[Federal Register Volume 69, Number 171 (Friday, September 3, 2004)]
[Notices]
[Pages 53917-53923]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-20163]


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FEDERAL COMMUNICATIONS COMMISSION

[CC Docket No. 96-45; FCC 04J-2]


Federal-State Joint Board on Universal Service Seeks Comment on 
Certain of the Commission's Rules Relating to High-Cost Universal 
Service Support

AGENCY: Federal Communications Commission.

ACTION: Notice; solicitation of comments.

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SUMMARY: In this document, the Federal-State Joint Board on Universal 
Service seeks comment on issues recently referred to it by the 
Commission, relating to the high-cost universal support mechanisms for 
rural carriers and the appropriate rural mechanism to succeed the five-
year plan adopted in the Rural Task Force Order. By this document, the 
Joint Board initiates its review. The Federal-State Joint Board on 
Universal Service invites public comment on whether these rules 
continue to fulfill their intended purposes, whether modifications are 
warranted, and if so, how the rules should be modified.

DATES: Comments are due on or before October 15, 2004. Reply Comments 
are due on or before December 14, 2004.

ADDRESSES: Comments may be filed using the Commission's Electronic 
Comment Filing System (ECFS) or by filing paper copies. See Electronic 
Filing of Documents in Rulemaking Proceedings, 63 FR 24121, May 1, 
1998. See Supplementary Information for additional filing instructions.

FOR FURTHER INFORMATION CONTACT: Ted Burmeister, Attorney, or Sheryl 
Todd, Management Analyst, Wireline Competition Bureau, 
Telecommunication Access Policy Division, (202) 418-7400 TTY: (202) 
418-0484.

SUPPLEMENTARY INFORMATION: 1. In this Public Notice, we seek comment on 
issues recently referred to us by the Commission, relating to the high-
cost universal support mechanisms for rural carriers and the 
appropriate rural mechanism to succeed the five-year plan adopted in 
the Rural Task Force Order, 66 FR 30080, June 5, 2001. In particular, 
the Commission asked the Joint Board to consider whether a universal 
service support mechanism for rural carriers based on forward-looking 
economic cost estimates or embedded costs would most efficiently and 
effectively achieve the goals set forth in the Telecommunications Act 
of 1996. The Commission also asked the Joint Board both to revisit the 
definition

[[Page 53918]]

of ``rural telephone company'' for high-cost universal service support 
purposes and to consider consolidating multiple study areas within a 
State. Finally, the Commission requested that the Joint Board consider 
whether to retain or modify Sec.  54.305 of the Commission's rules, 
which concerns the amount of universal service support for transferred 
exchanges. By this Public Notice, the Joint Board initiates its review. 
As set forth below, we invite public comment on whether these rules 
continue to fulfill their intended purposes, whether modifications are 
warranted, and if so, how the rules should be modified.

I. Issues for Comment

    2. We seek comment below on the issues referred to us by the 
Commission in the Referral Order, 69 FR 48232, August 9, 2004, and seek 
further comment on issues from the Joint Board Recommended Decision on 
Portability. We first seek comment regarding whether the Commission 
should continue to use the statutory definition of ``rural telephone 
company'' to determine which carriers are rural carriers for high-cost 
universal service support purposes. We then seek comment regarding the 
appropriate structure of universal service support mechanisms in areas 
served by rural carriers, including the cost basis of support and the 
method of calculating support. Finally, we seek comment regarding 
whether the Commission should retain, modify, or eliminate Sec.  54.305 
of its rules, which governs high-cost universal service support for 
transferred exchanges.

