In the Matter of ) ) Federal-State Joint Board on ) CC Docket No. 96-45 Universal Service )
FURTHER COMMENTS
BELLSOUTH CORPORATION
BELLSOUTH TELECOMMUNICATIONS, INC.
M. Robert Sutherland
Richard M. Sbaratta
Rebecca M. Lough
Their Attorneys
Suite 1700
1155 Peachtree Street, N.E.
Atlanta, Georgia 30309-3610
(404) 249-3390
DATE: August 2, 1996
TABLE OF CONTENTS
SUMMARY
Definitions Issues
The record in this proceeding establishes that the current rates for the services that would be deemed within the definition of core universal services should be considered affordable. In establishing a universal service plan, the Commission could establish affordability benchmarks and provide universal service support to eligible carriers whose costs of providing universal service exceed the affordability benchmark. In setting an affordability benchmark, BellSouth believes that the Commission should take into account average income level within an state. The income factor used in setting the affordability benchmark must be disaggregated below a national average, otherwise states with income levels below the national average would become responsible for funding a proportionately larger amount for universal service, making it potentially more difficult to ensure affordable service in these states. In its Comments, BellSouth describes a proxy cost model. As BellSouth explains, it is critical that, if the Commission proceeds to establish a universal service plan based on such a model, implementation of that plan be accomplished in a revenue neutral manner. A universal service approach that is not grounded in revenue neutrality at the start will arbitrarily harm some companies.
Schools, Libraries, and Health Care Providers
The Commission should adopt a Funds to Schools ("FTS") approach for implementing the universal service discount program for schools and libraries. Under FTS, the support fund size would be based upon the McKinsey Partial Classroom model, the amount of the fund would be known from the outset, and each school or library would have the flexibility to utilize its allotted support for telecommunications services as needed.
The FTS approach would promote competition by incenting telecommunications service providers to offer creative solutions to schools and libraries which can enable schools and libraries to make the best use of their total universal service support allotment, either on an individual basis or in sharing arrangements among multiple eligible entities. The competitive process could be utilized to drive prices to market levels, with universal service support applied to the resulting rates. The FTS approach could also easily accommodate a determination by the Commission to adjust base amounts of support upward for individual schools and libraries deemed to be in need of above-average support.
In implementing the FTS approach and establishing means to determine bona fide requests, the Commission should find ways to assure that recipients have plans to utilize such support consistent with an educational technology plan. The Commission should not impose additional, burdensome mechanisms upon recipients, but rather should find ways to utilize existing channels at the state, school district, or local level as may be appropriate.General Questions
The existing high cost fund is not sufficient to address funding of universal service as required by the Telecommunications Act of 1996. The high cost fund should be replaced by a new, comprehensive federal universal service fund. In establishing this new funding mechanism, BellSouth has advocated that support for eligible carriers be based on the incumbent LEC's book costs. The advantages of such an approach are that book costs provide a reliable estimate of the cost of providing service in an area. Further, book costs are not theoretical costs but, instead, are grounded on the actual cost involved in building and operating a network throughout the area being served.
Moreover, basing payments initially on an incumbent's book costs encourages competitors with incremental costs lower than the incumbent's incremental costs to eventually win over the incumbent's customers. By receiving the full amount of the support received by the incumbent, the more efficient competitor could offer the same service at a price below that set by policy. Portable payments mean that the most efficient competitor eventually serves the customer and at the same time provides a strong incentive for the incumbent to become more efficient.
Regardless of the approach used to establish a fund, once established, any carrier designated as an eligible carrier is entitled to receive universal service support in accordance with the plan. The Commission cannot limit support on the basis of how the Commission classifies a carrier, such as a price-cap or non-price cap LEC.
Proxy Models
A proxy model must be properly specified in order to produce a reasonable result; i.e., it should produce costs that will ensure that the universal service support is sufficient to attract telecommunications service providers. A properly specified model will estimate the forward looking cost of providing only the defined universal service core services, although it should include a reasonable share of joint and common costs.
Because a proxy model produces hypothetical costs that are not specific to, or even necessarily representative of, a service provider's actual book costs, the possibility exists for book costs to exceed substantially the costs produced by a proxy model. Since service providers have to recover their actual-not hypothetical- costs to remain viable, it is critical that alternative recourse be available to those providers for whom support payments are insufficient to recover their costs. Thus, if a proxy model is adopted, it is imperative that the approach be implemented in a revenue neutral manner. If a company is forced to reduce rates by more than it receives out to the universal service fund, then that would abrogate the federal price regulation plan that is in place, and it could well result in confiscation.
So long as the new universal service fund is implemented in a revenue neutral manner, incumbent LECs will continue to have an incentive to invest in their infrastructure. Further, if support is set at a sufficient level, then multiple companies will have the incentive to provide universal service in a given area.
The outcome of a proxy model should be technologically neutral. Any carrier that is an eligible carrier would be able to collect universal service support regardless of the technology it uses to provide service.
Competitive Bidding
Any bidding process would be subject to considerable opportunities for gaming that effectively preclude competitive bidding from being considered as a means for funding universal service.
Benchmark Cost Model
BellSouth will provide it Benchmark cost model analysis in comments August 9.
SLC/CCL
If the Commission adopts a methodology that results in universal service support that is inadequate to eliminate the interstate CCL charge, then local exchange carriers must be afforded the flexibility to recover what CCL amounts remain in a way other than through a per minute of use charge. Alternative recovery approaches would include bulk billing and/or flat rate per line charges.
Low-Income Consumers
BellSouth supports including a low income element as part of the new universal service fund. In order to implement the new program as simply as possible, the Lifeline subsidy should continue to be linked to the amount of the subscriber line charge.
Administration of Universal Service Support
At this time there is no data available to estimate the administrative costs associated with the various methods that could be used to calculate a carrier's funding obligation. Nevertheless, a retail revenue approach, as suggested by BellSouth, is a straightforward means of determining a carrier's funding obligation. Accordingly, a priori, it would appear that such an approach would be simple and not particularly difficult or costly to implement.
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
BellSouth Corporation and BellSouth Telecommunications, Inc. (BellSouth) hereby submit their comments on the specific questions set forth in the Public Notice (DA 96-1078) released July 3, 1996.
Definitions Issues
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?
The record in this proceeding establishes that the current rates for services included within the definition of universal service (i.e. - voice grade residential local exchange service and touchtone) are affordable. While there are variations in rates among companies and service areas, subscription rates are generally high in all states. Moreover, local exchange service rates, in general, have declined in real terms over the last decade, and this is especially true in BellSouth's states. Dr. Gordon and Dr. Taylor, of National Economic Research Associates Inc., showed in their analysis (submitted with BellSouth's Comments and hereinafter Gordon and Taylor) that, if anything, local rates could actually be higher in many cases without any significant impact on affordability. The essential fact, however, is that state commissions are responsible for ensuring that basic local exchange service is affordable, and they take a wide variety of factors into consideration in setting rates. They give weight to factors such as size of calling area, income level, etc.
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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?
The state commissions already consider numerous factors in determining local service rates. Most, if not all, of the factors enumerated in the question are relevant for determining affordability. For example, the methodology suggested in Gordon and Taylor (pp. 30-35) uses information on subscribership level, telephone expenditures as a percentage of income, cost of living (through CPI or CPI-like values over time and possibly by state), household income level (especially the poverty threshold level), etc.
In developing a universal service plan, the Commission could establish affordability benchmarks and provide universal service support for any costs which exceed the benchmarks. The benchmarks will also ensure that rates are "reasonably comparable" in all areas.
The main non-rate factor which should be considered in setting affordability benchmarks is average income level within an area. Affordability benchmarks could be set at the state level based on a percentage of average household income. Given that overall telecommunications expenditures (including long distance and vertical services) generally average around two percent of the average household income, a benchmark for universal service based on one percent of the average household income would appear reasonable. This benchmark rate would apply to basic residential local service and touchtone. Under a proxy model system for calculating support, the affordability benchmark rate simply provides that level at which funding from the federal universal service support mechanism would commence. It would not mean that local service rates need to be raised to the affordability benchmark. Individual states would be responsible for funding any difference that may exist between actual service rates and the affordability benchmark rates. (See the response to question number 3 for a description of how a proxy model system with affordability benchmarks would operate).
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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?
