Opening Statement of Rep. Earl Blumenauer.
Re: Ways and Means Oversight Subcommittee Hearing on E-Rate Funding.
Date: August 4, 1998.
Source: Ways and Means Committee. This document was created by TLJ by scanning a paper copy, and then converting to HTML.

FUNDING FOR THE E-RATE
Statement of Representative Earl Blumenauer (D-OR)
Ways and Means Subcommittee On Oversight
August 4, 1998

Thank you for allowing me to testify this morning regarding the funding mechanism for the Education Rate. This E-Rate hearing is timely and important, and I appreciate the opportunity to present my views. At times, I fear we may be losing our perspective on these matters. Long distance phone bills are now at their lowest point in history. AT&T has just agreed to merge with TCI at a cost of $48 billion. GTE and Bell Atlantic are seeking to spend $52 billion on their recently announced merger. The telecommunications industry has saved billions in costs as a result of telecommunications reform to date. Yet controversy has erupted over one element the so-called E-Rate, which would represent less than I cent-per-day-per-customer line to provide internet access for America's schools and libraries.

I believe it would be most useful for me to provide members of the subcommittee with a legislative and historical framework behind what has unfortunately become a very controversial program. Let me state at the outset, I am a strong supporter of the E-Rate. I believe that Congress and the FCC made a committment to assist schools and libraries across the country in their efforts to provide America's school children with access to the Information Highway. Thousands have taken us at our word and we must honor that commitment.

History / Background

The Legislative, Executive and Judicial branches have all taken actions relating to establishment and implementation of the E-Rate.

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Legislative Branch: The Telecommunications Act of 1996

The federal commitment to schools and libraries is grounded in the Telecommunications Act of 1996. Section 254 of the Act created the E-Rate, a discounted rate for the telecommunications needs of schools and libraries, as part of the Universal Service program. The Universal Service program had been in place administratively for over 60 years. It provides telephone services to low cost and rural areas. In addition to establishing the E-Rate, the 1996 Act codified the existing Universal Service program into statute, with some changes.

Under Section 254(d) of the Act, carriers are required to contribute to mechanisms established by the Commission to preserve and advance Universal Service. Section 254(h)(1)(B) established E-Rate as part of the overall Universal Service fund. Hence, the FCC collects contributions from telephone companies for Universal Service fund activities, including the E-Rate.

The Conference Report language clarifies that the now E-Rate program "is intended to ensure that health care providers for rural areas, elementary and secondary school classrooms, and libraries have affordable access to modem telecommunications services that will enable them to provide medical and educational services to all parts of the Nation." (Committee Report -- Hse. Rpt. 104-458 - Telecommunications Act of 1996)

I have attached a copy of the statutory language and conference report language on this provision.

Perhaps most important to understanding the E-Rate is the legislative history, as reflected in the Senate and House floor debates. These debates reflect the clear understanding on the part of sponsors of the E-Rate provision that an agreement had been reached -- that this discounted rate for schools and libraries would be paid for through the savings and opportunities that telephone companies would receive as a result of deregulation. This was just one of the delicate balances that were struck between those who believed that [begin page 3] telephone consumers would best be served through a "let the marketplace decide" approach and those who favored retaining regulatory protections.

Executive Branch: The Federal Communication Commission's Implementation of Section 254(h)

Once the Act was passed, the FCC began to implement the E-Rate program. In May of 1997, the FCC issued its first Notice of Proposed Rulemaking on the Education Rate. At that time, the FCC proposed that total expenditures for universal service support for schools and libraries would be capped at $2.25 billion per year, with a roll-over into following years of funding authority, if necessary, for funds not disbursed in any given year. Eligible schools and libraries would receive discounts ranging from 20% to 90%, depending on whether a school or library is disadvantaged or located in a high cost area. The understanding, under the FCC's order, was that the costs of the E-Rate program to telephone carriers would be more than offset by the savings telephone companies were receiving as a result of deregulation.

The funding mechanism that the FCC established for the E-Rate program was similar, but not identical to the mechanism already in place to fund existing programs for universal service. Under existing universal service programs, the FCC collects contributions from telecommunications carriers which are deposited in a revolving fund and used to reimburse those companies who have provided telecommunications services to rural and poor areas at reduced or subsidized rates.

