BEFORE THE
Federal Communications Commission
WASHINGTON, D.C.
In the Matter of ) ) Federal-State Joint Board on ) CC Docket No. 96-45 Universal Service )
COMMENTS OF TELE-COMMUNICATIONS, INC.
Philip L. Verveer
Sue Blumenfeld
Thomas Jones
WILLKIE FARR & GALLAGHER
Three Lafayette Centre
1155 21st Street, N.W.
Washington, D.C. 20036
(202) 328-8000
ATTORNEYS FOR TELE-
COMMUNICATIONS, INC.
August 2, 1996
TABLE OF CONTENTS Page I. SUMMARY 1 II. RESPONSES TO SELECTED QUESTIONS 4 III. CONCLUSION 41
BEFORE THE
Federal Communications Commission
WASHINGTON, D.C.
In the Matter of ) ) Federal-State Joint Board on ) CC Docket No. 96-45 Universal Service )
COMMENTS OF TELE-COMMUNICATIONS, INC.
Tele-Communications, Inc. ("TCI") hereby files its responses to certain of the questions listed in the Commission's Public Notice, released July 2, 1996, in the above-captioned proceeding.[1] TCI has restated below only those questions to which it is submitting responses.
I. SUMMARY
In responding to the questions in the Public Notice, TCI has applied two widely accepted principles that the Commission should follow in implementing the provisions of Section 254. First, the federal subsidy pool should be as small as possible to meet the goals articulated in Section 254. Second, the mechanisms for funding and distributing the subsidies should be removed from the Commission's Part 36 rules so that all eligible carriers have
equal access to the subsidies. Specifically, TCI recommends the following:
Definitions Issues
1 The Commission should set a single, national affordability benchmark based on the national average of rates charged for core services; this benchmark should include, without the need for any adjustment, rate increases appropriately implemented as a result of access charge reform;
1 Determinations of "affordability" under Section 254(i) should be based on subscribership levels;
Schools, Libraries and Health Care Providers
1 The creation of a subsidy mechanism for schools, libraries and rural health care providers and the choice of the services to which those mechanisms should apply are extremely complex; the Commission should establish an advisory committee to study these issues;
1 In this proceeding, the FCC should specifically limit the services eligible for subsidy provided to schools, libraries and health care providers to the core services identified in the initial Notice in this proceeding;
1 Educational and health care institutions receiving subsidized services should not be permitted to resell those services;
1 The FCC should not provide block grants to be distributed to schools, libraries and health care institutions by the states; the FCC should study the possibility of creating direct billing credits for telecommunications services provided to eligible institutions;
1 The FCC should study the proposals offered in the Comments for ensuring that funds allocated for discounts are used for their intended purposes and that requests made by schools, libraries and health care providers are bona fide;
1 The base service prices to which discounts for schools and libraries are applied should be based on total service long run incremental cost ("TS-LRIC") as determined by a proxy model; where proxy model data are not readily available, the tariffed rate should be used;
1 Existing discounts for services provided to schools, libraries and health care providers should continue to apply if they result in a lower rate than the one set by federal subsidies;
1 An extra discount should be considered for eligible institutions in economically disadvantaged areas; the Commission should use a model for identifying such institutions that is based on the overall prosperity of school districts and it should probably apply the further subsidy on a step approach;
1 In TCI's experience, the cost estimates in the McKinsey Report and NII KickStart Initiative are reliable; the FCC should consider using these estimates for both public and private schools;
High Cost Fund
1 If the existing universal service program remains in place, Section 254 requires that the FCC ensure that the subsidy is available to all eligible carriers and that all telecommunications carriers providing interstate service contribute to the fund; beyond these changes mandated by the Act, the FCC should also mandate that costs be determined by a proxy model using small geographic units and that the fund be administered by a neutral third party;
1 Payments to competitive carriers should not be based on the incumbent LEC's costs where a proxy model can be applied;
1 If proxy models are used, the Commission should allow price cap LECs to be eligible to receive universal service subsidies;
1 The FCC should not establish a committee to form a consensus proxy model; it should instead choose the best model and make any appropriate modifications;
1 Where data are not available for proxy models, the cost of providing service should be based on the book costs for core services of the incumbent LEC until proxy model data become available;
1 The states should be given responsibility for protecting against service degradation in the proxy model context;
1 The FCC should grant waivers of its universal service rules where a carrier can demonstrate that its costs (resulting from prudent investment) are 150% of the projected proxy level;
1 Any proxy model adopted should be a public document;
1 The Commission should not adopt a bidding system at this time because there is not sufficient facilities-based competition
to support such an approach; if a bidding system is adopted, the winning bidder should probably be offered an extra subsidy to give the auction participants the incentive to bid low;
SLC/CCL
1 The subscriber line charge ("SLC") should be increased to replace the carrier common line ("CCL") charge; any concerns as to local rate "sticker shock" can easily be addressed by shifting the CCL to the SLC over an appropriate transition period;
Low-Income Consumers
1 The Commission should reform the current Lifeline and Linkup programs as follows: a neutral third party should administer the programs; all eligible carriers should be able to receive reimbursement from the Lifeline/Linkup fund; and all carriers providing interstate service should be required to contribute to the fund.