The most significant advantage of a national affordability benchmark rate for core services is its simplicity. A benchmark, however, should reflect average state income. If average income level by state is not considered, states with income levels below the national average would become responsible for a proportionately larger part of the problem of funding universal service. A simple example illustrates why this is so. Assume there are two states; state A has an average income level of $20,000 and state B has an average income level of $40,000. The average income level of the two states is $30,000 and a benchmark rate based on 1% of the average income level for all states would be $25.00 per month. Under a proxy model system, the federal fund would handle any costs above $25.00. The states would be responsible for funding universal service up to the benchmark level. Thus, state A would have to find ways to fund the same amount as state B even though it has a lower per capita income level. Even an intrastate universal service fund would be dependent on raising funds from services provided within the state. Thus, a national benchmark could make it more difficult to ensure affordable service in states with income levels below the national average.
The essential predicate of this question is an understanding of the way in which a proxy model would work. The following illustrates a universal service approach that incorporates benchmark affordability rates and a proxy cost model.
Description of The Proxy Cost Approach
If an approach based on proxy costs and affordability benchmarks is adopted, it should operate as follows:
Step 1: Determine affordability benchmark rate(s) (ABR). This should be done at the state level based on a percentage of average income. The ABR would be used to determine the level at which federal universal service funding would commence.
Step 2: Calculate proxy costs for small geographic areas such as census block groups or grid cells. A cost proxy model such as the Benchmark Cost Model 2 or the Cost Proxy Model could be used.
Step 3: For each small geographic area, compare the proxy cost to the affordability benchmark rate. In general, the amount by which the proxy cost exceeds the ABR would be funded out of the federal fund. Then, to the extent that actual rates are below the ABR, the state would be responsible for funding the difference. Examples A-E (which follow) discuss how to calculate federal fund support and state fund support for every possible scenario. The per line support amount would be made available to any eligible carrier.
Step 4: Determine the total support to be provided out of the federal fund for each local exchange company by state.
Step 5: Require local exchange companies to lower their rates for non-universal service services by the net amount of universal service support initially received. Since it is a federal fund that is being created, the first place to look for rate reductions would be in those federal rate elements that are currently considered to be implicit support for universal service. Thus, if the federal fund is sufficient, the interstate CCL and residual interconnection charges could be reduced to zero. If the federal fund amount exceeds the amount of support that is necessary to reduce interstate CCL and RIC charges, then intrastate rates for non-core services should be reduced by the remaining amount. Intrastate switched access rates, i.e., intrastate CCL and interconnection charges, would be an obvious target for rate reductions within the state.
It is critical that the initial funding of universal service be accomplished on a revenue neutral basis. Thus, rates should be reduced by the same amount as is initially received from the fund. Embedded costs may exceed proxy costs for a given area and there are numerous reasons why this could occur. Companies need to have the opportunity to continue to recover these actual costs. Regulators should not arbitrarily foreclose the opportunity of companies to recover their actual costs by requiring rate reductions in excess of what is provided out of the fund. Such an approach would erroneously assume that proxy costs are appropriate for rate setting. Proxy costs are simply theoretical costs, and they indicate which areas are relatively high cost to serve. They should never be mistaken for actual costs. Any universal service funding approach that is not grounded in revenue neutrality at the start will arbitrarily and capriciously harm some companies.
Example of Proxy Cost Calculations
ABR Proxy Federal No. of Monthly Actual State
Cost Support Lines Federal Rate support
Per Line Support per line
State X
Area A $30 $50 $20 100 $2000 $27 $3
Area B $30 $25 0 200 0 $27 $0
Area C $30 $30 0 250 0 $27 $3
State Y
Area D $25 $30 $5 300 $1500 $21 $4
Area E $25 $20 0 150 0 $21 $0
Assume that ACME Telephone Company serves two states (X and Y). The proxy cost model calculates support for areas A-E. Upon implementation of the federal fund, Acme Telephone Company would receive federal universal service support equal to $3500 and it would correspondingly reduce its rates by $3500. Of course, the federal universal service support would be available to any "eligible carrier." Thus, if Acme loses universal service lines in Area A, its support would be reduced accordingly. Similarly, if it gains lines in Area A, its support would correspondingly increase.
Examples A-E which are set forth in Appendix 1 demonstrate how to calculate the federal fund support under various scenarios.
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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?
The core set of services proposed in this proceeding to constitute universal service are so elementary and basic, that no company could have difficulty providing these core services and, accordingly, there should be no impact on competition.
Of course, some companies may not want to have to provide service throughout a given area. These niche providers would not be eligible for universal service support. Competition will not be harmed by such a scenario. Fair competition will be promoted throughout a given area because all companies will have the opportunity to qualify as universal service providers and receive support. With the exception of an incumbent LEC, each company is free to make a business decision whether to be a universal service provider. Such freedom of choice, epitomizes competitive markets.
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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 costs associated with providing cores services? To the extent local 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.
Loop costs represent the great majority of the cost of providing universal service. If loop costs are calculated on a fully distributed embedded cost basis, they may provide a reasonable estimation of the going forward cost of providing universal service. However, if proxy costs are calculated, they need to account for all of the costs associated with providing universal service. This would include local switching costs and interoffice transport costs for the local calling area. In addition, joint and common and shared costs must also be considered.
With regard to advanced services, the core set of services identified in the NPRM, when combined with a computer and a modem, will ensure access to the Internet and information services. If the definition of universal service is expanded beyond basic residential voice grade local exchange service, then a new proxy cost model would be needed.
It should be noted that incremental costs associated with access to directory assistance and emergency assistance should be minimal, if they exist at all. While there could be considerable cost involved in actually using these services, that goes beyond universal service and therefore the cost would be covered by non-core service rate elements.
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Schools, Libraries, Health Care Providers
6. Should the services or functionalities eligible for discounts be specifically limited and identified, or should the discount apply to all available services?
BellSouth proposes that the services or functionalities eligible for discounts should be limited to "telecommunications services" as defined by the Act. The amount of the discount available to each school and library should be limited to the amount allocated to it each year through the "Fund to Schools" ("FTS") approach proposed by BellSouth.
Under the FTS approach, the national universal service fund for schools and libraries would be sized based upon a model which assumes the provisioning of specific telecommunications services or functionalities,[1] to each school or library. The amount allocable to each school and library would be determined, based upon a set of criteria established by the Commission. Then each school or library would be permitted to utilize its allotted support for any "telecommunications service"[2] as defined by the Act. Thus, the school or library would not be limited to those services which were the basis for determining the size of the national fund. Such an approach would permit schools and libraries to tailor their use of universal service support dollars to services which they particularly need and can best incorporate into their educational technology plans. At the same time, the size of the universal service fund would be quantified, allowing for predictability of both the amounts to be contributed to the fund and amounts to be expended from the fund.
In order to make this approach possible, the Commission, in designating those services which are eligible for universal service support discounts under Sections 254(c)(3) and 254(h)(1)(B) of the Act, should specify that any "telecommunications services," as defined by the Act, will be eligible. The Commission should clarify that non-"telecommunications services" are not included within such "special services" category, as BellSouth discusses further in its response to question #7 below.
Section 254(h)(1)(A) of the Act, which establishes universal service support for rural health care providers, is materially different from Section 254(h)(1)(B), and, as such, does not lend itself to a pre-sized fund. Rather than requiring services to be provided at a discounts to be established by the Commission and the states, for interstate and intrastate services, respectively, Section 254(h)(1)(A) requires telecommunications carriers to provide telecommunications services at rates "reasonably comparable" to urban rates.[3] BellSouth proposes that the services and functionalities which must be made available to rural health care providers at rates reasonably comparable to urban rates should be transport for telemedicine purposes at speeds of up to 1.544 mbps. As with support for schools and libraries, the Commission should clarify that non- "telecommunications services" are not eligible for the "urban rate" nor for universal service support, as BellSouth discusses further in its response to Question #7.
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7(a). 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?
Section 254(h) does not contemplate that inside wiring or other internal connections to classrooms may be eligible for universal service support. Inside wiring and other internal connections are not "telecommunications services" within the meaning of the Act.
As a preliminary matter, the Act defines "universal service" as "an evolving level of telecommunications services."[4] When the Commission defines those services which are eligible for universal service support, it must determine whether "such telecommunications services" meet certain criteria.[5] Section 254(c)(3), which permits the Commission to designate "additional services" eligible for universal service support for schools, libraries and health care providers, merely means that the Commission can designate additional "telecommunications services" which do not fall within the criteria set forth earlier in subsection 254(c) for evaluating telecommunications services eligible for core universal service support. Moreover, Section 254(h), which establishes the right of schools, libraries and rural health care providers, to obtain discounts supported by universal service funding mechanisms is entitled "Telecommunications Services for Certain Providers" and subsection Section 254(h)(1)(B) specifically limits discounts to "telecommunications services."
