Before the
                Federal Communications Commission
                      Washington, D.C. 20554

In the Matters of:              )
                                )
Changes to the Board of         )
Directors of the National Exchange)          CC Docket No. 97-21
Carrier Association, Inc.       )
                                )
Federal-State Joint Board on    )       CC Docket No. 96-45
Universal Service               )

     FIFTH ORDER ON RECONSIDERATION in CC Docket No. 97-21
   ELEVENTH ORDER ON RECONSIDERATION in CC Docket No. 96-45 
           AND FURTHER NOTICE OF PROPOSED RULEMAKING
                                
   Adopted:  March 18, 1999             Released:  May 28, 1999

Comment Date:  June 30, 1999

By the Commission:  Chairman Kennard and Commissioners Ness and Tristani issuing separate
statements; Commissioner Furchtgott-Roth dissenting in part and issuing a statement.

I.   INTRODUCTION

     1.   In this Order, we clarify certain portions of the Commission's funding priority rules
for the schools and libraries universal service support mechanism to remove any ambiguity that
may exist in the application of such rules.  Specifically, we clarify that, when a filing window is in
effect, and demand exceeds total authorized support, the Administrator of the universal service
support mechanisms (the Universal Service Administrative Company or USAC), shall allocate
funds for discounts to schools and libraries for internal connections beginning with those
applicants at the highest discount level, i.e., ninety percent, and to the extent funds remain,
continue to allocate funds for discounts to applicants at each descending single discount
percentage.  

     2.   In this Order, we also reconsider, on our own motion, the Commission's rule that
prohibits the disbursement of funds during the pendency of an appeal of a decision issued by the
Administrator.  We find that, if the appeal relates to a request for additional support by the
applicant or involves a challenge by a third party to only a portion of the approved support, and
the application is not otherwise the subject of an appeal, the Administrator may disburse, during
the pendency of the appeal, those funds that have been approved by the Administrator.

     3.   In the attached Further Notice of Proposed Rulemaking (Further Notice), we
propose a method for allocating funds in the event that the Administrator's initial denial of a
request for support is reversed by the Administrator or the Commission.  Specifically, we propose
a method for allocating support when there is sufficient funding to support all telecommunications
service and Internet access (priority one services) appeals, but not sufficient funding to support all
internal connection appeals.  We also propose a method for allocating support in the unlikely
event that sufficient funds are not available for all priority one service appeals.

II.  RULES OF FUNDING PRIORITY

     4.   In the Fifth Reconsideration Order, the Commission adopted new rules of funding
priority that would apply when a filing window is in effect and demand exceeds total authorized
support.  In establishing these rules of priority, the Commission sought to ensure that funds are
directed to the most economically disadvantaged schools and libraries and that every eligible
school and library that filed within the window would receive some assistance.  Consistent with
these goals, the rules of priority provide that requests for telecommunications services and
Internet access for all discount categories shall receive first priority for the available funding
(priority one services).  The remaining funds are allocated to requests for support for internal
connections, beginning with the most economically disadvantaged schools and libraries, as
determined by the schools and libraries discount matrix, i.e., schools and libraries eligible for a
ninety percent discount.  To the extent funds remain, the rules provide that the Administrator
shall allocate funds to the requests for support for internal connections submitted by schools and
libraries eligible for an eighty percent discount, then for a seventy percent discount, and shall
continue committing funds for internal connections in the same manner to the applicants at each
descending discount level until there are no funds remaining.  The rules further provide that, if
the remaining funds are not sufficient to support all funding requests within a particular discount
level, the Administrator shall allocate the total amount of remaining support on a pro rata basis to
that particular discount level.

     5.    Although the Commission's rules prioritize funding requests on the basis of broad
discount categories, e.g., ninety percent or eighty percent, the Commission's rules also specifically
recognize that not all discounts calculated under the schools and libraries support mechanism will
fall within these broad discount categories.  In the Fourth Reconsideration Order, the
Commission revised the rules regarding how to calculate the appropriate discount level when
schools and libraries aggregate their demand with others to create a consortium.  The
Commission determined, inter alia, that, for services that are shared by two or more schools,
libraries, or consortia members, i.e., "shared services," the discount level should be calculated by
averaging the applicable discounts of all member schools and libraries.  As a result, the discount
levels for "shared service" requests, which typically are internal connection requests, are single
discount level percentages, e.g., eighty-nine percent, eighty-eight percent, and so on.   

     6.   While the Commission's funding priority rules do not specifically address the single
discount percentage levels associated with "shared service" requests, the rules on "shared
services" and the funding priority rules must be read in concert.  We clarify, therefore, that, when
sufficient funds are not available to fund all internal connection requests, the Administrator shall
allocate funds for discounts to schools and libraries beginning with those applicants at the ninety
percent discount level and, to the extent funds remain, continue to allocate funds for discounts to
applicants at each descending single discount percentage, e.g., eighty-nine percent, eighty-eight
percent, and so on.  We believe that this method of allocating funds is consistent with the
Commission's goal of ensuring that support for internal connections is directed first toward the
most economically disadvantaged schools.  We also note that allocating funds at each
descending discount level will enable the Administrator to distribute funds sooner than it could if
it were required to determine the pro rata amount for the entire discount category before
distributing support.  As set forth in Appendix A attached hereto, we add a Note to section
54.507(g)(1)(iii) to reflect the clarification made in this Order.  We also clarify that, to the extent
sufficient funds do not exist to fund all requests within a single discount percentage, the
Administrator shall allocate the remaining support on a pro rata basis over that single discount
percentage level, as provided in section 54.505(g)(1)(iv) of the Commission's rules.   

     III. DISBURSEMENT OF FUNDING DURING PENDENCY OF A REQUEST FOR
     REVIEW OF AN ADMINISTRATOR DECISION

     7.   The Commission's rules provide that, during the pendency of a request for review
of a decision by the Administrator, a service provider shall not be reimbursed for the provision of
discounted services under the schools and libraries or rural health care support mechanisms, or
receive support under the high cost and low income support mechanism, until a final decision has
been issued either by the Administrator or by the Commission.  In adopting this rule, we
reasoned that withholding support during the pendency of an appeal would reduce the likelihood
that support is disbursed in error.  We did not intend, however, to require that funds be withheld
where an applicant claims on appeal that it was eligible for more support than that which was
approved by the Administrator or where a third party challenges only a portion of the support
approved by the Administrator.  In such a case, assuming the application is not otherwise the
subject of an appeal, there is no reason to withhold the disbursement of those funds that the
Administrator has approved.  Moreover, we believe that withholding funds under such
circumstances might also have the unintended result of discouraging applicants from filing
legitimate appeals.  Such a result would undermine one function of our appeal procedures, which
is to help ensure that the universal service support mechanisms are operating consistent with
Commission rules and policies.  Accordingly, we find that, where a pending appeal involves a
request for additional support or a third party challenge to only a portion of the approved support,
and the application is not otherwise the subject of an appeal, the Administrator may disburse,
during the pendency of that appeal, the unchallenged portion of the approved support. 
Accordingly, section 54.725 of the Commission's rules is revised as set forth in Appendix A
hereto.

IV.  EFFECTIVE DATE OF RULES

     8.   In this Order, we revise section 54.725 of the Commission's rules to provide that,
where an applicant seeks review of a decision of the Administrator on the grounds that the
applicant was eligible for additional support or a third party challenges only a portion of the
approved support, and the application is not otherwise the subject of an appeal, the Administrator
may disburse the funds that it has approved.  Some applicants already have filed appeals seeking
additional support, but, under our current rules, they are unable to receive the support that the
Administrator has approved.  Receipt of support is particularly crucial with regard to internal
connections in light of the Commission's requirement that applicants complete implementation of
their internal connections by a date certain for this funding year.  To ensure that the disbursement
of support to these applicants is not further delayed, this revised rule must take effect upon
publication in the Federal Register.  We therefore find good cause to depart in the manner
described above from the general requirement of 5 U.S.C.  553(d) that final rules take effect not
less than thirty (30) days after their publication in the Federal Register.  Accordingly, section
54.725 of the Commission's rules, as revised in Appendix A attached hereto, shall become
effective upon release of this Order.  

