[Federal Register Volume 63, Number 236 (Wednesday, December 9, 1998)]
[Proposed Rules]
[Pages 67837-67845]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32736]


=======================================================================
-----------------------------------------------------------------------

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 36 and 54

[CC Docket No. 96-45; FCC 98J-7]


Federal-State Joint Board on Universal Service

AGENCY: Federal Communications Commission

ACTION: Proposed rule; recommended decision.

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

SUMMARY: On November 24, 1998, the Federal-State Joint Board adopted a 
Second Recommended Decision regarding universal service. In this 
decision, the Joint Board made numerous recommendations on universal 
service issues. The Joint Board recommends a federal high cost support 
mechanism for non-rural carriers that enables rates to remain 
affordable; that the Commission replace the 25/75 jurisdictional 
division of responsibility for high cost support; that the Commission 
compute federal high cost support for non-rural carriers through a two-
step process; and that the mechanisms outlined be reviewed no later 
than three years from July 1, 1999. The Commission seeks comment on the 
Second Recommended Decision.

DATES: Comments should be filed on or before December 23, 1998 and 
Reply

[[Page 67838]]

Comments on or before January 13, 1999.

ADDRESSES: All filings should reference: Comments on Joint Board Second 
Recommended Decision, CC Docket No. 96-45, and should include DA 98-
2410. Interested parties must file an original and six copies of their 
comments with the Office of Secretary, Federal Communications 
Commission, 445 Twelfth Street, S.W., Room TW-A325, Washington, D.C. 
20554. Parties should send one copy of their comments to the 
Commission's copy contractor, International Transcription Service, 1231 
20th Street, N.W., Washington, D.C. 20036. Copies of documents filed 
with the Commission, including the Second Recommended Decision, may be 
obtained from the International Transcription Service, 1231 20th 
Street, N.W., Washington, D.C. 20036, (202) 857-3800. Documents are 
also available for review and copying at the FCC Reference Center, Room 
239, 1919 M Street, N.W., Washington, D.C. 20554, from 9:00 a.m. to 
4:30 p.m.
    Parties may also file comments electronically via the Internet at: 
<http://www.fcc.gov/e-file/ecfs.html>. Only one copy of an electronic 
submission must be submitted. In completing the transmittal screen, 
commenters should include their full name, Postal Service mailing 
address, and the lead docket number for this proceeding, which is CC 
Docket No. 96-45. Parties not submitting their comments via the 
Internet are also asked to submit their comments on diskette. Parties 
submitting diskettes should submit them to Sheryl Todd, Common Carrier 
Bureau, Federal Communications Commission, 2100 M. St, N.W., 8th Floor, 
Washington, D.C. 20554. Such a submission should be on a 3.5 inch 
diskette formatted in an IBM compatible format using WordPerfect 5.1 
for Windows or compatible software. The diskette should be accompanied 
by a cover letter and should be submitted in ``read only'' mode. The 
diskette should be clearly labelled with the party's name, proceeding 
(including the lead docket number in this case, Docket No. 96-45, type 
of pleading--comment or reply comment), date of submission, and the 
name of the electronic file on the diskette. Each diskette should 
contain only one party's pleadings, preferably in a single electronic 
file. In addition, parties must send copies to the Commission's copy 
contractor, International Transcription Service, Inc., 1231 20th 
Street, N.W., Washington, D.C. 20036.

FOR FURTHER INFORMATION CONTACT: Chuck Keller, Attorney, Common Carrier 
Bureau, Accounting Policy Division, (202) 418-7400, TTY (202) 418-0484, 
or via e-mail: <[email protected]>.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's 
document released on November 24, 1998. The full text of this document 
is available for public inspection during regular business hours in the 
FCC Reference Center, Room 239, 1919 M Street, N.W., Washington, D.C. 
20554.

Summary of Second Recommended Decision

I. Introduction

    1. The Telecommunications Act of 1996 (``1996 Act'') explicitly 
recognized the need for federal and state support to ``preserve and 
advance universal service.'' In the 1996 Act, legislators recognized 
that existing support mechanisms could be threatened as effective 
competition materializes. Congress also made clear in the 1996 Act that 
federal and state regulators together must ensure that universal 
service is preserved and advanced as we move from a monopoly to a 
competitive market. Although never quantified or targeted in 
traditional rate designs, these mechanisms have included support 
flowing from urban to rural consumers implicit in rate averaging, and 
from interstate and intrastate access charges.
    2. The Act requires that rates be ``just, reasonable and 
affordable,'' and that rates in rural, insular and high cost areas be 
``reasonably comparable'' to rates charged for similar services in 
urban areas. The Act also requires ``specific, predictable and 
sufficient Federal and State mechanisms to preserve and advance 
universal service.'' Goals of reforming universal service include: (1) 
revising support mechanisms that do not currently meet new statutory 
mandates, such as the need for nationwide reasonably comparable rates; 
(2) ensuring that support mechanisms are not eroded as local 
competition develops; and (3) establishing universal service support 
mechanisms that are part of a new regulatory structure consistent with 
Congress's pro-competitive goals.
    3. The Joint Board and the Federal Communications Commission 
(``Commission'') determined previously that rates generally are 
affordable. While keeping in mind the need to ensure continued 
affordability, we focus to a greater degree in this Second Recommended 
Decision on the issue of reasonable comparability, and how to ensure 
the sufficiency of federal support to assure both of those important 
public interest goals. As effective competition develops for high-
volume, urban customers, one consequence may be erosion of the implicit 
support system that protects consumers in rural, insular and high cost 
areas from unaffordable rates. The Joint Board recommends a federal 
high cost support mechanism for non-rural carriers that enables rates 
to remain affordable and reasonably comparable, even as competition 
develops, but that is no larger than necessary to satisfy that 
statutory mandate. The Joint Board believes that sizing the fund 
correctly is essential to ensuring that all consumers across the 
country benefit from universal service. The transition to a competitive 
environment requires us to be mindful of two competing goals: (1) 
supporting high cost areas so that consumers there have affordable and 
reasonably comparable rates; and (2) maintaining a support system that 
does not, by its sheer size, over-burden consumers across the nation.
    4. As an initial matter, we note and support the Commission's 
``hold harmless'' commitment not to reduce the current levels of 
explicit high cost support to states. In this Second Recommended 
Decision, consistent with that commitment, we outline an initial 
methodology for directing sufficient federal support to non-rural 
carriers to offset high intrastate costs in states with insufficient 
internal resources to ensure affordable and reasonably comparable 
rates. We recognize that further changes may be necessary as 
competition develops to change certain amounts of current implicit 
support into explicit support. We recommend that the Commission replace 
the 25/75 jurisdictional division of responsibility for high cost 
universal service support, adopted in the Universal Service Order, 62 
FR 32862 (June 17, 1997), with the methodology for non-rural carriers 
outlined herein. Under this approach, the federal mechanism should 
instead provide the necessary support set by the methodology that we 
outline today.
    5. We recommend that the Commission compute federal high cost 
support for non-rural carriers through a two-step process. First, the 
Commission should develop a total support amount necessary to reflect 
those areas considered to have high costs relative to other areas. 
Second, for areas that have high costs relative to other areas, the 
Commission should consider, in a consistent manner across all states, 
any particular state's ability to support high cost areas within the 
state. Federal support should be provided to the extent that the state 
would be unable to support its high cost areas through its own 
reasonable efforts. We also make

