Matthew C. Ames

William Malone

Miller & Van Eaton, P.L.L.C.

1225 Nineteenth Street, N.W.

Suite 400

Washington, D.C. 20036

(202) 785-0600

Attorneys for the Education and Library Networks Coalition

and the American Library Association

June 2, 1998

The Education and Library Networks Coalition ("EDLINC") and the American Library Association ("ALA") submit this Corporate Disclosure Statement pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure.

EDLINC is an unincorporated, ad hoc association whose members are nonprofit educational associations. ALA is a non-profit library association. Neither ALA nor any of the members of EDLINC have any parent companies, subsidiaries or affiliates that have issued shares to the public.

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CORPORATE DISCLOSURE STATEMENT i

STATEMENT REGARDING ORAL ARGUMENT *

TABLE OF AUTHORITIES *

STATEMENT OF JURISDICTION *

STATEMENT OF ISSUES *

STANDARD OF REVIEW *

STATEMENT OF THE CASE *

A. Introduction: Discounted Rates for Schools and Libraries. *

B. Universal Service, Competition, and the Purpose of the 1996 Act. 3

C. Three Classes of Universal Service. 5

D. The FCC’s Universal Service Order. 8

SUMMARY OF ARGUMENT 11

ARGUMENT 15

I. THE 1996 ACT PLAINLY DIRECTS THE COMMISSION TO ESTABLISH A MECHANISM THAT WILL MAKE ADVANCED TELECOMMUNICATIONS TECHNOLOGY AVAILABLE IN ALL LIBRARIES AND SCHOOL CLASSROOMS 15

A. The Structure and Language of Section 254 Demonstrate that Congress Meant Universal Service for Schools and Libraries to Encompass more than just Telecommunications Services.15

B. Congress Expressly Directed the Commission To Include Access to Advanced Telecommunications and Information Services -- and Therefore Internet Access -- in Universal Service for Schools and Libraries 19

C. Congress Expressly Directed the Commission to Include Internal Connections in Universal Service for Schools and Libraries 22

II. TO COMPLY WITH THE CONGRESSIONAL DIRECTIVES TO PROMOTE COMPETITION AND DEVELOP COMPETITIVELY NEUTRAL RULES TO SERVE SCHOOLS AND LIBRARIES, THE COMMISSION WAS REQUIRED TO ALLOW NON-TELECOMMUNICATIONS CARRIERS TO RECEIVE SUPPORT PAYMENTS. 25

III. THE COMMISSION HAS NOT ASSERTED JURISDICTION OVER INTRASTATE RATES BECAUSE THE STATES REMAIN FREE TO ESTABLISH THEIR OWN DISCOUNT MECHANISMS. 29

IV. IN DESIGNATING ALL COMMERCIALLY-AVAILABLE SERVICES AS ELIGIBLE FOR DISCOUNTS, THE COMMISSION DID NOT DELEGATE ANY AUTHORITY TO SCHOOLS, LIBRARIES, OR ANY OTHER ENTITY. 32

V. THE COMMISSION’S CONTRIBUTION SYSTEM IS LAWFUL. 33

CONCLUSION 35

On August 6, 1997, the Court granted the motions to intervene of the Education and Library Networks Coalition ("EDLINC") and the American Library Association ("ALA"). The Court has jurisdiction to review final orders of the Federal Communications Commission (the "Commission" or the "FCC") under 47 U.S.C. § 402(a) and 28 U.S.C. § 2342(1).

1. Whether the Telecommunications Act of 1996 directs the Commission to establish a mechanism for making Internet access available to schools and libraries at discounted rates?
2. Whether the Telecommunications Act of 1996 directs the Commission to establish a mechanism for making internal connections available to schools and libraries at discounted rates?
3. Whether the Commission properly complied with the Congressional directives to promote competition and develop competitively neutral rules to serve schools and libraries by allowing non-telecommunications carriers to receive federal universal service support?
4. Whether the Commission’s universal service support mechanism for schools and libraries asserts jurisdiction over intrastate rates?
5. Whether the Commission improperly delegated its authority by designating all commercially-available services as eligible for discounts?
6. Whether the Commission has the authority to base carrier contributions to the universal service mechanism for schools and libraries on combined interstate and intrastate revenues?

