In the Matter of   		)
                               	)
Federal-State Joint Board on	)	   CC Docket No. 96-45
Universal Service		)

The Rural Telephone Coalition ("RTC") files these Reply Comments in response to the comments filed on April 12, 1996, in the above-captioned docket.[1] This proceeding is examining implementation of the universal service provisions contained predominantly, but not entirely, in Section 254 of the Telecommunications Act of 1996 ("Act").

The Commission and Joint Board should use this round of comments and replies as an opportunity to dismiss suggestions that are misplaced, harmful, or beyond any lawful implementation according to the direct requirements and time constraints of the Act. The reply comments below are intended to assist the Commission and Joint Board in two ways: to point out those suggestions which can be eliminated; and to provide a realistic set of suggested actions to be completed by May 1997 to implement the Act .

I. THE COMMISSION AND JOINT BOARD MUST REJECT PROPOSALS NOT IN COMPLIANCE WITH THE 1996 ACT.

The RTC explained in its initial comments the need for federal mechanisms that comply with the 1996 Act and achieve the intentions of Congress. The comments, however, reflect diverse views that embrace several conceptual themes which must be rejected. These suggestions are either inconsistent with or counter-productive to the requirements of the Act. Moreover, many commenting parties suggest provisions that would act, if implemented, to limit severely the universal service mechanisms' effectiveness and the potential benefits Congress intended the Act to promote.[2]

The Commission and Joint Board should look to those experienced with rural conditions to help in universal service implementation. As one excellent example, the Eight Rural States: (1) realize that Congress has required "sufficient" high cost funding, rather than the curtailed funding pursued by the previous Joint Board proceeding;[3] (2) recognize the need to determine rural and urban rate and service comparability;[4] (3) state that high cost support and distribution must be based on actual costs unless the major shortcomings of the proxy approach can be solved and its reliability demonstrated;[5] (4) support application of the new law's broad federal responsibility for universal service mechanisms and a limited, supplemental state role with respect to additional requirements;[6] and (5) point out that interexchange carriers should pay a continuing share of loop costs because they require and use local distribution to obtain access to their customers.[7]

In sharp contrast, many other commenting parties fail to accept the Act's concern for adequate rural measures and other universal service policy directives. The Joint Board should listen carefully to those that oversee and provide universal service to rural America and implement sections 254 and 214 accordingly. Moreover, the Joint Board should reject the following misdirected proposals and presumptions to avoid wasting its limited time and resources.

A. THE CORE SET OF FEDERALLY DEFINED UNIVERSAL SERVICES IS AT THIS TIME ONLY A STARTING POINT IN A CONTINUING EVOLUTION.

Some commenting parties suggest that the list of defined and supported services be limited to minimum levels.[8] These parties ignore the express statutory principles of "access to advanced telecommunications and information services." Minimum commitment will mean minimum result. The core set of defined services should only represent a starting point, at least as beneficial for customers as are the levels of services the nation's users enjoy today.

As the RTC Comments explained, Congress expects the Joint Board to encourage network advances and service availability in rural areas, based on urban market developments.[9] However, the RTC also supports a pragmatic approach by the Joint Board to initiating the mandated evolution: first adopting the core set and then clearly committing to review, through a progressive definition process, immediately upon completion of the heavy implementation schedule next year.

B. THE BENCHMARK RATE PROPOSALS DO NOT ASSURE REASONABLE AND COMPARABLE RATES.

Some comments suggest satisfaction of the statutory principles requiring comparable, reasonable and affordable rates by setting "benchmark rates." There are several views on how to implement a benchmark system.

USTA proposes an "interstate affordability benchmark equal to the nationwide average loop cost."[10] This proposal would, for other than rural telephone companies, limit the federal universal service funding mechanism to the amount by which the interstate portion of loop costs exceed the interstate benchmark.[11] The effect would be to create a different SLC for each LEC capped at its interstate benchmark rate. This plan would substantially undermine the comparability criterion and sufficiency requirements in the Act.

