Preparation for Addressing Universal Service Issues: A Review of Current Interstate Support Mechanisms Common Carrier Bureau Federal Communications Commission Washington, D.C. 20554 February 23, 1996 Preparation for Addressing Universal Service Issues: A Review of Current Interstate Support Mechanisms Universal Service Task Force Deborah A. Dupont, Task Force Leader Common Carrier Bureau, Accounting & Audits Division Ted Allen (Intern) -- Common Carrier Bureau, Policy Division Margo Domon -- Cable Services Bureau, Policy Division Daniel F. Grosh -- Wireless Telecommunications Bureau, Policy Division Robert Hall -- Common Carrier Bureau, Accounting & Audits Division George Johnson -- Common Carrier Bureau, Accounting & Audits Division Clara E. Kuehn -- Common Carrier Bureau, Accounting & Audits Division Rafi Mohammed -- Common Carrier Bureau, Accounting & Audits Division Andrew G. Mulitz -- Common Carrier Bureau, Accounting & Audits Division Mark S. Nadel -- Common Carrier Bureau, Policy Division Jonathan Reel -- Common Carrier Bureau, Accounting & Audits Division Douglas L. Slotten -- Common Carrier Bureau, Policy Division February 23, 1996 Table of Contents PRELIMINARY STATEMENTS AND SUMMARY Purpose of the Report 1-2 Organization and Summary of the Report 2-10 PRELIMINARY CONSIDERATIONS A Review of Telephone Subscribership Studies: Why Some Households Are Not Connected to the Network 11-24 Observations Regarding the Implications of Competition for Universal Service Issues 25-33 EXPLICIT SUPPORT MECHANISMS For Individual Telephone Subscribers: Lifeline and Link Up 34-44 Telecommunications Relay Service (TRS) for Hearing-Impaired Telecommunications Users 45-49 For Local Exchange Carriers: The Universal Service Fund 50-65 Dial Equipment Minutes (DEM) Weighting 66-70 Long Term Support (LTS) 71-77 Rural Utilities Service Loan Subsidies for Telephone Service78-89 IMPLICIT SUPPORT AND OTHER PRICING PRACTICES Recovering the "Interstate" Portion of the Cost of Subscriber Lines: Carrier Common Line Charges (CCLCs) and Subscriber Line Charges (SLCs)90-99 Study Area Access Rate-Averaging 100-106 Non-Traffic-Sensitive Switching Costs 107-110 Interim Transport Rate Structure 111-124 Other Areas to Investigate 125-128 PRELIMINARY STATEMENTS AND SUMMARY Purpose of the Report During the past several years, the Federal Communications Commission ("Commission") has devoted significant resources to addressing the issue of support mechanisms, both explicit and implicit, in the regulated telecommunications industry. The subject of subsidies has arisen in numerous Commission proceedings, as a focal point in some proceedings and as a subsidiary issue in other proceedings. Examining the functions and effects of subsidies in the telecommunications industry is an attempt to serve two policy objectives: to ensure that the telecommunications needs of consumers and society are met, and to remove barriers to competition in various telecommunications submarkets. Both of those policy objectives are prominent underlying principles of the recently-enacted telecommunications legislation. The Telecommunications Act of 1996 emphasizes the importance of support mechanisms to ensure that telecommunications users are provided with quality services at affordable rates. In addition, the Act stresses the need to promote increased availability of advanced telecommunications services, especially for schools, health care providers, and libraries. The legislation also contains numerous provisions designed to ensure an opportunity for fair and full competition in the telecommunications industry. Numerous sections of the new Act convey Congress' intent that the Commission thoroughly review the existing system of federal mechanisms supporting universal service. Moreover, in the accompanying conference report, the conferees declare that "any support mechanisms continued or created under [the relevant portions of the new Act] should be explicit, rather than implicit as many support mechanisms are today." The primary purpose of this report is to facilitate the review of support mechanisms that the conferees intended be undertaken by providing regulators and interested parties with background information regarding many of the current interstate support mechanisms, both explicit and implicit. In this report, we summarize existing support mechanisms only, and we do not address implementation of new universal service support responsibilities arising under the new Act. For that reason, we do not discuss future support mechanisms for public schools and libraries or public and nonprofit healthcare providers in rural areas. In addition to subsidies and pricing practices that are generally recognized as universal service support mechanisms, we also discuss pricing practices that have drawn criticism for creating alleged cross-subsidies between users or customers. Such practices may or may not constitute support mechanisms for universal service, but we include a description of them because they are closely related to many of the pricing practices that constitute implicit support for universal service. The description of each support mechanism includes an explanation of how it operates, a brief history of how it developed, an account of criticisms of the mechanism, proposals for reform suggested by interested parties, and a summary of the positions of many major interest groups. Our statements regarding the pricing practices and subsidies are not meant to constitute findings or conclusions, but rather to communicate preliminary information derived both from our own proceedings and from the media and other public forums. Similarly, descriptions of the positions of various interest groups and of criticisms of the support mechanisms are intended only to provide an informal summary of information derived from regulatory proceedings and public remarks of interested parties. Organization and Summary of the Report Preliminary to the description of the support mechanisms, the report begins with a brief discussion of what will be two essential factors in subsequent study of universal service: an exploration of the factors underlying a decision to subscribe--or not to subscribe--to telephone service and a review of potential competitive developments in the telecommunications industry. Telephone Subscribership. Over the last half-century, subsidies and transfer payments have played an important role in promoting the goal of universal service. Overall telephone subscribership in the United States steadily increased until the 1980s. Since then, however, subscribership has reached a plateau, currently at approximately ninety-four percent. The Commission requested comment on specific proposals for enhancing subscribership in a Notice of Proposed Rulemaking released on July 20, 1995. This report discusses several studies that have attempted to identify factors that deter telephone subscribership. Nonsubscribership is particularly high among the young, the unemployed, minority households with children, and those receiving public assistance. Low income households and households in nonpermanent living situations comprise the vast majority of nonsubscribers. Despite high overall subscribership rates, and recent gains among minorities, subscribership rates among African-American and Hispanic households have been consistently below those of White households by about ten percentage points. Most nonsubscribers are former subscribers who have been disconnected because they were unable to pay for toll charges. Studies also suggest that some households choose not to have a telephone to avoid unwanted intrusion. Given the positive correlation between income and subscribership and the fact that most of the households without telephones subscribed once, but now have been disconnected from the network, increasing telephone subscribership appears to depend upon the success of efforts to reduce disconnection and ease reconnection. Techniques employed in the states to achieve these ends are (1) prohibiting disconnection of local service for nonpayment of toll charges; (2) low cost toll call blocking services; and (3) streamlining procedures for eligibility and receipt of assistance. Implications of Competition. Competition in the local telecommunications markets has enormous potential to foster the goals of universal service. Competition creates incentives for companies to enter local markets with cost effective and technologically advanced systems. This results in consumers paying less for local service, at the same time spurring demand for new state-of-the-art telecommunications systems. In this manner, both subscribership and the scope of services increase. Existing assistance programs and pricing practices also promote universal service. On the other hand, competitive entry into local service markets may make it impossible for certain types of support to continue without disadvantaging one or more competitors in a given market. For example, local service pricing practices that implicitly subsidize other types of service or other categories of carriers may fail to reflect the underlying costs of service, distorting incentives for market entry. A competitively fair environment in the local telephone service market would serve universal service by allowing consumers to reap the benefits of competition. Support Mechanisms: Explicit and Implicit. The body of this report addresses two categories of support mechanisms: explicit and implicit. Explicit support mechanisms are assistance programs that provide subsidies targeted to specific groups of subscribers or types of local exchange carriers ("LECs"). Explicit mechanisms include the Lifeline Assistance and Link Up America programs, and Telecommunications Relay Services, all of which provide assistance to individual telephone subscribers. Other explicit mechanisms, including the Universal Service Fund, the dial equipment minutes weighting subsidy, the Long Term Support program, and Rural Utilities Service loan programs, provide support to LECs. The implicit support mechanisms are pricing practices that appear to create subsidies due to mismatches between costs and cost-recovery. In many cases, the implicit support mechanisms were not created pursuant to specific regulatory directives, but rather were the result of pricing and cost-allocation practices that arose in the prior monopoly service environment, and may not be sustainable in a competitive market. Interstate pricing practices providing such implicit support arguably include use of the carrier common line charge to recover a portion of the non-traffic-sensitive costs of the common line, some subscriber line charges, study area rate averaging, the recovery of non-traffic-sensitive switching costs on a traffic-sensitive basis, and the interim transport rate structure. Lifeline Assistance and Link Up America. Lifeline Assistance and Link Up America promote universal service by reducing the monthly rate or initial connection charge for elderly or low income telephone subscribers. The programs are managed by the states, which typically extend benefits to recipients of other social welfare services, such as Food Stamps or Medicaid. One study estimates that eighty percent of Lifeline recipients depend on the subsidy to make telephone service affordable. The National Exchange Carrier Association, Inc. ("NECA") administers funds for these programs through a Lifeline/Link Up pool, to which all interexchange carriers ("IXCs") having at least .05 percent of presubscribed lines nationwide contribute (on a flat-rate, per line basis). The Commission adopted the first of two Lifeline plans in 1984. This plan reduces an eligible subscriber's monthly telephone bill by an amount equal to the subscriber line charge ("SLC") (currently $3.50), with half the reduction coming from a fifty percent waiver of the SLC, and the rest from the participating state. The second Lifeline plan, adopted in 1985, waives the entire SLC, and is matched by the state, so a subscriber's bill is reduced by twice the SLC. Thirty-five states report subscribers receiving assistance under the second plan (only California still uses the first). About 4.4 million households received $123 million in Lifeline assistance in 1994. The Link Up America program helps low income subscribers begin telephone service by paying half of the first $60 of connection charges. Where a LEC has a deferred payment plan, Link Up will also pay the interest on the balance. To be eligible for Link Up, a subscriber must meet a state-established means test, and may not, unless over sixty years old, be a dependent. Link Up is available in all but three states. In 1994, about 840,000 households received $19 million in Link Up assistance. Telecommunications Relay Services. Telecommunications Relay Services enable persons with hearing or speech impairments to have full access to the voice telecommunications network. TRS facilities have specialized staff and equipment who relay conversations between persons using text telephones and persons using conventional telephones. To access TRS, a caller connects the text telephone through an acoustic coupling device to the telephone line (or directly to the telephone line with some text telephones) and dials a preassigned 800 number to reach the local TRS center. The caller communicates with one of the center's communications assistants by typing into the text telephone; the communications assistant places a voice call to the called party. Communications assistants serve as links in the conversation in a similar manner when a person without a hearing or speech impairment initiates the call. TRS services are required by the Americans with Disabilities Act of 1990 ("ADA"). The ADA requires that "users of telecommunications relay services pay rates no greater than the rates paid for functionally equivalent voice communication services." To implement the law, the Commission established a TRS Fund administered by NECA. All interstate telecommunications companies, data as well as voice (including LECs, IXCs, resellers, 900 services providers, and satellite, video, and paging providers), contribute to the TRS Fund in proportion to their gross interstate revenues. Currently, approximately 2,850 carriers contribute .03 percent of their gross interstate revenues to fund TRS at approximately $30 million each year. Universal Service Fund. The creation of a Universal Service Fund ("USF"), through which IXCs fund LECs' non-traffic sensitive local plant costs that exceed the national average, has its origins in the pre-divestiture interstate division of revenues and settlements process. In the pre-divestiture era, a significant number of high-cost LECs relied upon higher-than-average cost allocations to interstate services as a means of holding down local rate levels. Under current Commission rules, carrier costs (reported under the Part 32 Uniform System of Accounts) are allocated between regulated and nonregulated activities (pursuant to Part 64). Regulated costs are then separated into their interstate and intrastate components under Part 36 "jurisdictional separation" rules. Part 69 rules, in turn, specify the amounts LECs can charge IXCs for access (connection) to the local exchange. In particular, the rules allow LECs to allocate to IXCs twenty-five percent of their "loop" costs (fixed costs of connecting customers to the LEC central office). The USF operates through the Commission's jurisdictional separations rules to assist LECs with local loop costs above 115 percent of the