MCI Communications
Corporation
1801 Pennsylvania Avenue, NW
Washington, DC 20006
202-872-1600
April 12, 1996
Mr. William F. Caton
Secretary
Federal Communications Commission
Room 222
1919 M Street, N.W.
Washington, D.C. 20554
Re: CC Docket No. 96-45; Federal-State Joint Board on Universal Service
Dear Mr. Caton:
Enclosed herewith for filing are the original and four (4) copies of MCI
Telecommunications Corporation's Comments in the above-captioned
proceeding.
Please acknowledge receipt by affixing an appropriate notation on the copy of
the MCI Comments furnished for such purpose and remit same to the bearer.
Sincerely yours,
Chris Frentrup
Senior Regulatory Analyst
Enclosure
JCF
Before the
FEDERAL COMMUNICATIONS COMMISSION
Washington, DC 20554
In the Matter of
Federal-State Joint Board on
Universal Service
MCI COMMENTS
CC Docket No. 96-45
TABLE OF CONTENTS
EXECUTIVE SUMMARY................................... i
1. MCI'S UNIVERSAL SERVICE PROPOSAL................... 2
II. DEFINITION OF UNIVERSAL SERVICES.................... 8
Ill. COMPUTATION OF THE UNIVERSAL SERVICE SUBSIDY SHOULD BE
BASED ON THE DIFFERENCE BETWEEN ECONOMIC COST AND AN
ACCEPTABLE RATE............................... 10
IV. CARRIER COMMON LINE AND SUBSCRIBER LINE CHARGES SHOULD
BE REDUCED TO ECONOMIC COST..................... 14
V. UNIVERSAL SERVICE SUPPORT SHOULD BE PAID BY ALL
TELECOMMUNICATIONS CARRIERS..................... 1 5
VI. SUPPORT SHOULD GO TO ALL CARRIERS THAT PROVIDE A MINIMUM
LEVEL OF FEATURE FUNCTIONALITY................... 16
VII. AUCTIONS SHOULD BE USED TO SET THE SUBSIDY IN AREAS WHERE
NO CARRIER WILL OTHERWISE OFFER SERVICE............ 18
VIII. SUPPORT FOR SERVICES TO LOW INCOME CONSUMERS SHOULD BE
AVAILABLE TO ALL TELECOMMUNICATIONS SERVICE PROVIDERS
.............................................. 19
IX. SUPPORT FOR SCHOOLS, LIBRARIES, AND RURAL HEALTH CARE
PROVIDERS..................................... 20
X. OTHER ISSUES................................... 21
XI. CONCLUSION.................................... 23
Appendix A
EXECUTIVE SUMMARY
This proceeding is integral to the development of the new competitive
framework for competition specified by the Telecommunications Act of 1996. A
competitive market will, over time, drive down today's above-cost price of local
exchange service to economic cost. For some areas of the country, however, the
economic cost of serving customers in high cost areas likely exceeds a rate that
those customers are willing to pay or exceeds a rate that regulators find acceptable.
In addition, rates set at economic cost may be unaffordable for low-income
consumers. Universal service mechanisms must address these issues in order to
maximize the number of customers connected to the public switched network, even
in a market that is fully competitive.
Current universal service subsidy flows are incompatible with the
development of competition in several respects:
- subsidy flows that are internal to incumbent LECs prevent competition
in areas that receive subsidies
- since the statute mandates that all carriers must contribute to
universal service, the system must be designed so that a contribution
does not simply guarantee the revenues of the incumbent LEC
- competition will eliminate the source of today's subsidy payments
- the statute prohibits subsidy of competitive services by
noncompetitive ones, a prohibition that cannot be enforced under
today's system
MCI recommends that the Joint Board and the Commission "de-link" the
universal service subsidy from LEC revenue requirements, and create a
competitively-neutral universal service mechanism, consistent with statutory
requirements. Our recommendations include:
define basic universal service to include single party service to the
first point of switching, local usage, touch tone, white pages listings,
access to 91 1, E91 1, operator services directory assistance, and
telecommunications relay service, at a rate no higher than the
current nationwide average rate for basic telephony, about $20;
calculate the subsidy -- the difference between the total service
long run incremental cost (TSLRIC) of basic universal service,
determined separately for different geographic cost zones
reflecting distinctive cost characteristics, and the revenues
generated by rates set at the current nationwide average;
provide a "block grant" of the subsidy amount to the states and
require the states to determine the distribution among eligible
carriers; the Commission must then remove all subsidies that are
built into interstate access rates;
mandate a "carrier of last resort" auction for any area that is or
becomes unserved, allowing auction participants to determine at
what subsidy level they would provide service.
