Telecommunications: Federal and State Universal Service Programs 
and Challenges to Funding (04-FEB-02, GAO-02-187).		 
                                                                 
"Universal service" means providing residential customers with	 
affordable, nationwide access to basic phone service. The	 
Telecommunications Act of 1996 extended support for universal	 
service to eligible schools, libraries, and rural health care	 
providers. Universal service programs are generally funded by	 
mandatory contributions from telecommunications companies. New	 
technologies, however, are putting this funding source in	 
jeopardy. The Federal Communications Commission (FCC) has issued 
many orders designed to implement the act's universal service	 
reforms. The Universal Service Administration Company runs the	 
day-to-day operations of federal universal service programs on	 
FCC's behalf, although FCC retains responsibility for oversight  
and ensuring compliance with its rules. At the state level,	 
public utility commissions generally regulate rates for local and
long-distance phone service and implement universal service	 
programs. Public utility commissions subsidize local phone	 
service from the rates set for urban and business phone service  
and for "vertical" services, such as caller ID and call waiting. 
Although the use of digital technologies and internet protocol	 
networks for communications has risen rapidly during the past	 
decade, the providers of these services are not required to	 
contribute to the universal service fund. As these new voice	 
services gain in popularity, funding for universal service may	 
begin to decline. Considerable debate has arisen over whether the
current regulatory framework for funding universal service--which
relies on interstate telecommunications revenue--should be	 
revised in light of digital communications.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-187 					        
    ACCNO:   A02721						        
  TITLE:     Telecommunications: Federal and State Universal Service  
Programs and Challenges to Funding				 
     DATE:   02/04/2002 
  SUBJECT:   Customer service					 
	     Information technology				 
	     Regulation 					 
	     Telecommunication					 
	     Telecommunication industry 			 
	     Telephone						 
	     Utility rates					 
	     Interstate Telecommunications Relay		 
	     Services Fund					 
                                                                 
	     Lifeline Program					 
	     Schools and Libraries Program			 
	     Universal Service Fund				 

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GAO-02-187
     
United States General Accounting Office

GAO Report to the Ranking Minority Member, Subcommittee on
Telecommunications and the Internet, Committee on Energy and Commerce, House
of Representatives

February 2002

TELECOMMUNICATIONS

Federal and State Universal Service Programs and Challenges to Funding

GAO-02-187

           United States General Accounting Office February 2002

Accountability Integrity Reliability 
Federal and State Universal Service

Highlights Programs and Challenges to Funding

Highlights of GAO-02-187, a report to the Ranking Minority Member,
Subcommittee on Telecommunications and the Internet, Committee on Energy and
Commerce, House of Representatives.

Why GAO Did This Study What GAO Found

GAO was asked to provide an Federal and state universal service programs
have helped make
overview of current federal and telephone service affordable to a wide range
of beneficiaries: low-income
state universal service support and hearing-and speech-impaired customers;
schools, libraries, and rural
programs and to discuss the health care providers; and rural localities
where the costs of providing
potential impact of emerging telephone service are high. The funding
mechanisms for these programs
Internet-based voice generally depend on the revenues of telecommunications
carriers. The
communications on how these emergence of new Internet-based voice
communications may pose
programs are funded. The long-challenges to how these programs are funded in
the future.
standing goal of universal
service-affordable residential Federal universal service programs are funded
by mandatory
telephone service for all contributions made by telecommunications carriers
and certain other
Americans-has resulted in a providers of telecommunications. The amount of
the carriers'
variety of federal and state contributions is a percentage, approved by FCC,
of their interstate and
support programs. Over the international telecommunications revenues.
Carriers can and often do
years, these programs have pass these costs to their customers. State
universal service programs,
evolved as the telephone which supplement the federal programs, also can be
funded with fees
industry's structure changed and that are passed on to consumers. In
addition, states promote universal
universal service benefits were service through various rate-setting
strategies, such as setting business
extended to new groups, such as rates significantly higher than residential
rates in order to subsidize
schools and libraries. residential customers.

Under current federal regulations, revenues from Internet services are not
included in the calculations for universal service contributions. Although
this new technology is not widespread yet, it may eventually become an
attractive alternative and could affect the revenue base from which
universal service programs are funded. Some industry analysts question the
long-term viability of the current funding mechanisms for universal service
and believe that these mechanisms should be reassessed in light of the
changing telecommunications environment.

FCC agreed with the information presented in the report.

Universal Service: Current Funding Mechanisms and Beneficiaries

This is a test for developing highlights for a GAO report. The full report,
including GAO's objectives, scope, methodology, and analysis is available at
www.gao.gov/cgi-bin/getrpt?GAO-02-187. For additional information about the
report, contact Peter Guerrero (202-512-2834). To provide comments on this
test highlights, contact Keith Fultz (202-512-3200) or E-mail
[email protected].

Contents

Letter 1

Background 2
Five  Federal   Programs  Are  Designed  to   Further  Universal  Service  4
States   Implement    a   Variety   of   Programs    Designed   to   Further

Universal Service 12
States Use Several Rate-Setting Mechanisms to Promote Affordable
Basic Local Telephone Service 14
Converging Communications Technologies Pose Long-Term

Challenges to Federal Funding of Universal Service 18
Conclusion 24
Scope and Methodology 25
Agency Comments 26

Appendix I Description of Sample Design, Local Telephone

Rates, and Estimated Costs of Providing Service 28

Subsidies in Local Telephone Rates 28
Sample  Design  for  Gathering   Local  Telephone  Rate  and  Cost  Data  28
Local Telephone Rates 31
The   Cost  of   Providing   Local  Telephone   Service  and   FCC's  Hybrid

Cost Proxy Model 32

Appendix II Aggregate Results of Survey of Public Utility Commissions

Appendix III State-Level Universal Service Programs

Appendix IV Local Telephone Rates

Appendix V GAO Contacts and Staff Acknowledgments 60

GAO Contacts 60
Acknowledgments 60

Tables

Table 1: Summary of the Federal Universal Service Programs 8

Table 2: Presence of State-Level Universal Service Programs for Each State
and the District of Columbia 47 Table 3: Residential and Single-Line
Business Monthly Tariff Local Telephone Rates for Sampled Places by State 49

Figures

Figure 1: Universal Service Funding Mechanisms and Beneficiaries

Figure 2: State-Level Universal Service Programs in all 50 States and the
District of Columbia

Figure 3: Average Residential Rates and Estimated Costs for Suburbs and
Rural Places (Percent Difference from Central City)

Figure 4: Average Monthly Single-Line Business and Residential Local
Telephone Rates for Central City, Suburb, and Rural Places

6 13

16

17

Abbreviations

ETC eligible telecommunications carrier
FCC Federal Communications Commission
IP Internet Protocol
MSA Metropolitan Statistical Area
NECA National Exchange Carrier Association
TRS Telecommunications Relay Services
USAC Universal Service Administrative Company

United States General Accounting Office Washington, DC 20548

February 4, 2002

The Honorable Edward J. Markey
Ranking Minority Member
Subcommittee on Telecommunications and the Internet
Committee on Energy and Commerce
House of Representatives

Dear Mr. Markey:

Universal service traditionally has meant providing residential customers
with affordable, nationwide access to basic telephone service. Two factors
pose challenges for achieving universal service. First, low-income
households subscribe to basic telephone service at lower levels than
households with higher incomes. For example, while approximately 94
percent of all households have telephone service, only 80 percent of
households with incomes below $5,000 have telephone service. Second, as
population density decreases, the cost of providing basic telephone
service increases. Rates based on cost would be higher for customers in
rural areas than for customers in more densely populated areas. As a
result, universal service programs traditionally targeted support to low-
income customers and customers in rural and other areas where the costs
of providing basic telephone service are high. Through the
Telecommunications Act of 1996, the Congress extended universal service
support to include services for eligible schools, libraries, and rural
health
care providers. Universal service programs are generally funded through
mandatory contributions from telecommunications companies. However,
6 years after the 1996 act, emerging technologies pose challenges for long-
term funding of these programs.

Because of your interest in universal service policy, you requested that we
provide information on (1) the federal universal service programs and how
they operate; (2) the state universal service programs and how they
operate; (3) how states set local telephone rates among various types of
customers and services to promote affordable service and how rates and
costs vary across urban, suburban, and rural areas; and (4) how telephone
service via Internet-based technology is developing and its potential
impact on funding universal service programs.

To respond to the first objective, we interviewed officials from the Federal
Communications Commission (FCC) and two not-for-profit organizations
that administer the day-to-day operations of federal universal service

programs within FCC's framework of orders and rules. We also reviewed
relevant documents regarding the funding and operation of the federal
universal service programs. To assess state-level universal service
programs, we surveyed 51 public utility commissions in all 50 states and the
District of Columbia regarding their universal service programs. We asked
the commissions whether their states operated various universal service
programs and how those programs are funded. We received responses from all
commissions. For the third objective, we asked the commissions about various
aspects of their rate-setting mechanisms and about the rates for local
telephone service in a sample of places throughout each state. In addition,
we used a model developed by FCC that provides estimates of the cost of
providing local telephone service to discern how cost varies across urban,
suburban, and rural areas. Finally, to respond to the fourth objective, we
conducted semi-structured interviews with industry participants and
academics familiar with the development of telephone service via
Internet-based technology and researched the technical and regulatory
aspects of the provision of these services. Our scope and methodology are
discussed in more detail at the end of this letter.

                                 Background

Title 1 of the Communications Act of 1934 sets forth the nation's
telecommunications policy, including making communication services available
"so far as possible, to all the people of the United States." Early efforts
by FCC, state regulators, and industry to promote universal service
generally began in the 1950s.1 At that time, increasing amounts of the costs
associated with providing local telephone service were recovered from rates
for long distance services. This had the effect of lowering local telephone
rates and raising long distance rates, which was intended to make basic
local telephone service more affordable. Because American Telephone and
Telegraph Company (AT&T) provided both nationwide long distance service and
local telephone service to approximately 80 percent of the nation's
telephone subscribers, universal service was largely promoted by shifting
costs between different customers and services.