EDLINC and ALA hereby adopt the standard of review set forth in the FCC’s Brief.

Among the matters covered by the Commission order under review, Federal-State Joint Board on Universal Service, Order, 12 FCC Rcd 8776 (1997) (the "Order"), was the implementation of the Congressional mandate to provide universal service for schools and libraries. As directed by Sections 254(c)(3) and 254(h) of the Communications Act of 1934 (the "Communications Act"), added by the Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (the "1996 Act"), the FCC established a mechanism under which schools and libraries receive discounts on rates for all commercially-available telecommunications services, Internet access, and internal connections. Order at ¶ 425; 47 C.F.R. §§ 54.502, 503.

The Order provides that if a state has adopted rules consistent with the FCC’s, schools and libraries in that state may obtain any of the eligible services from a telecommunications carrier, whether it is an interstate or intrastate service. Order at ¶¶ 431, 436, 450; 47 C.F.R. § 54.505(e). Schools and libraries may also obtain Internet access and internal connections from non-telecommunications carriers. Order at ¶ 589; 47 C.F.R. § 54.517. If a state chooses not to participate, schools and libraries in that state will not be eligible for federal support.

To be eligible for discounts, schools and libraries must enter into contracts with providers through a competitive bidding process. Order at ¶ 480; 47 C.F.R. § 54.504(a). The discounted rate for a service is determined by reducing the contract rate by a percentage based on the proportion of student enrollment eligible for the federal school lunch program, and on whether the school or library is in an urban or rural area. Order at ¶ 498; 47 C.F.R. § 54.505. The service provider may then recover the difference between the contract rate and the discounted rate from the universal service support fund. Order at ¶ 586; 47 C.F.R. § 54.515. The fund consists of assessments paid by telecommunications carriers based on their revenues from providing international, interstate and intrastate telecommunications services; revenues from non-telecommunications services are not included. Order at ¶ 837; 47 C.F.R. § 54.709.

B. Universal Service, Competition, and the Purpose of the 1996 Act.

A complete understanding of universal service for schools and libraries requires understanding the goals of the 1996 Act. The purpose of the 1996 Act is best expressed by its preamble, which describes it as "An Act to promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies."

The primary mechanism Congress chose to reach this goal was increased competition. The 1996 Act added nearly twenty provisions to the Communications Act that deal one way or another with opening markets to competition.

But the authors of the 1996 Act recognized that merely promoting competition would not always achieve their goal. Indeed, driving prices toward costs would make it more difficult to deliver services to all users at affordable prices. Consequently, important provisions of the 1996 Act were directed to preserving and enhancing universal service, including universal service for schools and libraries. This case involves reconciling the FCC’s obligation to advance the mandate of universal service with its obligation to promote competition. Properly read, these obligations reinforce one another: competition is a means of extending service, universal service offers a means of promoting competition, and both advance the goals of higher quality, lower prices, and new services.

C. Three Classes of Universal Service.

In enacting Section 254, Congress intended to establish a comprehensive federal-state scheme to improve current universal service mechanisms and expand them by including schools and libraries, and rural health care providers, for the first time. But Congress did not employ a single mechanism to achieve this goal. The Senate bill that ultimately became the 1996 Act, S. 652, 104th Cong., 1st Sess. (1995) contained two separate provisions to assure comprehensive universal service. Section 253 ("Universal Service") established universal service principles and directed the Commission to establish a mechanism for telecommunications providers to contribute to universal service, and Section 264 ("Telecommunications Services for Certain Providers") required telecommunications carriers to provide universal service to schools and libraries and to rural health care providers at affordable rates.

During consideration of S. 652, Section 264 was grafted onto Section 253 as new subsection 254(h), and services for schools and libraries, and rural health care, became part of universal service. But Section 264 was not completely integrated into Section 253 to create a single, uniform approach to universal service; instead, it was left largely intact, with appropriate cross-references between relevant subsections of new Section 254 inserted. Consequently, Congress established three separate universal service mechanisms, one for schools and libraries, one for rural health care providers, and a third for other classes of subscribers. Although they are interrelated, they serve different purposes and operate in different ways.

