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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of ) ) Western Wireless Corporation ) File No. CWD 98-90 Petition for Preemption of ) Statutes and Rules Regarding the ) Kansas State Universal Service Fund ) Pursuant to Section 253 ) of the Communications Act of 1934 ) MEMORANDUM OPINION AND ORDER Adopted: August 18, 2000 Released: August 28, 2000 By the Commission: Commissioner Furchtgott-Roth concurring in part, dissenting in part, and issuing a statement. I. INTRODUCTION 1. Kansas has enacted the Kansas Telecommunications Act (Kansas Act) and the Kansas Corporation Commission (KCC) has promulgated regulations to implement local exchange competition and promote universal service in the state. On July 20, 1998, Western Wireless Corporation (Western Wireless), a provider of commercial mobile radio service (CMRS) in Kansas, filed a Petition for Preemption asking the Commission to preempt those provisions of the Kansas Act and regulations that limited the ability of carriers other than incumbent local exchange carriers ("non-ILECs") to receive universal service support. Subsequent to Western Wireless' filing, the KCC adopted new regulations for determining and allocating universal service support that, among other things, make all such support fully portable among competing carriers in Kansas. With this Memorandum Opinion and Order, we therefore dismiss the Western Wireless petition as moot. However, in order to provide guidance on these critical universal service issues, which may well arise in other contexts, we briefly discuss certain concerns that similarly structured programs may easily run afoul of Section 253 of the Communications Act. II. BACKGROUND 2. On May 17, 1996, Kansas enacted the Kansas Act to implement local exchange competition and promote universal service in that state. Section 66-2005(c) of the Kansas Act requires all local exchange carriers in Kansas to reduce their intrastate access charges to interstate rate levels. The statute authorizes the KCC to offset the access charge and toll charge reductions required by the Kansas Act through rebalancing of local residential and business rates, with any remaining portion initially being paid out from the Kansas Universal Service Fund (KUSF or Fund). Section 66-2008(a) of the Kansas Act states that "[t]he initial amount of the KUSF shall be comprised of local exchange carrier revenues lost as a result of rate rebalancing" pursuant to section 66-2005(c) and that such revenues shall be recovered on a revenue-neutral basis. Section 66-2008(d) requires the KCC to periodically review whether changes in the cost of providing service justify modification of the KUSF, and, if so, modify the KUSF accordingly. Section 66-2008(b) also requires all telecommunications providers, including wireless providers, to contribute to the KUSF on an equitable and nondiscriminatory basis. Section 66-2008(c) states that distributions from the KUSF shall be made in a competitively neutral manner to qualified telecommunications public utilities, telecommunications carriers, and wireless telecommunications providers that are deemed eligible under section 214(e)(1) of the Communications Act by the KCC. Sections 66-2008(e) and (f) allow "[a]ny qualified telecommunications carrier, telecommunications public utility or wireless telecommunications service provider" to request supplemental funding from the KUSF. 3. On December 27, 1996, the KCC issued an Order which, among other things, implemented the Kansas Act and established the KUSF. Pursuant to section 66-2008(a), the KCC initially sized the KUSF at $111.6 million, the amount of revenues it found that the ILECs lost as a result of intrastate access rate reductions mandated by the Kansas Act. As explained by the KCC in its comments in this proceeding, the KUSF, at least initially, was comprised of two components -- a High Cost Funding program and a Rate Cut Funding program. Under the High Cost Funding program, all ETCs were eligible to receive support up to $36.88 for each residential or single business line they serve in rural areas, defined by the KCC as exchange areas with 10,000 or fewer access lines. In addition, in order to implement the revenue neutrality requirement of the Kansas Act, the Rate Cut Funding program provided ILECs additional support based on their revenues lost due to intrastate access charge reform. This support was based on the ILECs' statewide lines, and was thus not limited to "high cost" areas but was available to the ILECs - - and only the ILECs - - for lines they serve anywhere in the state. The KCC also stated that a portion of the revenue-neutral support for ILECs would be designated as the amount per residential loop or "high cost" support. Thus, the high cost support payment, according to the KCC, was "not in addition to the Rate Cut Funding." In the first two years of the Fund, the KUSF distributed approximately $158 million, of which approximately $152 million, or 96 percent, was distributed to ILECs to offset the revenues they lost due to intrastate access charge reform. 4. On July 20, 1998, Western Wireless filed a Petition for Preemption asking the Commission to declare that section 253 of the Communications Act of 1934, as amended, preempted the provisions of the Kansas Act and the accompanying rules adopted by the KCC that served to limit the ability of carriers other than ILECs to receive universal service support under the Rate Cut Funding program in exchange areas with more than 10,000 access lines. Western Wireless alleged that the Kansas Act and 1996 KCC Order violated sections 253(a) and 254(f) of the Communications Act because the KUSF's Rate Cut Funding program discriminated against new entrants and deterred competitive entry. Western Wireless further alleged that the Kansas Act and 1996 KCC Order were not protected by section 253(b) because the Rate Cut Funding program was not competitively neutral and not related to the cost of providing universal service. Fifteen parties filed comments on the Western Wireless petition and 11 parties filed reply comments. 