[Federal Register Volume 67, Number 230 (Friday, November 29, 2002)]
[Proposed Rules]
[Pages 71121-71126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-30164]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 36 and 54

[CC Docket No. 96-45; DA 02-2976]


Comment Sought on Recommended Decision Issued by Federal-State 
Joint Board on Universal Service Regarding the Non-Rural High-Cost 
Support Mechanism

AGENCY: Federal Communications Commission.

ACTION: Proposed rules; solicitation of comments.

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SUMMARY: In a document released on November 5, 2002, the Wireline 
Competition Bureau sought comment on the Recommended Decision of the 
Federal-State Joint Board on Universal Service addressing issues from 
the Ninth Report and Order that were remanded by the United States 
Court of Appeals for the Tenth Circuit.

DATES: Submit comments on or before December 20, 2002, and reply 
comments on or before January 3, 2003.

ADDRESSES: Federal Communications Commission, 445 12th St., SW., 
Washington, DC 20554. See Supplementary Information section for where 
and how to file comments.

FOR FURTHER INFORMATION CONTACT: Katie King, Jennifer Schneider, or 
Narda Jones, Attorneys, Telecommunications Access Policy Division, 
Wireline Competition Bureau, (202) 418-7400; TTY: (202) 418-0484.

SUPPLEMENTARY INFORMATION: This is a summary of the Wireline 
Competition Bureau's Public Notice in CC Docket No. 96-45 released on 
November 5, 2002. 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, SW., Washington, DC 20554.
    The Wireline Competition Bureau (Bureau) seeks comment on the 
Recommended Decision of the Federal-

[[Page 71122]]

State Joint Board on Universal Service (Joint Board), released on 
October 16, 2002, addressing issues from the Ninth Report and Order, 
(64 FR 67416, December 1, 1999), that were remanded by the United 
States Court of Appeals for the Tenth Circuit. The Ninth Report and 
Order established a federal high-cost universal service support 
mechanism for non-rural carriers based on forward-looking economic 
costs. The court remanded the Ninth Report and Order to the Commission 
for further explanation of its decision. On February 15, 2002, the 
Commission issued a Notice of Proposed Rulemaking, 67 FR 1087, March 
11, 2002, seeking comment on issues remanded by the court and referring 
the record collected in the proceeding to the Joint Board for a 
recommended decision.
    Comment is sought on the Joint Board's recommendations. 
Specifically, in its Recommended Decision, the Joint Board recommended 
continued use of statewide average costs and a national benchmark of 
135 percent to determine non-rural high-cost support, but recommended 
that the Commission modify the non-rural high-cost support mechanism by 
adopting additional measures to induce states to ensure reasonable 
comparability of urban and rural rates. In particular, the Joint Board 
recommended that the Commission implement a supplementary rate review, 
through an expanded annual certification process under section 254(e) 
of the Act, as a check on whether non-rural high-cost support continues 
to provide sufficient support to enable the states to maintain 
reasonably comparable rural and urban rates. The Joint Board 
recommended that states be required to certify that the basic service 
rates in their high-cost areas are reasonably comparable to a national 
urban rate benchmark or explain why they are not. States would have the 
opportunity to demonstrate that further federal action is needed 
because current federal support and state actions together are 
insufficient to yield reasonably comparable rates.
    Pursuant to Sec. Sec.  1.415 and 1.419 of the Commission's rules, 
interested parties may file comments December 20, 2002, and reply 
comments January 3, 2003. Comments may be filed using the Commission's 
Electronic Comment Filing System (ECFS) or by filing paper copies.
    Comments filed through the ECFS can be sent as an electronic file 
via the Internet to http://www.fcc.gov/e-file/ecfs.html. Generally, 
only one copy of an electronic submission must be filed. If multiple 
docket or rulemaking numbers appear in the caption of this proceeding, 
however, commenters must transmit one electronic copy of the comments 
to each docket or rulemaking number referenced in the caption. In 
completing the transmittal screen, commenters should include their full 
name, U.S. Postal Service mailing address, and the applicable docket or 
rulemaking number. Parties may also submit an electronic comment by 
Internet e-mail. To get filing instructions for e-mail comments, 
commenters should send an e-mail to [email protected], and should include 
the following words in the body of the message, ``get form .'' A sample form and directions will be sent in 
reply.
    Parties who choose to file by paper must file an original and four 
copies of each filing. If more than one docket or rulemaking number 
appears in the caption of this proceeding, commenters must submit two 
additional copies for each additional docket or rulemaking number. 
Filings can be sent by hand or messenger delivery, by commercial 
overnight courier, or by first-class or overnight U.S. Postal Service 
mail (although we continue to experience delays in receiving U.S. 
Postal Service mail). The Commission's contractor, Vistronix, Inc., 
will receive hand-delivered or messenger-delivered paper filings for 
the Commission's Secretary at 236 Massachusetts Avenue, NE., Suite 110, 
Washington, DC 20002. The filing hours at this location are 8 a.m. to 7 
p.m. All hand deliveries must be held together with rubber bands or 
fasteners. Any envelopes must be disposed of before entering the 
building. Commercial overnight mail (other then U.S. Postal Service 
Express Mail and Priority Mail) must be sent to 9300 East Hampton 
Drive, Capitol Heights, MD 20743. U.S. Postal Service first-class mail, 
Express Mail, and Priority Mail should be addressed to 445 12th Street, 
SW., Washington, DC 20554. All filings must be addressed to the 
Commission's Secretary, Marlene H. Dortch, Office of the Secretary, 
Federal Communications Commission.
    Parties also must send three paper copies of their filing to Sheryl 
Todd, Telecommunications Access Policy Division, Wireline Competition 
Bureau, Federal Communications Commission, 445 12th Street, SW., Room 
5-B540, Washington, DC 20554. In addition, commenters must send 
diskette copies to the Commission's copy contractor, Qualex 
International, Portals II, 445 12th Street, SW., Room CY-B402, 
Washington, DC 20054.
    Pursuant to Sec.  1.1206 of the Commission's rules, this proceeding 
will continue to be conducted as a permit-but-disclose proceeding in 
which ex parte communications are permitted subject to disclosure.