This approach, by focusing only on the interstate portion of loop costs, shifts much of the burden of high cost recovery onto the states, except for the small LECs which remain under the current Universal Service Fund ("USF") and Dial Equipment Minutes ("DEM) weighting rules. Intrastate rates would have to absorb the other 75 percent or so of costs and the responsibility to support comparability and reasonableness would be left to states to accommodate within this portion of cost recovery. As described by GTE, some states would be unable to fund their share of the universal service requirements if the Federal universal service support mechanism is limited to the portion of the 25 percent of loop costs above the interstate benchmark.[12] The Act's expansive universal service mandate will not be satisfied if the interstate mechanisms are too limited.[13]

US West suggests a different "federal funding benchmark" of $30 a month.[14] Costs over that level would be recovered through a federal universal service fund, with any further high cost mechanism left to the states. While preferable in that it recognizes a greater federal mechanism role, US West's plan, nevertheless, applies only an affordability test without consideration of comparability.

In addition, these approaches are too simplistic, because as pointed out in CC Docket No. 80-286 and this proceeding, a single benchmark would completely disregard differences in levels and values of service.[15]

Benchmarks would need to incorporate comparability of price and adjustment for the recognition of different service levels to comply with the Act and the will of Congress. The RTC believes, as do others, that the use and comparison of rate levels presents difficulties that should be avoided at this time.[16] Instead, the Joint Board should adopt the recommendation to use an actual cost-based mechanism designed to identify high-cost above an appropriate threshold of per-unit network costs, in order to monitor comparability and sufficiently address high costs.[17]

C. THE BENEFICIARIES OF THE NEW UNIVERSAL SERVICE MECHANISM ARE ALL USERS OF THE NETWORK

Some commenting parties incorrectly suggest that universal service support is to be limited to residential subscribers and then only to those who "need" the funding. For example, MCI states that support should be limited to residential customers because "[e]xtending support of universal service to business customers would greatly expand the scope. . . ."[18] Sprint states that "[a]t this time only basic residential telephone services should be generally supported for residential subscribers."[19] Others would only provide universal service support for those customers served who are "eligible for support."[20]

These commenting parties are mistaken in their beliefs about the new law. Congress did not intend that access to advanced services supported by universal service mechanisms be confined to one "type" of customer.[21] Congress intended not only to support services to individuals who could not otherwise afford service, but to support services to all users located in rural, insular, and high-cost areas. The Act and the explanatory statement clearly indicate that Congress intended for the universal service provisions to ensure that more than "needy" or residential customers should be the beneficiaries of the supported services.[22]

D. THE CONCEPT OF PORTABILITY OF UNIVERSAL SERVICE SUPPORT IS INCONSISTENT WITH THE ACT.

Some commenting parties suggest that funding should follow subscribers. i.e., that funding should be "portable."[23] The Act does not contemplate a system in which individual ratepayers decide which carriers are eligible for universal service support. The states have the authority to designate eligible carriers and only those so designated may receive support.[24] Moreover, the portability discussion may presume exclusive support based on customers served. However, Section 214(e) prescribes more than one eligible carrier in urban areas and allows more than one in rural areas. Nor do the conditions which must be met to be deemed eligible hinge on service to any particular customer, but instead look to a carrier's ability and willingness to provide the list of defined supported services in a particular area.[25] The "portability" suggestions simply are inapposite given the Act's prescription of the eligible carrier concept and state designation.[26]

E. THE BENCHMARK COSTING MODEL IN ITS CURRENT FORM WOULD BE HARMFUL TO UNIVERSAL SERVICE.

There is still substantial concern regarding proxy models, even from their supporters. The concerns involve the need for further revision, improvement, and relevant testing of the validity of the results. Even MCI, one of the Benchmark Costing Model ("BCM") sponsors, points to improper assumptions used by the model.[27] AT&T, another apparent supporter of a modeling approach, nevertheless admits that enhancements will be necessary, including the recognition of business lines.[28] The Eight Rural States, while apparently open-minded at this point, will require modifications and proof that "its results bear some relationship to the actual cost of providing service today."[29]

