Internet Impact on Universal Service from:
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In the Matter of Federal-State Joint Board on Universal Service
CC Docket No. 96-45 (Report to Congress)
Policy Implications
Congress directed us to explain in this Report "the impact of the Commission's interpretation . . . on the current and future provision of universal service," and "the consistency of the Commission's application" of statutory definitions. Therefore, we address in this section the policy consequences of the legal analysis described above. We conclude that our reading of the statutory definitions reflects a consistent approach that will safeguard the current and future provision of universal service to all Americans, and will achieve the 1996 Act's goals of a "pro- competitive, deregulatory communications policy." Further, we are committed to monitoring closely developments in the telecommunications industry to ensure that such changes do not undermine our obligation to ensure universal service.
Generally
The Internet and other enhanced services have been able to grow rapidly in part because the Commission concluded that enhanced service providers were not common carriers within the meaning of the Act. This policy of distinguishing competitive technologies from regulated services not yet subject to full competition remains viable. Communications networks function as overlapping layers, with multiple providers often leveraging a common infrastructure. As long as the underlying market for provision of transmission facilities is competitive or is subject to sufficient pro-competitive safeguards, we see no need to regulate the enhanced functionalities that can be built on top of those facilities. We believe that Congress, by distinguishing "telecommunications service" from "information service," and by stating a policy goal of preventing the Internet from being fettered by state or federal regulation, endorsed this general approach. Limiting carrier regulation to those companies that provide the underlying transport ensures that regulation is minimized and is targeted to markets where full competition has not emerged. As an empirical matter, the level of competition, innovation, investment, and growth in the enhanced services industry over the past two decades provides a strong endorsement for such an approach.
Impact on Universal Service
Congress has directed us to explain how our interpretation of the 1996 Act promotes "the current and future provision of universal service to consumers in all areas of the Nation, including high cost and rural areas." With regard to the current provision of universal service, we have established programs under section 254 to fund telecommunications services in high-cost areas and for low-income consumers, as well as access to advanced services for schools, libraries, and rural health care providers. We believe that these programs have been designed with a sufficiently broad contribution base to support current universal service needs.
As we have explained, our interpretation of the terms "telecommunications" and "information service" reflect continuity with pre-existing legal categories. Consequently, we do not believe that these interpretations would create significant shifts in contribution obligations based on the current configuration of the communications industry. Retail revenues of Internet service providers -- approximately five billion dollars in 1997 -- are relatively small compared to the $100 billion in long-distance revenue reported in the latest telecommunications relay service fund worksheet report. The fact that Internet access is not considered a "telecommunications service" therefore does not have a significant impact on the current universal service funding base. More importantly, however, Internet access generates additional telecommunications revenue to support universal service in the form of the thousands of business lines (with their associated tariffed rates, subscriber line charges, and presubscribed interexchange carrier charges) that Internet service providers must purchase in order to provide connectivity to their users, and the high-capacity leased lines that they use to route data across their networks.
It is critical, however, to make sure that our interpretation of the statute, to the extent legally possible, will continue to sustain universal service in the future. Some parties argue that, as new communications services such as Internet access and IP telephony grow, traffic will shift away from conventional telecommunications services, thus draining the support base for universal service. We are mindful that, in order to promote equity and efficiency, we should avoid creating regulatory distinctions based purely on technology. Congress did not limit "telecommunications" to circuit-switched wireline transmission, but instead defined that term on the basis of the essential functionality provided to users. Thus, for example, we have previously required paging providers to contribute to universal service funding, because they are providers of "telecommunications service." We have also required private carriers to contribute to federal universal service funding, even though they are not common carriers. In this Report, we have further addressed providers of pure transmission capacity used for Internet services, and have concluded that these entities provide services that meet the legal definition of "telecommunications." We also have considered the regulatory status of various forms of "phone- to-phone IP telephony" service mentioned generally in the record. The record currently before us suggests that certain of these services lack the characteristics that would render them "information services" within the meaning of the statute, and instead bear the characteristics of "telecommunications services." We do not believe, however, that it is appropriate to make any definitive pronouncements in the absence of a more complete record focused on individual service offerings. As noted, to the extent we conclude that certain forms of phone-to-phone IP telephony are "telecommunications," and to the extent that providers of such services are offering those services directly to the public for a fee, those providers would be "telecommunications carriers." Accordingly, those providers would fall within section 254(d)'s mandatory requirement to contribute to universal service mechanisms. If such providers are exempt from universal service contribution requirements, users and carriers will have an incentive to modify networks to shift traffic to Internet protocol and thereby avoid paying into the universal service fund or, in the near term, the universal service contributions embedded in interstate access charges. If that occurs, it could increase the burden on the more limited set of companies still required to contribute. Such a scenario, if allowed to manifest itself, could well undermine universal service. At this time, however, there is no evidence that there is an immediate threat to the sufficiency of universal service support.
