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April 10, 1998


Re: Federal-State Joint Board on Universal Service, Report to Congress, CC Docket 96-45.


The majority has worked hard to make this report a success. Comments have been received from the public. En banc hearings have been held. Many staff members have invested countless hours in preparing this report. Everyone involved has had the best of intentions.

I wish that there were a way that I could vote with the majority on this report. Efforts and intentions are commendable. They were also commendable in the May 1997 order on universal service. But efforts and intentions alone are not sufficient to lead to a good order or a good report on universal service.

Priorities matter. Rural, high-cost universal service is not just one of many objectives of Section 254; it is the highest priority. Rural, high-cost universal service issues should not be resolved and implemented in some dim and distant future after all other universal service issues have been resolved; rural, high-cost universal service issues should be resolved and implemented first. Rural, high-cost universal service should not be viewed as the residual after enormous amounts for other federal universal service obligations have been promised; rural, high-cost universal service should receive the lion's share of any increase in the federal universal service fund.

New federal universal service policy should not discard prior programs through a revolutionary process; new federal universal service programs should develop through a careful evolutionary process. Federal universal service programs should not be funded by unlimited, hidden taxes and fees, negotiated behind closed doors, that harm all consumers of telecommunications services through ever increasing prices; federal universal service programs must be funded by prudent mechanisms that allow for lower, and consequently more affordable, telecommunications rates for all Americans. Federal universal service programs should not stifle innovation and competition; they must encourage them. Federal universal service programs should not be based on creative and expansive readings of the law; they should be based on narrow readings of the law. Federal universal service programs should not ignore Congressional intent; they must reflect it.

For these and other reasons explained below, I must reluctantly and respectfully dissent from the majority opinion today.

Congressional Intent Regarding Federal Universal Service Programs

For many years, a universal service funding mechanism, based on federal collection of fees from interstate service revenues, has defrayed the costs of service in rural, high-cost areas. It has been a system of subsidies with neither great efficiencies nor great excesses. It has evolved with little fanfare or controversy.

The Telecommunications Act of 1996 placed in statute what had largely evolved by regulation. Section 254 is an evolution of preexisting programs, not a revolution that endangers those programs to create entirely new ones. The clear emphasis of Section 254 is to preserve and enhance universal service in rural, high-cost areas of the country. There are other goals of Section 254, but it is difficult to read Section 254 in its entirety and understand how a federal universal service fund program could have as its primary emphasis anything other than rural, high-cost support; and it is even more difficult to understand how any portion of this section could proceed piecemeal before the rural, high-costs issues are resolved and in a fashion that jeopardizes support for rural, high-cost areas. And it is still further difficult to read Section 254 to lead to funding mechanisms that make telecommunications services less affordable to all Americans on the pretext of supporting non-telecommunications plant, equipment, and peripheral services. Even a few conversations with Members and staff reveal that Congress intended primarily to make telecommunications services more -- not less -- affordable through support of rural, high-cost areas under Section 254; many conversations make the point more forcefully.

Somewhere between Capitol Hill and 1919 M Street, N.W., the intention of Congress seems to have been lost. Last May, the Commission issued an order on universal service that was more revolutionary than evolutionary. Much thought and care went into this revolutionary order; it was intellectually sophisticated and established novel interpretations of the law and Commission authority; but, in the process, it seems to have inadvertently lost sight of both the intent and the letter of the law.

The failure of the Commission on universal service was not lost on Congress; it decided to give the FCC a second chance to redeem itself. Congress requested a report from the FCC not because Congress was pleased with the earlier universal decision; Congress requested the report precisely because it was displeased.

The report that the Commission submits to Congress is a missed opportunity. We could correct past mistakes, but we do not. We could affirm a commitment to Congressional intent, but we do not. Senator Dorgan eloquently suggested that, if the FCC has made a mistake, it should now make a "U-turn."(1)

Instead, we largely reaffirm past decisions.

Untenable Taxes

The federal government has had universal service programs for rural, high-cost areas and for low-income Americans for many years. These programs have been quietly met with a tax of approximately 3 percent on interstate telecommunications services.

Section 254 sets forth goals that emphasize rural, high-cost support as well as low-income support and other objectives. The Commission must be nimble and energetic to meet all of those goals. Instead, we have made costly promises for some services without making promises for increases in rural, high-cost programs. How much will all of these promises cost? No one can say with certainty.

Commission orders last year set caps of $2.25 billion annually for schools and libraries. For the second quarter of 1997, we have imposed a 0.71 percent tax on all telecomm services, both interstate and intrastate, to support schools and libraries programs for an amount of $1.3 billion annual rate. The $2.25 billion annual rate would require a 1.22 percent tax on all telecommunications. Moreover, as I explain below, I have substantial doubts about our authority to tax intrastate services directly or even to use them as a basis for taxes. To support fully the promised schools and libraries program with just interstate telecommunications service revenue would require a tax rate of 3.2 percent.

The Commission has thus set about to promise a schools and libraries program that can only be funded with a 3.2 percent tax. New programs for rural health care providers and for low-income programs add another 1 billion, or a tax rate of 1.4 percent on interstate services for a cumulative incremental tax rate of 4.6 percent on interstate telecommunications services. These promises have been made before any incremental expansion of the federal high-cost program is decided. It is difficult for me to imagine how Congress intended the FCC to spend less on any incremental new rural, high-cost support than on the other universal service programs. It is thus possible that, to meet Congressional intent without reducing the promises already made for other universal service programs will require an incremental federal tax rate of 10 percent on interstate telecommunications services on top of the preexisting 3 percent tax.

