[Federal Register Volume 64, Number 110 (Wednesday, June 9, 1999)]
[Rules and Regulations]
[Pages 30917-30924]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-14698]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 36

[CC Docket Nos. 96-45 and 96-262; FCC 99-119]


Federal-State Joint Board on Universal Service; Access Charge 
Reform

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: The document Federal-State Joint Board on Universal Services; 
Access Charge Reform establishes the framework for a new forward-
looking high-cost universal service support mechanism. The new 
mechanism will have a two-part methodology that considers both the 
relative costs of providing supported services and the states' ability 
to support those costs using their own resources. In taking these 
steps, we are moving closer to bringing to fruition the work of the 
Joint Board and this Commission to render universal service support 
mechanisms explicit, sufficient, and sustainable as local competition 
develops. The federal support mechanism would provide support for costs 
that exceed both the

[[Page 30918]]

national benchmark and the individual state's resources to support 
those costs.

DATES: Effective June 9, 1999.

FOR FURTHER INFORMATION CONTACT: Jack Zinman, Attorney, Common Carrier 
Bureau, Accounting Policy Division, (202) 418-7400.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's 
document released on May 28, 1999. The full text of this document is 
available for public inspection during regular business hours in the 
FCC Reference Center, Room CY-A257, 445 Twelfth Street, S.W., 
Washington, D.C. 20554.

I. Introduction

    1. The Telecommunications Act of 1996 (1996 Act) has fostered and 
accelerated the development of competition in local telecommunications 
markets across the nation. The 1996 Act also, for the first time, wrote 
into law the Commission's long-standing policy of supporting universal 
service. In codifying this federal policy, Congress sought to ensure 
that universal service remains achievable and sustainable as local 
competition develops.
    2. In this Order, based on recommendations from the Federal-State 
Joint Board on Universal Service (Joint Board), we take action to 
achieve this Congressional goal and to ensure that mechanisms exist so 
that non-rural carriers' rates for services supported by universal 
service mechanisms remain affordable in all regions of the nation and 
reasonably comparable to those prevalent in urban areas. In taking 
these steps, we are moving closer to bringing to fruition the work of 
the Joint Board and this Commission to render universal service support 
mechanisms explicit, sufficient, and sustainable as local competition 
develops.
    3. In this Order, we adopt broad revisions to the federal support 
mechanisms, in light of the Joint Board's most recent recommendations, 
to permit rates to remain affordable and reasonably comparable across 
the nation, consistent with the 1996 Act and the competitive 
environment that it envisions. To accomplish these goals, as 
recommended by the Joint Board, we establish a methodology for 
determining non-rural carriers' support amounts, based on forward-
looking costs estimated using a single, national model, and a national 
cost benchmark. We explicitly reconsider and repudiate any suggestion 
in the First Report and Order, 62 FR 32862 (June 17, 1997), that 
federal support should be limited to 25 percent of the difference 
between the benchmark and forward-looking cost estimates, in favor of 
the more nuanced balancing of federal and state responsibilities 
outlined by the Joint Board. To the extent a state's resources are 
deemed inadequate to maintain affordable and reasonably comparable 
rates, the federal mechanism will provide the necessary support. We 
also adopt today the hold-harmless and portability principles 
recommended by the Joint Board.

A. The Purpose of Support

    4. We agree with the Joint Board that a primary focus in reforming 
the federal high-cost universal service support mechanism is to enable 
intrastate rates to remain both affordable and reasonably comparable 
across high-cost and urban areas. We also agree with the Joint Board 
that the Commission bears the responsibility to ensure that interstate 
rate structures comply with the Congressional mandates expressed in the 
Communications Act of 1934, as amended (the Act). In this section, we 
adopt the majority of the Joint Board's conclusions and recommendations 
concerning affordability, reasonable comparability, explicit interstate 
support, and explicit intrastate support. Pursuant to the Joint Board's 
recommendation, we are leaving the existing support mechanism in place 
for non-rural carriers for an additional six months. We anticipate 
adopting the permanent methodology for calculating and distributing 
support for non-rural carriers, based on forward-looking economic 
costs, this fall for implementation on January 1, 2000.
1. Enabling Reasonably Comparable Rates
    5. We agree with the Joint Board that a central purpose of federal 
universal service support mechanisms is to enable rates in rural areas 
to remain reasonably comparable to rates in urban areas, and we adopt 
the Joint Board's interpretation of the reasonable comparability 
standard to refer to ``a fair range of urban/rural rates both within a 
state's borders, and among states nationwide.'' This does not mean, of 
course, that rate levels in all states, or in every area of every 
state, must be the same. In particular, as the local exchange market 
becomes more competitive, it would be unreasonable to expect rate 
levels not to vary to reflect the varying costs of serving different 
areas. The Joint Board and the Commission have concluded that current 
rate levels are affordable. Therefore, we interpret the goal of 
maintaining a ``fair range'' of rates to mean that support levels must 
be sufficient to prevent pressure from high costs and the development 
of competition from causing unreasonable increases in rates above 
current, affordable levels. When we use the term ``reasonably 
comparable'' throughout this Order, we are referring to this definition 
of the term.
    6. We find that, once we have resolved several implementation 
issues and further verified the forward-looking cost model, the Joint 
Board's recommended methodology largely will be an appropriate means 
for the federal mechanism to ensure that states have the ability to 
achieve reasonable comparability. Specifically, the Joint Board's 
proposed methodology will ensure that any state with per-line costs 
substantially above the nationwide average will receive federal support 
for those intrastate costs, unless the state has the ability to 
maintain reasonably comparable rates without such support. States, of 
course, retain primary responsibility for local rate design policy and, 
as such, bear the responsibility to marshall state and federal support 
resources to achieve reasonable comparability of rates.
    7. This approach does not consider rates directly. Instead, it uses 
costs as an indicator of a state's ability to maintain reasonable 
comparability of rates within the state and relative to other states. 
We conclude that the underlying assumption in the Joint Board's 
recommendation--that a relationship exists between high costs and high 
rates--is a sound one, because rates are generally based on costs. We 
adopt this approach, in part, because states possess broad discretion 
in developing local rate designs. State rate designs may reflect a 
broad array of policy choices that affect actual rates for local 
service, intrastate access, enhanced services, and other intrastate 
services. A state facing costs substantially in excess of the national 
average, however, may be unable through any reasonable combination of 
local rate design policy choices to achieve rates reasonably comparable 
to those that prevail nationally. Through an examination of the 
underlying costs, instead of the resulting rates, we can evaluate the 
cost levels that must be supported in each state in order to develop 
reasonably comparable rates. Because responsibility for such support is 
shared at the federal and state levels, determining the federal portion 
based on costs rather than rates allows the federal jurisdiction to 
help accomplish the goal of rate comparability without having to 
evaluate states' policy choices affecting those rates.
    8. By providing support for costs in any state that exceed a 
benchmark level,

