[Federal Register Volume 63, Number 236 (Wednesday, December 9, 1998)]
[Proposed Rules]
[Pages 67837-67845]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32736]
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Parts 36 and 54
[CC Docket No. 96-45; FCC 98J-7]
Federal-State Joint Board on Universal Service
AGENCY: Federal Communications Commission
ACTION: Proposed rule; recommended decision.
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SUMMARY: On November 24, 1998, the Federal-State Joint Board adopted a
Second Recommended Decision regarding universal service. In this
decision, the Joint Board made numerous recommendations on universal
service issues. The Joint Board recommends a federal high cost support
mechanism for non-rural carriers that enables rates to remain
affordable; that the Commission replace the 25/75 jurisdictional
division of responsibility for high cost support; that the Commission
compute federal high cost support for non-rural carriers through a two-
step process; and that the mechanisms outlined be reviewed no later
than three years from July 1, 1999. The Commission seeks comment on the
Second Recommended Decision.
DATES: Comments should be filed on or before December 23, 1998 and
Reply
[[Page 67838]]
Comments on or before January 13, 1999.
ADDRESSES: All filings should reference: Comments on Joint Board Second
Recommended Decision, CC Docket No. 96-45, and should include DA 98-
2410. Interested parties must file an original and six copies of their
comments with the Office of Secretary, Federal Communications
Commission, 445 Twelfth Street, S.W., Room TW-A325, Washington, D.C.
20554. Parties should send one copy of their comments to the
Commission's copy contractor, International Transcription Service, 1231
20th Street, N.W., Washington, D.C. 20036. Copies of documents filed
with the Commission, including the Second Recommended Decision, may be
obtained from the International Transcription Service, 1231 20th
Street, N.W., Washington, D.C. 20036, (202) 857-3800. Documents are
also available for review and copying at the FCC Reference Center, Room
239, 1919 M Street, N.W., Washington, D.C. 20554, from 9:00 a.m. to
4:30 p.m.
Parties may also file comments electronically via the Internet at:
http://www.fcc.gov/e-file/ecfs.html>. Only one copy of an electronic
submission must be submitted. In completing the transmittal screen,
commenters should include their full name, Postal Service mailing
address, and the lead docket number for this proceeding, which is CC
Docket No. 96-45. Parties not submitting their comments via the
Internet are also asked to submit their comments on diskette. Parties
submitting diskettes should submit them to Sheryl Todd, Common Carrier
Bureau, Federal Communications Commission, 2100 M. St, N.W., 8th Floor,
Washington, D.C. 20554. Such a submission should be on a 3.5 inch
diskette formatted in an IBM compatible format using WordPerfect 5.1
for Windows or compatible software. The diskette should be accompanied
by a cover letter and should be submitted in ``read only'' mode. The
diskette should be clearly labelled with the party's name, proceeding
(including the lead docket number in this case, Docket No. 96-45, type
of pleading--comment or reply comment), date of submission, and the
name of the electronic file on the diskette. Each diskette should
contain only one party's pleadings, preferably in a single electronic
file. In addition, parties must send copies to the Commission's copy
contractor, International Transcription Service, Inc., 1231 20th
Street, N.W., Washington, D.C. 20036.
FOR FURTHER INFORMATION CONTACT: Chuck Keller, Attorney, Common Carrier
Bureau, Accounting Policy Division, (202) 418-7400, TTY (202) 418-0484,
or via e-mail: ckeller@fcc.gov>.
SUPPLEMENTARY INFORMATION: This is a summary of the Commission's
document released on November 24, 1998. The full text of this document
is available for public inspection during regular business hours in the
FCC Reference Center, Room 239, 1919 M Street, N.W., Washington, D.C.
20554.
Summary of Second Recommended Decision
I. Introduction
1. The Telecommunications Act of 1996 (``1996 Act'') explicitly
recognized the need for federal and state support to ``preserve and
advance universal service.'' In the 1996 Act, legislators recognized
that existing support mechanisms could be threatened as effective
competition materializes. Congress also made clear in the 1996 Act that
federal and state regulators together must ensure that universal
service is preserved and advanced as we move from a monopoly to a
competitive market. Although never quantified or targeted in
traditional rate designs, these mechanisms have included support
flowing from urban to rural consumers implicit in rate averaging, and
from interstate and intrastate access charges.
2. The Act requires that rates be ``just, reasonable and
affordable,'' and that rates in rural, insular and high cost areas be
``reasonably comparable'' to rates charged for similar services in
urban areas. The Act also requires ``specific, predictable and
sufficient Federal and State mechanisms to preserve and advance
universal service.'' Goals of reforming universal service include: (1)
revising support mechanisms that do not currently meet new statutory
mandates, such as the need for nationwide reasonably comparable rates;
(2) ensuring that support mechanisms are not eroded as local
competition develops; and (3) establishing universal service support
mechanisms that are part of a new regulatory structure consistent with
Congress's pro-competitive goals.
3. The Joint Board and the Federal Communications Commission
(``Commission'') determined previously that rates generally are
affordable. While keeping in mind the need to ensure continued
affordability, we focus to a greater degree in this Second Recommended
Decision on the issue of reasonable comparability, and how to ensure
the sufficiency of federal support to assure both of those important
public interest goals. As effective competition develops for high-
volume, urban customers, one consequence may be erosion of the implicit
support system that protects consumers in rural, insular and high cost
areas from unaffordable rates. The Joint Board recommends a federal
high cost support mechanism for non-rural carriers that enables rates
to remain affordable and reasonably comparable, even as competition
develops, but that is no larger than necessary to satisfy that
statutory mandate. The Joint Board believes that sizing the fund
correctly is essential to ensuring that all consumers across the
country benefit from universal service. The transition to a competitive
environment requires us to be mindful of two competing goals: (1)
supporting high cost areas so that consumers there have affordable and
reasonably comparable rates; and (2) maintaining a support system that
does not, by its sheer size, over-burden consumers across the nation.