The specific parameters in the preceding paragraph are only illustrative. They may be higher or lower than actual values, but any incremental rate close to 5 percent, much less 10 percent, would be punitive as it would lead to substantial price increases in interstate telecommunications services and would harm the very consumers that universal service is intended to help. The interstate telecommunications service market would shrink in response to over-taxation. Fewer firms would invest in the industry; fewer firms would innovate; American leadership in world markets would erode. The greater the taxes on interstate telecommunications services, the greater the economic pressures for both consumers and businesses to seek to avoid these taxes through unregulated technologies.

Congress did not envision substantial new taxes on interstate or other telecommunications services as a result of the Telecommunications Act of 1996, nor did it envision price increases -- much less substantial price increases -- in any telecommunications market.(2) The harm to consumers from increases in universal service taxes is not just the direct expense of the taxes themselves. Prof. J. Hausman of MIT has estimated that consumers lose a total of more than $2 in consumer benefits for every dollar paid in taxes on long-distance services.(3) Do American households really want to lose approximately $14 billion annually in consumer benefits -- or approximately $140 annually per household -- to support Section 254?(4)

Preserving Universal Service

The proper path for the FCC to interpret Section 254 is not an easy one. But we should begin with the old adage: Do no harm. We should seek to do no harm to the consumers who currently benefit from federal universal service programs, and we should build on that program in a prudent manner that does not overtax and harm telecommunications consumers.

The Commission has compounded untenable policy and taxes with untenable promises. Some potential universal service beneficiaries have been "promised" enormous and unending benefits, long before there are actual revenues for these programs and long before other potential universal service beneficiaries have voiced their concerns. What has ensued is an unfortunate confrontation among various potential beneficiaries from universal service. Simply stated, the potential pot of revenue that the FCC can collect for universal service from fees on interstate services is limited. And the potential beneficiaries are locked in a struggle to see who will receive the lion's share of the benefits. Yet some parties have been promised in advance large and unsustainable amounts of money to the exclusion of other parties.

Authority To Establish The Size And Funding Mechanisms For Universal Service

The May 1997 universal service order promises the Schools and Libraries Corporation, an entity of questionable legal status,(5) $2.25 billion annually. This target is not written in statute nor is it an amount that was demonstrably contemplated by Congress. Moreover, it is an arbitrary target, one that the FCC could equally well, and with equal legal authority, have set at $22.5 million, or $225 million, or $22.5 billion, or $225 billion.(6) Does the FCC acting alone have the legal authority to set arbitrary targets for SLC spending and then establish tax schemes to fund those targets? Sadly, despite the enormous political, economic, and technological consequences of these decisions, the answer appears to be "yes."

These decisions would be large ones even for Congress, much more for the FCC, to make. The FCC must be prudent in making these decisions, and extraordinarily cautious about making promises. Our only legal means of fulfilling large promises is to impose devastating "fees" on the interstate telecommunications markets. Congress, in contrast, has other means of financing programs and fulfilling large promises. In many ways, perhaps it would be better for Congress rather than the FCC to make many of the large decisions about the contours of universal service. Current law, however, appears to place these decisions with the FCC. We should work within the law of Section 254, prudently, and with the close advise of Congress. Only in that way can Section 254 work.

The FCC has enormous power under Section 254. The wisest exercise of power, whether in this section, or in other areas of law, is self-restraint rather than profligacy. We must have a plan to implement Section 254 that makes sense. It must preserve universal service without imposing devastating taxes. It must focus on high-cost, rural issues. It must have clearly more benefits than harm. All of this the FCC can and should do on its own. To the extent that more ambitious and costly programs are required, the FCC should work with Congress to find appropriate funding mechanisms rather than developing them on our own.

Specific Legal Concerns

Before elaborating on my legal concerns with the majority's universal service plan, 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 am not persuaded, however, that the steps the Commission has taken to date meet all of the requirements of Section 254.

Below I describe in more detail a few of my specific concerns about how the Commission has not fully met the requirements of Section 254. The discussion below is not intended to be exhaustive of all of the shortcomings of past Commission interpretations of Section 254. The discussion, however, is a sample of issues that should be -- but are not -- addressed in the report to Congress. The specific topics below answer, in part, one or more of the questions the Commission is required to answer in its report to Congress.


In the current report, the majority introduces vague proposals to increase the number of entities that would be required to contribute to universal service. Not only are these suggestions -- each of which involves the Internet -- not based on a thorough record, they are inherently premature given the FCC's inadequate treatment of broad universal service policies and the nascent state of IP telephony. Further, each suggestion is problematic in its own right; they have been floated, and now they will sink.

There is merit, of course, to the concern that the Internet could affect universal service and our general regulatory policies. The FCC must, however, first develop a viable plan for universal service and, then, work closely with Congress to implement long-term public policy solutions that take the Internet into account.

Specifically, the FCC suggests that contributions could be collected from some providers of so-called "phone-to-phone" IP telephony service and self-providers of Internet backbone transmission capacity. These proposed "solutions," however, are mere band-aids for a dying patient. I am concerned that such rules, could be technically infeasible, could discourage further facilities build-out, and could seriously undermine our international telecommunications policies.

