Universal Service

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 36, 54, and 69

[CC Docket No. 96-45; FCC 97-157]

Universal Service

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: The Report and Order released May 8, 1997, promulgates rules

implementing the statutory requirements of the Telecommunications Act

of 1996 relating to universal service. The rules adopted in this Order

are intended to promote affordable access to telecommunications and

information services to low-income consumers and consumers residing in

high cost, rural, and insular regions of the nation. The Order

establishes the definition of services to be supported by Federal

universal service support mechanisms, carriers eligible for universal

service support, and the specific timetable for implementation. The

Order modifies existing federal universal service support in the

interstate high cost fund, the dial equipment minutes weighting

program, long term support, and the Lifeline and Link-Up program. In

addition, this Order establishes new universal service support

mechanisms for eligible schools and libraries to purchase

telecommunications services at discounted rates and eligible rural

health care providers to have access to telecommunications services at

rates comparable to those in urban areas.

EFFECTIVE DATES: July 17, 1997, except for Subpart E of Part 54 which

will become effective on January 1, 1998.

FOR FURTHER INFORMATION CONTACT: Timothy Peterson, Legal Counsel,

Common Carrier Bureau, (202) 418-1500, or Sheryl Todd, Common Carrier

Bureau, (202) 418-7400.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Report

and Order adopted May 7, 1997, and released May 8, 1997. The full text

of the Report and Order is available for inspection and copying during

normal business hours in the FCC Reference Center (Room 239), 1919 M

St., NW., Washington, DC. Pursuant to the Telecommunications Act of

1996, the Commission released a Notice of Proposed Rulemaking and Order

Establishing Joint Board, Federal-State Joint Board on Universal

Service, CC Docket No. 96-45 on March 8, 1996 (61 FR 10499 (March 14,

1996)), a Recommended Decision on November 8, 1996 (61 FR 63778

(December 2, 1996)), and a Public Notice on November 18, 1996 (61 FR

63778 (December 2, 1996)) seeking comment on rules to implement

sections 254 and 214(e) of the Act relating to universal service. As

required by the Regulatory Flexibility Act (RFA), the Report and Order

contains a Final Regulatory Flexibility Analysis. Pursuant to section

604 of the RFA, the Commission performed a comprehensive analysis of

the Report and Order with regard to small entities and small incumbent

LECs. The Report and Order also contains new information collection

requirements subject to the Paperwork Reduction Act (PRA). The

Commission has published a separate notice in the Federal Register

relating to these information collection requirements (62 FR 28024 (May

22, 1997)).

Summary of the Report and Order:

Principles

1. Pursuant to section 254(b)(7) and consistent with the Joint

Board's recommendation, we establish ``competitive neutrality'' as an

additional principle upon which we base policies for the preservation

and advancement of universal service. Consistent with the Joint Board's

recommendation, we define this principle, in the context of determining

universal service support, as:

Competitive Neutrality--Universal service support mechanisms and

rules should be competitively neutral. In this context, competitive

neutrality means that universal service support mechanisms and rules

neither unfairly advantage nor disadvantage one provider over

another, and neither unfairly favor nor disfavor one technology over

another.

2. We agree with the Joint Board that, as a guiding principle,

competitive neutrality is consistent with several provisions of section

254 including the explicit requirement of equitable and

nondiscriminatory contributions. We also note that section 254(h)(2)

requires the Commission to establish competitively neutral rules

relating to access to advanced telecommunications and information

services for eligible schools, health care providers, and libraries. In

addition, we agree that an explicit recognition of competitive

neutrality in the collection and distribution of funds and

determination of eligibility in universal service support mechanisms is

consistent with congressional intent and necessary to promote ``a pro-

competitive, de-regulatory national policy framework.''

3. We concur in the Joint Board's recommendation that the principle

of competitive neutrality in this context should include technological

neutrality. Technological neutrality will allow the marketplace to

direct the advancement of technology and all citizens to benefit from

such development. By following the principle of technological

neutrality, we will avoid limiting providers of universal service to

modes of delivering that service that are obsolete or not cost

effective. We also agree that the principle of competitive neutrality,

including the concept of technological neutrality, should be considered

in formulating universal service policies relating to each and every

recipient and contributor to the universal service support mechanisms,

regardless of size, status, or geographic location. We agree with the

Joint Board that promoting competition is an underlying goal of the

1996 Act and that the principle of competitive neutrality is consistent

with that goal. Accordingly, we conclude that the principle of

competitive neutrality is ``necessary and appropriate for the

protection of the public interest'' and is ``consistent with this Act''

as required by section 254(b)(7).

4. We agree with the Joint Board's recommendation that our

universal service policies should strike a fair and reasonable balance

among all of the principles identified in section 254(b) and the

additional principle of competitive neutrality to preserve and advance

universal service. Consistent with the recommendations of the Joint

Board, we find that promotion of any one goal or principle should be

tempered by a commitment to ensuring the advancement of each of the

principles enumerated above.

5. We agree with the Joint Board's conclusion that Congress

specifically addressed issues relating to individuals with disabilities

in section 255 and, therefore, do not establish, at this time,

additional principles related to individuals with disabilities for

purposes of section 254. In the Notice of Inquiry adopted pursuant to

section 255 (61 FR 50465 (September 26, 1996)), the Commission sought

comment on the implementation and enforcement of section 255. The

Commission also recently released a Notice of Inquiry seeking comment

on improving telecommunications relay service (TRS) for individuals

with hearing and speech disabilities (CC Docket No. 90-571). Although

we are mindful of the commenters' concerns regarding the affordability

of, and access to, telecommunications services by individuals with

disabilities, we find that those concerns are more appropriately

addressed in the context of the Commission's implementation of

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section 255. Therefore, we do not adopt principles related to

telecommunications users with disabilities in this proceeding.

6. We have considered the requests to promote access to affordable

telecommunications services to other groups and organizations,

including minorities and community-oriented organizations, but we

decline to adopt these proposals as additional principles. We decline

at this time to adopt additional principles the purpose of which would

be to extend universal service support to individuals, groups, or

locations other than those identified in section 254.

Definition of Universal Service: What Services To Support

7. Designated Services

We generally adopt the Joint Board's recommendation and define the

``core'' or ``designated'' services that will be supported by universal

service support mechanisms as: Single-party service; voice grade access

to the public switched network; DTMF signaling or its functional

equivalent; access to emergency services; access to operator services;

access to interexchange service; access to directory assistance; and

toll limitation services for qualifying low-income consumers. In

arriving at this definition, we have adopted the Joint Board's analysis

and recommendation that, for purposes of section 254(c)(1), the

Commission define ``telecommunications services'' in a functional

sense, rather than on the basis of tariffed services. We find that this

definition of core universal services promotes competitive neutrality

because it is technology neutral, and provides more flexibility for

defining universal service than would a services-only approach. We also

find that all four criteria enumerated in section 254(c)(1) must be

considered, but not each necessarily met, before a service may be

included within the general definition of universal service, should it

be in the public interest. We interpret the statutory language,

particularly the word ``consider,'' as providing flexibility for the

Commission to establish a definition of services to be supported, after

it considers the criteria enumerated in section 254(c)(1) (A) through

(D). We conclude that the core services that we have designated to

receive universal service support are consistent with the statutory

criteria in section 254(c)(1).

8. Single-Party Service

We agree with and adopt the Joint Board's conclusion that single-

party service is widely available and that a majority of residential

customers subscribe to it, consistent with section 254(c)(1)(B).

Moreover, we concur with the Joint Board's conclusion that single-party

service is essential to public health and safety in that it allows

residential consumers access to emergency services without delay.

Single-party service also is generally consistent with the public

interest, convenience, and necessity because, by eliminating the

sharing required by multi-party service, single-party service

significantly increases the consumer's ability to place calls

irrespective of the actions of other network users and with greater

privacy than party line service can assure. In addition, single-party

service is being deployed in public telecommunications networks by

telecommunications carriers. We adopt the finding that the term

``single-party service'' means that only one customer will be served by

each subscriber loop or access line. Eligible carriers must offer

single-party service in order to receive support regardless of whether

consumers choose to subscribe to single-or multi-party service. In

addition, to the extent that wireless providers use spectrum shared

among users to provide service, we find that wireless providers offer

the equivalent of single-party service when they offer a dedicated

message path for the length of a user's particular transmission. We

concur with the Joint Board's recommendation not to require wireless

providers to offer a single channel dedicated to a particular user at

all times.

9. Voice Grade Access to the Public Switched Network

We conclude that voice grade access includes the ability to place

calls, and thus incorporates the ability to signal the network that the

caller wishes to place a call. Voice grade access also includes the

ability to receive calls, and thus incorporates the ability to signal

the called party that an incoming call is coming. We agree that these

components are necessary to make voice grade access fully beneficial to

the consumer. We find that, consistent with section 254(c)(1), voice

grade access to the public switched network is an essential element of

telephone service, is subscribed to by a substantial majority of

residential customers, and is being deployed in public

telecommunications networks by telecommunications carriers. In

addition, we find voice grade access to be essential to education,

public health, and public safety because it allows consumers to contact

essential services such as schools, health care providers, and public

safety providers. For this reason, it is also consistent with the

public interest, convenience, and necessity.

10. We also adopt the Joint Board's recommendation that voice grade

access should occur in the frequency range between approximately 500

Hertz and 4,000 Hertz for a bandwidth of approximately 3,500 Hertz.

Although we conclude below that certain higher bandwidth services

should be supported under section 254(c)(3) for eligible schools,

libraries, and rural health care providers, we decline to adopt,

pursuant to section 254(c)(1), a higher bandwidth than that recommended

by the Joint Board. We conclude, except as further designated with

respect to eligible schools, libraries and health care providers, that

voice grade access, and not high speed data transmission, is the

appropriate goal of universal service policies at this time because we

are concerned that supporting an overly expansive definition of core

services could adversely affect all consumers by increasing the expense

of the universal service program and, thus, increasing the basic cost

of telecommunications services for all.

11. Support for Local Usage

We agree with the Joint Board that the Commission should determine

the level of local usage to be supported by federal universal service

mechanisms and that the states are best positioned to determine the

local usage component for purposes of state universal service

mechanisms. Further, we agree that, in order for consumers in rural,

insular, and high cost areas to realize the full benefits of affordable

voice grade access, usage of, and not merely access to, the local

network should be supported.

12. We find, consistent with the Joint Board's conclusion, that we

have the authority to support a certain portion of local usage,

pursuant to the universal service principles adopted above. In

particular, section 254(b)(1) states that ``[q]uality services should

be available at just, reasonable, and affordable rates.'' As a result,

ensuring affordable ``access'' to those services is not sufficient.

Universal service must encompass the ability to use the network,

including the ability to place calls at affordable rates.

13. We are also concerned, however, that consumers might not

receive the benefits of universal service support unless we determine a

minimum amount of local usage that must be included within the

supported services. We intend to consider this issue in our Further

Notice of Proposed Rulemaking (``FNPRM'') on a forward-looking economic

cost methodology, which will

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be issued by June 1997. We are making various changes to the existing

universal service support mechanisms--including making support portable

to competing carriers--that will become effective on January 1, 1998.

The Commission will also separately seek further information regarding,

for example, local usage, and local usage patterns, in order to

determine the appropriate amount of local usage that should be provided

by carriers receiving universal service support. We will, by the end of

1997, quantify the amount of local usage that carriers receiving

universal service support will be required to provide.

14. Defining minimum levels of usage is critical to the

construction of a competitive bidding system for providing universal

service to high cost areas. An auction for only the ``access'' portion

of providing local service would be neither competitively nor

technologically neutral, because competitors and technologies with low

``access'' costs yet high per-minute costs would be unduly favored in

such an auction. This could result in awarding universal service

support to a less efficient technology, which is the precise result

that a competitive bidding system is meant to avoid. In addition, a

carrier with low access costs could then charge high per-minute rates

to consumers, which would increase consumers' overall bills, rather

than reducing them, as is the expected result of competition. Such a

result is not consistent with the principle in section 254(b)(1) that

these ``services'' are to be ``affordable.''

15. DTMF Signaling

The Joint Board recommended including DTMF signaling or its digital

functional equivalent among the supported services, and we adopt this

recommendation. We find that the network benefit that emanates from

DTMF signaling, primarily rapid call set-up, is consistent with the

public interest, convenience, and necessity, pursuant to section

254(c)(1)(D). Although consumers do not elect to subscribe to DTMF

signaling, we find that DTMF signaling provides network benefits, such

as accelerated call set-up, that are essential to a modern

telecommunications network. In addition, we agree with NENA's

characterization of DTMF signaling as a potential life- and property-

saving mechanism because it speeds access to emergency services. Thus,

we find that supporting DTMF signaling is essential to public health

and public safety, consistent with section 254(c)(1)(A), and is being

deployed in public telecommunications networks by telecommunications

carriers, consistent with section 254(c)(1)(C). We also adopt the Joint

Board's conclusion that other methods of signaling, such as digital

signaling, can provide network benefits equivalent to those of DTMF

signaling. In particular, we note that wireless carriers use out-of-

band digital signaling mechanisms for call set-up, rather than DTMF

signaling. Consistent with the principle of competitive neutrality, we

find it is appropriate to support out-of-band digital signaling

mechanisms as an alternative to DTMF signaling. Accordingly, we include

DTMF signaling and equivalent digital signaling mechanisms among the

services supported by federal universal service mechanisms.

16. Access to Emergency Services

In addition, we concur with the Joint Board's conclusion that

access to emergency services, including access to 911 service, be

supported by universal service mechanisms. We agree with the conclusion

that access to emergency service i.e., the ability to reach a public

emergency service provider, is ``widely recognized as essential to * *

* public safety,'' consistent with section 254(c)(1)(A). Due to its

obvious public safety benefits, including access to emergency services

among the core services is also consistent with the public interest,

convenience, and necessity. Further, consistent with the Joint Board's

recommendation and NENA's comments in favor of supporting access to 911

service, we define access to emergency services to include access to

911 service. Noting that nearly 90 percent of lines today have access

to 911 service capability, the Joint Board found that access to 911

service is widely deployed and available to a majority of residential

subscribers. For these reasons, we include telecommunications network

components necessary for access to emergency services, including access

to 911, among the supported services.

