-------------------- In the Matter of ) ) CC Docket No. 96-45 Federal-State Joint Board on ) DA 96-1078 Universal Service ) --------------------
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COMMENTS OF
MFS COMMUNICATIONS COMPANY, INC.
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David N. Porter Andrew D. Lipman
Vice President, Government Affairs Mark Sievers
MFS COMMUNICATIONS SWIDLER & BERLIN, Chartered
COMPANY, INC. 3000 K Street, N.W., Suite 300
3000 K Street, N.W., Suite 300 Washington, D.C. 20007
Washington, D.C. 20007 (202) 424-7500
(202) 424-7709 Fax (202) 424-7645
Attorneys for
MFS COMMUNICATIONS COMPANY, INC.
Dated: August 2, 1996Before the
FEDERAL COMMUNICATIONS COMMISSION
Washington, D.C. 20554
-------------------- In the Matter of ) ) CC Docket No. 96-45 Federal-State Joint Board on ) DA 96-1078 Universal Service ) --------------------
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COMMENTS OF
MFS COMMUNICATIONS COMPANY, INC.
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Table of Contents
SUMMARY ii
I. DEFINITIONS ISSUES 2
II. SCHOOLS, LIBRARIES, HEALTH CARE PROVIDERS 13
III. HIGH COST FUND 34
A. General Questions 34
B. Proxy Models 38
C. Competitive Bidding 44
D. Benchmark Cost Model (BCM) 46
E. Cost Proxy Model Proposed by Pacific Telesis 49
IV. SLC/CCLC 51
V. LOW-INCOME CONSUMERS 53
VI. ADMINISTRATION OF UNIVERSAL SERVICE SUPPORT 53
SUMMARY
As a long time proponent of universal service reform, MFS enthusiastically supports the Commission and Joint-Board's efforts to resolve the issues that stymie competition under the guise of "universal service." MFS recommends that universal service policies be compatible with the pro-competition policies of the Telecommunications Act, provide support that is fully portable among competitors, and be narrowly targeted to low income individuals who could not afford telephone services without assistance or carriers serving customers who live in high-cost areas.
Three major policies to advance universal service should be adopted:
_ Deployment of and Access to Advanced Telecommunications Services. Universal service should require the deployment of networks capable of providing high-speed access to advanced telecommunications services. MFS suggests two specific mechanisms to encourage such deployment and the competitive provision of high-speed, broadband services. First, the Commission should require that all local exchange carriers that draw any universal service support must meet the network standards required of rural telecommunications carriers by federal statute (loops capable of 1 Megabit transmission speeds and video services). Second, the Commission should require that incumbent local exchange carriers unbundle their local loops to allow users and competitors to derive high-speed, broadband access using unbundled end-to-end metallic connections. With unbundled metallic loops free of incumbent carriers' electronics, competitors, customers and others can add the necessary hardware to configure such metallic loops to provide broadband services, and that competition will drive down the price and encourage deployment of broadband services more effectively than government-set prices or discounts. Such an unbundling will fulfill the Commission's obligation to "encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans," facilitate competition, and meet the needs of schools, libraries and rural health care providers for economical advanced telecommunications services.
_ Low Income Support. The Commission and Joint-Board should retain the universal service support mechanisms that are targeted to low income individuals and individuals with special telecommunications needs, specifically Lifeline, Link Up and TRS support. If the Joint Board feels additional support is necessary for low income customers, it should enhance these programs.
_ High-Cost Support. High-cost support mechanisms (USF, DEM weighing and LTS) should be replaced with a high-cost support mechanism that is based on the forward-looking costs of an efficient competitor at a level of disaggregation, like census blocks, much smaller than the state-wide study areas used today. The embedded costs of the incumbent provider should not be used as the basis for universal service support. As a starting point, support should be limited to census block areas with proxy costs greater than 130% of the national average and average household incomes less than 130% of the national average income. Total high-cost support should be no larger than is presently provided under existing high-cost support mechanisms and should not be based on a carrier's individual costs (if any) of upgrading its network or offering unbundled loop capabilities.
Universal service support should attach to customers and not the carrier. That is, universal service support should be reflected as credits on the bills of low income customers and customers living in high costs areas. For example, if an eligible (i.e., low income or high-cost) customer chooses a wireless provider or any landline carrier, the carrier selected by the customer should receive the universal service support designated for that customer. Any carrier that provides basic service to low income customers or customers who live in high cost service areas should receive universal service support on a per-customer basis irrespective of the type of technology the carrier uses to provide basic service or the price of the basic service. Thus, ultimately, the Commission would not explicitly set "affordable" prices for universal service, and the support that a carrier receives would depend on the number of eligible customers the carrier actually serves. While all telecommunications carriers should contribute to universal service support, contributions to low income and high-cost universal service support should be based on telecommunications carriers' common carrier revenues less payments to intermediaries.
Before the
FEDERAL COMMUNICATIONS COMMISSION
Washington, D.C. 20554
-------------------- In the Matter of ) ) CC Docket No. 96-45 Federal-State Joint Board on) DA 96-1078 Universal Service ) --------------------
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COMMENTS OF
MFS COMMUNICATIONS COMPANY, INC.
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MFS Communications Company, Inc. ("MFS"), by its undersigned counsel and pursuant to Section 1.415 of the Commission's rules, submits these comments in response to the Common Carrier Bureau's request for further comment on specific questions in the above captioned proceeding[1] released on July 3, 1996. The comments that follow respond specifically to the questions raised in the Common Carrier Bureau's request.
I. DEFINITIONS ISSUES
1. It is appropriate to assume that current rates for services included within the definition of universal service are affordable, despite variations among companies and service areas?
With the exception of low income customers, the availability of telephones to more than 95 percent of the population indicates that price variations have not made telephone service "unaffordable." Indeed, it would be entirely inconsistent with the intent of the Telecommunications Act to "provide for a pro-competitive, de-regulatory national policy framework" if "affordable" in Section 254(b)(1) was interpreted to require government-mandated nationally uniform prices. In a competitive market, prices are not uniform or set by government, but vary according to product features and costs. For example, the price of television sets is not uniform, and that lack of uniformity has not created a perception that televisions are "unaffordable" nor deterred the near universal penetration of television sets throughout the United States.