4. As an initial matter, we note and support the Commission's
``hold harmless'' commitment not to reduce the current levels of
explicit high cost support to states. In this Second Recommended
Decision, consistent with that commitment, we outline an initial
methodology for directing sufficient federal support to non-rural
carriers to offset high intrastate costs in states with insufficient
internal resources to ensure affordable and reasonably comparable
rates. We recognize that further changes may be necessary as
competition develops to change certain amounts of current implicit
support into explicit support. We recommend that the Commission replace
the 25/75 jurisdictional division of responsibility for high cost
universal service support, adopted in the Universal Service Order, 62
FR 32862 (June 17, 1997), with the methodology for non-rural carriers
outlined herein. Under this approach, the federal mechanism should
instead provide the necessary support set by the methodology that we
outline today.
5. We recommend that the Commission compute federal high cost
support for non-rural carriers through a two-step process. First, the
Commission should develop a total support amount necessary to reflect
those areas considered to have high costs relative to other areas.
Second, for areas that have high costs relative to other areas, the
Commission should consider, in a consistent manner across all states,
any particular state's ability to support high cost areas within the
state. Federal support should be provided to the extent that the state
would be unable to support its high cost areas through its own
reasonable efforts. We also make
[[Page 67839]]
recommendations about the information that consumers should receive
from carriers in connection with the recovery of universal service
contributions. We recommend as well that the mechanisms outlined here
be reviewed no later than three years from July 1, 1999. While we
recommend a shared federal-state responsibility, we also conclude that,
consistent with the statute, no state can or should be required by the
Commission to establish an intrastate universal service fund.
6. The Act acknowledges and maintains the complementary roles that
state and federal authorities have played in preserving and advancing
universal service. Historically, both state and federal regulators have
exercised their jurisdictional authority to ensure the availability of
universal service. The ongoing cooperation throughout this proceeding
between the federal and state staff and members of the Joint Board is a
further example of the vitality of the federal-state partnership for
ensuring universal service, and this referral proceeding represents the
latest chapter in that cooperation. We look forward to continued
collaboration with the Commission as universal service reform proceeds.
In addition, we note that this proceeding involves the balancing of
many difficult, competing interests. In resolving these issues in light
of our guidance, therefore, the Commission has the difficult task of
selecting a national solution that balances these competing interests.
7. This Second Recommended Decision is designed to take into
account this dual federal and state responsibility in a manner that
effectuates the principles and requirements of Sec. 254. The federal
mechanism should provide support in a manner that is designed to ensure
that state universal service needs are fully met, consistent with the
states' role with respect to universal service. We believe that this
Second Recommended Decision establishes a framework for accomplishing
that difficult mission.
II. The Purpose of Support
8. In mandating the reform of universal service support mechanisms,
Congress clearly envisioned that the reform process would be conducted
as a joint federal and state effort. The creation of this Joint Board
is perhaps the plainest expression of this vision. Other provisions of
Sec. 254 reflect this shared responsibility. A primary aspect of the
Joint Board's task in reforming universal service mechanisms is to
ensure that consumers in high cost areas have access to
telecommunications and information services that are affordable and
reasonably comparable to those in urban areas, at rates reasonably
comparable to those in urban areas. We believe that the demarcation of
the respective responsibilities of state and federal regulators can be
found in the mandate to ensure reasonably comparable rates. Regulators
in the two jurisdictions have different tools available to them to meet
universal service challenges. Issues of affordability and reasonable
comparability can be dealt with through a combination of approaches,
including: (1) through the rate design issues of a single local
carrier, (2) through mechanisms that affect the rates of all carriers
within a state, and (3) through mechanisms that affect rates across
state lines. State commissions and the Commission each can use the
first two tools with respect to rates in their respective
jurisdictions. Only the Commission is able to employ the last. Our
recommendations reflect both the availability of, and the relationship
among, these approaches.
9. While the Act does not define reasonable comparability, we
interpret that term to refer to a fair range of urban and rural rates
both within a state's borders, and among states nationwide. We note
that existing federal high cost loop support provides additional
federal support to areas that have particularly high costs, and our
recommendations herein continue that policy. It is proper to begin an
inquiry by focusing on universal service issues closest to the
consumer. Present rates are sufficient to cover the costs of serving
most consumers across the nation. The costs of serving other consumers,
however, are in excess of rates. To address these concerns, support
mechanisms have been set up to offset these higher costs.
The Joint Board acknowledges that, absent reform to these
mechanisms, the forces of competition could erode certain of these
support mechanisms and potentially have a negative impact on the
provision of universal service.
10. The first step in dealing with this potential impact concerns
the rates currently being charged to consumers, and the ability of the
state to respond to competitive entry through its own ratemaking
methods. This responsibility falls within the state's jurisdiction. To
the extent the Commission determines that the totality of reasonable
state efforts would not be sufficient to address universal service
funding without violating the principles of reasonable comparability
and affordability, the federal universal support mechanism should
complete the effort. With this framework in mind, then, the Joint Board
will set forth the method it recommends that the Commission use to
size, calculate, and distribute federal support among the nation's non-
rural carriers.