V.   FURTHER NOTICE OF PROPOSED RULEMAKING

     9.   The Commission's rules provide that an applicant may file a request for review
with the Administrator or the Commission in connection with the Administrator's denial of an
application.  Although the Administrator has taken all reasonable and appropriate steps to ensure
that it will be able to fund fully all appeals that may be granted, we conclude that it is necessary to
adopt additional funding priority rules setting forth how funds will be allocated in the unlikely
event that sufficient funds are not available at the appeal phase.  Consistent with the
Commission's funding priority rules, as clarified above, we propose that, when a filing window is
in effect, the Administrator shall first fund all priority one service appeals that have been granted
and, if sufficient funds remain, shall allocate funds to internal connection appeals at each
descending single discount percentage, e.g., ninety percent, eighty-nine percent, and so on.  In
no case, however, would an applicant be able to receive support for internal connections below
the discount level for which an applicant received support in the original application process. 
That is, if the Administrator were only able to provide support during the original application
process to applicants at a discount level of seventy percent or above, an applicant would not be
able to receive support on appeal for an internal connection request at a sixty-nine percent
discount level.  To the extent funds do not exist to fund all appeals granted within a single
discount percentage, we propose that the Administrator allocate the remaining support on a pro
rata basis within that single discount percentage.  We seek comment on this proposal.   

     10.  If the Administrator determines that sufficient funds are not available to fund all
priority one service appeals, we propose that the Administrator allocate the available funds to all
appeals for priority one services, i.e., telecommunications services and Internet access on a pro
rata basis, irrespective of the discount level associated with the request.  We believe that this is
the best approach in light of both the funding priority rules, which grant first priority to requests
for telecommunications services and Internet access, and the Commission's goal of ensuring that
every eligible school and library receive some assistance.  We seek comment on this proposal. 
In particular, we seek comment on how this proposed allocation method should be implemented
in light of our appeal procedures, which permit applicants to seek review of decisions issued by
the Administrator from either the Administrator or the Commission.  We tentatively conclude
that, to ensure an equitable distribution of funds to all priority one service appeals, the
Administrator should wait until a final decision has been issued on all priority one service appeals
before it allocates funds on a pro rata basis.  We seek comment on this tentative conclusion.  We
also seek comment on whether it would be more appropriate for the Commission to permit the
Administrator to use funds collected in the next funding year to fund priority one service appeals
for the prior year.  While we recognize that using funds collected for the next funding year may
deplete the available funds for that year, we nevertheless seek comment on whether there are any
advantages to such an approach.  We also invite parties to submit alternative proposals that would
enable the Administrator to distribute fairly funds for appeals in the event that sufficient funds are
not available to fund all priority one service appeals.

     11.  We recognize that applicants must complete the installation of internal connections
by a date certain for each funding year.  We tentatively conclude that an applicant would be
required to complete the installation of internal connections that received support pursuant to an
appeal within six months from the date that the final decision on appeal is issued.  We seek
comment on this tentative conclusion.

     12.       Finally, pending the outcome of this Further Notice, we find that, if the
Administrator is able to determine that sufficient funds are available to provide support for all
priority one service appeals that may be granted for the first funding year, the Administrator may
allocate support immediately to such appeals.  To the extent funds remain, and the Administrator
is able to determine that sufficient funds are available to allocate funds to all internal connection
appeals down to the seventy percent discount level, i.e., the lowest discount level for which
applicants received support during the original funding period, the Administrator may allocate
support immediately to such internal connection appeals that may be granted. 

VI.  FILING PROCEDURES

     13.  Pursuant to sections 1.415 and 1.419 of the Commission's rules, 47 C.F.R. 
1.415, 1.419, interested parties may file comments by June 30, 1999.  Pursuant to section 1.3 of
the Commission's rules, 47 C.F.R.  1.3, we find good cause to waive section 1.415(c) of the
Commission's rules, which provides for the submission of replies to original comments. 
Dispensing with reply comments is crucial in light of the urgent need to provide definitive
guidance to the Administrator regarding the priorities for allocating funds to applications whose
initial denials are reversed by the Administrator or the Commission. 

     14.  Comments may be filed using the Commission's Electronic Comment Filing System
(ECFS) or by filing paper copies.  See Electronic Filing of Documents in Rulemaking
Proceedings, 63 Fed. Reg. 24,121 (1998).  Comments filed through the ECFS can be sent as an
electronic file via the Internet to <http://www.fcc.gov/e-file/ecfs.html>.  Generally, only one copy
of an electronic submission must be filed.  If multiple docket or rulemaking numbers appear in the
caption of this proceeding, however, commenters must transmit one electronic copy of the
comments to each docket or rulemaking number referenced in the caption.  In completing the
transmittal screen, commenters should include their full name, Postal Service mailing address, and
the applicable docket or rulemaking number.  Parties may also submit an electronic comment by
Internet e-mail.  To get filing instructions for e-mail comments, commenters should send an e-mail
to ecfs@fcc.gov, and should include the following words in the body of the message, "get form
<your e-mail address."  A sample form and directions will be sent in reply.  

     15.  Parties who choose to file by paper must file an original and four copies of each
filing.   If more than one docket or rulemaking number appear in the caption of this proceeding,
commenters must submit two additional copies for each additional docket or rulemaking number. 
All filings must be sent to the Commission's Secretary, Magalie Roman Salas, Office of the
Secretary, Federal Communications Commission, 445 12th Street, S.W., Washington, D.C.
20554.  Parties who choose to file by paper should also submit their comments on diskette.  These
diskettes should be submitted to: Sheryl Todd, Federal Communications Commission, Common
Carrier Bureau, Accounting Policy Division, 445 12th Street, S.W., Room 5A-523, Washington,
D.C. 20554.  Such a submission should be on a 3.5 inch diskette formatted in an IBM compatible
format using WordPerfect 5.1 for Windows or compatible software.  The diskette should be
accompanied by a cover letter and should be submitted in "read only" mode.  The diskette should
be clearly labelled with the commenter's name, proceeding (including the lead docket number in
this case (97-21)), type of pleading (comment or reply comment), date of submission, and the
name of the electronic file on the diskette.  The label should also include the following phrase
"Disk Copy - Not an Original."  Each diskette should contain only one party's pleadings,
preferably in a single electronic file.  In addition, commenters must send diskette copies to the
Commission's copy contractor, International Transcription Service, Inc., 445 12th Street, S.W.,
Room CY-B400, Washington, D.C. 20554.  For further information, please contact:  Sharon
Webber, Common Carrier Bureau, Accounting Policy Division, (202) 418-7400.

     16.  Pursuant to section 1.1206 of the Commission's rules, 47 C.F.R.  1.1206, this
proceeding will be conducted as a permit-but-disclose proceeding in which ex parte
communications are permitted subject to disclosure. 