As MFS argued in its initial comments, the Commission and Joint Board need not set a national affordable price to determine the size of a universal service fund. MFS recommends that the Commission and Joint Board ensure that the barriers to competition and market entry are eliminated, and allow market forces to determine prices. With the introduction of competition, prices fell in the long distance market, the cable television market, the CPE market, and virtually every other market that introduced market mechanisms. The same will likely be true for the price of local telephone service as competition emerges. In its survey of universal service support mechanisms, the Commission Staff summarized the role of competition in promoting universal service.
New entrants in local telecommunications markets have strong incentives to develop and implement cost-efficient technology, creating pressure for the incumbent service provider to lower prices and improve service capabilities. Effective local service competition thus can promote universal service by stimulating technological advancement, lower prices, and marketing innovation. The Commission has already observed that prices are lower in cable television markets subject to competition and expects the entry of competitive access providers to lead to lower access prices in telephone markets.[2]
As the Commission and the Joint Board develop universal service policies, they should not fall victim to the Cassandras who claim that competition threatens universal service by threatening the level of local service rates. It is often asserted that local rates are set below costs and that competition will invariably increase local rates to a cost based level that is unaffordable, and therefore an extraordinary universal service support mechanism is required to maintain affordable rates. That claim obviously flys in the face of real world experience with competition -- competition has reduced prices and increased consumer choices in virtually every market that has replaced regulated monopolies with competition. It is economically bizarre to argue that competition will result in substantially higher local service rates.
However, even if one accepts the argument that current prices are set below costs the introduction of competition may not result in an increase of local service prices to costs in at least three instances:
(1) When a firm adds telephone service to an existing product line (e.g., cable television service) it may not need to price local service at the stand-alone costs, but rather at the much lower incremental costs of adding telephone service;
(2) In order to have the opportunity to sell related services (e.g., long distance service, vertical services, video services, information services) to customers a firm may offer local telephone service below costs to attract customers; and,
(3) a firm may have to price below its own embedded costs to match the price of the most efficient competitor.
As the Commission Staff described in its Universal Service Survey, new entrants may be adding local telephone service to cable television service, electric utility service, or adjoining local exchange services.[3] In such circumstances, adding local telephone service to an existing product line (like cable television service or electric service) may cost far less than the stand-alone costs of the incumbent local telephone company. Also, a vertically integrated firm may offer local telephone service at or below cost for the opportunity to market and bundle long distance services, vertical services, information services, video services, and/or telephone equipment with the "subsidized" local telephone service. In the competitive wireless industry, for example, cellular providers often give away or sell for a nominal amount cellular phones costing hundreds of dollars in order to have the opportunity to market other services to customers. In an interview in Wired, Bell Atlantic's chief executive officer, Raymond Smith applied this same pricing principle to telephone service when he predicted, "I can envision one day offering various packages of services. And one of them might be a package of video and interactive services in which the customer also gets phone service for another two or three bucks."[4] Obviously, it is not sensible public policy to develop universal service support programs to subsidize such market-driven offerings.
As a matter of basic economic theory, in a competitive market the price of service will equilibrate at a level based on the costs of the most efficient service provider. If it costs an incumbent provider $25 per line per month to provide service, but a new entrant using a more modern network, a different collection of services (e.g., telephone service and electric service) or wireless facilities can provide service at a lower cost, say $15 per line per month, the market price will equilibrate at a cost-based level of $15 and not $25. In a competitive environment, the incumbent provider must emulate the efficiencies of its competitors to remain profitable. Certainly, affordable rates should not be defined in a manner that seeks to preserve the inefficiencies of the incumbent providers or guarantee their revenues in a competitive market.
There are individuals who could not afford telephone service without assistance, and there are high-cost service areas where telephone service would be unaffordable if consumers paid a market-driven price. The Commission and Joint-Board should identify the high-cost service areas and low income individuals that ought to be subsidized and fix the amount of universal service support targeted to yield affordable rates for those customers rather than seeking to set and maintain a national "affordable" price.
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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?
Individual income levels should continue to be used as the basis for assistance programs such as Lifeline and Link Up, and those programs should continue to be an integral part of the Commission's universal service support mechanisms. However, universal service support beyond Lifeline and Link Up should be limited to support for customers living in high-cost service areas. Specifically, MFS suggests that support be limited to areas where the proxy cost of providing local telephone service is more than 130% of the national average proxy cost. The amount of support provided should not depend on the prices that individual carriers charge for their version of local service, but rather, should be calculated as the difference between the per line proxy cost of serving a high-cost area and 130% of the national average proxy cost per line. The support should follow the customer, and thus, be available to whatever carrier or service the customer selects. If a customer chooses to subscribe to local service that is more expensive than the basic package offered by another carrier, the amount of support provided would be identical. Using proxy costs to determine universal service support rather than an analysis of prices eliminates the need to become mired in service and rate comparisons.
In defining high-cost areas eligible for universal service support, MFS suggests that census block household average incomes be used to limit subsidies in affluent areas. For example, Jackson Hole Wyoming may be a high-cost service area, but the incomes of residents are generally high and it is unreasonable to believe that they would drop off the network if required to pay cost-based competitive rates. By using census blocks to develop proxy costs, it is possible to match household incomes with proxy costs. MFS suggests that no support be available in census blocks where household average income exceeds 130% of the national average regardless of proxy costs.
High-cost universal service support should be capped at the existing high-cost support levels. In 1996 the federal Universal Service Fund ("USF") is estimated to generate $734.6 million, DEM ("Dial Equipment Minutes") weighting is estimated to generate about $311 million.[5] There is no reason to expect that support for high-cost areas will exceed this level in a competitive market since that level of support has been adequate to advance universal service in a monopoly environment. Thus, a proxy cost model should be used to determine the size of the high-cost support fund subject to the aggregate cap. If the proxy cost model yields costs larger than the cap, then it should be used to apportion the capped high-cost support funds to be distributed to customers of firms that serve high-cost areas.
