Federal-State Joint Board on Universal Service; Access Charge Reform

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 36

[CC Docket Nos. 96-45 and 96-262; FCC 99-119]

Federal-State Joint Board on Universal Service; Access Charge

Reform

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: The document Federal-State Joint Board on Universal Services;

Access Charge Reform establishes the framework for a new forward-

looking high-cost universal service support mechanism. The new

mechanism will have a two-part methodology that considers both the

relative costs of providing supported services and the states' ability

to support those costs using their own resources. In taking these

steps, we are moving closer to bringing to fruition the work of the

Joint Board and this Commission to render universal service support

mechanisms explicit, sufficient, and sustainable as local competition

develops. The federal support mechanism would provide support for costs

that exceed both the

[[Page 30918]]

national benchmark and the individual state's resources to support

those costs.

DATES: Effective June 9, 1999.

FOR FURTHER INFORMATION CONTACT: Jack Zinman, Attorney, Common Carrier

Bureau, Accounting Policy Division, (202) 418-7400.

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

document released on May 28, 1999. The full text of this document is

available for public inspection during regular business hours in the

FCC Reference Center, Room CY-A257, 445 Twelfth Street, S.W.,

Washington, D.C. 20554.

I. Introduction

1. The Telecommunications Act of 1996 (1996 Act) has fostered and

accelerated the development of competition in local telecommunications

markets across the nation. The 1996 Act also, for the first time, wrote

into law the Commission's long-standing policy of supporting universal

service. In codifying this federal policy, Congress sought to ensure

that universal service remains achievable and sustainable as local

competition develops.

2. In this Order, based on recommendations from the Federal-State

Joint Board on Universal Service (Joint Board), we take action to

achieve this Congressional goal and to ensure that mechanisms exist so

that non-rural carriers' rates for services supported by universal

service mechanisms remain affordable in all regions of the nation and

reasonably comparable to those prevalent in urban areas. In taking

these steps, we are moving closer to bringing to fruition the work of

the Joint Board and this Commission to render universal service support

mechanisms explicit, sufficient, and sustainable as local competition

develops.

3. In this Order, we adopt broad revisions to the federal support

mechanisms, in light of the Joint Board's most recent recommendations,

to permit rates to remain affordable and reasonably comparable across

the nation, consistent with the 1996 Act and the competitive

environment that it envisions. To accomplish these goals, as

recommended by the Joint Board, we establish a methodology for

determining non-rural carriers' support amounts, based on forward-

looking costs estimated using a single, national model, and a national

cost benchmark. We explicitly reconsider and repudiate any suggestion

in the First Report and Order, 62 FR 32862 (June 17, 1997), that

federal support should be limited to 25 percent of the difference

between the benchmark and forward-looking cost estimates, in favor of

the more nuanced balancing of federal and state responsibilities

outlined by the Joint Board. To the extent a state's resources are

deemed inadequate to maintain affordable and reasonably comparable

rates, the federal mechanism will provide the necessary support. We

also adopt today the hold-harmless and portability principles

recommended by the Joint Board.

A. The Purpose of Support

4. We agree with the Joint Board that a primary focus in reforming

the federal high-cost universal service support mechanism is to enable

intrastate rates to remain both affordable and reasonably comparable

across high-cost and urban areas. We also agree with the Joint Board

that the Commission bears the responsibility to ensure that interstate

rate structures comply with the Congressional mandates expressed in the

Communications Act of 1934, as amended (the Act). In this section, we

adopt the majority of the Joint Board's conclusions and recommendations

concerning affordability, reasonable comparability, explicit interstate

support, and explicit intrastate support. Pursuant to the Joint Board's

recommendation, we are leaving the existing support mechanism in place

for non-rural carriers for an additional six months. We anticipate

adopting the permanent methodology for calculating and distributing

support for non-rural carriers, based on forward-looking economic

costs, this fall for implementation on January 1, 2000.

1. Enabling Reasonably Comparable Rates

5. We agree with the Joint Board that a central purpose of federal

universal service support mechanisms is to enable rates in rural areas

to remain reasonably comparable to rates in urban areas, and we adopt

the Joint Board's interpretation of the reasonable comparability

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

state's borders, and among states nationwide.'' This does not mean, of

course, that rate levels in all states, or in every area of every

state, must be the same. In particular, as the local exchange market

becomes more competitive, it would be unreasonable to expect rate

levels not to vary to reflect the varying costs of serving different

areas. The Joint Board and the Commission have concluded that current

rate levels are affordable. Therefore, we interpret the goal of

maintaining a ``fair range'' of rates to mean that support levels must

be sufficient to prevent pressure from high costs and the development

of competition from causing unreasonable increases in rates above

current, affordable levels. When we use the term ``reasonably

comparable'' throughout this Order, we are referring to this definition

of the term.