This was a logical result, because schools and libraries, rural health care providers, and individual telephone subscribers all have different needs. In a statement on the Senate floor just before the adoption of the 1996 Act, Senator

Snowe, chief sponsor of what became Section 254(h), noted that the purpose of universal service was to ensure that residents of rural areas should not pay more for essential telecommunications services than residents of urban areas. 142 Cong. Rec. S708 (daily ed. Feb. 1, 1996) (statement of Sen. Snowe). But, she added, "there is a widening gap between the high expectations of an increasingly technologically driven society and the inability of most schools – particularly rural schools – to prepare students adequately for the high-technology future." Id. Therefore, all schools and libraries must have affordable access to the Internet and other advanced services. Id. Senator Snowe also noted the particular benefits of "telemedicine" technology for rural health care. Id. at S708-709.

The Conference Report on S. 652 identified the particular services that Congress intended to be included in universal service for schools and libraries:

Thus, Congress expected the FCC to establish a means of delivering advanced telecommunications, including access to the Internet, to libraries and individual school classrooms.

D. The FCC’s Universal Service Order.

The Commission carefully crafted its Order to apply the same considerations that motivated Congress. It relied on competition as a means of achieving the goals of the 1996 Act, and also sought to meet the particular needs of schools and libraries, within Congress’s three-part structure.

In deference to competition, the Commission adopted the principle that universal service rules should be "competitively neutral." By this, the Commission meant that its rules should not create advantages or disadvantages for particular providers or technologies. Order at ¶ 47. The Commission’s goal, consistent with that of Congress, was to promote new technologies that might provide competitive alternatives in rural, insular and high cost areas. Order at ¶ 50. In other words, it saw universal service as a means of promoting competition. The Commission also noted that it already had an obligation to adopt competitively neutral rules for service to schools and libraries. Order at 587.

The Commission also developed a detailed factual record confirming Congress’s judgment regarding the special needs of schools and libraries. For example, the Order notes that when the Joint Board proceeding began, only nine percent of all instructional rooms were connected to the Internet. Order at ¶ 467. The record also showed that many of the computers installed in schools were not connected to any internal or external network. Although as of 1995 49 % of schools had local area networks, half were used only for administrative purposes, and less than 10% were used to connect computers in all classrooms. A General Accounting Office report found that over half of all schools surveyed reported deficiencies in the number of modems, telephone lines, and internal conduits for installing connections. Libraries faced similar problems: for example, a 1995 survey showed that in libraries serving communities of 100,000 or more, 68.3% had Internet access, but only 23.3% provided public access terminals. Some schools and libraries were making great efforts to take advantage of the new technology, but most institutions lagged far behind.

The record also confirmed Congressional concerns about the consequences of not meeting these needs. For example, the record showed that in 1984, 25% of jobs required computer or networking capability, but in 1993, that figure had grown to 47%. By the year 2000, 60% of jobs are expected to require computer and advanced telecommunications skills, and such jobs will pay 10-15% more than others. But today businesses must spend large sums training and retraining workers because the schools do not have access to the necessary technology.

With these facts in mind, the Commission sought to address the needs of schools and libraries in the most pro-competitive manner permitted by the statute.

The overarching purpose of the 1996 Act was to increase the availability of modern telecommunications technology to all kinds of telecommunications users. To accomplish this goal, Congress adopted two complementary and mutually reinforcing mechanisms: competition and universal service. Section 254 creates three types of universal service: basic universal service to benefit residential users in low income and rural areas, Section 254(c)(1); universal service for rural health care providers, Sections 254(c)(3), 254(h)(1)(A); and universal service for schools and libraries, Sections 254(c)(3), 254(h)(1)(B). Each type of universal service is effectuated by a mechanism tailored to the unique needs of the class of users it is to benefit.

Internet Access.

The Commission has the authority to make Internet access eligible for discounts under Sections 254(h)(1)(B) and 254(c)(3). Section 254(c)(3) allows the Commission to designate certain additional services, over and above the telecommunications services included in basic universal service under Section 254(c)(1). Because Congress did not require that those additional services be telecommunications services, but used the single word "services," the Commission has broad authority, so long as they are services used for the purposes of Section 254(h)(1)(B).