Under one suggestion, the Commission implies that it would classify providers of phone-to-phone IP telephony as telecommunications carriers. Such a regulatory framework is not only artificial and fragile, but also exposes the futility of assessing fees on specific Internet content. Because this framework would be inconsistent with current treatment of similar services, consumers and industry quickly would develop methods to avoid any new fees.

In the first place, the Commission's definitions of "phone-to-phone" IP telephony (which would be subject to the tax) and "computer-to-computer" IP telephony (which would go tax-free) beg the question: what is a phone and what is a computer? On one hand, the FCC suggests that the key criterion would be transparency to the consumer: if a consumer believes he is using a phone and making a phone call, then it's a phone and he's making a phone call. This analysis ignores, however, the fact that devices that look and function like telephones already are capable of converting voice to IP packets; a conversion that, under the FCC's proposed framework, would make these devices "computers." In essence, these new "phones" are computers on the inside. But it is absurd to impute to consumers knowledge of the technology inside CPE. Consumers buy for function, not internal technology.

At base, the Commission's analysis hinges on where the conversion to IP packets takes place. Neither can this construct withstand close scrutiny. A "conversion" already occurs in ordinary phones: sound energy is converted into electrical energy. In most phones, the signal exiting the phone varies analogously to variations in the input sound. In ISDN phones, the signal is further converted from an analog electrical signal into a PCM encoded digital bit stream before being sent to the network. As noted above, it would be a trivial technical matter for a new breed of phones to convert the analog signals to IP packets, instead of a PCM encoded digital bit stream. Such phones could look like and, for the consumer, behave exactly like ordinary ISDN telephones. Under the FCC's definition, however, these new IP packet devices would be "computers."

Thus, if it emits a PCM encoded digital bit stream, it's a phone and it's taxed; if it emits a stream of IP digital packets, it's a computer and it's not taxed.

The results of rules based on this framework are easy to predict. A new market for IP phones will spring up and replace today's phone-to-phone IP telephony service, which relies on remote "gateways" to make the voice-to-IP conversion. The proposed rules simply would force the conversion to IP packets further out in the network, from a limited number of gateways to all CPE.

Are these results inherently bad? Perhaps not, if they had been reached through consumer choice in the market. Consumers simply would have spoken in favor of distributed IP protocol conversion in much the same way they spoke in favor of distributed computing a decade ago. But in this case, arbitrary FCC policy and regulatory fiat, not consumer choice, would control.

The majority also suggests that the FCC might require universal service contributions from ISPs that build their own backbone facilities. The Commission, however, has questionable statutory authority to reach this result. The Act says that only "telecommunications carriers" or "other providers of interstate telecommunications" may be required to contribute, but ISPs -- which are not carriers -- are not in the not in the business of selling telecommunications capabilities to third parties and, thus, it is difficult to understand how they could be required to contribute.

From an international telecommunications perspective, assessing specific telecommunications service fees on IP telephony would have severe consequences for our international policy and market goals. Not only would we invite burdensome Internet regulation from all over the world, we would destroy our most powerful weapon against excessive settlement rates.

For over a year now, the United States has made it a matter of national policy to encourage other nations to eschew Internet regulation and taxation. Ira Magaziner, on behalf of President Clinton, won broad bipartisan support for the report in which he concluded that the Internet should remain free of such burdens. To introduce our own form of Internet regulation and fees at this point would be the height of hypocrisy and would set a terrible precedent for other countries to follow.

Almost immediately, IP telephony would be eliminated as a competitor to foreign telecommunications monopolies that hold international settlement rates so high in so many countries. Like international call-back, IP telephony could have drive down costs much faster than inter-government negotiations and would have been perhaps the best lever to bring rates down to benchmark levels. The United States sends billions of dollars abroad as a result of unfavorable international settlement rates. IP telephony could save American rate-payers billions of dollars, possibly a significant portion of the size of a federal universal service fund.

In sum, serious issues have been raised regarding the impact that Internet applications have on public policy regulation that should be explored more fully. But the majority's plans for IP telephony regulation would not be technically feasible, and would have a serious detrimental effect on our international telecommunications agenda. Similarly unfounded, the majority's plan to assess fees on the self-provisioning of capacity would discourage transmission capacity build-out and would cause administrative burdens. I am concerned that what motivates the majority to these conclusions is a desire to prevent industries from "escaping their obligations" to be regulated. Majority Report, at 4. As I have indicated elsewhere, concerns of competitive neutrality should urge us to further deregulate the burdened industries already before us. This report is not a call for this agency to slap its old regulations on new technologies but, rather -- as a matter of utmost urgency -- to reevaluate seriously its universal service policies to meet all legal, policy, and technical requirements.


Under the 1996 Act, the Commission's primary universal service responsibility was to establish an explicit and sufficient universal service fund for rural America. The Commission's failure to establish such a fund while creating a complex administrative structure for the schools and libraries and rural health care programs violated the Act's clear focus and intent. Moreover, the Commission exceeded its legal authority by creating the Schools and Libraries and Rural Health Care Corporations.

A. In their zeal to implement a new universal service program for schools and libraries, the Commission failed to meet its statutory mandate of developing an explicit and sufficient support system for rural and high cost telephone users in a timely manner.