Regardless of which approach is taken, this basic subsidy mechanism should
not replace or diminish the Life Line and Link Up targeted subsidy programs.
The Commission should adopt a pilot program to gather more information
on the services that schools, libraries, and hospitals need.
Before the
FEDERAL COMMUNICATIONS COMMISSION
Washington, DC 20554
In the Matter of
CC Docket No. 96-45
Federal-State Joint Board on
Universal Service
MCI COMMENTS
MCI Telecommunications Corporation ("MCI") believes a properly
designed universal service mechanism can contribute to the development of
competition for exchange service, ensure that current high levels of
subscribership are preserved and enhanced, and maintain high quality,
affordable telephone service for all Americans. The Telecommunications Act
of 1996 (1996 Act) mandates a complete revision in the existing system of
implicit, hidden subsidies and inefficiently-targeted explicit subsidy flows, such
as the High Cost Fund. MCI advocates that the Joint Board and the
Commission re-engineer universal service support flows to accommodate
competition and improve the levels of subscribership.1
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Federal-State Joint Board on Universal Service, Notice of Proposed Rulemaking
and Order Establishing Joint Board, CC Docket 96-45, FCC 96-93, released
March 8, 1996 ('NPRM").
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1. MCI'S UNIVERSAL SERVICE PROPOSAL
This proceeding is integral to the development of the new competitive
2
framework specified by the 1996 Act. A competitive market will, over time,
drive down today's above-cost price of local exchange service to economic
cost. For some areas of the country, however, the economic cost of serving
customers in high cost areas likely exceeds a rate that those customers are
willing to pay or exceeds a rate that regulators find acceptable. In addition,
rates set at economic cost may be unaffordable for low-income consumers.
Because the value of a network is affected by the number of people who can
be reached on it, there is a strong policy rationale for universal service
mechanisms which will maximize the number of customers connected to the
public switched network, even in a market that is fully competitive.
Of equal significance, the current universal service subsidy flows are
incompatible with the development of competition. First, as long as the
universal service funding mechanism involves subsidies that are internal to the
incumbent LEC, potential competitive providers of exchange service -- even if
more efficient -- would find it difficult to compete with the incumbent local
exchange carrier (LEC) in areas that receive subsidies. Second, since the
statute mandates that all telecommunications carriers must contribute to
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Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996)
(to he codified at 47 U.S.C. Section 151 et seq.). For consistency with the
NPRM, we refer to provisions of the 1996 Act using the sections at which they
will be codified.
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universal service, and the existing subsidy flows are not targeted to high cost
areas and low income customers, a contribution from a new entrant simply
serves to guarantee the revenues of the incumbent LEC. Third, the current
system cannot be sustained because as competition drives rates to cost, the
source of today's subsidy flows -- above-cost rates -- is eliminated. Finally, the
current system cannot survive under the Section 254(k) provision banning the
3
subsidy of competitive services by those not subject to competition.
Re-engineering a universal service support system for a competitive
environment requires that the Joint Board and Commission "de-link-, universal
service from existing LEC revenue requirements. A universal service subsidy
based on the serving LEC's historical costs would protect the LEC from the
market discipline on its prices that competition should provide. MCI therefore
proposes that the Joint Board take the following steps, consistent with the
statute, to design a new universal service mechanism:
define universal service -- the provision of single-line residential
access to the first point of switching in a local exchange network,
unlimited usage within an exchange area, touch-tone service,
white pages listings, and access to 91 1 and E91 1 service,
operator services, directory assistance, and telecommunications
relay service, at a rate no higher than the current nationwide
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The existing cost allocation rules assign all LEC overheads to existing services.
