PENNSYLVANIA PUBLIC UTILITY COMMISSION
Harrisburg, PA 17105-3265
Public Meeting held July 31, 1997
COMMISSIONERS PRESENT:
John M. Quain, Chairman
Robert K. Bloom, Vice-Chairman
John Hanger
David W. Rolka
Nora Mead Brownell
Docket No. I-00940035
In re: Formal Investigation to Examine and Establish Updated Universal Service
Principles and Policies for Telecommunications Services in the Commonwealth
ORDER ON RECONSIDERATION
I. INTRODUCTION
Today, we grant in part and deny in part, the Petitions for Reconsideration of our January 28,
1997 Opinion and Order which tentatively endorsed the BCM-2 as the appropriate method to
calculate basic universal service (BUS) costs in Pennsylvania; established the BUS rate level for
the purpose of determining BUS funding levels; and established a Universal Telephone Service
Task Force to analyze and make recommendations to the Commission on universal service issues
in the future. In our Order on Reconsideration, we reopen the record of this proceeding for the
purpose of conducting on the record technical workshops to select a final BUS proxy model for
Pennsylvania, to determine whether the model selected meets the relevant criteria contained in
the FCC's May 8, 1997 Report and Order, and to reach consensus on outstanding issues relating
to model parameters and funding mechanism operation.
II. BACKGROUND
This proceeding was commenced by Commission Order dated June 15, 1994. The Order
initiated a formal investigation to examine and establish updated universal service principles and
policies for basic telecommunications in the Commonwealth. On April 10, 1995, the
Commission entered an Order which bifurcated the investigation into three separate proceedings.
The first proceeding consisted of a rulemaking at L-00950102 to establish the parameters for the
ongoing evaluation and review of the universal service definition adopted by the Commission.
The second proceeding consisted of a proposed rulemaking at L-00950105 which created a
universal service funding mechanism. The Commission's Final Form Rulemaking at this docket
was entered on June 21, 1996.
The third proceeding at Docket I-00940035 was an investigation into the cost of providing basic universal service in the Commonwealth. The specific issues to be addressed by the parties included:
(1) application of cost study methodology, the submission of universal cost studies into the record and review of the results of these studies, including evaluation of relevant subsidies, assuming present LEC price levels pertaining to universal service. Analysis of relevant subsidies was to be evaluated both between cost study areas and between basic universal service and other services;
(2) identification of a basic universal service rate and evaluation of hypothetical subsidies between cost study results and the basic universal rate;
(3) identification of rate rebalancing plans by LECs, evaluation of the effect on universal service caused if rebalancing were permitted and identification of hypothetical subsidies which result or remain if rebalancing is presumed relative to both the cost study results and the basic universal service rate. September 5, 1995 at pps. 20-25
The Commission by Order entered October 4, 1995, included access pricing as an additional
issue to be addressed in this case. By Secretarial Letter dated October 6, 1995, the Commission
asked parties to also address appropriate reciprocal compensation rates.
The Commission subsequently referred the cost issues to the Office of Administrative Law
Judge. A prehearing conference was held on September 27, 1995 before Administrative Law
Judge Louis Cocheres. Evidentiary hearings were held from March 4, 1996 through March 13,
1996. Parties participating in the evidentiary hearing included the Office of Consumer Advocate
("OCA"), the Office of Small Business Advocate ("OSBA"), the Pennsylvania Telephone
Association ("PTA"), Bell Atlantic-PA, Inc., ("Bell"), GTEN North ("GTEN"), Sprint/United
Telephone ("Sprint/United"), ALLTEL Pennsylvania, Inc., the Pennsylvania Cable and
Telecommunications Association ("PCTA"), Eastern Telelogic Corporation ("ETC"), AT&T
Communications of PA, Inc. ("AT&T"), Teleport Communications Group ("TCG"), MCI
Telecommunications, Inc. ("MCI"), and the Office of Trial Staff ("OTS").
The Commission entered its final Opinion and Order at this Docket on January 28, 1997. In its
Opinion and Order, the Commission endorsed the use of a forward-looking cost methodology;
established a basic universal service rate of $20.00 for purposes of determining the level of
subsidy in high-cost areas of the state; initiated a separate comprehensive generic proceeding on
intrastate access charge reform; and established a Universal Telephone Service Task Force, a
consortia consisting of interested intergovernmental agencies, industry and trade association
representatives and consumer groups. The Commission also initiated a Phase II at this Docket to
obtain additional comment on the use of an end-user surcharge to recover universal service
contributions.
Petitions for Reconsideration of the Commission's January 28, 1997 Opinion and Order were
filed on February 12, 1997 by Sprint/United, MCI, PTA, ALLTEL, GTEN, and Bell. At the
request of parties, a technical conference was held on April 28, 1997 for the limited purpose of
reviewing and responding to questions on the development of individual company distributions
from and contributions into the state universal service funding mechanism contained in
Appendix A of the January 28, 1997 Opinion and Order.
Supplemental comments on the data presented at the technical conference and the impact of the FCC's May 8, 1997 Report and Order were filed by parties on May 29, 1997 and reply comments were filed on June 13, 1997. Parties filing Supplemental comments and/or replies included ALLTEL, GTEN, Bell Atlantic, PTA, OCA, AT&T and Sprint/United.
III. DISCUSSION
A. Standard of Review
Consistent with Section 703(g) of the Public Utility Code, 66 Pa. C.S. Section 703(g) of the
Public Utility Code, 66 Pa. C.S. Section 703(g), relating to reconsideration, rescission, and
amendment of an order, Section 5.572 of our Regulations, 52 Pa. Code Section 5.572, relating to
relief following a final decision; and judicial and administrative precedent, the standards for
review of a petition for relief following a final decision are set forth in Duick v. PG&W, 56 Pa.
P.U.C. 553 (December 17, 1982)(Duick).
Duick held that a petition for relief under Section 703(g) of the Public Utility Code may properly
raise any matter designed to convince this Commission that we should exercise our discretion to
reconsider, rescind, or amend a prior Order, in whole or in part. Such petitions, however, are
likely to succeed only when they raise "new and novel arguments" not previously heard or
considerations which appear to have been overlooked or not addressed by us. Duick at p. 559.
The Commonwealth Court case, AT&T v. Pa. PUC, 568 A.2d 1362 (Pa. Cmwlth. 1990), further
elucidated these standards.
B. Purpose and Need for a State Funding Mechanism
Bell's argument that there is no need for a state funding mechanism fails under the Duick
standard set out above. Bell argues that Pennsylvania currently has a 97% penetration rate -- one
of the highest in the country, and hence, a funding mechanism is not needed. Bell Petition at p.
2. Bell further argues that until rates increase to levels that could cause customers to leave the
network, there is no need for a fund to "offset" existing rates. Bell Petition at 2. We have
already addressed this issue at length in our January 28, 1997 Opinion and Order. Bell has raised
no new arguments in support of its position that we have not already considered and rejected, and
thus, Duick requires that we reject them. In addition, new circumstances arising since the entry
of our January 28, 1997 Opinion and Order strongly support the establishment of a state funding
mechanism. Most notably, the FCC's May 8, 1997 Report and Order contemplates the
establishment of both federal and state funding mechanisms. Without a state funding
mechanism, companies would only receive a partial high-cost offset of 25% from the federal
funding mechanism. The other 75% of their costs would not be covered.
We also reject Bell's argument that our January 28, 1997 Opinion and Order is not competitively neutral because it mandates the creation of a fund in which it is the only net contributor. Bell argues that long distance carriers and other providers are either net recipients or are made whole through revenue neutral pass-through of funds and that new CLECs, IXCs and other telecommunications providers escape completely or actually benefit from new subsidies paid by Bell customers. Bell Petition at p. 3. Bell's interpretation is a misreading of our January 28, 1997 Opinion and Order and Appendix A. Not only are all existing telecommunications providers required to contribute to the fund based upon their intrastate operating revenues, but new providers will also begin contributing once they commence operations in Pennsylvania. There is no doubt that Bell's contributions will initially exceed those of any other providers in Pennsylvania. However, Bell also has 80-90% of the intrastate market at this time and its contributions appropriately reflect this fact. Moreover, it is anticipated that as more competitors enter Bell's markets, Bell's contributions to the funding mechanism will decline proportionately since Bell's competitors will assume the funding obligation to the extent they begin to serve Bell's existing customers. Viewed in this context, the funding mechanism is competitively neutral, and Bell's arguments to the contrary are without merit.
Finally, we also deny GTEN's request for modification of the requirement that monies received from the state Universal Service funding mechanism be reinvested in the network to meet the network modernization objectives of Chapter 30. GTEN asks the Commission to strike this language or clarify that the calculation of the cost of providing Universal Service was not based upon an advanced broadband network -- but rather was calculated based upon the provision of single party, voice grade service and that therefore it is arbitrary and capricious for the Commission to require that Universal Service fund receipts be used for providing services that are not part of Universal Service. GTEN Petition at p. 8. GTEN's primary concern appears to be its belief that the Commission is somehow attempting to tie Universal Service funding or access charge reductions to filing a network modernization and alternative regulation plan under Chapter 30. GTEN Petition at p. 8. GTEN has obviously misconstrued the discussion in our January 28, 1997 Opinion and Order pertaining to the use of fund receipts and Chapter 30. Our Order does not require any company to file a Chapter 30 network modernization and alternative regulation plan as a precondition to receiving state Universal Service funds. Nonetheless, the Commission will require that funds received be used, inter alia, to update and modernize the public switched telecommunications network in Pennsylvania. This requirement is consistent with Section 254(e) of the Federal Act, which prescribes that a carrier which receives federal universal service support "shall use that support only for the provision, maintenance and upgrading of facilities and services for which the support is intended." To the extent GTEN believes that Universal Service receipts are not to be used to upgrade the public switched network, we believe that it is interpreting the language of Chapter 30 and the Federal Act too narrowly. GTE's position is clearly inconsistent with both Chapter 30 and the Federal Act and must be rejected.
