In the Matter of ) CC Docket No. 96-45 ) Federal-State Joint Board on ) Universal Service )
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?
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 be considered in determining the affordability and reasonable comparability of rates?
Response to Questions 1 and 2. The rates for the local, nontoll services that fit the current definition of universal service are generally perceived by ratepayers as affordable. In many rural and high-cost areas, however, the flat rates charged for local services are only part of the cost incurred by ratepayers to reach destinations within their local communities of interest. So, for example, a rural subscriber may pay only $10 per month for local, flat-rate calling, but may pay twice that or more per month for short-haul toll calls to the nearest schools, hospitals, local government offices and other destinations that an urban customer would reach through flat-rate calling. An adequate definition of basic service would include all calls within a subscriber's community of interest, and an adequate definition of affordability would include the cost of all such calls, as well.
The problem of subscribership in rural areas suggests that the present Lifeline program is not reaching the neediest rural residents. The Western Alliance believes that the definition of affordable service should take into account subscribership and income, and that support for affordable service for low-income subscribers should be achieved through a more adequate Lifeline program. The Western Alliance does not, however, support the inclusion of income levels in the formula for calculation of high-cost assistance. Preserving the distinction between support programs based on subscriber plant costs, and support programs based on individual need, will avoid undue complexity, confusion and possible dilution of the effectiveness of both types of programs.
Any estimates of the scope of the discount program also must reflect choices concerning technology. ISDN, for example, is a relatively low-cost technology for rural areas, followed by T1 transport technology. If the program is to support full-motion video, however, considerably more expensive DS3 technology may be required. A cost-
benefit analysis might show ISDN video, followed by fractional television technology, to be more cost-effective than DS3 transport.
rural and insular companies may be eligible.[3] Accordingly, companies initially subject to book costs under a bifurcated approach should convert to proxy treatment only if changes in their size and the character of their service areas, or further refinement of the proxy models, make the proxy approach appropriate for those companies. And even after a company qualifies for proxy treatment, the Commission should establish a procedure for prompt consideration of waiver requests from companies that are prepared to demonstrate that the proxy model does not accurately reflect the cost of serving their ratepayers.
Finally, if the Commission chooses to subject small, rural companies to a proxy model or competitive bidding after a period of transition, the transition period should at least match the repayment schedules of the loans the rural companies have with the Rural Utilities Service, COBank, and Rural Telephone Finance Cooperative, and/or the depreciation periods established by the local public service commission. These loan repayment and depreciation schedules are based on the continued availability of high-cost support based on actual costs, and premature implementation of proxies would jeopardize the viability of rural companies and their ability to meet these commitments.
High-cost assistance to new local exchange service providers should be based on actual costs. Where new carriers agree to assume universal service obligations and seek inclusion in the universal service system, the Commission should impose appropriate cost reporting requirements from which their eligibility for high-cost supports can be determined.
Proxy Models
The Western Alliance recognizes that in order to designate, and calculate support for, eligible telecommunications carriers under the 1996 Act,[4] it may be necessary to disaggregate cost information presently maintained on a study area basis into smaller units such as wire centers or Census Block Groups. Disaggregation, however, does not require the adoption of proxy mechanisms, and the Western Alliance continues to oppose the application of proxy models to small, rural telephone companies. The Alliance's opposition is based on close study of the models proposed so far, the comments and information filed in this rulemaking, and participation in industry efforts to refine those models. Familiarity with those efforts has caused the Alliance to reach the following conclusions.
First, even those most familiar with the proxy models -- their authors and proponents -- caution that those models may work substantial hardship to smaller
companies, and recommend their application only to larger companies.[5] Some proponents, in fact, go so far as to recommend that proxies only be used with price cap carriers -- a category that excludes a number of urbanized telephone service areas.[6]
Second, the assumptions and data in the proxy models lump together small companies displaying widely different cost structures. So, for example, the BCM2 model assumes uniform distribution of population at any level of population density -- an assumption wildly at odds with many, and perhaps most, real-world service areas. Similarly, the BCM2 treats all Census Block Groups below five households per square mile the same, ignoring the wide variations in cost within this range, in which the smallest, highest-cost companies are disproportionately represented.[7] Finally, the models do not account for differences in vintages of subscriber plant within companies, even though the average age and amortization of equipment may be drastically different from one small company to another.
To the extent the question is confined to true island areas, the Western Alliance believes that existing support mechanisms are adequate for all high-cost areas, whether or not those areas are insular.
On the more general question of the adequacy of existing programs for high-cost areas, the Western Alliance notes that many states may require customers to pay construction charges if they live too far from the present backbone telecommunication facilities. These construction charges are a barrier to subscribership and should be eliminated throughout the country if adequate support can be provided through a high cost fund. There are many areas of the country that nearby LECs are unwilling to serve because of the high cost. These areas need to be reviewed to find out why they are not being served even though the present universal service fund is meant to provide service to these regions.
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?
Response to Question 40. Intrastate rate relationships should remain an area of state responsibility, subject to the requirements of the 1996 Act.
Response to Question 49. The Western Alliance strongly questions the ability of
any system of competitive bidding to serve the public interest and achieve the universal service goals of the 1996 Act.
One difficulty with competitive bidding is the inability of even the best-informed, most conscientious bidder to anticipate the cost of providing universal service. For example, under today's rules, if a company's subscriber loop cost is greater than twice the nationwide average, the local jurisdiction will receive a local rate requirement somewhere between 160 and 170% of the nationwide average. If the support for universal service is reduced for this carrier, the local rate requirement will of course move above 160% of the nationwide average. Under these circumstances, assume that a new entrant bids for universal service support in the belief that its average loop cost will be three times the national average, then receives a request for service from a customer who will impose service costs of 14 times the national average. Unless the new entrant is adding a sufficient number of low-cost customers to offset the costs that the new customer would impose, the temptation to deny service to the more costly customer will be strong. As this example demonstrates, competitive bidding, however great its theoretical appeal, will not solve the long term universal service problem.
however, could do no more than screen some of the more irresponsible bids. It could not correct for the inherent, and ultimately fatal, weaknesses of competitive bidding in the universal service context. (See Response to Question 49.)
Response to Question 56. As a number of commenters in this proceeding have demonstrated, proxy models produce results that are comprehensively inaccurate, even for large companies.[8] While larger, price-cap companies can average the effects of these systematic inaccuracies over a wide range of service environments, smaller companies have no such opportunity. Accordingly, proxies should at most be applied as part of a system of bifurcated regulation, under which companies serving fewer than 50,000 access lines continue to receive supports based on actual costs.
common line charges, so that the true value of a SLC would most likely be substantially higher: for example, in the $10 range in Arkansas, and in the $14 range in Alaska.
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 contributions selected by the Commission." What levels of administrative costs should be expected per carrier under the various methods that have been proposed funding (e.g., gross revenues net of payments to other carriers, retail revenues, etc.)?
Response to Question 72. The collection of funds from carriers should not be a major problem. Each carrier should be responsible for hiring certified public accounting firms to prepare audits regarding their revenues and the amount of money owed by such carriers would be based on these CPA reports. Companies not able to provide these reports should not participate in any universal service funding program.
Respectfully submitted,
By:__________________________
Charles H. Kennedy
MORRISON & FOERSTER, LLP
2000 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Telephone: (202) 887-1500
Attorney for the Western Alliance
August 2, 1996