17. We also include the telecommunications network components

necessary for access to E911 service among the services designated for

universal service support. Access to E911 is essential to public health

and safety because it facilitates the determination of the approximate

geographic location of the calling party. We recognize, however, that

the Commission does not currently require wireless carriers to provide

access to E911 service. As set forth in the Commission's Wireless E911

Decision (61 FR 40348 (August 2, 1996)), access to E911 includes the

ability to provide Automatic Numbering Information (``ANI''), which

permits that the PSAP have call back capability if the call is

disconnected, and Automatic Location Information (``ALI''), which

permits emergency service providers to identify the geographic location

of the calling party. We recognize that wireless carriers are currently

on a timetable, established in the Wireless E911 Decision, for

implementing both aspects of access to E911. For universal service

purposes, we define access to E911 as the capability of providing both

ANI and ALI. We note, however, that wireless carriers are not required

to provide ALI until October 1, 2001. Nevertheless, we conclude that,

because of the public health and safety benefits provided by access to

E911 services the telecommunications network components necessary for

such access will be supported by federal universal service mechanisms

for those carriers that are providing it. We recognize that wireless

providers will be providing access to E911 in the future to the extent

that the relevant locality has implemented E911 service. In addition,

because the Wireless E911 Decision establishes that wireless carriers

are required to provide access to E911 only if a mechanism for the

recovery of costs relating to the provision of such services is in

place, there is at least the possibility that wireless carriers

receiving universal service support will be compensated twice for

providing access to E911. We intend to explore whether the possibility

is in fact being realized and, if so, what steps we should take to

avoid such over-recovery in a Further Notice of Proposed Rulemaking.

18. We support the telecommunications network components necessary

for access to 911 service and access to E911 service, but not the

underlying services themselves, which combine telecommunications

service and the operation of the PSAP and, in the case of E911 service,

a centralized database containing information identifying approximate

end user locations. The telecommunications network represents only one

component of 911 and E911 services; local governments provide the PSAP

and generally support the operation of the PSAP through local tax

revenues. We conclude that both 911 service and E911 service include

information service components that cannot be supported under section

254(c)(1), which describes universal service as ``an evolving level of

telecommunications services.'' Accordingly, we include only the

telecommunications network components necessary for access to 911

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and E911 services among the services that are supported by federal

universal service mechanisms.

19. Access to Operator Services

In addition, we adopt the Joint Board's recommendation to include

access to operator services in the general definition of universal

service. Access to operator services is widely deployed and used by a

majority of residential customers. For purposes of defining the core

section 254(c)(1) services and consistent with the Joint Board's

recommendation, we base our definition of ``operator services'' on the

definition the Commission used to define the duties imposed upon LECs

by section 251(b)(3), namely, ``any automatic or live assistance to a

consumer to arrange for billing or completion, or both, of a telephone

call.'' Contrary to the suggestion of CWA, there is no evidence on the

record to suggest that automated systems provide inadequate access to

operator services for consumers in emergency situations. We also do not

require initial contact with a live operator for purposes of operator

services because we expect that most consumers will more appropriately

rely upon their local 911 service in an emergency situation. To the

extent that access to operator services enables callers to place

collect, third-party billed, and person-to-person calls, among other

things, we find that such access may be essential to public health and

is consistent with the public interest, convenience, and necessity.

20. Access to Interexchange Service

We adopt the Joint Board's recommendation to include access to

interexchange service among the services supported by federal universal

service mechanisms. We conclude that access to interexchange service

means the use of the loop, as well as that portion of the switch that

is paid for by the end user, or the functional equivalent of these

network elements in the case of a wireless carrier, necessary to access

an interexchange carrier's network. This decision is consistent with

the principle set forth in section 254(b)(3) that ``consumers * * *

should have access to telecommunications and information services

including interexchange services.'' In addition, we agree that the

majority of residential customers currently have access to

interexchange service, thus satisfying a criterion set forth in section

254(c)(1)(B). Access to interexchange service also is widely deployed

in public telecommunications networks by telecommunications carriers.

Further, as observed by the Joint Board and commenters, access to

interexchange service is essential for education, public health, and

public safety, particularly for customers who live in rural areas and

require access to interexchange service to reach medical and emergency

services, schools, and local government offices. For these reasons,

access to interexchange service also meets the public interest,

convenience, and necessity criterion of section 254(c)(1)(D).

21. We emphasize that universal service support will be available

for access to interexchange service, but not for the interexchange or

toll service. We find that the record does not support including toll

service among the services designated for support, although, as

discussed below, we find that the extent to which rural consumers must

place toll calls to reach essential services should be considered when

assessing affordability. Nevertheless, universal service should not be

limited only to ``non-competitive'' services. One of the fundamental

purposes of universal service is to ensure that rates are affordable

regardless of whether rates are set by regulatory action or through the

competitive marketplace. We note that section 254(k), which forbids

telecommunications carriers from using services that are not

competitive to subsidize competitive services, is not inconsistent with

our conclusion that it is permissible to support competitive services.

22. We do not include equal access to interexchange service among

the services supported by universal service mechanisms. Equal access to

interexchange service permits consumers to access the long-distance

carrier to which the consumer is presubscribed by dialing a 1+ number.

As discussed below, including equal access to interexchange service

among the services supported by universal service mechanisms would

require a Commercial Mobile Radio Service (CMRS) provider to provide

equal access in order to receive universal service support. We find

that such an outcome would be contrary to the mandate of section

332(c)(8), which prohibits any requirement that CMRS providers offer

``equal access to common carriers for the provision of toll services.''

Accordingly, we decline to include equal access to interexchange

service among the services supported under section 254(c)(1).

23. We note that the Commission has not required CMRS providers to

provide dialing parity to competing providers under section 251(b)(3)

because the Commission has not yet determined that any CMRS provider is

a LEC. We seek to implement the universal service provisions of section

254 in a manner that is not ``biased toward any particular

technologies,'' consistent with the Joint Board's recommendation. In

light of the provision of section 332(c)(8) stating that non-LEC CMRS

providers are statutorily exempt from providing equal access and

because the Commission has not determined that any CMRS providers

should be considered LECs, we find that supporting equal access would

undercut local competition and reduce consumer choice and, thus, would

undermine one of Congress' overriding goals in adopting the 1996 Act.

Accordingly, we do not include equal access to interexchange carriers

in the definition of universal service at this time.

24. Access to Directory Assistance and White Pages Directories

We also adopt the Joint Board's recommendation to include access to

directory assistance, specifically, the ability to place a call to

directory assistance, among the core services pursuant to section

254(c)(1). Access to directory assistance enables customers to obtain

essential information, such as the telephone numbers of government,

business, and residential subscribers. We agree that directory

assistance is used by a substantial majority of residential customers,

is widely available, is essential for education, public health, and

safety, and is consistent with the public interest, convenience, and

necessity. Accordingly, we conclude that providing universal service

support for access to directory assistance is consistent with the

statutory criteria of section 254(c)(1).

25. We further agree with the Joint Board's recommendation not to

support white pages directories and listings. We concur with the Joint

Board's determination that white pages listings are not

``telecommunications services'' as that term is defined in the Act. As

the Joint Board recognized, unlike white pages directories and

listings, access to directory assistance is a functionality of the loop

and, therefore, is a service in the functional sense.

26. Toll Limitation Services

Additionally, we include the toll limitation services for

qualifying low-income consumers among those that will be supported

pursuant to section 254(c). We find that including these services

within the supported services is essential to the public health and

safety because, as discussed below, toll limitation services will help

prevent subscribership levels for low-income

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consumers from declining. Thus, we find that toll limitation services

will promote access to the public switched network for low-income

consumers and, therefore, are in the public interest, consistent with

the criteria of section 254(c)(1).

27. Access to Internet Services

We agree with the Joint Board's determination that Internet access

consists of more than one component. Specifically, we recognize that

Internet access includes a network transmission component, which is the

connection over a LEC network from a subscriber to an Internet Service

Provider, in addition to the underlying information service. We also

concur with the Joint Board's observation that voice grade access to

the public switched network usually enables customers to secure access

to an Internet Service Provider, and, thus, to the Internet. We

conclude that the information service component of Internet access

cannot be supported under section 254(c)(1), which describes universal

service as ``an evolving level of telecommunications services.''

Furthermore, to the extent customers find that voice grade access to

the public switched network is inadequate to provide a sufficient

telecommunications link to an Internet service provider, we conclude

that such higher quality access links should not yet be included among

the services designated for support pursuant to section 254(c)(1). We

find that a network transmission component of Internet access beyond

voice grade access should not be supported separately from voice grade

access to the public switched network because the record does not

indicate that a substantial majority of residential customers currently

subscribe to Internet access by using access links that provide higher

quality than voice grade access. In addition, although access to

Internet services offers benefits that contribute to education and

public health, we conclude that it is not ``essential to education,

public health, or public safety'' as set forth in section 254(c)(1)(A).

Under the more expansive authority granted in section 254(h), however,

we agree that supporting Internet access under that section is

consistent with Congress' intent to support Internet access for

eligible schools, libraries, and rural health care providers.

28. Other Services

We conclude that, at this time, no other services that commenters

have proposed to include in the general definition of universal service

substantially meet the criteria set forth in section 254(c)(1). We

emphasize that this section also defines universal service as

``evolving'' and, therefore, as described below, the Commission will

review the services supported by universal service mechanisms no later

than January 1, 2001. In addition, as discussed below, we find that the

issues relating to the telecommunications needs of individuals with

disabilities, including accessibility and affordability of services,

will be addressed in the context of the Commission's implementation of

section 255.

29. We are mindful of the concern expressed by commenters that an

overly broad definition of universal service might have the unintended

effect of creating a barrier to entry for some carriers because

carriers must provide each of the core services in order to be eligible

for universal service support. We concur with the Joint Board's

conclusion that conditioning a carrier's eligibility for support upon

its provision of the core services will not impose an anti-competitive

barrier to entry. We note that other services proposed by commenters,

at a later time, may become more widely deployed than they are at

present, or otherwise satisfy the statutory criteria by which we and

the Joint Board are guided.

30. Feasibility of Providing Designated Service

We conclude that eligible carriers must provide each of the

designated services in order to receive universal service support. In

three limited instances, however, we conclude that the public interest

requires that we allow a reasonable period during which otherwise

eligible carriers may complete network upgrades required for them to

begin offering certain services that they are currently incapable of

providing. Given the Joint Board's finding that not all incumbent

carriers are currently able to offer single-party service, we find that

excluding such carriers from eligibility for universal service support

might leave some service areas without an eligible carrier, especially

in areas where there currently is no evidence of competitive entry.

Therefore, as to single-party service, we will permit state

commissions, upon a finding of ``exceptional circumstances,'' to grant

an otherwise eligible carrier's request that, for a designated period,

the carrier will receive universal service support while it completes

the specified network upgrades necessary to provide single-party

service. This is consistent with the Joint Board's recommendation that

state commissions be permitted to grant requests by otherwise eligible

carriers for a period to make necessary upgrades if they currently are

unable to provide single-party service.

31. We conclude, consistent with the Joint Board's finding that

some carriers are not currently capable of providing access to E911

service, that it may be warranted to provide universal service support

to carriers that are not required under Commission rules to provide

E911 service and to carriers that are completing the network upgrades

required for them to provide access to E911 service. Access to E911

will be supported only to the extent that the relevant locality has

implemented E911 service. If the relevant locality has not implemented

E911 service, otherwise eligible carriers that are covered by the

Commission's Wireless E911 Decision are not required to provide such

access at this time to qualify for universal service support. Even in

cases in which the locality has implemented E911 service, some wireless

carriers are not currently capable of providing access to E911 service.

Although we have directed cellular, broadband PCS, and certain SMR

carriers to provide access to E911 service, we set a five-year period

during which these carriers must make the technical upgrades necessary

to offer access to E911 service. Consequently, requiring carriers to

provide access to E911 service at this time may prevent many wireless

carriers from receiving universal service support during the period

that we have already determined to be appropriate for wireless carriers

to complete preparations for their offering E911 service. We find that

this would be contrary to the principle that universal service policies

and rules be competitively neutral. In light of these considerations,

we will make some accommodation during the period in which these

carriers are upgrading their systems.

32. The Joint Board envisioned granting a period to make upgrades

while still receiving support only if a carrier could meet a ``heavy

burden that such a * * * period is necessary and in the public

interest'' and if ``exceptional circumstances'' warranted the granting

of support during that period. We find that the Joint Board's

recommendation provides a reasoned and reasonable approach to ensuring

access to single-party service while, at the same time, recognizing

that ``exceptional circumstances'' may prevent certain carriers serving

rural areas from offering single-party service. We conclude that this

approach also makes sense in the context of toll limitation service and

access to E911 when a locality has implemented E911 service.

Accordingly,

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we conclude that a carrier that is otherwise eligible to receive

universal service support but is currently incapable of providing

single-party service, toll limitation service, or access to E911 in the

case where the locality has implemented E911 service may, if it

provides each of the other designated services, petition its state

commission for permission to receive universal service support for the

designated period during which it is completing the network upgrades

required so that it can offer these services. A carrier that is

incapable of offering one or more of these three specific universal

services must demonstrate to the state commission that ``exceptional

circumstances'' exist with respect to each service for which the

carrier desires a grant of additional time to make network upgrades.

33. We emphasize that this relief should be granted only upon a

finding that ``exceptional circumstances'' prevent an otherwise

eligible carrier from providing single-party service, toll limitation,

or access to E911 when the locality has implemented E911 service. A

carrier can show that exceptional circumstances exist if individualized

hardship or inequity warrants a grant of additional time to comply with

the general requirement that eligible carriers must provide single-

party service, toll limitation service, and access to E911 when the

locality has implemented E911 service and that a grant of additional

time to comply with these requirements would better serve the public

interest than strict adherence to the general requirement that an

eligible telecommunications carrier must be able to provide these

services to receive universal service support. The period during which

a carrier could receive support while still completing essential

upgrades should extend only as long as the relevant state commission

finds that ``exceptional circumstances'' exist and should not extend

beyond the time that the state commission deems necessary to complete

network upgrades. We conclude that this is consistent with the intent

of section 214(e) because it will ensure that ultimately all eligible

telecommunications carriers offer all of the services designated for

universal service support.

34. We recognize that some state commissions already may have

mandated single-party service for telecommunications service providers

serving their jurisdictions. If a state commission has adopted a

timetable by which carriers must offer single-party service, a carrier

may rely upon that previously established timetable and need not

request another transition period for federal universal service

purposes. Specifically, where a state has ordered a carrier to provide

single-party service within a specified period pursuant to a state

order that precedes the release date of this Order, the carrier may

rely upon the timetable established in that order and receive universal

service support for the duration of that period.