5. In late 1999 and early 2000, the KCC adopted a series of orders that substantially changed the operation of the KUSF. First, on September 30, 1999, the KCC adopted a forward-looking cost model for purposes of determining KUSF support for non-rural carriers (SWBT and Sprint). This new mechanism replaces the previous mechanism with respect to these carriers, eliminating the "transitional" Rate Cut Funding program intended to offset reductions in intrastate access charges. Then, on December 29, 1999, the KCC affirmed its forward-looking cost model with some modifications, applied the model to SWBT and Sprint, and made several other decisions relating to the KUSF. Most relevant for purposes of the Western Wireless petition, the KCC held that on a going-forward basis, all KUSF funding would be fully portable to competing carriers; i.e., if a competing carrier obtained a customer that was previously served by an ILEC, all funding that would previously have gone to the ILEC as a result of serving that line would instead be paid to the competing carrier. This principle of portability applies not only to the funding calculated for SWBT and Sprint under the new cost model, but also to the funding for rural ILECs that continues to be calculated under the High Cost Funding program and the previously non-portable Rate Cut Funding program. Finally, on January 19, 2000, the KCC released an Order which, among other things, established a carrier assessment rate for SWBT that provides for universal service support at a level somewhat higher than would be calculated under the forward-looking cost model, but that preserves the principle of portability for all funding. A similar settlement proceeding with Sprint remains pending. III. DISCUSSION 6. We conclude that Western Wireless' petition has been rendered moot by the December 1999 KCC Order. The gravamen of Western Wireless' complaint is that the Rate Cut Funding program, as previously structured, effectively prohibited the ability of non-ILECs to provide a telecommunications service by rendering them ineligible for the substantial support that was available only to ILECs in exchanges with more than 10,000 access lines. The December 1999 KCC Order rectified this feature of the KUSF by making all funding, including Rate Cut Funding, fully portable. We therefore dismiss the Western Wireless Petition as moot. 7. In order to provide guidance on these critical universal service issues which may well arise in other contexts, however, we briefly discuss our concern that programs structured like the original Rate Cut Funding program could easily run afoul of section 253. Section 253 provides the legal framework for preemption of a state statute or regulation that prohibits or has the effect of prohibiting the competitive provision of telecommunications service, which we have applied on a number of occasions. In order to determine whether a section 253(a) violation has occurred, we must consider whether the challenged law, regulation or legal requirement "prohibit[s] or has the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service." 8. We would be concerned about a universal service fund mechanism that provides funding only to ILECs. A new entrant faces a substantial barrier to entry if its main competitor is receiving substantial support from the state government that is not available to the new entrant. A mechanism that makes only ILECs eligible for explicit support would effectively lower the price of ILEC-provided service relative to competitor-provided service by an amount equivalent to the amount of the support provided to ILECs that was not available to their competitors. Thus, non-ILECs would be left with two choices -- match the ILEC's price charged to the customer, even if it means serving the customer at a loss, or offer the service to the customer at a less attractive price based on the unsubsidized cost of providing such service. A mechanism that provides support to ILECs while denying funds to eligible prospective competitors thus may give customers a strong incentive to choose service from ILECs rather than competitors. Further, we believe that it is unreasonable to expect an unsupported carrier to enter a high-cost market and provide a service that its competitor already provides at a substantially supported price. In fact, such a carrier may be unable to secure financing or finalize business plans due to uncertainty surrounding its state government-imposed competitive disadvantage. Consequently, such a program may well have the effect of prohibiting such competitors from providing telecommunications service, in violation of section 253(a). 9. If we find that a state requirement violates section 253(a), then we must determine whether it is nevertheless permissible under section 253(b). The criteria set forth in section 253(b) preserve the states' ability "to impose, on a competitively neutral basis and consistent with section 254, requirements necessary to preserve and advance universal service . . . ." We have held that a state program must meet all three of these criteria -- it must be "competitively neutral," "consistent with section 254," and "necessary to preserve and advance universal service" -- to fall within the "safe harbor" of section 253(b). We have preempted state regulations for failure to satisfy even one of the three criteria. If a requirement violates section 253(a) and does not fall within the safe harbor of section 253(b), the Commission must preempt the enforcement of the requirement in accordance with section 253(d). 