Application No. NUSF-1

In the Matter of the Nebraska Public Service Commission, on Its Own Motion, Seeking to Establish Guidelines for Administration of the Nebraska Universal Service Fund.

Comments of Community Internet Systems, Inc.

Community Internet Systems, Inc. is an Internet Service Provider organized under the Laws of the State of Nebraska in 1995 and as such is a telecommunications company. As such it was one of the very first organizations to offer Internet service to Rural Nebraska. It operates in rural communities spread across the state. It also serves as the administrator of Internet pilot projects for the Nebraska Cooperative Government, a body politic consisting of approximately 80 Cities, Counties, and Villages spanning the state.

Basic Technology & History

Before entering our principal argument a bit of basic technology and history may be necessary for the any public and appellate readers.

The Internet was a creation of the military. It served the defense needs of the United States during the Cold War. It is a robust system of conveying packets of binary digits (0's & 1's) over medium consisting of either fixed land lines or various radio frequencies. The binary digits are encoded with information using a computing device. The digits are then packaged into packets that carry routing labels unique to sender and the intended receiver. These routing numbers are called IP addresses. The packets are transmitted over the lines to devices called routers using a transmission technique (protocol) called TCP/IP. These routers are really computers programmed to relay the packets from router to router over the best route available to the destination. Once at the destination, another computing device translates the binary digits into the original sent message. Thus, using a World Wide Web of such interconnected routers and lines, Cold War communications were designed to survive at least the initial wave of a nuclear attack. The system resembles truckloads of information placed on the Interstate Hiway system. Even though a road might be out, a truck can take a detour and the information still get through. When the truck gets to its destination, the packet is opened. The packet of data is then transformed into a perfect replicate of the sent message. This smart system differed from the more vulnerable switched (civilian) network that relied on dedicated channels over fixed medium to transmit signal. Under the civilian system if the circuit carrying the signal was cut the signal was lost. Signal over such a system is easily be degraded in transmission (static or weak signal strength). The packeted (TCP/IP) technology was a distinctively superior method of transferring information. National Security required limiting this technology to defense uses. The bottom line of the technology is that any form of communication that could be transformed into binary digits could be transmitted and received over this web of lines and routers. The only limitation was the power of the computing device used to translate the communication into binary digits. Initially, this limitation caused the communications to be restricted to text.

Since the end of the Cold War, significant developments occurred which add an entirely new and critically important dimension to the decision making process now before the Commission. In the context of positioning Nebraska for participating in the economic growth in the 21st Century, the issues now before the Commission rank among the very top in importance. The rapidity of the changes and the underlying transformation of the telecommunication industry call upon the Commission to be acutely aware of the great burden it has. The Commission by acting originally and creatively can open great doors for the people that elected it. It can also close them. This is simply put the battle for who will control and terminate the packeted network in this state. How the NUSF is administered will determine how level the playing field is between the entrepreneur based packeted providers and the incumbent switched network providers. These and related proceedings and processes will determine (1) whether there is a rapid formation of new Nebraska companies and infusion of new capital from local communities into constructing a fiber optic distribution system capable of carrying high bandwidth TV, data, Internet and telephone signal using the packeted technology or (2) whether the hand of the existing local phone monopolies is so strengthened that competition with them is impossible and the are given the luxury to gradually depreciate out their investments in the switch network distribution systems and phase in packeted / fiber optic technology over decades. Does the mere fact that the switched network operators were once granted a monopoly to grow and own the regulated switched network entitle them and any entities that they will ultimately merge with them to dominant control of telecommunications in rural Nebraska throughout the next century? Whether the NUSF is allowed to exist and, if so, how it is administered will determine the answer. Its potential for anti-competitive misuse is very great.

Mosaic of Relevant Developments

These are the operative developments that have occurred since the end of the Cold War which impact this process. Individually some seem to have little relationship to the others, but collectively they form a mosaic which public policy makers must deal with.

It is against the backdrop of this mosaic that the Commission seeks comment on the issue of the Nebraska Universal Service Fund and the four specific items set forth in Application NUSF-1.

Section 86-1402 instructs the Commission to establish a "funding mechanism" to supplement federal efforts and assure comparable telecommunications access to all Nebraskans. It is unclear whether the comparability is comparability among Nebraskans or comparability with citizens of other states. The Legislature did not give much guidance on the nature of the funding mechanism.

Section 86-1407 instructs the Commission or its optional administrator to estimate obligations, notify telecommunications companies of their obligations to the fund, and distribute money collected in accordance with the Act and the Commission's rulings.