VII. REGULATORY FLEXIBILITY ANALYSIS

     A.   Supplemental Final Regulatory Flexibility Analysis
     
     17.  In compliance with the Regulatory Flexibility Act (RFA), this Supplemental Final
Regulatory Flexibility Analysis (SFRFA) supplements the Final Regulatory Flexibility Analysis
(FRFA) included in the Universal Service Order, and the Supplemental Final Regulatory
Flexibility Analyses in the Fifth Reconsideration Order and the Eighth Order on
Reconsideration, only to the extent that changes to the Order adopted here on reconsideration
require changes in the conclusions reached in the FRFA in the Universal Service Order and the
Supplemental Final Regulatory Flexibility Analyses in the Fifth Reconsideration Order and Eighth
Order on Reconsideration. This FRFA was preceded by an Initial Regulatory Flexibility Analysis
(IRFA) incorporated in the Notice of Proposed Rulemaking and Order Establishing the Joint
Board (NPRM), prepared in connection with the Recommended Decision, which sought written
public comment on the proposals in the NPRM and the Recommended Decision.  

     18.  To the extent that any statement contained in this Supplemental Final Regulatory
Flexibility Analysis is perceived as creating ambiguity with respect to our rules or statements
made in preceding sections of this Order, the rules and statements set forth in those preceding
sections shall be controlling.

     1.   Need for and Objectives of this Report and Order  

     19.  The Commission is required by section 254 of the Act to promulgate rules to
implement promptly the universal service provisions of section 254.  On May 8, 1997, the
Commission adopted rules intended, inter alia, to reform our system of universal service support
mechanisms so that universal service is preserved and advanced as markets move toward
competition.  In this Order, we clarify one aspect of those rules and reconsider another aspect of
those rules.  First, we clarify that, when a filing window is in effect, and demand exceeds total
authorized support, the Administrator shall allocate funds for discounts to schools and libraries
for internal connections beginning with those applicants at the highest discount level, i.e., ninety
percent, and to the extent funds remain, continue to allocate funds for discounts to applicants at
each descending single discount percentage.  Second, we find that, if an appeal of a decision by
the Administrator relates to a request for additional support by the applicant or involves a
challenge by a third party to only a portion of the approved support, and the application is not
otherwise the subject of an appeal, the Administrator may disburse, during the pendency of the
appeal, those funds that have been approved by the Administrator.  

     2.   Summary and Analysis of the Significant Issues 
          Raised by Public Comments in Response to the IRFA

     20.  In this Order, the Commission clarifies certain portions of the Commission's
funding priority rules for the schools and libraries universal service support mechanism to remove
any ambiguity that may exist in the application of such rules.  In doing so, the Commission affirms
similar guidance that was provided by the Common Carrier Bureau to the Schools and Libraries
Division of USAC.  In this Order, the Commission also reconsiders, on its own motion, the rule
that prohibits the disbursement of funds during the pendency of an appeal from a decision of the
Administrator.  The Order modifies the rule to provide that, where a pending appeal involves a
request for additional support or a third party challenge to only a portion of the approved support,
and the application is not otherwise the subject of an appeal, the Administrator may disburse,
during the pendency of that appeal, the funds that it has approved.
     
               3.   Description and Estimates of the Number of Small Entities to Which the
          Rules Adopted in This Order will Apply

     21.  The RFA directs agencies to provide a description of and, where feasible, an
estimate of the number of small entities that may be affected by the proposed rules, if adopted. 
The RFA generally defines the term "small entity " as having the same meaning as the terms "small
business," "small organization," and "small governmental jurisdiction."  In addition, the term
"small business" has the same meaning as the term "small business concern" under the Small
Business Act.  A small business concern is one which:  (1) is independently owned and operated;
(2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by
the Small Business Administration (SBA).   A small organization is generally "any not-for-profit
enterprise which is independently owned and operated and is not dominant in its field." 
Nationwide, as of 1992, there were approximately 275,801 small organizations.  "Small
governmental jurisdiction" generally means "governments of cities, counties, towns, townships,
villages, school districts, or special districts, with a population of less than 50,000."  As of 1992,
there were approximately 85,006 such jurisdictions in the United States.  This number includes
38,978 counties, cities, and towns; of these, 37,566, or 96 percent, have populations of fewer
than 50,000.  The Census Bureau estimates that this ratio is approximately accurate for all
governmental entities.  Thus, of the 85,006 governmental entities, we estimate that 81,600 (91
percent) are small entities.  

     22.  As noted in the FRFA at paragraphs 890-925 of the Universal Service Order,
there are a number of small entities that would be affected by the new universal service rules.  The
rules adopted in this Order, however, would affect primarily schools and libraries.  Moreover,
because the rules would allow schools and libraries to benefit more fully from the schools and
libraries universal service support mechanism, would not have a significant impact on these small
entities.  We further describe and estimate, however, the number of small governmental
jurisdictions, small businesses, and small organizations that may potentially be affected by the
rules adopted in this Order.    

     23.  The Commission specifically noted in the Universal Service Order that the SBA
defined small elementary and secondary schools and small libraries as those with under $5 million
in annual revenues.  The Commission further estimated that there are fewer than 86,221 public
and 26,093 private schools and fewer than 15,904 libraries that may be affected by the decisions
and rules adopted in the Universal Service Order.  We believe that these same small entities may
be affected potentially by the rules adopted in this Order. 

     24.  In addition, the Commission noted in the Universal Service Order that neither the
Commission nor the SBA has developed a definition of small, rural health care providers.  Section
254(h)(5)(B) defines the term "health care provider" and sets forth the seven categories of health
care providers eligible to receive universal service support.  We estimated that there are fewer
than 12,296 health care providers potentially affected by the rules in the Universal Service
Order.  We note that these small entities may potentially be affected by the rules adopted in this
Order.    
     
     4.   Description of the Projected Reporting, Recordkeeping,
          and Other Compliance Requirements.  Both the clarification and modification
to the Commission's rules that are set forth in this Order relate only to actions that need to be
taken by the Administrator of the universal service support mechanisms.  As a result, we do not
anticipate any additional burdens or costs associated with these proposed rules on any entities,
including on small entities.  

               5.   Steps Taken to Minimize Significant Economic Impact on Small Entities, and
          Significant Alternatives Considered. 
     
     25.  In the FRFA to the Universal Service Order, the Commission described the steps
taken to minimize the significant economic impact on a substantial number of small entities
consistent with stated objectives associated with the Schools and Libraries section, the Rural
Health Care Provider section, and the Administration section of the Universal Service Order. 
As described above, our current action to amend our rules will benefit schools, libraries, and rural
health care providers, by ensuring that funds are allocated first to the neediest schools and
libraries and that schools, libraries, and rural health care providers will be able to receive any
support approved by the Administrator that is not the subject of an appeal.  We believe that these
amended rules fulfill the statutory mandate to enhance access to telecommunications services for
schools, libraries, and rural health care providers, and fulfill the statutory principle of providing
quality services at "just, reasonable, and affordable rates," without imposing unnecessary
burdens on schools, libraries, rural health care providers, or service providers, including small
entities.

     26.  Report to Congress.  The Commission will send a copy of the Fifth Order on
Reconsideration in CC Docket No. 97-21, Eleventh Order on Reconsideration in CC Docket No.
96-45, and Further Notice of Proposed Rulemaking, including this FRFA, in a report to be sent to
Congress pursuant to the Small Business Regulatory Enforcement Fairness Act of 1996, see 5
U.S.C.  801(a)(1)(A).  In addition, the Commission will send a copy of the Fifth Order on
Reconsideration in CC Docket No. 97-21, Eleventh Order on Reconsideration in CC Docket No.
96-45, and Further Notice of Proposed Rulemaking, including FRFA, to the Chief Counsel for
Advocacy of the Small Business Administration.  A copy of the Fifth Order on Reconsideration in
CC Docket No. 97-21, Eleventh Order on Reconsideration in CC Docket No. 96-45, and Further
Notice of Proposed Rulemaking and FRFA (or summaries thereof) will also be published in the
Federal Register.  See 5 U.S.C.  604(b).