This revised high-cost universal service funding mechanism would flow directly to users in addition to existing programs aimed to providing subsidized service to low income customers, namely Lifeline and Link Up. There is no compelling reason to modify these existing programs as they already provide a mechanism that targets support to low income individuals.
When low income customers live in high-cost census blocks, it is entirely appropriate that both support mechanisms apply (Lifeline, Link Up and any high-cost support). There may be limited instances where low income customers live in census blocks that have high costs but are ineligible for assistance because the census block has high average household incomes. In such instances, the Commission and Joint Board can and should provide supplemental support for the low income individuals, but such instances should be rare since census block contain only about 400 households. The Joint Board and Commission should also consider a sliding scale for Lifeline discounts.
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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?
As described above, universal service support should not incorporate an explicit national benchmark price in a proxy cost model, but support mechanisms should use the proxy cost model to identify high-cost areas, and develop support based on the difference between an area's proxy cost and 130% of the national average proxy cost. Under MFS's proposal, affordable rates would not be determined by explicitly setting a national rate, but by providing low income customers and customers living in high-cost areas with support that they could apply to whatever local services they decided to purchase. For customers living in high-cost areas, their support would be the high cost differential for their census block. For low income customers, their support would be the Lifeline and Link Up support for which they qualify. Low income customers in high cost areas would receive both. Affordable rates would be defined as the range of competitive rates charged to customers in each census block for the services they choose less the high-cost support and/or the Lifeline and Link Up subsidies that serving carriers receive on behalf of supported customers.
Mathematically, there is little difference between picking a national benchmark price and picking a threshold proxy cost. If national average proxy costs are $20 a line, under MFS's proposal, universal service support would be provided in areas with costs greater than $26 ($20 times 130%) a line. Obviously, that is mathematically equivalent to selecting a national benchmark price of $26. The advantage of using proxy costs to set the cost threshold is that the threshold is easier to justify than ruminations about what price should be considered affordable. For example, the cost threshold could be set to include the 5, 10 or 15 percent of the most costly service territories.[6]
For example, using a census block based approach, the national average loop cost might be calculated as $9.98 a month. Using MFS's recommendation, census blocks would not be eligible for high-cost support unless their costs exceeded $12.97 a month ($9.98 times 130%). Suppose further that that threshold affects about 20% of residential customers included in the model (18.8 million households out of 92 million), and requires aggregate support of about $4.0 billion. However, to the extent that the $4.0 billion of universal service support is greater than existing high-cost support (i.e., the sum of the USF, DEM weighting, and other high-cost support mechanisms), the proxy cost model would be used to distribute the sum of existing high-cost support. The rationale for this approach is that high-cost support should not exceed current levels since current levels have resulted in affordable prices that yielded penetration levels in excess of 95 percent.
In the short term, regulating the level of local service rates should continue to be the responsibility of state regulators who have historically ensured that local rates are "affordable." In the longer term, local competition will regulate rates. Because "affordability" can vary from location to location, the Commission and the Joint-Board should not become mired in trying to determine a national standard for "affordable" local service prices.[7] If universal service support is based solely on the difference between proxy costs and 130% of the national average costs, there is no need to wrestle with what constitutes "affordable" local service rates.
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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 services listed by the Commission in its Universal Service Notice and endorsed by virtually all commentors[8] are minimal services that should not preclude entry by many, if any, competitors. MFS strongly urges that this list be supplemented with a condition that local carriers would be eligible to receive universal service support credited to their eligible customers only if they provided local distribution networks (i.e., loops) that meet the standards presently applied to rural telephone companies (i.e., capable of 1Mb of data or video transmission).[9] As required by the Telecommunications Act, incumbent carriers would also have to make available unbundled access to their loop components so that customers and competitors could add the appropriate electronics to the unbundled loops to derive high-speed, broadband access. Such high-speed capabilities are not an impediment to competition, but rather, enhance the competitive deployment of broadband, high-speed services mandated by the Telecommunications Act.
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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 actual cost of providing core services? To the extent that loop costs do not fully represent the costs associated with including a service in the definition of core services, identify and quantify other costs to be considered.
Under MFS's proposal, for the purpose of calculating universal service support, the costs of these services should not be included in loop costs unless the costs of providing these services varies by census block. For example, if it costs $1 per line per month for all census blocks to provide 911 service, then the $1 of costs associated with 911 service affect all census blocks equally, and does not contribute to making a census block a high-cost area. If the national average loop cost is $29.98 without 911, then the threshold cost level under MFS's proposal is $38.97 without 911; including $1 of 911 costs simply raises the average loop cost by $1 and the threshold cost by 30cents.
The obligation to provide 911 and Directory Assistance services likely will fall ultimately on all carriers. The opportunity to provide advanced services will be one charcateristic that will distinguish competing carriers. Costs related to these services should not be reflected in loop costs.
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II. 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?
MFS believes that its universal service proposal requiring deployment of high-speed networks that conform with the statutory requirements for rural telephone providers (see responses to Questions 4 and 8, above and below) and the unbundled provision of loop components will better meet the needs of schools, libraries and rural health care providers than government-mandated discounts on existing telecommunication services. It is important to emphasize that discounts are not mandated by the Telecommunications Act, but may be implemented at the Commission's discretion. The Act requires that:
(1) The Commission may designate additional services for universal service support for schools, libraries and health care providers.[10]
(2) With regards to educational providers, the Commission (and the States) shall set the discount that it "determine[s] is appropriate and necessary to ensure affordable access to and use of such services by such entities."[11]
(3) With respect to rural health care providers, rural health care providers are entitled to receive service at rates that are "reasonably comparable to rates charged for similar services in urban areas in that State."[12]
(4) With respect to the provision of advanced services to, the Commission is directed to establish competitive neutral rules "to enhance, to the extent technically feasible and economically reasonable, access to advanced telecommunications and information services for all public and non-profit elementary and secondary school classrooms, health care providers, and libraries."[13]
Thus, the Commission may decide, as a policy matter, not to designate additional services for educational institutions or health care providers as eligible for universal service support. It may also decide, as a matter of policy, that a discount is unnecessary to ensure affordable access to and use of such additional, advanced services. For example, the cost of computers, inside wiring, software and training may be many times higher than the price of the telecommunications services. A discount on a telephone line may do nothing to promote use of the Internet if a school cannot afford computers, training and ancillary facilities.