35. Extent of Universal Service

The Joint Board recommended that support for designated services be

limited to those carried on a single connection to a subscriber's

primary residence and to businesses with only a single connection. In

light of our determination, however, to adopt a modified version of the

existing universal service support system for high cost areas, we

conclude, consistent with the proposal of the state Joint Board

members, that all residential and business connections in high cost

areas that currently receive high cost support should continue to be

supported for the periods set forth below. For rural telephone

companies this means that both multiple business connections and

multiple residential connections will continue to receive universal

service support at least until January 1, 2001. We intend, however, to

continue to evaluate the Joint Board's recommendation to limit support

for primary residential connections and businesses with a single

connection as we further develop a means of precisely calculating the

forward-looking economic cost of providing universal service in areas

currently served by non-rural telephone companies. As we determine how

to calculate forward-looking economic cost, or as states do so in

state-conducted cost studies, we necessarily will examine the forward-

looking economic cost of supporting additional residential connections

or multiple connection businesses. Depending on how we determine the

forward-looking economic cost of the primary residential connection,

for example, there may be little incremental cost to additional

residential connections. In that case, for instance, there would be no

need to support additional residential connections. We will consider

the forward-looking cost of supporting designated services provided to

multiple-connection businesses as well. We recognize the arguments

raised by the several parties that commented on this aspect of the

Joint Board's recommendation, but we do not address the merits of these

arguments at this time. We intend to examine the record on this issue

in our FNRPM on a forward-looking economic cost methodology.

36. Quality of Service

We concur with the Joint Board's recommendation against the

establishment of federal technical standards as a condition to

receiving universal service support. Further, we agree with the Joint

Board that the Commission should not adopt service quality standards

``beyond the basic capabilities that carriers receiving universal

service support must provide.'' Section 254(b)(1) establishes

availability of quality services as one of the guiding principles of

universal service, but, contrary to CWA's characterization of this

section as a statutory requirement, section 254(b)(1) does not mandate

specific measures designed to ensure service quality. Rather, section

254(b) sets forth the statutory principles that the Joint Board

considered when making its recommendations and, similarly, must guide

the Commission as it implements section 254.

37. Based on the Joint Board's recommendation that the Commission

not establish federal technical standards as a condition to receiving

universal service support, we conclude that the Commission should rely

upon existing data, rather than specific standards, to monitor service

quality at this time. Several states currently have service quality

reporting requirements in place for carriers serving their

jurisdictions. We find, consistent with the Joint Board's

recommendation, that imposing additional requirements at the federal

level would largely duplicate states' efforts. In addition, imposing

federal service quality reporting requirements could be overly

burdensome for carriers, particularly small telecommunications

providers that may lack the resources and staff needed to prepare and

submit the necessary data. For this reason, we also decline to expand,

solely for universal service purposes, the category of

telecommunications providers required to file ARMIS service quality and

infrastructure reporting data. Currently, ARMIS filing requirements

apply to carriers subject to price cap regulation that collectively

serve 95 percent of access lines. We will not extend ARMIS reporting

requirements to all carriers because we find that additional reporting

requirements would impose the greatest burdens on small

telecommunications companies.

38. We will rely upon service quality data provided by the states

in combination with those data that the Commission already gathers from

price cap carriers through existing data

[[Page 32868]]

collection mechanisms in order to monitor service quality trends. We

concur with the Joint Board's recommendation that state commissions

share with the Commission, to the extent carriers provide such data,

information regarding, for example, the number and type of service

quality complaints filed with state agencies. We encourage state

commissions to submit to the Commission the service quality data they

receive from their telecommunications carriers.

39. We conclude that states may adopt and enforce service quality

rules that are competitively neutral, pursuant to section 253(b), and

that are not otherwise inconsistent with rules adopted herein. We

concur with commenters that favor state implementation of carrier

performance standards. Relying on data compiled by the National

Association of Regulatory Utilities Commissioners, we note that 40

states and the District of Columbia have service quality standards in

place for telecommunications companies. Because most states have

established mechanisms designed to ensure service quality in their

jurisdictions, we find that additional efforts undertaken at the

federal level would be largely redundant. We conclude that state-

imposed measures to monitor and enforce service quality standards will

help ``ensure the continued quality of telecommunications services, and

safeguard the rights of consumers,'' consistent with section 253(b). In

light of the existing state mechanisms designed to promote service

quality, we conclude that state commissions are the appropriate fora

for resolving consumers' specific grievances regarding service quality.

40. We agree with the Joint Board's conclusion that, to the extent

the Joint Board recommended, and we adopt, specific definitions of the

services designated for support, these basic capabilities establish

minimum levels of service that carriers must provide in order to

receive support. For example, we conclude above that voice grade access

to the public switched network should occur in the frequency range

between approximately 500 Hertz and 4,000 Hertz for a bandwidth of

approximately 3,500 Hertz. Although not a service quality standard per

se, this requirement will ensure that all consumers served by eligible

carriers receive some minimum standard of service.

41. Reviewing the Definition of Universal Service

The Commission shall convene a Joint Board no later than January 1,

2001, to revisit the definition of universal service, as section

254(c)(2) anticipates. In addition to relying upon existing data

collection mechanisms, such as ARMIS reports, the Commission will

conduct any surveys or statistical analysis that may be necessary to

make the evaluations required by section 254(c)(1) to change the

definition of universal service.

Affordability

42. We agree with and adopt the Joint Board's finding that the

definition of affordability contains both an absolute component (``to

have enough or the means for''), which takes into account an

individual's means to subscribe to universal service, and a relative

component (``to bear the cost of without serious detriment''), which

takes into account whether consumers are spending a disproportionate

amount of their income on telephone service. We adopt the

recommendation that a determination of affordability take into

consideration both rate levels and non-rate factors, such as consumer

income levels, that can be used to assess the financial burden

subscribing to universal service places on consumers.

43. Subscribership Levels

We also concur in the Joint Board's finding that subscribership

levels provide relevant information regarding whether consumers have

the means to subscribe to universal service and, thus, represent an

important tool in evaluating the affordability of rates. Based on

recent nationwide subscribership data, the Joint Board judged that

existing local rates are generally affordable. We find that recent

subscribership data, indicating that 94.2 percent of all American

households subscribed to telephone service in 1996, and the record in

this proceeding are consistent with the Joint Board's determination. We

recognize that affordable rates are essential to inducing consumers to

subscribe to telephone service, and also that increasing the number of

people connected to the network increases the value of the

telecommunications network. Further, we note that insular areas

generally have subscribership levels that are lower than the national

average, largely as a result of income disparity, compounded by the

unique challenges these areas face by virtue of their locations.

44. We also agree with the Joint Board that subscribership levels

are not dispositive of the issue of whether rates are affordable. As

the Joint Board concluded, subscribership levels do not address the

second component of affordability, namely, whether paying the rates

charged for services imposes a hardship for those who subscribe.

Accordingly, we conclude that the Commission and states should use

subscribership levels, in conjunction with rate levels and certain

other non-rate factors, to identify those areas in which the services

designated for support may not be affordable.

45. Non-Rate Factors

The record demonstrates that various other non-rate factors affect

a consumer's ability to afford telephone service. We agree that the

size of a customer's local calling area is one factor to consider when

assessing affordability. Specifically, we concur with the Joint Board's

finding that the scope of the local calling area ``directly and

significantly impacts affordability,'' and, thus, should be a factor to

be weighed when determining the affordability of rates. We further

agree with the Joint Board that an examination that would focus solely

on the number of subscribers to which one has access for local service

in a local calling area would be insufficient. Instead, a determination

that the calling area reflects the pertinent ``community of interest,''

allowing subscribers to call hospitals, schools, and other essential

services without incurring a toll charge, is appropriate. In reaching

this conclusion, we agree with commenters that affordability is

affected by the amount of toll charges a consumer incurs to contact

essential service providers such as hospitals, schools, and government

offices that are located outside of the consumer's local calling area.

Toll charges can greatly increase a consumer's expenditure on

telecommunications services, mitigating the benefits of universal

service support. In addition, rural consumers who must place toll calls

to contact essential services that urban consumers may reach by placing

a local call cannot be said to pay ``reasonably comparable'' rates for

local telephone service when the base rates of the service are the same

in both areas. Thus, we find that a determination of rate affordability

should consider the range of a subscriber's local calling area,

particularly whether the subscriber must incur toll charges to contact

essential public service providers.

46. In addition, we agree with the Joint Board that consumer income

levels should be among the factors considered when assessing rate

affordability. We concur with the Joint Board's finding that a nexus

exists between income level and the ability to afford universal

service. A rate that is affordable to

[[Page 32869]]

affluent customers may not be affordable to lower-income customers. In

light of the significant disparity in income levels throughout the

country, per-capita income of a local or regional area, and not a

national median, should be considered in determining affordability. As

the Joint Board concluded, determining affordability based on a

percentage of the national median income would be inequitable because

of the significant disparities in income levels across the country.

Specifically, we agree that such a standard would tend to overestimate

the price at which services are affordable when applied to a service

area where income level is significantly below the national median.

Accordingly, we decline to adopt proposals to establish nationwide

standards for measuring the impact of customer income levels on

affordability.

47. We also agree with the Joint Board that cost of living and

population density affect rate affordability. Like income levels, cost

of living affects how much a consumer can afford to pay for universal

services. The size of a consumer's calling area, which tends to be

smaller in areas with low population density, affects affordability. In

addition, given that cost of living and population density, like income

levels, are factors that vary across local or regional areas, we find

that these factors should be considered by region or locality.

48. Finally, we agree with and adopt the Joint Board's finding that

legitimate local variations in rate design may affect affordability.

Such variations include the proportion of fixed costs allocated between

local services and intrastate toll services; proportions of local

service revenue derived from per-minute charges and monthly recurring

charges; and the imposition of mileage charges to recover additional

revenues from customers located a significant distance from the wire

center. We find that states, by virtue of their local rate-setting

authority, are best qualified to assess these factors in the context of

considering rate affordability.

49. Determining Rate Affordability

We agree with the Joint Board that states should exercise initial

responsibility, consistent with the standards set forth above, for

determining the affordability of rates. We further concur with the

Joint Board's conclusion that state commissions, by virtue of their

rate-setting roles, are the appropriate fora for consumers wishing to

challenge the affordability of intrastate rates for both local and toll

services. The unique characteristics of each jurisdiction render the

states better suited than the Commission to make determinations

regarding rate affordability. Each of the factors proposed by parties

and endorsed by the Joint Board with the exception of subscribership

levels--namely, local calling area size, income levels, cost of living,

and population density--represents data that state regulators, as

opposed to the Commission, are best situated to obtain and analyze.

50. As the Joint Board recommended, the Commission will work in

concert with states and U.S. territories and possessions informally to

address instances of low or declining subscribership levels. Such

informal cooperation may consist of sharing data or conducting joint

inquiries in an attempt to determine the cause of low or declining

subscribership rates in a given state, or providing other assistance

requested by a state. We will defer to the states for guidance on how

best to implement federal-state collaborative efforts to ensure

affordability. We find that this dual approach in which both the states

and the Commission play significant roles in ensuring affordability is

consistent with the statutory mandate embodied in section 254(i).

51. In addition, where ``necessary and appropriate,'' the

Commission, working with the affected state or U.S. territory or

possession, will open an inquiry to take such action as is necessary to

fulfill the requirements of section 254. We conclude that such action

is warranted with respect to insular areas. The record indicates that

subscribership levels in insular areas are particularly low.

Accordingly, we will issue a Public Notice to solicit further comment

on the factors that contribute to the low subscribership levels that

currently exist in insular areas, and to examine ways to improve

subscribership in these areas.

52. Some commenters have suggested that the Commission provide

universal service support for rates that are found to be unaffordable

or where subscribership levels decline from current levels. We agree

that, if subscribership levels begin to drop significantly from current

levels, we may need to take further action. Among the benefits

subscribership brings to individuals is access to essential services,

such as emergency service providers, and access to entities such as

schools, health care facilities and local governments. In addition,

subscribers enjoy the increased value of the telephone network, i.e.,

the large numbers of people who can be reached via the network, that

results from high subscribership levels. We agree with Puerto Rico Tel.

Co. that, because the Puerto Rico subscribership level remains

significantly below the national average, it is not appropriate to

delay action until a subscribership level that is already low declines

further. As discussed above, we find that further action is warranted

with respect to insular areas.

53. In addition, we will continue actively to monitor

subscribership across a wide variety of income levels and demographic

groups and encourage states to do likewise. The Commission currently

uses Census Bureau data to publish reports that illustrate

subscribership trends among households, including subscribership by

state, as well as nationwide subscribership rates by categories

including income level, race, and age of household members, and

household size. We find that any response to a decline in

subscribership revealed by our analysis of the relevant data should be

tailored to those who need assistance to stay connected to the network.

54. We concur with the Joint Board's recommendation to implement a

national benchmark to calculate the amount of support eligible

telecommunications carriers will receive for serving rural, insular,

and high cost areas. The Joint Board declined to establish a benchmark

based on income or subscribership and specifically did not equate the

benchmark support levels with affordability. We agree. Setting the

rural, insular and high cost support benchmark based on income and

subscribership would fail to target universal service assistance and

could therefore needlessly increase the amount of universal service

support. Recent data show that telephone subscribership was 96.2

percent in 1996 for households with annual incomes of at least $15,175

and 85.4 percent for households with annual incomes below $15,175. The

Joint Board concluded that, because telephone penetration declines

significantly for low-income households, the impact of household income

is more appropriately addressed through programs designed to help low-

income households obtain and retain telephone service, rather than as

part of the high cost support mechanism. Accordingly, we adopt the

Joint Board's recommendation to channel support designed to assist low-

income consumers through the Lifeline and Link Up programs, rather than

through the high cost support methodology.

[[Page 32870]]

Carriers Eligible for Universal Service Support

55. Adoption of Section 214(e)(1) Criteria

Consistent with the Joint Board's recommendation, we adopt the

statutory criteria contained in section 214(e)(1) as the rules for

determining whether a telecommunications carrier is eligible to receive

universal service support. Pursuant to those criteria, only a common

carrier may be designated as an eligible telecommunications carrier,

and therefore may receive universal service support. In addition, each

eligible carrier must, throughout its service area: (1) Offer the

services that are supported by federal universal service support

mechanisms under section 254(c); (2) offer such services using its own

facilities or a combination of its own facilities and resale of another

carrier's services, including the services offered by another eligible

telecommunications carrier; and (3) advertise the availability of and

charges for such services using media of general distribution.

