Federal-State Joint Board on Universal Service

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 36 and 54

[CC Docket No. 96-45; FCC 99-306]

Federal-State Joint Board on Universal Service

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: This document concerning the Federal-State Joint Board on

Universal Service adopts a new specific and predictable forward-looking

mechanism that will provide sufficient support to enable affordable,

reasonably comparable intrastate rates for customers served by non-

rural carriers. This document also addresses specific

[[Page 67417]]

methodological issues relating to the calculation of forward-looking

support, including the area over which costs should be averaged; the

level of the national benchmark; the amount of support to be provided

for costs above the national benchmark; the elimination of the state

share requirement; and the targeting of the statewide support amount.

It also modifies the rules governing our existing support mechanism to

ensure that support for rural carriers is not substantially changed

when non-rural carriers are removed from that mechanism and

transitioned to the new forward-looking support mechanism.

DATES: Effective December 1, 1999 except for Secs. 36.611(h), 36.612,

54.307(b), (c), 54.309(c), 54.311(c), and 54.313 which contain

information collection requirements that have not been approved by the

Office of Management Budget (OMB). The Commission will publish a

document in the Federal Register announcing the effective date of those

sections.

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 Ninth

Report and Order and Eighteenth Order on Reconsideration in CC Docket

No. 96-45 released on November 2, 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. In the Communications Act of 1934 (Act), as amended by the

Telecommunications Act of 1996 (1996 Act), Congress codified the

Commission's historical policy of promoting universal service to ensure

that consumers in all regions of the nation have access to

telecommunications services. Specifically, in section 254 of the Act,

Congress instructed the Commission, after consultation with the

Federal-State Joint Board on Universal Service (Joint Board), to

establish specific, predictable, and sufficient mechanisms to preserve

and advance universal service.

2. Based on recommendations from the Joint Board in the Second

Recommended Decision, 63 FR 67837 (December 9, 1998), and building on

the framework the Commission set forth in the First Report and Order,

62 FR 32862 (June 17, 1997) and the Seventh Report and Order, 64 FR

30917 (June 9, 1999), we establish in this Order a new federal high-

cost support mechanism that will be sufficient to enable non-rural

carriers' rates for services supported by universal service to remain

affordable and reasonably comparable in all regions of the nation. The

support determined by the mechanism described in this Order will

replace the support that non-rural carriers currently receive from the

existing high-cost fund, which provides support for intrastate rates

and services. The new high-cost support mechanism described in this

Order provides support based on the estimated forward-looking costs of

providing supported services. The forward-looking costs and the cost

model that we will use to estimate them are discussed at length in the

companion Inputs Order adopted. With the adoption of this Order and the

Inputs Order, the Commission's new forward-looking high-cost support

mechanism for non-rural carriers will be ready to begin providing

support effective January 1, 2000.

3. Our methodology for determining non-rural carriers' high-cost

universal service support conforms to the 1996 Act's goals and balances

the competing interests involved in this proceeding. As the 1996 Act

requires, the Commission has developed policies for reforming high-cost

support in consultation with the Joint Board, and this Order reflects

deference to states' interests and needs. We also have attempted to

balance the various and often countervailing concerns of many industry

segments that have an interest in the outcome of this proceeding,

including incumbent local exchange carriers (LECs), interexchange

carriers (IXCs), competitive LECs, and wireless carriers.

4. Because of the disparate interests involved and the complexity

of the issues, however, this has not been an easy process. For example,

high-cost states, which are likely to be net recipients of high-cost

support, have very different views on universal service than low-cost

states, which are likely to be net payors of high-cost support. On the

other hand, all states have expressed similar concerns about the

Commission's jurisdiction. Similarly, incumbent LECs in high-cost

states, which are likely to be major recipients of support,

particularly in the near term, have very different views than other

LECs, IXCs, and wireless carriers, which are major contributors to

federal support mechanisms. In some cases, however, IXCs and wireless

carriers are entering competitive local service markets, so that these

carriers are both contributors and potential recipients.

5. The 1996 Act charged the Commission with resolving the difficult

issues surrounding universal service, within prescribed guidelines, and

so we must balance the competing interests of these divergent parties.

In this proceeding, the Commission has done so in a way that is

faithful to the statute's commitment to ensuring that support

mechanisms serve ``consumers in all regions in the nation,'' and that

consumers in high-cost areas continue to have access to reasonably

comparable services at reasonably comparable rates.

II. Order

A. Introduction

6. In this Order, we adopt a new specific and predictable forward-

looking mechanism that will provide sufficient support to enable

affordable, reasonably comparable intrastate rates for customers served

by non-rural carriers. The methodology for this mechanism is based on

the framework outlined in the Seventh Report and Order, with certain

modifications. Specifically, the forward-looking mechanism compares the

costs of providing supported services in a particular state, as

determined by the cost model, to a national benchmark, and provides

support for costs that exceed that benchmark. In constructing this

mechanism, we begin by examining the appropriate federal and state

roles in providing universal service support for intrastate rates.

Next, we address specific methodological issues relating to the

calculation of forward-looking support, including the area over which

costs should be averaged; the level of the national benchmark; the

amount of support to be provided for costs above the national

benchmark; the elimination of the state share requirement; and the

targeting of the statewide support amount.

We then address the hold-harmless and portability provisions, and

the methods to ensure that non-rural carriers use support in compliance

with the 1996 Act. We next address the assessment and recovery bases

for contributions to the high-cost support mechanism. We also describe

our plan to address implicit support in access charges as part of our

separate Access Charge Reform proceeding. In addition, we modify the

rules governing our existing support mechanism to ensure that support

for rural carriers is not substantially changed when non-rural carriers

are removed from that mechanism and transitioned to the new forward-

looking support mechanism. Finally, we lift the stay on our section 251

pricing rules, effective May 1, 2000. We emphasize that there may be

several

[[Page 67418]]

ways in which we could design the various components of the federal

support mechanism consistent with section 254, but we believe, in light

of the facts before us and in consultation with the Joint Board, that

the method we adopt here appropriately balances the varied and

competing goals of section 254.

7. The new forward-looking support mechanism that we adopt will

provide forward-looking support effective January 1, 2000. As

discussed, however, the actual disbursement of forward-looking support

(retroactive to January 1, 2000) will not occur until the second

quarter of 2000. Moreover, no commenter has claimed that implementation

of the new forward-looking mechanism presents any ``Y2K'' problems.

Thus, we do not foresee any ``Y2K'' issues associated with the

transition to the new forward-looking mechanism because there will be

no actual change in support levels on or around January 1, 2000.

B. Federal and State Roles in Providing Universal Service Support for

Intrastate Rates

8. To construct an appropriate methodology for providing federal

high-cost support, we must first examine the respective roles of

federal and state regulators in providing such support. Historically,

federal programs have provided explicit intrastate high-cost support

for local loop and switching costs that significantly exceeded the

national average. Many state programs, on the other hand, have largely

achieved the goals of intrastate universal service implicitly through

rate structures and, to a lesser extent, through explicit state high-

cost support mechanisms. As discussed, many state rate structures have

included significant implicit support for universal service. The

states' historical authority over intrastate ratemaking, and thus their

primary responsibility for intrastate universal service, has been

recognized by the Commission. The Commission, however, has had a

longstanding goal of promoting universal service nationwide, and thus

has provided support for intrastate-allocated costs that significantly

exceed the national average.

9. In Texas Office of Public Utility Counsel v. FCC, the Fifth

Circuit held that section 254 of the Act did not affect the

proscription, set forth in section 2(b), against Commission regulation

of intrastate rates. Thus, states alone have jurisdiction for setting

rates for intrastate services. Consequently, states alone have the

authority to set rates for intrastate services that are just,

reasonable, affordable, and reasonably comparable. We conclude that

Congress would not have imposed on the Commission obligations regarding

intrastate rates that the Commission does not have the legal authority

to effectuate. Indeed, the Fifth Circuit found that the Commission was

permitted (but not required) to provide federal universal service

support for intrastate services. The Fifth Circuit also found that the

Commission may condition such support on assurances by states that such

federal support will be used for its intended purposes.

10. In the Second Recommended Decision, the Joint Board recognized

that section 254 does not alter the states' historical responsibility

for intrastate universal service. The Joint Board interpreted section

254(b)(3)'s principle that rates be ``reasonably comparable'' to refer

to ``a fair range of urban/rural rates both within a state's borders,

and among states nationwide.'' The Joint Board found that the federal

role in achieving reasonably comparable rates should be to provide

``those amounts necessary to establish a standard of reasonable

comparability of rates across states.'' According to the Joint Board,

the state role is to ``supplement, as desired, any amount of federal

funds it may receive,'' and to ``address issues regarding implicit

intrastate support in a manner that is appropriate to local

conditions.'' Stated another way, the primary federal role is to enable

reasonable comparability among states (i.e., to provide states with

sufficient support so that states can make local rates reasonably

comparable among states), and the primary role of each state is to

ensure reasonable comparability within its borders (i.e., to apply

state and federal support to make local rates reasonably comparable

within the state). This Order adopts that approach as a policy goal. In

addition, the approach is consistent with the Fifth Circuit's decision

regarding the Commission's responsibility for supporting intrastate

services. It also is consistent with Congress's goal of making

universal service support explicit.

C. New Forward-Looking High-Cost Support Methodology

11. This Order sets out a methodology--in essence, a set of

formulas--that will be used to determine non-rural carriers' support

amounts for serving rural and high-cost areas. The methodology computes

a specific support amount, and can be replicated by carriers or other

members of the public. The methodology will change over time only in

the ways we specifically describe herein or pursuant to modifications

that we make in the future pursuant to public notice and comment in

this proceeding. Thus, the methodology is specific and predictable.

Moreover, for the reasons discussed, we find that this mechanism will

result in sufficient support to enable affordable and reasonably

comparable rates for customers in areas served by non-rural carriers.

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

high-cost support should be based on forward-looking costs. Since that

time, the Commission has continued to work to adopt a cost model that

is reasonably accurate and verifiable. As an initial matter, we note

that in the Inputs Order we have affirmed the Commission's decision to

base support calculations on forward-looking costs. Moreover, the

Commission and its staff have undertaken a thorough review of the model

and its input values over the past six months. In so doing, the staff

has coordinated extensively with, and received substantial input from,

the Joint Board staff and interested outside parties. As a result of

this examination of the model, we have concluded in the Inputs Order

that the model generates reasonably accurate estimates of forward-

looking costs and that the model is the best basis for determining non-

rural carriers' high-cost support in a competitive environment. We have

found that none of the criticisms of the model undermine our decision

to use it for calculating non-rural carriers' high-cost support. As

discussed in the Inputs Order, we believe that using the model is the

best way to determine non-rural carriers' support amounts for the

funding year beginning January 1, 2000. We also recognize, however,

that the model must evolve as technology and other conditions change.

We therefore have committed in the Inputs Order to initiating a

proceeding to study how the model should be used in the future and how

the model itself should change to reflect changing circumstances.

13. Finally, as discussed further in the Inputs Order, we reiterate

that the federal cost model was developed for the purpose of

determining federal universal service support, and that it may not be

appropriate to use nationwide values for other purposes, such as

determining prices for unbundled network elements. The Commission has

not considered the appropriateness of this model for any other

purposes, and we have cautioned parties from making any claims in other

proceedings based upon the input values adopted in the Inputs Order.

14. Consistent with the goals of federal universal service support

[[Page 67419]]

discussed, the new forward-looking support mechanism will compare the

average costs of providing supported services in a given area to the

national benchmark, provide support for costs exceeding the national

benchmark, and then target that support based on wire-center costs, so

that the amount of support available to a competitor depends on the

cost level of the wire center. In this section, we examine the area

over which costs should be averaged; the level of the national

benchmark; the amount of support to be provided for costs above the

national benchmark; the elimination of the state share requirement; and

the method for targeting statewide support amounts.

1. Area Over Which Costs Should Be Averaged

15. Federal and State Roles. After further consultation with the

Joint Board, we believe that the federal mechanism should calculate

support levels for non-rural carriers by comparing the forward-looking

costs of providing supported services, averaged at the statewide level,

to the national benchmark. Of all the potential approaches suggested,

we believe that statewide averaging is the approach most consistent

with the federal role of providing support for intrastate universal

service to enable reasonable comparability of rates among states.