Even some large LECs which presumably would be more protected from serious errors under a proxy plan, do not now or in the future support a BCM approach. Ameritech wants to retain an actual cost approach and appears not to want to waste time on the BCM "[u]ntil that evaluation and review . . . can be completed."[30] Southwestern Bell argues that "[a]dopting a demonstrably inaccurate proxy model to address the assumed unwillingness of new entrants to offer consistent, uniform, and actual data comparable to that supplied by an incumbent LEC is simply wrong."[31]

The Eight Rural States take the view that "[i]f universal support mechanisms are to adequately address localized cost differences, ultimately they should base funding upon the costs of providing service . . .," and a proxy approach should be accepted only if "reliable engineering and economic model can be developed . . . ."[32] Most serious at this point of development is that the model authors have avoided disaggregation of their analysis and modeling in the range of density, which by mere common sense, is most likely to be the highest cost and most likely to present the most unique and difficult to model characteristics.[33]

The RTC emphasizes that, despite the claims of the sponsors, the predictive value of the BCM from a quantitative standpoint has not changed since it was first described and proposed. The sponsors have made changes, but there is no logical proof whether the changes improve or worsen the result.[34] The authors have described the engineering judgements that went into their multiple assumptions, have described how the multiple assumptions have been combined into mathematical formulas, and have shown how the mathematical formulas can be calculated. No one has been able yet to determine whether the results of the mathematical calculations bear any reasonable comparison to network costs associated with even a representative sample of census block groups. This is because network cost by census block group is not known, not defined, and, except for the speculation and assumptions, has not been examined.[35] It also bears repeating that the quantitative evaluations we do have, however inadequate they may be at this time, reveal that on a study area basis the model deviates from a realistic level of cost.[36] In any event, the model must be tested properly before any evaluation can be made.

As a matter of logic, it is not possible to prove that the sponsors will be unsuccessful in their efforts.[37] It is easy, however, to observe that success has not yet been achieved. Despite the extreme dangers and the serious legal impediments presented by an inaccurate proxy model, should the Joint Board and Commission decide to move forward, perhaps only with some segment of the industry, a bifurcated approach must be constructed carefully to isolate those experimenting with proxies.[38]

F. INCREMENTAL COSTING AND PRICING THEORY HAS NO CONCEPTUALLY SOUND APPLICATION IN UNIVERSAL SERVICE MECHANISMS

Some commenting parties suggest mechanisms that in one way or another rely on incremental costing methodology to establish support levels for universal service.[39] These suggestions and the results they would yield are inconsistent with the goals of the legislation and must he dismissed.

First, Congress did not intend to apply a minimizing cost recovery approach, as incremental costing theory would yield, to determine the sufficient levels necessary to achieve the goals outlined in the Act.[40] Carriers cannot make capital commitments to major network upgrades and maintain current facilities if they are to be subjected to cost recovery support based on the potentially minimum calculations.[41] The parties suggesting this approach have not explained how "squeezing" cost recovery on all sides is going to lead to reasonable, affordable and comparable rates. Forms of incremental costing may be useful intellectual, analytical tools for establishing non-predatory pricing floors in a not yet fully competitive marketplace, but provide relatively little guidance to the real world practitioner trying to preserve and advance universal service.[42] The Act explicitly requires that universal service be retained in a competitive, interconnecting environment. Basic "universal service" users should not be asked to pay for the remainder of cost after the incremental payers have had their way by squeezing the cost recovery of the class of carriers that most contribute to the goals.

