Before the
FEDERAL COMMUNICATIONS COMMISSION
Washington, D.C. 20554

				)
In the Matter of		)
				)
Federal-State Joint Board	)	CC Docket No. 96-45
on Universal Service		)
				)

COMMENTS OF AT&T CORP.

Mark C. Rosenblum
Peter H. Jacoby
Judy Sello

Room 3244J1
295 North Maple Avenue
Basking Ridge, New Jersey 07920
(908) 221-8984

Its Attorneys

April 12, 1996

TABLE OF CONTENTS

Page

SUMMARY .............................................. i

I. THE TELECOMMUNICATIONS ACT'S GOAL OF PROMOTING
LOCAL COMPETITION WHILE ADVANCING UNIVERSAL SERVICE
REQUIRES A FUNDAMENTAL PARADIGM SHIFT IN PROVIDING
FOR UNIVERSAL SERVICE 1

II. THE NEW UNIVERSAL SERVICE SUPPORT MECHANISM SHOULD
FUND A CORE SET OF QUALITY SERVICES AT REASONABLE
COST 11

III. UNIVERSAL SERVICE SUPPORT SHOULD BE AVAILABLE TO
ELIGIBLE CARRIERS AND A NEUTRAL THIRD PARTY
SHOULD ADMINISTER THE FUND 21

CONCLUSION ............................................ 23

APPENDIX A: HOW TO CALCULATE THE SUBSIDY
USING A PROXY MODEL SUCH AS THE BCM

APPENDIX B: DEAVERAGING THE SUBSIDY:
AN ILLUSTRATIVE EXAMPLE

SUMMARY

The Telecommunications Act's goal of promoting local competition while advancing universal service requires the Commission to make a fundamental paradigm shift in providing for universal service. As shown in Part I, universal service today is promoted through cross-subsidies from excessive access charges paid by IXCs to incumbent monopoly LECs. To comply with the Act, on a going-forward basis, all universal service subsidies must be divorced from access charges and all telecommunications service providers must make an equitable and nondiscriminatory contribution to universal service support. Indeed, if the local competition that is the core promise of the Act is to be realized, the price of all forms of access must be set at total service long- run incremental cost or "TSLRIC" to avoid permitting incumbent LECs to discriminate against potential new entrants and to cross-subsidize competitive services with noncompetitive access offerings.

In the instant Section 254 proceeding, the current system of subsidies needs to be reformed and replaced by a single New Universal Service Fund ("NUSF") with competitively neutral funding. This could readily be provided through a surcharge on the retail services of all telecommunications service providers, whether providing interstate or intrastate service. Such a recovery mechanism is fair, simple and efficient, and fully comports with the Act's requirement that support be "explicit."

With the exception of subsidies flowing to small rural telephone companies, all subsidies must be "portable" with the end user customer, to ensure compliance with the Act's nondiscrimination requirement. If the new regime is structured in this manner -- i.e., portable, explicit and funded in a competitively neutral manner -- NUSF subsidies will provide a source of funding to allow appropriate contribution to residential local service costs by all telecommunications services and for the benefit of all customers of that service. It will thus encourage local market entry, while ensuring the availability and affordability of local service to all consumers regardless of location.

Part II shows that universal service subsidies should be available to support a core set of essential services, consisting primarily of voice grade dial tone, touch tone, residential single party service, access to 911, operator, 411, local usage in a limited calling area, equal access to long distance service, and local number portability. The subsidy should be available for the primary line to a subscriber's principal residence, irrespective of the technology employed. The set of services needed to achieve universal service could "evolve" over time, based on the operation of market choices by consumers.

To implement the Act's directive that services should be available at "affordable rates" and that "low-income consumers and those in rural, insular and high cost areas" be able to obtain service at rates reasonably comparable to those for similar services in urban areas, the Joint Board should define what constitutes an "affordable rate" for consumers in all Tier 1 LEC areas. In so doing, the Joint Board should presume that the existing local rate for the group of core services described above, as augmented by an increased SLC that recovers fully the subscriber loop portion of the interstate common line, is affordable for all subscribers, except those qualifying for low-income assistance, and then use the weighted average of those rates (including the increased SLC) as the "nationwide affordable rate." To the extent that the TSLRIC (as determined by the relevant cost proxy model) of providing the core set of services exceeds that level, the LEC or ALEC serving the customer should be able to receive national NUSF subsidy support for the difference (between TSLRIC and the nationwide affordable rate). Supplemental state-funded programs should also be permitted, so long as they are competitively neutral.