Federal high-cost support is generated through contributions by all

interstate telecommunications carriers for purposes of providing

support to high-cost states. This has the effect of shifting money from

relatively low-cost states to relatively high-cost states. By averaging

costs at the statewide level, the federal mechanism compares the

relative costs of providing supported services in different states. The

federal mechanism will then provide support to carriers in those states

with costs that exceed the national average by a certain amount, i.e.,

the national benchmark (135 percent of the national average). This

approach ensures that no state with costs greater than the national

benchmark will be forced to keep rates reasonably comparable without

the benefit of federal support. By averaging costs at the statewide

level, the federal mechanism is designed to achieve reasonable

comparability of intrastate rates among states based solely on the

interstate transfer of funds.

16. The states, in contrast, have the primary responsibility for

ensuring reasonable comparability of rates within their borders. The

federal mechanism leaves this state role intact, but provides support

to carriers in states with average costs substantially in excess of the

national average. With the elimination of the state share requirement,

no state resources are relied upon by the federal mechanism in

providing support for costs above the benchmark. This permits the

states to use their substantial resources to achieve the goal of

reasonably comparable rates within states. In many cases, states have

brought their resources to bear through rate averaging and other forms

of implicit support. Recently, some states have created explicit

support mechanisms. We recognized the states' jurisdiction over

intrastate support in the Seventh Report and Order, when we observed

that ``the erosion of intrastate implicit support does not mean that

federal support must be provided to replace [it]. 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.'' Thus, we believe that

statewide averaging, together with the rest of the methodology we

adopt, is consistent with the division of federal and state

responsibility for achieving reasonable comparability for non-rural

carriers.

17. Joint Board. We also find that averaging costs at the statewide

level is consistent with the Joint Board's vision for the scope and

purpose of the federal high-cost support mechanism. The Joint Board

noted that this Commission alone has the ability to implement a support

mechanism that transfers support from one state to another, and stated

that federal support should be provided to achieve reasonably

comparable rates across states. The Joint Board envisioned that the

states should have the primary responsibility for ensuring reasonable

comparability within states. Although the Joint Board recommended

averaging costs at the study area level instead of the statewide level,

it did so based on its concern that there would be insufficient time

before implementation of the new federal mechanism for some states to

adopt the necessary mechanisms to transfer support among non-rural

carriers in different study areas within a particular state. The

carrier-by-carrier interim hold-harmless approach that we adopt,

however, alleviates the Joint Board's concern. Under that approach,

each non-rural carrier within a state will receive no less support

under the new mechanism than it receives under the current mechanism.

Because the carrier-by-carrier interim hold-harmless approach will be

in effect for up to three years from implementation of the new forward-

looking mechanism, states have no immediate need to transfer support

among study areas within their borders. In addition, states should have

ample time to implement whatever state mechanisms are necessary to

achieve such transfers before the Commission reviews the need for a

hold-harmless provision. Therefore, the only impediment to statewide

averaging identified by the Joint Board--lack of sufficient time for

state action--has been removed by the carrier-by-carrier interim hold-

harmless provision.

18. Alternative Approaches. We have carefully reviewed the

alternatives to statewide averaging, and in the context of non-rural

carriers, in light of the overall methodology we adopt here and the

specific circumstances before us, we conclude that statewide averaging

is the best approach to further the goals of section 254, while

respecting the historical federal and state roles for universal

service. There are several benefits to statewide averaging. Statewide

averaging considers costs averaged with regard to state boundaries,

thereby taking into consideration each state's authority and ability to

achieve reasonable comparability of rates within its borders. We

recognize that averaging at the study area, UNE cost zone, or wire

center levels would have the advantage of providing a more granular

measure of support, and that granularity of support is a desirable goal

in a competitive marketplace. Given the specific circumstances and

purposes we address here, however, we believe that statewide averaging,

coupled with our decision to target the distribution of support to wire

centers with the highest costs in a state, better balances the goal of

targeting support to high-cost areas against the recognition that

states can and should satisfy their own rate comparability needs to the

extent possible before drawing support from other states.

19. For example, assume that the Commission chose to average costs

at the wire center level. Under this approach, the costs of providing

supported services in individual wire centers would be averaged

together to arrive at a national average cost per wire center. Wire

centers with costs that exceed the national benchmark would receive

support. Because the costs in high-cost wire centers in a given state

would not be averaged first with lower-cost wire centers in the same

state, wire center averaging would ignore the state's authority and

ability to ensure reasonable comparability of rates within its borders.

Stated another way, the federal mechanism would shift funds

[[Page 67420]]

from low-cost wire centers (and customers) in other states to fund

high-cost wire centers in the state at issue, and would do so without

giving the state the opportunity to support its high-cost wire centers

with funds from its low-cost wire centers.

20. The same issue arises if costs are averaged at the UNE cost

zone level. Pursuant to our UNE cost zone rules, state commissions must

set different rates for elements in at least three defined geographical

areas within the state to reflect geographic cost differences, and may

employ existing density-related zone pricing plans or other cost-

related zone plans established pursuant to state law. Under a UNE cost

zone approach to averaging forward-looking costs, costs in individual

UNE cost zones would be averaged together to arrive at a national

average cost per UNE cost zone. UNE cost zones with costs greater than

the benchmark would receive support. As in the wire center approach,

the federal mechanism would provide support to high-cost UNE cost zones

in a state, without regard to the state's authority or ability to

ensure reasonable comparability of rates within its borders. In

providing such support, the federal mechanism would shift funds from

low-cost UNE zones in other states to high-cost UNE zones in the

subject state, thus saddling ratepayers in other states with burdens

more appropriately placed on ratepayers in the subject state.

Additionally, although we expressed concern in the Seventh Report and

Order that averaging costs over an area larger than the UNE cost zone

could result in opportunities for arbitrage or other uneconomic

activities, our concern was based on the assumption that all lines

within that larger geographic area would be eligible for the same

amount of support, even though UNE prices would differ among UNE zones.

Because the new federal mechanism calculates the amount of support at

the statewide level, but targets that support to high-cost wire centers

within the state, all lines within a state are not eligible for the

same amount of support. Thus, the potential for arbitrage or other

uneconomic activity is reduced.

21. Study area cost averaging suffers from the same infirmities as

wire center or UNE cost zone averaging. In many states, only one non-

rural carrier provides service. In such states, the state boundary and

the study area boundary are the same. Some states, however, possess

more than one non-rural carrier, and thus more than one study area.

Thus, under a study area averaging approach, costs in individual study

areas would be averaged together to arrive at a national average cost

per study area. Study areas with costs greater than the benchmark would

receive support. The federal mechanism, therefore, would shift funds

from low-cost study areas in one state to high-cost study areas in

another state without regard to the recipient state's authority or

ability to provide support for costs within its borders. In addition,

such a federal mechanism could provide greater support to a state with

more than one study area than it would to a state with a single study

area, even though both states have the same average forward-looking

costs on a statewide level, thus discriminating against a state that

has only one non-rural study area. For example, assume that a state

with a single study area has average costs below the benchmark and

therefore does not receive forward-looking support. Assume that another

state has the same average statewide costs below the benchmark, but has

two study areas, one with costs above the benchmark and one with costs

below the benchmark. Under a study area averaging approach, the federal

mechanism would provide support for the high-cost study area even

though the statewide average cost is below the benchmark. This result

would burden the federal support mechanism (and thus all ratepayers)

with providing support for a state that, through happenstance, has more

than one non-rural carrier, and therefore more than one study area.

Such support should instead be provided by the state in its role as the

primary ratemaking authority and provider of support within its

borders.

22. Several commenters have suggested nonetheless that a decision

by the Commission to average costs over a large geographic area is

merely an arbitrary way to restrain the size of the fund created by the

new forward-looking support mechanism. We reject this assertion.

Congress stated that the Commission shall establish specific,

predictable, and sufficient mechanisms to preserve and advance

universal service. Moreover, the Fifth Circuit approved the

Commission's use of a methodology based on forward-looking cost models

for this task ``[a]s long as [the Commission] can reasonably argue that

the methodology will provide sufficient support for universal service *

* *.'' Thus, despite our general agreement with the Joint Board's

conclusion that the federal fund should not increase substantially at

this time, our primary goal in this proceeding must be to provide

sufficient universal service support to enable reasonable comparability

of rates among states. We meet this policy goal, however, in a manner

consistent with the federal role for providing universal service

support, which, as discussed, we find to be transferring funds among

states. Accordingly, we conclude that statewide averaging of forward-

looking costs is the appropriate means for achieving the federal

mechanism's primary goal of enabling reasonable comparability of rates

among states.

2. National Benchmark

23. In establishing a national cost benchmark to enable reasonably

comparable rates among states, we observe that the 1996 Act does not

define the term ``reasonably comparable.'' We find that Congress' use

of the term ``reasonably'' indicates its recognition that the task of

setting federal support amounts is not an exact science. Accordingly,

consistent with our interpretations of ``reasonableness'' provisions

elsewhere in the statute, we conclude that the term ``reasonably

comparable'' leaves us substantial discretion to determine what is

reasonable, including the manner in which we make that determination.

The Joint Board interpreted the reasonable comparability standard to

refer to a ``fair range'' of urban and rural rates both within a

state's borders, and among states nationwide. In the Seventh Report and

Order, the Commission adopted the Joint Board's interpretation. The

Commission recognized, however, that reasonably comparable does not

mean that rate levels in all states, or in every area of every state,

must be the same. Therefore, we believe that reasonably comparable must

mean some reasonable level above the national average forward-looking

cost per line, i.e., greater than 100 percent of the national average.

In interpreting ``reasonably comparable,'' we must consider the burden

placed on below-benchmark states (and ratepayers) whose contributions

fund the federal support mechanism. We also must ensure that the

benchmark we select, when taken together with other aspects of the

overall funding mechanism, allows for universal service support that is

specific and predictable.

24. We conclude that the level of the national benchmark should be

set at 135 percent of the national average forward-looking cost per

line for non-rural carriers. The federal mechanism will provide support

for costs that exceed this national benchmark. A national benchmark of

135 percent falls within the range recommended by the Joint Board, and

ensures that no state will face costs greater than 35 percent above the

national average cost per line.

[[Page 67421]]

Moreover, setting the benchmark at 135 percent of the national average

forward-looking cost is consistent with the precedent of the existing

support mechanism and the comments we have received. The current

mechanism begins providing support for costs between 115 and 160

percent of the national average cost per line, based on carriers'

books, and the vast majority of non-rural carriers receive all their

current support for costs in this range. The new national benchmark of

135 percent is near the midpoint of this range. Commenters generally

proposed benchmark levels between 80 and 200 percent of the nationwide

average. Vermont and US West, for example, advocated benchmarks of 80

percent and 115 percent, respectively. California stated that it uses

an affordability benchmark of 150 percent. CBT, Sprint, and Western

Wireless also advocate a 150 percent benchmark, and AT&T urges us to

use a 200 percent benchmark. Thus, the 135 percent benchmark is a

reasonable compromise of commenters' proposals. By adopting this

benchmark, we do not mean to suggest that we could not, in consultation

with the Joint Board, determine that a different level of benchmark is

appropriate in future proceedings. In the context of non-rural

carriers, and in light of the overall methodology we adopt here and the

specific circumstances before us, however, we believe that the

benchmark we adopt appropriately balances various goals under the

statute. These goals include, among others, sufficiency, specificity,

and predictability, as well as the need to achieve rate comparability.

In addition, we have also attempted to ensure that the fund is no

larger than necessary, and to minimize burdens on carriers and

consumers that contribute to universal service mechanisms.

25. We believe that this level of support will provide states with

the ability to provide for a ``fair range'' of urban and rural rates

within their borders, and will be sufficient to ``prevent pressure from

high costs and the development of competition from causing unreasonable

increases in rates above current, affordable levels.'' Because no state

will face costs, net of federal support, that exceed 135 percent of the

national average, the federal mechanism will prevent excessive upward

pressure on rates caused by high costs. This will remain true even as

competition develops and pushes prices toward economic cost. We

therefore find that using a benchmark set at 135 percent of the

national average forward-looking cost per line will, at this time, in

light of the facts before us, provide sufficient support to enable

reasonably comparable rates.

