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November 7, 1996


Re: Federal-State Joint Board on Universal Service Recommended Decision (CC Docket No. 96-45)

Today's decision is another milestone in the implementation of the Telecommunications Act of 1996. The task at hand is as challenging as any that Congress assigned under this landmark legislation. Our job is to construct a new universal service regime that makes subsidies more explicit, more targeted, more efficient, and more compatible with competition, even as the vision of universal service is boldly extended.

The new legislation seeks to make quality services available at affordable rates to all Americans. Congress chose competition as the surest route to that end. Yet the law also mandates special measures to protect low-income consumers and those living in rural, insular, and high-cost areas. Congress also enlarged the universal service program to encompass schools, libraries, and rural health care providers.

Congress told us to "thoroughly review the existing system of Federal universal service support." We have done what Congress directed and determined that our current system of support for universal service is not sustainable. It relies on billions of dollars (no one can say how many) of implicit subsidies. Access charges, vertical services, and business lines, for example, are all priced well in excess of cost, and some of the excess helps to keep local phone rates low. Competitors, naturally, will target the high-margin services, and these sources of subsidies will inevitably diminish over time.

Our current system is not competitively neutral. The obligation to support universal service is not fairly distributed, and neither is the opportunity to receive universal service support. To effectuate the will of Congress, new mechanisms are necessary to expand the base of carriers who fund universal service and to expand eligibility to receive universal service support.

These challenges call for a comprehensive restructuring of universal service support mechanisms. Today's Recommended Decision is a promising start in that endeavor.


Throughout our deliberations, we have adhered to the principles Congress enumerated in the legislation. We have also taken the opportunity created by the law to add "competitive neutrality" as a guiding principle of universal service policymaking. This decision is consistent with the intentions underlying Section 254 and the legislation as a whole.

Definition of universal service

As we defined the services to be supported, we were mindful that the funds for universal service ultimately come from consumers; and so we have resisted entreaties for an expansive definition. The menu of services initially to be supported for high-cost areas and low-income consumers is limited to those services that most consumers already receive. We look to competitive supply and consumer demand to establish higher levels of service, which the Joint Board can take into account as it reviews the definition of supported services in future years.

Prudence also requires that (except as directed in the case of schools, libraries, and rural health care providers) we limit universal service support to single-line residences and single-line businesses. There is no reason why ratepayers as a whole should bear the burden of supporting multiple lines to a single residence, single lines to second homes, or multi-line businesses.

Low-income consumers

Charges for telephone service appear to be generally affordable throughout the nation. Subscribership is at 94 percent overall. The problem of access appears to be concentrated at the lower end of the income scale, and this necessitates certain focused changes in our low-income programs. Extending these programs to states that do not have them, encouraging the deployment of toll limitation services, and prohibiting disconnection for nonpayment of toll charges of Lifeline customers should, in the aggregate, promote the goal of increased telephone subscribership by low-income consumers.

High-cost support

We have made good progress in addressing the challenge of high-cost areas, but much remains to be done. We have achieved consensus on the important principle that support should be based on forward-looking economic costs. We have established principles and procedures for further development and evaluation of cost proxy models. We have agreed to bifurcate the treatment of rural and non-rural local exchange carriers, recognizing that rural carriers are more vulnerable to errors that may be caused by the proxy models and that Congress envisioned a slower transition to competition in rural areas.

Regrettably, the Joint Board has failed to address the question whether the funding for federal programs for high-cost support -- as well as low-income support -- will be based on both the intrastate and interstate revenues of carriers that provide interstate telecommunications services, or only on their interstate revenues. This necessarily draws into question the ability of the federal fund to support the difference between cost (proxy or embedded) and a reasonable benchmark; an interstate-only approach inevitably leads to a much higher benchmark.

In my view, the federal program must be based on both intra- and interstate revenues and provide the full measure of support needed to meet the benchmark. The alternative is to risk that consumers, small businesses, and carriers in high-cost states will be left without the support Congress intended. This cannot be squared with Congress's decision to write a clear commitment of universal service into federal law.

In addition, I can see no reason why interstate revenues alone should be the source of all new explicit subsidies, given that a portion of today's implicit subsidies comes from local business service, vertical services, and intrastate access. And the principle of competitive neutrality should steer us away from an approach that would disproportionately burden any category of carrier (as, for example, would occur with wireless companies under an interstate-only approach).

Schools and libraries

The boldest, most visionary section of the legislation requires us to promote the connection of schools and libraries to the Information Superhighway. As Congress saw clearly, the Industrial Age is giving way to the Information Age. To prepare our nation for life in the 21st Century, communications and information tools must be readily available to all American students and communities.

There is a substantial danger that disparities in access to these tools will widen the economic and cultural divide between the rich and the poor. I am delighted that the Joint Board has recommended that we address this issue through aggressive discounts that enable poorer schools and those in rural areas to obtain the services they need.

Learning occurs in the classroom, not the principal's office. I share President Clinton's hope for a "day when computers are as much a part of the classroom as blackboards and we put the future at the fingertips of every American child."

So, too, does the Congress.

That's why the legislation explicitly promotes the connection not just of "schools," but of "classrooms." And we are on firm legal and policy ground in recommending universal service support for internal connections, whether or not they are "telecommunications services." A contrary construction, which would permit support of wireless connections but not wired ones, would be completely at odds with the principle of competitive neutrality. Technology choices should be made by schools and libraries, not by regulators.

Our proposal for schools and libraries reflects a careful compromise among all eight members of the Joint Board. All of us brought different perspectives to the discussion, but we ultimately forged consensus on the proposal we announce today.

The proposal is fair to all. It is simple to administer. It provides schools with flexibility to choose the services they need. It is competitively neutral. It is fiscally responsible and creates the right economic incentives to both encourage participation and discourage inefficient consumption.

I hope that schools and libraries seize this exciting opportunity. Over the next four years, if communities are willing and able to shoulder their share of the financial responsibility, all of the classrooms in the country can be connected, to each other and to the world beyond. A relatively small investment in connecting our schools and libraries to cyberspace will be repaid many times over in the 21st century.