Federal-State Joint Board on Universal Service

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 36 and 54

[CC Docket No. 96-45; FCC 98J-7]

Federal-State Joint Board on Universal Service

AGENCY: Federal Communications Commission

ACTION: Proposed rule; recommended decision.

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SUMMARY: On November 24, 1998, the Federal-State Joint Board adopted a

Second Recommended Decision regarding universal service. In this

decision, the Joint Board made numerous recommendations on universal

service issues. The Joint Board recommends a federal high cost support

mechanism for non-rural carriers that enables rates to remain

affordable; that the Commission replace the 25/75 jurisdictional

division of responsibility for high cost support; that the Commission

compute federal high cost support for non-rural carriers through a two-

step process; and that the mechanisms outlined be reviewed no later

than three years from July 1, 1999. The Commission seeks comment on the

Second Recommended Decision.

DATES: Comments should be filed on or before December 23, 1998 and

Reply

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Comments on or before January 13, 1999.

ADDRESSES: All filings should reference: Comments on Joint Board Second

Recommended Decision, CC Docket No. 96-45, and should include DA 98-

2410. Interested parties must file an original and six copies of their

comments with the Office of Secretary, Federal Communications

Commission, 445 Twelfth Street, S.W., Room TW-A325, Washington, D.C.

20554. Parties should send one copy of their comments to the

Commission's copy contractor, International Transcription Service, 1231

20th Street, N.W., Washington, D.C. 20036. Copies of documents filed

with the Commission, including the Second Recommended Decision, may be

obtained from the International Transcription Service, 1231 20th

Street, N.W., Washington, D.C. 20036, (202) 857-3800. Documents are

also available for review and copying at the FCC Reference Center, Room

239, 1919 M Street, N.W., Washington, D.C. 20554, from 9:00 a.m. to

4:30 p.m.

Parties may also file comments electronically via the Internet at:

http://www.fcc.gov/e-file/ecfs.html>. Only one copy of an electronic

submission must be submitted. In completing the transmittal screen,

commenters should include their full name, Postal Service mailing

address, and the lead docket number for this proceeding, which is CC

Docket No. 96-45. Parties not submitting their comments via the

Internet are also asked to submit their comments on diskette. Parties

submitting diskettes should submit them to Sheryl Todd, Common Carrier

Bureau, Federal Communications Commission, 2100 M. St, N.W., 8th Floor,

Washington, D.C. 20554. Such a submission should be on a 3.5 inch

diskette formatted in an IBM compatible format using WordPerfect 5.1

for Windows or compatible software. The diskette should be accompanied

by a cover letter and should be submitted in ``read only'' mode. The

diskette should be clearly labelled with the party's name, proceeding

(including the lead docket number in this case, Docket No. 96-45, type

of pleading--comment or reply comment), date of submission, and the

name of the electronic file on the diskette. Each diskette should

contain only one party's pleadings, preferably in a single electronic

file. In addition, parties must send copies to the Commission's copy

contractor, International Transcription Service, Inc., 1231 20th

Street, N.W., Washington, D.C. 20036.

FOR FURTHER INFORMATION CONTACT: Chuck Keller, Attorney, Common Carrier

Bureau, Accounting Policy Division, (202) 418-7400, TTY (202) 418-0484,

or via e-mail: [email protected]>.

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

document released on November 24, 1998. The full text of this document

is available for public inspection during regular business hours in the

FCC Reference Center, Room 239, 1919 M Street, N.W., Washington, D.C.

20554.

Summary of Second Recommended Decision

I. Introduction

1. The Telecommunications Act of 1996 (``1996 Act'') explicitly

recognized the need for federal and state support to ``preserve and

advance universal service.'' In the 1996 Act, legislators recognized

that existing support mechanisms could be threatened as effective

competition materializes. Congress also made clear in the 1996 Act that

federal and state regulators together must ensure that universal

service is preserved and advanced as we move from a monopoly to a

competitive market. Although never quantified or targeted in

traditional rate designs, these mechanisms have included support

flowing from urban to rural consumers implicit in rate averaging, and

from interstate and intrastate access charges.

2. The Act requires that rates be ``just, reasonable and

affordable,'' and that rates in rural, insular and high cost areas be

``reasonably comparable'' to rates charged for similar services in

urban areas. The Act also requires ``specific, predictable and

sufficient Federal and State mechanisms to preserve and advance

universal service.'' Goals of reforming universal service include: (1)

revising support mechanisms that do not currently meet new statutory

mandates, such as the need for nationwide reasonably comparable rates;

(2) ensuring that support mechanisms are not eroded as local

competition develops; and (3) establishing universal service support

mechanisms that are part of a new regulatory structure consistent with

Congress's pro-competitive goals.

3. The Joint Board and the Federal Communications Commission

(``Commission'') determined previously that rates generally are

affordable. While keeping in mind the need to ensure continued

affordability, we focus to a greater degree in this Second Recommended

Decision on the issue of reasonable comparability, and how to ensure

the sufficiency of federal support to assure both of those important

public interest goals. As effective competition develops for high-

volume, urban customers, one consequence may be erosion of the implicit

support system that protects consumers in rural, insular and high cost

areas from unaffordable rates. The Joint Board recommends a federal

high cost support mechanism for non-rural carriers that enables rates

to remain affordable and reasonably comparable, even as competition

develops, but that is no larger than necessary to satisfy that

statutory mandate. The Joint Board believes that sizing the fund

correctly is essential to ensuring that all consumers across the

country benefit from universal service. The transition to a competitive

environment requires us to be mindful of two competing goals: (1)

supporting high cost areas so that consumers there have affordable and

reasonably comparable rates; and (2) maintaining a support system that

does not, by its sheer size, over-burden consumers across the nation.