6. We find that, once we have resolved several implementation

issues and further verified the forward-looking cost model, the Joint

Board's recommended methodology largely will be an appropriate means

for the federal mechanism to ensure that states have the ability to

achieve reasonable comparability. Specifically, the Joint Board's

proposed methodology will ensure that any state with per-line costs

substantially above the nationwide average will receive federal support

for those intrastate costs, unless the state has the ability to

maintain reasonably comparable rates without such support. States, of

course, retain primary responsibility for local rate design policy and,

as such, bear the responsibility to marshall state and federal support

resources to achieve reasonable comparability of rates.

7. This approach does not consider rates directly. Instead, it uses

costs as an indicator of a state's ability to maintain reasonable

comparability of rates within the state and relative to other states.

We conclude that the underlying assumption in the Joint Board's

recommendation--that a relationship exists between high costs and high

rates--is a sound one, because rates are generally based on costs. We

adopt this approach, in part, because states possess broad discretion

in developing local rate designs. State rate designs may reflect a

broad array of policy choices that affect actual rates for local

service, intrastate access, enhanced services, and other intrastate

services. A state facing costs substantially in excess of the national

average, however, may be unable through any reasonable combination of

local rate design policy choices to achieve rates reasonably comparable

to those that prevail nationally. Through an examination of the

underlying costs, instead of the resulting rates, we can evaluate the

cost levels that must be supported in each state in order to develop

reasonably comparable rates. Because responsibility for such support is

shared at the federal and state levels, determining the federal portion

based on costs rather than rates allows the federal jurisdiction to

help accomplish the goal of rate comparability without having to

evaluate states' policy choices affecting those rates.

8. By providing support for costs in any state that exceed a

benchmark level,

[[Page 30919]]

the Joint Board's recommended methodology ensures that the cost levels

net of support that must be recovered through intrastate rates--and, by

analogy, its assumed rate levels--must substantially exceed the

national average. By taking account of the cost levels that must be

supported in each state in order to enable reasonable comparability of

rates, the Joint Board's methodology ensures that federal support is

targeted to areas where it is necessary to achieve its intended

purpose--enabling reasonable comparability of rates--and also that

overall support levels are no higher than necessary to achieve this

goal. We agree with the Joint Board that this methodology will result

in federal support levels for each state that are appropriate to

achieve the statutory principle of reasonable comparability of rates.

9. In the First Report and Order, the Commission concluded that the

share of support provided by the federal mechanism should initially be

set at 25 percent of the difference between the forward-looking cost of

providing the supported services and a national benchmark. In adopting

the Joint Board's recommended methodology, we reconsider the

Commission's conclusions in the First Report and Order regarding the

federal share of support. The Joint Board's recommended methodology for

enabling reasonable comparability of rates will define the sharing of

responsibility between the federal and state jurisdictions for high-

cost intrastate universal service support in a way markedly different

from the 25 percent federal share methodology adopted in the First

Report and Order. Instead of allocating responsibility for universal

service support based on fixed percentages, the Joint Board's

recommended methodology recognizes the states' primary role in enabling

reasonable comparability of rates. Under this recommendation, to the

extent a state possesses the ability to support its high-cost areas

wholly through internal means, the methodology we adopt recognizes that

no federal support is required in that state to enable reasonably

comparable local rates. Conversely, to the extent that a state faces

larger rate comparability challenges than can be addressed internally,

our forward-looking methodology places no artificial limits on the

amount of federal support that is available, thus resulting in

sufficient support as required by the 1996 Act.

10. We find that section 254(b)(3) supports the use of federal

support to enable reasonable rate comparability among states. By

specifying that ``[c]onsumers in all regions of the Nation'' should

have rates and services reasonably comparable to rates and services in

urban areas, we believe that Congress intended national, as opposed to

state-by-state, comparisons. Some commenters dispute the Joint Board's

interpretation of reasonable comparability. For example, the California

Commission asserts that using federal universal service support to

enable rate comparability among states would impermissibly expand the

scope of section 254(b)(3), and that support should merely seek to

enable the reasonable comparability of rates within each state.

Similarly, the Maryland Commission claims that the Joint Board's

interpretation would lead to the comparison of rural rates in all

states to some fictional national urban rate, with the potentially

anomalous result that rural rates in a state could be lower than urban

rates in that state. The Joint Board's approach for enabling rate

comparability relies not on a national urban rate, as the Maryland

Commission asserts, but rather on a methodology that ensures that no

state will face per-line costs that substantially exceed the costs

faced by other states, taking into account the individual state's

ability to support its own universal service needs. In this way, the

Joint Board sought to ensure that every state has the means at its

disposal to achieve reasonable comparability of rates in that state. We

agree that the Joint Board's approach is an appropriate way for federal

support mechanisms to enable ``consumers in all regions of the Nation''

to have access to ``reasonably comparable'' rates. We emphasize again,

however, that, because states establish local rates, each state's

policies will determine the level of urban rates relative to rural

rates in that state.

2. Enabling Affordable Rates

11.We decline to adopt the proposals suggested by the D.C.

Commission and Ad Hoc. We continue to believe, consistent with the

Joint Board's recommendation, that rates for local service are

generally affordable. Indeed, since March 1989, at least 93 percent of

all households in the United States have had telephone service, and as

of November 1998, the subscribership rate was 94.2 percent. While

affordability encompasses more than subscribership, the Joint Board and

the Commission agree that the states are better equipped to determine

which additional factors can and should be used to measure

affordability.