11. In formulating this Second Recommended Decision, our goal has
been to ensure that rates in rural and high cost areas served by non-
rural carriers are affordable and reasonably comparable through
specific, predictable, and sufficient support mechanisms that are, to
the extent possible, explicit. To do this, commenters proposed three
possible ways in which universal service support could be used: (1) To
provide support for high cost areas to enable the comparability of
rates; (2) to make existing interstate support explicit; and (3) to
make existing intrastate support explicit. In this section, we will
address each of these three possible uses of support.
A. Enabling ``Reasonably Comparable'' Rates
12. The Act requires that consumers have access to rates and
services ``in rural, insular and high cost areas'' that are
``reasonably comparable'' to rates and services in urban areas. While
the Act does not define reasonable comparability, we interpret that
term to refer to a fair range of urban/rural rates both within a
state's borders, and among states nationwide. We note that existing
federal high cost loop support provides additional federal support to
areas that have particularly high costs, and we propose to continue
that policy as we move to a forward-looking cost methodology for
determining high cost support.
13. We recommend that federal support be available to non-rural
carriers serving consumers in areas with costs significantly above the
national average and whose average costs throughout its study area
significantly exceed the national average. This support should be
available where, considered in a consistent manner across all states, a
state would find it particularly difficult to achieve reasonably
comparable rates, absent such federal support. To the extent that
additional federal high cost support to non-rural carriers, beyond the
amount currently provided, is necessary to help meet the statutory goal
of reasonably comparable rates, that additional federal support should
be used to help ensure that intrastate rates are able to satisfy this
statutory goal. The state commission has the authority to indicate
which intrastate rates shall be affected to help ensure that the
carrier does not double recover. Because rate setting methods and goals
may vary
[[Page 67840]]
across jurisdictions, we recommend, for purposes of determining federal
high cost support, that the Commission use the cost of providing all
supported services, rather than local rates. These costs are used in
the methodology we describe below to calculate the level of federal
support that will be available to help achieve reasonable comparability
in rates across all states.
B. Making Interstate Support Explicit
14. In the Universal Service Order and the Access Reform Order, the
Commission made several changes to its access charge rules, with the
goal of reforming the mechanisms for recovery of subscriber loop costs
to move from implicit to explicit federal universal service support
mechanisms. In summary, the Commission decided that: (1) Long term
support (LTS) should be removed from interstate access charges and made
part of explicit federal support mechanisms; and (2) incumbent LECs
should use any universal service support from the new support
mechanisms to reduce support implicit in access charges, pending
further reform.
15. The Commission concluded that universal service support
implicit in rates cannot be sustained if competition emerges in the
marketplace, and that removing implicit universal service support from
interstate rates and replacing such support either with improved
revenue recovery mechanisms or with explicit support should remain a
goal of federal telecommunications reform. The Commission also found
that, unless implicit support is identified and eventually stripped
from interstate access charges, those access charges could remain
artificially high.
16. The Commission's efforts to remove implicit universal service
support from interstate access charges will not affect intrastate rates
directly. This issue is intertwined with the Commission's ongoing
access reform proceeding, and the Commission should continue to
synchronize the access reform and universal service proceedings with
any action it takes to remove implicit universal service support from
interstate access charges.
17. If the Commission determines that there is implicit universal
service high cost support currently in interstate access rates, it is
within the Commission's jurisdiction to determine what that implicit
support is and what action the Commission should take to make that
support explicit. Although we make no recommendation regarding whether
the Commission should eliminate implicit support from interstate access
rates, we recognize that it has the authority to do so. We do
recommend, however, that, to the extent that the Commission determines
that implicit support needs to be removed from interstate access
charges and replaced with explicit universal service support,
interstate access rates, such as the carrier common line charge (CCLC),
presubscribed interexchange carrier charge (PICC), or subscriber line
charge (SLC), be reduced dollar for dollar to reflect the corresponding
explicit support. We further recommend that the Commission seek to
ensure that any reductions in interstate access rates inure to the
benefit of consumers. When considering such recommendations, the
Commission should give due regard to the requirement that universal
service shall bear no more than a reasonable share of joint and common
costs. Moreover, the Commission should ensure that any efforts to
replace implicit support in interstate access charges with explicit
support do not jeopardize the reasonable comparability standard, or
harm consumers generally, or any class of consumers in particular.
Before taking any final action on removing this support from interstate
access charges, the Commission should first consult with the Joint
Board.
C. Making Intrastate Support Explicit
18. The Act requires that the Joint Board recommend changes to the
Commission's rules that may be necessary to implement Secs. 214(e) and
254, ``including the definition of the services that are supported by
Federal universal service support mechanisms.'' Section 254(b)(5)
provides that there should be ``specific, predictable and sufficient
Federal and State mechanisms to preserve and advance universal
service.'' Thus, the Act envisions that both states and the federal
government have authority and responsibility to ensure that universal
service needs are met. The Act further allows the states in Sec. 254(f)
to create state universal service support mechanisms. The Act clearly
envisions the role of the Joint Board to be that of advising the
Commission on matters related to federal support mechanisms, and
preserves the ability of each state to design intrastate support
mechanisms, although these state support mechanisms may not be
inconsistent with the federal rules or burden the federal support
mechanism. In this Second Recommended Decision, we recommend a shared
responsibility, but we also conclude, consistent with the statute, that
the Commission may not mandate that a state establish an intrastate
universal service fund.
19. Historically, intrastate rate design has helped promote
universal service. While techniques such as rate averaging have served
states well in the past, the onset of competition in local markets is
likely to erode the ability of states to fund universal service through
implicit support mechanisms. States possess the jurisdiction and
responsibility to address these implicit support issues through
appropriate rate design and other mechanisms within a state.