4. As an initial matter, we note and support the Commission's

``hold harmless'' commitment not to reduce the current levels of

explicit high cost support to states. In this Second Recommended

Decision, consistent with that commitment, we outline an initial

methodology for directing sufficient federal support to non-rural

carriers to offset high intrastate costs in states with insufficient

internal resources to ensure affordable and reasonably comparable

rates. We recognize that further changes may be necessary as

competition develops to change certain amounts of current implicit

support into explicit support. We recommend that the Commission replace

the 25/75 jurisdictional division of responsibility for high cost

universal service support, adopted in the Universal Service Order, 62

FR 32862 (June 17, 1997), with the methodology for non-rural carriers

outlined herein. Under this approach, the federal mechanism should

instead provide the necessary support set by the methodology that we

outline today.

5. We recommend that the Commission compute federal high cost

support for non-rural carriers through a two-step process. First, the

Commission should develop a total support amount necessary to reflect

those areas considered to have high costs relative to other areas.

Second, for areas that have high costs relative to other areas, the

Commission should consider, in a consistent manner across all states,

any particular state's ability to support high cost areas within the

state. Federal support should be provided to the extent that the state

would be unable to support its high cost areas through its own

reasonable efforts. We also make

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recommendations about the information that consumers should receive

from carriers in connection with the recovery of universal service

contributions. We recommend as well that the mechanisms outlined here

be reviewed no later than three years from July 1, 1999. While we

recommend a shared federal-state responsibility, we also conclude that,

consistent with the statute, no state can or should be required by the

Commission to establish an intrastate universal service fund.

6. The Act acknowledges and maintains the complementary roles that

state and federal authorities have played in preserving and advancing

universal service. Historically, both state and federal regulators have

exercised their jurisdictional authority to ensure the availability of

universal service. The ongoing cooperation throughout this proceeding

between the federal and state staff and members of the Joint Board is a

further example of the vitality of the federal-state partnership for

ensuring universal service, and this referral proceeding represents the

latest chapter in that cooperation. We look forward to continued

collaboration with the Commission as universal service reform proceeds.

In addition, we note that this proceeding involves the balancing of

many difficult, competing interests. In resolving these issues in light

of our guidance, therefore, the Commission has the difficult task of

selecting a national solution that balances these competing interests.

7. This Second Recommended Decision is designed to take into

account this dual federal and state responsibility in a manner that

effectuates the principles and requirements of Sec. 254. The federal

mechanism should provide support in a manner that is designed to ensure

that state universal service needs are fully met, consistent with the

states' role with respect to universal service. We believe that this

Second Recommended Decision establishes a framework for accomplishing

that difficult mission.

II. The Purpose of Support

8. In mandating the reform of universal service support mechanisms,

Congress clearly envisioned that the reform process would be conducted

as a joint federal and state effort. The creation of this Joint Board

is perhaps the plainest expression of this vision. Other provisions of

Sec. 254 reflect this shared responsibility. A primary aspect of the

Joint Board's task in reforming universal service mechanisms is to

ensure that consumers in high cost areas have access to

telecommunications and information services that are affordable and

reasonably comparable to those in urban areas, at rates reasonably

comparable to those in urban areas. We believe that the demarcation of

the respective responsibilities of state and federal regulators can be

found in the mandate to ensure reasonably comparable rates. Regulators

in the two jurisdictions have different tools available to them to meet

universal service challenges. Issues of affordability and reasonable

comparability can be dealt with through a combination of approaches,

including: (1) through the rate design issues of a single local

carrier, (2) through mechanisms that affect the rates of all carriers

within a state, and (3) through mechanisms that affect rates across

state lines. State commissions and the Commission each can use the

first two tools with respect to rates in their respective

jurisdictions. Only the Commission is able to employ the last. Our

recommendations reflect both the availability of, and the relationship

among, these approaches.

9. While the Act does not define reasonable comparability, we

interpret that term to refer to a fair range of urban and rural rates

both within a state's borders, and among states nationwide. We note

that existing federal high cost loop support provides additional

federal support to areas that have particularly high costs, and our

recommendations herein continue that policy. It is proper to begin an

inquiry by focusing on universal service issues closest to the

consumer. Present rates are sufficient to cover the costs of serving

most consumers across the nation. The costs of serving other consumers,

however, are in excess of rates. To address these concerns, support

mechanisms have been set up to offset these higher costs.

The Joint Board acknowledges that, absent reform to these

mechanisms, the forces of competition could erode certain of these

support mechanisms and potentially have a negative impact on the

provision of universal service.

10. The first step in dealing with this potential impact concerns

the rates currently being charged to consumers, and the ability of the

state to respond to competitive entry through its own ratemaking

methods. This responsibility falls within the state's jurisdiction. To

the extent the Commission determines that the totality of reasonable

state efforts would not be sufficient to address universal service

funding without violating the principles of reasonable comparability

and affordability, the federal universal support mechanism should

complete the effort. With this framework in mind, then, the Joint Board

will set forth the method it recommends that the Commission use to

size, calculate, and distribute federal support among the nation's non-

rural carriers.

11. In formulating this Second Recommended Decision, our goal has

been to ensure that rates in rural and high cost areas served by non-

rural carriers are affordable and reasonably comparable through

specific, predictable, and sufficient support mechanisms that are, to

the extent possible, explicit. To do this, commenters proposed three

possible ways in which universal service support could be used: (1) To

provide support for high cost areas to enable the comparability of

rates; (2) to make existing interstate support explicit; and (3) to

make existing intrastate support explicit. In this section, we will

address each of these three possible uses of support.

