AT&T

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		)
				)

FURTHER 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

August 2, 1996

TABLE OF CONTENTS

							Page

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

DEFINITIONS ISSUES					 2

SCHOOLS, LIBRARIES, HEALTH CARE PROVIDERS		 6

HIGH COST FUND						18

	General Questions				23

	Proxy Models					28

	Competitive Bidding				36

	Benchmark Cost Model (BCM) 			40

	Cost Proxy Model Proposed By Pacific Telesis	42

SLC/CCLC						43

LOW-INCOME CONSUMERS					46

ADMINISTRATION OF UNIVERSAL SERVICE SUPPORT		48

CONCLUSION						50

SUMMARY

AT&T's responses demonstrate that to comply with Section 254 of the Telecommunications Act of 1996's requirement that all subsidies be "explicit," "equitable" and "nondiscriminatory," the Commission should establish a New Universal Service Fund (NUSF) that would be both funded and administered in a competitively neutral manner and would provide the subsidies necessary to support: (1) the core set of essential local exchange services for residential consumers in high cost areas, thus ensuring affordability and comparability of rates; (2) need-based Lifeline and Link-Up support for low-income consumers; and (3) special discounts on telecommunications services for qualifying schools, libraries and non-profit health care providers.

As shown in the "Definitions Issues" section, the core set of basic local exchange services for residential customers that would be eligible for universal service-related support should include, for now, 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, and ability to change service providers while retaining the same telephone number. The subsidy should be available for the primary line to a subscriber's principal residence, irrespective of the technology (wireline or wireless) employed. Low-income consumers would qualify for need-based support from the Lifeline and Link-Up programs, which would receive NUSF funding.

As shown in the section on Schools, Libraries and Health Care Providers, these qualifying institutions should be allowed to obtain telecommunications services at the "best commercial rate" based on the deepest volume discount level that is offered by the carrier for similar service to a commercial or residential user in the same geographic area (or the closest urban area within the state). In all cases, the service provider would be reimbursed from the NUSF for the difference between the "best commercial rate" paid by the qualifying institution and the rate the institution would have been charged absent the special discount. Support for enhanced services, hardware/software, wiring, on-site networking and training would not come from the NUSF, but rather from other public and private sources, including mechanisms available under Section 708 of the Act.

As shown in the High Cost Fund section, the NUSF that AT&T proposes promotes both the development of competition and the preservation of universal service, by replacing the existing system of subsidies paid by IXCs to incumbent LECs with a competitively neutral funding mechanism. In particular, the NUSF should be funded by a surcharge on all retail telecommunications services revenues, both interstate and intrastate, which is a fair, simple and efficient recovery process. With the exception of subsidies flowing to small rural telephone companies, all subsidies must be "portable" and follow the customer, not the carrier, to comply with the Act's nondiscrimination requirement and to provide maximum incentive and opportunity for new local entry.

A national affordable benchmark rate (to be established by the Joint Board), based on the weighted average current local rate for consumers in all areas served by non-rural LECs (i.e., those LECs not entitled to exemption from interconnection under Section 251(f)(1) of the Act) including the $3.50 subscriber line charge, should be used in conjunction with the total service long-run incremental cost (TSLRIC) of providing the core service (as determined by the appropriate cost estimate utilizing a tool such as the Hatfield Model) to determine the actual NUSF subsidy for carriers providing the core set of residential local exchange services in high cost areas. The NUSF would provide a subsidy for the difference between the TSLRIC of this core set of local services and the national affordable benchmark rate or the current basic local service rate, whichever is higher. If a current local service rate is lower than the national affordable benchmark rate, the state commission has the option of either raising the local rate to the national affordable rate or creating a supplemental state universal service fund to be funded by state services.

As shown in the responses to Questions 28, 40 and the preamble to the Proxy Model section, it is critical that the Joint Board and the Commission adopt a forward-looking economic standard such as TSLRIC in developing the benchmark for determining whether universal service support is necessary for local service rates, and if so, for establishing the subsidy level. As the Commission has noted, economists agree that a long-run incremental cost standard gives appropriate signals to producers and consumers and ensures efficient entry and utilization of the telecommunications infrastructure. By contrast, using historical costs would permit LECs to obtain universal service subsidies for local exchange facilities that are obsolete, redundant or even unnecessary, and would allow the LECs to thwart entry by more efficient providers. Only by using the TSLRIC standard can the Commission ensure that all implicit subsidies have been removed from the rates for telecommunications services as Section 254 requires, and that these impediments to the development of competition have been eliminated.

The NUSF will allow the Commission to achieve an orderly transition to competitive local service markets, without subjecting subscribers to sudden and significant changes that could jeopardize the goals of universal service. Indeed, there should be no rate shock at all, given the fact that local service rates in most areas are already compensatory, and, to the extent the LECs legitimately require subsidies to provide service to their customers, the NUSF would provide the support.

The section on Competitive Bidding shows that, in general, competitive bidding to implement universal service subsidies is fundamentally at odds with the Act's procompetitive goals. Inherent in the concept of a bidding process is that the winner of the auction would be given exclusive rights to serve an area; this result would not give consumers a choice among service providers, as the Act envisions. Accordingly, except for those limited areas which are not currently served by any LEC and in which a state commission wishes to initiate telephone service, competitive bidding should not be used.

