In the Matter of			)
					)
Common Carrier Bureau Seeks Further	)		DA 96-1078
Comment on Specific Questions in	)
Universal Service Notice of Proposed	)		CC Docket No.  96-45
Rulemaking				)

FURTHER COMMENTS

National Exchange Carrier Association, Inc.
100 South Jefferson Road
Whippany, New Jersey 07981

August 2, 1996

Summary of NECA Responses

Definitions Issues

Questions 1-5 of seek comment on issues relating to the definition of universal service. NECA shows herein that current rates for services generally considered to be within the definition of universal service appear to reflect the economic and service conditions of various areas, and should therefore be deemed "affordable" pending further study of alternative measures, such as nationwide or regional affordability benchmarks.

NECA further shows that the widespread availability of "affordable" telephone service is attributable, in large measure, to the universal service funding policies developed by the Commission and state regulators since enactment of the Communications Act of 1934. Commission programs currently responsible for achieving "affordable" service include the Universal Service Fund (USF), Lifeline Assistance (LA) programs, Dial Equipment Minutes (DEM) weighting rules, common line cost recovery methodologies, and the Telecommunications Relay Services (TRS) fund. These programs must be continued as part of any new universal service programs.

Schools, Libraries, Health Care Providers

Questions 6 - 25 address issues arising under new section 254(h) of the Communications Act. From an administrative perspective, clear guidelines regarding the types of services eligible for discounts are needed to assist in verification of discounts. Funding or offsets to cover the costs of providing discounted services to eligible institutions should be provided to carriers, not to states or other institutions. Similar to the existing Lifeline Assistance mechanisms, carriers that provide discounts to eligible institutions would be able to obtain compensation for those discounts from the program administrator.

NECA also strongly recommends that funds for discounted services provided to schools, libraries and rural health care providers should be kept separate from other universal service funds. This is needed to assure that changes in one fund do not result in unintended impacts for other funds. NECA recommends, however, that the Commission use a common fund collection mechanism for its universal service programs. This would provide efficiencies both for contributors as well as the administrator.

High Cost Fund

Continuation of cost-based funding for small companies serving rural areas is necessary to achieve the goals of the 1996 Act. NECA suggests, however, that certain specific changes to existing programs should be made in order to comply with the 1996 Act. These include replacement of the current presubscribed lines-based allocation method for USF and LA funding with a system based on interstate revenues. To the extent that support amounts are embedded in service rates (e.g., DEM weighting amounts), the Act's "explicitness" requirement can be satisfied by removing such amounts from rates and recovering them via bulk-billed charges. Although it is not clear whether there will be any significant number of entities qualifying for designation as "eligible" in high-cost rural areas, changes to the Commission's rules arguably will also be necessary in order to effectuate Act's requirement for designation of additional eligible carriers.

NECA shows that there is no basis for excluding price cap companies that currently qualify for high cost support from receiving support in the future. Further, as competition develops in urban areas, price cap companies that currently rely on internal cost averaging to equalize rates between urban and suburban areas, will have a correspondingly greater need for universal service support. The 1996 Act requires all subsidies to be made explicit, which should increase the qualification of price cap ECs for high cost support for their high cost service areas.

Proxy Models

NECA's preliminary analysis of proxy models shows that while they bear promise and may work well for larger companies, they should not be used to determine high cost support amounts for small companies. Actual cost results are readily available for small companies. Theoretical cost results produced by proxy models can vary greatly from actual study area costs of small companies. These variances, which are due in part to "mapping" problems between census block groups and actual operating territories of small companies, may not be a significant problem for larger companies but could be devastating for small companies. Accordingly, the Commission should not mandate conversion to proxy systems for small carriers.

Competitive Bidding

As NECA stated in its 1995 NPRM Comments, a system that would determine eligibility for interstate funding of local service based on competitive bids would impose additional costs and create unnecessary complexity, and would require unprecedented Commission involvement in intrastate issues and local service quality monitoring. Allowing support levels to be set on the basis of competitive bids could result in insufficient support payments or a "race for the bottom" as competitive carriers seek to capture funding dollars without regard to maintaining or improving service quality or providing technological advancements. Because of the high capital investment required to serve rural areas, the long-term risks of basing support on competitive bids far outweigh the likely benefits.

Benchmark Cost Model (BCM)

Cost Proxy Model Proposed by Pacific Telesis

NECA's analysis of results produced by the original BCM showed dramatic variances between book costs of incumbent LECS and theoretical costs produced by the model. See NECA 1995 NPRM Comments at 76-82. NECA's preliminary analysis of the original model indicated that substantial additional study is needed before the BCM could be applied to interstate USF distributions.

NECA is currently analyzing the updated BCM ("BCM2) and Pacific Telesis' CPM, and expects to provide comparisons of model results in its August 9th Comments in this proceeding.

SLC/CCLC

NECA shows herein that the carrier common line charge (CCLC) is designed to recover a portion of the joint and common costs associated with providing subscriber line plant. While it is certainly possible to identify the magnitude and proportions of common line costs allocated to the interstate jurisdiction and to particular cost recovery mechanisms, no particular portion of the CCLC or any other common line cost recovery mechanism -- including USF amounts -- can be specifically identified as a "subsidy."

Several alternatives to the CCLC exist for recovery of interstate common line costs allocated to the carrier common line element. For example, the Commission may wish to consider a common recovery mechanism for CCL revenue requirements and interstate high-cost fund revenue requirements. This would require inclusion of interstate CCL amounts within the universal service billing mechanism described in NECA's response to question 26, with amounts to be recovered from interstate carriers based on proportionate shares of interstate revenues. Another approach would be a form of bulk billing similar to that for which NYNEX received a waiver last year.

Low-Income Consumers

Existing Lifeline and Linkup programs should continue; however, the method by which Lifeline Assistance revenue requirements are collected should be changed from the current PSL-based tariff collection method to a revenue-based allocation method, under Commission rules, applicable to all interstate service providers.

Administration of Universal Service Support

Based on its experience in administering the USF/LA program and the TRS program, NECA strongly suggests that the Commission replace the current PSL-based, tariff collection mechanism with a revenue based collection system similar to the TRS mechanism. In addition to being a superior measure of carrier market share, the TRS system eliminates many of the administrative problems associated with the current PSL allocation system.

