[Federal Register Volume 59, Number 180 (Monday, September 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23033]


[[Page Unknown]]

[Federal Register: September 19, 1994]


_______________________________________________________________________

Part III





Department of Commerce





_______________________________________________________________________



National Telecommunications and Information Administration



_______________________________________________________________________




Inquiry on Universal Service and Open Access Issues; Notice
DEPARTMENT OF COMMERCE

National Telecommunications and Information Administration
[Docket No. 940955-4255]

 
Inquiry on Universal Service and Open Access Issues

AGENCY: National Telecommunications and Information Administration 
(NTIA), Commerce.

ACTION: Notice of inquiry; request for comments.

-----------------------------------------------------------------------

SUMMARY: NTIA is conducting a comprehensive review of universal service 
and open access issues in communications. NTIA requests public comment 
relevant to such a review. After analyzing the comments, NTIA may issue 
a report, a series of short analyses, and/or make recommendations to 
the Administration's Information Infrastructure Task Force, the Federal 
Communications Commission, and to Congress.

DATES: The public should file comments on or before December 14, 1994 
to receive full consideration.

ADDRESSES: Please send comments (seven copies plus one copy on 
diskette, preferably WordPerfect or DOS compatible) to the Office of 
Policy Analysis and Development, NTIA, U.S. Department of Commerce, 
14th St. and Constitution Ave., N.W., Room 4725, Washington, D.C. 
20230.

FOR FURTHER INFORMATION CONTACT: James McConnaughey or Cynthia Nila, 
Office of Policy Analysis and Development, (202) 482-1880.

SUPPLEMENTARY INFORMATION:

    Authority: National Telecommunications and Information 
Administration Organization Act of 1992, Public Law 102-538, 106 
Stat. 3533 (1992) (codified at 47 U.S.C. 901 et seq.)

I. Introduction\1\

    1. The United States has a long-standing commitment to the 
achievement of ``universal service''--widespread availability of 
``basic'' telephone service at affordable rates. First articulated in 
the early twentieth century,\2\ universal service has since been 
adopted by Federal and State regulators as one of the core objectives 
of U.S. telecommunications policy. For example, it was incorporated in 
general terms in Section 1 of the Communications Act of 1934.\3\ More 
importantly, many of the major regulatory reforms that have been 
considered over the past several decades--most notably decisions 
concerning whether and under what conditions to allow competition in 
telecommunications service and equipment markets--have been evaluated, 
at least in part, in terms of their possible impact on universal 
service.
---------------------------------------------------------------------------

    \1\This Notice of Inquiry (Notice) and other related documents 
are also available in electronic form on the NTIA Bulletin Board at 
(202) 482-1199. Please set your communications parameters to No 
parity, 8 data bits, and 1 stop bit (N,8,1). Commenters are 
encouraged to file their comments electronically at the same number.
    \2\The concept was first articulated by Theodore Vail, President 
of AT&T, in 1907, although his concept of universal service was 
quite distinct from modern notions of what that term means. See 
Milton Mueller, Universal Service in Telephone History, 17 Tel. Pol. 
352, 353, 356-358 (1993).
    \3\Section 1 authorizes the Federal Communication Commission 
(FCC) to regulate interstate and foreign communications ``so as to 
make available, so far as possible, to all the people of the United 
States a rapid, efficient, Nation-wide, and world-wide wire and 
radio communication service with adequate facilities at reasonable 
charges.'' 47 U.S.C. 151 (1988). Telecommunications reform 
legislation pending in both Houses of Congress would make 
preservation and advancement of universal service an explicit goal 
of U.S. policy. See S. 1822, the Communications Act of 1934, 103d 
Cong., 2d Sess. Sections 101, 102 (1994); H.R. 3626, the Antitrust 
and Communications Reform Act of 1994, 103d Cong., 2d Sess. Sec. 301 
(1994).
---------------------------------------------------------------------------

    2. Historically, universal service has meant widespread access to 
voice-grade telephone service, commonly referred to as ``plain old 
telephone service'' (POTS). The fundamental objective has been to give 
all Americans an opportunity to pick up the telephone and, at a 
reasonable cost, have a voice conversation with anyone else in the 
country or, increasingly, the world. In recent years, however, many 
have questioned whether traditional notions of universal service are 
adequate to meet the needs of the American people, now and in the 21st 
century.
    3. This reassessment is prompted by two principal developments. 
First is the emergence of information as a vital economic resource and 
source of individual empowerment. In 1991, U.S. companies for the first 
time spent more money on computer and communications equipment than on 
industrial, mining, farm and manufacturing machinery--dramatic evidence 
of the nation's transition from the Industrial Age to the Information 
Age.\4\ Increasingly, the ability of U.S. businesses to remain 
competitive in a global marketplace and to create challenging, high-
paying jobs hinges on their proficiency in creating, manipulating, 
managing, and using information. Similarly, an individual's ability to 
acquire, develop, and sustain marketable job skills--and, indeed, to be 
an informed, productive participant in American society--will depend on 
how well he or she can access, analyze, and assimilate information.
---------------------------------------------------------------------------

    \4\See Thomas Stewart, The Information Age in Charts, Fortune, 
Apr. 4, 1994, at 75.
---------------------------------------------------------------------------

    4. Second, technological changes--particularly the convergence of 
computers and communications and the deployment of high capacity, 
digital transmission facilities--promise to make telecommunications 
networks the highways of the Information Age, the principal means by 
which individuals and businesses access and distribute essential 
information resources. In this environment, it may be anachronistic to 
continue speaking of universal service in terms of voice telephone 
service. Accordingly, consensus is growing that there is a need to 
redefine that concept to meet the demands of a new age.
    5. Reform of universal service policies would be necessary even if 
there were no redefinition issue. As described more fully below, many 
experts agree that current pricing policies for voice telephone service 
are characterized by extensive subsidies between and among services, 
although the extent of those subsidies remains a matter of considerable 
dispute.\5\ In other words, certain services (e.g., long distance, 
business service) have been overpriced to maintain low cost residential 
voice service. Whether or not that pricing structure was ever desirable 
as a matter of policy,\6\ it could be sustained only in a market 
environment characterized by monopoly provision of telephone service.
---------------------------------------------------------------------------

    \5\See infra Section IV.
    \6\Several economists have estimated that the welfare losses 
associated with the existing subsidy structure can be measured in 
the billions of dollars annually. See, e.g., James Griffin, The 
Welfare Implications of Externalities and Price Elasticities for 
Telecommunications Pricing, 64 Rev. Econ. & Stat. 59 (1982); Lewis 
Perl, Welfare Gains from Cost-Based Telephone Pricing (June 19, 
1986) (unpublished paper).
---------------------------------------------------------------------------

    6. That environment is rapidly becoming a thing of the past. 
Competition is the norm in many telecommunications services and 
equipment markets; it is growing rapidly in the rest. Competition 
drives prices toward the costs of providing those services and, in so 
doing, undermines traditional pricing structures that incorporate 
inter-service subsidies. As a result, even though competition is not 
inimical to universal service goals,\7\ its emergence and expansion is 
forcing a re-examination of traditional universal service funding 
policies as surely as technological change and the emergence of the 
Information Age are prompting changes in the way universal service is 
defined. The challenge for government and service providers alike is to 
find a new funding scheme that is compatible with and sustainable in a 
competitive market environment.
---------------------------------------------------------------------------

    \7\See infra Section II.
---------------------------------------------------------------------------

    7. The National Telecommunications and Information Administration 
(NTIA) is issuing this Notice to gather public comment on these 
important issues. The Clinton Administration (the Administration) has 
stated a commitment to extending the concept of universal service to 
ensure that information resources are available to all at affordable 
rates.\8\ This policy is a matter of fundamental fairness; if 
information means empowerment, the United States ``cannot accept a 
division of our people among telecommunications `haves' and `have-
nots.'''\9\
---------------------------------------------------------------------------

    \8\The National Information Infrastructure: Agenda for Action 58 
Fed. Reg. 49,025, at 49,028 (1993) (Agenda for Action).
    \9\Id.
---------------------------------------------------------------------------

    8. This Notice represents another stage in NTIA's continuing 
investigation of universal service issues.\10\ Since December 1993, 
NTIA has conducted field hearings in five locations across the country 
to gather information on those issues.\11\ This Notice has been shaped 
by what the agency has learned over the course of those hearings. The 
Notice also seeks to supplement the record developed at those hearings 
on the many questions subsumed within the concept of universal service. 
At the end of this process, NTIA will work to develop a concept of 
universal service that fits the challenges and opportunities of the 
Information Age. As importantly, NTIA intends to identify mechanisms 
that can fund an expanded version of universal service in a competitive 
market environment.
---------------------------------------------------------------------------