Attachment

I. Introduction

    1. In this Recommended Decision, the Federal-State Joint Board 
on Universal Service (Joint Board) provides its recommendations on 
issues from the Ninth Report and Order, (64 FR 67416, December 1, 
1999), that were remanded to the Commission by the United States 
Court of Appeals for the Tenth Circuit. The Ninth Report and Order 
established a federal high-cost universal service support mechanism 
for non-rural carriers based on forward-looking economic costs. 
Consistent with the court's decision, the Joint Board recommends 
that the Commission modify the non-rural high-cost support mechanism 
implemented in the Ninth Report and Order by adopting additional 
measures to induce states to ensure reasonable comparability of 
urban and rural rates. We also recommend that the Commission 
implement a supplementary rate review as a check on whether non-
rural high-cost support continues to provide sufficient support to 
enable the states to maintain reasonably comparable rural and urban 
rates. In addition, we recommend continued use of statewide average 
costs to determine non-rural high-cost support. We believe that 
these recommendations will enable the Commission to satisfy the 
court's remand and continue to fulfill Congress's directive in the 
Telecommunications Act of 1996 to preserve and advance universal 
service.

II. Discussion

    2. Based on examination of the record in this proceeding, the 
Joint Board recommends that the Commission modify the non-rural 
high-cost support mechanism implemented in the Ninth Report and 
Order by adopting additional measures that will establish specific 
inducements for states to ensure that rates in all regions of the 
nation are reasonably comparable to rates in urban areas. We also 
recommend that the Commission implement a supplementary rate review 
to assess whether non-rural high-cost support continues to provide 
sufficient support to enable the states to maintain reasonably 
comparable rates. Consistent with the court's decision, our 
recommendations with regard to these additional measures will 
support and complement the Commission's initial decision in the 
Ninth Report and Order. Specifically, we recommend a process that 
includes the following: (1) Continuing use of a national average 
cost benchmark based on 135% of the national average cost; (2) 
funding 76% of state average costs exceeding the national benchmark; 
(3) establishing a national rate benchmark based on a percentage of 
the national average urban rate; (4) implementing state review and 
certification of rate comparability; and (5) providing states the 
opportunity to demonstrate that further federal action is needed 
because current federal support and state actions together are 
insufficient to yield reasonably comparable rates.
    3. The Joint Board's recommendations comprise an integrated 
approach to the complex and interrelated issues referred by

[[Page 71123]]

the Commission. We believe that these recommendations will enable 
the Commission to satisfy the court's remand and continue to fulfill 
Congress's directive to preserve and advance universal service. We 
note that this mechanism calculates support only for non-rural 
carriers. Certain assumptions in this Recommended Decision may not 
make sense for rural carriers. For example, as discussed below, 
while statewide averaging is appropriate in the non-rural mechanism, 
it may not be appropriate for the high-cost mechanism providing 
support to rural carriers.