A. Enabling ``Reasonably Comparable'' Rates

12. The Act requires that consumers have access to rates and

services ``in rural, insular and high cost areas'' that are

``reasonably comparable'' to rates and services in urban areas. While

the Act does not define reasonable comparability, we interpret that

term to refer to a fair range of urban/rural rates both within a

state's borders, and among states nationwide. We note that existing

federal high cost loop support provides additional federal support to

areas that have particularly high costs, and we propose to continue

that policy as we move to a forward-looking cost methodology for

determining high cost support.

13. We recommend that federal support be available to non-rural

carriers serving consumers in areas with costs significantly above the

national average and whose average costs throughout its study area

significantly exceed the national average. This support should be

available where, considered in a consistent manner across all states, a

state would find it particularly difficult to achieve reasonably

comparable rates, absent such federal support. To the extent that

additional federal high cost support to non-rural carriers, beyond the

amount currently provided, is necessary to help meet the statutory goal

of reasonably comparable rates, that additional federal support should

be used to help ensure that intrastate rates are able to satisfy this

statutory goal. The state commission has the authority to indicate

which intrastate rates shall be affected to help ensure that the

carrier does not double recover. Because rate setting methods and goals

may vary

[[Page 67840]]

across jurisdictions, we recommend, for purposes of determining federal

high cost support, that the Commission use the cost of providing all

supported services, rather than local rates. These costs are used in

the methodology we describe below to calculate the level of federal

support that will be available to help achieve reasonable comparability

in rates across all states.

B. Making Interstate Support Explicit

14. In the Universal Service Order and the Access Reform Order, the

Commission made several changes to its access charge rules, with the

goal of reforming the mechanisms for recovery of subscriber loop costs

to move from implicit to explicit federal universal service support

mechanisms. In summary, the Commission decided that: (1) Long term

support (LTS) should be removed from interstate access charges and made

part of explicit federal support mechanisms; and (2) incumbent LECs

should use any universal service support from the new support

mechanisms to reduce support implicit in access charges, pending

further reform.

15. The Commission concluded that universal service support

implicit in rates cannot be sustained if competition emerges in the

marketplace, and that removing implicit universal service support from

interstate rates and replacing such support either with improved

revenue recovery mechanisms or with explicit support should remain a

goal of federal telecommunications reform. The Commission also found

that, unless implicit support is identified and eventually stripped

from interstate access charges, those access charges could remain

artificially high.

16. The Commission's efforts to remove implicit universal service

support from interstate access charges will not affect intrastate rates

directly. This issue is intertwined with the Commission's ongoing

access reform proceeding, and the Commission should continue to

synchronize the access reform and universal service proceedings with

any action it takes to remove implicit universal service support from

interstate access charges.

17. If the Commission determines that there is implicit universal

service high cost support currently in interstate access rates, it is

within the Commission's jurisdiction to determine what that implicit

support is and what action the Commission should take to make that

support explicit. Although we make no recommendation regarding whether

the Commission should eliminate implicit support from interstate access

rates, we recognize that it has the authority to do so. We do

recommend, however, that, to the extent that the Commission determines

that implicit support needs to be removed from interstate access

charges and replaced with explicit universal service support,

interstate access rates, such as the carrier common line charge (CCLC),

presubscribed interexchange carrier charge (PICC), or subscriber line

charge (SLC), be reduced dollar for dollar to reflect the corresponding

explicit support. We further recommend that the Commission seek to

ensure that any reductions in interstate access rates inure to the

benefit of consumers. When considering such recommendations, the

Commission should give due regard to the requirement that universal

service shall bear no more than a reasonable share of joint and common

costs. Moreover, the Commission should ensure that any efforts to

replace implicit support in interstate access charges with explicit

support do not jeopardize the reasonable comparability standard, or

harm consumers generally, or any class of consumers in particular.

Before taking any final action on removing this support from interstate

access charges, the Commission should first consult with the Joint

Board.

C. Making Intrastate Support Explicit

18. The Act requires that the Joint Board recommend changes to the

Commission's rules that may be necessary to implement Secs. 214(e) and

254, ``including the definition of the services that are supported by

Federal universal service support mechanisms.'' Section 254(b)(5)

provides that there should be ``specific, predictable and sufficient

Federal and State mechanisms to preserve and advance universal

service.'' Thus, the Act envisions that both states and the federal

government have authority and responsibility to ensure that universal

service needs are met. The Act further allows the states in Sec. 254(f)

to create state universal service support mechanisms. The Act clearly

envisions the role of the Joint Board to be that of advising the

Commission on matters related to federal support mechanisms, and

preserves the ability of each state to design intrastate support

mechanisms, although these state support mechanisms may not be

inconsistent with the federal rules or burden the federal support

mechanism. In this Second Recommended Decision, we recommend a shared

responsibility, but we also conclude, consistent with the statute, that

the Commission may not mandate that a state establish an intrastate

universal service fund.

19. Historically, intrastate rate design has helped promote

universal service. While techniques such as rate averaging have served

states well in the past, the onset of competition in local markets is

likely to erode the ability of states to fund universal service through

implicit support mechanisms. States possess the jurisdiction and

responsibility to address these implicit support issues through

appropriate rate design and other mechanisms within a state.

20. The same competitive forces that Congress anticipated would

require making interstate universal service support explicit may

militate for making intrastate universal service support explicit as

well. The Act, however, did not mandate such an outcome. States should

bear the responsibility for the design of intrastate funding

mechanisms. The federal support mechanism should not be contingent

upon, nor should it require, any particular action by the state.

