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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of Federal-State Joint Board on Universal Service ) ) ) ) CC Docket No. 96-45 RECOMMENDED DECISION Adopted: June 28, 2000 Released: June 30, 2000 By the Federal-State Joint Board on Universal Service: Commissioner Furchtgott-Roth approving in part, dissenting in part, and issuing a statement. I. INTRODUCTION 1. This Recommended Decision sets forth the recommendations of the Federal-State Joint Board on Universal Service (Joint Board) for phasing down the interim hold-harmless provision of the new, forward- looking high-cost universal service support mechanism for non-rural carriers. In the Ninth Report and Order, the Commission adopted a new high-cost universal service support mechanism for non-rural carriers, based on the estimated forward-looking economic costs of providing services eligible for support. The interim hold-harmless provision ensures that the amount of high-cost support provided to a non-rural carrier on a per-line basis under the new mechanism will be no less than it receives under the preexisting high-cost support mechanism. Support from the interim hold-harmless provision is based on two preexisting support mechanisms: (1) Long-Term Support (LTS); and (2) high-cost loop support under Part 36 of the Commission's rules. 2. The Commission emphasized that the interim hold-harmless provision is "a transitional provision" to protect consumers in high-cost areas from rate shock as a result of any sudden, significant increases in rates during the shift to forward-looking support. Accordingly, it requested a Joint Board recommendation by July 1, 2000 as to how interim hold-harmless support can be phased down or eliminated without causing undue rate disruption. On November 3, 1999, the Joint Board sought comment on schedules and procedures for phasing down or eliminating interim hold-harmless support. 3. For the reasons discussed below, we recommend that LTS be maintained under the current rules until the Commission considers appropriate reforms for the LTS program in connection with the pending proceedings for high-cost reform for rural carriers and/or interstate access charge reform for rate-of-return carriers. We further recommend that the Commission phase down the balance of interim hold-harmless support, excluding LTS, through $1.00 reductions in average monthly, per-line support beginning January 1, 2001, and every year thereafter. We believe that this recommended approach will ensure a prompt, equitable phase-down of interim hold-harmless support without undue disruption of consumer rates in high-cost areas. Finally, we recommend against phasing down any interim hold-harmless support that is transferred to a rural carrier when it acquires exchanges from a non-rural carrier. Such transferred interim hold-harmless support should be maintained until the Commission completes a review of the rule governing the transfer of universal service support or until rural high-cost reform is complete. IV. RECOMMENDATIONS A. Long-Term Support 1. Background 2. As stated above, the interim hold-harmless provision includes LTS for non-rural carriers under section 54.303 of the Commission's rules. The LTS program ensures reasonable comparability of interstate access rates among local exchange carriers (LECs) by reducing the carrier common line (CCL) charges of rate-of-return LECs that participate in the National Exchange Carrier Association (NECA) common line pool. CCL charges are per-minute charges that LECs assess on interexchange carriers (IXCs) to recover a portion of their interstate-allocated loop costs. Formerly, all incumbent LECs had to pool such costs to set a uniform, nationwide CCL rate. When individual LECs were allowed to leave the NECA pool in 1989, departing LECs predominantly larger, lower-cost carriers were required to pay LTS to prevent the CCL rates of the remaining, high-cost LECs from rising significantly above the national average. 3. In the First Report and Order, the Commission concluded that the LTS program serves the public interest by facilitating interexchange service in high-cost areas, but that modifications were necessary to make LTS explicit, portable, and competitively neutral. Therefore, the Commission continued the LTS program, but removed it from the access charge system and modified its calculation and distribution scheme. In the First Report and Order, the Commission anticipated that LTS for non-rural carriers would be subsumed in the new, forward-looking support mechanism. The Commission anticipated, however, that rural high-cost reform would require a more extended time period, during which the Commission sought to maintain the existing LTS program for rural carriers, as modified, "to provide rural LECs . . . sufficient time to adjust to any changes in universal service support." The Commission's proceeding to reform the high- cost support mechanism for rural carriers is pending, as is the related proceeding to reform the interstate access charge system for rate-of-return carriers. 