The Act's definitions section indicates that any "provider" of a "telecommunications service" shall be treated as a "common carrier" with respect to that service.[6] If the term "telecommunications service" is deemed to include inside wiring, then, as a result of the definition of "telecommunications carrier," any provider of inside wiring would be a common carrier as to such service, even private electricians or other contractors who provide inside wiring services. The definition of "telecommunications carrier" could then read, substituting "inside wiring" for "telecommunications service" as follows: "Any provider of inside wiring...shall be treated as a common carrier under this Act...to the extent that it is engaged in providing inside wiring." This is too broad an interpretation of the Act. The Commission should recognize that Congress intended to limit those services eligible for universal service discounts under Section 254(h) to "telecommunications services," services which are, by definition, common carrier services.
If the Commission's legal authority were read as providing authority to designate services which are not presently common carrier telecommunications services as eligible for universal service support under the Act, then there would be no limitation upon those services which could be designated as eligible for universal service support. Moreover, once designated as a service eligible for universal service support, such a service would, in essence, become a common carrier service. For instance, if the Commission were to deem its legal authority to permit it to designate inside wiring, presently a non-common carrier, non-telecommunications service, as eligible for universal service support discounts under Section 254(c)(3) and 254(h)(1)(B), then its legal authority would ostensibly permit it to designate as eligible for support any other service which the telecommunications carrier provides.[7]
The Commission must recognize that its legal authority does not include the discretion to designate any non-common carrier, non-telecommunications services as eligible for universal service support. A non-common carrier, non-telecommunications service designated as an eligible service included under Sections 254(c)(3) and 254(h) would no longer have the benefit of non-common carrier status, as the Commission, by such designation, would be invading the purview of the provider of such service "to make individualized decisions in particular cases whether and on what terms to serve."[8] A telecommunications carrier deciding whether to offer a non-common carrier service would need consider the fact that, as a telecommunications carrier, it could be required by the Commission to offer such service to all schools, libraries, and rural health care providers at a designated discount, whereas its non-common carrier, non-telecommunications carrier competitors would have no such requirements.
BellSouth recognizes the Commission's concern that internal connections are necessary for effective use of telecommunications services for learning in the classroom. Since most schools were built without an internal network, retrofitting is necessary. But the responsibility for retrofitting should be defined similarly to the manner in which the needs of schools and libraries for other types of retrofitting, such as air conditioning or increased electrical capacity, are handled.
Nevertheless there may be several ways in which the Commission's concern could be addressed. First, the Commission could review the regulatory status of inside wiring. At the present time, inside wiring is deemed under the Commission's rule to be a non-common carrier service, and the Commission's rules define the location of the demarcation point between common carrier, regulated wiring and non-common carrier deregulated inside wiring,[9]. Internal wiring to classrooms falling within the non-common carrier deregulated category. Of course, the Commission could review these determinations and consider whether it would be appropriate to revise the demarcation point to bring inside wiring within the scope of a common carrier telecommunications provider's common carrier offerings and, thus, within the scope of the term "telecommunications service" under the Act.
Another opportunity to address the Commission's apparent internal connections concerns is through the national movement to "wire the schools" by volunteers in "NetDays." In a successful demonstration in California in March, 1996, 20% of the state's schools connected five classrooms or more to the local telecommunications network. Forty-one states have organized schools, businesses, and community members to implement "NetDay" in October 1996. While volunteerism may not be the sole source of inside wiring, it stimulates the support of the local community and school board and provides a foundation for demonstrating the value of telecommunications services to education.
BellSouth will be an active participant in states in the southern region that have committed to NetDay. Beyond the corporations' involvement in wiring the schools, the BellSouth Foundation has committed almost one million dollars for special technology initiatives through the year 2000 as well as a portion of the $7.5 million in grants it will award over the next five years. Indeed, another important way in which funding for inside wiring could be obtained would be through the support of private foundations such as this, as well as through government grants and bond issues. An additional funding source is the National Education Technology Funding Corporation ("NETFC"), to which Section 708 of the Act refers. It is encouraging that the Commission makes specific reference to the NETFC in the instant questions as, hopefully, this will increase awareness of this funding and support vehicle and will encourage greater utilization of it by both contributors to and recipients of its benefits.
7(b). If so, what is the estimated cost of the inside wiring and other internal connections?
The cost of inside wiring for schools is expected to be substantial. For instance, the McKinsey Report estimates that the cost of internal connections in the Partial Classroom model would be more than $ 5 billion for initial costs and $410 million annually in ongoing costs.[10] Another estimate, provided by the Florida Department of Education through its "Retrofit for Technology Project," is that retrofitting schools for inside wiring would cost an average of approximately $220,000 per school.
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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 Joint Board should consider such provisions, but should not confuse them with the requirements of Section 254. It is BellSouth's view that both Section 706 and Section 708 can provide useful vehicles for enhancing the availability of telecommunications services and technology to schools, libraries and health care providers. Thus, the Commission's determination regarding the scope of Section 254(h) need not be made with a view that Section 254(h) itself must be the single-source cure-all for all telecommunications service and technology needs of public institutional telecommunications users.
Whereas Section 254 contemplates the defining of specific telecommunications services eligible for universal service support as well as the amount of such support to be provided by the universal service funding mechanism, Section 706 enables the Commission to provide incentives which would assist in "remov[ing] barriers to infrastructure investment" related to "advanced telecommunications capability."[11] This can provide a useful counterpart to Section 254 universal service funding support mechanisms. For instance, the provisions of Section 254(h) do not impose the requirement that telecommunications carriers must make uneconomic, untimely, or uncompensated infrastructure investments. Rather, it contemplates existing services and existing infrastructure, and services provided thereunder must be pursuant to "bona fide" requests and paid for pursuant to the universal service support mechanism. Under Section 706, however, means could be developed to encourage infrastructure deployment to increase the availability of an advanced technology to schools and libraries on a faster track and broader base than might otherwise occur.
Section 708 is an example of other funding vehicles and support mechanisms which can be utilized to advance the availability and usefulness of telecommunications services and technology for schools and libraries. Indeed, BellSouth is pleased that the Commission has addressed this section of the Act in these questions because this is likely to increase awareness of the existence of the National Education Technology Funding Corporation and to spur greater visibility of the mechanisms it offers for support of the Commission's education technology goals. Private and public entities should be encouraged to support and contribute to efforts such as this which can serve as enablers of the advancement of educational technology goals, of which universal service support can and should be only one component.[12]*****************************************************************************
9. How can universal service support for schools, libraries, and health care providers be structured to promote competition?
Schools and Libraries: BellSouth suggests that the Commission size a universal service fund for schools and libraries based upon the Partial Classroom Model. This fund would then be distributed by allocating to each school its allotted amount of support in the form of vouchers or other documentation, under a "Funds to Schools" ("FTS") program. BellSouth views such an arrangement to be more conducive to promoting competition than a universal service mechanism which would merely provide schools and libraries with a set amount of a discount off of each service. Under the FTS approach, each school and library would have the flexibility to utilize its allotted fund amount to purchase and therefore achieve a discount for those services which can best meet its needs at that point in time and from the telecommunications carrier which it chooses, based upon factors such as service quality and price.
The FTS "flexible discount" approach would permit the competitive marketplace to determine the most efficient prices prior to the school/library's purchase of the service using its universal service funds. The marketplace would be permitted to operate freely to drive prices down through competitive bidding arrangements. The FTS approach would encourage carriers to work with schools and libraries on a local, school district or state basis to provide individualized solutions designed to make the most efficient use of such support. It would encourage competition among service providers in offering innovative solutions. Telecommunications service providers, knowing the amount of funding support available to each school, would be incented to compete with one another, thus maximizing the benefits of the support available to each school (or district). Competing providers would want to meet with the school to determine its particular needs, would be incented to propose creative and flexible service arrangements which best address those needs as well as to maximize the benefits which the available support could provide to the school. The proposals of the various competing entities could then be submitted to the school under competitive bid arrangements, and schools could use their allotted funds to purchase some or all of its service needs from one or a combination of providers. Such a mechanism also permits the pooling of allotted funds by eligible entities as well as individualized decisions by schools and school districts as to which services to apply their universal service funds. Thus under FTS, schools would become an important market force, and competitors' interests in earning the school's business could intensify.[13]
Health care: As discussed above in BellSouth's response to Question #6, an FTS approach would not appear to be possible for rural health care providers, as the Act itself specifies that rates "reasonably comparable" to urban rates are to be charged.[14] In establishing any regulations which interpret and implement the provisions of Section 254(h)(1)(A), the Commission should be cautious so as not to disincent telecommunications providers from actively seeking the business of rural health care providers. If such provisions are implemented in such a way that the provider is not fully compensated through the combination of the rate paid by the rural health care provider and the amount of the universal service support, then providers may not have either the incentive to market their services in rural areas nor to offer innovative solutions. At the same time, a provider could be disincented from lowering its urban rates in order to avoid non-compensatory arrangements in rural areas.