There are two facets to the process (1) funding the fund and (2) spending the fund. Both elements must pass constitutional muster. The determination of the categories of covered and uncovered services and the fairness and reasonableness of the contributions must fit within the limitations imposed on the Legislature and Commission by the State Constitution. Therefore to properly address the Commission's request for comments, this analysis is necessary.

The Legislature seems to be requiring that an assessment be made against incumbent switch network carriers. According to the preliminary finding by the Commission in C-1626, "Additional carriers other than incumbent LEC's will be designated as Eligible Telecommunication Carriers in areas served by rural carriers only if such designation is found to be in the public interest, which shall be determined on a case by case bases." Only those carriers against whom an assessment is made may receive a distribution of the funds collected.

Funding the Fund

In the implementation of the fund the Commission took a step not specifically authorized by the Legislature and opened a Pandora's box of Constitutional issues that have not been considered or addressed. The Commission required in its January 13, 1999, Order in docket C-1628, that "companies are required to pass the NUSF surcharge on to the consumer and explicitly display the surcharge amount on each customer's bill."

What is the nature of this pass through?

It can only be one of 4 things:

  1. A government ordered taking of the consumer's money for the private benefit of the fund receipents.
  2. A government ordered taking of the consumer's money for a public purpose.
  3. A tax to fund privately owned infrastructure.
  4. A tax to fund a public purpose.

If it is (1) the state has no authority to do it. Neither the Commission or the Legislature has been granted authority to order the taking of private property (the consumers money) for a private purpose. It violates the due process and Section 3 of the State's bill of rights and it also violates the fifth amendment to the Federal Constitution. It can't be done.

If it is (2), a taking directed by the Public Service Commission of the private property of the consumer for a public purpose then the consumer must be compensated for the taking under Section 21 of the State's Bill of Rights. There is no mechanism for making such claims, no fund from which such claims will be paid. If it is (2) the payment of these citizen claims needs to be addressed.

It it is (3), a tax for private purposes. There is no authority for it. Taxation is not a power inherent in the Commission in the Article IV Section 20 of the State Constitution and the Legislature revenue raising authority is limited to raising the necessary revenue of the state and its governmental subdivisions. The only phone companies, which could qualify would be those organized by the respective counties under Sec. 86-401 et. seq. of the statutes of Nebraska. None of them exist. It is essential that the Commission make it impossible for the recipients of the fund to convert it into a tax for unfair, anti-competitive, private purposes and a mechanism for the creation of the most unlevel of playing fields - so unlevel in fact that one end of it is "6 foot under". This comes in two areas. First, if the incumbent provider uses NUSF proceeds to build infrastructure in the form of lines and switching centers, the incumbent must not be allowed to, directly or indirectly, get free or low cost use of those lines for its own packeted information service. That would put them in a position to offer at lower rates than the non-subsidized competition and it would insure their market monopoly. Elementary fairness requires that when a LEC, directly or indirectly, uses infrastructure funded in whole or part by the NUSF in activities that compete with those not eligible for funding, the NUSF funding available to them should be reduce by an amount equal to what the competitor would have been charged for the service. Second, the fair market value of the revenue stream and assets acquired by that revenue stream should be subject to recapture with interest upon sale, merger, or distribution of the assets or revenue stream. When a company sells operations that entitle it to the NUSF revenue stream, that revenue stream is in due course of calculating the value of the company included in the present valuation of the entire revenue stream of the property. Without a recapture mechanism, the sale/merger effectively converts that public revenue stream into the private present value of the Selling incumbent. As such it is a special tax for a private purpose. It beyond the power of the State to levy such a tax. It also violates equal protection and due process.

If it is (4), a tax for public purposes, the Legislation is devoid of the usual language necessary to levy a tax. There is no evidence in the plain language of the act that the Legislature delegated to the Commission the power to levy a massive consumer tax. Taxation is not an inherent power of the Commission and there is simply no authority to order the assessment be passed through to the consumer. The Legislature under Section 1 of Article III has the right to direct taxation. It has not directed the pass through to the consumer. When one acquires a phone line which runs through and is incorporated into real estate it is a real property? If so, it must conform to the rules on apportionment and uniformity. Is it a personal property tax? This "pass through" has many of the ear markings of a tax on property rights levied by the state. If it is, the state is prohibited from levying it under Section 1A of Article III. There seems to be no intent of the Legislature to create a consumer tax. The bill did not originate in the Revenue Committee. Section 22 of Article III requires that the Legislature make the appropriations for the expenses of government. That constitutional mandate does not appear to be capable of delegation to the Commission or any other entity. If it is a tax, it must fail because there is no mechanism for the ultimate consumer/taxpayer to question the validity or amount of the tax in levied these proceedings and as such it constitutes a deprivation of property without due process.