III. Proposed Method for Ensuring Sufficient Support for Affordable

and Reasonably Comparable Rates

A. Basing Federal High Cost Support on Forward-Looking Economic Costs

21. In the Universal Service Order, the Commission adopted the

Joint Board's recommendation that the revised universal service support

mechanism would determine non-rural carriers' high cost support based

on forward-looking economic costs, instead of the incumbent carrier's

book costs, of providing supported services in order to ``send the

correct signals for entry, investment, and innovation in the long

run.'' We continue to believe that federal high cost support should be

based on forward-looking economic costs.

22. Without a complete forward-looking economic cost model, it is

not possible for the Joint Board to make a final recommendation as to

the most reasonable forward-looking methodology to be used in

distributing federal high cost support to the states and/or carriers.

We note, however, that the vast majority of proposals on the record in

this proceeding would use a model to estimate the forward-looking cost

of providing the supported services. No party has suggested that there

is a method preferable to a model to determine support based on

forward-looking costs. We recommend, therefore, that the Commission

continue to work with the Joint Board to select the input values to

complete a forward-looking cost model and to finalize the methodology

for distributing federal high cost support. We do recommend a

framework, discussed in more detail below, that relates federal support

to

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high average forward-looking costs and to states' ability to address

their own universal service requirements.

23. Because the Commission's cost proxy model results are not

complete, our recommendation on using a model to estimate forward-

looking costs is a work in progress, and therefore tentative. We fully

anticipate that the model results will furnish reasonable cost

estimates for all regions of the country that can provide the basis for

determining federal high cost support. Nevertheless, significant

uncertainties need to be eliminated before a model can serve as the

basis for federal support distributions. For example, a model must meet

the openness criterion required of all model developers. At present the

federal platform has been tested using geocoded customer location data

that is treated as proprietary information by its supplier. We also

understand that the Commission is seeking to identify alternative data

sources at this time. We urge the Commission not to adopt those

particular data as input values unless the Commission determines that

such data are sufficiently open and available for testing and comment.

Despite these uncertainties, we recommend that the states, the

Commission, and the Joint Board continue their joint efforts to develop

an accurate cost proxy model. In the event that the Commission has not

defined all elements necessary to calculate support based on forward-

looking costs in time for implementation by July 1, 1999, then the

Joint Board recommends that the present method for determining support

be continued for an interim period. In that event, we also recommend

that the Commission make interim adjustments to the present rules to

resolve any comparability issues in rural states primarily served by a

large carrier, consistent with our general recommendation on

comparability issues.

24. We emphasize, however, that, in recommending this framework for

determining non-rural carriers' high cost support based on forward-

looking cost, we do not intend for the Commission to create any

precedent for any potential revisions to support mechanisms for rural

carriers. The model platform that the Commission adopted in October was

designed to estimate non-rural carriers' costs. Pursuant to the Joint

Board's recommendation, the Commission has provided that the

determination of the appropriate manner in which a model should be

applied to rural carriers, if at all, will take into account the

recommendation of this Joint Board, after the Joint Board receives a

report from the Rural Task Force. The Joint Board intends to look

closely at these issues to ensure that rural carriers' unique

situations and challenges are addressed in the separate proceedings

examining their high cost support mechanisms.

25. We further recommend that the Commission reconsider its

decision to allow state cost studies to be used in place of the federal

model for non-rural companies. We believe that it is more appropriate

that the federal universal service support mechanisms be based upon a

national yardstick for determining cost. Without such a national

yardstick, it will be difficult to establish a consistent nationwide

measurement of rate comparability. Although the Commission should fully

evaluate any comments on this issue, we recommend that, absent a clear

showing that basing federal support on a state cost study is necessary

and appropriate to achieve statutory goals, the Commission base all

federal support on a uniform methodology that derives from a single,

national model. States may, of course, base any intrastate high cost

support mechanisms on their own cost studies, rather than a federal

model.

B. Size of Area Over Which Costs Are Averaged

26. In the Universal Service Order, the Commission adopted the

Joint Board's recommendation that forward-looking economic costs be

determined at the wire center level or below. While we acknowledge the

value of a cost model that is capable of estimating costs at that level

of granularity, we now recommend that federal support initially be

determined by measuring costs at the study area scale, a scale

considerably larger than the wire center. In general, a study area is

an area served by a local exchange carrier in a single state. The

existing high cost support program measures costs and distributes

support at the study area level.

27. We recommend measuring costs at the study area level at this

time because we believe that support calculated at this level will

properly measure the support responsibility that ought to be borne by

federal mechanisms given the current extent of local competition. We

noted above that the primary purpose of federal support should be to

ensure that rates remain affordable and reasonably comparable

throughout the nation. By ensuring that cost disparities among study

areas and among states are limited, we believe that federal support

will be sufficient to maintain rate comparability and affordability.

28. We also recognize that, as competition develops within a study

area, calculating costs using the aggregate characteristics of the

study area may become less appropriate. Again, in light of the second

goal of reforming universal service--ensuring that support mechanisms

are not eroded as competition develops--we recommend that the

Commission consider the possible impacts of competition on federal

universal service support mechanisms.

29. We have considered the use of statewide average cost (as

opposed to study area costs) to determine the need for universal

service support. While we agree that the states can be expected to

participate as full partners in preserving universal service, a

statewide approach could require states to create mechanisms to

transfer support among non-rural carriers. At present, however, some

states may lack such a mechanism. Given the short time to implement the

new mechanism, we find it prudent to average costs at the study area

level.