Under the 1996 Act, the Commission's primary universal service responsibility was to develop an "explicit and sufficient" support system that would ensure support for local telephone users in high cost and rural areas to replace the complex system of implicit subsidies that could exist in a world without local competition.(7) The expeditious creation of a new subsidy system was not only critical for preserving the goals of universal service, but also necessary to provide for a fair transition to competition in the local markets. As such, Congress set a strict time-frame for developing this plan -- the Joint Board was required to make a recommendation within 9 months of enactment, and the Commission was then required to complete its "proceeding to implement the recommendations" within 15 months after enactment.(8)

Despite this strict timetable, the Commission decided it needed further time to address this aspect of universal service. The Commission needed more time to develop complex models and complicated plans to provide federal support, postponing until January 1, 1999, the start of any new subsidy system. In so doing, the Commission also failed to make explicit all implicit support. Indeed, in this proceeding, the majority now refer to the Commission's somewhat arbitrary decision to provide federal support for only 25% of costs as merely a "placeholder" and announce their intention to initiate a new proceeding, seeking additional proposals and comments on alternatives to the 25/75 high cost regime. I support the Commission's acknowledgement that this placeholder, and the accompanying complex modeling process in which we have been engaged, is not tenable. I also support reexamining these issues. But I fault the majority for failing to acknowledge that the prior Commission's adoption of this mere "placeholder" and the ensuing commitment of this Commission to continue to work with the states to develop a plan and our openness to new options more than two years after the passage of the Act was not what Congress envisioned or required. Rather, Congress intended -- and the 1996 Act required -- the Commission to focus their efforts on resolving this problem first, as opposed to finding sufficient support for new programs.

Indeed, this problem has only been made worse by the Commission's emphasis on other pieces of the universal service puzzle. It would be bad enough if the FCC had simply failed to address all universal service issues in the time frame required by Congress. But instead, the Commission has addressed some universal service issues but not others, and certainly not the pieces of universal service that were of primary concern to Congress. For example, the Commission has earmarked $2.25 billion for the new schools and libraries program and has ensured that that program start at the "earliest feasible date."(9) In contrast, the FCC has yet to finalize new rules addressing the larger and more complicated universal service program for all high-cost areas.

By implementing these entirely new programs before establishing the explicit support mechanisms, the Commission has increased the pressure on the current implicit subsidy system without justification. I believe that the Commission's desire to establish the schools and libraries program, but not the other aspects of universal service, as quickly as possible was at best arbitrary. While having certain political benefits, it was certainly not what the 1996 Act required or what Congress intended.

In effect, I believe that the Commission may have "put the cart before the horse" by failing to address the rural, high cost issues in a timely manner. The failure of the Commission to address these high cost issues may also have adverse market effects. By failing to make all subsidies explicit, the Commission continues to hinder the development of local competition. Moreover, to the extent that competition in the local markets erodes the implicit state subsidies prior to the Commission implementing a final universal service fund, it will place unintended additional pressure on some local rates.

In that vein, I also remain concerned that some of the actions that the Commission has taken have not only failed to address the rural, high cost issues, but may have may have threatened the integrity of the high cost fund. In responding to the first two quarters contribution rates, I objected to the Commission's continued failure to take into account the reality of uncollectibles. Since the first of the year, the Universal Service Administrative Company ("USAC") has had difficulty collecting all of its billed amounts for universal service. In a memorandum to the USAC Board of Directors dated February 24, 1998, Ed English, USAC Secretary and Treasurer estimated that, based on collections received through February 23, 1998, there was a shortfall for the high cost fund distribution to be made on Friday, February 27, 1998, in excess of $10,000,000.(10) This shortfall was primarily due to some instances of nonpayment and the Common Carrier Bureau's decision last December to reduce the estimate of uncollectibles to zero. USAC originally recommended, and the contribution factors initially set forth in the Common Carrier Bureau's November 13 Public Notice included, an adjustment for possible uncollectible contributions. Such a minor adjustment was reasonable for these new programs. The final Order released December 16, 1997, however, included no adjustments for uncollectibles. Despite the fact that the First Quarter has had total uncollectibles in excess of $12 million, the Bureau's Second Quarter recommendations followed the December First Quarter Order that expressly "includ[ed] no adjustments for uncollectibles."

Why would the Commission continue with this fallacy of 0% uncollectibles? Because the reduction of uncollectibles to zero was part of a larger scheme by the Commission to "reduce the [universal service] charges after the carriers said the fee could lead to higher rates and after AT&T and MCI threatened to specify the charge on the bills they send to customers."(11) I am concerned that, in the Commission's zeal to implement the schools and libraries program on January 1, 1998, despite specific Congressional requests that we delay commencement until the impact of our actions could be more fully assessed, the Commission has taken actions that have adversely impacted the high cost fund.

In conclusion, I would agree with one recent commentator who observed, that, the Commission "should set a majority of the universal service funds aside for furnishing basic telephone service to areas of high cost and poverty. It is more important for all Americans to have access to basic telephone services than for a student to have limited Internet capabilities."(12)

B. The Commission exceeded its legal authority and the intent of Congress by creating the Schools and Libraries and Rural Health Care Corporations.

On February 10th, 1997 in response to a request from Senator Stevens, the General Accounting Office ("GAO") released an analysis of the Commission's actions in establishing the Schools and Libraries and Rural Health Care Corporations.(13) GAO concluded that the Commission lacked the statutory authority to create these corporations and that, by requiring NECA to establish these corporations without specific statutory authority, the Commission violated the procedural requirements of the Government Corporation Control Act.