Low-income consumers would continue to qualify for need-based support from the Lifeline Assistance and Link-Up Programs, which should be funded by the NUSF. To qualify for such assistance, a subscriber should be required to meet minimum verifiable eligibility standards established by the state commission for each jurisdiction. Carriers would also be entitled to reimbursement from the NUSF for special discounts they offer for "telecommunications services" to qualifying schools, libraries and health care providers.

As shown in Part III, the Commission should specify that for a carrier to be eligible for NUSF subsidy, it must provide the core services identified above as a basic stand-alone offering, either by using its own facilities, using another carrier's unbundled network elements (paying the full TSLRIC), or by any combination of such facilities and elements. Finally, the Commission should select a neutral organization not affiliated with any telecommunications carrier to administer the NUSF.

Before the
FEDERAL COMMUNICATIONS COMMISSION
Washington, D.C. 20554

				)
In the Matter of		)
				)
Federal-State Joint Board	)	CC Docket No. 96-45
on Universal Service		)
				)

COMMENTS OF AT&T CORP.

Pursuant to the Commission's March 8, 1996 Notice of Proposed Rulemaking and Order Establishing a Joint Board, FCC 96-93 ("NPRM"), AT&T submits these comments on the implementation of the universal service provisions of the Telecommunications Act of 1996 ("Act").[1]

I. THE TELECOMMUNICATIONS ACT'S GOAL OF PROMOTING
LOCAL COMPETITION WHILE ADVANCING UNIVERSAL SERVICE
REQUIRES A FUNDAMENTAL PARADIGM SHIFT IN PROVIDING FOR
UNIVERSAL SERVICE.            nbsp;                       

AT&T strongly supports the Act's objective of ensuring universal service for all residential consumers at reasonable rates and believes that this goal will be more efficiently and fully realized with the advent of local competition. The key public policy issue confronting the Commission and the Joint Board in this proceeding is how to redesign the existing system of universal service subsidies so that it no longer impedes competition, and thereby make it consistent with the Act's overriding objective of "opening all telecommunications markets to competition."[2]

There is no doubt that the current system of funding universal service is fundamentally flawed and has allowed access charges to remain at levels far greater than necessary to support a properly targeted universal service support regime. Much of what has been alleged to be a subsidy is unnecessary because retail local service rates already recover efficiently incurred costs. By providing funding beyond what is required to sustain universal service, the existing system not only encourages, and indeed rewards, inefficiency, but it is profoundly anticompetitive. The excessive contribution built into supracompetitive access charges deters entry of more efficient competitors into local exchange markets and thus denies consumers the benefits of lower prices and innovative services that competition would surely bring. The excessive returns generated by today's access rates also produce grave risks to competition in toll markets -- including price squeeze and predatory pricing -- to the extent that monopoly access providers integrate into those markets. A policy that promotes both the development of competition and the preservation of universal service is certainly attainable, but it requires a fundamental shift in providing for universal service.

Today, universal service is promoted through a set of broad-based cross-subsidies that flow principally to incumbent monopoly local exchange carriers ("LECs") without any demonstration of need, and without regard to whether they accomplish the intended objective. Many cross-subsidies are funded by the LECs' access charges, which are set substantially above cost, allegedly in order to subsidize rates for the LECs' basic local telephone service. Some of these cross-subsidies are built directly into the access charge structure,[3] whereas others, such as the Universal Service Fund ("USF") and Lifeline Assistance Program, have the effect of raising interexchange carrier ("IXC") toll prices by imposing an additional charge on IXCs per presubscribed line. The Act clearly applies to the full range of universal service support mechanisms.[4]

Divorcing all of these subsidies from access charges is essential to comply with the Act's mandate that "all providers of telecommunications services . . . make an equitable and nondiscriminatory contribution to the preservation and advancement of universal service."[5] To the extent any subsidy is tied to the purchase of LEC switched access, the only carriers required to contribute are those who purchase such access, while others are improperly relieved of their statutory obligation to do so.

Cost-based pricing is also essential to fulfilling the Act's nondiscrimination requirement. To the extent any subsidy mechanism makes the price of access deviate from the access provider's long-run incremental cost (as measured by total service long-run incremental cost or "TSLRIC"), it permits the incumbent LEC to discriminate against its potential rivals in local markets and also against IXCs if the LEC is permitted to offer long distance service.[6] To foster competition all subsidies must be eliminated and access must be set at efficient, cost-based prices. Simply put, artificially inflated access rates flunk [[section]] 254(b)'s nondiscrimination requirement and run afoul of [[section]] 254(k)'s express prohibition against carriers using "services that are not competitive to subsidize services that are subject to competition."[7]

For all these reasons, the creation of a competitive environment requires that all cross-subsidies be eliminated from access prices and that, in the six-month proceeding required by Section 251 of the Act, the Commission mandate that all forms of access be priced at TSLRIC rates. As the Commission recently observed, "[e]conomists generally agree that prices based on LRIC reflect the true economic cost of a service and give appropriate signals to producers and consumers and ensure efficient entry and utilization of the telecommunications infrastructure."[8] TSLRIC pricing more nearly allows bottleneck local exchange markets to mimic competitive markets, thereby permitting all carriers, including incumbents, to compete efficiently, as contemplated by the Act.