[[Page 67839]]

recommendations about the information that consumers should receive 
from carriers in connection with the recovery of universal service 
contributions. We recommend as well that the mechanisms outlined here 
be reviewed no later than three years from July 1, 1999. While we 
recommend a shared federal-state responsibility, we also conclude that, 
consistent with the statute, no state can or should be required by the 
Commission to establish an intrastate universal service fund.
    6. The Act acknowledges and maintains the complementary roles that 
state and federal authorities have played in preserving and advancing 
universal service. Historically, both state and federal regulators have 
exercised their jurisdictional authority to ensure the availability of 
universal service. The ongoing cooperation throughout this proceeding 
between the federal and state staff and members of the Joint Board is a 
further example of the vitality of the federal-state partnership for 
ensuring universal service, and this referral proceeding represents the 
latest chapter in that cooperation. We look forward to continued 
collaboration with the Commission as universal service reform proceeds. 
In addition, we note that this proceeding involves the balancing of 
many difficult, competing interests. In resolving these issues in light 
of our guidance, therefore, the Commission has the difficult task of 
selecting a national solution that balances these competing interests.
    7. This Second Recommended Decision is designed to take into 
account this dual federal and state responsibility in a manner that 
effectuates the principles and requirements of Sec. 254. The federal 
mechanism should provide support in a manner that is designed to ensure 
that state universal service needs are fully met, consistent with the 
states' role with respect to universal service. We believe that this 
Second Recommended Decision establishes a framework for accomplishing 
that difficult mission.

II. The Purpose of Support

    8. In mandating the reform of universal service support mechanisms, 
Congress clearly envisioned that the reform process would be conducted 
as a joint federal and state effort. The creation of this Joint Board 
is perhaps the plainest expression of this vision. Other provisions of 
Sec. 254 reflect this shared responsibility. A primary aspect of the 
Joint Board's task in reforming universal service mechanisms is to 
ensure that consumers in high cost areas have access to 
telecommunications and information services that are affordable and 
reasonably comparable to those in urban areas, at rates reasonably 
comparable to those in urban areas. We believe that the demarcation of 
the respective responsibilities of state and federal regulators can be 
found in the mandate to ensure reasonably comparable rates. Regulators 
in the two jurisdictions have different tools available to them to meet 
universal service challenges. Issues of affordability and reasonable 
comparability can be dealt with through a combination of approaches, 
including: (1) through the rate design issues of a single local 
carrier, (2) through mechanisms that affect the rates of all carriers 
within a state, and (3) through mechanisms that affect rates across 
state lines. State commissions and the Commission each can use the 
first two tools with respect to rates in their respective 
jurisdictions. Only the Commission is able to employ the last. Our 
recommendations reflect both the availability of, and the relationship 
among, these approaches.
    9. While the Act does not define reasonable comparability, we 
interpret that term to refer to a fair range of urban and rural rates 
both within a state's borders, and among states nationwide. We note 
that existing federal high cost loop support provides additional 
federal support to areas that have particularly high costs, and our 
recommendations herein continue that policy. It is proper to begin an 
inquiry by focusing on universal service issues closest to the 
consumer. Present rates are sufficient to cover the costs of serving 
most consumers across the nation. The costs of serving other consumers, 
however, are in excess of rates. To address these concerns, support 
mechanisms have been set up to offset these higher costs.
    The Joint Board acknowledges that, absent reform to these 
mechanisms, the forces of competition could erode certain of these 
support mechanisms and potentially have a negative impact on the 
provision of universal service.
    10. The first step in dealing with this potential impact concerns 
the rates currently being charged to consumers, and the ability of the 
state to respond to competitive entry through its own ratemaking 
methods. This responsibility falls within the state's jurisdiction. To 
the extent the Commission determines that the totality of reasonable 
state efforts would not be sufficient to address universal service 
funding without violating the principles of reasonable comparability 
and affordability, the federal universal support mechanism should 
complete the effort. With this framework in mind, then, the Joint Board 
will set forth the method it recommends that the Commission use to 
size, calculate, and distribute federal support among the nation's non-
rural carriers.
    11. In formulating this Second Recommended Decision, our goal has 
been to ensure that rates in rural and high cost areas served by non-
rural carriers are affordable and reasonably comparable through 
specific, predictable, and sufficient support mechanisms that are, to 
the extent possible, explicit. To do this, commenters proposed three 
possible ways in which universal service support could be used: (1) To 
provide support for high cost areas to enable the comparability of 
rates; (2) to make existing interstate support explicit; and (3) to 
make existing intrastate support explicit. In this section, we will 
address each of these three possible uses of support.