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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?
The Act is straightforward in its prohibition against the resale of telecommunications services provided under Section 254(h). Section 254(h)(3) prohibits a public institutional telecommunications user from selling, reselling, or otherwise transferring the service, or network capacity within the service, "in consideration for money or any other thing of value." Although this provision prohibits the sale, resale or transfer of the service, or network capacity within the service, it would not prohibit the sharing of telecommunications services, or network capacity within such services, by multiple eligible public institutional telecommunications users where an FTS approach is used. Under an FTS approach, schools and libraries could pool their allotted amounts to purchase telecommunications service arrangements together on a shared basis which none alone could afford. BellSouth believes that a substantial benefit can be gained by such entities through sharing arrangements.
It appears that this resale prohibition would not prevent a public institutional telecommunications user from charging a fee to others for their use of information services which may be provided over the telecommunications services (transmission services) which are obtained pursuant to Section 254(h). Indeed, nothing in Section 254 prevents the resale of non-telecommunications services that are accessed by means of those telecommunications services which are eligible for universal service support. For instance, if a school or library obtained telecommunications services from a telecommunications provider and used them to gain access to non-telecommunications services such as the Internet or other enhanced service offerings, then the public institutional telecommunications user would be free to charge the public a fee for utilization of the Internet or other enhanced services (although not for the telecommunications service itself).
There would be significant problems associated with any plan to permit eligible entities to share, sell or transfer the telecommunications services obtained to non-eligible entities. For one, non-eligible entities should not be permitted to obtain the benefit of the universal service discount at which a school or library is able to obtain a telecommunications service, either directly or indirectly. Secondly, it would appear to be an insurmountable task to distinguish between eligible and non-eligible uses of the same telecommunications service by multiple entities.[15] Congress cannot have intended that the universal service provisions of the Act should be used to create a national subsidy which promotes bypass of telecommunications carriers' telecommunications services. If a school does desire to resell the telecommunications services themselves, it should be required to do so as a reseller without the benefit of any universal service discounts.
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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?
As explained in the previous answer, no such sale, resale, or transfer for money or other thing of value is permitted. Of course, if the Commission determines otherwise, then, at a minimum, the discount made available to the public institutional educational user should not be permitted to inure to the benefit of the non- eligible entity which is the purchaser or transferee. To do otherwise would far exceed any reasonable interpretation of Congress' intentions in limiting the Section 254 discounts to a narrow category of entities.
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12. Should discounts be directed to the states in the form of block grants?
Under BellSouth's FTS proposal, the nationwide size of the fund would be determined, using the Partial Classroom Model. Then each school would be provided its allotted amount based upon criteria established by the Commission and possibly varying to account for social policy. For instance, each school could be provided with the same base amount plus some variable amount based upon factors such as the number of students. Each school would receive its allotted amount either directly, or through an appropriate entity such as its school district or state, depending upon state or local law requirements.
The term "block grants" is inappropriate because it connotes competition between the recipients of the funds for those funds. On the contrary, under BellSouth's proposal each school would be allotted its amount based upon nationwide criteria.
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13. Should discounts for schools, libraries, and health care providers take the form of direct billing credits for telecommunications services provided to eligible institutions?
It is unclear what the Commission means by "direct billing credits." If this means the FTS approach, then the answer is in the affirmative. Under FTS each school would have a dollar amount of support allotted to it and would be permitted to utilize such amount among one or more telecommunications carriers and one or more services. The school could be provided with vouchers or an electronic funds account to be used for payment to the telecommunications carrier or carriers providing the service or services for which the school desires to utilize all or a portion of its allotted funds. The telecommunications carrier(s) would then submit the necessary documentation to the administrator of the universal service fund for receipt, in turn, of reimbursement (or credit against its obligation to contribute to the universal service fund) in the amount shown.
For health care, a credit or voucher system would not be required. Rather, the bill to the rural health care provider would simply display the urban rate as the charge being assessed. It would then be incumbent upon the telecommunications carrier providing the service to report to the administrator of the universal service fund the rate assessed, the rate for the comparable service in rural areas, and the difference between the two in order to obtain a credit toward its obligation to participate in universal service mechanisms. Of course, some auditing mechanisms would appear to be needed to assure straightforward compliance with such a reporting mechanism.
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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.
Whatever mechanism is chosen to assure that universal service funds are used for their intended purpose should be one which does not impose unnecessary or burdensome administrative processes or duplicate educational administrative channels at the front end. BellSouth urges that a means be found to assure that the school recipient of the funds has a plan to utilize such funds consistent with some legitimate educational technology plan, whether at the state, school district, or school level. Some states or school districts already have such plans and a means for overseeing an individual school's own plans.
The Commission should encourage states and/or school districts which do not have such plans to formulate them in order to afford individual schools with the guidance which may be needed once funds become available. Individual telecommunications service providers should not be the entity responsible for enforcing a school's use of universal service funds for educational purposes. There may be a role for each school district or state, or even the universal service fund administrator or the Commission, in obtaining reports from schools on the use of funds and/or auditing such use, as may be deemed necessary from time to time, in order to monitor the use of the universal service funding and its impact on the advancement of educational technology in schools. Schools and school districts already have budgeting and reporting processes that universal service matters could be incorporated into. For private schools, libraries and rural health care providers, similar monitoring, reporting and auditing could be performed for the universal service support which they receive.
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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)?
It is recognized that a process which is burdensome or complicated would not be desirable. On the other hand, there is a need for coordinated and compatible educational technology plans. One means for determining bona fide requests could be for each school district to publish a list of those schools which it certifies are in compliance with the district's education technology plans, are prepared to implement telecommunications services for educational purposes, and are therefore eligible to make bona fide requests for services under the Commission's universal service program. There may also be a role for the state to determine which are eligible institutions for universal service under the Act. Similar mechanisms would need to be found for private schools, libraries and health care providers. It is unlikely that such processes would be abused, but the Commission should address what remedies would be appropriate in such an event.
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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?
Rates established through a competitive bidding processes should provide the base service prices for schools and libraries to which the FTS amount allotted to the school or library could be applied. This would allow the competitive marketplace to determine the most efficient prices prior to the school/library's purchase of the service using its flexible discount funds. Such an approach would be consistent with the fundamental goal of the Telecommunications Act of 1996 to increase competition and decrease regulation. Indeed, such an approach would be more realistic than discounts off of "tariffed" rates given that, as competition increases, fewer and fewer carriers will be filing tariff rates for their services, and negotiated prices will become more prevalent. Moreover, such an approach avoids the complexity and lag time of other suggested approaches such as trying to determine the lowest price at which the same or comparable service arrangement has been offered to other customers,[16] or the total service-long run incremental cost of the service arrangements.[17] Such an approach would avoid the need for collecting and monitoring data for the broad and increasingly expanding range of services which are provided by so many different service providers to so many different customers.
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17. How should discounts be applied, if at all, for schools and libraries and rural health care providers that are currently receiving special rates?
Under the FTS approach, a school or library could obtain the service at the existing "special rate," and apply its allotted amount to that "special rate," or it could request competitive bids for a new competitively bid rate and could apply its allotted amount to that competitive bid rate. A rural health care provider could choose not to continue to take service under the existing "special rate," if it already has a better rate than the urban rate, or it could submit a request for service under Section 254(h)(1)(A) to obtain the benefit of the urban rate.
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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.