NECA's experience in administering the TRS fund indicates that per-carrier collection costs are minimal. Accordingly, NECA does not recommend establishment of a "de minimis" for exempting carriers from contributing to the funds. To reduce administrative expenses associated with processing small contributions, the Commission may wish to consider specifying some minimum contribution level, as is done in the TRS context.

CC DOCKET 96-45
UNIVERSAL SERVICE - SUPPLEMENTAL QUESTIONS
NECA Responses

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?

Yes. Current rates for services generally considered to be within the definition of universal service (e.g., dial tone, white page directory listings, access to interexchange carrier services, etc.) are based on long-standing public policies and appear to reflect reasonably the service conditions of various areas. Current rates should therefore be deemed "affordable" pending further study of alternative measures.

The widespread availability of "affordable" telephone service throughout the United States, at a 94 percent penetration rate, is one of the major achievements of the twentieth century. This success is attributable, in large measure, to the universal service cost recovery policies developed by the Commission and state regulators since enactment of the Communications Act of 1934.

Commission programs currently responsible for achieving and maintaining "affordable" service include the Universal Service Fund (USF), Lifeline Assistance (LA) programs, Dial Equipment Minutes (DEM) weighting rules, common line cost recovery methodologies,¹ and the Telecommunications Relay Services (TRS) fund. These programs have demonstrably been successful in promoting universal service.[2] Current cost-based universal service cost recovery programs help keep local service rates affordable while facilitating deployment of advanced telecommunications infrastructure.[3]

The cost of these achievements has been very reasonable. Existing support mechanisms represent a small portion of overall exchange carrier costs, are small in relation to telecommunications industry revenues,[4] and have continuously declined over time on a per-minute basis.[5] Actions taken by the Commission in this proceeding or related proceedings that reduce recovery of common line costs through carrier common line charges will further reduce the extent to which costs are recovered from long distance carriers and add additional pressure to local rates. Failure to assure continued adequate cost recovery for high cost areas in light of these pressures will result in substantial increases in local rates, especially in rural high-cost areas, reversing the achievements gained in the past 60 years and ending the era of affordable nationwide modern telephone service.

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?

It is essential that the Commission fully consider the size of local calling areas in determining whether local services provided in particular areas are affordable or "reasonably comparable." This inquiry should take into account local calling scope (e.g., number and types of other subscribers within local calling area) and amount of total bills (local plus toll). Use of non-rate factors such as subscribership levels, telephone expenditures as a percentage of income and cost of living would be complex and would not be relevant in comparing actual services provided. A broad-brush approach that eliminated all support in some service areas simply because of the presence of a few wealthy subscribers or a vacation resort would plainly be unfair to the vast majority of subscribers in high cost areas who fall below average income levels. For these reasons NECA continues to recommend that programs intended to target high cost areas (such as the current universal service fund) be maintained separately from those intended to assist low income subscribers (such as the current Lifeline Assistance programs).

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?

A national benchmark for universal service would reduce complexity but would be highly inaccurate because of the diversity of small rural communities (see, e.g., impacts of calling scope discussed in response to question 2 above). What is "affordable" in one area may be out-of-reach for subscribers in other areas. Establishment of a national benchmark rate may also be viewed as a significant expansion of federal regulation in an area traditionally regulated by state commissions. Current methodologies, which measure the relationship of study area loop costs to national average costs, work well and should not be replaced.

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?

Section 214(e) of the 1996 Act requires carriers to provide and advertise universal service throughout a designated service area in order to be deemed "eligible" for universal service support. Universal service can be provided over the carrier's own facilities, or through a combination of owned and resold facilities. 47 U.S.C. [[section]] 214(e)(1)(A). Thus, technical feasibility should not be a barrier to qualification as an "eligible" carrier. In any event, the Act permits only "eligible" carriers to receive support for universal service. Accordingly, the public interest would not be harmed by denying support to carriers that fail to qualify under the standards set forth in section 214(e).

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

The current universal service fund mechanisms provides high-cost support based on comparisons of individual study area loop costs to the national average. Costs of providing particular services are reflected in investment and expense accounts, as defined by the Commission's Part 32 and Part 36 accounting rules, and recovered, in part, via the universal service fund.

Under the current rules, total company costs are allocated to the loop pursuant to categorization methods developed in the context of CC Docket 80-286. These costs include not only the direct costs of providing physical loop plant facilities but also a portion of other costs, such as general and administrative costs, that are absolutely necessary to the provision of the physical facilities and local services associated with loop plant. As discussed in NECA's 1995 NPRM Comments, these loop costs should continue to be recovered as part of any new universal service mechanism.

The current interstate DEM weighting program permits small exchange carrier study areas to recover additional portions of switching costs from the interstate jurisdiction. As shown in NECA's 1994 NOI Comments and 1995 NPRM Comments, the DEM weighting mechanism (which allocates approximately $350 million per year to interstate) is an effective way of identifying areas that have high per-unit switching costs. Data filed in CC Docket 80-286 show clearly that the DEM weighting rules properly recognize the higher per-minute switching costs of small exchange carriers, and that separate recovery mechanisms are necessary for switching- and loop-related costs.[6]

These programs have been extremely successful in promoting and maintaining universal service. Loop and switching costs currently allocated to the interstate jurisdiction through these methods provide a reasonable starting point for determining the interstate cost of providing core universal services.

As additional services are provided in high cost areas, current rules may need to be modified to identify costs for recovery. The Commission should consider such issues in the context of future reviews of the definition of universal service.

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?

Section 254(h) of the Act appears to require that the Commission and Joint Board identify particular services and functionalities eligible for discounts. Section 254(h)(1)(A) limits discounts to rural health care providers to services "which are necessary for the provision of health care services in a State, including instructions relating to such services." Section 254(h)(1)(B) defines eligible services for schools and libraries as those "services that are within the definition of universal service" specified under section 254(c)(3) of the Act. These provisions appear to require designation of particular services eligible for discounts.

From an administrative perspective, clear guidelines regarding the types of services eligible for discounts are needed for verification of discounts. Such guidelines are also necessary for carriers and the administrator to gauge funding requirements properly.

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?