    \10\The Administration's activities relating to universal 
service are one facet of a comprehensive National Information 
Infrastructure (NII) initiative. The Administration has established 
an interagency Information Infrastructure Task Force (IITF), chaired 
by the Secretary of Commerce, to address the many issues relating to 
deployment of the NII. The IITF operates through a number of 
subcommittees and working groups, and with the assistance of a 
public/private sector Advisory Council. For further information on 
the IITF and related organizations, see The NII Field Hearings on 
Universal Service and Open Access: America Speaks Out 1-2 (Sept. 
1944) (Report of the Telecommunications Policy Committee of the 
Information Infrastructure Task Force) (NII Field Hearings).
    \11\Hearings were held in Albuquerque, New Mexico (December); 
South Central Los Angeles (February); Raleigh-Durham, North Carolina 
(April); Sunnyvale, California (May); and Indianapolis, Indiana 
(July). At each hearing, NTIA received testimony from public 
interest groups, state and local governments, labor, industry, and 
academia. Summaries of each of the hearings are on the on-line NTIA 
Bulletin Board. See not 1 for access information. In this Notice, we 
also request comment on how best to continue and expand these public 
outreach activities.
---------------------------------------------------------------------------

    9. Finally, we also seek comment on another issue related to the 
policies underlying universal service--``open access.'' If, as noted 
above, information is of increasing importance to businesses and 
individuals alike, and if competition among service providers is likely 
to be the norm in the future, ensuring universal service for consumers 
is only part of the equation. Steps must also be taken to afford 
information providers access to consumers and vice versa. Accordingly, 
the Administration is also committed to ensuring that 
telecommunications facilities and networks are sufficiently ``open'' so 
that all information providers can transmit their wares to consumers 
across those facilities reliably, efficiently, and seamlessly, without 
compromising the integrity or security of the information 
delivered.\12\ NTIA therefore requests comment on a variety of 
questions relating to the meaning and implementation of open access.
---------------------------------------------------------------------------

    \12\Agenda for Action, supra note 8, at 49,027, 49,029. Open 
access may also permit users themselves to develop new services and 
applications or to exchange information among themselves, without 
waiting for services to be offered by commercial providers. Id. at 
49,029.
---------------------------------------------------------------------------

    10. Section II of the Notice considers the impact of competition on 
universal service goals. Section III.A of the Notice addresses current 
universal service policies and solicits comment on the degree to which 
the nation has achieved the goal of providing basic voice telephone 
service to all Americans. Section III.B considers the issue of 
redefining the traditional concept of universal service and determining 
what services or functions should be included in an expanded definition 
of universal service. Section IV focuses on mechanisms for funding 
universal service in an increasingly competitive market environment. 
Section V focuses on the role of the Federal and State governments in 
determining universal service policies. Finally, Section VI requests 
comment on the definition and implementation of open access.

II. Competition and Universal Service

    11. The Federal government and many States have made a fundamental 
commitment to introducing and expanding competition in 
telecommunications markets. The benefits of that commitment are 
increasingly apparent and show no signs of diminishing. There is also 
some concern, however, about the effects of competition on universal 
service. While those concerns merit attention, there is much evidence 
to suggest that competition and universal service are not incompatible 
goals. Market rivalry both drives prices towards underlying costs and 
reduces underlying costs by forcing competing firms to operate more 
efficiently. Competition thus tends to reduce prices for goods and 
services, making them more affordable for more consumers and ultimately 
reducing the need for subsidies. At the same time, competition also 
increases the range of services and products available to consumers 
and, potentially, their geographic reach as well, further promoting 
universal service goals.
    12. The potential effects of competition on rates and consumer 
choice can be gleaned from the recent history of the long distance and 
CPE markets in the United States. Prior to the break-up of the Bell 
System in 1984, most of the United States was served by a single long 
distance network operated by AT&T. Today, after a decade of government 
efforts to facilitate entry in the long distance market, there are more 
than 500 long distance carriers in the United States, offering a wide, 
ever-changing array of services and pricing options.\13\ Due in part to 
this active rivalry among firms, long distance rates have declined more 
than sixty percent since 1984 by some estimations, making long distance 
calling more affordable for more Americans.\14\
---------------------------------------------------------------------------

    \13\Industry Analysis Division, Common Carrier Bureau, Federal 
Communications Commission, Trends in Telephone Service, at 31 (May 
1994) (Telephone Trends). AT&T now captures less than 60 percent of 
all long distance revenues. Industry Analysis Division, Common 
Carrier Bureau, Federal Communications Commission, Long Distance 
Market Shares--Fourth Quarter, 1993 Table 6 (Apr. 1994).
    \14\See, e.g., Letter from Gerald J. Kovach, MCI, to Clarence L. 
Irving, Jr., NTIA, Attachment 1 at 1 (June 9, 1994) (long distance 
rates, adjusted for inflation, have declined 66% since 1985). As a 
result of the sharp decline in long distance rates, long distance 
calling has surged in recent years, especially relative to local 
calling. Toll calls (measured in minutes of use) comprised 26.6% 
percent of all calls in 1992, as compared to 19.9% in 1984. 
Telephone Trends, supra note 13, at 25 and Table 16.
---------------------------------------------------------------------------

    13. Similarly, when the Bell System controlled the CPE market, 
customers could lease (but not buy) any telephone they wanted, so long 
as it was a black instrument that delivered unadorned voice service. 
Today, customers can choose their phones from a wide variety of colors, 
sizes, shapes, and designs. Modern telephones also include a variety of 
features (e.g., speed dialing, re-dial, memory programming) that 
greatly increase usefulness of that equipment for many customers. In 
addition, its cost has declined considerably in the last decade (as 
much as 50 percent in ``real'' terms).\15\
---------------------------------------------------------------------------

    \15\See National Telecommunications and Information 
Administration, U.S. Dep't of Commerce, NTIA Special Publication 91-
26 The NTIA Infrastructure Report: Telecommunications in the Age of 
Information 204-205 and n. 707 (1991) (Infrastructure Report).
---------------------------------------------------------------------------

    14. The impact of competition on universal service can be examined 
more directly by reviewing the development of local telephone service 
after expiration of the original Bell telephone patents in 1893/94 
unleashed a twenty-five year period of competition in the provision of 
local telephone service.\16\ In 1895, after nineteen years of the Bell 
System patent monopoly, there were only 251,994 telephones in the 
United States, or one telephone for every 276 of the nation's 69.5 
million people. By 1920, at the close of the competitive era, there 
were some 13.4 million telephones in the United States, or one 
telephone for every eight of the nation's 105.7 million people.\17\ 
Moreover, fifty-five percent of all telephone subscribers were 
residential customers, as compared to only ten percent in 1895.
---------------------------------------------------------------------------

    \16\The following discussion is taken from Mueller, supra note 
2, at 356-358, 360-361.
    \17\In 1895, the number of telephones in the United States was 
growing by five percent annually. Id. at 356. At that rate, the 
nation would have had fewer than one million telephones by 1920.
---------------------------------------------------------------------------

    15. We seek comment on the relationship between competition and 
universal service. Will competition help make new advanced 
telecommunications services more readily available across the nation 
and thereby reduce the need for universal service regulation? Some 
argue that the universal service rationale is based on the premise that 
the market alone cannot uniformly guarantee provision of 
telecommunications and services. They believe that depending on the 
market to provide advanced services may seriously impede access by 
important segments of society to those services, particularly if the 
offerings are not commercially viable in certain areas.\18\ Consumer 
and civil rights groups, in particular, raise the specter of 
``electronic redlining,'' in which low income and minority 
neighborhoods are ``systematically underrepresented'' in the deployment 
of advanced services, as has been alleged with respect to various local 
telephone companies' video dialtone networks.\19\
---------------------------------------------------------------------------

    \18\Raymond Lawton, Associate Director of The National 
Regulatory Research Institute, pointed out in his testimony at the 
Indianapolis field hearings that in an unregulated market, services 
are provided to rural/residential/low income service recipients last 
because service to them is often more expensive and they are most 
often unable to pay. See Lawton Comments, p. 2.
    \19\See Center for Media Education, Consumer Federation of 
America, et al., ``Information Superhighway'' Could Bypass Low 
Income and Minority Communities, (released May 23, 1994) and 
associated petitions filed with the FCC on the same date. Under the 
FCC's ``video dialtone'' rules, a local telephone company can 
construct, operate, and maintain a transport facility within its 
local service area, leasing channel capacity to unaffiliated 
programmers on a common carrier basis. See Telephone Company-Cable 
Television Cross-Ownership Rules, Sections 63.54-63.58, Second 
Report and Order, Recommendation to Congress, and Second Further 
Notice of Proposed Rulemaking, 7 FCC Rcd 5781 (1992).
---------------------------------------------------------------------------