In response to education's need to offer students the advantages of information technology, BellSouth already has arranged special pricing for educational institutions. Many of these offerings are in the form of discounted exchange line rates and distance learning networks. From 1991 through 1995, the value to education of these BellSouth offerings was approximately $57 million per year. For example, in Alabama, Georgia, Louisiana, Mississippi, Tennessee and South Carolina a potential savings to schools of $47 million per year is offered in the form of discounted exchange lines into the classroom. Additionally, in Louisiana, Mississippi and Tennessee, BellSouth offers ISDN, SynchroNet or MegaLink services at special rates to support interactive video, Internet access and other information services, with a potential savings to schools of almost $10 million annually.
In Florida, a 1996 Education Facilities Infrastructure Improvement Act established a procedure that allows providers to bid on telecommunications services to eligible entities, including schools and libraries. Winning bidders agree to deploy the infrastructure to provide connections to the eligible facility at no cost, not to exceed $20,000 per eligible facility. In Georgia, Kentucky and North Carolina, BellSouth is a vendor or primary contractor for a state- wide network that provides eligible entities, including schools and libraries and health care providers, with special rates for their telecommunications services. These state networks include the North Carolina Information Highway, the Georgia Statewide Academic and Medical (GSAMS) network, and the Kentucky Information Highway.
BellSouth has also collaborated with education and government leaders to test the use and value of the BellSouth network for distance learning, with a company investment of over $16,500,000 during the 1990's for infrastructure, technical services and support of distance learning trials. Interactive networks connected various entities in a variety of combinations to learn about both the technical and educational requirements for effective learning over the network. The company's physical investment was augmented by support for education research, teacher training, community affairs and foundation organizations. The trials were instrumental in identifying the potential for the more comprehensive concept of an information highway and for advances in educational understanding of the teaching and learning process.
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19(a). Should an additional discount be given to schools and libraries located in rural, insular, high-cost and economically disadvantaged areas?
This is a social issue which should be decided by the Commission. The FTS approach could easily allow for such considerations, as the amount allotted to schools and libraries located in such areas could be increased above the usual amount.
19(b). What percentage of telecommunications services (e.g., Internet services) used by schools and libraries in such areas are or require toll calls?
BellSouth does not have the data which would be required to answer this question.
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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?
This is a question which would appear to be appropriately addressed by the educational community and social policy makers.
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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?
This question appears to be most appropriately addressed to the education community and social policy makers. BellSouth suggests, however, that unduly complex rules not be established. It would appear that the more complicated the approach is, the more burdensome the process becomes. If the Commission does determine to use a graduated approach, then the FTS approach suggested by BellSouth would be easier to administer as the funds to each individual school would be determined at the outset when each school is assigned its allotted universal service fund amount.
By comparison, if the universal service program were administered by means of set discounts for eligible services, with discounts varying school-by-school based upon the extent to which each given school is determined to be disadvantaged, administration of those multi-level discounts could become unduly burdensome and confusing to both schools and telecommunications carriers alike.
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22. Should separate funding mechanisms be established for schools and libraries and for rural health care providers?
As BellSouth described above in its response to Question #6 the mechanisms for providing universal service support to rural health care providers and to schools and libraries are different. Under Section 254(h)(1)(A), "reasonably comparable" rates to urban rates apply, and the support is measured by the difference in the rates for rural health care providers and rates for similar service provided to other customers in comparable rural areas. Under Section 254(h)(1)(B), the Commission and states set the amount of the discount to be supported by universal service support. For an FTS mechanism under Section 254(h)(1)(B) for schools and libraries, the total amount of the Section 254(h)(1)(B) portion of the fund would be determined, as well as each school or library's allocable share of the total. These amounts could be drawn upon by a telecommunications carrier when it submits to the fund administrator its documentation, received from the school or library customer, either as reimbursement or as an offset to its universal service obligation.
Separate funds would be appropriate given these diverse mechanisms. If only one fund is established, then separate accounting practices would need to be established and strictly maintained.
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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 McKinsey Report and NII KickStart Initiative certainly represent a concentrated effort to determine an accurate funding estimate to connect schools and libraries. Although private schools were not included, it would appear that analogous funding estimates for private schools could be extrapolated and the total funding estimate increased accordingly. Above all, it is important that the size of the fund for schools and libraries be established so that contributors will know the amount of the contribution required. If the initial fund size is later determined to be inappropriate based upon experience gained over time, modifications could be made for subsequent years.
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24. Are there other cost estimates available that can serve as the basis for establishing a funding estimates for the discount provisions applicable to schools and libraries and to rural health care providers?
The McKinsey Report lists three other studies which estimate "the national costs of connecting all public schools to the NII."[18] BellSouth is not aware of any similar study for rural health care providers.
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25. Are there any specific cost estimates that address the discount funding estimates for eligible private schools?
BellSouth is not aware of any. However, it would appear that the per school funding amounts estimated by the McKinsey Report could provide useful data for extrapolating the costs for private schools.
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High Cost Fund
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 fund (the existing Universal Service Fund which is administered by NECA) is not sufficient to handle the funding of universal service in a competitive environment. It would require such substantial modification to comply with the Telecommunications Act that it makes more sense to simply start over and design a new fund which accomplishes the goals of the Telecommunications Act. The current USF provides minimal levels of explicit support to large companies since it generally only deals with about 10% of the costs that are in excess of 115% of the nationwide average cost. Other than costs assigned to the interstate jurisdiction by the jurisdictional separations gross allocator, the remaining loop costs over 115% (but less than 150%) are the responsibility of the states, and, as such, they are mostly recovered via implicit support. Another problem is that the current support is calculated at the statewide level rather than for smaller areas within the state and therefore is not targeted to the truly high cost areas.
Furthermore, the existing high cost support mechanism can only work where there is a single provider of local exchange service. Once competition is authorized, companies should transition to the new mechanism, or else the existing high cost mechanism will need to be modified to allow multiple eligible carriers in a given area.
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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?
BellSouth makes no specific recommendations at this time.
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28. What are the specific 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?
BellSouth assumes this question is addressing the new federal support mechanism envisioned by the Telecommunications Act of 1996, not the existing high cost mechanism.
As BellSouth noted in its comments, there are considerable advantages to calculating support for all eligible carriers based on the incumbent LEC's book costs. Those book costs provide a reliable estimate of the cost of providing service in that area. They are not theoretical in nature, but instead are grounded on the actual cost involved in building and operating a network throughout the given area.
As pointed out in Gordon and Taylor [pp. 9-14], basing payments initially on the incumbent's book costs encourages competitors with incremental costs lower than the incumbent's incremental costs to eventually win over the opportunity to provide service (i.e., to win over the incumbent's customers). This is because the support that is initially set equal to the difference between the universal service rate and the incumbent's per-line book cost may prove to be greater than that needed by a competitor with a lower incremental cost to match the price at which the incumbent provides service. In fact, by receiving the full amount of the support received by the incumbent, the more efficient competitor could offer the same service at a price below that set by policy. This could encourage customers to shift to the more efficient competitor. This process has several advantages. First, the portable support payment ensures that the most efficient competitor eventually serves the customer.[19] Second, it provides a strong incentive to the incumbent to become more efficient. Third, it offers the incumbent the opportunity to recover its past and present, prudently-incurred, actual costs. Fourth, the support payment can be determined easily by reference to the incumbent's well-publicized book cost, without requiring contentious and protracted proceedings for establishing the incremental costs of all competing providers. Finally, it avoids the need for unproven mechanisms like cost proxy models or competitive bidding processes to determine the initial level of support; the market mechanism ensures that support goes to the most efficient provider.
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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?
Within any given area, high-cost support should be provided on a consistent basis to any eligible carrier serving the area. With regard to the new universal service fund that is envisioned by the Telecommunications Act, it would be contrary to the Act to deny support to an "eligible" carrier because of the way it is regulated. Indeed, the fact that the act calls for support to be provided to multiple "eligible carriers" in any area served by a non-rural company clearly shows that companies other than rate-of-return companies should be eligible for support.
The Joint Board and the Commission could, if it wished, initially leave the existing high cost support mechanisms in place for those areas served by "rural" companies and in which competition has not been authorized as well as establish a comprehensive universal service mechanism. Such a bifurcated approach should eventually transition to a single nationwide approach to funding universal service.
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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?
With regard to the new, comprehensive universal service fund that the Act requires that the Commission establish, Section 214(e) does not permit eligibility to be differentiated by class of carrier. Once a carrier is designated as an eligible carrier, such carrier "shall be eligible to receive universal service support...." (Section 214(e)). The Act establishes the criteria to become designated as an eligible carrier. The criteria are based on providing universal service to an area and advertising to the public.
