Before the
FEDERAL COMMUNICATIONS COMMISSION
Washington, DC 20554
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CC Docket No. 96-45
NYNEX RESPONSE TO
REQUEST FOR FURTHER COMMENTS
On July 3, 1993, the Commission issued a Public Notice requesting further comments on 72 issues in the above-referenced proceeding.[1] Attached is the response of the NYNEX Telephone Companies[2] ("NYNEX") to the Commission's notice. The following is a summary of NYNEX's response.
SUMMARY OF RESPONSE
Definitions Issues
The Commission should assume that the current State rates for local telephone exchange service, which have resulted in a 94% nationwide penetration rate, constitute "affordable" rates for the vast majority of customers. High cost funding should be designed to support the current rate levels. This can be accomplished by comparing the cost of the extremely high cost areas with a national benchmark cost, and not with a national benchmark rate. Targeted assistance mechanisms should be used to increase subscribership by low income groups and by other groups that have lower-than-average penetration levels.
Schools, Libraries and Health Care Providers
The Commission should include the costs of inside wiring and other internal connections in the universal service fund so that advanced telecommunications and information services will be made available to classrooms. The NYNEX Education Plan would provide schools and libraries with the flexibility to obtain the telecommunications services and information services they need at the best available prices, with additional discounts funded by the universal service fund. The plan would encourage competitive bidding for these services. The competitive bidding process would establish the "base price" for determining the amount of the discount that would be funded. In the absence of competitive bidding, the tariffed price for a similar customer would be the base price. Resale should be prohibited, but aggregation among schools
should be permitted and encouraged. The federal program should be designed to complement existing and future programs that have been adopted in many states to promote the provision of advanced telecommunications services to schools. The Commission should adopt a range of discounts that the State authorities could use to provide higher levels of support to schools and libraries in low-income areas.
High Cost Fund
If the Commission decides to retain the existing universal service fund ("USF"), either on a temporary or permanent basis, it should modify the USF to increase the threshold for assistance and to consolidate study areas within a state. In addition, the Commission should make administrative changes to conform to Section 254 of the Act and to make the funding mechanism competitively neutral.
A proxy model like the Benchmark Cost Model ("BCM") would be a better way of targeting high cost assistance to the census block groups that are truly high-cost. The BCM should only be used to determine high-cost support levels for areas served by price cap LECs -- support for non-price cap LECs should be based on their book costs.
The Commission's recent decision in Docket 96-98 to allow interexchange carriers to purchase unbundled network elements under Section 251(c)(3) of the Act at prices based on total element long run incremental cost ("TELRIC"), plus an allocation of joint and common costs, will eliminate contributions that may
need to be included in the universal service fund. The current interstate and state access charges, as well as state services such as vertical features, provide contribution that allows the LECs to maintain affordable rates for residential customers in general, and for high-cost areas in particular. After June 30, 1997, or earlier, the LECs will not be able to recover access charges from purchasers of unbundled network elements, and the charges for those elements will be well below current rates. The Commission should include the shortfall, to the extent that it is not covered through access charge reform, in the universal service fund.
SLC/CCLC
The carrier common line ("CCL") charge contains two subsidy elements -- Long Term Support, and payphone costs. The remainder of the CCL charge recovers nontraffic sensitive costs of the local loop on a usage-sensitive basis. This is a pricing issue that should be dealt with through pricing flexibility and/or access charge reform. The Commission's recent decision not to require purchasers of unbundled network elements to pay the CCL charge after June 30, 1997, or earlier, will require the LECs to recover these revenues through other means, such as some sort of bulk billing mechanism, an increase in the subscriber line charge ("SLC"), or the universal service fund. If the Commission decides not to allow an increase in the SLC, the most competitively neutral mechanism would be the universal service fund.
The universal service fund should incorporate funding for Lifeline and Link-up America programs, to make those programs competitively neutral as required by the Act.
Administration of Universal Service Support
The costs of administering the universal service fund, assuming a nationwide surcharge determined by the fund administrator, are likely to be small. Therefore, it is unlikely that any carrier will be eligible for a "de minimis" exemption as specified in Section 254(d) of the Act.
Respectfully submitted,
The NYNEX Telephone Companies
By:__________________________
Joseph Di Bella
1300 I Street, N.W., Suite 400 West
Washington, DC 20005
(202) 336-7894
Their Attorney
Dated: August 2, 1996
CERTIFICATE OF SERVICE
I hereby certify that copies of this pleading were mailed this date, first class postage prepaid, upon the persons listed on the attached service list.
____________________________
Joseph Di Bella
Dated: August 2, 1996
Definitions Issues
1. Is it appropriate to assume that current rates for services included within the definition of universal service are affordable, despite variations among companies and service areas?
The Commission should presume that the current rates for local telephone service are at or below the level that is "affordable." These rates have resulted in a very high level of telephone service penetration throughout the nation. The 1995 national telephone penetration rate was 93.9%.[3] In the NYNEX region, the penetration rates are as follows: Maine 95.7%; Massachusetts 95.9%; New Hampshire 96.2%; New York 92.9%; Rhode Island 96.0%; Vermont 96.5%.[4] Thus, while telephone rates vary by jurisdiction, the rates are "affordable" to the vast majority of telephone subscribers in all states. This is a product of state regulatory policies that were designed to minimize the rates for basic residential telephone service. However, the penetration rates for certain income levels and for certain ethnic groups shows that these groups need targeted financial assistance, as well as other measures such as toll blocking, to make telephone service more affordable to all citizens.
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?
These factors should not be considered at a national level; however, state regulators could consider such factors among other things in setting local rates.
The state commissions are in the best position to determine affordable basic residential rates for different localities and calling area sizes in each state. It would not be practical for the Commission to establish a nationwide formula that would properly take into account the differences among states, and localities within states, in economic conditions, income levels, level of competition, infrastructure and technological development, etc. For example, even within a particular state, local calling areas differ radically in size, so that the value of flat-rated calling areas varies greatly within and among states. There are varied types of local exchange services -- some include flat service, others include measured service, and still others include "LATA-wide calling service, "municipal calling service" and "Regional Calling Plan service." The cost of living varies from locality to locality. Telephone expenditures per customer differ from one income group to another. Even within an income group, individuals do not value telephone services in the same way. Some may value telephone service highly, while others may place a higher value on cable television services. Still others may not want to have a telephone at all.