national average. Without such assistance, costs currently allocated to IXCs via the USF would have to be recovered through increased charges for intrastate (including local) telephone service. In many high-cost areas, the resulting local rate increases could be substantial, potentially causing some telephone subscribers to discontinue service. NECA administers the USF. Each year NECA: determines the LECs' loop costs and number of working loops; calculates the total amount of USF assistance needed; and prepares tariffs to recover that amount from the contributing IXCs. Each IXC with at least .05 percent of presubscribed lines nationwide contributes to the fund an amount based on the number of its presubscribed lines. In 1994, the USF was $725.4 million and in 1995, $749.5 million. USF payments in 1996 will be $734.6 million. In August 1994, the Commission released a Notice of Inquiry asking commenters to address the appropriate level and targeting of high-cost assistance, the relationship between high-cost assistance and competition, and alternatives to the present high-cost mechanisms (one based on actual LEC costs, and one based on an incentive approach using proxies for actual costs). Responding commenters stated that as currently structured, the USF rules provide little or no incentive for many high-cost carriers to invest efficiently: LECs with less than 200,000 lines in a given state may allocate 90 percent to 100 percent of their incremental loop costs to the interstate jurisdiction. Commenters also argued that the present USF mechanism hinders competitive entry, because it provides assistance only to the incumbent LEC, which allows it to price services at below cost levels that potential competitors, without access to USF assistance, cannot meet. On July 13, 1995, the Commission issued a Notice of Proposed Rulemaking and Notice of Inquiry inviting comment on three proposals for revising USF assistance. In the first proposal, three alternative modifications to the existing rules were presented, each of which would continue to base high-cost assistance on actual costs. The second proposal would allocate high-cost assistance on the basis of proxy factors, rather than actual costs. In the third proposal, proxy factors would be used to allocate assistance among the States; then, State utility commissions would decide the distribution of assistance among the carriers serving a State, under plans developed pursuant to general Commission guidelines and reviewed by the Commission. In addition, as an adjunct to any of the three proposals, comment was requested on the use of high-cost credits allowing customers to direct USF assistance to chosen carriers. Dial Equipment Minutes Weighting. Based on the assumption that smaller telephone companies have higher local switching costs per line because they cannot take advantage of certain economies of scale, current rules relieve such companies of the need to recover some of these costs through intrastate service rates by allocating additional costs attributable to such equipment to interstate traffic. The Commission's jurisdictional separations rules allocate local switching equipment costs between the interstate and intrastate jurisdictions on the basis of each jurisdiction's relative number of dial equipment minutes of use ("DEM"). Dial equipment minutes are the minutes of holding time of originating and terminating local dial switching equipment. For small LECs (with fewer than 50,000 access lines) the DEM is weighted (multiplied) to allocate additional costs to the interstate jurisdiction. DEM weighting is specifically provided outside of, and unrelated to, the Universal Service Fund assistance program. It applies to small carriers only, because in theory smaller companies have higher switching costs per line because they lack economies of scale. The weighted DEM subsidy is funded by those who pay switched access charges: the IXCs, and ultimately their customers. NECA estimated the total subsidy resulting from DEM weighting for 1995 to be about $311 million. DEM weighting may contribute to an overall competitive advantage for any IXC that does not carry the same cost burden. Additionally, DEM weighting causes customers to pay higher interstate long distance rates than are justified by cost. Finally, the aggregate costs removed from the intrastate jurisdiction via the various subsidy mechanisms (including DEM weighting) may allow certain LECs to charge below cost prices for local exchange services, which may deter the entry of potential new local market competitors. Critics of DEM weighting charge that assistance to small carriers is less necessary than it once was, because switching technology has significantly reduced cost-per-line differences, making DEM weighting, in reality, a subsidy to small companies, not necessarily high-cost companies. In the July 1995 Universal Service Fund Notice of Proposed Rulemaking and Notice of Inquiry, the Commission invited comment on proposals to abolish or revise the current DEM weighting assistance mechanism. One proposal for revision would combine both loop and switching cost factors into a single form of high-cost support. The other suggested revision would preserve the current DEM weighting mechanism, but with assistance provided to high- cost LECs or LECs using small switches rather than to small LECs. Long Term Support. The Long Term Support program reduces the pressures on IXCs to deaverage their interstate toll rates by supporting local telephone companies with higher-than-average subscriber line costs. LTS payments provide those high-cost LECs who are members of a NECA pool with enough support to enable them to charge IXCs a nationwide average carrier common line interstate access rate, but still recover the full interstate portion of their subscriber line costs. LTS payments, the difference between the pool members' actual costs and the rates charged to IXCs, are funded by larger LECs outside the pool. In turn, lower cost LECs charge IXCs rates above their interstate costs and contribute the difference to the pool. IXCs then pass this cost on--in the form of higher rates--to consumers calling from or to low cost areas, when they set geographically averaged rates. LTS is a subsidy because it is provided to LECs in high-cost areas by low cost LECs outside those areas. Support generally flows from urban and other high density locations to rural and other low density locations. The LTS subsidy has been subject to several criticisms: the LTS may inefficiently suppress demand; and it may encourage inefficient entry in markets served by LECs forced to collect and pass on the cost of LTS, while discouraging efficient entry in markets served by LEC recipients of LTS. Rural Telephone Loans. Since 1949, the Rural Utilities Service ("RUS"), formerly the Rural Electrification Administration, has provided loan assistance to rural telephone companies to finance the acquisition, construction and installation of telephone facilities to furnish and improve telephone service in rural areas. The RUS uses three mechanisms: (1) insured, direct five percent or "cost-of-money" loans; (2) direct loans from the Rural Telephone Bank ("RTB") made at the cost of money to the RTB; and (3) RUS guarantees of market rate loans made by the RTB and other banks. Loans under these programs subsidize telephone companies and cooperatives insofar as the Federal Government provides loans to the borrower at rates below the cost to the Government of obtaining those funds. Rural telephone loan subsidies have successfully targeted rural households and undercapitalized rural telephone companies. Currently ninety- six percent of rural households have telephones. Rural telephone borrowers, in turn, have become increasingly financially stable. These very successes suggest to some critics that the continuation of the subsidies is undesirable. Carrier Common Line and Subscriber Line Charges. The carrier common line charge ("CCLC") and the subscriber line charge ("SLC") (which is also known as an end user common line charge) are collected by local telephone companies to cover the interstate portion of the cost of subscriber lines. The SLC is a flat rate monthly charge assessed to end user customers, up to $3.50 per line per month for residential and single line business customers and up to $6 per line per month for multi-line business customers. The CCLC is a per minute charge assessed to IXCs to collect the remaining interstate common line costs. CCLC payments represent subsidies to the degree that customers' lines with the most traffic recover more than the interstate portion of their subscriber line costs, while customers' lines with the least traffic recover less than the interstate allocation of the cost of those lines. Since the cost of providing the subscriber line to customers is not sensitive to the amount of traffic it carries, the Commission initially proposed to recover it through a flat monthly fee, but opponents of a SLC argued that such a charge would price telephone service beyond the budgets of a significant portion of telephone subscribers, and thus diminish overall levels of telephone subscribership. While the CCLC may have fostered universal service by keeping subscribers' total fixed monthly charges lower than they would otherwise have been, detractors have pointed to a number of drawbacks. One primary concern of commentators has been a potentially diminished demand for toll service caused by the higher per minute prices for access caused by CCL charges, which is alleged to yield inefficiency losses on the order of a billion dollars per year. CCLC subsidies are also criticized as detrimental to the development of fully competitive telecommunications markets because unnecessarily high CCLC rates may cause incumbent LECs to lose their public network customers with the highest levels of interstate traffic to alternative providers not burdened with these costs. Some argue that CCLC subsidies distort competition for those customers with the lowest volume of interstate traffic. They contend that, because these customers generate such low levels of interstate traffic, LECs who serve them do not recover enough in CCL charges to cover their actual interstate costs. Ironically, SLC and CCLC subsidies may also force low income individuals who make many interstate calls to subsidize wealthy individuals who do relatively little interstate calling. AT&T and GTE, among others, have advocated that the entire amount of non-traffic sensitive ("NTS") common line costs should be recovered on a per month rather than per minute basis, via a SLC. Study Area Access Rate-Averaging. Under the current access charge rules, LECs are generally required to offer interstate access services at averaged rates throughout each study area, which usually encompasses all of a LEC's local exchange operations within a state. Interstate access rates, therefore, usually do not reflect: (1) the differences between the unit cost of providing service in high density and low density service areas; (2) the differences in the cost of the technology used to provide the underlying facilities for a particular service; or (3) for some services, such as common line, the length of the transmission path as a factor in the pricing of the service. Rate averaging, however, enables a LEC to avoid the potentially higher administrative costs of implementing de-averaged rates. The Commission has permitted two forms of pricing that mitigate the effects of this rate averaging to different degrees. First, LECs are permitted, subject to certain limitations, to price their interstate special access and switched transport services at different levels in different zones within a study area. Second, within a particular study area, LECs may offer volume and term discounts that are cost-supported under the Commission's new services test for price cap regulation if there is sufficient evidence that a given level of competition exists within the study area. Rate averaging has also been criticized as encouraging uneconomic market entry in areas in which rates are higher than underlying costs, even if the entrant may not be the most efficient provider. Conversely, rate averaging is said to deter competitive entry in high-cost areas because the LEC's prices in those areas are below the LEC's real costs of providing service. Some parties allege that rate averaging may erode the LEC's customer base to absorb the costs of supporting the high-cost portions of the switched access network. Non-Traffic Sensitive Switching Costs. The access charge rules recover local switching costs allocated to the interstate jurisdiction by the separations process through a per minute charge assessed upon IXCs even though, as some parties allege, a significant share of the local switching costs are NTS in character. One example of an NTS switching cost is the line card necessary to drive an integrated services digital network ("ISDN") channel over a twisted wire pair. An ISDN line card, an interface circuit in the central office local switch, is necessary for each ISDN loop. Recovering NTS switching costs on a traffic sensitive, or usage sensitive, basis has been criticized as creating economic distortions similar to those created by the recovery of the NTS loop costs through the traffic sensitive carrier common line charge. Interim Transport Rate Structure. The interim rules governing the pricing of interstate transport between LEC end offices and IXC networks include a per minute "interconnection charge" that is assessed on all persons interconnecting with the LEC switched access network. The interconnection charge is a residual amount calculated to provide LECs initially with the same level of total transport revenues under the new transport rules as they would have received under the prior rules. The interconnection charge recovers approximately seventy percent of the LECs' transport revenues. Some portion of the amount recovered through the interconnection charge represents adjustments made to the transport rate structure that reduce the level of the charge that would otherwise be assessed as the initial rate for tandem-switched transport. The remainder of the costs included in the interconnection charge presumably result from the interplay of cost allocation procedures under the separations and access charge rules. The interconnection charge is criticized because some of these costs allegedly reflect subsidies to other interstate access service segments, which affect the competitiveness of the markets for these other services. Critics argue that if a service segment is underpriced (e.g., tandem-switched transport) because of the subsidy, competitive entry into that segment of the market is more difficult. Alternatively, if the LECs' rates for a given access service are too high because they subsidize another service, uneconomic competitive entry may be encouraged in that market segment. In either case, the critics assert, the optimal allocation of market resources will not be achieved and consumers as a whole will be the losers. Finally, to the extent that some of the costs included in the interconnection charge are actually NTS in nature, recovery through a per minute pricing mechanism results in high volume users subsidizing low volume users, as occurs with the CCL charge, which may depress high volume users' demand. Other Areas to Investigate. Critics identify several distortions inherent in the current allocation process for central office equipment ("COE") maintenance