If the LECs also provide interexchange service, any charge for access above
economic cost will allow the LEC a discriminatory advantage, because the LEC
can set its access rates so as to advantage its interexchange services and
disadvantage its competitors.
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average rate for basic telephony, about $20;'
calculate the subsidy -- the difference between the total service
long run incremental cost (TSLRIC) of basic universal service,
determined separately for different geographic cost zones
reflecting distinctive cost characteristics, and the revenues
generated by rates set at the current nationwide average ;5
provide a "block grant" of the subsidy amount to the states and
require the states to determine the distribution among eligible
carriers; the Commission must then remove all subsidies that are
built into interstate access rates;
mandate a "carrier of last resort" auction for any area that is or
becomes unserved, allowing auction participants to determine at
what subsidy level they would provide service.
MCI believes that this approach is fully consistent with Section 254, and
recognizes the federal-state partnership that will be required to create single
efficient mechanism to subsidize universal service needs.
Alternatively, if the Joint Board and Commission decide that a unified
approach to universal service is not practical, MCI proposes the following:
after defining the services that constitute universal service,
selecting a national average, and calculating a total universal
service requirement based on TS-LRIC as above, determine the
portion of the subsidy that should be collected from interstate
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MCI believes that the current nationwide average local service rate represents
the most defensible definition of an "affordable" rate for the purposes of this
proceeding.
MCI has in the past advocated either the use of geographic cost zones or the
use of census tracts to separate areas requiring high cost assistance from
those that need no assistance. In either case, the concept of identifying high
cost areas to target support flows is the same.
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services based on the current 25 percent gross allocator, and use
the proxy cost model to assign the residual state portion among
the states;
for the interstate portion, mandate a competitively-neutral method
to collect revenues -- a percentage assessment on common carrier
revenues of each telecommunications service provider, net of
payments made to other carriers;"
for the interstate portion, create provider-neutral distribution of
revenues -- the provider selected by the customer should be
entitled to the per-line subsidy;
for the intrastate portion of the subsidy, refer the creation of the
revenue collection and revenue distribution mechanisms to the
state commissions, for their action consistent with the 1996 Act,
and the principles and rules established by the Joint Board and
Commission.
The chief downside of this alternative process is that it creates a dynamic that
makes it difficult to reduce the subsidy flowing from interstate services today,
and to create an environment in which all services bear an equitable share of
the universal service burden.
Regardless of which approach is taken, this basic subsidy mechanism
should not replace or diminish the Life Line and Link Up targeted subsidy
Section 254(b)(4) states that all providers of telecommunications services
should contribute to the preservation and enhancement of universal service.
Section 254(d) states that the Commission's obligation is to ensure that
providers of interstate services shall contribute, unless the Commission
determines the contribution would be de minimis.
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-7 Pursuant to Section 254(f), the states may also decide to increase the
intrastate portion of the universal service subsidy, in response to state
interests and needs. However, states must create specific, predictable, and
sufficient mechanisms that "do not rely on or burden Federal universal service
support mechanisms."
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programs that are explicitly intended to allow low income customers to receive
basic service at reduced rates. However, these programs need to be modified
to allow all carriers to participate, and to allow low income consumers to apply
credits toward any service they wish. This will ensure that competitive
provision of service to low income consumers will also occur, thereby lowering
its overall cost.
This proposal envisions that the current system of support flows
would be entirely replaced, by explicit and targeted subsidy systems at the
state and interstate level. Concurrent with identifying the universal service
support necessary under this method, existing support flows would be
removed from LEC rates. In the interstate jurisdiction, this would require
reduction or elimination of the Carrier Common Line (CCL) charge, the
current Universal Service Fund (High Cost Fund) charge, Long Term
Support, triple-DEM weighting, the Subscriber Line Charge (SLC), and the
Local Switching charge.
