March 20, 1998

By taking no further action, the Common Carrier Bureau allowed the proposed universal service contribution factors for the second quarter of 1998 announced in the Public Notice released February 27, 1998, to go into effect today. For a variety of reasons, I objected to these contribution factors when released and continue to be concerned about the Bureau's calculations. Because of these concerns and despite the fact that the Commission may be able to resolve some of these issues in the upcoming report to Congress as required by the 1998 appropriations legislation, Pub. L. No. 105-119, I cannot support the universal service contribution factors as established by the Bureau.

Before elaborating on my concerns, I would like to make one point clear. I am committed to the full and proper implementation of all sections of the Communications Act, including Section 254. I understand the great interest of Congress and the American people in universal service. I recognize that the Commission has the responsibility to find funding sufficient to support the federal universal service fund. I am not persuaded, however, that the steps the Commission has taken to date meet all of the requirements of Section 254. With these reservations as well as my concerns regarding the effects that the Commission's actions continue to have on rates, I cannot endorse the contribution factors.

Specifically, as I described more fully in my earlier Separate Statement Regarding the Second Quarter 1998 Universal Service Contribution Factors, February 27, 1998, I object to the Bureau's continued failure to take into account the reality of uncollectibles, thus endangering the high cost fund. As a result of the inability to collect from certain carriers, there was a shortfall for the high cost fund distribution that was made in February, and it is currently estimated that there will be a similar shortfall for meeting high cost fund disbursements due to carriers in March. Yet the Bureau still includes no adjustments for uncollectibles. In addition, I am reluctant to support any further expansion in the new universal service programs, even the $25 million for the Schools and Libraries Corporation submitted here. Finally, I cannot support in good faith the exorbitant administrative expenses proposed by the Schools and Libraries Corporation, which are currently estimated to increase by an average of $18,000 every day for the next quarter.

In addition to those concerns that I raised in February, I also object to the fact that the contributions for the schools, libraries, and rural health care support mechanisms are based not only on interstate but also on intrastate revenues. The legality of this approach to calculating contributions is highly questionable. As I read the Communications Act, it does not permit the Commission to assess contributions for universal service support mechanisms based on intrastate revenues. Rather, the Act makes clear that charges based on such revenues are within the exclusive province of the States.

In the Communications Act, Congress explicitly set forth a jurisdictional principle to govern its application. Section 2(b) of the Act provides that "nothing in this Act shall be construed to apply or to give the Commission jurisdiction with respect to . . . charges, classifications, practices, services, facilities, or regulations for or in connection with intrastate communication service by wire or radio of any carrier." 47 U.S.C. section 152(b)(emphasis added). The Supreme Court has explained that by this section the Act "not only imposes jurisdictional limits on the power of a federal agency, but also . . . provides its own rule of statutory construction." Louisiana PSC v. FCC, 476 U.S. 355, 377 n.5 (1986).

By "fenc[ing] off from FCC reach or regulation intrastate matters," id. at 370, section 2(b)works, together with other provisions, to establish the Act's system of dual federal-state regulation for telecommunications. In essence, the Act creates federal authority over interstate communications services while protecting state jurisdiction over intrastate services. See Louisiana PSC v. FCC, 476 U.S. at 359 (internal citations omitted) ("[T]he Act grants to the FCC the authority to regulate 'interstate and foreign commerce in wire and radio communication' while expressly denying that agency 'jurisdiction with respect to . . . intrastate communications service.").

To be sure, there are exceptions to section 2(b)'s jurisdictional limitation. See 47 U.S.C. section 152(b) ("Except as provided in sections 223 through 227, inclusive, and section 332, and subject to the provisions of section 301 and title VI . . ."). These exceptions must be explicit. Section 254, however, is not included in that group and nothing else in the Act exempts section 254 from the operations of 2(b).⁽¹⁾ The statutory prohibition against federal jurisdiction over intrastate communications thus fully applies to section 254.

The Supreme Court has squarely held that the specific limit on the Commission's jurisdiction contained in section 2(b) trumps other parts of the Act that confer undifferentiated grants of substantive authority to the Commission. In Louisiana PSC v. FCC, the Commission argued that, notwithstanding section 2(b), it could require states to follows federal depreciation rules for purposes of intrastate ratemaking because section 220 authorized the Commission to set depreciation rates and did not expressly prohibit the application of such rates to intrastate pricing.

The Court disagreed. It ruled that the Commission was powerless to extend its rules into the intrastate context: "While it is, no doubt, possible to find some support in the broad language of the [depreciation provision] for [the Commission's] position, we do not find the meaning of the section so unambiguous or straightforward as to override the command of section 152(b) that 'nothing in this chapter shall be construed to apply to or give the Commission jurisdiction' over intrastate service." Louisiana PSC v. FCC, 476 U.S. at 377.

The analogy to this situation is clear. Just as section 220's general grant of authority over depreciation rates did not empower the Commission to regulate intrastate aspects of depreciation, neither does section 254's authorization to establish a universal service fund allow the Commission to assert jurisdiction over intrastate revenues in implementing that fund. In short, it is irrelevant, under Louisiana PSC, that section 254 does not itself forbid the Commission from reaching into matters relating to intrastate service. That is why Congress included section 2(b)in the Act.

Nothing in section 254 of the Act, the provision that deals with the substance of universal service, trumps the express limitation on the Commission's authority in section 2(b). Quite the contrary, section 254 replicates the general scheme of dual federal-state power that characterizes the Act as a whole.