26. We recognize that, irrespective of our policies, the

development of competition may place pressure on implicit support

mechanisms at the state level. For example, states that use above-cost

pricing in urban areas to subsidize below-cost service in rural areas

may face pressure to deaverage rates as competitors begin to offer

cost-based rates to urban customers. Although this development may

compromise states' ability to facilitate universal service using

implicit support, it should not compromise states' ability to

facilitate universal service through explicit support mechanisms. In

addition, we do not believe it would be equitable to expect the federal

mechanism--and thus ratepayers nationwide--to provide support to

replace implicit state support that has been eroded by competition if

the state possesses the resources to replace that support through other

means at the state level. This approach is consistent with our

discussion, of the appropriate, respective roles of the state and

federal jurisdictions in providing universal service support.

27. We also believe that a national benchmark of 135 percent

strikes a fair balance between the federal mechanism's responsibility

to enable reasonable comparability of rates among states and the burden

placed on below-benchmark states (and ratepayers) whose contributions

fund the federal support mechanism. We recognize that selecting the

national benchmark is not an exact science. We conclude, however, that

a national benchmark of 135 percent of the national average cost per

line will allow the federal mechanism to provide sufficient support

pursuant to the Act, while at the same time minimizing the burden on

those who fund the federal support mechanism. Moreover, we believe

that, given the specific circumstances here, the mechanism we adopt is

consistent with the Joint Board's conclusion that the federal high-cost

support fund should be only as large as necessary, consistent with

other requirements of the law.

28. Some commenters have suggested that our choice of a benchmark

will necessarily be arbitrary, and some have suggested that we will

intentionally set the benchmark with an eye to minimizing the size of

the federal support mechanism. We reject these claims. We remain

committed to the objective that the fund not be any larger than is

necessary to achieve the various goals of section 254. As noted, we

have attempted to set a benchmark level that provides sufficient

support to enable reasonably comparable rates, as the statute requires.

To do so, we have relied on the Joint Board's recommendations, the

existing mechanism, and commenters' proposals to arrive at a benchmark

level that reasonably balances the roles of the states and the federal

mechanism to meet the statutory goals.

3. Support for Costs Above the National Benchmark

29. All of the proposals to limit the size of the high-cost support

mechanism assume that costs will be averaged at the wire center or UNE

cost zone level. As discussed, however, we have concluded that

averaging costs below the statewide level is not the most appropriate

means for the federal support mechanism to achieve the goals of the

Act. We recognize that our primary mission in this proceeding is to

construct a federal mechanism that provides sufficient support, and we

conclude that using one of the proposals described to limit the amount

of support available to states from the federal mechanism would not

provide sufficient support and would be contrary to Congress' goals and

the Fifth Circuit's decision. Therefore, we reject all four of these

proposals.

30. We observe, however, that providing support for all loop costs

that exceed the federal benchmark would not properly take account of

our separations rules. Pursuant to the separations process, incumbent

carriers currently recover, through interstate access rates, a portion

of their book costs for all components necessary to provide supported

services, e.g., loop costs, switching costs, etc. Our separations rules

specify the percentage of costs that will be recovered through

interstate rates. In producing cost estimates, the cost model estimates

only the forward-looking intrastate (i.e., separated) costs for all of

the components necessary to provide supported services, with three

important exceptions: loop costs, port costs, and local number

portability (LNP) costs. The model's estimates for loop and port costs

consist of both the intrastate and interstate (i.e., unseparated) costs

of the loop and port. The model's estimates of LNP costs consist solely

of interstate costs. In this Order, we are addressing support to enable

the reasonable comparability of intrastate rates. It would therefore be

inappropriate for us to address costs in this Order that are recovered

through interstate rates, as these costs, or their recovery, will not

directly affect intrastate rates. Our methodology must therefore

account for the percentage of

[[Page 67422]]

costs that are recovered in the interstate jurisdiction in determining

how much support should be provided to enable the reasonable

comparability of intrastate rates.

31. Our current separations rules allow carriers to recover 25

percent of their book loop costs through interstate rates. Carriers

also recover 15 percent of their book port costs, on average, through

interstate rates, and 100 percent of their LNP costs through the

federal LNP cost recovery mechanism. We therefore conclude that the

forward-looking mechanism will calculate support based on 75 percent of

forward-looking loop costs, 85 percent of forward-looking port costs,

and 0 percent of forward-looking LNP costs, as well as 100 percent of

all other forward-looking costs determined by the cost model. Based on

the percentage of forward-looking costs that the intrastate portion of

each of these items represents, we have determined that together they

represent 76 percent of total forward-looking costs. Therefore, we

conclude that the federal mechanism should provide 76 percent of the

portion of the forward-looking cost of providing the supported services

that exceeds the national benchmark. We emphasize that this will not

undermine the federal mechanism's ability to provide sufficient

support. Rather, it is merely a safeguard to ensure that our mechanism

adequately takes account of our separations rules and the division of

cost recovery responsibility set forth in those rules. If necessary, we

will adjust this support amount in light of further developments in our

ongoing separations and access charge reform proceedings.

4. Elimination of the State Share Requirement from the Forward-Looking

Support Methodology

32. After further consultation with the Joint Board, we conclude

that determining support amounts for non-rural carriers in each state

based on statewide averaged costs will, under these specific

circumstances, more accurately reflect each state's ability to support

universal service with its own resources than would imputing a per-line

amount to each state to support universal service internally.

Therefore, we reconsider and eliminate the state share requirement from

the methodology adopted in the Seventh Report and Order.

33. We find that this result is consistent with both section 254

and the Joint Board's overarching recommendation that federal support

not be dependent on any particular state action and that ``no state can

or should be required by the Commission to establish an intrastate

universal service fund.'' We conclude that the Joint Board's general

recommendation, namely that the Commission abstain from requiring any

state action as a condition for receiving federal high-cost universal

service support (other than state certifications), represents the best

policy choice at this time. Furthermore, we conclude that, together

with the statewide averaging approach discussed, the elimination of the

state share requirement better fosters the Joint Board's goal of

ensuring that the states' ability to provide for universal service

needs within their borders is reflected in the federal mechanism. Thus,

we reconsider and eliminate the state share requirement from the

methodology for the forward-looking high-cost support mechanism for

non-rural carriers.

5. Targeting Statewide Support Amounts

34. We conclude that, after the total amount of forward-looking

support provided to carriers in a particular state has been determined

in accordance with the methodology set forth, which is based on

statewide average costs, the total support amount will then be targeted

so that support is only available to carriers serving those wire

centers with forward-looking costs in excess of the benchmark, and so

that the amount available per line in a particular wire center depends

on the relative cost of providing service in that wire center. This

targeting approach has two main effects. First, once the forward-

looking mechanism calculates the total amount of support available

within a state, the targeting approach determines which carriers

receive support, and how much support is provided to each carrier.

Second, the targeting approach determines the amount of support that is

available to a competitive carrier that captures lines from an

incumbent carrier.

35. As discussed, the primary role of the federal mechanism is to

transfer funds among states, while states are primarily responsible for

transferring funds within their borders. Our targeting approach is

consistent with this determination. The total amount of support

available within the state is based, as discussed, on statewide costs--

not wire center costs--relative to the federal benchmark. If we did not

target support, then the same amount of federal support would be

available for any line served by a competitor within the state. Thus,

support would be available, for example, to competitors that serve only

low-cost, urban lines, regardless of whether the cost of any of the

lines served exceeds the benchmark. This result would create uneconomic

incentives for competitive entry, and could result in support not being

used for the purposes for which it was intended, in contravention of

section 254(e).

36. In the Seventh Report and Order, the Commission described this

targeting process as follows: ``if we were to determine total support

amounts in each study area by running the model to estimate costs at

the study area level, [we propose] to distribute support by running the

model again at the wire center level in order to target support to

high-cost wire centers within the study area.'' We clarify that this

process does not involve running the model more than once. The cost

model, by design, calculates costs at the wire center level. The wire

center costs generated by the model can then be averaged together, as

desired, at higher levels of aggregation, such as the UNE cost zone

level (assuming UNE cost zones are composed of wire centers), the study

area level, or the statewide level. Thus, the model only needs to be

run once to determine forward-looking costs for whatever methodology is

selected.

37. Under the methodology we adopt, the model's wire center costs

are averaged at the statewide level and a total statewide support

amount is determined. That total statewide support amount is then

targeted, based on the individual high-cost wire center costs in the

state, as previously determined by the cost model, that are above the

benchmark. For example, assume that a state has three wire centers with

ten lines in each wire center. Assume that the average forward-looking

cost per line in each wire center is as follows: Wire Center 1--$20,

Wire Center 2--$30, Wire Center 3--$40. Thus, the statewide average

cost per line is $30 ((($20 x 10)+($30 x 10)+($40 x 10))/30 lines).

Assume further that the national benchmark equates to $25 per line.

Using the statewide methodology adopted, the total amount of support

provided to the carriers in the state would be $114.00 (($30-$25) x 30

lines x 76%), or $3.80 per line per month of untargeted support. Under

the targeting approach, however, this support is distributed to

carriers serving lines in the highest-cost wire centers, based on the

difference between costs in that wire center and the benchmark, the

number of lines served, and a pro rata factor. Any carrier serving

customers in the low-cost wire center receives no support. Targeting

support to high-cost wire centers requires three calculations. First,

support is calculated separately

[[Page 67423]]

for each wire center (wc-scale support). Wire Center 1 is not entitled

to any support because its cost is below the benchmark. Wire Center 2's

wc-scale support would be $38.00 (($30-$25) x 10 lines x 76%). Wire

Center 3's wc-scale support would be $114.00 (($40-$25) x 10

lines x 76%). Second, a pro-rating factor is calculated for the state.

Total wc-scale support for both wire centers is $152 ($38.00+$114.00).

Because only $114.00 of support is available in the state, each wire

center will receive 75 percent ($114/$152) of its wc-scale support.

Third, the pro-rating factor is applied to each wire center eligible

for support. In Wire Center 2, support will be $2.85 per line

($38.00 x 75%/10). In Wire Center 3, support will be $8.55 per line

($114.00 x 75%/10). Total support in the state, distributed in this

way, is $114.00 (($2.85 x 10)+($8.55 x 10)). The targeting mechanism,

therefore, provides support to carriers serving the highest cost

customers, but within the overall limit on the state's support amount

from the federal mechanism.

38. By comparison, a uniform distribution in the hypothetical state

described would result in all lines in the state receiving $3.80. Thus,

even though a carrier serving lines in Wire Center 1 has costs ($20)

below the benchmark ($25), it would receive a substantial amount of

support ($3.80) for those lines, resulting in a windfall for the

carrier and an artificial incentive for other carriers to compete in

that wire center. At the same time, although the carrier serving lines

in Wire Center 3 has costs ($40) above the benchmark ($25), it would

receive a support amount ($3.80) substantially below its costs, thereby

discouraging competitive entry in that wire center and placing

increased pressure on the state to provide additional support.

39. By targeting the total amount of support to high-cost wire

centers, the federal mechanism avoids the inefficiencies and potential

market distortions that could be caused by distributing federal support

on a uniform statewide basis. We believe that this distribution

methodology ensures that federal high-cost support provided by state-

to-state transfers will flow to carriers serving the high-cost areas

within each state.

40. After further consultation with the Joint Board, we recognize

that some states may wish to have federal support targeted to an area

different than the wire center, e.g., the UNE cost zone, in order to

achieve the individual state ratemaking goals unique to a particular

state. We believe that such an approach is consistent with the states'

primary role in ensuring reasonable comparability within their borders

and would give the states a degree of flexibility in reaching that

goal. Therefore, we conclude that a state may file a petition for

waiver of our targeting rules, asking the Commission to target federal

support to an area different than the wire center. Such a petition

should include a description of the particular geographic level to

which the state wishes federal support to be targeted, and an

explanation of how that approach furthers the preservation and

advancement of universal service within the state.