Section 254(h) of the Act specifically limits the services for which educational institutions and libraries may receive discounts to those "that are within the definition of universal service under subsection (c)(3)." Subsection 254(c)(3), however, permits the Commission to designate services in addition to those defined as universal service under paragraph 1 of subsection 254(c)(3).

State regulators may take a leading role in determining the need for such funding. In some instances, local service providers have agreed, pursuant to state initiatives, to provide inside wiring and other connections to schools and libraries. Similar to the current lifeline assistance program, clear guidelines should be established to determine the extent to which such initiatives will be eligible for funding from a national fund.

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 of the Act provide, respectively, for the study and encouragement of advanced telecommunications capabilities for schools and the creation of a National Education Technology Funding Corporation. These provisions appear designed to provide benefits to schools that supplement (but do not replace) the universal service discounts required under section 254(h). By conducting the monitoring proceedings contemplated under section 706, and by coordinating with the new corporation formed pursuant to section 708, it may be possible for the Commission to address the numerous issues identified by commenters in this proceeding regarding technologies and advanced services to be provided to schools and libraries.

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

Support for services provided to schools, libraries and health care providers should be structured to assure compliance with the universal service goals and principals set forth in new section 254. Under the Act, all telecommunications carriers serving a particular area are required to offer service at reasonably comparable or discounted rates to eligible institutions. So long as all carriers providing such discounts are able to receive offsets or funding on a non-discriminatory basis, the mechanism will help achieve the Act's objectives without favoring or disfavoring any competitor.

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?

Section 254(h)(3) states that telecommunications services and network capacity provided to schools, libraries and rural health care providers "may not be sold, resold, or otherwise transferred by such user in consideration for money or any other thing of value. In order to effectuate the intent of this provision the Commission should promulgate rules that limit the availability of section 254(h) discounts to the specific entities described in the legislation (i.e., schools, libraries and health care providers).[7]

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?

See response to question 10, supra.

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

No. Section 254(h) requires telecommunications carriers to provide services to eligible institutions at discounted rates. Section 254(h)(1)(A) states that carriers providing discounted services to health care providers "shall be entitled to have an amount equal to the [discount] treated as a service obligation as a part of its obligation to participate in the mechanism to preserve and advance universal service." Similarly, subsections (i) and (ii) of section 254(h)(1)(B) state that discount amounts provided to educational providers and libraries may either be treated as offsets to obligations to contribute to the new universal service mechanism or reimbursed via the fund. This language plainly requires that funding or offsets be provided to carriers, not to states or other institutions.

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

No. As discussed above in NECA's response to question 12, supra, the Act requires that discount amounts be treated as offsets to carrier obligations to contribute to fund mechanisms and/or be reimbursed to carriers. There does not appear to be a need for the Commission to specify rules governing the way in which such discounts are stated in end user bills (i.e., as discounts, "billing credits" or otherwise).

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?

As discussed in NECA's responses to questions 12 and 13, supra, discount amounts must be made available to carriers via offsets or direct reimbursements. To assure that discounted services are provided only to qualified institutions, the Commission should establish clear eligibility criteria, including potential certification requirements. Certification by state or federal government bodies responsible for regulating or funding health care providers, education providers and libraries will help carriers identify eligible institutions (thereby reducing administrative burdens) and help assure that discount cost recovery from the program is used only for the intended purpose.

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)?

As discussed in NECA's response to question 14, supra, clear procedures and guidelines for determining eligibility must be established in order to assure that requests for discounts are within the intent of section 254(h).

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?

Selection of relevant prices in a competitive environment is obviously difficult. Nevertheless, in order to permit verification of discount claims some guidelines will need to be established. To the extent that rate comparisons are based on public information (such as tariffed rates or rate schedules filed for informational purposes), administrative burdens will be lessened.

Whatever mechanism is ultimately adopted by the Commission, it should assure that the net costs of telecommunications services for rural schools and libraries are sufficiently low to meet the standard set forth in section 254(h)(1)(b) (i.e., rates that ensure affordable access to and use of universal service by such entities). Telecommunications services provided to rural institutions involve significantly higher transport costs, and involve a greater proportion of toll services. Discounts that are calculated as a flat percentage off a distance sensitive base rate would not reflect these differences. Consideration must be given to the actual net costs encountered by these institutions in obtaining similar levels of service.

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

There may be instances where service is currently provided to schools, libraries or rural health care providers at rates lower than those found to be required by the Commission pursuant to section 254(h). In no event should the Commission promulgate rules that require the discontinuance of such arrangements. Clear guidance should be provided to carriers and the administrator, however, for reimbursement in such cases. The Commission could, for example, authorize reimbursement for the full amount of such discounts, or it could specify that reimbursement from a universal service fund will be available up to the amount that would have been paid if service was provided at the rate found to be in the public interest under section 254(h).

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.

NECA does not currently maintain data or information on discount programs for telecommunications services provided to schools, libraries or rural health care providers.

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 may be necessary in order to assure that the net costs of telecommunications services are low enough to ensure affordable access to and use of universal service by schools and libraries located in rural, high-cost and insular areas. Local access to Internet services is becoming increasingly available, but, as discussed in NECA's response to question 16, supra, calls to information service providers from rural areas often involve long transport mileage and/or toll charges. Discount programs may need to reflect these factors. Also, subscribers located in outlying areas have encountered difficulties in connecting to advanced services, partly because of problems with physical facilities (e.g., the need to use loading coils in transmission lines, which slow down modem transmission speeds). Universal service programs that are sufficient to promote deployment of modern infrastructure will help alleviate these concerns.

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?

NECA does not currently maintain data on the validity of such models.

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?

Should the Commission determine that additional funding is required for schools and libraries located in rural, insular, high-cost, and economically disadvantaged areas, it may find that it is more equitable to structure the support on a sliding scale. Use of a step approach may cause significant and unnecessary dislocations as a school or library is moved from one step to the next as a result of some external factor unrelated to the economic need of the institution. As suggested in NECA's response to question 16, however, the primary consideration in such cases should be the extent to which schools encounter extraordinary charges for services (e.g., transport) as a consequence of location in a rural, high-cost or insular area.

