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The New Universal Service: A User's Guide

On May 8, 1997, the Federal Communications Commission (FCC) issued a landmark decision regarding universal service -- the availability and affordability of telecommunications service for all Americans. In February 1996, Congress working with the Administration and a variety of public and private sector parties adopted for the first time since 1934 comprehensive legislation that establishes a policy making framework for the emerging Information Age.

The Telecommunications Act of 1996, among other things, directed that a special Universal Service Joint Board comprised of federal and state regulators and a consumer advocate develop recommendations for the FCC identifying services that will be supported by a federal universal service funding mechanism. Relying heavily on the Joint Board's November 8, 1996, Recommended Decision, the FCC released a Report and Order that undertakes to modernize universal service policy in an increasingly competitive marketplace and to fundamentally expand its applicability.

This summary addresses how the FCC's action will affect users of telecommunications services, particularly low-income households or those in high-cost areas, and institutions such as schools, libraries, and rural health care providers. The full Report and Order also deals with issues not discussed here, such as telephone company contributions to the universal service fund and the administration of this fund. Through this web site, we seek to inform and assist users who wish to take advantage of the newly-authorized discounts permitted under the revised universal service system.


Focusing on the universal service provisions of the 1996 Telecommunications Act, the FCC issued rules based on the following four goals:

  • All universal service objectives established by the Act must be implemented, including those for low-income individuals, consumers in rural, insular and high cost areas, as well as for schools, libraries, and rural health care providers.
  • Rates for basic service must be maintained at affordable levels.
  • Affordable basic phone service must continue to be available to all users with the help of a universal service fund which will subsidize phone service for those who qualify.
  • The benefits of competition in the telecommunications arena must be brought to as many consumers as possible.
(i.e, services that will be supported by the fund):
  • Access to a telephone network with the ability to place and receive calls;
  • Access to touch tone capability;
  • Single-party service;
  • Access to emergency systems including, where available, 911 and Enhanced 911;
  • Access to operator services;
  • Access to interexchange services;
  • Access to directory assistance; and
  • Limited long distance calling (for those low-income users who qualify).


Rural and High-Cost Areas

Traditionally, universal service has been achieved primarily through implicit subsidies designed to shift costs from rural to urban areas, residential to business customers, and local to long distance service. Some explicit support mechanisms have been employed in high cost areas and for low-income users. Through changes in universal service funding and interstate "access charges" (i.e., the payments made by long distance telephone companies for use of local exchange carrier facilities), the FCC will convert existing Federal support to an explicit, competitively neutral, and sustainable mechanism during 1999. The total amount of support will not decline materially but will be restructured to better fit a competitive environment.

Low Income Support for Households

The "Lifeline Assistance"program, which is designed to mitigate the cost of monthly phone bills, must now be offered to qualifying low income consumers by all eligible telecommunications carriers. In addition, all states must provide this service to its consumers.

Amount of support

Lifeline participants will now receive an extra $1.75 a month over the $3.50 that Lifeline currently contributes, totaling $5.25 in federal "interstate" support even if the state provides no funds (from the "intrastate" jurisdiction). In addition, Lifeline will provide matching funds equal to half of the funds generated from the intrastate jurisdiction, up to $7.00 a month in federal support. If a state provides the minimum amount ($3.50 per month) required to elicit the full federal support (i.e., $5.25 plus $1.75 in one-for-two matching funds), the total monthly Lifeline contribution to a reduction in end user charges could rise from $7.00 under the current system to $10.50 under this new regime.

In addition to services that meet the definition of "universal service," Lifeline customers are also allowed to receive toll limitation service free of charge in areas in which this capability is offered. That means that a monthly limit can be set on the amount of money spent on long distance calling, and if the long distance bills are not paid, then only the long distance service, and not the local service, would be cut off until the long distance bill is paid.

These new Lifeline programs are scheduled to go into effect on January 1, 1998.

Eligibility for Lifeline

In states that provide intrastate support, the eligibility for Lifeline is currently determined by state agencies or telephone companies; this will continue. In states that do not provide intrastate support, however, the default Lifeline eligibility standard will be participation in Medicaid, food stamps, Supplementary Social Security Income, federal public housing assistance or Section 8, or Low Income Home Energy Assistance Program. States may choose other criteria, but they must be based solely upon the income of the candidates.

