Before the
FEDERAL COMMUNICATIONS COMMISSION
Washington, DC 20554
In the Matter of ) ) Common Carrier Bureau Seeks ) CC Docket No. 96-45 Further Comment on Specific ) [DA 96-1078] Questions in Universal Service ) Notice of Proposed Rulemaking )
COMMENTS OF THE
RURAL TELEPHONE COALITION
(NRTA, NTCA, OPASTCO)
August 2, 1996
PUBLIC NOTICE
Federal Communications Commission
1919 M St., N.W.
Washington, D.C. 20554
[DA 96-1078]
Released July 3, 1996
COMMON CARRIER BUREAU SEEKS FURTHER COMMENT ON SPECIFIC
QUESTIONS IN UNIVERSAL SERVICE NOTICE OF PROPOSED RULEMAKING
CC DOCKET 96-45
Comment Date: August 2, 1996
On March 8, 1996, the Commission adopted a Notice of Proposed Rulemaking (NPRM) that sought comment on the Congressional directives set out in Section 254 of the Telecommunications Act of 1996 (1996 Act) and that established a Federal-State Joint Board to recommend changes to our regulations to implement Section 254 of the 1996 Act. Specifically, the NPRM asked for comment on: 1) goals and principles of universal support mechanisms; 2) support for rural, insular, and high-cost areas and low-income consumers; 3) support for schools, libraries, and health care providers; 4) enhancing access to advanced services for schools, libraries, and health care providers; 5) other universal service mechanisms; and, 6) administration of support mechanisms.
Comments and Reply Comments in this proceeding were received on April 12, 1996 and May 7, 1996, respectively. Having reviewed the submissions, the Common Carrier Bureau, at the request of the staff of the Federal-State Joint Board, seeks further comment on specific issues relating to the subjects previously noticed in this proceeding. Interested parties are invited to file comments on the attached list of questions. Commenters should restate and underline each question above their responses. Commenters also must provide a brief summary of their comments, not to exceed three sentences per question or three single-spaced pages in total, as a preface to their comments. The comments and comment summary should follow the order of the questions. Comments should be filed on or before August 2, 1996. Interested parties must file an original and four copies of their comments with the Office of the Secretary, Federal Communications Commission, Room 222, 1919 M Street, N.W., Washington, D.C. 20554. Comments should reference CC Docket No. 96-45. Parties must also serve comments on the Federal-State Joint Board and Joint Board staff in accordance with the attached service list. Parties should send one copy of their comments to the Commission's copy contractor, International Transcription Service, Room 140, 2100 M Street, N.W., Washington, D.C. 20037. Comments will be available for public inspection during regular business hours in the FCC Reference Center, Room 239, 1919 M Street, N.W., Washington, D.C. 20554.
Parties are also asked to submit comments on diskette. Such diskette submissions would be in addition to and not a substitute for the formal filing requirements addressed above. Parties submitting diskettes should submit them to Ernestine Creech, Common Carrier Bureau, Accounting and Audits Division, 2000 L Street, N.W., Suite 257, Washington, D.C. 20554. Such a submission should be on a 3.5 inch diskette in an IBM compatible format using WordPerfect 5.1 for Windows software in a "read only" mode. The diskette should be clearly labeled with the party's name, proceeding, and date of submission. The diskette should be accompanied by a cover letter.
For further information on schools, libraries and health care providers
contact:
Irene Flannery, 202 418-0847
For further information on other issues contact:
Gary Seigel, 202 418-0879
-FCC-
Rural Telephone Coalition Comments:
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?
"Affordability" is a term new to the Communications Act, and with little legislative history. The concept however is intended to build upon the policies first made explicit by the Commission when it adopted the first Universal Service Fund rules, i.e. that an explicit mechanism should recover enough of the cost of providing dialtone so that basic local service rates do not become unaffordable. Affordability analysis is not limited to evaluating effects on the economically underprivileged, but is to be gauged against the economic burden on the average citizen. The 1996 Act explicitly preserves the Lifeline program, which would be unnecessary if the affordability criteria were meant to limit universal service support to persons presently supported by those programs.
In this context, and in light of the record of the subscribership docket (CC 95-115) indicating that in most cases the level of local service rate is not a material cause of non-subscribership, it is reasonable to conclude that, on average, rates can be considered affordable today.
Because the Commission has not yet defined the services to be supported by the federal universal service support mechanism, the question cannot be answered definitively. However, the record shows that this area is not one of substantial disagreement in regard to services provided to residential and small business subscribers. This conclusion cannot be made in regard to schools, libraries and health care providers until the services to be supported are identified.