[[Page 30919]]

the Joint Board's recommended methodology ensures that the cost levels 
net of support that must be recovered through intrastate rates--and, by 
analogy, its assumed rate levels--must substantially exceed the 
national average. By taking account of the cost levels that must be 
supported in each state in order to enable reasonable comparability of 
rates, the Joint Board's methodology ensures that federal support is 
targeted to areas where it is necessary to achieve its intended 
purpose--enabling reasonable comparability of rates--and also that 
overall support levels are no higher than necessary to achieve this 
goal. We agree with the Joint Board that this methodology will result 
in federal support levels for each state that are appropriate to 
achieve the statutory principle of reasonable comparability of rates.
    9. In the First Report and Order, the Commission concluded that the 
share of support provided by the federal mechanism should initially be 
set at 25 percent of the difference between the forward-looking cost of 
providing the supported services and a national benchmark. In adopting 
the Joint Board's recommended methodology, we reconsider the 
Commission's conclusions in the First Report and Order regarding the 
federal share of support. The Joint Board's recommended methodology for 
enabling reasonable comparability of rates will define the sharing of 
responsibility between the federal and state jurisdictions for high-
cost intrastate universal service support in a way markedly different 
from the 25 percent federal share methodology adopted in the First 
Report and Order. Instead of allocating responsibility for universal 
service support based on fixed percentages, the Joint Board's 
recommended methodology recognizes the states' primary role in enabling 
reasonable comparability of rates. Under this recommendation, to the 
extent a state possesses the ability to support its high-cost areas 
wholly through internal means, the methodology we adopt recognizes that 
no federal support is required in that state to enable reasonably 
comparable local rates. Conversely, to the extent that a state faces 
larger rate comparability challenges than can be addressed internally, 
our forward-looking methodology places no artificial limits on the 
amount of federal support that is available, thus resulting in 
sufficient support as required by the 1996 Act.
    10. We find that section 254(b)(3) supports the use of federal 
support to enable reasonable rate comparability among states. By 
specifying that ``[c]onsumers in all regions of the Nation'' should 
have rates and services reasonably comparable to rates and services in 
urban areas, we believe that Congress intended national, as opposed to 
state-by-state, comparisons. Some commenters dispute the Joint Board's 
interpretation of reasonable comparability. For example, the California 
Commission asserts that using federal universal service support to 
enable rate comparability among states would impermissibly expand the 
scope of section 254(b)(3), and that support should merely seek to 
enable the reasonable comparability of rates within each state. 
Similarly, the Maryland Commission claims that the Joint Board's 
interpretation would lead to the comparison of rural rates in all 
states to some fictional national urban rate, with the potentially 
anomalous result that rural rates in a state could be lower than urban 
rates in that state. The Joint Board's approach for enabling rate 
comparability relies not on a national urban rate, as the Maryland 
Commission asserts, but rather on a methodology that ensures that no 
state will face per-line costs that substantially exceed the costs 
faced by other states, taking into account the individual state's 
ability to support its own universal service needs. In this way, the 
Joint Board sought to ensure that every state has the means at its 
disposal to achieve reasonable comparability of rates in that state. We 
agree that the Joint Board's approach is an appropriate way for federal 
support mechanisms to enable ``consumers in all regions of the Nation'' 
to have access to ``reasonably comparable'' rates. We emphasize again, 
however, that, because states establish local rates, each state's 
policies will determine the level of urban rates relative to rural 
rates in that state.
2. Enabling Affordable Rates
    11.We decline to adopt the proposals suggested by the D.C. 
Commission and Ad Hoc. We continue to believe, consistent with the 
Joint Board's recommendation, that rates for local service are 
generally affordable. Indeed, since March 1989, at least 93 percent of 
all households in the United States have had telephone service, and as 
of November 1998, the subscribership rate was 94.2 percent. While 
affordability encompasses more than subscribership, the Joint Board and 
the Commission agree that the states are better equipped to determine 
which additional factors can and should be used to measure 
affordability.
    12.The principle of ensuring reasonably comparable rates, set forth 
in section 254(b)(3), does not specify an income component. To the 
contrary, although affordability may vary with individual subscriber 
income, section 254(b)(3)'s statement that consumers in rural and high-
cost areas of the country should have access to telecommunications 
services at rates that are reasonably comparable to rates in urban 
areas is not qualified. Therefore, we find no congressional mandate for 
the Commission to implement or to require that states implement means-
testing in conjunction with mechanisms designed to provide support to 
high-cost areas and to enable reasonable comparability of rates 
nationwide. Affordability problems, as they relate to low-income 
consumers, raise many issues that are unrelated to the need for support 
in high-cost areas, and section 254(b)(3) reflects a legislative 
judgment that all Americans, regardless of income, should have access 
to the network at reasonably comparable rates. The specific 
affordability issues unique to low-income consumers, including all 
factors that may be relevant to means-testing or other need-based 
inquiries, are best addressed at the federal level through programs 
specifically designed for this purpose. Indeed, the Commission already 
has such programs in place, namely, the Lifeline and Link-Up programs, 
which provide assistance for low-income consumers to get connected and 
stay connected to the telecommunications network. As discussed in the 
First Report and Order, we believe that the impact of household income 
on subscribership is more appropriately addressed through programs 
designed to help low income households obtain and retain telephone 
service, rather than as part of the federal high-cost support 
mechanism.
    13. Moreover, forcing states to adopt means testing or limits on 
rates of return in order to receive federal high-cost support would be 
contrary to the Joint Board's recommendations. Although it may be 
within the Commission's jurisdiction to condition federal support on 
specific state action, the Joint Board recommended against our doing so 
in the high-cost context. Individual state commissions are in a 
position to evaluate specific affordability issues facing their 
respective states, and we believe that individual states should retain 
the primary responsibility to decide questions of affordability and to 
weigh the relative importance of factors such as consumer income and 
local rate design. Therefore, we decline to require means testing for 
federal high-cost support. An individual state, however,