A. Enabling ``Reasonably Comparable'' Rates

    12. The Act requires that consumers have access to rates and 
services ``in rural, insular and high cost areas'' that are 
``reasonably comparable'' to rates and services in urban areas. While 
the Act does not define reasonable comparability, we interpret that 
term to refer to a fair range of urban/rural rates both within a 
state's borders, and among states nationwide. We note that existing 
federal high cost loop support provides additional federal support to 
areas that have particularly high costs, and we propose to continue 
that policy as we move to a forward-looking cost methodology for 
determining high cost support.
    13. We recommend that federal support be available to non-rural 
carriers serving consumers in areas with costs significantly above the 
national average and whose average costs throughout its study area 
significantly exceed the national average. This support should be 
available where, considered in a consistent manner across all states, a 
state would find it particularly difficult to achieve reasonably 
comparable rates, absent such federal support. To the extent that 
additional federal high cost support to non-rural carriers, beyond the 
amount currently provided, is necessary to help meet the statutory goal 
of reasonably comparable rates, that additional federal support should 
be used to help ensure that intrastate rates are able to satisfy this 
statutory goal. The state commission has the authority to indicate 
which intrastate rates shall be affected to help ensure that the 
carrier does not double recover. Because rate setting methods and goals 
may vary

[[Page 67840]]

across jurisdictions, we recommend, for purposes of determining federal 
high cost support, that the Commission use the cost of providing all 
supported services, rather than local rates. These costs are used in 
the methodology we describe below to calculate the level of federal 
support that will be available to help achieve reasonable comparability 
in rates across all states.

B. Making Interstate Support Explicit

    14. In the Universal Service Order and the Access Reform Order, the 
Commission made several changes to its access charge rules, with the 
goal of reforming the mechanisms for recovery of subscriber loop costs 
to move from implicit to explicit federal universal service support 
mechanisms. In summary, the Commission decided that: (1) Long term 
support (LTS) should be removed from interstate access charges and made 
part of explicit federal support mechanisms; and (2) incumbent LECs 
should use any universal service support from the new support 
mechanisms to reduce support implicit in access charges, pending 
further reform.
    15. The Commission concluded that universal service support 
implicit in rates cannot be sustained if competition emerges in the 
marketplace, and that removing implicit universal service support from 
interstate rates and replacing such support either with improved 
revenue recovery mechanisms or with explicit support should remain a 
goal of federal telecommunications reform. The Commission also found 
that, unless implicit support is identified and eventually stripped 
from interstate access charges, those access charges could remain 
artificially high.
    16. The Commission's efforts to remove implicit universal service 
support from interstate access charges will not affect intrastate rates 
directly. This issue is intertwined with the Commission's ongoing 
access reform proceeding, and the Commission should continue to 
synchronize the access reform and universal service proceedings with 
any action it takes to remove implicit universal service support from 
interstate access charges.
    17. If the Commission determines that there is implicit universal 
service high cost support currently in interstate access rates, it is 
within the Commission's jurisdiction to determine what that implicit 
support is and what action the Commission should take to make that 
support explicit. Although we make no recommendation regarding whether 
the Commission should eliminate implicit support from interstate access 
rates, we recognize that it has the authority to do so. We do 
recommend, however, that, to the extent that the Commission determines 
that implicit support needs to be removed from interstate access 
charges and replaced with explicit universal service support, 
interstate access rates, such as the carrier common line charge (CCLC), 
presubscribed interexchange carrier charge (PICC), or subscriber line 
charge (SLC), be reduced dollar for dollar to reflect the corresponding 
explicit support. We further recommend that the Commission seek to 
ensure that any reductions in interstate access rates inure to the 
benefit of consumers. When considering such recommendations, the 
Commission should give due regard to the requirement that universal 
service shall bear no more than a reasonable share of joint and common 
costs. Moreover, the Commission should ensure that any efforts to 
replace implicit support in interstate access charges with explicit 
support do not jeopardize the reasonable comparability standard, or 
harm consumers generally, or any class of consumers in particular. 
Before taking any final action on removing this support from interstate 
access charges, the Commission should first consult with the Joint 
Board.

C. Making Intrastate Support Explicit

    18. The Act requires that the Joint Board recommend changes to the 
Commission's rules that may be necessary to implement Secs. 214(e) and 
254, ``including the definition of the services that are supported by 
Federal universal service support mechanisms.'' Section 254(b)(5) 
provides that there should be ``specific, predictable and sufficient 
Federal and State mechanisms to preserve and advance universal 
service.'' Thus, the Act envisions that both states and the federal 
government have authority and responsibility to ensure that universal 
service needs are met. The Act further allows the states in Sec. 254(f) 
to create state universal service support mechanisms. The Act clearly 
envisions the role of the Joint Board to be that of advising the 
Commission on matters related to federal support mechanisms, and 
preserves the ability of each state to design intrastate support 
mechanisms, although these state support mechanisms may not be 
inconsistent with the federal rules or burden the federal support 
mechanism. In this Second Recommended Decision, we recommend a shared 
responsibility, but we also conclude, consistent with the statute, that 
the Commission may not mandate that a state establish an intrastate 
universal service fund.
    19. Historically, intrastate rate design has helped promote 
universal service. While techniques such as rate averaging have served 
states well in the past, the onset of competition in local markets is 
likely to erode the ability of states to fund universal service through 
implicit support mechanisms. States possess the jurisdiction and 
responsibility to address these implicit support issues through 
appropriate rate design and other mechanisms within a state.
    20. The same competitive forces that Congress anticipated would 
require making interstate universal service support explicit may 
militate for making intrastate universal service support explicit as 
well. The Act, however, did not mandate such an outcome. States should 
bear the responsibility for the design of intrastate funding 
mechanisms. The federal support mechanism should not be contingent 
upon, nor should it require, any particular action by the state.