D. Interim Hold-Harmless Provision

41. We conclude that the new federal high-cost support mechanism

will contain an interim hold-harmless provision that provides hold-

harmless support on a carrier-by-carrier basis. That is, no carrier

will receive less support, on a per-line basis, than it would have

received if we had continued to provide support under the existing

high-cost support mechanism. To accomplish this result, we shall

calculate interim hold-harmless support pursuant to the existing high-

cost support mechanism for non-rural carriers in part 36 of our rules

for the duration of the interim hold-harmless provision. Interim hold-

harmless support also shall include LTS under Sec. 54.303 of our rules

for those non-rural carriers that would otherwise be eligible for LTS

if we had continued to provide support under our existing high-cost

support mechanism. To the extent that a carrier qualifies for forward-

looking support, in an amount greater than it would receive pursuant to

the existing mechanism, the carrier shall receive support based solely

on the forward-looking methodology. To the extent that a carrier does

not qualify for forward-looking support, or qualifies for forward-

looking support in an amount less than it would receive pursuant to the

existing mechanism, the carrier shall receive interim hold-harmless

support based solely on the existing support mechanism in part 36 of

our rules, and, if applicable, LTS under Sec. 54.303 of our rules.

Thus, we will ensure that no non-rural carrier will receive less

support on a per line basis than it receives under the current

mechanism.

42. Existing federal high-cost support under part 36 and

Sec. 54.303 is calculated on a carrier-by-carrier basis and is

reflected in the recipient carrier's rates. Our continuation of the

high-cost support mechanism under part 36 and Sec. 54.303, as an

interim hold-harmless provision, therefore, effectively adopts a

carrier-by-carrier hold-harmless approach. The majority of commenters

supporting a hold-harmless provision are in favor of a carrier-by-

carrier approach. We believe that a carrier-by-carrier hold-harmless

provision is necessary to ensure that no sudden or undue disruption in

consumer rates occurs during the transition to the new federal high-

cost support mechanism based on forward-looking economic costs.

Moreover, as discussed, an interim carrier-by-carrier hold-harmless

provision ensures that states will not have to take immediate action to

transfer funds among carriers within their borders as a result of our

decision to average costs at the statewide level.

43. We emphasize, however, that we do not intend for the

continuation of high-cost support under part 36 and Sec. 54.303 as an

interim hold-harmless provision, to insulate carriers from changes in

their support amounts due to changed circumstances unrelated to the

rules adopted in this Order. If a carrier becomes ineligible for high-

cost universal service support after January 1, 2000, then the carrier

shall not continue to receive hold-harmless support under part 36 or

Sec. 54.303 of our rules. In addition, our continuation of support

under part 36 and Sec. 54.303 as an interim hold-harmless provision

ensures that, if the carrier's high-cost universal service support

would have changed under the existing mechanism after December 31,

1999, then the carrier's hold-harmless support will be adjusted to

reflect that change. We believe that computing hold-harmless support

under part 36 and Sec. 54.303 of our rules on an ongoing basis is a

better policy choice than simply ``freezing'' support levels as of a

certain date. Freezing hold-harmless support could provide windfalls,

or create hardships, for carriers that should have experienced changes

in their support amounts through the normal operation of part 36 and

Sec. 54.303. Therefore, we reject the frozen hold-harmless approach.

44. We recognize that an interim carrier-by-carrier hold-harmless

provision may increase the size of the federal high-cost fund slightly

when compared to a state-by-state hold-harmless provision. Nonetheless,

we agree with commenters that this concern is outweighed by the

potential for rate shock in high-cost areas during the transition to a

forward-looking mechanism if carriers are not fully held harmless.

Under the interim carrier-by-carrier hold-harmless provision that we

adopt, the amount of federal high-cost support provided to each non-

rural carrier will be the greater of the amount indicated by the new

forward-looking

[[Page 67424]]

support mechanism, or the explicit amount of federal high-cost support

that the carrier would receive, on a per-line basis, under the

operation of the existing high-cost support mechanism at part 36 and

Sec. 54.303 of the Commission's rules. Specifically, all carriers will

continue to report cost and loop count data pursuant to part 36. In the

event that carriers in a particular state do not qualify for forward-

looking support pursuant to part 54 of our rules because the statewide

average forward-looking cost per line is below the national cost

benchmark, or the amount determined pursuant to Sec. 54.309 of our

rules is less than the amount that would be determined under part 36

and Sec. 54.303, then those carriers shall receive interim hold-

harmless support pursuant to part 36 and, if applicable, Sec. 54.303.

This provision will ensure that no non-rural carrier receives less

federal high-cost universal service support per line under the new

mechanism than it receives under the current mechanism.

45. Rather than simply making available a uniform hold-harmless

amount to each non-rural carrier, however, we conclude that hold-

harmless support must be targeted for competitive purposes to the high-

cost wire centers served by a non-rural carrier. We believe that

targeting hold-harmless support to individual wire centers is necessary

for many of the same reasons that we chose to target forward-looking

support to individual wire centers. By targeting hold-harmless support

to individual wire centers, we can encourage competitive entry in high-

cost wire centers. Targeting also avoids the economic inefficiencies

that could be caused by making hold-harmless support available to

competitors on a uniform basis among all of the wire centers served by

a carrier, such as arbitrage between deaveraged UNE rates and averaged

support in low-cost wire centers.

46. Because the interim hold-harmless support provided pursuant to

part 36 and Sec. 54.303 of our rules, unlike forward-looking support,

will be based on carriers' book costs rather than the forward-looking

methodology, the amount of hold-harmless support provided is not

related to the level of the national benchmark. Thus, during the

limited period for which hold-harmless support is available, certain

carriers may receive support for costs that are below the national

benchmark for forward-looking support. To ensure that hold-harmless

support is available in the highest cost wire centers, we adopt a

method for targeting hold-harmless support that is slightly different

than the method we adopted for targeting forward-looking support.

Specifically, as discussed in the following paragraph, we adopt a

cascading approach to target hold-harmless support, so that a carrier's

highest-cost wire centers receive support before its lower-cost wire

centers receive support. Thus, while the total amount of interim hold-

harmless support available to a carrier is determined pursuant to part

36 and Sec. 54.303, that amount is targeted to the carrier's individual

wire centers based on the forward-looking costs of providing supported

services in those wire centers as determined pursuant to Sec. 54.309 of

our rules. As we explained, carriers will receive lump sum support

payments, and the states can direct carriers to spend the federal

support in a manner consistent with section 254(e), though not

necessarily in the wire center to which the support was targeted. By

targeting hold-harmless support, however, the federal mechanism ensures

that, in a wire center where the incumbent is receiving hold-harmless

support, a competitor will receive an amount of support that is related

to the costs in that wire center.

47. For example, assume a state has a single carrier with three

wire centers in the state and ten lines in each wire center. Assume

that the average forward-looking cost per line in each wire center is

as follows: Wire Center 1--$15, Wire Center 2--$20, Wire Center 3--$25.

Thus, the statewide average cost per line is $20 (($150+ $200+$250)/30

lines = $20/line). Assume further that the national benchmark equates

to $22 per line, and therefore the carrier receives no forward-looking

support under the forward-looking methodology in part 54 of our rules,

which averages costs at the statewide level. Also assume that the

carrier receives a total of $90 of interim hold-harmless support as

determined pursuant to part 36 of our rules. Under our targeting

approach, the hold-harmless support is distributed first to the wire

center with the highest costs until that wire center's costs, net of

support, equal the costs in the next most expensive wire center. This

process continues in a cascading fashion until all support has been

distributed. In this example, the first $50 of hold-harmless support

($5 per line) would be distributed to Wire Center 3, so that the

average forward-looking cost in Wire Center 3, net of hold-harmless

support, is reduced to $20 per line. This places Wire Center 3 on equal

footing with Wire Center 2, which also has average costs of $20 per

line. The remaining $40 of hold-harmless support would be divided

equally on a per-line basis between Wire Center 2 and Wire Center 3.

Thus, both wire centers would receive an additional $2 per line ($40/20

lines), so that the average forward-looking costs, net of hold-harmless

support, in Wire Center 2 and Wire Center 3 would be $18 per line.

48. Moreover, because we have decided that a competitor that

captures a customer from an incumbent is entitled to any per line hold-

harmless support that the incumbent is receiving, the distribution

described is necessary to prevent uneconomic incentives for competitive

entry, potential for arbitrage with UNE rates, and to ensure that

support reaches the areas where it is needed most. If hold-harmless

support were not targeted to high-cost wire centers, then a uniform

hold-harmless amount would be available for a competitor serving any

line in the state, including low-cost lines. For example, in the

hypothetical situation described, a uniform distribution would result

in all lines being eligible for $3 ($90/30 lines) of hold-harmless

support. Thus, even though the cost of providing service is relatively

low in Wire Center 1 ($15), competitors serving lines in that wire

center would receive a significant amount of support for those lines,

creating an artificial incentive for other carriers to compete in that

wire center. At the same time, the cost of providing service is

relatively high in Wire Center 3 ($25), but this would not be reflected

in the amount of support available to competitors, thereby discouraging

competitive entry in that wire center. Accordingly, we conclude that

targeting forward-looking support to high-cost wire centers is an

appropriate means for achieving Congress's goal of promoting

competition in the marketplace.

49. We decided to allow individual states to petition the

Commission to have federal forward-looking support targeted for

competitive purposes to an area different from the wire center. We

concluded that such an approach is consistent with the states' primary

role in achieving the goal of reasonable comparability within their

borders and would allow states greater flexibility to reach that goal.

We conclude that the same rationale applies with equal force in the

context of targeting interim hold-harmless support. Accordingly, we

conclude that a state may file a petition for waiver of our targeting

rules, asking the Commission to target interim hold-harmless support to

an area different than the wire center. Such a petition should include

a description of the particular geographic level to which the state

wishes interim hold-harmless support to be targeted, and an

[[Page 67425]]

explanation of how that approach furthers the preservation and

advancement of universal service within the state.

50. As discussed, we are adopting several amendments to the current

data reporting requirements to ensure that cost and loop count data

submitted by non-rural carriers under part 36 will conform with loop

count data submitted under our part 54 rules for forward-looking

support. All carriers serving customers in areas served by non-rural

incumbent LECs will be required to file data on a quarterly schedule,

instead of the present annual schedule with voluntary quarterly

updates. The filing of quarterly data for rural carriers, however,

shall remain voluntary. By synchronizing the reporting requirements for

non-rural high-cost support, we can ensure that all non-rural carriers

receive support based on data from the same time periods. We conclude

that this synchronization will result in a high-cost support mechanism

that is easier to administer and is more equitable, non-discriminatory,

and competitively neutral.

51. We stress that the interim carrier-by-carrier hold-harmless

provision that we adopt is a transitional provision intended to protect

consumers in high-cost areas during the shift to the new federal

support mechanism that will provide support based on statewide-averaged

forward-looking costs of providing the supported services. We agree

with commenters that the hold-harmless provision should not be a

perpetual entitlement, and should be phased out as carriers and states

adapt to the new forward-looking mechanism. Accordingly, we request

that, on or before July 1, 2000, the Joint Board provide the Commission

with a recommendation on how the interim hold-harmless provision can be

phased out or eliminated without causing undue disruption to consumer

rates in high-cost areas. In addition, we reaffirm our original

conclusion in the Seventh Report and Order that the Commission and the

Joint Board shall, no later than January 1, 2003, comprehensively

examine the operation of the revised high-cost universal service

support mechanism.

E. Portability of Support

52. We reiterate that federal universal service high-cost support

should be available and portable to all eligible telecommunications

carriers, and conclude that the same amount of support (i.e., either

the forward-looking high-cost support amount or any interim hold-

harmless amount) received by an incumbent LEC should be fully portable

to competitive providers. A competitive eligible telecommunications

carrier, when support is available, shall receive per-line high-cost

support for lines that it captures from an incumbent LEC, as well as

for any ``new'' lines that the competitive eligible telecommunications

carrier serves in high-cost areas. To ensure competitive neutrality, we

believe that a competitor that wins a high-cost customer from an

incumbent LEC should be entitled to the same amount of support that the

incumbent would have received for the line, including any interim hold-

harmless amount. While hold-harmless amounts do not necessarily reflect

the forward-looking cost of serving customers in a particular area, we

believe this concern is outweighed by the competitive harm that could

be caused by providing unequal support amounts to incumbents and

competitors. Unequal federal funding could discourage competitive entry

in high-cost areas and stifle a competitor's ability to provide service

at rates competitive to those of the incumbent.