The Commission is also required to ensure that the provision of access to enhanced services for schools, libraries and health care providers is competitively neutral. If the Commission decides that deep discounts for the telecommunications services provided to schools, libraries and health care providers is not competitively neutral, it may decide to (and should) develop a different mechanism for assuring that schools, libraries and health care providers have access to advanced telecommunications services. The Joint Board and the Commission should note that several local carriers and cable television companies have announced programs to provide such services to all schools. Also, at least one interexchange carrier has offered 800 service access to the Internet for only $5 per hour. No special action by regulators may be required.
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7. Does Section 254(h) contemplate that inside wiring or other internal connections to classrooms may be eligible for universal service support of telecommunications services provided to schools and libraries? If so, what is the estimated cost of the inside wiring and other internal connections?
No. Section 254(h) requires telecommunications carriers to provide "any of its services that are within the definition of universal service under subsection (c)(3)," and subsection (c)(3) allows the Commission to "designate additional services for such support mechanisms for schools, libraries, and health care providers." The Telecommunications Act distinguishes between telecommunications services, telecommunications facilities, and customer premises equipment.[14] The inside wiring or other internal connections are either telecommunications equipment or customer premise equipment, neither of which are services. The universal service provisions of Section 254 address services and do not authorize the Commission to subsidize the provision of telecommunications equipment or customer premises equipment.
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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?
Sections 706 and 708 complement the universal service provisions that focus on providing advanced telecommunication services to schools, libraries and health care providers, but extend the provision of advanced services to all Americans. In a sense, Sections 706 and 708 extend the definition of universal service to include access to advanced telecommunications services. In the comments filed in response to the Universal Service Notice, a large number of commentors observed that economical access to high-speed, broadband transmission capabilities (such as ISDN, T1 connections, video transmission capabilities, high-speed Internet connections, etc.) and less exotic capabilities for Group III facsimile and modern computer modems are essential to provide schools, libraries and rural health care providers with adequate access to advanced communications services.[15] Indeed, such high-speed, broadband access is desirable for all (business and residential customers) who wish access to advanced telecommunications services. Voice grade local loops provide an inadequate basis for addressing such needs.
In lieu of developing market distorting, complex systems of subsidies for broadband services for just schools, libraries and health care providers, in its reply comments MFS suggested two mechanisms for addressing the needs of those who demand access to broadband services. First, the Commission and Joint-Board should require that all local exchange carriers meet the federal network standards required of rural telecommunications carriers. As an eligibility requirement for federal rural utility loans, Congress and 30 state telecommunications modernization plans already impose more stringent network standards on rural telephone companies that should be applied to all telecommunications carriers as a condition to receive reimbursement for universal service funding credited to their customers. Second, the Commission and Joint Board should require that incumbent local exchange carriers unbundle their local loops to allow users and competitors to derive high-speed, broadband access using end-to-end metallic connections. By simply requiring incumbent local exchange carriers to unbundle their local loops in a manner that allows users to derive high-speed, broadband access, the Commission will meet the advanced services needs of schools, libraries and rural health care providers, fulfill its obligations to "encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans,"[16] and, fulfill one of the unbundling requirements of the Telecommunications Act. Thus, MFS's proposal develops a competitive mechanism for providing access to broadband services to all Americans (as required under Section 706) and not just schools, libraries and health care providers.
As the Commission Staff described in its review of universal service support mechanisms,[17] the Rural Electrification Loan Restructuring Act of 1993[18] requires state public utility commissions or borrowers to develop network modernization plans as a prerequisite for otherwise eligible carriers to receive federally subsidized loans for telecommunications utilities. The Act specifically requires that
a telecommunications modernization plan must, at a minimum, meet the following objectives:
(i) The plan must provide for the elimination of party service.
(ii) The plan must provide for the availability of telecommunications services for improved business, educational, and medical services.
(iii) The plan must encourage and improve computer networks and information highways for subscribers in rural areas.
(iv) The plan must provide for --
(I) subscribers in rural areas to be able to receive through telephone lines --
(aa) conference calling;
(bb) video images; and,
(cc) data at a rate of at least 1,000,000 bits of information per second; and,
(II) the proper routing of information to subscribers.[19]
The Rural Utilities Service ("RUS") has promulgated rules implementing the above statute.[20] Implementation plans from thirty states have been filed with the RUS and the RUS expects to receive plans from ten more. These network modernization standards unambiguously express the minimum standards that Congress defines as the prerequisite for federal rural telephone loans, and the 30 state plans reflect the network standards state commissions or borrowers believe are appropriate for rural carriers in their states. Clearly, if policy makers (Congress and state commissions) set these minimum standards for rural telephone companies, they should also be the minimum standard for all local telecommunications providers. Said differently, it would not be sensible telecommunications policy to hold rural telephone utilities to a standard higher than other telecommunications providers. Certainly, networks capable of one Megabit transmission speeds and video transmission, as required by the Rural Electrification Act, could provide the type of broadband access that schools, libraries, health care providers and others seek, and should be a prerequisite to receiving universal service support.