Section 254(d) speaks to federal authority over universal service, authorizing the Commission to establish a federal universal service fund subsidized by interstate carriers: "Every telecommunications carrier that provides interstate telecommunications services shall contribute on an equitable and nondiscriminatory basis, to the specific, predictable, and sufficient mechanisms established by the Commission to preserve and advance universal service." 47 U.S.C. section 254(d). Section 254(f),in turn, addresses the role of the states in universal service. It carefully preserves state authority to create support mechanisms not inconsistent with any federal program and leaves to the states the regulation of intrastate carriers: "Every telecommunications carrier that provides intrastate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, in a manner determined by the State to the preservation and advancement of universal service in that State." Id. section 254(f). Both the language and the structure of sections 254(d) and 254(f) clearly indicate that Congress intended that both federal and state governments have separate, but complementary, roles in providing universal service.

This view of dual federal and state roles is further supported by section 254(h). That provision expressly provides states with the responsibility of determining the rates schools and libraries would pay for discounted intrastate services: "The discount shall be an amount that the Commission, with respect to interstate services, and the States, with respect to intrastate services, determine is appropriate and necessary to ensure affordable access to and use of such services by such entities." 47 U.S.C. section 254(h). Section 254(h) provides no specific authority to overturn section 2(b)'s general federal-state division; nor does it contemplate a separate federal fund that draws on intrastate revenue. Rather, 254(h) indicates that Congress envisioned a separate state fund, which must draw on intrastate revenues, to provide the discounted rates for intrastate telecommunications services to schools and libraries.⁽²⁾

Nowhere in section 254 did Congress require carriers providing intrastate services to contribute to any federal support mechanism. Thus, section 254, read in light of the express directive of section 2(b), precludes the Commission from asserting jurisdiction over revenues based on intrastate activities. Although section 254 does not explicitly prohibit the Commission from calculating the contributions of interstate service providers based on intrastate revenues, such a practice would undermine the dual scheme established in section 254 and, in any event, violate section 2(b).

First, the assertion of federal authority over intrastate revenues impinges upon the states' ability to establish their own universal service funds, which Congress expressly provided for in section 254(f) and envisioned in Section 254(h). If the federal government has first rights to intrastate revenues, there will be a smaller pool of resources for the states to draw upon in establishing their own universal service programs. Although in theory federal and state regulatory bodies could tax away all intrastate revenues in order to support universal service, the reality is that the amount of intrastate revenue that can be allocated for this purpose is limited. I think that when Congress went to the trouble to authorize state universal service plans, it meant for those plans to be fiscally viable and, therefore, to have an independent funding base.

Conversely, as long as the federal program applies to intrastate revenues, any state plan that relies on that source of funding would violate section 254(f). That section requires that state plans cannot "rely on or burden federal universal service mechanisms." Surely Congress did not mean to prohibit states from drawing on intrastate revenue; indeed, they expressly authorized it in Section 254(f). But as long as there is overlap between funding sources for federal and state service plans, any state plan interferes with one of the federal sources of revenue, thus "burdening" the federal mechanisms. Limiting the Commission to interstate revenues and eliminating the overlap, however, solves this problem.

Apart from undermining the purpose of section 254 to allow for viable state plans to complement federal universal service efforts, as described above, the Commission's exercise of jurisdiction over intrastate revenues contravenes the plain language of section 2(b).

Finally, I believe that the manner in which the FCC has implemented these provisions violates the statutory requirement that the funding mechanisms for universal service be equitable and nondiscriminatory. Section 254(b)(4) embodies the general principle that contributions to universal service must be equitable and nondiscriminatory. But the federal assessment of intrastate revenues creates a competitive disadvantage for interstate telecommunications carriers that provide intrastate services. It does so in two ways.

First, these carriers also compete, in local markets, against purely intrastate carriers. The interstate carriers, however, are forced to pay more in universal service fees because they have federal obligations that their intrastate competitors do not. As the dissenting state members of the Joint Board explained, "a carrier with intrastate revenues of a billion dollars a year would be subject to no federal USF assessment at all, while a carrier with $999,999,999.000 of intrastate revenue and one dollar of interstate revenue would be subject to assessment for the whole billion dollars of its revenue." Dissenting Statement of Commissioners Kenneth McClure, Missouri Public Service Commission and Laska Schoenfelder, South Dakota Public Utilities Commission, April 21, 1997.

In addition, the carriers that have both interstate and intrastate revenues are also at a competitive disadvantage vis-a-vis their purely interstate competitors. While the Commission bases the universal service contribution on both interstate and intrastate revenues, it limits a carrier to recovering the entire contribution through interstate revenues. As it has no jurisdiction over intrastate rates, the Commission cannot ensure that carriers would be able to recover the intrastate portion of the contribution in their intrastate rates. Thus, a carrier is required to recover assessments on their intrastate revenues in their prices for interstate services. This recovery mechanism discriminates against carriers who derive a significant amount of their revenues from intrastate activities, as their recovery rates for interstate services would be higher than their purely interstate counterparts.

Thus, the scheme that the FCC has established adversely effects the ability of interstate providers of intrastate services to compete with purely intrastate providers and with purely interstate providers. Such disparities cannot meet the section 254 requirements that contributions to universal service be equitable and nondiscriminatory.

In conclusion, I reiterate my support for the need to find funding sufficient to support the federal universal service fund. I recognize that respecting State authority over intrastate revenues may make this responsibility more difficult; the ends, however, cannot justify the means. I hope that the Commission will use the upcoming report to Congress required by the 1998 appropriations legislation, Pub. L. No. 105-119, as an opportunity to revisit the scope of our authority over intrastate revenues as well as the mechanics of our new universal service system. Without such revisions, I am afraid that the current system will not be able to support access to telecommunications services for all.

2. Section 254(k) similarly provides an express division of authority between "the Commission, with respect to interstate services, and the States, with respect to intrastate services" regarding cost allocation rules and accounting safeguards. 47 U.S.C. section 254(k).