Any universal service subsidy is the functional equivalent of a tax on
one class of customers for the benefit of another. Such a tax will raise the
price of telecommunications service (in a given area or for a specific service)
above its economic cost, in order to keep the price somewhere else, or for
another service, below its economic cost. Setting rates at a level other
than their economic costs will distort telecommunications markets, inducing
customers to consume more of the service which is priced below its cost
and less of the service which is priced above its cost. if LEC access
charges are set well above economic cost to fund universal local service, for
example, this will increase the vulnerability of telecommunications carriers
that must purchase access to anti-competitive tactics by the LECS.
Finally, the Commission must design the support for schools, libraries,
and rural health care providers in such a way as to foster the development
of new infrastructure for serving those entities. If the Joint Board and
Commission, in partnership with the state commissions, replace the existing
universal service subsidy flows with the explicit, targeted, cost-based
subsidy fund that MCI is recommending, and thereby bring rates to cost,
there is ample ability to increase the size of the universal service fund to
accommodate advanced telecommunications for schools, libraries, and
hospitals. This additional money for advanced telecommunications is only
made possible, however, by regulatory decisions that replace existing
subsidy mechanisms, and avoiding a decision that will ensure recovery of
current LEC revenue requirements.
The Commission needs to gather more information on the services
that schools, libraries, and hospitals need. One possible method for doing
this could be to establish a fund at some defined level, which would be used
to fund pilot programs for these entities. The Commission could then
evaluate these programs after two years to determine what services were
needed, and determine at that time what further subsidies, if any, were
needed. These steps will ensure that this support will improve service to
these entities, rather than merely serving as a regulatory funding mechanism
for support these entities already receive.
II. DEFINITION OF UNIVERSAL SERVICES
In developing a list of services which are to receive universal service
support, the Commission should consider that any subsidy provided to a
service runs the risk of distorting that and other related markets. Before
adding services to the list of services eligible for universal service support,
the Commission must quantify the cost of the service and the effect of the
subsidy on the demand for that service. The Commission must also
determine the effect of the subsidy payment on demand for the services
that are paying the subsidy. Only if the benefit of the increased
subscribership of the subsidized service exceeds the cost of the reduced
subscribership of the subsidizing service should the Commission add the
service.
The Commission seeks comment on the effect on competition of its
proposed definition of services that receive universal service support, and
on whether the support will serve as a barrier to entry to new entrants, or
favor a particular technology. So long as all LECs are eligible to receive
universal service support, the services on the Commission's proposed list
should not serve as a barrier to entry. However, if universal service support
is available only to the incumbent LEC, any competing LEC will find it more
difficult to enter the market, because its cost structure will have to be lower
than the incumbent LEC's by the amount of the subsidy. To avoid this
barrier to entry, the support must be available to all LECs serving an area.
The Commission seeks comment on whether it should add a number
of other services to its list of services eligible for universal service support,
including Internet access, data transmission capability, optional SS7 features
(or blocking of those features), enhanced services, and broadband services.
None of these features should be added to the list at this time. When these
services are purchased by a substantial majority of subscribers, and none of
them currently are, consideration can be given to adding them to the list of
eligible services, if they meet the cost/benefit test described supra.
For this same reason, support should be limited to residential
customers. Extending support of universal service to business customers
would greatly expand the scope of universal service subsidy, thereby
increasing the risk of unintended adverse effects. It would also provide
subsidy to customers who are less likely to need the reduced rates the
subsidy makes possible.
The Commission seeks comment on whether the 1996 Act requires
that all regions of the country have access to all telecommunications
services, and if so how can this be done in a "pro-competitive, de-regulatory
environment." A competitively-neutral universal service mechanism will
promote the market competition that will ensure all consumers a choice of
providers and services. So long as the Commission's rules allow effective
competition, advanced services will be made available to all.