The Commission should require use of the same TSLRIC standard both for pricing access and interconnection under [[section]] 252(d)(1) of the Act, and as the basis for the identification of universal services subsidies. Using TSLRIC as the economic standard, the Commission will find that the amount of current access revenues above TSLRIC is more than necessary to support universal service. If the excess contributions related to inefficiencies and supracompetitive profits applied other than to universal service preservation are eliminated and the new universal service obligation properly sized -- and these must be the Commission's and Joint Board's key objectives -- consumers will realize a substantial net benefit by a reduction in their total bill for telecommunications services.

To achieve these goals, the price of access must be set at TSLRIC, and, in the instant 15- month proceeding required by Section 254 of the Act, the current system of subsidies needs to be reformed and replaced by a single New Universal Service Fund ("NUSF") with competitively neutral funding. AT&T proposes that this be accomplished by a surcharge on the retail services of all telecommunications service providers, including IXCs, LECs, ALECs, wireless carriers, resellers, and anyone else providing telecommunications services. Preliminarily, such a surcharge should not be viewed as a rate increase for consumers. To the contrary, as when the subscriber line charge ("SLC") was introduced in 1985, AT&T anticipates that consumers will reap immediate benefits in lower overall telecommunications prices. A surcharge will not only permit substantial reductions in access rates and prices for unbundled network elements to be passed along to customers, it will also foster greater efficiency and new entry that will further drive prices lower.

A surcharge on all retail telecommunications services, both interstate and intrastate, creates a fair, simple and efficient recovery mechanism.[9] First, it ensures that all subscribers make a fair and equitable contribution on exactly the same basis -- all retail revenues.[10] Second, it also ensures that high-volume users, who derive the greatest benefit from the network, bear a proportionate share of the universal service obligation.[11] Third, it obviates altogether the potentially difficult problems associated with having to make jurisdictional determinations. NPRM, [[paragraph]] 125. In keeping with [[section]] 254(e)'s requirement that all universal service support be "explicit," regulators must be able to easily identify the surcharge apart from the service provider's rates -- a procedure that will have the added benefit of enabling regulators to prevent the subsidy from spinning out of control in the future. NPRM, [[paragraph]] 28.

Further, with the exception of subsidies flowing to small rural carriers, all subsidies must follow the customer, not the carrier, to ensure compliance with the nondiscrimination requirement of [[section]] 254(b)(4) and to encourage new local entry.[12] As the Commission has correctly observed, portability of subsidies is essential to avoid "discriminat[ion] among providers of local telecommunications services" that gives incumbent LECs a significant competitive edge over potential competitors, and which thereby deters new entry into local exchange services. NOI, [[paragraph]] 79.

If the new universal service support regime is structured as described above -- i.e., portable, explicit and funded in a competitively neutral manner -- NUSF subsidies will provide a source of funding to allow recovery of residential local service costs by all telecommunications services and for the benefit of all customers of that service, thus encouraging local market entry in all geographic areas. Moreover, as described in Part II below, the new system will provide an orderly transition to competitive local service markets, without subjecting subscribers to sudden and significant changes that could jeopardize the goals of universal service -- ensuring availability and affordability of local service to all consumers regardless of location.[13] The NUSF should be implemented on a flash-cut basis to allow these substantial benefits to be realized.[14]

II. THE NEW UNIVERSAL SERVICE SUPPORT MECHANISM SHOULD FUND A CORE SET OF QUALITY SERVICES AT REASONABLE COST.     

Reasonable limits on the services included in the definition of universal service are needed to maintain "predictability" of the regime ([[section]] 254(b)(5)), to avoid the ballooning of subsidy costs, or the perception that by subsidizing too many services, the Commission rather than the marketplace is determining the evolution of telecommunications services. Such a perception would seriously erode public support for the program and jeopardize the procompetitive objectives of the Act. Accordingly, all universal service-related subsidies should be limited to funding a core set of essential, high-quality services, necessary to ensure education, public health, and public safety, and funded at reasonable cost. [[section]] 254(c)(1)(A); NPRM, [[paragraph]] 9.

