Report No. CC 97-39    COMMON CARRIER ACTION           July 21, 1997

        FCC Seeks Comment on Universal Service Cost Models 
          for Support to Non-Rural Local Exchange Carriers
                    (CC Docket Nos. 96-45; 97-160)

     The Commission has adopted a Further Notice of Proposed Rulemaking seeking
comment on the mechanism it should use to estimate the forward-looking economic costs that
non-rural local exchange carriers (LECs) would incur to provide universal service in rural,
insular, and high cost areas.  

     In its May 8, 1997 Universal Service Order (the Order), the Commission adopted the
recommendation of the Federal-State Joint Board on Universal Service that universal service
support for serving rural, insular, and high cost areas should be provided based on forward-
looking economic costs.  The Commission, however, was precluded from selecting a
mechanism to calculate non-rural LECs' forward-looking economic costs by May 8 because
none of the models submitted to the Commission was sufficiently reliable in its current form
to be used to determine universal service support.

     In the Order, the Commission decided to use forward-looking economic cost studies
conducted by state commissions to determine universal service support for those states.
Where a state elects not to conduct a study, the Commission decided to determine the cost of
providing universal service according to a forward-looking economic cost mechanism adopted
by the Commission with assistance from the Joint Board. The Commission anticipated that it
will select a mechanism for support to non-rural carriers by August 1998, and that the
mechanism will take effect on January 1, 1999.  Prior to January 1, 1999, the Commission
will also determine the type and level of benchmark on which universal service support will
be based.  The Commission stressed that non-rural carriers will continue to receive support
based on existing universal service mechanisms until the new mechanism takes effect. 

     Based on recommendations of the Joint Board and subsequent state reports and
comments, the Commission has already reached many conclusions regarding the forward-
looking mechanism that should be selected to determine support for non-rural carriers.  In the
Further Notice of Proposed Rulemaking (FNPRM) released today, the Commission identifies
for public comment the remaining issues it must evaluate in order to adopt a mechanism that
will send the correct signals for entry, investment, and innovation.  The Commission seeks
further comment on the platform design and input values it should adopt in the selected
mechanism to estimate the cost of each of the elements of the telephone network necessary to
provide universal service to high cost areas.  The Commission also requests information about
the input values or model design features that would allow the selected mechanism to
determine support for non-rural carriers in Alaska and the insular areas.  In addition, the
Commission seeks comment on the level of local usage to be included in the definition of
universal service. 
      
     The FNPRM establishes a series of comment and reply comment deadlines for
various aspects of the models that will serve as a workplan for the model proponents, the
public, the states, and Commission staff.  This staged workplan will allow all parties to
consider critical issues at the same time, thereby encouraging the public dialogue to progress
in an orderly fashion and maximizing all parties' resources.  Prior to and during the initial
comment and reply comment periods, the Commission also intends to hold public workshops
on particular model components.

     Shortly after each reply comment period on a group of issues has closed, the
Common Carrier Bureau staff will issue guidance for the modeling process that will take into
consideration the proposals presented in the filed comments, including input from the states,
about those issues.  The Commission anticipates that this workplan will facilitate coordination
with states that elect to develop cost studies for federal universal service support.  The
Commission also intends this workplan to complement proceedings implementing states'
universal service support programs. 

     As a result of cooperative work among the Commission staff, the model proponents,
the states, and the public, the Commission expects that the similarities between the two
models under consideration will increase throughout the staged process in this proceeding
until the platform designs of the model converge.  In the alternative, the Commission
anticipates that one of the models, or a hybrid comprised of the best features of both models,
will be sufficiently developed so that the Commission can adopt that mechanism to determine
support levels for non-rural LECs beginning in 1999. 

     Finally, the Commission stated in the FNPRM that it will address the use of
competitive bidding as a mechanism for determining universal service support levels in a
separate proceeding.  The Commission also noted that it will issue a Further Notice of
Proposed Rulemaking on a forward-looking economic cost mechanism for rural carriers by
October 1998.  
  
     Action by the Commission July 18, 1997 by Further Notice of Proposed Rulemaking
(FCC 97-256).  Chairman Hundt, Commissioners Quello, Ness and Chong.

                                -FCC-

     News media contact: Rochelle Cohen at (202) 418-0253.
     Common Carrier Bureau contact:  Tim Peterson or Chuck Keller at 418-7400.