II. RESPONSES TO SELECTED QUESTIONS
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?
ANSWER:
The Commission should use the current rates (including both the interstate and intrastate components of those rates) for core services as the basis for determining a single, national affordability benchmark. Specifically, the Commission should set the national affordability benchmark at the national average of rates charged for the core services.[2] This affordability benchmark should include, without the need for any adjustment, any increase in the federal SLC, as well as increases in state
SLCs, appropriately implemented as a result of access charge reform and state rate rebalancing.[3]
The current nationwide subscribership level of 94%[4] demonstrates that existing rates, when combined with targeted subsidy programs such as Linkup and Lifeline, are affordable. Indeed there is evidence that rates for local residential service could rise significantly and still remain affordable.[5] Moreover, while it is important for regulators and carriers to strive to raise this penetration figure even higher, lowering the national affordability benchmark is not the appropriate means of doing
so.[6] Lowering rates below their current levels would needlessly increase the size of the subsidy pool required to keep those rates down. Increasing the subsidy pool will create entry barriers to telecommunications markets by raising the contribution each telecommunications carrier providing interstate services must make. Targeted subsidies such as the Lifeline and Linkup programs are much more effective and efficient means of increasing use of the public switched network among groups that have disproportionately low subscribership levels.[7]
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?
ANSWER:
Section 254(i) requires that "[t]he Commission and the States should ensure that universal service is available at rates that are just, reasonable, and affordable."8 The common dictionary meaning of "affordable" is "to be able to bear the
cost of."9 It is safe to say that a consumer who subscribes to telephone service is "able to bear the cost of" that service. As mentioned above, subscribership levels are therefore an appropriate basis upon which to gauge the affordability of the core services to which for universal service subsidies should apply.
It would be inappropriate, however, for the Commission to consider other factors in determining the level at which prices are "affordable." The application of such factors as telephone expenditures as a percentage of income and cost of living is simply too complex and costly. Subscribership is a far more reliable and simple standard.
As to assessing the comparability of rates, a single, national benchmark for affordability would ensure that rates across the country, in rural and urban areas, would be reasonably comparable as contemplated by Section 254(b)(3). Moreover, that provision concerns only the comparability of rates and services in rural and urban areas. The Commission need not and should not consider factors other than rate levels and the quality of service in determining whether the aspirational requirements of Section 254(b)(3) have been met.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?
ANSWER:
A single, national benchmark rate for core services in a proxy model holds several advantages over an approach that would permit variations among regions or subscribers. First, the single benchmark (i.e., a national average of all prices currently charged for the core services, including any increases that result from access charge reform) would be easy and inexpensive to administer. Permitting variations based on geography or consumer characteristics for price levels, however, would consume scarce administrative resources in an endeavor that would in any case be inexact.
For example, a benchmark that varies according to the cost of living in a region would require regulators to choose a mechanism for measuring such costs as well as the geographic units to which the mechanism would be applied, both of which are likely to be contentious issues. Such a system would also be administratively burdensome because, to achieve an acceptable level of accuracy, the FCC would have to use relatively small geographic units, such as census block groups ("CBGs"). Small geographic units are appropriate for determining the level of the
subsidy because they target subsidies to truly rural areas thus increasing the contribution to those areas over current levels. But determining a different level of affordability for each CBG would likely be unnecessarily costly. Moreover, such an approach
to affordability would also likely require regulators to adjudicate disputes arising out of such region-by-region affordability determinations.