C. BUS Cost Model and Model Parameters
Bell seeks reconsideration of the BUS cost model endorsed by the Commission in its January 28, 1997 Opinion and Order and numerous ILECs seek reconsideration of the various model parameters selected by the Commission. Numerous parties commented that the Commission had not allowed comment on the updates to the BCM as contained in the BCM-2 tentatively endorsed by the Commission, and therefore, it was necessary to reopen the record to permit input from the parties on the updated models. Finally, many parties also requested a technical conference with the Commission's consultant(1)
to discuss Appendix A to the Commission's January 28, 1997 Opinion and Order which
contained estimated individual company contributions to and distributions from the state funding
mechanism based on the input parameters adopted by the Commission. In addition, both
ALLTEL and GTEN seek reconsideration of our rejection of a company's ability to recover
"asset impairment" through the state funding mechanism. We address each of these concerns in
turn below, in addition to the need for further refinement given the FCC's May 8, 1997 Report
and Order.
1. Use of a Forward-Looking Proxy Model to Determine BUS Costs
Once again, we reject Bell's arguments against the use of a proxy model to determine BUS costs.
Bell states that a proxy model is less accurate than studies which measure the actual cost of BUS.
Bell Petition at p. 9. Since we have already extensively addressed each of Bell 's arguments set
forth in its Petition for Reconsideration in our January Opinion and Order, reconsideration is not
appropriate under the Duick standard discussed above.
Additionally, we note that the FCC, in its May 8, 1997 Report and Order, has itself endorsed the use of forward-looking economic costs for the purpose of sizing the federal universal service support mechanism.(2)
We recognize that this Commission, like the FCC, needs to do more work before it can select a
permanent model to determine BUS costs. We are confident that this work can be completed
quickly, and in time to submit the results to the FCC by the deadline of February 6, 1997,
contained in its May 8, 1997 Report and Order.
Indeed, almost all commenting parties recommend that the Commission notify the FCC that it
would like to use its own intrastate costing model to determine state funding levels under the
federal mechanism. We agree. Given the significant work Pennsylvania has already done to
develop a costing model of its own to determine BUS costs, we should not abandon our efforts at
this juncture. In particular, our already considerable efforts in Pennsylvania may be instructive
to the FCC in selecting a model for the federal funding mechanism. The FCC has stated that it
hopes to draw on the work now underway in various states to fashion to some extent its own
model for federal funding purposes. The FCC's recent May 8, 1997 Report and Order requires
that a state notify it by August 15, 1997 if it intends to submit its own cost study for federal
funding purposes. Accordingly, as most parties to this proceeding urge, this Commission will
file such an election with the FCC on or before August 15, 1997, and forward a copy of this
Opinion and Order to the FCC in order for the agency to closely track developments in our state
proceeding.
The FCC has stated in its Universal Service Order that a state cost study will receive FCC approval for federal funding purposes only if it meets proof of the following ten criteria:
1. The technology assumed in the cost study or model must be the least-cost, most-efficient, and reasonable technology for providing the supported services that is currently being deployed. A model, however, must include the ILECs' wire centers as the center of the loop network and the outside plant should terminate at ILECs' current wire centers. The loop design incorporated into a forward-looking economic cost study or model should not impede the provision of advanced services. For example, loading coils should not be used because they impede the provision of advanced services. We note that the use of loading coils is inconsistent with the Rural Utilities Services guidelines for network deployment by its borrowers. Wire center line counts should equal actual ILEC wire center line counts, and the study's or model's average loop length should reflect the incumbent carrier's actual average loop length.
2. Any network function or element, such as loop, switching, transport, or signaling, necessary to produce supported services must have an associated cost.
3. Only long-run forward-looking economic cost may be included. The long-run period used must be a period long enough that all costs may be treated as variable and avoidable. The costs must not be the embedded cost of the facilities, functions or elements. The study or model, however, must be based upon an examination of the current cost of purchasing facilities and equipment such as switches and digital loop carriers (rather than list prices).
4. The rate of return must be either the authorized federal rate of return on interstate services, currently 11.25 percent, or the state's prescribed rate of return for intrastate services. We conclude that the current federal rate of return is a reasonable rate of return by which to determine forward looking costs. We realize that, with the passage of the 1996 Act, the level of local service competition may increase, and that this competition might increase the ILECs' cost of capital. There are other factors, however, that may mitigate or offset any potential increase in the cost of capital associated with additional competition. For example, until facilities-based competition occurs, the impact of competition on the ILEC's risks associated with the supported services will be minimal because the ILEC's facilities will still be used by competitors using either resale or purchasing access to the ILEC's unbundled network elements. In addition, the cost of debt has decreased since we last set the authorized rate of return. The reduction in the cost of borrowing caused the Common Carrier Bureau to institute a preliminary inquiry as to whether the currently authorized federal rate of return is too high, given the current marketplace cost of equity and debt. We will re-evaluate the cost of capital as needed to ensure that it accurately reflects the market situation for carriers.
5. Economic lives and future net salvage percentages used in calculating depreciation expense must be within the FCC-authorized range. We agree with those commentaries that argue that currently authorized lives should be used because the assets used to provide universal service in rural, insular, and high cost areas are unlikely to face serious competitive threat in the near term. To the extent that competition in the local exchange market changes the economic lives of the plant required to provide universal service, we will re-evaluate our authorized depreciation schedules. We intend shortly to issue a notice of proposed rule making to further examine the Commission's [FCC's] depreciation rules.
6. The cost study or model must estimate the cost of providing service for all businesses and households within a geographic region. This includes the provision of multi-line business services, special access, private lines, and multiple residential lines. Such inclusion of multi-line business service and multiple residential lines will permit the cost study or model to reflect the economies of scale associated with the provision of these services.
7. A reasonable allocation of joint and common costs must be assigned to the cost of supported services. This allocation will ensure that the forward-looking economic cost does not include an unreasonable share of the joint and common costs for non-supported services.
8. The cost study or model and all underlying data, formulae, computations, and software associated with the model must be available to all interested parties for review and comment. All underlying data should be verifiable, engineering assumptions reasonable, and outputs plausible.
9. The cost study or model must include the capability to examine and modify the critical assumptions and engineering principles. These assumptions and principles include, but are not limited to, the cost of capital, depreciation rates, fill factors, input costs, overhead adjustments, retail costs, structure sharing percentages, fiber-copper cross-over points, and terrain factors.
10. The cost study or model must deaverage support calculations to the wire center serving area level at least, and, if feasible, to even smaller areas such as a Census Block Group, Census Block, or grid cell. We agree with the Joint Board's recommendation that support areas should be smaller than the carrier's service area in order to target efficiently universal service support. Although we agree with the majority of the commenters that smaller support areas better target support, we are concerned that it becomes progressively more difficult to determine accurately where customers are located as the support areas grow smaller. As SBC notes, carriers currently keep records of the number of lines served at each wire center, but do not know which lines are associated with a particular CBG, CB, or grid cell. Carriers, however, would be required to provide verification of customer location when they request support funds from the administrator. FCC Universal Service Order, ¶ 250 (footnotes omitted).
It will be necessary for Pennsylvania to examine whether the model which we ultimately select
as a permanent BUS costing model meets these ten criteria. As discussed below, we ask parties
to address whether these ten criteria will be satisfied by the proposed final BUS cost model, in
the on the record workshops that will commence next month.
2. Model Inputs
We do not find merit in the arguments of numerous ILECs that the Commission should use
company specific inputs in its proxy model to determine BUS costs. For instance, several
companies continue to argue that the prices of capital goods, materials and labor have a direct
and critical effect on cost estimates, and hence, the values used need to be regional and company
specific and not national averages. See, inter alia, GTEN Petition at p. 4.
GTEN also criticizes the Commission's Opinion and Order for allegedly failing to utilize a
forward-looking annual charge factor which uses forward-looking capital costs, rates of return,
and debt/equity ratios. GTEN Petition at 3. GTEN argues that competition in the industry will
increase risks; therefore, forward-looking capital costs are higher than current capital costs.
Petition at 3. GTEN also argues that forward-looking debt/equity ratios are lower than today's
actual ratios and forward-looking depreciation lives are considerably shorter than the book
depreciation lives which have been determined by regulatory decision. Petition at p. 3. GTEN
also argues that the Commission's Order fails to recognize the joint and common costs incurred
by companies. GTEN Petition at p. 12 Finally, it is GTEN's position that the failure to utilize a
company's actual costs raises serious constitutional questions GTEN Petition at p. 12.
ALLTEL and PTA also support the use of company-specific information with regard to annual
carrying charges, equipment purchase discounts, and other inputs. ALLTEL Petition at p. 13;
PTA Petition at p. 7. PTA argues that the Order allows companies with less than 50,000 access
lines to use a loading factor of only 28% as opposed to the approximately 30-35% range
demonstrated by the PTA. PTA argues that the 28% annual carrying factor for the smaller
companies was derived by the Commission without record support, by simply pro-rata factoring
of the two theoretic methods of TS-LRIC costing (BCM and Hatfield) and ignores the
uncontested record evidence presented by the PTA. PTA Petition at p. 7.
Because we believe that forward-looking data is more competitively neutral and appropriate for
use in determining BUS costs, we once again reject the use of company-specific inputs. No party
has presented any new arguments that have not already been considered and rejected by the
Commission in its January 28, 1997 Opinion and Order, and accordingly Duick also requires
their rejection.
We note, however, that the updated BUS cost model information may contain parameters and/or
inputs that differ from those specified in our January 28, 1997 Opinion and Order. We
specifically request parties to comment on the differences in the on the record workshops to
commence in August. In addition, we note that the ten criteria specified by the FCC may require
reexamination of some of the parameters and/or inputs adopted in our January 28, 1997 Opinion
and Order; including capital costs and rate of return. We have already stated that parties are to
address these issues in the technical workshops. Consequently, while we deny reconsideration
on the use of company specific inputs, further consideration of certain parameters and/or inputs
adopted in our January 28, 1997 Opinion and Order is not altogether foreclosed.
Finally, we find merit to the arguments of both Sprint and ALLTEL that we structure our state funding mechanism similar to the federal funding mechanism and recognize the distinction between rural and non-rural carriers, rather the looking at the number of access lines as Chapter 30 does. As discussed later, we agree with ALLTEL and Sprint that the distinction between rural and non-rural carriers more closely reflects the intent of Section 254 of the Federal Act. Therefore, like the FCC, we find that this distinction is appropriate for purposes of study parameters and/or inputs which would permit us to take into account the unique circumstances of smaller, rural carriers.
3. Asset Impairment
We deny reconsideration of our determination that recovery for asset impairment be
accomplished outside of the state funding mechanism. Both GTEN and ALLTEL seek
reconsideration of their ability to recover for asset impairment. ALLTEL Petition at p. 14.