10. It appears doubtful that a program which limits eligibility for universal service funding to ILECs would be found competitively neutral, and thus within the authority reserved to the states in section 253(b). "[S]ection 253(b) cannot save a state legal requirement from preemption pursuant to sections 253(a) and (d) unless, inter alia, the requirement is competitively neutral with respect to, and as between, all of the participants and potential participants in the market at issue." Because, as discussed above, a mechanism that offers non-portable support may give ILECs a substantial unfair price advantage in competing for customers, it is difficult to see how such a program could be considered competitively neutral. Moreover, a state requirement which otherwise violates section 253(b) cannot be saved merely because it is transitional. 11. We further note that a program that provides universal service funding only to ILECs could well be found invalid under traditional preemption doctrine. A state or local provision may be preempted when, for instance, it conflicts with federal law or "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Preemption may result not only from action taken by Congress, but also from a federal agency acting within the scope of its congressionally delegated authority. We have previously held, in interpreting section 254 of the Communications Act, that "competitive neutrality in the collection and distribution of funds and determination of eligibility in universal service support mechanisms is consistent with congressional intent and necessary to promote a procompetitive, de-regulatory national policy framework." As discussed above, it is doubtful that a universal service funding program that restricts eligibility to ILECs could be considered competitively neutral. Thus, a program of this nature may well be found to be inconsistent with and to impede the achievement of important Congressional and Commission goals. 12. We decline to address in this order the other challenges to provisions of the KUSF that the parties raised. These issues were not raised by Western Wireless in its petition and are beyond the scope of this proceeding. IV. CONCLUSION 13. In conclusion, we find that the orders adopted and implemented by the KCC in late 1999 and early 2000 have effectively rendered moot the significant issues of lawfulness raised by Western Wireless regarding the operation of the previously structured program. We therefore dismiss Western Wireless' petition as moot. V. ORDERING CLAUSE 14. Accordingly, IT IS ORDERED that, pursuant to section 4(i) of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), and section 1.2 of the Commission's rules, 47 C.F.R.  1.2, that this Memorandum Opinion and Order IS ADOPTED. 15. IT IS FURTHER ORDERED that the Petition for Preemption filed by Western Wireless Corporation IS DISMISSED as moot. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary STATEMENT OF COMMISSIONER HAROLD FURCHTGOTT-ROTH, CONCURRING IN PART AND DISSENTING IN PART Re: Western Wireless Corporation Petition for Preemption of Statutes and Rules Regarding the Kansas State Universal Service Fund Pursuant to Section 253 of the Communications Act of 1934, File No. CWD 98-90. As the Commission correctly recognizes, Western Wireless's petition is moot. The Kansas Corporation Commission has completely altered its regulatory scheme for determining and allocating universal service support to carriers in Kansas. Western Wireless's petition must therefore be dismissed as moot, and I concur in this aspect of the order. Why the Commission thinks it necessary to devote an additional five or six pages of this order to a discussion of why it would preempt the Kansas regulations if they were still in effect is beyond me. The Commission vaguely asserts its advisory opinion is necessary "to provide guidance" on universal service issues, based on its wholly unsupported assertion that these issues "might well arise elsewhere." Tellingly, the Commission cannot point to a single state commission that has even suggested it would adopt requirements similar to the Kansas Commission's. I therefore dissent from those aspects of this order that purport to interpret section 253(d). Although this agency unlike Article III federal courts may have the power to render advisory opinions in some circumstances, I think it exceedingly unwise for it to make such determinations in connection with section 253(d). In my view, in making this statement, the Commission disregards basic principles of federal-state comity and insults the Kansas Commission, which has itself corrected whatever infirmity may have existed in its previous rules. The 1996 Act contemplates that state commissions will play an important part in bringing competition to the local exchange markets, and it gives states freedom to fashion regulatory approaches that supplement the Act's federal requirements. See, e.g., 47 U.S.C.  253(b). This Commission may interfere with a state commission's requirements only pursuant to section 253(d). An examination of that provision is instructive. It states that if the Commission "determines that a State or local government has permitted or imposed any statute, regulation, or legal requirement that violates [section 253(a) or (b)], the Commission shall preempt the enforcement of such statute, regulation, or legal requirement to the extent necessary to correct such violation or inconsistency." 47 U.S.C.  253(d) (emphasis added). The provision is drafted in the present tense, and I therefore question whether we may legally make section 253(d) determinations on state commission rulings that do not exist. Moreover, given that no regulation currently exists, a Commission ruling is most assuredly not "necessary to correct" the Kansas Commission's approach to implementing the Act's universal service provisions. In any event, I believe that comity concerns alone are enough to prevent us from reaching out to strike down nonexistent state regulations, simply in order to dictate to states the "proper" way for them to conduct their business. We must not forget that Congress charged both this Commission and the state commissions with implementing the 1996 Act, and we should keep our interference in the business of the states to a minimum.