The States have already taken these factors into account in setting rates for local telephone service that have resulted in very high penetration rates. Therefore, the Commission need not, and should not, establish a nationwide formula for determining the affordable rate for local exchange service in each locality. The Commission should establish two goals at the federal level: (1) to maintain support for current local telephone rates in high cost areas; and (2) to develop targeted support mechanisms to increase subscribership for groups that are below the nationwide average.
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?
For detailed discussion of disadvantages, see Answer 2, above. In addition, a disadvantage of setting a national benchmark rate is that it gives the impression that any cost above the national benchmark rate will be explicitly funded. If that is the case, the high-cost fund will be very big, since even a relatively average cost area may qualify for assistance; and there will be no incentive for the local telephone company to reduce costs. This would impede the operation of a free and competitive market. Instead of a national benchmark rate, it is preferable to use a national benchmark cost. This benchmark cost should be set relatively high, since its purpose would be to identify relatively few high cost areas that require support. The benchmark cost could be used to determine the size of the fund and to target support to areas that are truly high-cost.
The difference between the cost estimate and the benchmark cost would be the amount that would be subject to national funding. The actual difference could be weighted by some percentage to reflect the fact that a company should be required to recover some of the difference through rate averaging. Even in the most competitive industries, companies engage in various levels of price averaging among customer groups, so that margins can be expected to vary even under competitive conditions.[5]
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?
Universal service funding for high-cost areas, as required by Section 254 of the Act, would have little effect on competition.[6] For instance, the NYNEX proposal to use the Benchmark Cost Model ("BCM") to provide a set of support levels ranging from $5 to $30 per month would provide support to approximately 2.2 million, or 2.59%, of the 85 million households in areas served by the price cap LECs.[7] Even if none of the competitive local exchange carriers ("CLECs") was eligible to receive universal service funds, the CLECs would still be on an equal competitive footing with the LECs in offering services to the remaining 97.41% of market that would not be eligible for universal service support. However, the NYNEX proposal is based on the assumption that the
LECs would still be able to collect significant contributions from access charges, toll, and vertical services.
If the Commission adopted a much larger level of universal service funding, it still would not inhibit competition in the local exchange. In its Comments, NYNEX supported a definition of "core" universal service that should be within the means of most switch-based CLECs. In addition, Section 214(e) of the Act allows the CLECs to be eligible for universal service support if they provide universal service using their own facilities, or a combination of their own facilities and resale of another carrier's services. Resale of LEC services should make it "technically feasible" for CLECs to provide the full range of "core" universal services.
5. A number of commenters proposed various services to be included on the list of supported services, including access to directory assistance, emergency assistance, and advanced services. Although the delivery of these services may require a local loop, do loop costs accurately represent the actual cost of providing core services? To the extent that loop costs do not fully represent the costs associated with including a service in the definition of core services, identify and quantify other costs to be considered.
The costs that should be supported by universal service funding should include the loop, the line port (nontraffic sensitive switching) and some part of the usage sensitive switch costs.[8] These functions would provide access to additional services, such as directory assistance, emergency assistance, advanced services, etc. Therefore, the cost model for universal service should not include the costs of those additional services.
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?
The Commission should develop a plan that allows the schools, libraries and health care providers to define the services for which they need support by the universal service fund. NYNEX has recommended the establishment of an Education Telecommunications Council to assist in this process. The Commission should avoid adopting an inflexible universal service support mechanism that would dictate a standard set of services to be provided to every school or library, or that would specify a particular discount for each telecommunications service.[9]
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?
The Telecommunications Act specifically contemplates universal service for delivery of telecommunications services to elementary and secondary school classrooms. Section 254(c)(3) of the Act, which defines "special services," says that: "In addition to the services included in the definition of universal service under paragraph (1), the Commission may designate additional services for such support mechanisms for schools, libraries, and health care providers for the purposes of subsection (h)." Subsection (h)(2) states that the Commission shall establish competitively neutral rules to enhance access to advanced telecommunications and information services for all public and non-public elementary and secondary school classrooms. The Conference Report also makes it clear that Congress intended for the Commission to define universal service as a set of telecommunications and information services for classrooms.[10] Therefore, the Commission should define universal service to include the inside wiring and other internal connections needed to ensure that telecommunications and information services are delivered to the classroom.[11]
The cost of such internal connections has been estimated by McKinsey & Co. to be $5.025 billion initially for public K-12 schools, and $410 million per year for ongoing costs. These figures would have to be adjusted to include nonprofit private schools.
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?
Section 706 states that the Commission and the State commissions shall encourage the deployment of advanced telecommunications capabilities to all Americans (including, in particular, to elementary and secondary schools and classrooms) through such methods as price cap regulation, regulatory forbearance, measures which promote competition in the local telecommunications market, or other regulatory methods that remove barriers to infrastructure investment. The Joint Board and the Commission should pursue these goals by adopting policies that encourage facilities-based competition and market-based pricing in the local and long distance markets. Facilities-based competition will tend to drive down the costs of telecommunications while giving the carriers the incentive to deploy advanced technologies. Market-based pricing will encourage efficient investment in the telecommunications infrastructure by both incumbent LECs and CLECs. The Joint Board should ensure that carriers who provide universal service are adequately compensated, so that both incumbent LECs and new entrants will have an incentive to invest in the network. It should adopt a universal service funding mechanism that allows the schools and libraries to obtain the lowest possible prices by requesting competitive bids from among facilities-based carriers, and to apply universal service support funds as discounts to the bid prices (not to the carriers' list prices). These policies, abetted by targeted support mechanisms for high cost areas, schools, libraries, and health care providers, would ensure that all Americans have access to advanced telecommunications services.
Section 708 recognizes the need for further aid to public educational institutions beyond the universal service funding provisions of Section 254. It provides funding for the National Education Technology Funding Corporation to provide information, technical assistance, and loans, grants, and other forms of assistance to the States. This section should be utilized by the FCC to coordinate and stimulate the funding of activities and services which are not covered under Section 254. This section, however, does not contemplate creating such funding under a Universal Service Support Fund.
9. How can universal service support for schools, libraries, and health care providers be structured to promote competition?
