August 18, 1998

Re:	Proposed Fourth Quarter 1998 Universal Service Contribution Factors Announced; (CC Docket No. 96-45).

Today, the Common Carrier Bureau releases a Public Notice announcing the proposed universal service contribution factors for the fourth quarter of 1998 that will automatically go into effect if the Federal Communications Commission takes no action within 14 days. For the reasons described below, I object to the proposed contribution levels.

First, I continue to object to the exorbitant and unjustified administrative expenses of the Schools and Libraries Corporation and the further increase in their budget proposed by this Public Notice. Under today's scheme proposed by the Common Carrier Bureau, the administrative expenses of the Schools and Libraries Corporation will increase again from $4.4 million per quarter to $4.9 million per quarter. These administrative expenses continue to be more than twice that of those for either the rural health care program or the high cost/low income programs; the administrative expenses for schools and libraries exceeds the administrative expenses for all of the other universal service programs combined by more than a million dollars. Indeed, these administrative expenses on annualized basis would equal almost 25% of the total demand of Internet Services requested by all of the 30,000 applications received for the first year of this program.⁽¹⁾

In objecting to the second quarter contribution factors, I noted that SLC was allocated almost four times as much money for administrative expenses as the high-cost/low income funds and that the administrative budget increased from $2.7 million to $4.4 million or by 65% in just that one quarter. These increased administrative expenses continued in the third quarter, despite the fact that, at that time, the Schools and Libraries Corporation could not even provide an accurate estimate of all its administrative costs for the first quarter.⁽²⁾ In their filing precipitating this proceeding, the Schools and Libraries Corporation now calculates their actual First Quarter administrative expenses -- with no offset for interest income earned -- as $4.4 million.⁽³⁾ This amount is well in excess of the $2.7 million that was actually budgeted, and does not even include the additional 1.9 million which was paid to NECA during the first quarter for additional start-up expenses.⁽⁴⁾

I cannot endorse the disparity -- and certainly not one of this magnitude -- between the administrative expenses of the Schools and Libraries and those of the other universal service corporations. I believe there is a need for more adequate safeguards against excessive administrative spending by this program.

Second, as I have described on several occasions, the size and scope of the current schools and libraries program is far in excess of what was envisioned by Congress and thus beyond the Commission's authority to establish.⁽⁵⁾ I believe that the universal service contributions, at least to the extent they are providing support for non-telecommunications services to non-telecommunications carriers, may not be fairly characterized as mere "fees." Some have argued that there is only one section of the act that provides funding for universal service and that any challenge to universal service necessarily sweeps in all of the programs.⁽⁶⁾ I point out, however, that the contributions for the schools, libraries, and rural health care support mechanisms are based not only on interstate but intrastate revenues, while the contributions for the high cost program are based solely on interstate revenues. Thus, there are separate rates to fund separate programs.

In addition, as I have described on several occasions, the legality of this approach to calculating contributions is highly questionable.⁽⁷⁾ 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 the power to collect charges based on such revenues rests within the exclusive province of the States.

Finally, I question whether the Commission's current plan to differentiate among bona fide applications -- as will be necessary with these contribution levels -- is legal. The Commission's rules already consider a schools' economic status in determining the level of support to which they may qualify. The Commission also takes economic status into account to determine whether the schools are even eligible for participation in the inside wiring aspect of the school and libraries program. I do not see how the Commission has the discretion to prioritize among bona fide applications. The universal service provisions of section 254(h)(1) mandate that "upon a bona fide request" the "telecommunications carriers ...shall" provide a discount.⁽⁸⁾

All of the applications that met our previous rules are bona fide requests, and I question the propriety and legality of differentiating among them. In addition, I note that there is no such mandatory language under section 254(h)(2). Thus, I believe that the Commission must ensure that applications that have sought funding under 254(h)(1) are separated from those seeking funding 254(h)(2), and that the Commission ensure that the 254(h)(1) applications for legal services are fully funded. To the extent that an application seeks funding under section 254(h)(2), the Commission must set those applications aside until it has ensure adequate funding for all of the 254(h)(1) applications.

Conclusion

I reiterate my desire that the Commission delay further implementations of this new universal service program until we have addressed all aspects of universal service -- including rural and high cost issues. Such a delay would provide us the opportunity to reconsider some of our legal conclusions related to the implementation of this new program, as I believe we must do.