4. Rural carriers are the primary recipients of LTS and receive approximately $381 million in annual LTS. Annual LTS for non-rural carriers is approximately $97 million, which is slightly more than half of the projected $184 million in net annual interim hold-harmless support. Only three non-rural carriers receive LTS: Roseville Telephone Co. in California; North State Telephone Co. in North Carolina; and the Puerto Rico Telephone Co. (Puerto Rico), which is projected to receive $89 million, or over 90 percent, of the total annual LTS for all three carriers. Each of the seven parties that addressed LTS argues that, regardless of how the balance of interim hold-harmless support is handled, LTS for non-rural carriers should not be eliminated or phased down at this time because it has no substitute in the new, forward-looking support mechanism. 5. Discussion 6. As set forth below, we recommend that LTS be maintained under the current rules until the Commission considers appropriate reforms for the LTS program in connection with the pending proceedings for rural high-cost reform and/or interstate access charge reform for rate-of-return carriers. As an initial matter, we recognize that, because LTS supports only interstate-allocated loop costs and therefore does not directly affect intrastate rates, it is within the Commission's jurisdiction to determine whether to phase down or eliminate LTS. At the Commission's request, however, we have prepared a recommendation on this issue. 7. Our recommendation is based principally on two considerations. First, unlike the preexisting high-cost loop support mechanism under Part 36, LTS for non-rural carriers is not replaced by the new, forward-looking high-cost support mechanism. The Commission concluded in the Ninth Report and Order that, to properly account for the separations rules, the new mechanism should provide support only for the percentage of total costs exceeding the national benchmark that are allocated to the intrastate jurisdiction, not for interstate-allocated costs such as those supported by LTS. As a result, the new high-cost mechanism does not replace LTS for non-rural carriers, as the Commission originally had anticipated at the time of the First Report and Order. Because no substitute support mechanism currently exists, we believe that the Commission's rationale for phasing down interim hold-harmless support that it is "a transitional provision . . . during the shift to the new federal support mechanism" may not be appropriate to LTS. 8. Second, we find that phasing down LTS for non-rural carriers will have an indirect impact on rural LTS recipients, thereby undermining the Commission's objective to maintain the current support structure, as modified, for rural LTS recipients. Because NECA pools costs, revenues, and support to calculate an average CCL rate for pool participants, if LTS were phased down for the three eligible non-rural carriers without a corresponding reduction in costs, the CCL rate for all NECA pool participants would increase. According to NECA, loss of LTS for non-rural carriers could cause the NECA CCL rate to rise by up to 42 percent. Thus, we are concerned about the potential rate impact on rural LTS recipients as a result of the phase-down of LTS for non-rural carriers. 9. In light of these considerations, we recommend that the Commission consider the future of LTS to non-rural carriers in conjunction with its consideration of the pending proceeding to reform the Commission's high-cost support mechanism for rural carriers, and/or the related proceeding to reform the interstate access charge system for rate-of-return carriers. In the meantime, the Joint Board recommends that the Commission preserve LTS. A. Phase Down of Interim Hold-Harmless Support 1. Background 10. In addition to LTS, the interim hold-harmless provision provides per-line support to eligible non-rural carriers based on the preexisting high-cost loop support mechanism under Part 36 of the Commission's rules. Under this mechanism, 18 non-rural carriers will receive a total of about $87 million in net annual interim hold-harmless support (excluding LTS), based on projections for the first quarter of the year 2000. These projections indicate that, on a per-line basis, 12 of the 18 carriers receive average monthly support of less than $1.00, four receive support of less than $2.00, one (GTE North Inc. in Missouri) receives support of $3.26, and one (Puerto Rico) receives support of $12.06 and $1.86, respectively, for each of its two study areas. We note that interim hold-harmless support recipients and support estimates may vary from quarter to quarter, because support is calculated on an ongoing, quarterly basis, and in a given quarter carriers may qualify to receive either interim hold-harmless support or forward-looking support, depending on which is greater. 