[Federal Register Volume 64, Number 230 (Wednesday, December 1, 1999)]
[Rules and Regulations]
[Pages 67416-67433]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30876]
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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
