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April 10, 1998

Separate Statement of Chairman William E. Kennard

Universal service is an American success story. For the better part of this century, our commitment to universal service has made telephone service affordable for Americans living in all corners of the Nation. And indeed about 95% of American households have basic local telephone service. While it is easy to take this level of penetration for granted, it is, by world standards, a remarkable achievement. Our responsibility is to sustain and improve upon this record, especially in areas and for portions of our communities that do not have or cannot afford service.

To be sure, the notion of universal service must continue to change, to keep pace with the technology that it supports. In the Telecommunications Act of 1996, Congress described universal service as "an evolving level of telecommunications that the Commission shall establish . . ., taking into account advances in telecommunications and information technologies and services."(1) In the 1996 Act, Congress also included within the concept of universal service discounted services to schools, libraries, and rural health care providers. The evolving nature of universal service is essential to keeping our Nation connected as technology, innovation, and investment produce ever greater, faster, and more efficient media of communications.

As we enter the twenty-first century, our duty is to maintain and improve upon the successes of universal service in an environment that differs markedly, in any number of ways, from the communications world of the past. The new communications world is different not only because of stunning advances in technology, but also because of a shift in the competitive and regulatory paradigms, as foretold by the 1996 Act. These changes present us with some formidable challenges.

First and foremost, this Commission and our colleagues at the various state commissions must reform universal service mechanisms that were designed to work in an environment of regulated monopolies, but that must now be adapted if we are to pave the way for robust competition while continuing to safeguard and advance universal service. In the world of the regulated monopolist, it was easy enough to keep basic residential phone service affordable, even if it meant pricing that service below the carrier's cost of providing it, since the monopolist could be permitted to make up the difference in other ways, such as through higher rates for long distance and business services. In this way, phone companies could earn a reasonable overall return, while basic residential phone service was kept affordable even in high cost, hard-to-serve areas.

Such implicit forms of universal service support must be reformed at the federal and state levels if competition is to succeed without sacrificing universal service. The first impact of competition will be to put downward pressure on the above-cost rates that now subsidize residential local phone service. This Commission has set into motion a process for removing universal service support that is implicit in the interstate access charges that long distance carriers pay to local exchange carriers, and replacing that form of support with an explicit universal service support recovery mechanism. I am encouraged by those States that have begun the same process within their jurisdictions, and I pledge my full support and cooperation.

We have the ultimate responsibility to assure affordable rates throughout the country. When this Commission first undertook to reform universal service last year, we observed that, through the process of separations, approximately 25% of universal service support historically had been funded through federal support mechanisms. What was not expressly recognized, however, was that some areas of our country currently receive much more than 25% federal universal service support. In these areas, it makes little sense to limit federal support to 25%. Even beyond these baseline levels, I believe we all recognize that in some instances the proportion of federal support will have to increase. It is my intention to see to it that such additional support is forthcoming. The hard question this Commission must step up to in the coming months, in close cooperation with the States, is what is the best manner in which to proceed to ensure that these are "specific, predicable and sufficient Federal and State mechanisms to preserve and advance universal service."(2)

I believe that we will all be better off if both we and the States act expeditiously to preserve existing sources of universal service support by converting existing implicit sources of support into explicit sources of support. Rates today are affordable and universal service today is supported. States and the FCC together ought to be able to restructure today's support to continue to ensure affordable rates. But doing this will mean that States determine the extent to which existing, implicit intrastate subsidies can be converted to explicit subsidies. This process of reform by the States should not increase the amount of universal service support that the States raise within their own jurisdictions. When a state cannot restructure existing universal service support and maintain affordable rates, we should further help maintain affordability. I do not envision that States complete their reform efforts before additional federal support is provided. Nor do I mean to imply that States must raise local phone rates in order for additional federal support to be available. Indeed, I seek only to follow the principle articulated by Congress that "[t]here should be specific, predictable and sufficient Federal and State mechanisms to preserve and advance universal service."(3) And where a State can demonstrate that, despite reasonable efforts, it will be unable to convert its existing intrastate support system into a specific and predictable universal support mechanism that will maintain affordable rates, the difference must and will be made up from the federal support mechanism.

As we pursue this reform, it is also our responsibility to ensure that all telecommunications carriers contribute to the universal service support in the manner contemplated by the Communications Act.(4) As our Report to Congress shows, application of the statutory terms "telecommunications carrier"(5) and "telecommunications service,"(6) which we must undertake if we are to identify those whom the statute directs to make universal service contributions, will not always be an easy task. And as our Report further shows, there are those who believe it is in this regard that our maintenance of a robust universal support mechanisms poses a threat to another American success story, the Internet. I disagree. For I believe that the continuing success of universal service can not only co-exist with the maintenance of a "hands off" regulatory approach to the Internet, I believe that universal service support can and will benefit from such an approach.

We already have witnessed the symbiotic relationship between universal service and the Internet. Universal service has given millions of Americans affordable access to the public switched telephone network and, through that network, access to all of the wonders and knowledge of the Internet. In this way the Internet benefits from the maintenance of universal service. By the same token, the growth of the Internet leads to increased support of universal service. This is because an enormous amount of pure telecommunications is purchased by the businesses that make the Internet available to the 40 million American homes with personal computers. While Internet service providers, for example, do not incur, or pass on to their subscribers, direct universal service obligations, their purchase of telecommunications does lead to an increase in universal service support from the providers from whom they purchase telecommunications services. Thus, as we refrain from treating Internet service providers as telecommunications providers, we promote the growth of Internet services; this growth in turn sparks demand for telecommunications, which then increases the amount of universal support.

In sum, I view the relationship between universal service and the Internet like a couple at the beginning of a long-lasting marriage -- inevitably there will be occasional signs of tension, but in the end they will always need each other.

I believe our Report to Congress exemplifies this approach. I have yet to see an Internet service that appears to fall within the definition of a telecommunications service. As the Report indicates, however, there are other services that seem to do so. In the Report, we discuss IP telephony, a service that seems virtually indistinguishable from traditional long distance telephone services. While a more definitive determination demands that we have a better factual record, I note that even in this regard we are not proposing the possibility of "regulating the Internet" or imposing universal service contribution obligations on Internet service providers. We are simply identifying a very narrow category of service -- IP telephony -- that shares many of the characteristics of a telecommunications service.

I do not seek to understate the concern of some that the migration of traffic from the public switched network to other networks could threaten the viability of universal service. I am committed to ensuring that no such threat materializes, whatever its source. Simply put, this Commission can have no higher priority than the preservation and enhancement of universal service. As I have outlined above, I believe that services provided by the Internet and IP telephony have provided, and will continue to provide, support for universal service, even as we avoid regulation of the former and begin to examine the telecommunication-like characteristics of the latter. But this Report is in some respects simply a snapshot. Our federally-mandated commitment to preserve and protect universal service did not begin with the 1996 Act and it does not end with this Report. It is ongoing. I look forward to continuing to work with the state commissions and with Congress to honor this commitment.

The very first sentence of our organic law states that the fundamental mission of this Commission is "to make available, so far as possible, to the all the people of the United States, without discrimination on the basis of race, color, religion, national origin, or sex, a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges."(7) The Commission has fulfilled this mission for the last seven decades of the twentieth century, and will continue to do so as it enters the twenty-first century.

1. 47 U.S.C. 254(c)(1).

2. 47 U.S.C. 254 (b)(5).

3. 47 U.S.C. 254(b)(5).

4. 47 U.S.C. 254(d).

5. 47 U.S.C. 153(44).

6. 47 U.S.C. 153(46).

7. 47 U.S.C. 151.