expenses (for circuit equipment, switching and operator services). Among these are allocations based on total COE investment, instead of type of expense (and the resulting over recovery of COE maintenance expenses in IXC interconnection charges and under recovery in local switching and common line categories), and the uneconomic distortions caused by recovering non- traffic sensitive costs on a traffic sensitive basis. Another cost misallocation relating to COE is claimed to result from the method of counting circuit terminations in Category 4 circuit equipment allocations. This allegedly results in overallocating costs to transport and underallocating costs to special access. Critics have also complained that investments in computers LECs use to provide nonregulated interstate billing and collection services, that are included in general support facility costs, are misallocated to interstate access charges. They argue that shifting these costs to the nonregulated billing and collection category would reduce access charges. Enhanced service providers also may receive a subsidy because, under a special access charge exemption, providers of interstate enhanced services pay only the rates for local business lines to access the local exchange for their interstate traffic. This exemption enables the enhanced service providers to avoid paying the much higher, interstate access charges that would otherwise apply to that traffic. PRELIMINARY CONSIDERATIONS A Review of Telephone Subscribership Studies: Why Some Households Are Not Connected to the Network I. Overview Over the last half-century, subsidies have been an important tool used by regulators to promote the goal of universal telephone service in the United States. As one study put it, "as one looks at the historical development of the telephone system it appears that almost everything conceivable has been done to make telephone service more affordable to residential consumers through a system of transfer payments." Whether due to subsidies or to other factors, the current level of household subscribership--about 94 percent-- demonstrates significant success in the pursuit of universal service objectives. Subscribership rose dramatically from the depths of the Depression until the mid-1970s, paralleling an extended period of growth in economic activity in the United States. In 1940, 37 percent of households had telephone service. By 1983, that number had increased to 91 percent. During the last decade, however, it has become increasingly apparent that nationwide telephone subscribership has leveled off. Since 1983, total increases in overall subscribership have been small, about 2 percent to 3 percent, plateauing at approximately 94 percent. During this same period, subscribership among minorities has increased at better than double the national rate--about 6 percent. Despite the high overall rates and the apparent progress among minorities, recent studies indicate that subscribership among African-American and Hispanic households continues to lag that of White households by about 10 percent. In some demographic categories, nonsubscribership remains as high as 20 percent or 30 percent or more. Studies of subscribership rates in Washington, D.C. and New York City suggest that even with highly subsidized local service rates, significant numbers of low-income households remain off the telephone network. The emergence of competition in local exchange service will be accompanied by efforts to ensure that subsidies and support mechanisms do not distort competition. It will be important to weigh the effects of changes in subsidies made in order to promote competition upon subscribers remaining on the telephone network. In considering the rules and procedures under which competition is introduced into local service markets, particular attention should be given to whether the price and service benefits of competition will reach low-income, mobile and other populations most likely to be nonsubscribers. Recent Census-based subscribership data, and surveys of nonsubscriber attitudes and behavior regarding telephone service, suggest that: - the highest rates of nonsubscribership are among the young, the unemployed, and minority households with children; - most nonsubscribers are former subscribers, many of whom have been disconnected because of inability to pay toll charges; - the vast majority of nonsubscribers are renters and persons in non-permanent living situations; - many low-income minority households choose not to have telephone service in order to avoid being reached by the outside world. A number of state regulatory initiatives have targeted some of the primary impediments to having telephone service. These measures include: - prohibiting disconnection of local service for non-payment of toll charges; - requiring local exchange carriers ("LECs") to offer low-cost toll blocking service; - ordering streamlined procedures for reconnection. On July 20, 1995, the Commission issued a Notice of Proposed Rulemaking requesting comment on specific proposals to enhance subscribership. Several areas of inquiry addressed customer control of the long-distance use of their telephones. These included requiring LECs to offer low-cost interstate toll blocking services to block interstate calls chargeable to the subscriber, requiring reduced connection deposits for subscribers electing toll blocking options, and prohibiting disconnection of local service for failure to pay interstate toll charges. Several methods of providing service to underserved populations were raised. Voice mailboxes, low-cost centralized calling facilities, and pre-paid long- distance calling cards were suggested as possible alternatives to basic service connections for low income, highly mobile populations. Fixed cellular service and newer wireless technologies were identified as possible lower-cost alternatives to traditional wire loops for serving small populations in remote areas. The Subscribership Notice also invited comment on methods of measuring subscribership, efforts to educate consumers about available options, and streamlined procedures for determining eligibility for assistance under existing programs. Comments and reply comments were received on these proposals on September 27, 1995 and November 14, 1995, respectively. II. Profile Sketch of Households Without Telephones Analysis of the telephone subscribership information in the Current Population Survey of the U.S. Census Bureau has yielded the following profile of households without telephone service: A. Poverty - Nonsubscribership among adult heads of households between the ages of fifteen and twenty-four (15 percent) is the highest of any of the various age groups; - Nonsubscribership among African-Americans in the fifteen to twenty-four year-old group (26 percent) is nearly 75 percent higher than for the category as a whole; - Nonsubscribership among welfare and public assistance recipients is approximately 30 percent; - Analysis of census data indicates that more than two-thirds of those households without telephone service have annual incomes of $15,000 or less; - Nonsubscribership among households headed by females with children living at or below the poverty line is approximately 50 percent. B. Mobility - Nationally, renters are six times more likely than owners to be without a telephone; - In New York State, renters make up 90 percent of the households without telephones; - In a California study of areas with subscribership below 90 percent, over half of the nonsubscribers had lived at their current address for less than one year; - In the same study, after economic reasons, mobility was the most important factor determining nonsubscribership. III. Reasons Why Households Do Not Have Telephones A. Poverty Poverty, or low income, is a primary predictor of nonsubscribership. Over two- thirds of those without telephone service have annual incomes of $15,000 or less. One of the noteworthy findings in recent analyses of Census data on telephone subscribership is the very high rates of nonsubscribership among those households dependent upon public assistance: - 17.6 percent of households in subsidized housing are without telephones (an increase of close to 2 percent from ten years ago); - 31 percent of households receiving food stamps have no telephone; - 27.9 percent of households on welfare lack telephones; - 43.5 percent of households completely dependent on public assistance lack a telephone. The Link Up America and Lifeline Assistance programs provide assistance to precisely these under-served populations. B. Disconnection of Telephone Service The majority of those without telephone service once were subscribers. Of these nonsubscribers, the principal reason for nonsubscription is inability to pay toll charges. In a study of California communities with subscribership rates of less than 90 percent, 65 percent of the non-customers previously had received telephone service. This and similar studies suggest that the inability to control toll usage may be the main reason households are disconnected from the public switched network. Disconnection studies by the seven Regional Bell Holding Companies and GTE, done at the request of the Federal-State Joint Board, showed that most customers involuntarily disconnected were above-average users of toll telephone service. For example, BellSouth found that involuntarily disconnected customers in low-income areas had toll charges that were on average more than twice as high as toll charges of current customers in those areas. Some recent survey data suggest that disconnection for nonpayment of toll charges may occur disproportionately among low-income minorities. A recent study of subscribership in the District of Columbia found that the primary reason households do not have telephone service is their inability to pay the charges incurred for services used. Another recent survey of Camden, New Jersey (where African-Americans comprise 53 percent of the population and Hispanics 29 percent), found that despite their relatively lower income levels, residents of Camden consume a much higher than average amount of expensive telecommunications services and are driven from the telephone network by high usage, rather than local basic service, costs. Similarly, a survey of non-customers in California, predominantly minorities, showed that most had been disconnected voluntarily or involuntarily because of inability to control and pay for service usage. C. Mobility Mobility is highly correlated with nonsubscribership. Several studies confirm that a person in-transit is less likely to have a telephone than a long-term resident. One study of nonsubscribers in low-income areas indicates that the vast majority of nonsubscribers are renters, most have lived at their current residence for less than one year, and most of these households are below or near the poverty line. D. Privacy - Limiting Intrusion of the Outside World Two recent studies suggest that a significant number of low-income households may not subscribe to telephone service in order to avoid intrusion from unwanted sources. A recent interview survey conducted in Camden, New Jersey, focused on the reasons why households were without telephone service. Although the survey consisted of only fourteen households, the results are suggestive of attitudes among inner-city low-income households without telephones. One of the most interesting findings was that half of the households without telephones preferred cable TV service to telephone service. As reasons for making such a choice, these households cited not only a desire to avoid excess toll call usage and disconnection, but two other reasons: (1) telephones can lead to undesirable interactions involving drugs and crime; and (2) government agencies and businesses, which the study states these households view as threatening, may be able to reach the household through the telephone. Similarly, a 1993 California survey of non-customers and demographically matched customers, noted that, in this predominantly low-income population, non-English speaking Hispanics had "concerns about being reported to governmental agencies but these concerns rank well below other factors as reasons for not having phone service." The possibility that there may be a substantial number of low-income households remaining off the network by choice suggests that making telephone service more affordable may not bring these households onto the network. IV. Innovations Targeting the Sources of Disconnection As noted above, several jurisdictions have taken steps to address the impact, of disconnection for non-payment of toll charges and of cost barriers to reconnection, on subscribership rates. A. Prohibiting Disconnection of Local Service The Commonwealth of Pennsylvania prohibits disconnection of local service for non- payment of toll charges. Instead, toll calls are blocked until arrears are paid. During 1989-1992, while inner-city Washington, D.C., was experiencing a steady decline in subscribership, notwithstanding subsidy programs, our analysis of census data indicates that Philadelphia, alone among the five largest metropolitan areas in the country, experienced a dramatic increase in subscribership, from 91 percent to 97 percent. B. Low-Cost Call Blocking Services Both Maryland and the District of Columbia recently have approved low-cost tariffs for toll call blocking services. The Maryland-approved services, blocking long distance calls or 700 and 900 calls, are available to residential customers for one-time charges of $10 and $11, respectively. In the District of Columbia, two types of toll charge-restricted service are generally available. For a one-time charge of $10, and a $3 monthly fee, the call restriction service blocks origination of all direct-dial long distance calls, 700 calls, and 900 calls. The long distance message restriction service blocks those same calls and all operator ("zero") dialing for a one-time charge of $10, and a $2.50 monthly fee. Message "B" service is available to residential customers that have been or are about to be disconnected for nonpayment. Message "B" includes the toll blocking services of long distance message restriction. Customers electing message "B" service cannot subscribe to other services except Touch-Tone service, nonpublished or nonlisted service, and call trace. C. Streamlined Procedures for Assistance Procedures which make it easier to obtain subsidized connection and local service may lower reluctance of low-income households to contact telephone companies or government offices. The California Public Utilities Commission has approved a procedure allowing new subscribers to self-certify their eligibility for subsidized service. In New Mexico, participants in state public assistance programs are automatically eligible for subsidized service. D. "Quick Dial Tone" Policies "Quick dial tone" or "warm line" policies can ameliorate the effects of local service disconnection. In the state of California, disconnected customers retain access to emergency (911) services on the theory that access to emergency services is an essential service that should not be disconnected under any circumstances. V. Sources 52 PA. CODE  64.21, available in WESTLAW, Database PA-ADC (current through Master Transmittal Supplement 248 (July, 1995)). Amendment of the Commission's Rules and Policies to Increase Subscribership and Usage of the Public Switched Network, Notice of Proposed Rulemaking, 10 FCC Rcd 13,003 (1995). MTS and WATS Market