Section 254(h)(2) provides additional authority because it requires the FCC to enhance access to telecommunications services and information services. Because Internet access is an information service, the Commission has the authority to make it eligible for discounts; indeed, Congress clearly intended that it should be eligible. Conf. Rep. at 132-33.

In addition, making Internet access more affordable for schools and libraries expands the market and encourages new entrants to serve that market. The resulting competition will engender lower prices, higher quality, and new services, as desired by Congress.

Internal Connections.

Section 254(h)(2)(A) directs the Commission to facilitate access to advanced telecommunications services and information services for all libraries and classrooms. The statutory language makes it clear that Congress was not thinking merely of access to school buildings, but wanted the Commission to ensure that each instructional room in a school or library could receive and use advanced telecommunications and information services. Without such direct access to the classroom, other services would be practically useless. Making internal connections eligible for discounts also promotes competition by broadening the market for other services and increasing the number of potential competitors.

Services from Competitive Providers.

The statute also requires the FCC to allow non-telecommunications carriers to receive support payments if they provide Internet access or internal connections. If the Commission did not allow non-telecommunications carriers to receive support, only incumbent local exchange carriers would be likely to provide services to school and libraries. The result would be to restrict competition and to allow incumbent local exchange carriers to extend their telecommunications service monopolies to Internet access and internal connections. This would violate the pro-competitive policy underlying the 1996 Act, and the express requirement of Section 254(h)(2)(A) to adopt competitively neutral rules.

Intrastate Services.

Petitioners GTE, Southwestern Bell Telephone Company, and BellSouth Corporation (the "LEC Petitioners") have argued that the FCC’s discount mechanism amounts to an assertion of jurisdiction over intrastate rates. This is incorrect, because the states remain free to adopt their own discount mechanisms. They are not being coerced or preempted in any way.

Non-delegation.

The LEC Petitioners also assert that by allowing schools and libraries to determine what services they wish to purchase, the Commission has delegated its authority to schools and libraries. This argument makes no sense because schools and libraries are only doing what they have always done: paying for services that they think they need. The only difference is that part of the cost of the services is paid for by the universal service fund. Furthermore, by designating "all commercially-available telecommunications services" as eligible for discounts, the Commission has done exactly what the statute required: identified the class of services to be provided at a discount.

Contribution Mechanism.

Finally, the FCC’s decision to require telecommunications carriers to base their contributions on both interstate and intrastate revenues does not violate the Act. Nor does the decision to require providers to recover their contributions only from interstate rates.

The plain language of Section 254 and the legislative history of the 1996 Act leave no doubt that Congress expected the Commission to take the steps needed to foster delivery of advanced telecommunications technology – including access to the Internet – directly to the classroom. Section 254 ensures that classes of users with particular needs, schools and libraries among them, are not left behind because of their location or ability to pay.

The specific emphasis on advanced services for schools and libraries is critical. There would be little educational benefit in establishing discounted rates for traditional telephone service to the principal’s office. Congress understood what kinds of technologies schools and libraries need to be effective, and it directed the Commission to deliver what is needed, where it is needed.

Because the services schools and libraries need to perform their missions are different from those required to meet general universal service goals or the needs of rural health care providers, Congress established three different types of universal service, each comprising different types of services.

First, in Section 254(c)(1), the statute defines universal service in terms of telecommunications services only. That section directs the Commission to periodically establish a level of service, based on advances in telecommunications and information technologies and services, directed at the needs of residential subscribers. But this level of service is not limited to residential subscribers, because Section 254(c)(3) authorizes the Commission to extend services under subsection (c)(1) to schools, libraries, and rural health care providers.

Second, Section 254(c)(3) also authorized the Commission to expand the definition of universal service for schools and libraries and rural health care providers beyond that in Section 254(c)(1); here, Congress did not limit the services under discussion to "telecommunications services," but referred to "special services" needed to meet "the purposes of subsection (h)."

Subsection (h) establishes the basic mechanism for providing special universal services to each of the two additional classes. In defining the services to be made available to rural health providers in Section 254(h)(1)(A), Congress again referred specifically to "telecommunications services." But Section 254(h)(1)(B) is different. Instead of using language parallel to that applicable to rural health care providers, Congress used the general term "services," clearly indicating that it meant something more than just "telecommunications services."