A. Definition of ``Rural'' for Universal Service Purposes

    3. We seek comment on whether the Commission should continue to use 
the statutory definition of ``rural telephone company'' to determine 
which carriers are rural carriers for high-cost universal service 
purposes. In particular, we seek comment on the extent to which each of 
the four subparts of the definition accurately identifies companies 
that ``generally serve fewer subscribers, serve more sparsely populated 
areas, and generally do not benefit as much from economies of scale and 
scope'' as the large non-rural carriers. For example, approximately 40 
companies serving study areas with more than 100,000 access lines, 
including one company serving over 2 million access lines, self-
certified as rural carriers under subsection 3(37)(D) of the Act. Most 
of these companies are owned by holding companies that have operations 
in many States. On the other hand, companies that serve only one study 
area in one State, but exceed the 100,000 access line threshold in 
subsection 3(37)(C), are considered to be non-rural carriers.
    4. We seek comment on whether the Commission should continue to use 
subsection 3(37)(D) to identify rural carriers for high-cost universal 
service purposes despite the anomalies resulting from carriers self-
certifying under this test. There being no statutory requirement that 
the Commission uses the Act's definition of rural telephone company for 
high-cost universal service purposes, should the Commission simply 
eliminate this test? This likely would ensure that no study area 
serving more than 100,000 access lines would be considered ``rural.'' 
Alternatively, would some other method be preferable? Is there some 
universal service policy objective that would be served by treating a 
carrier with more than 100,000 lines as rural when most of those lines 
are in rural areas? How can we ensure that those policy objectives are 
met? Should the Commission interpret subsection 3(37)(D) to exclude 
carriers that are serving areas that are merely separate, but adjacent, 
communities in an urbanized area?
    5. Specifically, could the Commission interpret ``communities of 
more than 50,000'' in a way that would prevent rural treatment of 
urbanized or suburban areas? When the Commission decided to use Census 
Bureau statistics for legally incorporated localities, consolidated 
cities, and census-designated places to define communities of more than 
50,000, there was no information on the record to indicate that this 
definition would present any problems in the Commission's determination 
of a carrier's status as a rural or non-rural company. The Commission 
declined to adopt an approach proposed by GTE that would have 
differentiated between lines serving metropolitan statistical areas 
(MSAs) and those serving rural areas. We seek comment on whether we 
should use different Census Bureau definitions, such as MSA, urbanized 
area, or urban cluster, to define ``communities of more than 50,000.'' 
Would using any of these broader definitions be either under-inclusive 
or over-inclusive in identifying companies that should be considered as 
rural for high-cost universal service purposes?
    6. We also seek comment more generally on the extent to which the 
Commission should continue to use the other three parts of the 
statutory definition. We seek comment on whether the Commission should 
modify its rural/non-rural definitional framework to permit finer 
distinctions among carriers of different sizes or characteristics. 
Would using finer distinctions among carriers better recognize the 
great diversity among rural telephone companies? Would such 
distinctions be useful in more effectively targeting universal service 
support to rural carriers serving the highest cost areas? For example, 
should the Commission have different high-cost universal service 
support mechanisms for small, medium, and large size companies? How 
should the Commission determine carrier size? What other 
characteristics should the Commission consider in distinguishing among 
carriers?
    7. We seek comment on whether the Commission should continue to 
categorize carriers based generally upon study area size. Although a 
carrier's study area generally corresponds to the carrier's entire 
service territory within a State, for various reasons a carrier may 
have more than one study area per state. To what extent does a carrier 
operating multiple study areas in a given State achieve some economies 
of scale that are not reflected in high-cost support calculations based 
on separate study areas? To what extent is the fact that a single 
company currently has multiple study areas within a State inconsistent 
with the policies underlying the study area freeze? Would considering 
all of a company's study areas within a State for universal service 
support purposes better reflect the appropriate economies of scale 
achieved by the carrier?
    8. We seek comment on whether the Commission should consider 
holding company size, as well as study area size, when identifying 
companies that generally do not benefit as much from economies of scale 
and scope as the large non-rural companies. Many rural carriers are the 
operating subsidiaries of larger holding companies that may provide 
some economies of scale not realized by other non-affiliated rural 
carriers. For example, although mid-sized rural telephone holding 
companies with operations in many States do not have the same buying 
power as the largest non-rural companies, they likely have greater 
economies of scale and scope than very small rural companies with only 
one study area. Should the Commission consider having categories of 
carriers for high-cost universal service purposes that would take into 
account all affiliated companies nationwide?
    9. If the Commission were to differentiate between small, medium, 
and large companies for high-cost universal service purposes, how 
should the Commission define those sizes? Should the Commission 
consider using