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

Yes. Specifically-targeted funds should be kept separate from one another. For example, while funds from the federal Universal Service Fund and Lifeline Assistance programs are both made available to exchange carriers, these programs are dissimilar in nature, as one is targeted to companies serving high cost areas and the other to low-income subscribers. Likewise, funds for schools and libraries are targeted to advance education, and should not be commingled with amounts for services provided to rural health care providers, nor should either fund be mixed with funds targeted to high-cost universal service areas.

As discussed in its response to question 72, infra, NECA does recommend that the Commission use a common fund collection mechanism for its universal service programs.[8] This would provide efficiencies both for contributors as well as the administrator. Resulting funds should be maintained separately, however, in order to avoid unexpected changes in one type of fund from creating unintended impacts in other funds.

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?

NECA does not currently maintain data or information on these programs.

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

NECA does not currently maintain data or information on fund requirements for these entities.

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

NECA does not currently maintain data or information on fund requirements for these entities.

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?

New section 254(d) of the Communications Act, added by the Telecommunications Act of 1996, requires that "every telecommunications carrier that provides interstate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, to the specific, predictable and sufficient mechanisms established by the Commission to preserve and advance universal service." 47 U.S.C. [[section]] 254(d).

NECA continues to support replacement of the current presubscribed lines-based allocation method for USF and LA amounts with a system based on interstate revenues. Currently, USF and LA charges are assessed upon all interexchange carriers that have at least .05% of the total common lines presubscribed to interexchange carriers in all study areas. See 47 C.F.R. [[section]] 69.5. As noted above, however, the 1996 Act requires that contributions to the new universal service support mechanism are to be made on an equitable and non-discriminatory basis by all interstate telecommunications carriers. Replacement of the current presubscribed lines allocation method with a revenue-based method, similar to that used for TRS fund contributions, should satisfy this requirement. New section 254(e) of the Act requires that universal service support amounts be "explicit and sufficient." 47 U.S.C. 254(e). Current Universal Service Fund, Lifeline Assistance and TRS fund mechanisms satisfy the Act's "explicitness" requirement, since they are each specifically identified, collected via explicit charges or assessments, and distributed to eligible carriers according to well-defined formulas. USF distributions to individual carriers are stated in NECA's annual USF data submissions, filed in late September of each year.

To the extent that other support amounts are embedded in service rates (e.g., DEM weighting amounts), the Act's "explicitness" requirement can be satisfied by removing such amounts from rates and recovering them via bulk-billed charges.

As discussed in NECA's 1994 NOI Comments and 1995 NPRM Comments in CC Docket 80-286, allocation of support amounts to large company high cost areas using proxy methodologies could expand fund requirements significantly. Reductions in the recovery of costs via carrier common line charges will create substantial upward pressure on local rates. To satisfy the Act's "sufficiency" requirement in these circumstances it is imperative that the Commission discontinue the current interim cap on the Universal Service Fund and refrain from imposing any form of cap on new universal service cost recovery . It is also critical that the Commission takes steps to assure that changes in other types of support funding (e.g. funding for discounted services to schools, libraries and rural health care providers) do not adversely affect cost recovery levels for small companies relying on continuation of current high cost mechanisms.

Nothing in the 1996 Act mandates the replacement of current cost-based universal service mechanisms with other mechanisms such as proxies. As discussed in NECA's April 12 Comments in this proceeding, it is critically important that universal service support levels under any new system be based on the most accurate and complete cost of service information available. For some larger companies, this might be obtained using proxy models in lieu of cost study data. For smaller companies, however, cost study data, which are readily available, are the only proven, reliable basis for determining sufficient levels of universal service support. Continuation of cost-based funding for small companies serving rural areas is necessary to achieve the goals of the 1996 Act.

Section 214(e) of the Act contemplates the designation of non-incumbent exchange carriers as "eligible" carriers for universal service support. Inasmuch as current high cost recovery is available only to incumbent exchange carriers, changes to the Commission's rules will arguably be necessary in order to effectuate this requirement.

As NECA pointed out in its April 1996 Comments in this proceeding, it is not clear whether there will be any significant number of entities qualifying for designation as "eligible" in high-cost rural areas. Passage of the 1996 Act did not alter the underlying economics of serving rural America. Competition simply may not be viable in high cost rural areas. Complicated support mechanisms designed to make support payments available to new entrants in these areas may only distort competition, without producing any real benefits for consumers.

To ameliorate these effects, Commission rules implementing section 214(e) should make clear that universal service support amounts would be available only to designated eligible carriers that actually serve entire designated service areas, not simply portions thereof or selected high-volume customers. See 47 U.S.C. [[section]] 214(e)(1)(A). Further, support amounts should reflect the extent to which carriers actually incur costs. It is possible that some carriers may provide universal service primarily by reselling discounted services or facilities obtained from an underlying carrier. Universal service support in these instances must go to the underlying carrier, since that entity is the one incurring the costs of building and maintaining the facility. The underlying carrier, in turn, would reflect the support in the price of the facility offered to the reseller.

In order to make support payments available on a non-discriminatory basis to non-incumbent eligible carriers the Commission should require such carriers to perform the same accounting and categorization studies currently performed by incumbent LECs. This approach was suggested by a number of commenters, including NECA, in the comment round of this proceeding.[9]  As NECA pointed out in its comments, the Commission's cost accounting rules have been used for many years by incumbent LECs, many of which are quite small. Application of these rules to new eligible carriers would not impose any greater burdens than those imposed on small LECs.

If the Commission were to adopt such an approach, however, rule revisions would be needed to assure that per-line universal service payments to new eligible LECs do not exceed amounts payable to the incumbent LEC. Such limits would be necessary in order to avoid competitive distortions and maintain reasonable fund levels.[10]

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?

In addition to the modifications discussed in NECA's response to question 26, NECA believes that the current high-cost system could be improved by adopting "sliding scale" methodologies in place of the current "stepped" formulas used in calculating DEM weighting amounts. See NECA 1995 NPRM Comments at 44. In addition, NECA has suggested that the existing USF mechanism can be improved by adopting revisions to the Part 36 data reporting rules to allow companies involved in mergers and acquisitions to adjust annual USF data to avoid mismatches between end-of-year investment data and partial-year expense data. Id. at 60-62 and Appendix F. Finally, NECA has suggested that, if the Commission is concerned about excessive levels of general and administrative expenses included in universal service fund amounts, it may wish to consider using statistical measures, such as the two standard deviation test proposed by NECA in its 1995 NPRM Comments (at 60) to limit the amount of such expenses allocated to USF.