     B.  Initial Regulatory Flexibility Analysis

     27.  As required by the Regulatory Flexibility Act (RFA), the Commission has
prepared this present Initial Regulatory Flexibility Analysis (IRFA) of the possible significant
economic impact on small entities by the policies and rules proposed in this Fifth Order on
Reconsideration in CC Docket No. 97-21, Eleventh Order on Reconsideration in CC Docket No.
96-45, and Further Notice of Proposed Rulemaking.  Written public comments are requested on
this IRFA.  Comments must be identified as responses to the IRFA and must be filed by the
deadlines for comments on the Fifth Order on Reconsideration in CC Docket No. 97-21, Eleventh
Order on Reconsideration in CC Docket No. 96-45, and Further Notice of Proposed Rulemaking
provided above in Section VI.  The Commission will send a copy of the Fifth Order on
Reconsideration in CC Docket No. 97-21, Eleventh Order on Reconsideration in CC Docket No.
96-45, and Further Notice of Proposed Rulemaking, including this IRFA, to the Chief Counsel for
Advocacy of the Small Business Administration.  See 5 U.S.C.  603(a).  In addition, the Fifth
Order on Reconsideration in CC Docket No. 97-21, Eleventh Order on Reconsideration in CC
Docket No. 96-45, and Further Notice of Proposed Rulemaking and IRFA (or summaries thereof)
will be published in the Federal Register.  See id.

     28.  Need for an Objectives of the Proposed Rules.  The Commission's rules provide
that an applicant may file a request for review with the Administrator or the Commission in
connection with the Administrator's denial of an application.  Although the Administrator has
taken all reasonable and appropriate steps to ensure that it will be able to fund fully all appeals
that may be granted, we conclude that it is necessary to adopt additional funding priority rules
setting forth how funds will be allocated in the unlikely event that sufficient funds are not available
at the appeal phase.  Accordingly, the Further Notice proposes that, when a filing window is in
effect, the Administrator shall first fund all priority one service appeals that have been granted
and, if sufficient funds remain, shall allocate funds to internal connection appeals at each
descending single discount percentage, e.g., ninety percent, eighty-nine percent, and so on.  To
the extent funds do not exist to fund all appeals granted within a single discount percentage, we
propose that the Administrator allocate the remaining support on a pro rata basis within that
single discount percentage.  If the Administrator determines that sufficient funds are not available
to fund all priority one service appeals, the Further Notice proposes that the Administrator
allocate the available funds to all appeals for priority one services, i.e., telecommunications
services and Internet access on a pro rata basis, irrespective of the discount level associated with
the request.  

     29.  Legal Basis.  The proposed action is supported by sections 4(i), 4(j), 201-205, 254,
and 403 of the Communications Act of 1934, as amended, 47 U.S.C.  154(i), 154(j), 201-205,
254, and 403.

     30.  Description and Estimate of the Number of Small Entities to which the proposed
rules will Apply.  The RFA directs agencies to provide a description of and, where feasible, an
estimate of the number of small entities that may be affected by the proposed rules, if adopted. 
The RFA generally defines the term "small entity " as having the same meaning as the terms "small
business," "small organization," and "small governmental jurisdiction."  In addition, the term
"small business" has the same meaning as the term "small business concern" under the Small
Business Act.  A small business concern is one which:  (1) is independently owned and operated;
(2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by
the Small Business Administration (SBA).   A small organization is generally "any not-for-profit
enterprise which is independently owned and operated and is not dominant in its field." 
Nationwide, as of 1992, there were approximately 275,801 small organizations.  "Small
governmental jurisdiction" generally means "governments of cities, counties, towns, townships,
villages, school districts, or special districts, with a population of less than 50,000."  As of 1992,
there were approximately 85,006 such jurisdictions in the United States.  This number includes
38,978 counties, cities, and towns; of these, 37,566, or 96 percent, have populations of fewer
than 50,000.  The Census Bureau estimates that this ratio is approximately accurate for all
governmental entities.  Thus, of the 85,006 governmental entities, we estimate that 81,600 (91
percent) are small entities.  

     31.  Schools and Libraries.  The Commission specifically noted in the Universal Service
Order that the SBA defined small elementary and secondary schools and small libraries as those
with under $5 million in annual revenues.  The Commission further estimated that there are fewer
than 86,221 public and 26,093 private schools and fewer than 15,904 libraries that may be
affected by the decisions and rules adopted in the Universal Service Order.  We believe that
these same small entities may be affected potentially by the rules proposed in this Further Notice. 

     32.  Rural Health Care Providers.  The Commission noted in the Universal Service Order
that neither the Commission nor the SBA has developed a definition of small, rural health care
providers.  Section 254(h)(5)(B) defines the term "health care provider" and sets forth the seven
categories of health care providers eligible to receive universal service support.  We estimated
that there are fewer than 12,296 health care providers potentially affected by the rules in the
Universal Service Order.  We note that these small entities may potentially be affected by the
rules proposed in this Further Notice.

     33.   Description of Projected Reporting, Record keeping, and Other Compliance
Requirements.  Both the clarification and modification to the Commission's rules that are set forth
in this Order relate only to actions that need to be taken by the Administrator of the universal
service support mechanisms.  As a result, we tentatively conclude that there will not be any
additional burdens or costs associated with these proposed rules on any entities, including on
small entities.  We seek comment on this tentative conclusion.

     34.  Steps Taken to Minimize Significant Economic Impact on Small Entities and
Significant Alternatives Considered.  In the FRFA to the Universal Service Order, the
Commission described the steps taken to minimize the significant economic impact on a
substantial number of small entities consistent with stated objectives associated with the Schools
and Libraries section, the Rural Health Care Provider section, and the Administration section of
the Universal Service Order.  As described above, our current action to amend our rules will
benefit schools, libraries, and rural health care providers, by ensuring that funds are allocated first
to the neediest schools and libraries and that schools, libraries, and rural health care providers will
be able to receive any support approved by the Administrator that is not the subject of an appeal. 
We believe that these amended rules fulfill the statutory mandate to enhance access to
telecommunications services for schools, libraries, and rural health care providers, and fulfill the
statutory principle of providing quality services at "just, reasonable, and affordable rates,"
without imposing unnecessary burdens on schools, libraries, rural health care providers, or service
providers, including small entities.

     35.  Federal Rules That May Overlap, Duplicate, or Conflict with the Proposed Rule. 
None.

VIII.     ORDERING CLAUSES

     36.  Accordingly, IT IS ORDERED that, pursuant to the authority contained in
sections 1-4, 201-205, 218-220, 254, 303(r), 403 and 405 of the Communications Act of 1934, as
amended, 47 U.S.C.  151-154, 201-205, 218-220, 254, 303(r), 403 and 405, section 553 of the
Administrative Procedure Act, 5 U.S.C.  553, and section 1.108 of the Commission's rules, 47
C.F.R.  1.108, the Fifth Order on Reconsideration in CC Docket No. 97-21, Eleventh Order on
Reconsideration in CC Docket No. 96-45 and Further Notice of Proposed Rulemaking IS
ADOPTED.

     37.  IT IS FURTHER ORDERED that, pursuant to the authority contained in sections
1-4, 201-205, 218-220, 254, 303(r), 403 and 405 of the Communications Act of 1934, as
amended, 47 U.S.C.  151-154, 201-205, 218-220, 254, 303(r), 403 and 405, section 553 of the
Administrative Procedure Act, 5 U.S.C.  553, and section 1.108 of the Commission's rules, 47
C.F.R.  1.108, sections 54.507(g)((1)(iii) and 54.725 of the Commission's rules, 47 C.F.R.  
54.507(g)(1)(iii), 54.725 ARE AMENDED, as set forth in Appendix A attached hereto.