[[Page 53919]]

the size categories in subsections 3(37)(B)-(C) of the Act? For 
example, carriers with fewer than 50,000 lines could be considered 
small; carriers with more than 50,000 lines, but fewer than 100,000 
lines, could be considered medium size; and carriers with more than 
100,000 lines could be considered large. To what extent would the size 
categories depend on whether the Commission is considering study area, 
statewide operations, or nationwide operations in determining company 
size? Should size categories include consideration of both study area 
size and total company size? We invite commenters to propose 
alternative size categories, and number of categories, that would take 
into account the significant distinctions and great diversity among 
rural telephone companies.
    10. We seek comment on what carrier characteristics, in addition to 
company size, the Commission should consider for purposes of 
determining how high-cost support should be calculated. To what extent 
should the Commission try to identify carriers that serve rural areas? 
While the test in subsection 3(37)(A) would exclude carriers serving 
urbanized areas, the tests in subsections 3(37)(B) and (C) consider 
only the number of lines. To what extent do these definitions permit 
carriers serving relatively low-cost suburban areas to receive high-
cost support, merely because of their small size? Should a small 
carrier in an urbanized area and a small carrier in a sparsely 
populated rural area be treated the same for high-cost support 
purposes? Should the Commission try to target support more effectively 
to the highest cost rural areas by considering whether the area served 
is rural, as defined in some fashion? Should the Commission try to 
target support to the highest cost rural areas by comparing the costs 
among companies or areas and identifying the highest-cost companies or 
areas as rural? Should the Commission consider providing different 
levels of support depending on the rural nature of the area served? If 
commenters believe that the Commission should consider the type of area 
served for universal service purposes, we ask them to propose how the 
Commission should define ``rural area.''
    11. Within the context of the definition of rural carrier, we seek 
comment on whether the Commission's universal service rules encourage 
carriers to provide quality, affordable services more efficiently. To 
what extent do the Commission's rules encourage carriers serving rural 
areas to achieve economies of scale and scope that may benefit 
consumers? To what extent do the Commission's rules encourage or 
discourage consolidation that may provide economies of scale and scope? 
To what extent does the existence of separate support mechanisms for 
rural and non-rural carriers create incentives or disincentives for 
carriers to achieve economies of scale that permit the efficient 
provision of quality telecommunications to consumers in rural areas at 
rates that are reasonably comparable to those in urban areas?
    12. We also seek comment on the impact of changing the definition 
of rural carriers. It is possible that if a new definition of ``rural'' 
is adopted for purposes of determining high-cost support, some 
companies that are currently designated as rural will instead be deemed 
non-rural. We seek comment on how such companies should be treated. For 
example, should these companies receive support under the same system 
as applies to existing non-rural companies, or should some other 
methodology apply? Should there be a transition period allowing these 
companies to adjust to whatever new rules and support levels may apply?

