.

84. We disagree with parties that argue that state

telecommunications networks should be able to receive direct

reimbursement from the support mechanisms for providing schools and

libraries with services other than access to the Internet and internal

connections. Because they do not meet the definition of

``telecommunications carrier,'' state telecommunications networks are

not eligible to receive direct reimbursement from the support

mechanisms pursuant to section 254(h)(1)(B). Section 254(h)(1)(B)

provides that only telecommunications carriers may receive support for

providing schools and libraries with the telecommunications supported

under section 254(h)(1)(B). Based on the record before us, we agree

with USTA that, because they do not offer telecommunications ``for a

fee directly to the public, or to such classes of users as to be

directly available to the public,'' state telecommunications networks

do not meet the definition of ``telecommunications carrier.'' As the

Commission determined in the Order, the definition of

``telecommunications service'' is intended to encompass only

telecommunications provided on a common carrier basis. The Commission

further noted that ``* * * precedent holds that a carrier may be a

common carrier if it holds itself out `to service indifferently all

potential users' '' and that ``a carrier will not be a common carrier

`where its practice is to make individualized decisions in particular

cases whether and on what terms to serve.' ''

85. We are not persuaded by the record before us that state

telecommunications networks offer service ``indifferently [to] all

potential users.'' Rather, the evidence indicates that state

telecommunications networks offer services to specified classes of

entities. Because the record does not contain any credible evidence

that a

[[Page 2108]]

state telecommunications network offers or plans to offer service

indifferently to any requesting party, we find that state

telecommunications networks do not offer service ``directly to the

public or to such classes of users as to be directly available to the

public'' and thus will not be eligible for reimbursement from the

support mechanisms pursuant to section 254(h)(1). We further find that

prohibiting state telecommunications networks from receiving direct

reimbursement from the support mechanisms pursuant to section 254(h)(1)

is consistent with the Commission's determination in the Order that

consortia of schools and libraries may receive discounts on eligible

services, but that such consortia will not be permitted to receive

direct reimbursement from the support mechanisms.

86. We recognize that it may be more administratively burdensome

for state telecommunications networks to obtain and pass through

discounts on behalf of schools and libraries, rather than to receive

direct reimbursement from the support mechanisms for procuring

telecommunications and making such telecommunications available to

schools and libraries. As discussed above, however, state

telecommunications networks do not meet the definition of

``telecommunications carrier'' and thus will not be permitted to

receive direct reimbursement for the provision of telecommunications.

Additionally, parties have not suggested any reason why state

telecommunications networks should be treated differently from other

consortia and thus be allowed to receive support directly from the

universal service support mechanisms for providing telecommunications

other than Internet access and internal connections. Furthermore, even

if they were able to receive direct reimbursement from the support

mechanisms for providing telecommunications, state telecommunications

networks would still need to determine which entities are eligible for

discounts and the discount rate to which each eligible entity is

entitled. Therefore, any additional administrative burden created by

requiring state telecommunications networks to pass through the

discount amounts, rather than allowing them to receive direct

reimbursement from the support mechanisms, may not be as significant as

some parties suggest.

2. Internet Access and Internal Connections

87. With respect to Internet access and internal connections, we

conclude that state telecommunications networks may either secure

discounts on the purchase of such telecommunications purchased from

other providers on behalf of schools and libraries in the manner

discussed above with regard to telecommunications, or receive direct

reimbursement from the support mechanisms for providing Internet access

and internal connections to schools and libraries, pursuant to section

254(h)(2)(A). As the Commission concluded in the Order, section

254(h)(2)(A), in conjunction with section 4(i), authorizes the

Commission to permit discounts and funding mechanisms to enhance access

to advanced services provided by non-telecommunications carriers. On

this basis, the Commission stated that it would permit discounts for

Internet access and internal connections provided by non-

telecommunications carriers. Thus, although we conclude that state

telecommunications networks do not constitute telecommunications

carriers that are eligible for reimbursement for making available

telecommunications pursuant to section 254(h)(1)(B), we do find that

networks that make Internet access and internal connections available

to schools and libraries are eligible, under the Order and section

54.517 of our rules, as non-telecommunications carriers for direct

reimbursement from the support mechanisms for providing these services.

88. NASTD suggests that the Commission's statement in the Order

that it was ``constrained only by the concepts of competitive

neutrality, technical feasibility, and economic reasonableness'' in

implementing section 254(h)(2)(A) means that state telecommunications

networks should be eligible for reimbursement from the support

mechanisms for providing ``bundled service packages'' that include

telecommunications and access to the Internet and internal connections.

As explained above, however, the Act defines ``telecommunications

carrier'' as any provider of ``telecommunications service'' and does

not equate ``telecommunications'' (the term used in section

254(h)(2)(A)) with ``telecommunications service.'' Therefore, because

state telecommunications networks do not provide ``telecommunications

service,'' they do not meet the definition of ``telecommunications

carrier'' and will not be permitted to receive direct reimbursement for

the provision of services other than Internet access and internal

connections. To the extent that they make available Internet access and

internal connections, state telecommunications networks are non-

telecommunications carriers. As non-telecommunications carriers, they

are eligible, as we determined in the Order, pursuant to section

254(h)(2)(A), for direct reimbursement from the support mechanisms when

they make available to eligible entities Internet access and internal

connections.

