Statement: Christopher Wright: E-rate: 8/4/98.

Opening Statement of Christopher Wright.
Re: Ways and Means Oversight Subcommittee Hearing on E-Rate.
Date: August 4, 1988.
Source: House Ways and Means Committee. This document was created by TLJ by scanning a paper copy, and converting it to HTML.

Statement of Christopher J. Wright
General Counsel
Federal Communications Commission
on
Implementation of the "E-Rate" Program
Before the Subcommittee on Oversight
Committee on Ways and Means
U.S. House of Representatives

August 4, 1998

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STATEMENT OF CHRISTOPHER J. WRIGHT
GENERAL COUNSEL, FEDERAL COMMUNICATIONS COMMISSION
BEFORE THE HOUSE WAYS AND MEANS COMMITTEE
SUBCOMMITTEE ON OVERSIGHT

August 4, 1998

Madam Chair and Members of the Subcommittee:

I am pleased to be here this morning as the designee of the Chairman of the Federal Communications Commission to discuss your questions regarding the universal service program for schools and libraries. That program provides discounts to schools and libraries purchasing telecommunications service, internet access, and internal connections. As you have requested, my remarks address whether this program, as administered by the Commission, was authorized by Congress and whether the assessments on telecommunications carriers that fund the program violate the Origination Clause of the Constitution, Art. I, з 7, cl. 1. Those issues, along with about 30 others, have been raised in the Fifth Circuit by parties challenging the Commission's implementation of the universal service provision of the Communications Act, 47 U.S.C. з 254, which was adopted by Congress in 1996 as part of the Telecommunications Act. See Texas Office of Public Utility Commissioners et al. v. FCC, No. 97-60421 (and consolidated cases).

The Chairman (and a majority of the Commissioners) believe that the Commission's straightforward implementation of section 254 is fully consistent with the terms of the statute and does not constitute an unconstitutional tax. That view is shared by Senators Snowe and Rockefeller, the principal drafters of section 254(h) of the Communications Act, which specifically authorizes the provision of discounted service to schools and libraries. Senators Snowe and Rockefeller filed an amicus brief in the Fifth Circuit defending the Commission's implementation of the statute. Indeed, they specifically agree that the Commission properly provided for discounted internet access and internal connections to classrooms, the two aspects of the program that have been challenged most vigorously. With respect to the Origination Clause issue, I understand that this Committee would like to focus on the schools and libraries program and not the aspects of the Commission's order funding support to rural areas and low income Americans. However, although I will focus on the schools and libraries program, the issue cannot be severed in that manner. As the Fifth Circuit briefs make clear, if the schools and libraries program is an unconstitutional tax in violation of the Origination Clause, so are the larger high cost and low income programs. Fortunately, there is no merit to the Origination Clause challenge.

But before turning to that issue, I would like to address in more detail the claim that the Commission has not administered the new universal service provision properly. Prior to 1996, there was no provision in the Communications Act that explicitly addressed "universal service." Nevertheless, the Commission, together with state public utility commissions, developed a patchwork quilt of explicit and implicit subsidies to ensure that all Americans, [begin page 2] including those living in high-cost rural areas and those with low incomes, had affordable basic telephone service. A decade ago, some telephone companies challenged the Commission's universal service program, arguing both that it was not authorized by the statute and that it was an unconstitutional tax. The D.C. Circuit rejected those challenges in Rural Telephone Coalition v. FCC, 838 F.2d 1307 (1988). With respect to statutory authority, the court found sufficient authority under sections I and 4(i) of the Communications Act, 47 U.S.C. зз 151, 154(i). 838 F.2d at 1315. Those provisions, which were adopted in 1934 and remain in force today, do not use the phrase "universal service," but instead, respectively, establish the goal of providing "a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges," and authorize the Commission to "perform any and all acts, make such rules and regulations, and issue such orders, not inconsistent with this Act, as may be necessary in the execution of its functions." Quoting the Supreme Court's 1943 decision in NBC v. FCC, 319 U.S. 190, 219, the D.C. Circuit held that the ability to subsidize telephone service is one of the .. expansive powers' delegated to [the FCC] by the Communications Act." 838 F.2d at 1315. With respect to the tax issue, the D.C. Circuit began by warning that ... [t]he definition of "tax" in the abstract is a metaphysical exercise in which courts do not have occasion to engage."' Id. at 1314 (quoting Brock v. WMATA, 796 F.2d 481, 498 (D.C. Cir. 1986), cert. denied, 481 U.S. 1013 (1987)). "Rather," the court held, "a regulation is a tax only when its primary purpose judged in legal context is raising revenue," and it dismissed the contention that the goal of the Commission's universal service program was to raise revenue. 838 F.2d at 1314.