    16. To what extent is ``electronic redlining'' occurring or likely 
to occur, i.e., the calculated exclusion of a geographic area from 
deployment of advanced telecommunications capabilities or services on 
the basis of income, ethnicity, race, or disability? What weight should 
be assigned to those arguments that identify economic reasons for 
serving certain areas on a less timely basis than others?
    17. Various proposals address the concern that a marketplace-driven 
definition of universal service may not bring comparable services to 
all segments of the population or to all areas of the country at the 
same rate. One proposal, for example, is for government to require 
firms to provide services to community centers, such as schools and 
libraries, at the same time that such services are first provided to 
businesses and residences. The proponents of this approach claim that 
focusing on providing service to such centralized points within a 
community, as a transitional mechanism, could make desirable services 
more widely available without incurring the risks and costs of 
mandating universal provision of uneconomical or unwanted services.\20\ 
We request comment on this approach. In particular, do such public 
institutions have the facilities, funds, and hours of operation to 
afford individuals, especially the young, a full and fair opportunity 
to explore the highways of the Information Age? If not, what mechanisms 
could be explored for providing such resources?
---------------------------------------------------------------------------

    \20\See, e.g., Comments of Carlos Atencio, Chairman, New Mexico 
Educational Technology Coordination Council at the Los Alamos 
National Laboratories, New Mexico Hearing (Dec. 16, 1993).
---------------------------------------------------------------------------

    18. We also seek comment on the possible effects of competition on 
the achievement of universal service goals in rural areas. Some argue 
that competition in such areas is not only unsustainable, but 
potentially destructive to universal service goals.\21\ On the other 
hand, competition may spur the introduction or expansion of service in 
rural areas, as suggested by the forty-fold increase in telephone 
penetration that occurred in rural areas during the competitive period 
between 1895 and 1920.\22\ We also solicit comment as to whether the 
``rural subscriber may be just as willing to ride the information 
highway as his urban counterpart,'' thereby creating a market setting 
that could sustain competition.\23\
---------------------------------------------------------------------------

    \21\See, e.g., John Panzar and Steven Wildman, Competition in 
the Local Exchange: Appropriate Policies to Maintain Universal 
Service in Rural Areas (undated, unpublished paper) (Panzar and 
Wildman). To gather a more complete picture of market conditions in 
rural areas, we request the following data from rural telephone 
companies (although additional information would be welcome): cost 
of service per access line; average minutes of use per access line; 
number of business lines versus number of residential access lines; 
long distance calling by business customers versus residential 
customers; and nature, number, and market share of competitors, 
where applicable.
    \22\Nearly 40% of all farm households had a telephone in 1920, 
as compared to less than one percent in 1895. See Mueller, supra 
note 2, at 356, 357.
    \23\The Universal Service Subcommittee, Western Alliance, 
Universal Service in the Nineties, Section II, at 2 (a draft report 
by a consortium of western rural telephone companies released at the 
National Association of Regulatory Utility Commissioners (NARUC) 
Summer Meetings, San Diego, California, July 1994).
---------------------------------------------------------------------------

III. Universal Service Today and in the Future

    19. The record developed over the course of NTIA's five universal 
service field hearings demonstrates considerable public support for 
expanding the current definition of universal service beyond ``plain 
old telephone service''--POTS.\24\ Accordingly, this section of the 
Notice addresses the myriad issues raised by such a redefinition.\25\ 
Because any new concept of universal service will build on the existing 
definition, it is appropriate, however, first to consider the extent to 
which the nation has achieved its goal of universal POTS before turning 
our attention to a new definition of universal service.
---------------------------------------------------------------------------

    \24\NII Field Hearings, supra note 10, at 8-9.
    \25\This Notice does not, of course, contain the definitive list 
of such issues. We encourage commenters to raise other important 
matters not touched on in the Notice.
---------------------------------------------------------------------------

A. Achievement of Universal POTS

    19a. In many respects, U.S. universal service policies have been a 
major success. As of March, 1994, 93.9% of all American households had 
telephone service, compared to 91.4% a decade earlier, and fewer than 
fifty percent at the end of World War II.\26\ Moreover, telephone 
subscribership in the United States exceeds that in most other nations, 
often by a substantial margin.\27\
---------------------------------------------------------------------------

    \26\See Industry Analysis Division, Common Carrier Bureau, 
Federal Communications Commission, Telephone Subscribership in the 
United States at 6, Table 1 (Aug. 1994) (Telephone Subscribership) 
(citing the Census Bureau's Current Population Survey (CPS)). See 
also Congressional Budget Office, The Changing Telephone Industry: 
Access Charges, Universal Service, and Local Rates 55 (June 1984) 
(cited in Office of Policy Analysis and Development, NTIA, Telephone 
Subscribership in the United States: A Post-Divestiture Analysis 
(1985)).
    Basic telephone service has also become increasingly affordable 
for the average American, particularly since the AT&T divestiture in 
1984. Between 1983 and 1993, prices for telephone service, on 
average, rose less (2.0%) than the consumer price index for all 
items (3.8%) or for all services (4.7%). Moreover, since 1984, 
telephone service has comprised no more than 2.0-2.1% of annual 
household expenditures. Telephone Trends, supra note 13, Table 3, 
Table 8. Over this same period of time, the variety and quality of 
telephone services and equipment have also increased dramatically. 
Devices such as touch-tone service, multiple phones, cordless 
phones, and answering machines, that were once regarded as luxuries, 
have now become commonplace for many U.S. citizens.
    \27\For example, compared to the world's major industrial 
nations--the so-called ``Group of 7''--the United States in 1992 
(56.49) trailed only Canada (59.21) in terms of main telephone lines 
per 100 inhabitants while surpassing France (52.13), Japan (46.74), 
the United Kingdom (45.25), Germany (43.96), and Italy (41.03). 
International Telecommunication Union, World Telecommunication 
Development Report 1994, A-3. Canada's success in extending 
universal service to its citizens (evidenced by the 98.7% of 
Canadian households in 1992 with basic telephone service) 
demonstrates, however, that there is room for improvement in the 
United States. See Universal Service Project, NARUC Subcommittee on 
Communications, Staff Draft Position Statement on Universal Service 
Principles 4 (June 1994) (NARUC Paper).
---------------------------------------------------------------------------

    20. On the other hand, although the vast majority of American homes 
have at least one telephone, approximately six million households have 
none.\28\
---------------------------------------------------------------------------

    \28\H.R. Rpt. No. 560, 103d Cong., 2d Sess. 6 (1994).
---------------------------------------------------------------------------

    Household penetration rates (i.e., the percentage of households 
with a telephone) vary substantially both from State to State and 
within a State.\29\ Subscribership is also particularly low among 
certain segments of our society. Approximately one-third of African-
American and Hispanic households with annual incomes of less than 
$5,000 lack telephone service, as compared to twenty percent of white 
households.\30\ Fifty-three percent of Native American households on 
reservations do not have phones.\31\ Nearly three-quarters of all 
phoneless households are renters, and fifteen percent of households 
headed by a person under twenty-five years of age are without 
telephones.\32\ Finally, in many states, some areas have no telephone 
service at all--not even pay phones.\33\
---------------------------------------------------------------------------

    \29\In March 1994, telephone penetration ranged from 87.7% in 
South Carolina to 97.2% in Pennsylvania. Telephone Subscribership, 
supra note 26, at 14, Table 2. Further, while more than half of 
Southwestern Bell's 550 central offices in Texas report penetration 
rates of 95% or higher, some seven percent of the company's central 
offices have penetration rates of 80% or less. Source: Southwestern 
Bell Telephone analysis of 1990 Census data. We request comment from 
other telephone companies as to whether similar variations exist in 
their subscribership.
    \30\Telephone Subscribership, supra note 26, at 23, Table 4. In 
1989, about 50 percent of households at or below the poverty level 
headed by single women with small childen did not have telephone 
service. Jorge Schement, Beyond Universal Service: Characteristics 
of Americans Without Telephone Service 4 (unpublished paper 
presented at a conference sponsored by The Benton Foundation and The 
Columbia Institute for Tele-Information, Washington, D.C., Oct. 15, 
1993).
    \31\Bureau of the Census, U.S. Dep't of Commerce News (Release 
#CB94-127) Aug. 22, 1994, at 1.
    \32\Bureau of the Census, U.S. Dep't of Commerce, SB/94-16, 
Phoneless in America 1 (July 1994) (Phoneless) (1990 data).
    \33\Universal Service Project, NARUC Subcommittee on 
Communications, Staff Position Statement on Universal Service 
Principles 4 (July 19, 1994).
---------------------------------------------------------------------------