B. Universal Service Support in Areas Served by Rural Carriers

    13. In this section, we seek comment on how to determine universal 
service support in areas served by rural carriers after the end of the 
RTF plan on June 30, 2006. We first seek comment on how the underlying 
costs that provide the basis for support should be determined. 
Specifically, we seek comment regarding whether forward-looking 
economic cost estimates, embedded costs, or some other method of 
determining costs should be used for rural carriers, how each potential 
method of determining costs should be implemented, and what method of 
determining costs should be used for competitive eligible 
telecommunications carriers (ETCs). Finally, we seek comment on what 
methodology should be used to calculate each rural carrier's support.
    14. We ask that commenters, in analyzing these issues, recognize 
the distinction between the method of determining the cost basis of 
support and the method of calculating support, which together form a 
universal service support mechanism. For example, embedded costs have 
been linked, in the past, to universal service support calculated on a 
study area basis, while forward-looking economic cost estimates have 
been linked to support calculated using statewide averages. There is no 
requirement, however, limiting us to consideration of only those 
combinations. So that we may better understand all of the possible 
options, we encourage commenters to analyze the impact of each 
particular option in isolation. Of course, commenters should also 
identify any benefits or concerns related to particular combinations of 
cost bases and support calculations.
1. Cost Basis of Support
a. Forward-Looking Economic Costs Versus Embedded Costs
    15. We seek comment on what method should be used to determine the 
costs associated with serving a particular area for the purposes of the 
rural support mechanism. In the Universal Service First Report and 
Order, 62 FR 32862, June 17, 1997, the Commission agreed with the Joint 
Board's recommendation that forward-looking economic costs should be 
the basis for universal service support because, unlike embedded costs, 
they provide appropriate incentives for investment, entry, and 
innovation in the marketplace. In the Ninth Report and Order, 64 FR 
67416, December 1, 1999, and Tenth Report and Order, 64 FR 67372, 
December 1, 1999, the Commission implemented a forward-looking support 
mechanism for non-rural carriers. The Commission's methodology, based 
on the forward-looking high-cost synthesis model, has been used to 
determine support for non-rural carriers since January 2000. However, 
in the Rural Task Force Order in 2001, the Commission acknowledged that 
it did not, at that time, have sufficient information to develop a 
forward-looking model that appropriately could be used to estimate 
costs in areas served by rural carriers, and retained a modified 
embedded cost mechanism. Is it possible now to design a forward-looking 
model that would be appropriate to estimate costs for some or all rural 
carriers, or do embedded costs remain a more appropriate basis for 
determining the costs for all rural carriers? If embedded costs remain 
more appropriate, what future actions or events, if any, are necessary 
to make a forward-looking economic cost model viable? Is a forward-
looking economic cost mechanism a viable long-term goal for areas 
served by rural carriers? Are there any other methods for determining a 
rural carrier's costs, besides a forward-looking economic cost model or 
embedded costs, that would be appropriate for universal service 
purposes?
    16. We seek comment on whether a rural support mechanism that bases 
support on forward-looking economic

[[Page 53920]]