20. The same competitive forces that Congress anticipated would
require making interstate universal service support explicit may
militate for making intrastate universal service support explicit as
well. The Act, however, did not mandate such an outcome. States should
bear the responsibility for the design of intrastate funding
mechanisms. The federal support mechanism should not be contingent
upon, nor should it require, any particular action by the state.
III. Proposed Method for Ensuring Sufficient Support for Affordable
and Reasonably Comparable Rates
A. Basing Federal High Cost Support on Forward-Looking Economic Costs
21. In the Universal Service Order, the Commission adopted the
Joint Board's recommendation that the revised universal service support
mechanism would determine non-rural carriers' high cost support based
on forward-looking economic costs, instead of the incumbent carrier's
book costs, of providing supported services in order to ``send the
correct signals for entry, investment, and innovation in the long
run.'' We continue to believe that federal high cost support should be
based on forward-looking economic costs.
22. Without a complete forward-looking economic cost model, it is
not possible for the Joint Board to make a final recommendation as to
the most reasonable forward-looking methodology to be used in
distributing federal high cost support to the states and/or carriers.
We note, however, that the vast majority of proposals on the record in
this proceeding would use a model to estimate the forward-looking cost
of providing the supported services. No party has suggested that there
is a method preferable to a model to determine support based on
forward-looking costs. We recommend, therefore, that the Commission
continue to work with the Joint Board to select the input values to
complete a forward-looking cost model and to finalize the methodology
for distributing federal high cost support. We do recommend a
framework, discussed in more detail below, that relates federal support
to
[[Page 67841]]
high average forward-looking costs and to states' ability to address
their own universal service requirements.
23. Because the Commission's cost proxy model results are not
complete, our recommendation on using a model to estimate forward-
looking costs is a work in progress, and therefore tentative. We fully
anticipate that the model results will furnish reasonable cost
estimates for all regions of the country that can provide the basis for
determining federal high cost support. Nevertheless, significant
uncertainties need to be eliminated before a model can serve as the
basis for federal support distributions. For example, a model must meet
the openness criterion required of all model developers. At present the
federal platform has been tested using geocoded customer location data
that is treated as proprietary information by its supplier. We also
understand that the Commission is seeking to identify alternative data
sources at this time. We urge the Commission not to adopt those
particular data as input values unless the Commission determines that
such data are sufficiently open and available for testing and comment.
Despite these uncertainties, we recommend that the states, the
Commission, and the Joint Board continue their joint efforts to develop
an accurate cost proxy model. In the event that the Commission has not
defined all elements necessary to calculate support based on forward-
looking costs in time for implementation by July 1, 1999, then the
Joint Board recommends that the present method for determining support
be continued for an interim period. In that event, we also recommend
that the Commission make interim adjustments to the present rules to
resolve any comparability issues in rural states primarily served by a
large carrier, consistent with our general recommendation on
comparability issues.
24. We emphasize, however, that, in recommending this framework for
determining non-rural carriers' high cost support based on forward-
looking cost, we do not intend for the Commission to create any
precedent for any potential revisions to support mechanisms for rural
carriers. The model platform that the Commission adopted in October was
designed to estimate non-rural carriers' costs. Pursuant to the Joint
Board's recommendation, the Commission has provided that the
determination of the appropriate manner in which a model should be
applied to rural carriers, if at all, will take into account the
recommendation of this Joint Board, after the Joint Board receives a
report from the Rural Task Force. The Joint Board intends to look
closely at these issues to ensure that rural carriers' unique
situations and challenges are addressed in the separate proceedings
examining their high cost support mechanisms.
25. We further recommend that the Commission reconsider its
decision to allow state cost studies to be used in place of the federal
model for non-rural companies. We believe that it is more appropriate
that the federal universal service support mechanisms be based upon a
national yardstick for determining cost. Without such a national
yardstick, it will be difficult to establish a consistent nationwide
measurement of rate comparability. Although the Commission should fully
evaluate any comments on this issue, we recommend that, absent a clear
showing that basing federal support on a state cost study is necessary
and appropriate to achieve statutory goals, the Commission base all
federal support on a uniform methodology that derives from a single,
national model. States may, of course, base any intrastate high cost
support mechanisms on their own cost studies, rather than a federal
model.
B. Size of Area Over Which Costs Are Averaged
26. In the Universal Service Order, the Commission adopted the
Joint Board's recommendation that forward-looking economic costs be
determined at the wire center level or below. While we acknowledge the
value of a cost model that is capable of estimating costs at that level
of granularity, we now recommend that federal support initially be
determined by measuring costs at the study area scale, a scale
considerably larger than the wire center. In general, a study area is
an area served by a local exchange carrier in a single state. The
existing high cost support program measures costs and distributes
support at the study area level.
27. We recommend measuring costs at the study area level at this
time because we believe that support calculated at this level will
properly measure the support responsibility that ought to be borne by
federal mechanisms given the current extent of local competition. We
noted above that the primary purpose of federal support should be to
ensure that rates remain affordable and reasonably comparable
throughout the nation. By ensuring that cost disparities among study
areas and among states are limited, we believe that federal support
will be sufficient to maintain rate comparability and affordability.
28. We also recognize that, as competition develops within a study
area, calculating costs using the aggregate characteristics of the
study area may become less appropriate. Again, in light of the second
goal of reforming universal service--ensuring that support mechanisms
are not eroded as competition develops--we recommend that the
Commission consider the possible impacts of competition on federal
universal service support mechanisms.
29. We have considered the use of statewide average cost (as
opposed to study area costs) to determine the need for universal
service support. While we agree that the states can be expected to
participate as full partners in preserving universal service, a
statewide approach could require states to create mechanisms to
transfer support among non-rural carriers. At present, however, some
states may lack such a mechanism. Given the short time to implement the
new mechanism, we find it prudent to average costs at the study area
level.