    21. Statistics such as these have caused many observers to conclude 
that universal service has not been fully achieved in the United 
States.\34\ Low penetration rates among certain groups appear to result 
from a variety of factors. For example, witnesses at NTIA's 
Albuquerque, New Mexico, field hearing cited the state's low per-capita 
income as an important cause of the low penetration in the area.\35\ 
More than sixty-five percent of the households of the Navajo Nation in 
New Mexico do not subscribe to telephone service because telephone 
service is either not affordable or not available.\36\ Language 
barriers and the need for increased public education, at least among 
certain groups, may also result in reduced telephone service 
penetration.\37\
---------------------------------------------------------------------------

    \34\See, e.g., NII Field Hearings, supra note 10, at 8.
    \35\See Transcript of New Mexico Hearing at 55, 253-254 
(Comments of Thomas A. Garcia, U S WEST Vice President, New Mexico; 
Comments of Kenneth Solomon, Acting Director, Telecommunications 
Division, New Mexico State Corporation Commission (Dec. 16, 1993)). 
Another factor in affordability may be long distance charges. See 
Field Research Corporation Affordability of Telephone Service 68, 
Customer Survey Conducted for GTE and Pacific Bell (Oct. 1993) 
(finding that, among other things, customers who find it difficult 
to afford service have a higher percentage of their average monthly 
bill attributable to long distance charges).
    \36\Comments of Rodger Boyd, Executive Director of the Navajo 
Nation, Division of Economic Development (Dec. 16, 1993).
    \37\For example, research indicates that people with limited 
knowledge of the English language frequently are not able to take 
full advantage of the programs and services available to them. A 
1992 survey of Chinese, Korean and Latino consumers in San 
Francisco, Los Angeles, New York, Chicago, and Brownsville, Texas, 
about their knowledge of telecommunications revealed that 43% did 
not know how to begin the process of having a phone installed and 
17% did not know who to call if the phone was not working. See 
Comments of Bong Hwan Kim, Executive Director, Korean Youth and 
Community Center, Los Angeles hearing, at 6 (Feb. 16, 1994).
---------------------------------------------------------------------------

    22. We seek further comment on these matters. Are there other 
underserved groups besides those we have mentioned? Are the measures 
used and types of data currently being collected by the Census 
Department and other government agencies adequate for determining 
whether universal service goals are being met in all sectors of 
society? If so, parties are requested to provide that information for 
the record. If not, what recommendations are there for providing more 
comprehensive and targeted data on these issues?
    23. We also solicit comment (particularly studies, surveys, etc.) 
on why some Americans do not have telephone service. Is income the 
determining or predominant factor? Does subscribership depend to any 
significant degree on geography (e.g., do penetration levels differ 
between rural and urban areas after controlling for factors like 
income)? To what extent are cultural factors important? If such factors 
are important, what steps can be taken to overcome them? Do different 
considerations affect a household's ability to retain phone service 
over time, as compared to its decision to subscribe initially?
    24. Finally, we request comment on whether implementation of 
universal service should be measured in terms of availability of POTS 
rather than penetration. For example, some households may not have 
telephone service simply because they choose not to subscribe. What 
measure(s), applied on a regular basis for monitoring purposes, would 
best enable policymakers to distinguish such households from those that 
desire basic service but cannot obtain it?

B. Formulating an Expanded Definition of Universal Service

    25. As the nation decides whether and how to redefine universal 
service, it is important to remember that, to a large extent, the 
current debate represents but a new phase in a continuing process. 
Although universal service has traditionally been defined as voice-
grade POTS, the minimally-acceptable characteristics of that service 
have changed over the past sixty years. Thus, direct dialing became 
popular as it obviated the need to make more expensive operator-
assisted calls in many instances and regulators mandated lower rates 
for directly-dialed calls. Party-line service has been replaced in 
recent decades by single-line service. Some states have directed local 
exchange carriers to incorporate touch-tone capability into their basic 
service offerings because of its importance in accessing many 
information services. In short, the current interest in redefining 
universal service is consistent with past practice. The principal 
differences are the ever-expanding range of services that could be 
incorporated into a revised concept of universal service and the 
quicker pace at which policymakers must make their decisions.
    26. As noted above, there appears to be strong public support for 
expanding the existing definition of universal service. There is, 
however, little consensus about what services, features, and 
capabilities should be included within a new definition. Witnesses at 
the NTIA field hearings suggested that universal service encompass a 
host of different services, including: access to a basic set of 
information and telecommunications services; multiple languages, 
including Spanish and Native American languages that require special, 
non-ASCII\38\ characters; set-aside resources, facilities, and capacity 
for public, education, and government training and use; new 
technologies such as video link and cellular telephone service; and 
services defined as characteristics or features, rather than 
technologies.\39\ A random survey of 1,000 likely voters conducted by 
the Benton Foundation found that Americans are very interested in 
educational and informational services.\40\
---------------------------------------------------------------------------

    \38\ASCII is a uniform code used in computer and data 
communications systems. It employs seven binary digits (bits) to 
represent a specific set of letters, numbers, punctuation and 
special characters, plus a parity bit used in checking for 
transmission errors.
    \39\Comments of KNME-TV (Channel 5); Prodigy Services Co.; 
University of New Mexico, Department of Engineering; Alliance for 
Community Media; Virtual City Network Project; Citizens Action 
Coalition of Indiana; Casey Luna, Lt. Governor, State of New Mexico; 
Valley Telephone; Chinese for Affirmative Action; State Senator 
Douglas Hunt, Indiana. Cf. Comments of The National Regulatory 
Research Institute; Hudson Institute, and GTE East Area Telephone 
Operations.
    \40\Mellman Lazarus Lake, What People Think About New 
Communications Technologies, Communications Policy Briefing 2, at 4 
(Benton Foundation 1994).
---------------------------------------------------------------------------

    27. If universal service is to be redefined as a group of services 
or capabilities, some mechanism or set of principles must be found to 
help select from the wealth of possible alternatives. We therefore 
request comment on whether there is an organizing principle or set of 
principles that can be used to determine whether a particular service 
or feature should be included within a modern concept of universal 
service. This is essential because redefinition is not without 
potential pitfalls. Adding each new component to the package deemed 
universally necessary increases both the societal costs of making that 
package universally available as well as the chances of prematurely 
mandating services or features that are ultimately proven to be 
commercially undesirable.\41\
---------------------------------------------------------------------------

    \41\Defining universal service to include certain services may 
also raise constitutional and regulatory issues. For example, 
government designation of certain information services as part of a 
universal service package could be challenged as violative of the 
First Amendment on the ground that it compels providers to ``speak'' 
or because it discriminates against other information services. 
Moreover, inclusion of information services within a redefined 
universal service could lead to regulation of currently unregulated 
services. We seek comment on these issues as well.
---------------------------------------------------------------------------

    28. One approach could be to allow the marketplace to identify, at 
least in the first instance, services and features that warrant 
inclusion in an expanded definition of universal service.\42\ Under 
this approach, private firms would offer services to consumers in 
competition with other companies. If some service were subscribed to by 
a predesignated minimum percentage of U.S. households, government 
regulators would either have the authority to consider whether to make 
that service universally available or be required to do so.\43\ We seek 
comment on whether government should select services to be included in 
an expanded definition of universal service and, if so, on what basis 
such services should be chosen? What role should the market play in 
determining that mix? Should there be some threshold of market 
penetration before a capability or service is added to the definition 
of universal service? If so, what should the threshold be and why? Are 
there disadvantages in relying on market forces even in the first 
instance?
---------------------------------------------------------------------------

    \42\See, e.g., Comments of Neil Pickett, Director of Research 
and Programs, the Hudson Institute, Indianapolis field hearing.
    \43\Cf. S. 1822, 103d Cong., 2d Sess. Sec. 102(a) (1994), which 
would add a new section 201A(b) to the Communications Act requiring 
the FCC to incorporate within universal service ``any 
telecommunications and information services which . . . have, 
through the operation of market choices by customers, been 
subscribed to by a substantial majority of residential customers.''
---------------------------------------------------------------------------

    29. An alternative to identifying particular services to be 
incorporated into an expanded concept of universal service would be to 
define universal service in terms of a network connection that would 
enable customers to access any service available via such network. If 
universal service were to be defined in such a fashion, the cost of 
making it available throughout the country would likely be reduced. 
Moreover, government officials would not be required to make difficult 
determinations about the relative value of different services or 
equipment; instead, it should allow the market to determine customer 
valuation of each service or equipment item. On the other hand, 
government officials may have to make equally difficult decisions as to 
the type of network connection that should be provided.
    30. We request comment on the notion of defining universal service 
in terms of a network connection. Would such an approach effectively 
spur deployment of an advanced telecommunications infrastructure? Would 
it give all sectors of society a chance to participate in the 
information revolution? If this approach were adopted, what sort of 
connection should be specified (e.g., in terms of capacity, 
transmission speed, signalling, etc.)?
    31. The notion of defining universal service as customer access to 
a telecommunications network raises the issue of access to the 
Internet, which began in 1969 as a Pentagon experiment to aid 
researchers in trading information by computer. Today the Internet is a 
worldwide network linking over 21,000 separately administered computer 
networks. Each computer network connects tens of thousands of computers 
with ten million users in the United States and fifteen million users 
in sixty countries around the world.\44\ One observer recently 
asserted:
---------------------------------------------------------------------------

    \44\About the Internet, The InfoLetter: A Monthly Roadmap to the 
Information Superhighway, May 1994, at 5. Parts of the Internet are 
growing at an exponential rate of 15 percent per month. See 
Testimony of Dr. Vinton G. Cerf, President, Internet Society, before 
the House Science Committee, March 22, 1994.