Unfortunately, due to controversies which arose in large part as a result of charges that were placed on consumers' phone bills, in June of this year the FCC cut the proposed E-rate funding by nearly half to approximately $1.9 billion through June of 1999, instead of the $3.3 5 billion that would have been generated for the 18 months.

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Judicial-Branch - Court Decisions on the Universal Service Program

Before Congress codified the Universal Service program and established the E-Rate under the Telecommunications Act of 1996, the United States Court of Appeals for the District of Columbia considered whether the Commission's administratively established Universal Service program represented an inappropriate delegation of the power to tax. The Court found that it did not [Rural Telephone Coalition v. FCC, 838 F.2d 1307 (DC Circuit 1988)]. The reasoning was that Universal Service is intended to ensure affordable rates for specified services; it is not designated primarily as a means of raising revenue. In my opinion, the addition of a support mechanism for schools and libraries does not change the fundamental nature of Universal Service. The E-Rate meets the DC Circuit court's test of providing affordable rates for a specified service.

Current Status

Judicial Branch Actions

Telephone companies and others have used the changes made to the Universal Service funding mechanism in the 1996 Act as an opportunity to once again put the question of Universal Service before the courts. The Fifth Circuit Court of Appeals is currently considering a case (Texas Office of Public Utility Counsel Et. Al  v. FCC) regarding the legality of the Universal Service program in its entirety, as constituted under the Telecommunications Act. In particular, the court is considering whether it is legal for the FCC to collect funds from an expanded group of telecommunications carriers (as opposed to just the long distance companies, who, before the 1996 Act, were the only contributors to Universal Service). A ruling on this issue could come as early as the end of this year.

Executive Agency Actions

Some opponents of the E-Rate point out that there have been a great number of problems with the administration and structure of the program, and particularly the Schools and [begin page 5] Libraries Corporation, which was set up to administer the E-Rate. I concur, The head of the SLC did receive a salary in excess of $200,000. Schools and libraries across the country have been extremely frustrated by the morass of red tape they must go through to apply for the E-Rate and the inconsistency of some of the SLC's decisions. The General Accounting Office did, indeed find serious constitutional problems with the structure of the SLC.

The FCC agrees there are serious concerns and has taken immediate steps to comply with all GAO recommendations on improving management by reducing salaries, combining the SLC and the RHCC into one entity with the existing Universal Service Administrative Company, and clarifying that funding may be used only for telecommunications services, Internet access, and Internal connection. (not carpeting, drywall, etc.) Once those questions are resolved, funds for the E-Rate will begin to flow, albeit at a greatly reduced rate, to eligible schools and libraries sometime this fall.

Legislative Actions

Some Members of Congress are suggesting that the E-Rate is an illegal tax, despite the fact that the Fifth Circuit has not yet ruled on this question. Two bills (H.R. 4032 and H.R. 4065) have been introduced to end the FCC's authority to collect funds for the E-Rate program. Rep. Scarborough has filed an amendment to the Commerce Justice State Appropriation bill to end the FCC's authority to administer the program.

Our colleague, Rep. Tauzin, has introduced separate legislation which would also put an end to the FCC's authority to collect funds for E-Rate, but also designates an alternative funding source, the telephone excise tax, to help schools and libraries in their efforts to connect America's school children to the Information Highway.

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Getting to the Heart of the Matter: Is this an Illegal Tax?

The charges that have appeared on phone company bills have lead some to argue that the E-Rate is an illegal tax that the FCC is Imposing on the American people. From the review of the E-Rate's legislative, judicial, and regulatory background, four key points are clear:

• Congress established a discounted rate for schools and libraries under the Telecommunications Act of 1996. It is not something the FCC decided to pursue on its own authority;
• The FCC has taken significant steps to resolve legitimate concerns about the structure and administration of the program;
• The courts have already ruled that the Universal Service Fund, as administered by the FCC before the 1996 Telecommunications Act, does not constitute a tax, and,
• The issue about whether the changes to universal service constitutes a tax is before the courts and will be resolved in the near future.

Although it is not necessarily within the jurisdiction of this Committee, it is important to point out the charges on phone bills which some have blamed on the E-Rate actually reflect the cost to phone companies of the entire range of Universal Service activities. For example, only 19 cents of AT&T's 93 cent surcharge will go to schools and libraries. The remainder is for ongoing universal service costs that phone companies have been paying since 1934.