Many commentors observed that while high-speed, broadband services like ISDN were desirable, it is inappropriate to expand universal service to include such services. Ameritech, for example, argued
It would be a mistake to let regulation, rather than market demand, drive service parameters. For example, some argued in the past that the Commission should order carriers to deploy fiber to the home because they thought fiber was necessary to deliver advanced telecommunications services. As it turned out, however, advances in compression technology facilitated the provision of some advanced services over copper wire and that, in turn, made fiber uneconomic at least in some situations. Thus, while the Act may require the creation of certain support mechanisms, the lesson learned in the case of compression technology suggests that the Commission should avoid mandating the deployment of any particular technology and services or fixed timetables for deployment.[21]
MFS agrees; such an expansion of services or deployment of facilities would greatly increase the universal service subsidy required for low income and high-cost customers and likely would distort the development of competition to provide such advanced, high-speed services. However, it is possible to greatly enhance the ability of users, telephone companies and competitors to derive high-speed, broadband access by simply requiring local exchange carriers to unbundle their local networks in a manner that eliminates the impediments to such access. For example, if a carrier unbundles its local loops to provide end-to-end metallic connections (without the electronics and functionality typically applied to such loops in order to provide full-fledged local telephone service),[22] such unbundled loops could be used by customers and competitors to configure high-speed, broadband services like ISDN, ADSL or HDSL by adding the appropriate electronics.[23] Just as an incumbent provider has access to its loop components that could be configured to provide ISDN, ADSL or HDSL access, competitors and users should also have access to the same network components on an unbundled basis. A library that wants high-speed access to the Internet could buy an unbundled metallic local loop from the local telephone carrier and could collaborate with the incumbent or a competing carrier to add the appropriate electronics to configure ADSL or HDSL service over that loop. Likewise, a competitor that wishes to serve the library or any other customer could obtain the unbundled local loop from the telephone company, add its own electronics, and provide the customer with the high-speed access it desires. Competition for the provision of broadband services using the unbundled loop would drive down the price of such services rather than government-mandated discounts. Such a mechanism would be entirely consistent with the pro-competition, deregulatory intent of the Telecommunications Act.
Requiring that local loops be provided on an unbundled basis eliminates the need to discount the provision of ISDN, T-1 or other broadband services and address the recovery of ISDN or T-1 service provided below costs. It also eliminates the competitive impediment faced by new entrants who must physically deploy duplicative facilities to provide competitive broadband services. In most cases, the provision of unbundled local loops will require neither new services nor new facilities, but merely a rearrangement and reconfiguration of existing facilities that does not burden incumbent local exchange carriers by requiring them to install new equipment or lines. As the American Library Association argued in its comments, if the unbundled local loops are provided at cost (as measured by the lowest price such unconditioned lines are presently offered at or long run incremental costs), such unbundling places no incremental economic burden on incumbent local telephone companies.[24] Thus, no additional subsidies or support are required to provide unbundled loops in most cases.
Requiring that the local loop be provided on an unbundled basis stimulates the deployment of competitive alternatives much faster than would occur if new entrants are required to deploy their own network facilities to schools, libraries and health care providers. The provision of unbundled loops may be the best mechanism for bringing competition (and the lower prices and enhanced services that accompany competition) to rural schools, libraries and health care providers. It is important to emphasize that if unbundled loops are made available, competitive broadband services will become available from service providers (like MFS) who use the unbundled loop, computer companies who sell the hardware necessary to convert a metallic loop to broadband capabilities, and the incumbent providers who may have to reprice their broadband services to be competitive.
Incumbent local telephone companies might complain that requiring them to provide unbundled local loops at cost interferes with their ability to sell higher margin special access products, like ISDN which is priced many multiples above where an end-to-end metallic loop would be priced. Such an argument, however, is wrong for at least two reasons. First, provision of unbundled local loops will stimulate demand for advanced services that does not presently exist in part due to the incumbent provider's high special access prices. The incumbent local telephone company may well realize a revenue increase from this growth in demand. Second, the incumbent may have to reprice its special access and broadband services to be competitive with the alternatives that might be available using the unbundled local loops. Certainly, an incumbent local telephone company should not be compensated from a universal service fund for reducing its prices to a competitive level, nor should the Commission implement policies designed to guarantee an incumbent firm's revenues in a competitive environment.
Even if an incumbent local telephone company must incur costs to upgrade its network to comply with such an unbundling requirement, it should bear its own costs and not recover them from a universal service fund or unbundled loop prices. General network upgrades are a common cost that should be recovered from all services rather than solely from competitors or a universal service fund. As a competitive local service provider, MFS engineers its network to provide advanced, high-speed services to its customers, and uses those services as a mechanism to attract and retain customers. MFS did not install a POTS-only network, and it certainly did not receive subsidies from its competitors to finance its deployment of an advanced network. MFS did not expect to and should not recover its additional costs of installing a high-tech network from a universal service fund. Likewise, in a competitive environment, incumbent local telephone companies should not be allowed to recover the incremental costs of upgrading their networks from a federal universal service fund. Other competitive carriers are deploying networks capable of high-speed access, as well. For example, in its comments, Winstar, a wireless service provider indicated that its wireless network had high-speed, broadband capabilities.[25] A network upgrade to match or exceed the capabilities of modern competitors should not be funded with universal service subsidies provided by incumbent carriers' competitors.
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9. How can universal services support for schools, libraries, and health care providers be structured to promote competition?
See response to Question 8, above.
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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 resale restrictions in 254(h)(3) provide that the discounted telecommunications services provided to schools, libraries or health care providers "may not be sold, resold, or otherwise transferred by such user in consideration for money or any other thing of value." This provision prohibits a schools from buying discounted telecommunications service and then selling or reselling it, but the Telecommunications Act does not specify whether these restrictions apply only to for-profit sales. These resale restriction issues, however, need not arise if MFS's proposal for cost-based unbundled end-to-end metallic loops described in response to Question 8 is adopted.
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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?
Yes, however, the problem of how to segregate eligible and ineligible circuits and traffic would not arise under MFS's proposal described in response to Question 8.
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12. Should discounts be directed to the states in the form of block grants?
No. See response to Question 8.
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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?
See response to Question 8.
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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?