cost estimates or on embedded costs more efficiently and effectively 
achieves the Act's goals. Does basing support on forward-looking 
economic costs or on embedded costs better ensure the availability of 
telecommunications services in rural areas that are comparable to those 
in urban areas, in terms of both rates and quality? Does basing support 
on forward-looking economic costs remain integral to providing 
appropriate incentives for investment, innovation, and entry into the 
marketplace? Can embedded costs be utilized in a manner that would 
provide appropriate incentives? We also ask commenters to address the 
competitive and technological neutrality of each method of determining 
the cost basis of support.
    17. How would shifting to a mechanism based on forward-looking 
economic costs affect investment in facilities that are capable of 
providing advanced services? In the Rural Task Force Order, the 
Commission noted that the public switched telephone network is not a 
single-use network. Modern network infrastructure can provide access 
not only to voice services, but also to data, graphics, video, and 
other services. High-cost loop support is available to rural carriers 
``to maintain existing facilities and make prudent facility 
upgrades[.]'' To what extent has the use of embedded costs affected the 
deployment of infrastructure capable of providing advanced services? 
Does the embedded cost mechanism create different incentives to deploy 
facilities that are capable of providing advanced services than the 
forward-looking synthesis model?
    18. While mindful of our caveat that commenters should distinguish 
between the method of determining the cost basis of support and the 
method of calculating support, we seek comment on the extent to which 
the choice of forward-looking economic costs or embedded costs should 
be considered in the context of a specific method of calculating 
support. For example, is there any reason that forward-looking economic 
costs should be utilized only as part of a mechanism that calculates 
support based on statewide average costs? Or should embedded costs only 
be used to compare study area costs to nationwide average cost 
benchmarks? Commenters should explain in detail why certain methods of 
determining costs are particularly appropriate or inappropriate for 
certain methods of calculating support.
    19. We also seek comment on whether both embedded and forward-
looking economic costs can be used when developing support levels. For 
example, if support is based on the results of a forward-looking 
economic cost model, should a company's support be capped at the level 
of support determined under an embedded cost system? Stated another 
way, should support be capped at the lesser of embedded or forward-
looking costs? Would such a system provide sufficient support and 
create proper incentives for investment and efficiency?
    20. We seek comment on whether other factors should be analyzed to 
determine when it is appropriate to use a cost model to determine 
support for a carrier. In particular, we seek comment on whether the 
demographics of the territory served, such as the density of customer 
locations, rather than the lineage of the company or the number of 
lines served should be used to determine whether support should be paid 
under a forward-looking or an embedded cost system. In addition, we 
seek comment on whether the relative cost characteristics of the area 
served should be considered in determining the cost basis of support. 
For example, do embedded costs provide any useful information in 
determining whether using a cost model is appropriate? We seek comment 
on what other factors, in addition to demographics and costs, should be 
considered in making this decision.
    21. Finally, we seek comment on the impact of any proposed changes 
in the rural support mechanism on existing rules that limit the growth 
of support for rural carriers. How would existing capping mechanisms 
that apply to rural carrier support be affected by proposed changes in 
the basis of support for rural carriers? If particular changes in the 
basis of support are adopted, are capping mechanisms still necessary? 
If so, are there alternative mechanisms that would limit growth of the 
fund to sufficient levels, while still promoting efficiency and 
investment?
b. Estimating Forward-Looking Economic Costs
    22. If the Commission ultimately concludes that it should base 
support for at least some rural carriers on forward-looking economic 
costs, we seek comment on how to estimate forward-looking economic 
costs in areas served by those rural carriers. If commenters propose to 
base support on a forward-looking economic cost model, what factors 
should be considered in designing a forward-looking economic cost model 
for areas served by rural carriers? To what extent are these factors 
different, in type or degree, from the factors relevant to a model for 
areas served by non-rural carriers? We ask that commenters address 
these issues generally and emphasize that commenters need not rely on 
the Commission's synthesis model--which is currently used in the non-
rural high-cost support mechanism--to form the basis of their comments. 
We seek comment regarding whether there are other methods of estimating 
forward-looking economic costs. If a commenter contends that some other 
method of estimating forward-looking economic costs would be 
appropriate, it should describe its proposed method in detail.
    23. We also seek comment regarding the synthesis model. The Rural 
Task Force critiqued the synthesis model and found fault with its 
application to rural carriers. What are the major concerns regarding 
the synthesis model with respect to its application to rural carriers? 
To what extent can those concerns be addressed through the modification 
or redesign of the synthesis model? We encourage commenters to discuss 
developments and refinements in cost modeling techniques that have 
occurred since the Rural Task Force evaluated forward-looking costs 
several years ago. Are there forward-looking cost models now available 
that may be superior to the synthesis model for estimating rural 
carriers' costs? Are geocoded data for rural carriers more readily 
available now than in the past?
    24. Should a forward-looking economic cost model for rural carriers 
use different inputs than those used for non-rural carriers? If so, how 
should the inputs differ for rural carriers? Are there additional 
inputs that should be considered? We note that in the non-rural 
mechanism a nationwide set of inputs is used. To what extent should a 
model for smaller carriers use input values that vary by region or 
locality? For example, would using inputs that reflected local or 
regional physical plant limitations, such as soil or rock conditions or 
climate, significantly improve the usefulness of a model for rural 
carriers? Are there other local or regional conditions that could be 
included in a model for rural carriers?
    25. As previously discussed, the Commission has used a forward-
looking cost model as part of the support mechanism for non-rural 
carriers since 2000. When making proposals for appropriate changes to 
the model for rural carriers, commenters should address whether their 
proposals implicate the non-rural model, and if so, how. For example, 
if a commenter proposes that the Commission's synthesis model should be 
modified before being applied to rural carriers, the commenter should 
also explain

[[Page 53921]]

