Re:	Universal Service Report to Congress in Response to Senate bill 1768 and Conference Report on HR 3579.

Introduction

I regretfully dissent from the majority's Report to Congress on universal service. I remain concerned that the Commission fails to address the underlying frustration that many members of Congress, and the general public feel, as a result of the Commission's misguided Universal Service Order last May.

As I stated only a month ago in this Commission's last report to Congress: priorities matter. I remain convinced that rural, high-cost universal service is not just one of many objectives of Section 254; it should be the highest priority. The federal government has had universal service programs for rural, high-cost areas and for low-income Americans for many years. Section 254 embodied these ideals and set forth goals that emphasize rural, high-cost support as well as low-income support and other objectives. Instead of such an emphasis, we have made costly promises for some services without making promises for increases in rural, high-cost programs. 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.

This Report provides another missed opportunity, and the accompanying structural changes to the Schools and Libraries Corporation that are required by it provide another reason, for the Commission to put on hold its plans to implement a far-reaching schools and libraries program until after it has finished implementing the rural, high-cost fund issues. I also object to the majority's continued refusal to allow any of the benefits of reduced access charges to actually flow to consumers. For these and other reasons explained below, I must reluctantly and respectfully dissent from the majority opinion today.

I. Public Funds Should Not Be Allocated for Schools and Libraries Until the Proposed Restructuring Has Been Completed.

The proposal for consolidating the three corporations is a good first step in reaching a more rational, efficient, and legal structure to administer universal service. I have several reservations, however, with the specifics of the proposal. First, I am concerned that the proposal merely perpetuates too much of the current bureaucracy. For example, it appears that the majority would simply fold the current Schools and Libraries and Rural Health Care Corporations into USAC in their entirety, with the new "operational units" maintaining virtual autonomy as they would have the power to bind the USAC Board regarding matters within their expertise.⁽¹⁾ I am concerned that the ultimate reorganization/streamlining plan obtain the benefits of economies of scale and consolidate the ultimate responsibility for universal service into one decision-maker.

The consolidation of the ultimate decision-making authority is also important for accountability. I am concerned that adequate safeguards may not have been implemented to prevent fraud and abuse. Recently, there have been complaints that some schools and libraries are basing their award of contracts on the amount of ineligible items that the bidder is willing to provide at "no cost." Such actions could encourage bidders to inflate the cost of eligible services, to provide ineligible services for free. This is the type of behavior that the Commission must ensure is not taking place prior to the disbursement of any public funds.

I also remain concerned that the majority fails to address fully the issues raised by the GAO report regarding the legality of the Commission creating these corporations without specific statutory authority. I commend the majority for seeking Congressional guidance regarding this issue. I remain convinced, however, that the Commission should explicitly acknowledge the legitimacy of GAO's conclusions regarding the legality of these corporations, and wait for Congressional approval of the revised structure prior to further expenditure of any funds. I fail to see how the Commission can direct that these corporations continue to act without first receiving the requisite authorization from Congress.

In addition, I would take this opportunity to clarify that the full Commission must take a more active role in the direct oversight of these quasi-public companies. Congress clearly favors a more efficient organization of only limited administrative functions, without the ability to "interpret the intent of Congress" or "any rule promulgated by the Commission."⁽²⁾ Yet, the majority indicates that the revised entity might be able to apply its expertise to interpreting and applying existing "decisional principles."⁽³⁾ I am concerned that, while a good start, the majority does not go far enough in delineating specific means of ensuring full Commission involvement in all budgetary decisions and the policy-making process.⁽⁴⁾ As it will take some time to restructure the universal service corporations, it would be prudent and in the taxpayers interest to suspend further expenditures on schools and libraries.

II. The Excessive Funding Proposed for Schools and Libraries Will Harm Consumers and Increase Telecommunication Rates

I also object to the majority's conclusions regarding the funding that has been provided to the schools and libraries program. For the following reasons, I disagree with the majority's conclusion that the steps the Commission has taken thus far were necessary to assure that the schools and libraries funding mechanism was adequately funded and the program delivered efficiently.⁽⁵⁾

First, as I have stated previously, the size and scope of the current schools and libraries program is in excess of what was envisioned by Congress, and thus beyond the Commission's authority to establish. Nothing in the statute or the legislative history indicates that Congress contemplated 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.⁽⁶⁾

The Schools and Libraries Corporation projected that, as of May 1, 1998, $2.02 billion in discounts has been requested by applicants. Although current Commission rules cap the program at $2.25 billion or demand, the report indicates that the Commission will seek comment on whether the amount collected this year should equal demand or "be limited to an amount that does not cause long distance rates to increase."⁽⁷⁾ While I certainly agree that the Commission should not collect any revenues that would cause long distance rates to "increase," I remain frustrated that the majority assumes that any reduction in access charges should be "used" for new universal service programs, instead of turning any of the reductions back to consumers. Unfortunately, the majority indicates its intention to use the entire $700 million in access charge reductions estimated for July to increase the quarterly contributions to the schools and libraries program from $325 million to approximately $524 million for a fund of $1.67 billion for 1998. This amount is not only excessive but prevents consumers from receiving any of the benefits of deregulation.

