I. INTRODUCTION

II. EXECUTIVE SUMMARY

III. PRINCIPLES

A. Overview

1. The following is a summary of comments relating to the issue of principles.

B. Comments

2. 1996 Act Principles. Commenters generally support the guiding principles identified under section 254(b), with some commenters stating various preferences for prioritization of those goals.⁽²³⁴⁰⁾ Others emphasize those goals related to access to services.⁽²³⁴¹⁾ No comments were received in opposition to the establishment of these enumerated principles.

3. In addition to the principles enumerated above, numerous comments were filed regarding additional principles that should guide the Commission when addressing universal service issues.⁽²³⁴²⁾ These proposed additional principles are set forth below.

4. Competitive Neutrality. A majority of commenters addressing this issue advocate adopting competitive neutrality as an additional principle to shape policies governing universal service.⁽²³⁴³⁾ A few commenters advocate specific definitions of competitive neutrality that emphasize application of universal service rules and mechanisms in a manner that does not advantage or disadvantage one provider of telecommunications services over another.⁽²³⁴⁴⁾ Others emphasize competitively neutral contribution, distribution, and determination of eligibility for universal service support.⁽²³⁴⁵⁾ ALTS contends that the Joint Board's definition of competitive neutrality should be broadened to include the concept of a competitively neutral administrator and that rules and regulations themselves, not just application of the rules, should be competitively neutral.⁽²³⁴⁶⁾ Commenters also cite congressional intent to promote competition in the advancement of telecommunications services.⁽²³⁴⁷⁾ Several commenters advocate inclusion of technological neutrality as a concept related to the principle of competitive neutrality.⁽²³⁴⁸⁾ They contend that the Commission should avoid defining any particular service or technology that must be available and supported by universal service support mechanisms and allow the marketplace to shape the direction of technology.⁽²³⁴⁹⁾

5. Some commenters focus on the effect of a principle of competitive neutrality on rural areas. Evans Tel. contends that Congress adopted "rural safeguard" provisions in the 1996 Act in the form of statutory advantages and protections to rural telephone companies not provided to competitors. These provisions, according to Evans Tel., were designed to protect universal service in areas served by small, rural telephone companies from competition in the absence of such safeguards that could threaten rural service rates and quality standards.⁽²³⁵⁰⁾ Therefore, Evans Tel. and other commenters assert, competitive neutrality can enter into universal service only as a secondary consideration - subordinate to the specific principles identified in the 1996 Act.⁽²³⁵¹⁾ RTC contends that Congress understood that rural conditions require special scrutiny "even where pro-competitive measures are concerned" and that Congress balanced the policies of rural competition and universal service in the 1996 Act.⁽²³⁵²⁾

6. A few commenters contend that a principle of competitive neutrality is unnecessary or inconsistent with section 254.⁽²³⁵³⁾ Western Alliance asserts that the section 254(b) principles make it clear that universal service is intended to be a safeguard against competitive excesses and market failures.⁽²³⁵⁴⁾ They further assert that, given the express reference to competitive neutrality in section 254(h)(2), the lack of any reference to competitive neutrality in the general provisions of section 254(b) demonstrates a conscious decision by Congress not to include competitive neutrality as a principle.⁽²³⁵⁵⁾

7. TCA contends that the concept of competitive neutrality already is embodied in the 1996 Act and, therefore, is not needed as an additional principle.⁽²³⁵⁶⁾ Wyoming PSC contends that if competitive neutrality permits diminished emphasis on affordable universal service in rural and high cost areas where market forces dictate such a result, then the principle runs against the express policy of the 1996 Act and should not be allowed.⁽²³⁵⁷⁾

8. Americans with Disabilities. Some commenters urge the Commission to address specific issues faced by Americans with disabilities pursuant to the provisions of section 254.⁽²³⁵⁸⁾ NAD contends that, while individuals with disabilities are covered by section 255, reliance upon section 255 to ensure basic access to the public switched network by individuals with disabilities who must purchase specialized customer premises equipment (SCPE) is misplaced.⁽²³⁵⁹⁾ Specifically, NAD contends that universal service support is needed to fund SCPE for individuals with disabilities.⁽²³⁶⁰⁾ Commenters also contend that individuals with speech disabilities who use Alternative and Augmentive Communications (AAC) pay more for end-user access to telecommunications services than does the general public due to the increased response time required by AAC device users.⁽²³⁶¹⁾ Commenters request universal service support to bring toll charges for both text telephone (TTY) and telecommunications relay service users in line with other toll charges based on the longer than average calls associated with the use of these services.⁽²³⁶²⁾

9. Additional Protection for Specific Groups. Public Advocates suggests as an additional goal that, in each state, carriers should work to achieve the statewide average rate of subscribership among that state's low-income, minority, and limited English-speaking communities.⁽²³⁶³⁾

10. Schools and Libraries. Some commenters suggest that allowing community-based organizations providing educational, health, and literary services to receive the same full and equal access to advanced services as libraries and schools should be a principle that stems from section 254(b).⁽²³⁶⁴⁾

11. Other Suggested Principles. Bar of New York advocates including an additional principle expressly promoting access to interactive services.⁽²³⁶⁵⁾ GSA recommends that "economic efficiency" be recognized as a principle.⁽²³⁶⁶⁾ A few commenters also contend that the Commission should adopt a principle of minimizing the growth and overall size of the universal service support mechanisms.⁽²³⁶⁷⁾

IV. DEFINITION OF UNIVERSAL SERVICE: WHAT SERVICES TO SUPPORT

A. Overview

12. The following is a summary of the comments on the issue of what services should be included in the definition of universal service under section 254(c)(1).