A. Sufficiency

    4. The Joint Board recommends that, for purposes of non-rural 
high-cost support, sufficiency should be principally defined as 
enough support to enable states to achieve reasonable comparability 
of rates. Sufficiency should be defined based on the relevant 
statutory goals under section 254(b). Thus, the definition of the 
term may vary depending on the underlying purpose of the universal 
service program in question. The principal purpose of the non-rural 
high-cost support mechanism is to provide enough federal support to 
enable states to achieve reasonable comparability of rural and urban 
rates, the principle found in section 254(b)(3). As discussed in 
more detail below, non-rural high-cost support is designed to 
provide high-cost states enough support so that their net average 
costs are reasonably comparable to the national average cost. With 
reasonably comparable net costs, these high-cost states should then 
have the resources to ensure that rural and urban rates within their 
borders are reasonably comparable. The Joint Board recommends below 
that the Commission require states to certify that their rates are 
reasonably comparable or explain why they are not, and provide 
states the opportunity to demonstrate that further federal action is 
needed because current federal support and state action together are 
insufficient to achieve reasonably comparable rates. Accordingly, 
for purposes of non-rural high-cost support, the Joint Board 
recommends that sufficiency be defined as enough support to enable 
states to achieve reasonably comparable rates.
    5. The Joint Board also reaffirms that the statutory principle 
of sufficiency means that non-rural high-cost support should be only 
as large as necessary to achieve its statutory goal. Correct fund 
size is essential to ensure that all consumers benefit from 
universal service.

A. Use of Costs Rather Than Rates To Determine Non-Rural High-Cost 
Support

    6. We explain more fully here why costs rather than rates should 
continue to be the principal basis for determining federal support 
flows among states. Congress adopted section 254 to ensure that, as 
competition develops, there would be explicit support mechanisms in 
place to preserve the fundamental communications policy goal of 
providing universal telephone service in all regions of the nation 
at reasonably comparable rates. Section 254(b)(3) requires 
reasonably comparable rates. This would be a relatively easy 
undertaking if the cost of providing telephone service were 
comparable in urban and rural areas. But costs are not comparable. 
The cost of providing telephone service is largely a function of 
population density and distance. Sparsely populated, rural areas 
have longer telephone loops, the most expensive portion of the 
telephone network, and fewer customers to spread the costs among. In 
some rural areas the cost of providing telephone service may be one 
hundred times greater than costs in urban areas.
    7. Although rates generally are related to costs, states may 
base rates on numerous considerations in addition to cost. For 
example, local rates may vary from state to state depending upon 
each state's local rate design policies; whether or not a carrier's 
rates are set based on a price cap approach; the degree to which 
implicit subsidies may remain within local rates; whether a state 
universal service fund exists; and other factors. Attempting to 
develop cost support levels based principally on rates would 
therefore likely be difficult to implement considering the lack of 
uniformity in local rate design practices and could lead to 
inequitable treatment between states with substantially similar 
costs but different local rate policies.
    8. For these reasons, the use of costs rather than rates to 
determine federal support was central to the Commission's decision 
adopting the non-rural high-cost support mechanism in the Ninth 
Report and Order. We agree with the Commission's past decision that 
cost analysis offers advantages over rate analysis for purposes of 
determining Federal support levels. Cost analysis enables accurate 
comparison of states for purposes of determining federal support 
levels. The Commission has stated that ``[a] state facing costs 
substantially in excess of the national average may be unable 
through any reasonable combination of local rate design policy 
choices to achieve rates reasonably comparable to those that prevail 
nationwide.'' Examining the underlying costs enables the Commission 
to ``evaluate the cost levels that must be supported in each state 
in order to develop reasonably comparable rates.''
    9. While the inducements to state action on rates and 
supplemental rate review contained in this recommendation recognize 
that the ultimate test of rate comparability will be the rates 
customers actually pay for service, the use of costs for determining 
the areas of greatest need establishes a firm foundation for the 
states to fulfill the goals of section 254 of the Act. We recommend 
that the Commission continue to use a cost-based approach as the 
principal means of achieving the statutory goal of rate 
comparability.