Incremental costing theory is presented with a huge conceptual dilemma -- the treatment of joint and common costs in excess of incremental costs. The resolution of this dilemma is essential to the achievement of reasonable basic rate levels for high-cost, rural, sparsely populated areas because the portion of costs not clearly addressed by incremental theory constitutes a large percentage of the overall cost recovery burden. The Washington Utilities and Transportation Commission ("WUTC") recently concluded in addressing a rate case of US West that "[s]ince the loop is required if [US West] is to provide any one of toll service, access service, or local service, it is incremental to none of the services."[43] The WUTC also concludes that "local loop facilities are required for nearly every service provided by a [LEC] to a customer."[44] In contrast, the proponents of incremental costing techniques often conveniently conclude that 100 percent of the local loop distribution costs are incremental to services for which they hope to bear little or no recovery responsibility or risk.[45] Every service places cost recovery demands on LECs' local distribution and first point of switching networks. Theoretical long run incremental cost arguments work to establish minimal prices for those customers who successfully convince policy makers that their service should be incrementally priced leaving to all other customers the remaining non-incremental revenue requirements.[46]

Additionally, AT&T wants, in determining an affordable benchmark rate, to presume that it includes an increase in the subscriber line charge to recover all of the joint cost of local loops.[47] Then, AT&T suggests the use of an as yet undeveloped model to determine a minimized incremental cost of universal service to be compared to a full-SLC "weighted average of . . . rates" to establish the level of support.[48] In other words, AT&T wants to squeeze universal service from both ends: minimize its theoretical cost calculation and then compare its cost to an arbitrarily maximized benchmark.[49] Even novice observers will wonder how such a system will achieve a beneficial result.

As most understand, if all telecommunications providers (or for that matter any other industry) set out to charge all their customers on some incremental cost basis, they would all go out of business. The Commission has previously recognized the huge issue of how to recover costs in excess of incremental costing when non-incremental dependent costs represent a large portion of telecommunications networks.[50] Given this "in excess of incremental cost" component, the debate has more to do with the manner in which these costs are spread to prices than perhaps the manner in which theoretical incremental costing determinations are developed in the first place. This industry does not need to plunge into a incremental cost pricing scheme to promote universal service.

G. INTEREXCHANGE SERVICES MUST CONTINUE TO BE RESPONSIBLE FOR AN APPROPRIATE PORTION OF NON-TRAFFIC SENSITIVE AND SWITCHING COSTS, AND IMPOSITION OF FULL SLCs CANNOT LEAD TO REASONABLE, AFFORDABLE, AND COMPARABLE RATES.

It may be that some adjustment to the SLC could be shown to be reasonable and consistent with the comparability test in the Act. However, a continuing misleading theme found in the comments is that LEC access charges are set at levels that result in subsidy from interexchange carriers and their service users. Access charges including both common line IXC charges and traffic sensitive charges are neither set at subsidizing levels now nor were they ever constructed to yield universal service support.

The Commission and Joint Board should be wary of elevating the SLC for the sole purpose of lowering common line charges that IXCs should justifiably pay.[51] Interstate access charges are set at reasonable levels that reflect a fair share assessment of IXCs' use of local network plant. This relative share of use reflected in charges to IXCs results in their cost recovery responsibility for only a small percentage of local distribution and local switching costs nationwide. First, only 25 percent of common line costs are allocated to the interstate jurisdiction. The subscriber line charge for most LECs recovers the bulk of this 25 percent allocation. The remaining portion -- much less than 25 percent -- is recovered via IXCs and the rates they charge their long distance users.[52] It is difficult to imagine how such a modest portion of costs represents a "subsidizing" level. Absent any artificial influence of others (such as regulation), IXCs would not expect to gain use of local networks for free. No one would expect local network providers to offer the use of their facilities for free. This result should not be imposed by regulatory fiat.[53]

[Charges for volume services would be structured differently than today in that volume discounts would be more prevalent and significant than is currently reflected in the industry today. Volume discounts would be the means by which carriers would moderate the impact of charge in a traffic-sensitive basis to recover the costs of fixed plant like loops.]

Moving to full SLCs and/or reducing the responsibility of IXC services to bear a reasonable percentage of local costs would be contrary to simulation of a competitive marketplace and would result in local network providers and their local services users subsidizing interexchange carriers and their long distance users.[56] More important, to make such a move would put upward pressure on the rates that universal service mechanisms are intended to support, thereby making these goals more difficult to achieve.[57] We should not transfer needlessly non-universal service cost recovery, properly addressed elsewhere, to the support mechanism. Therefore, the CCL portion of common line recovery should neither be moved to the new mechanisms under the guise of universal service support nor simply discontinued. The CCL remains a small portion of common line costs for which IXCs appropriately should remain responsible.