56. Statutory Construction of Section 214(e)

We conclude that section 214(e)(2) does not permit the Commission

or the states to adopt additional criteria for designation as an

eligible telecommunications carrier. As noted by the Joint Board,

``section 214 contemplates that any telecommunications carrier that

meets the eligibility criteria of section 214(e)(1) shall be eligible

to receive universal service support.'' Section 214(e)(2) states that

``[a] state commission shall * * * designate a common carrier that

meets the requirements of paragraph (1) as an eligible

telecommunications carrier * * *.'' Section 214(e)(2) further states

that ``* * * the State commission may, in the case of an area served by

a rural telephone company, and shall, in the case of all other areas,

designate more than one common carrier as an eligible

telecommunications carrier for a service area designated by the State

commission, so long as each additional requesting carrier meets the

requirements of paragraph (1).'' Read together, we find that these

provisions dictate that a state commission must designate a common

carrier as an eligible carrier if it determines that the carrier has

met the requirements of section 214(e)(1). Consistent with the Joint

Board's finding, the discretion afforded a state commission under

section 214(e)(2) is the discretion to decline to designate more than

one eligible carrier in an area that is served by a rural telephone

company; in that context, the state commission must determine whether

the designation of an additional eligible carrier is in the public

interest. The statute does not permit this Commission or a state

commission to supplement the section 214(e)(1) criteria that govern a

carrier's eligibility to receive federal universal service support.

57. In addition, state discretion is further limited by section

253: A state's refusal to designate an additional eligible carrier on

grounds other than the criteria in section 214(e) could ``prohibit or

have the effect of prohibiting the ability of any entity to provide any

interstate or intrastate telecommunications service'' and may not be

``necessary to preserve universal service.'' Accordingly, we conclude

that the section 253 precludes states from imposing additional

prerequisites for designation as an eligible telecommunications

carrier. Although section 214(e) precludes states from imposing

additional eligibility criteria, it does not preclude states from

imposing requirements on carriers within their jurisdictions, if these

requirements are unrelated to a carrier's eligibility to receive

federal universal service support and are otherwise consistent with

federal statutory requirements. Further, section 214(e) does not

prohibit a state from establishing criteria for designation of eligible

carriers in connection with the operation of that state's universal

service mechanism, consistent with section 254(f).

58. Consistent with the findings we make above, we disagree with

GTE's assertion that the use of the phrases ``a carrier that receives

such support'' and ``any such support * * *'' instead of the phrase

``such eligible carrier'' in section 254(e) indicates that Congress

intended to require carriers to meet criteria in addition to the

eligibility criteria in section 214(e). We conclude that the quoted

language indicates only that a carrier is not entitled automatically to

receive universal service support once designated as an eligible

telecommunications carrier.

59. The terms of section 214(e) do not allow us to alter an

eligible carrier's duty to serve an entire service area. Consequently,

we cannot modify the requirements of section 214(e) for carriers whose

technology limits their ability to provide service throughout a state-

defined service area. We note, however, that any carrier may, for

example, use resale to supplement its facilities-based offerings in any

given service area.

60. Additional Obligations as a Condition of Eligibility

We reject proposals to impose additional obligations as a condition

of being designated an eligible telecommunications carrier pursuant to

section 214(e) because section 214(e) does not grant the Commission

authority to impose additional eligibility criteria.

61. We emphasize that, even if we had the legal authority to impose

additional obligations as a condition of being designated an eligible

telecommunications carrier, we agree with the Joint Board that these

additional criteria are unnecessary to protect against unreasonable

practices by other carriers. As the Joint Board explained, section

214(e) prevents eligible carriers from attracting only the most

desirable customers by limiting eligibility to common carriers and by

requiring eligible carriers to offer the supported services and

advertise the availability of these services ``throughout the service

area.''

62. We further conclude that adopting the eligibility criteria

imposed by the statute without elaboration is consistent with the Joint

Board's recommended principle of competitive neutrality because, once

the forward-looking and more precisely targeted high cost methodology

is in place, all carriers will receive comparable support for

performing comparable functions. Several ILECs assert that the Joint

Board's recommendation not to impose additional criteria is in conflict

with its recommended principle of competitive neutrality because some

carriers, such as those subject to COLR obligations or service quality

regulation, perform more burdensome and costly functions than other

carriers that are eligible for the same amount of compensation. The

statute itself, however, imposes obligations on ILECs that are greater

than those imposed on other carriers, yet section 254 does not limit

eligible telecommunications carrier designation only to those carriers

that assume the responsibilities of ILECs. We find that the imposition

of additional criteria, to the extent that they would preclude some

carriers from being designated eligible pursuant to section 214(e),

would violate the principle of competitive neutrality.

63. Treatment of Particular Classes of Carriers

We agree with the Joint Board's recommendation that any

telecommunications carrier using any technology, including wireless

technology, is eligible to receive

[[Page 32871]]

universal service support if it meets the criteria under section

214(e)(1). We agree that any wholesale exclusion of a class of carriers

by the Commission would be inconsistent with the language of the

statute and the pro-competitive goals of the 1996 Act. The treatment

granted to certain wireless carriers under section 332(c)(3)(A) does

not allow states to deny wireless carriers eligible status. We also

agree that non-ILECs and carriers subject to price cap regulation

should be eligible for support. We agree with the Joint Board that

price cap regulation is an important tool for smoothing the transition

to competition and that its use should not foreclose price cap

companies from receiving universal service support. We find that

requiring price cap carriers to cover their costs of providing

universal service through internal cross-subsidies would violate the

statutory directive that support for universal service be ``explicit.''

Consequently, in our decision here and in the Access Charge Reform

Order, we adopt a plan to eliminate implicit subsidies as we identify

and make explicit universal service support. Because we have determined

that we will not exclude price cap companies from eligibility, we agree

with the Joint Board that we need not delineate the difference between

price cap carriers and other carriers, as proposed in the Further

Comment Public Notice.

64. We note that not all carriers are subject to the jurisdiction

of a state commission. Nothing in section 214(e)(1), however, requires

that a carrier be subject to the jurisdiction of a state commission in

order to be designated an eligible telecommunications carrier. Thus

tribal telephone companies, CMRS providers, and other carriers not

subject to the full panoply of state regulation may still be designated

as eligible telecommunications carriers.

65. Advertising

We agree with the Joint Board's analysis and recommendation that we

not adopt, at this time, nationwide standards to interpret the

requirement of section 214(e)(1)(B) that eligible carriers advertise,

throughout their service areas, the availability of, and charges for,

the supported services using media of general distribution. We agree

that, in the first instance, states should establish any guidelines

needed to govern such advertising. We agree that the states, as a

corollary to their obligation to designate eligible telecommunications

carriers, are in a better position to monitor the effectiveness of

carriers' advertising throughout their service areas. We also agree

with the Joint Board that competition will help ensure that carriers

inform potential customers of the services they offer. Although we

decline to adopt nationwide standards for interpreting section

214(e)(1)(B), we encourage states, as they determine whether to

establish guidelines pursuant to that section, to consider the

suggestion that the section 214(e)(1)(B) requirement that carriers

advertise in ``media of general distribution'' is not satisfied by

placing advertisements in business publications alone, but instead

compels carriers to advertise in publications targeted to the general

residential market. We conclude that no further regulations are

necessary to define the term ``throughout.'' The dictionary definition

--``in or through all parts; everywhere''--requires no further

clarification.

66. Relinquishment of Eligible Carrier Designation

We conclude that no additional measures are needed to implement

section 214(e)(4), the provision that reserves to the states the

authority to act upon an eligible carriers's request to relinquish its

designation as an eligible carrier.

67. Facilities Requirement

Section 214(e)(1) requires that, in order to be eligible for

universal service support, a common carrier must offer the services

supported by federal universal service support mechanisms throughout a

service area ``either using its own facilities or a combination of its

own facilities and resale of another carrier's services (including the

services offered by another eligible telecommunications carrier).'' In

interpreting the facilities requirement, we first address the meaning

of the term ``facilities'' and then address the meaning of the phrase

``own facilities.''

68. Defining the Term ``Facilities'' in Section 214(e)(1)

We interpret the term ``facilities,'' for purposes of section

214(e), to mean any physical components of the telecommunications

network that are used in the transmission or routing of the services

designated for support under section 254(c)(1). We conclude that this

interpretation strikes a reasonable balance between adopting a more

expansive definition of ``facilities,'' which would undermine the Joint

Board's recommendation to exclude resellers from eligible status, and

adopting a more restrictive definition of ``facilities,'' which we fear

would thwart competitive entry into high cost areas.

69. We adopt this definition of ``facilities,'' in part, to remain

consistent with the Joint Board's recommendation that ``a carrier that

offers universal service solely through reselling another carrier's

universal service package'' should not be eligible to receive universal

service support. By encompassing only physical components of the

telecommunications network that are used to transmit or route the

supported services, this definition, in effect, excludes from

eligibility a ``pure'' reseller that claims to satisfy the facilities

requirement by providing its own billing office or some other facility

that is not a ``physical component'' of the network, as defined in this

Order. We find that our determination to define ``facilities'' in this

manner is consistent with congressional intent to require that at least

some portion of the supported services offered by an eligible carrier

be services that are not offered through ``resale of another carrier's

services.''

70. Whether the Use of Unbundled Network Elements Qualifies as a

Carrier's ``Own Facilities''

We conclude that a carrier that offers any of the services

designated for universal service support, either in whole or in part,

over facilities that are obtained as unbundled network elements

pursuant to section 251(c)(3) and that meet the definition of

facilities set forth above, satisfies the facilities requirement of

section 214(e)(1)(A).

71. In making this decision, we first look to the language of

section 214(e)(1)(A), which references two classes of carriers that are

eligible for support--carriers using their ``own facilities'' and

carriers using ``a combination of (their) own facilities and resale of

another carrier's services.'' Neither the statute nor the legislative

history defines the term ``own'' as that term appears within the phrase

``own facilities'' in section 214(e)(1)(A). In addition, neither

category in section 214(e)(1)(A) explicitly refers to unbundled network

elements. Notwithstanding the lack of an express reference to unbundled

network elements in section 214(e), however, we conclude that it is

unlikely that Congress intended to deny designation as eligible to a

carrier that relies, even in part, on unbundled network elements to

provide service, given the central role of unbundled network elements

as a means of entry into local markets. Because the statute is

ambiguous with respect to whether a carrier providing service through

the use of unbundled network elements is providing service through its

``own facilities'' or through

[[Page 32872]]

the ``resale of another carrier's services,'' we look to other sections

of the Act and to legislative intent to resolve the ambiguity.

72. In so doing, we conclude that Congress did not intend to deny

designation as eligible to a carrier that relies exclusively on

unbundled network elements to provide service in a high cost area,

given that the Act contemplates the use of unbundled network elements

as one of the three primary paths of entry into local markets. We have

consistently held that Congress did not intend to prefer one form of

local entry over another. As we recognized in the Local Competition

Order (61 FR 45476 (August 29, 1996)), ``[t]he Act contemplates three

paths of entry into the local market--the construction of new networks,

the use of unbundled elements of the incumbent's network, and resale.

The 1996 Act requires us to implement rules that eliminate statutory

and regulatory barriers and remove economic impediments to each.'' In

the Recommended Decision, the Joint Board explicitly stated that

``[c]ompetitive neutrality'' is ``embodied in'' section 214(e). Indeed,

the Joint Board recommended ``that the Commission reject arguments that

only those telecommunications carriers that offer universal service

wholly over their own facilities should be eligible for universal

service [support].''

73. We conclude that the phrase ``resale of another carrier's

services'' does not encompass the provision of service through

unbundled network elements. The term ``resale'' used in section 251

refers to an ILEC's duty to offer, at wholesale rates, ``any

telecommunications service that the carrier provides at retail'' as

well as the duty of every LEC not to prohibit ``the resale of its

telecommunications services.'' Section 251 makes it clear that an

ILEC's duty to offer retail services at wholesale rates is distinct

from an ILEC's obligation to provide ``nondiscriminatory access to

network elements on an unbundled basis.'' We find that the statute's

use, in section 214(e)(1), of the term used in sections 251(b)(1) and

251(c)(4)--``resale''--suggests that Congress contemplated that the

provision of services via unbundled network elements was different from

the ``resale of another carrier's services.'' In addition, to interpret

the phrase ``resale of another carrier's services'' to encompass the

provision of a telecommunications service through use of unbundled

network elements obtained from an ILEC would require the Commission to

find that the provision of nondiscriminatory access to an unbundled

network element by an ILEC is the provision of a ``telecommunications

service''--an interpretation that is not consistent with the Act. A

``network element'' is defined as a ``facility or equipment used in the

provision of a telecommunications service'' that also ``includes

features, functions, and capabilities that are provided by means of

such facility or equipment * * *.'' A ``network element'' is not a

``telecommunications service.''

74. We conclude that, when a requesting carrier obtains an

unbundled element, such element--if it is also a ``facility''--is the

requesting carrier's ``own facilit[y]'' for purposes of section

214(e)(1)(A) because the requesting carrier has the ``exclusive use of

that facility for a period of time.'' The courts have recognized many

times that the word ``own''--as well as its numerous derivations--is a

``generic term'' that ``varies in its significance according to its

use'' and ``designate[s] a great variety of interests in property.''

The word ``ownership'' is said to ``var(y) in its significance

according to the context and the subject matter with which it is

used.'' The word ``owner'' is a broad and flexible word, applying not

only to legal title holders, but to others enjoying the beneficial use

of property. Indeed, property may have more than one ``owner'' at the

same time, and such ``ownership'' does not merely involve title

interest to that property.

75. Additionally, we note that section 214(e)(1) uses the term

``own facilities'' and does not refer to facilities ``owned by'' a

carrier. We conclude that this distinction is salient based on our

finding that, unlike the term ``owned by,'' the term ``own facilities''

reasonably could refer to property that a carrier considers its own,

such as unbundled network elements, but to which the carrier does not

hold absolute title.

76. In the context of section 214(e)(1)(A), unbundled network

elements are the requesting carrier's ``own facilities'' in that the

carrier has obtained the ``exclusive use'' of the facility for its own

use in providing services, and has paid the full cost of the facility,

including a reasonable profit, to the ILEC. The opportunity to purchase

access to unbundled network elements, as we explained in the Local

Competition Order, provides carriers with greater control over the

physical elements of the network, thus giving them opportunities to

create service offerings that differ from services offered by an

incumbent. This contrasts with the abilities of wholesale purchasers,

which are limited to offering the same services that an incumbent

offers at retail. This greater control distinguishes carriers that

provide service over unbundled network elements from carriers that

provide service by reselling wholesale service and leads us to conclude

that, as between the two terms, carriers that provide service using

unbundled network elements are better characterized as providing

service over their ``own facilities'' as opposed to providing ``resale

of another carrier's services.''