12.The principle of ensuring reasonably comparable rates, set forth

in section 254(b)(3), does not specify an income component. To the

contrary, although affordability may vary with individual subscriber

income, section 254(b)(3)'s statement that consumers in rural and high-

cost areas of the country should have access to telecommunications

services at rates that are reasonably comparable to rates in urban

areas is not qualified. Therefore, we find no congressional mandate for

the Commission to implement or to require that states implement means-

testing in conjunction with mechanisms designed to provide support to

high-cost areas and to enable reasonable comparability of rates

nationwide. Affordability problems, as they relate to low-income

consumers, raise many issues that are unrelated to the need for support

in high-cost areas, and section 254(b)(3) reflects a legislative

judgment that all Americans, regardless of income, should have access

to the network at reasonably comparable rates. The specific

affordability issues unique to low-income consumers, including all

factors that may be relevant to means-testing or other need-based

inquiries, are best addressed at the federal level through programs

specifically designed for this purpose. Indeed, the Commission already

has such programs in place, namely, the Lifeline and Link-Up programs,

which provide assistance for low-income consumers to get connected and

stay connected to the telecommunications network. As discussed in the

First Report and Order, we believe that the impact of household income

on subscribership is more appropriately addressed through programs

designed to help low income households obtain and retain telephone

service, rather than as part of the federal high-cost support

mechanism.

13. Moreover, forcing states to adopt means testing or limits on

rates of return in order to receive federal high-cost support would be

contrary to the Joint Board's recommendations. Although it may be

within the Commission's jurisdiction to condition federal support on

specific state action, the Joint Board recommended against our doing so

in the high-cost context. Individual state commissions are in a

position to evaluate specific affordability issues facing their

respective states, and we believe that individual states should retain

the primary responsibility to decide questions of affordability and to

weigh the relative importance of factors such as consumer income and

local rate design. Therefore, we decline to require means testing for

federal high-cost support. An individual state, however,

[[Page 30920]]

could voluntarily adopt an explicit support mechanism using means

testing or other cost-of-living data, as suggested by the D.C.

Commission and Ad Hoc. Although the states retain discretion to adopt

such a mechanism, we will continue to monitor the issue of rate

affordability, and we will take remedial action, to the extent we have

jurisdiction to do so, if it becomes necessary.

3. Making Interstate Support Explicit

14. We agree with the Joint Board that the Commission has the

jurisdiction and responsibility to identify support for universal

service that is implicit in interstate access charges. Moreover, we

agree with the Joint Board that it is part of our statutory mandate

that any such support, to the extent possible, be made explicit. In

this proceeding and in our pending Access Charge Reform, 62 FR 31040

(June 6, 1997), proceeding, we are endeavoring to identify the types of

implicit support in interstate access charges and the amount of that

support. As we move forward with our efforts to reform interstate

access charges, we will develop additional information on the costs of

interstate access necessary to evaluate the Joint Board's

recommendations in this area and the associated record. The

overwhelming majority of commenters addressing the Joint Board's

recommendations, however, agree that interstate access rates contain

implicit support that should be made explicit. These commenters differ

only as to the amount of their estimate of implicit support presently

in access rates and the method for making it explicit. We anticipate

taking action in the fall of 1999 to resolve the issue of making

interstate support explicit, and we will address the Joint Board's

recommendations at that time. Although, as explained, the statutory

goal of making explicit the support that is currently implicit in

interstate access charges is distinct from the statutory goal of

ensuring reasonably comparable intrastate rates, we nevertheless

recognize the close relationship between the implementation of the

permanent revised support mechanism on January 1, 2000 and the Access

Charge Reform proceeding. We therefore intend to move ahead with access

reform in tandem with the implementation of the revised methodology.

4. Making Intrastate Support Explicit

15. Historically, states have ensured universal service principally

through implicit support mechanisms, such as geographic rate averaging

and above-cost pricing of vertical services, such as call waiting,

voice mail, and caller ID. We agree with the Joint Board that the 1996

Act does not require states to adopt explicit universal service support

mechanisms. Section 254(e) does not specifically mention state support

mechanisms. Section 254(b)(5) declares that ``[t]here should be

specific, predictable and sufficient Federal and State mechanisms to

preserve and advance universal service.'' Section 254(f) provides that

states ``may adopt regulations not inconsistent with the Commission's

rules to preserve and advance universal service.'' The permissive

language in both of these sections demonstrates that Congress did not

require states to establish explicit universal service support

mechanisms. Accordingly, our actions today are consistent with the

directives of the 1996 Act.