89. Finally, we emphasize that, consistent with the Order, eligible

schools and libraries will be required to seek competitive bids for all

services eligible for section 254(h) discounts, including those

services that state telecommunications networks provide using their own

facilities. Thus, schools and libraries in Iowa may not obtain support

from the universal service support mechanisms if they select ICN as

their provider of access to the Internet and internal connections

without first seeking competitive bids. Schools and libraries are not

required to select the lowest bids offered, although the Commission

stated that price should be the ``primary factor.'' If eligible schools

and libraries in Iowa choose ICN as their provider of access to the

Internet and internal connections, we conclude that ICN may receive

reimbursement from the support mechanisms for providing such services.

b. Wide Area Networks

On our own motion, we further conclude that, to the extent that

states, schools, or libraries build and purchase wide area networks to

provide telecommunications, the cost of purchasing such networks will

not be eligible for universal service discounts. We reach this

conclusion because, from a legal perspective, wide area networks

purchased by schools and libraries and designed to provide

telecommunications do not meet the definition of services eligible for

support under the universal service discount program. First, the

building and purchasing of a wide area network is not a

telecommunications service because the building and purchasing of

equipment and facilities do not meet the statutory definition of

``telecommunications.'' Moreover, as the Commission determined in the

Order, the definition of ``telecommunications service'' is intended to

encompass only telecommunications provided on a common carrier basis.

Second, wide area networks are not internal connections because they do

not provide connections within a school or library. We herein establish

a rebuttable presumption that a connection does not constitute an

internal connection if it crosses a public right-of-way. Third, wide

area networks built and purchased

[[Page 2109]]

by schools and libraries do not appear to fall within the narrow

provision that allows support for access to the Internet because wide

area networks provide broad-based telecommunications. For these

reasons, therefore, we conclude that the purchase of wide area networks

to provide telecommunications services will not be eligible for

universal service discounts.

F. State Support

91. We conclude that, for services provided to eligible schools and

libraries, federal universal service discounts should be based on the

price of the service to regular commercial customers or, if lower than

the price of the service to regular commercial customers, the

competitively bid price offered by the service provider to the school

or library that is purchasing eligible services, prior to the

application of any state-provided support for schools or libraries. To

find otherwise would penalize states that have implemented support

programs for schools and libraries by reducing the level of federal

support that those schools and libraries would receive. We anticipate

that our conclusion will encourage states to implement or expand their

own universal service support programs for schools and libraries.

92. Our determination to calculate discounts on the price of a

service to eligible schools and libraries prior to the reduction of any

state support will not require an adjustment in the $2.25 billion in

annual support that the Commission estimated was necessary to fulfill

the statutory obligation to create sufficient universal service support

mechanisms for schools and libraries. In estimating the level of

universal service support needed to serve schools and libraries, the

Commission purposefully did not take into consideration state universal

service support to schools and libraries. Thus, our determination to

calculate federal universal service support levels on the price of

service to schools and libraries prior to the application of any state-

provided support should not threaten the sufficiency of the federal

support mechanisms for schools and libraries.

93. Finally, we do not agree with USTA that allowing federal

support levels to be based upon the price of service to schools and

libraries prior to the application of any state-provided support for

schools or libraries will force all telecommunications carriers to

subsidize state-wide networks. Pursuant to section 254(h), universal

service support for schools, libraries, and rural health care providers

can be provided only to designated educational and health care

providers. Moreover, USTA has not explained why applying the federal

discount rate before applying any state discounts would reduce the

overall amount that a carrier will receive for providing a supported

service.

G. Aggregate Discount Rates

94. Our current rules require consortia to calculate the discount

level by using a weighted average that is based on the share of the

pre-discount price for which each school or library agrees to be

``financially liable.'' Our rules also provide that each ``eligible

school, school district, library, or library consortium will be

credited with the discount to which it is entitled.'' We hereby adopt a

modified version of the Working Group's proposal regarding the

application of discounts for schools and libraries that apply through

consortia, including school districts, rather than on an individual

basis. Because the discount is determined based on the weighted average

of the amount for which each individual school or library agrees to be

financially liable, we conclude that the amount of support likewise

should be determined, where possible, on the discount rate to which

each individual school or library is entitled. In other words, both the

discount rate and the provision of support should be determined for

each individual school or library if it is not unreasonably burdensome

to do so. We therefore agree with the Working Group that, for services

that will be used only by an individual institution, the applicable

discount rate for the services should be determined based on the

applicable discount rate for the individual school or library, not the

consortium. Thus, for example, if a school applies for support as part

of a consortium, but seeks support for internal connections that it

alone will use, the amount of support for that internal connection

should be calculated based on the specific discount rate applicable for

that school. We find that this decision is consistent with our earlier

decision that the level of support should be based on the economic

level and geographic location of the institution seeking support.