As shown in the section on SLC/CCLC, the CCLC is bloated, but to the extent that it can be justified at all, it subsidizes local service in a manner that runs afoul of the 1996 Act. Using an economically efficient TSLRIC standard, current local rates in most areas of the nation are compensatory and do not require CCLC support. For those subscribers whose local rates are not compensatory under a TSLRIC standard, the Act requires the subsidy be recovered in a competitively neutral manner from all service providers, not just IXCs.

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		)
				)

FURTHER COMMENTS OF AT&T CORP.

Pursuant to the Commission's Public Notice, DA 96-1078, released July 3, 1996, in CC Docket 96-45, AT&T Corp. (AT&T) submits these further comments concerning the implementation of the universal service provisions of the Telecommunications Act of 1996.[1]In accordance with the Commission's directions, AT&T's further comments respond to the questions in the order presented. To assist the Commission, AT&T has provided a preamble to each section which summarizes AT&T's key position on the questions that follow.[2]

DEFINITIONS ISSUES

Preamble: All universal service-related subsidies should be limited to funding a core set of essential, high-quality services. For now, basic local exchange service for residential customers 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, and ability to change service providers while retaining the same telephone number.[3]The subsidy, based on TSLRIC methodology, should be available for the primary line to a subscriber's principal residence, irrespective of the technology (wireline or wireless) employed.[4](AT&T Comments at 12-13).

1. Is it appropriate to assume that current rates for services included within the definition of universal service are affordable, despite variations among companies and service areas?

Yes, it is appropriate to assume that existing local service rates, which have been approved by state commissions, are a lower-bound of affordable rates to all but low-income subscribers. The fact that overall subscribership level in the United States is 93.8% underscores the correctness of this assumption.[5]

2. To what extent should non-rate factors, such as subscribership level, telephone expenditures as a percentage of income, cost of living, or local calling area size be considered in determining the affordability and reasonable comparability of rates?

With the exceptions of the Lifeline and Link-Up programs which reflect the income dimension of affordability, non-rate factors such as subscribership level, telephone expenditure as a percentage of income, should not be considered in determining the affordability and reasonable comparability of rates.

Congress' intent was to maintain comparability of affordable rates between urban and rural areas. The FCC can assume that such comparability is manifested in the current local rates approved by state commissions. Universal service reform, as proposed by AT&T, specifically ensures that such support is designed to provide the difference between rates and TSLRIC in those areas with high costs.

3. When making the "affordability" determination required by Section 254(i) of the Act, what are the advantages and disadvantages of using a specific national benchmark rate for core services in a proxy model?

As noted in AT&T's Comments (at 14-16) and Reply Comments (at 19-21), establishing a benchmark national "affordable" rate is only an accounting mechanism that allows for the support of the universal service subsidy to be distinguished between a national New Universal Service Fund (NUSF) and State Universal Service Funds (SUSFs). The subsidies themselves are identified as the difference between the TSLRIC for local service, and the current basic local service rate, for those primary residence lines that are not compensatory. Use of such a benchmark prevents one state from attempting to import subsidies from other states by establishing an unduly low affordable rate for that state.[6]With AT&T's approach, the NUSF will fund subsidies between the TSLRIC and either the national affordable rate or the current basic local service rate, whichever is higher. If a state's current rate is below the national affordable rate, the state commission has the option of raising the rate to the national affordable rate or creating a SUSF to be funded by state services.

4. What are the effects on competition if a carrier is denied universal service support because it is technically infeasible for that carrier to provide one or more of the core services?

At present, the only carriers receiving universal service support are incumbent local exchange carriers (ILECs), and they obviously have the technical capability of providing core services. The only way it would be technically infeasible for a competitor to provide those services would be if the ILEC were to deny access and interconnection to the facilities that are used to provide those services. If ILECs deny access to the unbundled elements under Section 251(c)(3), for example, it may be technically infeasible for a new entrant to provide one or more of the core services and thus be denied universal service support. It is for this very reason that the FCC must ensure unrestricted access to the unbundled elements and other essential services.

5. A number of commenters proposed various services to be included on the list of supported services, including access to directory assistance, emergency assistance, and advanced services. Although the delivery of these services may require a local loop, do loop costs accurately represent the actual cost of providing core services? To the extent that loop costs do not fully represent the costs associated with including a service in the definition of core services, identify and quantify other costs to be considered.

The local loop is only part of the facilities used in providing the basic core service. (See preamble for core services that comprise the residential basic service offering.) Other facilities include the components associated with signaling, switching and transmission. The NUSF proposed by AT&T, based on the TSLRIC of basic residential local service, including loop, switching, transmission and other unbundled elements costs, thus accounts for all of the facilities used in providing the core service, not just the loop.

SCHOOLS, LIBRARIES, HEALTH CARE PROVIDERS

Preamble: AT&T believes that schools, libraries and non-profit health care providers should have choice in technology, choice in providers, and choice in applications. In its initial comments, AT&T endorsed the Act's approach of requiring telecommunications service providers to give discounts to qualified institutions to facilitate their access to those types of telecommunications services which best meet their needs. (AT&T Comments at 19-20). Consistent with the intent and requirements of the Act, these telecommunications services should be made available to eligible schools, libraries and non-profit health care providers at a discount and be designated as eligible for universal service support.