16. As the Joint Board acknowledged, however, the development of

competition in local markets is likely to erode states' ability to

support universal service through implicit mechanisms. We agree with

the Joint Board that the erosion of intrastate implicit support does

not mean that federal support must be provided to replace implicit

intrastate support that is eroded by competition. Indeed, it would be

unfair to expect the federal support mechanism, which by its very

nature operates by transferring funds among jurisdictions, to bear the

support burden that has historically been borne within a state by

intrastate, implicit support mechanisms. The Joint Board stated that

states ``possess the jurisdiction and responsibility to address these

implicit support issues through appropriate rate design and other

mechanisms within a state,'' and it concluded that states ``should bear

the responsibility for the design of intrastate funding mechanisms.''

The Joint Board's position is consistent with the methodology that it

recommended for determining federal support levels. That methodology

does not mandate any particular state action, but assumes that states

will take some action, whether through rate design or through an

explicit support mechanism, to support universal service within the

state, and provides for federal support where such state efforts would

be insufficient to achieve reasonable comparability of rates. We will

continue to monitor state efforts at eliminating implicit support and

will consider additional measures should state efforts be insufficient

in this regard.

B. Methodology for Estimating Costs and Computing Support

17. We are adopting the majority of the Joint Board's

recommendations for a revised methodology for estimating costs and

calculating federal support levels to enable reasonably comparable

local rates for non-rural carriers. We are seeking further comment,

however, on specific implementation issues in an Further Notice of

Proposed Rulemaking (FNPRM). We conclude that the revised universal

service high-cost support mechanism shall take effect on January 1,

2000. We anticipate that by January 1, 2000, the Commission will have

made final determinations on all outstanding issues raised, and all

verification of the cost model that will be used to estimate the

forward-looking costs of providing supported services will have been

completed.

18. Specifically, we adopt the Joint Board's recommendation that

forward-looking economic costs should be used to estimate the costs of

providing supported services. We also adopt the Joint Board's general

recommendation that the methodology should rely primarily on states to

achieve reasonably comparable rates within their borders while

providing support for above-average costs to the extent that such costs

prevent the state from enabling reasonable comparability of rates. We

further adopt the Joint Board's recommendations that this explicit

federal support mechanism should not be significantly larger than the

current explicit federal mechanism.

1. Forward-Looking Economic Costs

19. We adopt the Joint Board's recommendation that support

calculations be based on forward-looking costs, and that those costs be

estimated using a single national model. As we stated in the First

Report and Order, a methodology based on forward-looking economic costs

will ``send the correct signals for entry, investment, and innovation

in the long run.'' Many commenters support the use of forward-looking

economic costs as the basis for estimating the costs of providing the

supported services, because the use of forward-looking economic costs

will encourage efficient entry and investment. The use of a carrier's

book costs, by contrast, would not allocate support in a competitively

neutral manner among potentially competing carriers. Instead, such a

system would tend to distort support payments because current book

costs are influenced by a variety of carrier-specific factors, such as

the age of the plant, depreciation rates, efficiency of

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design, and other factors. Support based on forward-looking models will

ensure that support payments remain specific, predictable, and

sufficient, as required by section 254, particularly as competition

develops. To achieve universal service in a competitive market, support

should be based on the costs that drive market decisions, and those

costs are forward-looking costs.

20. Although we believe that forward-looking costs will set support

levels most efficiently, we decline to adopt a suggestion of the Ohio

Consumers' Counsel that carriers should receive the lesser of either

current amounts of high-cost support or a forward-looking economic cost

model-based amount. The hold-harmless provision set forth in of this

Order is intended to prevent dislocation and rate shocks as we make the

transition to a support system based on forward-looking costs. As

noted, we intend for the Joint Board and the Commission to re-evaluate

non-rural carriers' support mechanisms, including the hold-harmless

provision, three years from the date that the revised mechanism is

implemented.

21. Although some commenters have expressed concerns about the

accuracy of the outputs of the cost model, we agree with the Joint

Board that a national forward-looking model will provide a more

consistent approach by which to develop a method for measuring rate

comparability than would individual state cost studies. We believe

state cost studies could rely on differing forward-looking cost

methodologies, including differing assumptions or input data elements

that would prevent meaningful comparisons of the resulting forward-

looking cost estimates, and thus would provide a less accurate and

consistent picture by which we could evaluate the cost levels that must

be supported in each state to develop reasonably comparable rates.

Therefore, we reject the use of state cost studies for the purpose of

developing our method for rate comparability. States, of course, retain

the flexibility to design state-level support mechanisms using other

indicators of cost.

22. At this time, however, there has not been adequate time to

verify the results of the cost model and to verify that certain input

data elements are accurate. Thus, we cannot implement immediately a

revised high-cost support mechanism based on forward-looking economic

costs. We anticipate that the model and the input data will be verified

and ready for use by January 1, 2000.

23. The Joint Board recommended that, if the Commission did not

implement a forward-looking support mechanism on July 1, 1999 to enable

the reasonable comparability of non-rural carriers' rates, the

Commission should provide interim relief to high-cost states served

primarily by non-rural carriers. In formulating this Order, we have

continued to consult with the state Joint Board members, and they

recently filed a letter stating that the Commission should not adopt an

interim mechanism, given the brevity of the implementation delay that

we adopt today. The state Joint Board members state that they have been

unable to develop a workable interim solution, and that the

administrative complexity of overlaying changes in collection and

disbursement onto the existing system for only six months does not

appear prudent. In light of the state members' position on this issue,

and the reasons they present in their letter, we conclude that we

should not adopt an interim support mechanism at this time.