Second, a single, national benchmark for affordability will be less expensive for compliance by carriers eligible under Section 214(e) to receive the universal service subsidy. Simply put, the more complex the approach adopted by the Commission for determining the benchmark for affordability, the more expensive it is likely to be for eligible carriers to participate in the federal subsidy program. Variations across many geographic units will require similar variations in business plans for each of those areas. Also, to the extent that such benchmarks change over time, business plans would again need to change to accommodate the new benchmarks. Business planning under a single, national benchmark regime, on the other hand, would be simpler and less expensive.
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?
ANSWER:
Section 214(e) of the Communications Act defines the obligations carriers must meet to be eligible to receive federal universal service subsidies.[10] Subsection (1)(A) of Section 214(e) states that an eligible telecommunications carrier must offer the services supported by federal universal service support mechanisms "either using its own facilities or a combination of its own facilities and resale of another carrier's services (including services offered by another eligible telecommunications carrier)."11 If the Commission adopts the appropriately limited list of core services proposed in the
Notice[12] and supported by TCI,[13] it is unlikely that a facilities-based carrier could not provide those services using its own network or a combination of its own network and resale. Even a predominantly non-facilities based provider could offer the core services through resale. The Commission should not therefore be concerned about the possibility that a carrier would be denied reimbursement if it could not provide a subsidized service.
Schools, Libraries, Health Care Providers
6. Should the services or functionalities eligible for discounts be specifically limited and identified, or should the discount apply to all available services?
ANSWER:
The services eligible for universal service discounts should be specifically limited to the core services proposed in the Commission's Notice.14 The Commission should not add any services to this list. Most importantly, the Commission should determine that market forces, in conjunction with existing taxation and educational programs, can be relied upon instead of expensive subsidy programs to deliver advanced and information services to schools, libraries and health care providers. 15 In any case, prior to acting upon its discretionary authority to expand the size and scope of the subsidy program for schools, libraries and health care providers, the Commission must undertake careful study assessing the costs and benefits of doing so.[16]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?
ANSWER:
Section 254(h)(1)(B) states that telecommunications carriers shall provide any of their "services" to schools and libraries.[17] The FCC has already determined that inside-wiring is not a common carrier service, that is, it may be supplied by carriers and non-carriers outside the regulatory process.[18] Thus, inside wiring is not among the mandated list of subsidized carrier services.
There are good policy reasons for not subsidizing inside wiring. As with other aspects of subsidizing services for educational institutions, an internal connections subsidy could, if improperly designed, be extremely expensive and inefficient. This is especially true if the costs of retrofitting and asbestos removal (which are usually required for installing inside-wiring in older schools) are subsidized.[19] Again, increasing the size of the subsidy pool raises entry barriers by increasing interstate carriers' required contributions to universal service.
What is more, even though sound policy may dictate the exclusion of the additional costs of retrofitting and asbestos removal from any proposed subsidy, difficult issues may arise in separating the costs of inside-wiring from the costs associated with renovating the physical plant. Further, given the Commission's long-standing policy of deregulated inside-wiring, this market is comprised of literally thousands of small companies whose business could be dramatically affected by the adoption of a subsidy program.
9. How can universal service support for schools, libraries, and health care providers be structured to promote competition?
ANSWER:
Universal service support for schools, libraries, and rural health care providers can be structured to promote competition by (1) setting the subsidy at the minimum level necessary to provide schools access to the core telecommunications services, (2) ensuring that all telecommunications carriers can receive the subsidy, and (3) making the subsidy system easy to administer. But while many parties agree on these broad principles, the diversity of specific proposals in the Comments indicates that there is no consensus as to what program approaches would best promote competition.[20] This subject clearly warrants further investigation.
The Commission's task under section 254(h) must be appreciated in its full scope. The Commission has, in effect, been assigned the job of potentially designing a new wealth transfer program in areas that exceed its traditional jurisdictional bounds. It has to date appropriately consulted with the Department of Education, but much more study -- drawing upon required expertise from a variety of disciplines -- will be necessary before any adequate program can or should be developed. A panel of experts in social programs, telemedicine, library studies, education, taxation, information services and the telecommunications industry, all need to be assembled, and the Commission must bring their collective insights and experiences to bear upon this complex issue. Absent detailed, expert consideration, the FCC's program will be in serious jeopardy of overshooting or undershooting its mark -- and significantly impeding core FCC competition policies in the process. Just by way of a single example, there is a danger that a program might be developed at significant cost to support services, but that such investment would go underutilized due to lack of training. It has, in fact, been TCI's experience that training is a critical element for educational services, and that in its absence, enormous resources are wasted.[21]
For these reasons, TCI urges the Commission to await any formulation of subsidy programs in this area until it has obtained, perhaps through the expansion of its Education Task Force to include non-FCC participants, the full input of all required experts in this area.