95. We recognize, however, that we must balance the desire for

equitable distribution of support against the need to keep the

application process as simple and efficient as possible. Thus, while we

require the state, school district, or library system to ``strive to

ensure'' that each school and library in a consortium receives the full

benefit of the discount on shared services to which it is entitled, we

will not require school districts or library systems to compute their

discount rate for shared services based on estimates of the actual

usage that each of their schools or library branches will make and the

respective discounts that these individual units are entitled to

receive. Shared services are those that cannot, without substantial

difficulty, be identified with particular users or be allocated

directly to particular entities. We conclude that the administrative

burden of such a requirement would not be justified by the benefit in

light of existing rules in this area. We recognize that states already

prohibit unreasonable discrimination against disadvantaged schools in

the state, and that the courts have upheld such rules of equity, even

against the state itself. Although we do not mandate consortia to adopt

a particular methodology for distributing shared services, we seek to

ensure that economically disadvantaged institutions receive the

discounts to which they are entitled. Accordingly, we require that

consortia certify that each individual institution listed as a member

of a consortium and included in determining the discount rate will

receive a proportionate share of the shared services within each year

in which the institution is used to calculate the aggregate discount

rate. Consortia may, for example, satisfy this obligation by keeping

track of the usage level of shared services with respect to each

institution that was included in calculating the discount rate, or they

may adopt other methods to ensure that each institution receives a

proportionate share of shared services. This requirement is appropriate

because the discount rate for calculating support for shared services

will be based on all entities listed in the request for services. By

the same token, this requirement is not unduly burdensome because it

does not require applicants to develop complex weighting methodologies

or to calculate different discount rates for different entities that

use shared services. Our determination that the state or district must

``strive to ensure'' that each school or library receives the full

benefit of the discount to which it is entitled will help ensure that

this goal is met. Moreover, the Schools and Libraries Corporation,

pursuant to its obligation to review and approve schools' and

libraries' applications and service providers' bills, is developing

cost allocation procedures to further ensure that schools and libraries

receive the discounts to which they are entitled.

96. Finally, we agree with the Working Group that an applicant that

is

[[Page 2110]]

comprised of multiple eligible schools and libraries must keep adequate

records showing how the distribution of funds was made, and the basis

for distribution. Our rules currently require such records.

H. Limiting Internal Connections to Instructional Buildings

97. We take this opportunity to make clear, on our own motion, that

the Order limits support for internal connections to those essential to

providing connections within instructional buildings. Thus, discounts

are not available for internal connections in non-instructional

buildings of a school district or administrative buildings of a library

unless those internal connections are essential for the effective

transport of information to an instructional building or library.

Hence, discounts would be available for routers and hubs in a school

district office if individual schools in the school district were

connected to the Internet through the district office. The Order stated

that ``a given service is eligible for support as a component of the

institution's internal connections only if it is necessary to transport

information all the way to individual classrooms.'' This focus on

access to classrooms followed from the Commission's conclusion that

``Congress intended that telecommunications and other services be

provided directly to classrooms.'' The Commission reached this

conclusion based on its analysis of the statute (where classrooms are

explicitly mentioned) and of the legislative history (where Congress

explicitly refers repeatedly to classrooms). Similarly, to the extent

that a library system has separate administrative buildings, support is

not available for internal connections in those buildings. Sections

254(h)(1)(B) and (h)(2) provide for universal service support for

``libraries.'' Imposing this restriction on support to non-

administrative library facilities is consistent with the approach to

support for internal connections to instructional school buildings

discussed above.

98. Consistent with this clarification, we modify our rules to

reflect that support is not available for internal connections in non-

instructional buildings used by a school district unless those internal

connections are essential for the effective transport of information

within instructional buildings or buildings used by a library for

strictly administrative functions.

Thus, discounts would be available for the internal connections

installed in a school district office if that office were used as the

hub of a local area network (LAN) and all schools in the district

connect to the Internet through the internal connections in that

office. We further hold that ``internal connections'' include

connections between or among multiple instructional buildings that

comprise a single school campus or multiple non-administrative

buildings that comprise a single library branch, but do not include

connections that extend beyond that single school campus or library

branch. Thus, for example, connections between two instructional

buildings on a single school campus would constitute internal

connections eligible for universal service support, whereas connections

between instructional buildings located on different campuses would not

constitute internal connections eligible for such support.

I. Existing Contracts

99. We reconsider our earlier finding that contracts signed on or

after November 8, 1996 are not eligible for universal service support

after December 31, 1998. We conclude that a contract of any duration

signed on or before July 10, 1997 will be considered an existing

contract under our rules and therefore exempt from the competitive bid

requirement for the life of the contract. Discounts will be provided

for eligible services that are the subject of such contracts on a

going-forward basis beginning on the first date that schools and

libraries are eligible for discounts. We further conclude that

contracts signed after July 10, 1997 and before the date on which the

Schools and Libraries Corporation website is fully operational will be

eligible for support and exempt from the competitive bid requirement

for services provided through December 31, 1998. Contracts that are

signed after July 10, 1997 are only eligible for support for services

received between January 1 and December 31, 1998, regardless of the

term or duration of the contract as a whole. In reconsidering our prior

determination, we seek to avoid penalizing schools and libraries that

were reasonably uncertain of their rights pursuant to the Order and to

allow greater flexibility for schools and libraries to obtain the

benefits of longer-term contracts, including potentially lower prices.

