Federal preemption of state universal service regulations under the Telecommunications Act of 1996.

• Author: Trinchero, Mark P.

1. 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.

2. 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.

   With respect to intrastate service, traditionally, states have the responsibility to ensure that universal service is available at just, reasonable, and affordable rates. Under the Telecommunications Act of 1996, Congress has given states significant responsibility to maintain universal service in a competitive environment.(6) Specifically, section 254(f) of the Act provides:

   State authority A State may adopt regulations not inconsistent with the Commission's rules to preserve and advance universal service. Every telecommunications carrier that provides intrastate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, in a manner determined by the State to the preservation and advancement of universal service in that State. A State may adopt regulations to provide for additional definitions and standards to preserve and advance universal service within that State only to the extent that such regulations adopt additional specific, predictable, and sufficient mechanisms to support such definitions or standards that do not rely on or burden Federal universal service support mechanisms.(7) State commissions have authority to determine which carriers are eligible to receive universal service support and are subject to universal service obligations, to determine the service area for universal support to nonrural carriers, and to determine when a carrier may be relieved of its universal service obligations.(8) Under the Act, states also may adopt separate state universal service programs, provided that their rules are "not inconsistent with" the FCC's universal service regulations and are supported by "specific, predictable, and sufficient mechanisms ... that do not rely on or burden Federal universal service support mechanisms."(9) Section 254(f) thus creates a delicate balance between encouraging states to adopt intrastate universal service programs and ensuring that state programs do not interfere with the federal universal service mechanism.

3. A TEST FOR DETERMINING WHETHER STATE UNIVERSAL SERVICE PLANS ARE "NOT INCONSISTENT WITH" SECTION 254(F) OF THE ACT

   The following section details preemption law as it applies to section 254(f) of the Telecommunications Act of 1996, and develops a test for determining whether state universal service regulations are "not inconsistent with" the FCC's universal service rules. This section also provides an overview of FCC preemption of state law.

   1. Preemption

      1. Preemption of State Law by Congress

         The Supremacy Clause of the U.S. Constitution provides that federal law is the supreme Law of the Land.(10) The doctrine of preemption derives from the Supremacy Clause and provides that federal law will invalidate state law in some instances.(11) To conclude that a federal law has preemptive effect, there must be evidence of congressional intent.(12) Such intent may be determined by reviewing the history and language of the federal law.(13) If state regulation of an area existed before the federal regulation, there must be a clear showing of congressional intent to preempt.(14) Properly promulgated federal agency regulations that reflect congressional intent have the same preemptive effect as federal laws.(15)

         Although commentators argue that preemption law cannot be reduced to general formulas, the common law has defined at least two and possibly three categories of preemption.(16) First, Congress preempts state regulation by expressly providing for such preemption in a federal statute.(17) Second, when express language of Congress's intent to preempt state law is absent from federal law, Congress's intent to preempt state law may be inferred.

         A court infers intent to preempt state law in two instances. First, preemptive intent is inferred where Congress has legislated comprehensively so as to occupy an entire field of regulation.(18) In these instances of "field preemption," there is no room for a state to supplement federal law. Second, a court may infer Congress's intent to preempt state law when state law conflicts with federal law. This is known as "conflict preemption." Conflict preemption occurs when it is impossible to comply with both state and federal law.(19) Mere inconsistency with federal law is not sufficient to warrant conflict preemption--the state law must substantially compromise an important federal interest.(20) Conflict preemption also occurs when a state law "stands as an obstacle to the accomplishment of the full purposes and objectives of Congress."(21)

         In Cipollone v. Liggett Group, Inc., the Supreme Court addressed two issues integral to delineating the scope of federal preemption of state law.(22) First, the opinion seemed to conclude that express preemptive language precludes a conflict preemption analysis;(23) however, in a later decision, the Court clarified that Cipollone does not preclude a conflict preemption analysis where express preemption exists.(24) Second, Cipollone provides some indication of the level of intent required in the statutory language be fore express preemption occurs.(25)

         In an attempt to define the interplay between express and conflict preemption, the Court concluded that "Congress' enactment of a provision defining the pre-emptive reach of a statute implies that matters beyond that reach are not pre-empted."(26)

         When Congress has considered the issue of pre-emption and has included in the enacted legislation a provision explicitly addressing that issue, and when that provision provides a "reliable indicium of congressional intent with respect to state authority, ... there is no need to infer congressional intent to pre-empt state laws from the substantive provisions" of the legislation.(27) Although lower courts have interpreted Cipollone to preclude a conflict preemption analysis when express preemptive language exists,(28) the Supreme Court later clarified its position in a manner that rendered the lower court interpretations moot.(29) An express preemption clause merely gives rise to...