Under the NYNEX Education Plan, after a school was certified by a State Authority, the school could solicit the best market price for the telecommunications services it desired to purchase. If the school/library/health care provider was in an area where no competitive bidders existed, it could join forces with a larger entity which had greater market clout and could broker the best price for those services. All telecommunications carriers would compete freely in providing services to schools, since the customers, rather than the designated carriers, would determine the amount of assistance that would be applied. The schools would be able to negotiate the best deals they could with telecommunications carriers, since the discount amount would be applied against the total amount bid by a carrier, which presumably would reflect the amount that the carrier would charge to a similar customer for a similar volume and/or term purchase. Funding would not be tied to any particular technology, and schools could decide from year to year how to apply the funds in the most cost-effective manner.[12]
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) does not permit the resale of universal service by schools, libraries or health care providers, regardless of whether such institutions make a profit on resale. If the Commission adopted a funding mechanism such as the NYNEX Education Plan, schools could aggregate their demand and obtain lower prices for telecommunications services without running afoul of the Section 254(h)(3) prohibition.
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 the answer to question number 10.
12. Should discounts be directed to the states in the form of block grants?
No, states should not receive block grants. Under the NYNEX Education Plan , funds would be allocated to the schools based on a Benchmark Price per student. The Commission, after gathering data on the difference in costs between urban and rural areas of acquiring similar telecommunications capabilities, would disaggregate the Benchmark Price per student for urban and rural areas for purposes of calculating a Benchmark Discount per student. After each school was certified as eligible for funding by a state authority, it would receive discounts directly from the fund in the form of "Telecommunications Credits."[13] NYNEX proposes that at the state level, however, there should be the ability to vary the level of the discount applicable to each school, if that is necessary to achieve the educational vision. The state can supply a level of coordination which does not exist in individual schools, and it can also achieve a higher level of discount through brokering for the schools. An example is NYNEX's contract with the Maine Department of Education, which provides for a lower cost for in-state toll services for state schools.
13. Should discounts for schools, libraries, and health care providers take the form of direct billing credits for telecommunications services provided to eligible institutions?
Yes. After soliciting the best market price, the eligible institutions would apply pre-determined Telecommunications Credits to their purchase price, and carriers would incorporate that amount as a discount on the total charges for the services in question. The telecommunications carrier that was selected by the eligible entity to provide the telecommunications services would seek reimbursement from the universal fund administrator for the amount of Telecommunications Credits, and bill the institution for the remainder.[14]
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?
The state authorities should determine how this might be best achieved through each State's education vision. Under the NYNEX Education Plan, the States would not disburse the funds. However, the States should monitor the distribution of universal service funding and gather data on the effectiveness of the funding mechanism. For example, in its agreement in Rhode Island to provide Internet services and other data network access, NYNEX has agreed to issue quarterly reports to the Department of Education regarding revenue foregone, and to cooperate with and report billing data to the Department of Education so that the use of services for data network access offered by NYNEX is efficiently utilized.
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)?
NYNEX believes that this request process should be as streamlined as possible while still meeting the requirements and goals of the Act. An appropriate state or local organization would be given the authority to certify annually that that a school was eligible to receive funding under the plan. In order to ensure that there is reasonable coordination among schools in a district or state, however, part of the certification could be the verification of the existence of a technology plan, along with other information, possibly in the form of a checklist, helpful in tracking universal service progress. States that already require technology plans could pre-certify the existence of local plans for all schools in their state.
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?
Because the Telecommunications Act of 1996 will promote a competitive environment, many tariffed rates will disappear, and confidential contractual arrangements for telecommunications services will become commonplace. The base service price should be the rate established through competitive bidding (please refer to our answer to question No. 9). In the absence of competing bidders, the base service price should be the tariffed rate, since tariffed rates are likely to continue until markets are fully competitive. NYNEX does not support
proposals that telecommunications carriers be required to provide services to schools and libraries priced at incremental cost, or that they should be provided universal service funds only for discounts from prices based on incremental cost.[15] Under Section 254(h)(1)(B), telecommunications carriers are entitled to compensation, either through the universal service fund or through offsets to the carriers' universal service obligations, for any discounts that they provide to schools and libraries if the amounts of the discounts have been approved by the Commission and the States and if the services are within the Commission's definition of universal service. Anything less would not encourage carriers to build infrastructure or to compete for contracts to provide advanced telecommunications services to schools and libraries.[16]
17. How should discounts be applied, if at all, for schools and libraries and rural health care providers that are currently receiving special rates?
Discounts and special rates already in existence should not be affected. The NYNEX Education Plan would not conflict with or interfere with any existing state program or any other discount plan. Under the NEP, the State Authority has the ability to vary the discount to the schools within its jurisdiction. The discounting structure NYNEX has proposed ensures flexibility.
The State Authority could decide that those special rates should be further discounted under the plan so that they become, for those entities, a deeper discount or possibly even free. Or the State Authority might decide that other entities have greater need, and direct the discounts in question to those entities. The State could also supplement the discount with additional credits for intrastate services that would be funded by a state universal service fund, or with other alternative support mechanisms, as permitted by Section 254(f).[17]
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.
As part of a regulatory agreement in Maine, NYNEX will supply funding for a plan to provide access to information networks and services to those public libraries and K-12 public schools that presently lack adequate access. Up to $4 million a year for five years will be used to provide reduced rates and/or provide access to a statewide frame relay network, including Internet access. NYNEX also entered into a contract with the Maine Department of Education in 1995 to provide for a lower cost for in-state toll services for state schools, allowing them to triple their current level of usage at no additional cost. In Rhode Island, under the terms of a Price Regulation Plan and Settlement Agreement of June 14, 1996, NYNEX will spend $7.5 million over a 5-year period to provide Internet services or other data network access, in consultation with and in accordance with methods and procedures approved by NYNEX and the Rhode Island Department of Education, using technology which is mutually agreed upon by NYNEX and the individual institution, and which allows for user discretion and flexibility for the most efficient use of available funding.
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?
NYNEX has proposed that there be disaggregated Benchmark Prices and Benchmark Discounts for urban and rural areas, with supplemental support for rural areas to ensure that each would pay the same net price for services.[18] Through the flexible structure NYNEX has proposed, entities in high cost service areas and schools with special needs could also receive supplemental allotments from the State Authority to better equalize their purchasing opportunities. However, the average discount for all schools in the state would have to equal the Benchmark Discount, and the discounts would have to be within a range set by the Commission. NYNEX has proposed that services identified as start-up be discounted at a level of 75%, and services identified as ongoing be discounted at a level of 50%. NYNEX has additionally proposed that the Commission allow the States to vary the discounts within ranges of 25%-100% for initial costs, and 20%-90% for ongoing costs.[19]
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?
The State education authorities should make the determination of which model or combination of models should be used.
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?