C. State Responsibility for Reasonably Comparable Rates

30. In this section, we conclude that the law gives the Commission

an important role in universal service, but that the federal role is

not exclusive. The states also bear part of the shared responsibility

for universal service. States are free under the Act to establish or

refrain from establishing explicit universal service support

mechanisms. As we noted above, furthermore, federal support may not be

made contingent upon any actions taken, or not taken, by the states.

Federal support should not rely on a state's actions with respect to

universal service but depend only upon the total support amount

generated by the methodology described herein for calculating the

amount of federal support for each state. The Joint Board believes

therefore, that the level of federal support should reflect, in a

consistent manner, each state's ability to use its own resources to

address its universal service needs, regardless of whether that or any

other amount of support is explicitly provided by the state.

31. While there is no mandate that a state create such an explicit

fund, the state should have in place ``specific, predictable and

sufficient'' mechanisms to preserve and advance universal service. The

federal support mechanism need not take into account the state's

authority and ability actually to establish state universal service

support mechanisms, since carriers may be required to recover more

total support than the amount used exclusively for purposes of

developing the federal fund. Such discretionary variations in support

[[Page 67842]]

at the state level are left intentionally independent of the standard

determinations of federal support levels, precisely in order to allow

states to set their own levels of corresponding affordability and

funding requirements. In contrast, federal funding requirements should

be those amounts necessary to establish a standard of reasonable

comparability of rates across states. Any state is then able to

supplement, as desired, any amount of federal funds it may receive

under this standard.

32. While we recommend a shared responsibility, we also conclude

that, consistent with the statute, no state can or should be required

by the Commission to establish an intrastate universal service fund.

Each state is uniquely qualified to determine, based upon its own

costs, rates and other circumstances, when and if it needs an explicit

universal service support mechanism.

33. Implicit support in state rates is a matter intimately related

to each state's rate design. The success of these state efforts is

demonstrated by the fact that rates today are generally affordable and

subscribership is currently very high in most areas of the nation. This

indicates a limited need for additional federal involvement. We believe

it is consistent with the Act for the Commission to assume that the

states will address issues regarding implicit intrastate support in a

manner that is appropriate to local conditions. We also conclude that,

under the Act, where states have the capacity today to accomplish this

task, states are the most appropriate governmental level to address

this issue.

34. Some states may face significant obstacles in maintaining

reasonably comparable rates, and may find that solving this problem by

state action alone is impossible or unreasonable in some instances. For

this reason, we believe that additional federal support may be needed

to ensure that rates are reasonably comparable, as required by

Sec. 254(b)(3).

D. Methodology for Federal Support of Reasonably Comparable Rates

35. We have considered numerous distribution options, including all

those submitted by the parties. The methodology we propose incorporates

elements from the various plans filed in this proceeding. Our

methodology would average costs at a study area level. Our methodology

incorporates a reasonable ``hold harmless'' component, and is grounded

in the principle that additional federal high cost support should be

targeted to areas with the greatest need. Our recommended methodology

includes a cost-based benchmark. Finally, as advocated by a number of

parties, our methodology takes into account each state's ability to

support its universal service needs internally. The framework below

addresses only the affordability and comparability goals of the Act. As

indicated previously, we cannot at this time provide the details of a

recommendation for a specific mechanism to distribute federal support

to eligible carriers. We can, however, outline the basic elements that

we believe should be considered in designing the distribution

methodology.

36. We recommend that the distribution methodology contain two

primary elements. First, study areas with average forward-looking per-

line costs significantly in excess of the national average cost should

be identified. Second, the state's ability to support its own universal

service needs should be determined. Federal support should be provided

only for costs that exceed both these thresholds.

37. In the first step of the process, identifying areas with high

costs, we recommend that the Commission use the cost of providing

supported services, rather than local rates, to evaluate rate

comparability, because rate setting methods and goals may vary across

jurisdictions. We recommend that federal support be available to non-

rural carriers with average costs significantly above the national

average. Specifically, we recommend that the Commission select a single

national cost benchmark against which the forward-looking cost in a

given study area would be compared to determine whether that study

areas has costs that are significantly above the national average. We

recommend that the Commission consider setting this national benchmark

at a level somewhere between 115 and 150 percent of the national

weighted average cost per line.

38. The second step in determining federal support should reflect

that, for the reasons outlined above, federal support is only one

portion of the shared federal-state responsibility established in

Sec. 254. Federal support should only be used to supplement a state's

ability to address its own universal service needs. In order to

accomplish this second step, it will be necessary to calculate a level

of support that could equitably and reasonably be assumed to be

provided by implicit or explicit state support. There are potentially

several ways to estimate a state's ability to support its universal

service needs. For example, the ratio of lines in a state with costs

above a certain threshold could be determined, as a general indication

of whether a state has a higher or lower percentage of high cost lines

than other states. This ratio of high cost to low cost lines could then

be factored into the support equation to reflect that states with a

higher percentage of high cost lines will be less able to support their

own universal service needs. Other approaches could set each state's

presumed support responsibility at a given level, which might be

expressed as a dollar value per line or as a percentage of intrastate

revenue. The ratio of intrastate traffic volume to total traffic volume

could also be used.

39. An example of how this system would work in practice would be

an approach that calculated the state's ability to support its own

universal service needs based on a percentage of intrastate revenues.

Such a limit on a state's presumed responsibility, if adopted, could be

between 3 and 6 percent of intrastate telecommunications revenues. Once

the first step in the methodology has identified the amount by which

costs in the study areas in the state exceed the cost benchmark, the

percentage of intrastate revenues would be calculated that would be

required to meet this high cost responsibility. If that amount exceeded

the state revenue threshold, then the federal mechanism would provide

support for the difference.

