More than 24% of E-rate funds that were committed to applicants in first 2 program years remained unused as of Jan. 2001, GAO reported to Appropriations Subcommittee on Commerce, Justice, State. In May 11 report, GAO said $880 million of $3.7 billion was unused, although efforts by E-rate administrators reduced total from 35% -- $1.3 billion -- unused at end of Aug. 2000. FCC and Universal Service Administrative Co. (USAC) have taken steps to reduce level of unused money, including canceling funding commitments if applicants don’t meet deadlines for receiving services associated with E-rate funds. Cancellations make more money available to other applicants, GAO said. FCC told GAO that as of April, figure had been reduced to $774 million. Unused E-rate funds are kept in interest-bearing account. E-rate funds, which are used to reduce cost of Internet projects, don’t go directly to schools and libraries. Instead they are sent to contractors as reimbursement for providing discounted services. GAO report also found that requests for services greatly exceeded $2.25 billion yearly cap in 3rd and 4th years. For 3rd year, more than $4.2 billion in requests were received. USAC estimated that 4th year requests would be nearly $5.2 billion, GAO said. USAC generally has had enough money each year to fund requests for telecom services and Internet access, which are considered first priority. However, E-rate program could support only small part of requests for internal connection, which are lower priority, GAO said. Nearly $2 billion of $3.2 billion worth of requests for internal connections in 3rd year have gone unfunded, agency said. GAO also questioned procedure USAC used to keep track of funding requests. For example, data don’t reflect original amount of funding requested by applicants, only amount approved after application review, GAO said. It prepared similar report for Sen. Rockefeller (D-W.Va.) that offered more detailed state-by-state breakdown of funding by category of service.

FCC Thurs. revised universal service system that’s used to help nation’s 1,300 rural telcos defray cost of providing service in remote areas. Action at Commission’s agenda meeting came in response to Telecom Act mandate that Commission revise high-cost universal service mechanism to accommodate competition and remove implicit subsidies. Agency’s order increases high-cost fund by cumulative $1.2 billion over 5 years, raising it to $5.6 billion total over period. In first year, $124 million will be added to fund, which currently stands at $840 million annually. Order retains cap on high-cost fund, which rural telcos have fought, but includes mechanism that permits it to grow annually. There’s also some “above-cap” support for carriers that make new investment. New plan will begin July 1.

FCC approved proposal Tues. to explore whether and how to reform way agency assesses carrier contributions to Universal Service Fund (USF) and how carriers can recover such costs from customers. Notice of proposed rulemaking unanimously approved by Commission solicits feedback on continuing to require carriers to contribute to USF based on percentage of collected revenue or whether agency should move toward flat-fee alternative, such as per-line charge. Companies that have recovered universal service contributions from customers haven’t historically been held by FCC to particular cost recovery method, with agency instead generally requiring contributors not to shift more than “equitable” amount of contributions to any customer or group of customers. FCC said changes under examination are response to industry trends, including new entrants such as RBOCs into long distance market because contributions now are based on historical, not current, interstate revenue.

Federal court decision last week on ILEC access charges has ramifications for other proceedings such as FCC’s attempts to overhaul access charge and universal service regimes for rural telcos, industry observers said Mon. Fifth U.S. Appeals Court, New Orleans, ruled May 3 that ILECs couldn’t recover their Universal Service Fund (USF) contributions through access charges levied on long distance companies. Court, which remanded FCC regulations for 2nd time on this issue, said such action constituted implicit subsidy, which is barred by Telecom Act. At issue are contributions that all carriers must make to USF. Long distance companies, for example, recover those contributions directly from their customers. FCC in 1997 ordered ILECs to recover their costs from long distance companies as part of access charges. Fifth Circuit remanded that rule in 1999 because of implicit subsidy problem. Commission rewrote rule and said ILECs no longer were required to recover costs from access charges but were permitted to do so if they wished. FCC said it interpreted court’s decision to mean it couldn’t require contributions through access charges but instead had to give ILECs choice of how they recovered contributions. In latest ruling, court said FCC interpretation was wrong. It said ILECs couldn’t recover universal service contributions from access charges, period: “The distinction the agency draws between ‘require’ and ‘permit’ is one without a difference.” Court said its original ruling “turned on the recovery method per se, not whether the Commission permitted or mandated it.” AT&T Vp Joel Lubin said he was cheered by strong language court used in defining access charge recovery as implicit subsidy. Lubin said court’s ruling could affect decision FCC is expected to make Thurs. on rural universal service. At very least, proposals under study by FCC, such as one proposed by Multi-Assn. Group, should be revised to eliminate implicit USF subsidies in access charges, he said. AT&T and several other carriers proposed such action to FCC last month, Lubin said, so court’s ruling was pleasant coincidence. Appeals Court ruling doesn’t have as much effect on large price-cap-regulated ILECs because FCC directed them last year to stop recovering USF contributions through access charges. Action was taken as part of Commission’s adoption of CALLS proposal. Lubin said court’s strong statements barring implicit subsidies in access charges applied to other industry practices as well. Among them, he said, is practice of pooling carrier common line (CCL) charges for rural carriers. Because National Exchange Carrier Assn. (NECA) pools those charges, by nature they are not cost-based, he said. Pooling access charges discourages competition, he said. Competitors such as Western Wireless can’t share in that subsidy because it’s “buried in the pool,” he said. Judge Emilio Garza wrote decision. Also on panel were Judges Eugene Davis and Donald Pogue. Pogue concurred because he disagreed with 1999 decision, saying it might have gone too far