B. Use of Statewide Averaging To Reflect Appropriate Federal and 
State Roles in Achieving Rate Comparability

    10. The Joint Board recommends that the Commission continue to 
determine high-cost support for non-rural companies by using 
statewide average costs. We believe that this reflects an 
appropriate division of federal and state responsibility for 
achieving rate comparability for non-rural companies. Because the 
states, not the Commission, set intrastate rates, the states have 
primary responsibility for ensuring reasonably comparable rural and 
urban rates. States tend to rely on either implicit or explicit 
mechanisms to transfer support from low-cost lines to high-cost 
lines within a state.
    11. Despite implicit or explicit state support mechanisms, the 
low-cost areas of some states cannot balance their high-cost areas. 
Although such states could, through their own efforts, achieve 
reasonably comparable rates within their own boundaries, those rates 
would still be high relative to the national average because of the 
states' high average costs. The Commission's primary role is to 
identify those states that do not have the resources within their 
borders to support all of their high-cost lines. The non-rural high-
cost support mechanism achieves this through the comparison of 
statewide average cost to a national cost benchmark. The averaging 
process provides a logical means to assess the relative extent to 
which states can support their high-cost areas by using resources 
from low-cost areas. By shifting funds to states with average costs 
above the national benchmark, the Commission provides federal 
support that is intended to enable high-cost states to set rates 
that are reasonably comparable to all rates across the nation.
    12. The Commission explained in the Ninth Report and Order that 
the non-rural high-cost support mechanism ``has the effect of 
shifting money from relatively low-cost states to relatively high-
cost states.'' The Commission believed that its non-rural support 
mechanism ensured that no state with costs greater than the national 
benchmark would be forced to keep rates reasonably comparable 
without the benefit of federal support. Statewide averaging assigns 
to the states the primary responsibility for ensuring reasonable 
comparability of rates within their borders and permits states to 
use their resources to achieve the goal of reasonable comparability 
within states. We continue to support these policies.
    13. We disagree with the contention of the Rural Utilities 
Service that high-cost customers are being hidden by statewide 
averaging. The Rural Utilities Service was concerned about the 
circumstance in which some customers have high costs but the state 
average is not high enough to qualify for support. The use of 
statewide average costs reflects what we believe to be an 
appropriate policy decision that in such cases the state has the 
primary responsibility and demonstrated ability to ensure rate 
comparability. Federal support is needed when the state, because of 
its high average cost, cannot solve such a problem without imposing 
an undue burden on its own ratepayers.
    14. While statewide averaging is appropriate in the non-rural 
mechanism, it may not be appropriate for the high-cost mechanism 
providing support to rural carriers. Many rural carriers lack the 
economies of scale and scope of the generally larger non-rural 
carriers, as the Rural Task Force established in documenting 
differences that exist between rural and non-rural companies. The 
Commission has stated that

[[Page 71124]]

it intends to ask the Joint Board to conduct a comprehensive review 
of the high-cost support mechanisms for rural and non-rural carriers 
as a whole to ensure that both mechanisms function efficiently and 
in a coordinated fashion. Accordingly, the Joint Board does not 
address the complex issues surrounding high-cost support for rural 
telephone companies in this Recommended Decision. The Joint Board 
emphasizes that the current recommendation is not intended to apply 
to rural companies. Now that the Joint Board has concluded its 
recommended decision on the issues in the court's remand, we look 
forward to a Commission referral of a comprehensive review of the 
rural and non-rural high-cost support mechanisms.