Unless the Commission develops appropriate auditing mechanisms and oversees the use of discounted services by the thousands of schools, libraries and health care providers that might order such service, there is no way to assure that the funds allocated for discounts are used for the intended purposes. MFS believes that its proposal, described in response to Question 8 is a better mechanism than discounted offerings for providing access to advanced, broadband telecommunications services.
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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)?
If telecommunications services are provided on a deeply discounted basis, that will create economic incentives for organizations and individuals to seeks ways to qualify for the discounted offerings. Mechanisms will have to be developed to distinguish between legitimate, bona fide requests for discounted offerings and offerings that should not qualify for the discounts. As described in its response to Question 8, MFS believes that its proposal is a better mechanism than discounted offerings for providing access to advanced, broadband telecommunications services.
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16. What should be the base service 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 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?
As described in response to Question 8, MFS believes that its proposal is superior to providing deeply discounted services to schools, libraries and health care providers. MFS's proposal eliminates the necessity of wrestling with the appropriate base to which the discount applies.
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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?
See response to Question 8.
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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.
MFS has no information that is responsive to this request.
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19. Should an additional discount be given to schools and libraries located in rural, insular, high cost and economically disadvantaged areas? What percentage of telecommunications services (e.g., Internet services) used by schools and libraries in such areas are or require toll calls?
Additional discounts should not be applied to schools and libraries in rural, high cost and insular areas apart from the assistance such areas receive as a result of generic high-cost support. Universal service support should not become a program aimed at addressing the needs of economically disadvantaged schools. Rather, the general body of taxpayers, and the appropriate state and federal legislative agencies, should fund the needs of economically disadvantaged schools. It is inappropriate and beyond the scope of the Telecommunications Act to require telecommunications companies and telecommunications customers to bear the burden of financing economically disadvantaged schools. Moreover, a universal service program designed to fund schools based on economic need would probably run afoul of the Telecommunications Act's requirements that universal service support be "specific, predictable and sufficient" since there would be no way to predict what needs schools would have on a year-to-year basis. For example, if school budgets are reduced in any single year, or decline due to on-going municipal financial difficulties (like Washington, D.C.) a larger proportion of schools could be considered economically disadvantaged, and thus, eligible for universal service support.
Internet services are interLATA information services. Generally, customers subscribe to an Internet service provider and use either dial-up or dedicated access to reach their service provider's router. Their service provider's router, in turn, is typically connected to other routers by being connected to a long distance carrier's high-speed backbone or the high-speed backbone provided by firms that specialize in aggregating Internet traffic and providing Internet providers with access to a high-speed data backbone. These long distance backbones typically transmit traffic to one or more peering points where Internet routers are interconnected and exchange traffic.[26] Thus, virtually all Internet traffic involves a component of long distance transport although traditional per minute long distance charges are not paid by Internet customers for their use.
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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?
No. See response to Question 19. Universal service support envisioned in the Telecommunications Act is not designed to be a program for funding disadvantaged schools. No provisions in the Telecommunications Act require universal service assistance based on an evaluation of a school's economic status.
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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?
No. See response to Questions 19 and 20.
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22. Should separate funding mechanisms be established for schools and libraries and for rural health care providers?
Under MFS's proposal described in response to Question 8, it would not be necessary to develop separate funding mechanisms for health care providers and schools and libraries. However, the Telecommunications Act describes different levels of contribution from universal service funding for schools and libraries and rural health care providers.
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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?
MFS has no information that is responsive to this question.
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24. Are there other cost estimates available that can serve as the basis for establishing a funding estimate for the discount provisions applicable to schools and libraries and to rural health care providers?
See response to Question 8, above.
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25. Are there any specific cost estimates that address the discount funding estimates for eligible private schools?
MFS does not have information that is responsive to this question.
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III. HIGH COST FUND
A. 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?
MFS recommends that the existing high-cost support mechanisms be incorporated in a single fund as described in response to Questions 1-3.
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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?
See responses to Questions 1-3.
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28. What are the potential advantages and disadvantages of basing the payments to competitive carriers on the book costs of the incumbent local exchange carrier operating in the same service area?
Payments should not be based on the book or embedded costs of the incumbent local exchange carrier, but should be based on the costs of a service provider using the most efficient technology. It will create substantial motivation for the incumbent to improve if a new entrant that provides service using a more efficient technology (e.g., a digital, wireless loop) receives universal service support based on the proxy national cost. But, if universal service support is based on the incumbent provider's embedded costs, a new entrant might be able to price its services at its costs less the difference between its costs and the incumbent's costs.
For example, suppose a new entrant can provide service for $25, but the incumbent can provide service for $35. The national benchmark cost (or price) for universal service support should be $25. Using the new entrant's technology, no universal service subsidies should be provided (to either the incumbent or the new entrant) since the census block cost do not exceed the national benchmark. In a competitive environment, the market price would equilibrate at $25 regardless of the incumbent's embedded costs. However, if the new entrant can receive the $10 subsidy that is based on the incumbent's costs, its net effective economic cost is only $15. Thus, by using the incumbent's book costs as the basis of universal service support, prices would be artificially and inefficiently depressed far below the threshold "affordable" or competitive level of $25.
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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?
Any company that provides service to low income customers or high-cost service areas should be eligible to receive the universal service subsidies that flow to such customers.
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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 of all rates as part of a "social contract" regulatory approach?
See response to Question 29.
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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?
It is inappropriate to use the book costs of the incumbent provider to develop universal service support. See response to Question 28.
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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?
See response to Question 28.
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33. If a proxy model is used, should carriers serving areas with subscription below a certain level continue to receive assistance at levels currently produced under the HCF and DEM weighting subsidies?
Carriers should receive support payments for serving low income customers and customers who live in high-cost service areas. The amounts they receive under existing high-cost mechanisms or their current subscription levels should not affect the support they should receive from a proxy cost model.
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B. 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?
Universal service support should be provided only to low income customers and customers who live in high-cost service areas as described in the responses to Questions 1-3. To the extent that insular areas have high costs, the high cost credit will reduce the end user's ultimate payment.