AT&T believes that the qualified institution should be allowed to obtain telecommunications services at the "best commercial rate" based on the deepest volume discount level that is offered by the carrier for similar service to a commercial or residential user in the same geographic area.[7]If the "best commercial rate" for a school, library or non-profit health care provider in rural or high cost areas is deemed excessive, the qualified institution could be permitted to request the "best commercial rate" in the closest urban area within the state. In all cases, the service provider would be reimbursed from the NUSF for the difference between the "best commercial rate," i.e., the rate which the qualifying institution actually pays for the specially discounted telecommunications service, and the rate the institution would have been charged absent the special discount. This will ensure that the subsidy will be explicit, equitable, non-discriminatory and portable for the user.

Both the individual school, library or non-profit health care provider, as well as the appropriate state-level governing authority (e.g., school, library or health care board), should certify that the discounted telecommunications services (including the transmission capacities) requested are necessary and appropriate given the institutional plan for the applications supported and that the services will be used for the stated purpose. The certification should include a statement that the associated hardware, software, wiring, on-site networking and training will be deployed simultaneously with the discounted telecommunications services. The qualifying institution should also acknowledge that resale of these specially discounted telecommunications services is prohibited and that it will not resell any such service. For example, a qualified hospital should not be permitted to use discounted telecommunications services to carry communications paid for by patients, as this practice would be equivalent to the resale of telecommunications services.

AT&T recognizes that the services required by these institutions are not necessarily solely telecommunications services, but may also include information[8]or enhanced services available from traditional telecommunications service providers, Internet/on-line and other enhanced service providers and many new entrants in this market segment. While AT&T believes that these critical institutions should have discounted access to enhanced services, funding from the NUSF should be limited to telecommunications services. Thus, there needs to be a way for enhanced services to be provided to schools, libraries and non-profit health care providers at a discount. Public and private funding sources, as well as provisions of Section 708 of the Act, could be utilized to provide for the availability of these non-telecommunications services and products to schools, libraries and non-profit health care providers at a discount. Similarly, these non-telecommunications funding mechanisms could be used to assist in the provision of inside wiring, customer premises equipment, or computer hardware/software, as well as associated training and maintenance, which will be required by these institutions.

The AT&T plan proposed above will help ensure that while eligible schools, libraries and non-profit health care providers receive discounted telecommunications services, the NUSF will not be misused and that public support, which is absolutely critical to its success, remains strong.

6. Should the services or functionalities eligible for discounts be specifically limited and identified, or should the discount apply to all available services?

As stated in the preamble, the discount for qualified schools, libraries and non-profit health care providers should apply to telecommunications services of the qualified institution's choice. The marketplace and not the Commission should determine the evolution of telecommunications services and, accordingly, schools, libraries and non-profit health care providers should select the services suitable for their needs.

7. Does Section 254(h) contemplate that inside wiring or other internal connections to classrooms may be eligible for universal service support of telecommunications services provided to schools and libraries? If so, what is the estimated cost of the inside wiring and other internal connections?

No. Inside wiring or other internal connections to classrooms should not be eligible for universal service support from the NUSF. The Act refers to "telecommunications services" and not inside wiring, customer premises equipment, computer hardware/software, or training. See 47 U.S.C. Sections 254(b)(6) and 254(h).

The Commission and Joint Board may reasonably anticipate that many industry participants will continue to voluntarily offer other products and services at special rates for these users. AT&T also supports grassroots initiatives like NetDays, where the physical connections within the schools are done by volunteers, and AT&T is actively involved in helping to organize several such initiatives.[9]The Clinton Administration and the Department of Education kicked off the Education Empowerment Zone Initiative in March, 1996. This initiative focuses on 15 of the already established empowerment zones to encourage corporate sponsors and the local communities to bring technology to the schools. AT&T is one of the corporate sponsors of this initiative.[10]

8. To what extent should the provisions of Sections 706 and 708 be considered by the Joint Board and be relied upon to provide advanced services to schools, libraries and health care providers?

The preamble addresses how telecommunications services will be provided to schools, libraries and non-profit health care providers at a discount, and that these services are eligible for NUSF support. Enhanced services are also very important, and schools, libraries and non-profit health care providers should have affordable access to them. Given the critical need of many schools to obtain access to telecommunications services, this is a key priority. However, if the broader market has accepted certain enhanced services, as evidenced through user choices, then Section 708 could be utilized as a possible funding source.

9. How can universal service support for schools, libraries, and health care providers be structured to promote competition?

The current system of subsidies needs to be reformed and replaced by a single New Universal Service Fund (NUSF). The new fund should be structured so that it is portable for users, explicit and funded in a competitively neutral manner so that NUSF subsidies will provide a source of funding to allow appropriate contribution for telecommunications services for schools, libraries and non-profit health care providers by all service providers and for the benefit of all qualified institutions and eligible users. It will thus encourage entry into the local market for the providers of these services, while ensuring the availability and affordability of telecommunications services to all qualified institutions regardless of location.

10. Should the resale prohibition in Section 254(h)(3) be construed to prohibit only the resale of services to the public for profit, and should it be construed so as to permit end user cost based fees for services? Would construction in this manner facilitate community networks and/or aggregation of purchasing power?

No. Qualified institutions, in AT&T's view, would be entitled to the "best commercial rate" based on the deepest volume discount level that is offered by the service provider for a similar service to a commercial or residential user in the same geographic area. In rural areas, if the best commercial rate is deemed excessive, schools, libraries and non-profit health care providers may request the "best commercial rate" in an adjacent urban area within the state. In this model, there is no need to aggregate purchasing power, because the qualified institution would be provided the deepest available discount regardless of the size of the institution. Accordingly, the resale restriction should be strictly construed to carry out Congress' intent, and most fundamentally, to limit the demand on and to keep the NUSF within reasonable limits, so that public support remains strong to ensure its survival. End user cost recovery should be permitted for schools, libraries and non-profit health care providers, but the resale of subsidized telecommunications services to create new sources of revenue or free use of the network by nonqualified users should be prohibited.