The States should determine the approach to be used. However, the national school lunch program would be better than Lifeline, since children that participate in school lunch programs may not necessarily be from families that receive Lifeline service. The school lunch programs are more likely to correlate with the level of support that a particular school system needs to obtain universal service.
22. Should separate funding mechanisms be established for schools and libraries and for rural health providers?
There could be any number of separate funds making up the larger universal service fund. The methodology for collecting the fund, however, should be the same: a single surcharge on interstate retail revenues.
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?
Yes. McKinsey used tariffed rates, or in their absence, surrogates, in estimating costs.
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?
We are not aware of any other nationwide estimates.
25. Are there any specific estimates that address the discount funding estimates for eligible private schools?
NYNEX is not aware of specific estimates for eligible private schools. NYNEX proposes that private schools be treated the same as public schools, and that their funding be estimated on a pro-rata basis with public schools. If states determine otherwise, they should address the difference within those states.
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?
For permanent modifications, see Answer 27. If the Commission decides to retain the existing USF on a temporary basis, then five modifications are needed to target assistance to high cost areas.
First, the Commission should increase the current threshold for receiving assistance from 115% of the national average loop cost to 130%. The current threshold is too low to effectively distinguish a high-cost area from an average-cost area. If a study area is to be characterized as high-cost, at a minimum, its average loop cost should be one standard deviation greater than the national average. This would be a statistically sound way of distinguishing relatively high cost areas from those that are not. A threshold of 130% of the national average loop cost approximates one standard deviation.[20] An analysis of NYNEX New York, which has loop costs close to the national average, shows that loop costs in the rural areas are more than 180% of the loop cost in the nation and 254% of the Loop costs in urban areas.[21] See Chart 1 below.Chart 1
NYNEX New York : Average Cost per Loop by Areas
Area Average Monthly Cost Percentage of the
Per Loop National Average
Major Cities $14.61 72.14%
Major Suburban $17.60 86.94%
Rest of New York State $37.14 183.45%
Average of New York $20.59 101.72%
Average of Nation $20.25 100.00%
Second, the Commission should consolidate multiple study areas within a state to a single study area. Some large carriers have been able to qualify for assistance intended for small carriers by maintaining small study areas within a state. High-cost assistance mechanisms should be applied uniformly and consistently, at least among the large LECs or among the price cap LECs. The rules should not favor one LEC over another, just because of an historical accident in the way that study areas evolved and were frozen in 1984.[22] For example, NYNEX does not qualify for high-cost support in the State of New York, where it maintains a state-wide study area and where its average loop cost is very close to the national average (see chart above). However, if NYNEX had different study areas in the urban and rural portions of New York State, it would qualify for a substantial amount of interstate high cost assistance. The weighted average loop costs in the relatively rural serving territory of NYNEX New York are greater than 180% of the national average loop cost, and these loops constitute almost 20% of the total loops in the state. A large LEC with the same
cost characteristics as NYNEX should not receive high-cost support simply because it chooses to maintain separate study areas within the same state.
Third, for support to be competitively neutral, a new entrant should qualify for the same amount of assistance per line in any study area served by the incumbent LEC only if it offers universal service throughout the LEC's study area, as required by Section 214(e) of the Act.
Fourth, the Commission should keep the current "interim cap" that indexes the growth in the total level of the interstate high cost fund to growth in the total number of working loops nation-wide.[23]
Fifth, the Commission should modify the funding mechanism to collect contributions from all providers of retail interstate telecommunications services, as required by Section 254(d) of the Act. Each carrier should apply the same percentage surcharge on its end users' bills to collect USF revenues, which would be allocated by the USF administrator to the companies that qualified for high-cost assistance.
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?
Currently, there are three high-cost programs for rural areas; the current USF, Dial Equipment Minute ("DEM") Weighting, and Long Term Support ("LTS") payments. None of these programs meets the technical requirements of Section 254 of the Act concerning the definition of universal service or the method of collecting and distributing universal service support.
(A) USF. NYNEX supports the implementation of separate mechanisms of high-cost assistance for price cap LECs and rate of return LECs, and this support should be limited to residential customers. The support amounts for eligible price cap LECs should be calculated using a "proxy factors" system such as the Benchmark Cost Model ("BCM"). The BCM could be used to effectively target high-cost areas. It would be consistent with price cap or incentive regulation, because it would not require carriers to report actual cost data. It would allow carriers equal treatment regardless of whether they were incumbents or new entrants or whether they maintained large or small study areas, and it would allow portability of support. The subsidy amounts that would be developed through the BCM would be competitively neutral, since any eligible carrier, as defined in Section 214(e) of the Act, could receive the same payment as an incumbent LEC for serving a customer in the same area.
Rate of return carriers should be allowed to use actual study area costs. The BCM may be satisfactory for a carrier that serves a wider geographic area, as any overestimation in some areas will be offset by underestimation in other areas. However, such a model may not accurately portray the costs of a carrier that serves only a limited or a smaller area, and this could cause financial harm to small carriers.
(B) DEM. DEM weighting does not satisfy the requirements of the Act that support for universal service be "explicit" and that all telecommunications providers contribute on an "equitable and nondiscriminatory" basis.[24] The DEM weighting program should be restructured by removing the revenue requirements associated with it from smaller LECs' interstate switched access rates, and by recovering those costs through an explicit federal fund.[25]
(C) LTS. LTS is another form high-cost assistance; it is a fund paid by LECs that are not members of the NECA common line pool to members of the pool.[26] The LTS program is not consistent with Section 254. It does not support the definition of core universal service, as it is designed to help small LECs maintain lower carrier common line (CCL) charges, which only affects rates for interexchange service. Therefore, LTS should be eliminated, and the NECA pooling LECs should recover these costs directly through their CCL charges.[27]
(D) Funding the Programs. High cost support should be funded by all interstate telecommunications carriers. Under Section 254, there should be individual funds, such as funds for schools, low income subscribers, and for
high cost areas, but the revenues for these funds should be collected through a single mechanism. The funding mechanism should be competitively neutral; it should not favor one technology, service, or company over another. Contributions for the Federal fund should be based on interstate retail revenues. Each contributor's interstate universal service payment should be based on its percentage of total interstate retail revenues. The Commission should specify a surcharge that all interstate carriers would apply to their interstate retail customers' bills.[28]
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?