77. Unlike a pure reseller, a carrier that provides service using

unbundled network elements bears the full cost of providing that

element, even in high cost areas. Section 252(d)(1)(A)(i) requires that

the price of an unbundled network element be based on cost; a carrier

that purchases access to an unbundled network element incurs all of the

forward-looking costs associated with that element. We conclude that

universal service support should be provided to the carrier that incurs

the costs of providing service to a customer. Because a carrier that

purchases access to an unbundled network element incurs the costs of

providing service, it is reasonable for us to find that such a carrier

should be entitled to universal service support for the elements it

obtains.

78. We conclude that interpreting the term ``own facilities'' to

include unbundled network elements is the most reasonable

interpretation of the statute, given Congress's intent that all three

forms of local entry must be treated in a competitively neutral manner.

If the term ``own facilities'' is interpreted not to include service

provided through unbundled network elements, however, a carrier

providing service using unbundled network elements would suffer a

substantial cost disadvantage compared with carriers using other entry

strategies. In effect, excluding a competitive local exchange carrier

(CLEC) that uses exclusively unbundled network elements from being

designated an eligible carrier could make it cost-prohibitive for CLECs

choosing this entry strategy to serve high cost areas because ILECs

serving those areas will receive universal service support. We cannot

reconcile these implications with the ``pro-competitive'' goals of the

1996 Act and the goals of universal service and section 254. As a

result, the most reasonable interpretation of section 214(e)(1)(A) is

that the phrase ``own facilities'' includes the provision of service

through unbundled network elements, and that a carrier that uses

[[Page 32873]]

exclusively unbundled network elements to serve customers would be

entitled to receive the support payment, subject to the cap that we

describe below, that would allow it to compete with carriers utilizing

other entry strategies.

79. To hold otherwise would threaten the central principles of the

universal service system and the 1996 Act. In the Local Competition

Order, we explicitly stated that, in enacting section 251(c)(3),

Congress did not intend to restrict the entry of CLECs that use

exclusively unbundled network elements. Indeed, entry by exclusive use

of unbundled elements might be common in high cost areas--for example,

a carrier considering providing service to a single high-volume

customer or only to a portion of a high cost area might be encouraged

to offer service using unbundled elements throughout an entire service

area if it could compete with the incumbent and other entrants that may

already be receiving a payment from the universal service fund.

80. If we interpreted the term ``own facilities'' not to include

the use of unbundled network elements, the end result would be that the

entry strategy that includes the exclusive use of unbundled network

elements would be the only form of entry that would not benefit from,

either directly or indirectly, universal service support. A carrier

that has constructed all of its facilities would certainly be eligible

for support under section 214(e)(1), as would an entrant that offers

service through a mix of facilities that it had constructed and resold

services. A pure reseller indirectly receives the benefit of the

support payment, because, as discussed above, the retail rate of the

resold service already incorporates the support paid to the underlying

incumbent carrier. Such an environment--in which some forms of entry

are eligible for support but one form of entry is not--is not

``competitively neutral.'' In addition, this outcome would create an

artificial disincentive for carriers using unbundled elements to enter

into high cost areas.

81. Several commenters urge us to adopt an interpretation of the

term ``own facilities'' that would exclude the use of unbundled network

elements. These commenters assert that, in light of the Joint Board's

recommendation that support be ``portable,'' a narrow interpretation of

the section 214(e) facilities requirement is necessary to ensure that

ILECs receive adequate funds to construct, maintain, and upgrade their

telecommunications networks. We are not persuaded by these arguments

because we find that the pricing rule in section 252(d)(1) that applies

to unbundled network elements assures that the costs associated with

the construction, maintenance, and repair of an incumbent's facilities,

including a reasonable profit, would already be recovered through the

payments made by the carrier purchasing access to unbundled network

elements. The carrier purchasing access to those elements will, in

turn, receive a universal service support payment. To the extent that

these commenters' arguments are premised on their contention that

unbundled network element prices do not compensate ILECs for their

embedded costs, and that ILECs are constitutionally entitled to

recovery of their embedded costs, we will address that issue in a later

proceeding in our Access Charge Reform docket.

82. Although the states have the ultimate responsibility under

section 214(e) for deciding whether a particular carrier should be

designated as eligible, we are fully authorized to interpret the

statutory provisions that govern that determination. This language

appears in a federal statute, establishing a federal universal service

program. It is clearly appropriate for a federal agency to interpret

the federal statute that it has been entrusted with implementing.

Moreover, we believe it is particularly important for us to set out a

federal interpretation of the ``own facilities'' language in section

214, particularly as it relates to the use of unbundled network

elements. We note that the ``own facilities'' language in section

214(e)(1)(A) is very similar to language in section 271(c)(1)(A),

governing Bell operating company (BOC) entry into interLATA services.

While we are not interpreting the language in section 271 in this

Order, given the similarity of the language in these two sections, we

would find it particularly troubling to allow the states unfettered

discretion in interpreting and applying the ``own facilities'' language

in section 214(e). In order to avoid the potential for conflicting

interpretations from different states, we believe it is important to

set forth a single, federal interpretation, so that the ``own

facilities'' language is consistently construed and applied.

83. Level of Facilities Required To Satisfy the Facilities Requirement

We adopt the Joint Board's conclusion that a carrier need not offer

universal service wholly over its own facilities in order to be

designated as eligible because the statute allows an eligible carrier

to offer the supported services through a combination of its own

facilities and resale. We find that the statute does not dictate that a

carrier use a specific level of its ``own facilities'' in providing the

services designated for universal service support given that the

statute provides only that a carrier may use a ``combination of its own

facilities and resale'' and does not qualify the term ``own

facilities'' with respect to the amount of facilities a carrier must

use. For the same reasons, we find that the statute does not require a

carrier to use its own facilities to provide each of the designated

services but, instead, permits a carrier to use its own facilities to

provide at least one of the supported services. By including carriers

relying on a combination of facilities and resale within the class of

carriers eligible to receive universal service support, and by

declining to specify the level of facilities required, we believe that

Congress sought to accommodate the various entry strategies of common

carriers seeking to compete in high cost areas. We conclude, therefore,

that, if a carrier uses its own facilities to provide at least one of

the designated services, and the carrier otherwise meets the definition

of ``facilities'' adopted above, then the facilities requirement of

section 214(e) is satisfied. For example, we conclude that a carrier

could satisfy the facilities requirement by using its own facilities to

provide access to operator services, while providing the remaining

services designated for support through resale.

84. In arriving at this conclusion, we compare Congress's use of

qualifying language in the section 271(c)(1)(A) facilities requirement

with the absence of such language in the section 214(e) requirement.

Section 271(c)(1)(A) provides that a BOC that is seeking authorization

to originate in-region, interLATA services must enter into

interconnection agreements with competitors that offer ``telephone

exchange service either exclusively over their own facilities or

predominantly over their own telephone exchange service facilities in

combination with the resale of the telecommunications services of

another carrier.'' By contrast, section 214(e) does not mandate the use

of any particular level of a carrier's own facilities.

85. Several ILECs assert that eligible carriers that furnish only a

de minimis level of facilities should not be entitled to receive

universal service support. ILECs are concerned that, unless a carrier

is required to provide a substantial level of its own facilities

throughout a service area, a CLEC may be able to receive a level of

support in excess of its actual costs, and thereby gain a competitive

advantage over

[[Page 32874]]

ILECs. For example, ILECs argue that, because the prices of unbundled

network elements may be averaged over smaller geographic areas than

universal service support, the cost that a competitive carrier will

incur for serving a customer using unbundled network elements will not

match the level of universal service support the CLEC will receive for

serving that customer.

86. This asymmetry could arise because of the procedures currently

used to calculate the cost of serving a customer. Because it is

administratively infeasible to calculate the precise cost of providing

service to each customer in a service area, and because rate averaging

and the absence of competition generally have allowed it, the cost of

providing service has been calculated over a geographic region, such as

a study area, and the total cost of providing service in that area has

been averaged over the number of customers in that area. This average

cost provides the basis for calculating universal service support in

that area. To illustrate, the average cost of providing service in a

study area might be $50.00 per customer, but the cost of providing

service might be $10.00 in urban portions of the area, $40.00 in the

suburban portions, and $100.00 in outlying regions. Although the cost

of providing the supported services will be calculated at the study

area level in 1998, the cost of unbundled network elements is

calculated by the states, possibly over geographic areas smaller than

study areas. Thus, the total support given to a carrier per customer in

a study area might be $20.00, but the price of purchasing access to

unbundled network elements to serve a customer in that study area might

be $10.00, $60.00, or $100.00, depending on where the customer is

located. Consequently, a CLEC might pay $10.00 to purchase access to an

unbundled network element in order to serve a customer in a city, but

receive $20.00 in universal service support.

87. We emphasize that the uneconomic incentives described above are

largely connected with the modified existing high cost mechanism that

will be in place until January 1, 1999. We also conclude, based on the

reasons set forth immediately below, that the situation described by

the ILECs will occur, at most, infrequently during this period. We

conclude that the ILECs' concerns should be significantly alleviated

when the forward-looking and more precisely targeted methodology to

calculate high cost support becomes effective. Specifically, in our

forthcoming proceeding on the high cost support mechanism that will

take effect January 1, 1999, we intend to address fully any potential

dissimilarities between the level of disaggregation of universal

service support and the level of disaggregation of unbundled network

element prices. Nevertheless, we agree with the ILECs that we should

limit the ability of competitors to make decisions to enter local

markets based on artificial economic incentives created under the

modified existing mechanism.

88. To this end, we take the following actions to reduce the

incentives that a CLEC may have to enter a rural or non-rural market in

an attempt to exploit the asymmetry described above. First, we conclude

that a carrier that serves customers by reselling wholesale service may

not receive universal service support for those customers that it

serves through resale alone. In addition, we conclude below that a CLEC

using exclusively unbundled network elements to provide the supported

services will receive a level of universal service support not

exceeding the price of the unbundled network elements to which it

purchases access.

89. In markets served by non-rural carriers, we conclude that the

risk of the anticompetitive behavior described above is minimal

because, as of January 1, 1999, universal service support for non-rural

high cost carriers will be determined using a forward-looking

methodology that will more precisely target support. We doubt that

carriers will incur the costs necessary to meet the eligibility

requirements of section 214(e) in order to exploit this opportunity

when the support mechanisms will soon change. Further, the incentive

for a CLEC to enter an area served by a non-rural carrier to gain an

unfair advantage is diminished because the level of universal service

support per customer in these areas is small relative to the start-up

costs of attracting customers and the cost of providing service to

those customers using unbundled network elements.

90. We also expect that state commissions, in the process of making

eligibility determinations, will play an important part in minimizing

the risk of anticompetitive behavior as described above. Under section

214(e)(3), a state commission must make a finding that designation of

more than one eligible carrier is in the public interest in a service

area that is served by a rural telephone company. Accordingly, under

section 214(e)(3), a state commission may consider whether a

competitive carrier seeking designation as an eligible carrier will be

able to exploit unjustly the asymmetry between the price of unbundled

network elements and the level of universal service support. Under

section 251(f), rural telephone companies are not required to provide

nondiscriminatory access to unbundled network elements pursuant to

section 251(c)(3) until the relevant state commission determines that a

bona fide request under section 251(c) for such access ``is not unduly

economically burdensome, is technically feasible, and is consistent

with section 254 (other than sections (b)(7) and (c)(1)(D) thereof).''

Thus, state commissions may also consider whether a CLEC's request for

nondiscriminatory access to unbundled network elements is consistent

with universal service, and will be able to take into account the

arguments of ILECs to the extent that they are not addressed by the

measures discussed herein.

91. Location of Facilities for Purposes of Section 214(e)

Although we conclude above that the term ``facilities'' includes

any physical components of the telecommunications network that are used

in the transmission or routing of the supported services, we find that

the statute does not mandate that the facilities be physically located

in that service area. We find that it is reasonable to draw a

distinction between particular facilities based on the relationship of

those facilities to the provision of specific services as opposed to

their physical location within a service area both for reasons of

promoting economic efficiency as well as competitive neutrality. We

conclude that our determination not to impose restrictions based solely

on the location of facilities used to provide the supported services is

competitively neutral in that it will accommodate the various

technologies and entry strategies that carriers may employ as they seek

to compete in high cost areas.

92. Eligibility of Resellers

We adopt the Joint Board's analysis and conclusion that section

214(e)(1) precludes a carrier that offers the supported services solely

through resale from being designated eligible in light of the statutory

requirement that a carrier provide universal service, at least in part,

over its own facilities. Under any reasonable interpretation of the

term ``facilities,'' a ``pure'' reseller uses none of its own

facilities to serve a customer. Rather, a reseller purchases service

from a facilities owner and resells that service to a customer. As

explained above, resellers should not be entitled to receive universal

service support directly from federal universal service

[[Page 32875]]

mechanisms because the universal service support payment received by

the underlying provider of resold services is reflected in the price

paid by the reseller to the underlying provider.

93. We conclude that no party has demonstrated that the statutory

criteria for forbearance have been met and therefore we agree with the

Joint Board that we cannot exercise our forbearance authority to permit

``pure'' resellers to become eligible for universal service support. In

order to exercise our authority under section 10(a) of the Act to

forbear from applying a provision of the Act, we must determine that:

(1) Enforcement of the provision ``is not necessary to ensure that the

charges, practices, classifications, or regulations by, for, or in

connection with that telecommunications carrier or telecommunications

service are just and reasonable and are not unjustly or unreasonably

discriminatory;'' (2) enforcement of such provision ``is not necessary

for the protection of consumers;'' and (3) ``forbearance from applying

such provision * * * is consistent with the public interest.'' In

addition, we must consider ``whether forbearance * * * will promote

competitive market conditions.'' If pure resellers could be designated

eligible carriers and were entitled to receive support for providing

resold services, they, in essence, would receive a double recovery of

universal service support because they would recover the support

incorporated into the wholesale price of the resold services in

addition to receiving universal service support directly from federal

universal service support mechanisms. Making no finding with respect to

the first two criteria, we conclude that it is neither in the public

interest nor would it promote competitive market conditions to allow

resellers to receive a double recovery. Indeed, allowing such a double

recovery would appear to favor resellers over other carriers, which

would not promote competitive market conditions. Allowing resellers a

double recovery also would be inconsistent with the principle of

competitive neutrality because it would provide inefficient economic

signals to resellers.