C. State Responsibility for Reasonably Comparable Rates
30. In this section, we conclude that the law gives the Commission
an important role in universal service, but that the federal role is
not exclusive. The states also bear part of the shared responsibility
for universal service. States are free under the Act to establish or
refrain from establishing explicit universal service support
mechanisms. As we noted above, furthermore, federal support may not be
made contingent upon any actions taken, or not taken, by the states.
Federal support should not rely on a state's actions with respect to
universal service but depend only upon the total support amount
generated by the methodology described herein for calculating the
amount of federal support for each state. The Joint Board believes
therefore, that the level of federal support should reflect, in a
consistent manner, each state's ability to use its own resources to
address its universal service needs, regardless of whether that or any
other amount of support is explicitly provided by the state.
31. While there is no mandate that a state create such an explicit
fund, the state should have in place ``specific, predictable and
sufficient'' mechanisms to preserve and advance universal service. The
federal support mechanism need not take into account the state's
authority and ability actually to establish state universal service
support mechanisms, since carriers may be required to recover more
total support than the amount used exclusively for purposes of
developing the federal fund. Such discretionary variations in support
[[Page 67842]]
at the state level are left intentionally independent of the standard
determinations of federal support levels, precisely in order to allow
states to set their own levels of corresponding affordability and
funding requirements. In contrast, federal funding requirements should
be those amounts necessary to establish a standard of reasonable
comparability of rates across states. Any state is then able to
supplement, as desired, any amount of federal funds it may receive
under this standard.
32. While we recommend a shared responsibility, we also conclude
that, consistent with the statute, no state can or should be required
by the Commission to establish an intrastate universal service fund.
Each state is uniquely qualified to determine, based upon its own
costs, rates and other circumstances, when and if it needs an explicit
universal service support mechanism.
33. Implicit support in state rates is a matter intimately related
to each state's rate design. The success of these state efforts is
demonstrated by the fact that rates today are generally affordable and
subscribership is currently very high in most areas of the nation. This
indicates a limited need for additional federal involvement. We believe
it is consistent with the Act for the Commission to assume that the
states will address issues regarding implicit intrastate support in a
manner that is appropriate to local conditions. We also conclude that,
under the Act, where states have the capacity today to accomplish this
task, states are the most appropriate governmental level to address
this issue.
34. Some states may face significant obstacles in maintaining
reasonably comparable rates, and may find that solving this problem by
state action alone is impossible or unreasonable in some instances. For
this reason, we believe that additional federal support may be needed
to ensure that rates are reasonably comparable, as required by
Sec. 254(b)(3).
D. Methodology for Federal Support of Reasonably Comparable Rates
35. We have considered numerous distribution options, including all
those submitted by the parties. The methodology we propose incorporates
elements from the various plans filed in this proceeding. Our
methodology would average costs at a study area level. Our methodology
incorporates a reasonable ``hold harmless'' component, and is grounded
in the principle that additional federal high cost support should be
targeted to areas with the greatest need. Our recommended methodology
includes a cost-based benchmark. Finally, as advocated by a number of
parties, our methodology takes into account each state's ability to
support its universal service needs internally. The framework below
addresses only the affordability and comparability goals of the Act. As
indicated previously, we cannot at this time provide the details of a
recommendation for a specific mechanism to distribute federal support
to eligible carriers. We can, however, outline the basic elements that
we believe should be considered in designing the distribution
methodology.
36. We recommend that the distribution methodology contain two
primary elements. First, study areas with average forward-looking per-
line costs significantly in excess of the national average cost should
be identified. Second, the state's ability to support its own universal
service needs should be determined. Federal support should be provided
only for costs that exceed both these thresholds.
37. In the first step of the process, identifying areas with high
costs, we recommend that the Commission use the cost of providing
supported services, rather than local rates, to evaluate rate
comparability, because rate setting methods and goals may vary across
jurisdictions. We recommend that federal support be available to non-
rural carriers with average costs significantly above the national
average. Specifically, we recommend that the Commission select a single
national cost benchmark against which the forward-looking cost in a
given study area would be compared to determine whether that study
areas has costs that are significantly above the national average. We
recommend that the Commission consider setting this national benchmark
at a level somewhere between 115 and 150 percent of the national
weighted average cost per line.
38. The second step in determining federal support should reflect
that, for the reasons outlined above, federal support is only one
portion of the shared federal-state responsibility established in
Sec. 254. Federal support should only be used to supplement a state's
ability to address its own universal service needs. In order to
accomplish this second step, it will be necessary to calculate a level
of support that could equitably and reasonably be assumed to be
provided by implicit or explicit state support. There are potentially
several ways to estimate a state's ability to support its universal
service needs. For example, the ratio of lines in a state with costs
above a certain threshold could be determined, as a general indication
of whether a state has a higher or lower percentage of high cost lines
than other states. This ratio of high cost to low cost lines could then
be factored into the support equation to reflect that states with a
higher percentage of high cost lines will be less able to support their
own universal service needs. Other approaches could set each state's
presumed support responsibility at a given level, which might be
expressed as a dollar value per line or as a percentage of intrastate
revenue. The ratio of intrastate traffic volume to total traffic volume
could also be used.
39. An example of how this system would work in practice would be
an approach that calculated the state's ability to support its own
universal service needs based on a percentage of intrastate revenues.
Such a limit on a state's presumed responsibility, if adopted, could be
between 3 and 6 percent of intrastate telecommunications revenues. Once
the first step in the methodology has identified the amount by which
costs in the study areas in the state exceed the cost benchmark, the
percentage of intrastate revenues would be calculated that would be
required to meet this high cost responsibility. If that amount exceeded
the state revenue threshold, then the federal mechanism would provide
support for the difference.