If the Commission defines a LEC's "service area" as the current study area, which typically includes all of the LEC's exchanges in a state, using the book costs of the large LECs to determine universal service support payments to the CLECs would result in windfall profits to the CLECs. This would occur because the CLECs typically concentrate their initial efforts in dense urban areas that have loop costs that are significantly below the state-wide average.[29] For example, in New York, which has state-wide loop close to the national average, loop costs in urban areas are about 72% of the national average, and those in suburban areas are about 87% of the national average.[30] Therefore, providing high cost support to CLECs based on the LEC study area average loop cost would exceed the amount of support that those carriers need to provide universal service. It would also distort competition, because the LECs would have a continuing obligation to serve the high cost areas while competing with subsidized CLECs in the lower cost areas.
If the Commission adopted a proxy model, such as the BCM, it could target support levels to costs in individual Census Block Groups ("CBGs"). Because CBGs are small, the costs within a CBG should not vary significantly.[31] Therefore, the LEC-based BCM costs could be used to calculate support for CLECs provided that they offered universal service throughout the CBG in the same manner as the LEC.
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?
The price cap LECs should be eligible for high-cost support. Since the Commission has decided in Docket 96-98 to remove most of the access charge revenue stream from the rates for unbundled network elements, the price cap carriers will need universal service funds to replace the contribution from access charges that they have used to support affordable service to high cost areas.
If the Commission decides to provide high-cost support for price cap carriers, the support should be structured differently for these carriers than for non-price cap carriers. See answer to question No. 27. The Commission could use the BCM as a means of identifying areas served by price cap LECs that are likely to have higher-than-average costs. The BCM is both technologically and competitively neutral, as it does not rely on a company's actual costs of providing service. The BCM treats carriers equally, regardless of the size of the area served and regardless of whether they are incumbent LECs or new entrants. In addition, the BCM allows for portability of the subsidy among eligible service providers. As such, the model should be used to calculate universal service support for price cap LECs providing "core" services to residential customers in high-cost areas.
The BCM assumes that the Commission will not disturb the current sources of revenue that the LECs use to provide residential and business services. Both price cap LECs and rate-of-return LECs rely on the contribution from access services, vertical features,[32] and other high-margin services to
maintain universal service at affordable prices. NYNEX's previous proposal to establish relatively high Benchmark Cost thresholds for determining the amount of universal service support that a LEC would receive for a particular area assumed that the Commission would not disturb these sources of contribution. However, the Commission's decision in Docket 96-98 to require the LECs to offer unbundled network elements under Section 251(c)(3) of the Act based on total element long run incremental cost ("TELRIC") plus a portion of joint and common costs[33] will remove much of the contribution that the LECs currently rely upon to maintain affordable local exchange rates. This will occur for two reasons. First, the TELRIC methodology, even after addition of joint and common costs, is likely to result in prices that are well below the current level of state and interstate Local Switching access charges. Second, the Commission has decided to allow the LECs to apply the carrier common line charge and three fourths of the transport interconnection charge to carriers that purchase switching as an unbundled network element only until the Commission completes the earlier of (1) the universal service and access charge reform investigations; (2) the date that a LEC receives authority to provide in-region interLATA service; or (3) June 30, 1997. Thus, the revenues from these elements, as well as the shortfall in the unbundled price for switching, will either have to be recovered through the universal service fund, or through access charge reform, or both. If these shortfalls were not recovered, it would undermine the ability of the LECs to maintain their current service levels to high-cost areas and to residential customers in all areas.
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?
For interstate universal service purposes, price cap LECs should be defined as those carriers that are not under rate of return regulation in the interstate jurisdiction per Section 61.41(a), and as defined in the Price Cap Performance Review for Local Exchange Carriers.[34]
Companies that participate in a state price cap or incentive regulation plan but that are not price cap carriers in the interstate jurisdiction should not be classified as "price cap carriers" for purposes of determining eligibility for high-cost support. Such carriers are still basing their interstate rates on their costs, and their ability to maintain service in high cost areas may require universal service funding based on their book costs.
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?
A rural company is already defined in the Act. The Act defines a rural telephone company as:
"[A] local exchange carrier operating entity to the extent that such entity --
A) provides common carrier service to any local exchange carrier study area that does not include either:
(i) any incorporated place of 10,000 inhabitants or more, or any part thereof, based on the most recently available population statistics of the Bureau of the Census; or;
(ii) any territory, incorporated or unincorporated, included in an urbanized area, as defined by the Bureau of the Census as of August 10, 1993;
B) provides telephone exchange service, including exchange access, to fewer than 50,000 access lines;
C) provides telephone exchange service to any local exchange carrier study area with fewer than 100,000 access lines; or
D) has less than 15 percent of its access lines in communities of more 50,000 on the date of enactment of the Telecommunications Act of 1996."[35]
If the above definition of a rural carrier as specified in the Act is used, some rate of return carriers may not qualify as rural carriers. Therefore, the Commission should define rural carrier for purposes of receiving universal service support as a carrier that is not under price cap or any other incentive form of regulation in the interstate jurisdiction. Non-price cap LECs are generally small LECs that serve rural areas, while price cap LECs are large carriers that generally serve both rural and urban areas.[36]
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?
Carriers that use book costs should transition, on a flash cut basis, to a proxy system when their form of interstate regulation changes from rate of return to price caps or another type of incentive regulation.
Under a bifurcated approach, CLECs should be eligible for the same amount of universal service support as the incumbent carrier serving the area in which the CLEC operates. In other words, in areas served by price cap LECs, the competitor will be eligible for support at levels determined by the proxy system; and in areas served by rate of return LECs, the competitor will be eligible for the same assistance per line as 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?
No. The whole point of a proxy system is that it would provide a consistent level of support for all LECs serving high cost areas. It would provide assistance based on high-cost areas rather than high-cost companies; and it would encourage recipients of assistance to control their costs, because the level of assistance would not increase as their costs increased. In a broader sense, it would be consistent with the Act's regulatory trend towards non-cost-based forms of regulation.[37] Moreover, it is unlikely that the NYNEX BCM methodology would provide less high cost assistance to price cap LECs than the current HCF mechanism.[38] It is for this reason that NYNEX proposes that any additional funding should be reflected in a reduction in interstate and state access rates.
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?
To ensure that insular areas have affordable telecommunications service, the Commission should provide targeted universal service funding for high-cost, insular areas. Low income customers should continue to benefit from existing assistance programs, such as the Lifeline and Link-up America programs. These programs have been effective in the past in promoting subscribership. However, they may need to be enhanced to accommodate the effects of increased competition in the local exchange market.[39]
In addition, the Commission should rely upon other mechanisms, such as toll limit services, toll blocking services, credit limits, reduced service deposits, and debit cards, to make telephone service accessible to low-income customers in insular areas. This would help the LECs to provide access to such customers as well as to help the customers avoid disconnections for non-payment.