1In 1949, the Congress amended the Rural Electrification Act (REA) to
authorize the REA Administrator to make low-interest loans to extend and
improve telephone service in rural areas.

Following the divestiture of AT&T's local telephone companies in 1984,2 FCC
made several changes to universal service policy. First, the costs
associated with local telephone service could no longer be shifted
internally within AT&T. FCC therefore implemented federal access
charges-fees that long distance companies pay to local telephone companies
to originate and terminate long distance telephone calls over the local
telephone network. Access charges were intended to not only recover the cost
of originating and terminating long distance telephone calls over the local
telephone network, but also to subsidize local telephone service. Second,
FCC initiated several federal programs that targeted support to low-income
customers to bring the rates for basic telephone service within their reach.
At this time, federal universal service programs were for the most part
funded through charges imposed on long distance companies.

Twelve years after divestiture, the Congress made significant changes to
universal service policy through the Telecommunications Act of 1996. First,
the 1996 act provided explicit statutory support for federal universal
service policy. Second, the 1996 act extended the scope of federal universal
service-beyond the traditional focus on low-income consumers and consumers
in rural and high-cost areas-to include eligible schools, libraries, and
rural health care providers. Third, the 1996 act altered the federal
mechanism for funding universal service. Every telecommunications carrier
providing interstate telecommunications services was required to contribute
to federal universal service, unless exempted by FCC; and their
contributions were to be equitable, nondiscriminatory, and explicit. In
addition, FCC was authorized to require any other providers of interstate
telecommunications to contribute if the public interest so requires.
Contributions from both sources are deposited into the federal Universal
Service Fund, from which disbursements are made for the various federal
universal service programs.

Both the federal and state governments implement universal service programs.
This dual federal-state implementation of universal service

2In 1974, the Department of Justice (DOJ) brought an antitrust suit against
AT&T, alleging that the company was engaging in anticompetitive behavior.
DOJ and AT&T entered into a consent decree that required AT&T to divest its
local telephone companies.

Five Federal Programs Are Designed to Further Universal Service

arises from sections 2(b) and 254 of the Communications Act of 1934.3 At the
federal level, FCC has issued numerous orders to implement the universal
service reforms enunciated in the 1996 act. The Universal Service
Administrative Company (USAC)4 administers, on behalf of FCC, the day-to-day
operations of federal universal service programs, although FCC retains
responsibility for overseeing the operations of the programs and ensuring
compliance with its rules. At the state level, public utility commissions
generally regulate local telephone rates and rates for intrastate long
distance services. Additionally, these commissions implement many universal
service programs initiated at the state level.

At the federal level, universal service programs target support to high-cost
areas, schools and libraries, low-income customers, and rural health care
providers. In addition, another program-Telecommunications Relay Services
(TRS)-administered by the National Exchange Carrier Association (NECA)
furthers universal service by providing hearing-and speech-impaired
customers with functional equivalent access to telephone services.5 USAC and
NECA administer two funds, the Universal Service Fund and the Interstate TRS
Fund, respectively, into which specified companies deposit contributions and
from which USAC and NECA distribute funds for the High Cost, Schools and
Libraries, Low Income, Rural Health Care, and TRS programs.

In the year 2000, NECA and USAC disbursed6 approximately $4.45 billion for
the five federal programs. NECA disbursed $47 million to the 11 providers
that offer interstate TRS. USAC disbursed approximately $4.4 billion for the
four programs that it administers. To receive universal

3Section 2(b) assigns responsibility for intrastate telephone rate setting
to state governments. Section 254 directs both FCC and the states to take
the steps necessary to promote universal service.

4USAC is a subsidiary of the National Exchange Carrier Association (NECA).
NECA was, at one point, the temporary administrator of the federal universal
service programs.

5The TRS program is mandated in title IV of the Americans with Disabilities
Act and is codified in section 225 of the Communications Act of 1934. While
not included in section 254 of the Communications Act with other universal
service programs, we nonetheless include the TRS program in our discussion
of universal service because the program helps to make telephone service
available to individuals who otherwise might not receive service.

6USAC reports the amount paid to and due to service providers, while NECA
reports payment obligations. We refer to both as disbursements when
reporting the program amounts for the year 2000.

service support from USAC, a common carrier must be designated as an
eligible telecommunications carrier (ETC).7 State commissions have the
primary responsibility for making the ETC designation. Section 214(e)(1) of
the act requires that, to be designated an ETC, the common carrier must (1)
offer the services that FCC identified as eligible for universal service
support throughout the service area for which the designation is received;8
(2) advertise the availability of those services; and (3) use at least some
of its own facilities to deliver those services. In addition to ETCs,
Internet service providers and equipment vendors can receive support from
USAC for Internet access and internal connections associated with the
schools and libraries program.

Federal universal service programs and TRS are not funded with annual
appropriations; rather, funding comes from mandatory contributions made by
various telecommunications companies pursuant to the act.9 These
contributions can be, and it appears that many of these contributions are,
passed on to customers, sometimes in the form of a line item on customers'
monthly telephone bills. For the TRS program, NECA generally collects funds
from every common carrier that provides interstate telecommunications
services, based on each carrier's interstate end-user telecommunications
revenues. For the federal universal service programs, USAC collects funds
from telecommunications carriers and certain other providers of interstate
telecommunications, based on these providers' interstate and international
end-user telecommunications revenues, in accordance with FCC regulations.10
There are several exceptions to FCC's contribution regulations for the
federal universal service programs. Based on interim guidance from FCC,
wireless providers may elect to contribute

7In some instances, providers of eligible services without an ETC
designation can receive support from USAC for the Schools and Libraries and
Rural Health Care programs.

8These services include single-party service; voice grade access to the
telephone network; Touch-Tone service or its equivalent; access to emergency
services, operator services, long distance service, and directory
assistance; and toll limitation service.

9Funding also comes from certain other non-common carrier providers of
interstate telecommunications that FCC has required to contribute by
regulation because the public interest so requires.

10On a quarterly basis, USAC estimates the funding necessary for the four
programs that it administers and the total interstate and international
end-user telecommunications revenues. Based on these estimates, FCC approves
a "contribution factor" that is applied to each telecommunications carrier's
interstate and international end-user telecommunications revenue from the
previous 6 months to determine its contribution.

based on certain "safe harbor" percentages.11 These safe harbor percentages
range from 1 to 15 percent, depending on the type of service provided. FCC
also has implemented rules and guidelines meant to reduce administrative
burdens for interstate companies whose annual contributions would be less
than $10,000. These companies are not required to make contributions to
USAC. Furthermore, companies with interstate end-user telecommunications
revenues that constitute less than 8 percent of their combined interstate
and international end-user telecommunications revenues are required to make
contribution to USAC, based on their interstate revenues only. Some
companies, who currently are treated as providers of "information services,"
are not required to make contributions to universal service. For example,
providers of some new technologies that are beginning to substitute for
traditional interstate telecommunications services, such as telephone
service via Internet-based technology, are not required to contribute to
universal service, as shown in figure 1.

Figure 1: Universal Service Funding Mechanisms and Beneficiaries

              Source: GAO analysis of FCC and NECA documents.

11 The safe  harbor percentages are  intended to  approximate the carrier 's
percentage  of   interstate  and international  end-user  telecommunications
revenue.

In table 1, we provide a summary of the federal universal service

12

programs.

12The Rural Utilities Service (RUS) in the Department of Agriculture also
operates two programs that provide telecommunications-related assistance.
RUS operates a loan program to provide funding to build and maintain rural
telephone systems and a grant and loan program for distance learning and
telemedicine.

         Table 1: Summary of the Federal Universal Service Programs

    Programs and
    subprograms         Program description     Administrator Intended beneficiaries
   (1) High Cost     Assists customers living                  All customers living in
                     in high-cost, rural,           USAC                         high-
                     or remote areas through                    cost, rural, or remote
                     financial support to                                       areas
                        telephone companies,
                          thereby lowering
                      rates for local and long
                         distance service.

* High-Cost Loop Support Assists rural local telephone companies with high
local loop costs. Support provided for the intrastate portion of the local
loop.

* High-Cost Support Assists non-rural local telephone companies with high
costs, based on FCC's Hybrid Cost Proxy model of forward-looking costs.
Support provided for the intrastate portion of the costs.

* Local-Switching Support Assists local telephone companies serving 50,000
or fewer customers. Support provided to offset a portion of the local
switching costs.

* Long-Term Support Assists local telephone companies subject to
rate-of-return regulation that participate in NECA's Common Line Pool with
high local loop costs. Support provided for the interstate portion of the
local loop.

* Interstate Access Support Assists local telephone companies subject to
price-cap regulation with high costs. Support provided for the interstate
portion of the network.

* Interstate Common Line Assists local telephone companies subject

Support to rate-of-return regulation with high costs. Support provided for
the interstate portion of the network.

   (2) Schools and            Assists eligible schools and
     Libraries                          libraries through USAC   Public and private
   (Federal E-Rate                                                kindergarten through
      Program)        discounted telecommunications and                          12th
                           information services. Discounts       grade schools with
                                            available for
                     local and long distance telephone            endowments less than
                     service,                                                     $50
                     Internet access, and internal                million; libraries
                     connection                                         whose
                                projects (e.g., wiring and        budgets are not part
                                       networking schools                        of a
                     and libraries). Discounts are                 school's budget
                     between 20
                               and 90 percent.

Amount paid or due to service providers in 2000

       Eligibility How support reaches beneficiaries Service provider

Based on size and cost characteristics of the companies providing service to
customers Support allows eligible telephone companies to charge lower
telephone rates than otherwise would be available to customers in high-cost,
rural, or remote areas.