40. We urge the Commission to continue its deliberations with this

Joint Board and to consult with Congress in order to specify further

the proper parameters of these two variables as the study area costs

are derived from the Commission's model and choice of inputs. It is our

goal to recommend a plan that achieves the Act's goals of affordability

and reasonable comparability without overburdening consumers across the

nation.

IV. Size of the Federal Support Mechanism

41. We described above the general outlines of a method for

calculating federal support to high cost areas. Finalization of that

method will determine the overall size of federal support for

reasonably comparable rates. So long as the fund is for the purposes

established in the Act, the Commission has discretion in providing

remedies that are designed to ``preserve and advance'' universal

service. Nevertheless, for several reasons we conclude that the federal

high cost support fund should be only as large as necessary, consistent

with other requirements of the law. This will ensure that there is

balance between consumers who directly receive the

[[Page 67843]]

benefits of universal service support and those consumers who must pay

for the support through their rates.

42. Enabling reasonably comparable rates among states is a task

that can likely be accomplished only with federal assistance. Federal

support must be sufficient so that, when combined with a reasonable

state effort, rates within service areas may be reasonably comparable

both within and among states. Until we resolve several other pending

policy decisions, as well as obtain more precise cost data, however, it

is not possible to define, in dollars, the amount of support required

by the comparability standard.

43. We do not believe, however, that current circumstances warrant

a high cost support mechanism that results in a significantly larger

federal support amount than exists today. We recognize that some states

currently may not receive support sufficient to enable reasonably

comparable rates, and thus we believe the support level may rise

somewhat.

44. These principles can be implemented through a plan that, at

least initially, calculates support on a study area basis and allocates

a reasonable and equitable share of responsibility for support to state

universal service efforts. The plan can enable reasonably comparable

rates if the combination of state and federal support can keep the net

cost differences (after receipt of universal service support) between

high cost and low-cost areas within reasonable bounds. We recognize

that competition may develop in unpredictable ways. As competition

threatens rate comparability or affordability in high cost areas served

by non-rural carriers, it may be necessary to re-evaluate the

appropriate level of federal support. Incumbent LECs to date have not

demonstrated that implicit support has eroded as a result of

competition.

V. Hold Harmless

45. When a new federal support mechanism is implemented, some

carriers could receive more or less support than in the past. If

substantial reductions were to occur in a single year, some consumers

could experience rate shock. Both significant, sudden increases in the

fund size overall, and significant decreases in the support that goes

to a particular carrier, could have a notable impact on consumers'

rates.

46. Rural companies have been assured by the Commission that their

support systems will not be altered until January 1, 2001, at the

earliest, and in no event before the Joint Board has completed further

deliberations on high cost support mechanisms for rural carriers, in

light of the recommendations received from the Joint Board-appointed

Rural Task Force. In addition, the Commission has stated to Congress

that no state should receive less support than it currently receives.

The Puerto Rico Telephone Company has asked, notwithstanding its non-

rural status, to continue to receive support at present levels, until

the transition to a forward-looking high cost support mechanism is

implemented for rural companies.

47. We support the Commission's commitment to continue to hold

states harmless, so that no non-rural carrier, including the Puerto

Rico Telephone Company, will receive less federal high cost assistance

than the amount it currently receives from explicit support mechanisms.

We recommend, depending on the final amounts of support estimated on a

forward-looking basis, that the Commission consider a gradual phase-in

of any increase in federal universal service high cost support for non-

rural carriers.

VI. Unserved Areas

48. The Arizona Corporation Commission (Arizona Commission)

submitted a proposal to use a portion of federal support to address the

problem of unserved areas and the inability of low-income residents to

obtain telephone service because they cannot afford to pay the required

line extension or construction charges. The Arizona Commission's

proposal is not intended to be a comprehensive alternative to the high

cost fund distribution model, but rather is intended to address a

discrete concern related to low-income residents in remote areas.

49. The framework created in the Act was designed to accelerate

deployment of services to all Americans, and the universal service

program plays an important role in that framework. The issue raised by

the Arizona Commission is of interest to the Joint Board, even though

it was not among those specifically referred to the Joint Board for

further recommendation. States have generally addressed the ``unserved

household'' concern through intrastate proceedings that establish

reasonable rates for line extension agreements and encourage carriers

to minimize unserved regions of the state. We recognize that

investments in line extensions have historically been an issue

addressed by the states, and we believe they should continue to be

dealt with by the states, to the extent that the states are able to do

so. Unserved areas are not unique to Arizona; other states may also

face this issue. Although historically a state issue, we recognize that

there may be some circumstances which may warrant federal universal

service support for line extensions to unserved areas. We recommend

that the special needs of unserved areas be investigated and subject to

a more comprehensive evaluation in a separate proceeding. The

Commission should seek information on unserved areas throughout the

nation and determine, in consultation with the Joint Board, whether

such areas warrant any special federal universal service consideration.

VII. Mechanism for Distributing Support

A. Portability of Support

We recommend that the Commission continue with the policy

established in the Universal Service Order of making high cost support

available to all eligible telecommunications carriers, whether they be

an incumbent LEC or a competitive carrier, including wireless carriers.

We believe that portable support is consistent with the principle of

competitive neutrality that we previously recommended and the

Commission subsequently adopted in the Universal Service Order. We

continue to support the use of competitive neutrality as a guiding

principle of universal service reform and endorse the Commission's

definition of this important principle in the Universal Service Order.

B. Use of Support

51. One issue raised in comments was whether the Commission should

condition the receipt of federal high cost support to ensure that

support is used in a manner consistent with Sec. 254. We recommend that

the Commission require carriers to certify that they will apply federal

high cost universal service support in a manner consistent with

Sec. 254.