Therefore, under the statute, basic universal service consists of telecommunications services; universal service for rural health care providers consists of basic universal service plus additional telecommunications services needed to meet the particular needs of rural health care providers; and universal service for schools and libraries consists of basic universal service, plus additional telecommunications, information, and other services needed to meet the particular needs of schools and libraries. Under this three-part structure, the FCC determined that schools and libraries should be eligible for discounted rates for all commercially-available telecommunications services, Internet access, and internal connections. Order at ¶ 425; 47 C.F.R. §§ 54.502, 503.

The LEC Petitioners insist that when the word "services" appears alone it must be read to mean "telecommunications services." LEC Petitioners’ Brief at 83. But because Congress speaks both of telecommunications services and information services in numerous provisions of the 1996 Act, as well as within the confines of Section 254(h), and also refers specifically to telecommunications services alone in a number of places within Section 254(h), the reference to "services" in Sections 254(c)(3) and 254(h)(1)(B) is not coincidental and must be read as including, at a minimum, both classes of service. Of course, the reference to "the purposes of subsection (h)" in Section 254(c)(3) also permits the inclusion of services other than telecommunications and information services.

The LEC Petitioners also point to Section 254(c)(2), which, like Section 254 (c)(3), refers to "services," without any modifier. LEC Petitioners’ Brief at 84. The LEC Petitioners argue that the Commission’s interpretation "makes no sense," because if "services" in that section does not mean "telecommunications services," the Commission is free to add "all sorts of services" to the definition of universal service. Id. This argument reveals the LEC Petitioners’ lack of understanding of the structure of Section 254. The reference to "services" alone in Section 254(c)(2) is necessary because, as just discussed, there is not one universal service program, but three. Congress had to use the broad term "services" in Section 254(c)(2) because in some cases -- namely, schools and libraries -- the Commission does have the authority to include non-telecommunications services in the definition of universal service.

As discussed in point I.A, above, Congress directed the Commission to include in the definition of universal service for schools and libraries whatever "services" were needed to meet the purposes of Section 254(h). Section 254(c)(3). But Congress also explicitly required the Commission to make Internet access eligible for discounts. Section 254(h)(2)(A) directs the Commission to establish rules that will "enhance access to advanced telecommunications and information services . . . ." Whether Internet access is an information service, a telecommunications service, or some sort of hybrid, is irrelevant. The Commission was expressly directed to enhance access to both types of service, and if Internet access does not constitute "access to advanced telecommunications and information services," what does?

The legislative history confirms that Congress meant for all schools and libraries to have access to the Internet. The Conference Report expressly stated that:

This is clear enough. Given the importance of the Internet as a means of communications and as a research tool, the express reference to it in the Conference Report, and the fact that it is clearly "an advanced telecommunications and information service," not including access to the Internet among the services eligible for discounts would have defeated the purpose of Section 254(h).

Finally, making Internet access eligible for discounts promotes competition by increasing the market for such services. If schools and libraries have the financial means to purchase Internet access, their entry into the marketplace creates an opportunity for new service providers to compete against established providers. If the new providers succeed and expand their markets to other classes of subscribers, prices will come down, perhaps even to the point that discounts are not required. Presumably, the resulting competition will also engender new services and higher quality. Thus, the Commission’s rules advance both competition and universal service, and in the process promote the overall goals of Congress.

The second class of non-telecommunications services the Commission determined to be eligible for discounts was the provision of internal connections. Section 254(h)(2) expressly directs the Commission to do so because it requires the Commission to enhance access to "classrooms." This choice of words is obviously significant. Congress could have referred simply to schools and libraries, as it did in numerous other places in Section 254, but it did not. Any defensible construction of the statutory provisions must take the legislature’s choice of words into account, but the LEC Petitioners completely ignore the statutory reference to "classrooms."

Having concluded that Congress meant for the advanced services under Section 254(h)(2)(A) to be delivered directly to the classroom, the Commission had to decide how to comply with the congressional mandate. Presumably one could "enhance access" to telecommunications services and information services at the classroom level by various means. For example, the Commission could have provided funds for schools to hire runners to relay information from a single computer lab or telecommunications control center to every classroom in a building. Of course, this would have been ludicrous, because the entire purpose of the 1996 Act and Section 254(h) was to promote the growth of modern technology.