ALLTEL argues that in every other fixed utility service that has moved to competition, the
Commission and its federal counterparts have provided some mechanism for recovery of
stranded investment or transition costs. ALLTEL Petition at p. 15. ALLTEL also states that in
the recently enacted Chapter 28, the Commission and the Legislature worked diligently to assure
that electric utilities would be provided an opportunity to recover, through a competitive
transition charge assessed each customer using the distribution or transmission system, transition
costs incurred and stranded costs arising during the transition to electric generation competition.
ALLTEL further argues that the Commission provided the gas industry a means of recovering
FERC Order 636 transition costs when the gas industry moved toward deregulation. ALLTEL
Petition at p. 16.
We do not dispute that stranded costs may ultimately become an issue in the telephone industry
as it has in other industries. We see several problems with the position of both ALLTEL and
GTEN, however, that stranded costs be recovered as part of the state universal service funding
mechanism. First, these costs are speculative at this time -- no credible evidence has been
presented by any party that stranded costs exist or that they will ever materialize. Second,
Chapter 28 explicitly provides for the recovery of stranded costs; Chapter 30 does not. Finally,
the FCC has not yet recognized stranded costs as appropriate for recoupment as part of the
federal funding mechanism. We also reiterate that recovery of stranded costs is more
appropriately addressed within the context of a Section 1308 proceeding than within the context
of this proceeding, and accordingly, we once again reject the arguments of ALLTEL and GTEN
with regard to the inclusion of stranded costs in the state universal service funding mechanism.
D. Loop Allocation
.
While the arguments of the parties seeking reconsideration on the allocation of the local loop
have for the most part been considered and rejected by this Commission, subsequent events
including the FCC's findings in its May 8, 1997 Report and Order require that we reexamine this
issue. GTEN argues that the Commission's arbitrary allocation of loop costs is inconsistent with
the FCC's First Report and Order in FCC CC Docket No. 96-98, released August 8, 1997. The
loop, argues GTEN, is a critical element to which the FCC allocates common costs, not the other
way around. GTEN Petition at p. 5. GTEN also recommends that the Commission defer its final
decision on loop allocation until the FCC has issued its orders on access charge reform and
universal service so that there is consistency between the way the loop is treated as a cost and the
way the cost of the loop is recovered. GTEN Petition at p. 6.
While as already noted we do not find the majority of arguments presented persuasive and note
that many of them have already been considered and rejected by this Commission in its January
28, 1997 Opinion and Order, we do agree that a degree of consistency between our funding
mechanism and the mechanism adopted by the FCC is desirable. The Pennsylvania costing
method allocates loop cost based on SLU, whereas the FCC mechanism does not. GTEN
Supplemental Petition at p. 10.
The differences between the FCC's approach and our approach in this respect were also pointed out by the OCA which noted that the Commission has calculated universal service funds by setting a BUS rate, allocating loop costs to BUS and then comparing the BUS cost to the BUS rate; but that the FCC has calculated BUS costs using a very different approach. OCA Supplemental Petition at p. 9.(3)
OCA states that the FCC has used a benchmark of revenue per line for a group of services
including local, discretionary and interstate and intrastate access services. OCA Supplemental
Petition at p. 8. OCA advocates that the Commission consider modifying some of its cost
determination requirements in order to be consistent with the FCC's Universal Service Order.
We agree that it is important that the federal and state funding mechanisms be consistent in this
respect so that distributions under both do not result in either under-funding or over-funding of
BUS in high cost areas. While we continue to believe that the loop is a joint cost which should
be allocated among the services that utilize it, we believe that consistency in this regard with the
approach taken by the FCC in its May 8, 1997 Report and Order is critical. We are also willing
to modify our position because we believe that the approach taken by the FCC takes full account
of the contributions made by other services by taking into account the revenues received from all
of those services in determining BUS funding levels.
We also note that as GTEN pointed out, the interim SLU of 74% used in the universal service
order is close to the 75%/25% split ordered by the FCC. However, the application of those
ratios results in significantly different results. The FCC applies the 25% allocator to the
difference between the cost and the revenue benchmark, while under our funding mechanism, the
allocator is applied to the costing end of the equation only.
We, therefore, modify our January 28, 1997 Opinion and Order to adopt the FCC's approach
which examines total costs and revenues. Consistency will ensure that carriers do not receive a
windfall or in the alternative are under-funded. Important to our decision to reconsider is the fact
that all parties filing comments agree that it is important that the state funding mechanism be
consistent with the federal funding mechanism in this regard. See, Supplemental Petition of the
OCA, at pps 8-9.
Without modification, if the Commission were to change its benchmark to be consistent with the
FCC calculation, as we do below, it would be double-counting the implicit subsidies, if the loop
was allocated based upon SLU, because costs would be decreased (via the allocation of the loop
based on SLU) and revenues would be increased to account for revenues from other services.
GTEN Supplemental Petition at p. 10.
E. BUS Rate
Our Final-Form Rulemaking at Docket L-00950105 provided for the establishment of a BUS rate
to be used to determine state funding levels. The FCC's May 8, 1997 Report and Order utilizes a
revenue benchmark which is applied against BUS costs to determine funding levels. Several
parties seek reconsideration of the $20.00 BUS rate selected by the Commission to determine
BUS funding levels, as well as the overall approach taken by the Commission in light of the
FCC's Report and Order.
With regard to the rate itself, Bell argues that the fund should not authorize the subsidization of
rates that are already affordable. Bell Petition at p. 4. Bell states that only two LECs in
Pennsylvania charge a higher price for BUS than the Commission-determined maximum rate of
$20 per month, and thus, Bell states that the Commission's Order may perversely provide funds
to high-cost companies even when those companies actually have lower rates than lower cost
companies like Bell. Bell Petition at p. 5.
GTEN argues that both contributions to and receipts from the Universal Service fund are based
upon an incorrect assumption that the local exchange carrier is charging a BUS rate of $20. This
results in a requirement that the LEC "fund" the difference between the rate it charges and the
$20 BUS rate wherever the BUS cost is higher than the current rate charged. This will
necessitate the continuation of an implicit subsidy. GTEN Petition at p. 9. Sprint agrees that
companies with basic service rates below the regulated price of basic service must be allowed to
bring their prices up to that rate to eliminate as much implicit subsidy as possible. In that way
the dollars that need to be drawn from the fund are lessened and the total USF is sized correctly.
Sprint Petition at p. 8
GTEN and Sprint also argue that since the Commission requires an eligible carrier to show the
monthly credit associated with their service area, on customers' bills, a correct result can only be
reached if the eligible carrier is authorized to show on the customer's bill the full cost of serving
the area in question. GTEN Petition at p. 10. Sprint also argues that to design a billing system to
"show" customers a credit on their bills, which is unrelated to the price of their service, would be
an administrative nightmare. Sprint Petition at p. 3.
Many parties filed Supplemental Petitions discussing, inter alia, the impact of the FCC's May 8,
1997 Report and Order upon the BUS rate adopted by the Commission. Most parties agree that
consistency between the FCC and Pennsylvania approach would be desirable. PTA notes that
the FCC suggests a benchmark rate of $31 for residential service and $51 for business customers.
These benchmark rates include revenues associated with subscriber line charge, inter and
intralata CCL, intralata toll, vertical services and basic service. PTA Supplemental Petition at p.
8. OCA argues that since the FCC will fund a 25% portion of high cost support, it would be
appropriate for the Commission to use an approach similar to the FCC's, so as to avoid over or
under-funding. OCA Supplemental Petition at p. 9.
We note to begin with that the BUS rate has been the subject of much confusion and
misunderstanding, and continues to be. While we have repeatedly stated that the sole purpose of
the BUS rate is to determine BUS funding levels, parties continue to attribute far more
significance to it than ever was intended by this Commission. Many parties continue to believe
that it constitutes a "cap" on the rates that may be charged by eligible carriers. Other parties
continue to believe that before a carrier may become eligible for high-cost support, it must
charge a rate higher than the BUS rate selected by the Commission. Still others believe that all
ILECs must be permitted to rate rebalance up to the BUS rate, or implicit subsidies will result.
All of these positions belie a fundamental misunderstanding of the BUS rate's purpose and
function. The BUS rate was never intended to function as a cap on the rates that could be
charged by eligible carriers. Nothing in the Federal Act would support this Commission
imposing an additional requirement in the form of a "rate cap" on a carrier's eligibility for federal
funds. Additionally, the Commission at Docket L-00950105 has adopted the same eligibility
criteria set out in the Federal Act for purposes of the state funding mechanism. Nor did we ever
intend that the BUS rate be used as a form of endorsement by this Commission of rate
rebalancing up to the BUS rate level selected, as other parties appear to believe. Carrying this
position to its logical conclusion, all Pennsylvania consumers would end up paying the same rate
for local service regardless of the location they lived or the carrier that served them. Such an
approach would fly in the face of effective competition.
We also note, in response to the further concerns of GTEN and Sprint that this Commission has never mandated that the actual credit appear on the customer's bill. See Final-Form Rulemaking Order at Docket L-00950105 at pps. 59-60. The Commission's January 28, 1997 Opinion and Order did nothing to change this result.
Nonetheless, given all of the confusion and concern that continues to surround the BUS rate, and
the fact that we believe consistency in calculating funding levels between the state and federal
models is important to prevent over or under-funding, we tentatively modify our January 28,
1997 Opinion and Order and adopt the use of a revenue benchmark for the purpose of
determining Universal Service funding levels. This approach is consistent with the approach
taken by the FCC, and therefore, should simplify administration of the state funding mechanism.
This approach will also eliminate much of the confusion and misunderstanding that presently
surrounds the BUS rate. It is our intent initially to use the same revenue benchmark ultimately
selected by the FCC. Nonetheless, we ask parties to comment on the appropriate level of the
benchmark, including the use of individual company benchmarks or state average benchmarks,
when the record in this proceeding is reopened as discussed in Section G following.
F. Technical Conference and Calculation of Net Distributions and Contributions
1. Cost Calculation
Sprint states that there are two major errors in the calculations appearing in Appendix A to the Commission's January 28, 1997 Opinion and Order.(4)
First, Sprint argues that the calculations incorrectly apply the subscriber line usage ("SLU") allocation of 74% for large local exchange and 90% for small LECs to the total cost of universal service. Sprint Supplemental Petition at p. 3. In addition, according to Bell, this has a greater proportionate impact on large LECs because of the lower allocation factor used for the larger carriers. Bell Supplemental Petition at p. 7.