The Government Corporation Control Act requires that agencies have specific legislative authority in order to "establish or acquire" a corporation to act as an agent. The purpose of this requirement was to restrict the creation of all government-controlled, policy-implementing corporations.(14) According to GAO, the legislative history indicates that Congress was attempting to make all such corporations more accountable.(15)

There can be little doubt that the schools and libraries and rural health care entities act as agents for and at the direction of the Commission. The Commission ordered that these entities be created and established their specific purpose; the Chairman of the Commission selects or approves the entities' boards of directors; the size and composition of the board and the terms of office for its members are set by the Commission; the FCC Chairman must approve the removal of any director as well as a resolution to dissolve the corporations; the CEO must be approved by the Chairman; and the authority to enter into contracts must be in compliance with Commission rules.

The Commission unsuccessfully attempted to persuade GAO that it did not actually create these corporations, but merely directed another entity to do so pursuant to its general authority under section 4(i) of the Act. As GAO concluded, however, "the Control Act's requirements cannot be avoided by directing another entity to act as incorporator."(16) Moreover, I would point out that it is this type of expansive reading of section 4(i) that seems to lead this Commission astray from its clear statutory duties and limitations. If section 4(i) provided such a general exemption from the Control Act, then what limitations on the Commission's authority would the Control Act provide -- or could the Commission merely delegate any of its functions to a separate corporation without explicit Congressional approval?

Finally, GAO also noted that, as private corporations, these entities are not subject to the types of federal obligations imposed on other entities in such areas as employment practices, procurement and contracting, lobbying and political activities, ethics, and the disclosure of public information. If these entities had been authorized by statute, Congress would have had the opportunity to specify which federal laws should apply. But, without such an opportunity, Congress has no direct oversight over these corporations.(17) It was just this type of lack of accountability that lead Congress to enact the Control Act. Recently, the House Judiciary Committee also expressed its concerns about whether the corporations were established legally, and whether the administration of these programs "raises questions of accountability."(18)

In addition, a revised administrative structure would be administratively more efficient. In the most recent Public Notice announcing the Second Quarter contribution factors, the Commission also released the administrative expenses proposed by the USAC, the Schools and Libraries Corporation ("SLC") and the Rural Health Care Corporation ("RHCC"). In objecting to the December Contribution Order, I noted that in the first quarter SLC and RHCC "were each allocated more than twice as much money to administer certain aspects of those support mechanisms than is allocated to administer the substantially larger high cost fund." In the current Notice, this disparity continues to grow, with the SLC being allocated almost four times as much money for administrative expenses. Indeed, the SLC's administrative budget increases from $2.7 million to $4.4 million or by 65% in just one quarter. This change is the equivalent of an additional $18,000 every day for the next 90 days. I cannot endorse this disparity, or this magnitude, while knowing that many members of Congress are equally concerned with high cost areas as with schools and libraries and rural health care.

In conclusion, I believe that the Commission should have acknowledged already these problems with its current administrative structure and moved to restructure the administration of universal service to comply with the law.

C. To the extent that the universal service program is requiring contributions based on telecommunications service revenues but using the funds raised to provide support for non-telecommunications services (i.e. inside wiring and internet services), the Commission has established a fee to promote the general welfare (i.e. a "tax") and in so doing has exceeded its legal authority.

I am concerned that the universal service contributions, at least to the extent they are providing support for non-telecommunications services, may not even be fairly characterized as mere "fees." In general, taxes can be distinguished from administrative fees by the determining who is the recipient of the ultimate benefit. Taxes are levied in disregard of the benefits they may bestow on the taxpayer. As the Supreme Court has held, and the D.C. Circuit has further explained, a "fee" is a payment "incident to a voluntary act, e.g., a request that a public agency permit an applicant to practice law or medicine or construct a house or run a broadcast station. The public agency performing those services normally may exact a fee for a grant which, presumably, bestows a benefit on the applicant, not shared by other members of society."(19)

To the extent that the telephone network can be considered a single telecommunications system, all users benefit from that system being capable of serving others. What good is it to be able to make calls if no one can receive them? There are no such direct benefits to telephone customers, however, from the provision of Internet services to and inside wiring of schools and libraries. With respect to the schools and libraries program, the funds raised may be used to support general services that are not classified as telecommunications. Given the lack of a quid pro quo between the service providers and the Government in the context of universal service, there may not be a "sufficient nexus between the agency service for which the fee is charged and the individuals who are assessed."(20) In addition, these contributions do not meet the traditional definition of a fee because they are premised not on the use of some identifiable government service but rather purely on ability to pay. According to the Supreme Court, taxation is marked by the calculation of liability "solely on ability to pay, based on property or income."(21) Here, of course, the contribution amounts are based entirely on revenues. In addition, because they are not related to any benefits conferred, they carry the Commission "far from its customary orbit and puts it in search of revenue in the manner of an Appropriations Committee of the House."(22)

The Supreme Court has stated that only Congress may levy taxes.(23) I agree with the concerns recently expressed by several members of the House Judiciary Committee that Congress retain "direct authority over and responsibility for any tax burden on the public."(24)