So the question becomes, how did Congress intend for the Commission to enhance access to telecommunications services and information services in classrooms? The Commission naturally concluded that it had no realistic alternative but to take steps to ensure that those services could be delivered directly to classrooms using technology at least as advanced as the services themselves. Without internal connections, individual schools might be able to obtain enhanced access to certain services, but individual classrooms could not.

The LEC Petitioners claim that internal connections are not a service. LEC Petitioners’ Brief at 82. This is incorrect, however, because the installation and maintenance of facilities is plainly a service. See NARUC v. FCC, 880 F.2d 422, 430-431 (D.C. Cir. 1989) (referring to "inside wiring services" and "installation and maintenance services"). What schools and libraries need and what the FCC’s rules provide are functional networks, which require a combination of engineering design, construction, and maintenance services.

Furthermore, as the Commission noted, to find that internal connections are goods and not services would create an artificial distinction between purchasing the installation of internal connections, and leasing the use of internal connections owned by a provider. Order at ¶ 452. This distinction would skew the marketplace in favor of entities that make their facilities available to others, and against entities that use their own facilities. This is precisely the kind of distinction the 1996 Act meant to erase. See 47 U.S.C. § 251. It would also violate the pro-competitive policy of the 1996 Act. Consequently, the Commission properly included internal connections among the services eligible for discounts.

The LEC Petitioners also argue that in the past the Commission has declared that "internal connections" are not "telecommunications services" and deregulated their purchase, installation and maintenance. LEC Petitioners’ Brief at 82. Consequently, they imply, the Commission should simply not address the concept of internal connections at all. This is incorrect, for two reasons. First, the Commission deregulated "inside wiring," not "internal connections." Internal connections are defined more broadly than inside wiring because they include not only wiring but equipment needed to rout transmissions. Detariffing the Installation and Maintenance of Inside Wiring, Memorandum Opinion and Order, 1 FCC Rcd. 1190, 1191 n.1 (1986); 47 C.F.R. §§ 54.506; Order at ¶ 460. Second, the FCC’s earlier decision was made before Congress had explicitly directed the agency to develop a means of enhancing access to classrooms.

Finally, making internal connections eligible for discounts promotes competition because it makes a whole range of services available in individual classrooms, thus broadening the market for those services and increasing the number of potential competitors. Just as with Internet access, the Commission’s decision increases the likelihood that quality will improve, prices will drop, and new services will become available.

The Commission was required to allow non-telecommunications carriers that provide services eligible for discounts to schools and libraries because Congress meant for the 1996 Act to promote competition, and the Commission was charged with drafting regulations that advanced that goal. The only way for the Commission to achieve this purpose was to permit non-telecommunications carriers to provide services eligible for discounts; the Order went no further than the statute required.

Section 254 reflects this policy in favor of competition at subsection 254(h)(2)(A), which expressly the directs the Commission to "establish competitively neutral rules . . . to enhance access to advanced telecommunications and information services . . . ." The Commission properly concluded that it should "empower schools and libraries to take the fullest advantage of competition to select the most cost-effective provider of Internet access and internal connections, in addition to telecommunications services . . . " Order at ¶594. Allowing only telecommunications carriers to provide Internet access and internal connections at a discount would not be competitively neutral. Any FCC rule that would protect telecommunications carriers as a class or shield them from competition by market forces that would otherwise be able to provide a particular service would violate both the general thrust of the 1996 Act and the express competitive neutrality requirement of Section 254(h)(2)(A).

This is the only possible conclusion. The LEC Petitioners, however, argue that because Section 254(h)(1)(B) refers only to telecommunications carriers, Congress must have meant for only such entities to participate in the discount program. But this misreads the statute. Section 254(h)(1)(B) is not a limitation on who may receive support. First of all, Section 254(h)(1)(B)(ii) was needed to broaden the scope of who could provide universal service to schools and libraries, because support for basic universal service is limited to "eligible telecommunications carriers" under Section 254(e). Second, Section 254(h)(1)(B) imposes an obligation on carriers to provide discounted services if no other party offers to do so. Third, nowhere does Section 254(h)(1)(B) say that support is limited only to telecommunications providers. Accordingly, Section 254(h)(1)(B) does not negate the Commission’s responsibility to enhance competition and adopt competitively neutral rules.