These qualifications also apply to "Link-Up America," the federal program designed to support the installation of phone lines in homes.

Assistance for Schools and Libraries

Under the 1996 Telecommunications Act, schools and libraries are now eligible for discounts applicable to three broad categories of offerings. First, these institutions can procure any telecommunications service on a subsidized basis. Second, support is available for Internet access. Finally, these discounts can apply to internal networking that is necessary to connect school or library terminals to the Internet. The discounts also cover expenditures for networking hubs, routers, network file servers and server software, and maintenance of network systems. Personal computers, fax machines, modems, and asbestos removal, however, are specifically excluded. Training, non-network software, voice mail or information services in general, electrical connections, and security are also not eligible for discounts.

To receive a discount, schools and libraries must seek competitive bids for the eligible services. Price should be the primary factor in accepting a bid, but other factors may be included such as prior experience, personnel qualifications, management capability and environmental objectives. However, during the start-up period, a special rule will apply. For any contract that a school or library signs after November 8, 1996 and before the new competitive bidding system is operational, no such bidding is required if the contract covers only telecommunications services provided before December 31, 1998.

The subsidy for authorized services and equipment will be based upon whether the school or library is located in a rural or high-cost area as well as the percent of students in the district who are eligible for the national school lunch program, which provides free or reduced cost lunches for needy students. Similarly, a library's level of poverty should be calculated on the basis of school lunch eligibility in the public school district in which the library is located. The matrix of discounts developed by the FCC based on the school lunch program and the rural/urban nature of a given school or library appears below.

Schools and Libraries
Discount Matrix
Discount Level
How Disadvantaged? Urban Discount (Percent) Rural Discount (Percent)
Percent of Students Eligible for national school lunch program Estimated percent of US schools in category
<1 3 20 25
1-19 31 40 50
20-34 19 50 60
35-49 15 60 70
50-74 16 80 80
75-100 16 90 90

For eligible schools ordering subsidized products or services, the procurement officer for each school district or state applicant is required to certify to the FCC the percentage of students eligible for the national school lunch program. The applicant may choose to calculate discounts for individual schools or on an area-wide basis. For libraries ordering equipment or services at the library system level, discounts should be computed on an individual branch basis or based on an average of all branches within the system. Regardless of the calculation method chosen, the state, district, or library system should strive to ensure that each school or library receives the full benefit of the discount to which it is entitled.

At the federal level, universal support for schools and libraries is capped at $2.25 billion per year. Funds will be allocated on a first-come, first-served basis, until there is $250 million left in the fund, at which point those schools and libraries that are most economically disadvantaged will be provided funds before others. If the annual cap is not reached in a given year, the unspent funds will be available to support discounts in subsequent years.

If schools or libraries have entered into multi-year contracts for supported services or equipment, subsidies can only be applied on a year-to-year basis and not provided in one lump sum at the beginning or the end of the contract. If a multi-year contract has already been entered into, subsidies are only available for contract payments and services in future years.

All K-12 schools, whether public or private, that operate as a not-for-profit business and have an endowment of $50 million or less, are eligible for subsidies. Eligible libraries are as defined in the Library Services and Technology Act, as is "library consortium" with the exception of "international cooperative association of library entities."

To receive subsidies, schools and libraries must do the following:

  • Conduct internal assessments of the components necessary to use effectively the discounted services that they order, including specific plans for using these technologies and integrating them into the curriculum, and receive independent approval of the technology plan, ideally by a state agency that regulates schools and libraries.

  • Submit a complete description of the requested services so that it may be posted for competing providers to evaluate.

  • Certify that the school or library is an eligible entity, that the services will be used solely for educational purposes and will not be resold, and that all necessary funding in the current budget year has been allocated to pay for the non-subsidized portion of the services.

The subsidy will be paid directly to the service provider who will then supply the services or equipment to the school or library at the discounted rate.

For the first year of the program, applications for discounted services will be accepted as soon as the fund administrator's web site is operational and application forms become available later this year.

Funding support will begin to flow on January 1, 1998, and only services provided to schools and libraries after that date will be eligible for universal service discounts.