Section 254 both specifically addresses "universal service" (that is its title) and specifically extends universal service to schools and libraries (the title of section 254(h)(1)(B) is "educational providers and libraries"). Congress generally described universal service as "an evolving level of telecommunications services" to be defined by the FCC, after consultation with state commissions and consideration of "the extent to which such telecommunications services -(A) are essential to education, public health, or public safety; (B) have, through the operation of market choices by customers, been subscribed to by a substantial majority of residential customers; (C) are being deployed in public telecommunication networks by telecommunications carriers; and (D) are consistent with the public interest, convenience, and necessity." 47 U.S.C. з 254(c)(1). Section 254 separately required "[a]ll telecommunications carriers" to provide "services to elementary schools, secondary schools, and libraries" at a discounted rate that the Commission "determine[s] is appropriate and necessary to ensure affordable access to and use of such services by such entities." 47 U.S.C. з 254(h)(1)(B), In addition, section 254 directed the FCC to establish "completely neutral rules to enhance, to the extent technically feasible and economically reasonable, access to advanced telecommunications and information services for all public and non-profit elementary and secondary school classrooms, health care providers, and libraries." 47 U.S.C. з 254(h)(2)(A) (emphasis added). See also 47 U.S.C. з254(c)(3) (authorizing the FCC to designate "additional services" to be funded by the support mechanisms for "schools, libraries, and health care providers for the purposes of' section 254(h) (emphasis added)).

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Consistent with the dictates of Congress, the Commission reasonably interpreted this language to mean that discounted services should include internal connections and internet access. Internal connections are necessary to provide services to classrooms, and the word "classrooms" appears twice in section 254. First, one of the Act's six "universal service principles" provides that "[e]lementary and secondary schools and classrooms, health care providers, and libraries should have access to advanced telecommunications services as described in subsection (h)." 47 U.S.C. з 254(b)(6). Second, section 254(h)(2)(A) directs the FCC to enhance access to "information services" such as internet access "for all ... classrooms." The Commission's reading also is supported by the legislative history, which states: "[T]he Commission could determine that telecommunications and information services that constitute universal service for classrooms and libraries shall include dedicated data links and the ability to obtain access to ... the Internet." Joint Explanatory Statement of the Committee on the Conference, S. Conf. Rep. No. 230, 104th Cong., 2d Sess. (1996) at 133 (emphasis added). While expansive, the Commission's authority to designate additional services is by no means "open-ended," however. It is limited to those services that are consistent with the purposes of section 254(h), and the Commission accordingly designated only two additional services for support: internal connections and internet access, both of which are clearly consistent with section 254(h)'s mandate to "enhance ... access to advanced telecommunications and information services for ... classrooms." Thus, contrary to the claims of some telephone companies, the Commission acted well within the scope of its statutory authority.

Those telephone companies also argue that, if schools and libraries may obtain discounts for internal connections and internet access, only internet service providers owned by telephone companies should be eligible to obtain support for providing those services. The Commission properly rejected that contention. Congress made clear that "[e]very telecommunications carrier that provides interstate telecommunications services shall contribute" to the "mechanisms established by the Commission to preserve and advance universal service." 47 U.S.C. з 254(d). However, although only "telecommunications carrier[s]" contribute, the statute specifically authorizes payments for "access to advanced telecommunications and information services." 47 U.S.C. з 254(h)(2)(A). The statutory scheme would be distorted, the Commission reasonably concluded, if only certain types of information service providers (namely, those owned by telephone companies) were eligible for support. More specifically, the Commission concluded, adoption of the telephone companies' position would be inconsistent with the statutory directive that the Commission "establish competitively neutral rules," 47 U.S.C. з 254(h)(2), and would raise the costs of the program. According to the telephone companies, a school simply could not choose an independent internet service provider charging a lower rate for comparable service, but instead would be required to obtain internet service from a telephone company charging a higher rate. It is clear why the telephone companies would prefer such a result, but it also is clear why the Commission authorized schools to select from as many providers of internet access as possible.