III. COMPUTATION OF THE UNIVERSAL SERVICE SUBSIDY SHOULD BE
BASED ON THE DIFFERENCE BETWEEN ECONOMIC COST AND AN
ACCEPTABLE RATE
A universal service subsidy based on the difference between
economic cost and the nation-wide average rate would ensure that the
subsidy payment reflected only the cost of service, rather than also funding
current LEC inefficiencies. Because the current separations-based universal
service support mechanisms are not related to the incumbent LECs'
economic costs, they give LECs no incentive to control their costs, thereby
increasing the ultimate cost of universal service to end users. In addition,
use of separations-based universal service fund mechanisms in a
competitive environment would require all eligible LECs to compute their
local service costs, and would give a lower subsidy amount to the more
efficient companies. In a competitive market, the price is determined by the
most efficient firm; providing a higher subsidy to less efficient firms would
simply ensure that local access rates would not fall as much as they should.
A forward-looking model of the economic cost of the network such as
the Benchmark Cost Model (BCM) can be used to determine the universal
service support level. The BCM is an engineering cost model that computes
the cost by Census Block Group (CBG) of serving every area in the country
except Alaska, based on data on terrain and soil conditions and number of
households.8 Because the BCM is based on the cost of building the network
today, it more closely reflects the economic cost of the network.
There are a number of modifications that could be made to the BCM
to make it more useful. First, as the Commission suggests, it should have a
cap based on wireless technology. In its current state, the BCM assumes
use of the current wireline technology to serve every area, even though
some areas could be more economically served by wireless technology.
Placing a cap based on the cost of wireless technology would help ensure
that the universal service support mechanism was technology-neutral.
In addition, there are further assumptions that the BCM makes which
need to be revised. First, the BCM assumes that households are uniformly
distributed throughout the CBG. This assumption is probably least true in
the more rural areas, which are likely to have population centers with
concentrated customers, with some customers scattered in outlying areas.
Second, the BCM looks only at residential lines. The presence of business
lines will increase the economies of scale, and may result in a lower cost per
loop. The Joint Sponsors of the BCM have indicated that they plan to file
revisions to the BCM to reflect some of these changes.9
Once the Commission has determined the size of the required subsidy
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The data necessary to run the model are unavailable for Alaska.
See Letter from Glenn Brown to William F. Caton, Ex Parte RE: CC Docket 80-
286, filed February 21, 1996.
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using BCM or some other proxy cost model, it must determine from whom
to recover that subsidy. MCI believes that the Commission should use a
proxy cost model such as the BCM to set the total amount of the subsidy.
That subsidy should then be recovered from all telecommunications carriers
based on their relative revenues, net of payments for the services of other
telecommunications carriers. The funds would be provided to the states in
the form of 'block grants" for allocation among the eligible carriers. The
Commission would then take steps to remove all excess allocations of cost
to the interstate jurisdiction, because those allocations are no longer needed
to ensure affordable local service.
In the alternative, the total subsidy could be allocated between the
interstate and intrastate jurisdictions based on the current 25 percent gross
interstate allocator. The remainder would then be allocated to the states for
recovery in a state fund. The Joint Board and Commission should require
the state commissions to allocate the subsidy for their states among the
eligible carriers in their state on a competitively neutral basis, consistent
with the governing principles adopted by the Commission and Joint Board.
Setting the state-specific subsidy amount at the Commission will
ensure that the universal service subsidy on interstate telecommunications
companies reflects national goals, while allowing the state commissions to
determine the distribution of the subsidy will ensure that the agency with
greater direct experience of the cost of local service determines which
company receives support. States that wish to subsidize a rate lower than
the nationwide average can do so for their intrastate universal service
support mechanism, which will be recovered from telecommunications
carriers in the state.
MCI does not believe the Joint Board and Commission should rely on
Pacific's proposed cost model, incorporating data showing the location of
business and residence customers in its territories. While the inclusion of
business customer data should improve the results from a BCM-type model,
the use of LEC-specific proprietary data will give the LECs the potential to
manipulate the data in a way that favors their interest, thereby reducing the
confidence that the public can have in the reasonableness and fairness of
the cost model.
