When the state members of the Joint Board asked the FCC to refer several issues to the Joint Board for further recommendation, I expected we would be able to arrive at definitive, well supported recommendations. It is with a great deal of disappointment and dissatisfaction that I write this dissent. I have always been skeptical of the use of a proxy model to determine and distribute the universal service support. The FCC, Joint Board and industry have spent thousand of hours and countless dollars attempting to develop a model to no avail. We still do not have any realistic results. We are being asked, however, in this recommended decision to accept the fact that eventually a model will produce reliable numbers for universal service funding and distribution that will be fair to all states and carriers and at the same time maintain a reasonable fund size. I can not in good conscience accept this premise on blind faith. I believe we should reject the use of a proxy model and continue to use the existing methodology based on embedded cost. I also believe the explicit fund size for non-rural LECs should remain at its present level until the Joint Board determines that competition has eroded implicit support for universal service.

At this time, we do not know what the results of the cost model will be. The Commission still must select the inputs to be used in the model. Without the opportunity to review the final results of the model, I do not believe we can make a determination that the model will provide a realistic estimate of the costs of providing the supported services. The model could either overstate or understate the costs. The model does not represent the actual cost incurred by the individual companies and is not tied to any verifiable cost incurred. Reliance on the cost model shifts the burden of proof that the level of universal support is sufficient from the companies that receive the support to the Commission.

A forward-looking cost model estimates the cost of the network built by an efficient provider in a totally competitive market. No one proposes that the carriers that receive the support build that network. The use of the model may ultimately reward companies that have not been aggressive in building or upgrading their networks and may penalize companies that have been diligent in constructing state of the art networks. The customers ultimately will carry the burden of the fund. If the resulting fund is either too large or too small, the resulting recovery mechanisms may hurt the very customers it was designed to help.

Today universal service high cost support is funded one hundred percent by federal funding. Any new universal service support mechanism should continue to be funded one hundred percent from the federal jurisdiction. The Telecommunications Act of 1996 states that services defined by the Commission are to be supported by the federal universal service support mechanisms. Anything less than one hundred percent federal funding does not meet the sufficiency requirement of the Act.

Further, I can not agree with the recommended decision'proposed methodology containing two elements, one of which calculates a state's ability to support its own universal service needs.⁽¹⁾ This method will require a state to fund, implicit or explicitly, some percentage of the universal service support needed before the federal funding level for the state or carrier is determined. This approach is inconsistent with language contained in the recommended decision that federal support may not be made contingent upon any actions taken, or not taken, by the states. The proposed methodology of determining support calculates a state's contribution to be deducted from the determined level of needed universal support. This calculation in fact produces the same result as a specific requirement for state actions. The Act speaks to state responsibility, however, it is my believe that states need to implement that section of the law and do not need direction or mandates from the Joint Board or the Commission. In no way should a carrier's or state's receipt of universal service funds be contingent on any state action mandated by the FCC.

This recommendation can not make receipt of federal universal service support contingent, directly or indirectly, on states making intrastate subsidies explicit. Intrastate rate design is the sole jurisdiction of state regulators. The Commission has no authority to require states to establish a state universal service fund or rate rebalance. State regulators have the authority and the knowledge to design intrastate rates to best meet the conditions and needs of their states.

I do not believe that universal service support for the rural companies should be designed based on the results of the cost model. It must not be assumed in any way that the recommendation of the majority to use the cost model platform for the non-rural companies will set a precedent that will be applied to the rural companies. It is imperative that a cost model not be forced on rural companies. The Rural Task Force was created to address the rural carrier issues. The Task Force must have all solutions available to them to consider in determining how best to address the universal support for those companies. It must be clear that the recommendation to support the model for non-rural companies does not require that it will be used for rural companies. The rural companies currently receive the majority of the high cost fund based on actual costs they have incurred. Under the existing system these companies have been able to maintain affordable rates and provided the needed services.

I further dissent from the decision to apply any universal support to the interstate access charges. I do not believe that the Universal Service Joint Board possesses any jurisdiction over access charge reform. Access charges are a separations issue and should be addressed by the Separations Joint Board. Additionally, the Commission has an open docket on access charge reform. It has already implemented measures to change the recovery of the non-traffic sensitive costs in the carrier common line (CCL) rate from a usage sensitive basis to a flat rate basis by implementing the phase-in of the PICC charge. These charges are currently being passed on by some carriers directly to their customers as additional line charges. The level of these charges will increase over the next several years.