These surcharges do not reflect the over $3 billion in savings that phone companies have enjoyed as a result of deregulation provided by the 1996 Telecommunications Act. Before deregulation of the industry, the charges for providing Universal Service were hidden in the rates paid by telephone consumers. Now that telephone companies are providing as-low-as-possible per minute rates, they are pulling these once-hidden costs out into line items.

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Conclusion: What is the Appropriate Congressional Response?

Congress can react in any one of a number of ways to the current E-Rate controversy. We can throw the baby out with the bath water, and completely eliminate the E-Rate. We can seek alternative funding mechanisms (even though we have a funding mechanism in place). Or we can work with what we have.

Elimination of the E-Rate

As I pointed out earlier, a number of my colleagues have introduced legislation to completely defund the E-Rate. I oppose these proposals. Defunding the E-Rate now will do irreparable harm to America's school children. Over 100,000 schools and libraries across the country took the federal government at its word -- they spent countless hours and tens of thousands of dollars preparing applications to receive funds from the FCC under the "E-Rate" program. We must not break that commitment.

Alternative Funding Mechanisms: The Telephone Excise Tax

I appreciate Rep. Tauzin's desire to continue the federal commitment to schools and libraries his efforts to find an alternative source of funding

For the past year, my office has been working with a national network of organizations and businesses dedicated to ensuring that our schools and libraries are connected to the Information Highway. The depth and breadth of this network is astonishing, ranging from schools and libraries groups to civil rights organizations, telecommunications carriers, media interests, and high tech companies. Our efforts are dedicated to ensuring that our commitment to Internet access is honored.

Rep. Tauzin, who joins me on this panel, has proposed an alternative source of funding to help schools and libraries gain access to information services. While appreciated, I'm not convinced his legislation is necessary. We have a mechanism for funding the E-Rate in [begin page 8] place which, hopefully, will not be brought down by either the Fifth Circuit court, or through the Appropriations process.

Mechanically, I have concerns about the substance of the proposal, particularly whether it will provide adequate funds to fully connect our schools and libraries to the Information Highway.

I stand ready to work with the gentleman in any way we can be helpful should he think that appropriate. I feel an obligation to be open to any and all funding alternatives that will ensure access to the Information Highway for America's school children, although I'm reluctant to use the excise tax as an alternative source of funds. Clearly, maintaining the E-Rate's status as a part of Universal Service makes an important policy statement that access to the Internet for America's schoolchildren, particularly those in low-income areas, is an essential service. By keeping the E-Rate within the Universal Service program, we all share the burden of ensuring that tomorrow's leaders have access to today's technological tools.

I think, though, we should consider keeping our options open. Depending upon a number of factors: the ruling of the Fifth circuit court, the outcome of attacks on the E-Rate through the appropriations process, and possible other political considerations, those of us who want, ultimately, to see our schools and libraries wired may be forced to seek alternative sources of funds.

I'm not sure how wise it is for Congress to attempt to legislate in this area before we know more about the legality of the current Universal Service construct. Our best course of action would be to await the ruling of the Court before determining our next legislative steps on actual funding for the program. In the meantime, I intend to pursue two courses of action:

• I will continue to support the current E-Rate funding mechanism at the FCC. We must not hold our kids hostage to inter-governmental disputes -- they need this [begin page 9] technology today. Our schools and libraries can not educate tomorrow's leaders with decades-old technological tools. The E-Rate puts our children on par with the rest of the world. They must have this critical connection. Our future leadership and prosperity depends on it.
• Because the confusion generated by these surcharges clouds the future of the E-Rate, I have introduced legislation, H.R. 4018, calling for a GAO study on the actual savings that have accrued, and to give consumers some truth in billing. It would show how much money has been saved by telecommunications carriers, how much has been passed on to consumers, and how much additional costs telecommunications carriers will have to bear, if any. In addition, the legislation would require that those companies seeking to put line items on their bills, reflect the full and accurate picture of both savings and costs that have resulted from federal regulatory actions. I believe it entirely appropriate for the Congress to consider and adopt "Truth in Billing" legislation to give telephone consumers a greater understanding of the inherent subsidies within the telephone system, and how these subsidies are becoming more explicit as a result of deregulation.

The E-Rate proponents are simply asking Congress and the FCC to live up to the commitment they made to schools and libraries to use some of the savings from telephone deregulation to make an investment in our Nation's technological future. I remain willing to work with my colleagues on identifying funding options that retain the spirit and actual effect of that commitment.