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?

Incumbent carrier book costs would not provide a good basis for payments to competitive carriers. Costs recorded in incumbent carriers' books reflect pre-competitive regulatory policies, when these carriers were required to deploy sufficient plant to be "ready to serve" substantially all areas within a given territory, and to delay capital recovery of this investment pursuant to long depreciation schedules. As a result, incumbent LECs' book costs in many cases would have no rational relationship to competitive entrants' costs, particularly where a non-incumbent eligible carrier is providing universal service via resale of incumbent LEC services at a discounted rate. Distributions to competitive LECS based on incumbent LEC book costs, in these cases, would be too high, in effect "paying" for competition.

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?

Several price cap companies provide service in study areas that are considered high cost under current rules. In addition, virtually all price cap companies are required to provide service in areas that would qualify as high cost areas under current rules, but do not so qualify because of study area averaging effects. For example, US WEST, a price cap company, provides service to extensive high cost areas in rural Western states but is generally not eligible for high cost support because its costs of serving high-cost rural areas are averaged in with costs of serving low-cost large cities in the same study areas.

There is no basis for excluding price cap companies that currently qualify for high cost support from receiving support in the future. Further, as competition develops in urban areas, price cap companies that currently rely on internal cost averaging to equalize rates between urban and suburban areas, will have a correspondingly greater need for universal service support. The 1996 Act requires all subsidies to be made explicit, which should increase the qualification of price cap ECs for high cost support for their high cost service areas.

Several parties in this proceeding and the Commission's Docket 80-286 proceeding have proposed the use of proxy formulas to determine costs of serving individual "census block groups" rather than large study areas. These models would allow large companies, such as the price cap ECs, to determine costs below the study area level and would enable the Commission to target high cost support to these companies more accurately.

If the Commission permits larger companies (however defined) to receive additional high-cost assistance, care must be taken to assure that smaller companies are not adversely affected. If universal service cost recovery were "capped," for example, the addition of thousands of large company census block groups to the cost recovery mechanism could cause virtually all available funds to be transferred to larger companies. This result must be avoided by eliminating the current interim "cap" and/or by establishing separate funds or priorities on available funds for small companies.

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?

If the Commission determines that different high-cost rules should apply to companies based on their status as "price cap" or "rate of return" companies, NECA recommends that such distinctions be made by reference to the federal tariff status alone. Attempts to distinguish among various forms of state tariff or pricing regulation may add unnecessary complexity to the process, and increase administrative expenses.

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?

If the Commission determines that different high-cost rules should apply to companies based on their status as "rural" or "non-rural," NECA recommends that the Commission adopt the definition of "rural telephone company" set forth in new section 3(r)(47) of the Communications Act.

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

The Commission should not mandate conversion to proxy systems or competitive bidding for small carriers. Such methods must be demonstrated as accurate, over time, before they can rationally be required for smaller carriers. The Commission should recognize, as well, that some carriers, particularly the smallest ones, may never fit within proxy model specifications.

NECA's analysis of these models shows that, while they may work for larger companies, they should not be used to determine high cost support amounts for small companies. The primary reason for this conclusion is that the "theoretical" cost results produced by the models for smaller companies vary greatly from actual costs. These variances, which are due in part to "mapping" problems between census block groups and actual operating territories of small companies, may not be a significant problem for larger companies because the errors produced by the models tend to "average out" over the large number of census block groups served by these companies. For smaller companies, serving only a few census block groups, such errors could be devastating. Actual cost data for small incumbent LECs is readily available, and is subject to extensive verification and reconciliation processes. These methods should not be replaced.

If the Commission nevertheless decides to adopt mandatory conversion rules, it is critical that reasonable initial effective dates and transition periods be adopted. Significant changes in high-cost allocation rules must be accompanied by transition periods that are proportional to the magnitude of cost shifts. A major change in the USF rules, for example, should be phased in over an extended period of time (as occurred, for example, with the eight-year SPF phase down). Companies that have made significant investments in serving high-cost areas in reliance on the current cost recovery rules, especially, need time to adapt.

As explained above in NECA's response to question 26, where non-incumbent exchange carriers are designated as "eligible" carriers for areas served by small exchange carriers, they should be required to report their own actual costs of serving the area in which they receive such a designation. Among other advantages, this approach would equalize regulatory burdens between incumbent and non-incumbent eligible carriers and assure that high cost support is paid only where justified. Rule revisions would also be needed to assure that per-line universal service payments to new eligible LECs do not exceed amounts payable to the incumbent LEC.

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?

Incumbent exchange carriers should continue to qualify for support at levels comparable to those produced under the current HCF and DEM weighting programs regardless of subscribership levels. As discussed above in response to question 1, supra, maintenance and advancement of universal service is critically dependent on the continued availability of high-cost recovery for small companies based on the actual costs of providing service.

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?

Existing high cost mechanisms have been shown to be the most accurate for purposes of identifying areas with high loop and switching costs regardless of whether the areas are insular or located on the mainland. Issues relating to long distance rates for traffic originating and terminating in insular areas should be considered after the Commission's toll rate averaging proceeding, CC Docket No. 96-61, if not in that proceeding.

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's Board's recommended decision.

Substantial progress continues to be made in proxy model development. Efforts are underway in a number of critical areas, including model testing, reformulation, calibration and statistical analyses. These efforts may make consensus possible among larger companies, but it is not likely that any of the current proxy models will be ready for application on a mandatory basis to small companies for the foreseeable future. As discussed above, current model results show wide variances for sparsely populated areas. Estimation errors that might not be significant, on average, for carriers with numerous census block groups or other study units might be devastating for smaller carriers. Until proxy models are developed that accurately identify costs in the low-density areas that small carriers generally serve, a decision to mandate replacement of current cost-based support mechanisms for small companies with such models would not be supportable under the APA and would almost certainly be set aside on review.

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?

NECA understands that efforts are underway within the industry to combine the most promising elements of the current US WEST BCM model with Pacific Bell's Cost Proxy Model, but does not have yet have data to evaluate the success of this effort.