11. If the answer to the first question in number 10 is "yes," should the discounts be available only for the traffic or network usage attributable to the educational entities that qualify for the Section 254 discounts?

There is no public need or justification to allow schools, libraries and non-profit health care providers to resell NUSF-subsidized services.

12. Should discounts be directed to the states in the form of block grants?

No. Block grants would distort the competitive services marketplace by taking away the decisionmaking prerogative from the customer -- in this case the qualified institutions. Block grants will prevent schools, libraries and non-profit health care providers from having choice --choice in technology, providers and applications.

13. Should discounts for schools, libraries, and health care providers take the form of direct billing credits for telecommunications services provided to eligible institutions?

The bill to the customer would be for the "best commercial rate" and the difference between this special discounted rate and the rate the telecommunications service provider would normally charge would be recovered from the NUSF via a credit to the service provider.

14. If the discounts are disbursed as block grants to states or as direct billing credits for schools, libraries, and health care providers, what, if any, measures should be implemented to assure that the funds allocated for discounts are used for their intended purposes?

To ensure that discounted telecommunications services are necessary and used for their intended purpose, both the individual school, library or non-profit health care provider, as well as the appropriate state-level governing authority (e.g., school, library, health care board), should certify that: (i) the applicant for discounted telecommunications service is a qualified school, library or non-profit health care provider; (ii) the discounted service, including the amount of capacity requested, is necessary to support the application planned and will be used for the stated purposes; and (iii) the associated hardware, software, wiring, on-site networking and training are to be deployed simultaneously with the discounted telecommunications service.

15. What is the least administratively burdensome requirement that could be used to ensure that requests for supported telecommunications services are bona fide requests within the intent of section 254(h)?

See Response to Question 14.

16. What should be the base service prices to which discounts for schools and libraries are applied: (a) total service long-run incremental cost; (b) short-run incremental costs; (c) best commercially-available rate; (d) tariffed rate; (e) rate established through a competitively-bid contract in which schools and libraries participate;

(f) lowest of some group of the above; or (g) some other benchmark? How could the best commercially-available rate be ascertained, in light of the fact that many such rates may be established pursuant to confidential contractual arrangements?

The "best commercial rate" -- the deepest volume discount level that is offered by the carrier for similar service to a commercial or residential user in the same geographic area -- should be the base price for the qualified institution. The burden should be on the service provider to demonstrate its best commercially available rate and the rate it would otherwise charge the user to the NUSF administrator, so as to receive NUSF reimbursement for the difference.

17. How should discounts be applied, if at all, for schools and libraries and rural health care providers that are currently receiving special rates?

As new requests for services are received, qualified institutions would be entitled to the "best commercial rate" offered by the telecommunications service provider.

18. What states have established discount programs for telecommunications services provided to schools, libraries, and health care providers? Describe the programs, including the measurable outcomes and the associated costs.

AT&T believes the state authorities are in the best position to respond to this question. AT&T notes that the NIIAC KickStart Initiative lists several examples of states proposing or receiving special rates or discounts.

19. Should an additional discount be given to schools and libraries located in rural, insular, high-cost and economically disadvantaged areas? What percentage of telecommunications services (e.g., Internet services) used by schools and libraries in such areas are or require toll calls?

AT&T proposes that no additional discount be given. If the "best commercial rate" in a rural area is deemed excessive, the qualified institution could request the "best commercial rate" in an adjacent urban area within the state. AT&T believes schools and States are in the best position to respond to part 2 of this question.

20. Should the Commission use some existing model to determine the degree to which a school is disadvantaged (e.g., Title I or the national school lunch program)? Which one? What, if any, modifications should the Commission make to that model?

All qualified schools would be entitled to discounted telecommunications services under the AT&T plan without regard to whether or not the school is disadvantaged.

21. Should the Commission use a sliding scale approach (i.e., along a continuum of need) or a step approach (e.g., the Lifeline assistance program or the national school lunch program) to allocate any additional consideration given to schools and libraries located in rural, insular, high-cost, and economically disadvantaged areas?

See Response to Question 19.

22. Should separate funding mechanisms be established for schools and libraries and for rural health care providers?

No. The NUSF can be used for subsidy support of discounted telecommunications services to schools, libraries and non-profit health care providers. The discounting mechanism should be the "best commercial rate," and no additional discounting mechanism is required.

23. Are the cost estimates contained in the McKinsey Report and NII KickStart Initiative an accurate funding estimate for the discount provisions for schools and libraries, assuming that tariffed rates are used as the base prices?

The basis for the cost estimates contained in the McKinsey Report and the NIIAC KickStart Initiative, both of which are excellent efforts, should be examined further to determine if they are appropriate for this purpose.

24. Are there other cost estimates available that can serve as the basis for establishing a funding estimate for the discount provisions applicable to schools and libraries and to rural health care providers?

The U.S. Department of Education has done cost studies, one of which is "Connecting K-12 Schools to the NII: A Preliminary Assessment of Technology Models and their Associated Costs" (Russell I. Rothstein, August 4, 1994). As with the McKinsey Report, the basis for the estimates should be examined further to determine if they are appropriate for this purpose.