53. We reiterate our finding in the First Report and Order that,

where a competitive eligible telecommunications carrier is providing

service to a high-cost line exclusively through unbundled network

elements (UNEs), that carrier will receive the universal service

support for that high-cost line, not to exceed the cost of the

unbundled network elements used to provide the supported services. The

remainder of the support associated with that element, if any, will go

to the incumbent LEC.

54. As discussed, we are modifying our reporting requirements to

synchronize non-rural carrier submissions under part 36 and part 54 of

our rules. Under our current part 36 rules, incumbent LECs are required

to report cost and loop-count data on July 31st of each year. If they

so choose, incumbent LECs may update the July 31st data on a quarterly

basis. Part 54 of the Commission's rules, on the other hand, requires

competitive eligible telecommunications carriers to report loop-count

data on July 31st of each year. Unlike the rules applicable to

incumbent LECs, however, part 54 of the Commission's rules does not

currently allow competitive eligible telecommunications carriers to

update their loop-count data on a quarterly basis. To ensure that

forward-looking support provided under part 54 and interim hold-

harmless support provided under part 36 and Sec. 54.303 are based on

data from the same reporting periods, and to ensure equitable, non-

discriminatory, and competitively neutral treatment of incumbent LECs

and competitive eligible telecommunications carriers, we shall require

mandatory quarterly reporting for non-rural carriers under both part 54

and part 36 of our rules. By allowing incumbent LECs and competitive

eligible telecommunications carriers to obtain support for high-cost

lines on a regular quarterly basis, our rules will facilitate

portability of support among carriers. In addition, the quarterly

filing requirement is consistent with the Universal Service

Administrative Company's (USAC) quarterly submission of program demand

projections, and should allow more accurate projections based on

regular quarterly loop counts.

F. Use of Federal High-Cost Support by Carriers

55. We conclude that providing federal universal service high-cost

support in the form of carrier revenue, to be accounted for by states

in their ratemaking process, is an appropriate mechanism by which to

ensure that non-rural carriers use high-cost support only for the

``provision, maintenance and upgrading of facilities and services for

which the support is intended,'' in accordance with section 254(e) of

the Act. We note, however, that we are not attempting to direct the

manner in which states incorporate federal high-cost support into their

ratemaking processes, nor are we setting forth elaborate rules for

compliance with section 254(e). Rather, we anticipate that states will

take the appropriate steps to account for the receipt of federal high-

cost support and ensure that the federal support is being applied in a

manner consistent with section 254, and then certify to the Commission

that federal high-cost support received by non-rural carriers in their

states is being used appropriately. Because the support that will be

provided by the methodology described in this Order is intended to

enable the reasonable comparability of intrastate rates, and states

have primary jurisdiction over intrastate rates, we find that it is

most appropriate for states to determine how the support is used to

advance the goals set out in section 254(e).

56. For example, a state could adjust intrastate rates, or

otherwise direct carriers to use the federal support to replace

implicit intrastate universal service support to high-cost rural areas,

which was formerly generated by above-cost rates in low-cost urban

areas, that has been eroded through competition. A state could also

require carriers to use the federal support to upgrade facilities in

rural areas to ensure that services

[[Page 67426]]

provided in those areas are reasonably comparable to services provided

in urban areas of the state. These examples are intended to be

illustrative, not exhaustive. As long as the uses prescribed by the

state are consistent with section 254(e), we believe that the states

should have the flexibility to decide how carriers use support provided

by the federal mechanism.

57. As a regulatory safeguard, however, we adopt rules in this

Order requiring states that wish to receive federal universal service

high-cost support for non-rural carriers within their territory to file

a certification with the Commission stating that all federal high-cost

funds flowing to non-rural carriers in that state will be used in a

manner consistent with section 254(e). This certification requirement

is applicable to non-rural incumbent LECs, and competitive eligible

telecommunications carriers seeking high-cost support in the service

area of a non-rural LEC. The certification shall be filed annually and

shall be applicable to all non-rural carriers that the state certifies

as eligible to receive federal universal service high-cost support

during that annual period. A state may file a supplemental

certification for carriers not subject to the state's annual

certification. A certification may be filed in the form of a letter

from the appropriate state regulatory authority, and shall be filed

with (1) the Commission and (2) USAC. Each certification shall become

part of the public record maintained by the Commission. We note that

some state commissions, including Wisconsin, may lack direct regulatory

oversight to ensure that federal support is reflected in intrastate

rates. We believe, nonetheless, that states that lack direct authority

over rates in their jurisdictions would still be able to certify to the

Commission that a non-rural carrier in the state had accounted to the

state commission for its receipt of federal support, and that such

support had been used only for the provision, maintenance, and

upgrading of facilities and services for which the support is intended.

Indeed, in states with limited jurisdiction over carriers, the state

need not initiate the certification process itself. Instead, in such

states, non-rural LECs, and competitive eligible telecommunications

carriers serving lines in the service area of a non-rural LEC, may

formulate plans to ensure compliance with section 254(e), and present

those plans to the state, so that the state may make the appropriate

certification to the Commission. Under our rules, a state shall also

have the authority to revoke a certification in the event that it

determines that a carrier has not complied with section 254(e). Because

states are responsible for making section 254(e) certifications to the

Commission, challenges to the propriety of the certifications, or

revocation of the certifications, should be brought at the state level.

58. To ensure that non-rural carriers comply with section 254(e),

we do not believe that a non-rural carrier in a particular state should

receive federal forward-looking support until the Commission receives

an appropriate certification from the state. Absent such a

certification, the Commission has no reliable way of knowing whether

the forward-looking support is being used properly, because of the

Commission's limited authority over carriers' intrastate activities.

Therefore, we conclude that, during the first year of operation of the

new federal forward-looking support mechanism (January 1, 2000-December

31, 2000), a non-rural carrier in a particular state will not receive

forward-looking support until the state files an appropriate

certification with the Commission. The carrier will, however, receive

interim hold-harmless support during the first year in the event that

the state does not make the required certification. Given the short

time before implementation of the new mechanism, we believe that

providing interim hold-harmless support in the absence of a state

certification is necessary to prevent possible rate shocks that might

occur absent such support.

59. After further consultation with the Joint Board, we conclude

that all federal high-cost support flowing to non-rural carriers in the

second year of operation and thereafter, including both forward-looking

support and interim hold-harmless support (to the extent that this

measure is still in place), should be contingent upon the state's

filing the section 254(e) certification described. Although we

recognize that some states will need more time than others to produce a

certification, we must have a reliable way of knowing that federal

support is being used in a manner consistent with section 254(e). We

believe that the certification requirement is not an overly burdensome

means of effectuating Congress's goals, and we conclude that a year is

a sufficient period of time for states to file the required

certification with the Commission.

60. Under our existing rules, USAC submits estimated universal

service support requirements, including high-cost support, to the

Commission two months before the beginning of each quarter. Thus, for

the first quarter of 2000, USAC will submit estimated universal service

support requirements on or before November 1, 1999. The Commission uses

those support requirements to establish a contribution factor for the

upcoming quarter. USAC then uses the contribution factor to bill

carriers and collect the appropriate amount of support to fund the

universal service programs. In order for USAC to submit an accurate

estimate of high-cost demand, it will need to know which carriers have

been certified by states pursuant to the section 254(e) certification

process before it files its estimate. To allow USAC sufficient time to

process section 254(e) certifications and estimate demand, we conclude

that states should file such certifications one month before USAC's

filing is due. For a given program year of the new forward-looking

high-cost support mechanism, this would mean that section 254(e)

certifications would be due on October 1.

61. We recognize that the timing of the adoption of this Order will

not give states sufficient time to file section 254(e) certifications

for the first program year 2000 under this approach. Therefore, for the

first and second quarters of 2000 only, non-rural carriers in a state

shall be entitled to retroactive forward-looking high-cost support for

those quarters. Specifically, if the state files its certification on

or before January 1, 2000, then carriers subject to that certification

shall receive forward-looking support for the first quarter of 2000 in

the second quarter of 2000, and forward-looking support for the second

quarter of 2000 in that quarter. If the state files its certification

on or before April 1, 2000, and certifies carriers for the first and

second quarters of 2000, then carriers subject to that certification

shall receive forward-looking support for the first quarter of 2000 in

the third quarter of 2000, together with forward-looking support for

the third quarter of 2000. Such carriers shall receive forward-looking

support for the second quarter of 2000 in the fourth quarter of 2000,

together with forward-looking support for the fourth quarter of 2000.

62. Under this approach, some carriers may receive two quarters

worth of support in a single quarter. To prevent fluctuations in the

contribution factor and ensure a uniform collection of contributions,

we direct USAC to collect contributions in the first quarter of 2000 as

if all carriers potentially eligible for forward-looking support were

certified to receive such support beginning in the first quarter of

2000, and as if support were actually provided beginning in the first

quarter of 2000. In the event that not all potentially eligible

[[Page 67427]]

carriers are certified to receive support for the first and second

quarters of 2000, USAC shall apply any surplus contributions to reduce

future collection requirements.

63. In order for non-rural carriers in a state to receive any high-

cost support, either forward-looking or hold-harmless support, for the

second program year beginning on January 1, 2001, the state must file

its section 254(e) certification no later than one month before USAC's

filing is due (i.e., October 1, 2000). In order for non-rural carriers

in a state to receive any high-cost support, either forward-looking or

hold-harmless support, for subsequent program years beginning on

January 1, of each year, the state must file its section 254(e)

certification no later than one month before USAC's filing is due

(i.e., October 1 of the preceding year).

64. In the event that a state files an untimely certification, the

carriers subject to that certification will not be eligible for support

until the quarter for which USAC's subsequent filing is due. For

example, if a state files a section 254(e) certification for the first

program year, after April 1, 2000, but on or before July 1, 2000, then

carriers subject to that certification will not receive forward-looking

support until the fourth quarter of 2000. If a state files a section

254(e) certification for the first program year after July 1, 2000,

then carriers subject to that certification will not receive forward-

looking support in the first program year. If a state files a section

254(e) certification for the second program year, after October 1,

2000, but on or before January 1, 2001, then carriers subject to that

certification will not receive any support, either forward-looking or

hold-harmless support, until the second quarter of 2001.

65. Because support from the federal methodology described in this

Order will be used to maintain reasonably comparable intrastate rates,

we must decide how to apply the federal support in the intrastate

jurisdiction. The current federal support mechanism operates through

the jurisdictional separations rules, shifting additional carrier book

costs into the interstate jurisdiction so that they can be recovered

through the federal mechanism.

66. We conclude that support amounts provided to incumbent non-

rural carriers as a result of the hold-harmless provision should

continue to operate through the jurisdictional separations process to

reduce book costs to be recovered in the intrastate jurisdiction. The

hold-harmless amounts are based on the existing system, which is based

on carriers' book costs. Moreover, these amounts have generally been

accounted for in intrastate ratemaking, so treating them differently

could result in a need for states to take further action to ensure the

proper application of the support.

67. As noted, forward-looking support will be provided to non-rural

carriers once states have certified that such support will be used in

the intrastate jurisdiction in a manner consistent with section 254(e).

In light of this provision, we conclude that we do not need to take

further action to specify how such support will be applied in the

intrastate jurisdiction. Before forward-looking support begins flowing

to non-rural carriers, the state commission will have specified or

reached agreement with that carrier on how the support will be used in

the intrastate jurisdiction, in a manner consistent with section

254(e). Thus, there is no reason for further federal requirements for

the application of the support.

68. We are not adopting any rules in this Order that, as a means to

ensure compliance with section 254(e), would require that non-rural

carriers receiving federal high-cost support offer an affordable basic

local service package to their customers. GTE, for example, argues that

each state should be required to determine the rate it considers

``affordable'' and then certify to the federal fund administrator that

each carrier seeking high-cost funding for areas within that state

provide at least one service package that meets the Commission's

definition of the supported services, and is offered at a rate no

greater than the state-determined affordable rate. We decline to

condition support on such extensive state actions. We believe that the

less onerous certification requirements described allow states an

appropriate amount of flexibility to determine how to ensure that

carriers comply with section 254(e). Furthermore, as we found in the

First Report and Order, even assuming that section 214(e) allowed the

Commission to impose such a ``basic service package'' requirement, it

is not necessary to adopt such a requirement because, in areas where

there is no competition, states are charged with setting rates for

local services, and where competing carriers offer the supported

services, consumers will be able to choose the carrier that offers the

service package best suited to the consumer's needs.