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?
ANSWER:
Section 254(h)(3) states that services and capacity sold to qualifying institutions under Section 254(h) "may not be sold, resold, or otherwise transferred by such user in consideration for money or any other thing of value."[22] This provision is clear on its face: recipients of subsidized services under Section 254(h) may not transfer those services to others.
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?
ANSWER:
Discounts should be available only for the traffic or network usage attributable to the educational entities that qualify for the Section 254 discounts.
12. Should discounts be directed to the states in the form of block grants?
ANSWER:
Discounts should not be directed to the states in the form of block grants. It is sound policy to give purchasing power and decision-making ability directly to the schools, libraries and rural health care providers rather than to the 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?
ANSWER:
The Commission should study the possibility of creating direct billing credits for telecommunications services provided to eligible institutions.
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)?
ANSWER:
While many of the approaches recommended in the Comments hold promise,[23] there is inadequate information on the record for determining which is the most effective. This issue requires further study by the Commission.
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?
ANSWER:
If only the core services are subsidized, the base service price could be based on TS-LRIC as determined by a proxy model.[24] Proxy costs should be available for virtually every area of the country. Since TS-LRIC counts only the costs of a state-of-the-art network, reliance on this methodology will limit unnecessary growth in the subsidy pool. In those few areas for which proxy cost data are not available, the Commission should use the tariffed rate.[25]
If, contrary to the comments of many carriers, the Commission decides to add special or advanced services to the list of discounted services for public institutional telecommunications users, then the Commission should either apply the existing proxy methodologies to those services or, if more efficient, use a bidding approach where adequate competition exists to make such an approach worthwhile. If none of these approaches is possible, then the tariffed rate should be used.
17. How should discounts be applied, if at all, for schools and libraries and rural health care providers that are currently receiving special rates?
ANSWER:
If the federal discounted rate is higher than any special rate schools, libraries and rural health care providers are currently receiving, the special rate should continue to apply. If the federal discounted rate is lower than the current special rate, the discounted rate should apply as of the date the new rules go into effect.
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?
ANSWER:
The Commission should not establish an additional discount for rural, insular or high-cost areas. Schools in those regions may actually be wealthy, and increased subsidy of services would be unnecessary and wasteful. Moreover, rural areas will in any case benefit from the use of small geographic units in setting high cost subsidies. Truly rural areas should receive more support under such an approach than under the current subsidy system. On the other hand, an additional discount should be considered for school districts and library systems located in economically disadvantaged areas.
TCI does not have the information necessary to determine what percentage of telecommunications services (e.g., Internet services) used by schools and libraries in such areas is or would require toll calls. Of course, as the Commission is aware, Internet calls are interstate or international in scope, but do not incur traditional toll charges.
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?
ANSWER:
The Commission should study the use of a model that is based on the wealth of all inhabitants (i.e., families of pupils as well as non-pupils) in a school district. The Commission should not rely on models such as Title I and the national school lunch program that focus primarily on the economic circumstances of the pupils in a particular area (county, school district or individual school) and their families.
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?
ANSWER:
The Commission should consider adopting a step approach to allocate any additional consideration given to school districts and library systems located in economically disadvantaged areas. Although a sliding scale approach (i.e., along a continuum of need) might be more closely targeted, a step approach is significantly easier to administer and, if the steps are properly set, will be adequately targeted.
22. Should separate funding mechanisms be established for schools and libraries and for rural health care providers?
ANSWER:
There may be good reasons for establishing separate funding mechanisms for schools and libraries on the one hand and for rural health care providers on the other. There is inadequate information in the record at this time, however, to make this determination. The Commission should return to this issue after it has studied the appropriate subsidy mechanisms for these institutions.
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?
ANSWER:
TCI, in providing services to schools and libraries through its subsidiary ETC, has compared the McKinsey cost estimates to the costs incurred in some of its educational projects and found the McKinsey estimates to be quite accurate. Based on this experience, TCI would recommend the use of the McKinsey Report as one possible resource for determining the appropriate subsidy level for schools and libraries.[26] As mentioned in the Bureau's question, the McKinsey estimates assume tariffed rates. TCI would recommend that those estimates be altered for the use of TS-LRIC costs determined by an appropriate proxy model.
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?