Second, Sprint notes that the BCM-2 applies three different and distinct annual charge factors
(ACFs) to three classes of plant: 23.28% for Cable and Wire, 24.24% for Circuit, and 25.7% for
Switching. Additionally, the non-plant related expenses are a BCM-2 constant amount added to
each access line. Sprint Supplemental Petition at p. 9. Sprint states that the total effect for
United in correcting the application of the 22.9% ACF is an increase in annual subsidy.(5)
Although we agree that both of these criticisms have technical merit, it should be recognized that this Commission, its consultant and its staff have been operating under certain constraints while preparing the BUS cost and USF support estimates that were contained in Appendix A of our January 28, 1997, Order in the instant Docket. These constraints include but are not limited to: (1) ease of access to the BCM-2 cost model and associated data bases that the model utilizes; (2) the ability to independently work with the model in order to produce alternative model runs with changes in the input assumptions; and (3) the need to protect the Commission's confidentiality and privilege of its own deliberative process. Thus, in view of the time constraints imposed by our own deliberative process, the Commission's consultant had to almost exclusively rely on manipulating the BCM-2 model outputs in order to reflect the BUS cost and USF support parameters that were established in our January 28, 1997 Opinion and Order. This approach, however, was hampered by the fact that the available BCM-2 model outputs did not distinguish in sufficient detail the discrete amounts of capital investment in various categories of telephone plant. The fact that the BCM-2 model run outputs did not sufficiently distinguish between the capital investment amounts in non-traffic sensitive (NTS) loop plant and the NTS portion of central office (CO) switching equipment, complicated the efforts of the Commission's consultant in producing BUS cost and USF support estimates that would have reflected the intent of the Commission's Order with the requisite degree of precision.
We reiterate that the initial estimates of USF costs and funding support requirements that were
included as Appendix A to our January 28, 1997 Opinion and Order, were only estimates. The
Commission has always recognized that a true-up process would be necessary and that once a
permanent model was selected by the Commission, new runs would have to be completed.
Appendix A was merely to give parties an idea of the cumulative impact of the various
parameters selected by the Commission on funding size and individual company distributions
and contributions.
We also note that certain of the criticisms may have already been superseded by later
developments. Namely, enhanced versions of the costing models that are designed to measure
the BUS costs and USF requirements are available or will be made available in the near future.
As certain comments that have been filed by the parties in the context of the Reconsideration
Petitions also suggest, there is also a larger need for coordinating this Commission's Universal
Service proceeding and activities in the instant Docket with the corresponding proceedings
before the FCC.
While we note Bell's further concern that Dr. Stevenson may not have applied the common cost
factor because he assumed common costs were already included in the costs provided to him, the
record is simply not sufficiently developed on this point to make any determination on whether
Dr. Stevenson's calculations in this regard were technically correct. For instance, we note that
the computational logic of certain proxy cost models already accounts for certain common costs.
For example, as United/Sprint's Supplemental Comments clearly indicate, certain common costs
were accounted as part of the ACF in the original BCM model. United Supplemental Comments
at 7, also citing Technical Conference Tr. at 2099-2104. This has already been addressed by our
Order where we observed that the BCM's use of a 22.97% ACF is based on certain assumptions
including "General and Administrative expenses that are based on a 10% Gross-Up level for
Overhead." Order at 50, citing Sprint/United St. 2.0 at 28-30 (Dunbar). Furthermore, the same
Order pointed out that the BCM assumptions regarding CO switching technologies include a
certain "common cost per switch [of] $647,526" which translates to a "per line cost [of]
$238.87." Order at 49, citing Sprint/United St. 2.0 at 28 (Dunbar). As the United/Sprint
Supplemental Comments point out there are certain differences on how the original BCM model
and its BCM-2 version account for common costs (non-plant related expense add-ons). United
Supplemental Comments at 7. Nonetheless, it appears, however, that the United/Sprint proposed
corrections to Appendix A of the January 28, 1997 Opinion and Order, may account for common
costs (non-plant related expense add-ons) through an allocation of a non-plant related expense
add-on which is allocated between the loop and the switch. United Supplemental Comments at
7-8. Consequently, given the uncertainty surrounding this issue, we direct parties to reexamine
this issue in the technical workshops discussed in Section G.
In addition, the other concern raised by parties in the Technical Conference and their
Supplemental Petitions relating to a discrepancy in the number of households used by the
Commission's consultant, should also be resolved in the on the record workshops to be
conducted by the Commission, discussed in Section G below.
In summary, the need for more precise derivation of the Pennsylvania-specific BUS costs and
USF support is obvious given the concerns raised by the parties at the Technical Conference and
more recent developments including continued enhancements to the BUS costing models and the
subsequent findings of the FCC in its May 8, 1997 Report and Order on Universal Service.
2. Revenue Calculation
Many parties argue that the calculations and assumptions for LEC revenues available for USF
support are flawed and in need of revision. For instance, both Bell and Sprint argue that
uncollectible revenues are being added back to gross intrastate operating revenues to arrive at net
operating revenues when they should be subtracted from gross revenues to arrive at net revenues.
Sprint Supplemental Petition at p. 12; Bell Supplemental Petition at p. 13. Sprint and Bell also
argue that it is inappropriate to add directory and other non-regulated revenues to operating
revenues (either net or gross) to arrive at something titled total regulated revenue. Both
companies argue that non-regulated revenues should not be utilized as part of the basis on which
the commission computes individual company contributions. Sprint Supplemental Petition at p.
13. Bell argues that nothing in the January 28, 1997 Opinion and Order permits consideration of
revenues that are not derived from the provision of intrastate telecommunications services in
calculating carriers' USF contributions. Bell Supplemental Petition at p. 13. GTEN states that
the total intrastate revenues numbers for all carriers in Pennsylvania are only an estimate and
must be closely scrutinized by industry participants before actual company contributions are
made. GTEN Supplemental Petition at p. 6.
Finally, according to Bell, the revenues attributed to non-wireline carriers were based on an
estimate that understates the revenues actually being earned by those carriers. Bell
Supplemental Petition at p. 13. All in all, GTEN states that the total intrastate revenues numbers
for all carriers in Pennsylvania are only an estimate and must be closely scrutinized by industry
participants before actual company contributions are made. GTEN Supplemental Petition at p. 6.
We agree with parties that CMRS intrastate revenues were likely understated in Appendix A. CMRS providers are not subject to entry or rate regulation by the Commission and are not currently under any reporting obligations to this agency. The Staff estimate, therefore, had to rely exclusively on 1994 revenue figures supplied by the FCC for CMRS providers that were unequivocally known to operate in Pennsylvania, i.e., those providers that had Pennsylvania business addresses. The Staff also utilized a very conservative 15% annual growth figure for the 1994-1995 period in order to adjust the intrastate revenue estimate for the CMRS providers to a 1995 level.(6)
As such, the intrastate CMRS revenue estimate included in Appendix A can only be
characterized as a preliminary baseline estimate. Once again, this was an estimate used to give
parties a preliminary idea of the level of funding required given the parameters selected by the
Commission in its January 28, 1997 Opinion and Order. This estimate must be updated and
trued up once a final BUS model is selected by the Commission and the funding mechanism.
Nonetheless, we ask parties to address these issues in more detail in the on the record technical
workshops to be conducted by the Commission commencing next month.
With respect to the other concerns raised regarding inclusion of uncollectibles, directory
revenues and unregulated revenues of ILECs, in identifying the revenue pool that can be used for
USF contributions, we note that in our USF rulemaking at Docket No. L-00950105, the
Commission identified the sources for USF contributions as "gross intrastate operating revenues"
which, by definition, include uncollectible revenues and other nonregulated revenues. If the
Commission accepted the arguments of parties that the categories of available funding sources
for USF contribution purposes should be restricted to intrastate regulated revenues alone,
computation of these revenues would be always at issue. The verification of the revenue levels
for individual telecommunications carriers would also become increasingly difficult if this
agency and its Staff were to engage in complex computations in order to ascertain the revenues
of each telecommunications carrier that are subject to USF contributions. Such information
should be readily and easily available and verifiable through existing reporting requirements with
this Commission.
We also note that certain revenue categories are not per se deregulated for all
telecommunications carriers that will be subjected to USF contributions. For example, although
this Commission does not regulate telephone company directory operations, directory revenues
are accounted as being "below the line" only for certain companies that have been accorded
alternative or streamlined regulatory treatment under Chapter 30. See generally Bell
Atlantic-Pennsylvania, Inc., Docket No. P-00930715, Order entered June 28, 1994. However, the
directory operations and the associated revenue stream arises from the overall
telecommunications operations that telephone companies in general and ILECs in particular are
engaged. Therefore, we believe that their inclusion is appropriate.
G. Due Process Concerns and Reopening the Record
Most parties urge the Commission to reopen the record of this proceeding to permit further
evidence to be submitted on the BUS costing model tentatively endorsed by the Commission and
on the updates and improvements to the model. For instance, Bell argues that the BCM-2 was
introduced after the record was initially closed and the hearings concluded, and the parties have
had no meaningful opportunity to conduct discovery, cross examine the sponsors, or prepare and
submit responsive evidence. Bell also states that there are significant conceptual flaws with the
BCM-2 model and that it has now been superseded by another model called the BCPM. Bell
goes on to state that the FCC identified several aspects of the BCPM which prevented its use to
calculate BUS costs at the federal level. Bell Supplemental Petition at p. 17.
Bell further argues that the FCC's findings, although not automatically binding on the
Commission for purposes of determining state funding levels, raise significant questions with
respect to the Commission's tentative adoption of the BCM-2 model together with certain
adjustments and assumptions. Bell Supplemental Petition at p. 17. Bell states that these
considerations militate in favor of re-opening the record for the limited purpose of determining
whether the FCC's findings merit adjustment of the Commission's determinations. Bell
Supplemental Petition at p. 17
Most other parties agree that the Commission should reopen the record to allow after-discovered
evidence, the BCPM, to be placed on the record and examined by the parties in the proceeding.