[[Page 30920]]

could voluntarily adopt an explicit support mechanism using means 
testing or other cost-of-living data, as suggested by the D.C. 
Commission and Ad Hoc. Although the states retain discretion to adopt 
such a mechanism, we will continue to monitor the issue of rate 
affordability, and we will take remedial action, to the extent we have 
jurisdiction to do so, if it becomes necessary.
3. Making Interstate Support Explicit
    14. We agree with the Joint Board that the Commission has the 
jurisdiction and responsibility to identify support for universal 
service that is implicit in interstate access charges. Moreover, we 
agree with the Joint Board that it is part of our statutory mandate 
that any such support, to the extent possible, be made explicit. In 
this proceeding and in our pending Access Charge Reform, 62 FR 31040 
(June 6, 1997), proceeding, we are endeavoring to identify the types of 
implicit support in interstate access charges and the amount of that 
support. As we move forward with our efforts to reform interstate 
access charges, we will develop additional information on the costs of 
interstate access necessary to evaluate the Joint Board's 
recommendations in this area and the associated record. The 
overwhelming majority of commenters addressing the Joint Board's 
recommendations, however, agree that interstate access rates contain 
implicit support that should be made explicit. These commenters differ 
only as to the amount of their estimate of implicit support presently 
in access rates and the method for making it explicit. We anticipate 
taking action in the fall of 1999 to resolve the issue of making 
interstate support explicit, and we will address the Joint Board's 
recommendations at that time. Although, as explained, the statutory 
goal of making explicit the support that is currently implicit in 
interstate access charges is distinct from the statutory goal of 
ensuring reasonably comparable intrastate rates, we nevertheless 
recognize the close relationship between the implementation of the 
permanent revised support mechanism on January 1, 2000 and the Access 
Charge Reform proceeding. We therefore intend to move ahead with access 
reform in tandem with the implementation of the revised methodology.
4. Making Intrastate Support Explicit
    15. Historically, states have ensured universal service principally 
through implicit support mechanisms, such as geographic rate averaging 
and above-cost pricing of vertical services, such as call waiting, 
voice mail, and caller ID. We agree with the Joint Board that the 1996 
Act does not require states to adopt explicit universal service support 
mechanisms. Section 254(e) does not specifically mention state support 
mechanisms. Section 254(b)(5) declares that ``[t]here should be 
specific, predictable and sufficient Federal and State mechanisms to 
preserve and advance universal service.'' Section 254(f) provides that 
states ``may adopt regulations not inconsistent with the Commission's 
rules to preserve and advance universal service.'' The permissive 
language in both of these sections demonstrates that Congress did not 
require states to establish explicit universal service support 
mechanisms. Accordingly, our actions today are consistent with the 
directives of the 1996 Act.
    16. As the Joint Board acknowledged, however, the development of 
competition in local markets is likely to erode states' ability to 
support universal service through implicit mechanisms. We agree with 
the Joint Board that the erosion of intrastate implicit support does 
not mean that federal support must be provided to replace implicit 
intrastate support that is eroded by competition. Indeed, it would be 
unfair to expect the federal support mechanism, which by its very 
nature operates by transferring funds among jurisdictions, to bear the 
support burden that has historically been borne within a state by 
intrastate, implicit support mechanisms. The Joint Board stated that 
states ``possess the jurisdiction and responsibility to address these 
implicit support issues through appropriate rate design and other 
mechanisms within a state,'' and it concluded that states ``should bear 
the responsibility for the design of intrastate funding mechanisms.'' 
The Joint Board's position is consistent with the methodology that it 
recommended for determining federal support levels. That methodology 
does not mandate any particular state action, but assumes that states 
will take some action, whether through rate design or through an 
explicit support mechanism, to support universal service within the 
state, and provides for federal support where such state efforts would 
be insufficient to achieve reasonable comparability of rates. We will 
continue to monitor state efforts at eliminating implicit support and 
will consider additional measures should state efforts be insufficient 
in this regard.