ANSWER:
As stated above, it is TCI's experience that the McKinsey Report cost estimates are accurate. TCI is not aware of any other similarly reliable cost estimates.
25. Are there any specific cost estimates that address the discount funding estimates for eligible private schools?
ANSWER:
TCI is not aware of any specific cost estimates which address the discount funding for eligible private schools. However, TCI believes that the McKinsey Report cost estimates are equally applicable to private schools. It should not cost a carrier any more or less to bring identical services to a private school rather than to a public school.
High Cost Fund
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?
ANSWER:
TCI assumes that the term "high cost fund" refers to the existing universal service fund ("USF") which subsidizes those LECs with loop costs above the national average.[27] There are two general aspects of the existing USF that must be altered to comply with the requirements of 1996 Act. First, USF assistance must be available to all eligible carriers as defined by Section 214(e). Under the current USF rules, the subsidy is recovered through the separations process by allocating the excess costs to the LECs' interstate rate base and increasing the access charges levied against long distance carriers. Since new entrants are not subject to the FCC's separations rules, they are currently unable to receive USF assistance. Section 214(e), however, requires that all carriers meeting the standard established therein "be eligible to receive universal service support in accordance with Section 254."28 The Commission must therefore remove the USF program from its jurisdictional separations rules. It must instead establish a separate fund, administered by a neutral third party, to which all carriers with high loop costs, as defined in the USF rules, have access.
Second, the Commission must ensure that all telecommunications carriers providing interstate services contribute to the USF. As mentioned, only long distance carriers currently contribute to the fund. But Section 254(d) requires that "[e]very telecommunications carrier that provides interstate
telecommunications services shall contribute, on an equitable and nondiscriminatory basis, to the . . . mechanisms established by the Commission to preserve and advance universal service."29 The Commission must therefore establish a requirement that all carriers providing interstate services contribute to the universal service fund in an equitable, competitively neutral, and nondiscriminatory manner.
While these two requirements are essential to bringing the current USF into compliance with the 1996 Act, there are several other changes that the Commission should institute as quickly as possible to increase the fairness and effectiveness of the USF. First, the current USF scheme relies on reported incumbent LEC ("ILEC") costs for determining the loop costs in a particular area. The problem with this system is that it does not give carriers the incentive to control their costs.[30] The Commission should therefore adopt a proxy model for determining the loop costs in a particular area. Under a proxy model, the amount recoverable from the USF would not increase if a carrier were unable to control its costs. The carrier would therefore have a greater incentive to control the cost of delivering telephone service.
Second, the current USF rules count loop costs on a study area basis. Because study areas are often very large,[31] this scheme does not allow regulators to apply the subsidy only where it is needed. In other words, applying the system on a study-area basis results in LECs receiving support for areas in which their loop costs do not exceed the national average and receiving inadequate support in areas where their loop costs do exceed the national average. The Commission should therefore require that the proxy model track costs in small geographic units, such as CBGs or wire centers.
Finally, the current USF is not administered by a neutral third party. As MCI has correctly observed, the National Exchange Carrier Association ("NECA"), which administers the USF, is owned and controlled by the ILECs and is therefore not neutral.[32] The Commission should therefore issue a request for proposal for fund administration and choose the most appropriate neutral third party to administer the USF.[33]
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?
ANSWER:
The central disadvantage of basing the payments to competitive carriers on the book costs of the ILEC operating in a particular area is that the ILEC may not be the most efficient provider of telephone service. Indeed, given the historical circumstances of monopoly service and regulatory distortions, the ILEC is very likely not the most efficient provider. If this is the case, a subsidy level (i.e., the difference between the "cost" of providing service and the affordable rate) that is based on the ILEC's book costs will be higher than necessary. An unnecessarily high subsidy is damaging to competition because it increases the required contribution to the USF which all telecommunications carriers are required to make. Like any other tax increase levied on a particular industry, higher than necessary universal service contributions will reduce society's investment in and consumption of telecommunications services.
In addition, relying on reported costs would make it more difficult for regulators to target the federal high cost subsidy. This is because most ILECs report their costs on a study area-wide basis. It is therefore impossible to determine from such cost data the particular areas within a study area which are characterized by high costs. As a result, carriers operating in areas that are not high cost would be oversubsidized while carriers in areas which are high cost would not receive a large enough subsidy.[34]
Some parties will likely argue that relying on book costs is a more "accurate" reflection of the cost of providing service. But it is far from clear that the reported costs of an ILEC are actually an accurate reflection of even the ILEC's cost of providing telephone service.