The Order permitted schools and libraries to apply the relevant

discounts to only those ``contracts that they negotiated prior to the

Joint Board's Recommended Decision [November 8, 1996] for services that

will be delivered and used after the effective date of our rules.'' We

agree with commenters, however, that section 54.511(c) did not make

clear that only contracts that were entered into prior to the date of

the Joint Board's Recommended Decision would be eligible for discounts.

The July 10 Order, by contrast, clearly established that discounts

would be provided only for those contracts that either complied with

the competitive bid requirement or qualified as ``existing'' contracts

under our rules.

100. We also clarify on our own motion that, if parties take

service under or pursuant to a master contract, the date of execution

of that master contract represents the applicable date for purposes of

determining whether and to what extent the contract is exempt from the

competitive bid requirement. For example, if a state signed a master

contract for service prior to July 10, 1997, such contract would

qualify as an existing contract. If an eligible school subsequently

elects to obtain services pursuant to that contract, that school will

be exempt from the competitive bid requirement because it is receiving

service pursuant to an existing contract. This clarification is

consistent with our rules regarding competitive bidding for master

contracts set forth in section VI.J, infra. Nevertheless, as discussed

in sections VI.E. and VI.J. herein, we believe that schools and

libraries may benefit from soliciting competitive bid even in cases

where they are exempt from such competitive bidding requirements.

101. We further conclude that we should extend our rules regarding

support for existing contracts to eligible rural health care providers.

Members of the health care community have expressed concern that they

will face the same difficulties as those faced by members of the school

and library communities, including negotiating lower prices through

longer term contracts and avoiding penalties in terminating existing

contracts. For generally the same reasons noted above regarding schools

and libraries, we also conclude that an eligible health care provider

that entered into a contract prior to the date on which the websites

are operational would be unfairly penalized by requiring that provider

to comply with the competitive bid requirement. We thus extend the same

treatment with regard to existing contracts to eligible rural health

care providers as we have extended to eligible schools and libraries.

An eligible rural health care provider will not be required to comply

with the competitive bid requirement for any contract for eligible

telecommunications services that it signed on or before July 10, 1997,

regardless of the duration of the agreement. In addition, such

providers will be eligible to receive reduced rates for services

provided

[[Page 2111]]

through December 31, 1998 for any contract for telecommunications

services signed after July 10, 1997 and before the website is

operational. Although the July 10 Order addressed the issue of existing

contracts for only schools and libraries, we believe that establishing

July 10, 1997 as the date relevant to our existing contracts rule for

rural health care providers is reasonable. We note that this

determination is consistent with the request of rural health care

providers to be treated in the same manner as schools and libraries. In

addition, we anticipate that adopting the same existing contract rules

for schools, libraries, and rural health care providers should be

administratively simpler and reduce potential confusion on the part of

program participants and providers regarding the existing contracts

eligible for universal service support. We note that no existing

contract exception from the competitive bid requirement previously had

been adopted for rural health care providers and that this modification

will serve to benefit rural health care providers.

102. We reject the suggestion of EdLiNC that we eliminate any

limitation on the duration of discounts for contracts executed before

the website for schools and libraries is fully operational. Although we

agree with EdLiNC that schools and libraries have a strong incentive to

negotiate contracts at the lowest possible pre-discount price in an

effort to reduce their costs, we affirm our initial finding that

competitive bidding is the most efficient means for ensuring that

eligible schools and libraries are informed about the choices available

to them and receive the lowest prices. Allowing eligible schools,

libraries, and rural health care providers to receive discounts

indefinitely on contracts entered into after July 10, 1997 without

requiring participation in the competitive bid process would hinder the

competitive provision of services for the reasons discussed above.

103. Schools, libraries, and rural health care providers that

qualify for the ``existing contract'' exemption from the competitive

bid process described herein will continue to be required to file

applications each year with the Schools and Libraries Corporation and

Rural Health Care Corporation, respectively, in order to receive

universal service discounts. We note that approval of discounts in one

year should not be construed as a guarantee of future coverage or

assurance that the same level of support will be available in

subsequent years. We will continue to monitor the existing contract

rule and will make further modifications if necessary.

J. Competitive Bid Requirements for Schools, Libraries, and Rural

Health Care Providers

1. Minor Modifications to Contracts

104. We agree with USTA that requiring a competitive bid for every

minor contract modification would place an undue burden upon eligible

schools, libraries, and rural health care providers. Such eligible

entities should not be required to undergo an additional competitive

bid process for minor modifications such as adding a few additional

lines to an existing contract. We, therefore, conclude that an eligible

school, library, or rural health care provider will be entitled to make

minor modifications to a contract that the Schools and Libraries

Corporation or the Rural Health Care Corporation previously approved

for funding without completing an additional competitive bid process.

We note that any service provided pursuant to a minor contract

modification also must be an eligible supported service as defined in

the Order to receive support or discounts.

105. In the Order, the Commission explained that the universal

service competitive bid process is not intended to be a substitute for

state, local, or other procurement processes. Consistent with this

observation, we conclude that eligible schools, libraries, and rural

health care providers should look to state or local procurement laws to

determine whether a proposed contract modification would be considered

minor and therefore exempt from state or local competitive bid

processes. If a proposed modification would be exempt from state or

local competitive bid requirements, the applicant likewise would not be

required to undertake an additional competitive bid process in

connection with the applicant's request for discounted services under

the federal universal service support mechanisms. Similarly, if a

proposed modification would have to be rebid under state or local

competitive bid requirements, then the applicant also would be required

to comply with the Commission's universal service competitive bid

requirements before entering into an agreement adopting the

modification.