The Commission asks whether it should extend the interim USF cap
until it completes this proceeding, and whether it can or should transition
between any new universal service support mechanism adopted in this
docket and the current USF and DEM mechanisms. When the Commission
resolves the issues in this docket, it should institute the new support
mechanism without delay. The reduction in the subsidy burden will bring an
immediate reduction in rates to millions of consumers, and the LECs have
made no showing that delay is necessary to protect any legitimate interest.
IV. CARRIER COMMON LINE AND SUBSCRIBER LINE CHARGES SHOULD
BE REDUCED TO ECONOMIC COST
The Commission proposes to eliminate the CCL charge and increase
the Subscriber Line Charge (SLC). The Commission also asks whether the
current Long Term Support (LTS) mechanism is consistent with the 1996
Act.
The CCL and SLC charges were originally adopted over a decade ago
to reduce the recovery of non-traffic sensitive costs from IXCs on a traffic-
sensitive basis. The CCL charge was retained as an interim measure to
soften the transition to a more economically efficient pricing structures
The D.C. Circuit upheld the CCL solely and explicitly because the
Commission warranted that it was a transitional measure." Any reasonable
transition period to eliminate the CCL would have ended long ago.
Eliminating the CCL does not, however, mean that an increase in the
SLC is justified. The prices for the local loop, including the CCL and SLC
charges, are currently well in excess of their economic cost. An increase to
the SLC coupled with an exactly offsetting reduction of the CCL will allow
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10 See MTS & WATS Market Structure: Third Report and Order, 93 FCC 2d 241,
modified on reconsideration, 97 FCC 2d 682 (1983), modified on further
reconsideration, 97 FCC 2d 834, aff'd and remanded in part, National Ass'n
of Reg. Util. Com'rs v. FCC 737 F. 2d 1095 (1984) ("NARUC"), cert. denied,
469 U.S. 1227 (1985).
NARUC, 737 F. 2d at 1 1 34-35, and Rural Telephone Coalition v. FCC, 838
F.2d 1307, 1314-15 (D.C.Cir. 1988).
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the LECs to continue to recover more than the true cost of the loop. The
CCL and SLC should be replaced with a system of universal service support
based on the difference between an acceptable rate and economic cost, and
funded by all carriers based on their interstate revenues net of payments to
other carriers. The result will be a decline in the total subsidy needed, and
over time, a reduction in the cost of local service.
As the Chart in Appendix A shows, the total subsidy required for
universal service under the method MCI proposes equals approximately $5
billion. The current interstate contribution, from traffic sensitive switched
rates, CCL charges, SLC charges, and the current Universal Service Fund is
about $14 billion. Thus, the interstate access charges are already more
than funding the true universal service requirement. If these access charges
are driven to cost, there will be a substantial reduction in the total cost of
telecommunications services, to the benefit of consumers.
V. UNIVERSAL SERVICE SUPPORT SHOULD BE PAID BY ALL
TELECOMMUNICATIONS CARRIERS
Funding the current federal universal service mechanisms falls only on
purchasers of interstate access. Section 254(b)(4) of the 1996 Act requires
universal service subsidy to be funded by all telecommunications carriers.
MCI advocates that any universal service funds be recovered from all
providers of telecommunications services, based on their relative revenue
shares, net of payments to other carriers subject to the funding requirement.
Netting out payments made to other providers of interstate services will
avoid double-recovering from those services. Recovering universal service
support from all carriers would eliminate current incentives for
interexchange carriers to avoid those services that pay for the universal
service programs.
VI. SUPPORT SHOULD GO TO ALL CARRIERS THAT PROVIDE A
MINIMUM LEVEL OF FEATURE FUNCTIONALITY
A major drawback of the existing universal service support
mechanisms is that they funnel money to the LECs without requiring that
the LECs make any modifications to their network to receive that money.
To help ensure that the LECs use any universal service support they receive
to improve their networks, the Joint Board and Commission could adopt a
list of network features that the LECs must provide to receive a full
universal service support payment. Failure to provide the network functions
on the list would result in a commensurate reduction in the universal service
support payment.