As has been submitted in this and the earlier CC Docket 80-286 proceeding, the special demands of long distance service are one reason that per-unit switching costs are higher than that attributable to local calling. The weighting of the interstate DEM by smaller LECs is a method intended both to recognize the higher toll costs of switching and the higher relative per-unit switching costs of smaller LECs with predominantly small offices.[58] Both purposes are reflected in the weighting scheme. The portion that addresses higher toll service demands on switching, in general, and higher proportions for smaller offices, more specifically, still represents an appropriate share for toll service providers and their users to bear. Other portions intended solely to address high cost can be treated as such.[59]

Instead, this discussion of the subsidy issue should be dropped and the concentration moved to the structure of the charges and recovery from users. Once an IXC's share of cost recovery responsibility for local distribution and switching plant is established, IXCs can then find ways in which to charge their customers for this responsibility. LECs should be allowed to structure the CCL charge in ways that do not accumulate per-minute charges that motivate IXCs to find ways to avoid the charges that correspond to high volume, individual customers. LECs are more concerned about the relative recovery of local distribution cost across all services than in determining the portion for any single customer.

II. RECOMMENDATION FOR SOUND POLICIES.

The record indicates that the Commission and Joint Board should build on the existing, successful mechanisms as a strong starting point to implement Section 254 of the Act.

There is no need to make any initial, disruptive changes, particularly those suggestions found in the comments that would be counter-productive to universal service. Accordingly, to reinforce and expand what works, the RTC offers the following recommendations.

A. CURRENT HIGH COST MECHANISMS CAN BE ACCOMMODATED WITHIN THE REQUIREMENTS OF THE ACT.

The current universal service mechanisms, in conjunction with new provisions, can be adjusted, without radical modifications, to fit the requirements of the Act.

1. Universal Service Fund ("USF")

The need to address the high per-unit cost of local distribution loop plant will remain a primary goal under the Act. NTS plant costs vary most indirectly with density of customers from location to location and can potentially place the greatest demand on maintaining comparable rates. The current USF mechanism addresses recovery of costs in excess of national averages in a remarkably successful manner. This provision mitigates and limits costs that must be recovered elsewhere in rates. The provision should be paralleled in the new system by simply moving the allocation and recovery to the federal universal service mechanism as prescribed in the Act.[60]

2. Treatment of New Eligible Telecommunications Carriers.

One necessary modification involves accommodation of support to newly eligible carriers who may not yet possess the necessary data to participate in the USF mechanism initially. The RTC has already explained why the public interest and the new law require that any support to new facilities-based eligible carriers must be based on an equivalent cost and achieved quality mechanism as applied to existing carriers.[61] The Commission should base the support level on the calculation of the actual costs for individual eligible carriers, and should not base it on the incumbent LECs' costs. This is a small burden for eligible carriers and the public to bear to be certain the goals of the Act are being carried out as intended.[62] Only through oversight that is dependent on accounting, costing and quality criteria will the results be known and the success guaranteed. The RTC also agrees with others that at least initially, support should be limited for newly eligible carriers to no higher than that of incumbent LECs.[63] Should newly eligible carriers use some measure of support apart from actual cost and quality, it should be severely limited in scope, duration and be subject to an actual accounting at a later date.[64]

3. Treatment of Resale.

In no case should resellers receive support for the portion of services they provide over the actual facilities of another carrier.[65] The mechanism must be structured to support the cost of facilities that provide the defined universal services, and only once.

