Federal Preemption of State Universal Service Regulations under the Telecommunications Act of 1996

Article excerpt

I. INTRODUCTION

Section 254(f) of the Telecommunications Act of 1996 provides that states may adopt regulations "not inconsistent with" the Federal Communications Commission's (FCC or Commission) universal service regulations.(1) After careful analysis of both the new federal universal service regulations and developments in preemption law, this Article develops a legal test for determining whether a state universal service program is in whole or in part "inconsistent with" and thereby preempted by federal law.

Part II of the Article provides a brief overview of the history and policy objectives of the Federal Universal Service Program. Part III provides a brief chronology of the jurisprudence surrounding federal preemption of state regulations with a focus on cases dealing with FCC regulations. By combining developed theories of preemption law with the substantive FCC universal service requirements, this Article develops a test for determining whether a state universal service program is "not inconsistent with" the Federal Plan.

Part IV analyzes the Universal Service Program established by the FCC pursuant to the Telecommunications Act of 1996 (1996 Act or Act). In Part V, the proposed test is applied to the Kansas and California universal service plans to determine if any portion of either state plan is preempted. The states selected represent both urban and rural demographics in state universal service regulation.

II. GENERAL OVERVIEW OF UNIVERSAL SERVICE

The goal of the Federal Universal Service Program is to extend telecommunications services "to as many members of society as possible" while providing the necessary funding to support the policy.(2) Although notions of universal service existed prior to the Communications Act of 1934 (1934 Act),(3) the Act evidenced Congress's intent for all consumers to receive telecommunications services at nondiscriminatory prices regardless of the additional costs involved in providing service to rural areas.(4) Under the regulated monopoly regime that existed prior to the breakup of AT&T, companies could internally generate funds to support their universal service responsibilities by cross-subsidizing--that is, using long-distance revenues to amortize the fixed cost of building local service networks. After the divestiture of AT&T separated local and long-distance service provision, carriers increasingly subsidized service in high-cost rural areas with revenues earned in low-cost urban areas and subsidized residential service with business service revenues. Long-distance continued to subsidize local service through switched access charges that local exchange companies assessed on interexchange carriers.

The goal of the 1996 Act is to increase competition in the telecommunications industry at the local service level by removing regulatory barriers to entry. However, promoting competition in local service is at odds with the current method of funding universal service through cross-subsidies. Because the most profitable services, such as business service, attract the most new entrants, competition decreases the profit margin on services typically used to subsidize universal service. As incumbents are forced to sell their previously profitable services at more competitive prices, their ability to cross-subsidize diminishes. In addition, new competitive entrants are unable to compete in residential markets and high-cost areas because, unlike the incumbent providers, they do not have a captive customer base to subsidize the provision of such service. Congress attempted to solve this inherent paradox between the goals of competition and universal service by replacing cross-subsidies with explicit subsidies from a universal service fund.(5) The FCC's new universal service plan attempts to transform implicit subsidies into explicit subsidies so that Congress's goal of increasing competition in telecommunications is not achieved at the expense of universal service. …