The majority's opinion affirms the prior Commission's finding that, under the Act, direct financial support can be provided for non-telecommunications services, such as inside wiring and Internet service. Such an interpretation is at odds with the clear reading of the statute. The 1996 Act defines universal service in general as "an evolving level of telecommunications services."(25) Although subsection c(3) does allow the Commission to designate additional special services for support to schools and libraries, that provision is still limited by the overriding definition of c(1). Moreover, subsection c(3) expressly limits these additional designations as only applicable "for the purposes of subsection (h)."(26) As subsection (h) is itself entitled "Telecommunications Services For Certain Providers,"(27) the Act's intention to limit universal service discounts to some form of telecommunications service seems self-evident.(28) In addition, one of the fundamental principles that Congress identified as necessary for the preservation of universal service was "Access to Advanced Telecommunications Services for Schools, Health Care, and Libraries."(29) Thus the clearest reading of the statute is that Congress intended that the subsequent reference to "services" in section 254(c)(3) refers to the general reference to "telecommunications service" in b(6), c(1) and (h).(30)

I acknowledge that the definition of universal service for schools and libraries is broader pursuant to section c(3) than for other aspects of universal service. But even this broader definition must still come within the rubric of telecommunications services. Thus, for example, the Commission could designate ISDN lines or other types of advanced telecommunications facilities that include expanded bandwidth as a telecommunications service that would not qualify for general universal service support, but might come within the special telecommunications services contemplated by Congress for schools and libraries under section (c)(3).

In addition, limiting the Commission's discount program to telecommunications services is consistent with Commission regulatory precedent. Internal connections are owned and maintained by the customer -- the telecommunications carrier is not responsible for them. The Commission has previously indicated that such internal connections are not telecommunications services and deregulated these facilities -- including their purchase, installation, and maintenance.(31) Similarly, as I discussed earlier, Internet access has been traditionally treated as an information service by the Commission.

Similarly, the Commission erred by allowing non-telecommunications carrier to receive support payments from the discount program established under sections 254(h)(1)(B) and 254(h)(2). The Commission's decision violates the plain language of the statute. Section 254(h)(1)(B) unambiguously states that "a telecommunications carrier providing service under this paragraph shall . . ." offset the discount from their universal service contribution obligation or receive reimbursement.(32) Thus, Congress expressly specified that only telecommunications carriers could receive support for providing discounted services to schools and libraries. Some have argued that not allowing other entities who can provide a similar service to receive support is inequitable. Congress explicitly adopted this distinction, however, and for good reason -- because Congress only obligated telecommunications providers to contribute to the discounted service program in the first place.

The majority also argues that the competitive neutrality demands of 254(h)(2), along with section 4(i), require that the Commission allow non-telecommunications carriers to receive support. There are several problems with this argument. First, typical statutory construction requires that specific directions in a statute trump any general admonitions. Section 254(h)(1)(B) expressly limits recipients of the schools and libraries fund to telecommunications carriers, and as it is more specific than 254(h)(2) it direction should take precedence. In addition, the provisions of section 254(e) -- which require that only eligible telecommunications carriers be able to receive federal universal service support -- apply fully to section 254(h)(2). Thus, the requirements for being able to receive funds in conjunction with section 254(h)(2) are actually stricter -- a recipient would have to be designated an eligible telecommunications carrier.

In addition, the majority argues that reading section 254(e) to limit section 254(h)(2), when it does not apply to section 254(h)(1)(B), appears inconsistent with the relative directives of those provisions. The majority further argues that to "allow support for Internet access and internal connections only when provided by a telecommunications carrier would reduce the sources from which schools and libraries could obtain these services at a discount." However, the majority's entire competitive neutrality argument is built upon a misreading of section 254(h)(2)(a)'s mandate. That provision permits the Commission to establish competitively neutral rules "to enhance, to the extent technically feasible and economically reasonable, access to advanced telecommunications and information services."(33) It does not provide for an explicit discount program like the one envisioned in section 254(h)(1)(B). Indeed, if both provisions were meant to establish a single discount program for both telecommunications and non-telecommunications providers for telecommunications and non-telecommunications services, Congress would not have differentiated between the two. Instead, Congress specifically provided for something less than a discount program -- competitively neutral rules for enhanced access -- in section 254(h)(2)(A).


Section 2(b) of the Communications Act creates a system of dual federal-state regulation for telecommunications. In essence, the Act establishes federal authority over interstate communications services while protecting state jurisdiction over intrastate services. I believe that the Commission's decision to look to intrastate revenues to determine federal universal service support and to establish a minimum discount for intrastate telecommunications services for schools and libraries impermissibly encroaches on state's rights and violates the Act's federal-state dichotomy.

A. The Commission erred in assessing contributions to the schools and libraries and rural health care programs based on intrastate revenues because any federal assessment on intrastate revenues is beyond the Commission's authority.

I object to the majority's decision to endorse the disparate funding of schools and libraries over the high cost fund. I cannot support 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."(34) 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."(35)

By "fenc[ing] off from FCC reach or regulation intrastate matters,"(36) 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.(37) To be sure, there are exceptions to section 2(b)'s jurisdictional limitation.(38) These exceptions are 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).(39) 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 follow 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."(40)

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."(41) 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."(42) 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 complementary, but separate, 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."(43) 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.(44)

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).

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. When Congress went to the trouble to authorize state universal service plans, it clearly 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 that 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).

B. The Commission's decision to assess contributions to the schools and libraries and rural health care programs based on intrastate revenues, but allow recovery only on interstate services, is also in error as it fails to meet the Commission's mandate of equity and nondiscrimination.