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35. U S West has stated that an industry task force "could develop a final model process utilizing consensus model assumptions and input data," U S West comments at 10. Comment on U S West's statement, discussing potential legal issues and practical considerations in light of the requirement under the 1996 Act that the Commission take final action in this proceeding within six months of the Joint's Board's recommended decision.
The statutory requirement that the Commission take final action within six months does not prohibit it from establishing an industry task force to develop an appropriate proxy cost model to be used to develop universal service support. Said differently, the Joint Board and the Commission need not have a complete, comprehensive proxy cost model developed within the statutory time limits, but merely that they develop recommendations or rules implementing the universal service requirements of the Telecommunications Act. The Joint Board could comply with the statutory time frames by adopting MFS's proposal and recommending that universal service support be based on the difference between proxy costs and 130% of the national average proxy costs. It could recommend that an industry task be established, much like industry forums implement the technical details of Commission orders, to develop and finalize a consensus proxy cost model.
An industry forum to address the technical details of developing a proxy cost model could also be established to address on-going technical issues. For example, as technologies change, the proxy cost model should be updated. Similarly, as population densities change or as the composition of what should be included in the core functionalities on of universal service changes, the industry forum could update the proxy cost model. There are several industry bodies that might sponsor such a forum.
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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?
MFS has no information that is responsive to this request.
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37. How does a proxy model determine costs for providing only the defined universal service core services?
This may be an on-going technical issue that is best left to an industry forum to resolve as described in the response to Question 35.
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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?
This is an on-going technical issue that is best left to an industry forum to resolve as described in the response to Question 35.
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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?
Access to advanced telecommunications services can best be provided by offering local loops on an unbundled basis as described in response to Question 8. If MFS's proposal is adopted, the proxy cost model would not have to be adjusted to account for the costs of access to advanced services.
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40. If a proxy model is used, what, if any, measures are necessary to assure that urban rates and rates in rural, insular, and high-cost areas are reasonably comparable, as required in Section 254(b)(3) of the 1996 Act.
Since it focuses on costs, a proxy cost model will provide little information about urban and rural rates.
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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 constructed proxy cost model should be robust enough to accommodate all areas.
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42. Will support calculated using a proxy model provide sufficient incentive to support infrastructure development and maintain quality service?
Yes, as long as the support is equally available to new entrants and incumbents. Incentives for infrastructure development will be diminished if universal service support is available only to incumbents or is used exclusively to maintain incumbent revenues or to profitability.
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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?
Universal service support should not be designed to maintain the revenues or profitability of incumbent providers. It should be targeted to provide support to low income customers or customers who live in high-cost service areas. As described in response to Questions 1-3, a proxy cost model should be designed to reflect the costs of a competitor that uses the most efficient technology to provide supported services. Basing support on the most efficient technology creates incentives for the incumbent to improve the efficiency of its plant and operations. If the proxy cost model develops costs that are lower than the incumbent's costs, efficiency incentives would be destroyed if the incumbent were allowed to recover something more than the level indicated by the proxy cost model.
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44. How can a proxy model be modified to accommodate technological neutrality?
This is an on-going technical issue that is best left to an industry forum as described in response to Question 35.
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45. It is 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?
A proxy cost model should be independent of the costs, technologies and facilities used by any individual carrier, but should reflect the costs of a hypothetical competitor using the most efficient technology. As such, it should not include any data that is proprietary in nature. Also, see response to Question 28.
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46. Should a proxy cost model be adopted if it is based on proprietary data that may not be available for public review?
No. See responses to Questions 28 and 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.
Book costs should not be used to develop a proxy cost model. See responses to Questions 28, 43 and 45.
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48. Should the materiality and potential importance of proprietary information be considered in evaluating the various models?
See response to Question 43.
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C. Competitive Bidding
49. How would high-cost payments be determined under a system of competitive bidding in areas with no competition?
As described in response to Questions 1-3, universal service support should be assigned to customers and not carriers. If universal service support is assigned to customers, it is unnecessary to develop a bidding process to apportion universal service support. The amount universal service support received by a carrier should depend entirely on the number of supported customers (low income customers or customers who live in high-cost service areas) served by the carrier.
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50. How should a bidding system be structured in order to provide incentives for carriers to compete to submit the low bid for universal service support?
A bidding system should not be adopted. See response to Question 49.
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51. What, if any, safeguards should be adopted to ensure that large companies do not bid excessively low to drive out competition?
See response to Question 49.
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52. What safeguards should be adopted to ensure adequate quality of service under a system of competitive bidding?
Competition provides the best safeguard. The plan should favor no carrier. See response to Question 49.
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53. How is collusion avoided when using a competitive bid?
See response to Question 49.
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54. Should the structure of the auction differ if there are few bidders? If so, how?
See response to Question 49.
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55. How should the Commission determine the size of the areas within which eligible carriers bid for universal service support? What is the optional basis for determining the size of those areas, in order to avoid unfair advantage for either the incumbent local exchange carriers or competitive carriers?
See response to Question 49.
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D. 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?
To create incentives to efficiently provide service, the proxy costs used to calculate universal service support should be the costs of providing service using the most efficient technologies and operations. Thus, it is unnecessary and inappropriate to compare those proxy costs with the embedded costs of incumbent carriers.
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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?
The BCM should be robust enough to accommodate any feasible technology that might be used for local service. If any feasible technology is shown to be lower than the costs used by the incumbent, the projected costs should be capped at the lower level in order to create efficiency incentives.
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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?
Wire centers should not be used as the basis for developing proxy costs in a competitive environment. A substantial amount of non-proprietary information relevant to proxy costs and universal service is available at a census block group level, including population statistics, terrain characteristics, and income data. Such data are not readily available on a wire center basis, but would have to be custom developed if wire centers were used to estimate proxy costs. Further, a system based on existing wire centers is inexorably based in favor of incumbents. As local service competition develops, there will be more than one competitor and more than one wire center serving a particular area. This cannot be accommodated in a wire-center based proxy cost model. Also, as local service competition develops, the boundaries of competitors' wire centers will not be the same.[27]
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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 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?