                             ETC $2.22 billion

Rural companies with local loop costs exceeding 115 percent of the national
average Support allows rural companies to charge lower rates for intrastate
services (e.g., local telephone rates). Non-rural companies in states with a
statewide average cost per line that exceeds 135 percent of the national
average Support allows non-rural companies to charge lower rates for
intrastate services (e.g., local telephone rates). Small companies serving
Support allows small companies to charge

50,000 or  fewer customers lower rates for  intrastate services (e.g., local
telephone rates).

Rate-of-return regulated Support allows companies subject to rate-companies
that participate in of-return regulation to charge lower rates for NECA's
Common Line Pool interstate access services.

Price-cap regulated companies with high costs

Rate-of-return regulated companies with high costs

Support allows companies subject to price Program took effect July 1, cap
regulation to charge lower rates for 2000 interstate access services.

Support allows companies subject to rate-Program adopted October 11,
of-return regulation to charge lower rates for 2001, for implementation on
interstate access services. July 1, 2002; funding not

included in total for High Cost

programs

Based on economic Eligible companies are reimbursed for Providers of local
$1.65 billion
disadvantage of the population providing discounted services to schools and
long distance
served by the school or library and libraries. services; Internet
as measured by the number of access services;
students eligible to participate and internal
in the national school lunch connections
program and designation of the
location of the school or library
as urban or rural

     Programs and subprograms Program description Administrator Intended
                               beneficiaries

   (3) Low Income Assists qualifying low-income consumers USAC Low-income
                                 consumers

through discounted installation and monthly telephone services and free toll
limitation service.

* Link-Up Reduces installation fees for qualifying low-income consumers.
Installation fees are reduced 50 percent, up to $30. On tribal lands, an
additional $70 is available.

* Lifeline Support Reduces monthly fees for qualifying low-income consumers.
Depending on matching support from the state, monthly fees are reduced
between $5.25 and $11.35. On tribal lands, an additional $25 reduction per
month is available.

* Toll Limitation Service Provides free blocking/limitation service to
low-income consumers to prevent or limit the amount of long distance
telephone calls.

(4) Rural Health Care Assists health care providers located in rural USAC
Citizens and health care areas through discounts for providers in rural
areas telecommunications services. Discounts are provided to make rates for
facilities in rural areas reasonably comparable to those in nearby urban
areas.

(5) Telecommunications Relay Assists hearing-and speech-impaired NECA
Hearing-and speech-impaired

Services (TRS) customers through communications customers and customers
assistants relaying the content of calls wishing to communicate with between
users of text telephones and users hearing- and speech-impaired of
traditional telephones. TRS is intended to customers provide "functionally
equivalent" access to the telephone network for hearing- and speech-impaired
individuals.

Amount paid or due to Eligibility How support reaches beneficiaries Service
provider service providers in 2000

Based on the consumer's income or factors directly related to income, with
criteria established by the state, unless the state does not have a program,
in which case eligibility is based on participation in one of several
federal programs Carriers receive support to provide discounted or free
services for low-income consumers.

                              ETC $523 million

Carriers are reimbursed for providing discounted installation services.

Carriers are reimbursed for providing discounted telephone service.

Carriers are reimbursed for providing toll limitation service.

Public and not-for-profit health Companies are reimbursed for providing
Providers of $5 million care providers located in rural discounted services
to eligible rural health telecommunications areas care providers. services
Companies receive support to provide relay Providers of TRS $47 million
(Obligated) service.

Note 1: USAC is the Universal Service Administrative Company.

Note 2: NECA is the National Exchange Carrier Association.

Note 3: ETC is Eligible Telecommunications Carrier.

Note  4: Rural  local telephone  companies are  generally smaller  and serve
fewer customers than non-rural local telephone companies.

Note 5:  The local  loop is the  connection between the telephone  company's
facility and the customer's premises.

Note  6: A  switch is  a piece  of equipment  that routes  telephone signals
between users.

States Implement a Variety of Programs Designed to Further Universal Service

Note 7: NECA's Common Line Pool is a mechanism where NECA submits a single,
averaged tariff for interstate access charges to FCC on behalf of typically
small local telephone companies. NECA distributes the revenues derived from
the access charges paid for by long distance companies and end-user
subscriber line charges (SLC) to participating companies.

Source: GAO's analysis of FCC, USAC, and NECA information.

In addition to the federal programs, state governments implement a variety
of programs designed to further universal service. In figure 2, we
illustrate the number of states, including the District of Columbia that
implement various universal service programs, based on our survey of public
utility commissions (see app. III for program availability by state); we
only considered state programs that are independent of or supplement a
similar federal program.13 Some state-level programs target similar
beneficiaries as the federal programs, including deaf and disabled
customers, low-income customers, and schools and libraries. There are
several reasons for this. First, FCC ensures that TRS services are
available, sets minimum standards, and certifies state-level TRS programs.
Second, the federal Lifeline Program for low-income customers provides
additional matching support for state-level programs. In addition, some
states also have programs for high-cost and small local telephone companies
and state communications networks that allow schools, libraries, government,
and community facilities to receive discounted services.

13For example, the federal Lifeline Program provides support to customers in
all states. However, for purposes of reporting the number of states with a
Lifeline Program, we only include states that have an independent program or
provide additional funding beyond the federal funding.

Figure 2: State-Level Universal Service Programs in all 50 States and the
District of Columbia

Source: GAO's survey of public utility commissions (May - Sept. 2001).

We found that state governments use a variety of approaches to implement
state-level universal service programs. Public utility commissions implement
many of the programs we identify in figure 2. In our survey of commissions,
the two most common approaches that state governments use to fund
state-level universal service programs are (1) a fee or tax levied directly
on consumers and (2) a fee or tax levied on telecommunications or other
service companies that the companies are permitted to pass on to consumers.

States Use Several Rate-Setting Mechanisms to Promote Affordable Basic Local
Telephone Service

In addition to state-level universal service programs, there are several
rate-setting mechanisms that public utility commissions use to subsidize
various aspects of local telephone service. These rate-setting mechanisms
subsidize rural, residential, and basic telephone service. These subsidies
are made possible through rates set for urban and business telephone service
as well as rates set for "vertical" services-such as caller identification
(caller ID) and call waiting.

Many States Use Geographic Rate Averaging and Value-of-Service Pricing to
Promote Lower Local Telephone Rates in Rural and High-Cost Areas

Geographic rate averaging and value-of-service pricing are intended to
promote lower rates in rural and high-cost areas. With geographic rate
averaging, customers across a geographic area pay the same local telephone
rate, although rates for residential customers are generally different than
rates for business customers. These geographic areas can be either small or
large, in some instances there is a single geographic area for the entire
state. If the geographic area is large, customers in areas where the cost of
providing service is low, typically urban areas, will pay rates higher than
they would if the area was small and only included customers with low costs.
Conversely, customers in areas where the cost of providing service is high,
typically rural areas, will pay rates lower than they would if the area was
small and only included customers with high costs. With value-of-service
pricing, local telephone rates are based on the number of customers that can
be called with local telephone service. In rural areas where there are fewer
customers to call, rates are set at a relatively low level because the
perceived "value" of the local telephone service is lower than in more
populous areas where there are greater numbers of customers to call with
local telephone service.

We found that state regulators use both geographic rate averaging and
value-of-service pricing in setting local telephone rates. In our survey of
public utility commissions, 15 commissions report that local telephone rates
are the same throughout the service territory of the largest local telephone
company in their state. That is, there is a single, large geographic area
over which the commission averages local telephone rates. Among other
commissions, 19 report that local telephone rates for the largest local
telephone company are the same in areas with a similar geographic size or
number of lines, thereby implying that there are multiple geographic areas
over which the commission averages local

telephone rates.14 In 40 states where one or more local telephone companies
have multiple geographic areas over which regulators average rates, 22
commissions report using value-of-service pricing to establish the relative
rates for different geographic areas. Thus, local telephone rates in some
states will be lower in rural and less populous areas, relative to rates in
urban areas.

The relationship between local telephone rates and estimates of the cost of
providing service in central city, suburban, and rural places illustrates
the influence of geographic rate averaging and value-of-service pricing. In
figure 3, we illustrate how local telephone rates and the estimated cost of
providing service for suburban and rural places differs from the rates and
estimated costs for central city places.15 We gathered these data from
public utility commissions and FCC's Hybrid Cost Proxy Model (see app. I for
a discussion of our sample design, rate data, and FCC's model). There is no
statistical difference in residential local telephone rates between central
city, suburban, and rural places. However, the estimated cost of providing
local telephone service, as measured by FCC's model, increases significantly
from central city places to suburban and especially rural places. The
estimated cost of providing local telephone service is approximately 61
percent higher and 195 percent higher in suburban and rural places,
respectively, than in central cities. The results in figure 3 are consistent
with geographic averaged rates and value-of-service pricing- local telephone
rates on average do not appear to be highly related to the differences in
the cost of providing service.

14The remaining state commissions reported two different types of geographic
averaging. Nine commissions reported that rates for the largest local
telephone company are set the same within broad geographic areas (e.g.,
urban, suburban, and rural). The remaining eight commissions reported that
some other type of geographic averaging approach was used for the largest
local telephone company in their state.

15We classified places in Metropolitan Statistical Areas (MSA) as either
central city or suburb. The Census Bureau reports a central city for each
MSA. We classified all other places within an MSA, excluding the central
city, as suburbs. We classified rural places as those outside an MSA.

Figure  3: Average  Residential Rates  and Estimated  Costs for  Suburbs and
Rural Places (Percent Difference from Central City)

Source: GAO 's survey of  public utility commissions (May  - Sept. 2001) and
GAO's analysis of FCC's Hybrid Cost Proxy Model.