40. We urge the Commission to continue its deliberations with this
Joint Board and to consult with Congress in order to specify further
the proper parameters of these two variables as the study area costs
are derived from the Commission's model and choice of inputs. It is our
goal to recommend a plan that achieves the Act's goals of affordability
and reasonable comparability without overburdening consumers across the
nation.
IV. Size of the Federal Support Mechanism
41. We described above the general outlines of a method for
calculating federal support to high cost areas. Finalization of that
method will determine the overall size of federal support for
reasonably comparable rates. So long as the fund is for the purposes
established in the Act, the Commission has discretion in providing
remedies that are designed to ``preserve and advance'' universal
service. Nevertheless, for several reasons we conclude that the federal
high cost support fund should be only as large as necessary, consistent
with other requirements of the law. This will ensure that there is
balance between consumers who directly receive the
[[Page 67843]]
benefits of universal service support and those consumers who must pay
for the support through their rates.
42. Enabling reasonably comparable rates among states is a task
that can likely be accomplished only with federal assistance. Federal
support must be sufficient so that, when combined with a reasonable
state effort, rates within service areas may be reasonably comparable
both within and among states. Until we resolve several other pending
policy decisions, as well as obtain more precise cost data, however, it
is not possible to define, in dollars, the amount of support required
by the comparability standard.
43. We do not believe, however, that current circumstances warrant
a high cost support mechanism that results in a significantly larger
federal support amount than exists today. We recognize that some states
currently may not receive support sufficient to enable reasonably
comparable rates, and thus we believe the support level may rise
somewhat.
44. These principles can be implemented through a plan that, at
least initially, calculates support on a study area basis and allocates
a reasonable and equitable share of responsibility for support to state
universal service efforts. The plan can enable reasonably comparable
rates if the combination of state and federal support can keep the net
cost differences (after receipt of universal service support) between
high cost and low-cost areas within reasonable bounds. We recognize
that competition may develop in unpredictable ways. As competition
threatens rate comparability or affordability in high cost areas served
by non-rural carriers, it may be necessary to re-evaluate the
appropriate level of federal support. Incumbent LECs to date have not
demonstrated that implicit support has eroded as a result of
competition.
V. Hold Harmless
45. When a new federal support mechanism is implemented, some
carriers could receive more or less support than in the past. If
substantial reductions were to occur in a single year, some consumers
could experience rate shock. Both significant, sudden increases in the
fund size overall, and significant decreases in the support that goes
to a particular carrier, could have a notable impact on consumers'
rates.
46. Rural companies have been assured by the Commission that their
support systems will not be altered until January 1, 2001, at the
earliest, and in no event before the Joint Board has completed further
deliberations on high cost support mechanisms for rural carriers, in
light of the recommendations received from the Joint Board-appointed
Rural Task Force. In addition, the Commission has stated to Congress
that no state should receive less support than it currently receives.
The Puerto Rico Telephone Company has asked, notwithstanding its non-
rural status, to continue to receive support at present levels, until
the transition to a forward-looking high cost support mechanism is
implemented for rural companies.
47. We support the Commission's commitment to continue to hold
states harmless, so that no non-rural carrier, including the Puerto
Rico Telephone Company, will receive less federal high cost assistance
than the amount it currently receives from explicit support mechanisms.
We recommend, depending on the final amounts of support estimated on a
forward-looking basis, that the Commission consider a gradual phase-in
of any increase in federal universal service high cost support for non-
rural carriers.
VI. Unserved Areas
48. The Arizona Corporation Commission (Arizona Commission)
submitted a proposal to use a portion of federal support to address the
problem of unserved areas and the inability of low-income residents to
obtain telephone service because they cannot afford to pay the required
line extension or construction charges. The Arizona Commission's
proposal is not intended to be a comprehensive alternative to the high
cost fund distribution model, but rather is intended to address a
discrete concern related to low-income residents in remote areas.
49. The framework created in the Act was designed to accelerate
deployment of services to all Americans, and the universal service
program plays an important role in that framework. The issue raised by
the Arizona Commission is of interest to the Joint Board, even though
it was not among those specifically referred to the Joint Board for
further recommendation. States have generally addressed the ``unserved
household'' concern through intrastate proceedings that establish
reasonable rates for line extension agreements and encourage carriers
to minimize unserved regions of the state. We recognize that
investments in line extensions have historically been an issue
addressed by the states, and we believe they should continue to be
dealt with by the states, to the extent that the states are able to do
so. Unserved areas are not unique to Arizona; other states may also
face this issue. Although historically a state issue, we recognize that
there may be some circumstances which may warrant federal universal
service support for line extensions to unserved areas. We recommend
that the special needs of unserved areas be investigated and subject to
a more comprehensive evaluation in a separate proceeding. The
Commission should seek information on unserved areas throughout the
nation and determine, in consultation with the Joint Board, whether
such areas warrant any special federal universal service consideration.
VII. Mechanism for Distributing Support
A. Portability of Support
We recommend that the Commission continue with the policy
established in the Universal Service Order of making high cost support
available to all eligible telecommunications carriers, whether they be
an incumbent LEC or a competitive carrier, including wireless carriers.
We believe that portable support is consistent with the principle of
competitive neutrality that we previously recommended and the
Commission subsequently adopted in the Universal Service Order. We
continue to support the use of competitive neutrality as a guiding
principle of universal service reform and endorse the Commission's
definition of this important principle in the Universal Service Order.