The Commission has not identified the amount of implicit subsidy they believe is in access charges and yet they want to allocate some hypothetical amount of subsidy from access charges to the universal service support mechanism and make it explicit. The Separations Joint Board will determine what allocation of network costs will be assigned to the federal jurisdiction for recovery. Federal access charge service must bear its fair share of the costs of the network. The courts have already decided that the network is a shared costs. That cost is a cost of doing business and should be recovered in the rates for the all services provided by that network. Additionally, no significant competition exists in the access market at this time to erode any implicit subsidies that may be embedded in access charges. Access charge reform is being addressed in two proceedings already; it does not need to be made a part of universal service as well.

I believe it is imperative that state regulators have the authority to ensure that universal service support is used for the purposes enumerated in the Act. Section 254(e) clearly states: A carrier that receives such support shall use that support only for the provision, maintenance, and upgrading of facilities and services for which the support is intended.⁽²⁾ The state regulators are in the best position to ensure that the support is applied to the rates, services and facilities that it was intended to support. Competition must not result in the deterioration of the quality of service for rural customers. State regulators must have the authority to ensure that the universal support is used to maintain and upgrade facilities to provide quality service in rural areas.

I do not believe that the FCC has the authority to assess intrastate revenues for universal service nor do I believe they have the authority to permit states to assess interstate revenues. My position has not changed from my position in the First Recommended Decision. (See attached Dissenting Statement of Commissioners Kenneth McClure and Laska Schoenfelder.)

I believe the Act explicitly recognized the need for universal service support to protect the customers in rural and high cost areas should effective competition develop and erode the current support that has maintained affordable rates. I do not believe the intent of Section 254 of the Act was to foster competition.

For the most part I agree with the positions expressed by Commissioner Furchtgott-Roth in his separate statement.

I believe that any further actions concerning Universal Service by the Commission should not be taken until it has been referred to the Joint Board for consideration and recommendation.

Set out later in this statement are the reasons demonstrating that Congress, in dividing the overall USF program between the Federal fund assessed against interstate carriers and the State funds assessed against intrastate carriers, intended to limit the FCC to assessing interstate revenues only. In short, in setting up the new USF system, Congress followed traditional telecommunications principles and gave the FCC authority over interstate issues and the States authority over intrastate issues, indicating that the FCC's authority is limited to interstate revenues.

Section 152

The majority of this Joint Board recognized in the Recommended Decision of November 8, 1996, that "[w]hile Section 254(d) prescribes that every telecommunications carrier that provides interstate communications services shall contribute to the Commission's universal service support mechanisms ... the statute does not expressly identify the assessment base for the calculation of the contribution." Recommended Decision, par. 820 (emphasis added). The crucial legal principle that the majority today has overlooked is that the lack of a plain statutory grant of authority to the FCC to take jurisdiction over intrastate revenues in and of itself mandates that Section 254 be construed so as to deny FCC jurisdiction to assess intrastate revenues.

What the FCC believes is the best rule or most efficient means of implementing Section 254 is not relevant. With certain exceptions that are not applicable in this case, Section 152(b) of the Communications Act simply forbids the FCC from using its interpretive powers to take jurisdiction over intrastate services:

Except as provided in sections 223 through 227 of this title, inclusive, and section 332 of this title, and subject to the provisions of section 301 of this title and subchapter V-A of this chapter, nothing in this chapter shall be construed to apply or to give the Commission jurisdiction with respect to (1) charges, classifications, practices, services, facilities, or regulations for or in connection with intrastate communications service by wire or radio of any carrier ...

47 USC ' 152(b) (emphasis added).⁽³⁾ In light of Section 152(b), the Commission cannot lawfully adopt rules under Section 254(d) permitting it to assess charges on intrastate telecommunications. Language in S. 652 as it passed both the House and Senate would have given the FCC such interpretive powers by adding Section 254 and neighboring provisions to the list of exceptions in the first clause of Section 152(b) quoted above. However, the Conferees deleted this language prior to the Bill's enactment as the Telecommunications Act of 1996.⁽⁴⁾

The Supreme Court, in rejecting a contention very similar to that accepted today by the majority, described Section 152 as a built-in rule of statutory construction:

While it is, no doubt, possible to find some support in the broad language of the section for [the FCC/LEC position that FCC depreciation rules apply to the intrastate as well as the interstate services of carriers subject to FCC jurisdiction], we do not find the meaning of the section so unambiguous or straightforward as to override the command of ' 152(b) that "nothing in this chapter shall be construed to apply or to give the Commission jurisdiction" over intrastate service.