52. We recognize that some states may lack the authority or the

desire to impose constraints or conditions on the use of federal high

cost support. We do not recommend, therefore, that the Commission

require that states provide any certification, or require any other

state action, as a condition for carriers to receive high cost support.

At the same time, parties may have a legitimate concern that federal

support should be used by carriers to further the goals of Sec. 254. We

further recognize that, even if costs are calculated at the study area

level, high cost support should be targeted to consumers living in the

highest cost areas of the study area. We therefore recommend that the

Commission permit, but not require,

[[Page 67844]]

states to certify that, in order to receive federal universal service

high cost support, a carrier must use such funds in a manner consistent

with Sec. 254. For example, in order to provide efficient incentives

for competitive entry, a state might require that federal support be

targeted to those consumers living in the highest cost areas within a

study area.

53. To the extent that the law permits, the Commission could reduce

or eliminate federal high cost support if it finds that a carrier has

not applied its federal universal service funds consistent with

Sec. 254, or if the state finds that the carrier has not adequately

demonstrated that the federal support is being used in a manner

consistent with Sec. 254(e), which provides that carriers receiving

universal service support ``shall use that support only for the

provision, maintenance, and upgrading of facilities and services for

which the support is intended.'' We also clarify that this decision is

intended only to affect the amount that carriers receive from the

federal universal service high cost support mechanism. We recommend

that the Commission clarify procedures by which a party, including a

state, may initiate action against a carrier that fails to apply

federal universal service support in an appropriate manner.

54. We do not believe that conditioning support on a demonstration

that funds are being used for the advancement of universal service

places any restrictions on the determination of a carrier's status as

an eligible telecommunications carrier. As the Universal Service Order

notes, ``section 214(e)(2) does not permit the Commission or the states

to adopt additional criteria for the designation as an eligible

carrier.''

55. One proposal recommends that the Commission distribute

universal service funding directly to state commissions rather than to

carriers. We recognize that some state commissions may be able to

ensure that high cost support is distributed to carriers and is used in

a manner, consistent with federal rules, that best ensures that rates

are just, reasonable, and affordable throughout that particular state.

Nevertheless, we cannot recommend that the Commission adopt that

mechanism, in light of the long-standing practice at the time that the

1996 Act became law of distributing federal universal service support

to the carriers providing the supported services, and the absence of

any affirmative evidence in the statute or legislative history that

Congress intended such a fundamental shift to a state block grant

distribution mechanism. In addition, distributing funding directly to

state commissions is likely to create substantial administrative

burdens for states currently lacking this ability, especially because

there is very little time, prior to the July 1, 1999 implementation

date, for the state to take the steps necessary to administer federal

high cost support pursuant to the rules that Commission will be

adopting in the spring.

VIII. Assessing Contributions from Carriers

56. In the Universal Service Order, the Commission determined that

assessment of contributions for the interstate portion of the high cost

and low-income support mechanisms shall be based solely on end-user

interstate telecommunications revenues, and assessment of universal

service support for eligible schools, libraries and rural health care

providers shall be based on interstate and intrastate end-user

telecommunications revenues. The Commission declined to assess both

intrastate and interstate end-user revenues for the high cost and low-

income support mechanisms because the states are currently reforming

their own universal service programs, and it would have been premature

to assess contributions on intrastate revenues before appropriate

forward-looking mechanisms and revenue benchmarks are developed. The

Commission also concluded that carriers shall be permitted to recover

their contributions to universal service support mechanisms only

through rates for interstate services.

57. Pending the decision of the Fifth Circuit, our recommendation

on this issue is necessarily tentative. Continuing to assess

contributions for high cost and low income support based solely on

interstate revenues, as set forth in the Universal Service Order, could

have certain benefits. Under this approach, state commissions would

have the greatest flexibility to tap into their intrastate revenue

bases to advance universal service at the state level. Assessing only

interstate revenues for federal high cost support also has some

significant disadvantages, however. For instance, many carriers that do

not routinely have to separate intrastate and interstate revenues for

regulatory or business purposes now must do so solely for federal

universal service purposes. This creates additional burdens on these

carriers, and may create incentives for carriers to misclassify

revenues between jurisdictions based on different assessment rates. A

jurisdictional assessment base also makes it difficult for carriers to

allocate the revenues associated with packages, or bundles, of services

that include both intrastate and interstate components. Finally, a non-

jurisdictional assessment base would enable both the state and federal

mechanisms to tap broader revenue bases, thereby lowering the

assessment rates needed. Thus, if the Fifth Circuit determines that the

Commission may properly assess all revenues for universal service

contributions, the Commission may wish to consider using that

assessment methodology for high cost support. If the Commission

determines that it may assess universal service contributions based on

all revenues, the Commission should find that states may do the same

for their state universal service mechanisms. Alternatively, the

Commission could consider assessing carriers high cost universal

service contributions on a flat, per-line basis, which also addresses

some of the difficulties of assessing only interstate revenues.

IX. Carrier Recovery of Universal Service Contributions from

Consumers

58. In this section, we recommend that the Commission provide to

telecommunications carriers that contribute to universal service strict

guidance regarding the extent to which they recover their universal

service contributions from consumers. We also recommend that the

Commission provide such carriers with express instructions regarding

the manner in which carriers may depict on bills charges used to

recover universal service contributions. Specifically, we recommend

that, to the extent permitted by law, the Commission prohibit carriers

from depicting such charges as a ``tax'' or as mandated by the

Commission or the federal government by terms or placement on the bill.