B. Methodology for Estimating Costs and Computing Support

    17. We are adopting the majority of the Joint Board's 
recommendations for a revised methodology for estimating costs and 
calculating federal support levels to enable reasonably comparable 
local rates for non-rural carriers. We are seeking further comment, 
however, on specific implementation issues in an Further Notice of 
Proposed Rulemaking (FNPRM). We conclude that the revised universal 
service high-cost support mechanism shall take effect on January 1, 
2000. We anticipate that by January 1, 2000, the Commission will have 
made final determinations on all outstanding issues raised, and all 
verification of the cost model that will be used to estimate the 
forward-looking costs of providing supported services will have been 
completed.
    18. Specifically, we adopt the Joint Board's recommendation that 
forward-looking economic costs should be used to estimate the costs of 
providing supported services. We also adopt the Joint Board's general 
recommendation that the methodology should rely primarily on states to 
achieve reasonably comparable rates within their borders while 
providing support for above-average costs to the extent that such costs 
prevent the state from enabling reasonable comparability of rates. We 
further adopt the Joint Board's recommendations that this explicit 
federal support mechanism should not be significantly larger than the 
current explicit federal mechanism.
1. Forward-Looking Economic Costs
    19. We adopt the Joint Board's recommendation that support 
calculations be based on forward-looking costs, and that those costs be 
estimated using a single national model. As we stated in the First 
Report and Order, a methodology based on forward-looking economic costs 
will ``send the correct signals for entry, investment, and innovation 
in the long run.'' Many commenters support the use of forward-looking 
economic costs as the basis for estimating the costs of providing the 
supported services, because the use of forward-looking economic costs 
will encourage efficient entry and investment. The use of a carrier's 
book costs, by contrast, would not allocate support in a competitively 
neutral manner among potentially competing carriers. Instead, such a 
system would tend to distort support payments because current book 
costs are influenced by a variety of carrier-specific factors, such as 
the age of the plant, depreciation rates, efficiency of

[[Page 30921]]