     38.  IT IS FURTHER ORDERED that, if the Administrator determines that sufficient
funds are available to provide support for all priority one service appeals that may be granted for
the first funding year, the Administrator may allocate support immediately to such appeals.  

     39.  IT IS FURTHER ORDERED that, to the extent funds remain after the
Administrator has allocated support to all priority one services, and the Administrator has
determined that sufficient funds are available to allocate support to all internal connection appeals
down to the seventy percent discount level, the Administrator may allocate support immediately
to such internal connection appeals that may be granted. 

     40.  IT IS FURTHER ORDERED that, because the Commission has found good
cause, this Order and 47 C.F.R.  54.725, as amended and set forth in Appendix A, IS
EFFECTIVE upon publication in the Federal Register.

     41.  IT IS FURTHER ORDERED that the Commission's Office of  Public Affairs,
Reference Operations Division, SHALL SEND a copy of this Fifth Order on Reconsideration in
CC Docket No. 97-21, Eleventh Order on Reconsideration in CC Docket No. 96-45, and Further
Notice of Proposed Rulemaking, including the Supplemental Final Regulatory Flexibility Analysis
and Initial Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of the Small
Business Administration.


                              FEDERAL COMMUNICATIONS COMMISSION


                              Magalie Roman Salas
                              Secretary



                    Appendix A -- Rule Changes

Part 54 of Title 47 of the Code of Federal Regulations is amended to read as follows:

Part 54 -- UNIVERSAL SERVICE

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

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

 54.507 Cap.

2.  Add a Note to paragraph (g)(1)(iii) to read as follows:

     Note 1:  To the extent that there are single discount percentage levels associated with
"shared services" under section 54.505(b)(4), the Administrator shall allocate funds for internal
connections beginning at the ninety percent discount level, then for the eighty-nine percent
discount, then for the eighty-eight percent discount, and shall continue committing funds for
internal connections in the same manner to the applicants at each descending discount level until
there are no funds remaining.

 54.725 Universal service disbursements during pendency of a request for review and
Administrator decision.

3.  Revise section 54.725 to read as follows:

     (a)  When a party has sought review of an Administrator decision under  54.719(a)-(c) in
connection with the schools and libraries support mechanism or the rural health care support
mechanism, the Administrator shall not reimburse a service provider for the provision of
discounted services until a final decision has been issued either by the Administrator or by the
Federal Communications Commission; provided, however, that the Administrator may disburse
funds for any amount of support that is not the subject of an appeal .  

(b)  When a party has sought review of an Administrator decision under  54.719(a)-(c) in
connection with the high cost and low income support mechanisms, the Administrator shall not
disburse support to a service provider until a final decision has been issued either by the
Administrator or by the Federal Communications Commission; provided, however, that the
Administrator may disburse funds for any amount of support that is not the subject of an appeal. 

          
       SEPARATE STATEMENT OF CHAIRMAN WILLIAM E. KENNARD

          Re:       Changes to the Board of Directors of the National Exchange Carrier Association, Inc.;
          Federal-State Joint Board on Universal Service; (CC Docket Nos. 97-21, 96-45)
     
     
     I wish to commend the staff of the Common Carrier Bureau for the sterling efforts they
have made, and the great success they have achieved, in their wise and prudent exercise of the
authority delegated to them to "issue orders interpreting our rules as necessary to ensure that
support for services provided to the schools and libraries and rural healthcare providers operate to
further our universal service goals."  I especially wish to cite the fine work of Irene Flannery and
her staff in the Accounting Policy Division, Lisa Zaina and Katherine Schroder in the Bureau
Front Office, and Larry Strickling, the Bureau Chief.  Their work has been exemplary.

     The order we release today clarifies one aspect of the method by which funds are to be
distributed to schools and libraries that are eligible for universal service support under section 254
of the Communications Act of 1934, as amended.  Eligible schools and libraries are entitled to
discounts in a range of between 20% and 90% off of the rate for eligible services.  Needier
schools and libraries get larger discounts, with need determined based on the percentage of
students in the school or school district that are eligible for the federal school lunch program.  In
addition, rural schools are eligible for greater discounts than urban schools.

     While each individual school or library is assigned a discount level that is divisible by 10
(e.g., 90%, 80%, 70%, etc.), schools and libraries can aggregate their demand and file a joint
application for which the discount level is set at the average discount of all the schools and
libraries joining in that application.  Because the discount level for a joint application is an
average, it is quite possible that the discount level will not be divisible by 10.

     The Commission adopted a specific rule, section 54.507(g)(1)(iv), to govern when the
amount of demand by schools and libraries within a specific discount level exceeds the amount of
funding available.  That rule provides:

          If the remaining funds are not sufficient to support all of the funding requests
     within a particular discount level, Schools and Libraries Corporation shall divide
     the total amount of remaining support available by the amount of support
     requested within the particular discount level to produce a pro-rate factor. 
     Schools and Libraries Corporation shall reduce the support level for each applicant
     within the particular discount level, by multiplying each applicant's requested
     amount of support by the pro-rate factor.

     The rule does not distinguish between discount levels that are divisible by 10 and discount
levels that are not divisible by 10.  Thus, if there is sufficient funding to support fully all of the
schools and libraries in the 74% discount level, but the remaining funds are insufficient to support
fully all of the applicants in the 73% discount level, then the remaining funds are allocated
proportionately among the applicants in the 73% discount level.  This is the precise issue
addressed previously, and properly, by the Common Carrier Bureau in its January 22, 1999 letter
to the Schools and Libraries Division of the Universal Service Administrative Company.

     When the Bureau made this clarification in January, Commissioner Furchtgott-Roth
quickly objected by sending a letter to the Universal Service Administrative Company, instructing
it to disregard the Bureau's action.  Despite my disagreement with Commissioner Furchtgott-
Roth's legal and policy arguments, I elected to place the matter before the full Commission to
eliminate any confusion or doubt, thus culminating in the order we release today.

     In their separate statements, Commissioners Furchtgott-Roth and Tristani make clear their
views concerning the scope of the Bureau's delegated authority under current rules.  While I am
not persuaded by all of their arguments, I certainly appreciate their concerns and will work to
accomodate them.

     I do wish to note that, contrary to Commissioner Furchtgott-Roth's suggestion, there is no
requirement that the Bureau seek pre-clearance from individual commissioners, or all of the
commissioners, when exercising delegated authority.  That would be a recipe for gridlock.  
     Delegated authority permits the Bureaus to clarify and implement the policies and rules
adopted by the full Commission, thus greatly expediting the resolution of the countless disputes
and inquiries that are presented to us.  Pre-clearance by the full Commission of Bureau-level items
would undermine the very efficiency that delegated authority is designed to promote, and would
interfere with my statutory obligation "to promote the prompt and efficient disposition of all
matters within the jurisdiction of the Commission."

     I do not question the right of individual commissioners to voice their disagreement with a
Bureau decision and to exercise their vote accordingly when presented with that decision for
review.  And I have instructed the Bureaus  to keep the commissioners apprised of actions taken
on delegated authority.  But requiring the full Commission to pre-approve the exercise by the
Bureaus of their lawfully delegated authority is flatly inconsistent with the very concept and
purpose of delegated authority and would bring the work of the Commission to a virtual halt.  I
will not permit that to happen.
         Separate Statement of Commissioner Susan Ness



     Re:  Changes to the Board of Directors of the National Exchange Carrier Association, Inc.;
     Federal-State Joint Board on Universal Service; (CC Docket Nos. 97-21, 96-45)


I support today's decision that funds for discounts to schools and libraries for internal connections
be distributed to applicants at each descending single discount percentage.  I believe that today's
decision is consistent with our rules and is the better policy result, for the following reasons:  (1)
the funds are distributed first to the most economically disadvantaged schools, as Congress and
the Commission directed; (2) funding commitments will arrive more quickly than if the
Administrator must first determine the pro rata amount for the entire category before distribution;
and (3) the probability that a small amount of remaining funds will have to be split among a large
number of applications is reduced and, thus, schools are less likely to receive a sliver wholly
inadequate to do the job.