Such examination would proceed after the BCPM is updated in accordance with the FCC's
recently released USF cost model criteria. Sprint recently stated that the BCPM updated
information would be available in mid-August. Sprint Supplemental Petition at p. 2. GTEN
states that the Commission should through the Phase II costing workshops, develop a cost study
for filing with the FCC on or before February 6, 1998. GTEN Supplemental Petition at p. 9.
GTEN advocates that the review include not only the models' structures, that is, algorithms and
internal relationships, but also the justification of key parameter values such as fill factors and
other user-variable inputs such as materials prices and discounts. GTEN Petition at 3. GTEN
notes that models are highly sensitive to key parameter values, such as fill factors, capital costs,
depreciation lives and structure sharing factors. The degree of sensitivity has to be established
by extensive testing and then the values of any parameters to which the model is sensitive have
to be carefully chosen. GTEN Petition at p. 4.
GTEN also proposes that industry participants work through the details of the funding and
contribution calculations. GTEN Supplemental Petition at p. 7. This would allow for a complete
understanding within the industry of how funding and contributions are determined, and more
importantly, produce more accurate results. GTEN Supplemental Petition at p. 7.
At least one party, however, argues that the formal reopening of the record will lead to
unnecessary litigation and delay, and that this approach is not the most constructive method for
resolving the BUS cost model issue. AT&T Supplemental Reply Comments at 6-7, citing
Supplement to Petition for Reconsideration and Clarification of Bell Atlantic-Pa., at 17-18. Both
arguments have merit from a substantive and procedural viewpoint, and accordingly we attempt
to accommodate both to the extent possible. It is clear that the record of this proceeding must be
reopened to examine updated information on the models and the findings of the FCC in its May
8, 1997 Report and Order. Nonetheless, at the same time we believe that the reduction of formal
litigation is desirable and that to the extent consensus can be achieved on the various issues, it is
far more likely to be accomplished in the context of a nonadversarial proceeding. To accomplish
both the objective of permitting additional record evidence on the issues outlined herein and
below, while at the same time encouraging consensus building to the extent possible, we will
order the following. We shall direct the reopening of the formal evidentiary record in the instant
proceeding. We shall further direct the Office of the Administrative Law Judge to preside over a
series of technical on the record workshops on the Universal Service cost proxy models. These
workshops shall be open to the public. We further direct the Office of the Administrative Law
Judge to coordinate the conduct of these workshops with the members of the Universal Service
Task Force as well as with other offices of the Commission as it may be deemed necessary. The
purposes of the technical workshops will be to elicit the necessary information that will enable
the Commission to select a proxy cost model for the estimation of BUS costs and of USF support
in Pennsylvania, as well as an examination of an appropriate benchmark for use in determining
BUS funding levels.
The information presented in these workshops shall include but may not be limited to:
1. The presentation of the most up-to-date proxy cost models and/or enhanced versions of those models previously considered in the evidentiary record in the instant proceeding.
2. Whether the presented cost proxy models meet the criteria discussed in our January 28, 1997 Opinion and Order, as well as the criteria set forth in the FCC's Universal Service Order of May 8, 1997.
3. The computational logic and fundamental input assumptions utilized by the proxy cost models.
4. Alternative model runs with changes in the input assumptions, where such changes, singly or in combination, shall reflect not only the input assumptions adopted in our January 28, 1997 Opinion and Order, but also the tentative assumptions reached herein and such other reasonable assumptions as they may be necessary in order to coordinate Pennsylvania's BUS cost and US support estimation with the FCC's Universal Service Order of May 8, 1997, and any other Universal Service support activities that are being carried out on the federal level.
5. The alternative model runs should include the corresponding Pennsylvania-specific US support results that should be generally depicted in the same format as in Appendix A of our January 28, 1997, Order.
6. Any other issue as appropriate given our findings herein.
7. The participating parties should also present their proposals on:
-- How the Commission can utilize any and all of these models in the deliberative stage of the proceedings in the instant Docket, while preserving the due process rights of the participating parties and the confidentiality and privilege of the Commission's own decision making process.
-- How the Commission can utilize the selected cost proxy model for the development of its own Universal Service cost studies for submission to the FCC in accordance with the FCC's May 8, 1997, Universal Service Order.
At the conclusion of the workshops, parties shall be given an opportunity to submit their final
positions in the form of initial and reply briefs.
While we do not normally do so, given the constricted timeframe imposed by the FCC's May 8,
1997 Report and Order for the submission of state cost studies, we find it necessary to establish a
procedural schedule at the outset of this case. Accordingly, we direct the Office of
Administrative Law Judge to adhere to the following procedural schedule to the extent possible.
Pursuant to the schedule set out below, we request parties to initially address the procedural
issues raised in item 7 above, and any other matters of a procedural nature, which will be the
subject of a separate interim Report and Recommendation to be submitted by the presiding ALJ
in this case.
| Initial prehearing Conference | Within 10 days of the entry date of this Order |
| Comments on procedural issues raised in item 7 above | August 27, 1997 |
| Reply comments on procedural issues | September 10, 1997 |
| Technical workshops | August 15, 1997 through October 15, 1997 |
| Interim Report and Recommendation on procedural issues | October 10, 1997 |
| Initial Brief due | October 30, 1997 |
| Reply Briefs due | November 14, 1997 |
| Report and Recommendation to the Commission | December 15, 1997 |
| Exceptions to Report and Recommendation due | December 30, 1997 |
| Replies to Exceptions due | January 9, 1997 |
The presiding ALJ shall have discretion to waive or alter any of the above dates to the extent necessary with the exception of the date for commencement of this proceeding and for submission of a final Report and Recommendation to the Commission.
H. Access Charges
Two concerns were raised regarding this portion of our January 28, 1997 Opinion and Order;
first with respect to our determination to offset fund contributions with the CCLC revenues
currently paid by IXCs, and second with respect to our determination to cap access charges at
present levels. GTEN argues that the use of CCLC revenues to determine Universal Service
support is inconsistent with the 1996 Act which requires predictable and sufficient funding for
Universal Service. GTEN Petition at p. 6. GTEN states that the Commission's reduction of the
level of Universal Service support by the amount of CCLC revenues will result in insufficient
Universal Service funding and is therefore arbitrary and unreasonable. GTEN Petition at p. 6.
GTEN further states that a more fundamental problem with this calculation is the dollar for dollar
offset of non-LEC contributions with LEC revenue reductions. GTEN Supplemental Petition at
p. 6. GTEN argues that the CCLC is a source of implicit subsidy, and receipts would be offset
by price reductions to services with high contributions, so there is no "double-recovery" issue.
GTEN Supplemental Petition at pps. 6-7. GTEN states that LEC revenue reductions should
instead be tied to the amount of Universal Service funding each LEC receives, and LECs should
be given the flexibility to determine which high margin services receive price reductions. GTEN
Supplemental Petition at p. 7. GTEN further states that CCLC reductions should be considered
in the generic intrastate access charge reform investigation. This would give LECs direction as
to the amount of access rate reductions that are consistent with the Commission's access charge
reforms. GTEN Supplemental Petition at p. 7.
Bell argues that any reduction of its revenues in this proceeding to fund an administrative
initiative would violate the Public Utility Code and Bell's Alternative Regulation Plan, as well as
principles of competitive neutrality. Bell Supplemental Petition at p. 4. Bell goes on to argue
that the Commission's rationale for reducing the local exchange carriers' CCLC does not apply to
Bell. The offset is intended to prevent double recovery of NTS costs -- however Bell states that
it is a net payer and since it will not be receiving any portion of the non-LEC contribution to
universal service, there is no possibility of "double recovery" and no need to reduce Bell's CCLC
at all. Bell Supplemental Petition at p. 5. Bell also argues that there is no evidentiary or logical
basis for the calculation of Bell's CCLC reduction, which applies an identical offset rate to each
carrier's CCLC revenues. Bell argues that the use of the same offset for each carrier assumes that
the CCLC rates of each carrier contribute the same amount to the carrier's NTS costs which Bell
states is not the case. Bell Supplemental Petition at p. 5.
GTEN asks the Commission to delay any structural changes in the CCLC until both state and
federal access charge reforms have been completed. To do otherwise will create costly billing
changes and other efforts that will need to be reversed as part of access charge reform. GTEN
Petition at p. 7. PTA submits that it is wrong to cap access charges since it unfairly denies LECs
the revenue growth from their industry, which they "use constructively to offset cost increases
and maintain rates at the lowest possible level." PTA Petition at p. 6.
ALLTEL also opposes any alteration of the CCLC and requests the Commission reconsider
imposing caps at this time and instead consider the issue in the intrastate access charge reform
proceeding. ALLTEL Petition at p. 16. Sprint agrees that the Commission's decision to order
capping of the CCL is an issue which should be addressed on the record. Sprint Petition at p. 7.
Sprint further argues that capping is not supported by substantial evidence. Capping, according
to Sprint, may be in conflict with the FCC's process for interstate access reform. Sprint Petition
at p. 7.
We find GTE's arguments unpersuasive with regard to the CCLC offset -- the record before us
was uncontroverted in demonstrating that existing intrastate access charges contain some of the
highest implicit subsidies to NTS costs, up to 70% for some small LECs. Consequently, the
CCLC offset is appropriate and necessary to recognize the current contribution IXCs make to
NTS costs in their current access charges. Without an offset, IXCs would be making the same
contribution to NTS costs twice -- once by way of an implicit subsidy and second by way of an
explicit contribution to the state universal service funding mechanism. We agree with GTEN,
however, that once intrastate access charge reform is completed, there will presumably be no
need for an offset as appears on Appendix A since any implicit subsidies contained in current
access charges will be made explicit through the state universal service funding mechanism.
Nonetheless, it should be recognized, that to the extent there is a transition period, some level of
offset may continue to be appropriate. Implementation of the funding mechanism is to be
coordinated with the results of the intrastate access charge reform proceeding -- consequently the
actual level of any applicable offsets should be a consequence of the intrastate access charge
reform proceeding. We ask parties to address the interrelationship of this docket and the
Commission's intrastate access charge reform docket in the Technical Workshops. Parties should
also address the appropriate level of any offsets.
We also believe that our January 28, 1997 Opinion and Order gives LECs sufficient flexibility to
determine which high margin services receive price reductions. We also intend to give further
guidance on this issue once the workshops conclude and the intrastate access charge reform
proceeding is finished. Finally, we reiterate that Appendix A to our January 28, 1997 Opinion
and Order reflected our best estimate at that time of the impact of our determinations upon
overall fund size, individual carrier distributions and contributions. As has been repeatedly
stated, Appendix A was not meant to be a final determination with regard to any of these issues.