design, and other factors. Support based on forward-looking models will 
ensure that support payments remain specific, predictable, and 
sufficient, as required by section 254, particularly as competition 
develops. To achieve universal service in a competitive market, support 
should be based on the costs that drive market decisions, and those 
costs are forward-looking costs.
    20. Although we believe that forward-looking costs will set support 
levels most efficiently, we decline to adopt a suggestion of the Ohio 
Consumers' Counsel that carriers should receive the lesser of either 
current amounts of high-cost support or a forward-looking economic cost 
model-based amount. The hold-harmless provision set forth in of this 
Order is intended to prevent dislocation and rate shocks as we make the 
transition to a support system based on forward-looking costs. As 
noted, we intend for the Joint Board and the Commission to re-evaluate 
non-rural carriers' support mechanisms, including the hold-harmless 
provision, three years from the date that the revised mechanism is 
implemented.
    21. Although some commenters have expressed concerns about the 
accuracy of the outputs of the cost model, we agree with the Joint 
Board that a national forward-looking model will provide a more 
consistent approach by which to develop a method for measuring rate 
comparability than would individual state cost studies. We believe 
state cost studies could rely on differing forward-looking cost 
methodologies, including differing assumptions or input data elements 
that would prevent meaningful comparisons of the resulting forward-
looking cost estimates, and thus would provide a less accurate and 
consistent picture by which we could evaluate the cost levels that must 
be supported in each state to develop reasonably comparable rates. 
Therefore, we reject the use of state cost studies for the purpose of 
developing our method for rate comparability. States, of course, retain 
the flexibility to design state-level support mechanisms using other 
indicators of cost.
    22. At this time, however, there has not been adequate time to 
verify the results of the cost model and to verify that certain input 
data elements are accurate. Thus, we cannot implement immediately a 
revised high-cost support mechanism based on forward-looking economic 
costs. We anticipate that the model and the input data will be verified 
and ready for use by January 1, 2000.
    23. The Joint Board recommended that, if the Commission did not 
implement a forward-looking support mechanism on July 1, 1999 to enable 
the reasonable comparability of non-rural carriers' rates, the 
Commission should provide interim relief to high-cost states served 
primarily by non-rural carriers. In formulating this Order, we have 
continued to consult with the state Joint Board members, and they 
recently filed a letter stating that the Commission should not adopt an 
interim mechanism, given the brevity of the implementation delay that 
we adopt today. The state Joint Board members state that they have been 
unable to develop a workable interim solution, and that the 
administrative complexity of overlaying changes in collection and 
disbursement onto the existing system for only six months does not 
appear prudent. In light of the state members' position on this issue, 
and the reasons they present in their letter, we conclude that we 
should not adopt an interim support mechanism at this time.
2. Shared Federal-State Responsibility for Reasonably Comparable Rates
    24. We agree with the Joint Board that the states share 
responsibility for universal service, and that states should have 
``specific, predictable, and sufficient'' mechanisms in place to 
maintain and advance universal service. We further agree with the Joint 
Board that, because rates are generally affordable, and subscribership 
is high in most parts of the country, federal involvement may be 
limited to instances where states face significant obstacles in 
maintaining reasonably comparable rates. Because affordability is 
closely tied to local rate levels, established and regulated by the 
states, we conclude that states are well-positioned to adopt local rate 
structures and intrastate universal service support mechanisms that 
maintain affordable and reasonably comparable rates on a statewide 
basis. Federal mechanisms, in contrast, will assure that these goals 
are met nationally by providing support to those states where the cost 
of providing the supported services substantially exceed the national 
average. We find that the appropriate balance of responsibility for 
enabling reasonably comparable local rates can be struck through the 
methodology recommended by the Joint Board. Accordingly, we reconsider 
and reject the decision in the First Report and Order that the federal 
share of support should be limited to 25 percent of the difference 
between the forward-looking cost of providing the supported services 
and a national benchmark, and directed only to the interstate 
jurisdiction.
3. Determination of Federal Support Amounts
    (1) Determining the National Benchmark. 25. We adopt the Joint 
Board's recommendation that federal high-cost intrastate support should 
be determined using a cost-based benchmark and should be provided where 
states are unable to provide sufficient intrastate universal service 
support to non-rural carriers with costs that exceed a national 
benchmark. In so doing, we reconsider and reject the determination in 
the First Report and Order that federal support for rate comparability 
should be determined using a revenue-based benchmark. Given the focus 
of the Second Recommended Decision, 63 FR 67837 (December 9, 1998), on 
rate comparability, and its recommendation that the Commission should 
rely on the cost of providing the supported services when determining 
support amounts, rather than local rates, we believe that a cost-based 
benchmark is more appropriate. We agree with the Joint Board's re-
examination of this issue and its departure in the Second Recommended 
Decision from its original recommendation that a cost-based benchmark 
should not be used. We have continued to coordinate with the Joint 
Board in developing specific details of the methodology for determining 
high-cost support for non-rural carriers.
    26. In the first step of the revised support methodology, areas 
will be identified where the forward-looking cost of providing the 
supported services exceeds the benchmark amount. We agree with the 
Joint Board that a cost-based benchmark provides a better gauge with 
which to identify areas in need of support to enable reasonably 
comparable rates than would a revenue benchmark. Contrary to the 
assertions of some commenters, revenues may not accurately reflect the 
level of need for support to enable reasonably comparable rates because 
states have varying rate-setting methods and goals.
    (2) Determining a State's Ability to Support its High-Cost Areas. 
27. We further agree with the Joint Board that federal support should 
be available to enable local rate comparability if the state cannot do 
so on its own, and thus that federal support for this purpose should be 
determined based, in part, on a state's ability to support its 
universal service needs internally. Given the difficulties in 
determining a state's ability to support its high-cost areas, and after 
extensive consultation with the Joint Board, we have concluded that a 
set dollar amount per line is an

[[Page 30922]]