C. Benchmark

    15. Based on examination of the record, the Joint Board 
continues to support the 135% benchmark. The court appeared to 
consider the ability to produce reasonably comparable urban and 
rural rates as a key factor in supporting an appropriate cost 
benchmark. As the court observed, although non-rural high-cost 
support is distributed based on a comparison of national and 
statewide average costs, the benchmark must be ultimately based on 
attainment of the statutory principle of reasonable comparability of 
urban and rural rates. We have noted that the Joint Board and 
Commission have found in prior rulings that current rates are 
affordable and reasonably comparable. These findings are supported 
by a recent General Accounting Office (GAO Report). Based on data 
contained in the GAO Report, it appears that six years after passage 
of the Act the national averages of rural, suburban and urban rates 
for residential customers diverge by less than two percent. We 
believe that the comparability of average rural and urban rates 
supports continued use of the 135% cost benchmark. In addition, the 
Joint Board finds that the current benchmark is empirically 
supported by a cluster analysis and a standard deviation analysis. 
Both of these methods indicate that the 135% benchmark targets 
support to states with substantially higher average costs than other 
states, consistent with the purpose of non-rural high-cost support.
    16. Verizon argues that the 135% benchmark is consistent with 
Congressional intent that federal support be sufficient to maintain 
the range of rates existing at the time the 1996 Act was adopted. We 
agree with Verizon that one of the goals of the 1996 Act was to 
ensure that rates remain reasonably comparable as competition 
develops. Congress was concerned that competition would erode 
implicit support and adopted section 254 to preserve and advance 
universal service. Verizon argues further that rates have not 
changed substantially since 1996, so the range of existing rates, as 
reflected in the GAO Report, should be used to determine what is 
reasonably comparable. Because 95% of rates fall within two standard 
deviations of the mean, Verizon argues that rural rates within two 
standard deviations of urban rates should be considered reasonably 
comparable. Verizon points out that an analysis of the Commission's 
cost model shows that two standard deviations translates 
approximately to a 135% cost benchmark. Thus, Verizon argues that 
rural rates within two standard deviations of urban rates should be 
considered reasonably comparable and that the cost benchmark level 
of 135% is justified because it is nearly equivalent to two standard 
deviations. As discussed below, we agree.
    17. The current benchmark is supported by a standard deviation 
analysis. Standard deviation is a commonly used statistical analysis 
that measures dispersion of data points from the mean of those data 
points. In a normal distribution, data points within two standard 
deviations of the mean will comprise approximately 95% of all data 
points. In other words, use of two standard deviations will identify 
data points that are truly outliers within the sample studied. 
Verizon points out that both the Commission and state commissions 
have adopted this statistical approach as a standard for determining 
parity or comparability. As applied to the cost of non-rural lines, 
the measurement of two standard deviations from the national average 
cost results in approximately 132% of the national average cost. 
Based on this information, the Joint Board concludes that the 135% 
benchmark is a reasonable dividing line separating high-cost states 
from the remainder of average and low-cost states.
    18. The Joint Board used a cluster analysis to determine that 
the states receiving non-rural high-cost support under the current 
135% benchmark are states that have substantially higher average 
costs than other states. Cluster analysis is an analytical technique 
that organizes information around variables so that relatively 
homogeneous groups, or clusters, can be identified. The Joint Board 
used cluster analysis to identify groups of states that had similar 
cost characteristics, thereby warranting different treatment 
regarding universal service support. Specifically, states were 
sorted from lowest- to highest-cost based on statewide average cost 
per loop. Clusters were identified in this ranking if the difference 
in average costs between states was greater than ``cluster split 
differences'' ranging from 2.5 to 0.5. Under this analysis, 
Mississippi was the first to break out into a separate cluster, and 
the second was the District of Columbia. The first group of states 
to break out into a separate rural, high-cost cluster included 
Kentucky, Maine, Alabama, Vermont, Montana, West Virginia and 
Wyoming. The remaining states, ranging from New Jersey to Nebraska, 
formed a separate urban, low-cost cluster. When Mississippi and the 
District of Columbia, the respective high- and low-cost 
``outliers,'' were combined into the two larger clusters, ``cluster 
stability'' was achieved for a wide range of numerical values from 
2.5 to 0.85. ``Cluster stability'' means that the same clusters are 
maintained even as the numerical values are varied, indicating a 
strong similarity among members of the cluster groups. Because 
cluster analysis identifies a high-cost, rural cluster of states 
that matches the group of states currently receiving support under 
the non-rural high-cost support mechanism, the Joint Board finds 
that the cluster analysis empirically supports the current 135% 
benchmark.
    19. Because the standard deviation analysis and the cluster 
analysis both support 135% as a reasonable benchmark, the Joint 
Board recommends continued use of the 135% benchmark. The court 
recognized that the use of any benchmark may be somewhat arbitrary; 
however, choice of a specific, percentage-based benchmark (as 
opposed to a mathematically calculated benchmark based on two 
standard deviations which may result in a different percentage each 
year) provides certainty to the funding process that carriers and 
states desire. Accordingly, the Joint Board recommends continued use 
of a 135% benchmark. The supplemental rate comparability review 
which we recommend will allow the Commission to assess how 
successfully the non-rural high-cost support ensures reasonable 
comparability of rates.
    20. Some commenters suggest that, in light of the court's 
decision, it would be more appropriate to use a benchmark based on 
average urban cost, rather than nationwide average cost. The Joint 
Board recommends that the Commission continue to use a nationwide 
cost benchmark. The national benchmark is intended to ensure that 
each state has a relatively equal ability to achieve reasonable 
comparability of urban and rural rates. We do not agree that an 
urban cost benchmark would better satisfy the statutory comparison 
of urban and rural rates. Like the current mechanism, the urban 
benchmark substitutes costs for rates. In addition, rather than 
comparing rural and urban costs, it compares statewide average costs 
to nationwide urban costs.
    21. The urban benchmark proposal would require more funding or a 
higher benchmark level because urban average costs are lower than 
national average costs. For example, an urban benchmark of 165% 
would yield roughly the same support amounts as the current 135% 
national benchmark. An urban benchmark of less than 165% would 
require more federal support. The GAO Report suggests that more 
federal support is not necessary because urban and rural rates are 
similar. Proponents of the urban benchmark have not explained how 
additional funding produced by an urban benchmark would produce 
reasonably comparable rates, nor have they provided a rational 
justification for setting the benchmark at any particular level.
    22. The urban benchmark proposal is premised in part on the 
argument that the current 135% national benchmark cannot enable rate 
comparability because it is equivalent to about 165% of urban 
average cost, near the 70-80% range of variability that the court 
doubted was reasonably comparable. As explained, however, rates do 
not necessarily equate to costs, so setting a 135% national 
benchmark (or 165% urban benchmark) does not mean intrastate rates 
will vary to the same degree. For the same reason, establishing cost 
support based on an urban benchmark will not ensure that urban and 
rural rates will be reasonably comparable. Because the urban 
benchmark proposal does not improve the operation of the high-cost 
support mechanism, nor address the rate comparability concerns of 
the court, the Joint Board recommends that the current national 
benchmark be retained, supplemented by rate review to ensure 
comparability of urban and rural rates.