Structure; Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board; Establishment of a Program to Monitor the Impact of Joint Board Decisions, Second Study and Report in CC Dkt. Nos. 78-72, 80-286, 87-339, FCC 89J-3 (Joint Bd. Mar. 24, 1989). FEDERAL-STATE JOINT BOARD STAFF IN CC DKT. NO. 80-286, MONITORING REPORT MAY 1995 CC DKT. NO. 87-339 (1995). FEDERAL-STATE JOINT BOARD STAFF IN CC DKT. NO. 80-286, MONITORING REPORT SEPTEMBER 1988 CC DKT. NO. 87-339 (1988). FEDERAL-STATE JOINT BOARD STAFF IN CC DKT. NO. 80-286, MONITORING REPORT MARCH 1988 CC DKT. NO. 87-339 (1988). Bell Atlantic - Washington D.C., Inc., Local Exchange Services Tariff No. 202  2 (D.C. Pub. Serv. Comm'n, effective June 23, 1995). Bell Atlantic - Washington, D.C., Inc., General Services Tariff No. 203  6 (Supplemental Equipment) (D.C. Pub. Serv. Comm'n, effective June 17, 1994). Chesapeake & Potomac Tel. Co., Submission of Telephone Penetration Studies in Formal Case No. 850 (D.C. Pub. Serv. Comm'n, Oct. 1, 1993). Bell Atlantic - Maryland., Inc., General Services Tariff No. 203  6 (Supplemental Equipment) (Md. Pub. Serv. Comm'n, effective Oct. 1, 1994). US West Communications N.M., Exchange and Network Services Tariff  A5 (Exchange Services) (issued per N.M. State Corp. Comm'n Order in Dkt. No. 92-227-TC, effective May 15, 1993). BUREAU OF THE CENSUS, U.S. DEP'T OF COMMERCE, CURRENT POPULATION SURVEY (Nov. 1994). FCC, CC INDUS. ANALYSIS DIV., TELEPHONE SUBSCRIBERSHIP IN THE UNITED STATES (DATA THROUGH JULY 1994) (authored by Alexander Belinfante) (1994). J. Cale Case & Mark G. Ciolek, Federal Telecommunications Subsidies in the USA (Apr. 1993) (available from Palmer Bellevue Corp., 111 W. Washington St., Suite 1247, Chicago, IL 60602). Department of Telecommunications & Energy, City of N.Y., New York City Household Telephone Penetration Study, A Report on the Status of Universal Telephone Service in New York City's Neighborhoods (Nov. 23, 1993) (available from Department of Telecommunications and Energy, City of New York, 75 Park Place, 6th Floor, New York, NY 10007). [1 Non-Customer Survey] Field Research Corp., Affordability of Telephone Service (1993) (survey funded by GTE and Pacific Bell, available from Pacific Telesis, Federal Regulatory Relations, 1275 Pennsylvania Ave., Suite 400, Washington, DC 20004). John B. Horrigan & Lodis Rhodes, The Evolution of Universal Service in Texas (Sept. 1995) (available from LBJ School of Public Affairs, University of Texas at Austin, Austin, TX 78713-8925). Milton Mueller & Jorge Reina Schement, Rutgers Univ. Project on Info. Policy, Universal Service from the Bottom Up: A Profile of Telecommunications Access in Camden, New Jersey (1995) (available from Rutgers University School of Communication, Information and Library Studies, New Brunswick, New Jersey 08903). New York State Dep't of Pub. Serv., Universal Service Issues--A Staff Draft Report in Module 1 Case 94-C-0095--The Telecommunications Competition II Proceeding (May 16, 1995) (available from New York State Department of Public Service, Three Empire State Plaza, Albany, NY 12223). Scott J. Rubin, Telephone Penetration Rates for Renters in Pennsylvania (1993) (available from Pennsylvania Office of Consumer Advocate, 1425 Strawberry Square, Harrisburg, PA 17120). Jorge Reina Schement et al., Telephone Penetration 1984-1994 (Aug. 16, 1994). Telephone Interviews with Alexander Belinfante, Industry Economist, CC Indus. Analysis Div., FCC (Fall 1995 through Feb. 1996). Letter from Jerome D. Block, Chairman, New Mexico State Corporation Commission to Laurence E. Povich, Policy Analyst, CC, FCC (Mar. 20, 1995). Telephone Interview with Ann A. Dean, Regulatory Economist, Telecommunications Division, Maryland Public Service Commission (Jan. 24, 1996). Telephone Interview with Robert Loube, Director of Economics, District of Columbia Public Service Commission (Feb. 1996). Telephone Interview with Jorge Reina Schement, Associate Professor, Rutgers University School of Communication, Information and Library Studies (Mar. 1995). Telephone Interview with Corey Texeira, California Public Utilities Commission (Mar. 1995). VI. Background Sources FCC, CC INDUS. ANALYSIS DIV., REFERENCE BOOK: RATES, PRICE INDEXES, AND HOUSEHOLD EXPENDITURES FOR TELEPHONE SERVICE (authored by James L. Lande) (1994). Observations Regarding the Implications of Competition for Universal Service Issues The development of competition in local telecommunications services has two principal implications for universal service issues and concerns. First, competition has the potential to promote universal service by stimulating lower prices, improvements in facilities and technical capabilities, and innovations in pricing and service offerings. Second, competition may make it difficult to sustain the current subsidies and pricing mechanisms that were designed to support universal service in the previously monopolistic environment. This section of the report briefly addresses both of those points, as a general background to the discussion of current interstate subsidy and support mechanisms that follows. I. The Role of Competition in Promoting Universal Service General Benefits of Competition. Society benefits from competition because the incentive of an individual firm to maximize its profits is compatible with the societal economic interest in maximizing efficiency in the production and distribution of goods and services. Economists speak of the "invisible hand" of competition that directs resources into the proper markets. In a competitive environment, firms enter markets where there is the potential to earn higher than normal profits. Higher than normal rates of return signal potential entrants that consumer demand will support the demand from additional producers, and thus that entry should be profitable. Firms with production costs lower than those of the incumbent firms also anticipate profitable entry. In a competitive market, there is strong pressure for each competitor to minimize its costs, and prices are driven (down) towards marginal cost. Output expands to match demand, resulting in an efficient allocation of resources. A good example of the benefits of competition is the customer premises equipment ("CPE") market. More than twenty-five years ago, CPE was provided exclusively by LECs as part of local telephone service. In the 1960s, competitive manufacturers of CPE sought to sell their equipment directly to telephone subscribers. The Commission eventually found that there were no valid technical reasons to prohibit interconnection of competitors' CPE, and ordered that interconnection prohibitions be removed. The Commission subsequently required that charges for CPE be unbundled from local service rates and, ultimately, detariffed. After the CPE market was opened to competition, the prices of all types of telephone equipment dropped substantially. In addition, innovation by competitors in the CPE market greatly expanded the technical capabilities and the variety of CPE products available to consumers. Finally, the CPE market has experienced enormous growth. The basic phone products market (cordless telephones, corded telephones, telephone answering systems, and cellular telephones) expanded from $1.53 billion in 1984 to $4.37 billion in 1994. Potential Benefits of Competition in Local Service Competition. Universal service goals traditionally have focused on promoting telephone subscribership. More recently, it has been suggested that universal service objectives should include maximization of the availability of technologically-advanced services and facilities. New entrants in local telecommunications markets have strong incentives to develop and implement cost-efficient technology, creating pressure for the incumbent service provider to lower prices and improve service capabilities. Effective local service competition thus can promote universal service by stimulating technological advancement, lower prices, and marketing innovation. The Commission already has observed that prices are lower in cable television markets subject to competition and expects the entry of competitive access providers to lead to lower access prices in telephone markets. The very high-cost, capital-intensive nature of the local telecommunications market discourages new companies from seeking to compete with the incumbent provider. This market is unique because it is currently served by a monopolist and if a firm fails, it can not recover the significant resources that it invested to create a local network. Moreover, when a service industry moves from a regulated monopoly to a competitive market environment, there is always the possibility that new entrants may not be willing or able to serve areas where the cost of service is very high. The general assumption is that urban markets are cheaper to serve than the rural markets, and that the LECs currently use revenues from their lower-cost, urban markets to subsidize the rates for service in the high-cost, rural markets. New entrants may find that they can offer service in the urban areas at price levels significantly lower than those of the incumbent, but may not find it financially viable to offer service in the higher-cost rural areas, where prices that reflect the full cost of service may be above the LEC's subsidized rates. There is, however, some evidence that new entrants will, in fact, elect to serve at least some rural areas if a synergy is present with another existing business. For example, the Post-Newsweek Cable company has announced a strategy based on offering local telephone exchange service in rural areas. Post-Newsweek company executives reason that small rural markets may constitute a more secure market niche than the business and urban markets, where the most vigorous local service competition is likely to occur. Entering markets with low present and future competitive pressures is a well-established business practice that could encourage some competitors to offer local telecommunications services outside major metropolitan areas. II. Potential Competition in the Local Telephone Service Market While urban markets and some rural markets will readily attract competitors, the critical question is whether competition can serve the goals of universal service in markets where the incumbent providers' costs of providing service exceed the prices that customers are required to pay. In some cases, it may be unlikely that the market could generate sufficient revenues to attract a new entrant into the market. Nonetheless, competitive entry may still be possible in such markets. Economies of scale may allow local telephone companies to offer their services in an adjacent region at competitive rates; economies of scope may allow firms providing related services, such as cable television companies and electric utilities, to offer local telephone service at competitive rates. In addition, new technologies may permit new entrants to offer services at rates that are low enough to stimulate adequate demand for new service. The discussion that follows focuses on several potential sources of local service competition. A. Potential Competitors Due to Economies of Scope and Scale Cable Television Companies. The economies of scope associated with cable companies' providing both cable and telephone service may make local telephone service entry into rural area markets profitable for cable companies. In fact, Tele-Communications, Inc., Time Warner, Comcast, Cox Cable Communications, Viacom, and Continental Cablevision expect to invest over two billion dollars for the hardware and software necessary to provide telephone service over cable lines. Time Warner believes that it can deliver two lines of digital residential service at the same prices currently charged for a single line. It estimates that at a 15 percent penetration rate, revenues from telephony would generate a 25 percent pre-tax return on the incremental capital cost of telephony. In Rochester, New York, Rochester Telephone has opened its network to local telephone competition in exchange for the right to create a nonregulated business unit that could pursue new business opportunities. The approval of the New York Public Service Commission and the Federal Communications Commission allowed Rochester, New York to host the first significant test of the effects of a local cable company competing in the local telephone service market. Electric Utility Companies. Another formidable potential entrant into the local telephone service market is the electric utility industry. There could be significant economies of scope associated with providing both electric service and local telephone service. The electric utility industry is facing market changes that are similar in nature to those currently facing the telecommunications industry. The Energy Policy Act of 1992 created the potential for greater competition in the electricity market. Large power consumers currently have several viable power sources from which to select. Incumbent utility companies are now losing their monopoly positions and are looking for ways to maintain their customer base. Section 103 of the Telecommunications Act of 1996 also facilitates entry by electric utility companies. Incumbent utility companies are searching for methods to lower their costs, improve their services, and develop other revenue opportunities. These objectives can be achieved by utility companies' wiring homes to monitor electric service through a telecommunications network. The objective of this link-up is to adjust power demands constantly in a manner that reduces energy consumption. Another benefit of electric utilities' wiring homes with fiber optic cable is that energy meters can be read via computer instead of sending a meter reader to residences. Finally, a major benefit of wiring homes with fiber optic cable is that utility companies can make substantial progress toward the creation of digital telecommunications systems that can be used to provide local telephone and cable service. The Arkansas Power and Light Company believes that connecting each house it serves to its central computer will allow it to avoid building an additional 1.5 kilowatts of energy capacity per house. Based on analysis of the costs of installation against the benefits gained, as well as on the need to reduce costs in the face of impending competition in the electric market, utilities are likely to have substantial incentives to construct such a network. With this network in place, local telephone service is a logical endeavor for these utility companies. Adjoining LECs. One particularly interesting potential entrant to the local telephone service market to consider is a telephone company currently serving an adjoining service area. A firm that services an adjoining area can provide service as long as the marginal cost of service is less than the marginal revenue derived from this additional service. It may be cheaper for an incumbent firm to begin providing service to the fringes of an adjoining service area than immediately providing service for that entire service area. This raises an important point regarding competition policy. Allowing a new entrant to serve only part of a service area would increase the probability that an incumbent in an adjoining study service area would begin competitive service. In this case, we would observe competition beginning on the fringes of a service area and slowly moving towards the center of the area. B. Potential Competitors Due to Lower-Cost Technology A competitive local telephone