In addition, 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 $999,999,999.00 of intrastate revenue and one dollar of interstate revenue would be subject to assessment for the whole billion dollars of its revenue."(45)

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 its intrastate revenues in its 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.

C. The Commission impermissibly encroached on the rights of states to set discounts for intrastate telecommunications services.

Section 251(h)(1)(B) unambiguously places the role of establishing discounts for eligible intrastate telecommunications services in the hands of the states:

The discount shall be an amount that . . . 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.(46)

Congress plainly envisioned the continued federal-state jurisdictional divide embodied in section 2(b) to be followed in establishing discount rates for telecommunications services to schools and libraries. Never the less, the Commission has mandated a particular discount that states are required to adopt.

In the May 7, 1997, Order, the previous Commission required "states to establish intrastate discounts at least equal to the discounts on interstate services as a condition of federal universal service support for schools and libraries in that state."(47) Section 254 does not provide this Commission with such express authority. Indeed, the explicit language of the statute reserves this authority to the states. Moreover, such a reservation of state authority to establish intrastate discounts is the best policy, for it is the states, not Washington bureaucrats, who are in the best position to determine what discounts are needed to address each state's educational needs and goals.

I believe the previous Commission acted illegally in coercing states into adopting a federal discount schedule and would have redressed that issue here. I would favor allowing states to exercise the authority Congress clearly provided to them.


Neither Section 254 nor Section 214 requires the Commission to establish a national cost model for high-cost support. Such a model inescapably invites the question of who should cover those costs: local customers, state universal service mechanisms, or federal universal service mechanisms. As long as a national cost model remains the central analytical tool for high-cost support under Section 254, disputes will arise about responsibilities for covering those costs. Any allocation of those costs to the federal government not covered by local consumers is inherently arbitrary, whether 25 percent, 100 percent, or 0 percent.

These allocation disputes are in addition to the unending debate about whether and what form of forward-looking cost assumptions to use. Costs models are simply estimates and approximations of actual costs. Cost models are useful tools for many purposes, but I am deeply concerned about relying on such models as the primary, if not only, basis to allocate federal universal service funds. Models may approximate accurately the costs of service for the vast majority of Americans, but approximate poorly for Americans living in unusual, low-density, geographic areas. Yet it is precisely the unusual circumstances -- the tundra of Alaska, the bayous of Louisiana, the remote reaches of Montana and North Dakota, -- that may most likely require universal service support.

A better starting basis for federal high-cost, universal support may well be past specific federal universal support. Past support may not have been perfect or efficient; indeed, it may well have been arbitrary. But past support has, in its own way, worked quietly and well. The current Commission order starts with past support as a safety net, but only for a few years after which all carriers are to be placed on a national model with all of the associated allocation disputes. Past support need not and should not last into perpetuity independent of changed circumstances of technology, markets, and competition. But carriers may reasonably seek greater certainty than is currently offered by an impending end of current support to be replaced by cost models and allocation schemes shrouded in mystery, legal risks, and financial uncertainty.

I am also concerned that the prior Commission's decision to limit federal support to 25% is insufficiently supported. As I have stated earlier, one of the guiding principles in any universal service reform is that all states should be held harmless -- i.e., no state should receive less from the new universal service plan than it currently receives in support from the High Cost Fund and implicit subsidies in access charges. At least in some circumstances, however, there may be states that receive significantly higher than the 25% of federal support the Commission has committed to providing. Thus, by arbitrarily limiting the federal funding mechanism without relating it on a state-by-state basis to the amount of funds currently received, the Commission has failed to meet its statutory mandate that universal service funds be sufficient.

I believe the majority's opinion should have more fully addressed this issue. In addition, we should have made sure that states understand that this Commission does not -- and indeed in my opinion it cannot -- require them to rebalance or alter their local rates in any way prior to receiving additional federal universal service support.


The issuance of this report to Congress today is not the final chapter in the development of universal service. It is but an early chapter in a long book. It will take some time to correct many of the anomalies that I have addressed here. In addition, the Commission will need to work more closely with Congress and the States. Perhaps the Joint Universal Service Board needs to be reconvened to consider these issues in a timely fashion; I support the request by the state members of the Joint Board to refer at least certain designated issues back to that body for consideration. But, in whatever forum, I look forward to working with my colleagues to preserve and to advance universal service in the months and years ahead.

1. Statement of Sen. Byron Dorgan at a Hearing before the Subcommittee on Communications of the Senate Committee on Commerce, Science, and Transportation, March 25, 1998.

2. See for example, the comments of Sen. Slade Gorton, at a Hearing before the Subcommittee on Communications of the Senate Committee on Commerce, Science, and Transportation, March 25, 1998; and the comments of Rep. Michael Oxley at a Hearing before the Telecommunications, Trade, and Consumer Protection Subcommittee of the House Committee on Commerce, March 31, 1998.

3. Jerry Hausman, "Taxation by Telecommunications Regulation," National Bureau for Economic Research, Working Paper Series 6260, November 1997.

4. These figures are based on an incremental tax rate of 10 percent applied to a $70 billion dollar base for interstate services, and a $2 loss in consumer welfare for each dollar of tax.

5. Letter from Robert P. Murphey, General Counsel, United States General Accounting Office (GAO), to The Honorable Ted Stevens, United States Senate, February 10, 1998.