With regard to the existing high cost support mechanisms, there may be an occasional instance under a bifurcated approach where a "rural" company serving an area in which competition has not been authorized is operating under price cap regulation. In this case, the price cap carrier already has a huge incentive to operate as efficiently as possible and keep operating costs at an efficient level. In this case, there is no need to deviate from the same standard of actual costs that is used for rate of return companies.
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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 are defined in the Telecommunications Act. BellSouth recommends that the Act's definition be used. To the extent a bifurcated approach is adopted, it should only be an interim approach; long-term, all areas and companies should transition to the new, comprehensive universal service support mechanism mandated by the Act.
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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?
Eventually, those companies operating under the "old" system should transition to the new federal universal service fund. So long as new entrants are treated the same as incumbent LECs, this transition can be done on a gradual basis.
The difficulty with any transition will be to ensure that it is done in a manner that is initially revenue neutral. As was noted in response to question 3, proxy costs should never be mistaken for actual operating costs. Companies need to continue to have the opportunity to recover their actual costs. Thus, if universal service support is ratcheted down during some transition from book costs to proxy costs, then the affected companies would need to be provided the opportunity to raise other rates to capture the shortfall. It is imperative that all companies at least have the opportunity to recover their book costs.
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33. If a proxy cost 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?
The level of subscription should have nothing to do with the proper specifications of the proxy model or the existing high cost fund and DEM weighting mechanism. As all carriers transition to the new universal service funding mechanism, there will no longer be a need for separate loop cost and switching cost support mechanisms. The proxy model, if done properly, should account for the cost of switching and loop in a combined manner. Of course, implementation requires revenue neutrality. If the existing level of high cost support and DEM weighting support exceeds the amount that a given company would receive from the new universal service fund, then that company would need the ability to adjust the prices of its services to make up the reduction in support.
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Proxy Models
34 . What, if any, programs (in addition to those aimed at high-cost areas) are needed to ensure that insular areas have affordable telecommunications service?
If the proxy model is sufficiently detailed, then it should capture all of the variables that could cause costs to be high in insular areas. This question points out the importance of ensuring that the proxy model is properly specified in order to produce a reasonable result; i.e., - it should produce costs that will ensure that the universal service support is sufficient to attract telecommunications services providers. It is interesting to note that book costs cannot be used in areas that are currently unserved, since book costs do not exist.
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35 . US West has stated that an industry task force "could develop a final model process utilizing consensus model assumptions and input data," US West comments at 10. Comment on US 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.
If an industry task force is used, it must operate under a strict timetable in order to ensure it completes its work in time to be used by May, 1997. The industry task force must not be used as an excuse to indefinitely postpone the implementation of a new universal service fund. It is also doubtful that any industry task force that includes certain carriers such as AT&T and MCI would accomplish anything. In general, these carriers benefit from the status quo and have little incentive to build a consensus to resolve the complicated cost issues.
If the industry task force is limited to working on a proxy cost model that is to be presented to the Joint Board and the Commission for their consideration solely for the purpose of converting implicit support to explicit support in a revenue neutral manner , then there should not be any legal obstacles to the task force. A task force created for other purposes certainly could present competitive problems and give rise to legal issues that would have to be resolved. It is impossible and inappropriate to speculate what the precise issues might be without a specific proposal.
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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?
The Benchmark Costing Model has been substantially revised to respond to criticisms from numerous parties (including BellSouth). BellSouth is in the process of reviewing the Benchmark Cost Model 2 which was filed with the Commission by Sprint and US West. It is our understanding that the Hatfield Model has not been made generally available for review. In addition, any claims that the Hatfield Model incorporates key elements of the Benchmark Cost Model are specious. Based on what is available, it appears that the Hatfield model only selects from other models where such selection results in lower cost numbers. The purpose of a proxy cost model should be to produce the best estimate of the economic cost of providing the service. It should not be rigged so as to simply produce the lowest possible result.
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37. How does a proxy model determine costs for providing only the defined universal service core services?
A properly specified proxy model will estimate the forward looking cost of providing only the defined universal service core services, though it should include a reasonable share of joint and common costs. It is BellSouth's understanding that both the Benchmark Cost Model and the Cost Proxy Model produce results for basic local exchange service (which is the proposed definition for universal service).
Of course, it is important that economic engineering designs and other key inputs be properly specified. The challenge of designing a suitable model is to specify the appropriate inputs.
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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?
If the definition of the core services included within universal service change significantly (for example, to include ISDN and/or broadband services to every home), then the proxy cost model would need to be totally revamped. The engineering designs underlying the model would change as would other key inputs. All of the relationships between various inputs would need to be reviewed.
With regard to changes in the model to account for changes in technical capabilities, BellSouth believes the model should not be constantly revised. Instead, the model should be used only to calculate initial levels of support. Subsequently, support could be decreased over time to represent improvements in productivity through use of an inflation based productivity factor.
If universal service support were constantly recalculated to reflect changes in technical capabilities, then the result would be unpredictable changes in the level of universal service support. Such an approach would violate the principle of the Telecommunications Act that federal universal service support be specific and predictable.
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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?
The proxy model should be limited to estimating the cost of the core services. Of course, the core services proposed in this NPRM, when combined with a computer and a modem, provide access to the Internet and other information services.
With regard to other more advanced services, Section 706 of the Act calls for a proceeding to address advanced telecommunications services.
One last point relates to calculating support for advanced services to schools and libraries. If the schools and library fund is set-up as proposed by BellSouth, then there is no need to calculate proxy costs for individual advanced services. Schools and libraries would get the best possible prices they can in the competitive marketplace, and they could then use their fund dollars towards those competitively negotiated rates.
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40. If a proxy cost 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?
Use of an affordability benchmark rate will ensure that service is priced at reasonably comparable rates in all urban and rural areas. The affordability benchmark rate will effectively set a ceiling rate for each state. So long as service is priced below the ceiling, the service should be considered affordable and prices should be viewed as "reasonably comparable."
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41. How should support be calculated for those areas (e.g., insular areas and Alaska) that are not included under the proxy model?
A properly structured proxy cost model can calculate proxy costs for all areas, including insular areas and Alaska. Indeed, the Benchmark Cost Model 2 does include results for Alaska.
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42. Will support calculated using a proxy model provide sufficient incentive to support infrastructure development and maintain quality service?
Encouraging infrastructure development and service quality improvements requires that service providers be assured the opportunity to recover the costs they incur in the process. Innovation and infrastructure development often involves undertaking investments that are risky, made even more so by the presence of vigorous market competition. If service providers cannot recover the embedded costs of those investments, they will likely forego any effort to innovate and improve.
So long as any new universal service fund is implemented in a revenue neutral manner (see response to question #3), incumbent LECs will continue to have an incentive to invest in their infrastructure. As long as the support is set at a sufficient level (i.e., not based on an unrealistically low proxy cost), then multiple companies will have incentive to provide service in any given area. In such a situation, competition will ensure that service quality remains high. Of course, in the meantime, there will still be regulatory oversight of items such as service quality.
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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?
A proxy model produces hypothetical costs that are not specific to, or even necessarily representative of, a service provider's actual book costs. Therefore, the possibility certainly exists for book costs to exceed substantially the costs produced by a proxy model. Since service providers have to recover their actual -- not hypothetical -- costs to stay viable, it is critical that alternative recourse be available to those providers for whom support payments are insufficient to recover their actual costs. Thus, the best approach for costing out a universal service fund is to base it on actual embedded costs. If, however, a proxy model costing approach is adopted, it is absolutely imperative that the new universal service fund be implemented in a revenue neutral manner. If a company is forced to reduce rates by more than it receives out of the universal service fund, then that would abrogate the federal price regulation plan that is in place, and it could well result in confiscation.
Another possible problem could occur for a small company that is currently receiving more support from the existing high cost fund and the DEM weighting mechanism than it will receive from the proxy cost model universal service approach. If such an outcome occurs, then this company would need the opportunity to adjust its prices to maintain revenue neutrality.
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44. How can a proxy model be modified to accommodate technological neutrality?
As pointed out by Gordon and Taylor (p. 15), technological neutrality is best ensured by setting the initial level of support with reference to the incumbent provider's book cost. Under that approach, if alternative technologies prove to be more efficient than that of the incumbent, entry by new firms adopting those technologies would occur. For example, new entrants may find wireless technology a superior and more economical alternative to the incumbent's wireline-based mode of service provision in rural or sparsely-populated areas. In any event, the technology choice of more efficient entrants will not be affected by the incumbent's technology.