In implementing the 1996 Act and judging what is `affordable," the Joint Board needs to recognize that the national policy mandate deals with several different universal service concerns. These distinct concerns include (1) the problem of people who lack the income to subscribe to and use telecommunications services and (2) the separate problem of ensuring a nationwide public switched network that makes available advancing capabilities and services on terms that encourage the average customer to subscribe to and use the network. The second focuses on areas where relatively sparse population and below-average traffic volumes cause above-average service costs.[1]
The universal service objectives of "just, reasonable and affordable rates," [[section]] 254(b)(1) and (I), and reasonably comparable services and rates, [[section]] 254(b)(3), apply to all universal service concerns, along with the remaining principles. But differing emphases and interpretations with respect to the governing principles are appropriate depending on what particular concern is under consideration. For example, the policy of "affordable" rates is of paramount importance to ensuring universal service to low income customers. The Act states that it does not affect the current programs to provide service to the needy, [[section]] 254(j). However, the Joint Board and FCC may choose to improve those programs to resolve the concerns with unserved groups expressed in the NPRM. Even for the low income mechanisms, moreover, the law's implicit assumption that universal service is a necessity requiring government intervention may well indicate that some subscribers feel compelled by safety or health or other needs to take service, even if the price is a major burden.
While the "just, reasonable and affordable rates" mandate is important for high cost rural areas, Congress also established that rural and urban rates and services must be "reasonably comparable" and that all should have access to "advanced telecommunications and information services," [[section]] 254(b)(2). Congress specified that universal service cost recovery payments should be "sufficient" to "achieve the purposes of this section." The Conference Report also cautioned that the then on-going universal service review (which was dedicated to reducing the size and controlling the growth of the programs) was not an appropriate foundation for implementing [[section]] 254.[2] There will also be changes as the Joint Board works toward a fully explicit funding mechanism. With all of these instructions and admonitions, it would be imprudent to presume that "affordable" rates should be the primary issue. While the Act requires that all universal services be "affordable," it nowhere authorizes the Joint Board or the FCC to convert the high cost compensation mandate into a welfare program.
The Joint Board should concern itself, as Congress has directed, with achieving all the attributes of universal service embodied in [[section]] 254. Since the rural rates and services must be comparable to those in urban areas, and the question admits the variance in rates, a more fruitful focus for high cost areas would be on parity and infrastructure development incentives.
2. To what extent should non-rate factors, such as subscribership level, telephone expenditures as a percentage of income, cost of living, or local calling area size be considered in determining the affordability and reasonable comparability of rates?
The first three "non-rate" factors -- subscribership level, telephone expenditures as a percentage of income and cost of living -- are relevant to judging "affordability" in connection with universal service mechanisms for low income customers. These can provide some insight into whether consumers consider themselves able to pay the price of the monthly fixed charge for the level of service they obtain, what monthly part of their income subscription consumes and how overall prices in their areas compare to other areas. However, the current reliance upon eligibility for other state low income programs to establish eligibility for Lifeline is simpler, less costly to administer and benefits from each state's expertise about its own economic conditions and citizens.
These first three factors are not useful in determining the "reasonable comparability of rates." The question of comparability concerns the level of the rates for similar services in rural and urban areas. Straining to read the comparability mandate as meaning comparably affordable would add nothing to the basic issue of whether a customer has the means to take service. It matters nothing to the needy family struggling to pay even a subsidized telephone that he lives in an affluent county or town or that rates are even higher somewhere else. Affordability is necessarily a household or individual low income issue.
In contrast, the policy of rate and service comparability relates to the concept of a nationwide public switched network available everywhere on the same (or nearly the same) terms. It proceeds from recognition that the marketplace does not provide the same infrastructure investment incentives or per-customer costs where traffic volumes are low and loops are long, but that society will benefit from greater parity of telecommunications opportunities. Low income programs alone will not modernize the rural infrastructure.
Comparability requires that the units of comparison be sufficiently similar. Therefore, the size of the local calling area is relevant to both "comparability" and "affordability." Paying $20 for flat rate local service in a rural place where a local call can reach a few hundred or a couple of thousand lines is not comparable to paying that monthly rate to reach millions or hundreds of thousands of other lines. The local rate in a rural area may not even cover routine or emergency calls. This restricted service also means that customers in a small calling scope or area must make more toll calls, so that their local rates alone are a poor indicator of "affordability."
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?
In order to respond, the "benchmark" must be defined in relation to the other elements of cost recovery, since it has been used differently by the proponents at different times. If the benchmark identifies those costs which are not recovered through the new universal service fund, meeting the statutory requirement for affordability depends therefore on how much of this remainder is recovered through end user charges, e.g., local service and subscriber line charges. Comparability is also a requirement. Thus, a benchmark set to produce high cost recovery beyond a nationwide average could be a useful objective for examining comparability and affordability for the average customer. However, the differences in local and toll rate structures, service quality, local calling scope, etc., would make a meaningful single benchmark impractical to construct.[3]
As the RTC discussed in the record and will discuss briefly below (see questions 34-48) and more extensively in response to the Request for comments about current proxy proposals due August 9, 1996, the proxies proposed so far have not been adequate as surrogates for rural telephone company costs. Any proxy model would need sufficient validation to demonstrate that it would not cause under- or over recovery for rural LECs. Validation is particularly crucial when proxy use is proposed for identifying what costs may be recovered or for setting prices.[4]
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?