Single-Line Business Rates Exceed Residential Rates in Most States

Local telephone rates for single-line business customers are almost
uniformly set above rates for residential customers. In our survey of public
utility commissions, all states except Wyoming report that single-line
business rates are higher than residential rates.16 In figure 4, we report
the average residential and single-line business local telephone rates for
central city, suburb, and rural places (see app. I for a discussion of our
sample design and rate data). For every type of place, average single-line
business rates are approximately twice as high as residential rates.
Conversely, the cost of providing service is not likely to be significantly
different between business and residential customers.17 Thus, these results

16In Wyoming, business and residential local telephone rates are the same.

17Business customers are generally located closer to the telephone company's
facilities than are residential customers. This would imply that the cost of
providing service to the average business customer is less than that for the
average residential customer. Alternatively, most business telephone calls
occur during busy hours (e.g., 10:30 a.m. to 11:30 a.m.). This concentration
of telephone calls during the busy hours necessitates more switching
capacity than would otherwise be necessary and implies higher costs
associated with business customers. These effects most likely offset each
other.

indicate that single-line business customers are subsidizing residential
local telephone service because their rates are approximately twice as high
as residential customers' rates for local telephone service while the cost
of providing the service is most likely to be similar.

Figure 4: Average Monthly Single-Line Business and Residential Local
Telephone Rates for Central City, Suburb, and Rural Places

Note: These are the monthly local telephone tariff rates. The rates do not
include the Federal Subscriber Line Charge, which was capped at $5.00 per
month for each primary residential and single-line business line, federal
and state surcharges to fund universal service programs, federal and state
taxes, and long distance charges.

Source: GAO's survey of public utility commissions (May - Sept. 2001).

Vertical Services Often Subsidize Basic Local Telephone Service

Many public utility commissions establish rates for vertical services to
subsidize basic local telephone service. Vertical services are options that
customers can add to their basic local telephone service. Examples of
vertical services include caller ID, call waiting, and conference calling.
In our survey of public utility commissions, 40 commissions reported that
they regulate the rates for vertical services, and 32 of these commissions
reported that rates for vertical services are set above the cost of
providing the service to subsidize basic local telephone service.

Intrastate Long Distance Access Charges May Also Subsidize Local Telephone
Service

Converging Communications Technologies Pose Long-Term Challenges to Federal
Funding of Universal Service

Some public utility commissions use intrastate long distance access charges
to subsidize local telephone service. This subsidy can benefit local
telephone service by allowing the local telephone company to cover the costs
not recovered from local rates. Twenty-three commissions reported setting
intrastate access charges above cost to subsidize basic local telephone
service, while 21 commissions reported that intrastate access charges do not
subsidize basic local telephone service.18

The last decade has seen a rapid increase in the use of digital technologies
and Internet Protocol (IP) networks for communications. Applications now
exist to convert traditional analog voice services to digital, to break the
digital voice into "packets," and to send the voice packets over the
Internet or other IP networks. However, under the current regulatory
structure, providers of these IP voice services do not have to contribute to
the Universal Service Fund for the IP voice services. Therefore, as these
new voice services gain popularity, concerns exist of whether federal
funding levels for universal service might eventually decline. In addition,
there is much debate about whether the current federal regulatory framework
for funding universal service-with its reliance on interstate
telecommunications revenues-is appropriate for digital communications, where
voice, video, and data are carried in the same manner over networks that
lack intrastate/interstate designations.

"IP Telephony" Is a Small In the last few years, Americans have increasingly
been communicating but Growing Service in through applications, such as
e-mail, that make use of the Internet or IP Both Business and networks. Some
of these applications allow for real-time voice Residential Markets
communications, much like a traditional telephone call. Several different

names have been applied to these applications, including "IP telephony,"

"voice over IP (VoIP)," "Internet telephony," "packet voice," and others.19

18Five other states either have no intrastate long distance service (e.g.,
the District of Columbia) or are uncertain or have made no determination of
whether the intrastate long distance access charges are subsidizing basic
local telephone service.

19We asked the experts we interviewed for their definitions of the various
names given to IP voice applications. Several said that "IP telephony" and
"VoIP" often are used interchangeably in the industry. A number of the
experts considered "Internet telephony" to be a subset of IP telephony,
referring specifically to calls sent using the Internet rather than a
private data network. Those we spoke with differed in their terminology
preferences. We have chosen to use "IP telephony" in this report because it
is one of the more widely recognized of the various terms.

Essentially, these applications convert analog voice to digital and then
break the digital information into "packets," which are routed over an IP
network.20 Packets may be reassembled at the location of the recipient or
converted back to analog prior to reaching the recipient. If packet loss and
delay can be controlled and minimized, the quality of an IP telephony call
can be comparable to the traditional public switched telephone network.21

IP telephony is already in use today in a variety of ways. Experts with whom
we spoke said that the first uses of IP telephony were by consumers making
voice calls using their personal computers,22 and by companies providing
international long distance calling. At times, the companies providing
international service are wholesalers to the traditional long distance
carriers. Thus, consumers may make an overseas call that is at some point
converted to digital without ever knowing about the conversion, and usually
without knowing that their call was handled by a company other than their
own long distance service provider.23 We were told that international
calling is the most prevalent use of IP telephony today. Even so, a number
of the experts we interviewed estimated that IP telephony represents only a
tiny percentage of current worldwide voice traffic.24

Several of the industry representatives with whom we spoke believed that
business users are likely to drive the deployment of IP telephony services.
Industry representatives said that there were some cost savings to be
realized from a transition to IP telephony, particularly because voice and
data would be delivered over a single network, avoiding the duplicative
deployment and maintenance costs of separate voice and data networks. For
companies with a large number of branch offices, IP telephony gives

20In some cases, this is the Internet; and in others, it is a private data
network.

21We were told by a few of the industry representatives we interviewed that
quality problems still exist with IP telephony when it is sent over the
Internet.

22This application requires that each user has the correct software, as well
as special hardware such as speakers and a microphone, and is online.

23A couple of our interviewees pointed out that customers do not generally
care about the technology behind their telephone calls-only that calls are
completed and are of an acceptable quality.

24It was mentioned that exact numbers for the amount of IP telephony traffic
are not determined because "a packet is a packet," meaning it is unknown
whether any particular packet is voice, video, or data. Thus, there is no
accurate measurement of IP telephony usage.

them the ability to keep their interoffice calls completely off the
traditional telephone network.25 We were told that an even more significant
benefit of IP telephony is the range of new applications it allows and the
ease with which these new applications can be introduced. One industry
representative stated that IP telephony should not be thought of as merely a
substitute for traditional telephone service-it has much greater potential
for new features and functions than traditional telephone service. For
example, "virtual intelligent assistants" may provide many more options for
handling incoming calls than today's voice mail, and Web sites may allow
consumers to contact a customer service representative through a voice call
from their computer.

Although business users will likely be the first to adopt IP telephony
technologies, residential users will continue to have the opportunity to use
IP telephony in the long-haul services, such as international calls and
domestic long distance. Local telephone companies, however, have significant
investment in their current networks and technologies and may be slower to
roll out new services, such as IP telephony. Nonetheless, several people
whom we interviewed mentioned the possibility that Windows XP[tm] may
promote residential use of IP telephony, because it has the ability to turn
instant messaging into a voice application. Also, competitive voice service
providers, such as cable television companies, may use IP telephony over
their networks.26 Several industry representatives cautioned, however, that
IP voice services are not yet a market substitute for traditional
residential voice service. IP telephony might not provide lifeline services
during emergency situations, such as power outages, and does not generally
offer E-911 functionality.27 The offering of IP telephony as a competitive
residential telephone service, therefore, may be limited to secondary line
service at the present time and will likely be bundled with other offerings,
such as video or data services.

25These systems usually involve the installation of IP telephony telephones.
For  calls  outside the  company, equipment  linking to the  public switched
telephone network is retained.

26One equipment provider that we interviewed said there had been more than a
dozen trials of IP telephony by cable systems.

27E-911, or enhanced  911, means the location of the caller is automatically
identified to the emergency personnel receiving the call.

IP Telephony May Not Be an Immediate Threat to Federal Funding of Universal
Service but May Threaten Its Long-Term Viability

The assessment and recovery of universal service contributions are governed
by a statutory framework established by Congress in the Communications Act
of 1934 (as amended by the Telecommunications Act of 1996). The
Communications Act is "stovepiped," or compartmentalized, meaning various
types of services (e.g., telephone, cable, wireless) are held to different
rules and regulations.28 As discussed earlier, funding for federal universal
service generally comes from providers of interstate "telecommunications
services," but may also be assessed upon other providers of interstate
telecommunications if the public interest so requires. IP telephony is an
application that has, to date, been treated in effect as an "information
service."29 Therefore, companies offering IP telephony are not currently
required to make contributions to the universal service fund from revenues
for IP telephony services.30 As the deployment of IP telephony technologies
moves forward, and more

28For further explanation of the stovepiped structure of the Communications
Act of 1934 see our report, Telecommunications: Technological and Regulatory
Factors Affecting Consumer Choice of Internet Providers (GAO-01-93, Oct. 12,
2000), p. 19.

29It has never been determined by the Commission whether IP telephony is an
information service or a telecommunications service. FCC has stated that
certain forms of "phone-to-phone" IP telephony services lack the
characteristics that would render them "information services" within the
meaning of the statute, and instead bear the characteristics of
"telecommunications services." However, FCC found it was not appropriate to
make any definitive pronouncements in the absence of a more complete record
focused on individual service offerings. In the Matter of Federal-State
Joint Board on Universal Service, CC Docket No. 96-45, Report to Congress,
FCC 98-67 (released Apr. 10, 1998) at paragraph 14.