25. Are there any specific cost estimates that address the discount funding estimates for eligible private schools?

AT&T believes that the costs associated with private and public schools are consistent for like-size institutions.

HIGH COST FUND[11]

Preamble: A New Universal Service Fund (NUSF) that promotes both the development of competition and the preservation of universal service is certainly attainable, but it requires a fundamental shift in the current method of supporting universal service. AT&T's plan for a NUSF will provide a source of funding to allow recovery of residential local service universal service support costs from all telecommunications services and for the benefit of all customers of that service, thus encouraging local market entry in all geographic areas. 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. Indeed, there should be no rate shock at all, given the fact that local service rates in most areas are already compensatory, and, to the extent the LECs legitimately require subsidies to provide service for their customers, the competitively neutral mechanism would provide the support -- ensuring availability and affordability of local service to all customers regardless of location. (AT&T Comments at 10; AT&T Reply Comments at ii).

AT&T's plan for the NUSF is fully consistent with the requirements of the Act, and includes the following points:

. .The NUSF should be funded in a competitively neutral manner by a surcharge on all retail telecommunications services revenues, both interstate and intrastate, which is a fair, simple and efficient recovery mechanism.[12](AT&T Comments at 8).

. All subsidies must be "portable" and follow the customer, not the carrier, to ensure compliance with the nondiscrimination requirement of Section 254(b)(4) and to encourage new local entry. At least at the outset, small rural carriers can appropriately be exempted from the portability requirement because the administrative costs of portability could outweigh the benefits. (AT&T Comments at 9).

. All universal service-related subsidies should be limited to funding a core set of essential, high-quality services. For the present (and as described under Definitions Issues above), 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, and the ability for customers to retain their telephone numbers when changing local service providers.[13] (AT&T Comments at 12).

. A "national affordable rate" should be used in conjunction with the TSLRIC of providing the core service (as developed by the Hatfield Model) to determine the actual subsidy provided to carriers operating in high cost areas. To the extent that the TSLRIC of serving a particular area would require a local service rate that exceeds the "affordable rate," the ILEC or competitive local exchange carrier (CLEC) serving the customer should be able to receive national NUSF support for the difference between the TSLRIC and the affordable rate. (AT&T Comments at 14; Reply Comments at 19).[14]

. 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. (AT&T Comments at 18).

. Small rural carriers would benchmark their traffic-sensitive (TS) rates to the adjacent non-rural LEC's level (which is based on TSLRIC). To the extent that these new benchmark TS rates coupled with local service revenues (including the SLC and high cost fund revenues) are insufficient to cover all of a rural LEC's TS access and basic local service costs, the remainder should be subsidized directly by the NUSF. (AT&T Comments at 18).

. Reimbursement in the amount of the special discount for a telecommunications service provided by any carrier to a qualified institutional user (school, library, non-profit health care provider) should be funded by the NUSF. (AT&T Comments at 21).

. The NUSF should be administered by a neutral organization not affiliated with any telecommunications carrier, such as a major accounting firm, electronic data processor or financial institution. (AT&T Comments at 22).

. All subsidies need to be stripped from access charges in order to comply with the Section 254(b)(4)'s mandate that "all providers of telecommunications services . . . make an equitable and nondiscriminatory contribution to the preservation and advancement of universal service." (AT&T Comments at 4).

AT&T's proposed NUSF plan strongly supports the Act's objective of ensuring universal service for all residential consumers at reasonable rates, through a mechanism that complies with the Act's command that all subsidies be "explicit," "equitable" and "nondiscriminatory." This NUSF plan will thus facilitate local market entry in all geographic areas of the country, consistent with the Act's procompetitive objectives.

General Questions

26. If the existing high-cost support mechanism remains in place (on either a permanent or temporary basis), what modifications, if any, are required to comply with the Telecommunications Act of 1996?

The existing high-cost support mechanisms should not remain in place, because they are inconsistent with Section 254 of the Act's command that all subsidies be explicit, equitable and nondiscriminatory. Accordingly, 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 through a surcharge on carrier revenues (interstate and intrastate). The subsidy must be explicit and portable with the end user consumer, and the level of the NUSF subsidy should be developed by comparing the TSLRIC of providing the basic core services in an area with the nationwide "affordable rate." (AT&T Comments at ii-iii).

27. If the high-cost support system is kept in place for rural areas, how should it be modified to target the fund better and consistently with the Telecommunications Act of 1996?

As described above, the AT&T plan for a NUSF would provide appropriate universal service support to any eligible carrier that provides service in high cost areas. At least at the outset, small rural carriers can appropriately be exempted from the portability requirement because the administrative costs of portability could outweigh the benefits. These carriers would benchmark their traffic-sensitive access rates to the level of the adjacent non-rural LEC (which is based on TSLRIC); they would be eligible to receive "high cost support" from a restructured high cost fund, as described in Attachment A. To the extent that these new benchmark TS rates coupled with local service revenues (including the SLC and high cost fund revenues) are insufficient to cover all of a rural LEC's TS access and basic local service costs, the remainder should be subsidized directly by the NUSF. Once a state commission determines that it is in the public interest for a rural carrier to interconnect with new entrants in its territory per Section 251(f)(1)(B), then the subsidy should also become portable and follow the end user consumer to the carrier of choice. (AT&T Comments at 9).