There is only one reason consistent with the Congressional intent and the statute for temporary delay of the requirement to provide all universal services throughout the designated service area. This situation will be created by the ongoing implementation of the statute: The law requires an evolving definition of universal service, which necessarily means that the definition may be beyond what some LECs are capable of providing when the definition is adopted or expanded.
In that case, it would defeat the network advancement purposes of the Act unless the eligible telecommunications carrier could continue to receive high cost compensation while it upgrades to meet the requirements of providing all universal services in the entire service area.[5] The role of the state in determining eligible carriers under [[section]] 214(e) set out in the law makes it possible for this specific issue to be resolved by agencies familiar with the local conditions.
Aside from that, no exception is lawful. Congress has legislated the requirements and conditions attached to gaining and relinquishing essential telecommunications carrier (ETC) status in [[section]] 214(e). The provision requiring a state public interest finding before an additional ETC can be designated in a rural telephone company study area, [[section]] 214(e)(2), amply demonstrates Congress's concern about the impact of competition -- and particularly subsidized competition -- in such rural areas.[6] Beyond that, the Act generously permits a CLEC that wants to become an ETC but cannot provide all the required universal services on its own facilities to meet the rest of its universal service obligations using resale. Accordingly, Congress has determined that having to qualify in full as an ETC either does not conflict with the Act's overall pro-competition thrust or is nevertheless justified by the needs of rural LECs' markets.
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 definitions for universal services proposed in the record and the evolution contemplated by the Act, [[section]] 254(c), will require universal service contributions to switching and transport costs as well as loop costs. Some implicit high cost compensation that will presumably have to be made explicit already recovers such non-loop costs. For example, the Joint Board should provide high cost compensation for access charges that cause significant disparities between rural and urban areas. This approach would facilitate the toll rate averaging required by [[section]] 254(g) and promote rural long distance competition. It will also be necessary to provide compensation for any network upgrades, such as the software, and even hardware, that rural telephone companies within the top 100 MSAs will have to develop and install to provide number portability -- even if they have no bona fide request and thus no customer to pay the costs.
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?
Discounts are required to be available for any "universal service" according to Sec. 254(h)(1)(B). Of course, this will depend upon the definition of "universal service."
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 universal service provision for schools, libraries and rural health care providers requires discounts and mandatory provision related to telecommunications services. Inside wiring has been deregulated, so it will presumably not be declared a "universal service" eligible for discount.
8. To what extent should the provisions of Sections 706 and 708 be considered by the Joint
Board and be relied upon to provide advanced services to schools, libraries and health care providers?
The provisions of section 708 may accommodate incorporation into the separate fund for provision of advanced services to schools, libraries and health care providers, but is not likely to be sufficient by itself. Section 706, a provision that addresses advanced telecommunications incentives, doesn't ensure that funding be available and that schools, libraries, and health care providers have access to advanced services. Thus, [[section]]706 provisions must be applied with caution.
9. How can universal service support for schools, libraries, and health care providers be structured to promote competition?
The statutory provision for discount reimbursements or setoffs to their universal service contribution obligations for all telecommunications carriers, by itself, encourages competition because the customers will be able to choose from among competing providers of discounted services.
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?
Only entities eligible for the institutional discounts and preferences should be able to participate in any way, including sharing, and no resale for consideration for money or any other thing of value is permissible. Imposing end user fees has the potential for frustrating the intent of Congress by limiting access to the publicly-mandated telecommunications programs required by [[section]] 254(h).
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?
Not applicable.
12. Should discounts be directed to the states in the form of block grants?
No, the statutory plan is for setoffs or reimbursements to carriers to compensate them for the discounts provided. There is no contemplation of funds being flowed to any third party, including states.
13. Should discounts for schools, libraries, and health care providers take the form of direct billing credits for telecommunications services provided to eligible institutions?
If "billing credits" refers to the manner in which the discount is reflected in the customer's bill, the form is irrelevant and need not be regulated. If billing credits means something else, it would be inconsistent with the statutory plan for reimbursement and setoffs for carriers. In any event, there is no need for a "middleman" to add delay and administrative costs to the discount compensation process.
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 RTC believes that the carriers themselves should receive the reimbursement for the funding. If forced to choose block grants or direct billing credits, the RTC believes that direct billing credits are a better means of ensuring that the money is used for its intended purpose.
The discounts should be direct billing credits for the schools, etc., so that the provider and institution would deal face to face. The provider would have an incentive to limit the discounts to the intended statutory purpose to avoid having its reimbursement or offset denied. The complaint process could also be used for enforcement against abuses.
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)?
