Fifth Circuit Upholds FCC's E-Rate Program

(August 1, 1999) The U.S. Court of Appeals for the Fifth Circuit on Friday, July 30, upheld most of the FCC's order implementing the universal service support provisions of the 1996 Telecom Act, including the schools and libraries program.

Related Pages
Summary of Texas Office of Public Utility Counsel v. FCC.
Fifth Circuit Opinion, 7/30/99.

Section 254 of the 1996 Telecommunications Act codified the FCC's longstanding practice of providing universal service support for "telecommunications services" in high cost rural and low income areas. Section 254(h) of the Act added three new categories of recipients of universal service support: schools, libraries, and rural health clinics. Universal service support for schools and libraries is also known variously as the "e-rate" (the e is for education), and "Gore Tax" (since the VP promotes and claims credit for the program).

The Court upheld the Federal Communications Commission's e-rate program. However, the Court criticized the statute. It described the 1996 Act as "a model of ambiguity or indeed even self-contradiction" which contains "sometimes-mysterious sections".

The Court also criticized the FCC's May 8, 1997 universal service support order. The three judge panel wrote that the FCC had "exceeded its statutory authority" in implementing the schools and libraries program by mandating subsidies for internal connections and Internet access. However, the Court continued that it found enough ambiguity in the statute to require it to defer to the FCC's incorrect interpretation.

This matter, captioned Texas Office of Public Utility Counsel, et. al. v. FCC, 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 petitioners challenged the FCC's actions regarding high cost support. Others challenged the FCC's schools and libraries program. Various GTE companies led in challenging the e-rate program.

Subsidies for Internet Access and Internal Connections

A key issue in this proceeding was whether the FCC exceeded its statutory authority under Section 254(h) of the 1996 Act by subsidizing not only telecommunications services, but also Internet access and internal connections.

This is an very important issue because internal connections make up the largest portion of e-rate subsidies. (Internet access accounts for only a small part.)

The Court agreed with GTE that the FCC's decision to subsidize Internet access and internal connections exceeded its statutory authority to subsidize "telecommunications services." The Court concluded: "While section 254(h) plainly authorizes the FCC to support discounted telecommunications services to schools and libraries, ... The best reading of the relevant statutory language nonetheless indicates that the FCC exceeded its authority by mandating discounts for internet access and internal connections."

However, the Court added that it found just enough ambiguity in the statute that it would nevertheless defer to the FCC, citing an earlier Supreme Court decision, the Chevron case, as authority. The Court concluded: "Although we agree with GTE that the statute and its legislative history do not support the FCC's interpretation, the language of the statute is ambiguous enough to require deference ..."

This part of the ruling is far reaching. Since the FCC is to be deferred to on what is to be subsidized, there are no limits on what school or library function could be subsidized by a tax on telecommunications carriers.

The Court hinted at this implication of its ruling. It wrote in a footnote that at oral argument the FCC "could not explain why satellite television services or even janitorial services would not fit within its understanding" of Section 254 of the 1996 Act.

Hypothetically, the FCC could subsidize school construction, teacher salaries, football stadiums, or anything. Moreover, the 1996 Act sets no limit on the size of the program. Hence, under the Court's ruling, the FCC could establish itself as a de facto federal school board.

Unconstitutional Tax

The court addressed the question of whether the e-rate amounts to an illegal tax only briefly, in a footnote, and only for the purpose of deciding what degree of deference to give the FCC.

The Court wrote:

"We have identified two ways in which the agency's interpretation could raise constitutional concerns that might lead us to construe the statute more narrowly. First, the FCC's application of the universal service fund for non-telecommunications services could constitute an improperly delegated tax. Second, its interpretation of the reach of 254(h)(1)(B) could have transformed the Act into a "bil[l] for raising revenue" in violation of the Origination Clause.

Though it is a close question, we conclude that the FCC's interpretation does not raise sufficiently serious constitutional doubts to override our normal Chevron step-two deference. ..."

Subsidies Paid to Non Telecommunications Carriers.

Section 254 allows payments to "telecommunications carriers". The statute does not contain language giving the FCC authority to mandate payments to other entities. This is critical because much of the e-rate money is being paid to manufacturers of networking equipment, such as Cisco, and Internet service providers.

The Court ruled that the FCC properly extended coverage to non telecommunications carriers under is "necessary and proper" authority.

Other E-rate Issues

The Court dealt with several other e-rate issues. Petitioners also asserted that the FCC exceeded its statutory authority by mandating subsidies for schools and libraries for all telecommunications services. The 1996 Act directed the FCC to "designate" which telecommunications services would be covered. The Court held that the FCC could designate everything.

Another petitioner, Cincinnati Bell, a small telecommunications carrier with a mostly intrastate revenue base, argued that the FCC's decision to assess both interstate and intrastate revenues to fund the schools and libraries program exceeded its authority. The Court disagreed.

What Comes Next?

This is not the end of the matter. First, the petitioners have the option of filing petitions for writ of certiorari with the Supreme Court of the U.S.

See, Summary of E-Rate Bills in the 106th Congress.

Second, there is legislation pending in the Congress that would change the e-rate. Some bills would terminate the schools and libraries program entirely. Companion bills sponsored by Sen. Conrad Burns (R-MT) and Rep. Billy Tauzin (R-LA) would transfer the program from the FCC to the NTIA, fund it out of the existing excise tax on phones, distribute the funds in the form of block grants to the states, and sunset the program after five years.

Finally, there is the matter of the membership of the FCC. The five members are appointed for five year terms. Three of the five Commissioners staunchly support the schools and libraries program (Chairman William Kennard and Commissioners Susan Ness and Gloria Tristani). If Al Gore wins the presidential election in 2000, he would likely appoint Commissioners who would continue Kennard's agenda. However, other future Presidents might appoint Commissioners with different views about the e-rate.