B. Use of Support
51. One issue raised in comments was whether the Commission should
condition the receipt of federal high cost support to ensure that
support is used in a manner consistent with Sec. 254. We recommend that
the Commission require carriers to certify that they will apply federal
high cost universal service support in a manner consistent with
Sec. 254.
52. We recognize that some states may lack the authority or the
desire to impose constraints or conditions on the use of federal high
cost support. We do not recommend, therefore, that the Commission
require that states provide any certification, or require any other
state action, as a condition for carriers to receive high cost support.
At the same time, parties may have a legitimate concern that federal
support should be used by carriers to further the goals of Sec. 254. We
further recognize that, even if costs are calculated at the study area
level, high cost support should be targeted to consumers living in the
highest cost areas of the study area. We therefore recommend that the
Commission permit, but not require,
[[Page 67844]]
states to certify that, in order to receive federal universal service
high cost support, a carrier must use such funds in a manner consistent
with Sec. 254. For example, in order to provide efficient incentives
for competitive entry, a state might require that federal support be
targeted to those consumers living in the highest cost areas within a
study area.
53. To the extent that the law permits, the Commission could reduce
or eliminate federal high cost support if it finds that a carrier has
not applied its federal universal service funds consistent with
Sec. 254, or if the state finds that the carrier has not adequately
demonstrated that the federal support is being used in a manner
consistent with Sec. 254(e), which provides that carriers receiving
universal service support ``shall use that support only for the
provision, maintenance, and upgrading of facilities and services for
which the support is intended.'' We also clarify that this decision is
intended only to affect the amount that carriers receive from the
federal universal service high cost support mechanism. We recommend
that the Commission clarify procedures by which a party, including a
state, may initiate action against a carrier that fails to apply
federal universal service support in an appropriate manner.
54. We do not believe that conditioning support on a demonstration
that funds are being used for the advancement of universal service
places any restrictions on the determination of a carrier's status as
an eligible telecommunications carrier. As the Universal Service Order
notes, ``section 214(e)(2) does not permit the Commission or the states
to adopt additional criteria for the designation as an eligible
carrier.''
55. One proposal recommends that the Commission distribute
universal service funding directly to state commissions rather than to
carriers. We recognize that some state commissions may be able to
ensure that high cost support is distributed to carriers and is used in
a manner, consistent with federal rules, that best ensures that rates
are just, reasonable, and affordable throughout that particular state.
Nevertheless, we cannot recommend that the Commission adopt that
mechanism, in light of the long-standing practice at the time that the
1996 Act became law of distributing federal universal service support
to the carriers providing the supported services, and the absence of
any affirmative evidence in the statute or legislative history that
Congress intended such a fundamental shift to a state block grant
distribution mechanism. In addition, distributing funding directly to
state commissions is likely to create substantial administrative
burdens for states currently lacking this ability, especially because
there is very little time, prior to the July 1, 1999 implementation
date, for the state to take the steps necessary to administer federal
high cost support pursuant to the rules that Commission will be
adopting in the spring.
VIII. Assessing Contributions from Carriers
56. In the Universal Service Order, the Commission determined that
assessment of contributions for the interstate portion of the high cost
and low-income support mechanisms shall be based solely on end-user
interstate telecommunications revenues, and assessment of universal
service support for eligible schools, libraries and rural health care
providers shall be based on interstate and intrastate end-user
telecommunications revenues. The Commission declined to assess both
intrastate and interstate end-user revenues for the high cost and low-
income support mechanisms because the states are currently reforming
their own universal service programs, and it would have been premature
to assess contributions on intrastate revenues before appropriate
forward-looking mechanisms and revenue benchmarks are developed. The
Commission also concluded that carriers shall be permitted to recover
their contributions to universal service support mechanisms only
through rates for interstate services.
57. Pending the decision of the Fifth Circuit, our recommendation
on this issue is necessarily tentative. Continuing to assess
contributions for high cost and low income support based solely on
interstate revenues, as set forth in the Universal Service Order, could
have certain benefits. Under this approach, state commissions would
have the greatest flexibility to tap into their intrastate revenue
bases to advance universal service at the state level. Assessing only
interstate revenues for federal high cost support also has some
significant disadvantages, however. For instance, many carriers that do
not routinely have to separate intrastate and interstate revenues for
regulatory or business purposes now must do so solely for federal
universal service purposes. This creates additional burdens on these
carriers, and may create incentives for carriers to misclassify
revenues between jurisdictions based on different assessment rates. A
jurisdictional assessment base also makes it difficult for carriers to
allocate the revenues associated with packages, or bundles, of services
that include both intrastate and interstate components. Finally, a non-
jurisdictional assessment base would enable both the state and federal
mechanisms to tap broader revenue bases, thereby lowering the
assessment rates needed. Thus, if the Fifth Circuit determines that the
Commission may properly assess all revenues for universal service
contributions, the Commission may wish to consider using that
assessment methodology for high cost support. If the Commission
determines that it may assess universal service contributions based on
all revenues, the Commission should find that states may do the same
for their state universal service mechanisms. Alternatively, the
Commission could consider assessing carriers high cost universal
service contributions on a flat, per-line basis, which also addresses
some of the difficulties of assessing only interstate revenues.
IX. Carrier Recovery of Universal Service Contributions from
Consumers
58. In this section, we recommend that the Commission provide to
telecommunications carriers that contribute to universal service strict
guidance regarding the extent to which they recover their universal
service contributions from consumers. We also recommend that the
Commission provide such carriers with express instructions regarding
the manner in which carriers may depict on bills charges used to
recover universal service contributions. Specifically, we recommend
that, to the extent permitted by law, the Commission prohibit carriers
from depicting such charges as a ``tax'' or as mandated by the
Commission or the federal government by terms or placement on the bill.