30There has been some debate on whether companies providing IP telephony
services are engaging in "regulatory arbitrage," or using the regulatory
environment to one's competitive advantage. For example, a service provider
would be engaging in regulatory arbitrage if it chose to offer IP telephony
specifically to avoid including universal service charges on its customers'
bills, and thereby perhaps being able to offer less expensive service than
its traditional telephony competitors who are legally obligated to
contribute to the Universal Service Fund. Several of the experts with whom
we spoke noted that regulatory arbitrage had in fact driven the use of IP
telephony in international calling. The current international accounting
rates system is bypassed with IP telephony, keeping the cost of service
provision lower. Regarding the Universal Service Fund, however, companies
that exclusively provide international services are exempt from universal
service contributions. Thus, we were told that the "information service"
exemption was not a motivating factor for these international service
providers to have selected IP telephony technology. For domestic service
providers, some experts believed that companies have elected to deploy IP
telephony technologies because they see convergence of voice and data as the
future of the industry-not to avoid contributions to the Universal Service
Fund.

businesses31 and consumers begin to substitute IP telephony for traditional
telephone service, the question arises as to whether a decline in the
funding for universal service could result. Some of the industry
representatives we interviewed believed that IP telephony is not an
immediate threat to universal service funding because there is so little IP
telephony today.32 While providers of IP telephony do not pay into the fund
at present, this has yet to produce a perceptible financial impact on the
fund.

One industry representative pointed out that, as a practical matter, it
makes little sense to try to extend the current system-a system based on the
amount of interstate telecommunications revenues-to information services
such as IP telephony. First, measurement of IP voice revenues would require
a means of identifying which packets are voice packets. We were told that,
at present, packets are sometimes labeled "priority," but they are not
identified as "voice," "data," or "video."33 We were told such packet
identification likely could be done, although several experts pointed out
that just because it is technologically possible does not mean it is
affordable or that it makes sense from a network engineering standpoint.
Second, measurement of IP voice revenues would require a means of
identifying packets as "intrastate" or "interstate." We were told that this
makes little sense in the world of the Internet, where geographic boundaries
are difficult to determine.

However, a number of the industry representatives we interviewed believed
that increasing amounts of voice communications will be deemed "information
services" because of the manner in which they are provided. Under the
current universal service regulatory structure, which primarily relies on
assessment of revenues from interstate "telecommunications services," this
transformation might eventually have a noticeable and negative effect on the
universal service funding mechanism. But universal

31A representative of several large users of telecommunications explained
that the universal service charges on the telephone bills of large companies
can run anywhere from 8 to 12 percent of the total telephone bill. Thus, IP
telephony calls, which do not include universal service charges, can mean
savings of around 10 percent on corporate telephone bills. This savings,
along with the flexibility of the network, and the new features and
functions offered, may make IP networks attractive to large business end
users.

32We were given a wide range of views about how much voice traffic would be
IP telephony a few years from now, from just a few percent to more than 20
percent.

33Several people we interviewed noted that there could be privacy concerns
surrounding the labeling of packets as "voice."

service has not been a static system. As the telecommunications industry has
evolved, so too has the funding mechanism for universal service. For
example, the system for universal service financing changed when the long
distance market became competitive following the divestiture of AT&T and has
continued to be modified as new providers of voice services, such as
wireless carriers, entered the market and were required to pay into the
fund. The classes of supported services have also changed over the years.
With the establishment of the Schools and Libraries Program, Congress chose
to cover "advanced services" such as Internet access. Nonetheless, the basic
concept of relying primarily on revenues from interstate telecommunications
services for the financing of explicit universal service programs or for the
implicit subsidization of certain rates has remained in place.34

In the face of growing usage of IP telephony, there are mixed views on
whether information service providers should begin contributing to the
Universal Service Fund. Some in the industry argue that the system should be
technologically neutral-if it looks like traditional voice service, it
should be treated as such and generate contributions to the Universal
Service Fund. Others are concerned that the present regulatory system not be
force-fit onto information service providers. Among the experts we
interviewed, there was agreement that universal service is a valid policy
goal.35 This led several of those with whom we spoke to point out that these
new technologies may actually promote the goals of universal service by
lowering the costs of providing communications technologies to all
Americans.

34Some experts we spoke with thought that, ideally, universal service funds
should come from the nation's general tax revenues. Others suggested it be
recovered from the 3 percent telephone excise tax, originally placed on
American telephone bills in 1898 to fund the Spanish-American War. One
carrier we met with had a detailed plan calling for a flat, per-line fee
that would appear as a line item on every telephone bill-one rate for
residential and a higher rate for businesses. Another carrier felt the
current method of collecting, based on reported revenues, was sound and that
a flat, per-line fee would shift universal service contributions to local
exchange carriers because they have the most easily ascertainable line
count. In April 2001, the Consumer Energy Council of America released a
report that explored several alternative funding options for universal
service programs (see Universal Service: Policy Issues for the 21st Century,
Consumer Energy Council of America, Mar. 2001).

35However, some experts disagreed with aspects of the current High Cost
Program. They felt it should be a means-tested program-that we should not
subsidize everyone who chooses to live in a rural area irregardless of their
ability to afford the higher cost of telephone service in such areas.

Conclusion

Whether Congress and FCC should continue to rely largely on providers of
interstate telecommunications services for the funding of federal universal
service is an increasingly important debate as the world continues to
migrate to digital communications technologies and IP networks. In several
of our recent reports, we noted that convergence in communications markets
is presently occurring as many different communications networks are
redesigned or built to provide an array of services.36 Ultimately, these
various networks will each carry voice, video, and data packets. Yet, as we
said in October 2000, the Communications Act was originally structured and
remains a "stovepiped," or compartmentalized, law in which particular
communications services are governed under particular provisions of the law.
The resulting regulatory structure holds different types of networks to
different rules-even when they are used to provide similar services.
Fundamentally, universal service funding has been carried out under laws and
regulations pertaining to "telecommunications services." It is unclear what
rules should apply for voice applications that could be defined as
"information services," or more importantly, whether such service
distinctions should remain. We previously noted that policymakers may face
challenges in deciding how, under the present structure of communications
law, functionally similar services are governed over different networks. IP
telephony and its effect on universal service funding is another example of
this increasing dilemma.

FCC has undertaken a proceeding to examine how to streamline and reform both
the manner in which it assesses carrier contributions to the Universal
Service Fund and the manner in which carriers may recover those costs from
their customers. Most commenters in FCC's proceeding urged the Commission to
retain some form of a revenue-based assessment based on interstate and
international revenues.37 A few commenters argued

36See Telecommunications: The Changing Status of Competition to Cable
Television (GAO/RCED-99-158, Jul. 8, 1999); Telecommunications: Development
of Competition in Local Telephone Markets (GAO/RCED-00-38, Jan. 25, 2000);
Telecommunications: Technological and Regulatory Factors Affecting Consumer
Choice of Internet Providers (GAO-01-93, Oct. 12, 2000); and
Telecommunications: Characteristics and Competitiveness of the Internet
Backbone Market (GAO-02-16, Oct. 16, 2001).

37There was disagreement among commenters, however, on whether assessments
should be on a collected, gross-billed, or projected revenue basis. The
Commission also sought comment on the de minimus exception, the limited
international revenues exception, fund sufficiency, recovery of
contributions, and more. See In the Matter of Federal-State Joint Board on
Universal Service, CC Docket No. 96-45, Notice of Proposed Rulemaking, FCC
01-145 (released May 8, 2001) (NPRM).

for moving to a flat fee, line-item approach. Although FCC has not yet
issued an order in this proceeding, the Commission noted that it has an
obligation to ensure that the universal service contribution system remains
consistent with the statute, is reflective of current market trends and
technologies, is simple for carriers to administer, and does not shift more
than an equitable share of carrier contributions to any class of
customers.38 Nonetheless, the basic framework of funding universal service
via contributions from "every telecommunications carrier that provides
interstate telecommunications services" is a statutory mandate established
by Congress. This statutory framework also permits FCC to require any other
provider of interstate telecommunications to contribute, if the public
interest so requires. If it was determined that universal service
contributions should also be collected from companies and services operating
outside that framework-or if the funding framework itself was found to be
inadequate going forward-FCC or Congress might need to revisit how best to
provide universal service to all Americans.

Scope and Methodology

To provide information on the federal universal service programs, we
interviewed officials from FCC, NECA, and USAC. We also reviewed documents
from FCC, NECA, and USAC regarding the funding and operation of the federal
universal service programs. Additionally, we reviewed documents from
academics and industry participants regarding the federal universal service
programs.

We conducted a mail survey of public utility commissions to gather
information on state-level universal service programs and rate-setting
mechanisms. In the survey, we asked questions about state programs for deaf
and disabled consumers; high cost and small local telephone companies;
low-income consumers; and discounted telecommunications services for
schools, libraries, and other government-related facilities. We pretested
the survey with staff at five commissions to help ensure that (1) the
questions in the survey were clear and unbiased, (2) the terms used in the
survey were precise, and (3) the survey was not unduly burdensome. The
survey was mailed to staff at public utility commissions in all 50 states
and the District of Columbia. We received 51 completed questionnaires, a
response rate of 100 percent. We conducted the survey from May to September
2001.

38NPRM at paragraph 6.

In addition, to provide information on local telephone rates and the costs
of providing service, we asked public utility commissions for local
telephone rates and used a model developed by FCC that provides
forward-looking estimates of the cost of providing local telephone service.
We asked commissions for the local telephone rates for residential and
single-line business customers in randomly selected places throughout each
state and the District of Columbia (see app. I for a discussion of the
sample and local telephone rate data). We also used a model developed by FCC
to determine the estimated costs of providing service in the same randomly
selected places (see app. I for a discussion of FCC's model and our use of
the model).

Finally, to assess the development of telephone service via Internet-based
technology and the future funding of universal service programs, we
conducted semistructured interviews with 26 industry participants and
academics familiar with the development of IP telephony. These industry
participants included three providers of IP telephony services, two Internet
backbone providers, two long distance companies, one Regional Bell Operating
Company, six equipment manufacturers, five academics, two industry analysts,
three associations involved in IP telephony issues, one government agency,
and one representative of large business end-users. In addition, we reviewed
relevant documents from various government, industry, and academic sources.

We performed our review from January through November 2001 in accordance
with generally accepted government auditing standards.