III. Proposed Method for Ensuring Sufficient Support for Affordable 
and Reasonably Comparable Rates

A. Basing Federal High Cost Support on Forward-Looking Economic Costs

    21. In the Universal Service Order, the Commission adopted the 
Joint Board's recommendation that the revised universal service support 
mechanism would determine non-rural carriers' high cost support based 
on forward-looking economic costs, instead of the incumbent carrier's 
book costs, of providing supported services in order to ``send the 
correct signals for entry, investment, and innovation in the long 
run.'' We continue to believe that federal high cost support should be 
based on forward-looking economic costs.
    22. Without a complete forward-looking economic cost model, it is 
not possible for the Joint Board to make a final recommendation as to 
the most reasonable forward-looking methodology to be used in 
distributing federal high cost support to the states and/or carriers. 
We note, however, that the vast majority of proposals on the record in 
this proceeding would use a model to estimate the forward-looking cost 
of providing the supported services. No party has suggested that there 
is a method preferable to a model to determine support based on 
forward-looking costs. We recommend, therefore, that the Commission 
continue to work with the Joint Board to select the input values to 
complete a forward-looking cost model and to finalize the methodology 
for distributing federal high cost support. We do recommend a 
framework, discussed in more detail below, that relates federal support 
to

[[Page 67841]]

high average forward-looking costs and to states' ability to address 
their own universal service requirements.
    23. Because the Commission's cost proxy model results are not 
complete, our recommendation on using a model to estimate forward-
looking costs is a work in progress, and therefore tentative. We fully 
anticipate that the model results will furnish reasonable cost 
estimates for all regions of the country that can provide the basis for 
determining federal high cost support. Nevertheless, significant 
uncertainties need to be eliminated before a model can serve as the 
basis for federal support distributions. For example, a model must meet 
the openness criterion required of all model developers. At present the 
federal platform has been tested using geocoded customer location data 
that is treated as proprietary information by its supplier. We also 
understand that the Commission is seeking to identify alternative data 
sources at this time. We urge the Commission not to adopt those 
particular data as input values unless the Commission determines that 
such data are sufficiently open and available for testing and comment. 
Despite these uncertainties, we recommend that the states, the 
Commission, and the Joint Board continue their joint efforts to develop 
an accurate cost proxy model. In the event that the Commission has not 
defined all elements necessary to calculate support based on forward-
looking costs in time for implementation by July 1, 1999, then the 
Joint Board recommends that the present method for determining support 
be continued for an interim period. In that event, we also recommend 
that the Commission make interim adjustments to the present rules to 
resolve any comparability issues in rural states primarily served by a 
large carrier, consistent with our general recommendation on 
comparability issues.
    24. We emphasize, however, that, in recommending this framework for 
determining non-rural carriers' high cost support based on forward-
looking cost, we do not intend for the Commission to create any 
precedent for any potential revisions to support mechanisms for rural 
carriers. The model platform that the Commission adopted in October was 
designed to estimate non-rural carriers' costs. Pursuant to the Joint 
Board's recommendation, the Commission has provided that the 
determination of the appropriate manner in which a model should be 
applied to rural carriers, if at all, will take into account the 
recommendation of this Joint Board, after the Joint Board receives a 
report from the Rural Task Force. The Joint Board intends to look 
closely at these issues to ensure that rural carriers' unique 
situations and challenges are addressed in the separate proceedings 
examining their high cost support mechanisms.
    25. We further recommend that the Commission reconsider its 
decision to allow state cost studies to be used in place of the federal 
model for non-rural companies. We believe that it is more appropriate 
that the federal universal service support mechanisms be based upon a 
national yardstick for determining cost. Without such a national 
yardstick, it will be difficult to establish a consistent nationwide 
measurement of rate comparability. Although the Commission should fully 
evaluate any comments on this issue, we recommend that, absent a clear 
showing that basing federal support on a state cost study is necessary 
and appropriate to achieve statutory goals, the Commission base all 
federal support on a uniform methodology that derives from a single, 
national model. States may, of course, base any intrastate high cost 
support mechanisms on their own cost studies, rather than a federal 
model.

B. Size of Area Over Which Costs Are Averaged

    26. In the Universal Service Order, the Commission adopted the 
Joint Board's recommendation that forward-looking economic costs be 
determined at the wire center level or below. While we acknowledge the 
value of a cost model that is capable of estimating costs at that level 
of granularity, we now recommend that federal support initially be 
determined by measuring costs at the study area scale, a scale 
considerably larger than the wire center. In general, a study area is 
an area served by a local exchange carrier in a single state. The 
existing high cost support program measures costs and distributes 
support at the study area level.
    27. We recommend measuring costs at the study area level at this 
time because we believe that support calculated at this level will 
properly measure the support responsibility that ought to be borne by 
federal mechanisms given the current extent of local competition. We 
noted above that the primary purpose of federal support should be to 
ensure that rates remain affordable and reasonably comparable 
throughout the nation. By ensuring that cost disparities among study 
areas and among states are limited, we believe that federal support 
will be sufficient to maintain rate comparability and affordability.
    28. We also recognize that, as competition develops within a study 
area, calculating costs using the aggregate characteristics of the 
study area may become less appropriate. Again, in light of the second 
goal of reforming universal service--ensuring that support mechanisms 
are not eroded as competition develops--we recommend that the 
Commission consider the possible impacts of competition on federal 
universal service support mechanisms.
    29. We have considered the use of statewide average cost (as 
opposed to study area costs) to determine the need for universal 
service support. While we agree that the states can be expected to 
participate as full partners in preserving universal service, a 
statewide approach could require states to create mechanisms to 
transfer support among non-rural carriers. At present, however, some 
states may lack such a mechanism. Given the short time to implement the 
new mechanism, we find it prudent to average costs at the study area 
level.