We note that, in truly competitive markets, firms recover a wide
variety of costs in a wide variety of ways with no itemized
notification of similar increases or decreases to individual consumers.
1. Recovery of Universal Service Contributions from Consumers
59. We reiterate that the choice of whether to collect universal
service assessments from end users via a line-item charge on their
bills should remain with the carriers, and that carriers are free to
tell consumers that the carrier is required to pay to support universal
service. Specifically, we recommend, that the Commission give careful
consideration to a rule that provides that, for carriers that choose to
pass through a line item charge to consumers, the line item assessment
be no greater than the carrier's universal
[[Page 67845]]
service assessment rate. This will help prevent consumers or classes of
consumers from being charged excessively for a carrier's universal
service contribution. Such a rule will help prevent consumers or
classes of consumers from being charged excessively for a carrier's
universal service contributions. Some carriers may attempt to exercise
market power and recover through universal service charges in a non-
competitive fashion more than they are contributing to universal
service, believing that they can describe those charges as mandated by
the Commission or federal action. We are also concerned that some
carriers may be allocating a disproportionate share of universal
service costs to certain classes of consumers. Such practices might
contravene Sec. 201(b) of the Act. As noted above, consumers may be
less likely to engage in comparative shopping for a carrier if they are
led to believe that certain charges are fixed by the Commission or
federal government.
2. Characterization of Universal Service Charges to Consumers
60. We believe that a carrier's billing and collection practices
for communications services are subject to regulation as common carrier
services under Title II of the Act. We believe that inaccurately
identifying or describing charges on bills that recover universal
service contributions may violate Sec. 201(b) of the Act. For instance,
it is important for consumers to understand that universal service
support has long been implicit in the rates for various intrastate and
interstate telecommunications services. We therefore recommend that the
Commission take decisive action to ensure that consumers are not misled
as to the nature of charges on bills identified as recovering universal
service contributions. Specifically, we recommend that the Commission
consider prohibiting carriers from identifying as a ``tax'' or as
mandated by the Commission or federal government any charges to
consumers used to recover universal service contributions. Similarly,
we recommend that the Commission consider prohibiting carriers from
incorrectly describing as mandatory or federally-approved any universal
service line items on bills. This restriction would include both
written descriptions of the charges and any oral descriptions from
consumer service representatives as well as placement on the bill.
While interstate telecommunications providers are required to
contribute to the universal service support mechanisms, they are not
required to impose such charges on consumer bills.
61. Cognizant of the First Amendment implications in regulating the
manner in which carriers may convey information on consumers' bills, we
note that the Supreme Court has held that the government may require a
commercial message to ``appear in such a form, or include such
additional information, warnings, and disclaimers, as are necessary to
prevent its being deceptive.'' On the other hand, restrictions on
speech that ban truthful, non-misleading commercial speech about a
lawful product cannot withstand scrutiny under the First Amendment. We
believe that, pursuant to these Supreme Court rulings, it would not
violate the First Amendment to specifically prohibit carriers from
including on their bills untruthful or misleading statements regarding
the nature of line items used to recover universal service
contributions. We urge that the Commission carefully review the record
in its proceeding before reaching any conclusion on these issues.
62. We also recommend that the Commission continue to explore,
through its Truth-In-Billing proceeding, the possibility of
establishing standard nomenclature that carriers could use on their
bills to consumers regarding universal service charges. Such
standardized language would represent the Commission's view of language
that is accurate and not misleading. Standard nomenclature could
benefit consumers by having common language across carriers so that
consumers can easily identify the charge. We urge that the Commission
consider using ``Federal Carrier Universal Service Contribution'' as
standard nomenclature describing any universal service line item on
consumer bills. The line item should be accompanied by an explanation
that the carrier has chosen to separate its universal service
contribution from its other costs of business, and to display the
contribution as a line item on the consumer's bill.
63. Finally, we note that many state regulatory agencies either
have in place or are considering establishing requirements that will
curtail the practice of some carriers of mischaracterizing universal
service line items on bills. In addition, other federal agencies, such
as the Federal Trade Commission, may have jurisdiction that overlaps or
is concurrent with that of the Commission or state regulatory agencies.
We therefore recommend that the Commission work closely with these
agencies to ensure that consumers are provided with complete and
accurate information regarding the nature of universal service line
items.
X. Periodic Review
64. The Act contemplates that universal service is an ``evolving''
level of service. The Act further contemplates that the Joint Board may
periodically make recommendations to the Commission regarding
modifications in the definition of services supported by the federal
universal service support mechanism. Moreover, we recognize that the
telecommunications industry is rapidly changing and that both
competition and technological changes will affect universal service
needs in rural, insular, and high cost areas of the nation. We
therefore recommend that the Commission continue to consult with this
Joint Board on matters addressed in this Second Recommended Decision.
We also recommend that the Joint Board and the Commission broadly
reexamine its high cost universal service mechanism no later than three
years from July 1, 1999.
XI. Recommending Clauses
65. For the reasons discussed herein, this Federal-State Joint
Board, pursuant to Sec. 254(a)(1) and Sec. 410(c) of the Communications
Act of 1934, as amended, 47 U.S.C. 254(a)(1) and 410(c), recommends
that the Federal Communications Commission adopt the proposals
described above relating to high cost universal service support
mechanisms for non-rural carriers.
List of Subjects
47 CFR Part 36
Reporting and recordkeeping requirements, Telephone.
47 CFR Part 54
Universal service.
Federal Communications Commission.
Magalie Roman Salas,
Secretary.
[FR Doc. 98-32736 Filed 12-8-98; 8:45 am]
BILLING CODE 6712-01-P