106. Where state and local procurement laws are silent or are

otherwise inapplicable with respect to whether a proposed contract

modification must be rebid under state or local competitive bid

processes, we adopt the ``cardinal change'' doctrine as the standard

for determining whether the contract modification requires rebidding.

The cardinal change doctrine has been used by the Comptroller General

and the Federal Circuit in construing the Competition in Contracting

Act (CICA) as implemented by the Federal Acquisition Regulations. The

CICA requires executive agencies procuring property or services to

``obtain full and open competition through the use of competitive

procedures.''

107. Because CICA does not contain a standard for determining

whether a modification falls within the scope of the original contract,

the Federal Circuit has drawn an analogy to the cardinal change

doctrine. The cardinal change doctrine is used in connection with

contractors' claims that the Government has breached its contracts by

ordering changes that were outside the scope of the changes clause. The

cardinal change doctrine looks at whether the modified work is

essentially the same as that for which the parties contracted. In

determining whether the modified work is essentially the same as that

called for under the original contract, factors considered are the

extent of any changes in the type of work, performance period, and cost

terms as a result of the modification. Ordinarily a modification falls

within the scope of the original contract if potential offerors

reasonably could have anticipated it under the changes clause of the

contract.

108. The cardinal change doctrine recognizes that a modification

that exceeds the scope of the original contract harms disappointed

bidders because it prevents those bidders from competing for what is

essentially a new contract. Because we believe this standard reasonably

applies to contracts for supported services arrived at via competitive

bidding, we adopt the cardinal change doctrine as the test for

determining whether a proposed modification will require rebidding of

the contract, absent direction on this question from state or local

procurement rules. If a proposed modification is not a cardinal change,

there is no requirement to undertake the competitive bid process again.

109. An eligible school, library, or rural health care provider

seeking to modify a contract without undertaking a competitive bid

process should file FCC Form 471 or 466, ``Services Ordered and

Certification,'' with the School and Libraries Corporation or the Rural

Health Care Corporation, respectively, indicating the value of the

proposed contract modification so that the administrative companies can

track contract performance. The school,

[[Page 2112]]

library, or rural health care provider also must demonstrate on FCC

Form 471 or 466 that the modification is within the original contract's

change clause or is otherwise a minor modification that is exempt from

the competitive bid process. The school, library, or rural health care

provider's justification for exemption from the competitive bid process

will be subject to audit and will be used by the Schools and Libraries

Corporation and Rural Health Care Corporation to determine whether the

applicant's request is, in fact, a minor contract modification that is

exempt from the competitive bid process. We emphasize that, even though

minor modifications will be exempt from the competitive bidding

requirement, parties are not guaranteed support with respect to such

modified services. A commitment of funds pursuant to an initial FCC

Form 471 or Form 466 does not ensure that additional funds will be

available to support the modified services. We conclude that this

approach is reasonable and is consistent with our effort to adopt the

least burdensome application process possible while maintaining the

ability of the administrative companies and the Commission to perform

appropriate oversight.

2. Master Contracts

110. We find that eligible schools, libraries, and rural health

care providers seeking discounted services or reduced rates should be

allowed to purchase services from a master contract negotiated by a

third party. In the Order, the Commission found that the competitive

bid requirement would minimize the universal service support required

by ensuring that schools, libraries, and rural health care providers

are aware of cost-effective alternatives. The Commission concluded

that, like the language of section 254(h)(1) that targets support to

public and nonprofit rural health care providers, this approach

``ensures that the universal service fund is used wisely and

efficiently.'' Insofar as an independent third party negotiating a

master contract may be able to secure lower rates than an eligible

entity negotiating on its own behalf, we conclude that allowing

schools, libraries, and rural health care providers to order eligible

telecommunications services from a master contract negotiated by a

third party is consistent with our goal of minimizing universal service

costs and therefore is also consistent with section 254(h)(1).

111. We wish to emphasize, however, that for eligible schools and

libraries to receive discounted services, and for rural health care

providers to receive reduced rates, the third party initiating a master

contract either must have complied with the competitive bid requirement

or qualify for the existing contract exemption before entering into a

master contract. An eligible school, library, or rural health care

provider shall not be required to satisfy the competitive bid

requirement if the eligible entity takes service from a master contract

that has been competitively bid under the Commission's competitive bid

requirement. If a third party has negotiated a master contract without

complying with the competitive bid requirement, then an eligible entity

must comply with the competitive bid requirement before it may receive

discounts or reduced rates for services purchased from that master

contract.