2. Shared Federal-State Responsibility for Reasonably Comparable Rates

24. We agree with the Joint Board that the states share

responsibility for universal service, and that states should have

``specific, predictable, and sufficient'' mechanisms in place to

maintain and advance universal service. We further agree with the Joint

Board that, because rates are generally affordable, and subscribership

is high in most parts of the country, federal involvement may be

limited to instances where states face significant obstacles in

maintaining reasonably comparable rates. Because affordability is

closely tied to local rate levels, established and regulated by the

states, we conclude that states are well-positioned to adopt local rate

structures and intrastate universal service support mechanisms that

maintain affordable and reasonably comparable rates on a statewide

basis. Federal mechanisms, in contrast, will assure that these goals

are met nationally by providing support to those states where the cost

of providing the supported services substantially exceed the national

average. We find that the appropriate balance of responsibility for

enabling reasonably comparable local rates can be struck through the

methodology recommended by the Joint Board. Accordingly, we reconsider

and reject the decision in the First Report and Order that the federal

share of support should be limited to 25 percent of the difference

between the forward-looking cost of providing the supported services

and a national benchmark, and directed only to the interstate

jurisdiction.

3. Determination of Federal Support Amounts

(1) Determining the National Benchmark. 25. We adopt the Joint

Board's recommendation that federal high-cost intrastate support should

be determined using a cost-based benchmark and should be provided where

states are unable to provide sufficient intrastate universal service

support to non-rural carriers with costs that exceed a national

benchmark. In so doing, we reconsider and reject the determination in

the First Report and Order that federal support for rate comparability

should be determined using a revenue-based benchmark. Given the focus

of the Second Recommended Decision, 63 FR 67837 (December 9, 1998), on

rate comparability, and its recommendation that the Commission should

rely on the cost of providing the supported services when determining

support amounts, rather than local rates, we believe that a cost-based

benchmark is more appropriate. We agree with the Joint Board's re-

examination of this issue and its departure in the Second Recommended

Decision from its original recommendation that a cost-based benchmark

should not be used. We have continued to coordinate with the Joint

Board in developing specific details of the methodology for determining

high-cost support for non-rural carriers.

26. In the first step of the revised support methodology, areas

will be identified where the forward-looking cost of providing the

supported services exceeds the benchmark amount. We agree with the

Joint Board that a cost-based benchmark provides a better gauge with

which to identify areas in need of support to enable reasonably

comparable rates than would a revenue benchmark. Contrary to the

assertions of some commenters, revenues may not accurately reflect the

level of need for support to enable reasonably comparable rates because

states have varying rate-setting methods and goals.

(2) Determining a State's Ability to Support its High-Cost Areas.

27. We further agree with the Joint Board that federal support should

be available to enable local rate comparability if the state cannot do

so on its own, and thus that federal support for this purpose should be

determined based, in part, on a state's ability to support its

universal service needs internally. Given the difficulties in

determining a state's ability to support its high-cost areas, and after

extensive consultation with the Joint Board, we have concluded that a

set dollar amount per line is an

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appropriate method by which to ascertain a state's internal ability to

achieve rate comparability. We agree with the Maine Commission that a

fixed dollar amount per line is a reasonably specific and certain

method by which to determine a state's share of responsibility for

universal service support. We also believe that using a fixed dollar

amount per line is an administratively simple methodology that can be

applied in a consistent manner to all states. In this Order, however,

we have not set a specific per-line dollar amount.

28. We agree in principle with those commenters that assert that

using a fixed percentage of each state's intrastate revenues as the

level of the state's responsibility for its universal service needs

could unduly burden high-cost states that also have high intrastate

revenues because they currently have high rates due to high costs.

However a state chooses to bear its universal service burden (i.e.,

through existing, implicit rate designs or through an explicit support

mechanism), the ability to spread the burden over a larger number of

lines will make the burden easier for a state to bear. In contrast,

using the ratio of high-cost to low-cost lines, one method suggested by

the Joint Board, may not be as predictable as using a fixed dollar

amount per line, because the number of high-cost to low-cost lines may

fluctuate over time. Using the ratio of high-cost to low-cost lines

also would be an administratively difficult method of determining a

state's internal ability to achieve rate comparability, given the fact

that supporting data would need to be obtained from a variety of

sources in each state. Finally, the Joint Board's recommendation that

intrastate support be calculated as a percentage of intrastate

telecommunications revenues was based in part on its judgment that

intrastate telecommunications revenues provide a rough measure of the

funds available to support intrastate mechanisms. Because we have

decided to adopt a cost-based benchmark rather than a benchmark that is

based on revenues, we do not believe that a percentage-based cap on

intrastate responsibility would in every case provide a meaningful

measure of a state's ability to fund intrastate support.