C. State Responsibility for Reasonably Comparable Rates

    30. In this section, we conclude that the law gives the Commission 
an important role in universal service, but that the federal role is 
not exclusive. The states also bear part of the shared responsibility 
for universal service. States are free under the Act to establish or 
refrain from establishing explicit universal service support 
mechanisms. As we noted above, furthermore, federal support may not be 
made contingent upon any actions taken, or not taken, by the states. 
Federal support should not rely on a state's actions with respect to 
universal service but depend only upon the total support amount 
generated by the methodology described herein for calculating the 
amount of federal support for each state. The Joint Board believes 
therefore, that the level of federal support should reflect, in a 
consistent manner, each state's ability to use its own resources to 
address its universal service needs, regardless of whether that or any 
other amount of support is explicitly provided by the state.
    31. While there is no mandate that a state create such an explicit 
fund, the state should have in place ``specific, predictable and 
sufficient'' mechanisms to preserve and advance universal service. The 
federal support mechanism need not take into account the state's 
authority and ability actually to establish state universal service 
support mechanisms, since carriers may be required to recover more 
total support than the amount used exclusively for purposes of 
developing the federal fund. Such discretionary variations in support

[[Page 67842]]

at the state level are left intentionally independent of the standard 
determinations of federal support levels, precisely in order to allow 
states to set their own levels of corresponding affordability and 
funding requirements. In contrast, federal funding requirements should 
be those amounts necessary to establish a standard of reasonable 
comparability of rates across states. Any state is then able to 
supplement, as desired, any amount of federal funds it may receive 
under this standard.
    32. While we recommend a shared responsibility, we also conclude 
that, consistent with the statute, no state can or should be required 
by the Commission to establish an intrastate universal service fund. 
Each state is uniquely qualified to determine, based upon its own 
costs, rates and other circumstances, when and if it needs an explicit 
universal service support mechanism.
    33. Implicit support in state rates is a matter intimately related 
to each state's rate design. The success of these state efforts is 
demonstrated by the fact that rates today are generally affordable and 
subscribership is currently very high in most areas of the nation. This 
indicates a limited need for additional federal involvement. We believe 
it is consistent with the Act for the Commission to assume that the 
states will address issues regarding implicit intrastate support in a 
manner that is appropriate to local conditions. We also conclude that, 
under the Act, where states have the capacity today to accomplish this 
task, states are the most appropriate governmental level to address 
this issue.
    34. Some states may face significant obstacles in maintaining 
reasonably comparable rates, and may find that solving this problem by 
state action alone is impossible or unreasonable in some instances. For 
this reason, we believe that additional federal support may be needed 
to ensure that rates are reasonably comparable, as required by 
Sec. 254(b)(3).

D. Methodology for Federal Support of Reasonably Comparable Rates

    35. We have considered numerous distribution options, including all 
those submitted by the parties. The methodology we propose incorporates 
elements from the various plans filed in this proceeding. Our 
methodology would average costs at a study area level. Our methodology 
incorporates a reasonable ``hold harmless'' component, and is grounded 
in the principle that additional federal high cost support should be 
targeted to areas with the greatest need. Our recommended methodology 
includes a cost-based benchmark. Finally, as advocated by a number of 
parties, our methodology takes into account each state's ability to 
support its universal service needs internally. The framework below 
addresses only the affordability and comparability goals of the Act. As 
indicated previously, we cannot at this time provide the details of a 
recommendation for a specific mechanism to distribute federal support 
to eligible carriers. We can, however, outline the basic elements that 
we believe should be considered in designing the distribution 
methodology.
    36. We recommend that the distribution methodology contain two 
primary elements. First, study areas with average forward-looking per-
line costs significantly in excess of the national average cost should 
be identified. Second, the state's ability to support its own universal 
service needs should be determined. Federal support should be provided 
only for costs that exceed both these thresholds.
    37. In the first step of the process, identifying areas with high 
costs, we recommend that the Commission use the cost of providing 
supported services, rather than local rates, to evaluate rate 
comparability, because rate setting methods and goals may vary across 
jurisdictions. We recommend that federal support be available to non-
rural carriers with average costs significantly above the national 
average. Specifically, we recommend that the Commission select a single 
national cost benchmark against which the forward-looking cost in a 
given study area would be compared to determine whether that study 
areas has costs that are significantly above the national average. We 
recommend that the Commission consider setting this national benchmark 
at a level somewhere between 115 and 150 percent of the national 
weighted average cost per line.
    38. The second step in determining federal support should reflect 
that, for the reasons outlined above, federal support is only one 
portion of the shared federal-state responsibility established in 
Sec. 254. Federal support should only be used to supplement a state's 
ability to address its own universal service needs. In order to 
accomplish this second step, it will be necessary to calculate a level 
of support that could equitably and reasonably be assumed to be 
provided by implicit or explicit state support. There are potentially 
several ways to estimate a state's ability to support its universal 
service needs. For example, the ratio of lines in a state with costs 
above a certain threshold could be determined, as a general indication 
of whether a state has a higher or lower percentage of high cost lines 
than other states. This ratio of high cost to low cost lines could then 
be factored into the support equation to reflect that states with a 
higher percentage of high cost lines will be less able to support their 
own universal service needs. Other approaches could set each state's 
presumed support responsibility at a given level, which might be 
expressed as a dollar value per line or as a percentage of intrastate 
revenue. The ratio of intrastate traffic volume to total traffic volume 
could also be used.
    39. An example of how this system would work in practice would be 
an approach that calculated the state's ability to support its own 
universal service needs based on a percentage of intrastate revenues. 
Such a limit on a state's presumed responsibility, if adopted, could be 
between 3 and 6 percent of intrastate telecommunications revenues. Once 
the first step in the methodology has identified the amount by which 
costs in the study areas in the state exceed the cost benchmark, the 
percentage of intrastate revenues would be calculated that would be 
required to meet this high cost responsibility. If that amount exceeded 
the state revenue threshold, then the federal mechanism would provide 
support for the difference.
    40. We urge the Commission to continue its deliberations with this 
Joint Board and to consult with Congress in order to specify further 
the proper parameters of these two variables as the study area costs 
are derived from the Commission's model and choice of inputs. It is our 
goal to recommend a plan that achieves the Act's goals of affordability 
and reasonable comparability without overburdening consumers across the 
nation.