[[Page 71125]]

    23. As discussed, a ``step function'' provides gradually more 
support for costs that exceed certain thresholds or ``steps'' above 
the national average. BellSouth supports the 135% benchmark, but 
proposes an additional, lower benchmark to provide some support to 
carriers in states with average costs between 100 and 135% of the 
national average cost. BellSouth proposes a step function as a means 
of distributing support more widely among states and, thereby, 
inducing states to ensure reasonable comparability of urban and 
rural rates. As discussed, the purpose of non-rural high-cost 
support is to provide sufficient support to enable high-cost states 
to develop reasonably comparable rates. Providing additional support 
merely to induce states to ensure rate comparability without 
determining that additional support is necessary may conflict with 
the principle that support should be only as large as necessary. 
Nevertheless, a step function could promote predictability by 
preventing a total loss of federal support if small cost changes 
cause a state's average cost per line to fall below the dollar 
amount of the 135% benchmark in a given year. We believe that use of 
a step function may have benefits and warrants further 
consideration; however, the Joint Board does not recommend that the 
Commission add a step function to the non-rural high-cost support 
mechanism at this time. In light of the need to respond 
expeditiously to the court's remand, the Joint Board expects to 
address the issue of a step function in its comprehensive review of 
the rural and non-rural support mechanisms.