4. Strong and effective anti-cream skimming provisions.

An integrated and effective set of anti-cream skimming provisions must be adopted. The plan must include equivalent treatment of newly eligible carriers, must preclude support to resold services, and prevent new entrants from taking unjust advantage of averaged costing and pricing by incumbent LECs. At the very least, the support level must be calculated according to disaggregated areas that correspond to the targeting efforts of new entrants.[66]

5. DEM Weighting

DEM-weighted allocated switching costs still represent a legitimate cost of IXC use of local switching equipment. The per-minute charge resulting from the weighted portion can be adequately addressed by "bulk-billing" which removes the customer-by-customer, one-to-one correspondence between the charge and minutes of use.

6. Recognition and Accommodation of Higher Demands on Support Levels.

The NPRM and comments do not recognize that demands for support will grow tremendously when all current forms are moved to explicit mechanisms and new receivers and new services are added. It would be harmful to the universal service result if the intended beneficiaries had to compete among themselves for a limited amount of funding. This problem will arise if there is a failure to recognize the size of the programs.[67] Comparability will place new demands on support as urban areas' prices begin to reflect the generally lower local costs in dense, high-volume areas. Deaveraging to respond to the selective market strategy pursued by competitors will lead to higher levels of high cost. The Commission and Joint Board must understand these dynamics and be prepared to accept them. New and higher demands owing to requirements adopted by Congress may not lawfully cause reduction of the necessary benefits. In this regard, the Commission should allow the current indexed cap on the USF to expire on June 30, 1996, as scheduled.[68]

B. THE NEED FOR A TRANSITION DEPENDS ON THE EFFECT OF THE NEW PROVISIONS ON RATEPAYERS, LECs AND UNIVERSAL SERVICE.

With the details of any possible implementation plan unknown, it is difficult to discuss what transition will be needed to get the industry from the plan it applies today to the one that will emerge under the Act. The Act requires evolving enhancements to universal service beyond today's services. Congress did not intend the Act to make some customers or providers "losers." Benefits intended for rural markets should begin to be realized immediately.

III. CONCLUSION: THE COMMENTS DEMONSTRATE THE NEED FOR A MORE FOCUSED SET OF PROPOSALS.

Some comments filed on April 12 express concern at the lack of specific proposals to weigh against the requirements of the Act.[69] The RTC fully understands the weight of the issues and the difficulty of resolving them successfully in but a few months. The NPRM's exceedingly wide range of possible policy directions has spawned a similar wide range of suggestions. The Commission and Joint Board should narrow the scope to a plan consistent with the Act.

The success of universal service policies and the strength of any implementing rules will depend on whether they achieve the goals enacted by Congress. Unfortunately, the Joint Board, the public and the affected carriers cannot possibly tell because the resulting quality and prices for services, most key to success, cannot be forecast. Accordingly, the Commission, Joint Board, and the industry need firm policy proposals to evaluate in order to determine what effect on the achievement of these goals can be expected.

A follow-up notice should be released for comment as soon as possible. This notice should include a set of actual proposals limited to what can reasonably be accomplished in the short time frame Congress allowed. One goal should be limited disruption because the effect on universal service results will go beyond the actions taken in this proceeding. Access and separations policies reform will likely cause significant additional impact on the law's universal service provisions. The combined effect will have to pass muster under the Act's requirements and the expectations of Congress. The RTC recommends that only the necessary changes outlined above be accommodated within the Commission's rules in the short amount of time until the May 8, 1997, completion of the current proceeding.[70]

Respectfully submitted,

THE RURAL TELEPHONE COALITION

NRTA NTCA OPASTCO

By:_____________________	By:_____________________	By:_____________________
   Margot Smiley Humphrey	   David Cosson		            Lisa M. Zaina

		     		By:_____________________	By:_____________________
	       			   L. Marie Guillory	           Ken Johnson

			     	By:_____________________
	       			   Steven E. Watkins

Koteen & Naftalin, LLP		2626 Pennsylvania Ave. NW	21 Dupont Circle, NW
1150 Connecticut Ave., NW	Washington, D.C. 20037		Suite 700
Suite 1000			Washington, D.C. 20036
Washington, D.C. 20036
(202) 467-5700			(202) 298-2300			(202) 659-5990

May 7, 1996