Furthermore, the LEC Petitioners base their argument on Section 254(h)(1)(B), but the Commission’s authority to make non-telecommunications carriers eligible to receive universal service support derives from Section 254(h)(2). The LEC Petitioners claim that Section 254(h)(1)(B) controls Section 254(h)(2) because the so-called "specific direction" of 254(h)(1)(B) trumps the obligation to enhance access in 254(h)(2)(A). LEC Petitioners’ Brief at 87. But this, too, misreads the statute. Section 254(h)(1)(B) establishes the general discount mechanism. Section 254(h)(2) is an additional specific requirement to enhance access – it is not subordinate to Section 254(h)(1), or it would have been placed under that subsection. Instead, 254(h)(1) and (h)(2) are on an equal footing with each other.

The LEC Petitioners’ approach illustrates the importance of allowing non-telecommunications providers to provide discounted services. By limiting eligibility to telecommunications carriers, the LEC Petitioners would effectively establish service to schools and libraries as the private preserve of the incumbent telephone company. Schools and libraries would have no incentive to obtain Internet access and internal connection services from anybody else because if they did they would not be able to take advantage of the discounts. Only schools and libraries located in areas where there is already a competitor to the incumbent local exchange carrier would have any chance of obtaining competitive rates for Internet access and internal connections, and even in those areas a competitor would have to make a conscious decision to compete for the school and library market. In general, therefore, the LEC Petitioners’ interpretation would only make it harder for competition to develop, since the range of possible new entrants would be restricted and the incumbent would be well-positioned to retain its monopoly. This simply cannot be what Congress intended, when the desire to promote competition permeates every provision of the 1996 Act.

Finally, the LEC Petitioners claim that it would be unfair to allow non-telecommunications providers to be reimbursed out of the school and library support fund because non-telecommunications providers do not have to contribute to the fund. LEC Petitioners’ Brief at 88. The LEC Petitioners omit a key fact, however. Telecommunications providers are only required to contribute to the school and library fund on the basis of their telecommunications revenues. And non-telecommunications providers, by definition, are not permitted to provide telecommunications services. Thus, there is no "one-way subsidy flow." Both groups are on a level playing field: both can compete to provide Internet access and internal connections, both can draw on the universal service fund, and neither contributes based on its revenues from Internet access and internal connections. If anything, non-telecommunications providers are still at a disadvantage because they cannot offer their customers bundled service, while the LEC Petitioners may be able to undercut non-telecommunications providers by lowering their rates for Internet access and internal connections, and making up the difference in slightly higher rates for telecommunications services.

The LEC Petitioners argue that the Commission exceeded its authority when it required the states to adopt school and library discounts on intrastate services equal to those established by the Commission for interstate services as a condition of obtaining support from the federal universal service fund. LEC Petitioners’ Brief at 88. This argument misstates the question, because nothing in the Order requires, orders, or directs a state to adopt a particular level of discounts. Each state is free to develop its own plan, limited only by the Congressional directive to adopt regulations that are not inconsistent with the Commission’s. 47 U.S.C. § 254(f). Indeed, the Order specifically allows States to give their schools and libraries a choice: a state may allow schools and libraries to choose between applying for discounts under the Commission’s rules, and obtaining only state funding by applying for discounts under an entirely separate state plan. Order at ¶ 551. In the latter case, applicants would be precluded from participating in the federal mechanism, but this is hardly an intrusion on state authority. Indeed, tying compliance with federal regulatory requirements to acceptance of the benefits of those requirements is a time-honored way of respecting the boundary between state and federal jurisdictions.