28. What are the potential advantages and disadvantages of basing the payments to competitive carriers on the book costs of the incumbent local exchange carrier operating in the same service area?

It is critically important that the Joint Board and the Commission adopt TSLRIC as the economic standard in developing its benchmark for determining whether universal service support is necessary for local service rates, and if so, for establishing the subsidy level. AT&T's plan for a NUSF calls for a local exchange carrier to be permitted to collect universal service support only when its TSLRIC (as determined by the appropriate cost estimate utilizing a tool such as the Hatfield Model) is greater than the nationwide affordable rate.

As the Commission has observed, "[e]conomists generally agree that prices based on [long-run incremental cost] give appropriate signals to producers and consumers and ensure efficient entry and utilization of the telecommunications infrastructure. They further agree that competitive markets, over the long run, tend to force prices toward [long-run incremental cost]."[15]This principle applies with equal force to subsidies: forcing subscribers to subsidize a LEC's embedded costs in any fashion would distort the competitive market and, indeed, allow the LEC to thwart entry by other, more efficient potential competitors.

Only disadvantages exist in basing subsidy payments on embedded costs. The Commission should flatly reject such a suggestion, and instead require that all universal service support payments be made only on the basis of a TSLRIC-based cost estimate. It has long been recognized that permitting a LEC to obtain revenues --whether in the rates it charges or the subsidies it receives -- on the basis of historical costs gives it a strong incentive to overinvest in its capital asset rate base and to operate in an inefficient manner. Moreover, given a LEC's incentive to inflate costs, reliance upon embedded costs would require state public utility commissions to undertake frequent, unwieldy and expensive inquiries into the value and prudence of any claimed costs. The use of an embedded cost subsidy system would perpetuate inflated uneconomic subsidies -- one of the very barriers to competition that the Act requires be corrected.

29. Should price cap companies be eligible for high-cost support, and if not, how would the exclusion of price cap carriers be consistent with the provisions of section 214(e) of the Communications Act? In the alternative, should high-cost support be structured differently for price cap carriers than for other carriers?

All carriers providing the basic core service to high cost areas are entitled to universal service support. Therefore, whether a company is price cap or not becomes irrelevant to its eligibility for high cost support under AT&T's plan for a NUSF.

30. If price cap companies are not eligible for support or receive high-cost support on a different basis than other carriers, what should be the definition of a "price cap" company? Would companies participating in a state, but not a federal, price cap plan be deemed price cap companies? Should there be a distinction between carriers operating under price caps and carriers that have agreed, for a specified period of time, to limit increases in some or all rates as part of a "social contract" regulatory approach?

See Response to Question 29.

31. If a bifurcated plan that would allow the use of book costs (instead of proxy costs) were used for rural companies, how should rural companies be defined?

Rural companies should be defined as those LECs that are entitled to an exemption from interconnection under Section 251(f)(1) of the Act.

32. If such a bifurcated approach is used, should those carriers initially allowed to use book costs eventually transition to a proxy system or a system of competitive bidding? If these companies are transitioned from book costs, how long should the transition be? What would be the basis for high-cost assistance to competitors under a bifurcated approach, both initially and during a transition period?

When state commissions determine that it is in the public interest for rural carriers to interconnect with new entrants, then the NUSF support should be based on the TSLRIC of the basic core service as compared to the nationwide "affordable" rate. In this instance, the TSLRIC for providing basic core service could be either that for the adjacent non-rural LEC territory, or the TSLRIC specifically developed for the rural carrier territory.

33. If a proxy model is used, should carriers serving areas with subscription below a certain level continue to receive assistance at levels currently produced under the HCF and DEM weighting subsidies?

No. All carriers serving high cost areas would receive universal service subsidy in accordance with the provisions of the NUSF as outlined above.

Proxy Models

Preamble: It is critically important that the Commission and the Joint Board adopt TSLRIC as the economic standard for the benchmark for determining whether universal service support is necessary for local service rates, and if so, for establishing the subsidy level. Only by using the TSLRIC standard can the Commission ensure that all implicit subsidies have been removed from the rates for telecommunications services as Section 254 requires, and that these impediments to the development of competition have been eliminated.

TSLRIC should be the cost standard for developing the costs of providing basic local service for which subsidies may apply because a TSLRIC methodology embraces the following basic principles:

. .TSLRIC measures the forward-looking costs of providing the basic local service.

. TSLRIC is based on the costs an efficient, cost-minimizing competitor would incur -- i.e., the costs of assets that are optimally configured and sized with the efficient deployment of the latest technology and efficient operating practices. Proper TSLRIC estimates do not simply accept the past (possibly inefficient) architecture, sizing, or operating decisions of the ILECs as the foundation for calculating TSLRIC.

. TSLRIC includes the additional costs of providing the basic local service being examined (including a retail cost overlay), holding constant the ILEC's output of other goods and services.

. TSLRIC is based on the entire demand of all uses and users of basic local services.

. TSLRIC estimates reflect significant geographic cost differences.

Thus, only models that provide a direct measure of TSLRIC should be considered for purposes of measuring universal service subsidies.

The firm of Hatfield Associates, at the request of AT&T and MCI, has developed a detailed TSLRIC model that, among other things, establishes specific TSLRIC costs of providing basic local service. Building and improving upon earlier efforts to develop a costing model for local exchange facilities championed by a number of ILECs, the Hatfield Model includes the full array of different geologic, geographic, demographic, technological, and other pertinent cost-causative conditions in the development of detailed and realistic TSLRIC estimates of the cost of providing basic local service.