The BCM should include the costs of all feasible technologies, but the details of how such technologies are incorporated should be addressed by an industry forum as described in response to Question 35.
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60. The National Cable Television Association proposed a number of modification 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?
See response to questions 59 and more generally, questions 1-3.
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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?
See response to Questions 1-3.
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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, modified to incorporate the costs associated with all feasible technologies, is an appropriate mechanism for developing the unseparated costs of providing service. It is not an appropriate methodology for determining the benchmark rate, nor does it present any implications for separations. Certainly, firms that receive federal universal service support based on a proxy cost model might over-recover, but many firms may experience a reduction in federal revenues. The purpose of universal service support should not be to develop mechanisms that assure recovery of any particular revenue requirement (state or interstate), but rather, should focus on providing support to low income customers and customers who live in high-cost service areas.
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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?
MFS has no information that is responsive to this question.
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E. Cost Proxy Model Proposed by Pacific Telesis
64. Can the grid cell structure used in the CPM reasonably identify population distribution in sparsely-populated areas?
MFS has no information that is responsive to this question.
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65. Can the CPM be modified to identify terrain and soil type by grid cell?
MFS has no information that is responsive to this question.
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66. Can the CPM be used on a nationwide basis to estimate the cost of providing basic residential service?
MFS has no information that is responsive to this question.
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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)?
MFS has no information that is responsive to this question.
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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?
MFS has no information that is responsive to this question.
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IV. SLC/CCLC
69. If a portion of the CLC 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).
Certainly, the carrier common line ("CCL") charge exceeds the level of charges that would persist in a competitive environment. At a basic level, CCL charges are usage sensitive charges levied on long distance carriers to cover non-traffic sensitive ("NTS") loop costs that do not vary by usage.[28] Thus, loop costs grow as subscribers are added to the incumbent carrier's network, yet CCL revenues grow as long distance usage grows. Absent continual adjustment of the CCL charge, this mismatch of costs and revenues has created a windfall or subsidy for incumbent providers. However, there is no evidence that any of the revenues collected from CCL charges are earmarked for universal service support. CCL revenues are simply general revenues that incumbent local exchange carriers can use in any way they wish. In a more competitive environment, incumbents may not be able to maintain these charges. See response to Question 70.
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70. If a portion of the CCL charge represents a contribution to 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).
Broadly speaking, the interstate CCL charge was residually set based on the interstate revenue requirements associated the NTS costs that were not recovered through the subscriber line charge ("SLC"). Intrastate CCL charges are not typically set using the same methodology, but often are just the per line charge necessary to recover the intrastate allocation of NTS costs. Reform proposals include: (1) recovering NTS costs entirely from end-users; (2) recovering the CCL portion of NTS costs from long distance carriers in the form of flat-rate charges rather than per minute charges; and, (3) capping the CCL portion of NTS costs and allowing it to grow only as loops are added and annually reducing the per minute CCL charge. Recovering NTS costs from end-users is the most direct, economically sensible solution since end-users' subscription to telephone service causes those costs to be incurred and end-user customers ultimately pay those costs either directly in the form of local service charges or indirectly as inflated long distance rates. Historically, however, the transition to explicit end-user paid NTS costs has been politically difficult. Plans that propose to recover the CCL portion of NTS costs from long distance carriers in the form of flat rate charges are often schemes to guarantee incumbent carriers' CCL revenues, and properly, should be rejected. The best option is to cap CCL revenues, phase out the CCL and, as necessary, increase the subscriber line charge. If support is based on loop costs as MFS suggests, in order to avoid double recovery by carriers with loop costs greater than 130% of the national average, it is essential that the CCL be eliminated and NTS cost recovery transferred to end-users.
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V. LOW-INCOME CONSUMERS
71. Should the new universal service fund provide support for the Lifeline and Linkup programs, in order to make those subsidies technology 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?
Yes. See response to Questions 1-3. The amount of Lifeline support could simply be fixed at the current levels and adjusted as the Commission believes is appropriate to address the needs of low income individuals.
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VI. 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.)?
In its comments, MFS recommended that for administrative ease, the Commission should exempt carriers with less than a 1% market share as it presently exempts carriers with less than a _% market share (i.e., carriers with less than about 72,000 access lines) from contributing to the existing federal Universal Service Fund.[29] Because multiple carriers with different service configurations are involved, market share should be calculated based on revenues net of payments to intermediaries like the mechanism the Commission recently established in its Regulatory Fees Order.[30] Thus, a local exchange carrier's market share would be based on its revenues less compensation payments, interconnection payments, resale payments and payments for unbundled network elements that it makes to other telecommunications providers. A long distance carrier's market share would be based on its revenues less access payments and payments for long distance services it buys and resells.
Carriers that contribute to the universal service fund should include all carriers that are common carriers since the definition of "telecommunications services" in the Telecommunications Act is "the offering of telecommunications for a fee directly to the public."[31] Providers like private network providers or Shared Tenant Services ("STS") providers do not generally offer their services to the public and should be excluded from requirements to provide universal service funding. Also, if the Commission excludes carriers with less than a 1% market share from providing universal service support, such private network providers will likely be excluded anyway. Likewise, carriers that provide a mix of public and private telecommunications services should exclude the private service revenues and costs from their revenues used to develop market shares.
Respectfully submitted,
-------------------- David N. Porter Andrew D. Lipman Vice President, Government Affairs Mark Sievers MFS COMMUNICATIONS SWIDLER & BERLIN, Chartered COMPANY, INC. 3000 K Street, N.W., Suite 300 3000 K Street, N.W., Suite 300 Washington, D.C. 20007 Washington, D.C. 20007 (202) 424-7500 (202) 424-7709 Fax (202) 424-7645 Attorneys for MFS COMMUNICATIONS COMPANY, INC.
August 2, 1996