With regard to access charge capping, upon reconsideration of the issue, we have decided to
delay any structural changes to current access charges and ask that the structural changes
discussed in our January 28, 1997 Opinion and Order be examined in the context of the current
intrastate access charge reform proceeding. We find that several parties have raised several new
arguments not previously considered by us in our January 28, 1997 Opinion and Order including
the potential for costly billing charges that would need to be reversed in several months at the
conclusion of our intrastate access charge reform proceeding.
We reject Bell's argument that the Commission's rationale for reducing the LEC's CCLC is
inapplicable in Bell's case because it is a net payer and since it will not be receiving any portion
of the non-LEC contribution to universal service. Notwithstanding Bell's position as a net payer
at this time, the CCLC offsets must still be taken into account when determining overall funding
levels; and Bell is a contributor to the fund. We reiterate, however, that the offsets and other data
appearing on Appendix A were for illustrative purposes only. As already stated, the results of
the Commission's intrastate access charge reform proceeding will have to be taken into account
when the Commission and/or fund administrator determine final funding levels.
Finally, we cannot accept Bell's arguments that any reduction of its revenues in this proceeding
to fund an administrative initiative would violate the Public Utility Code or Bell's Alternative
Regulation Plan. Indeed, subsequent changes which may impact upon the Company's revenue
streams were specifically contemplated by the inclusion of the provisions permitting exogenous
treatment of certain expenses subsequently incurred. We note that the FCC determined in its
May 8, 1997 Report and Order that ILECs under price cap regulation would be entitled to
exogenous treatment to the degree of their participation or contributions to the federal funding
mechanism. Bell has also raised the FCC's treatment of these expenses in its supplemental
comments. Bell Supplemental Petition at p. 20.
While we are inclined to agree that Bell or other carriers which are under price cap or alternative
regulation plans at the state level should be entitled to exogenous treatment of the expenses
associated with their participation in the state funding mechanism, since the criteria for
exogenous treatment at the state level differ from the criteria utilized by the FCC, we ask for
comment on this issue by August 20, 1997, with reply comments due on August 29, 1997.
I. Fund Phase-In and Other Timing Concerns
Three timing concerns were addressed by parties in their Petitions for Reconsideration,
including: (1) the four year phase-in of the state universal service funding mechanism, (2) the
timing of Lifeline implementation and CCLC capping and rate restructuring with implementation
of the state funding mechanism, and, (3) coordination of the state and federal funding
mechanisms.
MCI argues that the state Universal Service funding mechanism should not be phased in over a
four year period. MCI Petition at p. 3. MCI argues that a phased-in implementation stifles
growth of the competitive local market and is counter to the intention of the Federal Act.
Petition at p. 3. MCI further argues that the Federal-State Joint Board on Universal Service
found "that a short transition period will expedite achieving the requirements of the 1996 Act,
with minimal adverse impact on carriers." Petition at p. 3.
Use of a phase-in period of four years serves to unnecessarily delay competition in Pennsylvania
and deny the benefits it brings to ratepayers. MCI Petition at p. 4. MCI also requests that the
Commission clarify that it did not intend to prejudge its actions in the Access Reform initiative
and that the four year phase-in is not intended to leave in place the present anti-competitive
implicit subsidies in the ILEC's intrastate switched access rates during the four year period.
Petition at p. 4. To fail to remove these implicit subsidies in favor or of explicit subsidies to the
LEC in need of those subsidies is anticompetitive. Petition at p. 4.
Sprint agrees with MCI and seeks reconsideration of the Commission's proposed phase-in
because it would move the USF further out of synchronization with access charge reform and
rate rebalancing by companies. Sprint Petition at p. 4. Because the purpose of the USF is to
promote competition in high-cost areas of the state, while maintaining basic service rates at an
affordable level, all of these piece parts must come together and be implemented at the same
time. Sprint Petition at p. 4. In addition, argues Sprint, the FCC's rulings must be considered or
there will be an overlap or gap of funds between the state and federal funding mechanisms.
Sprint Petition at p. 4.
GTEN likewise urges the Commission to reconsider its decision to adopt a four year phase-in for
the Universal Service Fund since it will create a mismatch between the costs of supporting
universal service and the revenues received from the Universal Service fund resulting in an
unlawful takings. GTEN Petition at p. 13. The impacts of competition, argues GTEN, will have
the effect of removing implicit subsidies far in advance of the four year phase-in. GTEN Petition
at p. 13.
With regard to other timing concerns, GTEN asks the Commission to reconsider the way in
which it has coordinated the implementation of Lifeline rates. GTEN states that both events are
scheduled to occur before the commencement of the Universal Service fund. GTEN Petition at
p. 11. GTEN urges coordination of the filing of Lifeline rates with implementation of full
Universal Service funding. GTEN Petition at p. 11. PTA agrees that Lifeline rate
implementation should coincide with the associated rate rebalancing proceedings, if any, and the
implementation of the Fund. PTA Petition at p. 7.
With regard to coodination with the federal funding mechanism, OCA, in its Supplemental
Petition, points out that the FCC has proposed the following schedule:
| June 30, 1997 | FCC will issue a Further Notice of Proposed Rulemaking in order to determine high cost support for non-rural carriers. |
| December 31, 1997 . | FCC will select a cost model platform for non-rural carriers and seek comments on input values |
| August 31, 1998. | FCC will adopt a cost methodology for non-rural carriers |
| October 31, 1997 | FCC releases Further Notice of Proposed Rulemaking on cost methodology for rural carriers. |
Id. at p. 9. OCA states that the PUC may wish to delay its implementation of its own high cost
assistance funding in order to correspond with the schedule that the FCC has set. OCA
Supplemental Petition at p. 10.
In contrast, PTA states that the FCC will begin to change interstate methods and levels of support
starting on January 1, 1998. PTA urges that it is absolutely essential that in Pennsylvania a
Universal Service fund be implemented and become operational on January 1, 1998. PTA
Supplemental Petition at p. 10. Unless Pennsylvania reacts to the dramatic and sweeping
changes which the FCC has stated it will implement for interstate access, Pennsylvania will face
a confusing mismatch of pricing theories and significant rate arbitrage. PTA Supplemental
Petition at p. 10.
Similarly, GTEN argues that the Commission should not delay making the Pennsylvania
universal service fund operational because of the many issues arising from the FCC universal
service order. GTEN states that the FCC will not make a final determination on a universal
service costing methodology until August of 1998, and federal support for non-rural carriers will
not be distributed until January 1, 1999. Competition, states GTEN, is not likely to wait until
1999, and it must be accompanied by an explicit and sufficient universal service fund. GTEN
Supplemental Petition at p. 8. GTEN further states that the FCC's inability to reach consensus on
a final proxy costing model is not cause for changing the Commission's direction. GTEN
Supplemental Petition at p. 8.
First, we deny the requests for reconsideration of our determination to phase-in the state funding
mechanism over a four year period. We note that the FCC's Access Charge Reform and
Universal Service determinations are similarly to be implemented over an extended period of
time, rather than on a flash cut basis. Phase-in should result in more structured coordination with
federal programs in that most changes to the federal funding mechanism will not be implemented
until 1998 or 1999.
At the same time we are not persuaded by OCA's arguments to delay implementation of the state
funding mechanism to correspond with the schedule the FCC has set for implementation of the
federal funding mechanism. OCA offered no compelling rationale to postpone implementation
of the state program. Indeed, we find GTEN's arguments to be the most persuasive -- a delay in
universal service funding until 1999 would be particularly damaging in Pennsylvania because
with the four-year transition plan, the universal service fund would not be fully operational until
2002. GTEN Supplemental Petition at p. 8.
Finally, we deny the requests for reconsideration of the other timing issues raised by parties with
regard to Lifeline rate implementation. We do not accept arguments that we must wait until the
state funding mechanism becomes fully operational before these important programs may be
implemented. The Lifeline program is narrowly targeted to low income customers and therefore
the costs of the program should not be significant to any carrier. To the extent that the costs are
significant, we once again make the option available to companies to file under Section 1308(b).
We do note, however, as discussed in much more detail below, that the FCC has significantly
amended the federal Lifeline program effective January 1, 1998. To ensure consistency with the
new federal requirements set out in the FCC's May 8, 1997 Report and Order, we grant PTA's
request for an extension of time, in part, and require all LECs which have not yet filed their
Lifeline plans with the Commission to do so on or before September 30, 1997; with an effective
date of January 1, 1998.
J. Rural Telephone Companies
PTA argues that for smaller, rural companies, embedded cost information will be employed for
at least another four or so years. TSLRIC costing models will be used, at the earliest, beginning
in the year 2001, at which time a national benchmark will be established. PTA Petition at p. 8.
ALLTEL submits that it should be designated a small local exchange carrier for purposes of the
Universal Service Investigation. It states that the Commission should revise its designation
between large and small LECs to more properly reflect the specifics of Pennsylvania's universal
service investigation and to coincide with the FCC's distinction between non-rural and rural
LECs. ALLTEL Petition at p. 2.
ALLTEL requests that the Commission limit the availability of proxy waivers to those
companies that can successfully convince the Commission of their detriment without a waiver,
regardless of their number of access lines. Petition at pp. 12-13. Sprint also submits that the
Commission should clarify that, for purposes of the USF, companies should be allowed to invoke
the rural status conferred on them by definition in the Federal Act. Sprint Petition at p. 8.
MCI asks the Commission to clarify the small LEC waiver process provisions by stating that a
LEC, which is an affiliate or part of a larger corporation operating inside or outside the
boundaries of Pennsylvania, will be reviewed in combination with its affiliates when determining
eligibility for a proxy waiver. MCI Petition at p. 9.
GTEN argues that the Commission has acted arbitrarily and unreasonably by using a much
higher ACF for small LECs. For large LECs, universal service costs produced by the BCM-2
were reduced by approximately 46%, as opposed to reductions of only 21% for smaller LECs,
states GTEN. GTEN Supplemental Petition at p. 4. GTEN argues that in regards to higher risk,
the small companies are more protected from the competitive market than are large LECs.
GTEN Supplemental Petition at pps. 4-5. GTEN states that using a different method of
calculating funding depending on the identity of the carrier compromises the intent of the fund
and complicates fund administration. GTEN Supplemental Petition at p. 5.