    Not knowing how to use the Internet will be as grave a 
deficiency as not knowing how to read. The Internet will become the 
world's primary means of communication and will soon carry more mail 
than the entire postal service worldwide.\45\
---------------------------------------------------------------------------

    \45\Mark Gibbs, Internet ABCs Essential, Investor's Business 
Daily, Apr. 14, 1994, at 4.

    If universal service is defined in terms of a network connection, 
should that connection provide access to the Internet?
    32. Another important area of inquiry is the extent to which 
universal service policy should address customer premises equipment 
(CPE). Without adequate equipment on the customer's premises, network 
connection and the many services it affords is meaningless. CPE capable 
of providing access to advanced services may be expensive at market 
prices, however, and thus could serve as a barrier to the availability 
of advanced services. For the same reason, however, subsidizing CPE as 
part of universal service could be expensive, possibly prohibitively 
so.
    Including CPE in the definition of universal service could also 
reverse the government's existing regulatory approach toward CPE, which 
is now deregulated and subject only to market forces.\46\ Local 
exchange carriers may provide CPE in conjunction with local telephone 
service, subject to certain safeguards. In addition, at present, 
computer manufacturers, set-top box manufacturers, and television 
manufacturers are competing to develop the product or products that 
could be used for receiving advanced services. It is thus not clear 
which equipment the government should specify, if any, and on what 
basis it should choose. Moreover, government selection of a certain 
type of CPE for inclusion within the universal service definition 
carries with it the risk of government picking winners and losers, a 
questionable strategy.
---------------------------------------------------------------------------

    \46\Although CPE was detariffed and generally deregulated in the 
early 1980s, the FCC still requires registration of this equipment 
to ensure that its connection does not cause harm to the public 
switched network. See 47 CFR part 68 (1994).
---------------------------------------------------------------------------

    33. We seek comment on whether CPE should be included in the new 
definition of universal service, and, if so, whether a category of 
providers should be obligated to supply it. Should the Government 
identify specific equipment or merely capabilities if it is included in 
the definition? What other alternative approaches could be adopted, 
e.g., such as a voucher system, which would assure that all consumers 
could purchase the type of CPE they desire from the provider of their 
choice without government specification?

IV. Funding Universal Service in a Competitive Environment

    34. Today, most experts agree that current pricing policies support 
universal service by generating subsidies that reduce the costs of 
providing POTS in particular areas and make service more affordable for 
certain groups of customers. By and large, such subsidies have been 
internally generated--i.e., created by setting the pricing of certain 
services above the costs of providing them--rather than funded by 
external sources, such as taxes.\47\ The growth of competition, which 
to some extent reduces the need for subsidies and is by no means 
incompatible with universal service, does put pressure on existing 
funding mechanisms. Above-cost pricing creates market opportunities for 
new entrants. New entry, in turn, drives prices towards costs, in the 
process, eliminating excess revenues that were available, prior to 
competitive entry, to subsidize universal services like POTS. The 
challenge for policymakers is to develop funding mechanisms that help 
achieve universal service goals, but are sustainable in a competitive 
environment.
---------------------------------------------------------------------------

    \47\Thus, for example, rates for the local telephone facilities 
used to originate and terminate long distance services--so-called 
access facilities--have been set above cost to subsidize local 
telephone rates. Long distance service providers pass those access 
costs through to subscribers. See, e.g., Infrastructure Report, 
supra note 15, at 290-291. Local service rates for business 
customers typically exceed relevant costs to provide support for 
local service to residential users. See, e.g., Bruce Egan and Steven 
Wildman, Funding the Public Telecommunications Infrastructure 7 
(unpublished paper presented at a conference sponsored by The Benton 
Foundation and The Columbia Institute for Tele-Information, 
Washington, DC., Oct. 15, 1993) (Egan and Wildman). Finally, the 
common regulatory practice of requiring uniform rates throughout a 
geographic area--so-called ``geographic rate averaging''--may result 
in above-cost rates for some customers and below cost rates for 
others. See, e.g., David Kaserman and John Mayo, Telecommunications 
Cross-Subsidies, 11 Yale J. on Reg. 119, 130 (1994).
    Although internally generated subsidies are widely used to fund 
universal service, they are not the only mechanisms. For example, 
subsidies to fund 911 emergency services and services for the 
hearing impaired increasingly are generated directly through a 
separate charge on each subscriber's bills. See Egan and Wildman, 
supra, at 7.
---------------------------------------------------------------------------

    35. While there is widespread agreement that competition is putting 
pressure on existing mechanisms for funding universal service, there is 
no consensus on the amount of subsidies at risk.\48\ Thus, a study 
sponsored by the United States Telephone Association concluded that 
interexchange access and toll services provided by local exchange 
telephone companies (LECs) are priced to produce approximately $20 
billion of contribution in excess of their long-run incremental 
costs.\49\ Those additional revenues are presumably needed to fund 
universal service. Teleport Communications Group (Teleport), a major 
provider of competitive local telecommunications services, disputes 
this claim, contending that only $400 million of the LECs' $86 billion 
in annual revenues goes toward subsidizing rates for basic telephone 
service.\50\ A study done for MCI estimated that the subsidy is about 
$3.7 billion when basic service costs are examined and extraneous LEC 
revenue requirements are subtracted.\51\ Finally, the Consumer 
Federation of America alleges that, far from requiring support from 
other services, local telephone service produces net income for the 
LECs in the amount of five to ten dollars per month.\52\
---------------------------------------------------------------------------

    \48\To the extent that universal service is redefined to include 
additional services and features, the costs (and associated 
subsidies) of making that new package of services universally 
available would likely increase above current levels.
    \49\Calvin S. Monson and Jeffrey H. Rohlfs, Strategic Policy 
Research, The $20 Billion Impact of Local Competition in 
Telecommunications 2,3 (issued July 16, 1993).
    \50\Teleport Communications Group, What $20 Billion Impact? A 
Reply to USTA (issued Aug. 10, 1993).
    \51\See Hatfield Associates, Inc., The Cost of Basic Universal 
Service 4 (July 1994).
    \52\See Dr. Mark Cooper, Consumer Federation of America Local 
Exchange Costs and the Need for a Universal Service Fund: A Consumer 
View 1 (May 1994).
---------------------------------------------------------------------------

    36. We ask for comments on the amount of the subsidy today and the 
basis for the estimates. What methodologies were used to derive the 
estimates cited, and what are the strengths and weaknesses of each 
approach? What data sources are available on which to base the 
estimates? What are the implications of universal service subsidies in 
terms of market inefficiencies and the positive ``externalities'' 
generated by the addition of subscribers to the network? With respect 
to a system of subsidies, is there a threshold point at which the net 
positive benefits to society are maximized?
    37. There is a similar lack of agreement concerning possible new 
mechanisms for funding universal service, although certain themes have 
begun to emerge. The debate overwhelmingly centers on the sources and 
distribution of the funding, since most parties appear to agree that 
some form of universal service support should be continued.\53\ The 
following discussion highlights some of the proposals that are 
currently under discussion.
---------------------------------------------------------------------------

    \53\During the five NII field hearings on universal service and 
open access, numerous witnesses set forth proposals relating to 
funding sources and distribution. See NII Field Hearings, pp. 9-10.
---------------------------------------------------------------------------