Several commenters urge us to subject Internet access providers and other information service providers to universal service contribution requirements. The potential future threat to universal service funding posed by use of the Internet derives from services that are functionally substitutable for telecommunications services at the same level of the network hierarchy. An end user that shifts its local exchange service from an incumbent local exchange carrier (LEC) to a competitive LEC, or to a wireless carrier, is purchasing a functionally identical service using different providers or technologies. We have designed the universal service regime so that shifting between such services does not eliminate the contribution requirement. Substitutability in a particular case, however, is not sufficient under the statute to require universal service contributions. Instead of making a telephone call or sending a fax, an end user could send an overnight letter. It is unlikely, however, that anyone would argue that the overnight delivery service should contribute to universal service funding. The key difference is that delivery service does not provide "telecommunications" as defined in the Act. Congress limited universal service contribution obligations to providers of "telecommunications," because only those services are truly substitutable in a functional sense.
Some parties argue that we should reclassify Internet service providers as telecommunications carriers in order to address congestion of local exchange networks caused by Internet usage. We note that the Commission addressed this argument last year in the Access Reform proceeding, and decided to continue to treat Internet service providers as end users for purposes of access charges. As the Commission stated in that Order, although concerns about network congestion deserve serious consideration, imposition of per-minute interstate access charges on Internet service providers is not an appropriate solution. Commenters in this proceeding have raised many of the same arguments that we considered in the Access Reform proceeding. We make no conclusions here as to whether some alternate rate structure for Internet service providers would be more efficient. That is an issue best addressed either on reconsideration of our Access Reform decision, or in connection with the Notice of Inquiry on Internet and Information Services that Use the Public Switched Telephone Network that we issued in the Access Reform proceeding. For purposes of this Report, we believe that the central issue is whether our decision that Internet access is not a "telecommunications service" is likely to threaten universal service. In other words, will Internet usage place such a strain on network resources that incumbent LECs will be unable to provide adequate service? As we noted in the Access Reform Order, both ILECs and the Network Reliability and Interoperability Council agreed that Internet usage did not pose any threat to overall network reliability. Incumbent LECs are investing in network upgrades to handle Internet traffic, and our Notice of Inquiry docket provides the appropriate forum to consider steps that we could take to ensure that incumbent LECs have incentives to choose the most efficient technology.
We realize that, as technology evolves, new means of providing telecommunications service may emerge. Although we conclude that Internet access is not a "telecommunications service," we acknowledge that there may be telecommunications services that can be provisioned through the Internet. We have singled out IP telephony services for discussion in this Report. As discussed above, users of certain forms of phone-to-phone IP telephony appear to pay fees for the sole purpose of obtaining transmission of information without change in form or content. Indeed, from the end-user perspective, these types of phone-to-phone IP telephony service providers seem virtually identical to traditional circuit-switched carriers. The record currently before us suggests that these services lack the characteristics that would render them "information services" within the meaning of the statute, and instead bear the characteristics of "telecommunications services." With respect to the provision of pure transmission capacity to Internet service providers or Internet backbone providers, we have concluded that such provision is telecommunications.