I applaud the Universal Service Administration Company for its excellent work.  Commitment
letters for $1.66 billion have been issued, and funds are now being disbursed for services
performed.  The Common Carrier Bureau is to be commended as well for its responsive oversight
of the program.

I write separately, however, to address a larger matter -- the Bureau's role in ensuring the efficient
management of the schools and libraries and rural health care programs, consistent with the
Telecommunications Act of 1996 and Commission orders issued pursuant to that legislation.  In
October, 1997, the Commission issued the Third Report and Order, which included a special
delegation of authority to the Bureau to oversee the schools and libraries and rural health care
programs.  That delegation was broader than the general delegation of authority under 47 C.F.R.
 0.291.  The special delegation has been neither rescinded nor eviscerated.

I voted for that order because I recognized that the USAC administrator needs to have timely
guidance on many issues, and that necessarily, Commission orders take far more staff and
Commissioner time than do Bureau responses.  Moreover, the Commission is always able to
reverse a Bureau order, should we desire to substitute our judgment for that of the Bureau.  By
delegating to the Bureau, we avoid the pitfall of micromanagement which could easily hamper the
efficient operation of the program.  

To be sure, the Commission has a vital role to play in overseeing the schools and libraries
program, but we cannot afford to become mired in the details of program administration.  I am
happy to work with my colleagues to ensure that process issues do not inhibit or delay the ability
of America's schools and libraries to reap the benefits that Congress envisioned.




                                             


                     SEPARATE STATEMENT OF
              COMMISSIONER HAROLD FURCHTGOTT-ROTH
                       DISSENTING IN PART

      Re: In the Matters of: Changes to the Board of Directors of the National Exchange Carrier
     Association; Federal-State Joint Board on Universal Service; (CC Docket Nos. 97-21,
     96-45).

     I dissent in part from today's Order on Reconsideration requiring that funds for discounts
to schools and libraries for internal connections be distributed to applicants at each single
descending discount percentage.  As I have stated previously, I am concerned that distributing
funds at each single discount percentage may inadvertently disadvantage individual school
applicants in comparison to school consortia applicants.  Instead, when funds are running short, I
would prefer that funds be allocated on a pro-rata basis to all qualifying applicants in a given
discount range, thus providing more schools with a piece of the universal service pie.  

     In addition, depending upon exact levels of demand and funding, prioritizing consortia
applicants at single discount percentages could adversely effect rural schools.  For example, this
year the 79%, 78%, and 77% applications were predominantly urban in nature.  The 70%
discount, however, is one for which only "rural" schools may qualify.  Thus, by favoring single
discounts above 70%, the Commission would have favored consortia applicants who were
predominantly urban over individual applicants that the Commission knew were entirely rural. 
This year the Commission was fortunate to be able to avoid this issue by finding sufficient funds
to fully grant all of the applications with at least a 70% discount.  I remain concerned, however,
that this issue could arise again next year or in the future.   

     I am pleased, however, that this issue is before the Commission for a decision.  Indeed,
there are several important reasons why today's decision must be made by the full Commission. 
First, today's decision is not a mere "clarification" of our rules of priority.  Rather, it is a change in
our rules of priority and as such requires this Commission vote.  

     Last June the Commission adopted new rules of priority for the distribution of schools and
libraries funds.  These rules ensured that all requests for telecommunications and internet access
receive first priority.  These rules then provide that the remaining funds should be allocated to
requests for internal connections, beginning with the most economically disadvantaged schools
and libraries "as determined by the schools and libraries discount matrix."  That discount matrix
provides a series of steps or levels of discount that are available.  The Commission's rules of
priority for funding internal connections are very specific; they provide that schools eligible for a
90% discount should receive first priority.  Then they provide that: 

          To the extent funds remain, SLC shall next allocate funds toward the requests for internal
     connection submitted by schools and libraries eligible for an 80 percent discount, then for
     a 70 percent discount, and shall continue committing funds for internal connections in the
     same manner to the applicants at each descending level until there are no funds remaining. 
     

Thus, the FCC rules are very clear that requests for internal connection should be examined in
steps that correspond to our own discount matrix.  These rules of priority clearly envision
discount levels that correspond to the discount levels provided for in the discount matrix -- 90,
80, 70, etc..  Today's Order changes those rules to allocate funds at individual discount levels.  As
proof, "Rule Changes" are attached as Appendix A to the Commission's Order.  

     In addition, I would take the opportunity to note that (i) the Common Carrier Bureau was
never delegated the authority to deal with any new or novel issues of fact, law or policy, and (ii) it
is unclear whether any Bureau-level authority remains pursuant to the October 1997 Third Report
and Order, 12 FCC Rcd 22485, after the Commission's subsequent modification of the universal
service corporation's authority and adoption of specific procedures for the review of universal
decisions in the Eighth Order on Reconsideration, CC Docket No. 96-45, rel. November 20,
1998.  In the 1997 Order, the Commission had determined that the "administrative corporations
general authority to administer support mechanisms should largely enable them to resolve these
[unanticipated] problems," such as the rules with respect to websites.  In that context, the
Commission also encouraged the Common Carrier Bureau to work with the administrative
corporations to "clarify" Commission rules.  The Commission did not delegate to the Bureau the
authority to determine any new or novel issues of fact, law or policy, as would be required for
such an unusual delegation.  

     Subsequently, section 2005(b)(2)(A) of Senate Bill 1768 prompted several universal
service structural revisions and provided for an extremely limited administrative entity:

          [T]he entity proposed by the Commission to administer the programs -- (i) is
     limited to implementation of the FCC rules for applications for discounts and
     processing the applications necessary to determine eligibility for discounts under
     section 254(h) of the Communications ct of 1934 (47 U.S.C. 254(h)) as
     determined by the Commission; (ii) may not administer the program in any manner
     that requires that entity to interpret the intent of Congress in establishing the
     programs or interpret any rule promulgated by the Commission  in carrying out the
     programs, without appropriate consultation and guidance from the Commission.

In light of this more limited administrative function, the Commission revised its corporate
structures and procedures for reviewing universal service decisions.  In that context, the
Commission concluded that it would "limit the Bureau's review function solely to the review of
issues that raise no novel questions of fact, law, or policy."  Thus, the Commission ensured that
"novel questions of fact, law, or policy shall be brought before the full Commission."  Thus, it is
clear that the full Commission must determine new and novel issues of fact, law and policy.  It is
not within the Common Carrier Bureau's discretion to determine the best policy when new or
novel questions arise.  Rather, that authority remains, appropriately and solely, with the full
Commission.  

     Finally, I would note that the October 1997 Order is clear in one regard.  It requires the
Common Carrier Bureau "to issue orders" whenever it acts to clarify Commission rules.  Even
under the broadest interpretation of the Bureau's authority, the word "orders" must be given
meaning.  In the context of this issue, no bureau order was issued.  Rather, a letter was sent by
the Common Carrier Bureau "interpreting" -- or more accurately misinterpreting -- our prior rules
and providing guidance in response to an inquiry from the Schools and Libraries Division.  But
such a "letter" cannot substitute for an "order." Particularly since Bureau-level orders have a
specific internal process -- requiring that they be provided to the Commissioners for a period of
review -- that was not followed here.  Thus, the only thing that is clear with regard to the
October 1997 Order is that if any authority remains with the Common Carrier Bureau to "clarify"
anything, the Bureau failed to follow the only procedural mechanism available for them -- issuing
an order.  By failing to issue an "order" and instead attempting to clarify an issue through an
informal letter, the Bureau failed to follow the appropriate procedures explicitly required by the
Third Report and Order.  