29. We emphasize that states are not, through the adoption of this

approach, required to impose a per-line charge to support universal

service, nor are carriers necessarily entitled to recover this amount

from new or explicit state mechanisms. As the Joint Board explained,

this amount reflects a reasonable estimate of the state's ability to

achieve reasonably comparable rates on a statewide basis and

establishes a level above which federal support, consisting of funds

transferred from other jurisdictions, should be provided to assist the

state in achieving rates that are reasonably comparable to those in

other states. States largely are already making use of this ability by

providing carriers with substantial universal service support, often

through rate averaging and other rate design methodologies, and states

are best positioned to determine how and whether these mechanisms need

to be altered to ensure that carriers do not double-recover universal

service support. Given the substantial amounts of universal service

support already built into state rate designs, we agree with the Joint

Board that providing the full amount of support determined by the

federal methodology from federal mechanisms, without any estimate of

state support, is likely to lead to carrier double-recovery.

30. Thus, in the second step of the revised support methodology, an

assessment will be made as to whether the perceived support need, as

established in the first step of the methodology, exceeds the state's

ability to achieve reasonable comparability of rates. The state's

ability will be estimated by multiplying a dollar figure by the number

of lines served by non-rural carriers in the state. Any needed support

that exceeds this estimate of the state's ability to support its own

high-cost areas will be provided by the federal mechanism. In this way,

the mechanism will ensure that every state will have adequate resources

to ensure reasonably comparable rates.

4. Size of the Federal Support Mechanism and Hold-Harmless

31. In this Order, we adopt the recommendation of the Joint Board

that a hold-harmless provision should be implemented to prevent

substantial reductions of federal support and potentially significant

rate increases. Adoption of a hold-harmless provision will both serve

to avoid any potential rate shock when the new federal support

mechanism goes into effect, and to prevent undue disruption of state

rate designs that may have been constructed upon, and thus are

dependent upon, current federal high-cost support flows. We agree with

the Joint Board that the hold-harmless amounts should be provided in

lieu of the amounts computed by the two-step forward-looking

methodology described, whenever the hold-harmless amount exceeds the

amount indicated by the forward-looking methodology.

32. In determining the size of the new federal mechanism to enable

reasonably comparable local rates, we must fulfill our statutory

obligation to assure sufficient, specific, and predictable universal

service support without imposing an undue burden on carriers and,

potentially, consumers to fund any increases in federal support.

Because increased federal support would result in increased

contributions and could increase rates for some consumers, we are

hesitant to mandate large increases in explicit federal support for

local rates in the absence of clear evidence that such increases are

necessary either to preserve universal service, or to protect

affordable and reasonably comparable rates, consistent with the

development of efficient competition. Rather, we agree with the Joint

Board that current conditions do not necessitate substantial increases

in federal support for local rates. We believe that limiting the amount

of new support that each state receives under the new mechanism is

consistent with the Joint Board's recommendation that the amount of

such federal support should not increase significantly.

33. The Joint Board initially recommended that having the federal

mechanism calculate support using study-area average costs would be one

way roughly to maintain the current size of the federal mechanism.

Indeed, the current system calculates costs using study area-averaged

costs. While we agree with the Joint Board that there is no current

need for large increases in the size of the federal support mechanism

for local rates, we are seeking further comment in an FNPRM on whether

it is equally important, even at this early stage in the development of

local competition, to provide support that is calculated at a more

granular level. Given that telephone service currently is largely

affordable, and any significant increase in the size of federal support

for local rates appears unnecessary, we conclude that we should limit

the size of the federal mechanism, as recommended by the Joint Board.

5. Portability of Support

34. In the Second Recommended Decision, the Joint Board recommended

that the Commission maintain the policy established in the First Report

and Order of making high-cost support available to all eligible

telecommunications carriers, whether they be incumbent LECs,

competitive carriers, or wireless carriers. The Joint Board stated that

portable support is consistent with the principle of competitive

neutrality, and expressed

[[Page 30923]]

its continued support for competitive neutrality as a guiding principle

of universal service reform. GTE and USTA expressed general support for

this recommendation.

35. We conclude, consistent with the Joint Board's recommendation,

that the policy the Commission established in the First Report and

Order of making support available to all eligible telecommunications

carriers should continue. All carriers, including commercial mobile

radio service (CMRS) carriers, that provide the supported services,

regardless of the technology used, are eligible for ETC status under

section 214(e)(1). We reiterate that the plain language of section

214(e)(1) prohibits the Commission or the states from adopting

additional eligibility criteria beyond those enumerated in section

214(e)(1). We also reaffirm that under section 214(e), a state

commission must designate a common carrier, including carriers that use

wireless technologies, as an eligible carrier if it determines that the

carrier has met the requirements of section 214(e)(1). We re-emphasize

that the limitation on a state's ability to regulate rates and entry by

wireless service carriers under section 332(c)(3) does not allow the

states to deny wireless carriers ETC status.

36. We agree with the Joint Board that competitive neutrality is a

fundamental principle of universal service reform, and that portability

of support is necessary to ensure that universal service support is

distributed in a competitively neutral manner. We also agree with US

West that ``portability'' of support should not be used to divert

federal funds from high-cost areas to other areas. For this very

reason, we conclude that all carriers, both incumbent LECs and

competitive LECs, must use high-cost support in a manner consistent

with section 254.