A. Sources of Contribution

    38. Many proposals focusing on potential funding sources look to 
service providers as a source of subsidies. For example, NARUC's 
Universal Service Project Group contends that as markets continue to 
evolve toward competition, all service providers that deliver services 
over the public switched network should be required to contribute 
proportionally to the universal service support mechanisms, including 
enhanced service providers.\54\ Metropolitan Fiber Systems (MFS), 
another provider of competitive local telecommunications services, 
would require contributions from all providers of telecommunications 
services.\55\ Teleport, on the other hand, suggests that all common 
carriers providing facilities-based, two-way telecommunications 
contribute to funding universal service.\56\ Professor Eli Noam has 
developed a plan under which all entities providing ``transmission path 
services'' to third parties for compensation would pay a proportionate 
share, based on revenues, toward universal service funding.\57\
---------------------------------------------------------------------------

    \54\NARUC Universal Service Project, NARUC Committee on 
Communications, Presentation of Staff Position Statement, NARUC 
Summer Meetings (San Diego, California) (July 25, 1994); Universal 
Service Project, NARUC Subcommittee on Communications, Staff Draft 
Position Statement on Universal Service Principles, 22 (June 27, 
1994) (Staff Draft Position Paper).
    \55\See e.g., Inquiry into Policies and Programs to Assure 
Universal Telephone Service in a Competitive Market Environment, 
Petition of MFS Communications Company, Inc. for a Notice of Inquiry 
and En Banc Hearing, at 5 (filed Nov. 1, 1993) (Petition of MFS).
    \56\Comments of Michael A. Morris, Western Regional Director, 
Regulatory and External Affairs, Teleport Communications Group, 
Transcript of Los Angeles Hearing at 223 (Feb. 16, 1994).
    \57\Eli M. Noam, NetTrans Accounts: Reforming the Financial 
Support System for Universal Service in Telecommunications (Sept. 
1993) (unpublished paper) (Noam). His scheme would apply to all 
facilities-based two way transmission carriers regulated by the FCC 
under Title II, including local exchange carriers, interexchange 
carriers, cellular carriers, competitive access providers, and 
satellite carriers. He would exclude enhanced service providers, 
information providers, resellers, private networks, equipment 
manufacturers, and cable and broadcast operators. A system of 
credits and debits would be used to determine amounts owed and 
transfers would only be made in the event of a difference owing 
between providers. He would begin this program at the same time that 
local competition would be fully permitted, with full 
interconnection and collocation rights. He indicates that his 
proposal could be implemented under existing mechanisms.
---------------------------------------------------------------------------

    39. We request comment on these and other mechanisms for generating 
funds to support universal service. What are the advantages and 
disadvantages of deriving universal service support funding from 
service providers? What criteria should be used to determine which 
service providers should be required to contribute to universal service 
funding? Should contributions be required only from facilities-based 
service providers and, if so, why? If contributions are to be required 
from non-facilities based service providers (e.g., resellers, enhanced 
service providers), do steps have to be taken to prevent double 
payment? How can the contribution scheme be structured so as to 
minimize adverse effects on competition?\58\ Finally, should we keep 
any of the existing funding mechanisms?
---------------------------------------------------------------------------

    \58\For example, MFS suggests that universal service obligations 
be determined annually, based on competitively neutral criteria, 
such as percentage of revenues or a fixed amount per access line. 
See Petition of MFS, supra note 55, at 19.
---------------------------------------------------------------------------

    40. Some have suggested public funding as an alternative to 
obtaining universal service funding from service providers. For 
example, Professor Noam lists a variety of tax measures that could be 
used to fund universal service (e.g., general tax revenues, a 
telecommunications sales tax, a tax on telecommunications equipment, or 
a property tax on carriers), while pointing to problems with each.\59\ 
Some witnesses at the NTIA field hearings asserted that subsidies 
should be generated from tax-based funding under ideal circumstances, 
with a sectoral levy on telecommunications as a second best option.\60\ 
Finally, at NTIA's Indianapolis hearing, an executive of Procter and 
Gamble suggested that commercial advertising on the NII could be an 
alternative mechanism for funding universal service objectives.\61\
---------------------------------------------------------------------------

    \59\Noam, supra note 57, at 17-20.
    \60\Comments of Barbara A. Cherry, Ameritech 2 (Indianapolis 
hearing); Transcript of Los Angeles hearing at 207 (Comments of 
Timothy J. McCallion, West Area Vice President--Regulatory, GTE). A 
State regulatory official testifying at the New Mexico field hearing 
raised the possibility of using revenues from Federal spectrum 
auctions to fund universal service objectives. Ken Solomon, Acting 
Director of Telecommunications, New Mexico State Corporation 
Commission, New Mexico transcript, at 256.
    \61\Comments of Robert Herbold, Senior Vice President, The 
Proctor & Gamble Company (Indianapolis Field Hearing).
---------------------------------------------------------------------------

    41. We request comment on the advantages and disadvantages of using 
public funding to advance universal service goals. While that approach 
would be competitively neutral, public funding would represent a sharp 
departure from current funding policies and would likely encounter 
stiff opposition, given the Federal deficit and other budget 
priorities. We also seek comment on the efficacy of advertising as a 
vehicle for funding universal service in the 21st century.

B. Distribution of Subsidies

    42. The other facet of universal service funding concerns the 
distribution of subsidies. Currently, universal service support is 
provided in both targeted and untargeted fashions. As noted above, 
government regulators historically have mandated above-cost prices for 
certain services to reduce rates for residential POTS. This approach, 
however, effectively subsidizes all residential customers, including 
those who would be willing and able to pay cost-based rates for 
telephone service. Similarly, regulators have also directed subsidies 
towards high cost areas to ensure affordable POTS in those areas.\62\ 
Once again, this approach benefits all households in high cost areas, 
whether or not they are low income or would terminate telephone service 
if faced with cost-based rates.
---------------------------------------------------------------------------

    \62\One such subsidy mechanism is the Universal Service Fund 
(USF) which provides monies to local telephone companies whose 
``local loop'' costs (i.e., the cost of the facility connecting the 
subscriber's home to the nearest company switching office) are more 
than 15 percent above the national average. The USF grew from $445 
million in 1986 to more than $700 million in 1993, sparking an 
investigation by a Federal-State Joint Board and the FCC into the 
causes of its rapid growth. See also Amendment of Part 36 of the 
Commission's Rules and Establishment of a Joint Board, Notice of 
Inquiry, CC Docket No. 80-286 (released August 30, 1994). Another 
subsidy mechanism is the Rural Electrification Administration's 
telephone loan program which, since 1947, has provided low-cost 
loans directly to rural telephone companies and cooperatives. See 7 
U.S.C. Sec. 901 et seq (1994).
---------------------------------------------------------------------------

    43. Recently, government regulators have developed more carefully 
targeted funding programs. For example, the FCC's Link-Up America 
program allows States to reduce telephone installation charges for 
qualified households by as much as $30, as well as to use installment 
payments for installation charges without any interest charges to the 
customer. To date, forty-eight states and the District of Columbia have 
implemented Link-Up America programs. Funding of the program this year 
will be approximately $15.9 million. Under the FCC's Lifeline program, 
started in 1985, the FCC matches State rate discounts to eligible 
subscribers (up to the maximum Federally-mandated subscriber line 
charge of $3.50 per month). Thirty-five states and the District of 
Columbia have implemented some form of Lifeline assistance, at a 
projected cost of some $119 million in 1994.
    44. Most experts contend that universal support should be provided 
only to those subscribers who could not otherwise afford telephone 
service. Some argue for targeting subsidies to low income users, high 
cost areas, and special needs groups.\63\ NARUC's Universal Service 
Project recommends continuing some support mechanisms in place today, 
including targeted support in low cost areas and direct assistance to 
end users through Lifeline and Link-up programs.\64\ Others also 
support some form of lifeline option to assist low income customers 
while avoiding subsidizing every household.\65\
---------------------------------------------------------------------------

    \63\See NII Field Hearings, p. 10-11.
    \64\Staff Draft Position Paper, supra note 54, at 8.
    \65\Comments of Charles Smith, Vice President and General 
Manager, Pacific Bell, Los Angeles region, Transcript of Los Angeles 
Hearing at 55 (Feb. 16, 1994).
---------------------------------------------------------------------------

    45. We seek comment on how best to target universal support 
funding. What criteria should be established to identify those eligible 
for subsidies? Should eligibility for support be linked to the 
eligibility standards associated with other social ``safety net'' 
programs. Should support be structured so that some defined package of 
telecommunications services consumes no more than a specified 
percentage of a household's annual income, or represents no more than a 
designated fraction of a household's yearly expenditures?\66\ Should 
subsidies be applied to a limited set of services and, if so, how 
should that set of services be determined?
---------------------------------------------------------------------------