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.
No comment
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?
No comment.
37. How does a proxy model determine costs for providing only the defined universal service core services?
Proxy model algorithms are designed to calculate a proxy cost for providing customers with access to the core universal services. For instance, if core universal service is defined as voice grade local exchange service, touch tone dialing, and access to other services (see the answer to question No. 39 below), the proxy algorithms would include loop costs and the costs of the local switch that are associated with local calls. Since the switch provides access to other services, such as long distance calling, the costs of such services do not need to be included in the proxy algorithm.
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 can be updated and improved to account for changes in the definition of core services and advances in telecommunications and information technologies. In fact, updated versions of existing proxy models have already been filed with the Commission in this proceeding. Changes can be incorporated by including additional cost algorithms, using LEC cost-to-investment ratios times the additional investment needed to provide the additional services.
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?
Proxy models should not account for the cost of access to advanced telecommunications and information services. Under Section 254(c)(1)(B) of the Act, universal service is defined as telecommunications services that are subscribed to by a substantial majority of residential customers. Advanced services, such as Internet access service, data transmission capability, ISDN, optional Signaling System Seven features, or blocking of such features, enhanced services, and broadband services are not subscribed to by a majority of customers at this time. A proxy model should include the costs of the following "core" universal service features; (1) voice grade residential service with the ability to place and receive calls; (2) single party service; (3) touch-tone dialing; (4) directory listing; (5) access to local and long distance toll calling; (6) access to operator services; (7) access to emergency (911) service; (8) access to
Telecommunications Relay Service. These services would provide the loop and switch facilities that a customer would need to subscribe to advanced services. The Commission should consider advanced services as part of its "evolving" definition of universal service under Section 254(c)(1).[40]
40. If a proxy model is used, what, if any, measures are necessary to assure that urban rates and rates in rural, insular, and high-cost areas are reasonably comparable, as required in Section 254(b)(3) of the 1996 Act.
The State regulatory commissions have traditionally taken the lead in ensuring that rates for local telephone service are comparable in urban and rural areas. A proxy model, like the BCM, should be used as a backstop for State efforts to support affordable rates. The BCM would promote the statutory objectives of providing support to rural and high cost areas at rates that are comparable to rates in urban areas, which are generally less costly to serve, and of ensuring that rates for telephone service are "affordable" in high cost areas. Under Section 254(f) of the Act, the States can supplement the interstate universal service funding levels with state universal service funds to ensure that the rates in rural and urban areas are comparable.
Because proxy models are based on hypothetical costs, and because they do not represent the actual amount of costs that a LEC or other carrier incurs to provide service, they should not be used to develop a "reasonable" state-wide average price for local exchange service. Proxy models are very good at identifying areas that are relatively more costly to serve than other areas. Therefore, they are useful in targeting universal service support to the truly high cost areas. However, they are not accurate enough to develop appropriate rate levels for telephone service in urban and rural areas. That responsibility should remain with the States.
41. How should support be calculated for those areas (e.g., insular areas and Alaska) that are not included under the proxy model?
A major portion of these insular areas and Alaska are served by rate of return LECs, which should not be included in a proxy model -- their support levels should be based on their actual costs. A proxy model should only be used for price cap LECs, which generally are the largest LECs. A well-designed proxy system may be satisfactory for a LEC that serves a wider geographic area, as any overestimation in some areas will be offset by underestimation in other areas. However, such a model may not accurately portray the costs of a LEC that serves only a limited or a smaller area, and this could cause financial harm to small LECs. To the extent that insular areas and Alaska are served by price cap LECs, they should be included in a proxy model.
42. Will support calculated using a proxy model provide sufficient incentive to support infrastructure development and maintain quality service?
A proxy model can be a valuable tool in strengthening the ability of the LECs to provide service to high-cost areas as they face increasing competition in low-cost areas. By targeting universal service support to high cost areas, a proxy model would provide an additional incentive for the LECs to invest in those areas. However, the price cap system would still provide the primary incentive for the LECs to invest in the network, because the LECs can share in the benefits of the productivity improvements that result from the introduction of new technologies.
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?
No. The advantage of a proxy model, like the BCM, is that it would provide an equitable level of support for price cap LECs that serve high cost areas; it would provide assistance to high-cost areas rather than to high-cost companies; and it would encourage recipients of assistance to control their costs, because the level of assistance would not increase as their costs increased.[41] Under NYNEX's proposal, the proxy model would be limited to price cap carriers, which are large companies that have the ability to attract capital and to maintain quality service for all customers. Therefore, they do not need additional support above the level developed through the proxy model.
44. How can a proxy model be modified to accommodate technological neutrality?
A proxy system should not be biased in favor of a particular technology. Instead, the model should approximate the cost for a price cap LEC to provide "core" services to a high-cost area by using the most efficient technology currently available. An example of this is the Benchmark Cost Model. The BCM avoids technological bias by estimating the loop investment needed to serve each Census Block Group as if a LEC were constructing a completely new network using current technologies. For both feeder and distribution plant, the model applies either copper facilities or fiber-based facilities on a least-cost analysis. The model can be updated as new technologies are introduced and as supplier prices change.[42] It may be appropriate to include wireless technology in those very remote areas where the cost of wireline facilities is extremely high.
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?
If the Commission adopts a proxy model in this proceeding, it must be a publicly available document. In addition, all interested parties in this proceeding must have an opportunity to run and analyze the model and its results, and be able to readily obtain the documentation of the model.
46. Should a proxy model be adopted if it is based on proprietary data that may not be available for public review?
No. In order to avoid bias and data anomalies, a proxy model should rely only on data that are publicly available.
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.
Public data sources include ARMIS Data, the Federal-State Joint Board Monitoring Report, Statistics of Communications Common Carriers, and the annual Tariff Review Plans.
48. Should the materiality and potential importance of proprietary information be considered in evaluating the various models?
A proxy model should not employ a LEC's proprietary information.
Competitive Bidding
49. How would high-cost payments be determined under a system of competitive bidding in areas with no competition?
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?
51. What, if any, safeguards should be adopted to ensure that large companies do not bid excessively low to drive out competition?
52. What safeguards should be adopted to ensure adequate quality of service under a system of competitive bidding?
53. How is collusion avoided when using a competitive bid?
54. Should the structure of the auction differ if there are few bidders? If so, how?
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?
