Report No. DC-2632      ACTION IN DOCKET CASE      August 2, 1994

                  FCC SEEKS COMMENTS ON EFFECTIVENESS 
                     OF TELCO HIGH COST ASSISTANCE  
                            (CC DOCKET 80-286)

     In order to evaluate the effectiveness and efficiency of
certain existing mechanisms designed to promote universal
service, the Commission has undertaken a review of two "high cost
assistance" programs.  These programs were instituted several
years ago and changes in the industry since then have prompted
the FCC to take another look at the way they operate.
     
     High cost assistance is currently provided to local exchange
carriers (LECs) through the Universal Service Fund (USF) and Dial
Equipment Minute (DEM) weighting rules.  The Commission asked for
comments on the goals of high cost assistance and proposed a
number of alternative approaches for revising or replacing the
current methods.

     The USF was established nine years ago to promote universal
telephone service by providing assistance to areas with higher
than average costs.  Eligible LECs are permitted to allocate a
specified amount of their costs to the interstate jurisdiction,
above and beyond the standard allocation already performed under
the Commission's rules.  This assistance, which is funded by
interexchange carriers (IXCs), is intended to enable recipient
companies to charge lower local rates to their subscribers than
would be possible without USF support.

     DEM weighting, adopted seven years ago, provides assistance
to small LECs by allowing them to allocate a greater percentage
of their switching equipment costs to the interstate jurisdiction
than larger companies.  This program is funded by interstate IXCs
through the charges that each IXC pays to recipient LECs for
interstate access. 

     In December 1993 the Federal-State Joint Board in this
proceeding recommended, and the Commission adopted, a two-year
interim rule to control growth in the total USF, a measure
designed to preserve the status quo while a full proceeding to
consider permanent changes in high cost assistance is conducted. 

                           (over)
                            - 2 -

     In the Notice of Inquiry adopted today, the Commission asks
for comment on the overall goals of high cost assistance and on
whether such assistance should be extended to support facilities
modernization in addition to reasonable local rates.  The Notice
of Inquiry notes the need to ensure that assistance is targeted
in the most efficient and effective manner possible and asks for
comment on the appropriate balance between the need to promote
the goals of high cost assistance and the need to avoid imposing
unreasonable cost burdens.  Commenters are asked to address the
appropriate level and targeting of high cost assistance and to
evaluate the relationship between high cost assistance and the
development of competition in local services.  

     The Notice of Inquiry also asks for comment on a number of
alternatives for changing the present high cost assistance
mechanisms.  These alternatives take two primary approaches: the
first is based upon individual companies' reported costs, as are
the present USF rules; and the second is based upon factors
designed to reflect general local service cost characteristics
and economic conditions.  The second method would encourage a LEC
receiving high cost assistance to control its costs as much as
possible, because the subsidy would not increase, as it does now,
when the recipient company increases its costs.  

     The Notice of Inquiry also requests comment on the use of
customer vouchers for high cost assistance.  The Commission noted
that the voucher system could promote competition by making
assistance available to new local market entrants and could
afford telephone subscribers an increased range of choice in
service options.  The Commission also seeks comment on the need
for a transition mechanism if it were to modify or replace the
existing high cost assistance rules. 

     Action by the Commission August 2, 1994, by Notice of
Inquiry (FCC 94-199).  Chairman Hundt, Commissioners Quello,
Barrett, Ness and Chong.

                               - FCC -

     News Media contacts: Audrey Spivack and Rosemary Kimball at
(202) 418-0500.
     Common Carrier Bureau contact: Deborah Dupont at (202) 632-
7500.