94. We adopt the Joint Board's recommendation that no additional

guidelines are necessary to interpret section 254(e)'s requirement that

a carrier that receives universal service support shall only use that

support for the facilities and services for which it is intended. We

agree with the Joint Board's conclusion that the optimal approach to

minimizing misuse of universal service support is to adopt mechanisms

that will set universal support so that it reflects the costs of

providing universal service efficiently. We conclude that we will adopt

the Joint Board's recommended approach to minimizing the misuse of

support by taking steps to implement forward-looking high cost support

mechanisms and implementing the rules set forth in our accompanying

Access Charge Reform Order. We adopt the Joint Board's recommendation

that we rely upon state monitoring of the provision of supported

services to ensure that universal service support is used as intended

until competition develops. We agree with the Joint Board that, if it

becomes evident that federal monitoring is necessary to prevent the

misuse of universal service support because states are unable to

undertake such monitoring, the Commission, in cooperation with the

Joint Board, will consider the need for additional action. In addition,

we agree with the Joint Board that no additional rules are necessary to

ensure that only eligible carriers receive universal service support

because a carrier must be designated as an eligible carrier by a state

commission in order to receive funding. Finally, as discussed below,

because the services included in the Lifeline program are supported

services, we note that only eligible carriers may receive universal

service support for these services, as required by section 254(e).

95. State Adoption of Non-Rural Service Areas

We adopt the Joint Board's finding that sections 214(e)(2) and

214(e)(5) require state commissions to designate the area throughout

which a non-rural carrier must provide universal service in order to be

eligible to receive universal service support. We agree with the Joint

Board that, although this authority is explicitly delegated to the

state commissions, states should exercise this authority in a manner

that promotes the pro-competitive goals of the 1996 Act as well as the

universal service principles of section 254. We also adopt the Joint

Board's recommendation that states designate service areas that are not

unreasonably large. Specifically, we conclude that service areas should

be sufficiently small to ensure accurate targeting of high cost support

and to encourage entry by competitors. We also agree that large service

areas increase start-up costs for new entrants, which might discourage

competitors from providing service throughout an area because start-up

costs increase with the size of a service area and potential

competitors may be discouraged from entering an area with high start-up

costs. As such, an unreasonably large service area effectively could

prevent a potential competitor from offering the supported services,

and thus would not be competitively neutral, would be inconsistent with

section 254, and would not be necessary to preserve and advance

universal service.

96. We agree with the Joint Board that, if a state commission

adopts as a service area for its state the existing study area of a

large ILEC, this action would erect significant barriers to entry

insofar as study areas usually comprise most of the geographic area of

a state, geographically varied terrain, and both urban and rural areas.

We concur in the Joint Board's finding that a state's adoption of

unreasonably large service areas might even violate several provisions

of the Act. We also agree that, if a state adopts a service area that

is simply structured to fit the contours of an incumbent's facilities,

a new entrant, especially a CMRS-based provider, might find it

difficult to conform its signal or service area to the precise contours

of the incumbent's area, giving the incumbent an advantage. We

therefore encourage state commissions not to adopt, as service areas,

the study areas of large ILECs. In order to promote competition, we

further encourage state commissions to consider designating service

areas that require ILECs to serve areas that they have not

traditionally served. We recognize that a service area cannot be

tailored to the natural facilities-based service area of each entrant,

we note that ILECs, like other carriers, may use resold wholesale

service or unbundled network elements to provide service in the

portions of a service area where they have not constructed facilities.

Specifically, section 254(f) prohibits states from adopting regulations

that are ``inconsistent with the Commission's rules to preserve and

advance universal service.'' State designation of an unreasonably large

service area could also violate section 253 if it ``prohibit[s] or

ha[s] the effect of prohibiting the ability of an entity to provide any

interstate or intrastate telecommunications service,'' and is not

``competitively neutral'' and ``necessary to preserve and advance

universal service.''

97. Authority To Alter Rural Service Areas

We find that, in contrast with non-rural service areas, section

214(e)(5) requires the Commission and the states to act in concert to

alter the service areas for areas served by rural carriers. We conclude

that the plain language of section 214(e)(5) dictates that neither

[[Page 32876]]

the Commission nor the states may act alone to alter the definition of

service areas served by rural carriers. In addition, we conclude that

the language ``taking into account'' indicates that the Commission and

the states must each give full consideration to the Joint Board's

recommendation and must each explain why they are not adopting the

recommendations included in the most recent Recommended Decision or the

recommendations of any future Joint Board convened to provide

recommendations with respect to federal universal service support

mechanisms. Furthermore, we conclude that the ``pro-competitive, de-

regulatory'' objectives of the 1996 Act would be furthered if we

minimize any procedural delay caused by the need for federal-state

coordination on this issue. Therefore, we conclude that we should

determine, at this time, the procedure by which the state commissions,

when proposing to redefine a rural service area, may obtain the

agreement of the Commission.

98. Under the procedures we adopt, after a state has concluded that

a service area definition different from a rural telephone company's

study area would better serve the universal service principles found in

section 254(b), either the state or a carrier must seek the agreement

of the Commission. Upon the receipt of the proposal, the Commission

will issue a public notice on the proposal within 14 days. If the

Commission does not act upon the proposal within 90 days of the release

date of the public notice, the proposal will be deemed approved by the

Commission and may take effect according to the state procedure. If the

Commission determines further consideration is necessary, it will

notify the state commission and the relevant carriers and initiate a

proceeding to determine whether it can agree to the proposal. A

proposal subject to further consideration by the Commission may not

take effect until both the state commission and this Commission agree

to establish a different definition of a rural service area, as

required by section 214(e)(5). Similarly, if the Commission initiates a

proceeding to consider a definition of a rural service area that is

different from the ILEC's study area, we shall seek the agreement of

the relevant state commission by submitting a petition to the relevant

state commission according to that state commission's procedure. No

definition of a rural service area proposed by the Commission will take

effect until both the state commission and this Commission agree to

establish a different definition. In keeping with our intent to use

this procedure to minimize administrative delay, we intend to complete

consideration of any proposed definition of a service area promptly.

99. Adoption of Study Areas

We find that retaining the study areas of rural telephone companies

as the rural service areas is consistent with section 214(e)(5) and the

policy objectives underlying section 254. We agree that, if

competitors, as a condition of eligibility, must provide services

throughout a rural telephone company's study area, the competitors will

not be able to target only the customers that are the least expensive

to serve and thus undercut the ILEC's ability to provide service

throughout the area. In addition, we agree with the Joint Board that

this decision is consistent with our decision to use a rural ILEC's

embedded costs to determine, at least initially, that company's costs

of providing universal service because rural telephone companies

currently average such costs at the study-area level. Some wireless

carriers have expressed concern that they might not be able to provide

service throughout a rural telephone company's study area because that

study area might be noncontiguous. In such a case, we note that this

carrier could supplement its facilities-based service with service

provided via resale. In response to the concerns expressed by wireless

carriers, however, we also encourage states, as discussed more fully

below, to consider designating rural service areas that consist of only

the contiguous portions of ILEC study areas. Further, we agree that any

change to a study area made by the Commission should result in a

corresponding change to the corresponding rural service area. Thus, we

encourage a carrier seeking to alter its study area to also request a

corresponding change in its service area, preferably as a part of the

same regulatory proceeding. If the carrier is not initiating any

proceedings with this Commission, it should seek the approval of the

relevant state commission first, and then either the state commission

or the carrier should seek Commission agreement according to the

procedures described above. We agree with the Joint Board that this

differing treatment of rural carriers sufficiently protects smaller

carriers and is consistent with the Act.

100. We also conclude that universal service policy objectives may

be best served if a state defines rural service areas to consist only

of the contiguous portion of a rural study area, rather than the entire

rural study area. We conclude that requiring a carrier to serve a non-

contiguous service area as a prerequisite to eligibility might impose a

serious barrier to entry, particularly for wireless carriers. We find

that imposing additional burdens on wireless entrants would be

particularly harmful to competition in rural areas, where wireless

carriers could potentially offer service at much lower costs than

traditional wireline service. Therefore, we encourage states to

determine whether rural service areas should consist of only the

contiguous portions of an ILEC's study area, and to submit such a

determination to the Commission according to the procedures we describe

above. We note that state commissions must make a special finding that

the designation is in the public interest in order to designate more

than one eligible carrier in a rural service area, and we anticipate

that state commissions will be able to consider the issue of contiguous

service areas as they make such special findings.

101. We agree with the Joint Board's analysis and conclusion that

it would be consistent with the Act for the Commission to base the

actual level of universal service support that carriers receive on the

cost of providing service within sub-units of a state-defined service

area, such as a wire center or a census block group (CBG). We reject

Bell Atlantic's argument that the language in section 214(e)(5) gives

the states exclusive authority to establish non-rural service areas

``for the purpose of determining universal service obligations and

support mechanisms.'' As the Joint Board concluded, the quoted language

refers to the designation of the area throughout which a carrier is

obligated to offer service and advertise the availability of that

service, and defines the overall area for which the carrier may receive

support from federal universal service support mechanisms. Bell

Atlantic is therefore incorrect when it argues that the approach

recommended by the Joint Board ignores the phrase ``and support

mechanisms.'' The universal service support a carrier will receive will

be based on the Commission's determination of the cost of providing the

supported services in the service area designated by a state

commission.

102. We conclude that, consistent with our decision to use a

modification of the existing high cost mechanisms until January 1,

1999, the Commission will continue to use study areas to calculate the

level of high cost support that carriers receive. Because we are

continuing to use study areas to calculate high cost support until

January 1, 1999, if a state commission follows our admonition to

designate a service

[[Page 32877]]

area that is not unreasonably large, that service area will likely be

smaller than the federal support areas during that period. We conclude

that the decision to continue to use study areas to calculate the level

of high cost support is nonetheless consistent with the Act for two

reasons. First, as the Joint Board found, the Act does not prohibit the

Commission from calculating support over a geographic area that is

different from a state-defined service area. Second, so long as a

carrier does not receive support for customers located outside the

service area for which a carrier has been designated eligible by a

state commission, our decision is consistent with section 214(e)(5)'s

requirement that the area for which a carrier should receive universal

service support is a state-designated service area. We agree with the

Joint Board, however, that calculating support over small geographic

areas will promote efficient targeting of support. We therefore adopt

the Joint Board's recommendation and conclude that, after January 1,

1999, we will calculate the amount of support that carriers receive

over areas no larger than wire centers. We will further define support

areas as part of our continuing effort to perfect the method by which

we calculate forward-looking economic costs.

103. Unserved Areas

We agree with the Joint Board that we should not adopt rules at

this time governing how to designate carriers for unserved areas. We

conclude that the record remains inadequate for us to fashion a

cooperative federal-state program to select carriers for unserved

areas, as proposed in the NPRM. We conclude that, if, in the future, it

appears that a cooperative federal-state program is needed, we will

then revisit this issue and work with state commissions and the Joint

Board to create a program. We seek information that will allow us to

determine whether additional measures are needed. Therefore, we

strongly encourage state commissions to file with the Common Carrier

Bureau reports detailing the status of unserved areas in their states.

In order to raise subscribership to the highest possible levels, we

seek to determine how best to provide service to currently-unserved

areas in a cost-effective manner. We seek the assistance of state

commissions with respect to this issue.

104. Implementation

The administrator of the universal service support mechanisms shall

not disburse funds to a carrier providing service to customers until

the carrier has provided, to the administrator, a true and correct copy

of the decision of a state commission designating that carrier as an

eligible telecommunications carrier. A state commission seeking to

alter a rural service area has the choice of either filing itself, or

requiring an affected eligible telecommunications carrier to file, a

petition with the Commission seeking the latter's agreement with the

newly defined rural service area. We delegate authority to the Common

Carrier Bureau to propose and act upon state proposals to redefine a

rural service area.

Rural, Insular, and High Cost

105. Use of Forward-Looking Economic Cost

We agree with the Joint Board's recommendation that the proper

measure of cost for determining the level of universal service support

is the forward-looking economic cost of constructing and operating the

network facilities and functions used to provide the supported services

as defined per section 254(c)(1). We agree that, in the long run,

forward-looking economic cost best approximates the costs that would be

incurred by an efficient carrier in the market. The use of forward-

looking economic costs as the basis for determining support will send

the correct signals for entry, investment, and innovation.

106. We agree with the Joint Board that the use of forward-looking

economic cost will lead to support mechanisms that will ensure that

universal service support corresponds to the cost of providing the

supported services, and thus, will preserve and advance universal

service and encourage efficiency because support levels will be based

on the costs of an efficient carrier. Because forward-looking economic

cost is sufficient for the provision of the supported services, setting

support levels in excess of forward-looking economic cost would enable

the carriers providing the supported services to use the excess to

offset inefficient operations or for purposes other than ``the

provision, maintenance, and upgrading of facilities and services for

which the support is intended.''

107. We also agree that a forward-looking economic cost methodology

is the best means for determining the level of universal service

support. We find that a forward-looking economic cost methodology

creates the incentive for carriers to operate efficiently and does not

give carriers any incentive to inflate their costs or to refrain from

efficient cost-cutting. Moreover, a forward-looking economic cost

methodology could be designed to target support more accurately by

calculating costs over a smaller geographical area than the cost

accounting systems that the ILECs currently use.

108. Embedded Cost

Several ILECs have asserted that only a universal service mechanism

that calculates support based on a carrier's embedded cost will provide

sufficient support. As we discussed, the use of forward-looking

economic cost will provide sufficient support for an efficient provider

to provide the supported services for a particular geographic area.

Thus, we conclude that the universal service support mechanisms should

be based on forward-looking economic cost, and we reject the arguments

for basing the support mechanisms on a carrier's embedded cost.

109. To the extent that it differs from forward-looking economic

cost, embedded cost provide the wrong signals to potential entrants and

existing carriers. The use of embedded cost would discourage prudent

investment planning because carriers could receive support for

inefficient as well as efficient investments. The Joint Board explained

that when ``embedded costs are above forward-looking costs, support of

embedded costs would direct carriers to make inefficient investments

that may not be financially viable when there is competitive entry.''

The Joint Board also explained that if embedded cost is below forward-

looking economic cost, support based on embedded costs would erect an

entry barrier to new competitors, because revenue per customer and

support, together, would be less than the forward-looking economic cost

of providing the supported services. Consequently, we agree with the

conclusion that support based on embedded cost could jeopardize the

provision of universal service. We also agree that the use of embedded

cost to calculate universal service support would lead to subsidization

of inefficient carriers at the expense of efficient carriers and could

create disincentives for carriers to operate efficiently.