IV. Size of the Federal Support Mechanism

    41. We described above the general outlines of a method for 
calculating federal support to high cost areas. Finalization of that 
method will determine the overall size of federal support for 
reasonably comparable rates. So long as the fund is for the purposes 
established in the Act, the Commission has discretion in providing 
remedies that are designed to ``preserve and advance'' universal 
service. Nevertheless, for several reasons we conclude that the federal 
high cost support fund should be only as large as necessary, consistent 
with other requirements of the law. This will ensure that there is 
balance between consumers who directly receive the

[[Page 67843]]

benefits of universal service support and those consumers who must pay 
for the support through their rates.
    42. Enabling reasonably comparable rates among states is a task 
that can likely be accomplished only with federal assistance. Federal 
support must be sufficient so that, when combined with a reasonable 
state effort, rates within service areas may be reasonably comparable 
both within and among states. Until we resolve several other pending 
policy decisions, as well as obtain more precise cost data, however, it 
is not possible to define, in dollars, the amount of support required 
by the comparability standard.
    43. We do not believe, however, that current circumstances warrant 
a high cost support mechanism that results in a significantly larger 
federal support amount than exists today. We recognize that some states 
currently may not receive support sufficient to enable reasonably 
comparable rates, and thus we believe the support level may rise 
somewhat.
    44. These principles can be implemented through a plan that, at 
least initially, calculates support on a study area basis and allocates 
a reasonable and equitable share of responsibility for support to state 
universal service efforts. The plan can enable reasonably comparable 
rates if the combination of state and federal support can keep the net 
cost differences (after receipt of universal service support) between 
high cost and low-cost areas within reasonable bounds. We recognize 
that competition may develop in unpredictable ways. As competition 
threatens rate comparability or affordability in high cost areas served 
by non-rural carriers, it may be necessary to re-evaluate the 
appropriate level of federal support. Incumbent LECs to date have not 
demonstrated that implicit support has eroded as a result of 
competition.

V. Hold Harmless

    45. When a new federal support mechanism is implemented, some 
carriers could receive more or less support than in the past. If 
substantial reductions were to occur in a single year, some consumers 
could experience rate shock. Both significant, sudden increases in the 
fund size overall, and significant decreases in the support that goes 
to a particular carrier, could have a notable impact on consumers' 
rates.
    46. Rural companies have been assured by the Commission that their 
support systems will not be altered until January 1, 2001, at the 
earliest, and in no event before the Joint Board has completed further 
deliberations on high cost support mechanisms for rural carriers, in 
light of the recommendations received from the Joint Board-appointed 
Rural Task Force. In addition, the Commission has stated to Congress 
that no state should receive less support than it currently receives. 
The Puerto Rico Telephone Company has asked, notwithstanding its non-
rural status, to continue to receive support at present levels, until 
the transition to a forward-looking high cost support mechanism is 
implemented for rural companies.
    47. We support the Commission's commitment to continue to hold 
states harmless, so that no non-rural carrier, including the Puerto 
Rico Telephone Company, will receive less federal high cost assistance 
than the amount it currently receives from explicit support mechanisms. 
We recommend, depending on the final amounts of support estimated on a 
forward-looking basis, that the Commission consider a gradual phase-in 
of any increase in federal universal service high cost support for non-
rural carriers.

VI. Unserved Areas

    48. The Arizona Corporation Commission (Arizona Commission) 
submitted a proposal to use a portion of federal support to address the 
problem of unserved areas and the inability of low-income residents to 
obtain telephone service because they cannot afford to pay the required 
line extension or construction charges. The Arizona Commission's 
proposal is not intended to be a comprehensive alternative to the high 
cost fund distribution model, but rather is intended to address a 
discrete concern related to low-income residents in remote areas.
    49. The framework created in the Act was designed to accelerate 
deployment of services to all Americans, and the universal service 
program plays an important role in that framework. The issue raised by 
the Arizona Commission is of interest to the Joint Board, even though 
it was not among those specifically referred to the Joint Board for 
further recommendation. States have generally addressed the ``unserved 
household'' concern through intrastate proceedings that establish 
reasonable rates for line extension agreements and encourage carriers 
to minimize unserved regions of the state. We recognize that 
investments in line extensions have historically been an issue 
addressed by the states, and we believe they should continue to be 
dealt with by the states, to the extent that the states are able to do 
so. Unserved areas are not unique to Arizona; other states may also 
face this issue. Although historically a state issue, we recognize that 
there may be some circumstances which may warrant federal universal 
service support for line extensions to unserved areas. We recommend 
that the special needs of unserved areas be investigated and subject to 
a more comprehensive evaluation in a separate proceeding. The 
Commission should seek information on unserved areas throughout the 
nation and determine, in consultation with the Joint Board, whether 
such areas warrant any special federal universal service consideration.

VII. Mechanism for Distributing Support

A. Portability of Support

    We recommend that the Commission continue with the policy 
established in the Universal Service Order of making high cost support 
available to all eligible telecommunications carriers, whether they be 
an incumbent LEC or a competitive carrier, including wireless carriers. 
We believe that portable support is consistent with the principle of 
competitive neutrality that we previously recommended and the 
Commission subsequently adopted in the Universal Service Order. We 
continue to support the use of competitive neutrality as a guiding 
principle of universal service reform and endorse the Commission's 
definition of this important principle in the Universal Service Order.