Chairman Kennard's letter to Chairman Bliley, Attachment E to this Report, entirely misses this point. The issue is not whether, despite massive tax increases that just offset decreases in federal access fee and charges, IXCs have no net differences in costs. The issue is whether, absent massive new taxes, consumers would be better off. By the Bureau's own analysis, consumers are bearing $2.4 billion in new costs in 1998 alone. How much lower might prices have been? How much more might the promise of the 1996 Act of lower prices for consumers been fulfilled? How many more businesses might have been spawned? Professor J. Hausman has estimated that consumers lose more than $2 for every $1 paid in taxes on long-distance services.⁽⁸⁾ Thus, the FCC had an opportunity to put more than $5 billion back in the pockets of ordinary Americans. But the FCC has chosen not to.

There is implicit in the Bureau's calculations a set of new taxes that just balances a reduction in federal charges and fees. Is this balance coincidental or the artifact of a private deal between industry and the Commission? The promise of the 1996 Act was that rates would come down, not that they would remain the same as the result of secret deals in which one set of federal taxes goes down and another goes up, while citizens are none the worse for the regulatory sleight of hand. Are we left to believe that if access charges and other fees had been reduced by only $200 million, that new universal service taxes would have been only $200 million? Or that if fee reductions had been $5 billion that new taxes would have been $5 billion? Moreover, there is no assurance that the consumers who benefit from access reductions will be the same consumers who will bear the new universal service burden. For example, business consumers could disproportionately benefit from the access charge reduction while residential consumers pay for new universal service fees.

Second, I am concerned that the majority continues to use all access reductions for new universal service fees while the high-cost program has not been fully implemented. As I argued in our previous report to Congress, "the potential pot of revenue that the FCC can collect for universal service from fees on interstate services is limited." 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 (rural, high-cost programs) have voiced all of their concerns.

Third, the plan outlined in the Report not only uses every cent of access charge reduction for new universal service programs, it will actually cause an increase in fees for some telecommunication services. Buried in the Report is the proposition that a $700 million reduction in access charges will yield $848 million in additional funds for schools and libraries.⁽⁹⁾ How is this possible? Because the majority anticipates increasing all contribution rates equally, even though almost 20% of the schools and libraries contributors will not benefit from reduced access charges. Thus, for example, wireless carriers will be required to pay proportionately higher costs, despite the fact that they have received no access charge reduction.

Fourth, I also note that this entire dilemma has been caused, at least in part, by the Commission's misguided and unlawful decision to fund inside wiring and other non-telecommunications services. As I explained in the April 10th report to Congress, the Commission has no statutory basis to provide direct financial support for non-telecommunications services and to non-telecommunications carriers. According to the Schools and Libraries Corporations own estimates, the vast majority of the program's demand is for non-telecommunications services and facilities.⁽¹⁰⁾ The vast majority of demand is for funds to provide inside wiring -- what should be an ineligible facility. Indeed, the amount already collected this year would almost fully fund the demand for telecom services.

At a minimum, I believe the Commission should reduce the current quarterly contribution rate for schools and libraries from $325 million to a mere $25 million. Such a reduction would allow previous access charge reductions and those contemplated for this July to flow to consumers directly, while still providing more than sufficient funds -- $675 million for 1998 -- to pay for all of the telecommunications services that have been requested by any school this year. The Commission would then have until January 1, 1999 to reevaluate the scope and scale of the schools and libraries program, while also finishing what should have been its first priority, namely, the rural and high-cost program.

In addition, I am concerned with the report's suggestion that carriers should conceal their universal service contributions from consumers. As I have stated previously, no carrier should have its billing information restricted or limited by the Commission. The Commission has explicitly provided carriers with the flexibility to decide how to recover their payments, including as charges on consumers bills, and I am concerned by implications that such charges are fraudulent or misrepresentations. Indeed, section 254(e) requires that funding mechanisms for universal service be explicit. Consumers have a right to know what federal charges they are paying; the Commission should not discourage companies from placing universal service charges on their bills.

Finally, I continue to believe that the Commission erred in assessing contributions to the schools and libraries and rural health care programs based on intrastate revenues. Any federal assessment on intrastate revenues is beyond the Commission's authority. 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 fundamental federal-state dichotomy.

Conclusion

Section 254 is an integral part of the Telecommunications Act of 1996. The Commission has yet to implement it properly, despite repeated opportunities. The proper implementation of section 254 should be of the highest priority.

10. Attachment D; total demand for telecom services is only $655,688,020, while total demand for internet services is $88,208,299 and total demand for internal connections is $1,275,399,870.