The outcome of the cost proxy model by definition should be technologically neutral. Any carrier that is an "eligible carrier" would be able to collect universal service support regardless of the technology it uses to provide service. For example, even if the proxy cost model assumes copper cable as the most efficient technology to serve a given customer, an eligible carrier could use any technology (fiber optics, coaxial cable, wireless technology, etc.) available to it and still receive the same level of universal service support.
No modifications need to be made to the model to ensure technological neutrality, provided that reasonable specifications are set at the beginning. The model will, then, reflect the most theoretically efficient technology for providing the core services on a universal service basis. Also, as noted in response to question #38, if the cost proxy model is constantly updated to reflect more efficient technologies, then the model would result in unpredictable levels of support, contrary to the principles of the Telecommunications Act.
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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?
While the proxy model does not necessarily need to be made public, all of the algorithms and inputs need to be made available for detailed inspection by any party willing to execute a confidentiality agreement. Thus, a cost model such as the Hatfield Model, which is built on hidden algorithms and which is not available for inspection, is not suitable for use in calculating universal service support.
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46. Should a proxy model be adopted if it is based on proprietary data that may not be available for public review?
See the response to question 45.
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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.
Publicly available data should be available. List prices for cable and equipment should be obtainable from a wide variety of vendors. Installation and contractor prices should also be obtainable. The Benchmark Cost Model is based on publicly available data, and its inputs could be used as a starting point. ARMIS data, which is filed annually with the FCC, could be used to calculate overhead cost estimates.
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48. Should the materiality and potential importance of proprietary information be considered in evaluating the various models?
As long as the model specifications and the inputs necessary to meet those specifications are publicly available, then it should not matter if the actual data is proprietary.
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Competitive Bidding
49-55. How would high-cost payments be determined under a system of competitive bidding in areas with no competition? 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? What, if any, safeguards should be adopted to ensure that large companies do not bid excessively low to drive out competition? What safeguards should be adopted to ensure adequate quality of service under a system of competitive bidding? How is collusion avoided when using a competitive bid? Should the structure of the auction differ if there are few bidders? If so, how? 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?
Any bidding process will be subject to considerable gaming. A simple example illustrates the potential for gaming. According to the Telecommunications Act, a carrier can be "eligible" for universal service support if it provides universal service through a combination of its own facilities and resale. Thus, a company need only provide one loop over its own facilities to be considered "eligible" for universal service support. This company, if allowed into the bidding process, might bid zero simply to put a financial squeeze on the underlying facilities based carrier. The winning bidder, which is primarily a reseller, does not need any support (except for its one loop). However, the low-ball bid effectively ends support for the underlying facilities based carrier. This carrier needs support but it is unable to obtain it because of the zero bid by the reseller. If the reseller were a major interexchange carrier, it would have both the incentive and the savvy to game the process, since the company it is harming may be its competitor in long distance and other areas.
The consumer would be the ultimate loser in this system of rampant gaming. Local rates would have to go up to cover the lost universal service support. If local rates can't be increased, then the facilities based carrier would have no incentive to invest in the infrastructure. Service quality would likely deteriorate. Potential facilities based competitors would have no incentive to enter. Under this scenario, there are many losers, including the incumbent LEC, potential competitors and the consumer. Only the game player wins.
Since bidding is a totally unworkable means of funding universal service, it would be misleading and fruitless to speculate and attempt to respond to the specific questions in this section.
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Benchmark Cost Model (BCM)
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?
Since the Benchmark Cost Model was significantly revised, BellSouth will provide an analysis in its August 9 comments.
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57. Should the BCM be modified to include non-wireline services? If wireless technology proves less costly than wireline facilities, should projected costs be capped at the level predicted for use of wireless technology?
No. Until such time as a wireless service provider becomes an "eligible carrier," there is no need to include wireless technology (except for wireless technology that is available to incumbent local exchange companies for service in very remote areas).
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58. What are the advantages and disadvantages of using a wire center instead of a Census Block Group as the appropriate geographic area in projecting costs?
If actual embedded costs are used to calculate universal service support, then the wire center is the most appropriate size area for calculating support, because it represents the smallest area for which embedded costs are available. If, however, a proxy cost model is used, then costs could be calculated in an even more targeted manner. Either census block groups (as used within the Benchmark Cost Model) or grid cells (as used in the Cost Proxy Model) are superior to wire centers for targeting high cost support under a proxy cost methodology.
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59. The Maine PUC and several other state commissions proposed inclusion in the BCM of the costs of connecting exchanges to the public switched network through the use of microwave, trunk, or satellite technologies. Those commenters also proposed the use of an additional extra-high-cost variable for remote areas not accessible by road. What is the feasibility and the advisability of incorporating these changes into the BCM?
BellSouth has no information regarding the feasibility of incorporating these technologies.
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60. The National Cable Television Association proposed a number of modifications to the BCM related to switching cost, fill factors, digital loop carrier subscriber equipment, penetration assumptions, deployment of fiber versus copper technology assumptions, and service area interface costs. Which, if any, of these changes would be feasible and advisable to incorporate into the BCM?
In their May 7, 1996 Reply Comments in this docket, US West fully addressed the modifications proposed by the National Cable Television Association and soundly refuted the proposed changes.
None of the NCTA's proposals should be adopted. Even a summary review of the Ex Parte presentation given to the Joint Board Staff by representatives of ETI and the National Cable Television Association on May 30, 1996 (Copies of which were filed some three weeks later (June 20, 1996) with the FCC) reveals ill-conceived notions that call into question the entirety of these recommendations
For example, ETI recommends that the fill factors for feeder and distribution cable be raised to levels of 95% in all areas. It makes this recommendation based on the following reasoning: "single line basic residential service, thus stable demand, thus high fill factor."
ETI's recommendation reflects an ignorance of network operations, in particular, the manner in which copper cable plant is maintained and/or of engineering practices designed to minimize overall levels of expenditures in providing basic service. If plant were maintained at an average fill level of 95%, there would be very few if any spare pairs available for use by maintenance crews. Thus, when a customer's service is impaired (for example, by water intrusion into the cable), there would be very limited options for getting that customer back into service. The lack of options would often times result in considerable extra expense in getting customers back into service. Thus, when a cable's fill factor exceeds a certain point, maintenance costs go up exponentially. A fill factor of 95% certainly exceeds any reasonable level from a cable maintenance standpoint. In addition to higher maintenance costs, an average fill factor of 95% would mean that many customers who request basic service could not get it when they want it. They would have to wait for new cable to be installed. This would occur due to the very few spare pairs that on average would be available to installation crews.
A fill factor of 95% is also unrealistic in situations where some of the residents own second homes. In these areas, there will often be low utilization levels caused by residents disconnecting phone service in their primary home while they occupy their second homes. Cable fill factors will fluctuate considerably in these areas.
Lastly, the ETI's fill factor recommendation is at odds with other recommendations it advocates. For example, ETI notes that residential service should benefit from economies of scale and scope from business lines. While such a recommendation has some merit, it also means that demand will be less stable, thereby resulting in the need for an even lower utilization factor.
ETI has not provided any valid reasons for increasing utilization levels beyond those specified in the BCM. Indeed, all they have done is point out the danger in basing universal service support purely on the results of a proxy model. If the inputs are flawed (such as the 95% fill factor recommended by ETI), then universal service support will be insufficient (which clearly violates one of the principles of the Telecommunications Act of 1996).
ETI also recommends that the fixed cost of the switch be totally ignored in the cost calculation for universal service. Such a recommendation would shift, in its entirety, the recovery of this considerable cost, which is part of the cost of providing universal service, to other highly competitive services. Such a recommendation is contrary to the universal service principles set forth in the Telecommunication Act.
Another area where ETI makes an obviously flawed recommendation is in the area of the fiber/copper crossover point. ETI recommends that a crossover point of 27kf be used rather than the 12kf used within the BCM. ETI's recommendation is largely driven by their fatally flawed recommendation to increase the copper cable utilization level to 95%. (Since they increase the utilization of copper cable by a larger relative amount than they increase the utilization level for fiber equipment, it increases the viability of copper cable). It is also doubtful that ETI properly accounted for the increase in maintenance costs that would arise from greater reliance on copper cable technology.
Hence, it is clear that ETI's recommendations should be disregarded.