                           Attachment I












                         February 9, 1999



Cheryl Parrino
President 
Universal Service Administrative Company
2120 L Street, N.W., Suite 600 
Washington, D.C. 20037

Dear Ms. Parrino:

     I write this letter and urge immediate action on behalf of numerous schools across the
country -- and particularly the rural schools at the 70% discount level -- that are in danger of
being unfairly excluded from recent Schools and Libraries Division (SLD) distributions that are
inconsistent with Federal Communications Commission Orders.  Schools with discounts of
between 70% and 76% should have been included in the most recent distributions.  These
excluded schools include many rural schools, in large part because the 70% discount level is only
available to rural applicants.  

     This issue was recently raised by the Schools and Libraries Division of the Universal
Service Company (USAC) regarding the method of distributing funds for discounts to schools and
libraries.  As I am sure you are aware, last June the Commission adopted new rules of priority for
the distribution of those funds.  These rules ensured that all requests for telecommunications and
internet access receive first priority.  These rules then provide that the remaining funds should be
allocated to requests for internal connections, beginning with the most economically
disadvantaged schools and libraries "as determined by the schools and libraries discount matrix." 
That discount matrix provides a series of steps or levels of discount that are available.  Our rules
provide that schools eligible for a 90% discount should receive first priority.  Our rules then
provide that: 

          To the extent funds remain, SLC shall next allocate funds toward the requests for internal
     connection submitted by schools and libraries eligible for an 80 percent discount, then for
     a 70 percent discount, and shall continue committing funds for internal connections in the
     same manner to the applicants at each descending level until there are no funds remaining. 
     

Thus, the FCC rules are very clear that requests for internal connection should be examined in
steps that correspond to our own discount matrix.  Indeed, USAC seems to have interpreted the
Commission's rules in such a manner.  Their own answers to frequently asked questions sheet
seems to make this clear:

          10.  If funds are available for internal connections requests below the 90% discount level,
     how will SLC make these funding decisions?

                    Consistent with FCC rules, we will consider internal connections requests below
          the 90% discount level by ten-point discount "bands" - for example, 80-89%, 70-
          79%, and so on.  If there are sufficient funds to grant all approved requests within
          a band, we will set aside funds for the approved requests in that band.  A funding
          commitment letter will be issued for each applicant when we can fully respond to
          all requests in that application.

To ensure that there was no confusion, the FCC clarified its rules last June with a hypothetical:

          If the remaining funds are not sufficient to support all of the funding requests that comply
     with the commission's rules and eligibility requirements within a particular discount level,
     SLC shall divide the total amount of remaining support available by the amount of support
     requested within a particular discount level to produce a pro rata factor.  Thus, for
     example, if all applicants eligible for discounts of 90% may be fully funded, but there are
     not sufficient funds remaining to fully fund internal connections for applicants eligible for
     discounts of 80%, SLC shall reduce the support level for each applicant that is eligible for
     an 80% discount by multiplying the appropriate requested amount of support by the pro-
     rata factor.  SLC shall then allocate funds to each applicant within the 80% discount
     category based on this reduced discount level.

     Recently, this very situation arose.  The SLD advised the Commission that it would not be
able to provide support for all requests for internal connections below the ninety percent discount
level.  Despite such previous guidance and explicit examples in the Commission's Order, "SLD
propose[d] allocating funds for discounts to schools and libraries beginning with those applicants
at the eighty-nine percent discount level and, to the extent funds remain, continuing to allocate
funds for discounts to applicants at each descending single discount percentage."  Such a
proposal, however, is inconsistent with the Commission's rules, the matrix the Commission has
adopted, the Commission's own example that was meant to provide guidance to SLD, and SLD's
own earlier interpretation.  

     Even more astonishing was the Common Carrier Bureau's response.  Without consulting
the Commission, the Common Carrier Bureau concluded that the proposal is "consistent" with the
Commission's direction.  To the contrary, this proposal is inconsistent with the Commission's
explicit direction.  Moreover, the Common Carrier Bureau's role is limited "to the review of issues
that raise no novel questions of fact, law, or policy."   Thus, even if our rules were ambiguous
and would have allowed for such an interpretation, which I question, it would clearly be a novel
question of fact, law or policy and as such could only be decided by the full Commission.  As
such, you should disregard such informal advice provided by the Common Carrier Bureau until
the full Commission provides further guidance.  Moreover, to the extent that you rely upon such
advice, USAC will remain liable for any application that would have received support that was
denied because of this misinterpretation of a Commission Order by a Bureau that may not provide
advice on new or novel issues.  In other words, you should be on notice that such advice may not
shield USAC from future liability by disadvantaged applicants.  

     In addition, I note that I am unpersuaded by the Office of General Counsels' arguments in
support of this request by SLD.  First, they argue that the rules of priority must include the
particular percentage points that result form the calculation of average discounts for shared
services pursuant to Section 54.505(b)(4).  The Commission's rules, however, are very specific on
this point and provide only for allocating funds for internal connections to disadvantaged schools
and libraries "as determined by the schools and libraries discount matrix in section 54.505(c) of
this part."   Indeed, there is no mention of Section 54.505(b)(4).  Similarly, the next section of
the rules provides for the continued allocation of funds "towards the requests for internal
connections submitted by schools and libraries eligible for an 80 percent discount, then for a 70
percent discount, and shall continue committing funds for internal connections in the same manner
to the applicants at each descending discount level until there are no funds remaining."  Thus,
these rules of priority clearly envision discount levels that correspond to the discount levels
provided for in the discount matrix -- 90, 80, 70, etc..  

     Second, the Office of the General Counsel argues that, even if the rules are ambiguous, the
Common Carrier Bureau's interpretation is reasonable.  Again, I point out that the reasonableness
of their interpretation is not the standard.  Rather, the question is whether or not this is a new or
novel question of fact, law or policy.  There may be very good reasons why this should be the
rule.  There may, however, be equally or even more compelling reasons why it should not.  For
example, allowing consortia applications to receive funds prior to individual schools may result in
some schools with a lower priority (e.g. 60%) receiving funds over other individual applicants
with a higher priority (e.g. 70%) merely because they paired with a school with a higher priority
(e.g. 90%).  Regardless, it is not within the Common Carrier Bureau's discretion to determine the
best policy when new or novel questions arise.  Rather, that authority remains solely with the full
Commission.  

     I am very disturbed by the arbitrary nature of this decision and the effect it will have on
numerous schools across the country.  For illustrative purposes, I have attached a preliminary list
of the schools that have been disadvantaged by this arbitrary interpretation.  All applicants deserve
to be treated in a fair and consistent manner.  Changing the rules for distribution to favor some
schools and disadvantage others in the middle of the distribution process hardly seems fair --
indeed, it seems rather arbitrary.

     What is even more disturbing about this flagrant contradiction of clear Commission
guidance, however, may be the detrimental effect that this decision is having on many rural
applicants.  Rural areas should always be the primary beneficiary of universal service programs. 
But under these revised rules, the rural applicants are the most likely to be disadvantaged.  As you
are aware, there have been sufficient funds to meet the requests of all applicants that qualify for an
80% discount and above.  It appears, however, that there may be insufficient funds to meet all of
the requests in the 70-79% range.  So what difference does it make to rural America that the
79%, 78% and 77% consolidated applications have been provided 100% of their requests while
the 70% applicants will get less and maybe nothing?  The 79%, 78%, and 77% applications are
predominantly urban in nature, but the 70% discount is one for which only "rural" schools may
qualify.  Thus, by favoring discounts above 70%, the Commission is favoring consortia applicants
who are predominantly urban.  Indeed, SLD estimates that the latest wave of commitment letters
funding schools between 77%-79% results in funds flowing to schools that are almost 90%
urban.  In contrast, we know that 100% of the applicants qualifying for a 70% discount are
rural.  But there may not be any money left for them.  