appropriate method by which to ascertain a state's internal ability to 
achieve rate comparability. We agree with the Maine Commission that a 
fixed dollar amount per line is a reasonably specific and certain 
method by which to determine a state's share of responsibility for 
universal service support. We also believe that using a fixed dollar 
amount per line is an administratively simple methodology that can be 
applied in a consistent manner to all states. In this Order, however, 
we have not set a specific per-line dollar amount.
    28. We agree in principle with those commenters that assert that 
using a fixed percentage of each state's intrastate revenues as the 
level of the state's responsibility for its universal service needs 
could unduly burden high-cost states that also have high intrastate 
revenues because they currently have high rates due to high costs. 
However a state chooses to bear its universal service burden (i.e., 
through existing, implicit rate designs or through an explicit support 
mechanism), the ability to spread the burden over a larger number of 
lines will make the burden easier for a state to bear. In contrast, 
using the ratio of high-cost to low-cost lines, one method suggested by 
the Joint Board, may not be as predictable as using a fixed dollar 
amount per line, because the number of high-cost to low-cost lines may 
fluctuate over time. Using the ratio of high-cost to low-cost lines 
also would be an administratively difficult method of determining a 
state's internal ability to achieve rate comparability, given the fact 
that supporting data would need to be obtained from a variety of 
sources in each state. Finally, the Joint Board's recommendation that 
intrastate support be calculated as a percentage of intrastate 
telecommunications revenues was based in part on its judgment that 
intrastate telecommunications revenues provide a rough measure of the 
funds available to support intrastate mechanisms. Because we have 
decided to adopt a cost-based benchmark rather than a benchmark that is 
based on revenues, we do not believe that a percentage-based cap on 
intrastate responsibility would in every case provide a meaningful 
measure of a state's ability to fund intrastate support.
    29. We emphasize that states are not, through the adoption of this 
approach, required to impose a per-line charge to support universal 
service, nor are carriers necessarily entitled to recover this amount 
from new or explicit state mechanisms. As the Joint Board explained, 
this amount reflects a reasonable estimate of the state's ability to 
achieve reasonably comparable rates on a statewide basis and 
establishes a level above which federal support, consisting of funds 
transferred from other jurisdictions, should be provided to assist the 
state in achieving rates that are reasonably comparable to those in 
other states. States largely are already making use of this ability by 
providing carriers with substantial universal service support, often 
through rate averaging and other rate design methodologies, and states 
are best positioned to determine how and whether these mechanisms need 
to be altered to ensure that carriers do not double-recover universal 
service support. Given the substantial amounts of universal service 
support already built into state rate designs, we agree with the Joint 
Board that providing the full amount of support determined by the 
federal methodology from federal mechanisms, without any estimate of 
state support, is likely to lead to carrier double-recovery.
    30. Thus, in the second step of the revised support methodology, an 
assessment will be made as to whether the perceived support need, as 
established in the first step of the methodology, exceeds the state's 
ability to achieve reasonable comparability of rates. The state's 
ability will be estimated by multiplying a dollar figure by the number 
of lines served by non-rural carriers in the state. Any needed support 
that exceeds this estimate of the state's ability to support its own 
high-cost areas will be provided by the federal mechanism. In this way, 
the mechanism will ensure that every state will have adequate resources 
to ensure reasonably comparable rates.
4. Size of the Federal Support Mechanism and Hold-Harmless
    31. In this Order, we adopt the recommendation of the Joint Board 
that a hold-harmless provision should be implemented to prevent 
substantial reductions of federal support and potentially significant 
rate increases. Adoption of a hold-harmless provision will both serve 
to avoid any potential rate shock when the new federal support 
mechanism goes into effect, and to prevent undue disruption of state 
rate designs that may have been constructed upon, and thus are 
dependent upon, current federal high-cost support flows. We agree with 
the Joint Board that the hold-harmless amounts should be provided in 
lieu of the amounts computed by the two-step forward-looking 
methodology described, whenever the hold-harmless amount exceeds the 
amount indicated by the forward-looking methodology.
    32. In determining the size of the new federal mechanism to enable 
reasonably comparable local rates, we must fulfill our statutory 
obligation to assure sufficient, specific, and predictable universal 
service support without imposing an undue burden on carriers and, 
potentially, consumers to fund any increases in federal support. 
Because increased federal support would result in increased 
contributions and could increase rates for some consumers, we are 
hesitant to mandate large increases in explicit federal support for 
local rates in the absence of clear evidence that such increases are 
necessary either to preserve universal service, or to protect 
affordable and reasonably comparable rates, consistent with the 
development of efficient competition. Rather, we agree with the Joint 
Board that current conditions do not necessitate substantial increases 
in federal support for local rates. We believe that limiting the amount 
of new support that each state receives under the new mechanism is 
consistent with the Joint Board's recommendation that the amount of 
such federal support should not increase significantly.
    33. The Joint Board initially recommended that having the federal 
mechanism calculate support using study-area average costs would be one 
way roughly to maintain the current size of the federal mechanism. 
Indeed, the current system calculates costs using study area-averaged 
costs. While we agree with the Joint Board that there is no current 
need for large increases in the size of the federal support mechanism 
for local rates, we are seeking further comment in an FNPRM on whether 
it is equally important, even at this early stage in the development of 
local competition, to provide support that is calculated at a more 
granular level. Given that telephone service currently is largely 
affordable, and any significant increase in the size of federal support 
for local rates appears unnecessary, we conclude that we should limit 
the size of the federal mechanism, as recommended by the Joint Board.
5. Portability of Support
    34. In the Second Recommended Decision, the Joint Board recommended 
that the Commission maintain the policy established in the First Report 
and Order of making high-cost support available to all eligible 
telecommunications carriers, whether they be incumbent LECs, 
competitive carriers, or wireless carriers. The Joint Board stated that 
portable support is consistent with the principle of competitive 
neutrality, and expressed

[[Page 30923]]