whether such changes are also needed as the model is applied to non-
rural carriers. Is it necessary that the model or model platform that 
applies to rural and non-rural carriers be the same? If not, why not?
    26. Should a forward-looking economic cost model reflect the 
availability of telecommunications provided by ETCs using wireless 
technology? Should there be a single model that estimates costs using 
the lowest cost technology? Should there be a wireless model, in 
addition to a wireline model, that estimates costs only for those ETCs 
that use wireless technology?
    27. If a forward-looking economic cost model is adopted for some or 
all rural telephone companies, how would it be implemented? Would there 
be a transition period, or could it be implemented immediately? Or 
should there be different implementation periods for differently sized 
rural carriers?
c. Measuring Embedded Costs
    28. Assuming that the Commission ultimately concludes that rural 
carriers should continue to receive support based on embedded costs, we 
seek comment on whether changes should be made with respect to how 
embedded costs are determined, or if the current rules should be 
retained beyond the five years of the RTF plan. Commenters that favor 
changes to embedded costs should describe those changes with 
specificity and explain how the proposed changes would be consistent 
with the Act's goals. In particular, we seek comment regarding changes 
that would improve the reliability of the cost data or reduce the 
administrative burdens associated with compiling, filing, and 
processing cost data. Do the Commission's rules create reliable 
accounts of the costs of providing supported services in rural areas? 
What modifications, if any, would improve the incentives for rural 
carriers to invest in their network facilities efficiently? We also 
seek comment on whether there should be any changes to the manner in 
which average schedule companies--which do not currently file actual 
cost data--receive high-cost support.
    29. We also seek comment regarding whether there are any 
alternative methods of developing costs for rural carriers without 
requiring that rural carriers file actual cost data. For example, could 
proxy data like line counts, line density, or other measures be used to 
determine the cost of serving high-cost areas served by rural carriers?
d. Basis of Support for Competitive ETCs
    30. On November 8, 2002, the Commission asked the Joint Board to 
review, among other things, the Commission's rules relating to high-
cost support in study areas in which a competitive ETC is providing 
service. In particular, the Commission sought the Joint Board's review 
of the methodology for calculating support for ETCs in competitive 
areas and asked the Joint Board to address the concerns raised in the 
Rural Task Force Order regarding excessive fund growth if incumbent 
LECs lose a significant number of lines to competitive ETCs. In our 
Recommended Decision in response to the prior referral order, we 
indicated that it would be desirable to ``consider possible 
modifications to the basis of support for all ETCs during the 
`comprehensive review of the high-cost support mechanisms for rural and 
non-rural carriers.' '' We explained that our approach to harmonizing 
the two mechanisms for rural and non-rural carriers will necessarily 
influence our recommendations on the basis of support in competitive 
areas.
    31. We thus again seek comment on the methodology for calculating 
support for ETCs in competitive study areas. Specifically, we seek 
comment regarding whether, if multiple carriers are supported, the 
competitive ETC should receive support based on its own costs, the 
incumbent's costs, the lesser of its own or the incumbent's costs, or 
some other estimate of costs. If the cost characteristics of the 
incumbent and the competitor are different, what are the consequences? 
If support is based on the incumbent's costs and the competitive ETC 
has lower costs, does that provide a fair or unfair competitive 
advantage to the competitive ETC? Alternatively, would providing higher 
per-line support to the incumbent than to the competitive ETC pose a 
regulatory barrier to competitive entry in rural areas? If the 
competitive ETC's costs are higher than the incumbent's, should the 
competitive ETC's support be limited to that provided to the incumbent?
    32. If support should be provided to competitive ETCs based on 
their own costs, how should those costs be determined? Competitive LECs 
are not subject to the Commission's cost allocation rules. Should the 
Commission's cost allocation rules be extended to competitive carriers 
that seek to receive universal service support? How would cost studies 
for wireless carriers be developed? Are there other methods of 
calculating support in study areas with more than one ETC? In providing 
comment, we ask commenters to address the significant changes in the 
marketplace that have occurred over the past several years. We note 
that, in considering issues related to support for competitive ETCs, we 
may find that it is necessary or appropriate to address these issues 
separately from other issues we consider in this proceeding.
2. Calculation of Support
    33. We seek comment on whether the Commission should continue to 
calculate high-cost support for rural carriers based on individual 
carriers' study area average costs. Does the current rural universal 
service support mechanism provide appropriate incentives for investment 
in network facilities and functions used to provide supported services? 
What modifications, if any, would improve the incentives for rural 
carriers to invest in their network facilities efficiently? Does the 
current mechanism, by basing support on per-line costs, create 
inefficiencies by increasing support when rural carriers have declining 
line counts?
    34. The current universal service support mechanisms for rural 
carriers measure investment expenses using the Commission's authorized 
rate-of-return on investment. In addition, forward-looking cost models 
often apply a rate-of-return to a forward-looking rate base. For 
example, the Commission's synthesis model for non-rural carriers uses 
the Commission's authorized rate-of-return as an input for the cost of 
capital. We seek comment on the rates of return that should be used in 
those calculations for rural carriers. Should the Commission use a 
rate-of-return other than that currently used for calculating high-cost 
support for rural carriers? Should the Commission use a rate-of-return 
other than its authorized rate-of-return for the purpose of calculating 
universal service support for rural carriers?
    35. Assuming that some support will continue to be based on 
embedded costs, we also seek comment, for all support mechanisms, on 
whether new limitations should be imposed or existing limitations 
adjusted on particular categories of investment or expense. For 
example, the high-cost loop support mechanism currently limits 
corporate operations expense. We seek comment on whether this 
particular limit remains appropriate or needs to be adjusted. More 
generally, we seek comment on whether federal support programs should 
include similar limitations on corporate operations or other categories 
of expense.