We note that, in truly competitive markets, firms recover a wide

variety of costs in a wide variety of ways with no itemized

notification of similar increases or decreases to individual consumers.

1. Recovery of Universal Service Contributions from Consumers

59. We reiterate that the choice of whether to collect universal

service assessments from end users via a line-item charge on their

bills should remain with the carriers, and that carriers are free to

tell consumers that the carrier is required to pay to support universal

service. Specifically, we recommend, that the Commission give careful

consideration to a rule that provides that, for carriers that choose to

pass through a line item charge to consumers, the line item assessment

be no greater than the carrier's universal

[[Page 67845]]

service assessment rate. This will help prevent consumers or classes of

consumers from being charged excessively for a carrier's universal

service contribution. Such a rule will help prevent consumers or

classes of consumers from being charged excessively for a carrier's

universal service contributions. Some carriers may attempt to exercise

market power and recover through universal service charges in a non-

competitive fashion more than they are contributing to universal

service, believing that they can describe those charges as mandated by

the Commission or federal action. We are also concerned that some

carriers may be allocating a disproportionate share of universal

service costs to certain classes of consumers. Such practices might

contravene Sec. 201(b) of the Act. As noted above, consumers may be

less likely to engage in comparative shopping for a carrier if they are

led to believe that certain charges are fixed by the Commission or

federal government.

2. Characterization of Universal Service Charges to Consumers

60. We believe that a carrier's billing and collection practices

for communications services are subject to regulation as common carrier

services under Title II of the Act. We believe that inaccurately

identifying or describing charges on bills that recover universal

service contributions may violate Sec. 201(b) of the Act. For instance,

it is important for consumers to understand that universal service

support has long been implicit in the rates for various intrastate and

interstate telecommunications services. We therefore recommend that the

Commission take decisive action to ensure that consumers are not misled

as to the nature of charges on bills identified as recovering universal

service contributions. Specifically, we recommend that the Commission

consider prohibiting carriers from identifying as a ``tax'' or as

mandated by the Commission or federal government any charges to

consumers used to recover universal service contributions. Similarly,

we recommend that the Commission consider prohibiting carriers from

incorrectly describing as mandatory or federally-approved any universal

service line items on bills. This restriction would include both

written descriptions of the charges and any oral descriptions from

consumer service representatives as well as placement on the bill.

While interstate telecommunications providers are required to

contribute to the universal service support mechanisms, they are not

required to impose such charges on consumer bills.

61. Cognizant of the First Amendment implications in regulating the

manner in which carriers may convey information on consumers' bills, we

note that the Supreme Court has held that the government may require a

commercial message to ``appear in such a form, or include such

additional information, warnings, and disclaimers, as are necessary to

prevent its being deceptive.'' On the other hand, restrictions on

speech that ban truthful, non-misleading commercial speech about a

lawful product cannot withstand scrutiny under the First Amendment. We

believe that, pursuant to these Supreme Court rulings, it would not

violate the First Amendment to specifically prohibit carriers from

including on their bills untruthful or misleading statements regarding

the nature of line items used to recover universal service

contributions. We urge that the Commission carefully review the record

in its proceeding before reaching any conclusion on these issues.

62. We also recommend that the Commission continue to explore,

through its Truth-In-Billing proceeding, the possibility of

establishing standard nomenclature that carriers could use on their

bills to consumers regarding universal service charges. Such

standardized language would represent the Commission's view of language

that is accurate and not misleading. Standard nomenclature could

benefit consumers by having common language across carriers so that

consumers can easily identify the charge. We urge that the Commission

consider using ``Federal Carrier Universal Service Contribution'' as

standard nomenclature describing any universal service line item on

consumer bills. The line item should be accompanied by an explanation

that the carrier has chosen to separate its universal service

contribution from its other costs of business, and to display the

contribution as a line item on the consumer's bill.

63. Finally, we note that many state regulatory agencies either

have in place or are considering establishing requirements that will

curtail the practice of some carriers of mischaracterizing universal

service line items on bills. In addition, other federal agencies, such

as the Federal Trade Commission, may have jurisdiction that overlaps or

is concurrent with that of the Commission or state regulatory agencies.

We therefore recommend that the Commission work closely with these

agencies to ensure that consumers are provided with complete and

accurate information regarding the nature of universal service line

items.

X. Periodic Review

64. The Act contemplates that universal service is an ``evolving''

level of service. The Act further contemplates that the Joint Board may

periodically make recommendations to the Commission regarding

modifications in the definition of services supported by the federal

universal service support mechanism. Moreover, we recognize that the

telecommunications industry is rapidly changing and that both

competition and technological changes will affect universal service

needs in rural, insular, and high cost areas of the nation. We

therefore recommend that the Commission continue to consult with this

Joint Board on matters addressed in this Second Recommended Decision.

We also recommend that the Joint Board and the Commission broadly

reexamine its high cost universal service mechanism no later than three

years from July 1, 1999.

XI. Recommending Clauses

65. For the reasons discussed herein, this Federal-State Joint

Board, pursuant to Sec. 254(a)(1) and Sec. 410(c) of the Communications

Act of 1934, as amended, 47 U.S.C. 254(a)(1) and 410(c), recommends

that the Federal Communications Commission adopt the proposals

described above relating to high cost universal service support

mechanisms for non-rural carriers.

List of Subjects

47 CFR Part 36

Reporting and recordkeeping requirements, Telephone.

47 CFR Part 54

Universal service.

Federal Communications Commission.

Magalie Roman Salas,

Secretary.

[FR Doc. 98-32736 Filed 12-8-98; 8:45 am]

BILLING CODE 6712-01-P