B. Use of Support

    51. One issue raised in comments was whether the Commission should 
condition the receipt of federal high cost support to ensure that 
support is used in a manner consistent with Sec. 254. We recommend that 
the Commission require carriers to certify that they will apply federal 
high cost universal service support in a manner consistent with 
Sec. 254.
    52. We recognize that some states may lack the authority or the 
desire to impose constraints or conditions on the use of federal high 
cost support. We do not recommend, therefore, that the Commission 
require that states provide any certification, or require any other 
state action, as a condition for carriers to receive high cost support. 
At the same time, parties may have a legitimate concern that federal 
support should be used by carriers to further the goals of Sec. 254. We 
further recognize that, even if costs are calculated at the study area 
level, high cost support should be targeted to consumers living in the 
highest cost areas of the study area. We therefore recommend that the 
Commission permit, but not require,

[[Page 67844]]

states to certify that, in order to receive federal universal service 
high cost support, a carrier must use such funds in a manner consistent 
with Sec. 254. For example, in order to provide efficient incentives 
for competitive entry, a state might require that federal support be 
targeted to those consumers living in the highest cost areas within a 
study area.
    53. To the extent that the law permits, the Commission could reduce 
or eliminate federal high cost support if it finds that a carrier has 
not applied its federal universal service funds consistent with 
Sec. 254, or if the state finds that the carrier has not adequately 
demonstrated that the federal support is being used in a manner 
consistent with Sec. 254(e), which provides that carriers receiving 
universal service support ``shall use that support only for the 
provision, maintenance, and upgrading of facilities and services for 
which the support is intended.'' We also clarify that this decision is 
intended only to affect the amount that carriers receive from the 
federal universal service high cost support mechanism. We recommend 
that the Commission clarify procedures by which a party, including a 
state, may initiate action against a carrier that fails to apply 
federal universal service support in an appropriate manner.
    54. We do not believe that conditioning support on a demonstration 
that funds are being used for the advancement of universal service 
places any restrictions on the determination of a carrier's status as 
an eligible telecommunications carrier. As the Universal Service Order 
notes, ``section 214(e)(2) does not permit the Commission or the states 
to adopt additional criteria for the designation as an eligible 
carrier.''
    55. One proposal recommends that the Commission distribute 
universal service funding directly to state commissions rather than to 
carriers. We recognize that some state commissions may be able to 
ensure that high cost support is distributed to carriers and is used in 
a manner, consistent with federal rules, that best ensures that rates 
are just, reasonable, and affordable throughout that particular state. 
Nevertheless, we cannot recommend that the Commission adopt that 
mechanism, in light of the long-standing practice at the time that the 
1996 Act became law of distributing federal universal service support 
to the carriers providing the supported services, and the absence of 
any affirmative evidence in the statute or legislative history that 
Congress intended such a fundamental shift to a state block grant 
distribution mechanism. In addition, distributing funding directly to 
state commissions is likely to create substantial administrative 
burdens for states currently lacking this ability, especially because 
there is very little time, prior to the July 1, 1999 implementation 
date, for the state to take the steps necessary to administer federal 
high cost support pursuant to the rules that Commission will be 
adopting in the spring.

VIII. Assessing Contributions from Carriers

    56. In the Universal Service Order, the Commission determined that 
assessment of contributions for the interstate portion of the high cost 
and low-income support mechanisms shall be based solely on end-user 
interstate telecommunications revenues, and assessment of universal 
service support for eligible schools, libraries and rural health care 
providers shall be based on interstate and intrastate end-user 
telecommunications revenues. The Commission declined to assess both 
intrastate and interstate end-user revenues for the high cost and low-
income support mechanisms because the states are currently reforming 
their own universal service programs, and it would have been premature 
to assess contributions on intrastate revenues before appropriate 
forward-looking mechanisms and revenue benchmarks are developed. The 
Commission also concluded that carriers shall be permitted to recover 
their contributions to universal service support mechanisms only 
through rates for interstate services.
    57. Pending the decision of the Fifth Circuit, our recommendation 
on this issue is necessarily tentative. Continuing to assess 
contributions for high cost and low income support based solely on 
interstate revenues, as set forth in the Universal Service Order, could 
have certain benefits. Under this approach, state commissions would 
have the greatest flexibility to tap into their intrastate revenue 
bases to advance universal service at the state level. Assessing only 
interstate revenues for federal high cost support also has some 
significant disadvantages, however. For instance, many carriers that do 
not routinely have to separate intrastate and interstate revenues for 
regulatory or business purposes now must do so solely for federal 
universal service purposes. This creates additional burdens on these 
carriers, and may create incentives for carriers to misclassify 
revenues between jurisdictions based on different assessment rates. A 
jurisdictional assessment base also makes it difficult for carriers to 
allocate the revenues associated with packages, or bundles, of services 
that include both intrastate and interstate components. Finally, a non-
jurisdictional assessment base would enable both the state and federal 
mechanisms to tap broader revenue bases, thereby lowering the 
assessment rates needed. Thus, if the Fifth Circuit determines that the 
Commission may properly assess all revenues for universal service 
contributions, the Commission may wish to consider using that 
assessment methodology for high cost support. If the Commission 
determines that it may assess universal service contributions based on 
all revenues, the Commission should find that states may do the same 
for their state universal service mechanisms. Alternatively, the 
Commission could consider assessing carriers high cost universal 
service contributions on a flat, per-line basis, which also addresses 
some of the difficulties of assessing only interstate revenues.

IX. Carrier Recovery of Universal Service Contributions from 
Consumers

    58. In this section, we recommend that the Commission provide to 
telecommunications carriers that contribute to universal service strict 
guidance regarding the extent to which they recover their universal 
service contributions from consumers. We also recommend that the 
Commission provide such carriers with express instructions regarding 
the manner in which carriers may depict on bills charges used to 
recover universal service contributions. Specifically, we recommend 
that, to the extent permitted by law, the Commission prohibit carriers 
from depicting such charges as a ``tax'' or as mandated by the 
Commission or the federal government by terms or placement on the bill. 
We note that, in truly competitive markets, firms recover a wide 
variety of costs in a wide variety of ways with no itemized 
notification of similar increases or decreases to individual consumers.