The Hatfield Model uses the best publicly available and auditable data about ILEC costs, and applies conservative TSLRIC calculations that assign at least as much to TSLRIC as pure economic theory would require. The model produces, for each state, actual TSLRIC figures for each of six population density zones, reflecting cost differences across low and high density regions within the state.

34. What, if any, program (in addition to those aimed at high-cost areas) are needed to ensure that insular areas have affordable telecommunications service?

If universal service support is needed for "core local service" in insular areas, the NUSF will provide the subsidy, just as it does for other high cost areas. In addition, AT&T recognizes that some form of rate averaging and/or integration may be appropriate to help ensure affordable long distance rates in insular areas, for example, by the use of a single nationwide, tariffed rate schedule for consumer basic long distances services. (See AT&T Comments, CC Docket 96-61, filed April 19, 1996, at 33-34). To the extent that telecommunications carriers, as a result of rate averaging and integration rules, provide interexchange services that are below cost for calls to or from insular areas, they should be permitted to recover from the NUSF the difference between the price charged to the end user and the TSLRIC. (See AT&T Comments at n.15).

35. U S West has stated that an industry task force "could develop a final model process utilizing consensus model assumptions and input data," U S West comments at 10. Comment on U S West's statement, discussing potential legal issues and practical considerations in light of the requirement under the 1996 Act that the Commission take final action in this proceeding within six months of the Joint Board's recommended decision.

While industry consensus on the underlying logic of the model is possible, consensus regarding the appropriate input data has not been forthcoming, and it is not realistic to assume that such a consensus can be achieved -- particularly in light of the short timeframes mandated by the Act. Therefore, it will be necessary for the Commission to establish the appropriate modeling technique.

36. What proposals, if any, have been considered by interested parties to harmonize the differences among the various proxy cost proposals? What results have been achieved?

See Response to Question 35.

37. How does a proxy model determine costs for providing only the defined universal service core services?

The Hatfield Model builds up from the unbundled TSLRIC network elements used for core services, with a basic retail cost overlay (based on TSLRIC).

38. How should a proxy model evolve to account for changes in the definition of core services or in the technical capabilities of various types of facilities?

The Hatfield Model has the capability to add to the definition of core services and to incorporate modifications to the technical capabilities of various types of facilities.

39. Should a proxy model account for the cost of access to advanced telecommunications and information services, as referenced in section 254(b) of the Act? If so, how should this occur?

A proxy model should be limited to measuring only the costs for core services subject to explicit universal service subsidies. AT&T recommends the core service defined in the preamble to the "Definition Issues" section as the services requiring cost measurement. These core services can be used to access advanced and information services.

40. If a proxy model is used, what, if any, measures are necessary to assure that urban rates and rates in rural, insular, and high-cost areas are reasonably comparable, as required in Section 254(b)(3) of the 1996 Act?

The Hatfield Model is designed to estimate the cost of providing basic local service using the most efficient deployment of the latest technology for each Census Block Group (CBG) served by a non-rural LEC, based on the actual demographic, geographic and topographic characteristics of the CBG. The CBGs are aggregated to six population density zones, and the cost of providing basic local service for each primary line is then determined for each zone. The TSLRIC per line for each density zone can then be compared with the affordable rate. Thus, for each population density zone for which the affordable rate is less than the TSLRIC for the primary line, the model can size the amount of the subsidy, thereby creating a deaveraged subsidy by density zone. The Hatfield model uses a database which assigns each CBG in the United States to a specific LEC wire center. The database can then be used to assign a per-line density zone subsidy to individual subscribers within the density zone. With the subsidy subsequently disaggregated to individual subscribers, service providers will not have to change rates for any subscriber, regardless of where the subscriber lives. Thus, today's reasonably comparable rates between urban and rural areas could be sustained.

41. How should support be calculated for those areas (e.g., insular areas and Alaska) that are not included under the proxy model?

Proxy models identify the TSLRIC of providing local service for all non-rural LEC territories, including insular areas. Accordingly, for insular areas served by non-rural LECs, TSLRIC should be the cost standard for identifying whether a subsidy is required. To the extent that subsidies are needed to support "core service" in these insular areas, the NUSF will provide the same support as for other high cost areas. All other insular areas will be covered under the rural LEC plan, which is described in the response to Question 27.

42. Will support calculated using a proxy model provide sufficient incentive to support infrastructure development and maintain quality service?

The Hatfield Model includes sufficient return/profit to provide efficient LECs with incentives to continue to invest in appropriate infrastructure.

43. Should there be recourse for companies whose book costs are substantially above the costs projected for them under a proxy model? If so, under what conditions (for example, at what cost levels above the proxy amount) should carriers be granted a waiver allowing alternative treatment? What standards should be used when considering such requests?

The NUSF plan recommended by AT&T provides an economically sound, properly targeted, and competitively neutral support program for which all carriers providing the core set of local services could become eligible for support on behalf of their customers. It provides appropriate universal service support to any eligible carrier that provides service in high cost areas. Therefore, there is no need to recognize book costs in the determination of universal service support. In fact, such excess book costs are most likely indicative of inefficiency that should not be sustained.

44. How can a proxy model be modified to accommodate technological neutrality?

Proxy models need to be flexible to allow for updating to accommodate the least cost, forward-looking proven technology. Periodic reviews of the models could be made to ensure that they are consistent relative to changing technology and the associated costs of that technology.