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As noted above, the Commission's interpretation of section 254 is supported by Senators Snowe and Rockefeller, the principal sponsors of the bill known as the "Snowe-Rockefeller-Exon-Kerrey amendment" that became section 254(h). In their amicus brief supporting the FCC before the Fifth Circuit, those Senators stated unequivocally "that the FCC's implementation of the universal service provisions of the 1996 Act is clearly supported by both the statutory language and congressional intent. The 1996 Act clearly contemplates the provision of non-telecommunications services to schools, libraries, and rural health care providers and clearly authorizes the FCC to provide funding to non-telecommunications carriers." Brief of Amici Curiae The Honorable John D. Rockefeller IV and The Honorable Olympia J. Snowe In Support of Respondents FCC and United States, at 4, filed in Texas Office of Public Utility Counsel v. FCC, No. 97-60421 (5th Cir.) (Snowe-Rockefeller Brief.) Senators Snowe and Rockefeller also specifically endorsed "the FCCs decision that schools and libraries should receive a discount for inside wiring and Internet access." Id. at 5.

Let me turn to the Origination Clause issue. The telephone companies raised an Origination Clause challenge to the Commission's universal service program prior to the adoption of section 254. The D.C. Circuit found that challenge so baseless that it dismissed the claim in an unpublished decision. ALC Communications Corp. v. FCC, 925 F.2d 487, 1991 WL 17222 (D.C. Cir. 1991). In that case the interexchange carriers complained that, because they paid into the universal service fund but did not receive payments from the fund, "the universal service program assessments are a tax, not enacted in accordance with the requirements of the origination clause." Id. at *3. The court acknowledged that the assessments at issue were "transfers from IXCs [interexchange carriers] to high-cost LECs [local exchange carriers] and low-income telephone subscribers," but held that the assessments "need not be authorized in a revenue bill originating in the House since '[t]here was no purpose ... to raise revenue to be applied in meeting the expenses and obligations of the Government."' Id. (quoting Millard v. Roberts, 202 U.S. 429, 436-37 (1906)). The D.C. Circuit went on to conclude that "[u]niversal service assessments fit comfortably within the range of special-purpose levies that are consistent with congressional authority to regulate commerce." 1991 WL 17222, * 3. As Senators Snowe and Rockefeller have explained: "Extending universal service support to schools and libraries did not transform these previously valid transfer payments into taxes. Rather, the funding mechanism envisioned by Congress and implemented by the FCC merely extends the pre-existing support mechanism to these new beneficiaries." Snowe-Rockefeller Brief at 14.

Moreover, the argument made before the Fifth Circuit by a single paging company, Celpage, that universal service assessments are an unconstitutional tax, as applied to paging companies, is noteworthy in that its central premise was specifically rejected by the Supreme Court in United States v. Munoz-Flores, 495 U.S. 385 (1990). The gist of the argument is that the universal service assessment mandated by section 254(d) is an unconstitutional tax because paging companies contribute to the universal service fund but allegedly receive no direct benefits from universal service. In Munoz-Flores, the petitioner similarly argued that the Victims of Crime Act was an unconstitutional tax because "assessments are not collected for the benefit of the payors, those convicted of federal crimes." 495 U.S. at 400. The Court [begin page 5] specifically rejected the contention "that a bill must benefit the payor to avoid classification as a revenue bill." Id. Rather, the Court held that "a statute that creates a particular governmental program and that raises revenue to support that program, as opposed to a statute that raises revenue to support Government generally, is not a 'Bil[l] for raising Revenue' within the meaning of the Origination Clause." Id. at 398.

Indeed, this is a much easier case than Munoz-Flores. Some of the proceeds of the assessments raised by the statute at issue in that case were "deposited in the general fund of the Treasury," 495 U.S. at 398, yet the assessments did not constitute an unconstitutional tax. Here, none of the assessments are used for general purposes. Celpage has noted that the Congressional Budget Office and the Office of Management and Budget treat universal service contributions and payments as federal receipts and outlays, but that is irrelevant under the Supreme Court's test. The relevant question is whether section 254 "creates a particular governmental program" rather than "rais[ing] revenue to support Government generally," id. at 398, and section 254 plainly is not an unconstitutional tax under the test enunciated by the Supreme Court. In addition, contrary to Celpage's claim, paging companies actually benefit, both directly and indirectly, from the universal service program. Paging services are "telecommunications services," and hence paging companies are eligible for reimbursements for providing discounted paging services to schools and libraries. Paging companies also benefit indirectly from the universal service program, because their services are more valuable to the extent that more Americans have telephone service.