[[Page 53922]]

    36. As demonstrated by the Rural Task Force, the size of the area 
over which costs are averaged and the national average cost benchmark 
used in the non-rural mechanism have more impact on determining overall 
support levels than whether those costs are forward-looking or 
embedded. Similarly, the area over which costs are averaged and the 
national average cost benchmarks used in the high-cost loop support 
mechanism impact overall support levels. Should the Commission consider 
averaging costs over larger areas or smaller areas for high-cost loop 
support and other programs? For example, should the Commission consider 
calculating support based on statewide average costs or wire center 
costs, rather than study areas costs?
    37. We seek comment on the cost benchmark or benchmarks that would 
be appropriate to use in future programs. If the Commission bases 
support on statewide costs, what should be the benchmarks? If the 
Commission continues to base support on study area costs, what should 
be the benchmarks? We also note that the high-cost loop support program 
uses different benchmarks based on the carrier's size. We seek comment 
on whether that distinction should be maintained, and if so, whether 
the differences in treatment of the two groups should remain as large 
as at present.
    38. In the high-cost loop support program, the national average 
unseparated loop cost serves as the basis for comparing costs of 
individual study areas. Since 2001, the national average has been 
defined as $240 per line per year, adjusted for inflation. We seek 
comment on whether this remains an appropriate policy.
    39. We seek comment on whether basing support on statewide average 
costs, as the Commission does in the non-rural mechanism, is more 
consistent with the purposes of universal service support and the 
principles set forth in section 254 of the Act. In reaffirming its 
decision to use statewide average costs in the non-rural mechanism, the 
Commission agreed with the Joint Board that ``the general framework of 
the non-rural mechanism, through the use of statewide average costs, 
reflects the appropriate division of federal and state responsibility 
for determining high-cost support for non-rural carriers.'' The 
Commission explained that ``[s]tatewide averaging effectively enables 
the state to support its high-cost wire centers with funds from its 
low-cost wire centers through implicit support mechanisms, rather than 
unnecessarily shifting funds from other states.'' Does providing 
support to rural carriers based on study area costs rather than 
statewide average costs adequately take into account a state's ability 
to address its own universal service needs? Do states that have many 
rural carriers receiving federal support place greater burdens on the 
federal universal service fund than states that have fewer rural 
carriers? On the other hand, are there historical or policy reasons why 
the Commission should not base rural carrier support on statewide 
average costs? The Joint Board and the Commission have recognized 
``that statewide averaging may not be appropriate for the high-cost 
mechanism providing support to rural carriers.''
    40. We also seek comment on whether basing rural company support on 
wire center costs, rather than study area costs, would more effectively 
target support to rural carriers serving the highest cost rural areas. 
To what extent would basing support on wire center costs require the 
use of a cost model? Because embedded costs are submitted at the study 
area level, it likely would be administratively burdensome to calculate 
embedded costs at the wire center level. Even if the Commission 
continues to base rural company support on embedded costs, should it 
use a cost model to target support to the highest cost wire centers? 
Would targeting support to wire centers be more or less effective than 
rural carriers' current disaggregation plans, which permit targeting 
support below the wire center level? Given that the overwhelming 
majority of rural telephone companies have chosen not to disaggregate, 
is further targeting of rural support necessary or desirable? Could the 
Commission use a cost model in conjunction with embedded costs in any 
other useful manner? For example, could the Commission compare embedded 
costs with forward-looking cost estimates to evaluate whether or not 
support is effectively targeted to rural telephone companies serving 
the highest cost areas?
    41. The local switching support mechanism (LSS) provides support to 
carriers serving 50,000 or fewer lines, without regard to other cost 
characteristics of the carrier. Should the LSS mechanism take switching 
costs into account? Is 50,000 lines in service an appropriate benchmark 
for eligibility for LSS? Does this condition provide appropriate 
incentives for rural carriers to consolidate their operations to a 
level where quality telecommunications services could be provided more 
efficiently? Is there a continued need to provide support for carriers 
with high switching costs, or do other high-cost mechanisms provide 
sufficient support for such carriers?
    42. We seek comment on whether the high-cost loop support mechanism 
should be merged with local switching support. Additionally, we seek 
comment regarding whether carriers that experience high transport costs 
should receive support. Non-rural carriers receive support for high-
cost loops, switching and transport pursuant to the non-rural high-cost 
mechanism. Would there be benefits to moving rural carriers to a single 
embedded cost mechanism that includes support for high-cost loops, 
switching and transport?