    \66\As noted above, telephone service comprised no more than 
2.0-2.1% of the average U.S. household's annual expenditures. See 
supra note 26.
---------------------------------------------------------------------------

    46. We also request comment on the current practice of providing 
support to firms providing service in high cost (predominantly rural) 
areas. Some have argued that rural telephone companies have higher 
average costs only if one considers the fixed costs of their telephone 
networks. When operating expenses (e.g., labor costs, taxes, interest 
expenses) are factored in, total costs for some rural companies are 
lower than the costs incurred by companies operating in non-rural 
areas.\67\ Commenters should address these analyses and their 
implications for universal service policies in rural areas.
---------------------------------------------------------------------------

    \67\See Joseph Fuhr, Jr., Should the U.S. Subsidize Rural 
Telephone Companies?, 12 J. of Pol. Analysis and Mgmt 310 (1993); 
Thomas Armstrong and Joseph Fuhr, Jr., Cost Considerations for Rural 
Telephone Service, 17 Tel. Pol. 80 (1993).
---------------------------------------------------------------------------

    47. In a related vein, MFS suggests that subsidies for high cost 
areas be based on objective criteria such as population density, 
geography, and other subscriber statistics rather than actual telephone 
company costs to reduce any incentive of LECs to inflate costs so they 
can keep receiving subsidies.\68\ Is that a viable funding strategy? 
Would it be more efficient to direct support to rural households, 
thereby subsidizing only those subscribers who could otherwise not 
afford telephone service?
---------------------------------------------------------------------------

    \68\See Petition of MFS, supra note 55, at Attachment I, p. 4.
---------------------------------------------------------------------------

    48. Finally, we solicit comment on the appropriate recipients of 
universal service support. As noted above, subsidies are directed 
towards the providers of telephone service, in return for their 
commitment to provide below cost service to certain subscribers or in 
certain areas. Some observers have suggested providing subsidies 
directly to subscribers, either as a complement to or in place of 
transfers to carriers. There is growing interest, for example, in a 
voucher system to allow subsidies to be distributed directly to 
eligible subscribers who would choose their own providers.\69\ 
Similarly, there is a proposal to give eligible customers credits on 
their monthly bills to reflect reductions in the price of basic 
service.\70\
---------------------------------------------------------------------------

    \69\Comments of Mark T. Bryant, MCI Telecommunications 13, New 
Mexico Hearing (Dec. 16, 1993). See also Noam at 36-37.
    \70\See Petition of MFS, supra note 55, at 20. Carriers that 
provide basic exchange service would grant credits to eligible end 
users, and these credits would apply against the carriers' universal 
service obligations.
---------------------------------------------------------------------------

    49. Directing support to end users, rather than to carriers, could 
give customers more control in choosing their providers, while 
continuing to ensure that all have access to affordable service. It 
might also stimulate competitive entry in some areas. Others have 
argued, however, that providing support to subscribers would encourage 
inefficient entry by new firms, jeopardize incumbent providers' ability 
to serve remaining customers, and actually increase universal service 
support requirements.\71\
---------------------------------------------------------------------------

    \71\See Panzar and Wildman, supra note 21, at 20-25.
---------------------------------------------------------------------------

    50. Should universal service support payments be made to service 
providers, to subscribers, or in some other fashion? Would directing 
subsidies to carriers encourage inefficient entry in some areas? If so, 
under what conditions? Could a subscriber-based subsidy program be 
structured to avoid such problems? How much would such a program cost 
to establish and operate? If support payments are made to service 
providers, should they be limited to certain categories of providers, 
such as ``carriers of last resort'' (i.e., firms that agree to provide 
universal services throughout an entire geographic area)? If so, would 
it be feasible or efficient to designate (and provide subsidy payments 
to) multiple carriers of last resort in a particular area? What rules 
should dictate when carriers of last resort can enter or exit 
geographic areas? What is the most effective way to establish service 
in currently unserved areas? For example, would it be possible to award 
a franchise to service an unserved area via competitive bidding? What 
minimum franchise requirements would be necessary to make such an 
auction fair and attractive to potential bidders?

C. Transition Measures

    51. Establishing a new funding scheme will likely necessitate 
transitional measures. For example, if any rate rebalancing occurs, it 
will be necessary to address potential ``rate shock'' to local 
ratepayers. One commenter contends that any transition should be aimed 
at achieving two goals: (1) developing a level playing field for 
competitors and (2) continuing to protect consumers. Ameritech proposes 
to use what it calls the ``Customers First Plan,'' based on what 
Ameritech labels ``bulk billing.'' In effect, Ameritech would collect 
the necessary subsidy amount by billing long distance carriers 
according to their share of the total toll revenues reported to the FCC 
for all of Ameritech's interstate access customers. Ameritech urges 
this approach as a transition to long-term reform of universal service 
funding mechanisms.\72\ We request comment on this approach, as well as 
on other transitional proposals. How should these mechanisms be 
structured so as not to distort competitive markets?
---------------------------------------------------------------------------

    \72\See Petition for a Declaratory Ruling and Related Waivers to 
Establish a New Regulatory Model for the Ameritech Region, DA 93-
481, Attachments to Ameritech's Reply Comments: Customers First: 
Ameritech's Advanced Universal Access Plan, Attachment G (filed July 
12, 1993).
---------------------------------------------------------------------------

V. Role of the Federal and State Governments in Developing Universal 
Service Policies

    52. Traditionally, FCC and state regulators have worked in tandem 
to promote universal service goals, but responsibility for defining the 
precise components of universal service has resided primarily with the 
States. The telecommunications reform legislation pending in Congress 
would specify differing degrees of Federal-State cooperation. The 
Senate bill, S. 1822, would charge the FCC with defining universal 
service, ``based on recommendations from the public, Congress, and the 
Federal-State Joint Board,'' although it would authorize the States to 
prescribe requirements over and above the federally-established minimum 
as long as such regulations are not inconsistent with those prescribed 
by the FCC.\73\ The House bill, H.R. 3626, would delegate the task to 
the FCC and the States, based on recommendations from the Joint 
Board.\74\
---------------------------------------------------------------------------

    \73\S. 1822, 103d Cong., 2d Sess. Section 102(a) (1994).
    \74\H.R. 3626, 103d Cong., 2d Sess. Section 302 (1994).
---------------------------------------------------------------------------

    53. Similarly, most funding proposals recognize the joint role of 
the FCC and the states, given the bifurcated regulatory jurisdiction 
over telecommunications. For example, both bills now pending in 
Congress, H.R. 3626 and S. 1822, require the involvement of the FCC and 
the States in determining new universal service funding mechanisms, 
although the final distribution authority between the two levels of 
government will turn on the specific legislative language enacted. Many 
parties stress the need for administration of a funding mechanism by a 
neutral third party from the private sector.\75\
---------------------------------------------------------------------------

    \75\See Petition of MFS, supra note 55, at 17; See also Comments 
of Michael Morris, TCG, supra note 56, at 222.
---------------------------------------------------------------------------

    54. There are numerous arguments for allowing more or less federal 
or state authority over universal service policies. Defining universal 
service on a nationwide basis, for example, could facilitate network 
planning and service deployment, thereby reducing the total costs to 
society of implementing universal service. On the other hand, giving 
individual states flexibility to adopt differing definitions and 
funding mechanisms, as is the case today, would allow them to craft 
policies more in line with local conditions. Allowing for state 
experimentation might also reduce the risks of mandating provision of 
services either unnecessarily or prematurely, and or leave room for 
creative funding mechanisms that might reduce the total subsidy 
requirement. We request comment on the appropriate role of the Federal 
and State government in defining and funding universal service. What 
role should be played by the private sector?