Louisiana Public Service Commission v. FCC, 476 US 355, 377 (1986) (emphasis in original); id. At 377, n. 5 (rule of statutory construction).⁽⁵⁾

A look at the statutory section at issue in Louisiana PSC, 47 U.S.C. ' 220, shows that the FCC had a basis for its argument that carriers doing at least some interstate business must use FCC depreciation rules for both their interstate and intrastate plant. That the FCC nonetheless lost shows just how tough it is to establish the existence of "unambiguous or straightforward" language. As with Section 254(d), Congress in Section 220 limited the FCC's jurisdiction by type of carrier, without distinguishing between the interstate and intrastate services of carriers subject to FCC jurisdiction:

(a) The Commission may, in its discretion, prescribe the forms of any and all accounts, records, and memoranda to be kept by carriers subject to this chapter ...

(b) The Commission shall, as soon as practicable, prescribe for such carriers the classes of property for which depreciation charges may be properly included under operating expenses, and the percentages of depreciation which shall be charged with respect to each of such classes of property ...

Such carriers shall not ... after the Commission has prescribed percentages of depreciation, charge with respect to any class of property a percentage of depreciation other than prescribed therefor by the Commission.

47 U.S.C. ' 220 (version in effect at time of Louisiana PSC decision, emphasis added). The Supreme Court noted a number of important points supporting the FCC's reading of Section 220:

* The command that carriers subject to FCC jurisdiction follow FCC depreciation rules was not qualified by a limitation of it to those carriers' interstate services,

* There was no provision giving States authority to set depreciation rates (in fact, Congress deleted such a provision, which would have been analogous to Section 254(f), in passing the 1934 Act),

* The FCC could delegate its duties to set depreciation rates to States on a case-by-case basis, but was under no obligation to do so,

* The provision giving the States a right to "present their views" on depreciation to the FCC strongly implied the FCC was the decision-maker.

Louisiana PSC, 476 U.S. at 367 and 378, n. 6 (discussing sub-sections h and i and never-enacted sub-section j).

Despite all these indications (the last three of which are not present in the case of Section 254) the Supreme Court refused to find Congressional intent to override Section 152. Under Louisiana PSC, simply imposing an unqualified duty on carriers subject to the FCC's jurisdiction to obey the FCC's rules does not mean that the FCC has the right to apply these rules to such carriers' intrastate services.

Most importantly, the Court affirmed a jurisdictional separation as the means of reconciling Section 152 with FCC authority, even thought in the context of depreciation this required "depreciating one piece of property two ways", id. At 375, after splitting it into state-regulated and federal-regulated portions:

The Communications Act not only establishes dual state and federal regulation of telephone service; it also recognizes that jurisdictional tensions may arise as a result of the fact that interstate and intrastate services are provided by a single integrated system. ... Because the separations process literally separates costs such as taxes and operating expenses between the interstate and intrastate service, it facilitates the creation or recognition of distinct spheres of regulation. ... [I]t is certainly possible to apply different rates and methods of depreciation to plant once the correct allocation between interstate and intrastate use has been made.

Id. at 375. This result is fully consistent with the intent behind Section 152, which was intended by the 1934 Congress to "exempt the intrastate business of any carrier" from the FCC's jurisdiction.⁽⁶⁾ While Louisiana PSC illustrates the degree to which the Supreme Court is willing to go to preserve the principle of state regulation of intratstate telecommunications, universal service separations requires only an identification of interstate revenue, and does not require the splitting of property or any other regulatory-intensive process.