C. Support for Transferred Exchanges

    43. Under the Commission's current rules, a carrier that acquires 
exchanges from an unaffiliated carrier receives universal service 
support for those acquired exchanges at the same per-line support 
levels for which the exchanges were eligible prior to the transfer. The 
Commission adopted this rule in its Universal Service First Report and 
Order in response to its concern that until universal service support 
for all carriers is based on a forward-looking economic cost 
methodology, potential universal service support payments might unduly 
influence a carrier's decision to purchase exchanges from another 
carrier. The high-cost support mechanisms that are subject to the 
limitations in section 54.305 include rural carrier high-cost loop 
support, LSS, non-rural carrier high-cost model support, and interim 
hold-harmless support for non-rural carriers. In its Rural Task Force 
Order, the Commission modified this rule to permit an acquiring rural 
carrier to receive additional support (i.e., ``safety valve'' support) 
for substantial investments it made in its acquired exchanges. 
Specifically, the safety valve mechanism enables rural carriers 
acquiring access lines to receive additional high-cost loop support to 
account for post-acquisition investments made to enhance the 
infrastructure of and improve the service in the acquired exchanges.
    44. If the Commission concludes that it should maintain separate 
mechanisms for rural and non-rural carriers, we seek comment on whether 
the Commission should retain, repeal, or further modify Sec.  54.305 of 
its rules. We ask commenters to discuss the costs and benefits of 
retaining this rule in its current form and whether more effective 
alternatives exist to ensure that carriers do not purchase exchanges in 
order to maximize the amount of universal service support that they 
receive while

[[Page 53923]]

not discouraging rural carriers, including those defined as such in 
this proceeding, from acquiring high-cost exchanges from carriers with 
low average costs. We also request comment on whether the safety valve 
mechanism provides sufficient incentives for investment in acquired 
exchanges.

II. Request for Comment

    45. Pursuant to Sec. Sec.  1.415 and 1.419 of the Commission's 
rules, 47 CFR 1.415, 1.419, interested parties may file comments on or 
before October 15, 2004, and reply comments on or before December 14, 
2004. Comments may be filed using the Commission's Electronic Comment 
Filing System (ECFS) or by filing paper copies. See Electronic Filing 
of Documents in Rulemaking Proceedings, 63 FR 24121, May 1, 1998.
    46. Comments filed through the ECFS can be sent as an electronic 
file via the Internet to http://www.fcc.gov/cgb/ecfs/. 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.
    47. 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).
    48. The Commission's contractor, Natek, 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 than 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, Office of the Secretary, Federal Communications Commission. 
In addition, one copy of each pleading must be sent to each of the 
following: The Commission's duplicating contractor, Best Copy and 
Printing, Inc, 445 12th Street, SW., Room CY-B402, Washington, DC 
20554; Web site: http://www.bcpiweb.com; phone: 1-800-378-3160; Sheryl 
Todd, Telecommunications Access Policy Division, Wireline Competition 
Bureau, 445 12th Street, SW., Room 5-B540, Washington, DC 20554; e-
mail: [email protected].

Federal Communications Commission.
Marlene H. Dortch,
Secretary.
[FR Doc. 04-20163 Filed 9-2-04; 8:45 am]
BILLING CODE 6712-01-P