The least burdensome way to limit institutional requests for supported services would be to define bona fide request with specificity and enforce that limitation through the complaint process.
16. What should be the base service prices to which discounts for schools and libraries are applied: (a) total service long-run incremental cost; (b) short-run incremental costs; (c) best commercially-available rate; (d) tariffed rate; (e) rate established through a competitively-bid contract in which schools and libraries participate; (f) lowest of some group of the above; or (g) some other benchmark? How could the best commercially-available rate be ascertained, in light of the fact that many such rates may be established pursuant to confidential contractual arrangements?
The base service prices for discounts would be the lowest rate available to any non- school, -library or -rural health care provider customer. When such a rate already reflects high cost support, the institutional rate should be applied to the supported rate. When a non-regulated carrier provides a discount, it must furnish sufficient information about its contract and other non-tariffed rates to permit an affected institutional customer to assess if it is not provided a discount from the lowest comparable non-institutional rate.
17. How should discounts be applied, if at all, for schools and libraries and rural health care providers that are currently receiving special rates?
The rates should be grandfathered, unless the institutional user is entitled to an additional discount under the Act. The providing carrier should receive compensation for the actual amount of the discount.
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.
The RTC has insufficient information to respond.
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?
If the discount from rates that already receive high cost compensation is insufficient to achieve the statutory goals for eligible institutions in one or more of the listed categories, a further discount could be appropriate and could lawfully be compensated from the school, library and rural health care provider support mechanism.
Internet access and intra-school district communications in rural areas are typically beyond the local calling areas.
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 Commission should not base determinations on the relative neediness of schools, libraries and rural health care providers, but rather on whether the statutory goals will not otherwise be achievable because of specific conditions or costs.
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?
As it does for all other universal service mechanisms, the Act requires "sufficient" support mechanisms to meet the statutory purposes, [[section]] 254(b)(5) and (e). Consequently, the Commission can only adopt a support mechanism if it can conclude that the mechanism will satisfy the Act's purposes. Sliding scales may be more difficult to administer in some circumstances, but are often preferable because they avoid large changes in compensation which would otherwise be caused by small changes in the relevant parameters.
22. Should separate funding mechanisms be established for schools and libraries and for rural health care providers?
The mechanism(s) adopted to implement [[section]] 254(h) should be separate from the high cost, Lifeline, and TRS mechanisms, at least insofar as any accounts that are maintained of payments and setoffs from universal service contributions and obligations. Since [[section]] 254(h) initiates a new and untested type of universal service program, it will be important to monitor its costs for comparison to its benefits. Furthermore, any carrier, not just eligible carriers, will have access to the funding mechanism established for provision of service to schools, hospitals and health care providers for the same reason. It may be wise to require separate rural health care provider, school and library accounts, so that each segment of the new national initiative may be evaluated in this manner. It is also crucial to keep the existing mechanisms separate from the new ones to evaluate the impact, costs and benefits of converting from the current system to fully explicit funding of universal service cost recovery.
23. Are the cost estimates contained in the McKinsey Report and NII KickStart Initiative an accurate funding estimate for the discount provisions for schools and libraries, assuming that tariffed rates are used as the base prices?
The RTC has no basis to evaluate these estimates.
24. Are there other cost estimates available that can serve as the basis for establishing a funding estimate for the discount provisions applicable to schools and libraries and to rural health care providers?
The RTC has no information on such cost estimates.
25. Are there any specific cost estimates that address the discount funding estimates for eligible private schools?
The RTC has no information on such cost estimates.
High Cost Fund
General Questions
26. If the existing high-cost support mechanism remains in place (on either a permanent or temporary basis), what modifications, if any, are required to comply with the Telecommunications Act of 1996?
The existing high cost recovery mechanisms should remain in place on a long term basis (i.e., until they are no longer necessary and effective to satisfy the purposes of [[section]] 254.) They should be funded through the broader all-provider contributions requirement in [[section]] 254(d) of the new law. In addition, the high cost recovery under DEM weighting should be bulk billed to enable interexchange carriers to satisfy their geographic toll rate averaging obligations, currently under pressure from disparity in NECA and depooled LECs' traffic sensitive access charges. Because of the requirement that the definition of universal services is an evolving one, the Act precludes imposition of a cap.
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?
High cost recovery in rural telephone companies' study areas should be disaggregated into zones, using a formula based on density, distance or another cost corollary. The resulting matching of their high cost recovery and the variances of such costs within their study areas will reduce misleading market entry signals that would result if the high cost compensation were uniform throughout the area, causing overcompensation in lower cost portions and under compensation in higher cost areas.
28. What are the potential advantages and disadvantages of basing the payments to competitive carriers on the book costs of the incumbent local exchange carrier operating in the same service area?