112. As noted above, the date of execution of a master contract

represents the applicable date for purposes of determining whether and

to what extent the contract is exempt from the competitive bid

requirement under the existing contract exemption. For example, if a

state signed a master contract for service prior to July 10, 1997 that

qualifies as an existing contract under our rules, and a school elects

to take service pursuant to that contract at a date after the website

is operational, that school will be exempt from the competitive bid

requirement because it is receiving service pursuant to an existing

contract. As we stated above, we strongly encourage schools and

libraries to engage in competitive bidding even if they are exempt from

such requirement pursuant to Commission rules. Schools and libraries

may well be able to obtain more favorable terms if they issue new

requests for bids designed to accommodate their specific needs, rather

than obtain service under the terms of the master contract. For

instance, a master contract that was put out for bid several years ago

but has not yet expired might not reflect the cost reductions resulting

from recent entry into the local exchange market, for example, by

wireless carriers. Although we have provided for certain exemptions

from competitive bidding requirements, to enable schools and libraries

to transition to the Commission's procedures implementing the new

universal service mechanisms, we believe that even institutions subject

to the exemptions may obtain substantial benefit from soliciting

competitive bids. Moreover, those institutions may ultimately obtain

service pursuant to the master contract, if they determine that the

master contract is the most cost effective provider. We intend to

monitor the impact of the competitive bid exemptions on an ongoing

basis.

113. Furthermore, even if eligible schools, libraries, and health

care providers are obligated by the school district or a consortium,

for example, to purchase from a master contract, the third party

nevertheless must have complied with the competitive bid process in

order for an eligible entity to receive discounts or reduced rates on

services ordered from the master contract. If the third party has not

complied with the competitive bid requirement before entering into a

master contract, then an eligible school, library, or rural health care

provider itself must undertake the competitive bid process before it

may receive discounts or reduced rates on services purchased from the

master contract. These requirements will ensure that the eligible

entity is receiving the most cost-effective service.

K. Reimbursement for Telecommunications Carriers

114. We do not anticipate that the cost of funding eligible

services will exceed the cap on universal service funding for schools,

libraries, and rural health care providers. An applicant's ``place in

line,'' or seniority for the purposes of allocating funding will be

determined by the date on which an applicant submits FCC Form 471 or

466 to the applicable administrative corporation. Because eligible

entities will enter into contracts with service providers prior to the

submission of requests for commitment of funds (FCC Form 466 or 471,

``Services Ordered and Certification''), such a request could be denied

in the unlikely event that funds prove to be insufficient. In light of

this possibility, and because charges incurred for eligible

telecommunications services remain the responsibility of the eligible

entity, we agree with USTA and again urge schools, libraries, and rural

health care providers to include clauses in their contracts that make

implementation of the agreements contingent on the commitment of

universal service funding.

115. USTA asks for clarification regarding the types of charges

associated with the purchase or termination of an eligible

telecommunications service that will be covered by the federal support

mechanisms. We conclude that the universal service support mechanisms

will cover all reasonable charges, including federal and state taxes,

that are incurred by obtaining an eligible

[[Page 2113]]

telecommunications service. Charges for termination liability, penalty

surcharges, and other charges not included in the cost of obtaining the

eligible service will not be covered by the universal service support

mechanisms. We do not include among the costs supported by the support

mechanisms charges associated with terminating a service because we

conclude that such charges are avoidable. The imposition of such

charges typically results from a party's failure to discharge its duty

of performance under a contract and supporting such charges does not

advance program goals.

L. Universal Service Support for Intrastate Telecommunications Services

Provided to Rural Health Care Providers

116. The Commission clarifies that the federal universal service

support mechanisms will support reduced rates on intrastate services

provided to eligible rural health care providers. As set forth in

section 54.601(c)(1) of the Commission's rules, any telecommunications

service of a bandwidth up to and including 1.544 Mbps that is the

subject of a properly completed bona fide request by an eligible health

care provider is eligible for universal service support, subject to

distance limitations. These eligible telecommunications services may be

intrastate or interstate in nature. In addition, limited toll free

access to an Internet service provider is eligible for universal

service support under section 54.621 of the Commission's rules for

health care providers that are unable to obtain such access.

M. Support for Services Beyond the Maximum Supported Distance for Rural

Health Care Providers

117. Although the Commission limited universal service support to

an amount that would cover an eligible telecommunications service

provided over a maximum allowable distance, nothing in the Order

precludes a health care provider from purchasing an eligible

telecommunications service carried over a distance that exceeds this

limitation. We clarify that we do not intend to restrict a rural health

care provider from purchasing an eligible telecommunications service

that is provided over a distance that is longer than the maximum

supported distance, that is, from the health care provider to the

farthest point on the boundary of the nearest large city. Rural health

care providers, however, must pay the applicable price for the distance

that such service is carried beyond the maximum supported distance.

This approach is consistent with Congress's intent to make rural and

urban rates comparable while affording the eligible rural health care

provider that chooses to connect to a city that is farther than the

nearest large city in that state the flexibility to make such a

decision without jeopardizing the provider's entitlement to receive a

discount on services carried within the maximum supported distance.

N. Establishing the Standard Urban Distance and Maximum Supported

Distance for Rural Health Care Providers

118. We amend section 54.605(d) of our rules to provide that the

Rural Health Care Corporation will be responsible for calculating the

standard urban distance (and, by definition, the maximum supported

distance) applicable to eligible rural health care providers. Section

54.605(d) of the Commission's rules currently requires the

``Administrator'' to establish the standard urban distance.