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

It is not clear whether results from current proxy models, which are designed to develop cost surrogates for plant investment and expense levels (e.g., loop costs), can be tied to any particular service rate structures (e.g., local exchange service, carrier common line rates, etc.). One possible way to define the costs of providing particular services via a proxy model would be to include or exclude particular service features from the theoretical network designs upon which the models are based. Such methods are likely to rely on arbitrary assumptions, however, and may not be supportable. If proxy cost data for particular services are required, it may be possible to develop allocation factors or percentages that can be applied to the cost data obtained from the proxy.

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?

Proxy models rely to a significant extent on various network engineering assumptions that may become outmoded as new technologies are developed and deployed by telephone companies. These developments should be incorporated into model assumptions when actual deployment reaches significant levels.

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?

See responses to questions 37 & 38, supra.

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?

As discussed above, application of proxy methodologies to small telephone companies will seriously jeopardize universal service and will not insure that rates in rural, insular and high cost areas served by these companies are reasonably comparable. If a proxy model is used to allocate support to large companies serving high-cost areas, these concerns are lessened. Rate monitoring programs should not be undertaken unless there is a demonstrated need.

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

See response to question 32, supra.

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

See response to question 32, supra.

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?

As discussed above, NECA does not believe that current proxy models can be applied on a mandatory basis, especially to small companies. Addition of a waiver procedure would not be sufficient to resolve fundamental questions of accuracy. Alltel Corp. v. F.C.C., 838 F.2d 551 (D.C. Cir. 1988).[11] If, however, after mandating proxy-based distributions for some companies the Commission wishes to permit companies to "opt out" from the proxy approach, procedures would need to be developed to determine the extent to which theoretical costs derived from the model fail to replicate costs.

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

As noted above in response to question 38 supra, proxy models are based to some extent on network engineering assumptions. These assumptions can be adjusted to include new or optimal technologies, but must be tested carefully to assure that model performance remains stable.

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?

Adoption of a proxy model on a mandatory basis would constitute "rulemaking" under the Administrative Procedure Act and would accordingly be subject to the substantive and procedural standards for agency action set forth in 5 U.S.C. [[section]] 553. This provision of the APA requires, among other things, that interested persons be given a meaningful opportunity to comment on a proposed rule. To the extent that proprietary restrictions on a model or its underlying data impede the ability of interested persons to study and comment on the model, Commission action adopting it would be subject to challenge under the APA. These concerns can perhaps be alleviated by establishing practices or procedures for interested persons to obtain access to relevant proprietary data subject to voluntary non-disclosure agreements.

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

See response to question 45, supra.

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.

Exchange carriers are currently required to submit cost data to the Commission in a variety of contexts, including the Commission's Docket 87-339 Monitoring Docket and the ARMIS process. Exchange carriers also report book cost data to NECA, for purposes of USF computations, that is filed on a non-proprietary basis with the Commission under NECA's annual USF data submission. ARMIS and USF data are generally reported at the study area level of detail, which limits their usefulness for determining sub-study area costs. No such data are provided by new exchange carriers.

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

See response to question 45, supra.

Competitive Bidding

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

As discussed above in response to question 1, NECA strongly urges the Commission to continue basing high-cost support on actual study area costs, at least for small companies serving rural areas. The need for cost-based support is particularly compelling in areas in which no carrier (other than the incumbent LEC) is willing to serve.

As NECA stated in its 1995 NPRM Comments, a system that would determine eligibility for interstate cost recovery of local service based on competitive bids would impose additional costs and create unnecessary complexity, and would require unprecedented Commission involvement in intrastate issues such as local service quality monitoring.

It is critically important that universal service support levels under any new system be based on the most accurate and complete cost of service information available. Allowing support levels to be set on the basis of competitive bids is likely to result in insufficient support payments, in violation of section 254 of the Act, or a "race for the bottom" as competitive carriers seek to capture funding dollars without regard to maintaining or improving service quality or providing technological advancements. Significant issues of confiscation would arise if incumbent LECs are required to provide facilities or services at non-compensatory rates established pursuant to unrealistic bids submitted by new entrants. Because of the high capital investment required to serve rural areas, the long-term risks of basing support on competitive bids far outweigh the likely benefits.

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?

As stated in NECA's response to question 49, supra., a system that would determine eligibility for interstate cost recovery of local service based on competitive bids would impose additional costs and create unnecessary complexity, and would require unprecedented Commission involvement in intrastate issues. Support levels based on competitive bids are likely to be insufficient to assure continuation of universal service, in violation of section 254 of the Act. Accordingly, this approach should not be adopted.

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 questions 49 & 50, supra.

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

See response to questions 49 & 50, supra.

53. How should collusion be avoided when using a competitive bid?

See response to questions 49 & 50, supra.

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

See response to questions 49 & 50, supra.

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

Section 214(e)(5) requires that state commissions make determinations as to the "service area" within which carriers are obligated to provide universal service and are eligible for universal service support. For an area served by a rural telephone company, the Act defines the service area as the company's study area until the Commission and the States, following Joint Board action, establish a different definition.

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?

NECA's analysis of results produced by the original BCM showed dramatic variances between book costs of incumbent LECS and theoretical costs produced by the model. See NECA 1995 NPRM Comments at 76-82. NECA's preliminary analysis of the original model indicated that substantial additional study is needed before the BCM could be applied to interstate USF distributions.

US WEST and Sprint, two of the original sponsors of the BCM, have recently released an updated version of the BCM ("BCM2"). MCI and AT&T have also submitted their own proxy model (the "Hatfield model"). In a Public Notice released July 10, 1996, the Commission requested comments on these two models, as well as comment on Pacific Telesis' Cost Proxy Model and the earlier BCM.

NECA is current analyzing the BCM2 and the CPM, and expects to complete preliminary comparisons of these models soon. A full report of NECA's analysis will be provided in NECA's comments, to be filed by the August 9th date specified in the Commission's Public Notice.

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?

NECA understands that the BCM2 recognizes that some customers may be more reasonably served by emerging "wireless loop" technologies. According to US WEST, the original BCM specifications have been changed to establish a maximum investment per wireline loop. Absent a demonstration that universal service provided using wireless technology is reasonably comparable with universal service provided through wire technology, however, any "capping" of investment for purpose of calculating high cost support would conflict with the 1996 Act's requirement for "sufficient" cost recovery and should therefore not be considered. Such capping based on wireless technology would also be inconsistent with the Commission's goal of technological neutrality in its support programs.