Health Care Providers

Under these new FCC rules, health care providers are eligible for universal service support for purchasing up to 1.544 Mbps of bandwidth (e.g., T-1 service). This bandwidth may be achieved through any combination of frame relay, ISDN, satellite or other services whose sum does not exceed 1.544 Mbps. Subsidies will also be provided for any "toll" (long distance) charges that might be incurred by connecting with an Internet service provider who is located outside of the local calling area. As with schools and libraries, customer premises equipment such as computers and modems will not be supported.

The subsidy will be calculated on the basis of the "standard urban distance"--that is, the average of the longest diameters of all the cities of a population of 50,000 or more within the state.

Where a rural health care provider requests a service to be provided over a distance that is less than or equal to the standard urban distance for its state, the rate paid by the rural health care provider will be the same as or less than that paid by an urban customer located in the nearest large city in the state who buys a similar service over the same distance as the rural health care provider.

If the rural health care provider needs a service to be provided over a distance greater than the standard urban distance, then the rate paid by the rural provider will be equal to or less than the highest tariffed or publicly available charge to an urban commercial customer for a similar service provided over the standard urban distance in the nearest large city in the state.

Health care providers are required to seek competitive bids for all eligible services by submitting bona fide requests for services to the fund administrator. The requests shall be posted on the administrator's website and contain information sufficient to identify the requester and the services requested. The health care provider shall certify that the service chosen is the most cost-effective service available once a telecommunications carrier is selected. The health care provider need not select the lowest bid and may take other considerations into account, but must submit copies of non-chosen responses to the Administrator.

To be eligible for these subsidies, the health care provider must be public or non-profit and located in a rural area. More specifically, eligible providers include:

  • teaching hospitals or medical schools;
  • community, migrant, or mental health centers;
  • not-for-profit hospitals;
  • local health departments;
  • rural health clinics; and
  • consortia of the above entities.

There is a $400 million annual cap on the amount of support given to rural health care providers. Collection and distribution of funding will begin in January 1998.

Support will be provided on a first-come, first-served basis with the funding requests normally accepted in July before each calendar funding year. In 1997, the timing of the first requests for funding will be a function of the development of an application process for universal service support.

Health care providers must file their contracts with the administrator either electronically or by paper. Health care providers are required to file new funding requests for each new year.

Multi-year contracts will be supported on a year-to-year basis, with no lump sum funding permitted.

Eligible health care providers participating in consortia that include (ineligible) private sector members would generally not receive universal service support. The one permitted exception: eligibility would be recognized only if the consortium is receiving tariffed rates, or market rates from those carriers who do not file tariffs.

When petitioning for support, all rural health care providers must give a statement to the carrier, signed by an officer of the health care provider who is authorized to order telecommunications services, that certifies the following under oath:

  • That the requester is a public or non-profit entity that falls within one of the categories in the definition of health care provider set forth in the Telecommunications Act of 1996;

  • That the requested service is supported under these regulations, and the requester is in a rural area or cannot obtain toll-free access to an Internet service provider;

  • That the services requested will be used solely for purposes reasonably related to the provision of health care services or instruction that the health care provider is legally authorized to provide under the law of the state in which they are provided;

  • That the services will not be sold, resold, or transferred in consideration of money or any other thing of value;

  • The full details governing the purchase, including the identities of all co-purchasers and the portion of the services being purchased by the health care provider, if the services are being purchased as part of an aggregated purchase with other entities or individuals; and

  • That this is the lowest cost method of providing the requested services, taking into consideration the features, quality of transmission, reliability, and other factors that the health care provider deems relevant to choosing an adequate method of providing the required health care services.

Health care providers must renew their certification annually.

Similar to support for schools and libraries, the subsidy will be paid to the provider of communication services, who will then provide those services at a discounted rate.

Health care providers who cannot obtain toll-free access to an Internet service provider may obtain either 30 hours of toll-free access or $180 of toll credits (whichever is reached first). Such support can be used to fund toll charges but not distance-sensitive charges for a dedicated connection to an Internet service provider.

For more information:

• FCC's Universal Service FAQ
US Department of Education Technology Initiatives
Other Universal Service Information
Office of Policy Analysis and Development


James McConnaughey, jmcconnaughey@ntia.doc.gov
Office of Policy Analysis and Development
National Telecommunications and Information Administration
U.S. Department of Commerce
14th St. & Constitution Ave., NW, Room 4725
Washington, D.C. 20230
Voice: (202) 482-1880 · Fax: (202) 482-6173

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