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?
ANSWER:
Denying price cap carriers eligibility to receive universal service subsidies would make sense in areas where the incumbent faces little or no competition and where the universal service subsidy is based on its book costs. With no significant competitor or potential competitor, the ILEC would not have a market-based incentive to control its costs. Moreover, the increased incentive created by price caps for the ILEC to control its costs would be reduced because increased costs could simply be reported and reimbursed through the subsidy program.
This problem could be significantly reduced, however, if the Commission were to adopt a forward-looking proxy cost model as the basis for determining the cost of providing service. Such models increase carriers' incentive to control their costs because they reflect the cost of providing service over a state-of-the-art-network.[35] In this way, a proxy model operates much like price caps because, as mentioned, an ILEC would theoretically not be able to recover increased costs caused by inefficiencies. Thus, if the Commission decides, as it should, to base costs on a proxy model, there appears to be no reason why it should not allow price cap LECs to receive universal service subsidies.
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?
ANSWER:
As mentioned above, under a proxy model approach, all carriers should be equally eligible to apply to receive federal universal service support subsidies.
Proxy Models
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.
ANSWER:
TCI opposes US WEST's proposal that an industry task force should be established to choose a consensus model. As the experience of the parties that initially developed the Benchmark Cost Model ("BCM") demonstrates,[36] parties with conflicting business interests will almost inevitably disagree on the characteristics of the model. Those disagreements will likely pit ILECs, who stand to receive the largest portion of the subsidy flow and who are interested in setting costs at a high level so that they can recover their "historical" costs, against new entrants, who seek to establish the proxy costs based on TS-LRIC.
It is especially unlikely that the parties will reach a consensus within the statutory deadline for concluding this proceeding (within 15 months of the passage of the 1996 Act). The Commission should, therefore, offer parties ample opportunity to comment on the proposed proxy models and then choose one, with any modifications it deems appropriate. Any other approach would invite delay and increase the risk that the statutory deadline will not be met.
41. How should support be calculated for those areas (e.g., insular areas and Alaska) that are not included under the proxy model?
ANSWER:
It is TCI's understanding that at least US West has now obtained cost information for Alaska, the Virgin Islands, Puerto Rico and Micronesia.[37] In areas for which data are still not available, however, the Commission should base the cost of providing service on the book costs reported by the ILEC. When the relevant data become available, the transition should be made to proxy-based cost estimates.
42. Will support calculated using a proxy model provide sufficient incentive to support infrastructure development and maintain quality service?
ANSWER:
It is possible that, in a proxy-cost environment, ILECs that do not face competition will try to reduce the quality of service provided in their regions as a way of lowering their costs and increasing profits. The most obvious solution to this problem is for the Commission to establish the preconditions for local competition as quickly and effectively as possible. But until competition develops, the Commission should rely on the states to establish safeguards against service degradation.
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?
ANSWER:
Carriers with book costs substantially above the costs projected for them under a proxy model should be permitted to receive waivers for the application of the proxy-based subsidy level. The Commission should grant such waivers, however, only where the carrier can demonstrate that its costs are 150% of the projected proxy level and that such excess can be justified as the result of prudent investment.
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?
ANSWER:
It is inappropriate for the Commission to adopt a proxy model in this proceeding that is subject to proprietary restrictions. Although presumably the applicable restrictions would permit interested parties to review and analyze the model in question in the context of this proceeding, proprietary restrictions would nonetheless be destructive.
46. Should a proxy model be adopted if it is based on proprietary data that may not be available for public review?
ANSWER:
Before the Commission implements a proxy model, which will have the significant and enduring impact on the regulation of the telecommunications industry, it must offer interested parties the maximum opportunity possible to review and comment on that mechanism. A prohibition on public review of the proxy model would be unsound policy and could well violate the requirements of the Administrative Procedure Act.[38]
Competitive Bidding
49. How would high-cost payments be determined under a system of competitive bidding in areas with no competition?
ANSWER:
TCI does not support the adoption of a bidding system for determining high-cost payments at this time because it is unlikely that there will be enough local competition in the near future to make subsidy auctions worthwhile. First, although there will soon be new entrants into the local market, many of those entrants will operate on a resale basis. Pure resellers cannot qualify under Section 214(e) to receive federal subsidies.[39] Moreover, those new entrants that have some facilities will likely rely heavily on resale to deliver all core services. Such entities may not be willing to fulfill the carrier of last resort obligations imposed on the eligible telecommunications carriers.[40] Finally, the more dependent a carrier is on resale, the less able it will be to underbid the incumbent because the costs of the incumbent will be passed onto to a reseller for all the network elements resold. In many cases, therefore, there may not be a sufficient "market" in the near term for the auctioned rights.
