July 17th, 1997

     Statement of Chairman Reed E. Hundt 
     Re: Administration of Universal Service 

     On May 8th of this year we voted unanimously to transform the universal service
system of support as required by Congress in Section 254 of the 1996 Telecommunications
Act.   The new universal service system continues to ensure low rates for basic phone service
across the country, while providing  for a more efficient and competitively neutral collection
and compensation scheme. 

     Fulfilling Congress' mandate, we also voted unanimously to commit up to $2.25 billion
a year in universal service funds to bring telecommunications services to our nation's
classrooms and libraries and up to $400 million a year  in support for the provision of 
telecommunications services to rural public and non-for-profit health care facilities at rates
comparable to those in urban areas.   The $2.25 billion annual fund for schools and libraries 
represents the largest investment this country has made on a national level in the infrastructure
of our public school system in this century.    Made wisely and well, this investment can truly
be a transforming force that will put a world of resources at the disposal of even the poorest 
schools and libraries -- opening up new worlds of learning for every single child in the country
-- regardless of income or location.  

     With this Order we establish a framework for universal service administration and
implementation that recognizes the many significant changes in the system.   The new
framework paves the way for the effective, efficient and accountable administration of the fund
to low income consumers, residents of high cost areas as well as to schools, libraries and  rural
health care facilities. 
     
      As the Joint Board recommended, in order to get the system up and running quickly, 
we appoint NECA as the interim administrator, subject to certain changes in its governance
and structure that will render it more representative of a broad range of interests.  Specifically,
we direct NECA to create a separate, not-for profit, subsidiary (USAC) that will administer the
support mechanisms for high cost areas and low income consumers as well as perform all
billing and collection functions.  We direct that the USAC board be comprised of a balanced
and fair representation of all contributing and recipient carriers, state regulators and
representatives of each of the intended beneficiaries.   

     We are altering, however, from our earlier determination that the universal service
administrator should select a subcontractor to administer the fund temporarily with respect to
schools,  libraries and rural health care providers.   Instead, we direct NECA to create two
independent, non-profit corporations to manage most all aspects of the administration of the
universal service fund with respect to schools, libraries and rural health care providers.  These
corporations will be solely responsible for administering the application process for schools
and libraries and rural health care providers, respectively, including disseminating, processing
and reviewing applications for service, approving technology plans, creating and maintaining
databases and websites on which applications for services will be posted for competitive bid,
performing outreach and public education functions, making and submitting quarterly
projections of demand for funding and conducting or authorizing the performance of audits. 
The establishment of these separate corporations will provide a management structure and
expertise that is needed to ensure the effective administration of the universal service program
for schools, libraries and rural health care facilities.   

     A majority of the Commission decided that this structure would better serve the goals
of effective, efficient and accountable management and administration with respect to schools,
libraries and rural health care facilities than the subcontractor approach we earlier adopted.  I 
believe that this approach will also better serve those goals than the subcommittee approach
suggested by Commissioner Chong in her dissenting statement. 

     Our decision to adopt this approach was based on thorough consideration of the merits
of various operational structures including board committees, separate corporations,
partnerships, associations and subcontractors.   Our consideration was guided by the shared
goals of establishing a system for rapid implementation and cost-effective, efficient and
accountable administration of the program to meet the specialized needs of schools, libraries,
rural health care providers, low income consumers and residents of high cost areas.   I  believe
that the separate corporate structures outlined in the order will best achieve these goals for the
reasons set forth below.  
 

     I.  Separate Corporations will be more effective, accountable, and efficient than
establishing a series of subcommittees of USAC.

     A separate corporate structure will permit the continued existence of legally- cognizable
and independent entities with sole responsibility and accountability for efficiently and
effectively  managing the administration of universal service funds to schools, libraries and
rural health care facilities.  Corporations are a desirable organizational structure generally
because they provide limited lability for their shareholders and are treated as independent legal
entities with the power to sue, to purchase or lease property, to lend or borrow money, to enter
into contracts, and to make or alter by-laws.   The corporate structure also provides an
effective, established model for governing the complex relationships among the shareholders
(or other beneficiaries), directors, officers, managers, creditors and others participating in the
business of the corporation.   The entities administering the universal service fund for schools,
libraries and rural health care facilities must be able to exercise these powers if they are to
operate effectively.  