69. We also decline to adopt rules in this Order that would require

incumbent non-rural carriers to notify their customers that the

incumbent has received federal support for their lines and that such

support is portable to the carrier of the customer's choice. We agree

with commenters that the issue of whether or not to require non-rural

incumbent LECs to provide notification or display high-cost support

credits on customer bills or inserts is best left to the individual

state jurisdictions to decide.

70. Finally, we re-emphasize our conclusion in the Seventh Report

and Order that, if we find that a carrier has not applied its universal

service high-cost support in a manner consistent with section 254(e),

we have the authority to take appropriate enforcement actions against

that carrier. We remind parties that they may petition the Commission,

under section 208 of the Act, if they believe a carrier has misapplied

its high-cost support, and may also fully avail themselves of the

Commission's formal complaint procedures to bring any alleged

misapplication of federal high-cost support before the Commission.

Moreover, although we have given states the flexibility to determine

how carriers may use federal support in a manner consistent with

section 254(e), we may revisit this issue if we find that a more

prescriptive approach is necessary to ensure compliance with section

254(e).

G. Assessment and Recovery Bases for Contributions to the High-Cost

Support Mechanism

71. Pursuant to the First Report and Order, the Commission

currently assesses contributions to the high-cost universal service

support mechanism on the basis of carriers' interstate and

international end-user telecommunications revenues, and carriers

recover their contributions through their rates for interstate

services. In the Second Recommended Decision, the Joint Board stated

that the Commission may wish to consider adding intrastate revenues to

the assessment and recovery bases for the high-cost support mechanism.

In the Seventh Report and Order, the Commission took the Joint Board's

recommendation under advisement, pending resolution of challenges to

the Commission's assessment and recovery rules in the Fifth Circuit.

72. As discussed, a three judge panel of the Fifth Circuit ruled

that the Commission could not assess carriers' intrastate revenues to

fund its universal service support mechanisms. The court also reversed

and remanded for further consideration the Commission's decision to

assess the international revenues of carriers with interstate revenues.

In addition, the court reversed the Commission's ``decision to require

[[Page 67428]]

ILECs to recover universal service contributions from their interstate

access charges.'' In response to the court's decision, the Commission

removed intrastate revenues from the contribution base; exempted from

the contribution base the international revenues of interstate carriers

whose interstate revenues account for less than 8 percent of their

combined interstate and international revenues; and revised its rules

to allow incumbent LECs to recover their contributions through access

charges or through end-user charges. In light of the court's decision,

and the Commission's response to it, the assessment base for

contributions to the high-cost support mechanism shall remain

interstate and international end-user telecommunications revenues, and

the recovery base shall remain rates for interstate services.

H. Adjusting Interstate Access Charges to Account for Explicit Support

73. In the Seventh Report and Order, the Commission agreed with the

Joint Board that the Commission has the jurisdiction and responsibility

to identify any universal service support that is implicit in

interstate access charges. If such implicit support does exist, the

Commission concluded that, to the extent possible, it should make that

support explicit. Thus, in order to supplement the record in the

ongoing companion access charge reform proceeding, the Commission

sought comment in the Seventh Report and Order on how interstate access

charges should be adjusted to account for implicit high-cost universal

service support that may, in the future, be identified in access rates.

Specifically, the Commission sought further comment on a number of

proposals and tentative conclusions regarding the adjustment of

interstate access charges to account for explicit support, including:

(1) whether price cap LECs should reduce their interstate access rates

to reflect any increase in explicit federal high-cost support they

receive; (2) whether the Commission should require price cap LECs to

make a downward exogenous adjustment to their common line basket price

cap indexes (PCIs); (3) whether price cap carriers should reduce their

base factor portion (BFP); (4) whether the Commission should reduce the

subscriber line charge (SLC) on primary residential or single-line

business lines; and (5) whether non-rural rate-of-return LECs should

apply additional interstate explicit high-cost support revenues to the

CCL element. The Commission received numerous comments addressing these

issues. As we stated in the Seventh Report and Order, we intend to move

ahead with access reform in tandem with the implementation of the

revised federal high-cost support methodology. Accordingly, we

anticipate that the Commission's final determinations regarding

adjustments to interstate access charges to account for explicit

universal service support will be issued in the separate Access Charge

Reform proceeding. We re-emphasize that the support provided through

the methodology described in this Order will be used to enable the

reasonable comparability of intrastate rates, and thus will not be used

to replace implicit support in interstate access rates.

I. High-Cost Loop Support For Rural Carriers

74. Initially, we emphasize that, under our current rules, removing

the non-rural carriers from the existing system does not result in a

decrease in support for rural carriers. Rather, rural carriers would

receive a smaller annual increase in support when non-rural carriers

are removed from the interim cap.

75. There are three general options available to address this

issue. First, we could take no action and, pursuant to our existing

rules, calculate rural support under the interim cap using only the

total growth in rural carrier loops. Second, as proposed by Western

Alliance, we could remove the interim cap in its entirety. Finally, as

proposed by NECA, we could calculate support for rural carriers as if

all carriers, rural and non-rural, continued to participate in the

existing fund.

76. Consistent with our commitment not to consider significant

changes in rural carriers' support until after the Rural Task Force and

the Joint Board have made their recommendations, we conclude that we

should amend our part 36 rules to calculate universal service funding

for rural carriers as if all carriers continued to participate in the

fund. This approach will avoid significant and immediate changes in

support for rural carriers, and is similar to the interim hold-harmless

provision that we adopted for non-rural carriers. We also believe that

it would be inconsistent with the intent of section 254 if we allowed

the growth rate of high-cost universal service support for rural

carriers to be significantly and unintentionally reduced because of the

overall slowdown in loop growth caused by the removal of non-rural

carriers. Contrary to the suggestions of Western Alliance, however, we

do not believe that removing the cap from the calculation is an

appropriate remedy for this situation. The cap is designed to prevent

excessive growth in the existing high-cost fund, and we believe it

should remain in place pending any restructuring of the high-cost

support mechanism for rural carriers. In addition, because we are

requiring non-rural carriers to continue reporting cost and loop-count

data under part 36 pursuant to the interim hold-harmless provision,

continuing to calculate the expense adjustment for rural carriers using

data from all carriers will be administratively easy to implement. We

also wish to stress that, although we are modifying our rules to

calculate the rural loop expense adjustment based on loop data for both

rural and non-rural carriers, this remedy is an interim solution until

we consider appropriate reforms for the rural high-cost support

mechanism.

J. Lifting the Stay of the Commission's Section 251 Pricing Rules

77. In August 1996, the Commission promulgated certain rules in the

Local Competition Order, 61 FR 45476 (August 29, 1996), to implement

section 251 of the Communications Act of 1934, as amended. One such

rule, Sec. 51.507(f), requires each state commission to ``establish

different rates for [interconnection and unbundled network elements

(UNEs)] in at least three defined geographic areas within the state to

reflect geographic cost differences.'' Numerous parties, including

incumbent LECs and state commissions, appealed the Local Competition

Order, and the U.S. Court of Appeals for the Eighth Circuit stayed the

Commission's section 251 pricing rules in September 1996 pending its

consideration of the appeal. In July 1997, the Eighth Circuit vacated

the deaveraging rule, among others, on the grounds that the Commission

lacked jurisdiction. On January 25, 1999, however, the U.S. Supreme

Court reversed the Eighth Circuit's decision with regard to the

Commission's section 251 pricing authority, and remanded the case to

the Eighth Circuit for proceedings consistent with the Supreme Court's

opinion.

78. Because the section 251 pricing rules had not been in force for

more than two years, and not all states established at least three

deaveraged rate zones, the Commission stayed the effectiveness of

Sec. 51.507(f) on May 7, 1999, to allow the states to bring their rules

into compliance. The Commission stated that the stay would remain in

effect until six months after the Commission released its order in CC

Docket No. 96-45 finalizing and ordering implementation of high-cost

[[Page 67429]]

universal service support for non-rural LECs. The Commission did so to

allow the states to coordinate their consideration of deaveraged rate

zones with issues raised in that proceeding. Now that we have adopted

an order in CC Docket No. 96-45 finalizing and ordering implementation

of intrastate high-cost universal service support for non-rural LECs,

state commissions can consider deaveraging in concert with the federal

high-cost support that will be available in the intrastate

jurisdiction. Consequently, the stay that has been in effect since May

7, 1999, shall be lifted on May 1, 2000. By that date, states are

required to establish different rates for interconnection and UNEs in

at least three geographic areas pursuant to Sec. 51.507(f) of the

Commission's rules.

III. Procedural Matters

A. Regulatory Flexibility Act Certification

79. 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 subsequently 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 terms ``small business,'' ``small organization,''

and ``small governmental jurisdiction.'' In addition, the term ``small

business'' has the same meaning as the term ``small business concern''

under the Small Business Act. A small business concern is one which:

(1) is independently owned and operated; (2) is not dominant in its

field of operation; and (3) satisfies any additional criteria

established by the Small Business Administration (SBA). The SBA defines

a small telecommunications entity in SIC code 4813 (Telephone

Communications, Except Radiotelephone) as an entity with 1,500 or fewer

employees.

80. We conclude that a FRFA is not 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 or affiliates of

such corporations. In a companion Further Notice of Proposed

Rulemaking, 64 FR 31780 (June 14, 1999), in this docket, the Commission

prepared an Initial Regulatory Flexibility Analysis (IRFA) seeking

comment on the economic impacts on small entities. No comments were

received in response to that IRFA. Furthermore, we are taking action in

this Report and Order that will have a beneficial impact on smaller

rural carriers. Specifically, we are amending our part 36 rules to

calculate universal service funding for rural carriers as if all

carriers, both rural and non-rural, continued to participate in the

fund, pending the selection of an appropriate forward-looking high-cost

support mechanism for rural carriers. This action will avoid

significant changes in support for rural carriers, and prevent the

growth rate of high-cost universal service support for rural carriers

from being significantly reduced because of a slowdown in loop growth

rates that would be caused by the removal of non-rural carriers from

the fund calculations. 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, and Report

and Order (or summaries thereof) will be published in the Federal

Register. The Commission will send a copy of this Report and Order

including a copy of this final certification, in a report to Congress

pursuant to the Small Business Regulatory Enforcement Fairness Act of

1996.

B. Effective Date of Final Rules

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

shall be effective upon publication in the Federal Register, except for

sections 36.611(h), 36.612, 54.307 (b), (c), 54.309(c), 54.311(c), and

54.313 which contain information collection requirements that have not

been approved by the Office of Management Budget (OMB). The Commission

will publish a document in the Federal Register announcing the

effective date of those sections. In this Order we conclude that the

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

on January 1, 2000, and that states and territories that desire non-

rural carriers within their jurisdiction to receive forward-looking

high-cost support for calendar year 2000 must certify to the Commission

and the Administrator that non-rural carriers receiving support within

their jurisdiction will only use the support for the provision,

maintenance and upgrading of the supported services. The first filing

deadline for this certification will be January 1, 2000. Thus, the

amendments must become effective before January 1, 2000. Making the

amendments effective 30 days after publication in the Federal Register

would jeopardize the required January 1, 2000 implementation and filing

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.

C. Paperwork Reduction Act

82. This Report and Order contains either new or modified

information collections. The Commission has requested Office of

Management and Budget (``OMB'') approval, under the emergency

processing provisions of the Paperwork Reduction Act of 1995, Public

Law 104-13, of the information collections contained in this

rulemaking.

IV. Ordering Clauses

83. The authority contained in sections 1-4, 201-205, 214, 218-220,

254, 303(r), 403, and 410 of the Communications Act of 1934, as

amended, the Ninth Report and Order and Eighteenth Order on

Reconsideration is adopted. This Order is effective December 1, 1999

except for sections 36.611(h), 36.612, 54.307 (b), (c), 54.309(c),

54.311(c), and 54.313 which contain information collection requirements

that have not been approved by the Office of Management Budget (OMB).

