Summary of Texas v. FCC
(e-rate challenge case)

Texas Office of Public Utility Counsel, et. al. v. Federal Communications Commission, U.S. Court of Appeals, Fifth Circuit, Appeal No. 97-60421 (Petitions for Review of a Final Order of the FCC).

This page was last updated on August 1, 1999.

Nature of the Case. This matter is a consolidation of many challenges brought by telecommunications companies and states to the FCC's implementation of the universal service provisions of the 1996 Telecom Act. Some challenge the FCC's actions regarding high cost support. Others challenge the FCC's schools and libraries program (also know as the "e-rate" and the "Gore Tax").

The case deals with a wide variety of issues. One set of issues pertains to high cost universal service support. The other pertains to the schools and libraries program. While the former are of tremendous importance to the telecom industry and residents of rural areas, this summary emphasizes the latter.

Plaintiffs.  The 33 Plaintiffs (who are referred to as Petitioners in this action) are telecommunications companies and state governments. Among these are Bell Atlantic, Southwestern Bell, various GTE companies, Cincinnati Bell, Comsat, California, Texas, Pennsylvania, New York, and other states. GTE companies are the primary challengers to the e-rate program.

Defendants. The Defendant is the Federal Communications Commission, a federal regulatory agency based in Washington DC.

Facts. The Telecommunications Act of 1996 did three things that are relevant to, and ultimately gave rise to, this consolidated action. First, the Act provided for competition in the provision of telecommunications services, thereby undermining the FCC's historic ability to compel a small number of regulated monopoly carriers to support high cost and low income areas through a system of subsidies. Second, Section 254 of the Act codified the FCC's longstanding practice of providing universal service support for "telecommunications services" in high cost rural and low income areas. Third, Section 254(h) of the Act added three new categories of recipients of universal service support: schools, libraries, and rural health clinics.

Fifth Circuit Opinion
Table of Contents
The entire opinion contains over 200 KB in HTML. Hence, Tech Law Journal has divided it into three web pages. The first page (25 KB) contains the court's introduction to the case. The second page (135 KB) deals with high cost support. The third page (50 KB) contains the court's analysis of the e-rate challenge.

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I. Background.
  A. The 1996 Act and the Universal Service Order.
    1. High-cost Support.
    2. Schools and Libraries.
  B. Challenges to the Order.
II. Standard of Review.

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III. Analysis.
  A. High-cost Support.
    1. Methodology for Calculating Support for High-cost Areas.
    2. Eligibility Requirements for Carriers Seeking Universal Service Support.
    3. Authority To Prohibit Carriers from Disconnecting Local Service to Low-income Consumers Who Fail To Pay Toll Charges.
    4. Recovery of Universal Service Contributions.
    5. Contributions.
    6. Timing.

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  B. Subsidization of Services for Schools, Libraries, and Health Care Providers.
    1. Mandating Support for Internet Access and Internal Connections to Schools and Libraries.
    2. Authority To Provide Support Payments to Non-telecommunications Entities That Provide Internet Access and Internal Connections to Schools and Libraries.
    3. Encroaching on State Authority To Set Discount Rates for Intrastate Services to Schools and Libraries.
    4. Exercising Authority in Deciding That Schools and Libraries Can Obtain Discounts on All Commercially Available Telecommunications Services.
    5. Authority To Subsidize Toll-Free Telephone Calls to Internet Service Providers by Non-rural Health Care Providers.
    6. Contribution System To Provide Universal Service Funding for Schools, Libraries, and Rural Health Providers.
IV. Conclusion.

The FCC implemented Section 254(h) by extending subsidies to schools and libraries, not only for telecommunications services, but also for Internet access and internal connections, computer networking, network servers, and server software. Moreover, the FCC set the level of subsidization at $2.25 Billion per year. The money is raised from telecommunications carriers, who in turn pass the charges on to their customers, thereby raising the cost of phone service -- not to mention upsetting phone companies and their customers. The subsidies go to the schools, libraries and rural health care clinics, who in turn purchase goods and services from telecommunications and non telecommunications companies.

Issues. The various consolidated claims raise a myriad of issues. Some pertain to high cost universal service support. Others pertain to the schools and libraries program.

Regarding the e-rate, some petitioners assert that the FCC illegally expanded the scope of 254(h) support beyond "telecommunications services" to include Internet access, internal connections, and other things. They also assert that the FCC has no statutory authority to support entities that are not telecommunications providers.

The petitioners also assert that the FCC encroached on state authority to implement state support programs for schools and libraries and failed to designate which telecommunications services will receive 254(h) support. They also assert that the FCC's 254(h) is an illegal contribution system because it assesses both the intrastate and interstate revenues of carriers.

Holding. First, the Court of Appeals for the Fifth Circuit denied several requests for stays of FCC universal service order in 1997 and 1998. However, the key holding is the Fifth Circuit's July 30, 1999 opinion.

The Court affirmed most, but not all, of the FCC's May 8, 1997 order regarding  implementation of the high-cost support system.

The Court rejected all of the challenges to the FCC's schools and libraries program. Actually, the Court agreed with the petitioners that the FCC had exceeded its statutory authority on a number of key issues, but found that there is enough ambiguity in the 1996 Telecom Act that the Court would nevertheless defer to the FCC.

Hence, the Court held, among other things, that:

Status. The U.S. Court of Appeals issued its final Opinion on July 30, 1999, affirming in part, and reversing in part, the FCC's universal service order of May 8, 1999. The next step for petitioners would be filing petitions for writ of certiorari (appeals) with the Supreme Court of the U.S.