11. The commenters are divided roughly into two groups. The first, including payor states, interexchange carriers (IXCs), and other net contributors to universal service support, favor rapid termination of interim hold-harmless support. Specifically, most of these commenters favor termination no later than January 1, 2001, although three suggest a phase-down schedule of at least three years for Puerto Rico. The other group, which includes LECs and state recipients of interim hold-harmless support, opposes the establishment of an elimination date or phase-down schedule at this time. These commenters argue that any such action should await Commission reform of the high-cost support system for rural carriers, which will not occur before January 1, 2001, and/or comprehensive review of the new, forward-looking support mechanism for non-rural carriers, which is scheduled to be completed by January 1, 2003. 1. Discussion 12. We recommend that interim hold-harmless support, excluding LTS, be phased down beginning January 1, 2001, through annual $1.00 reductions in each recipient's average monthly, per-line support. In developing this recommendation, we have considered a range of options, from the immediate, across-the-board elimination of interim hold-harmless support advocated by some commenters, to the "wait- and-see" approach advocated by others. We believe that our recommended approach is the best means of ensuring a prompt, equitable phase-down of interim hold-harmless support without causing undue rate disruption. As discussed below, this approach would promptly phase out interim hold-harmless support for the majority of carriers currently receiving less than $1.00 per-line/per-month, while permitting a gradual withdrawal of support from those receiving higher amounts of interim hold-harmless support. We also recommend that the Commission reexamine the phase-down schedule in conjunction with its comprehensive review of the new, forward-looking support mechansim, which is to be completed by January 1, 2003, at which time only two carriers are projected to be receiving interim hold-harmless support, and the Commission will have more information on the impact of our recommended phase-down approach on rates in the remaining carriers' study areas. 13. A number of commenters favor across-the-board termination of interim hold-harmless support as of January 1, 2001, arguing generally that the Commission intended the interim hold-harmless provision to be transitional only, that interim hold-harmless support is burdensome and inequitable to net contributors to universal service support, and that in most cases the loss of interim hold-harmless support would not cause rate shock. We agree that in most cases a sweeping approach would be unlikely to cause rate shock, as the majority of interim hold-harmless support recipients currently receive average monthly, per- line support of less than $1.00. We recommend a more tailored approach, however, because it will allow a gradual withdrawal of support from carriers receiving higher amounts of per-line support, thereby avoiding significant, sudden rate increases in the areas served by such carriers. Nevertheless, we believe that our recommendation is responsive to these commenters' concerns. During the year 2001, and based on first quarter year 2000 support estimates, our recommended approach would phase out interim hold-harmless support for 13 of the 18 current recipients and save approximately $47 million in annual interim hold- harmless support. In the following year, our approach would phase out interim hold-harmless support for four more recipients. Interim hold-harmless support for GTE North Inc. in Missouri would be phased out in the fourth year, leaving only one Puerto Rico study area as a recipient of interim hold-harmless support. 14. We disagree with commenters who argue that interim hold-harmless support should be preserved at its current level pending rural high-cost reform, which will not occur before January 1, 2001, and/or comprehensive review of the new, forward-looking high-cost support mechanism, which is to be completed by January 1, 2003. The Commission's purpose in adopting the interim hold-harmless provision was to ensure a nondisruptive transition to the new, forward-looking support mechanism for non-rural carriers, not to postpone or avoid the need for a transition. We anticipate that the states can adapt their rate designs to the new, forward-looking support mechanism for non-rural carriers without waiting for rural high- cost reform. In this regard, we note that none of the states for which interim hold-harmless support will be phased down maintain otherwise in their comments to the Joint Board. We also observe that, under the gradual phase-down approach that we recommend, no carrier's average monthly, per-line support will be reduced by more than $1.00 per year, so that no state will be faced with significant, sudden reductions in federal support to an individual study area. 1 Mechanics of Phase-Down 1. The support amounts for which interim hold-harmless recipients qualify may vary from quarter to quarter, because interim hold-harmless support is calculated on an ongoing, quarterly basis. To ensure that the phase-down conforms with this quarterly schedule, the Joint Board recommends that the applicable annual reductions be subtracted from the interim hold-harmless support that a carrier otherwise