PUBLIC NOTICE FEDERAL COMMUNICATIONS COMMISSION 445 12th STREET, S.W. WASHINGTON, D.C. 20554 DA 99-1091 News media information 202/418-0500 Fax-On-Demand 202/418-2830 Internet: http://www.fcc.gov ftp.fcc.gov Released: June 4, 1999 Proposed Third Quarter 1999 Universal Service Contribution Factors CC Docket No. 96-45 In this Public Notice, the Common Carrier Bureau announces proposed universal service contribution factors for the third quarter of 1999. Commission Action Affecting Schools and Libraries Support Mechanism In the universal service First Report and Order, the Commission established a calendar year funding cycle for the schools and libraries support mechanism and instituted a funding cap for that mechanism of $2.25 billion per funding year. In the Fifth Order on Reconsideration, the Commission adjusted the funding cycle and collection amounts for the schools and libraries support mechanism. Specifically, the Commission concluded that the public interest would be served by changing the funding year for the schools and libraries support mechanism from a calendar year cycle (January 1 - December 31) to a fiscal year cycle (July 1 - June 30). In order to accommodate the transition to a fiscal year funding cycle, the Commission established the first funding period as the 18-month period from January 1, 1998 through June 30, 1999. The Commission also directed the Universal Service Administrative Company (USAC) to collect only as much as required by demand, but in no event more than $325 million per quarter to support the schools and libraries support mechanism for the third and fourth quarters of 1998 and the first and second quarters of 1999. In the Twelfth Order on Reconsideration, the Commission set the collection level for the schools and libraries support mechanism at $2.25 billion for the second funding period (July 1, 1999 - June 30, 2000). The Commission also directed USAC to collect only as much as required by demand, but in no event more than $562.5 million per quarter to fund the schools and libraries support mechanism for the third and fourth quarters of 1999 and the first and second quarters of 2000. Commission Action Affecting Rural Health Care Support Mechanism In the First Report and Order, the Commission established a calendar year funding cycle for the rural health care support mechanism and instituted a funding cap for that mechanism of $400 million per funding year. In the Fifth Order on Reconsideration, the Commission adjusted the collection amounts for the rural health care support mechanism by directing USAC to collect only as much as required by demand, but in no event more than $25 million per quarter for the third and fourth quarters of 1998. In the Ninth Order on Reconsideration, the Commission concluded that the public interest would be served by changing the funding year for the rural health care support mechanism from a calendar year cycle (January 1 - December 31) to a fiscal year cycle (July 1 - June 30). In order to accommodate the transition to a fiscal year funding cycle, the Commission established the first funding period as the 18-month period from January 1, 1998 through June 30, 1999. In the Twelfth Order on Reconsideration, the Commission set the collection level for the rural health care support mechanism at $12 million for the second funding period (July 1, 1999 - June 30, 2000). The Commission also directed USAC to collect only as much as required by demand, but in no event more than $3.0 million per quarter to fund the rural health care support mechanism for the third and fourth quarters of 1999 and the first and second quarters of 2000. Commission Action Affecting High Cost Support Mechanism In the Thirteenth Order on Reconsideration, the Commission adopted the framework for a new forward-looking high cost support mechanism for non-rural carriers. To allow interested parties an opportunity to comment on certain implementation issues regarding the new forward- looking high cost support mechanism for non-rural carriers, the Commission deferred implementation of the new mechanism until January 1, 2000. Accordingly, the Commission amended its rules so that the current high cost support mechanism for non-rural carriers, which was set to expire on June 30, 1999, will remain in effect until January 1, 2000. USAC Projections of Demand and Administrative Expenses Consistent with the foregoing Commission actions and pursuant to section 54.709(a)(3) of the Commission's rules, USAC submitted the following projections of third quarter 1999 demand and administrative expenses: ($ millions) Program Projected Program Support Administrative Expenses Interest Income Periodic True-Ups Total Program Collection Schools and Libraries 555.7 6.8 (8.0) (14.8) 539.7 Rural Health Care (see text below) (see text below) (0.4) (0.3) (0.7) Subtotal 555.7 6.8 (8.4) (15.1) 539.0 High Cost 432.8 1.2 (0.5) (1.2) 432.3 Low Income 122.7 0.5 (0.8) 2.8 125.2 Subtotal 555.5 1.7 (1.3) 1.6 557.5 TOTAL 1111.2 8.5 (9.7) (13.5) 1096.5 The rural health care support mechanism has received initial applications for support covering approximately 2,500 rural health care providers for the first funding period, but only a small percentage of those applicants have completed the application process. Consequently, collections for the rural health care support mechanism prior to the first quarter