We provided a draft of this report to FCC for their review and comment and
subsequently spoke with the Chief of FCC's Accounting Policy Division. FCC
officials stated that they were in agreement with the information presented
in the report, and provided technical comments that were incorporated as
appropriate.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 7 days after
the date of this letter. At that time, we will provide copies to interested
congressional committees, the Chairman of FCC, and other interested parties.
We also will make copies available to others upon request.

Agency Comments

If you or your staff have any questions about this report, please call me at
(202) 512-2834. Key contributors to this report are listed in appendix V.

Sincerely yours,

Peter Guerrero
Director, Physical Infrastructure Issues

Appendix I: Description of Sample Design, Local Telephone Rates, and
Estimated Costs of Providing Service

Subsidies in Local Telephone Rates

Sample Design for Gathering Local Telephone Rate and Cost Data

In this appendix, we provide information on (1) the objectives and
limitations in measuring subsidies in local telephone rates, (2) the sample
design we used to select locations to gather local telephone rate and cost
data, (3) the local telephone rate data that we gathered, and (4) our use of
the Federal Communications Commission's (FCC) Hybrid Cost Proxy Model for
estimates of the cost of providing local telephone service.

As part of our analysis on how public utility commissions set local
telephone rates, we were asked to report on rates throughout the United
States. Additionally, we were asked to examine how rates and the costs of
providing local telephone service varied throughout the United States. To
respond to these objectives, we gathered data on local telephone rates and
the estimated costs of providing service for sampled locations throughout
all 50 states and the District of Columbia.

Due to limitations in the available data, we did not make a comparison
between local telephone rates and the estimated cost of providing service to
determine the amount of a subsidy in local telephone service for particular
locations. There are two reasons why we do not make this comparison. First,
we only consider the monthly tariff rates for local telephone service, which
exclude several additional charges paid for by consumers that provide
additional funding for local telephone service. Second, the costs of
providing local telephone service are estimated costs, based on FCC's model
of an efficient provider using current technology at current prices. The
estimated costs are used by FCC to determine and allocate federal universal
service support, not to price network elements, and are not the local
telephone companies' accounting costs. Additionally, industry participants
identified several weaknesses associated with the model regarding cost
estimates for specific locations.

To gather local telephone rate and cost data, we began with all 50 states
and the District of Columbia. State governments, typically through a public
utility commission, regulate many aspects of local telephone service within
their states. These public utility commissions regulate the rates for local
telephone service that many companies charge residential and business
customers. Because public utility commissions regulate local telephone
rates, we began our data gathering at the state level. This was necessary to
collect data on local telephone rates and also to ensure that we had
observations from every rate-setting jurisdiction, in this case every state.

Appendix I: Description of Sample Design, Local Telephone Rates, and
Estimated Costs of Providing Service

Within each state, we sampled places39 from three broad categories
associated with population density. While public utility commissions
regulate local telephone rates, these rates can vary between different areas
within states. To incorporate the different rates within states, we sampled
places within each state. We chose to conduct a sample, as opposed to a
census, because of the large number of places. In addition, the cost of
providing local telephone service varies inversely with population density.
To incorporate the differences in the cost of providing local telephone
service, we defined and sampled places from three broad categories that
roughly represent different categories of population density: central city,
suburb, and rural places.40 We classified places in metropolitan statistical
areas (MSA)41 as either central city or suburb. The Census Bureau reports a
central city for each MSA. We classified all other places within an MSA,
excluding the central city, as suburbs. Finally, we classified rural places
as those outside an MSA.

To sample the central cities and suburbs, we first identified all MSAs
within each state and the District of Columbia. We arrayed the MSAs within
each state by population and established state-specific strata, based on the
MSA population. For most states, we established three strata (large, medium,
and small MSA). For states with many MSAs (California, Florida, Michigan,
and Texas), we established four or five strata, depending on the number of
MSAs in the state. Within each stratum, we randomly selected an MSA. For
states with three or fewer MSAs, we simply selected all the MSAs in the
state. This sampling approach ensured that we included at least three MSAs
from each state, except for states where there were

39As defined by the Census Bureau, a place is a concentration of population,
either legally bounded as an incorporated place or delineated for
statistical purposes as a census designated place.

40Because places are defined by political boundaries, there can be instances
where the population density and categories of places that we have developed
are not consistent. For example, some central cities encompass very large
geographic areas and therefore have relatively few and less densely
populated suburbs, while some central cities are relatively small
geographically and therefore have many suburbs, some of which can be very
densely populated.

41The general concept of an MSA is that of a core area containing a large
population nucleus, together with adjacent communities having a high degree
of economic and social integration with that core. The current standards
provide that each newly qualifying MSA must include at least one city with
50,000 or more inhabitants, or a Census Bureau-defined urbanized area (of at
least 50,000 inhabitants) and a total metropolitan population of at least
100,000 (75,000 in New England).

Appendix I: Description of Sample Design, Local Telephone Rates, and
Estimated Costs of Providing Service

fewer than three MSAs, and that we included MSAs with varying populations
from each state.

Once the MSAs for each state and the District of Columbia were selected, we
selected the central city, suburb, and rural places. The central cities were
selected by default-the Census Bureau reports the central city for each MSA.
Therefore, once the MSAs were selected, the central cities were also
selected. We randomly sampled one place, excluding the central city, within
the selected MSAs for inclusion as the suburb.42 We also only included
central city and suburban places that were served by local telephone
companies identified by FCC as non-rural carriers. Non-rural carriers are
local telephone companies that do not meet the definition of rural
carrier.43 This exclusion was necessary because FCC uses its Hybrid Cost
Proxy Model only for non-rural carriers in each state. Finally, we generally
sampled three rural places in each state; two rural places served by a
non-rural carrier and one rural place served by a rural carrier.

Because we used a sample to develop the estimates of local telephone rates
and estimated costs presented throughout this report, each estimate has a
measurable precision, or sampling error, that may be expressed as a plus or
minus figure. A sampling error indicates how closely we can reproduce from a
sample, the results that we would obtain if we were to take a complete count
of the population we are analyzing using the same measurement methods. By
adding the sampling error to and subtracting it from the estimate, we can
develop upper and lower bounds for each estimate. This range is called a
confidence interval. Sampling errors and confidence intervals are stated at
a certain confidence level-in this report, 95 percent. For example, a
confidence interval at the 95-percent confidence level means that in 95 out
of 100 instances, the sampling procedure used would produce a confidence
interval containing the universe value we are estimating.

42In some instances, MSAs cross state boundaries. When this occurred, the
places within the MSA, but outside the state, were excluded. Approximately
3.8 percent of the U.S. population lives in these excluded places.

43A rural carrier is a local telephone company that (1) provides common
carrier service in a study area that does not include either any
incorporated place of 10,000 inhabitants or more or any territory included
in an urbanized place, (2) provides telephone exchange service to fewer than
50,000 access lines, (3) provides telephone exchange service to any local
exchange carrier study area with fewer than 100,000 access lines, or (4) has
less than 15 percent of its access lines in communities of more than 50,000
on the date of enactment of the Telecommunications Act of 1996 (Feb. 8,
1996).

Appendix I: Description of Sample Design, Local Telephone Rates, and
Estimated Costs of Providing Service

Local Telephone Rates

There are three common forms of service provided by local telephone
companies: unlimited service, message service, and measured service. With
unlimited service, the customer pays a monthly recurring service charge and
pays no additional charge for an unlimited number of local telephone calls
each month. Message service also includes a monthly recurring service
charge; however, the customer also pays a charge for each local telephone
call, or message. With measured service, the customer pays a monthly
recurring service charge and pays a charge for each local telephone call,
with the charge determined by the duration of the call. The monthly
recurring service charge is lower with message and measured service than
with unlimited service, reflecting the charge imposed on the local telephone
calls with message and measured service. In addition, message and measured
service can include a monthly allowance, a certain number of local calls,
units, or dollars, that the customer can incur before the per-call charges
begin.

We gathered local telephone rate data for the places selected in our sample
from public utility commissions. We asked for rates (the recurring service
charge, monthly allowance, and cost of a 5-minute business day call) for
both residential and single-line business customers. For each type of
customer, we asked for the unlimited service rate and the message or
measured service with the lowest rate.

Throughout the report, we provide information and analysis based on local
telephone tariff rates for unlimited service. These rates do not include the
federal Subscriber Line Charge, typically $3.50 to $5.00 per month for the
primary line;44 state and local surcharges for items such as state universal
service funding, 911 service, and taxes; the federal excise tax; and long
distance fees and associated universal service surcharges and other taxes.
Where offered, we use the tariff rate for unlimited service (the recurring
service charge). However, in some states, unlimited service is not
available. In those instances, we calculated a monthly fee for a
"representative customer" using the message rate. Consistent with previous
FCC analysis, we assumed that a "representative customer" makes 100 5-minute
calls per month for residential customers and 200 5-minute calls per month
for single-line business customers. Therefore, the monthly fee in these
instances is the monthly recurring service charge plus

44The federal Subscriber Line Charge is a monthly fee authorized by FCC and
payable to the customer's local telephone company to recover a portion of
the cost of providing local telephone service that is associated with
interstate service. The Subscriber Line Charge increases for additional
lines beyond the first, or primary, line.

Appendix I: Description of Sample Design, Local Telephone Rates, and
Estimated Costs of Providing Service

The Cost of Providing Local Telephone Service and FCC's Hybrid Cost Proxy
Model

the charge associated with making either 100 or 200 calls per month for
residential and single-line business customers, respectively.

FCC developed a cost model, called the Hybrid Cost Proxy Model, to
distribute support among non-rural carriers for the high-cost component of
the federal universal service program. FCC's model is a synthesis model,
based on FCC's staff-developed model and incorporating elements from two
industry-sponsored models (the HAI Model sponsored by AT&T and MCI and the
Benchmark Cost Proxy Model sponsored by US West, Sprint, and BellSouth).
FCC's model calculates an estimated cost at the wire center45 level. To
calculate the estimated cost of providing service for each wire center,
FCC's model assumes that an efficient provider constructs the most efficient
network to serve existing customers from the existing wire center locations.
We did not evaluate the operation of FCC's model.