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?

The choice of wire centers or Census Block Groups (CBGs) as the basis for projecting costs via a proxy model is complex. CBGs appear to be more "granular" in size, a factor that theoretically increases accuracy. On the other hand, CBGs are primarily designed to reflect population distributions, and may not coincide well with telephone company network design factors. Some small companies may cover only one or two CBGs, and in some cases may cover only partial CBGs. The "mapping" problems that result can produce substantial variances between proxy model costs and actual costs.

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?

NECA understands that the current BCM2 contains enhancements designed to recognize differences in distribution architecture and actual distributions of customers in rural CBGs. Results of NECA's analysis of the BCM2 will be provided in NECA's August 9th Comments.

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?

See response to question 59, supra.

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?

CBG data on income levels are available and could, theoretically, be used as an input to the BCM. However, such adjustments would not be desirable for a model intended to estimate the costs of providing telephone service in a given geographical area. It is essential that the telecommunications infrastructure investment be made to serve all subscribers, including those with both high and low income levels (which may be served by the same facilities in a given area). Rather than attempt to adjust costing models to reflect subscriber income, the Commission should continue to improve current Lifeline Assistance programs, which target assistance to low income subscribers based on individual need.

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?

NECA understands that the primary intent of the BCM was to identify relatively "high-cost" CBGs from "lower cost" CBGs for which explicit support might be required. The precise way in which such a model might be used to calculate support remains unclear. If the BCM or some other proxy model is used to identify high cost areas for support, changes to current rules are likely to be required. Extreme caution should be exercised in any attempt to relate proxy-based network infrastructure costs to any specific current or future "service."

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?

Integrating more "granular" data on customer locations within the BCM may prove beneficial. NECA is currently studying such approaches as part of its analysis of the proxy alternatives.

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?

NECA's preliminary analysis indicates that, while the grid cell structure used in the CPM provides a more accurate way of identifying population distribution in sparsely-populated areas than the CBG structure used in the BCM, mapping problems remain for areas served by small companies. This occurs because the grids do not recognize relevant boundaries affecting costs (i.e., exchange, state, etc.).

65. Can the CPM be modified to identify terrain and soil type by grid cell?

NECA does not currently have data sufficient to respond.

66. Can the CPM be used on a nationwide basis to estimate the cost of providing basic residential service?

See question 62 response, supra.

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)?

As noted above, NECA is currently analyzing the CPM and expects to complete preliminary comparisons of results produced by this model with actual costs. NECA plans to provide a full report of its analysis in its August 9th comments.

68. Is the CPM a self-contained model, or does it rely on other models, and if so, to what extent?

See response to question 67, supra.

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).

The carrier common line charge (CCLC) is designed to recover a portion of the joint and common costs associated with providing subscriber line plant. CCLC levels are based on common line costs derived pursuant to the Commission's Part 36 separations rules and Part 69 access charge rules.

The Part 36 separations rules reflect carefully-considered Commission and Joint Board policy judgments regarding the extent to which costs of subscriber loop plant should be allocated between intrastate services and interstate services.[12] Similarly, the Commission's Part 69 access charge rules reflect policy judgments regarding the allocation of interstate costs among various classes of users (assigning, for example, a portion of common line costs to end users via the subscriber line charge (SLC) element and a portion to interstate access customers via the CCLC).

It is certainly possible to identify the magnitude and proportions of common line costs allocated to the interstate jurisdiction and to particular cost recovery mechanisms. For example, incumbent LECs interstate common line costs currently total about $11.5 billion per year, of which $7.9 billion is recovered from end users via SLCs and $3.6 billion from access customers.[13] However, no particular portion of the CCLC or any other common line cost recovery mechanism -- including USF amounts -- can be specifically identified as a "subsidy."[14]

Considering the enormous changes in the industry that have occurred since the early 1980s, when current separations and access charge rules were formulated, the Commission and the Joint Board may wish to reexamine current cost allocation and recovery policies. It may be the case, for example, that the 25 percent gross allocator used to apportion common line costs between the jurisdictions no longer reflects a reasonable allocation between interstate and intrastate plant usage, and should therefore be adjusted upward or downward. Or, the Commission may wish to consider changes in the way that interstate NTS plant costs are recovered. As the Rural Telephone Coalition (RTC) has stated:

To the extent that the current division of the interstate portion of LEC non-traffic sensitive costs between CCL and SLC is not properly set to comparable market realities, adjustment may be required in either the capped level of the SLC charge, the manner in which the CCL cost is recovered, or both. . . . Similarly, any revisions to the Long Term Support mechanism can and should be accommodated at the time these adjustments are made.[15]

Current "caps" on SLC recovery specified in the Commission's Part 69 rules could be reexamined as part of such an inquiry , as well as regulatory policies that result in application of access charges to one class of users (interexchange carriers) while exempting others (e.g., ESPs).

Decisions to adjust current cost allocation percentages between the interstate and intrastate jurisdictions or to change the recovery of those costs from particular classes of users must be made based on careful consideration of factors affecting cost and should reflect to some extent the use of facilities.[16] Such inquiries might be made in the context of this proceeding or in the Commission's planned proceeding on access charge reform. Decisions based on such efforts are far more likely to be sustainable than decisions based on meaningless distinctions between "subsidy" and "cost recovery" portions of non-traffic sensitive plant costs.

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).

Several alternatives to the CCLC exist for recovery of interstate common line costs allocated to the carrier common line element. For example, the Commission may wish to consider a common recovery mechanism for CCL costs and interstate high-cost fund amounts. This would require inclusion of interstate CCL amounts within the universal service billing mechanism described above in NECA's response to question 6, with amounts to be recovered from interstate carriers based on proportionate shares of interstate revenues.

Another approach would be a form of bulk billing similar to that for which NYNEX received a waiver last year.[17] Such bulk billing could be based upon interstate toll minutes that access customers originate or terminate in a particular region or area. As in NYNEX's plan, interstate service providers could report toll minutes to a third party which would compute toll minute market shares for the LEC(s) represented in a particular region or area, and report that data to that LEC for billing purposes.