service market may attract new entrants with lower costs. New technology may bring costs to a level that makes competitive entry in traditionally high-cost rural areas profitable. Wireless Communications. In support of its comments filed in response to the Universal Service Fund Notice of Inquiry, MCI commissioned Hatfield Associates to study the cost of providing local telephone service. The Hatfield study examines that cost in six different types of geographic areas. The Hatfield study categorizes territories according to population density per square kilometer: (1) 0 to 10, (2) 10 to 100, (3) 100 to 500, (4) 500 to 1,000, (5) 1,000 to 5,000, and (6) greater than 5,000. The study finds that it is cheaper to serve markets with population density in the ranges of 0 to 10 and 10 to 100 per square kilometer with wireless technology than it is by using wire line technology. For instance, in areas with population density in the range of 0 to 10 per square kilometer, the Hatfield study found that the monthly cost per subscriber is over $25 lower when wireless technology is used. Especially in markets with population density in the range of 0 to 10, opportunities for new entry may exist. Satellite Technology. Satellite technology also may be a viable alternative method for providing local telephone service to rural areas. US West recently began using a traditional geostationary satellite to provide telephone service to a mountainous region in Jackson Hole, Wyoming. US West is testing this service to measure the feasibility of using satellites to provide phone service in rural areas. Several cable companies that use wireless interactive digital transmission technology are entering areas currently served by wired cable systems. It is often cheaper to provide cable service with this wireless technology than with wired systems. Thus, in addition to local telephone service competition from wired cable companies, wireless cable companies may be able to compete in this market. III. The Implications of Competition for Current Subsidies and Support Mechanisms Assistance programs that provide subsidies to incumbent service providers while denying assistance to new entrants may impede the development of competition. If the incumbent LEC's service is subsidized, potential market entrants are competitively disadvantaged unless they can receive the subsidies, too. This artificial pricing advantage may mean that new entrants will decline to enter markets even if they would be able to provide service at lower costs than the incumbent provider. Subsidies directed only to the incumbent service provider in a market thus may make effective competition impossible. In that event, the disadvantaged service providers would be denied a fair opportunity to compete in the market, and telecommunications consumers would be denied the full benefits of competition. Local service competition also has significant implications for many pricing practices that were developed in the prior monopoly environment. For example, the adoption of service prices that reflect pricing principles in competitive markets may facilitate the transition from monopoly to effective competition. Under these pricing conditions, the prices of the incumbent LEC would reflect the full underlying costs of each service provided. If that occurs, then new entrants would be attracted to markets whenever they could offer service at a lower price than the incumbent LEC. Similarly, competitors may not enter those markets where their costs would be greater than the price of the incumbent LEC. Prices set on the basis of these competitive economic principles would encourage consumers to use a service that produces real benefits, because the consumer values the service above the real cost of producing the service. In the telecommunications industry, pricing services at cost-based levels frequently requires determination of whether the costs and price of a specific service are usage-based; that is, whether the costs and price vary based on how much the service is used. Services that have costs that are usage-based are called "traffic-sensitive," and those that are not usage-based are referred to as "non-traffic-sensitive" ("NTS"). When regulators require that NTS costs be recovered through usage-based (rather than flat monthly) charges, inefficient pricing signals are created that could lead to an inefficient allocation of resources. Essentially, a cost-price mismatch tends to artificially depress demand for the service when the usage-based prices are higher than would be the case for a firm operating in a competitive market. In addition, competitive distortions may occur if a regulated firm pricing in this fashion is subject to competition from new entrants who price their services on the basis of competitive economic principles. In sum, although the continued growth of competition holds great promise for further advancements in the quality and availability of telecommunications services, effective competition could be impeded by regulatory subsidy mechanisms or pricing practices that are based on the existence of a total monopoly in local telephone services. Outdated regulatory policies may serve to disadvantage new entrants, incumbent service providers, or both. The challenge lies in designing universal service support mechanisms for a competitive industry and in managing the transition to that new system. IV. Sources Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996). Implementation of Section 19 of the Cable Television Consumer Protection and Competition Act of 1992 Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, First Report, 9 FCC Rcd 7442 (1994). Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Notice of Inquiry, 9 FCC Rcd 7404 (1994). Expanded Interconnection with Local Telephone Company Facilities; Amendment of the Part 69 Allocation of General Support Facility Costs, Report and Order and Notice of Proposed Rulemaking, 7 FCC Rcd 7369, recon., Memorandum Opinion and Order, 8 FCC Rcd 127 (1992), vacated in parts and remanded sub nom. Bell Atlantic Tel. Cos. v. FCC, 24 F.3d 1441 (D.C. Cir. 1994), recon., Second Memorandum Opinion and Order on Reconsideration, 8 FCC Rcd 7341 (1993). Amendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer Inquiry), Final Decision, 77 FCC 2d 384, recon., Memorandum Opinion and Order, 84 FCC 2d 50 (1980), further recon., Memorandum Opinion and Order on Further Reconsideration, 88 FCC 2d 512 (1981), aff'd sub nom. Computer & Communications Indus. Ass'n v. FCC, 693 F.2d 198 (D.C. Cir. 1982), cert. denied sub nom. Louisiana Pub. Serv. Comm'n v. FCC, 461 U.S. 938 (1983). Proposals for New or Revised Classes of Interstate and Foreign Message Toll Telephone Service (MTS) and Wide Area Telephone Service (WATS), First Report and Order, 56 FCC 2d 593 (1975), Second Report and Order, 58 FCC 2d 736 (1976), aff'd sub nom. North Carolina Utils. Comm'n v. FCC, 552 F.2d 1036 (4th Cir.), cert. denied, 434 U.S. 874 (1977). Telerent Leasing Corp., Memorandum Opinion and Order, 45 FCC 2d 204 (1974), aff'd sub nom. North Carolina Utils. Comm'n v. FCC, 537 F.2d 787 (4th Cir.), cert. denied, 429 U.S. 1027 (1976). Use of the Carterfone Device in Message Toll Telephone Service, Decision, 13 FCC 2d 420, recon. denied, Memorandum Opinion and Order, 14 FCC 2d 571 (1968). ELECTRONIC INDUS. ASS'N, CONSUMER ELECTRONIC U.S. SALES: 1990-1995 ESTIMATES. ELECTRONIC INDUS. ASS'N, 1993 ELECTRONIC DATA BOOK . Fred Dawson, MSOs Commit $2B to Branch Out into Telephony, MULTICHANNEL NEWS, Aug. 15, 1994. Joe Estrella, Wireless Co. Will Test Interactive Digital in Colo., MULTICHANNEL NEWS, Oct. 3, 1994. John M. Higgins, Post-Newsweek Goes Out into the Country, MULTICHANNEL NEWS, Sept. 26, 1994. Steven R. Rivkin, Look Who's Wiring the Home Now, N.Y. TIMES, Sept. 26, 1993,  6 (Magazine). Time Warner Focuses on Telephony, CABLE WORLD, May 9, 1994. US West Looks to the Sky for Rural Service, AMERICA'S NETWORK, Apr. 1, 1994. EXPLICIT SUPPORT MECHANISMS Lifeline and Link Up Lifeline Assistance and Link Up America promote universal service by reducing the monthly rate or initial connection charge for elderly or low-income telephone subscribers. The programs are managed by the states, and are funded through charges ultimately paid by interstate ratepayers. I. Description Lifeline: States may choose to participate in either of two Lifeline plans. Plan 1 provides for a reduction in a subscriber's monthly telephone bill equal to the $3.50 federal SLC. Half the reduction comes from a fifty percent waiver of the charge; the other half from the participating state, which matches the federal contribution by an equal reduction in the local rate. Assistance is available for a single telephone line to the principal residence of subscribers who satisfy a state-determined means test. Of the thirty-six states participating in Lifeline, only California still offers a Lifeline program under Plan 1. Under Plan 2, which expanded Plan 1 to provide for waiver of the entire SLC (up to the amount matched by the state), a subscriber's bill may be reduced by twice the SLC (or more, if the state more than matches the federal waiver). The state contribution may come from any intrastate source, including state assistance for basic local telephone service, connection charges, or customer deposit requirements. Companies in thirty-five states or territories reported subscribers receiving Plan 2 Lifeline assistance as of April, 1995. In 1994, about 4.4 million households received $123 million in Lifeline assistance through full or partial waiver of the SLC. Link Up: The Link Up America program helps low-income subscribers begin telephone service by paying half of the first $60 of connection charges. Where a LEC has a deferred payment plan, Link Up will also pay the interest on any balance, up to $200, for payment plans lasting up to one year. To be eligible, subscribers must meet a state- established means test, and may not, unless over sixty years old, be a dependent for federal income tax purposes. Link Up is available in all but two states (California and Delaware). Roughly 840,000 households received $19 million in Link Up assistance in 1994. II. History In conjunction with the divestiture of AT&T, the Commission adopted rules for the recovery of the fixed, non-traffic sensitive costs of the local telephone network. A major portion of these costs was to be collected directly from local ratepayers in a monthly flat-rate SLC. The Commission was concerned that this increase in subscribers' fixed monthly rates might drive low-income subscribers to cancel service, and asked the Federal-State Joint Board to prepare recommendations concerning the issue. On December 12, 1984, the Joint Board recommended the adoption of the first Lifeline plan: a fifty percent reduction in the SLC for subscribers satisfying a state-determined means test. On December 9, 1985, the Joint Board recommended expanding the Lifeline program. By then, however, Commission and Census Bureau studies indicated subscribership levels had not declined in response to implementation of the SLC, and were not likely to do so. (The SLC was then $1.00 per loop for residential subscribers, with an increase to $2.00 to become effective June 1, 1986.) Local telephone companies also reported stable subscribership despite significant local rate increases. The Joint Board nevertheless recommended expansion of the Lifeline program "to promote telephone subscribership among low income households." The focus of the Lifeline program had changed, and from then on, the Joint Board and the Commission emphasized active expansion, rather than mere preservation, of telephone service among low-income households. Under the new plan, which the Commission adopted December 10, 1985, qualifying subscribers could be eligible for a reduction of up to twice the SLC ($7.00 per month at present). By requiring participating states to obtain certification from the Commission before implementing the program, the new plan also strengthened the requirement to base assistance on a verifiable means test. On July 2, 1986, the Commission requested that the Joint Board examine the effects of the SLC and the Lifeline program. The Joint Board concluded that Lifeline was a sound response to concerns about low subscribership levels among low-income groups. But while endorsing the existing program, the Joint Board also recommended that the Commission "directly address the problem of high non-recurring charges for low income households that are not presently on the network, thereby not only preserving, but also increasing, universal telephone service." Specifically, the Joint Board recommended the Link Up America program: offsetting half the charge for initiating service (with a $30 cap), and paying the interest on deferred payment schedules (on up to $200, for schedules up to a year). On April 16, 1987, the Commission adopted the Link Up America plan, noting that "[w]hile we do not ordinarily propose or support subsidy programs . . . [w]e believe that this program is an appropriate means to achieve our universal service goal." To be eligible for the assistance, an applicant (i) had to live at an address that had been without service for the last three months; (ii) could not have received Link Up assistance within the last two years; (iii) could not be a dependent for federal income tax purposes (unless over age sixty), and (iv) had to meet a state-established means test. As in Lifeline Plan 2, Commission pre- certification was required. On February 27, 1989, with unanimous support from commenters, the Commission dropped the three-month residency and two-year limitation rules. III. Funding Like the much larger Universal Service Fund ("USF"), Lifeline and Link Up are funded through NECA, which disburses the subsidy to compensate local exchange carriers for SLCs not collected from end-users. NECA administers separate USF and Lifeline/Link Up pools, and IXCs contribute to each pool separately, on a flat-rate, per-line basis. At the outset of the Lifeline program, NECA assessed two categories of IXCs: those having 1 percent of all presubscribed lines nationwide; and those having 5 percent of the presubscribed lines in any given study area (with a 1,000 line minimum). These criteria produced anomalous results, however, with certain smaller IXCs concentrated in a single study area being assessed, while more diffuse, medium-sized IXCs were not. To avoid unreasonably harsh effects on small, concentrated IXCs, USF and Lifeline/Link Up assistance is now funded by the few dozen IXCs having .05 percent or more of presubscribed lines nationwide. IV. Targeting Lifeline was initially conceived to shield low-income subscribers already on the network from the effects of implementing the SLC. It developed, however, the broader purpose of expanding service to previously unserved low-income households, and Link Up America explicitly targets the unserved--those unable to afford the one-time cost of telephone connection. Both Lifeline and Link Up require state-determined means testing, and Link Up, which is available to dependents only if over age sixty, targets the elderly. Within that broad framework, the states determine eligibility. While states typically extend benefits to recipients of other social welfare services such as Food Stamps or Medicaid, some specifically target the elderly (Colorado, Hawaii, Minnesota, West Virginia); some target the disabled (Colorado, Hawaii, Idaho, Nebraska, New Hampshire); and some use a poverty level benchmark (Michigan: income at or below 130 percent of poverty; Oregon: 135 percent; California and Arizona: 150 percent). In his 1991 study, Thomas J. Makarewicz estimated how well Lifeline targets intended beneficiaries by measuring what recipients spent on the discretionary portion (long- distance calls, non-basic services) of their bills. If discretionary spending exceeded twice the Lifeline benefit, he suggested the recipient was probably a "free rider" who would maintain service even without the subsidy. Using this analysis, 80 percent of Lifeline recipients depend on the subsidy to afford telephone service, making Lifeline a narrowly targeted universal service subsidy. By contrast, studies estimate that only 8 percent to 20 percent of subscribers who benefit from USF assistance would be unable to afford the full cost of service. The discretionary spending curve of Link Up recipients closely tracks that of Lifeline recipients. V. Competitive Effect Regarding the interexchange market, Lifeline and Link Up by themselves may not cost enough to affect competition significantly; concerns about competitive distortions are more often directed at Lifeline/Link Up and USF combined. If, however, the level of support for these programs were to increase, IXCs could have a significant incentive to create subsidiaries (or small and otherwise nonviable IXCs might form) to avoid assessment. To eliminate this marketplace distortion, Ameritech has suggested bulk billing all IXCs according to market share. In the local exchange market, Lifeline and Link Up appear competitively neutral, because eligibility for the subsidy depends on characteristics of the end user, rather than on characteristics of the LEC itself. This appearance, however, may be deceptive because, under the current rules, Lifeline reimburses incumbent LECs but not competitive access providers for waiving SLCs for qualified customers, and Link Up is available for connection to wireline service only. One commenter has proposed assessing the interstate operations of LECs as well as IXCs. In response, LECs argued that an unfair double-counting of some lines would result, because exchange carriers in local access and transport areas ("LATAs") that cross state boundaries would have to contribute, while those in entirely intrastate LATAs would not. More recently, numerous parties to the Commission's USF proceeding have suggested that all carriers should contribute to funding for the Commission's assistance programs, as is currently the case with the Telecommunications Relay Services program. VI. Critique of the Subsidy Studies support a conclusion that the Lifeline Assistance and Link Up America programs are well-targeted, effective methods of expanding universal service. The combination of both programs has proven more effective than either program alone, and far more effective than Link Up alone. But some areas have been identified for improvement: o Some parties have proposed eliminating eligibility requirements that favor the elderly. A 1991 study revealed that Missouri's rules, which required that applicants be over sixty-five, targeted a population with a 95 percent subscribership level, compared to a statewide level of 91 percent. If the criterion had been that applicants receive some sort of income assistance, the subscribership among those eligible would have been 78 percent. Texas, with a similar age rule, showed similar results: 91 percent of the targeted group (age sixty-five and over) already subscribed, compared to 89 percent statewide and 71 percent if the criterion had been income assistance. By contrast, heads of household between sixteen and twenty-four have the lowest subscription rate, and are most likely to discontinue service. o Others express concern regarding the correlation between the receipt of Link Up assistance and uncollectible revenues. A rough correlation exists between Link Up subscribers and non-payment of long-distance bills. The correlation is especially marked in states with a deposit waiver program. Companies in those states had approximately ten times as many written-off accounts as companies in states that require a deposit. Blocking long-distance calls on lines with payment in arrears (as opposed to discontinuing service altogether) suggests itself as a possible solution to the "disconnect-reconnect" cycle. o Low participation is another concern. A 1991 study found that only approximately 10 percent of eligible households in Texas and Arkansas received assistance; in Missouri, 60 percent of eligible households received assistance. The disparity might reflect differences in the targeted populations, including how widely it is known that assistance is available, or may reflect general variances in state social service systems. VII. Sources 47 C.F.R.  36.701-36.741, 69.104(j)-(l), 69.116, 69.117, 69.203(f)-(g). Amendment of Part 69 of the Commission's Rules Relating to the Assessment of Charges for the Universal Service Fund and Lifeline Assistance, Memorandum Opinion and Order, 4 FCC Rcd 6134 (1989). MTS and WATS Market Structure LINK UP AMERICA, and Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Decision and Order, 4 FCC Rcd 3634 (1989). MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Report and Order, 2 FCC Rcd 2953 (1987). MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Further Notice of Proposed Rulemaking in CC Dkt. Nos. 78- 72, 80-286, FCC 86-305 (July 2, 1986) (summarized in 51 Fed. Reg. 27,426 (1986)). MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Decision and Order, 51 Fed. Reg. 1371 (1986). MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Decision and Order, 50 Fed. Reg. 939 (1985)]. MTS and WATS Market Structure Phase IV, Further Report on the Effects of Federal Decisions on Universal Service in CC Dkt. No. 78-72, FCC 84-636 (Jan. 4, 1985). Petition of the State of Michigan Concerning the Effects of Certain Federal Decisions on Local Telephone Service, Order, 96 FCC 2d 491 (1983). MTS and WATS Market Structure, Third Report and Order, 93 FCC 2d 241, modified on recon., Memorandum Opinion and Order, 97 FCC 2d 682 (1983), modified on further recon., Memorandum Opinion and Order, 97 FCC 2d 834, aff'd in principal part and remanded in part sub nom. National Ass'n of Regulatory Util. Comm'rs v. FCC, 737 F.2d 1095 (D.C. Cir. 1984), cert. denied, 469 U.S. 1227 (1985). MTS and WATS Market Structure LINK UP AMERICA, and Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision and Order, 4 FCC Rcd 1219 (Joint Bd. 1989). MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision and Order, 2 FCC Rcd 2324 (Joint Bd. 1987). MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision and Order, 50 Fed. Reg. 52,964 (Joint Bd. 1985). MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision and Order, 49 Fed. Reg. 48,325 (Joint Bd. 1984). Comments of Ameritech, MCI, NYNEX, Rochester Tel. Corp., and Sprint, to the Notice of Inquiry in CC Dkt. No. 80-286 (responding to Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Notice of Inquiry, 9 FCC Rcd 7404 (1994)). FEDERAL-STATE JOINT BOARD STAFF IN CC DKT. NO. 80-286, MONITORING REPORT MAY 1995 CC DKT. NO. 87-339 (1995). FEDERAL-STATE JOINT BOARD STAFF IN CC DKT. NO. 80-286, MONITORING REPORT MAY 1994 CC DKT. NO. 87-339 (1994). Herbert S. Dordick & Marilyn Diane Fife, Universal Service in Post-Divestiture USA, 15 TELECOMM. POL'Y 119 (1991). Thomas J. Makarewicz, The Effectiveness of Low-Income Telephone Assistance Programmes: Southwestern Bell's Experience, 15 TELECOMM. POL'Y 223 (1991). J.L. Walter, Assessing the Effectiveness of Residential Rate Assistance Programs in Furthering the Goal of Universal Service, in PROCEEDINGS OF THE EIGHTH BIENNIAL REGULATORY INFORMATION CONFERENCE 171 (1992). Organization for the Protection & Advancement of Small Tel. Cos., Keeping Rural America Connected: Costs and Rates in the Competitive Era (1994) (available from OPASTCO, 21 Dupont Circle, N.W., Suite 700, Washington, D.C. 20036). Carol Weinhaus et al., Telecommunications Indus. Analysis Project, What Is the Price of Universal Service? Impact of Deaveraging Nationwide Urban/Rural Rates (1993) (available from Telecommunications Industries Analysis Project, Meeting House Offices, 121 Mount Vernon St., Boston, MA 02108). VIII. Background Sources MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Memorandum Opinion and Order on Reconsideration and Order Inviting Comments, 3 FCC Rcd 4543 (1988). National Telecomm. & Info. Admin., U.S. Dep't of Commerce, Inquiry on Universal Service and Open Access Issues, Notice of Inquiry in Dkt. No. 940955-4255, 59 Fed. Reg. 48,112 (1994). Telecommunications Relay Services (TRS) for Hearing-Impaired Telecommunications Users I. Description Telecommunications Relay Services are services that provide persons with hearing or speech impairments the ability to communicate by telephone in a manner "functionally equivalent" to the ability of persons without such impairments. Currently, TRS involves the use of a text telephone ("TTY") by a hearing-impaired or speech-impaired caller to communicate by telephone with persons who do not have such impairments. TRS facilities have specialized equipment and staff who relay conversations between persons using TTYs and persons who use conventional telephones. To access TRS, a caller must connect the TTY to the telephone line through the acoustic coupling device on the TTY or directly to the telephone line. The caller then dials a preassigned 800 number to reach the local TRS center. The caller communicates with one of the center's communications assistants ("CA") by typing information into the TTY. The CA in turn places a voice call to the called party. The CA serves as a critical link in the conversation by converting all TTY messages from the caller into voice and all voice messages from the called party into typed text for the TTY user. The CA can perform the process in reverse when a person without a hearing or speech impairment initiates the call. TRS services, which began in the states in the mid-1980s, became a requirement under federal law with the enactment of the Americans with Disabilities Act of 1990 ("ADA"). Among other requirements, the ADA requires that "users of telecommunications relay services pay rates no greater than the rates paid for functionally equivalent voice communication services with respect to such factors as the duration of the call, the time of day, and the distance from point of origination to point of termination." In a series of orders, beginning with amendments to its Part 64 rules in July 1991, the Commission adopted rules that require the provision of TRS, set minimum standards for TRS providers and specified procedures for certification of state TRS programs. The Commission also established a shared-funding mechanism ("TRS Fund") for recovering the costs of providing interstate TRS and named NECA as the fund administrator. The Commission's rules require all interstate telecommunications companies, data as well as voice, to contribute to the TRS Fund. Contributing companies include, but are not limited to, LECs, IXCs, cellular telephone and paging companies, personal communications services, resellers, 900 services, and satellite, video, and paging providers. These carriers contribute annually to the TRS Fund based on a factor calculated by NECA and approved by the Commission. The factor is applied to the companies' gross interstate revenues. Currently, approximately 2,850 carriers contribute .03 percent of their gross revenues to fund TRS, and the size of the fund is approximately $30 million. NECA then distributes the contributed TRS funds monthly to eligible TRS providers based on a compensation rate (again, calculated by NECA and approved by the Commission) applied to provider-reported interstate TRS minutes-of-use. Recently, NECA reported to the Commission that the proposed January 1, 1996 compensation rate should be $1.379 per minute, an increase from the previous rate of $1.304 per minute. In summary, TRS is a subsidy program because it recovers at least some of its operating costs from sources other than those who actually cause them. II. History The ADA requires the Commission to ensure that every common carrier makes interstate and intrastate TRS available to the extent possible and in the most efficient manner to hearing-impaired and speech-impaired persons in their service areas. To carry out this mandate, the Commission, in a July 1991 order, amended its Part 64 rules to establish minimum standards for TRS providers and specified procedures for certification of state TRS programs that had been in existence since the mid-1980s. Subsequently, in February 1993, the Commission issued an order that required all interstate voice telecommunications carriers to offer TRS throughout their service areas by July of that year. The Commission's order also proposed a shared-funding mechanism for interstate TRS, administered by NECA. Later, the Commission's July 1993 order imposed annual reporting and fund contribution obligations upon all interstate carriers, and named NECA as administrator for an interim two-year term. In that order, the Commission also directed NECA to establish an interstate TRS advisory council. The council, which advises NECA on interstate TRS cost recovery matters, includes representatives of the hearing- impaired and speech-impaired communities, interstate communications providers, TRS providers, TRS users, and state telephone regulators. A September 1993 Commission order contained the TRS provider payment formula, initial fund requirements, and administration schedule. Since then, NECA has administered TRS funding, including calculating the annual percentage of revenue contributed by interstate providers, and the cost reimbursement to which TRS providers are entitled. In June 1995, the Commission reappointed NECA as TRS administrator for a four-year term and expanded the advisory council. III. Competitive Effect Recognizing that the customers of all interstate communications providers (e.g., LECs, IXCs, resellers) provide TRS funding, it would not appear that one interstate carrier or customer is placed at a competitive disadvantage by the action of another. This, of course, assumes that all interstate carriers pass the same proportion of their TRS fund costs on to their customers. Because interstate calling varies greatly among customers, however, high-volume interstate users support a greater portion of interstate TRS costs than occasional interstate users do. Many would argue that this is how it should be using pure cost causation principles. IV. Critique of TRS Funding Most critics of TRS have focused on the process and need for funding, rather than the concept of providing TRS services to persons with hearing or speech impairments. Two critics, Cellular Telecommunications Industry Association ("CTIA") and AT&T initially favored self-funding TRS. Self-funding, argued CTIA and AT&T, would eliminate significant administrative costs. The Commission, however, agreed with the majority of commenters who believed "that a self-funding mechanism would provide incentives for carriers to handle fewer relay calls, to degrade relay calling quality, [encourage relay customers] to migrate . . . to other carriers, and to restrict relay [service] to only their presubscribed customers." V. Positions of Major Interest Groups Following the Commission's TRS III order, which finalized the current shared-funding mechanisms for interstate TRS, Ameritech, NYNEX, and SWB filed petitions requesting the Commission to reconsider the definition of gross revenues, used for TRS contributions, to exclude interstate access revenues. In TRS IV, the Commission rejected this proposal, but allowed exogenous treatment of TRS contributions for price cap carriers. Several commenters responding to the Commission's August 30, 1994 Notice of Inquiry concerning high cost assistance issues suggested replacing the current method of supporting that assistance with a bulk billing funding scheme similar to the one used for TRS. VI. Sources Americans with Disabilities Act of 1990, Pub. L. No. 101-336, sec. 401(a), 104 Stat. 327, 366 (1990) (codified at 47 U.S.C.  225). 