would be eligible to receive on an ongoing, quarterly basis. Under this approach, a carrier may continue to be eligible for interim hold-harmless support during a particular year even if it does not qualify for such support in a given quarter. For example, if during the year 2001 a carrier otherwise would be eligible for quarterly support of $1.05, $0.95, $1.05, and $0.95 per-line/per-month, respectively, then it would receive support of $0.05 per-line/per-month during the first and third quarters of the year, but no support for the second and fourth quarters. The following year, a $2.00 reduction would be applicable and the carrier would no longer receive support. We believe that this method of calculating interim hold-harmless support during the phase- down would be the most equitable to interim hold-harmless recipients and easiest to administer. a. Calculation of High-Cost Loop Support for Rural Carriers 2. Under the Commission's rules, universal service support for all carriers under Part 36 is restricted by an "interim cap" that limits the total increase in support each year to the annual growth in nationwide loops. The cap is calculated by applying the total growth rate in industry working loops to the prior year support level. Although non-rural carriers (with the exception of interim hold-harmless support recipients) were shifted to the new, forward-looking support mechanism effective January 1, 2000, the Commission concluded in the Ninth Report and Order that the cap should continue to be calculated as if all carriers participate in the preexisting support mechanism. Otherwise, rural carriers would receive smaller annual increases in support, because the growth rate in working loops for non-rural carriers historically has been faster than the growth rate in working loops for rural carriers. The purpose of this interim "placeholder" measure was to avoid significant and immediate changes in high-cost support for rural carriers, consistent with the Commission's commitment "not to consider significant changes in rural carriers' support until after the Rural Task Force and the Joint Board have made their recommendations." 3. The effect that the Commission sought to avoid in the Ninth Report and Order smaller annual cap increases also could result from subtracting phased-down interim hold-harmless support amounts from calculation of the cap. This is so because the prior year support level used to calculate the cap includes the high-cost loop support for non-rural carriers that would be provided under Part 36 if the preexisting high- cost support mechanism had not been replaced. To avoid this undesired effect, we recommend that the cap continue to be calculated as if phased-down interim hold-harmless support were being distributed to non-rural carriers, pending reform of the high-cost support mechanism for rural carriers. This approach will avoid significant and immediate changes in high-cost support for rural carriers as a result of the phase-down of interim hold-harmless support, and is consistent with the Commission's action in the Ninth Report and Order. We do not recommend, however, that any of the support calculated for non-rural carriers under Part 36 (phased-down interim hold-harmless support or support calculated as a "placeholder") be redistributed to rural carriers. a. Transferred Interim Hold-Harmless Support 4. Finally, we address issues related to the transfer of interim hold-harmless support. The transfer of universal service support when one carrier acquires another carrier's exchanges is governed by the targeting provisions of the Ninth Report and Order and section 54.305 of the Commission's rules. Pursuant to the Ninth Report and Order, although a carrier receives interim hold-harmless support based on embedded costs averaged over its entire study area, the support is targeted for competitive purposes to its highest-cost wire centers based on forward-looking economic costs. Section 54.305 of the Commission's rules provides that per-line support for a transferred exchange remains equal to the per-line amount the seller was eligible to receive prior to the transfer, rather than being recalculated based on the average cost of all of the buyer's lines. Under these provisions, as of the date of sale, the acquiring company would receive the same per-line interim hold-harmless support for the transferred exchange that the seller was eligible to receive. The issue, however, is whether transferred interim hold-harmless support should be phased down following the transfer, as it would have been if it had not been transferred, or should remain frozen at the per-line support level as of the sale date. 5. As an initial matter, we wish to express our general concern about the operation of section 54.305. The Commission adopted this rule in the First Report and Order as a stopgap measure "to discourage carriers from placing unreasonable reliance upon potential universal service support in deciding whether to purchase exchanges from other carriers[.]" At the time, the Commission anticipated that all carriers eventually would receive support based on