VI. Open access for Telecommunications and Information Systems

    55. The development and convergence of new telecommunications and 
information technologies are also leading to changes in the way people 
think about access to the ``network.'' The concept of ``open access'' 
has come to represent technical, regulatory, and empowerment 
components. This section examines these evolving concepts of open 
access and the policies that can help make them a reality.
    56. Historically, access has focused on issues such as physical 
access to a seamless and transparent web of monopoly local exchanges, 
equal access to long distance carriers,\76\ and availability to and 
ease of use by consumers, among others. As a result, any telephone 
customer can initiate as well as receive phone calls, regardless of the 
local exchange and long-distance carrier serving the caller and the 
call recipient. This ``open system'' that we all take for granted has 
been achieved through a framework of policies designed to promote 
interconnection and interoperability, such as expanded interconnection 
and a uniform system of ``addresses'' (i.e., telephone numbers).\77\
---------------------------------------------------------------------------

    \76\Equal access for long-distance carriers has not yet been 
fully achieved for all local exchange carriers or for non-BOC 
cellular operators.
    \77\In contrast, cable television franchises are not 
interconnected with other networks. Each customer is served by a 
local provider who provides access solely to the services that cable 
operator wishes to provide and the set-top box is principally a 
receive-only device. In the cable context, access generally refers 
to customer access to cable service (measured in homes passed) and 
to carriage requirements imposed on cable providers such as Public, 
Education and Government channels, leased access, and must carry 
channels.
---------------------------------------------------------------------------

    57. The Administrations's open access goals are broader and more 
multi-faceted than the traditional approach. In the evolving 
competitive marketplace, open access will require that multiple 
telecommunications and information providers as well as users can 
interconnect transparently and be interoperable. This will in turn 
promote even more competition among information providers and service 
options for consumers. Thus, as the NII evolves, the Administration 
seeks to ensure that consumers and service providers will be able to 
transfer information across disparate networks easily and accurately, 
with seamless, interactive, user-driven operations. Also, to be truly 
useful, an advanced information infrastructure must allow service 
providers to offer a full range of educational material, health 
information, and home and business services, and it must make those 
services truly accessible without unreasonable technical or regulatory 
barriers, particularly to disabled individuals.\78\
---------------------------------------------------------------------------

    \78\See generally Agenda for Action, supra note 8.
---------------------------------------------------------------------------

    58. We solicit comments on how open access should be defined at 
this time. How should an open access policy be shaped to accommodate 
the changing needs of our information society? What impact will open 
access have on competition and ultimately on the extent of the need for 
universal service regulation? How can policymakers ensure that the NII 
fulfills its promise for education, economic growth and job creation? 
How will the new entrants in the market affect open access? What steps 
can be taken to facilitate or ensure access by Americans with 
disabilities?
    59. The Administration also envisions open access to a two-way 
system of broadband communications as a means of individual 
empowerment. The idea is that improved access to information will build 
and promote the values of democracy.\79\ Open access in this new 
environment creates opportunities for potential service providers as 
well as users to be providers of information, thereby promoting an 
enhanced concept of community involvement and competition in the free 
flow of ideas. Thus, open access to the NII could spur development of 
community-driven grass-roots networks or ``electronic commons.'' In 
addition, the NII will enhance the ability of the Federal government 
and state and local governments to deliver information and services to 
citizens more effectively, and for citizens to communicate their views 
on legislation and policy initiatives back to government officials just 
as easily.
---------------------------------------------------------------------------

    \79\Id. at 49,029.
---------------------------------------------------------------------------

    60. How can the ``electronic communities'' envisioned by the 
Administration be fostered? How can access to the NII be assured for 
individuals, small and large businesses, non-profit institutions (in 
particular, schools, libraries and health care facilities) and state 
and local governments? How can access be assured in rural areas? Should 
there be different access opportunities and prices for profit and non-
profit entities? Large and small entities? How can society ensure that 
our citizens are sufficiently ``computer literate'' to utilize the NII?
    61. The critical question facing policymakers is how to ensure open 
access to the NII.\80\ NTIA's field hearings revealed a general 
consensus among witnesses that significant issues such as 
interconnection,\81\ interoperability and standard open interfaces,\82\ 
and reasonable prices and tariffs\83\ need to be addressed before open 
access can be assured.\84\
---------------------------------------------------------------------------

    \80\The telecommunications reform bills being considered by the 
103rd Congress contain numerous provisions to promote open access. 
These include, for example, requirements for interconnection 
capability among telecommunications carriers; non-discriminatory 
access to network facilities, services, functions and information on 
an unbundled basis under certain conditions; the development of 
interconnection standards; joint planning among telecommunications 
and information service providers for interoperability of private 
and public networks; the elimination of restrictions on resale or 
sharing of network facilities and services; and the provision of 
advanced services, possibly with preferential rates, to various 
governmental and non-profit institutions. The nature and extent of 
these provisions will depend on final passage of telecommunications 
reform legislation in Congress and implementation actions by the 
FCC.
    \81\See Comments of The News & Observer; North Carolina State 
University; M. Strata Rose, Virtual City Network Project; and NC 
Electronics & Information Technologies Association.
    \82\Comments of NC Rural Economic Development Center; First 
Pacific Networks; Prodigy Services Company; SAGRELTO Enterprises; 
GTE West Area Telephone Operations; Pacific Bell; Virtual Valley 
Inc.; Multimedia Design Corporation; Adamation, Inc.; MCNC; and 
State of New Mexico, GSD/ISD Office of Communications.
    \83\Comments of First Pacific Networks; Prodigy Services 
Company; Adamation, Inc.; Communications Resources, Inc.; Hooked, 
Inc.; and NC Electronics & Information Technologies Association.
    \84\A number of commenters also noted that resolving security, 
privacy, and intellectual property issues over the NII is also 
critical. The Administration is currently addressing these issues 
through several IITF committees and working groups. These include 
the NII Security Issues Forum, the Network Reliability and 
Vulnerability Working Group, and the Privacy Working Group.
---------------------------------------------------------------------------

    62. The NII will integrate and build upon many different hardware 
and software components, some of which already exist and many of which 
are still in development. These components must be interoperable, i.e., 
able to work together. Interoperable components would allow distinct 
networks to communicate with each other and allows users to access 
various products and services through standard software and 
hardware.\85\ An NII comprised of interoperable networks will create an 
infrastructure that is accessible to all providers and users.\86\ What 
critical points in today's infrastructure must be interoperable if the 
NII vision is to be successfully implemented? What role, if any, should 
open or standard interfaces and protocols play? What role can 
government play in facilitating interoperability, both in the short 
term (e.g., two years) and in the long term.
---------------------------------------------------------------------------

    \85\Computer Systems Policy Project Perspectives on the National 
Information Infrastructure: Ensuring Interoperability 5 (Feb. 1944). 
Familiar examples of interoperability include standard size nuts and 
bolts, telephone jacks and telephones, and computers and modems.
    \86\Many believe that the Internet is an excellent model for 
such interoperability, since it allows users all over the world to 
access information and talk to each other easily over the network. 
We request comments on whether the Internet is, indeed, a good model 
for interoperability for the NII.
---------------------------------------------------------------------------

    63. Interoperability can be accomplished in a number of different 
ways. Equipment can have open protocols and interfaces that permit a 
physical connection (as is the case of a plug and socket) or logical 
connection (message format and exchange procedure).\87\ Equipment built 
with open architecture will also permit interoperability. Additionally, 
standards for voice, video, data and multi-media services are also 
crucial to interoperability.\88\
---------------------------------------------------------------------------

    \87\Protocols are the set of rules governing the operation of 
functional units of a communication system that make communication 
possible. Open interfaces are specifications for interconnection 
compatibility made available to all vendors.
    \88\See, e.g., Comments of Alan R. Blatecky, Vice President, 
Information Technologies, MCNC, North Carolina Hearing (Apr. 27, 
1994). ``It is essential to have regulatory guidelines which ensure 
interoperability across networks through the rapid adoption and 
encouragement of open standards. If standards are not adopted, the 
marketplace becomes a battleground for proprietary solutions which 
penalize users until one of the standards finally become[s] a de 
facto standard.'' Id. at 2.
---------------------------------------------------------------------------

    64. While there have been times when the U.S. government has 
promoted particular standards, industry adoption of voluntary 
standards, working with government officials, is now the norm. Various 
commenters have argued that either approach can be too slow given the 
fast pace of change in the industry. In addition, some argue that the 
industry standard-setting process is costly and requires large amounts 
of employee time, which creates hardships for smaller companies.
    65. How should standards develop for the NII? Do standards affect 
the ability to innovate? How can standards be developed that are 
flexible and adaptable enough to meet user needs at affordable costs? 
If voluntary, industry-set standards are the favored approach, what 
procedures should be followed in establishing standards, and what fora 
should be used? What role, if any, should the government play?
    66. Competition is one of several means of ensuring that innovation 
and the provision of information and transport services will flourish 
on the NII. At the same time, there is a recognized need for government 
intervention in the case of market failures, for example, to protect 
new entrants from the market power of incumbent operators when 
necessary. Will greater competition in information and transport 
markets alone be sufficient to achieve open access goals? If not, what 
other actions are necessary? What regulations or policies need to be in 
place to guarantee reasonable and nondiscriminatory interconnection and 
reasonable cost-based pricing and tariffs for the NII? What technical 
or regulatory barriers must be overcome?

VII. Conclusion

    67. NTIA hereby requests comments in this inquiry to be filed on or 
before December 14, 1994.

    Dated: September 13, 1994.
Larry Irving,
Assistant Secretary of Commerce for Communications and Information.
[FR Doc. 94-23033 Filed 9-14-94; 8:45 am]
BILLING CODE 3510-60-P