6. Rep. Joe Barton has suggested that a substantially smaller fund of approximately $40 million annually would be adequate. See comments of Rep. Barton at a Hearing before the Telecommunications, Trade, and Consumer Protection Subcommittee of the House Committee on Commerce, March 31, 1998.

7. See 47 USC 254(e) (establishing that universal service support devised by the Commission "should be explicit and sufficient to achieve the purposes of this section.")

8. 47 USC section 254(a)(2).

9. Chairman Kennard's response to Chairman Bliley, December 3, 1997.

10. Later estimates placed the shortfall for the high cost fund at closer to $5 million.

11. Fund to Aid Technology in Schools Facing Big FCC Cuts, New York Times, December 15, 1997 at D-1.

12. Christine Mason, "Universal Service in the Schools: One Step too Far?" 50 Fed. Comm. L. J. 1, at 252 (1997).

13. Letter from Robert P. Murphey, General Counsel, United States General Accounting Office, to The Honorable Ted Stevens, United States Senate, February 10, 1998. ("GAO Report")

14. Lebron v. National Railroad Passenger Corporation, 513 US 374 (1995).

15. GAO Report at 6-7.

16. Statement of Robert Murphey, General Counsel of GAO, Before the Subcommittee on Telecommunications, Trade and consumer Protection, Committee on Commerce, House of Representatives, March 31, 1998.

17. It is also unclear to what extent the Commission even has direct oversight over these corporations. For example, in response to questions before the House Telecommunications Subcommittee, it was unclear whether or not the Commission had authority to approve -- and also disapprove -- of these entities budgets including the salaries of specific positions. See Transcript of Hearing before the Telecommunications, Trade, and Consumer Protection Subcommittee of the House Committee on Commerce, March 31, 1998.

18. Letter from Members of the Judiciary Committee's Subcommittee on Commercial and Administrative Law to Chairman Bliley, March 31, 1998.

19. National Cable TV Ass'n v. United States, 415 U.S. 336, 340-41 (1974)(construing Independent Offices Appropriations Act); see also National Cable TV Ass'n v. FCC, 554 F.2d 1094, 1106 & n.42 (D.C. Cir. 1976) ("A 'fee' is a payment for a special privilege or service rendered, and not a revenue measure.") (citing cases).

20. National Cable TV Ass'n v. FCC, 554 F.2d at 1104.

21. National Cable TV Ass'n v. United States, 415 U.S. at 340; see also National Cable TV Ass'n v. FCC, 554 F.2d at 1107 ("[A] fee, in order not to be a tax, cannot be justified by the revenues received. . . .").

22. National Cable TV Ass'n v. United States, 415 U.S. at 341.

23. See National Cable TV v. United States, 415 U.S. at 340 ("Taxation is a legislative function, and Congress . . . is the sole organ for levying taxes."); see also Air Transport Ass'n of America v. Civil Aeronautics Board, 732 F.2d 219, 220 (D.C. Cir. 1984)("[T]axes . . . generally may be levied only by Congress.").

24. Letter from Members of the Judiciary Committee's Subcommittee on Commercial and Administrative Law to Chairman Bliley, March 31, 1998.

25. 47 USC 254(c)(1) (emphasis added).

26. 47 USC section 254(c)(3).

27. 47 USC section 254(h).

28. See, United States v. Wallington, 889 F.2d 573, 577 (5th Cir. 1989) ("section heading enacted by Congress in conjunction with statutory text is considered to `come up with the statute's clear and total meaning.'") (citations omitted).

29. 47 USC section 254(b)(6).

30. See also, 47 USC 254(c)(1) ("The Joint Board in recommending, and the Commission in establishing, the definition of the services that are supported by Federal universal service support mechanisms shall consider the extent to which such telecommunications services . . .")

31. See, Detariffing Customer Premises Equipment and Customer Provided Cable/Wiring, 48 Fed. Reg. 50534 (FCC 1983); Detariffing and the Installation and Maintenance of Inside Wiring, 51 Fed. Reg. 8498 (FCC 1986), recon. 3 FCC Rcd. 1719 (1988). See also, NARUC v. FCC, 880 f.2d 422 (D.C. Cir. 1989).

32. 47 USC section 254 (h)(1)(B).

33. 47 USC section 254(h)(2)(A).

34. 47 U.S.C. section 152(b)(emphasis added).

35. Louisiana PSC v. FCC, 476 U.S. 355, 377 n.5 (1986).

36. Id. at 370.

37. See id., 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.").

38. 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 . . .").

39. In fact, as the dissenting state members of the Joint Board explained, Congress considered and rejected language that would have added section 254 and neighboring provisions to the list of exceptions to 2(b). See Dissenting Statement of Commissioners Kenneth McClure, Missouri Public Service Commission and Laska Schoenfelder, South Dakota Public Utilities Commission, April 21, 1997, at 2.

40. Louisiana PSC v. FCC, 476 U.S. at 377.

41. 47 U.S.C. section 254(d).

42. Id. section 254(f).

43. 47 U.S.C. section 254(h).

44. 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).

45. Dissenting Statement of Commissioners Kenneth McClure, Missouri Public Service Commission and Laska Schoenfelder, South Dakota Public Utilities Commission, April 21, 1997.

46. 47 U.S.C. section 251(h)(1)(B).

47. Universal Service Order at Para. 550.