Nonetheless, if the Commission were to adopt a bidding system, it could do so as an overlay to a proxy model approach. Thus, in areas where bidding would not be appropriate (i.e., in markets lacking facilities-based competitors) the cost of providing service would be established by proxy. In areas where bidding would be appropriate, carriers deemed eligible to receive universal service subsidies under Section 214(e) would have the opportunity to bid on the "cost" of providing service in an area. If the lowest bid were lower than the cost as determined by the proxy model, then that amount would constitute the applicable cost level for the relevant geographic area.
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?
ANSWER:
Creating the incentive for carriers to bid low is probably the most difficult aspect of implementing a bidding system. The problem is that, since all carriers will be subject to the subsidy set based on a low cost bid, no carrier is likely to gain a competitive advantage by bidding low. This would be the case if the carriers believed, as may well be the case, that the direct benefits of receiving a larger subsidy outweighed their individual share of the increased costs of a higher required contribution to the federal subsidy fund.
There are, however, possible mechanisms the Commission could implement in order to increase carriers' incentives to underbid each other. For example, the Commission could offer the low bidding party an extra subsidy which other carriers would not receive. Such incentive payments would, however, add to the complexity and cost of the bidding scheme. When adequate levels of competition have developed to warrant serious consideration of a bidding scheme, the Commission must determine whether the reduction in the size of the subsidy pool created by a bidding mechanism exceeds the total cost, including the incentive subsidy or other similar mechanism, of operating the bidding system.
52. What safeguards should be adopted to ensure adequate quality of service under a system of competitive bidding?
ANSWER:
Although it is possible that carriers subject to a bidding scheme will have the incentive to degrade service in order to increase profits, such incentives should be diminished where carriers face competition (which they will, at least to some degree, in a bidding environment). In any case, the protections described in response to question 42 above may be used to diminish these opportunities.
53. How is collusion avoided when using a competitive bid?
ANSWER:
As mentioned above, it may be possible for the Commission to provide carriers with the incentive to bid low by granting the low bidder an extra subsidy payment. If the payment were large enough, parties would forgo opportunities for collusion. Direct prohibitions, such as those used by the FCC in spectrum auctions and those found in the antitrust laws, can also be used.
54. Should the structure of the auction differ if there are few bidders? If so, how?
ANSWER:
Like any other economic market, it would appear that the likelihood of collusion would increase as the number of bidders decreases. It may therefore be necessary for the Commission to increase the incentive payment in situations where there are fewer bidders.
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?
ANSWER:
Determining the proper geographic units for bidding purposes is yet another difficult aspect of the bidding approach. On the one hand, bidding should not be conducted for an area that includes a wide diversity of cost characteristics (i.e., some high cost areas and some low cost areas). This is because the subsidy set for such an area would not allow the support program to be adequately targeted. On the other hand, requiring bidding for very small geographic units would increase the number of auctions and also the cost of administering and participating in the bidding system. Again, it may be possible to solve this problem. Given the current lack of competition in the local telephone market, however, the costs of solving this and other aspects of the bidding scheme outweigh the benefits such a scheme may deliver at this time.
SLC/CCL
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).
ANSWER:
Whether viewed as a subsidy or not, there is no question that the CCL charge is an inefficient means of recovering the costs of the local telephone network.[41] The Part 36 jurisdictional separations rules allocate 25 percent of non-traffic sensitive loop costs[42] to the interstate jurisdiction.
The CCL charge recovers a substantial portion[43] of these non-traffic sensitive loop costs through traffic sensitive per-minute usage charges to long distance carriers. Thus, the price of each interstate toll call is used to recover the loop cost of connecting subscribers to the local network. The more interstate toll calls a subscriber makes, the higher the contribution paid by that subscriber.
The problem with characterizing this contribution as a subsidy is multifold. First, the historical legal requirement to separate interstate and intrastate costs bears no relation to the economic services provided. Further, it can and has been debated whether access to the network (local and/or toll) is itself an economic service that can be priced discretely from local and/or network usage.