Specifically, the NECA Report and Order assigned to USAC and to the

entity ultimately selected to serve as the permanent Administrator,

responsibility for performing the billing, collection and disbursement

functions associated with all of the universal service support

mechanisms, including the support mechanisms for rural health care

providers. The NECA Report and Order assigned to the Rural Health Care

Corporation the remaining administrative functions associated with

administering the rural health care program. Consistent with this

division of administrative responsibilities set forth in the NECA

Report and Order, we conclude that the Rural Health Care Corporation

rather than USAC or the permanent Administrator should perform the

calculations necessary to establish the standard urban distance

pursuant to section 54.605(d).

119. We also grant USTA's request that the calculation of the

standard urban distance for each state be posted on a website.

Accordingly, we direct the Rural Health Care Corporation to post such

information to the Rural Health Care Corporation's website.

VII. Administration of Support Mechanisms

120. Universal service contribution requirements pursuant to

section 254 of the Act will take effect on January 1, 1998. In the

Order, the Commission found that requiring a broad range of providers

to contribute to universal service was consistent with the statute.

Numerous parties have asked us to reconsider, prior to January 1, 1998,

our decisions requiring certain providers to contribute to universal

service pursuant to section 254. We herein reconsider those decisions.

We note, however, that we will conduct a thorough reevaluation of who

is required to contribute to universal service, pursuant to Congress'

direction to issue a report on this issue by April 10, 1998. That

report to Congress may serve as the basis for subsequent Commission

action on this issue.

A. Paging Carriers

121. We affirm our conclusion in the Order that all

telecommunications carriers, including paging carriers, are required by

section 254(d) to contribute to universal service. Petitioners offer no

compelling arguments to alter the Commission's earlier decision. We

find that universal service contributions do not constitute a tax. As

noted in the Order, the U.S. Court of Appeals for the D.C. Circuit has

held that ``a regulation is a tax only when its primary purpose judged

in legal context is raising revenue.'' The fact that section 254

permits discounts to be provided to schools and libraries for certain

services provided by non-telecommunications carriers also does not

convert universal service contributions into a revenue-raising ``tax''

because the primary purpose of the contributions is not to raise

general revenues. Rather, the primary purpose of the universal service

contribution requirements is the preservation and advancement of

universal service in furtherance of the principles set forth in section

254(b). Universal service contributions are not commingled with

government revenues raised through taxes. Furthermore, contrary to

ProNet's assertions, requiring contributions to universal service

confers a benefit on paging carriers because such contributions help

preserve the universal availability of service over the public switched

telephone network. Without the public switched telephone network,

subscribers of paging carriers would not be able to receive pages,

retrieve pages, or respond to messages. We find that the benefits of

universal service accrue to all paging carriers, regardless of whether

they serve high-income or low-income customers.

122. Section 254(d) requires ``[e]very telecommunications carrier''

to contribute to universal service. It does not limit contributions to

carriers eligible for universal service support. In fact, as RTC notes,

IXCs, payphone service providers, private service providers, and CMRS

providers are required to contribute to universal service, even though

they might not

[[Page 2114]]

receive support from the high cost mechanisms. The petitioning paging

companies have not advanced any credible evidence that would justify

exempting them from the Congressional requirement that we create a

broad base of support for universal service programs. The fact that the

Commission may treat paging carriers differently than other CMRS

providers in the context of regulatory fees is not relevant to the

treatment of paging carriers under section 254(d).

123. Although some two-way carriers that compete with paging

carriers may be eligible to receive universal service support, such

telecommunications carriers will receive support only for those

services included within the core definition of universal service

(e.g., voice-grade access, single-party service, and access to

emergency services). Eligible telecommunications carriers that provide

paging services will not receive support for their paging services.

Thus, eligible telecommunications carriers that provide paging services

will not have an unfair advantage over paging carriers.

124. As we found in the Order, basing contributions from all

telecommunications carriers on their gross end-user telecommunications

revenues best satisfies our goals of competitive neutrality and ease of

administration, as well as the statutory requirement that support be

explicit. Payments received from the universal service support

mechanisms are not counted as end-user telecommunications revenues in

the assessment base, because such funds are derived from the federal

support mechanisms, not end users of telecommunications. Furthermore,

high-cost support does not ``offset'' eligible telecommunications

carriers' contributions. Support is provided to offset in part the cost

of serving high cost areas. Moreover, it would be counter-productive to

universal service goals to require carriers eligible for support to

make a contribution based on support amounts. That approach would

increase the level of contributions needed to provide adequate support

to carriers that serve high cost areas.

125. It is well established that access to the interstate

interexchange network is an interstate service that brings paging

carriers within the coverage of section 254(c). An interstate

telecommunication is defined as a communication or transmission that

originates in one state and terminates in another. A page that

originates in one state and terminates in another meets the statutory

definition of ``interstate telecommunication.'' Therefore, even if a

paging carrier's service area does not cross state boundaries, if a

paging carrier enables paging customers to receive out-of-state pages,

i.e., be paged by someone located in another state, then that paging

carrier provides an interstate service and must contribute to universal

service.