There are a number of network features that should be included on
this list. The first of these is single party service, because this has proven
to be customers' preferred method of access in areas where it is offered. In
addition, the LECs should be required to use all digital switches and provide
SS7 signaling throughout their network. These will enable the LECS, and
other carriers that use their networks, to provide more advanced features
and more reliable service. The LECs should also be required to provide
equal access and number portability. These steps would allow competition
to flourish in both the local and interexchange market.
Adopting such a requirement would have several positive affects.
First, it would give LECs the incentive to upgrade or build their networks in
ways that would benefit their customers both directly, by improving the
level of service they receive, and indirectly, by fostering the competitive
conditions that will bring forth even greater improvements in quality.
Second, it will ensure that those who pay into the universal service support
fund are guaranteed some benefit from the use of those funds. Finally, it
will ensure that the funds are used for the purpose for which they were
intended, to provide quality service to end users.
The Commission seeks comment on how it can ensure that recipients
do not use services that are not competitive to subsidize services that are.
The LECs' rates for services, in a competitive market, would equal those
services' economic costs. Where competition is sufficiently strong, the
market will ensure that the prices charged reflect economic cost, and the
Commission need take no special action. However, in those markets which
do not face sufficient competition, the Commission must adopt regulations
which will ensure that services are priced at economic cost. Only in this
manner can the Commission ensure that the LECs do not subsidize
competitive services by non-competitive services.
The Commission asks how it can ensure that all eligible, and no
ineligible carriers get support, and how it should define the study area
(especially in rural areas) for which a company will be eligible for support.
All carriers willing and able to serve the entire area over which the support
is computed, should be eligible for support. So long as the area used to
compute the support coincides with the area the LEC must serve to be
eligible for support, there should be no problem with ineligible carriers
getting support.
The Joint Board and Commission should not adopt specific
requirements for how a LEC is to advertise generally. Competition will
ensure that LECs make known to their potential customers their offer of
service. Setting standards for advertising would create a barrier to entry by
imposing advertising standards that might not be necessary in every case.
VII. AUCTIONS SHOULD BE USED TO SET THE SUBSIDY IN AREAS
WHERE NO CARRIER WILL OTHERWISE OFFER SERVICE
MCI has previously proposed an auction mechanism to determine the
support level necessary in those few areas where the support computed
under MCI's proposed method would not be sufficient to induce any carrier
to offer service. 12 This auction mechanism is fully consistent with Section
214(e)(3) of the Communications Act, which allows the States and the
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12 See MCI Comments in Docket 80-286, filed October 10, 1995, incorporated
herein by reference.
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Commission to designate a carrier which will serve that area, without
specifying how the Commission or the states are to select that carrier. Use
of an auction mechanism will guarantee that the area is served at the
minimum subsidy necessary. The Commission and the state should together
hold the auction which will determine the level of support available to an
area. The states would certify the carriers eligible to participate in the
auction, and the eligible companies would bid the subsidy they would
require to serve the area. The low bid would determine the subsidy for that
area, and any carrier who wished to serve that area would be eligible to
receive that subsidy.
VIII. SUPPORT FOR SERVICES TO LOW INCOME CONSUMERS SHOULD
BE AVAILABLE TO ALL TELECOMMUNICATIONS SERVICE
PROVIDERS
Whatever additional support is made available to low income
households should be portable to any carrier. Under the current Lifeline
and Link-Up plans, discounts are given from the incumbent LEC's rates.
Whatever support is given to low income households should be given to the
low income household directly, and be usable for the purchase of any
telecommunications service provided by any telecommunications carrier.
The Joint Board and Commission should allow the low income consumer to
select the services he or she wants.
IX. SUPPORT FOR SCHOOLS, LIBRARIES, AND RURAL HEALTH CARE
PROVIDERS
The 1996 Act establishes additional universal service obligations for
provision of services to schools, libraries, and rural health care providers."
The advanced services these entities are likely to need will require greater
bandwidth than that required by the residential user for whom the general
list of services eligible for universal service support was developed. Before
the Commission mandates support for these services, it must determine the
cost of providing these services, and the likely effect of any proposed
discount on the demand for these services. Only at that point can the
Commission determine whether the value of the additional services
subsidized in this manner are worth the cost to other services of subsidizing
them.