It is in any event clear that the fact that the CCL charge is usage sensitive creates substantial inefficiency by recovering non-traffic sensitive costs through usage sensitive pricing. In order to accurately communicate the price of a service to consumers and market entrants (potential and actual), the pricing of the service should reflect the manner in which costs are incurred. In other words, non-usage sensitive loop costs should not be recovered through usage sensitive rates. To encourage efficient use of the network by subscribers, non-usage sensitive costs should be recovered with flat fees.
Further, substantial economic inefficiency results from the effective imposition of the CCL charge on long distance carriers. This is because assessing the CCL charge on IXCs rather than directly on subscribers understates the charge for connecting subscribers to the local loop and overstates the charge for long distance service. End users are thereby uneconomically encouraged to add additional lines (connections to the local exchange network) and to make fewer long distance calls. Market signals to both the local exchange and toll markets are skewed. Thus, even if the CCL charge were a flat fee charged to IXCs, economic inefficiency would result because costs would not be recovered from the cost causer.
However, while the CCL charge in the aggregate may be correctly termed a subsidy tending to reduce the price of purchasing connections to the local network, it is not an explicit subsidy and thus distorts market signals. Further, it tends to reduce the price of access to the network and to inflate the price of long distance service for all subscribers, and thus it is in no way targeted to high-cost areas or to subscribers in need of assistance.[44] There is no particular reason to believe that subscribers resident in high-cost areas make fewer toll calls then other subscribers. To the extent toll usage patterns for these subscribers do not materially vary from the norm, then no subsidy to high cost areas can be said to occur -- only between subscribers with high toll usage and those with low toll usage. In fact, as described above, the CCL is an implicit "subsidy" resulting from the required recovery of non-traffic sensitive loop costs through traffic sensitive pricing. As part of this proceeding, the Commission therefore should undertake access charge reform consistent with economic efficiency principles and the new competitive environment, as discussed below in question 70.
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).
ANSWER:
As described above, the CCL charge does make a contribution to the recovery of loop costs. However, merely continuing to load long distance rates with this subsidy is economically inefficient and likely unsustainable in the context of local loop competition. The SLC, or some other suitable fixed, subscriber charge, should therefore be increased to replace the CCL. It is important to point out that the amount that an increased SLC would recover should be significantly smaller than the amount currently recovered by the CCL charge because loop costs should be based on TS-LRIC and should therefore exclude costs caused by historical inefficiencies ostensibly recovered by the CCL charge. In any case, mandating that the CCL charge be assessed on subscribers in this way not only accurately reflects the cost of connecting subscribers to the network, but also avoids distorting the price and efficient use of the long distance network. Any concerns as to the local rate "sticker shock" can easily be addressed by shifting the CCL to the SLC over an appropriate transition period.[45]
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?
ANSWER:
As with the current USF program, both the Lifeline and Linkup programs are administered by NECA. Specifically, NECA administers a separate Lifeline/Linkup pool which certain long distance carriers contribute to on a flat-rate, per-line basis.[46]
There are three essential problems with this scheme. First, as mentioned above, NECA is owned and controlled by the ILECs and
is not an independent third party. The Commission should therefore require that the independent party chosen to administer the universal service fund also administer the Lifeline and Linkup fund. If such administration is more efficiently accomplished by combining the Lifeline/Linkup fund with the USF, then this should be done. Second, only ILECs are eligible to receive reimbursement from the Lifeline/Linkup fund. The Commission must therefore ensure that all local exchange carriers deemed eligible to receive the universal service subsidy under Section 214(e) are able to receive the Lifeline/Linkup subsidy as well. Finally, as with other aspects of the federal subsidy system, the Lifeline/Linkup program must be changed so that all carriers providing interstate services, not just long distance carriers, contribute to the program on an "equitable and nondiscriminatory basis" as required by Section 254(d).[47]
As to whether the Lifeline subsidy should continue to be tied to the level of the SLC, TCI believes that this is a sound approach. The Lifeline subsidy would likely need to increase correspondingly with increases in the SLC.
III. CONCLUSION
The Joint Board should recommend and the Commission adopt rules for universal service consistent with these comments.
Respectfully submitted,
______________________
Philip L. Verveer
Sue Blumenfeld
Thomas Jones
WILLKIE FARR & GALLAGHER
Three Lafayette Centre
1155 21st Street, N.W.
Washington, D.C. 20036
(202) 328-8000
ATTORNEYS FOR TELE-
COMMUNICATIONS, INC.
August 2, 1996