     To illustrate how this will adversely effect rural America, I have compared the applicants
with a 77% to 79% discount, with those applicants qualifying for the 70% discount.  Applicants
with a 77% to 79% discount requested a total of $48 million, while applicants with a 70%
discount similarly requested about $51 million.  But the distribution among states is dramatically
different, as urban schools receive the lion's share of the funds distributed with a 77% to 79%
discount.  Schools from predominantly rural states receive significantly less.  For example, schools
from such rural states as Alaska (1 school requesting $7,000), Montana (3 schools totaling
$16,000), and Kansas (6 schools totaling $200,000) will receive relatively little money in the 77%
to 79% discount distribution.  Indeed, not a single school from North Dakota will receive any
money in such a distribution.  In the 70% discount category, however, there are eight schools in
Alaska (for a total of over $200,000), 26 schools in Montana (for a total of more than $325,000),
48 schools in Kansas (for a total of almost $1.2 million), and 39 schools in North Dakota (for a
total of $336,000) that would qualify.  So who are the big winners in the upper brackets?  Schools
in urban areas such as New York (almost $8.5 million) and Washington, DC (almost $2.7
million).  Thus, by excluding the 70% category from the most recent distributions, SLD has
funnelled money away from rural areas and towards urban areas.  This is not what the
Commission intended.  Instead, the Commission envisioned the rural schools that qualify for a
70% discount getting a pro-rata share of these remaining funds, not the leftovers after the
predominantly urban schools in the 77%-79% range have been fully funded.  

      Indeed, last June, the Commission recognized that our matrix system with its steps
favored rural schools and praised that result:

          Because these rules of priority utilize the discount matrix, which provides higher discounts
     for schools and libraries in rural areas, they also equitably provide greater support to
     schools and libraries in rural areas.  These rules, therefore, further implement the
     Commission's prior decisions to allocate support for schools and libraries in a manner that
     provides higher levels of support for rural areas and areas with greater economic
     disadvantage, while recognizing that every eligible school and library should receive some
     assistance.  

I cannot stand by and watch the Common Carrier Bureau re-interpret our rules arbitrarily
benefitting some schools and harming others, and in particular I will not support interpreting these
rules in a manner that harms those schools in rural America.  

     With these concerns in mind, I request that the SLD reallocate on a pro-rata basis the
remaining funds to all qualifying applicants in the 70%-79% range.  The inclusion of the schools
in the 70%-76% range -- particularly those rural schools at the 70% discount level -- will provide
them with the same opportunity for a share of the universal service pie that the urban schools in
the 77%-79% range are currently receiving.  

     I would appreciate your prompt attention to these issues and request an official response
by Thursday, February 11, 1999.  Should you or your staff have any questions, please do not
hesitate to contact Kevin Martin on my staff at 418-2000.  


                                        Sincerely, 



                                        Harold Furchtgott-Roth
                                        Commissioner             
     



                                                                           
                     Separate Statement of
                  Commissioner Gloria Tristani

     Re:  Changes to the Board of Directors of the National
     Exchange Carrier Association, Inc.; Federal-State Joint
     Board on Universal Service (CC Docket Nos. 97-21, 96-
     45). 


     I support the substance of the Commission's decision
regarding the allocation of funding based on individual
percentage discount levels.  This result is compelled by the
principle already adopted by this Commission that poor
schools should be funded before wealthy schools.  
   
     Today's decision best comports with common sense as
well.  If there is a limited amount of money remaining for
internal connections, it should be distributed in a manner
that results in the greatest educational benefits for the most
students.  The instant order ensures that, when there is
limited funding for internal connections, the poorest schools
will be fully funded before moving on to other schools.  In my
view, it would be illogical to have a rule that could result in a
group of schools receiving as little as five or ten percent of
the money they requested for internal connections.  Such an
apportionment of limited funds for internal connections is a
recipe for wasted funding.  It makes far more sense to ensure
that at least some schools get the money they need to install
internal connections.  Today's order does that.
   
     I wish to register my concern with the views expressed
elsewhere that we should encourage Bureau-level decisions
over Commission-level decisions on important and novel
questions.  First, there is disagreement about whether a prior
Commission decision expanded the Common Carrier
Bureau's authority to address Schools and Libraries issues
that exceeds the Bureau's traditional delegated authority. 
Some say the Bureau has authority to resolve novel School
and Libraries questions based on an October 1997 order in
which the Commission "included a special delegation of
authority to the Bureau to oversee the schools and libraries
and rural health care programs."  The alternative view is that the October
1997 order fails to grant any additional authority to the Bureau because it does not unambiguously
expand the Bureau's longstanding authority to resolve issues under outstanding precedents and
guidelines.  
   
     Even if the Commission did delegate additional authority to the Bureau in the October 1997
order, it is not clear to me where the dividing line lies between the Bureau's existing authority to
resolve issues under outstanding precedents and the purportedly new authority to "oversee" the
schools and libraries program.  I expect that any undertaking to clarify our existing rules would be
done with reference to established Commission principles and precedent.
   
     Second, and perhaps more important than the legal issue, is the practical question of where
decisions about the Schools and Libraries Program should get made.  Some appear to favor a
substantial role for the Bureau and a less active role for the full Commission.  Those arguments are
aimed at maintaining the forward progress of the Schools and Libraries Program by avoiding
operational delays that could occur if the Commission micromanaged the Universal Service
Administrative Company.  
   
     I could not agree more that we need to maintain the operational viability of the program.  I
have been an unwavering supporter of the program from my first day at the Commission, and I am
committed to seeing this program become the success that Congress envisioned in the 1996 Act.  And I
agree that a variety of questions are appropriately resolved by the Common Carrier Bureau.  But
there are many questions that, in my view, must be resolved by the full Commission.  
   
     Today's decision, for instance, likely will determine whether or not some schools get funding
for internal connections in next year's funding cycle.  Apart from the legal issue of delegated
authority, how could today's decision not be made by the full Commission?  It would be difficult for
me to answer a school principal or a Member of Congress who inquired of me, "Why did X school get
no funding for wiring?" under the rule we adopt today.  Having cast a vote in favor of today's
decision, I take full responsibility for, and am able to defend, the way this rule impacts future
applications for funding.  It would be a very different matter if today's decision were one in which I
did not participate.   
   
     I also believe that Congress wants the Chairman and Commissioners actively involved in
overseeing the Schools and Libraries Program.  Congress manifested this intention when it specifically
limited the functioning of USAC to the implementation of FCC rules.  Congress, in my view, was
expressing a desire for greater accountability for the Schools and Libraries Program.  I believe that
request is best accommodated by the active involvement of the Chairman and Commissioners on
important questions relating to the Schools and Libraries Program. 
   
     The order that gives rise to the legal question regarding delegated authority was adopted just
weeks before the arrival of four new Commissioners.  Given the significant developments surrounding
the program since that time, and in light of today's public discussion of these issues, I believe this
Commission should have the opportunity to put its stamp on the procedures that it will follow in this
area.  
   
     Finally, I would add my voice to that of Chairman Kennard and Commissioner Ness in
applauding the work of the Common Carrier Bureau on the Schools and Libraries Program.  They
have done an outstanding job of advising us in this area, and they deserve a great deal of credit for
getting this important and multifaceted program off the ground.  I look forward to having the
Bureau's continued counsel on matters before the Commission and to their handing of issues that are
appropriately addressed at the Bureau level.