The Commission will publish a document in the Federal Register

announcing the effective date of those sections.

84. Parts 36 and 54 of the Commission's Rules, 47 CFR parts 36 and

54, are amended as set forth, effective immediately upon publication in

the Federal Register.

85. The Commission's Office of Public Affairs, Reference Operations

Division, shall send a copy of the Report and Order, including the

Regulatory Flexibility Act Certification, to the Chief Counsel for

Advocacy of the Small Business Administration.

List of Subjects

47 CFR Part 36

Reporting and recordkeeping requirements, Telephone.

47 CFR Part 54

Universal service.

[[Page 67430]]

Federal Communications Commission.

Magalie Roman Salas,

Secretary.

Final Rules

Parts 36 and 54 of Title 47 of the Code of Federal Regulations are

amended 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 unless otherwise noted.

2. Amend Sec. 36.601 by revising paragraph (c) to read as follows:

Sec. 36.601 General.

* * * * *

(c) The annual amount of the total nationwide expense adjustment

shall consist of the amounts calculated pursuant to Sec. 54.309 of this

chapter and the amounts calculated pursuant to this subpart F. The

annual amount of the total nationwide loop cost expense adjustment

calculated pursuant to this subpart F shall not exceed the amount of

the total loop cost expense adjustment for the immediately preceding

calendar year, increased by a rate equal to the rate of increase in the

total number of working loops during the calendar year preceding the

July 31st filing. The total loop cost expense adjustment shall consist

of the loop cost expense adjustments, including amounts calculated

pursuant to Sec. 36.612(a) and Sec. 36.631. The rate of increase in

total working loops shall be based upon the difference between the

number of total working loops on December 31 of the calendar year

preceding the July 31st filing and the number of total working loops on

December 31 of the second calendar year preceding that filing, both

determined by the company's submissions pursuant to Sec. 36.611.

Beginning January 1, 2000, non-rural incumbent local exchange carriers

and, eligible telecommunications carriers serving lines in the service

area of non-rural incumbent local exchange carriers, shall only receive

support pursuant to this subpart F to the extent that they qualify

pursuant to Sec. 54.311 of this chapter for interim hold-harmless

support.

3. Amend Sec. 36.611 by revising the introductory text and

paragraph (h) to read as follows:

Sec. 36.611 Submission of information to the National Exchange Carrier

Association.

In order to allow determination of the study areas and wire centers

that are entitled to an expense adjustment, each incumbent local

exchange carrier (LEC) must provide the National Exchange Carrier

Association (NECA) (established pursuant to part 69 of this chapter)

with the information listed for each of its study areas, with the

exception of the information listed in paragraph (h), which must be

provided for each study area and, if applicable, for each wire center,

as that term is defined in part 54 of this chapter. This information is

to be filed with NECA by July 31st of each year, and must be updated

pursuant to Sec. 36.612.

The information filed on July 31st of each year will be used in the

jurisdictional allocations underlying the cost support data for the

access charge tariffs to be filed the following October.

An incumbent LEC is defined as a carrier that meets the definition

of an ``incumbent local exchange carrier'' in Sec. 51.5 of this

chapter.

* * * * *

(h) For rural telephone companies, as that term is defined in

Sec. 51.5 of this chapter, the number of working loops for each study

area. For non-rural telephone companies, the number of working loops

for each study area and for each wire center. For universal service

support purposes, working loops are defined as the number of working

Exchange Line C&WF loops used jointly for exchange and message

telecommunications service, including C&WF subscriber lines associated

with pay telephones in C&WF Category 1, but excluding WATS closed end

access and TWX service. These figures shall be calculated as of

December 31st of the calendar year preceding each July 31st filing.

4. Amend Sec. 36.612 by revising paragraph (a) to read as follows:

Sec. 36.612 Updating information submitted to the National Exchange

Carrier Association.

(a) Any rural telephone company, as that term is defined in

Sec. 51.5 of this chapter, may update the information submitted to the

National Exchange Carrier Association (NECA) on July 31st pursuant to

Sec. 36.611 (a) through (h) one or more times annually on a rolling

year basis according to the schedule. Every non-rural telephone company

must update the information submitted to NECA on July 31st pursuant to

Sec. 36.611 (a) through (h) according to the schedule.

(1) Submit data covering the last nine months of the previous

calendar year and the first three months of the existing calendar year

no later than September 30th of the existing year;

(2) Submit data covering the last six months of the previous

calendar year and the first six months of the existing calendar year no

later than December 30th of the existing year;

(3) Submit data covering the last three months of the second

previous calendar year and the first nine months of the previous

calendar year no later than March 30th of the existing year.

* * * * *

5. Amend Sec. 36.622 by removing paragraph (d) and by revising

paragraphs (a)(1) and (b)(1) to read as follows:

Sec. 36.622 National and study area average unseparated loop costs.

(a) * * *

(1) The National Average Unseparated Loop Cost per Working Loop

shall be recalculated by the National Exchange Carrier Association to

reflect the September, December, and March update filings.

* * * * *

(b) * * *

(1) If a company elects to, or is required to, update the data

which it has filed with the National Exchange Carrier Association as

provided in Sec. 36.612(a), the study area average unseparated loop

cost per working loop and the amount of its additional interstate

expense allocation shall be recalculated to reflect the updated data.

* * * * *

6. Amend Sec. 36.631 by revising paragraph (d) introductory text to

read as follows:

Sec. 36.631 Expense adjustment.

* * * * *

(d) Beginning January 1, 1998, for study areas reporting more than

200,000 working loops pursuant to Sec. 36.611(h), the expense

adjustment (additional interstate expense allocation) is equal to the

sum of paragraphs (d) (1)-(4). After January 1, 2000, the expense

adjustment (additional interstate expense allocation) shall be

calculated pursuant to Sec. 54.309 of this chapter or Sec. 54.311 of

this chapter (which relies on this part), whichever is applicable.

* * * * *

PART 54--UNIVERSAL SERVICE

1. The authority citation for part 54 continues to read as follows:

[[Page 67431]]

Authority: 47 U.S.C. 1, 4(i), 201, 205, 214, and 254 unless

otherwise noted.

8. Amend Sec. 54.5 by adding the following definition in

alphabetical order to read as follows:

Sec. 54.5 Terms and definitions.

* * * * *

Wire center. A wire center is the location of a local switching

facility containing one or more central offices, as defined in the

Appendix to part 36 of this chapter. The wire center boundaries define

the area in which all customers served by a given wire center are

located.

9. Amend Sec. 54.307 by revising paragraph (a) introductory text,

paragraphs (a)(1), (a)(2), and (a)(3), and (b), and by adding paragraph

(c) to read as follows:

Sec. 54.307 Support to a competitive eligible telecommunications

carrier.

(a) Calculation of support. A competitive eligible

telecommunications carrier shall receive universal service support to

the extent that the competitive eligible telecommunications carrier

captures the subscriber lines of an incumbent local exchange carrier

(LEC) or serves new subscriber lines in the incumbent LEC's service

area.

(1) A competitive eligible telecommunications carrier shall receive

support for each line it serves in a particular wire center based on

the support the incumbent LEC would receive for each such line.

(2) A competitive eligible telecommunications carrier that uses

switching purchased as unbundled network elements pursuant to

Sec. 51.307 of this chapter to provide the supported services shall

receive the lesser of the unbundled network element price for switching

or the per-line DEM support of the incumbent LEC, if any. A competitive

eligible telecommunications carrier that uses loops purchased as

unbundled network elements pursuant to Sec. 51.307 of this chapter to

provide the supported services shall receive the lesser of the

unbundled network element price for the loop or the incumbent LEC's

per-line payment from the high-cost loop support and LTS, if any. The

incumbent LEC providing nondiscriminatory access to unbundled network

elements to such competitive eligible telecommunications carrier shall

receive the difference between the level of universal service support

provided to the competitive eligible telecommunications carrier and the

per-customer level of support that the incumbent LEC would have

received.

(3) A competitive eligible telecommunications carrier that provides

the supported services using neither unbundled network elements

purchased pursuant to Sec. 51.307 of this chapter nor wholesale service

purchased pursuant to section 251(c)(4) of the Act will receive the

full amount of universal service support that the incumbent LEC would

have received for that customer.

* * * * *

(b) In order to receive support pursuant to this subpart, a

competitive eligible telecommunications carrier must report to the

Administrator on July 31st of each year the number of working loops it

serves in a service area as of December 31st of the preceding year,

subject to the updates specified in paragraph (c) of this section. For

a competitive eligible telecommunications carrier serving loops in the

service area of a rural telephone company, as that term is defined in

Sec. 51.5 of this chapter, the carrier must report the number of

working loops it serves in the service area. For a competitive eligible

telecommunications carrier serving loops in the service area of a non-

rural telephone company, the carrier must report the number of working

loops it serves in the service area and the number of working loops it

serves in each wire center in the service area. For universal service

support purposes, working loops are defined as the number of working

Exchange Line C&WF loops used jointly for exchange and message

telecommunications service, including C&WF subscriber lines associated

with pay telephones in C&WF Category 1, but excluding WATS closed end

access and TWX service. These figures shall be calculated as of

December 31st of the calendar year preceding each July 31st filing.

(c) For a competitive eligible telecommunications carrier serving

loops in the service area of a rural telephone company, as that term is

defined in Sec. 51.5 of this chapter, the carrier may update the

information submitted to the Administrator on July 31st pursuant to

paragraph (b) of this section one or more times annually on a rolling

year basis according to the schedule. For a competitive eligible

telecommunications carrier serving loops in the service area of a non-

rural telephone company, the carrier must update the information

submitted to the Administrator on July 31st pursuant to paragraph (b)

of this section according to the schedule.

(1) Submit data covering the last nine months of the previous

calendar year and the first three months of the existing calendar year

no later than September 30th of the existing year;

(2) Submit data covering the last six months of the previous

calendar year and the first six months of the existing calendar year no

later than December 30th of the existing year;

(3) Submit data covering the last three months of the second

previous calendar year and the first nine months of the previous

calendar year no later than March 30th of the existing year.

10. Add Sec. 54.309 to subpart D to read as follows:

Sec. 54.309 Calculation and distribution of forward-looking support

for non-rural carriers.

(a) Calculation of total support available per state. Beginning

January 1, 2000, non-rural incumbent local exchange carriers, and

eligible telecommunications carriers serving lines in the service areas

of non-rural incumbent local exchange carriers, shall receive universal

service support for the forward-looking economic costs of providing

supported services in high-cost areas, provided that the State in which

the lines served by the carrier are located has complied with the

certification requirements in Sec. 54.313. The total amount of forward-

looking support available in each State shall be determined according

to the following methodology:

(1) For each State, the Commission's cost model shall determine the

statewide average forward-looking economic cost (FLEC) per line of

providing the supported services. The statewide average FLEC per line

shall equal the total FLEC for non-rural carriers to provide the

supported services in the State, divided by the number of lines served

by non-rural carriers in the State.

(2) The Commission's cost model shall determine the national

average FLEC per line of providing the supported services. The national

average FLEC per line shall equal the total FLEC for non-rural carriers

to provide the supported services in all States divided by the total

number of lines served by non-rural carriers in all States.

(3) The national cost benchmark shall equal 135 percent of the

national average FLEC per line.

(4) Support calculated pursuant to this section shall be provided

to non-rural carriers in each State where the statewide average FLEC

per line exceeds the national cost benchmark. The total amount of

support provided to non-rural carriers in each State where the

statewide average FLEC per line exceeds

[[Page 67432]]

the national cost benchmark shall equal 76 percent of the amount of the

statewide average FLEC per line that exceeds the national cost

benchmark, multiplied by the number of lines served by non-rural

carriers in the State.

(5) In the event that a State's statewide average FLEC per line

does not exceed the national cost benchmark, non-rural carriers in such

State shall be eligible for support pursuant to Sec. 54.311. In the

event that a State's statewide average FLEC per line exceeds the

national cost benchmark, but the amount of support otherwise provided

to a non-rural carrier in that State pursuant to this section is less

than the amount that would be provided pursuant to Sec. 54.311, the

carrier shall be eligible for support pursuant to Sec. 54.311.