Also relevant is the Supreme Court's analysis of Article I, section 8, cl. 1 of the Constitution, which provides that "Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises" so long as they are "uniform throughout the United States." In the Head Money Cases (Edye v. Robertson), 112 U.S. 580 (1884), the Court upheld a statute requiring shipowners to contribute to a special fund for the regulation of immigration and for care of immigrants against a challenge by the shipowners. The Court found that "the power exercised in this instance is not the taxing power." Id. at 595. Rather, the assessment was a "mere incident of the regulation of commerce" because the money raised, "though paid into the treasury, is appropriated in advance to the uses of the statute, and does not go to the general support of the government." Id. at 595-96. Cf. Rosenberger v. Rector and Visitors Of the University of Virginia, 515 U.S. 819, 840-41 (1995) (a student fee was not "a general tax designed to raise revenue for the University" in violation of the Establishment Clause in part because the fee "cannot be used for unlimited purposes") (citing Head Money Cases, 112 U.S. at 595-96).

A number of the other cases that have been cited by Celpage are irrelevant. Both National Cable Television 4ssn., Inc. v. United States, 415 U.S. 336 (1974), and Thomas v. Network Solutions, Inc., 1998 WL 191205 (D.D.C. April 6, 1998), involved regulatory fees that agencies sought to justify as authorized by the Independent Offices Appropriations Act. The Commission has never contended that the universal service contributions are authorized by the Independent Offices Appropriations Act. Rather, as explained above, those contributions are authorized by the Communications Act. The district court in Thomas v. [begin page 6] Network Solutions also considered whether an assessment on registrants of internet names called the "Preservation Assessment" was "an illegal tax ... not authorized by Congress" under the Constitution, Art. I, з 8, cl. 1. Id. at *5. That issue was relevant in that case because it was "undisputed that Congress did not itself impose the Preservation Assessment." As explained above, however, Congress has explicitly authorized the universal service assessment by providing that "[e]very telecommunications carrier that provides interstate telecommunications services shall contribute" to the "mechanisms established by the Commission to preserve and advance universal service." 47 U.S.C. з 254(d). Nor is United States v. United States Shoe Corporation, 118 S.Ct. 1290 (1998), relevant. The issue in that case was whether the Harbor Maintenance Tax was a tax for purposes of the Export Clause of the Constitution, Art. 1, з 9, cl. 5, which prohibits even Congress from imposing certain types of export taxes. "Distinguishing case law developed under the Commerce Clause," 118 S.Ct. at 1294, and emphasizing that "decisions involv[ing] constitutional provisions other than the Export Clause ... do not govern here," id. at 1295, the Court struck down the Harbor Maintenance Tax. But no claim has been or could be made that section 254 violates the Export Clause.

In short, attacks on universal service by telecommunications companies are nothing new. In 1988, in Rural Telephone Coalition, the D.C. Circuit upheld the Commission's efforts to provide affordable telephone service to all Americans and rejected the telephone companies' claims that the universal service program was a tax not authorized by Congress. Moreover, it did so at a time when there was no universal service provision in the Communications Act. The analogous claim recently advanced in the Fifth Circuit has even less force now that Congress has adopted section 254, including the Snowe-Rockefeller-Exon-Kerrey amendment, which (as its drafters confirm) specifically authorizes universal service support to schools and libraries for internal connections and internet service. The Origination Clause challenge brought by Celpage is considerably weaker than the Origination Clause attack brought by the interexchange carriers in 1991, because the paging companies now are eligible for universal service support. The D.C. Circuit dismissed that 1991 attack in an unpublished opinion in ALC Communications, and Celpage's pending claim deserves no better fate. As the Supreme Court stated in Munoz-Flores, a statute like section 254 "that creates a particular governmental program and that raises revenue to support that program" is not an unconstitutional tax. 495 U.S. at 398.

Finally, it should be noted that some of the parties in the Fifth Circuit, including Celpage, sought a stay of the Commission's universal service rules. They selected what they viewed as their strongest arguments, including the claim that the universal service program, as administered by the Commission, is an illegal tax, and emphasized their view that they were likely to succeed on the merits of their challenges to the Commission's implementation of the universal service provision. The Fifth Circuit denied the requests for a stay.

I appreciate the opportunity to testify and I am pleased to answer any questions that you and any other members of the Subcommittee may have.