The Great E-Rate Mystery

Congress's Net subsidy fund is already helping schools and libraries get connected, but are telcos actually shelling out all the e-rate money they're collecting from phone customers? It's anybody's guess.

by Patricia Fusco ISP-Planet Managing Editor [June 13, 2000]

Over the next few weeks the Federal Communications Commission will be doling out $2.25 billion to connect the nation's schools, libraries, and under-served communities to the Internet through its e-rate funding initiative.

Most consumers more or less understand that they pick up the tab on universal services, but long-distance telephone users certainly don't know what portion of the government subsidy goes into the e-rate fund.

Apparently neither do the carriers, as no one at any of the major companies would speak specifically about the numbers in terms of money collected and dollars disbursed.

Policy underpinnings
Communications policy is often based on the transmission medium. Each medium has its own public interest regulation and, consequently, its own universal service, often confused with an e-rate plan.

The universal service fund was created to subsidize basic phone services in rural and remote communities. The e-rate fund was created as a part of universal service to support Internet access in public schools and libraries.

The FCC was directed to create and manage both of these tax-fueled funds, because establishing new taxes is an unpopular passtime for elected representatives that earn their stay on Capitol Hill by popular vote. But the government has to have money to operate, so agencies like the FCC frequently end up holding the tax bag, or at least its purse strings.

The result of our government at work is that the e-rate is one of the most widely discussed policy issues in consumer advocacy circles. It is also confusing, constantly changing, inadequate, and essential -- as well as politically charged.

Legislative roots
Known officially as the Universal Service Provision (Section 254) of the Telecommunications Act of 1996, the e-rate is essentially an offspring of the Communications Act of 1934.

Back then, Congress realized that if only one person has phone service, owning a phone is useless. Conversely, the more people who have phone service, the more useful everybody's phone becomes.

Therefore, under the 1934 Universal Service provision, phone companies are required by law to overcharge urban and long-distance telephone users in order to subsidize providing high-cost phone services to isolated rural and remote areas.

The Telecommunications Act of 1996 introduced a major revision to universal service. One revisal created the e-rate tax. As a price of doing business, long distance carriers are required to pay a percentage of their revenue into the FCC-managed fund. The amount is limited to up to 1 or 2 percent of total U.S. long distance revenues, not to exceed $2.25 billion a year.

Telco reaction
Despite its relatively small impact, long distance carriers immediately attacked the additional e-rate subsidy in defense of their customers.

SBC Communications, Inc. took the program to task in July 1997. The parent company of Ameritech, Nevada Bell, Pacific Bell, SNET, and Southwestern Bell tried to kill the measure by claiming an "unrecoverable economic losses" would result if it had to forfeit 2 percent of its long distance revenues to e-rate funding.

In May 1998 AT&T announced plans to collect the new universal service charge. AT&T notified customers on May 26, 1998, that it had filed with the FCC to introduce a Universal Connectivity Charge for AT&T Residential Long Distance Customers. At the time, AT&T told customers the charge would equal to 5 percent of the sum of the customer's total interstate and international billed charges each month.

AT&T said it would also file with the appropriate state regulatory bodies a corresponding Universal Connectivity Charge of 1.8 percent applicable to customer's total intrastate billed charges.

Battle is joined
Consumer advocates were in an uproar over excessive taxes. The FCC was not amused by carrier requests to hike tariffs and challenges to the legality of the universal service and the e-rate litigated their way through the courts.

The U.S. Supreme Court has ruled, or is in the process of deciding three cases concerning universal service. The highest court of the nation agreed on this month to hear a challenge on federal universal service rules.

At issue in the forthcoming case is a ruling made last year by an U.S. appeals court in New Orleans. The appeals court upheld the FCC's decision to allow e-rate subsidies to use the money to pay directly for Internet access as well as for internal wiring at public institutions.

GTE Corp. challenged the program, arguing that the 1996 law stipulates funding could only be used to subsidize telecom services, not wiring and Internet service.

Arguments in the case will be heard during the court's upcoming term that begins in October.

In an earlier case, AT&T questioned an appeals court's ruling that the FCC may consider a telecom carrier's interstate revenues, but not its intrastate revenues, to determine its contribution to the e-rate program.

The FCC agreed with AT&T that the appeals court was wrong in that part of its ruling, but said the question was not significant enough to warrant Supreme Court review. The Supreme Court agreed, denying that appeal without any comment or dissent.

In a third case, the high court last week rejected a challenge by paging company Celpage Inc. arguing the law was too vague and, as applied to paging providers, did not follow the constitutional requirements on bills for raising revenues.

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