110. ``Legacy'' Cost

Several commenters assert that the use of forward-looking economic

cost necessitates the establishment of a separate mechanism to

reimburse ILECs for their ``legacy cost,'' which they define to include

the under-depreciated portion of the plant and equipment.

[[Page 32878]]

Several ILECs contend that unless we explicitly provide a mechanism for

them to recover their under-depreciated costs, the use of forward-

looking economic cost to determine universal service support would

constitute a taking under the Fifth Amendment. No carrier, however, has

presented any specific evidence that the use of forward-looking

economic cost to determine support amounts will deprive it of property

without just compensation. Indeed, the mechanisms we are creating today

provide support to carriers in addition to other revenues associated

with the provision of service.

111. Construction Costs

US West proposes to establish a separate support mechanism for the

cost of constructing facilities. Under US West's proposal, the carrier

that first constructed the facility to serve an end user would receive

support for its construction costs, even if the end user switched to

another carrier. The second carrier to serve the end user would receive

support only for its operational expenses. Under the US West proposal,

only the carrier that constructed first, generally an ILEC, except in

currently unserved areas, would receive support to cover the

facilities' construction costs. We observe that allowing only the ILEC

to receive support for the construction of the facilities used to

provide universal service would, however, discourage new entrants from

constructing additional facilities in high cost areas, thereby

discouraging facilities-based competition, in contravention of

Congress's explicit goals. Further investigation is needed to determine

whether there are special circumstances, such as the need to attract

carriers to unserved areas or to upgrade facilities, in which it may or

may not be reasonable to compensate one-time costs with one-time

payments. Because we believe this issue should be examined further, we

will consider this proposal in a future proceeding.

112. Determination of Forward-Looking Economic Cost for Non-Rural

Carriers

Having adopted the Joint Board recommendation that universal

service support be based upon forward-looking economic cost, we next

consider how such cost should be determined. The Joint Board found that

cost models provide an ``efficient method of determining forward-

looking economic cost, and provide other benefits, such as the ability

to determine costs at smaller geographic levels than would be practical

using the existing cost accounting system.'' The Joint Board also found

that because they are not based on any individual company's costs, cost

models provide a competitively neutral estimate of the cost of

providing the supported services. Based on those conclusions, the Joint

Board recommended that the amount of universal service support a

carrier would receive should be calculated by subtracting a benchmark

amount from the cost of service for a particular geographic area, as

determined by the forward-looking economic cost model.

113. The Joint Board discussed the three cost models that had been

presented to it during the proceeding, but did not endorse a specific

model. The Joint Board concluded that, before a specific model could be

selected, several issues would need to be resolved, including how the

various assumptions among the models regarding basic input levels were

determined, which input levels were reasonable, what were the

relationships among the inputs, why certain functionalities included in

one model were not present in the other models, and which of the unique

set of engineering design principles for each model were most

reasonable.

114. Three different forward-looking cost models were submitted to

the Commission for consideration in response to the January 9 Public

Notice: the BCPM; the Hatfield model; and the TECM. These three models

use many different engineering assumptions and input values to

determine the cost of providing universal service. For example,

Hatfield 3.1 uses loading coils in its outside plant to permit the use

of longer copper loops, thereby reducing the amount of fiber required

for outside plant. In contrast, the BCPM relies more heavily on fiber

and avoids the use of loading coils; this assumption increases the cost

of service that BCPM predicts. Another example is that Hatfield designs

the interoffice network required to provide local service in a multiple

switch environment, while the BCPM accounts for this interoffice

service by allowing the user to input a switch investment percentage.

115. There has been significant progress in the development of the

two major models--the BCPM and Hatfield 3.1--since the Joint Board made

its recommendation. For example, the ability of both models to identify

which geographic areas are high cost for the provision of universal

service has been improved. The BCPM uses seven different density

groups, rather than the six zones used in the BCM2, to determine for a

given CBG the mixture of aerial, buried, and underground plant, feeder

fill factors, distribution fill factors, and the mix of activities in

placing plant, such as aerial placement or burying, and the cost per

foot to install plant. Hatfield also increased the number of density

zones, going from six density zones in Hatfield Version 2.2.2 to nine

in Hatfield 3.1.

116. While acknowledging remaining problems with the models in

their report to the Commission, the state members of the Joint Board

recommend that the Commission reject the TECM and select in this Order

one of the remaining models to determine the needed level of universal

service support in order to focus the efforts of industry participants

and regulators. Specifically, three of the state members recommend that

the Commission select the BCPM as the platform from which to seek

further refinement to the modeling process. The state members of the

Joint Board recommend that the non-rural carriers move to the use of a

model over a three-year period. According to the state members, such a

period will allow for continued evaluation of the model's accuracy and

permit any needed improvements to be made before non-rural carriers

receive support based solely on the model. The state members of the

Joint Board also recommend that the Commission and Joint Board members

and staff work with the administrator to monitor the use of the model.

117. We agree with the state members that the TECM should be

excluded from further consideration for use as the cost model because

the proponents have never provided nationwide estimates of universal

service support using that model. We also agree with the state members

that there are many issues that still need to be resolved before a cost

model can be used to determine support levels. In particular, the

majority state members note that the model input values should not be

accepted. Instead, they suggest specific input values for the cost of

equity, the debt-equity ratio, depreciation lives, the cost of

switches, the cost of digital loop carrier equipment and the percentage

of structures that should be shared. The majority state members are

also concerned with the models' logic for estimating building costs.

They see no justification for tying building costs to the number of

switched lines as Hatfield 3.1 does and they suggest that using BCPM's

technique of estimating building costs as a percent of switch costs is

not logical. In light of the wide divergence and frequent changes in

data provided to us, we agree with the recommendation of the dissenting

state members of the Joint Board that we cannot at this time reasonably

apply either of the models currently before us

[[Page 32879]]

to calculate forward-looking economic costs of providing universal

service.

118. The proposed cost models also use widely varying input values

to determine the cost of universal service, and in many cases the

proponents have not filed the underlying justification for the use of

those values. For example, BCPM no longer uses ARMIS expenses as the

basis for its expense estimates. Instead, BCPM bases expenses on a

survey of eight ILECs. Neither the survey instrument nor the individual

carrier responses to the survey have been filed with the Commission.

The proponents have not provided supporting information underlying

their determinations of expenses. This lack of support fails to meet

the Joint Board's criterion for evaluation that the underlying data and

computations should be available to all interested parties. We agree

with the state members of the Joint Board that this lack of support

makes it impossible to determine whether the estimated expenses are the

minimum necessary to provide service. The Hatfield 3.1 model also is

based on information that has not been fully made available to the

Commission and all interested parties. For example, the Hatfield 3.1

model adjusts the number of supported lines assigned to a CBG on the

basis of an undisclosed algorithm. This algorithm has not been filed

with the Commission. The application of this algorithm, however,

increased the number of households in one state by 34 percent.

Moreover, in regard to the fiber/copper cross-over point, the

proponents of the Hatfield 3.1 model have submitted no studies to show

that the decision concerning the cross-over point between the use of

copper and fiber that they chose represents the least-cost

configuration, as required by the Joint Board.

119. Despite significant and sustained efforts by the commenters

and the Commission, the versions of the models that we have reviewed to

date have not provided dependable cost information to calculate the

cost of providing service across the country. The majority state

members emphasize that their recommendation to use the BCPM is not an

endorsement of all aspects of the model, but rather that they regard

the model as the best platform at this time from which the Commission,

state commissions, and interested parties can make collective

revisions. Indeed, the report finds that neither the Hatfield 3.1 model

nor the BCPM meets the criteria set out by the Joint Board pertaining

to openness, verifiability, and plausibility. The report also discusses

several specific issues that the majority state members of the Joint

Board contend must be addressed before the BCPM can be considered for

use in determining support levels, including the dispersion of

population within a CBG, the plant-specific operating expenses used by

the model, and interoffice local transport investment. We agree with

the state members that there are significant unresolved problems with

each of these cost models, such as the input values for switching

costs, digital loop carrier equipment, depreciation rates, cost of

capital, and structure sharing. We also agree with them that line count

estimates should be more accurate and reflect actual ILEC counts.

120. Based on these problems with the models, we conclude that we

cannot use any of the models at this time as a means to calculate the

forward-looking economic cost of the network on which to base support

for universal service in high cost areas. Consequently, we believe that

it would be better to continue to review both the BCPM and Hatfield

models. Further review will allow the Commission and interested parties

to compare and contrast more fully the structure and the input values

used in these models. We find that continuing to examine the various

models will not delay our implementation of a forward-looking economic

cost methodology for determining support for rural, insular, and high

cost areas. As discussed above, we will issue a FNPRM on a forward-

looking cost methodology for non-rural carriers by the end of June

1997. We anticipate that by the end of the year we will choose a

specific model that we will use as the platform for developing that

methodology. We anticipate that we will seek further comment on that

selection and the refinements necessary to adopt a cost methodology by

August 1998 that will be used for non-rural carriers starting on

January 1, 1999. Consequently, as we explain below, we will continue

using mechanisms currently in place to determine universal service

support until January 1, 1999, while we resolve the issues related to

the forward-looking economic cost models.

121. We also agree with the dissenting state members of the Joint

Board that our actions are consistent with the requirements of section

254 because we have identified the services to be supported by federal

universal service support mechanisms, and we are setting forth a

specific timetable for implementation of our forward-looking cost

methodology. Moreover, our actions here are consistent with section

254's requirement that support should be explicit. Making ``implicit''

universal service subsidies ``explicit'' ``to the extent possible''

means that we have authority at our discretion to craft a phased-in

plan that relies in part on prescription and in part on competition to

eliminate subsidies in the prices for various products sold in the

market for telecommunications services. Consequently, we reject the

arguments that section 254 compels us immediately to remove all costs

associated with the provision of universal service from interstate

access charges. Under the timetable we have set forth here, we will

over the next year identify implicit interstate universal support and

make that support explicit, as further provided by section 254(e).

122. As the basis for calculating federal universal service support

in their states, we will use forward-looking economic cost studies

conducted by state commissions that choose to submit such cost studies

to determine universal service support. As discussed further below, we

today adopt criteria appropriate for determining federal universal

service support to guide the states as they conduct those studies. We

ask states to elect, by August 15, 1997, whether they will conduct

their own forward-looking economic cost studies. States that elect to

conduct such studies should file them with the Commission on or before

February 6, 1998. We will then seek comment on those studies and

determine whether they meet the criteria we set forth. The Commission

will review the studies and comments received, and only if we find that

the state has conducted a study that meets our criteria will we approve

those studies for use in calculating federal support for non-rural

eligible telecommunications carriers rural, insular, and high cost

areas to be distributed beginning January 1, 1999. We intend to work

closely with the states as they conduct these forward-looking economic

cost studies. We will also work together with the states and the Joint

Board to develop a uniform cost study review plan that would

standardize the format for presentation of cost studies in order to

facilitate review by interested parties and by the Commission.

123. If a state elects not to conduct its own forward-looking

economic cost study or that the state-conducted study fails to meet the

criteria we adopt today, the Commission will determine the forward-

looking economic cost of providing universal service in that state

according to the Commission's forward-looking cost methodology. We will

seek the Joint Board's assistance in developing our method of

calculating forward-looking economic cost, which

[[Page 32880]]

we intend to develop by building on the work already done by the Joint

Board, its staff, and industry proponents of various cost models. We

will issue a FNPRM by the end of June 1997 seeking additional

information on which to base the development of a reliable means of

determining the forward-looking economic cost of providing universal

service. We shall also separately seek information on issues such as

the actual cost of purchasing switches, the current cost of digital

loop carriers, and the location of customers in the lowest density

areas.

124. Criteria for Forward-Looking Economic Cost Determinations

Whether forward-looking economic cost is determined according to a

state-conducted cost study or a Commission-determined methodology, we

must prescribe certain criteria to ensure consistency in calculations

of federal universal service support. Consistent with the eight

criteria set out in the Joint Board recommendation, we agree that all

methodologies used to calculate the forward-looking economic cost of

providing universal service in rural, insular, and high cost areas must

meet the following criteria:

(1) The technology assumed in the cost study or model must be the

least-cost, most-efficient, and reasonable technology for providing the

supported services that is currently being deployed A model, however,

must include the ILECs' wire centers as the center of the loop network

and the outside plant should terminate at ILECs' current wire centers.

The loop design incorporated into a forward-looking economic cost study

or model should not impede the provision of advanced services. For

example, loading coils should not be used because they impede the

provision of advanced services. We note that the use of loading coils

is inconsistent with the Rural Utilities Services guidelines for

network deployment by its borrowers. Wire center line counts should

equal actual ILEC wire center line counts, and the study's or model's

average loop length should reflect the incumbent carrier's actual

average loop length.

(2) Any network function or element, such as loop, switching,

transport, or signaling, necessary to produce supported services must

have an associated cost.

(3) Only long-run forward-looking economic cost may be included.

The long-run period used must be a period long enough that all costs

may be treated as variable and avoidable. The costs must not be the

embedded cost of the facilities, functions, or elements. The study or

model, however, must be based upon an examination of the current cost

of purchasing facilities and equipment, such as switches and digital

loop carriers (rather than list prices).

(4) The rate of return must be either the authorized federal rate

of return on interstate services, currently 11.25 percent, or the

state's prescribed rate of return for intrastate services. We conclude

that the current federal rate of return is a reasonable rate of return

by which to determine forward looking costs. We realize that, with the

passage of the 1996 Act, the level of local service competition may

increase, and that this competition might increase the ILECs' cost of

capital. There are other factors, however, that may mitigate or offset

any potential increase in the cost of capital associated with

additional competition. For example, until facilities-based competition

occurs, the impact of competition on the ILEC's risks associated with

the supported services will be minimal because the ILEC's facilities

will still be used by competitors using either resale or purchasing

access to the ILEC's unbundled network elements. In addition, the cost

of debt has decreased since we last set the authorized rate of return.

The reduction in the cost of borrowing caused the Common Carrier Bureau

to institute a preliminary inquiry as to whether the currently

authorized federal rate of return is too high, given the current

marketplace cost of equity and debt. We will re-evaluate the cost of

capital as needed to ensure that it accurately reflects the market

situation for carriers.