37. Although we adopt a hold-harmless provision we do not believe

that the Joint Board intended incumbent LECs to be held harmless for

federal high-cost support amounts that they lose when a customer elects

to switch carriers and begins taking service from a competitive LEC.

Such a conclusion would contravene the Joint Board's desire that

competitive neutrality be a driving force behind universal service

reform. Moreover, it would eviscerate the concept of ``portable''

support if the loss of customers to a competitor did not change the

incumbent's support amounts. We conclude, therefore, that incumbent

LECs will not be held harmless for reductions in their federal high-

cost support amounts that result from competitive LECs capturing that

incumbent LEC's customers. In addition, a competitive LEC or other

carrier that gains an incumbent LEC's customers, and hence any high-

cost support that the incumbent LEC had received for those customers,

may only use that support in a manner consistent with section 254.

6. Use of Support

38. We conclude that carriers must apply federal high-cost

universal service support in a manner consistent with section 254.

Specifically, section 254(e) requires carriers to use universal service

support ``only for the provision, maintenance, and upgrading of

facilities and services for which the support is intended.''

39. We also conclude that, if we find that a carrier has not

applied its universal service high-cost support in a manner consistent

with section 254, we have the authority to take appropriate enforcement

actions. States or other parties may petition the Commission, pursuant

to section 208 of the Act, if such parties believe that a common

carrier has misapplied its high-cost universal service support. States

or other parties should avail themselves of the Commission's formal

complaint procedures if they believe that a common carrier is not using

its federal universal service high-cost support in accordance with the

directions we have set forth in this Order. Because the Commission's

statutory authority under section 208 extends to violations of the Act

by all common carriers, we conclude that all potential recipients of

high-cost support would be subject to our enforcement jurisdiction.

Depending on the nature of the complaint, furthermore, a complaint

filed by a party against a common carrier alleging misapplication of

universal service high-cost support could qualify for resolution under

the Commission's ``accelerated docket'' procedures.

C. Carrier Recovery of Universal Service Contributions from Consumers

40. Because we have resolved, or are resolving, all of the carrier

recovery issues in the Truth-in-Billing proceeding, we need not revisit

them here. We continue to believe that the ongoing Truth-in-Billing

proceeding, with the detailed record being developed there, is the

correct forum to resolve these issues. We wish to emphasize, however,

that prior to the adoption in the Truth-in-Billing proceeding of any

final standardized label for universal service charges on consumer

bills, we will not hesitate to take enforcement action against carriers

who engage in unjust or unreasonable practices in violation of section

201(b).

D. Assessing Contributions from Carriers

41. The Fifth Circuit has not yet issued a decision in Texas Public

Utility Counsel v. FCC. While we acknowledge the Joint Board's

observation that changing the assessment base to include both

interstate and intrastate end-user telecommunications revenues would

ease burdens on carriers that would not otherwise have to separate

revenues on a jurisdictional basis and that a broader revenue base

would result in a lower assessment rate, these recommendations are

contingent upon the Fifth Circuit's decision in Texas Public Utility

Counsel v. FCC. Accordingly, pending further resolution of this matter

by the Fifth Circuit, the assessment base and the recovery base for

contributions to the high-cost and low-income universal service support

mechanism that we adopted in the First Report and Order shall remain in

effect.

E. Unserved Areas

42. During the proceedings that led to the Second Recommended

Decision, the Arizona Corporation 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 line extension or

construction charges. In the Second Recommended Decision, the Joint

Board expressed its interest in ensuring that telephone service is

provided to unserved areas, and recognized that states other than

Arizona may have unserved areas that may need to be examined. Because

providing service to unserved areas has historically been addressed by

the states, the Joint Board concluded that the states should continue

to address unserved area problems, to the extent they are able to do

so. The Joint Board recognized, however, that there may be some

circumstances that warrant federal universal service support for line

extensions to unserved areas. The Joint Board recommended that the

Commission investigate the question of unserved areas in a separate

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

there are unserved areas that warrant any federal universal service

consideration.

43. We agree with the Joint Board that, while the states have

historically addressed the issue of providing service to unserved

areas, there may be unserved areas, or inadequately-served areas

characterized by extremely low density, low penetration, and high costs

[[Page 30924]]

that warrant additional federal universal service support. Commenters

who addressed this issue agree with the Joint Board that the Commission

should investigate this issue further. Bringing service to these areas

is clearly within the goal of the 1996 Act to accelerate deployment of

services to ``all Americans.'' In accordance with the Joint Board's

recommendations, therefore, we will initiate a separate proceeding in

July of 1999 to more fully develop the record on this issue, and

investigate the nature and extent of the ``unserved area'' issue in the

nation. We anticipate that, as a result of this separate proceeding,

and in consultation with the Joint Board, we will be better able to

determine whether any of these unserved areas should receive federal

universal service support.