its continued support for competitive neutrality as a guiding principle 
of universal service reform. GTE and USTA expressed general support for 
this recommendation.
    35. We conclude, consistent with the Joint Board's recommendation, 
that the policy the Commission established in the First Report and 
Order of making support available to all eligible telecommunications 
carriers should continue. All carriers, including commercial mobile 
radio service (CMRS) carriers, that provide the supported services, 
regardless of the technology used, are eligible for ETC status under 
section 214(e)(1). We reiterate that the plain language of section 
214(e)(1) prohibits the Commission or the states from adopting 
additional eligibility criteria beyond those enumerated in section 
214(e)(1). We also reaffirm that under section 214(e), a state 
commission must designate a common carrier, including carriers that use 
wireless technologies, as an eligible carrier if it determines that the 
carrier has met the requirements of section 214(e)(1). We re-emphasize 
that the limitation on a state's ability to regulate rates and entry by 
wireless service carriers under section 332(c)(3) does not allow the 
states to deny wireless carriers ETC status.
    36. We agree with the Joint Board that competitive neutrality is a 
fundamental principle of universal service reform, and that portability 
of support is necessary to ensure that universal service support is 
distributed in a competitively neutral manner. We also agree with US 
West that ``portability'' of support should not be used to divert 
federal funds from high-cost areas to other areas. For this very 
reason, we conclude that all carriers, both incumbent LECs and 
competitive LECs, must use high-cost support in a manner consistent 
with section 254.
    37. Although we adopt a hold-harmless provision we do not believe 
that the Joint Board intended incumbent LECs to be held harmless for 
federal high-cost support amounts that they lose when a customer elects 
to switch carriers and begins taking service from a competitive LEC. 
Such a conclusion would contravene the Joint Board's desire that 
competitive neutrality be a driving force behind universal service 
reform. Moreover, it would eviscerate the concept of ``portable'' 
support if the loss of customers to a competitor did not change the 
incumbent's support amounts. We conclude, therefore, that incumbent 
LECs will not be held harmless for reductions in their federal high-
cost support amounts that result from competitive LECs capturing that 
incumbent LEC's customers. In addition, a competitive LEC or other 
carrier that gains an incumbent LEC's customers, and hence any high-
cost support that the incumbent LEC had received for those customers, 
may only use that support in a manner consistent with section 254.
6. Use of Support
    38. We conclude that carriers must apply federal high-cost 
universal service support in a manner consistent with section 254. 
Specifically, section 254(e) requires carriers to use universal service 
support ``only for the provision, maintenance, and upgrading of 
facilities and services for which the support is intended.''
    39. We also conclude that, if we find that a carrier has not 
applied its universal service high-cost support in a manner consistent 
with section 254, we have the authority to take appropriate enforcement 
actions. States or other parties may petition the Commission, pursuant 
to section 208 of the Act, if such parties believe that a common 
carrier has misapplied its high-cost universal service support. States 
or other parties should avail themselves of the Commission's formal 
complaint procedures if they believe that a common carrier is not using 
its federal universal service high-cost support in accordance with the 
directions we have set forth in this Order. Because the Commission's 
statutory authority under section 208 extends to violations of the Act 
by all common carriers, we conclude that all potential recipients of 
high-cost support would be subject to our enforcement jurisdiction. 
Depending on the nature of the complaint, furthermore, a complaint 
filed by a party against a common carrier alleging misapplication of 
universal service high-cost support could qualify for resolution under 
the Commission's ``accelerated docket'' procedures.

C. Carrier Recovery of Universal Service Contributions from Consumers

    40. Because we have resolved, or are resolving, all of the carrier 
recovery issues in the Truth-in-Billing proceeding, we need not revisit 
them here. We continue to believe that the ongoing Truth-in-Billing 
proceeding, with the detailed record being developed there, is the 
correct forum to resolve these issues. We wish to emphasize, however, 
that prior to the adoption in the Truth-in-Billing proceeding of any 
final standardized label for universal service charges on consumer 
bills, we will not hesitate to take enforcement action against carriers 
who engage in unjust or unreasonable practices in violation of section 
201(b).

D. Assessing Contributions from Carriers

    41. The Fifth Circuit has not yet issued a decision in Texas Public 
Utility Counsel v. FCC. While we acknowledge the Joint Board's 
observation that changing the assessment base to include both 
interstate and intrastate end-user telecommunications revenues would 
ease burdens on carriers that would not otherwise have to separate 
revenues on a jurisdictional basis and that a broader revenue base 
would result in a lower assessment rate, these recommendations are 
contingent upon the Fifth Circuit's decision in Texas Public Utility 
Counsel v. FCC. Accordingly, pending further resolution of this matter 
by the Fifth Circuit, the assessment base and the recovery base for 
contributions to the high-cost and low-income universal service support 
mechanism that we adopted in the First Report and Order shall remain in 
effect.

E. Unserved Areas

    42. During the proceedings that led to the Second Recommended 
Decision, the Arizona Corporation 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 line extension or 
construction charges. In the Second Recommended Decision, the Joint 
Board expressed its interest in ensuring that telephone service is 
provided to unserved areas, and recognized that states other than 
Arizona may have unserved areas that may need to be examined. Because 
providing service to unserved areas has historically been addressed by 
the states, the Joint Board concluded that the states should continue 
to address unserved area problems, to the extent they are able to do 
so. The Joint Board recognized, however, that there may be some 
circumstances that warrant federal universal service support for line 
extensions to unserved areas. The Joint Board recommended that the 
Commission investigate the question of unserved areas in a separate 
proceeding and determine, in consultation with the Joint Board, whether 
there are unserved areas that warrant any federal universal service 
consideration.
    43. We agree with the Joint Board that, while the states have 
historically addressed the issue of providing service to unserved 
areas, there may be unserved areas, or inadequately-served areas 
characterized by extremely low density, low penetration, and high costs

[[Page 30924]]

that warrant additional federal universal service support. Commenters 
who addressed this issue agree with the Joint Board that the Commission 
should investigate this issue further. Bringing service to these areas 
is clearly within the goal of the 1996 Act to accelerate deployment of 
services to ``all Americans.'' In accordance with the Joint Board's 
recommendations, therefore, we will initiate a separate proceeding in 
July of 1999 to more fully develop the record on this issue, and 
investigate the nature and extent of the ``unserved area'' issue in the 
nation. We anticipate that, as a result of this separate proceeding, 
and in consultation with the Joint Board, we will be better able to 
determine whether any of these unserved areas should receive federal 
universal service support.