It is unlawful, uneconomic and unfair to base high cost payments to CLECs on the serving ILEC's costs. The Act mandates "specific" federal (and state) high cost compensation to designated ETCs, [[section]] 254(b)(5) and (e). Payments to one class of LECs based on costs "specific" to an individual carrier of a different class are not even arguably "specific" to the CLECs. Competitors are allowed to choose to enter only markets where their costs are lower than the serving ILEC's costs. Above-cost (i.e., more than sufficient) payments to CLECs will also violate the Act's mandate for "sufficient" high cost recovery and the [[section]] 254(k) prohibition on subsidizing competitive services. The ratepayers who will ultimately pay for universal service contributions, however collected, may not lawfully be forced to bear costs that are not necessary for universal service. In addition, the inevitable result of overcompensating the CLECs in this way will be an unfair competitive disadvantage for the ILEC.
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 Joint Board must implement the universal service policy with the needs of high cost customers in mind, regardless of who serves them. Consequently, this proceeding must find a way to achieve the Act's universal service purposes for all customers in high cost areas. Above all, however, the universal service mechanisms may not lawfully restrict the aggregate high cost compensation available to the areas served by small and rural ILECs whose regulatory posture demonstrates their greater vulnerability to market and regulatory pressures. The Act's mandate for "sufficient" mechanisms continues to govern whatever approach the Joint Board and FCC apply to either set of ILECs.
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?
Should the Commission adopt rules providing different treatment for price cap companies, the federal tariffing status of such companies should be used. Otherwise there will be endless litigation over whether a particular state plan is or is not a price cap plan.
31. If a bifurcated plan that would allow the use of book costs (instead of proxy costs) were used for rural companies, how should rural companies be defined?
Rural companies should be those defined in the 1996 Act as "rural telephone companies," since that definition was written specifically to recognize the different competitive rules which are appropriate for such companies in reaching the difficult balance between promoting competition and preserving and enhancing universal service.
The RTC supports bifurcation. If actual costs are not to be used for large and urban-centered LECs, they must at least be allowed for companies with hard to serve -- low density or low traffic volume --service areas. Congress has defined the "rural telephone companies" that it determined could need the many rural safeguards enacted in the Act, including:
(1) the reservation of additional state authority over designating CLECs to receive support, [[section]] 214(e)(2),
(2) a distinct approach to the relevant area for universal service purposes, [[section]] 214(e)(5),
(3) extra state authority to set the terms for CLEC entry, [[section]] 253(f), and
(4) the automatic initial exemption from, and right to request suspension and modification of, the interconnection provisions designed to "jump start" competition.
This proceeding should use that same statutory definition for any bifurcation plan for high cost recovery mechanisms.
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?
If rural telephone companies are allowed to use actual costs, which the RTC believes is necessary under both the plain language of the Act and its public policy mandate, they should be permitted to use actual costs for the foreseeable future. If a proxy methodology of proven validity for predicting these carriers' costs is found, that could justify a transition.
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?
A proxy model should not be used for rural telephone companies unless and until a valid proxy is found and proven accurate. An accurate, valid proxy must have been shown to predict with reasonable certainty the costs to serve a given LEC's area. A non-confiscatory proxy plan which uses forward looking costs, will provide an opportunity to recover embedded costs which exceed the forward looking costs. It is true that there is no protection for such costs in a competitive environment, but neither does the government mandate the rates to be charged, the services which were required to be provided, the facilities required to be deployed, or prohibit exiting the market. Furthermore, any high cost recovery mechanism should be held to the full comparability and other universal service principles of [[section]] 254. As explained in the answers to questions 1 and 2, high cost compensation cannot be evaluated or targeted on the basis of subscribership; that function is the job of the Lifeline Assistance program, which Congress found unnecessary to change in [[section]] 254(j).
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?
The high cost and low income (i.e., Lifeline and Link-Up) mechanisms, if properly designed to be "sufficient to achieve the purposes of this section, [[section]] 254(e), should be sufficient to provide for universal service to insular areas. The need for comparable and affordable interexchange service should be adequately met by implementation of the geographic toll rate averaging requirements of [[section]] 254(g). Inclusion of insular areas in the universal services mandate is another reason to reject any proxy methodology absent proof that it is a valid predictor of the costs of serving rural, remote and insular areas.
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.
The law does not require the Joint Board to resolve every issue within the initial fifteen months allowed for this proceeding, [[section]] 254(a). The speculation that a consensus proxy model may be possible in the future is a patently inadequate basis for the Act's requirement for "specific, predictable, and sufficient mechanisms" that are "explicit and sufficient to achieve the purposes of this section," [[section]] 254(d)-(e). The record so far does not demonstrate that any proposal proxy is valid for small and rural telephone LECs.
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?
This information must come from the proponents.
37. How does a proxy model determine costs for providing only the defined universal service core services?
Because the proxy models focus on providing basic voice grade switched service, the major components of which are the loop and switching costs, other proposed universal services would not have a large effect on the cost. In fact, the error range of estimating the vendor switching discounts is probably greater than any incremental software costs of providing additional services. If universal service is defined to include broadband capability, then adjustments to the engineering cost estimates would be required.
