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Federal Communications Commission
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Internet: http://www.fcc.gov

This is an unofficial announcement of Commission action. Release of the full text of a Commission order constitutes official action. See MCI v. FCC. 515 F 2d 385 (D.C. Circ 1974).

Report No. CC 98-9 COMMON CARRIER ACTION April 10, 1998

(CC Docket No. 96-45)

In a Report to Congress submitted today, the Commission revisited many of its major decisions related to the implementation of the universal service provisions of the Telecommunications Act of 1996. Today's Report is consistent with the Commission's aim of ensuring that low-income and rural consumers have access to local telephone service at affordable rates and that an evolving level of telecommunications services are available and affordable for all Americans. At the same time, the Report reaffirms the Commission's commitment to encouraging the continued development of new services and technologies.

As required by Congress, the Commission analyzed several definitions in the 1996 Act and the impact of the Commission's interpretation of those definitions on the current and future provision of universal service. The major findings of the Report are detailed below.

Definitions and Policy Implications for Universal Service and the Internet

The 1996 Act requires providers of interstate telecommunications services to contribute to universal service funding mechanisms on an equitable and nondiscriminatory basis. Pursuant to Congress's directive, the Commission reviewed various statutory definitions, including definitions of "information service," "telecommunications," and "telecommunications service." The Commission concluded, as it had in its Universal Service Order, that the categories of "telecommunications service" and "information service" in the 1996 Act are mutually exclusive and consistent with preexisting definitions. The Commission found generally that Congress intended to maintain a regime in which information service providers are not subject to regulation as common carriers merely because they provide their services via telecommunications. The Commission also reaffirmed that information service providers are not subject to universal service obligations, the access charges paid by long distance providers, or rate regulation.

The Commission stated that its analysis of these important definitional issues reflects a consistent approach that will safeguard the current and future provision of universal service to all Americans and will achieve the 1996 Act's goal of a "pro-competitive, deregulatory" communications policy. Thus, the Commission found, in general, that continued growth in the information services industry will buttress, not hinder, universal service.

The Commission stated that the provision of transmission capacity to Internet service providers constitutes the provision of "telecommunications." As a result, telecommunications providers offering leased lines to Internet service providers must contribute to universal service support mechanisms. The Commission found that at least some leased-line providers currently are complying with that requirement, and the prices paid by Internet service providers for their leased lines reflect that universal service obligation. As Internet-based services grow, Internet service providers will have a greater need to lease lines. The payments for those additional leased lines will in turn lead to increased universal service contributions by leased-line providers.

In cases where an Internet service provider uses its own transmission facilities to provide an information service, the Report notes that the Commission's rules currently do not require Internet service providers to contribute to universal service support mechanisms. The Commission stated that, as a theoretical matter, it may be advisable to exercise its discretion under the statute to require such providers to contribute to universal service. The Commission acknowledged, however, the difficulties associated with determining the amount such an Internet service provider should contribute to universal service.

The Commission also examined the application of the statutory definitions to various new services, as required by Congress. In particular, the Commission reviewed services that are generally described as Internet telephony services. Some forms of Internet telephony involve the use of ordinary telephone handsets and employ an Internet protocol (IP) in routing calls to their destination. The Commission observed that certain forms of phone-to-phone IP telephony lack the characteristics that would render them "information services" within the meaning of the statute, and instead bear the characteristics of "telecommunications services." The Commission, however, did not find it appropriate to make any definitive pronouncements in the absence of a more complete record focused on individual IP service offerings.

Federal Funding of Universal Service ("25-75")

The Commission also reviewed its decisions regarding the percentage of universal service support provided by federal mechanisms. The Commission noted that, prior to adoption of the Universal Service Order, interstate rates generally

recovered 25 percent of local telephone network costs. Through the operation of an explicit universal service support mechanism, some non-rural local telephone companies did recover slightly more than 25 percent of costs through interstate rates. In the Report, the Commission concluded that a strict, across-the-board rule that provides larger local telephone companies with 25 percent of their total high cost support might, in essence, reduce the amount of federal support these companies receive.

The Commission stated that it would work to ensure that states do not receive less funding than before as it implements the new high cost universal service mechanism under the 1996 Act. The Commission's work in this area is not yet complete. It committed to issuing an order which reconsiders the "25-75" decision before the new universal service mechanism is fully implemented. In addition, the Commission committed to consult with the Universal Service Joint Board to address the viability of the 25-75 approach as well as various alternatives. The Commission acknowledged that a state may require greater assistance than it currently receives from interstate sources in order to maintain affordable rates. As states develop plans to reform their own universal service mechanisms, additional federal support may be required to ensure that quality services remain available at just, reasonable, and affordable rates.

In addition, the Commission stressed that there is no change in the mechanism for determining the amount of federal universal service support for rural local telephone companies. Moreover, there will be no change to the mechanism until January 1, 2001, at the earliest. Only the amount of federal universal service support for non-rural telephone companies was under consideration in this Report.

Who Contributes to and Who is Eligible to Receive Universal Service Support

In addition, the Commission reviewed its decisions with regard to which entities are required by the 1996 Act to contribute to federal universal service support and which entities are eligible to receive such support. The Commission concluded in the Report that it had properly interpreted the 1996 Act to require contributions from all telecommunications carriers who provide interstate telecommunications services. Additionally, after carefully evaluating the general standards of eligibility for support set forth in the 1996 Act, the Commission stated that certain of these provisions appeared to be susceptible to more than one interpretation. The Commission, however, found that it had properly implemented eligibility rules that are consistent with both the language and spirit of the 1996 Act.

The Commission was required by a recent Appropriations Act to submit the Report to Congress. The Report represents a thorough review of the Commission's interpretations of the relevant provisions of the 1996 Act with respect to each of the subjects identified in the Appropriations Act. The Report to Congress is available in its entirety on the FCC's web site at www.fcc.gov.

Action by the Commission, April 10, 1998, by Report to Congress (FCC 98-67). Chairman Kennard, Commissioners Ness, Powell, and Tristani, with Commissioner Furchtgott-Roth dissenting, and all issuing separate statements.


News Media contact: Rochelle Cohen at (202) 418-0253.
Common Carrier Bureau contacts: Melissa Waksman and Pam Gallant at (202) 418-7400.
Office of Plans and Policy contact: Robert Pepper at (202) 418-2030.