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61. Should the support calculated using the Benchmark Cost Model also reflect subscriber income levels, as suggested by the Puerto Rico Telephone Company in its comments?
The proxy cost by area will not be impacted by subscriber income levels. However, as was noted in response to question 3, it may make sense to vary the affordability benchmark rate by state based on the average income level within the state.
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62. The BCM appears to compare unseparated costs, calculated using a proxy methodology, with a nationwide local benchmark rate. Does use of the BCM suggest that the costs calculated by the model would be recovered only through services included in the benchmark rate? Does the BCM require changes to existing separations and access charge rules? Is the model designed to change as those rules are changed? Does the comparison of model costs with a local rate affordability benchmark create an opportunity for over-recovery from universal service support mechanisms?
The BCM calculates unseparated proxy costs. Once an initial level of support is calculated, each LEC would be required to reduce rates to offset the net amount of support received. (See response to question #3 for a prioritization of rate reductions). It is BellSouth's belief that no separations rule changes would be needed to implement a funding mechanism based on the BCM.
The costs calculated by the model would not be recovered solely by the core services. Indeed, the whole purpose of a universal service fund is to keep the rates for the core services at an affordable level, even where the costs of service are high. Thus, recovery of the estimated proxy costs would occur through a combination of the end user rates for the core services and the universal service fund. To the extent a company's actual costs exceed the theoretical proxy costs, then the opportunity for recovery of actual costs would need to be allowed via other rates. If the new universal service fund is implemented in a revenue neutral manner, then the opportunity for over recovery from universal service support mechanisms is virtually nil. However, if proxy costs are mistakenly used as actual costs, then some companies could actually end up with more support than they need, while other companies receive less support than they require. That is why revenue neutral implementation is so important. Inaccuracy within the proxy model is rendered moot by implementation of the universal service fund in a revenue neutral manner.
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63. Is it feasible and/or advisable to integrate the grid cell structure used in the Cost Proxy Model (CPM) proposed by Pacific Telesis into the BCM for identifying terrain and population in areas where population density is low?
It is BellSouth's understanding that the CPM, while it calculates cost by grid cell, actually looks at terrain on a census block group basis (since that is the lowest level for which terrain data is available).
While the grid cell approach is a reasonable way to account for population in sparsely populated areas, the BCM 2 also incorporates a new and improved way to account for the geographic dispersion of people in very sparsely areas. It only considers the area within 500 feet of roads for purposes of calculating the served area in sparsely populated CBGs. Such an approach addresses a concern raised by BellSouth in earlier comment cycles.
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Cost Proxy Model (CPM)
64. Can the grid cell structure used in the CPM reasonably identify population distribution in sparsely-populated areas?
It is BellSouth's understanding that census blocks (not census block groups) are used to determine where the population resides within a grid cell (or within a sparsely populated area consisting of several grid cells). Census blocks consist of about 10-20 homes on average, and thus the targeting should be quite good on average.
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65. Can the CPM be modified to identify terrain and soil type by grid cell?
It is BellSouth's understanding that terrain and soil type by grid cell are actually based on data by census block group (typically, a census block group is larger than a grid cell). While not perfect, it must be remembered that the output of the models is only to be used for calculating federal universal service support. Again, if the fund is implemented on a revenue neutral basis, the model does not need to be 100% accurate (indeed, no proxy model can be 100% accurate; there will always be some deviation from reasonable actual costs).
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66. Can the CPM be used on a nationwide basis to estimate the cost of providing basic residential service?
If the question is asking about the development of a nationwide average cost of providing basic residential service, BellSouth sees little value in such a calculation. However, if the question is asking about the applicability of the Cost Proxy Model in all parts of the United States, BellSouth is unaware of any obstacles to using the model in all areas. Of course, the developers of the model, Pacific Bell and INDETEC would be in the best position to address this question in detail.
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67. Using the CPM, what costs would be calculated by Census Block Group and by wire center for serving a rural, high-cost state (e.g., Arkansas)?
BellSouth is still in the process of evaluating the Cost Proxy Model. If the data can be processed, BellSouth will respond to this question when it files its comments on August 9, 1996, regarding the various cost models.
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68. Is the CPM a self-contained model, or does it rely on other models, and if so, to what extent?
It is BellSouth's belief that the CPM is a self contained model. It does require switching cost inputs, however, and those may need to be calculated on a per minute basis outside of the formal CPM for use within the model.
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SLC/CCLC
69. If a portion of the CCL charge represents a subsidy to support universal service, what is the total amount of the subsidy? Please provide supporting evidence to substantiate such estimates. Supporting evidence should indicate the cost methodology used to estimate the magnitude of the subsidy (e.g., long-run incremental, short-run incremental, fully-distributed).
Based on actual ARMIS data, BellSouth has shown that the entire interstate CCL charge (and the interconnection charge for that matter) is a subsidy to support universal service. This showing was provided to Commission in an ex parte presentation on June 21, 1996.
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70. If a portion of the CCL charge represents a contribution to the recovery of loop costs, please identify and discuss alternatives to the CCL charge for recovery of those costs from all interstate telecommunications service providers (e.g., bulk billing, flat rate/per-line charge).
If the Commission adopts a methodology that results in universal service support that is less than the current CCL, then local exchange companies need to have the flexibility to recover the remaining CCL amount in a method other than per minute charges. Bulk billing and/or flat rate per line charges would be appropriate alternatives for the Commission to implement.
Below, BellSouth discusses two alternatives, bulk billing and a per line charge.
1. Bulk Billing
Under this approach, the CCL and RIC charges would be replaced by a non-usage sensitive charge billed to interexchange carriers. The charge would be initially set to produce the same level of revenue that the current CCL and RIC charges produce. Each interexchange carrier would be apportioned a part of the total amount. This apportionment would reflect the interexchange carrier's bulk billed amount. The bulk billed amount would be divided by 12, and billed monthly to the interexchange carrier. The interexchange carriers apportionment could be based on their share of:
* Interstate retail revenues.
* presubscribed end user lines.
* minutes of use.
2. Per Line Charges
Under this approach, CCL and RIC charges would be replaced by a flat-rate charge per line assessed on each interexchange carrier for each line presubscribed to the interexchange carrier. The per line charge would be calculated by dividing the sum of CCL and RIC revenues by the number of projected end user access lines. A recurring charge would then be established and applied to Interexchange carriers for each line presubscribed to the interexchange carrier. The charge would be adjusted each year as a result of price cap index changes. However, no further adjustments are necessary since the amount an interexchange carrier is charged is directly related to the lines presubscribed to the interexchange carrier.
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Low-Income Consumers
71. Should the new universal service fund provide support for the Lifeline and Linkup programs, in order to make those subsidies technologically and competitively neutral? If so, should the amount of the lifeline subsidy still be tied, as it is now, to the amount of the subscriber line charge?
BellSouth has supported including a low income support element as part of the new universal service fund. In order to implement the new program as simply as possible, the Lifeline subsidy should continue to be tied to the amount of the subscriber line charge. That way, if the Joint Board decides to implement modest SLC increases on a gradual basis, low income consumers will see no increase in the amount they pay for the SLC component of service.
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Administration of Universal Service Support
72. Section 254(d) of the 1996 Act provides that the Commission may exempt carriers from contributing to the support of universal service if their contribution would be "de minimis." The conference report indicates that "[t]he conferees intend that this authority would only be used in cases where the administrative cost of collecting contributions from a carrier or carriers would exceed the contribution that carrier would otherwise have to make under the formula for contributions selected by the Commission." What levels of administrative costs should be expected per carrier under the various methods that have been proposed for funding (e.g., gross revenues, revenues net of payments to other carriers, retail revenues, etc.)?
BellSouth has no detailed data regarding administrative costs for each of the options listed. Intuitively, it would appear to be less administratively burdensome (and hence less costly) to calculate each company's assessment under a retail revenue approach as opposed to a value added tax approach. The use of gross revenues would also be administratively simple, but it would suffer from the flaw of assessing access revenues twice. Respectfully submitted,
BELLSOUTH CORPORATION and
BELLSOUTH TELECOMMUNICATIONS, INC.
Their Attorneys
By: __________________________
M. Robert Sutherland
Richard M. Sbaratta
Rebecca M. Lough
Suite 1700
1155 Peachtree Street, N.E.
Atlanta, Georgia 30309-3610
(404) 249-3390
DATE: August 2, 1996
APPENDIX 1