D. Reasonable Comparability and State Inducements

    24. The Joint Board recommends that the Commission implement a 
procedure that will induce states to achieve reasonably comparable 
rates and enable the Commission to take additional action, if 
necessary, to achieve comparable rates. Specifically, the Joint 
Board recommends the Commission expand the current annual 
certification process under section 254(e) of the Act to require 
states to certify that the basic service rates in high-cost areas 
served by eligible telecommunications carriers (ETCs) within the 
state are reasonably comparable to a national rate benchmark. For 
purposes of this state certification process, the Joint Board 
recommends that high-cost areas be defined as all wire centers with 
a line density less than 540 lines per square mile. As part of the 
certification process, all states should be required to compare 
basic service rates based on a standard template. The Commission 
should also establish a ``safe harbor'' whereby a state whose rates 
are at or below a certain rate benchmark may certify that their 
basic service rates in high-cost areas are reasonably comparable 
without the necessity of submitting rate information. However, 
states would have the option of submitting additional data to 
demonstrate that other factors affect the comparability of their 
rates. If a state's rates are more than the rate benchmark, the 
state could request further federal action based on a showing that 
federal support and state actions together were not sufficient to 
yield reasonably comparable basic service rates statewide. Further 
federal actions could include, but are not limited to, additional 
targeted federal support, or actions to modify calling scopes or 
improve quality of service where state commissions have limited 
jurisdiction. A state requesting further federal action must show 
that it has already taken all actions reasonably possible and used 
all available state and federal resources to make basic service 
rates reasonably comparable, but that rates nevertheless fall above 
the benchmark. A state whose basic service rates exceed the rate 
benchmark and that requests further federal action should be 
required to submit rate data in support of its certification, based 
on a basic service rate template. The Joint Board recognizes that it 
may be appropriate to use 135% for the safe harbor rate benchmark, 
but recommends that the Commission further develop the record to 
establish the appropriate rate benchmark for the safe harbor.
    25. The Joint Board believes that this expanded certification 
process meets the court requirement to induce state action to 
achieve rate comparability. With any support mechanism, the proof of 
success must be evaluated not only on whether the mechanism as a 
whole generally achieves rate comparability, but also upon the 
degree and nature of any exceptions. The court criticized the 
Commission for failing to adequately reconcile its conclusion that 
rates were generally comparable in light of instances where state 
rates were reportedly high. Together with federal non-rural high-
cost support, the expanded certification process will ensure that 
rates ``* * * in all regions of the Nation * * * are reasonably 
comparable * * *'' as set forth in section 254(b)(3). The expanded 
certification process encourages states to scrutinize their rates 
using the basic service rate template, to determine whether they are 
reasonably comparable, and if not, to take actions to make them 
reasonably comparable. When state basic service rates are at or 
below the rate benchmark level, then there should be a presumption 
that rates in that state are reasonably comparable to national urban 
rates. This recommended approach affords the states maximum 
flexibility to determine basic service rates. The Commission should 
accord substantial deference to these state certifications.

i. Rate Benchmark

    26. As an initial matter, the Joint Board recommends that the 
Commission base the rate benchmark on the most recent average urban 
residential rate as shown in the Bureau's Reference Book, as 
modified to reflect the most recent changes in subscriber line 
charges (SLC). The average urban rate can be adjusted annually based 
on data from the Bureau's annual rate survey. The Joint Board 
recognizes that it may be appropriate to use 135% for the safe 
harbor benchmark. Use of a 135% rate benchmark is consistent with 
the national average cost benchmark of 135%. The Joint Board 
believes that, since cost-based support is provided to ensure 
statewide average costs do not exceed 135% of the national average, 
most states should be able to maintain average rates below 135% of 
the national average urban rate. Based on the current national 
average urban rate, as adjusted, a 135% rate benchmark would be 
$30.16 per line per month. The Joint Board recommends that the 
Commission further develop the record to establish the appropriate 
rate benchmark for the safe harbor.
    27. The Joint Board emphasizes that any rate benchmark 
established is meant simply as a ``safe harbor'' for the purposes of 
determining rate comparability. The Joint Board does not suggest 
through this Recommended Decision that it is appropriate that any 
rates be increased to that level. The Joint Board recognizes and 
supports the role of state commissions in setting rates within each 
state. The Joint Board recommends requiring that states review only 
residential rate information at this time. The Joint Board suggests 
that it may be appropriate to solicit comment as to whether only 
residential or residential and business rates eventually should be 
reviewed by the states.