Bell agrees and states that the additional adjustments made by Dr. Stevenson to the BCM-2 cost
results in the case of small LECs to reflect the higher average capital cost factors for those
companies was inappropriate. Bell states that at least some of the higher costs associated with
the smaller LECs are caused by the generally longer loops and the geographical characteristics of
those companies' serving areas which the BCM-2 appears to account for to some extent. Thus,
according to Bell, these costs are accounted for and the use of the additional adjustment factor for
small LECs improperly double counts the impact of the longer loops and geographical
characteristics. Bell Petition at p. 11.
We agree with both Sprint and ALLTEL that all companies meeting the definition of a "rural
telephone company" under the Federal Act should be allowed to invoke that status for universal
service purposes and that there should be some consistency in this regard between the state and
federal funding mechanisms. Consequently, all rural telephone companies will be able to avail
themselves of the waiver process established in our January 28, 1997 Opinion and Order. We
amend our January 28, 1997 Opinion and Order accordingly.
Further, as we have already discussed, to achieve maximum consistency with the federal funding mechanism, we will also incorporate the "rural" and "non-rural"distinction for purposes of any input differentiation that is necessary to more appropriately reflect the unique circumstances of rural carriers. We direct the parties to address in more detail in the Technical Workshops the degree of differentiation that is appropriate.
K. Task Force
Bell questions the usefulness and purpose of a Task Force. Bell argues that there is no statutory
or procedural basis for such a Task Force and the Commission could not base any decision on the
results of any Task Force recommendation. Bell Petition at p. 6. Bell goes on to argue that
many of the issues referred to the Task Force will be addressed by the FCC in its Universal
Service docket. Bell Petition at p. 6. Bell requests that reference to the Task Force be removed,
or in the alternative, that the Task Force be deferred until after the FCC has acted. Bell Petition
at p. 7. If a Task Force is established, it must also include urban and suburban ratepayers whom
Bell claims are not expressly represented. Bell Petition at p. 7.
Sprint argues that the subject of refinements to models, that constitutes additional evidence in
this case, as well as the presentation of Sprint's BCPM model, which was not available at the
time of the hearings, require rehearing on the record. Sprint also argues that the Task Force is an
inappropriate forum in which to probe issues outside the record, which affect all parties to this
proceeding. The Task Force also is legally infirm because the results or recommendations that
may come out of it are not binding on the parties, unless the Commission then implements a
rulemaking under the Commonwealth Document law, 45 P.S. Section 501, et seq. Sprint
Petition at p. 9.
We decline to accept either Bell's or Sprint's arguments with regard to the Universal Telephone
Service Task Force. Contrary to Bell's arguments, we believe that the Task Force will perform
several very important functions in the future. First, it is an intergovernmental entity comprised
of representatives from Pennsylvania agencies, industry, and consumer groups which will all be
impacted by the federal and state universal service programs. We believe that is critical that the
varied viewpoints of all affected entities be taken into account to the maximum extent possible,
which the Task Force will allow us to do. Second, the Task Force provides an important vehicle
to quickly mobilize resources and to bring to bear the considerable expertise reflected in the Task
Force's membership to universal service issues which may arise in the future. Third, the Task
Force will function as an important consensus building vehicle which will afford affected parties
more direct input into issues which are of extreme importance to them. Finally, we believe that
the current membership is balanced and contains representatives from not only urban and rural
areas, but all other affected entities.
We also reject both Bell's and Sprint's arguments that the Commission cannot act based upon the
Task Force's recommendations. The Task Force has provided recommendations to the
Commission which the Commission has used as the basis for comments filed before the FCC.
For instance, this Commission filed with the FCC a Petition for Waiver of the definition of the
term "rural area" for purposes of the schools and libraries and health care provisions of the
Federal Act since under the FCC's definition nine counties in Pennsylvania would be ineligible
for discounts to which they would otherwise be entitled under the Federal Act given their
distinctly rural character. In addition, it was only through the quick action of the Task Force that
this Commission was able to immediately take the action necessary to adopt the federal discount
matrix which put Pennsylvania schools and libraries at the forefront of the new federal discount
program.
Nonetheless, we do agree with Sprint that some issues are more appropriately resolved within the
context of reopening the record in this proceeding and we believe that this Order, through the
initiation of technical workshops, appropriately balances these concerns.
L. Lifeline Plans
Sprint asks the Commission to reconsider the requirement for Lifeline plans in light of the need
to have synchronization of all aspects of the USF, including rate rebalancing and the appropriate
economic price of service, before any determination can be made as to the need for, or rate level
of, a Lifeline service. Sprint also argues that the Commission has not clearly stated in its Order
that such reduced rates for Lifeline plans are subject to offset from the USF. Sprint at p. 7.
Sprint states that until the USF has funds available to make such offerings revenue neutral for
companies, it would be inappropriate to require the filing of plans when companies cannot
determine what the reduced Lifeline rates should be, or how the reduction in rates will be
recovered. Sprint Petition at p. 7.
Sprint also notes that its local phone company already offers two other economic basic service
plans: 1) local measured service as low as $3.82 plus 6 cents for the first four minutes and 2)
message rate service as low as $4.77 plus 7 cents per message. Other local telephone companies
offer similar bargain plans in their tariffs. Sprint at p. 7.
MCI states that it does not object to the Lifeline Plan requirement but that some entities may not
be in a position to meet the sixty day filing requirement. MCI also states that it will not serve the
public interest, nor judicial economy for this Commission to impose a deadline which will result
in the filing of thoughtless and incomplete documents on a program so important to penetration
rates and universal service. MCI also expresses its concerns that the parties did not have an
opportunity to examine time frames in the Universal Service proceeding in connection with the
filing of Lifeline Plans and that given the lack of information the Commission may have on the
ability of incumbent and competitive local exchange carriers to meet this deadline, MCI requests
that this Commission reconsider the sixty day filing requirement for submission of Lifeline
plans.
ALLTEL does not object to the Lifeline filing requirements and ALLTEL, alongwith several
other carriers have filed proposed Lifeline plans in accordance with the Commission's January
28, 1997 Opinion and Order. ALLTEL indicated that it did not have a problem with filing a
Pennsylvania Lifeline Plan because it has filed similar plans in other states throughout the
country.
On March 28, 1997, fourteen incumbent LECs filed a Petition For Extension of Time to file
Universal Service Plans until sixty (60) days after a definitive Commission Order on
Reconsideration of the January 28, 1997 Universal Service Order. These fourteen LECs include
Armstrong Telephone Company-North, Armstrong Telephone Company-Pa., Bentleyville
Telephone Company, Hickory Telephone Company, Ironton Telephone Company, Lackawaxen
Telephone Company, North-Eastern Pennsylvania Telephone Company, North Pittsburgh
Telephone Company, Palmerton Telephone Company, Pennsylvania Telephone Company,
Pymatuning Independent Telephone Company, South Canaan Telephone Company, Venus
Telephone Company and Yukon-Waltz Telephone Company. The PTA further states that it is
uncertain from a review of the Commission Order or from discussion with respect thereto exactly
what the Commission expects to be included in any such proposed Lifeline Plan. The PTA also
states that it is impractical for many of the small companies to compile individual plans and
accordingly the PTA would request that they be able to file a Joint or Standard Plan developed
consistently with Commission directives.
By letter dated March 28, 1997, at Docket No. I-00940035, the PTA indicated that it does not
expect the remaining incumbent LECs to file Lifeline rates with the Commission because doing
so would essentially prejudice the outcome of its Petition For Clarification and Reconsideration
of Matter which was filed on February 10, 1997. The PTA noted in its letter, however that its
member companies will fully comply with any subsequent disposition of the Commission.
The federal Lifeline program operates by reducing end-user charges that low-income customers
pay for local service. Support consists of a waiver of the federal SLC. Currently, to participate,
states are required to generate a matching reduction in intrastate end-user charges. Pennsylvania
participates in Plan 2 which allows a subscriber's bill to be reduced by at least twice the SLC.
The FCC, in its May 8, 1997 Report and Order, extends the Lifeline program so that qualifying
low-income consumers can receive Lifeline service from all eligible telecommunications carriers.
The FCC established a baseline amount of federal support of $5.25 to qualifying low-income
customers, with a matching component above the baseline amount. This includes the current
$3.50 federal SLC plus an additional $1.75 in federal support. A state need only approve the
reduction in the portion of the intrastate rate paid by the end user; no state matching is required.
FCC Universal Service Order at para. 351. If a state provides $3.50 in intrastate support as most
participating states now do, low-income customers will receive $10.50 in support. The FCC
made the Lifeline program available in all states regardless of state participation. The FCC's
modified Lifeline plan is to take effect on January 1, 1998.
We note to begin that our decision requiring LECs to file Lifeline plans comports with the spirit
of the FCC's May 8, 1997 Report and Order which requires all eligible telecommunications
providers to offer Lifeline service to customers in the future. Consequently, in the future, both
ILECs and CLECs qualifying as eligible telecommunications carriers for federal funding
purposes, will be required to make Lifeline services available to low-income consumers.
Any carrier seeking to receive Lifeline support will be required to show that it offers Lifeline
service in compliance with the FCC rules. The FCC modified the Lifeline program to provide
that Lifeline service must include the following services: single-party service; voice grade access
to the public switched telephone network; DTMF or its functional digital equivalent; access to
emergency services; access to operator services; access to interexchange service; access to
directory assistance; and toll-limitation services.
As discussed previously, we grant the extension of PTA, in part, and require all LECs which
have not yet filed their Lifeline plans with the Commission to do so on or before September 30,
1997; with an effective date of January 1, 1998. We believe some coordination with the new
Lifeline revisions to be implemented by the FCC on January 1, 1998 is important, and thus will
allow carriers to provide for an effective date of January 1, 1998. While we recognize that the
new program will be applicable to "eligible telecommunications carriers", we note that the FCC
in its May 8, 1997 Report and Order stated that the Common Carrier Bureau has certified some
CLECs to offer Lifeline since passage of the 1996 Federal Act. In return the carriers are required
to stipulate to requirements that mirror those imposed on ILECs, including that the CLEC charge
a federal SLC. Consequently, we will not at this time modify the applicability of our
requirement to all LECs, but will reconsider to the extent that any CLEC that is not an eligible
telecommunications carrier is denied certification under the federal program.