     The separate corporate structure will also ensure greater clarity, simplicity  and
efficiency of decision making.   The lines of authority in a corporation are clear and direct;
reporting runs from managers to a CEO to the Board of Directors.  Accountability is clear and
more direct.   In a committee or subcontractor structure, the lines of authority are more
convoluted and accountability is more diffuse.   Under the committee approach it is unclear
who the schools, libraries and health care staffs would report to -- directly to the board
committee or through the CEO of USAC  (who would also be answerable to the full USAC
board). 
     In order to ensure that the universal service funds are invested wisely and efficiently,
the entities responsible for administering funds for schools, libraries and rural health care
facilities must be vested with clear management authority and responsibility to carry out all
aspects of administration of the funds to these entities.   Decisions about projected funding,
prioritization of expenditures, approval of applications and long range planning must be made
quickly, effectively and with accountability without being subjected to a burdensome
bureaucratic process.  In addition, given the broad representation of different groups on the
USAC board, the entities charged with administering these aspects of the fund must have the
unimpaired ability to vigorously defend themselves against legal challenges.  
     
     The continued existence of these separate corporations is also important to ensure
continuity and efficiency in the administration of  funds for schools, libraries and rural health
care facilities.   In order to ensure that the new funding mechanism is in place as quickly as
possible, we have appointed NECA to serve as the temporary administrator.  No   decision has
been made with respect to the permanent administrator.   Because the schools/ libraries and
health care corporations are separate legal entities, they will survive the dissolution of USAC
in the event that NECA is not selected to serve as the permanent administrator.  Under these
circumstances, the schools/libraries and health care corporations could quickly and easily
contract with the permanent administrator to continue administering the program for these
entities.   This would ensure the continued smooth operation of universal service support and
eliminate the need to spend additional funds on redundant start up costs.   The continuing role
of the schools and health care corporations will also help to attract  qualified personnel with the
expertise necessary to effectively implement the program with respect to schools, libraries and
rural health care providers.   The continued involvement of these corporations will also
provide incentives for better management in the early phases of the program and will provide
incentives for more strategic, long-range planning and better use of resources.  


     II.    Administration of  funds to schools/libraries and rural health care providers
through a sub-committee or division of the USAC Board would be administratively
cumbersome and could undermine the effective administration of the program. 

     The USAC Board will have substantial representation from telecommunications carriers
some of which have argued against or challenged the funding for schools and libraries and
rural health care facilities.   The USAC CEO will serve at the pleasure of that Board. 
Therefore, if we were to adopt a subcommittee structure, we  would necessarily have to devise
a complicated and indirect reporting structure to preserve and protect the autonomy of the
directors of the schools and health care subcommittees.  Moreover, such management by a
board committee is awkward and inefficient.  Boards generally monitor rather than manage the
day-to-day operations of most corporations.   Thus, management by committee in this instance,
would likely lead to less effective, efficient or accountable administration of funds. 

     Finally, I do not believe that the administration of universal service funds to schools,
libraries or rural health care facilities through two separate corporations rather than through
two separate USAC committees will result in either substantial delays or increased
administrative costs.   Differences in the way funds will be administrated to and used by
schools, libraries and rural health care providers will result in the need to establish separate
processes and procedures and to hire specialized staffs with relevant expertise regardless of
whether a committee or corporation structure is used.   In any event, we direct that the
separate corporations should contract with USAC or NECA to the extent necessary to
maximize the efficient use of resources and to avoid overlapping expenses.  

     For the above stated reasons, I am confident that the administrative structure  we
establish today will help to attract highly qualified, appropriately reimbursed and competent
management staff that will ensure accountable, cost-effective and efficient management of the
significant resources at issue.  Such a structure will thus ensure that universal service funds are
invested wisely and effectively to bring the benefits of the information age to classrooms,
libraries and rural health care facilities across the country.