ii. Basic Service Rate Template

    28. The Joint Board recommends that the Commission establish a 
basic service rate template for states to use to compare rates. We 
suggest that the basic service rate template should include the 
items contained in the annual rate survey by the Bureau. The Joint 
Board recommends that the template include the following factors: 
the rate for a line with access to the public switched network, 
federal subscriber line charge, state subscriber line charge (if 
any), federal universal fund charge, state universal fund charge (if 
any), local number portability charge, telecommunications relay 
service charge, 911 charges, federal universal service credits (if 
any), state universal service credits (if any) and the federal 
excise tax.

iii. Expanded Rate Certification Process

    29. The expanded state certification process would augment the 
existing state certification under section 254(e) of the Act. The 
existing procedure requires states to certify that all ETCs that 
receive federal universal service funding are using the funds to 
achieve the goals of the Act. The new procedure would expand 
reporting requirements to include a discussion of rate 
comparability. In the expanded certification process, states 
typically would report in one of four ways:
    a. Rates within the state fall below the benchmark and are 
considered by the state to be reasonably comparable. No further 
showing should be required.
    b. Rates are not below the benchmark, but may nevertheless be 
considered reasonably comparable. A state could show that due to 
other factors--for example, additional services included in the 
basic service rate or the method in which the state has targeted 
existing universal service support--the rates above the benchmark 
actually should be presumed reasonably comparable. In the 
alternative, the state could report on actions it intends to take to 
achieve reasonable comparability.
    c. Rates are below the benchmark, but are not reasonably 
comparable. A state may show that even though actual rates are 
within the safe harbor, the price paid for service received results 
in rates and services that are

[[Page 71126]]

not reasonably comparable. In this case, a state could show that 
existing basic service is lacking in some way. For example, the 
state could show that the local calling area size is too small to be 
considered comparable service, and that toll or extended area 
service charges should be included to produce a reasonably 
comparable rate. In addition to explaining why rates within the safe 
harbor should not be considered reasonably comparable, the state 
must also show the actions it has taken or is going to take to 
remedy the discrepancy, prior to requesting additional federal 
actions to achieve reasonably comparable rates.
    d. Rates are above the benchmark and are not reasonably 
comparable. A state could request federal action based on a showing 
that current combined federal and state actions are insufficient to 
produce reasonably comparable rates. If the state asserts that 
existing federal support and state resources are not sufficient for 
the state to attain reasonably comparable rates, the state should be 
required to show that it has already taken all available steps to 
remedy the situation, but that rates remain above the benchmark. If 
the state can make this showing, the Commission would consider 
taking further action to meet the needs of the state in achieving 
reasonably comparable rates.
    30. The Joint Board recommends that states certifying that their 
rates fall at or below the national rate benchmark and are 
reasonably comparable should not be required to submit any 
additional rate information. Any states requesting additional 
federal action should be afforded great flexibility in making their 
presentations, but should be required to fully explain the basis for 
their request. Factors that should be addressed by any such state 
would include, but not be limited to: Rate analysis and a 
demonstration why the state contends that rates are not reasonably 
comparable; any other factors that should be considered in 
evaluating rates; and a demonstration that the state has taken all 
reasonably possible steps to develop maximum support from within the 
state. The requesting state should fully explain how it has used any 
federal support currently received to help achieve comparable rates 
and whether the state has implemented a state universal service fund 
to support rates in high-cost areas of that state. The Joint Board 
recommends the Commission develop exact procedures to be used in 
filing and processing requests for further federal actions. In 
particular, the Joint Board recommends that the Commission establish 
a time limit for consideration of such state requests, to ensure 
that requests will be processed and decided expeditiously.

III. Recommending Clause

    31. This Federal-State Joint Board pursuant to section 254(a)(1) 
and section 410(c) of the Communications Act of 1934, as amended, 47 
U.S.C. 254(a)(1) and 410(c), recommends that the Commission adopt 
the proposals described relating to issues from the Ninth Report and 
Order that were remanded to the Commission by the United States 
Court of Appeals for the Tenth Circuit.

Federal Communications Commission.
William Scher,
Assistant Division Chief, Telecommunications Access Policy Division.
[FR Doc. 02-30164 Filed 11-27-02; 8:45 am]
BILLING CODE 6712-01-P