45. Is it appropriate for a proxy model adopted by the Commission in this proceeding to be subject to proprietary restrictions, or must such a model be a public document?

The model architecture and logic should be a public document, as well as the maximum amount of input data. To the extent that proprietary information allows for inputs that provide a more precise estimate of TSLRIC costs, the Commission should allow for the use of such proprietary information in the development of cost estimates. However, all proprietary information should be made available to interested parties, subject to non-disclosure agreements, to allow for review and audit of the data.

46. Should a proxy model be adopted if it is based on proprietary data that may not be available for public review?

See Response to Question 45.

47. If it is determined that proprietary data should not be employed in the proxy model, are there adequate data publicly available on current book costs to develop a proxy model? If so, identify the source(s) of such data.

See Response to Question 45. The Hatfield Model develops a reasonable approximation of the TSLRIC costs required to compute a competitively neutral subsidy by using publicly available date.

48. Should the materiality and potential importance of proprietary information be considered in evaluating the various models?

See Response to Question 45.

Competitive Bidding

Preamble: To stimulate a competitive environment, all exclusive franchises in territories currently served by non-rural LECs must be eliminated. All carriers having the technology, management and financial resources to offer the core set of basic residential local services must be allowed to compete for the subscriber.

Although there has been some discussion within the industry about the possibility of using competitive bidding as a way of fulfilling Section 254's requirement of competitively neutral universal service provision, AT&T believes that, in general, competitive bidding is fundamentally at odds with the Act's procompetitive goals. An inherent aspect of a bidding process is that the winner of the auction would be given exclusive rights to serve an area; but this result would obviously deny consumers the choice of service providers that the Act envisions.

AT&T's universal service reform proposal addresses the issue of universal service support for high cost areas in an efficient, competitively neutral manner and allows for development of local competition. Adoption of AT&T's proposal is far preferable to a competitive bidding process that would ultimately deny consumers choice among local service providers.

Once the New Universal Service Fund (NUSF) proposed by AT&T is implemented, every carrier that provides basic residential local exchange service would be eligible for a subsidy if the basic local service rates in an area are not compensatory. Upon winning the subscriber in the competitive marketplace, the carrier receives, on behalf of the customer, whatever subsidy is ascribed to that customer. Notwithstanding its above-noted concerns, AT&T would not be opposed to use of a competitive bidding process in those areas not currently served by any LEC (either non-rural or rural), and in which a state commission seeks to initiate telephone service in the unserved area. As the number of potential customers in this situation is presumably very small, only a single carrier is likely to be able to develop the necessary economies of scope to provide service economically, and use of a competitive bidding process to identify one carrier to serve this small customer base is about as efficient as any other mechanism. The amount of the subsidy from the NUSF would then be the difference between the winning bid, in this case the carrier submitting the lowest bid per primary residential line, and the nationwide affordable rate or the actual basic local service rate, whichever is higher. If the actual rate is set below the nationwide affordable rate, the state commission could provide additional support by a state-specific subsidy funded by a surcharge on intrastate service revenues.

49. How would high-cost payments be determined under a system of competitive bidding in areas with no competition?

As noted above, the amount of the subsidy from the NUSF would be the difference between the winning bid and the nationwide affordable rate or the actual basic local service rate, whichever is higher.

50. How should a bidding system be structured in order to provide incentives for carriers to compete to submit the low bid for universal service support?

AT&T does not believe that a bidding system can be structured that would be as efficient as a mechanism, such as the one proposed by AT&T, which limits the NUSF subsidy payment to the difference between TSLRIC and the nationwide affordable basic local service rate or the actual local service rate, whichever is higher. Carriers in a bidding system would have an incentive to bid at a level somewhat above the TSLRIC. Accordingly, for all territories other than those which are not currently served by any LEC, competitive bidding should not be employed.

51. What, if any, safeguards should be adopted to ensure that large companies do not bid excessively low to drive out competition?

See Response to Question 50.

52. What safeguards should be adopted to ensure adequate quality of service under a system of competitive bidding?

In those limited circumstances where competitive bidding may be allowed, state commissions should verify the credentials and capabilities of the bidding carriers to ensure subscribers are adequately served and are not abandoned.

53. How is collusion avoided when using a competitive bid?

See Response to Question 50.

54. Should the structure of the auction differ if there are few bidders? If so, how?

The fact that there might be few or potentially only one bidder in a serving area is a further indication that a bidding system would not be efficient.

55. How should the Commission determine the size of the areas within which eligible carriers bid for universal service support? What is the optimal basis for determining the size of those areas, in order to avoid unfair advantage for either the incumbent local exchange carriers or competitive carriers?

As indicated above, a competitive bidding process is not necessary for implementing universal service subsidies and should not be used, except for those areas which are not currently served by any LEC and in which a state commission wishes to initiate telephone service. The state commission should identify the specific geographic area in which it intends to initiate service and solicit competitive bids.

Benchmark Cost Model (BCM)

Preamble: Since none of the original sponsors of BCM currently supports BCM, and some of the sponsors have recently introduced BCM 2 to replace BCM, questions regarding the BCM are moot. AT&T's Comments on BCM 2 will be provided on August 9, 1996, in connection with the Universal Service (96-45) Public Notice seeking comments regarding proxy models.

56. How do the book costs of incumbent local exchange carriers compare with the calculated proxy costs of the Benchmark Cost Model (BCM) for the same areas?