For each place in our sample, we used the estimated cost directly from FCC's
Hybrid Cost Proxy Model or calculated a weighted-average estimated cost.
First, we identified all wire centers located in the sampled places. This
was accomplished using the street address of switches from Telcordia
Technologies, Inc.'s Local Exchange Routing Guide (LERG), May 2001 edition.
In some suburban and rural sampled places, there was no wire center located
in the place. In those instances, we found telephone numbers for government
offices or schools in the place and used the LERG to identify the wire
center serving the place. When we could not find a telephone number for a
government office or school in the place, we chose the closest switch to the
place to identify the wire center serving the place. Second, once we
identified the wire centers located in or serving the place, we could
determine the estimated cost for that place. If there was only a single wire
center located in or serving the place, the estimated cost for that wire
center was the estimated cost used in our analysis. However, if more than
one wire center was located in or served the place, we calculated a
weighted-average estimated cost, based on the proxy cost for each wire
center, with the number of lines at each wire center serving as the weight.
Because wire center boundaries do not exactly match political boundaries,
there are possible biases introduced in the analysis.

45A wire center is a telephone company facility where customers' telephone
lines originate and which also generally houses one or more switches to
route customers' telephone calls.

Appendix I: Description of Sample Design, Local Telephone Rates, and
Estimated Costs of Providing Service

For a variety of reasons, we believe these biases do not significantly
influence our results.46

We discussed our use of FCC's Hybrid Cost Proxy Model with both FCC staff
and industry participants, representing both local and long distance
telephone companies. In general, they told us that our use of FCC's model,
namely comparing relative costs between central city, suburban, and rural
places, was an acceptable use of the model. Some industry participants
identified several weaknesses with FCC's model. Weaknesses cited by more
than one participant include (1) problems with public data used in the model
(e.g., wire center boundaries could be inaccurate, Census block data from
the 1990 Census could be dated); (2) customers are assumed to be uniformly
distributed along roads, versus using actual customer locations; (3) certain
expenses are allocated on a per-line basis; and (4) input expenses generally
are nationwide, rather than company-specific values. We believe that the
weaknesses the industry participants identified are not significant for our
use of the model. Because we are comparing relative costs between central
city, suburban, and rural places, many potential problems associated with
calculating a cost estimate for a given place are not relevant because these
problems will affect our estimate for each place in a similar manner.

46Based on conversations with FCC staff, we believe there are two factors
that mitigate any possible bias introduced by the divergence between
political and wire center boundaries. First, even if customers are served by
wire centers outside their political jurisdiction, the impact on the
estimated cost is minor because adjacent wire centers generally have similar
costs. Second, biases likely offset because, while some customers in a place
are served by a wire center in an adjacent place, some wire centers in the
place serve customers in an adjacent place.

Appendix II: Aggregate Results of Survey of Public Utility Commissions

This appendix provides the aggregate results for our survey of public
utility commissions. For each question, the numbers indicate the number of
commissions selecting each response. Because some questions were not
answered by all respondents and because some questions allow multiple
responses, the totals do not necessarily add to 51 commissions.

Appendix II: Aggregate Results of Survey of Public Utility Commissions

Appendix II: Aggregate Results of Survey of Public Utility Commissions

Appendix II: Aggregate Results of Survey of Public Utility Commissions

Appendix II: Aggregate Results of Survey of Public Utility Commissions

Appendix II: Aggregate Results of Survey of Public Utility Commissions

Appendix II: Aggregate Results of Survey of Public Utility Commissions

Appendix II: Aggregate Results of Survey of Public Utility Commissions

Appendix II: Aggregate Results of Survey of Public Utility Commissions

Appendix II: Aggregate Results of Survey of Public Utility Commissions

Appendix II: Aggregate Results of Survey of Public Utility Commissions

Appendix II: Aggregate Results of Survey of Public Utility Commissions

Appendix II: Aggregate Results of Survey of Public Utility Commissions

Appendix III: State-Level Universal Service Programs

This appendix provides information on the presence of state-level universal
service programs in the 50 states and the District of Columbia. We gathered
this information from our survey of public utility commissions. In table 2,
a check mark (?) indicates the presence of the program in the state.

 Table 2: Presence of State-Level Universal Service Programs for Each State
                        and the District of Columbia

              Deaf or  High-cost   Small      Low income Low           State      State E-
                       local       local      -          income -
             disabled   telephone  telephone  establish   lower   communications   Rate

   State     customers   company    company    service    monthly     network     program
                                                           rate
  Alabama        ?
   Alaska        ?          ?          ?                    ?
  Arizona        ?          ?                     ?         ?
  Arkansas       ?                                ?         ?
 California      ?          ?          ?          ?         ?                        ?
  Colorado       ?          ?                     ?         ?
Connecticut      ?                                ?         ?
  Delaware       ?
District of
  Columbia       ?                                ?         ?
  Florida        ?                                          ?            ?           ?
  Georgia        ?                     ?          ?         ?
   Hawaii        ?          ?                               ?                        ?
   Idaho         ?          ?          ?                    ?
  Illinois       ?          ?          ?          ?         ?            ?
  Indiana        ?                     ?
    Iowa         ?                                                       ?
                                                                                                             Page 47 GAO-02-187 Telecommunications

Kansas ??  ?? ?Kentucky ?  ?? Louisiana ?  ? Maine ? ? ?? ?Maryland ? ? ? Massachusetts ? ? ? Michigan ? ? ? Minnesota ?  ? Mississippi ? ? ? Missouri ?  ? ?Montana ? ? ? ?Nebraska ?? 
                                                                                                                                                                er" valign="bottom"
>

                                                                                                                                                                
                                                                                                                                                                

Appendix III: State-Level Universal Service Programs

Deaf or  High-cost local Small local  Low income - Low income  - State State
E-disabled telephone telephone establish lower communications Rate

State customers company company service monthly rate network program

North Carolina  ? ?                             ? ?
 North Dakota   ?
     Ohio       ?                                                         ? ? ?  ?
   Oklahoma     ? ?                            ? ? ?                             ?
    Oregon      ? ?                             ? ?
 Pennsylvania   ? ?                             ? ?
 Rhode Island   ?                                                         ? ? ?
South Carolina  ? ?                           ? ? ? ?
 South Dakota   ?
   Tennessee    ?                                ?                               ?
     Texas      ? ?                            ? ? ?                             ?
     Utah       ? ?                             ? ?
    Vermont     ?                                                           ? ?
   Virginia     ?                                                             ?
  Washington    ? ?                                                       ? ? ?
 West Virginia  ?                                ?
   Wisconsin    ? ?                                                       ? ? ?  ?
    Wyoming     ? ?                            ? ? ?
                        Note: A check mark (?) indicates the presence of the
                                       program in the state.
                      Source: GAO's survey of public utility commissions (May -
                                            Sept. 2001).

                     Appendix IV: Local Telephone Rates

This appendix provides the residential and single-line business local
telephone rates for sampled places (see app. I for detailed information
regarding the sample design). We gathered the monthly tariff rates for the
sampled places from public utility commissions in all 50 states and the
District of Columbia. The rates listed below are based on responses from the
public utility commission and do not include the weights used to generate
the point estimates and confidence intervals reported in the letter.

The rates listed below are the monthly tariff rates. Where unlimited service
was available, we report the tariff rate for that service. If unlimited
service was not available, we report the tariff rate for message service,
assuming 100 5-minute calls per month for residential customers and 200
5-minute calls per month for single-line business customers. Also, the
monthly tariff rates that we report exclude the federal Subscriber Line
Change; federal, state, and local surcharges for items such as universal
service funding, 911 service, and taxes; the federal excise tax; and long
distance fees and associated universal service surcharges and other taxes.

Table 3: Residential and Single-Line Business Monthly Tariff Local Telephone
                     Rates for Sampled Places by State

State Place name Type of place Residential rate

Single-line business rate

                                                                                                                                                                

Alabama AuburnCentral $15.95$36.23 Notasulga Suburb16.38 41.38 BirminghamCentral 16.3036.23 Morris Suburb16.30 36.23 DecaturCentral 16.3036.23 Hillsboro Suburb15.95 36.23 BaileytonNon-MSA 15.9536.23 Goodwater Non-MSA15.65 36.23 
               city                                                       city                                               city                               

                                                                                                                                                                5.95 36.23 BaileytonNon-MSA 15.9536.23 Goodwater Non-MSA15.65 36.23 

                     Appendix IV: Local Telephone Rates

Single-line business rate

                                                                                                                                                                

            Type
State Place  of   Residential Arkansas Fort  Central14.91 30.66 BarlingSuburb 14.9130.66 Little Central16.31 33.61 WrightsvilleSuburb 16.3133.61  Pine  Central14.91 30.66 SherrillSuburb 12.1124.81 Haynes Non-MSA13.51 27.71 
      name           rate             Smith   city                                        Rock   city                                            Bluff   city   
           place

                                                                                                                                                                4.91 30.66 SherrillSuburb 12.1124.81 Haynes Non-MSA13.51 27.71 
                                                                                                                                                                4.91 30.66 SherrillSuburb 12.1124.81 Haynes Non-MSA13.51 27.71 

                     Appendix IV: Local Telephone Rates

Single-line business rate

                                                                                                                                                                

            Type              District                                        Fort
State Place  of   Residential    of    aWashington Central12.78 25.53Florida Walton Central 10.1521.60 Destin Suburb10.15 21.60 JacksonvilleCentral 10.4628.43 Fernandina Suburb8.22 22.24 LakelandCentral 11.5528.70 Bartow Suburb11.55 28.70 TallahasseeCentral 10.6522.75 Havana Suburb9.29 25.29 CarrabelleNon-MSA 9.1524.00 
      name           rate                           city                             city                                                    city               
           place              Columbia                                       Beach