For the present, these core services should include voice grade dial tone, touch tone, residential single party service, access to emergency (911) and operator services, directory information (411), white pages directory listing, local usage in a limited calling area, equal access to long distance services,[15] and local number portability. The subsidy should be available for the primary line to a subscriber's principal residence, irrespective of the technology (wireline or wireless) employed.[16] With these services, virtually anyone capable of using a telephone can become a full participant in the telephone network.[17] As the Act suggests, the set of services needed to achieve universal service could "evolve" over time. [[section]] 254(c)(1). If a service becomes "subscribed to by a substantial majority of residential customers" and contributes to network efficiencies, it could be added to the list of core services. [[section]] 254(c)(1)(B). As the language of the Act indicates, the proper course is to let "the operation of market choices by customers" identify the services that offer these kinds of network benefits.[18] Id.

The Act also directs that services be available at "affordable rates" and that "low-income consumers and those in rural, insular, and high cost areas" be able to obtain service "at rates that are reasonably comparable to [those] charged for similar services in urban areas." [[section]][[section]] 254(b)(1) and (b)(3); NPRM, [[paragraph]][[paragraph]] 14, 25-26. To implement these provisions of the Act, the Joint Board should define (using the process described below and based on data submissions) what constitutes a nationwide "affordable rate" for consumers in all of the areas served by the Tier 1 LECs. To the extent that the TSLRIC of serving a particular area would require a local service rate that exceeds that affordable rate, the LEC or ALEC serving the customer should be able to receive national NUSF subsidy support for the difference (between TSLRIC and the affordable rate).[19] If a state determines that a higher level of support is warranted within its jurisdiction, it can create a competitively neutral supplemental state-specific support mechanism to fund the additional amount, i.e., the difference between the nationwide affordable rate and the end user rate, under [[section]] 254(f) of the Act. Requiring this additional support to be funded from a state-specific mechanism will avoid states creating overly generous subsidy regimes, which could result if a state-determined subsidy were exported through a uniform national surcharge.

In defining what constitutes a nationwide "affordable rate" for consumers in areas served by the Tier 1 LECs, the Joint Board should presume that the current local rate level in each area (including the $3.50 SLC) is affordable for all subscribers, except those satisfying criteria for low-income assistance. Because, as the Commission has acknowledged, the CCLC is inconsistent with the directives of the 1996 Act, the SLC should be raised to recover fully the subscriber loop portion, or base factor portion, of the interstate common line;[20] this will result in a SLC of approximately $7.00 per subscriber (with offsetting reductions in the access charge component of toll rates). The existing local rate for the group of core services defined above, including the increased SLC, should be deemed "affordable" because the SLC increase will not affect telephone subscribership.[21] Accordingly, the Joint Board should develop the nationwide "affordable" local rate based on a weighted average of current local rates for Tier 1 territories as augmented by the increased SLC.

Low-income consumers would continue to qualify for need-based support from the Lifeline Assistance and Link-Up Programs, which should be funded by the NUSF. Specifically, for a subscriber to qualify for such assistance, the subscriber should be required to meet minimum verifiable eligibility standards established by the state commission for each jurisdiction, to demonstrate that he or she cannot afford to pay the generally affordable local service rate.[22] Like reasonable limits on the set of services supported, an appropriate means-testing procedure is also necessary to ensure that the new universal service subsidies do not spiral out of control, and that public support remains strong.

The Tier 1 LECs' traffic-sensitive access charges set at TSLRIC should be used as benchmarks for the access rates of small rural carriers located in the same region. Traffic-sensitive rates for small LECs would be adjusted to the level of the adjacent Tier 1 LECs. To the extent that these new benchmark traffic-sensitive rates coupled with local service revenues (including the increased SLC)[23] are insufficient to cover all of a rural LEC's traffic-sensitive access and basic local service costs (including high cost funds), the remainder should be subsidized directly by the NUSF. These support mechanisms will fully satisfy the principle articulated in [[section]] 254(b)(3): that consumers in rural areas "should have access to telecommunications and information services . . . that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates charged for similar services in urban areas."