forward-looking economic costs, at which point the rule would no longer be necessary. Although we recognize the importance of the rule's purpose, we believe that in practice it has negative consequences, at least with regard to transfers of exchanges between carriers that are not both receiving support based on the forward-looking mechanism. For example, by freezing support based on the seller's embedded costs, the rule prevents the acquiring carrier from receiving an amount of support related to the costs of providing supported services in the transferred exchange. Moreover, the rule requires the acquiring carrier to keep separate books of account for the acquired exchanges for an indefinite period of time. We strongly encourage the Commission to consider an alternative to section 54.305 at the earliest opportunity. 6. Turning to the issue of whether transferred interim hold-harmless support should be phased down following the transfer, the Joint Board recommends that interim hold-harmless support for exchanges transferred to rural carriers should not be phased down following the transfer until the Commission reexamines the operation of section 54.305, as recommended above, and/or reforms the high-cost mechanism for rural carriers, so that replacement support for the transferred exchanges is available. This approach would ensure that rural carriers receive constant support for eligible transferred exchanges, thereby ensuring affordable access to telecommunications service in high-cost exchanges. 7. The Joint Board recommends, however, that interim hold-harmless support for exchanges transferred to non-rural carriers be phased down over the same time period as the seller's support would have been phased down. This approach would ensure a prompt and equitable phase-down of transferred interim hold-harmless support. It also would discourage carriers from transferring exchanges to delay or avoid the phase-down of interim hold-harmless support. Because targeted support is likely to be greater than average support on a per-line basis, targeted interim hold-harmless support for exchanges transferred to non-rural carriers would have to be reduced at a faster rate than the seller's support to be phased down over the same time period. We recommend that such support be phased down by an equal percentage for each year of the phase-down period, on an exchange-by-exchange basis. We believe that this approach would be administratively simple and predictable for acquiring non-rural carriers. VIII. Recommending clause 21. For the reasons discussed herein, this Federal-State Joint Board, pursuant to section 254(a)(1) and section 410(c) of the Communications Act of 1934, as amended, 47 U.S.C.  254(a)(1) and 410(c), recommends that the Commission adopt the proposals described above relating to schedules and procedures for phasing out interim hold-harmless support. FEDERAL COMMUNICATIONS COMMISSION Magalie Roman Salas Secretary APPENDIX A Parties Filing Comments and Reply Comments Comments: 1. People of the State of California and the California Public Utilities Commission 2. Public Service Commission of the District of Columbia 3. GTE Service Corporation 4. National Exchange Carrier Association, Inc. 5. State of New York Department of Public Service 6. Puerto Rico Telephone Company, Inc. 7. Roseville Telephone Company 8. Rural Telephone Coalition 9. SBC Communications Inc. 10. Sprint Corporation 11. United States Telecom Association 12. U S WEST Communications, Inc. 13. Western Wireless Corporation Reply Comments: 1. AT&T Corporation 2. Florida Public Service Commission 3. GTE Service Corporation 4. Independent Telephone and Telecommunications Alliance 5. MCI Worldcom, Inc. 6. North State Telephone Company 7. Puerto Rico Telephone Company, Inc. 8. Roseville Telephone Company 9. Rural Telephone Coalition 10. Telephone Association of New England 11. United States Telecom Association 12. U S WEST Communications, Inc. 13. Wyoming Public Service Commission STATEMENT OF COMMISSIONER HAROLD FURCHTGOTT-ROTH, APPROVING IN PART AND DISSENTING IN PART Re: Recommended Decision, Federal State-Joint Board of Universal Service, CC Docket No. 96-45 I support the Joint Board's recommendations that the Commission (1) retain the long-term support mechanism; (2) continue to calculate the cap for rural high-cost loop support as if the preexisting high-cost loop support for non-rural carriers had not been changed; and (3) not implement a "phase down" of loop support when a non-rural carrier transfers an exchange to a rural carrier. I cannot, however, endorse the Board's recommendation that "hold-harmless" loop support be phased out over the next three years, so that non-rural carriers eventually will receive universal service support based exclusively on the model that the Commission adopted last year. That model never worked, and it has no prospect of working. As I have said before, the model does not satisfy the Act's basic requirements that universal service support be "specific" and "predictable," and I believe that relying in any way on this model does not meet the requirements of the statute.