Answers to 49 through 55.
NYNEX does not support use of a bidding system to determine the level of interstate high-cost support. Such a system would be difficult to administer, especially if the Commission determined high-cost support levels by CBG. Depending on the benchmark cost level that the Commission adopts as a threshold for determining whether a CBG is eligible for support, the number of CBGs could vary from a few thousand to over 100,000. Competitive bidding for that many areas would be a very time consuming and expensive undertaking. Also, competitive bidding would not necessarily represent a better method of identifying the amount of support that is needed in each high-cost area. It would create large variations in the amount of support that is directed at each area depending on the level of competition and the business objectives of the bidders.[43]
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?
We cannot quantify the difference between the BCM cost estimates and a LEC's book costs, since the BCM calculates the loop and local switching costs for providing basic residential service at the CBG level, and the incumbent LECs do not have book costs at the CBG level. However, as a general matter, BCM costs tend to be well below the LECs' book costs, because the model is based on the hypothetical costs that a LEC would incur if it were constructing a completely new network using the most up-to-date technologies, rather than on the LEC's actual network investment, which reflects varied technologies and vintages.
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?
Yes. Where wireless technology could be used efficiently to provide residential telephone service, it should be incorporated in a proxy model. In rural areas where customers are widely dispersed and very distant from the central office, wireless loop technology may be a less costly alternative to a wireline facility. The BCM assumes that wireline technology would be used for all customers. However, the BCM 2 submitted recently by US West and Sprint applies a $10,000 cap on loop investment to take into account the fact that wireless loops would be more efficient above that level of investment.[44]
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?
NYNEX supports identifying high cost areas on the basis of U.S. Census Block Groups. The U.S. Census Block Group ("CBG"), which contains, on average, about 400 household units, is a discreet geographical unit used by the Department of Commerce in its national population census surveys. It is sufficiently small so as to allow the Commission to target high cost support to specific areas that have above-average costs. The CBG could be applied uniformly to all providers of telecommunications service, incumbents as well as competitors. In addition, it would not be administratively burdensome to distribute USF support by CBG.[45]
Costs to serve end user customers may vary greatly over an exchange or wire center or any other large geographic area due to terrain conditions and the distance an end user may live from the serving central office. Even in smaller communities, there are some areas where the cost to serve subscribers are reasonable compared to urban areas, and there are other areas that have costs many times that of urban areas. Accordingly, determining support at the smaller CBG level better targets support to specifically defined high cost areas by eliminating some of the disparities in costs that can occur within a larger area. Additionally, the use of CBGs eliminates the implicit subsidy, inherent with a system where costs would be averaged throughout an entire exchange or wire center, of one group of subscribers by another.
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 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?
Since the BCM is primarily designed as a proxy for loop costs, it should not be modified to include the costs of connecting exchanges to the public switched network through the use of microwave, trunk, or satellite technologies. However, since loop facilities to some customers in rural areas may be served more efficiently by wireless technology, the BCM 2 incorporates a maximum investment of $10,000 per wireline loop. This is based on the assumption that, above that level, it would be less costly to provide a wireless loop to serve the customer.
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?
The BCM 2 includes many of the proposed modifications that parties in this proceeding, including the National Cable Television Association, recommended in their comments. However, the BCM 2 does not include all of the recommended modifications. According to the model designers, US WEST and Sprint, the model enhancements in the BCM 2 are designed to more accurately reflect actual engineering practices in the development of a local exchange network. Updating the switching module to include a variety of switch sizes, a user adjustable copper/fiber breakpoint, and business lines in the outside plant architecture, and adopting a road buffer approach to address household distribution assumptions, are among the major BCM 2 enhancements that were noted as areas of concern by the National Cable Television Association.
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?
Yes. A significant variable that should be included as part of a long-term package of high-cost funding is the inclusion of a general economic needs test. This
variable would differentiate areas with low income levels from areas with above-average income levels. High cost assistance should not automatically flow to subscribers just because they reside in areas where it is more costly to provide telephone service. Society does not subsidize the price of commodities for everyone irrespective of income, even when the commodities are considered essential. The same principle should apply to telephone services. This would allow the Commission to limit the level of high-cost support while targeting it to areas where it is most needed. An income test could also be used to narrow the reach of universal service funding, thereby reducing the total size of the fund.[46] The benchmark cost estimated by BCM model could be related to the average income level in a CBG so that subsidies could be targeted to lower income areas and exclude high income areas.[47]
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?
NYNEX proposes the use of a benchmark cost instead of a benchmark rate. Use of the BCM does not suggest that the costs calculated by the model would be recovered only through services included in the benchmark cost. The benchmark cost should be used simply to determine the level of universal service support for a particular area. The universal service funding for each area would be used to by the LEC to maintain its existing state and interstate rates, or to reduce its rates if the BCM funding level exceeded the current level of high cost support in the interstate jurisdiction.
If the Commission decided to use the BCM to provide high-cost support, existing separations and access charge rules would have to be updated. The Part 69 rules concerning Long Term Support and the Part 36 Separations rules concerning DEM weighting and the existing universal service fund would have to be replaced with a funding mechanism based on the BCM.
The comparison of model costs with a local rate affordability benchmark does not create an opportunity for over-recovery from universal service support mechanisms. A national cost benchmark would be established to identify CBGs with costs that are significantly above average. The benchmark would be used to control the size of the fund and to target support to areas that are truly high-cost. The difference between the cost estimate and the benchmark would be the number that would be subject to national funding, The actual difference could be weighted by some percentage to reflect the fact that a company should be required to recover some of the difference through its own internal rate averaging. Therefore, the company would not receive the entire difference from the universal service fund, but some percentage of the difference. To the extent that funding from the new USF exceeded the amount from the old USF, that amount would be used by the receiving LEC to reduce its interstate access rates, state access rates, or state toll rates.[48]
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?
No comment. An industry task force is looking into this issue.
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?
65. Can the CPM be modified to identify terrain and soil type by grid cell?
66. Can the CPM be used on a nationwide basis to estimate the cost of providing basic residential service?
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)?
68. Is the CPM a self-contained model, or does it rely on other models, and if so, to what extent?
No comment to questions 64 through 68.
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 CCL charge has three distinct categories of costs embedded in it. These costs may be referred to as (1) LTS; (2) Pay Phone; and (3) Base Factor Portion ("BFP").