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?
See answer to question 37. The RTC may provide further comment in its August 9 filing on the proxy models.
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 answer to question 37.
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 in question 3, the critical factor is the amount of cost remaining to be recovered after receipt of the universal service support. To the extent all or part of this remainder is recovered through end user charges, the charges must fall within a reasonable variation from the charges to urban users. Reasonable, in regard to local service rates, necessarily includes a consideration of calling scope. A $20 charge for a service that permits calling to 800 other subscribers is not comparable to a $20 charge that provides access to a million subscribers.
41. How should support be calculated for those areas (e.g., insular areas and Alaska) that are not included under the proxy model?
Actual cost should be used for all rural telephone companies and any non-rural LECs serving insular areas, Alaska or other high cost areas. Since the record shows that proxies are inaccurate for small and rural LECs, it would be discriminatory to allow only insular or Alaskan LECs to use reliable ( i.e., actual) costs.
42. Will support calculated using a proxy model provide sufficient incentive to support infrastructure development and maintain quality service?
Investment incentives to modernize the infrastructure and maintain quality service will only be adequate to the extent that carriers believe they will have a fair opportunity of recovering the real costs of their real networks. As long as no proxy has been sufficiently validated and priced out to provide a secure level of confidence in its accuracy, the riskiness of investment will provide a strong disincentive.
Additionally, the current mechanism does contain an incentive to upgrade since it compensates the carrier after the infrastructure investment has been made. Unfortunately, a proxy model will compensate a carrier, based on a hypothetical network, whether or not the carrier invests.
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?
If a proxy is adopted, it should allow relief at the option of the carrier for underpredictions of actual costs. The Joint Board should reject any proxy that has not been shown through reliable price outs to be valid for all the LECs to which it will apply. The universal service commitment in the Act and the deregulatory purpose of the legislation stand in the way of a system likely to require large numbers of waiver proceedings, thereby adding to the cost of universal service, without any gain over the current actual cost methodology for most ILECs.
44. How can a proxy model be modified to accommodate technological neutrality?
A proxy model based on a forward looking, imaginary network using "optimal" technology is by definition technologically biased in favor of the chosen technology and against other networks. Actual costs allow for differences in technology, while leaving the chosen technologies to compete against each other on the basis of their costs and technical advantages, is essential to allow the marketplace to select the technologies that meet their needs. Consequently, a proxy model, based on one theoretical network design, cannot adequately accommodate technical neutrality.
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?
A model must be available without cost to those that will be affected if it is adopted. It would be a fatal procedural and substantive flaw to proceed without the information necessary for an affected business, including a small LEC, to evaluate the effect on its revenues. Also, the model needs to recognize individual companies' proprietary information.
46. Should a proxy model be adopted if it is based on proprietary data that may not be available for public review?
A company should not be required to make specific information about its own operations available to competitors, but a company should not be subjected to a costing mechanism that affects its revenues or how it may recover its high costs on the basis of a methodology that is too complex or inadequately disclosed for it to determine what the effects will be. Of course, individual proprietary information should remain confidential.
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.
As indicated above, the test of whether a proxy is valid is not whether it has the right inputs, but whether it predicts what it purports to predict. The test of whether a proxy is useful is whether the predicted result meets the statutory objectives. Therefore the test of the adequacy of the data is whether, when used, both the validity and objectives tests are met.
48. Should the materiality and potential importance of proprietary information be considered in evaluating the various models?
See answers to questions 45, 46 and 47, above.
Competitive Bidding
49. How would high-cost payments be determined under a system of competitive bidding in areas with no competition?
The Act limits high cost compensation to state-designated essential telecommunications carriers (ETCs), [[section]] 214(e). If no competing ETC has been designated, there can be no other LEC to bid for the cost recovery. In a rural LEC service area, the state must make a public interest finding before it designates an additional ETC, [[section]] 214(e)(2), so Congress plainly did not have bidding for rural high cost support levels in mind.
In addition, the high cost mechanism must be "sufficient," so the single ETC in a non-competitive market would have to recover its excess costs, but must compensate no more than those costs, to avoid cross-subsidy forbidden by [[section]] 254(k). Therefore, the Act precludes bidding in a non-competitive area.
Specifically, [[section]] 254(b)(5) of the 1996 Act mandates "specific and predictable support mechanisms." Exposing high-cost customers to the vagaries of competitive bidding would not be predictable. Also, the lowest cost provider, in many cases, might not provide sufficient support.
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?
The Act also precludes competitive bidding for the support level in competitive markets. Again, state designation as an ETC is a prerequisite, so only a CLEC designated as an ETC could be a potential bidder. Even if multiple ETCs had been designated, the statutory requirement for "precise, sufficient and predictable" high cost recovery would not permit the bid of one LEC to set recovery levels for other ETCs. The losing bidder's high cost recovery, based on the low bidder's bid, would not be specific to any of them. Nor would such recovery be "sufficient" for any of the losers.