B. Other Providers of Interstate Telecommunications

126. We affirm our decision that private service providers that

provide interstate telecommunications on a non-common carrier basis

must contribute to universal service, pursuant to our permissive

authority over ``providers of interstate telecommunications.'' In the

Order, we found that the public interest requires private service

providers that furnish interstate telecommunications to others for a

fee to contribute to universal service on the same basis as common

carriers. We concluded that this approach (1) was consistent with the

principle of competitive neutrality because it will reduce the

possibility that carriers with universal service obligations will be

placed at an unfair competitive disadvantage in relation to carriers

that do not have such obligations; (2) will avoid creating a

disincentive for carriers to offer services on a common carrier basis;

and (3) will broaden the funding base, thereby lessening contribution

requirements of any particular class of telecommunications providers.

We affirm each of these findings.

127. We conclude that the Commission was not required to find that

private networks constitute a significant means of bypassing the public

switched telephone network before exercising our permissive authority

to apply the universal service contribution requirements to non-common

carriers. Section 254(d) grants the Commission explicit and unambiguous

authority to require ``other providers of interstate

telecommunications'' to contribute to universal service if the public

interest so requires. On this issue, the Joint Explanatory Statement

merely states that this section ``preserves the Commission's authority

to require all providers of interstate telecommunications to

contribute, if the public interest requires it to preserve and advance

universal service.'' There is no mention of a network bypass

requirement in either the Act or the Joint Explanatory Statement. Thus,

we find that the plain language of section 254(d) allows the Commission

to require non-common carriers to contribute if the Commission

concludes that doing so serves the public interest and furthers the

goals of universal service. We conclude, however, for the reasons

discussed below that we should not exercise our permissive authority to

require systems integrators, broadcasters, and non-profit schools,

universities, libraries, and rural health care providers to contribute

to universal service.

128. Systems Integrators. We are persuaded by systems integrators'

arguments that the public interest would not be served if we were to

exercise our permissive authority to require entities that do not

provide services over their own facilities and are non-common carriers

that obtain a de minimis amount of their revenues from the resale of

telecommunications to contribute to universal service. Systems

integrators provide integrated packages of services and products that

may include, for example, the provision of computer capabilities, data

processing, and telecommunications. Systems integrators purchase

telecommunications from telecommunications carriers and resell those

services to their customers. They do not purchase unbundled network

elements from telecommunications carriers and do not own any physical

components of the telecommunications networks that are used to transmit

systems integration customers' information. In other words, systems

integrators provide telecommunications solely through reselling another

carrier's service. We conclude that systems integrators that satisfy

these criteria, as discussed below, should not be required to

contribute to the federal universal service support mechanisms.

129. In our view, systems integrators that obtain a de minimis

amount of their revenues from the resale of telecommunications do not

significantly compete with common carriers that are required to

contribute to universal service. Systems integrators are in the

business of integrating customers' computer and other informational

systems, not providing telecommunications. Occasionally, systems

integrators may provide interstate telecommunications along with their

traditional integration services, but the provision of

telecommunications is incidental to their core business. Systems

integration customers who receive telecommunications from systems

integrators choose systems integrators for their systems integration

expertise, not for their competitive provision of telecommunications.

130. In determining what constitutes a de minimis amount of

revenues, we could compare the amount of revenues

[[Page 2115]]

derived from telecommunications to overall business revenues, revenues

derived from systems integration, or revenues derived from systems

integration contracts that also contain telecommunications. We conclude

that the second approach, telecommunications revenues relative to

systems integration revenues, is the best method to determine whether

systems integrators derive a de minimis amount of revenues from

telecommunications. Overall business revenues are irrelevant to the

determination of whether telecommunications revenues constitute a small

part of the systems integration business. Similarly, evaluating only

systems integration contracts that contain telecommunications will not

provide an accurate account of the systems integration business as a

whole. IBM and EDS suggest that de minimis should be defined as

revenues that are less than five percent of systems integration

revenues. Based on this record, we conclude that systems integrators'

telecommunications revenues will be considered de minimis if they

constitute less than five percent of revenues derived from providing

systems integration services. A systems integrator would not be

required to file a Universal Service Worksheet if, over the requisite

reporting period, its total revenues derived from telecommunications

represent less than five percent of its total revenues derived from

systems integration. Systems integrators that derive more than a de

minimis amount of revenues from telecommunications will be required to

contribute to the federal universal service support mechanisms and

comply with universal service reporting requirements. We conclude that

the limited nature of this exclusion from the obligation to contribute

will ensure that systems integrators that are significantly engaged in

the provision of telecommunications do not receive an unfair

competitive advantage over common carriers or other carriers that are

required to contribute to universal service.

131. To maintain the sufficiency of the support mechanisms, we find

that systems integrators that are excluded from contribution

requirements constitute end users for universal service contribution

purposes. In addition, systems integrators that obtain a de minimis

amount of their revenues from the resale of telecommunications must

notify the underlying facilities-based carriers from which they

purchase telecommunications that they are excluded from the universal

service contribution requirements. We conclude that excluding systems

integrators that obtain a de minimis amount of their revenues from the

resale of telecommunications from the obligation to contribute will not

significantly reduce the universal service contribution base because

revenues received by common carriers for minimal amounts of

telecommunications provided to systems integrators will be included in

the contribution bases of underlying common carriers. We anticipate

that, by providing this

This text is long and has been trimmed here. Open the source document for the complete record.