We note the concerns of PTA that it may be impractical for many of the small companies to
compile individual plans and therefore, PTA requested the ability to file a Joint or Standard Plan
on behalf of the smaller carriers in Pennsylvania. While we direct companies to use the Bell
Atlantic Lifeline Plan as a "minimum standard", subject to any amendments that are now
required as a result of the FCC's May 8, 1997 Report and Order, we also make available to PTA
the option to meet with Commission Staff prior to the September 30, 1997 filing deadline to
work out a format for a standard plan that could be used by the smaller PTA member companies.
M. Rate Rebalancing
GTEN argues that the Commission should change its decision not to permit rate rebalancing in
this proceeding. GTEN Petition at p. 9. PTA requests that the Commission reconsider
authorizing the LECs to commence the rebalancing of access charges, toll charges and local rates
coincident with the beginning of the Universal Service fund. PTA Petition at p. 4. PTA further
states that the need to "rebalance" toll, access and local rates will be critical for many of the
individual companies. The LECs must be given a fair opportunity to rebalance toll, access and
local rates. PTA Petition at p. 5. The PTA submits that not only the record here, but also that of
prior generic investigations support rate rebalancing.
ALLTEL argues that the Federal Act recognizes that rural companies, like ALLTEL, are unique
and must be provided sufficient time to rebalance their rates to reduce or eliminate implicit
subsidies and must have an appropriate explicit subsidy mechanism as a means to allow them to
move their rates closer to cost based pricing before facing local exchange competition and the
obligations specified in Section 251(b) and (c) of the Federal Act. Introducing local competition
in the serving areas of rural telephone companies without rate rebalancing is not in the public
interest and without an explicit support mechanism would be contrary to the Federal Act.
ALLTEL Petition at p. 5.
LECS must be allowed to rebalance rates and establish prices for basic service at cost-based
levels, thus eliminating the implicit subsidy in those prices, according to Sprint. Sprint Petition
at p. 7. Sprint argues that the rate rebalancing proposed by it would decrease existing prices that
have been collecting the traditional subsidies, by dollar amounts equal to companies' new
subsidy receipts from the USF. Sprint Petition at p. 7.
It is apparent from the Petitions for Reconsideration on this point, that several parties appear to
have misconstrued the discussion in our January 28, 1997 Opinion and Order to completely
preclude rate rebalancing in the future. To the contrary, this Commission's January 28, 1997
Opinion and Order did nothing to reverse prior Commission rulings regarding a carrier's ability
to propose rate rebalancing plans and specifically recognized that some rate rebalancing would
be necessary and appropriate in the future. In denying the specific rate rebalancing plans
submitted by several carriers in this proceeding, we did not mean to imply that we would not
entertain any rate rebalancing plans in the future. We denied the proposals before us because
they did not have adequate support or backup. Additionally, it was not at all clear to us that the
large increases to local service rates which were being proposed in some instances were
necessary or would not harm subscribership rates.
We believe, however, that it would be a futile exercise on our part to entertain any rate
rebalancing proposals before the outcome of our intrastate access charge reform proceeding. Our
January 28, 1997 Opinion and Order specifically permitted rate rebalancing proposals but
required that they be coordinated with the results of the Commission's intrastate access charge
reform proceeding now underway. We see no reason to depart from this result and no party has
presented any evidence to suggest that this would be appropriate given the significant subsidies
contained in current access charges.
N. Termination Rates
GTEN urges the Commission to reconsider its decision to set interim rates for end office
termination and tandem termination based on the result of the AT&T arbitration involving GTEN
under the Federal Act. GTEN Petition at p. 13. GTEN claims that these rates are not supported
by any valid evidence and do not reflect GTEN's actual costs of terminating traffic. They are
arbitrary and unreasonable, and utilizing them will result in an unlawful takings. GTEN Petition
at p. 13. Local interconnection should be priced based on switched access rates modified to
eliminate the CCLC and to limit the application of the switched access rates to end office
switching, transport, and the information surcharge rate elements. GTEN Petition at p. 13.
The PTA seeks clarification that the interim rates identified and the permanent rates to be
established in the two identified proceedings are applicable only to Bell Atlantic and GTEN
North. PTA Petition at p. 4. PTA seeks assurances that the interim rates identified apply solely
to the carriers for whom the rates are quoted, namely Bell and GTEN North, and that the MFSII
and GTEN II proceedings will develop permanent rates for those two companies only. PTA
Petition at p. 4. Sprint also requests clarification that any conclusion as a result of the MFS III
and GTEN II proceedings binds only the parties in those cases. Sprint Petition at p. 5.
We clarify that the interim rates identified are not applicable to carriers other than Bell and GTEN. We note, however, that we have recently established permanent rates for Bell which would supersede the interim rates at issue here. Additionally, given the recent Decision of the Eighth Circuit Court of Appeals which struck down, inter alia, the FCC interconnection pricing requirements, we will temporarily suspend the requirement that GTEN make the interim rates for end office termination and tandem termination adopted in its arbitration proceeding with AT&T available to others, until we have had an opportunity to more thoroughly review the Eighth Circuit Decision.
O. Miscellaneous
1. Universal Service Assessment Base
One of the issues arising as a result of the FCC's May 8, 1997 Report and Order is the
appropriate assessment base for universal service contributions. PTA notes that the FCC has
endorsed the use of end-user revenues as the assessment base for universal service contributions.
PTA Petition at pps. 8-9. PTA argues that the FCC's finding end-user telecommunications
revenues is more consistent with the principal of competitive neutrality and the most satisfactory
method of meeting the statutory requirement that support be explicit . PTA Supplemental
Petition at p. 9. Additionally, PTA argues that carriers will know exactly how much they will be
required to contribute to universal service. PTA Supplemental Petition at p. 9.
Bell agrees that USF contributions should be based on intrastate retail revenues. Bell
Supplemental Petition at p. 18. Bell notes that the FCC also found that the end-user
telecommunications revenues method of assessing contributions was competitively neutral
because it eliminated double counting, was easy to implement, and eliminated economic
distortions associated with the net telecommunications revenues method favored by the Joint
Board and interexchange carriers. Bell Supplemental Petition at p. 19. Bell notes that the
term end-user telecommunications revenues is broader than the term retail revenues since the
former encompasses revenues derived from the subscriber line charge and from other carriers
when they use telecommunications services for their own internal purposes. Bell Supplemental
Petition at p. 19.
GTEN agrees that contributions to the universal service fund should be based upon carrier
end-user revenues. GTEN Supplemental Petition at p. 6. GTEN states that this would simplify
the process and make contributions consistent with a competitively neutral method of recovery --
an end user surcharge. GTEN Supplemental Petition at p. 6.
We note that the issue of the proper assessment base for universal service contributions is more
properly directed to our Final-Form Rulemaking Docket at L-00950105. For this reason, it is our
intent to include the comments submitted in this proceeding on the universal service assessment
base in any subsequent proceeding regarding our Universal Service rules at Docket L-00950105.
With regard to the issue of a carrier's ability to use an end-user surcharge to recoup universal
service contributions, we note that this is at issue in Phase II of this Investigation. Consequently,
while we do not address either issue herein, it is our intent to address both issues in the near
future in other proceedings.
2. State Funding Eligibility and the Facilities Based Requirement
GTEN argues that the Commission should reject the FCC's interpretation of "own facilities" for
purposes of universal service funding. GTEN Supplemental Petition at p. 9. The FCC found that
"a carrier that offers any of the services designated for universal service support either in whole
or in part, over facilities that are obtained as unbundled network elements pursuant to section
251(c)(3) and that meet the definition of facilities set forth above, satisfies the facilities
requirement of Section 214(e)(1)(A). " GTEN urges that the best solution would be to allow for
funding to the CLEC up to the level of unbundled network element cost with the ILEC receiving
the remaining customer funding. In this way argues GTEN, the carrier that provides the high
cost facilities can be compensated for its cost and the CLEC is not discouraged from competing
in high cost areas using unbundled network elements. GTEN Supplemental Petition at p. 10.
Bell urges us to accept the FCC's determination that resale carriers are not eligible for support.
While Bell also notes that the FCC's decision that CLECs providing service exclusively through
unbundled network elements are eligible to receive universal service support, Bell states that the
FCC has provided that the level of such support is not to exceed the cost of the unbundled
network elements used to provide the supported services. Bell Supplemental Petition at p. 14.
Bell states that the remainder of the support is to go to the ILEC to cover the economic cost of
providing that element through out the relevant service area. Bell Supplemental Petition at p. 15.
As to the issue of state funding eligibility, we adopt the same standards adopted by the FCC in its
May 8, 1997 Report and Order since we believe that they are consistent with the intent and
purpose of the Federal Act. Carriers providing service on a purely resale basis shall be ineligible
for universal service support under the state universal service funding mechanism. Carriers
providing service solely through the purchase of unbundled network elements will be considered
to meet the facilities requirement of Section 214(e)(1)(A). Such carriers will eligible for state
universal service funds, as long as they meet the other criteria of Section 214 of the Federal Act;
THEREFORE,
IT IS ORDERED:
1) That the Petitions for Reconsideration and/or Clarification of the Commission's January 28,
1997 Opinion and Order are granted in part, and denied in part, to the extent discussed herein.
2) That a series of on the record technical workshops shall be conducted by the Office of
Administrative Law Judge consistent with the discussion contained herein. A prehearing
conference shall be scheduled within 10 days from the entry of this Order. The Office of
Administrative Law Judge shall submit its Report and Recommended Decision to the
Commission no later than December 15, 1997.
3) That the request of PTA, on behalf of certain carriers, for an extension of time to file Lifeline
plans with the Commission is granted in part. All LECs which have not yet filed their Lifeline
plans with the Commission shall do so on or before September 30, 1997, with an effective date
of January 1, 1998.
4) The Commission will accept further comment on the issue of exogenous treatment of
universal service contributions under state price cap or alternative regulation plans on or before
August 20, 1997, with replies due on or before August 29, 1997.
5) That the Acting Secretary of the Commission shall serve a copy of this Order upon all parties
of record and members of the Commission's Universal Telephone Service Task Force.
BY THE COMMISSION
James J. McNulty
Acting Secretary
(SEAL)
ORDER ADOPTED: July 31, 1997
ORDER ENTERED:
1. 2. 3. 4. 5. 6.