Setting a winner's premium to induce low bidding would increase the statutory conflict. It would subsidize the winner by paying more than its bid indicated it needed, thus overloading the cost burden on the end users that will ultimately fund the universal service contributors, contrary to [[section]] 254(k).
Forcing under recovery by the losing ETCs and over recovery by the winning bidder would impede and could destroy the existing competition and the incentives for future competition.
Unlike the PCS auctions, where there were numerous interested parties, high-cost areas have historically been ignored by the larger carriers. Designing a complex and administratively burdensome bidding system, for an area that no one (with the exception of rural telcos) may want to serve, would be a challenge even to a team of game-theory economists.
51. What, if any, safeguards should be adopted to ensure that large companies do not bid excessively low to drive out competition?
The experience with the C-Band PCS auction shows that it is probably impossible to conduct something resembling an auction in which the highest (i.e. most service for the dollar) bidder does not prevail. This question illustrates the precise problem with the auction proposal: The excellent service at reasonable prices which small and rural companies now provide can be destroyed by any big company which wants to take over the area.
The best safeguard against gaming of the bidding by anyone would be to adhere to the high cost recovery framework Congress established and eschew competitive bidding. Indeed, it is not clear why the Common Carrier Bureau is asking about competitive bidding in this expedited implementation proceeding. The Commission admitted in its earlier universal service proceeding that competitive bidding was not then feasible. There is no reason to think it is a feasible approach now, even if it were not also unlawful.
The PCS auctions demonstrated the difficulties of avoiding the deep-pocketed influence of large companies, even in the "entrepreneurs" blocks. This question illustrates one of many inherent flaws in the idea of competitive bidding. If a large company wants to "low-ball" bid for an area, it will be hard to stop. The resulting replacement of a small or rural carrier with a monolithic entity is contrary to the Act's pro-competitive slant.
52. What safeguards should be adopted to ensure adequate quality of service under a system of competitive bidding?
During the l970's and 1980's large companies bid for municipal CATV franchises by promising to provide more services at lower cost than their competitors. In many cases the result was that as soon as the franchise was acquired, the cable company "discovered" it could not feasibly deliver what it promised and either sold out or negotiated its obligations down. The same result could occur in the telephone situation, with the added feature that the incumbents who took the initiative to invest in their communities would be destroyed.
Competitive bidding would under-compensate the losing competitors. They would, thus, have strong incentives not to maintain high service quality, especially in rural areas, let alone to invest in developing competing facilities-based competition. The winning bidder would also have an incentive to use its windfall high cost compensation to compete elsewhere, and not to maintain high service quality or investment where it hopes to continue as the low bidder.
Again, competitive bidding, by its very nature, contains a disincentive to invest in quality service, which is contrary to the Act's intent. This question exposes yet another inherent flaw in the auction proposal.
53. How is collusion avoided when using a competitive bid?
The RTC is strongly opposed to "auctioning" off universal service, but any auction rules should make collusion illegal.
54. Should the structure of the auction differ if there are few bidders? If so, how?
No comment.
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?
Even if bidding were lawful, the area used to determine universal service compensation and the ETCs' serving areas are the "service area" set by the State or the study area of a rural LEC until changed by a Joint Board. Therefore, the Commission should not try to encroach on the area designations Congress left for determination by others as intrinsic to the high cost recovery framework in the Act.
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?
In previous comments, the RTC has noted that the for individual small companies, there can be no assurance the model will predict either its actual cost or the (forward looking) cost of building a new network in its area using a hypothetical design. The sponsors of the BCM readily acknowledge this fact. NECA is currently analyzing the latest version of BCM and is expected to file its results on August 9, at which time the RTC also expects to have further comment.
57. Should the BCM be modified to include non-wireline services? If wireless technology proves less costly than wireline facilities, should projected costs be capped at the level predicted for use of wireless technology?
The RTC understands that the BCM model now includes an assumed cost level at which wireless loop technology would be used. The basis for this assumed level is not clear. Such assumptions cannot be made purely on a cost basis, however, because wireless technology is not universally available or usable.
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?
On the one hand, wire centers can provide a realistic basis for determining actual costs below the study area level because they are a basic building block of the local network. On the other hand, for rural companies, wire center average cost as a basis for determining support which could be available to competitors provides inadequate protection from cream skimming. If a competitor can build (or convert CATV) facilities in a core area with relatively higher density and lower cost, and (if required) resell the incumbent's rural facilities at a wash, while receiving per line support at the average, the new entrant will receive a windfall, and the incumbent will be forced to raise prices to rural subscribers.
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?
Adding factors is a way to get closer to the variability of small and rural LECs' conditions and costs. However, more accuracy that comes at the cost of even greater complexity and administrative burdens and expenses will probably illustrate further that actual cost is preferable.