Of course part of the Louisiana PSC rule is that the FCC may regulate intrastate services where jurisdictional separation is not possible--as where separation would require a consumer to buy two phones, one for interstate and one for intrastate calls. Again, applying Section 152 in the case of universal service simply requires separating interstate from intrastate revenues. This has been done for years for purposes of comparing carriers interstate revenue to interstate costs (and intrastate revenue to intrastate costs) under the Commission's and the States' price cap and rate-of-return rules. It is also done in calculating carriers' payments to the Telecommunications Relay Service program, which is currently funded only by interstate revenue.⁽⁷⁾

For wireless carriers and other providers which do not use any separation procedure at the present time, call records should identify calling number and called numbers and so allow easy distinction between interstate intrastate calls. There is no requirement that the separations process be done with any particular precision,⁽⁸⁾ and it is well within the FCC's rulemaking power to accept projections based on samples of calls. Separating costs (other than prehaps payments to other carriers) would be unnecessary, as the USF assessment is on revenues. Mere "difficulty" in accomplishing separation, while grounds for assertion of FCC authority over intrastate matters prior to Louisiana PSC, is no longer reason to disregard Section 152.⁽⁹⁾ If there are any unusual carriers which cannot identify interstate revenue in an economically feasible manner, special arrangement (such as fixed allocation factors) can be used.⁽¹⁰⁾

Finally, it cannot credibly be argued that confining the Federal USF to interstate revenues would negate the goals of Congress. Within the interstate jurisdiction, the FCC is free to use whatever assessment rate is necessary to fuel a "sufficient" support mechanism. Congress did not set a dollar target the FCC must meet for the Federal USF, or otherwise set specific goals that might make the Federal USF dependent on intrastate revenue. Instead, Congress contemplated that the States might wish to set up their own funds, to supplement the Federal USF if a State so desired. Section 152 in no way prevents Congress from getting what is sought -- a Federal fund suplemented by State funds in States desiring a higher service level than that possible with federal funding alone.

Section 254

For reasons other than Section 152, we are convinced that most persuasive reading of Section 254 is that the Federal USF is limited to interstate revenue. In Conference, the House receded to the Senate on the Universal Service section of the Bill, with substantial changes, particularly on the question of jurisdiction.⁽¹¹⁾ These changes from the text of Senate Bill No. 652, as passed by the Senate, show an effort to distinguish the Federal USF from state universal service funds, and to tie the federal fund to interstate service and the state funds to intrastate services.

Senate Bill No. 652 as it passed the Senate contained only one provision as to contributions to support universal service, and treated intrastate, interstate, and foreign carriers in a unified manner:

Every telecommunications carrier engaged in intrastate, interstate, or foreign communications shall participate, on an equitable and nondiscriminatory basis, in the specific and predictable mechanisms established by the Commission and the States to preserve and advance universal service.

S. 652, Section 253(c). Under the Bill, one of the principles of universal service was to be "a coordinated Federal-State universal service system ..." S. 652, Section 253(a)(6). The subsection preserving state authority did not explicitly give the States authority to assess carriers providing intrastate services, and made no distinction between interstate and intrastate matters.⁽¹²⁾ Consistent with the approach of an all-encompassing universal service system run by the FCC, the Bill provided, without exempting carriers receiving moneys from State funds, that only "essential telecommunications carriers designated under Section 214(d) shall be eligible to receive support for the provision of universal service." S. 652, Section 253(e).

The language approved by the Conferees and enacted into law crystallized the distinction between the federal and state funds, and their sources of funding.

Every telecommunications carrier that provides interstate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, to the specific, predicatble, and sufficient mechanisms established by the Commission to preserve and advance universal service. ...

47 U.S.C. ' 254(d). The Conferees dropped language calling for "a coordinated Federal-State universal service system" from the list of universal service principles. See 47 U.S.C. ' 254(b). Moreover, the Conferees inserted in the section on state authority the requirement that carriers providing intrastate services contribute to state funds as directed by the states, thus (a) explicitly giving States assessment authority, and (b) limiting it to intrastate carriers.

A State may adopt regulations not inconsistent with the Commission's rules to preserve and advance universal service. 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. A State may adopt regulations to provide for additional definitions and standards to preserve and advance universal service within that State only to the extent that such regulations adopt additional specific, predictable, and sufficient mechanisms to support such definitions or standards that do not rely on or burden Federal universal service support mechanisms.

47 U.S.C. ' 254(f) (emphasis added). The Conferees also added language directing the States not to burden the newly distinguished "Federal" USF, and limited the requirement that carriers receiving USF funds be certified under Section 214(d) to carriers receiving Federal USF funds. See U.S.C. ' 254(e).