of 1999 exceeded disbursements, and USAC reports that the support mechanism had a balance of approximately $87 million at the end of 1998. In the First Quarter 1999 Contribution Factors Public Notice released on December 4, 1998, the Commission directed that excess contributions be credited back to contributors. Specifically, the Commission applied half of the balance in the rural health care account to reduce the amount of contributions collected during the first quarter of 1999 for support mechanisms with the same contribution base as the rural health care support mechanism. The Commission directed that, once USAC has completed its evaluation of rural health care funding needs, the balance remaining in the rural health care account, net of expected 1999 funding requirements, should be used to reduce subsequent contribution factors. USAC requests that no contributions for the rural health care support mechanism be collected during the third quarter of 1999. USAC reports that no more than $4.0 million will be necessary to fund completed applications from the first funding period that are payable in the third quarter of 1999. USAC also projects demand of $2.0 million for the third quarter of 1999. USAC estimates administrative expenses associated with the rural health care support mechanism will be $0.7 million for the third quarter of 1999. Thus, the total estimated program support and administrative expenses for the rural health care support mechanism for the third quarter of 1999 are $6.7 million. We do not include the expected funding requirements for the rural health care support mechanism in calculating contribution factors, however, because these amounts are not being collected in the third quarter of 1999, but instead are being funded by the remaining balance in the rural health care account. USAC reports that the remaining balance in the rural health care account is approximately $53.5 million. Additionally, USAC projects accumulated interest income for the rural health support mechanism of approximately $0.4 million for the third quarter of 1999. USAC also reports that over-collections in prior periods require a true-up of approximately $0.3 million to the rural health care account. Consistent with the First Quarter 1999 Contribution Factors Public Notice, and section 54.709(b) of the Commission's rules, we will apply the balance in the rural health care account net of third quarter 1999 funding requirements ($46.0 million), the projected accumulated interest income ($0.4 million), and the periodic true-up amount ($0.3 million) -- a total of $46.7 million -- to reduce the contribution factors for support mechanisms with the same contribution base. Proposed Contribution Factors USAC submitted end-user telecommunications revenue for July through December 1998 based on information contained in the March 1999 Universal Service Worksheets, FCC Form 457. The amounts are as follows: Total Interstate, Intrastate, and International End-User Telecommunications Revenues from July 1, 1998 - December 31, 1998: $100.947 billion Total Interstate and International End-User Telecommunications Revenues from July 1, 1998 - December 31, 1998: $38.366 billion We estimate quarterly revenues by dividing the six-month revenue estimates by two. In addition, we decrease the revenue estimates by one percent to account for uncollectible contributions. Accordingly, the contribution bases for the third quarter of 1999 are as follows: Contribution Base for Schools and Libraries and Rural Health Care: (Interstate, International, and Intrastate / 2) - 1% = Contribution Base ($100.947 billion / 2) - 1% = $49.969 billion Contribution Base for High Cost and Low Income: (Interstate and International / 2) - 1% = Contribution Base ($38.366 billion / 2) - 1% = $18.991 billion Using these contribution bases, the proposed contribution factors for the third quarter of 1999 are as follows: A. Contribution Factor for Schools and Libraries and Rural Health Care: As discussed above, we are applying the balance in the rural health care account, the projected accumulated interest income, and the periodic true-up amount (a total of $46.7 million) to reduce the contribution factors for support mechanisms with the same contribution base. This results in total program costs of $493.0 million ($539.7 million - $46.7 million). Accordingly, the contribution factor is calculated as: Total Program Costs / Contribution Base = Contribution Factor $0.493 billion / $49.969 billion = 0.0099 B. Contribution Factor for High Cost and Low Income: Total Program Costs / Contribution Base = Contribution Factor $0.558 billion / $18.991 billion = 0.0294 These factors are the proposed third quarter of 1999 universal service contribution factors. If the Commission takes no action regarding the proposed factors within the 14-day period following release of this Public Notice, the proposed factors shall be deemed approved by the Commission. USAC shall then use the factors to calculate universal service contributions for the third quarter of 1999. For further information, contact Jack Zinman, Accounting Policy Division, Common Carrier Bureau, at (202) 418-7400. DISSENTING STATEMENT OF COMMISSIONER HAROLD FURCHTGOTT-ROTH Re: Proposed Third Quarter 1999 Universal Service Contribution Factors; (CC Docket No. 96-45). Today, the Common Carrier Bureau releases