(5) Economic lives and future net salvage percentages used in

calculating depreciation expense must be within the FCC-authorized

range. We agree with those commenters that argue that currently

authorized lives should be used because the assets used to provide

universal service in rural, insular, and high cost areas are unlikely

to face serious competitive threat in the near term. To the extent that

competition in the local exchange market changes the economic lives of

the plant required to provide universal service, we will re-evaluate

our authorized depreciation schedules. We intend shortly to issue a

notice of proposed rule making to further examine the Commission's

depreciation rules.

(6) The cost study or model must estimate the cost of providing

service for all businesses and households within a geographic region.

This includes the provision of multi-line business services, special

access, private lines, and multiple residential lines. Such inclusion

of multi-line business services and multiple residential lines will

permit the cost study or model to reflect the economies of scale

associated with the provision of these services.

(7) A reasonable allocation of joint and common costs must be

assigned to the cost of supported services. This allocation will ensure

that the forward-looking economic cost does not include an unreasonable

share of the joint and common costs for non-supported services.

(8) The cost study or model and all underlying data, formulae,

computations, and software associated with the model must be available

to all interested parties for review and comment. All underlying data

should be verifiable, engineering assumptions reasonable, and outputs

plausible.

(9) The cost study or model must include the capability to examine

and modify the critical assumptions and engineering principles. These

assumptions and principles include, but are not limited to, the cost of

capital, depreciation rates, fill factors, input costs, overhead

adjustments, retail costs, structure sharing percentages, fiber-copper

cross-over points, and terrain factors.

(10) The cost study or model must deaverage support calculations to

the wire center serving area level at least, and, if feasible, to even

smaller areas such as a Census Block Group, Census Block, or grid cell.

We agree with the Joint Board's recommendation that support areas

should be smaller than the carrier's service area in order to target

efficiently universal service support. Although we agree with the

majority of the commenters that smaller support areas better target

support, we are concerned that it becomes progressively more difficult

to determine accurately where customers are located as the support

areas grow smaller. As SBC notes, carriers currently keep records of

the number of lines served at each wire center, but do not know which

lines are associated with a particular CBG, CB, or grid cell. Carriers,

however, would be required to provide verification of customer location

when they request support funds from the administrator.

125. In order for the Commission to accept a state cost study

submitted to us for the purposes of calculating federal universal

service support, that study must be the same cost study that is used by

the state to determine intrastate universal service support levels

pursuant to section 254(f). A state need not perform a new cost study,

but may submit a cost study that has already been performed for

evaluation by the Commission. We also encourage a state, to the extent

possible and consistent

[[Page 32881]]

with the above criteria, to use its ongoing proceedings to develop

permanent unbundled network element prices as a basis for its universal

service cost study. This would reduce duplication and diminish

arbitrage opportunities that might arise from inconsistencies between

the methodologies for setting unbundled network element prices and for

determining universal service support levels. In particular, we wish to

avoid situations in which, because of different methodologies used for

pricing unbundled network elements and determining universal service

support, a carrier could receive support for the provision of universal

service that differs from the rate it pays to acquire access to the

unbundled network elements needed to provide universal service.

Consequently, to prevent differences between the pricing of unbundled

network elements and the determination of universal service support, we

urge states to coordinate the development of cost studies for the

pricing of unbundled network elements and the determination of

universal service support.

126. Development and Selection of a Suitable Forward-Looking Support

Mechanism for Rural Carriers

Consistent with our plan for non-rural carriers, we shall commence

a proceeding by October 1998 to establish forward-looking economic cost

mechanisms for rural carriers. Although a precise means of determining

forward-looking economic cost for non-rural carriers will be prescribed

by August 1998 and will take effect on January 1, 1999, rural carriers

will begin receiving support pursuant to support mechanisms

incorporating forward-looking economic cost principles only when we

have sufficient validation that forward-looking support mechanisms for

rural carriers produce results that are sufficient and predictable.

Consistent with the Joint Board's recommendation that mechanisms for

determining support for rural carriers incorporate forward-looking cost

principles, rather than embedded cost, we will work closely with the

Joint Board, state commissions, and interested parties to develop

support mechanisms that satisfy these principles.

127. To ensure that the concerns of rural carriers are thoroughly

addressed, Pacific Telecom suggests that a task force be established

specifically to study the development and impact of support mechanisms

incorporating forward-looking economic cost principles for rural

carriers. State Joint Board members and USTA have also recommended the

formation of a rural task force to study and develop a forward-looking

economic cost methodology for rural carriers. The state Joint Board

members contend that such a task force ``should provide valuable

assistance in identifying the issues unique to rural carriers and

analyzing the appropriateness of proxy cost models for rural

carriers.'' We support this suggestion. Such a task force should report

its findings to the Joint Board. We encourage the Joint Board to

establish the task force soon, so that its findings can be included in

any Joint Board report to the Commission prior to our issuance of the

FNPRM on a forward-looking economic cost methodology for rural carriers

by October 1998. Although the Joint Board has the responsibility to

appoint the members of the task force, we suggest that it include a

broad representation of industry, including rural carriers, as well as

a representative from remote and insular areas. We also suggest that

the meetings and records of the task force be open to the public.

128. Specifically, through the FNPRM, we will seek to determine

what mechanisms incorporating forward-looking economic cost principles

would be appropriate for rural carriers. We require that mechanisms

developed and selected for rural carriers reflect the higher operating

and equipment costs attributable to lower subscriber density, small

exchanges, and lack of economies of scale that characterize rural

areas, particularly in insular and very remote areas, such as Alaska.

We also require that cost inputs be selected so that the mechanisms

account for the special characteristics of rural areas in its cost

calculation outputs. We recognize the unique situation faced by

carriers serving Alaska and insular areas may make selection of cost

inputs for those carriers especially challenging. Thus, if the selected

mechanisms include a cost model, the model should use flexible inputs

to accommodate the variation in cost characteristics among rural study

areas due to each study area's unique population distribution.

Moreover, the Commission, working with the Joint Board, state

commissions, and other interested parties, will determine whether

calculating the support using geographic units other than CBGs would

more accurately reflect a rural carrier's costs. The Commission will

likewise consider whether such mechanisms should include a ``maximum

shift or change'' feature to ensure that the amount of support each

carrier receives will not fluctuate more than an established amount

from one year to the next, similar to the provision in

Sec. 36.154(f)(1) of the Commission's rules to mitigate separations and

high cost fund changes.

129. The Commission with the Joint Board's assistance will also

consider whether a competitive bidding process could be used to set

support levels for rural carriers. The record does not support adoption

of competitive bidding as a support mechanism at this time. The FNPRM

will examine the development of such a competitive bidding process that

will meet the requirements of both sections 214(e) and 254.

130. Applicable Benchmarks

The Joint Board recommended that the Commission adopt a benchmark

based on nationwide average revenue per line to calculate the support

eligible telecommunications carriers would receive for serving rural,

insular, and high cost areas. The Joint Board recommended that the

support that an eligible telecommunications carrier receives for

serving a supported line in a particular geographic area should be the

cost of providing service calculated using forward-looking economic

cost minus a benchmark amount. The benchmark is the amount subtracted

from the cost of providing service that is the basis for determining

the support provided from the federal universal service support

mechanisms.

131. The Joint Board recommended setting the benchmark at the

nationwide average revenue per line, because ``that average reflects a

reasonable expectation of the revenues that a telecommunications

carrier would be reasonably expected to use to offset its costs, as

estimated in the proxy model.'' Because it recommended that eligible

residential and single-line business be supported, with single-line

businesses receiving less support, the Joint Board recommended defining

two benchmarks, one for residential service and a second for single-

line business service. Because they found that a revenue-based

benchmark will require periodic review and more administrative

oversight than a cost-based benchmark, however, the majority state

members of the Joint Board recommended, in their second report to the

Commission the use of a benchmark based on the nationwide average cost

of service as determined by the cost model.

132. We agree with the Joint Board's recommendation, and intend to

establish a nationwide benchmark based on average revenues per line for

local, discretionary, interstatecaretA and intrastate access

services, and other telecommunications revenues that will be used with

either a cost model or a

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cost study to determine the level of support carriers will receive for

lines in a particular geographic area. A non-rural eligible

telecommunications carrier could draw from the federal universal

service support mechanism for providing supported services to a

subscriber only if the cost of serving the subscriber, as calculated by

the forward-looking cost methodology, exceeds the benchmark. We note

that a majority of the commenters support the use of a benchmark based

on revenues per line. We also agree with the Joint Board that there

should be separate benchmarks for residential service and single-line

business service.

133. Consistent with the Joint Board's recommendation, we shall

include revenues from discretionary services in the benchmark. We agree

with Time Warner that a determination of the amount of support a

carrier needs to serve a high cost area should reflect consideration of

the revenues that the carrier receives from providing other local

services, such as discretionary services. As the Joint Board noted,

those revenues offset the costs of providing local service. Setting the

benchmark at a level below the average revenue per line, including

discretionary services, would allow a carrier to recover the costs of

discretionary services from customers purchasing these discretionary

services and from the universal service mechanisms. This unnecessary

payment would increase the size of the universal service support

mechanisms, and consequently require larger contributions from all

telecommunications carriers. We agree that competition could reduce

revenues from a particular service, we anticipate that the development

of competition in the local market will also lead to the development of

new services that will produce additional revenues per line and to

reductions in the costs of providing the services generating those

revenues. We will also review the benchmark at the same time we review

the means for calculating forward-looking economic cost. Thus, at these

periodic reviews, we can adjust both the forward-looking cost

methodology and the benchmark to reflect the positive effects of

competition.

134. We include revenues from discretionary services in the

benchmark for additional reasons. The costs of those services are

included in the cost of service estimates calculated by the forward-

looking economic cost models that we will be evaluating further in the

FNPRM. Revenues from services in addition to the supported services

should, and do, contribute to the joint and common costs they share

with the supported services. Moreover, the former services also use the

same facilities as the supported services, and it is often impractical,

if not impossible, to allocate the costs of facilities between the

supported services and other services. For example, the same switch is

used to provide both supported services and discretionary services.

Consequently, in modeling the network, the BCPM and the Hatfield 3.1

models use digital switches capable of providing both supported

services and discretionary services. Therefore, it would be difficult

for the models to extract the costs of the switch allocated to the

provision of discretionary services.

135. We also include both interstate and intrastate access revenues

in the benchmark, as recommended by the Joint Board. Access to IXCs and

to other local wire centers is provided by a part of the switch known

as the port. The methodologies filed in this proceeding include the

costs of the port as costs of providing universal service. The BCPM,

however, subtracts a portion of port costs allocated to toll calls.

Hatfield 3.1, in contrast, includes all port costs in the costs of

providing supported services. Both methodologies exclude per-minute

costs of switching that are allocated to toll calls. Therefore, the

methodologies filed in this proceeding do not include all access costs

in the costs of providing universal service. Access charges to IXCs,

however, have historically been set above costs as one implicit

mechanism supporting local service. We therefore conclude that, unless

and until both interstate and intrastate access charges have been

reduced to recover only per-minute switch and transport costs, access

revenues should be included in the benchmark. Accordingly, we reject

the proposals by some commenters to exclude revenues from discretionary

and access services in calculating the benchmark.

136. We also agree with the Joint Board that setting the benchmark

at nationwide average revenue per line is reasonable because that

average reflects a reasonable expectation of the revenues that a

telecommunications carrier could use to cover its costs, as estimated

by the forward-looking cost methodology we are adopting. A nationwide

benchmark will also be easy to administer and will make the support

levels more uniform and predictable than a benchmark set at a regional,

state, or sub-state level would make them. A nationwide benchmark, as

the Joint Board noted, will also encourage carriers to market and

introduce new services in high costs areas as well as urban areas,

because the benchmark will vary depending upon the average revenues

from carriers serving all areas. For that reason, contrary to the

contentions of some commenters, we conclude that a nationwide benchmark

will not harm carriers serving rural areas but rather encourage them to

introduce new services. We note that support levels for rural carriers

will be unaffected by the benchmark unless and until they begin to

transition to a forward-looking cost methodology, which would occur no

earlier than 2001. Further, we note that the states have discretion to

provide universal service support beyond that included in the federal

universal service support mechanism.

137. We agree the Joint Board's recommendation to adopt two

separate benchmarks, one for residential service and a second for

single-line business services. Because business service rates are

higher than residential service rates, we consider those additional

revenue derived from business services when developing the benchmark.

We note that the only parties who have opposed adopting separate

benchmarks contend that, because ILECs do not keep separate records for

residential and business revenues, separate benchmarks would be

administratively difficult. We do not believe, however, that using two

revenue benchmarks will be administratively difficult. For purposes of

universal service support, the eligible telecommunications carrier need

not determine the exact revenues per service, but only the number of

eligible residential and business connections it serves in a particular

support area. To calculate support levels, the administrator will take

the cost of service, as derived by the forward-looking cost

methodology, and subtract the applicable benchmark and multiply that

number by the number of eligible residential or business lines served

by the carrier in that support area.

138. The majority state members depart from the Joint Board

recommendation and now suggest the use of a cost-based benchmark. They

contend that it may be difficult to match the revenue used in a

benchmark with the cost of service included in the model. They also

argue that a revenue benchmark would require periodic review and more

regulatory oversight than a cost-based benchmark. Although we recognize

there may be some difficulties in using a revenue-based benchmark, we

agree with the Joint Board that a cost-based benchmark should not be

relied upon at this time. As the Joint Board noted, it is best to

compare the revenue to the cost to determine the needed support rather

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than to examine only the cost side of the equation. A cost-based

benchmark, as Time Warner states, does not reflect the revenue already

available to a carrier for covering its costs for the supported

services. Even in some areas with above average costs, revenue can

offset high cost without resort to subsidies, resulting in maintenance

of affordable rates. We also agree with the majority state members of

the Joint Board that a cost-based benchmark will not completely satisfy

the objective of ensuring that only a reasonable allocation of joint

and common costs are assigned to the cost of the supported services.

Although the majority state members of the Joint Board now express

concern about the difficulty in matching the service revenue and the

cost of services included in a model, we remain confident that we can

do that. We also do not find that it will be administratively difficult

to establish and maintain a revenue-based benchmark, and intend to

review the benchmark when we review the forward-looking economic cost

methodology. Consequently, we will not adopt a cost-based benchmark at

this time, but will, as the majority state members of the Joint Board

suggest, address in the FNPRM the specific benchmark that should be

used.

139. As stated above, we have determined that the revenue benchmark

should be calculated using local service, access, and other

telecommunications revenues received by ILECs, including discretionary

revenue. Based on the data we have received in response to the data

request from the Federal-State Joint Board in CC Docket 80-286 (80-286

Joint Board) on universal service issues, it appears that the benchmark

for residential services should be a

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