47 C.F.R.  64.601(6), (9), 64.604(c)(4). Telecommunications Relay Services, and the Americans with Disabilities Act of 1990, Second Order on Reconsideration and Fourth Report and Order, 9 FCC Rcd 1637 (1993). Telecommunications Relay Services, and the Americans with Disabilities Act of 1990, Third Report and Order, 8 FCC Rcd 5300 (1993). Telecommunications Services for Individuals with Hearing and Speech Disabilities, and the Americans with Disabilities Act of 1990, Order on Reconsideration, Second Report and Order, and Further Notice of Proposed Rulemaking, 8 FCC Rcd 1802 (1993). Telecommunications Services for Individuals with Hearing and Speech Disabilities, and the Americans with Disabilities Act of 1990, Report and Order and Request for Comments, 6 FCC Rcd 4657 (1991). Telecommunications Relay Services, and the Americans with Disabilities Act of 1990, Order in CC Dkt. No. 90-571, DA 95-2475 (rel. Com. Car. Bur. Dec. 14, 1995). The Universal Service Fund I. Description The Universal Service Fund uses the Commission's jurisdictional separations rules to provide assistance to LECs with higher-than-average local loop costs. LECs' local loop costs vary widely due to many factors, including subscriber density, terrain, the size of local exchanges, and labor costs. The Commission's rules define a basic allocation factor of 25 percent to govern the allocation of NTS costs to the interstate jurisdiction. Pursuant to that rule, a LEC may allocate 25 percent of its NTS costs, including local loop costs, to the interstate jurisdiction. The USF provides an additional subsidy to LECs operating in high-cost areas. The USF allows LECs with local loop costs above 115 percent of the nationwide average for such costs to allocate additional amounts of their local loop costs to the interstate jurisdiction. LEC study areas with fewer than 200,000 loops receive assistance for a greater percentage of their above-average loop costs than is the case for larger study areas. The Commission's purpose in adopting the USF rules was to promote universally available telephone service at reasonable rates. Absent the USF assistance mechanism, the costs currently allocated to the USF would need to be recovered by increasing intrastate charges, particularly charges for local telephone service. The Commission adopted the USF rules to promote telephone subscribership by providing financial assistance to prevent extremely high local rates in high-cost areas. Targeting. Unlike the Lifeline Assistance and Link Up America programs, which target assistance to individual subscribers, the USF program provides assistance to LECs operating in high-cost areas. There are two primary reasons for this different focus. First, the Commission based the USF on its broad mandate "to make available, so far as possible, to all the people of the United States a rapid, efficient, Nation-wide and world-wide wire and radio communication service with adequate facilities at reasonable charges." Second, the USF and the basic allocation factor replaced a system of jurisdictional separations that provided a general subsidy to local telephone service by allocating NTS costs to interstate toll service. Funding. The USF is funded through a tariffed interstate charge paid by IXCs, and based on the number of subscriber lines presubscribing to that carrier. IXCs with fewer than .05 percent of presubscribed lines nationwide are exempt. At present, the .05 percent threshold means that those carriers with more than approximately 72,000 lines (30 of the 424 IXCs) contribute to the fund. Each year, NECA collects information from each LEC study area regarding the carriers' loop costs and number of working loops. NECA then calculates the total amount of USF assistance needed for the next year and, accordingly, prepares USF tariffs designed to recover that amount from the contributing IXCs during the annual rate period. In 1993, the total USF assistance was $705.1 million. Contributing IXCs paid about $.46 per line per month into the fund. At the end of 1993, the Commission adopted a two-year indexed cap on the level of the USF. The Commission recently extended this cap through July 1, 1996. Under the cap, the rate of annual USF growth cannot exceed the previous year's rate of growth in the total number of working loops nationwide. In 1994, the USF was $725.4 million and in 1995, the USF was $749.5 million. USF payments in 1996 will be $734.6 million. II. History The concept behind establishment of the USF arose in 1982, as an outgrowth of proposed revisions to the jurisdictional separation of NTS exchange plant costs. The subscriber plant factor ("SPF"), the usage-based factor then used to allocate NTS costs between the interstate and intrastate jurisdictions, provided an interstate subsidy to local telephone operations. By 1982, SPF was causing increasing percentages of those costs to be allocated to interstate operations, and the Commission wished to consider replacing SPF with fixed allocation factors. The Joint Board Staff ("Staff") urged that the successor to SPF be designed to reflect "the special needs of high cost areas," many of which had high interstate allocations under SPF. The Staff believed that without such adjustments for high-cost companies, those LECs would experience major shifts of NTS costs to their intrastate operations, causing large increases in local telephone rates. The Commission therefore proposed to replace SPF with three new factors: a basic allocation factor; a high-cost factor to provide assistance to areas with high costs; and a transition factor "to minimize dislocations caused by moving away from the existing SPF basis." In developing an appropriate replacement for SPF to allocate NTS local exchange plant, the Joint Board recommended "an equal percentage interstate allocation of NTS local exchange plant costs for all study areas in conjunction with appropriate protection for subscribers in high cost areas." The Joint Board proposed, and the Commission adopted, as the replacement for SPF, a 25 percent basic interstate allocation factor for NTS exchange plant costs. In addition, the Joint Board recommended the establishment of a banded high-cost support mechanism designed to provide a greater degree of assistance to LECs with the highest average NTS costs. The Joint Board suggested a transition period for phasing out SPF and phasing in the new basic allocation factor and high-cost factor. The Joint Board determined that a high-cost support mechanism would "help protect the nationwide availability of telephone service at reasonable rates while limiting the amount to be recovered through carrier's carrier access charges." The Commission found that the methodology recommended by the Joint Board represented "a sound balancing of concern for the promotion of universally available telephone service at reasonable rates and the need to prevent uneconomic bypass of the local exchange." The Commission therefore adopted the high-cost support mechanism recommended by the Joint Board. Concurrently with proceedings to revise the jurisdictional separation of NTS exchange costs, the Commission considered the adoption of interstate exchange access charges. At that time, parties expressed much concern regarding the effect of the federal subscriber line charge ("SLC") upon customers of small telephone companies. As a result, the Commission deferred the effective date of the federal SLC while the Joint Board considered a means of "increasing the assistance that is provided to customers of small companies in high cost areas through the Universal Service Fund." After further proceedings, the Joint Board recommended that the Commission establish a two-tiered system of assistance, whereby USF assistance would be increased for LEC study areas with fewer than 50,000 loops and decreased for study areas with more than 50,000 loops. The Commission adopted the Joint Board's recommendation. In 1986, the Commission undertook an examination of the "cohesive package" of SLCs, lifeline programs, and high-cost assistance measures. The Commission asked parties to evaluate the effects of those three mechanisms and to consider whether revisions were needed in order to preserve universal service, promote economic efficiency, eliminate service pricing discrimination, and deter uneconomic bypass. After considering the comments and proposals submitted in response to the Commission's 1986 Notice, the Joint Board recommended, and the Commission adopted, a retargeting of the high-cost assistance measures provided to telephone companies with high-cost study areas. Assistance to study areas with fewer than 200,000 loops was increased while assistance to larger study areas was decreased. The Joint Board premised its recommendation on an assumption that small companies have more need for assistance than larger LECs, which were believed to have greater flexibility in how they recovered above-average costs. There was also evidence that the retargeting of the high-cost measures would decrease the overall size of the USF significantly. Both the USF and the 25 percent basic interstate allocation factor for NTS exchange plant costs were phased-in over a transition period lasting several years. Over the transition period, the basic allocation factor, supplemented by the USF factor for high-cost study areas, gradually replaced SPF. During 1993, the final year of the transition, both the 25 percent basic interstate allocation factor and the USF assistance factor had completely replaced SPF. During that period, however, significant changes had occurred in the technological capabilities and costs, market structure, and regulation of the telecommunications industry. The Commission faced the possibility that the USF assistance mechanism first adopted in 1984 was no longer suitable in the current marketplace. At the least, it appeared that evaluation of the effects and effectiveness of the current rules should be undertaken. Accordingly, the Commission announced in late 1993 that it intended to undertake examination and re-evaluation of the USF assistance rules. Moreover, because growth in the USF had been inexplicably erratic throughout the transition period, the Commission proposed to control USF growth while the rules are under review. The Joint Board subsequently recommended, and the Commission adopted, an indexed cap on USF growth that now extends through July 1, 1996. This cap limits annual USF growth to the percentage of growth in the total number of working loops nationwide during the previous year. In August 1994, the Commission released a Notice of Inquiry inviting "commenters 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 invited commenters to evaluate two broad approaches to the present high-cost mechanisms. The first approach would base high-cost assistance on costs reported by the local service provider, as is the case with the current USF rules; the second would base high-cost assistance upon the application of proxy factors designed to reflect general cost characteristics and economic conditions. After reviewing the comments submitted in response to the Notice of Inquiry, the Commission issued a Notice of Proposed Rulemaking and Notice of Inquiry on July 13, 1995. The Commission's proposals for revising USF assistance are discussed in part IV, below. III. Critique of the Subsidy Parties criticize the current rules for USF eligibility because they provide little or no incentive for many high-cost carriers to invest efficiently in their local loop plant. High cost areas with less than 200,000 working loops are able to allocate 90 percent to 100 percent of their incremental loop costs to the interstate jurisdiction. The USF therefore offers these high-cost carriers no incentive to invest efficiently because incremental loop plant investments are fully funded by the USF, thereby sparing the companies' investors the normal risks of investment. A second critique of the USF assistance mechanism is that it tends to serve as a barrier to entry into the local service market. The current USF rules grant assistance only to the qualifying incumbent LEC service provider. Would-be market entrants may complain that USF assistance allows LEC recipients to price their local services at below-cost levels that potential competitors, without access to USF assistance, may be unable to meet. With the current USF rules in place, potential local competitors often may find it impossible to price their services at levels that are competitive with those of the incumbent LEC, even if the competitor's underlying costs are significantly lower. IXCs and others criticize the total level of the USF as too high, maintaining that the total subsidy level exceeds that needed to maintain universal service. Moreover, many parties have argued that the USF is too untargeted, subsidizing users who are able to pay the full cost of local service, as well as those individuals who could not afford telephone service but for the availability of an interstate subsidy. They point out that interstate toll users, regardless of their individual income levels, bear the costs associated with providing local service to a significant number of subscribers who do not need assistance. Parties criticize the method of funding the USF. Many members of the telecommunications industry believe that the IXCs should not bear the entire responsibility for funding USF assistance, and that other carriers should be required to contribute to the cost of maintaining universal service. In addition, AT&T objects to the basis for determining each IXC's contribution, arguing that recovering USF costs from IXCs on the basis of presubscribed lines is unfair because many subscriber lines generate little or no toll revenue for the IXC to which the line is presubscribed. Finally, parties with a variety of interests (IXCs as well as State regulators) call for the designation of a neutral administrator of the USF. They maintain that administration of the current system is tainted by the fact that the administrator, NECA, also functions as a trade association and representative of the LEC industry. Those critics argue that NECA may have inadequate incentives to scrutinize carefully the costs and other information reported by USF recipients. IV. Proposals for Changing or Replacing the Subsidy The Commission's July 13, 1995 Notice of Proposed Rulemaking and Notice of Inquiry requested comment on three specific proposals for revising USF assistance. As an adjunct to any of the three proposals, the Commission proposed a system of high-cost credits to direct assistance to carriers chosen by customers. A. Proposal 1: High-Cost Assistance Based on Actual Costs Reported by LECs The first proposal outlined three alternatives, each of which would continue to base high-cost assistance on actual costs reported by the LECs: (1) retaining the current structure with some adjustments; (2) allocating high-cost assistance to large LECs through a high-cost credit system; and (3) basing high-cost assistance on a combination of both loop and switching costs. 