So what then is this mechanism where by the government is ordering money to be extracted from the public and funneled through to functionally closed Class of Corporations whose activities are in competition with entities barred from the Class? Not only is the favored Class functionally closed, there is no rational basis for the exclusion of packeted network, cellular network, satellite network, and cable networks from the Class entitled to the revenue stream extracted from the public. Closed Classes are prohibited.

Spending the fund

The Commissions decision to attempt to pass through the carrier's obligation to the consumer opens another Constitutional Pandora's box on the spending side.

The Commission lacks authority under its own Constitutional grant of authority to grant an exclusive privilege, immunity, or franchise to draw upon the NUSF to the LEC's and the Legislature under Section 18 of Article III of the Constitution of Nebraska is prohibited from directly or indirectly making such a grant. Distinctions drawn between providers of the service using packeted, cellular, satellite, and cable technology and those not, in those eligible and those not, are not rational, violate due process and equal protection, and amount to a grant of such exclusive privilege, immunity, or franchise.

The LEC's through the NUSF must not be granted any special privilege or immunity violating Section 16 of the Nebraska Bill of Rights

Public Policy

Unless the Commission is highly restrictive in the use of the fund and hyper vigilant in auditing its use, the Incumbent switched network providers are likely to be free to divert strength or infrastructure generated by the fund to provision their newly formed packeted associates or subsidiaries. These associates then are free to compete with the entrepreneurial packeted network providers and other emerging forms of telephony. Those entrepreneurial entities are in turn ineligible for NUSF funding. The bottom line is that massive amounts of tax money is taken from the consumer to fund the Incumbent who in turn is in direct competition with the services offered by the packeted industry. No clearer message could be sent to Nebraska investors. Stay out of this business. Your competition will be funded with your money! Under this scenario, the funding for an entire new industry dries up and the legal monopoly of the past becomes the defacto monopoly of the future.

It is indeed a paradox, that the incumbent industry that dramatically argued that it didn't need partnership with the public entities now argues it can't provide service at a reasonable price with out substantial subsidies. The same industry that wrapped itself in the arguments of a level playing field now argues for exclusive subsidies that can be directed against its competitors.

The bottom line is this. Any distinction between the LEC's switched network and other means of communicating the spoken word over lines or airwaves is meaningless. Packeted network access is an essential service. The information it conveys in video, audio, and pictures are essential to the strength of rural Nebraska and its ability to attract 21st century economies. Broad bandwidth to the door is rapidly becoming an economic necessity. If as such, it falls within the purview of the Act, it certainly can not be the intention of the Legislation that those who introduced the technology to Nebraska be excluded and ousted. It is foolhardy to think that adequate funding of the new fiber optic distribution systems will come from some state fund extracted from the consuming public. There is only one group that gives a hoot about investing in Nebraska's rural communities. The people who live there! They have the money. To install a complete fiber system in a city the size of Columbus would run $10 - $20 million. That is cable, Internet, and telephone. That is about the same as that community is set to spend on a one in a hundred year drainage system and less than it is spending on a community hospital. They have the know how to build the fiber distribution systems. They can not be expected to have the will, however, if they face heavily subsidized forces of the past. Forces whose first line of defense of their monopoly is to use the power of the state to rid itself of the pressures of competition. Once the threat of the local overbuilds is gone, the incumbents can enjoy their profits as their copper corrodes and rural Nebraska fades into the Sunset. The NUSF is well meaning but it, or its misadministration, could easily spell disaster for rural Nebraska. The regulatory scheme and the concept of the NUSF is so out of step with communications reality, that it is difficult to defend its rationality. If a fund is to be imposed, then it should be across all providers with all providers eligible for it use in a manner that does not tip the playing field. Those that levy it must be held politically accountable for its levy. If the NUSF mechanism purchases assets or generates wealth then those that made the payments should reap the rewards. Great caution must be used not to perpetuate a monopoly and not to discourage the investment of private sector capital into competing forms of service. The NUSF poses great constitutional difficulties and with the magnitude of the proposed fundraising those difficulties, it most certainly will be reviewed in the State's Courts.

The right of the people to do telecommunications may need to be the subject of a petition drive or a statewide candidacy. But those are second and third lines of defense against the evils that can be raised by this mechanism. The first line of defense is a Commission that puts the people first, a Commission that is aware of the realities.


Respectfully Submitted


Paul Schumacher

Attorney for Community Internet Systems, Inc.

Box 122

Columbus, NE 68602-0122