F. Periodic Review

    44. In the Second Recommended Decision, the Joint Board noted that 
the 1996 Act 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. In addition to recommending that the Commission 
continue to consult with the Joint Board on matters addressed in the 
Second Recommended Decision, the Joint Board specifically recommended 
that the Joint Board and the Commission broadly reexamine the high cost 
universal service mechanism no later than three years from the 
implementation date of the revised universal service high-cost 
mechanism.
    45. We affirm our commitment to consulting with the Joint Board on 
an ongoing basis on issues addressed in this Order. We agree with the 
Joint Board that both ongoing and periodic review is necessary in light 
of the fact that the telecommunications industry is rapidly changing, 
and both competition and technological change may affect universal 
service needs in rural, insular, and high cost areas. We conclude that, 
in addition to ongoing consultation with the Joint Board, the 
Commission and the Joint Board shall, on or before January 1, 2003, 
comprehensively examine the operation of the high cost universal 
service mechanism implemented in this Order, including the hold-
harmless mechanism.

II. Procedural Matters

A. Regulatory Flexibility Act

    46. The Regulatory Flexibility Act (RFA) requires an Initial 
Regulatory Flexibility Analysis (IRFA) whenever an agency publishes a 
notice of proposed rulemaking, and a Final Regulatory Flexibility 
Analysis (FRFA) whenever an agency promulgates a final rule, unless the 
agency certifies that the proposed or final rule will not have ``a 
significant economic impact on a substantial number of small 
entities,'' and includes the factual basis for such certification. The 
RFA generally defines ``small entity'' as having the same meaning as 
the term ``small business concern'' under the Small Business Act, 15 
U.S.C. 632. The Small Business Administration (SBA) defines a ``small 
business concern'' as an enterprise that (1) is independently owned and 
operated; (2) is not dominant in its field of operation; and (3) meets 
any additional criteria established by the SBA.
    47. We conclude that neither an IRFA nor a FRFA are required here 
because the foregoing Report and Order adopts a final rule affecting 
only the amount of high-cost support provided to non-rural LECs. Non-
rural LECs generally do not fall within the SBA's definition of a small 
business concern because they are usually large corporations, 
affiliates of such corporations, or dominant in their field of 
operations. Therefore, we certify, pursuant to section 605(b) of the 
RFA, that the final rule adopted in the Report and Order, will not have 
a significant economic impact on a substantial number of small 
entities. The Office of Public Affairs, Reference Operation Division, 
will send a copy of this certification, along with this Report and 
Order, to the Chief Counsel for Advocacy of the SBA in accordance with 
the RFA. In addition, this certification, Report and Order (or 
summaries thereof) will be published in the Federal Register.

B. Effective Date of Final Rules

    48. We conclude that the amendments to our rules adopted herein 
shall be effective upon publication in the Federal Register. Pursuant 
to our rules, our existing high-cost support mechanism is scheduled to 
be phased out on July 1, 1999. In this Order, however, we conclude that 
the new forward-looking high-cost support mechanism should be 
implemented on January 1, 2000, instead of July 1, 1999, as previously 
planned. The amendments we adopt in this Order extend the present high-
cost support mechanism from July 1, 1999, until January 1, 2000, when 
the new forward-looking high-cost support mechanism will be 
implemented. Thus, the amendments must become effective before July 1, 
1999. Making the amendments effective 30 days after publication in the 
Federal Register would jeopardize the required July 1, 1999 effective 
date. Accordingly, pursuant to the Administrative Procedure Act, we 
find good cause to depart from the general requirement that final rules 
take effect not less than 30 days after their publication in the 
Federal Register.

III. Ordering Clauses

    49. Accordingly, it is ordered that, pursuant to the authority 
contained in sections 1-4, 201-205, 218-220, 214, 254, 303(r), 403, and 
410 of the Communications Act of 1934, as amended, 47 U.S.C. 151-154, 
201-205, 218-220, 214, 254, 303(r), 403, and 410, the Report and Order 
is adopted, June 9, 1999.
    50. It is further ordered that part 36 of the Commission's rules, 
47 CFR 36, is amended as set forth, effective immediately upon 
publication of the text thereof in the Federal Register.

List of Subjects in 47 CFR Part 36

    Reporting and recordkeeping requirements and Telephone.

Federal Communications Commission.
Magalie Roman Salas,
Secretary.

Rule Changes

    For the reasons discussed in the preamble, the Federal 
Communications Commission amends 47 CFR Part 54 as follows:

PART 36--JURISDICTIONAL SEPARATIONS PROCEDURES; STANDARD PROCEDURES 
FOR SEPARATING TELECOMMUNICATIONS PROPERTY COSTS, REVENUES, 
EXPENSES, TAXES AND RESERVES FOR TELECOMMUNICATIONS COMPANIES

    1. The authority citation for part 36 continues to read as follows:

    Authority: 47 U.S.C. 151, 154(i) and (j), 205, 221(c), 254, 403, 
and 410.


Sec. 36.601  [Amended]

    2. In 47 CFR 36.601(c) remove the date ``July 1, 1999'' and add, in 
its place each place it appears, the date ``January 1, 2000.''

[FR Doc. 99-14698 Filed 6-8-99; 8:45 am]
BILLING CODE 6712-01-P