1. Recovery of Universal Service Contributions from Consumers

    59. We reiterate that the choice of whether to collect universal 
service assessments from end users via a line-item charge on their 
bills should remain with the carriers, and that carriers are free to 
tell consumers that the carrier is required to pay to support universal 
service. Specifically, we recommend, that the Commission give careful 
consideration to a rule that provides that, for carriers that choose to 
pass through a line item charge to consumers, the line item assessment 
be no greater than the carrier's universal

[[Page 67845]]

service assessment rate. This will help prevent consumers or classes of 
consumers from being charged excessively for a carrier's universal 
service contribution. Such a rule will help prevent consumers or 
classes of consumers from being charged excessively for a carrier's 
universal service contributions. Some carriers may attempt to exercise 
market power and recover through universal service charges in a non-
competitive fashion more than they are contributing to universal 
service, believing that they can describe those charges as mandated by 
the Commission or federal action. We are also concerned that some 
carriers may be allocating a disproportionate share of universal 
service costs to certain classes of consumers. Such practices might 
contravene Sec. 201(b) of the Act. As noted above, consumers may be 
less likely to engage in comparative shopping for a carrier if they are 
led to believe that certain charges are fixed by the Commission or 
federal government.

2. Characterization of Universal Service Charges to Consumers

    60. We believe that a carrier's billing and collection practices 
for communications services are subject to regulation as common carrier 
services under Title II of the Act. We believe that inaccurately 
identifying or describing charges on bills that recover universal 
service contributions may violate Sec. 201(b) of the Act. For instance, 
it is important for consumers to understand that universal service 
support has long been implicit in the rates for various intrastate and 
interstate telecommunications services. We therefore recommend that the 
Commission take decisive action to ensure that consumers are not misled 
as to the nature of charges on bills identified as recovering universal 
service contributions. Specifically, we recommend that the Commission 
consider prohibiting carriers from identifying as a ``tax'' or as 
mandated by the Commission or federal government any charges to 
consumers used to recover universal service contributions. Similarly, 
we recommend that the Commission consider prohibiting carriers from 
incorrectly describing as mandatory or federally-approved any universal 
service line items on bills. This restriction would include both 
written descriptions of the charges and any oral descriptions from 
consumer service representatives as well as placement on the bill. 
While interstate telecommunications providers are required to 
contribute to the universal service support mechanisms, they are not 
required to impose such charges on consumer bills.
    61. Cognizant of the First Amendment implications in regulating the 
manner in which carriers may convey information on consumers' bills, we 
note that the Supreme Court has held that the government may require a 
commercial message to ``appear in such a form, or include such 
additional information, warnings, and disclaimers, as are necessary to 
prevent its being deceptive.'' On the other hand, restrictions on 
speech that ban truthful, non-misleading commercial speech about a 
lawful product cannot withstand scrutiny under the First Amendment. We 
believe that, pursuant to these Supreme Court rulings, it would not 
violate the First Amendment to specifically prohibit carriers from 
including on their bills untruthful or misleading statements regarding 
the nature of line items used to recover universal service 
contributions. We urge that the Commission carefully review the record 
in its proceeding before reaching any conclusion on these issues.
    62. We also recommend that the Commission continue to explore, 
through its Truth-In-Billing proceeding, the possibility of 
establishing standard nomenclature that carriers could use on their 
bills to consumers regarding universal service charges. Such 
standardized language would represent the Commission's view of language 
that is accurate and not misleading. Standard nomenclature could 
benefit consumers by having common language across carriers so that 
consumers can easily identify the charge. We urge that the Commission 
consider using ``Federal Carrier Universal Service Contribution'' as 
standard nomenclature describing any universal service line item on 
consumer bills. The line item should be accompanied by an explanation 
that the carrier has chosen to separate its universal service 
contribution from its other costs of business, and to display the 
contribution as a line item on the consumer's bill.
    63. Finally, we note that many state regulatory agencies either 
have in place or are considering establishing requirements that will 
curtail the practice of some carriers of mischaracterizing universal 
service line items on bills. In addition, other federal agencies, such 
as the Federal Trade Commission, may have jurisdiction that overlaps or 
is concurrent with that of the Commission or state regulatory agencies. 
We therefore recommend that the Commission work closely with these 
agencies to ensure that consumers are provided with complete and 
accurate information regarding the nature of universal service line 
items.

X. Periodic Review

    64. The Act contemplates that universal service is an ``evolving'' 
level of service. The Act further contemplates that the Joint Board may 
periodically make recommendations to the Commission regarding 
modifications in the definition of services supported by the federal 
universal service support mechanism. Moreover, we recognize that the 
telecommunications industry is rapidly changing and that both 
competition and technological changes will affect universal service 
needs in rural, insular, and high cost areas of the nation. We 
therefore recommend that the Commission continue to consult with this 
Joint Board on matters addressed in this Second Recommended Decision. 
We also recommend that the Joint Board and the Commission broadly 
reexamine its high cost universal service mechanism no later than three 
years from July 1, 1999.

XI. Recommending Clauses

    65. For the reasons discussed herein, this Federal-State Joint 
Board, pursuant to Sec. 254(a)(1) and Sec. 410(c) of the Communications 
Act of 1934, as amended, 47 U.S.C. 254(a)(1) and 410(c), recommends 
that the Federal Communications Commission adopt the proposals 
described above relating to high cost universal service support 
mechanisms for non-rural carriers.

List of Subjects

47 CFR Part 36

    Reporting and recordkeeping requirements, Telephone.

47 CFR Part 54

    Universal service.

Federal Communications Commission.
Magalie Roman Salas,
Secretary.
[FR Doc. 98-32736 Filed 12-8-98; 8:45 am]
BILLING CODE 6712-01-P