                                                                                                                                                                ernandina Suburb8.22 22.24 LakelandCentral 11.5528.70 Bartow Suburb11.55 28.70 Tallahassee 
                                                                                                                                                                ernandina Suburb8.22 22.24 LakelandCentral 11.5528.70 Bartow Suburb11.55 28.70 Tallahassee 

                     Appendix IV: Local Telephone Rates

Single-line business rate

              State Place name Type of place Residential rate

                                                                                                                                                                

 EdgewoodSuburb 10.4837.75 Kokomo Central9.75 31.93 WindfallSuburb 15.9430.18 Elnora Non-MSA20.45 30.75 LadogaNon-MSA 9.7531.93 Marengo Non-MSA17.56 30.18Iowa DavenportCentral 12.6531.18 Panorama Suburb12.65 31.18 
                                   city                                                                                                                         

                                                                                                                                                                avenportCentral 12.6531.18 Panorama Suburb12.65 31.18 
                                                                                                                                                                avenportCentral 12.6531.18 Panorama Suburb12.65 31.18 

                     Appendix IV: Local Telephone Rates

Single-line business rate

              State Place name Type of place Residential rate

                                                                                                                                                                
                                                                                                                                                                WatervilleNon-MSA 16.0335.47 MarylandaBaltimore Central16.26 31.54 ManchesteraSuburb 15.51 
                                                                                                                                                                WatervilleNon-MSA 16.0335.47 MarylandaBaltimore Central16.26 31.54 ManchesteraSuburb 15.51 

 BelfastSuburb 15.6335.13 Lewiston Central16.91 35.81 AuburnSuburb 16.9135.81 Portland Central16.91 35.81 WestbrookSuburb 16.9135.81 Augusta Non-MSA16.91 35.81 WatervilleNon-MSA 16.0335.47 MarylandaBaltimore Central16.26 31.54 ManchesteraSuburb 15.5133.96 Cumberlanda Central15.01 33.96 aFrostburgSuburb 15.0133.96 aHagerstown Central15.01 33.96 HancockaSuburb 15.5133.96 aEldorado Non-MSA15.01 33.96 aKitzmillerNon-MSA 15.0133.96 MassachusettsaBoston Central17.34 32.00 TauntonSuburb 17.3439.77 Fitchburg Central17.34 39.77 TempletonSuburb 17.3439.77 Lowell Central17.34 39.77 ChelmsfordSuburb 17.3439.77 Bourne Non-MSA17.34 39.77 WilliamstownNon-MSA 17.3439.77 
                                    city                                                city                                                                    

                                                                                                                                                                WatervilleNon-MSA 16.0335.47 MarylandaBaltimore Central16.26 31.54 ManchesteraSuburb 15.51 
                                                                                                                                                                WatervilleNon-MSA 16.0335.47 MarylandaBaltimore Central16.26 31.54 ManchesteraSuburb 15.51 

                     Appendix IV: Local Telephone Rates

Single-line business rate

                                                                                                                                                                

            Type
State Place  of   Residential MississippiGulfport Central19.01 36.95  Ocean  Suburb 18.6636.95 Hattiesburg Central17.95 36.95 PurvisSuburb 14.7934.61 Jackson Central19.01 36.95 CantonSuburb 15.5036.95 
      name           rate                          city              Springs                                city                                               city  
           place

                                                                                                                                                                ntral19.01 36.95 CantonSuburb 15.5036.95 
                                                                                                                                                                ntral19.01 36.95 CantonSuburb 15.5036.95 

                     Appendix IV: Local Telephone Rates

Single-line business rate

              State Place name Type of place Residential rate

                                                                                                                                                                

                                                                                                                                                           Cape
 SomersworthSuburb 14.4540.31 Hillsborough Non-MSA12.68 21.20 LittletonNon-MSA 12.1431.75 Whitefield Non-MSA12.14 31.75  New   AtlanticCentral 7.4520.01   May  
                                                                                                                       Jersey   Citya   city                    
                                                                                                                                                         Pointa

                                                                                                                                                                
                                                                                                                                                                

                     Appendix IV: Local Telephone Rates

Single-line business rate

              State Place name Type of place Residential rate

                                                                                                                                                                

                                                                                                                                                                36.95 aDaytonCentral 14.2532.45 Miamisburga Suburb14.25 36.95 LimaCentral 16.0536.80 Delphos 
 EmeradoSuburb 17.6928.74 Belfield Non-MSA17.69 28.74 CayugaNon-MSA 14.1333.20 Watford Non-MSA17.99 26.02Ohio CantonaCentral 14.2536.95 aWaynesburg Suburb14.35 36.95 aDaytonCentral 14.2532.45 Miamisburga Suburb14.25 36.95 LimaCentral 16.0536.80 Delphos Suburb14.95 32.45 ClarksvilleNon-MSA 13.9327.86 Leipsic Non-MSA16.65 26.89 MiddleportNon-MSA 13.9327.86 OklahomaLawton Central12.07 32.44 CacheSuburb 12.0732.44 Oklahoma Central13.72 39.81 .Lake Suburb 13.7239.81 Tulsa Central13.72 39.81 ClaremoreSuburb 13.7239.81 Achille Non-MSA10.25 12.05 PawneeNon-MSA 10.2222.08 Pocola Non-MSA12.07 32.44Oregon CorvallisCentral 12.8026.40 Albany Suburb12.80 26.40 EugeneCentral 12.8026.40 Junction Suburb12.80 28.90 PortlandCentral 12.8026.40 Yamhill Suburb12.59 28.27 AdamsNon-MSA 12.8030.50 
                                                                                                                      city                                      
                                                                                                                                                                36.95 aDaytonCentral 14.2532.45 Miamisburga Suburb14.25 36.95 LimaCentral 16.0536.80 Delphos 

                                                                                                                                                                36.95 aDaytonCentral 14.2532.45 Miamisburga Suburb14.25 36.95 LimaCentral 16.0536.80 Delphos 
                                                                                                                                                                36.95 aDaytonCentral 14.2532.45 Miamisburga Suburb14.25 36.95 LimaCentral 16.0536.80 Delphos 

                     Appendix IV: Local Telephone Rates

Single-line business rate

              State Place name Type of place Residential rate

                                                                                                                                                                

 Arcadia                             Central                                           Central                                      Calhoun                     
 Lakes  Suburb 15.4042.75 Greenville  city  15.40 42.75 NorrisSuburb 14.0537.65 Sumter  city  15.96 32.75 BlufftonNon-MSA 8.3414.32  Falls  Non-MSA15.96 32.75 SpringfieldNon-MSA 12.7032.55 Dakota City  
                                                                                                                                                                

                                                                                                                                                                

                     Appendix IV: Local Telephone Rates

Single-line business rate

              State Place name Type of place Residential rate

                                                                                                                                                                

 NewportcNon-MSA 24.5555.00 Westminsterc Non-MSA25.20 48.25Virginia LynchburgCentral 12.6445.50 Altavista Suburb15.04 30.48 VirginiaCentral 14.3053.18 Hampton Suburb14.30 53.18 RoanokeCentral 13.5949.33 Buchanan Suburb12.64 45.50 Iron Non-MSA 12.6529.50 Melfa Non-MSA11.91 41.76 RadfordNon-MSA 12.6445.50 WashingtonBellingham Central12.50 26.89 BremertonCentral 12.5026.89 Bainbridge Suburb12.50 26.89 SeattleCentral 12.5026.89 Kenmore Suburb13.25 31.10 MossyrockNon-MSA 14.3020.50 Tekoa Non-MSA11.84 27.28 WardenNon-MSA 12.5026.89 A1West 12Huntington Central15.00 55.00 MiltonSuburb 15.0055.00 Parkersburg Central15.00 55.00 ViennaSuburb 15.0055.00 Wheeling Central15.00 55.00 MoundsvilleSuburb 15.0055.00 Keystone Non-MSA15.00 55.00 ShinnstonNon-MSA 15.0055.00 Terra Non-MSA15.00 55.00Wisconsin cJanesvilleCentral 10.6732.85 Footville Suburb19.48 25.00 cMadisonCentral 10.6732.85 cStoughton Suburb10.67 32.85 aWausauCentral 18.2536.65 Brokawa Suburb18.25 36.65 ClintonvilleNon-MSA 12.5021.00 cGenoa Non-MSA10.67 32.85 .2North 
                                                                              city                                           Beach   city                       

                                                                                                                                                                uburb14.30 53.18 RoanokeCentral 13.5949.33 Buchanan Suburb12.64 45.50 Iron Non-MSA 12.6529.50 
                                                                                                                                                                uburb14.30 53.18 RoanokeCentral 13.5949.33 Buchanan Suburb12.64 45.50 Iron Non-MSA 12.6529.50 

Appendix IV: Local Telephone Rates

aRate for single-line business customers calculated based on message rate.

bRate for residential customers calculated based on message rate.

cRate for residential and single-line business customers calculated based on
message rate.

dFor residential customers, there is an unlimited basic service available
for $43.95. According to staff at the Michigan Public Service Commission,
most residential customers purchase a message-rate service that allows 400
calls per month. The recurring service charge for this service is $12.01,
not including any per-call charges that would be incurred for calls in
excess of 400 per month.

Source: GAO's survey of state public utility commissions (May - Sept. 2001).

Appendix V: GAO Contacts and Staff Acknowledgments

GAO Contacts Peter  Guerrero (202) 512-2834 John Finedore (202) 512-2834 Amy
Abramowitz (202) 512-2834

Acknowledgments In addition to those named above, Wendy Ahmed, Michael
Clements, Eric Diamant, Michele Fejfar, Faye Morrison, James Sweetman, Jr.,
and Mindi Weisenbloom made key contributions to this report.

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