1. Retaining the Current Structure with Some Adjustments. The Commission proposed extending indefinitely the two-year interim cap on the total level of the USF, raising the current average local loop cost threshold from 115 percent to about 129 percent of the nationwide average for such costs, and eliminating assistance to those LECs receiving less than one dollar per line per month. In addition, the extra high-cost assistance provided to small study areas would be either completely eliminated or significantly restricted in amount (by both lowering the maximum percentage of incremental loop costs allocable to the interstate jurisdiction) and availability (by reducing by one-half the maximum number of loops in the largest study area qualifying for the extra assistance). Although the proposal does not specify how high-cost credits would be used with this alternative, high-cost credits would be available to customers in all eligible areas, whether served by large or small LECs. 2. Allocating High-Cost Assistance to Large LECs Through a High-Cost Credit System. Under this alternative the interim cap on the total level of the USF would be extended indefinitely. High-cost assistance would be allocated to each study area based on reported costs. In areas served by small LECs, assistance would be distributed directly to the carrier, as is the case under the current rules. However, assistance would be distributed through high-cost credits in areas served by large LECs. Within study areas served by large LECs, the high-cost credits would be targeted toward sparsely populated regions. 3. Basing High-Cost Assistance on a Combination of Both Loop and Switching Costs. Under this alternative, switching and loop costs for each study area would be associated with either local service or toll service. The Commission proposed a uniform allocation of loop costs for all LECs: 25 percent to the interstate jurisdiction, 25 percent to intrastate toll services, and 50 percent to local service. The fraction of switching costs allocated to local service would be in the same ratio as local minutes of traffic to total minutes of traffic flowing through the switch. Study area high-cost assistance, based on the average combined switching and loop costs associated with local service, would be distributed following any of the methods described in the first two alternatives. B. Proposal 2: High-Cost Assistance Based on Proxy Factors Under the second proposal, high-cost assistance would be distributed on the basis of proxy factors related to the costs of providing services, rather than actual reported costs. The Commission stated that basing assistance on area characteristics associated with high costs, rather than on incurred costs, would provide incentives to control costs and would further competition among disparate providers. The Commission suggested several tentative proxy factors and requested comments on their reliability, competitive neutrality, and utility in projecting service costs. The Commission proposed basing assistance on analysis of the projected service costs of smaller, more homogenous areas than the much larger study areas currently used to determine assistance, and invited comment on appropriate engineering models that would be used to project reasonable service costs from the proxy factors describing the areas to be served. C. Proposal 3: Commission Certified State Plans for Distributing High-Cost Assistance Under this proposal, assistance would be allocated first among the States; then State utility commissions would decide the distribution of assistance among the carriers serving a State, using plans developed pursuant to general Commission guidelines and reviewed by the Commission. Allocation among the states would be accomplished using a simplified subset of the proxy factors described in the second proposal discussed under IV.B. Comments were specifically invited "on [Commission] guidelines that would promote universal service and maximum subscribership, while preventing [State] distribution plans that would act as barriers to competition." D. High Cost Credits High-cost credits are intended to reduce barriers to competitive entry in the local service environment by giving new market entrants, as well as incumbent LECs, access to high-cost assistance. These credits could be adopted as part of any of the three proposals discussed above. The Commission noted that high-cost credits might be unnecessary in those areas where no competitive entry had occurred, and invited comment on whether assistance should be limited to areas where the existence of competition was established. The Commission proposed defining assistance levels and analyzing service costs within Census Block Groups ("CBGs") defined by the Census Bureau, rather than the much larger study areas currently used to determine USF assistance, to discourage attempts to cross-subsidize service in competitive markets using high-cost assistance. In response to concerns that incumbent LECs, unlike competitive carriers, were not free to choose among potential customers but offered basic service to all, the Commission proposed minimum basic service and maximum basic rate requirements on carriers as a condition of eligibility for assistance. Finally, the Commission invited comment on the question of whether assistance should be based in whole or in part on the financial needs of the particular customers served. V. Positions of Major Interest Groups Large LECs. Large LECs maintain that changes in the distribution of USF assistance must be accompanied by other changes. They emphasize revision of the current funding mechanisms for USF subsidies, elimination of the carrier common line charge and other internal subsidies, and the need for LEC pricing flexibility. The large LECs generally argue that the USF should be funded by all telecommunications carriers, not just IXCs. They object to making USF assistance available to deploy advanced services and facilities, suggesting instead that assistance should only be available to support basic telephone service. Bell Atlantic, Pacific Bell, and US West contend that USF assistance should be available to owners of large as well as small study areas, but NYNEX maintains that price cap LECs should not receive high cost support because it is inconsistent with the underlying premise of the price cap system. The large LECs would have the Commission consider a proxy approach to calculate high cost assistance, with some (e.g., US West) strongly supporting the use of proxy factors. Some large LECs (e.g., NYNEX, Cincinnati Bell, Rochester) maintain that USF assistance should be limited to the carrier of last resort (i.e., the incumbent LEC) in each service area, while others (e.g., Ameritech) support the concept of a customer voucher or credit system. Mid-Size LECs. Mid-size LECs contend that USF assistance should be available to support deployment of technologically-advanced services. They generally oppose the use of proxy factors or customer vouchers, maintaining that proxy factors cannot reflect the wide variations in costs among LECs and that vouchers would deter infrastructure development in high cost areas. The exception among mid-size LECs is Citizens Utilities Company, which supports consideration of proxy factors for determining USF assistance and proposes a virtual voucher methodology that would afford contribution credits to eligible residential customers. One mid-size LEC, Virgin Islands Telephone Corporation, advocates that companies with below-average rates or above-average rates of return be ineligible for USF assistance. Small LECs. Small LECs, almost without exception, strongly support the existing USF rules and oppose any change whatsoever. The only change that a few LECs concede would be acceptable is further limitation on the eligibility of large LECs for USF assistance. One small LEC (Mid-River Telephone Cooperative) suggests that price cap LECs could be excluded, and others propose excluding LECs with more than 50,000 (Golden West Communications) or 100,000 (e.g., Taconic, Telephone Electronics Corporation) access lines. Small LECs strongly oppose the use of proxy factors and customer vouchers, and they argue that USF assistance should be provided only to a single carrier of last resort in each area. Some small LECs (e.g., Blanca Telephone Company, Kalona Cooperative Telephone Cooperative, Ketchikan Public Utilities) support the USTA definition of universal service as including voice grade access to the public switched network, single-party, TouchTone service, white page listing, access to operator services and directory assistance, averaged toll rates, and access to emergency services (e.g., 911). OPASTCO, however, argues that the concept of universal service must include signalling system seven, deployment of digital and broadband technology and other advanced services as they become generally available to the public. One notable dissenter from the general support for the existing rules is Smithville Telephone Company, which advocates the initiation of strict auditing requirements and penalties for violations. IXCs. Some IXCs maintain that all telecommunications carriers, not just IXCs, should be required to fund USF high-cost assistance. If the USF assistance continues to be based on actual costs, most IXCs support increasing the threshold for assistance (e.g., from 115 percent to at least 130 percent, General Communication, Inc.) and reducing the maximum assistance level (e.g., from 75 percent to 50 percent, AT&T). Some IXCs oppose USF assistance for price cap and Tier 1 LECs (GCI argues that the access line cut-off should be reduced to 50,000 access lines). Some IXCs (e.g., CompTel, LDDS) propose that recipients be required to demonstrate that their subscribers pay higher than average local rates. Some IXCs suggest that the Commission adopt safeguards against abuses, including benchmarking LEC costs, undertaking audits, and setting up a neutral third-party administrator. IXCs generally support the use of a voucher system for delivering USF assistance. Competitive Access and Local Service Providers. Local service competitors contend that the current subsidy mechanisms serve as barriers to competitive entry and advocate the use of a competitively neutral subsidy mechanism, such as customer vouchers. The Association for Local Telecommunications Services ("ALTS") further advocates that all competing providers should contribute to funding of subsidy mechanisms and should be eligible for receipt of assistance. ALTS also argues that Tier 1 LECs should not receive assistance. The local competitors generally support the concept of proxy factors for determining the appropriate assistance levels. MFS proposes that basic local rates be capped in areas where high cost subsidies are received. Teleport suggests that the Commission should make several changes in the USF immediately by increasing the threshold for assistance, lowering the maximum access line requirements, paying support only on residential lines, adjusting the sliding cost scales, and continuing to index the fund to control its growth. Teleport further suggests that the Commission should undertake a second phase to begin a more comprehensive investigation of universal service and the need for long-term changes in the subsidy mechanisms, such as a means of delinking universal service from the revenue requirements of the incumbent LECs. State Commissions. The State commissions have taken diverse positions on these issues. The Wyoming PSC and the Virgin Islands PSC oppose any change to the current rules, which they believe have worked well. The Alabama PSC, the North Carolina Utilities Commission, and the Vermont Department of Public Service oppose any changes than would reduce the current level of USF support. The California PUC, the New York DPS, and the Pennsylvania PUC support the use of proxy factors because they believe that the current rules do not provide sufficient incentives for USF assistance recipients to operate efficiently. The concept of customer vouchers received mixed reviews, with the California PUC and Pennsylvania PUC supporting the concept, the Alaska PUC and Wyoming PSC opposing it, and the Alabama PSC, Vermont DPS, and Virgin Islands PSC uncertain. Finally, several commissions (California PUC, New York DPS, Pennsylvania PUC, North Carolina UC, and Vermont DPS) support the proposal to give State commissions a role in administering USF high cost assistance within their States. VI. Sources 47 U.S.C.  151. 47 C.F.R.  36. 47 C.F.R.  69.116(a). 47 C.F.R.  67.124(d), 67.641 (1986). Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Report and Order in CC Dkt. No. 80-286, FCC 95-494 (rel. Dec. 12, 1995). Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Notice of Proposed Rulemaking and Notice of Inquiry, 10 FCC Rcd 12,309 (1995). Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Notice of Inquiry, 9 FCC Rcd 7404 (1994). Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Notice of Proposed Rulemaking, 8 FCC Rcd 7114 (1993). Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Report and Order, 9 FCC Rcd 303 (1993). MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Report and Order, 2 FCC Rcd 2953 (1987). MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Further Notice of Proposed Rulemaking in CC Dkt. Nos. 78- 72, 80-286, FCC 86-305 (July 2, 1986) (summarized in 51 Fed. Reg. 27,426 (1986)). MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Decision and Order, 50 Fed. Reg. 939 (1985). Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Decision and Order, 96 FCC 2d 781 (1984). MTS and WATS Market Structure, Memorandum Opinion and Order, 97 FCC 2d 834, aff'd in principal part and remanded in part sub nom. National Ass'n of Regulatory Util. Comm'rs v. FCC, 737 F.2d 1095 (D.C. Cir. 1984), cert. denied, 469 U.S. 1227 (1985). MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Further Notice of Proposed Rulemaking, 49 Fed. Reg. 18,318 (1984). Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Decision and Order, 89 FCC 2d 1 (1982). Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Order Requesting Further Comments, 47 Fed. Reg. 54,479 (1982). Commission Requirements for Cost Support Material to Be Filed with 1993 Annual Access Tariffs, Order, 8 FCC Rcd 1936 (Com. Car. Bur. 1993). Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision, 9 FCC Rcd 334 (Joint Bd. 1993). MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision and Order, 2 FCC Rcd 2324 (Joint Bd. 1987). MTS and WATS Market Structure; Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Recommended Decision and Order, 49 Fed. Reg. 48,325 (Joint Bd. 1984). Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Second Recommended Decision and Order, 48 Fed. Reg. 46,556 (Joint Bd. 1983). Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Board, Recommended Interim Order, 46 Fed. Reg. 63,354 (Joint Bd. 1981). NECA Tariff FCC No. 5, Presubscribed Lines by Qualified Interexchange Carrier (Nov. 14, 1994). NECA Tariff FCC No. 5, Access Service, 17.1.4(B) (Dec. 28, 1992; May 17, 1993). FEDERAL-STATE JOINT BOARD STAFF IN CC DKT. NO. 80-286, MONITORING REPORT MAY 1995 CC DKT. NO. 87-339 (1995). Dial Equipment Minutes (DEM) Weighting I. Description Part 36 of the Commission's rules for jurisdictional separations allocates investment costs