F. Periodic Review

44. In the Second Recommended Decision, the Joint Board noted that

the 1996 Act 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. In addition to recommending that the Commission

continue to consult with the Joint Board on matters addressed in the

Second Recommended Decision, the Joint Board specifically recommended

that the Joint Board and the Commission broadly reexamine the high cost

universal service mechanism no later than three years from the

implementation date of the revised universal service high-cost

mechanism.

45. We affirm our commitment to consulting with the Joint Board on

an ongoing basis on issues addressed in this Order. We agree with the

Joint Board that both ongoing and periodic review is necessary in light

of the fact that the telecommunications industry is rapidly changing,

and both competition and technological change may affect universal

service needs in rural, insular, and high cost areas. We conclude that,

in addition to ongoing consultation with the Joint Board, the

Commission and the Joint Board shall, on or before January 1, 2003,

comprehensively examine the operation of the high cost universal

service mechanism implemented in this Order, including the hold-

harmless mechanism.

II. Procedural Matters

A. Regulatory Flexibility Act

46. The Regulatory Flexibility Act (RFA) requires an Initial

Regulatory Flexibility Analysis (IRFA) whenever an agency publishes a

notice of proposed rulemaking, and a Final Regulatory Flexibility

Analysis (FRFA) whenever an agency promulgates a final rule, unless the

agency certifies that the proposed or final rule will not have ``a

significant economic impact on a substantial number of small

entities,'' and includes the factual basis for such certification. The

RFA generally defines ``small entity'' as having the same meaning as

the term ``small business concern'' under the Small Business Act, 15

U.S.C. 632. The Small Business Administration (SBA) defines a ``small

business concern'' as an enterprise that (1) is independently owned and

operated; (2) is not dominant in its field of operation; and (3) meets

any additional criteria established by the SBA.

47. We conclude that neither an IRFA nor a FRFA are required here

because the foregoing Report and Order adopts a final rule affecting

only the amount of high-cost support provided to non-rural LECs. Non-

rural LECs generally do not fall within the SBA's definition of a small

business concern because they are usually large corporations,

affiliates of such corporations, or dominant in their field of

operations. Therefore, we certify, pursuant to section 605(b) of the

RFA, that the final rule adopted in the Report and Order, will not have

a significant economic impact on a substantial number of small

entities. The Office of Public Affairs, Reference Operation Division,

will send a copy of this certification, along with this Report and

Order, to the Chief Counsel for Advocacy of the SBA in accordance with

the RFA. In addition, this certification, Report and Order (or

summaries thereof) will be published in the Federal Register.

B. Effective Date of Final Rules

48. We conclude that the amendments to our rules adopted herein

shall be effective upon publication in the Federal Register. Pursuant

to our rules, our existing high-cost support mechanism is scheduled to

be phased out on July 1, 1999. In this Order, however, we conclude that

the new forward-looking high-cost support mechanism should be

implemented on January 1, 2000, instead of July 1, 1999, as previously

planned. The amendments we adopt in this Order extend the present high-

cost support mechanism from July 1, 1999, until January 1, 2000, when

the new forward-looking high-cost support mechanism will be

implemented. Thus, the amendments must become effective before July 1,

1999. Making the amendments effective 30 days after publication in the

Federal Register would jeopardize the required July 1, 1999 effective

date. Accordingly, pursuant to the Administrative Procedure Act, we

find good cause to depart from the general requirement that final rules

take effect not less than 30 days after their publication in the

Federal Register.

III. Ordering Clauses

49. Accordingly, it is ordered that, pursuant to the authority

contained in sections 1-4, 201-205, 218-220, 214, 254, 303(r), 403, and

410 of the Communications Act of 1934, as amended, 47 U.S.C. 151-154,

201-205, 218-220, 214, 254, 303(r), 403, and 410, the Report and Order

is adopted, June 9, 1999.

50. It is further ordered that part 36 of the Commission's rules,

47 CFR 36, is amended as set forth, effective immediately upon

publication of the text thereof in the Federal Register.

List of Subjects in 47 CFR Part 36

Reporting and recordkeeping requirements and Telephone.

Federal Communications Commission.

Magalie Roman Salas,

Secretary.

Rule Changes

For the reasons discussed in the preamble, the Federal

Communications Commission amends 47 CFR Part 54 as follows:

PART 36--JURISDICTIONAL SEPARATIONS PROCEDURES; STANDARD PROCEDURES

FOR SEPARATING TELECOMMUNICATIONS PROPERTY COSTS, REVENUES,

EXPENSES, TAXES AND RESERVES FOR TELECOMMUNICATIONS COMPANIES

1. The authority citation for part 36 continues to read as follows:

Authority: 47 U.S.C. 151, 154(i) and (j), 205, 221(c), 254, 403,

and 410.

Sec. 36.601 [Amended]

2. In 47 CFR 36.601(c) remove the date ``July 1, 1999'' and add, in

its place each place it appears, the date ``January 1, 2000.''

[FR Doc. 99-14698 Filed 6-8-99; 8:45 am]

BILLING CODE 6712-01-P