In addition to universal service support for essential services to residential subscribers, the Act provides that qualified schools, libraries and rural health care providers should have "access to advanced telecommunications services."[24] In particular, upon bona fide request, carriers: (1) must provide to eligible schools and libraries a discount off rates charged for similar services to other parties,[25] and (2) must provide "telecommunications services" to rural health care providers at rates "reasonably comparable to rates charged for similar services in urban areas in that State."[26] Carriers providing these discounted offerings are entitled to reimbursement for the amount of the discount.[27]

Consistent with the language of the Act and its legislative history,[28] the Commission should interpret carriers' obligations to provide their "telecommunications services" at discounted rates, not the premises equipment or inside wire upgrades that may be needed to use those services or the on-line services that a user may choose to access.[29] In addition, the Commission should cap the discount for which reimbursement would be available at the deepest volume discount level that is offered by the carrier for similar service to a commercial user.[30] Carriers should not be required to inform each school and library within their geographic serving area of the available discounts; such notice can be more efficiently handled through educational and library associations.[31]

Reimbursement in the amount of the special discount for a telecommunications service provided by any carrier to a qualified public institutional user should be funded by the NUSF. Funding to further promote education or public health should come from public funds, although it may be reasonably anticipated that many industry participants will continue to voluntarily offer other products and services at special rates for these users.

III. UNIVERSAL SERVICE SUPPORT SHOULD BE AVAILABLE TO
ELIGIBLE CARRIERS AND A NEUTRAL THIRD PARTY SHOULD
ADMINISTER THE FUND.                             

It is also important that the Commission specify appropriate criteria to guide the states in determining which carriers are eligible to receive subsidies from the NUSF. [[section]] 214(e)(1). To qualify for subsidy payments, the carrier must provide either the core services identified above as a basic stand-alone service offering.[32] Specifically, any carrier willing to offer and advertise such services and provide them by using its own facilities, using another carrier's unbundled network elements per [[section]] 251(c)(3) of the Act (paying the full TSLRIC of the relevant components), or by any combination of such facilities and elements, should be entitled to receive the subsidy on behalf of the subscribers it serves.[33] Such a rule is necessary to ensure that the NUSF support mechanism is competitively neutral and to encourage the new local entry that is the main purpose of the Act.

Finally, the Commission should adopt a specific set of principles and procedures under which the new, consolidated support mechanism will be administered. Specifically, the new regime should be administered by a neutral organization not affiliated with any telecommunications carrier.[34] After the new regime has been put in place and initial subsidy levels set by the Commission, the administrator should determine the amount of the surcharge (based on guidelines established by the Commission and the Joint Board), collect surcharge receipts from service providers, distribute subsidy payments to carriers serving eligible subscribers, grant surcharge credits to resellers for the surcharge they pay to their facilities-based carriers, and enforce the eligibility criteria. The administrator should also administer direct, non- customer dependent subsidies (e.g., high cost funds) to small rural LECs.[35]

CONCLUSION

For the reasons stated above, the Commission should adopt a new competitively neutral system of providing for universal service, so as not to impede the development of local competition as mandated by the 1996 Act.

Respectfully submitted,

AT&T CORP.

By

Mark C. Rosenblum
Peter H. Jacoby
Judy Sello

Room 3244J1
295 North Maple Avenue
Basking Ridge, New Jersey 07920
(908) 221-8984

Its Attorneys

April 12, 1996

CONCLUSION

For the reasons stated above, the Commission should adopt a new competitively neutral system of providing for universal service, so as not to impede the development of local competition as mandated by the 1996 Act.

Respectfully submitted,

AT&T CORP.

By /s/ Judy Sello
Mark C. Rosenblum
Peter H. Jacoby
Judy Sello

Room 3244J1
295 North Maple Avenue
Basking Ridge, New Jersey 07920
(908) 221-8984

Its Attorneys

April 12, 1996

April 12, 1996

Ms. Ernestine Creech
Federal Communications Commission
Common Carrier Bureau
Accounting and Audits Division
2000 L Street, N.W., Suite 257
Washington, DC 20554

Re: Federal-State Joint Board on

Universal Service, CC Docket No. 96-45

Dear Ms. Creech:

Enclosed please find a diskette formatted in IBM- compatible form using WordPerfect 5.1 Windows software, in a read-only mode, containing the Comments of AT&T Corp. that are being filed today in the above-captioned proceeding.

Respectfully yours,

Enclosure

cc: William F. Caton
Acting Secretary
Federal Communications Commission

CERTIFICATE OF SERVICE

I, Diane Danyo, do hereby certify that on this 12th day of April, 1996, a copy of the foregoing Comments of AT&T Corp. was mailed by U.S. first class mail, postage prepaid, to the parties on the attached Service List.

Diane Danyo

CERTIFICATE OF SERVICE

I, Diane Danyo, do hereby certify that on this 12th day of April, 1996, a copy of the foregoing Comments of AT&T Corp. was mailed by U.S. first class mail, postage prepaid, to the parties on the attached Service List.

 /s/ Diane Danyo        

Diane Danyo