a Public Notice announcing the proposed universal service contribution factors for the third quarter of 1999 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 object to the size of the schools and libraries program and the burden this increased program will place on telecommunications ratepayers. The projected support for the schools and libraries program dramatically increases by more than $230 million from the second to the third quarter of 1999. Indeed, for the first time, the schools and libraries program now exceeds the high cost program -- and by more than $120 million per quarter. The schools and libraries program is far in excess of what was envisioned by Congress. This is not what Congress meant by universal service, nor what the law requires. I object to the relative size of the schools and libraries program and to the Commission's increase of only one aspect of universal service, while at the same time delaying higher priorities. I also object to the fact that rates for many Americans will rise, ironically, in the name of "universal service." Today's public notice nearly doubles the e-rate "contribution" factor -- i.e. e- rate tax rate -- from .57% to .99%. I do not support such an increase. Similarly, I continue to oppose using access charge reductions to fund the schools and libraries program. The American consumer, not federal bureaucrats, should choose how to spend any reductions in access charges. Moreover, even if access charges are reduced, not all of the e-rate "contributors" benefit from such reductions. For example, there will be no offsetting reduction in access charges whatsoever for wireless customers who will simply have to pay higher rates. Similarly, there is no assurance that the consumers who benefit from access charge reductions will be the same consumers who will bear the new schools and libraries program burden. For example, business consumers could disproportionately benefit from the access charge reduction while residential consumers pay these higher fees. Second, I continue to object to the excessive administrative expenses of the schools and libraries program. Under today's Notice, the administrative expenses of the schools and libraries program will be $6.8 million for the third quarter alone. These administrative expenses are considerably higher than the administrative expenses of any and all of the other universal service programs. For example, the high cost/low income programs combined demand is approximately the same ($555 million), but the corresponding administrative expenses are considerably smaller (only $1.7 million, more than $5 million less than the schools and libraries administrative expenses). I object to this disparity between the administrative expenses of the schools and libraries program and those of the other universal service programs. Indeed, section 2005(b)(2)(A) of Senate Bill 1768, which prompted several universal service corporate structural revisions, provides for an extremely limited administrative entity: [T]he entity proposed by the Commission to administer the programs -- (i) is limited to implementation of the FCC rules for applications for discounts and processing the applications necessary to determine eligibility for discounts under section 254(h) of the Communications ct of 1934 (47 U.S.C. 254(h)) as determined by the Commission; (ii) may not administer the program in any manner that requires that entity to interpret the intent of Congress in establishing the programs or interpret any rule promulgated by the Commission in carrying out the programs, without appropriate consultation and guidance from the Commission. In light of this more limited administrative function, I fail to see the need for such excessive administrative expenses. I cannot help but wonder whether the overly bureaucratic structure adopted by the Commission, with its formal divisions and multiple committees overseeing them, has contributed in some way to these expenses. I believe there is a need for more adequate safeguards and Commission oversight to protect against such excessive administrative spending by this program. Third, the 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. Indeed, as I have discussed on numerous occasions, the Commission's actions in many ways violate the clear directives of the Telecommunications Act and are illegal. For example, 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 responded 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. 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. Moreover, as I have described on several occasions, the legality of this approach to calculating contributions is highly questionable. 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. I believe that the Commission's decision to look to intrastate revenues to determine federal universal service support for the schools and libraries program impermissibly encroaches on states' rights and violates the Act's federal-state dichotomy. Conclusion I reiterate my desire for the Commission to reconsider some of the legal conclusions related to the implementation of the schools and libraries program, as I believe we must do. At the very least, however, we must become more involved in the oversight of this program and the burden this program and its administrative expenses are placing on the telecommunications ratepayers.