The common line Pay Phone costs are interstate public pay phone costs that are recovered through the CCL charge. These costs are being dealt with in CC Docket 96-128, and they are not as significant as the common line Base Factor Portion.
The LTS program enables the NECA pool members to maintain a CCL charge equivalent to the CCL charge that would result if all LECs were members of the pool. The LTS fund replaces the revenues lost to the NECA pool members in setting their CCL charges at the nationwide equivalent rate. This amount is determined annually by NECA, which informs each LEC of its obligations to contribute to the fund. In 1995, $44 million of NYNEX's CCL revenues (out of a total of $423 million) represented LTS contributions. See Chart 2 below.
The CCL charge attributable to the common line Base Factor Portion recovers the revenue requirements for the difference between the capped $3.50 single-line business and residence end user common line ("EUCL") charge and the full monthly interstate loop cost. It also recovers the difference between the capped $6.00 multi-line EUCL rate and the interstate full loop cost, in the event that the loop cost is above $6.00 per month.
The payphone and LTS portions of the CCL revenue stream clearly represent inter-company or inter-service transfers, and they are implicit subsidies that need to be replaced under the Act.
The remainder of the CCL charge represents nontraffic sensitive costs of providing local loops. If the Commission eliminated the CCL charge without increasing the EUCL charge, then the LECs would not have sufficient revenues to recover their current common line costs.[49] This would have an impact on their ability to continue providing loop services, especially in high-cost areas. Therefore, if the Commission eliminated the CCL charge, it would have to allow another mechanism for recovery of these costs, either through increases in EUCL charges, through other mechanisms, such as bulk-billing, or through the universal service fund. If the Commission did not want to increase the EUCL charges, the most competitively neutral mechanism for recovering these revenues would be the universal service fund.
In Chart 2, NYNEX calculates the interstate loop cost, based on fully distributed costs per the Commission's Separations and Access rules.
Chart 2
Analysis of Interstate Loop Costs and the CCL Charge
Description Amount Source
1 Residence Lines 10,170,306 Section 2.1 Appendix
A**
2 Lifeline 912,283 Section 2.1 Appendix
A**
3 Total Residence Lines 11,082,589 Line 1 + Line 2
4 Single-line Business 580,780 Section 2.1 Appendix
A**
5 Lines Capped at $3.50 11,663,369 Line 3 + Line 4
6 Multi-line Business 4,481,370 Section 2.1 Appendix
A**
7 Total Access Lines 16,144,739 Line 5 + Line 6
8 Interstate Loop Costs (Common Line NYNEX Separations
BFP) $1,278,074,258 Systems
9 Interstate Cost per Loop per month $6.60 Line 8 / Line 7 / 12
10 Annual EUCL Revenues (at $3.50) $489,861,498 Line 5 * $3.50 * 12
11 Annual EUCL Revenues (at $6.00) $322,658,640 Line 6 * $6.00 * 12
12 Special Access Surcharge Revenues $2,748,325 Tariff Review Plan**
13 Total EUCL Revenues $815,268,463 Line 10 + Line 11 +
Line 12
14 Loop Cost not recovered through EUCL $462,805,795 Line 8 - Line 13
15 CCL Payphone Costs $53,000,000 NYNEX Separations
System
16 LTS Payments (Costs) $43,874,728 NECA
17 Total CCL Revenues $423,147,908 Tariff Review Plan***
18 Loop cost recovered through CCL $326,273,180 Line 17 - Line 16 -
Line 15
19 Loop cost not recovered through EUCL $136,532,615 Line 14 - Line 18
or CCL
**
NYNEX 1996 Annual Access Filing; Transmittal No. 420; June 27, 1996.*** Based on 1995 weighted rates.
Due to the fact that the price cap system of rate regulation has broken the linkage between prices and costs, there is no one-to-one relationship between the interstate revenue requirements and the interstate revenues that are recovered through the price cap regime. Chart 2 shows that the total interstate loop cost is about $1.28 billion, with a monthly loop cost of $6.60 per line. The EUCL charges of $3.50 for residence and single-line business and $6.00 for multi-line business recover about $815 million. Of the remainder of $463 million interstate loop costs, it is estimated that about $326 million are recovered through the CCL charge. The remaining $137 million is not recovered either through the CCL charge or the EUCL charge.
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).
As is shown above, most of the CCL charge represents the recovery of loop costs. The Commission's decision in Docket 96-98 to exclude the CCL charge from the rates for unbundled network elements after June 30, 1997, or earlier, and the realities of the competitive market will make it impossible for the LECs to continue collecting the usage-sensitive CCL charge to recover nontraffic sensitive loop costs. The emergence of competition was NYNEX's primary reason for seeking the USPP rate structure in LATA 132, where the CCL for multiline usage is recovered through a per-presubscribed line charge. However, there is a limit on the amount that can be recovered on a per- presubscribed line basis before interexchange carriers begin to have their customers (particularly large business customers) un-presubscribe their lines and use pre-programmed 10XXX dialing. Therefore, the Commission needs to adopt other mechanisms for recovering common line costs.
If the Commission does not want to eliminate the CCL charge by raising the EUCL charge or by incorporating CCL revenues in the universal service fund, it could recover these revenues from interexchange carriers through a bulk billing mechanism. Bulk billing would be assessed on all interexchange carriers offering service in a market area based on the carrier's toll market share (revenue or minutes). Such a procedure would ensure that all interexchange carriers offering service in the market would bear a proportionate share the recovery of these costs. However, the most competitively neutral mechanism would be the universal service fund.
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?
Yes, the Act specifies that all interstate subsidies should be explicit and funded by all interstate telecommunications carriers. In the interstate arena, the amount of Lifeline subsidy still should be tied to the amount of 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 conference report makes it clear that a carrier will be exempted from contributing to the universal service fund only if the administrative costs of collecting its share of the fund would be greater than the universal service revenues it collects. Under the NYNEX proposal, contributions for the Federal fund will be based on interstate retail revenues (see Answer 27). Each contributor's interstate universal service payment would be based on a pro rata share of its interstate retail revenues. All interstate carriers would apply the same percentage surcharge, calculated by the fund administrator, to their interstate customers' bills. The incremental cost of modifying the billing system and adding a surcharge line in a customer's bill is very small. Therefore, the cost to the carrier to administer the surcharge, and the cost to the fund administrator of determining the surcharge and collecting surcharge revenues from the carriers, is likely to be less than the funds that are received in almost all cases. Therefore, no interstate carrier should be exempted from contributing to the fund.