In any event, any modified proxy would need validation as an accurate predictor of costs for all the providers that would be expected to use it. The differences between ILECs and CLECs, cable, wireless and other competitors are undoubtably great. Specific mechanisms will require validation for all to avoid the competitive advantages and disadvantages that will inevitably arise from inaccurate cost methodologies.
The diverse variables that influence cost in areas not accessible by road are too numerous to mention (terrain, slope, weather, rocks, lower oxygen level...). Adding variables for different technologies such as microwave and satellite (will it be an Iridium proxy, a Teledesic proxy, or an Odyssey proxy?) to the not-accessible-by-road proxy would create a geometrically complex variable with a highly unlikely correlation to real world cost.
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 answer to question 59, above.
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?
No. Income levels are relevant to low income programs (i.e., Lifeline and Linkup). The combination of effective high cost mechanisms and effective low income programs -- which in each case must be "sufficient" to the universal service purposes, [[section]] 254(e) -- should be "sufficient" to deal with the low income concerns in Puerto Rico and elsewhere.
62. The BCM appears to compare unseparated costs, calculated using a proxy methodology, with a nationwide local benchmark rate. Does use of the BCM suggest that the costs calculated by the model would be recovered only through services included in the benchmark rate? Does the BCM require changes to existing separations and access charge rules? Is the model designed to change as those rules are changed? Does the comparison of model costs with a local rate affordability benchmark create an opportunity for over-recovery from universal service support mechanisms?
The required "sufficient" federal mechanism must fulfill the purposes of [[section]] 254. This will require high cost recovery that deals adequately with unseparated high costs. Indeed, today's USF provides interstate high cost recovery based on unseparated loop costs to prevent excessive cost shifts from raising local rates unduly. Congress did not enact the 1996 Act to increase customers' rates or diminish service quality and investment incentives.
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?
This question must be addressed by the respective sponsors.
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?
Same answer as for question 56.
65. Can the CPM be modified to identify terrain and soil type by grid cell?
See answer to question 59, above.
66. Can the CPM be used on a nationwide basis to estimate the cost of providing basic residential service?
Universal service is not confined to residential service. Indeed, when AT&T tried to convince the Conference to interject "residential" into [[section]] 254(g), the effort failed. If Congress had meant to limit universal service to residential service, it would have so stated.
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)?
Pacific should provide this information.
68. Is the CPM a self-contained model, or does it rely on other models, and if so, to what extent?
See above.
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 RTC does not believe that the CCL or any significant part of it is a subsidy. It recovers legitimate costs from interexchange carriers that benefit from network costs incurred to accommodate their use. If the Joint Board, nevertheless, decides to change the CCL, the costs should not be dumped into the intrastate jurisdiction or loaded onto local exchange customers by major increases in the SLC. The RTC would not oppose a carefully limited increase in the SLC, so long as the burden on customers in high cost areas were not disproportionate and the shifted costs were not permitted to deaverage CCL charges beyond today's disparity. To do otherwise would conflict with the Act's geographic averaging mandate for interexchange rates, [[section]] 254(g), and the policy of encouraging interexchange competition in rural areas: It would increase the pressure on IXCs that serve rural areas and further decrease the existing marketplace disincentives to provide competitive interexchange services in high cost markets.
To the extent the concern is recovery of NTS cost through a usage based charge so that large volume users pay more than low volume users, the intra-customer "subsidy" can be reduced or eliminated by changing the cost recovery plan to a non-usage based 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).
Bulk billing would be appropriate for the CCL because it recovers non-traffic sensitive costs. Recovering such costs through usage-based charges is likely to provide misleading market signals. A flat rate per line to the IXC would penalize the universal provision of interexchange services. However, an attempt to shift a sizable share of the costs into a SLC-type charge per line would conflict with the intent and expectations of Congress.
Low-Income Consumers
71. Should the new universal service fund provide support for the Lifeline and Link-Up 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?
It would be reasonable -- and is doubtless required by the Act, [[section]] 254(d) (requiring contribution by all providers to federal universal service mechanisms) -- to recover the costs of the Lifeline and Link-Up programs for low income customers from the broader pool of all interstate telecommunications providers. The new responsibility on the federal universal service mechanisms to provide "sufficient" support for the Act's universal service purposes may require
farther reaching Lifeline and Link-Up support. Also, the Act clearly indicates that Lifeline and Link-Up are to remain separate.
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 least administratively burdensome method of collection would be to simply have a $100.00 floor that every carrier must pay, similar to the TRS method. The Joint Board should set a minimum recovery for a provider with a specified minimum level of interstate retail revenues. All providers should pay at least this amount to relieve the smallest providers of administrative and calculation burdens. All providers with interstate retail revenues above the minimum would pay a given amount based on those revenues.
Service List:
[Service list deleted from online version.]