The Commission seeks comment on the discount it should require to
be offered for service to schools and libraries. The price of service to these
entities should recover at least the capital costs of the plant used to provide
the service. 14 A rate set at this level would ensure that these entities are
paying for the network elements they use, but would provide no
contribution to the LECs' joint and common costs.
The 1996 Act limits the eligibility for these universal service programs
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13 Section 254(h).
14 Capital costs include depreciation, return, taxes, and maintenance expenses.
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to schools and libraries that meet certain criteria regarding endowments or
eligibility for participation in State-based plans for funds, and prohibits resale
or transfer of the services to any other party by the eligible school or
library.15 These provisions prohibit an eligible school or library from
receiving subsidy under this program if it receives of the cost of developing
its network with another entity which is ineligible. This will help ensure that
this program is targeted toward the entities that truly need the support.
The Commission seeks comment on the criteria it should use to
specify a rural area eligible for support. The Rural Health Policy Office
currently defines rural areas based on Metropolitan Statistical Areas, as
defined by the Census Bureau. The Commission should adopt this
definition. The subsidy provided to health care providers should go only to
health care providers in these areas."'
X. OTHER ISSUES
The Commission asks how to assess whether quality services are
being made available. 17 New competitors that enter the market will have to
provide service quality at least equal to, and probably better than, the
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Section 254(h)(3) and (4).
16 Section 254(h)(5)(B) of the 1996 Act allows subsidy only to health care
providers that serve rural areas, while Section 254(h)(1)(A) defines who is a
health care provider.
17 NPRM at para. 4.
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incumbent's in order to obtain any customers. State commissions already
monitor incumbent LEC quality of service, particularly with respect to
services that constitute basic universal service."' MCI recommends that,
due to the historical expertise of the states in this area, oversight of quality
should be an issue resolved in state universal service plans. MCI suggests
that the Joint Board and Commission simply require the state commissions
to decide what measures they will use to ensure quality -- e.g., performance
standards, monitoring via collection of performance statistics or complaints,
etc. However, the Joint Board and the Commission should create a higher
burden for any state that seeks to impose equivalent reporting requirements
on new entrants. Because there is no incentive for new entrants to provide
lower quality service, it is especially important that the states not burden
new entrants with the cost of collecting and filing service quality data.
The Commission seeks to know what advanced services should be
provided, and what the cost of those services is. At present, there are no
advanced services that have achieved such market penetration as to justify
their inclusion in the list of services that receive universal service support.
As the market develops, and customers purchase advanced services in the
marketplace, additional advanced services can be added to the list of
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For example, the state of Oregon recently ended its alternative regulation plan
for U S West due to concerns about the degradation of service quality since
the beginning of that plan. This experience suggests that the incumbent LECs'
quality of service may need to be monitored.
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services that are eligible for subsidy, after the Commission performs a
cost/benefit analysis as discussed
XI. CONCLUSION
For the foregoing reasons, the Commission should adopt MCI's
proposals for handling universal service subsidy.
Respectfully submitted,
MCI TELECOMMUNICATIONS CORPORATION
Chris Frentrup
Senior Regulatory Analyst
1801 Pennsylvania Avenue, NW
Washington, DC 20036
(202) 887-2731
April 12, 1996
STATEMENT OF VERIFICATION
I have read the foregoing and, to the best of my knowledge, information,
and belief, there is good ground to support it, and it is not interposed for
delay. I verify under penalty of perjury that the foregoing is true and
correct. Executed on April 12, 1996.
Chris Frentrup
1801 Pennsylvania Avenue, NW
Washington, D.C. 20006
(202) 887 2731
APPENDIX A
CERTIFICATE OF SERVICE
1, Stan Miller do hereby certify that copies of the foregoing Comments were sent
via first class mail, postage paid, to the following of this 12th day of April, 1996.
[Service list deleted from online version.]
Stan Miller