The overall effect of the Conferees' work was to take an amorphous general universal service concept and break it down into a fund controlled by the Commission and supported by interstate carriers and funds controlled by the States and supported by intrastate carriers. There would be little purpose in taking such effort to carve the Universal Service world into two spheres if the Federal USF fund was to have a first right to assess both interstate and intrastate revenues. If the Federal USF fund had such a right, any State USF fund making assessments on the same revenues would "rely on or burden" the Federal mechanism, potentially violating Section 254(f).

Moreover, if the majority were correct, it would have been unnecessary for Congress to expressly give States the duty to police against cross-subsidization of competitive intrastate services by carriers receiving USF subsidies, while giving the FCC the duty to police against cross-subsidization of competitive interstate services.⁽¹³⁾ Drawing the line between the two types of services is the very step the majority seeks to avoid in recommending a combined intrastate/interstate Federal USF.

The majority's interpretation of Section 254 would result in violation of the Section's requirement that carriers be assessed in a non-discriminatory and equitable manner. Because only carriers doing some interstate business are subject to the terms of Section 254(d), a carrier could completely escape the Federal USF by becoming an intrastate only carrier. Thus, 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.⁽¹⁴⁾ The jurisdictionally-mixed carrier would carry a deadweight around with it as it tried to compete with the intrastate-only carrier. The majority's plan simply cannot satisfy the "competitively neutral" criteria of Section 254.

Just as there is an incentive to be an all intrastate carrier under the majority's reading, there is a reciprocal incentive to be an all-interstate carrier if States can assess the combined revenues of carriers doing some intrastate business. Escaping State USF assessments would then give the all-interstate carrier a leg up on a competitor doing some intrastate business.

Because only jurisdictionally-mixed carriers would pay into both funds, the end result of the majority's recommendation would be to create powerful and wholly aritifical incentives to turn down business on the basis of its intrastate or interstate nature, to create separate subsidiaries for intrastate in interstate business, and to take whatever steps are necessary to avoid assessment at both the Federal and State levels.

It is by no means clar that States will have the authority to assess interstate revenues to support their own funds. If they cannot, then intrastate revenue would be assessed at both the Federal and State level, while interstate revenue would be taxed only at the Federal level. This would give a competitive edge to carriers whose business is largely interstate. While caselaw interpreting Section 152, including a landmark Supreme Court opinion, holds that interstate communications is beyond the realm of the State's authority, the Supreme Court has upheld a State sales tax on end users for interstate calls against a challenge under the Commerce Clause, -- although there apparently was no claim that the tax was illegal under the Communications Act.⁽¹⁵⁾

If the litigation over this issue is resolved in favor of state authority to charge interstate calls, and states modify state-law restrictions confining their PUCs to intrastate matters, the next issue will be the allocation of interstate revenue between states. How much of AT&T's interstate revenue would be accessable by the Mississippi USF, the Louisiana USF, the Massachusetts UFS, etc.? Simply permitting both the Federal and State USF programs to assess both interstate and intrastate revenue in no way eliminates allocation difficulties.

Conclusion

Looking at just policy issues and the text of Section 254, the best interpretation of Section 254(d) is that the Federal USF program should be funded with only interstate revenues. Moreover, it cannot be credibly claimed that Section 254(d) so unambiguously or straightforwardly mandates the opposite result as to override Section 152's rule of construction against FCC jurisdiction over intrastate telecommunications. Because the majority is recommending a position which is bad policy, which extends the FCC's jurisdiction past its limit, and what will lead to years of litigation (most likely resulting in a reversal undoing years of hard work on the part of all concerned), we must respectfully dissent from the State Joing Board members' majority recommendation on this matter.

15. Compare Smith v. Illinois Bell Tel Co., 282 U.S. 133, 148 (1930) (states have no authority over interstate rates -- interpreting predecessor Act to Communications Act); Ivy Broadcasting Co. V. AT&T, 391 F.2d 486, 491 (2nd Cir. 1968) (often cited base broadly defining prohibition under Communications Act against state regulation of interstate communications); and AT&T Communications of the Mountain States, Inc. V. Public Service Comm'n, 625 F.Supp. 1204, 1208 (D.Wyo. 1985) (PSC exceeded its jurisdiction by including interstate call in base for calculating contribution for cost of local disconnect service); with Goldberg v. Sweet, 488 U.S. 252 (1989) (upholding Illinois sales tax on interstate and intrastate calls, no discussion of Communications Act).