The LEC Petitioners make much of the statements in Section 254(h)(1)(B) that the FCC will establish the amount of the discount for interstate services and the States will do the same for intrastate services. LEC Petitioners’ Brief at 89-91. This acknowledgment of the prerogatives and traditional authority of the States is not a limitation on the FCC’s authority, however. Nowhere does the 1996 Act say that the Commission may not establish a discount mechanism that extends to intrastate services if the States acquiesce, and this is what has happened. Indeed, we note that although eleven states are participating in this proceeding, none of them has challenged the Order on this basis. Although they have raised similar arguments regarding the Commission’s jurisdiction over interstate rates, they do so only in connection with the Commission’s decision to require carriers to obtain state authority to recover universal service contributions based on intrastate rates. See Brief for State Petitioners, pp. 38-49. The State Petitioners express no concerns over the school and library discounts.

Furthermore, Congress must have contemplated such a result. After all, most of the services schools and libraries need are provided on an intrastate basis. FCC rules providing for discounts only on interstate services would barely advance the goals so explicitly delineated in the legislative history. Yet Congress was concerned with such things as internal connections, Internet access and distance learning, all of which are generally provided on an intrastate basis.

Section 254(c)(3) expressly authorizes the Commission to "designate" services eligible for support. The Commission properly exercised this authority when it designated all commercially-available services as eligible for discounts. Black’s Law Dictionary defines "designate" as follows:

Thus, "to designate" does not necessarily mean "to specifically select," as the LEC Petitioners argue. It has the more general meaning of naming or identifying, and this is what the Commission did: it identified all commercially available services as eligible for discounts. Congress could have directed the Commission to "designate specific services," but it did not.

Furthermore, even if designation requires selecting some members of a larger group, the Commission did that as well. The Order does not permit discounts on all services, but only on those that are "commercially available." Thus, the Commission excluded those that are merely experimental, still in development, or otherwise not available "commercially."

Letting schools and libraries choose what services to buy is not a delegation of federal authority. If that were so, every instance of a government agency forbearing from regulation would be a delegation of authority. In fact, this argument turns our democratic system on its head, and presumes that all power resides in the government, which then doles it out to the people, instead of the reverse. We would hope that the LEC Petitioners recognize that this is not an argument they wish to win.

Finally, the Order does not change the status quo in one critical respect. The Order allows schools and libraries to decide what services they need, just as they did before the Order was adopted. The only thing that is different under the rules is that if a school or library qualifies, it can get a discount. But it will still be spending its own money to buy services of its choosing. Therefore, the true effect of the Commission’s rules is not a delegation of authority, but merely a partial reimbursement.

Petitioner Cincinnati Bell claims that the Commission did not have the authority to assess contributions on the combined interstate and intrastate revenues of carriers that provide interstate services, and that it was unreasonable for the Commission to require carriers to recover all of their contributions from interstate rates. Cincinnati Bell Brief at 8. Both arguments are incorrect.

First, as Cincinnati Bell admits, the FCC has the authority to require interstate carriers to make contributions towards universal service under Section 254(d). Cincinnati Bell’s complaint is that the Commission determined that the basis for such contributions by interstate carriers should be total revenues from the provision of both interstate and intrastate services. But the statute says nothing about the basis for any contributions. Accordingly, the FCC has discretion to determine what that basis should be. Chevron USA, Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984).

The Order also does not violate the traditional jurisdictional separation of Section 2(b) because it was based on the recommendations of a Federal-State Joint Board. Congress directed the Commission to establish such a Board in Section 254(a), and it was the Joint Board that first proposed letting the states benefit from the federal universal service fund if they adopted equal discounts. Federal State Joint Board on Universal Service, Recommended Decision, 12 FCC Rcd. 87 (1997), at ¶ 573. Consequently, the views of the states were considered in developing the policy.

Similarly, Section 601 of the 1996 Act does not apply in this instance. Section 601(c)(1) provides that nothing in the 1996 Act modifies, impairs or supersedes federal, state, or local law unless expressly so provided. The Commission’s decision to base funding contributions on both interstate and intrastate revenues does nothing to modify, impair or supersede any state law.

Finally, the Commission has the authority to require telecommunications providers to recover their contributions only through interstate rates. As the FCC notes in its Brief, at 191, any other approach would raise the argument that the Commission had violated the jurisdiction of the states over intrastate rates. Cincinnati Bell cannot have it both ways.

For all the foregoing reasons, the Court should uphold the provisions of the Commission’s Universal Service Order permitting schools and libraries to obtain discounted rates on telecommunications services, Internet access, and internal connections.

Respectfully submitted,