Cal. PUC is seeking bidders to conduct 2 separate universal service funding audits. One proposal seeks bids for audits of state universal service fund collections and remittances by AT&T, Pacific Bell, Sprint PCS. Bids are due May 30. Other proposal seeks bids for audit of state’s 2 high-cost funds and teleconnect hookup subsidy fund, with bids due May 31. PUC said each project would take 3-4 months to complete.

Rural Task Force (RTF) proposal to reform universal service is expected to be on FCC agenda at open meeting May 10, USTA officials and other sources said Wed. USTA Interim Pres. Gary Lytle said association is pleased with what it thinks FCC plans to do: (1) Approve RTF proposal with little change, meaning it will continue to base universal service support on embedded costs rather than Total Element Long-Run Incremental Cost (TELRIC). (2) Not combine RTF plan with one proposed by Multi-Assn. Group (MAG) that targets both universal service and access charges for reform. MAG group has urged FCC not to consider access charge reform as part of RTF. USTA is part of MAG group, which also includes National Telephone Co-op Assn, National Rural Telecom Assn., OPASTCO. In wide-ranging news briefing, Lytle said FCC was expected to approve “largely what the [Federal-State] Joint Board [on Universal Service] recommended.” Both plans are aimed at rural telephony. RTF proposal would increase size of universal service system for rural carriers and make funding portable.

Municipal govt. deployment of communications networks is catching attention of “high-ranking members” of Congress and USTA Interim Pres. Gary Lytle said he was “hopeful and confident” that legislation addressing govt. competition would be introduced in near future. More than 200 municipalities are competitive service providers, some of which have applied for universal service funding, he said Wed. in news briefing at USTA hq in Washington. Congressional leaders, whom he declined to identify, are interested in possible legislative remedy to unfair advantage some govt. providers may have over USTA members, Lytle said. Meanwhile, he expressed concern with move by House Judiciary Committee Chmn. Sensenbrenner (R-Wis.) to get shot at review of broadband deregulatory bill recently introduced by House Commerce Committee Chmn. Tauzin (R-La.) and ranking Democrat Dingell (Mich.). Sensenbrenner urged House Speaker Hastert (R-Ill.) Tues. to give Judiciary Committee partial jurisdiction over bill, since it could provide competitive advantage to Bell companies and therefore fell within committee oversight of antitrust issues. Lytle reiterated USTA’s support of Tauzin-Dingell bill and said group was “hopeful it will not be referred to the Judiciary Committee.” On other issues, Lytle said: (1) USTA “search committee” is close to decision on new pres. to replace Roy Neel. Lytle, head of Ameritech’s Washington office before its merger with SBC, said he was candidate but he had “no idea” who else was being interviewed or when decision would be made. (2) He expected Bells to gain Sec. 271 authority in 10-15 more states this year. (3) Assn. will play “active role” in FCC proceeding to standardize intercarrier compensation. “This is as big as it gets for our members.”

Federal appeals court upheld district court decision striking down Wis. state e-rate program as violating constitutional separation of church and state. Three-judge panel of 7th U.S. Appeals Court, Chicago, said Wis. program for supplementing federal e-rate program was unlawful because it gave money directly to religious schools without any restrictions to ensure they didn’t use funds for religious support. Court in case brought by Freedom from Religion Foundation (Case 99-2850) said both programs taxed telecom service providers. But federal program, court said, compensated carriers from federal universal service fund for e- rate discounts to schools, so schools never actually received federal funds. Court also faulted state program for lacking any rules to ensure that state e-rate subsidies given to parochial and other religiously affiliated schools weren’t used to benefit campus religious facilities such as chapels or religious classrooms.

Correction: Universal service programs, including e-rate funds, have been included in FCC budget proposals for years (CD April 11 p1).

S.C. PSC ordered removal of implicit universal service subsidies from intrastate access charges in favor of explicit state universal service fund. Currently, BellSouth charges interexchange carriers about 6 cents per min., among highest rates in BellSouth’s 9-state territory. PSC said new $40 million fund would allow 50% access charge reduction, to 3 cents per min., in same range as most other states in region. Fund will be supported by 1.4% surcharge on intrastate services. PSC said it expected fund would be revenue neutral for incumbent telcos, with support from new fund about equal to revenue losses from reduced access charges.