(b) Distribution of total support available per state. The total

amount of support available per State calculated pursuant to paragraph

(a) of this section shall be distributed to non-rural incumbent local

exchange carriers, and eligible telecommunications carriers serving

lines in the service areas of non-rural incumbent local exchange

carriers, in the following manner:

(1) The Commission's cost model shall determine the wire center

average FLEC per line for each wire center in the service areas of non-

rural carriers in the State. Non-rural incumbent local exchange

carriers, and eligible telecommunications carriers serving lines in the

service areas of non-rural incumbent local exchange carriers, that

serve wire centers with an average FLEC per line above the national

cost benchmark, as defined in paragraph (a)(3) of this section, shall

receive forward-looking support;

(2) The wire center scale support amount for each wire center

identified in paragraph (b)(1) of this section shall equal 76 percent

of the amount of the wire center average FLEC per line that exceeds the

national cost benchmark, multiplied by the number of lines in the wire

center;

(3) The total amount of forward-looking support available in the

State calculated pursuant to paragraph (a)(4) of this section shall be

divided by the sum of the total wire center scale support amounts

calculated for each wire center pursuant to paragraph (b)(2) of this

section;

(4) The percentage calculated pursuant to paragraph (b)(3) of this

section shall be multiplied by the total wire center scale support

amount calculated for each wire center pursuant to paragraph (b)(2) of

this section;

(5) The total amount of support calculated for each wire center

pursuant to paragraph (b)(4) of this section shall be divided by the

number of lines in the wire center to determine the per-line amount of

forward-looking support for that wire center;

(6) The per-line amount of support for a wire center calculated

pursuant to paragraph (b)(5) of the section shall be multiplied by the

number of lines served by a non-rural incumbent local exchange carrier

in that wire center, or by an eligible telecommunications carrier in

that wire center, to determine the amount of forward-looking support to

be provided to that carrier.

(c) Petition for waiver. Pursuant to section 1.3 of this chapter,

any State may file a petition for waiver of paragraph (b) of this

section, asking the Commission to distribute support calculated

pursuant to paragraph (a) of this section to a geographic area

different than the wire center. Such petition must contain a

description of the particular geographic level to which the State

desires support to be distributed, and an explanation of how waiver of

paragraph (b) of this section will further the preservation and

advancement of universal service within the State.

11. Add Sec. 54.311 to subpart D to read as follows:

Sec. 54.311 Interim hold-harmless support for non-rural carriers.

(a) Interim hold-harmless support. The total amount of interim

hold-harmless support provided to a non-rural incumbent local exchange

carrier shall equal the amount of support calculated for that carrier

pursuant to part 36 of this chapter. The total amount of interim hold-

harmless support provided to a non-rural incumbent local exchange

carrier shall also include Long Term Support provided pursuant to

Sec. 54.303, to the extent that the carrier would otherwise be eligible

for such support. Beginning on January 1, 2000, in the event that a

State's statewide average FLEC per line, calculated pursuant to

Sec. 54.309(a), does not exceed the national cost benchmark, non-rural

incumbent local exchange carriers in such State shall receive interim

hold-harmless support calculated pursuant to part 36, and, if

applicable, Sec. 54.303. In the event that a State's statewide average

FLEC per line, calculated pursuant to Sec. 54.309(a), exceeds the

national cost benchmark, but the amount of support that would be

provided to a non-rural incumbent local exchange carrier in such State

pursuant to Sec. 54.309(b) is less than the amount that would be

provided pursuant to part 36 and, if applicable, Sec. 54.303, the

carrier shall be eligible for support pursuant to part 36 and, if

applicable, Sec. 54.303. To the extent that an eligible

telecommunications carrier serves lines in the service area of a non-

rural incumbent local exchange carrier receiving interim hold-harmless

support, the eligible telecommunications carrier shall also be entitled

to interim hold-harmless support in an amount per line equal to the

amount per line provided to the non-rural incumbent local exchange

carrier pursuant to paragraph (b) of this section.

(b) Distribution of interim hold-harmless support amounts. The

total amount of interim hold-harmless support provided to each non-

rural incumbent local exchange carrier within a particular State

pursuant to paragraph (a) of this section shall be distributed first to

the carrier's wire center with the highest wire center average FLEC per

line until that wire center's average FLEC per line, net of support,

equals the average FLEC per line in the second most high-cost wire

center. Support shall then be distributed to the carrier's wire center

with the highest and second highest wire center average FLEC per line

until those wire center's average FLECs per line, net of support, equal

the average FLEC per line in the third most high-cost wire center. This

process shall continue in a cascading fashion until all of the interim

hold-harmless support provided to the carrier has been exhausted.

(c) Petition for waiver. Pursuant to section 1.3 of this chapter, a

State may file a petition for waiver of paragraph (b) of this section,

asking the Commission to distribute interim hold-harmless support to a

geographic area different than the wire center. Such petition must

contain a description of the particular geographic level to which the

State desires interim hold-harmless support to be distributed, and an

explanation of how waiver of paragraph (b) of this section will further

the preservation and advancement of universal service within the State.

12. Add Sec. 54.313 to subpart D to read as follows:

Sec. 54.313 State certification.

(a) Certification. States that desire non-rural incumbent local

exchange carriers and/or eligible telecommunications carriers serving

lines in the service area of a non-rural incumbent local exchange

carrier within their jurisdiction to receive support pursuant to

Secs. 54.309 and/or 54.311 must file an annual certification with the

Administrator and the Commission stating that all federal high-cost

support provided to such carriers within that State will be used only

for the

[[Page 67433]]

provision, maintenance, and upgrading of facilities and services for

which the support is intended. Support provided pursuant to

Secs. 54.309 and/or 54.311 shall only be provided to the extent that

the State has filed the requisite certification pursuant to this

section.

(b) Certification format. A certification pursuant to this section

may be filed in the form of a letter from the appropriate regulatory

authority for the State, and must be filed with both the Office of the

Secretary of the Commission clearly referencing CC Docket No. 96-45,

and with the Administrator of the high-cost universal service support

mechanism, on or before the deadlines set forth in paragraph (c) of

this section. The annual certification must identify which carriers in

the State are eligible to receive federal support during the applicable

12-month period, and must certify that those carriers will only use the

support for the provision, maintenance, and upgrading of facilities and

services for which the support is intended. A State may file a

supplemental certification for carriers not subject to the State's

annual certification. All certifications filed by a State pursuant to

this section shall become part of the public record maintained by the

Commission.

(c) Filing deadlines. In order for a non-rural incumbent local

exchange carrier in a particular State, and/or an eligible

telecommunications carrier serving lines in the service area of a non-

rural incumbent local exchange carrier, to receive federal high-cost

support, the State must file an annual certification, as described in

paragraph (b) of this section, with both the Administrator and the

Commission. Support shall be provided in accordance with the following

schedule:

(1) First program year (January 1, 2000-December 31, 2000). During

the first program year (January 1, 2000-December 31, 2000), a carrier

in a particular State shall receive support pursuant to Sec. 54.311. If

a State files the certification described in this section during the

first program year, carriers eligible for support pursuant to

Sec. 54.309 shall receive such support pursuant to the following

schedule:

(i) Certifications filed on or before January 1, 2000. Carriers

subject to certifications filed on or before January 1, 2000 shall

receive support pursuant to Sec. 54.309 for the first and second

quarters of 2000 in the second quarter of 2000, and on a quarterly

basis thereafter. Support provided in the second quarter of 2000 shall

be net of any support provided pursuant to Sec. 54.311 for the first

quarter of 2000.

(ii) Certifications filed on or before April 1, 2000. Carriers

subject to certifications that apply to the first and second quarters

of 2000, and are filed on or before April 1, 2000, shall receive

support pursuant to Sec. 54.309 for the first and third quarters of

2000 in the third quarter of 2000, and support for the second and

fourth quarters of 2000 in the fourth quarter of 2000. Such support

shall be net of any support provided pursuant to Sec. 54.311 for the

first or second quarters of 2000.

(iii) Certifications filed on or before July 1, 2000. Carriers

subject to certifications filed on or before July 1, 2000, shall

receive support pursuant to Sec. 54.309 for the fourth quarter of 2000

in the fourth quarter of 2000.

(iv) Certifications filed after July 1, 2000. Carriers subject to

certifications filed after July 1, 2000, shall not receive support

pursuant to Sec. 54.309 in 2000.

(2) Second program year (January 1, 2001-December 31, 2001). During

the second program year (January 1, 2001-December 31, 2001), a carrier

in a particular State shall not receive support pursuant to

Secs. 54.309 or 54.311 until such time as the State files the

certification described in this section. Upon the filing of the

certification described in this section, support shall be provided

pursuant to the following schedule:

(i) Certifications filed on or before October 1, 2000. Carriers

subject to certifications filed on or before October 1, 2000 shall

receive support pursuant to Secs. 54.309 or 54.311, whichever is

applicable, in the first, second, third, and fourth quarters of 2001.

(ii) Certifications filed on or before January 1, 2001. Carriers

subject to certifications filed on or before January 1, 2001 shall

receive support pursuant to Secs. 54.309 or 54.311, whichever is

applicable, in the second, third, and fourth quarters of 2001. Such

carriers shall not receive support pursuant to Secs. 54.309 or 54.311,

whichever is applicable, in the first quarter of 2001.

(iii) Certifications filed on or before April 1, 2001. Carriers

subject to certifications filed on or before April 1, 2001 shall

receive support pursuant to Secs. 54.309 or 54.311, whichever is

applicable, in the third and fourth quarters of 2001. Such carriers

shall not receive support pursuant to Secs. 54.309 or 54.311, whichever

is applicable, in the first or second quarters of 2001.

(iv) Certifications filed on or before July 1, 2001. Carriers

subject to certifications filed on or before July 1, 2001 shall receive

support pursuant to Secs. 54.309 or 54.311, whichever is applicable, in

the fourth quarter of 2001. Such carriers shall not receive support

pursuant to Secs. 54.309 or 54.311, whichever is applicable, in the

first, second, or third quarters of 2001.

(v) Certifications filed after July 1, 2001. Carriers subject to

certifications filed after July 1, 2001 shall not receive support

pursuant to Secs. 54.309 or 54.311, whichever is applicable, in 2001.

(3) Subsequent program years (January 1-December 31). During the

program years subsequent to the second program year (January 1, 2001-

December 31, 2001), a carrier in a particular State shall not receive

support pursuant to Sec. 54.309 or Sec. 54.311 until such time as the

State files the certification described in this section. Upon the

filing of the certification described in this section, support shall be

provided pursuant to the following schedule:

(i) Certifications filed on or before October 1. Carriers subject

to certifications filed on or before October 1 shall receive support

pursuant to Sec. 54.309 or Sec. 54.311, whichever is applicable, in the

first, second, third, and fourth quarters of the succeeding year.

(ii) Certifications filed on or before January 1. Carriers subject

to certifications filed on or before January 1 shall receive support

pursuant to Sec. 54.309 or Sec. 54.311, whichever is applicable, in the

second, third, and fourth quarters of that year. Such carriers shall

not receive support pursuant to Sec. 54.309 or Sec. 54.311, whichever

is applicable, in the first quarter of that year.

(iii) Certifications filed on or before April 1. Carriers subject

to certifications filed on or before April 1 shall receive support

pursuant to Sec. 54.309 or Sec. 54.311, whichever is applicable, in the

third and fourth quarters of that year. Such carriers shall not receive

support pursuant to Sec. 54.309 or Sec. 54.311, whichever is

applicable, in the first or second quarters of that year.

(iv) Certifications filed on or before July 1. Carriers subject to

certifications filed on or before July 1 shall receive support pursuant

to Sec. 54.309 or Sec. 54.311, whichever is applicable, beginning in

the fourth quarter of that year. Such carriers shall not receive

support pursuant to Sec. 54.309 or Sec. 54.311, whichever is

applicable, in the first, second, or third quarters of that year.

(v) Certifications filed after July 1. Carriers subject to

certifications filed after July 1 shall not receive support pursuant to

Sec. 54.309 or Sec. 54.311, whichever is applicable, in that year.

[FR Doc. 99-30876 Filed 11-30-99; 8:45 am]

BILLING CODE 6712-01-P