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?

Section 254(j) of the Act states that "nothing in this section shall affect the collection, distribution, or administration of the Lifeline Assistance Program provided for by the Commission" under 47 C.F.R. [[section]] 69.117. This provision clearly evidences Congress' intent that support for existing Lifeline and Linkup programs should continue. As discussed above in response to question 26, however, the method by which Lifeline Assistance amounts are funded should be changed from the current PSL-based tariff collection method to a revenue-based allocation method, under Commission rules, applicable to all interstate service providers.

The Commission may also wish to consider ways to make current Lifeline Assistance amounts available to all carriers providing local exchange service to customers that qualify for Lifeline Assistance benefits under the current rules. See supra, response to question 26. This may require consideration of alternatives to the current Subscriber Line Charge Waiver program, such as a discount based on a fixed dollar amount rather than the incumbent carrier's subscriber line charge.

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.)?

The costs of collecting funds from contributors vary depending on the scope and extent of identification, verification and enforcement duties required of the fund administrator.

Perhaps the most significant factor in devising such estimates is whether payment obligations are imposed pursuant to carrier-initiated tariffs or pursuant to Commission rule. Since 1989, NECA has collected funds for the Commission's Universal Service Fund and Lifeline Assistance programs on the basis of tariffed charges applicable to interexchange carriers with more than .05% of nationwide presubscribed lines. See 47 C.F.R. [[section]] 69.116 and .117. Since 1993, NECA has also collected funds for the interstate Telecommunications Relay Services (TRS) fund from all interstate carriers on the basis of interstate gross revenues. Carriers are required to contribute to the TRS cost recovery mechanism pursuant to an explicit FCC rule. See 47 C.F.R. [[section]] 64.604(c)(4)(iii)(A).

Based on its experience in administering the USF/LA program and the TRS program, NECA strongly suggests that the Commission adopt an approach similar to the TRS mechanism for the current universal service cost recovery programs, as well as any new programs developed in this proceeding.

The current USF/LA collection mechanism imposes substantial identification, verification and enforcement burdens on exchange carriers and the administrator. The USF/LA rules require more than 1000 incumbent exchange carriers to collect and supply NECA with extensive presubscribed line data twice each year. These data are collected and obtained solely for the purpose of supporting USF/LA billing. Data are gathered for about 600 interexchange carriers, yet, as of December 1995, only forty-seven qualified as having more than .05 percent of the total industry presubscribed lines. Questions have arisen as to whether PSLs of affiliated interexchange carriers should be aggregated for purposes of determining whether the .05% criterion has been met.

Use of historical PSL data also necessitates complicated "true up" billing mechanisms. See NECA Tariff F.C.C. No. 5, Sections 8.4 - 8.8. Further, because interexchange carriers do not have the ability to count their presubscribed lines directly, disputes regarding PSL counts can be very difficult to resolve. Dispute resolution is often made more problematic because the underlying data can be several years old by the time a dispute is analyzed. While uncollectible amounts arising from these disputes are relatively minor, a disproportionate amount of administrative effort is required of NECA and exchange carriers to resolve PSL disputes and issues relating to NECA tariff authority.

As noted above in response to question 26, the 1996 Act requires that every interstate carrier contribute to the universal service cost recovery mechanism. Not all interstate carriers have PSLs. Thus, it is not clear whether the current system could be maintained in any event. If the current system is maintained, however, PSL data would have to be obtained from new local exchange carriers, who are not currently subject to the reporting requirements contained in part 69 of the Commission's rules. If counts from these carriers are not included in either the individual interexchange carrier or the national presubscribed line counts, USF and LA rates would be artificially inflated and billing results distorted.

Since 1993 the Commission has relied on a revenue-based collection mechanism to fund interstate Telecommunications Relay Services. This mechanism, in addition to being a superior measure of carrier market share, eliminates many of administrative problems associated with the current PSL allocation system.

Approximately 3,000 telecommunications service providers contribute to the TRS fund. Carrier obligations to contribute to the TRS fund are established by Commission rule (as opposed to a carrier-initiated tariff) with billing factors determined by the Commission itself. This has significantly reduced controversy over questions relating to the administrator's authority to collect fund amounts, and avoids problems associated with verifying presubscribed line counts.

NECA's experience in administering the TRS fund indicates that the costs of processing carrier contributions are minimal.[18] It is likely that additional scrutiny and administrative resources will be required in processing contributions in the future, regardless of the collection mechanism used, if for no other reason than the size of the contributions being collected. For example, NECA anticipates a need to increase substantially the amount of effort devoted to review of reported revenue data for new universal service mechanisms, given the higher amounts involved. Proportionately greater resources would also be needed to review cost and/or proxy data reported by universal service support recipients.

TRS contributions are based on gross interstate revenues. This has tended to minimize expenses associated with verification of revenue data. If the Commission adopts an alternative "netting" approach for universal service fund collections, administrative expenses would likely increase further, as questions are raised about methods of determining netting amounts.

Should the Commission choose some form of revenues as the basis for determining Universal Service contributions, the FCC Form 431, with modifications, would provide a workable model. The form currently requires carriers to report gross revenues. If the Commission wishes to change the contribution base, it would need to make revisions to the form to permit identification of retail revenues or netting of payments to other carriers. In order to permit separate accounting for individual universal service programs Form 431 could be modified to include a separate factor for each.[19]

NECA does not recommend establishment of any "de minimis" contribution threshold for new universal service fund contributions. Establishment of a threshold would likely add unnecessary complexity and additional administrative expense, as carriers near the threshold seek to avoid payment obligations. To reduce administrative expenses associated with processing small contributions, the Commission may wish to consider specifying some minimum contribution level (e.g., $100). This approach appears to work well in the TRS context, and may help reduce questions about billing thresholds.[20] Further, to avoid questions about affiliation status, the Commission should make clear that each legal entity operating as an interstate carrier is required to contribute to the fund, regardless of whether it is affiliated with other carrier entities.

Respectfully submitted,

NATIONAL EXCHANGE CARRIER
ASSOCIATION, INC.

By: /s/ Richard A. Askoff
Richard A. Askoff

Its Attorney

August 2, 1996