As some parties observe, our interpretation of the 1996 Act may mean that information services such as Internet access are not eligible for subsidies outside of the limited scope of schools and libraries under section 254(h) We believe Congress made a policy decision to limit support for information services to schools and libraries. "Telecommunications services" provide the basic transmission functionality that enables customers in rural and high-cost areas to connect to the rest of America. These services also enable users to reach Internet access providers, so reductions in the cost of basic telephone service in rural areas will effectively reduce the cost of Internet access in those areas. The information services delivered over telecommunications networks are not sensitive to distance and density to the same extent as the telecommunications facilities themselves. Therefore, the rationale for establishing a subsidy mechanism for these services is far more attenuated.
At this early stage of Internet development, we cannot know whether market and technological forces will result in Internet access being widely available in rural and high cost areas. Already, free electronic mail services such as Juno and low-cost Internet access devices such as WebTV have made Internet-based services far more affordable. A recent study found that at least 87% of the U.S. population has access to a commercial Internet service provider through a local call, and that three-fourth of Americans live in local calling areas with at least three Internet service provider points of presence. America Online reports that seventeen percent of its local access nodes are in rural counties. Rural Internet service providers, especially smaller entrepreneurial companies, will be able to provide more affordable and widely-available service if they are not subject to unnecessary regulatory burdens. Finally, the support mechanism that will benefit schools and libraries established pursuant to section 254(h) of the 1996 Act will enable rural libraries to provide public access Internet terminals, and rural school districts to make Internet access available to their students.
Congress did recognize that "telecommunications services" would evolve over time, and that universal service should adapt to reflect those change. Thus, for example, universal service today includes functionalities such as touchtone service and access to 911 that simply did not exist in previous decades. Other such innovations, as well as improvements in voice transmission quality, will no doubt occur in the future, and we will update our definition of universal service to account for those changes. For example, it appears that universal service funds could be used to ensure rural and high-cost areas have affordable access to high-speed data transmission services, such as xDSL, when those services meet the criteria for support outlined in section 254(c).
Consistency of Commission Decisions
We believe that the framework described in this Report, and in the May 8th, 1997 Universal Service Order, is entirely consistent, both internally and with the letter and spirit of the Act. Companies that are in the business of offering basic interstate telecommunications functionality to end users are "telecommunications carriers," and therefore are covered under the relevant provisions of sections 251 and 254 of the Act. These rules apply regardless of the underlying technology those service providers employ, and regardless of the applications that ride on top of their services. Therefore, although we will need to consider further the definition of "phone-to-phone" IP telephony, the record currently before us suggests that certain of these services lack the characteristics that would render them "information services" within the meaning of the statute, and instead bear the characteristics of "telecommunications services." Further, we have found that providers of pure transmission capacity to support Internet services are providers of "telecommunications." Internet service providers and other information service providers also use telecommunications networks to reach their subscribers, but they are in a very different business from carriers. Internet service providers provide their customers with value-added functionality by means of computer processing and interaction with stored data. They leverage telecommunications connectivity to provide these services, but this makes them customers of telecommunications carriers rather than their competitors.
Under our framework, Internet service providers are not treated as carriers for purposes of interstate access charges, interconnection rights under section 251, and universal service contribution requirements. This treatment admittedly provides some benefits to such companies, but it also imposes limitations. Internet service providers are not entitled under section 251 to purchase unbundled network elements or discounted wholesale services from incumbent LECs, they are not entitled to federal universal service support for serving high-cost and rural areas, and they are not entitled to reciprocal compensation for terminating local telecommunications traffic. As we discuss below, the one case in which Internet service providers and carriers enjoy similar treatment is in the provision of certain services to schools and libraries at discounted rates. In that case, Congress expressly directed the Commission to create "competitively neutral rules" to facilitate "access to advanced telecommunications and information services." There is no necessary connection between those who contribute to universal service funding and those entitled to receive support. For example, contributions to the fund are primarily derived from interexchange carriers, but the companies that receive high-cost support are LECs. Paging providers are required to contribute to universal service, but have limited opportunity to receive support. We realize that Congress carefully balanced several competing concerns when it crafted the universal service provisions of the 1996 Act. After reviewing our implementation of those provisions, and considering novel issues such as the status of IP telephony, we believe that we are being faithful to the balance struck by Congress.
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