B. Designated Services

1. Comments

13. General Comments. Catholic Conference agrees with the Joint Board's conclusion that all four criteria enumerated in section 254(c)(1) must be considered, but not necessarily met, before a service may be included within the definition of universal service.⁽²³⁶⁸⁾ Benton suggests that the Commission adopt a universal service system defined by transport and termination requirements rather than services.⁽²³⁶⁹⁾ As defined by Benton, transport requirements concerning the "quality and capacity of telephony media" (such as the provision of single-party service or the capability of providing fax/data service at specified speeds), the distribution of those media, and termination requirements mandate that carriers connect with a specified destination on demand (for example, equal access to interexchange carriers).⁽²³⁷⁰⁾ According to Benton, this approach would permit the Commission to adopt "policies without either specifying or implying specific facilities, architecture, or network topography and the carriers that are traditionally associated with those elements."⁽²³⁷¹⁾

14. Services Proposed in the Recommended Decision. Various commenters concur with the Joint Board's recommended list of services to be supported by universal service support mechanisms.⁽²³⁷²⁾ GSA contends that the services proposed for support by the Joint Board encompass the "minimum group of services that should be available to all consumers."⁽²³⁷³⁾ In contrast, People For asserts that the Joint Board failed to recommend a sufficiently broad definition of universal service that would "fulfill Congress' mandate to ensure full participation in the information age."⁽²³⁷⁴⁾

15. Voice Grade Access to the Public Switched Network. Bar of New York asserts that the Joint Board's recommendation that voice grade access occur at approximately 3,500 Hertz will not ensure residential consumers access to interactive services, which, it argues, requires greater bandwidth.⁽²³⁷⁵⁾ Bar of New York cites the Recommended Decision's conclusion in connection with rural health care providers that services such as video-on-demand, medical imaging, two-way interactive distance learning and high definition television (HDTV) might require bandwidth of 1.544 Mbps.⁽²³⁷⁶⁾ Thus, Bar of New York argues that the benefits of broadband interactive services warrant support for increased bandwidth.⁽²³⁷⁷⁾ MFS asserts that the Commission should assure universal access to advanced services, including the capability to support data transmissions of at least 1 Mbps, by adopting the network standards established by Congress for carriers that borrow from the Rural Utilities Service (RUS) under the Rural Electrification Restructuring Act of 1993 (RELRA).⁽²³⁷⁸⁾

16. Local Usage. Ameritech, arguing that states should support local usage through their own universal service mechanisms, contends that a variable usage component should not be funded through federal support mechanisms.⁽²³⁷⁹⁾ According to Ameritech, if the Commission includes a variable usage component within the definition of voice grade access, states would be encouraged to designate a high level of local usage for support in their respective jurisdictions in order to maximize the benefits their constituents receive from federal universal service support mechanisms.⁽²³⁸⁰⁾ In contrast, Ohio PUC maintains that support for local usage is essential to realizing the full benefits of voice grade access and further contends that a local usage component meets the four criteria set forth in section 254(c)(1).⁽²³⁸¹⁾ Ohio PUC advocates that the states, rather than the Commission, be responsible for establishing minimum local usage levels in their respective jurisdictions.⁽²³⁸²⁾

17. United Utilities argues against the establishment of a local usage sensitive support mechanism because, it contends, such a mechanism would require carriers that do not offer measured service to eliminate flat, non-usage based rates and require those carriers to purchase new switches and software and implement new billing systems.⁽²³⁸³⁾ United Utilities contends that, if the Commission elects to limit the amount of support for local usage, the Commission should apply such a limitation only to non-rural carriers that use measured service and "exempt [the rural carrier] from having to limit the amount of local usage that customers receive in order to be able to receive the full amount of universal service funding that the carrier is otherwise entitled to receive."⁽²³⁸⁴⁾

18. DTMF Signaling. NENA favors including DTMF signaling among the services to be supported because, NENA argues, DTMF signaling "is an important means of speeding calls where seconds saved may save lives and property in emergencies."⁽²³⁸⁵⁾

19. Access to Emergency Services. NENA concurs with the Joint Board's recommendation to include access to emergency services, including access to 911, among the supported services.⁽²³⁸⁶⁾ TCA contends that by adopting the Joint Board's recommendation to exclude access to enhanced 911 (E911) service from the list of supported services, the Commission would be giving wireless providers a competitive advantage over providers that can or must offer this service.⁽²³⁸⁷⁾ Similarly, Western Alliance opposes what it characterizes as the Joint Board's failure to recognize the potential benefit provided by E911 in favor of ensuring that potential wireless competitors could receive universal service support.⁽²³⁸⁸⁾ TCA favors supporting access to E911 service, as well as E911 service itself, when it is requested by the local community.⁽²³⁸⁹⁾

20. Access to Directory Assistance and White Pages Directories. USTA urges the Commission to include white pages directories within the definition of universal service because, it argues, white pages directories meet the statutory criteria for inclusion and serve the public interest by making this information available to consumers.⁽²³⁹⁰⁾ West Virginia Consumer Advocate "strongly disagrees" with the Joint Board's decision against recommending that white pages directories be supported because it contends that the Joint Board's recommendation to exclude white pages directories is inconsistent with its recommendation to support access to directory assistance.⁽²³⁹¹⁾ West Virginia Consumer Advocate asserts that, like access to directory assistance, white pages directories are a "fundamentally important offering" that, while not a "telecommunications service" per se, are "necessary for consumers to access telecommunications and information services."⁽²³⁹²⁾ Oregon PUC argues that, if the Commission decides to exclude white pages listings from the list of supported services, the Commission should require carriers to include all of their subscribers in their directory assistance databases.⁽²³⁹³⁾ In contrast, Georgia PSC asserts that white pages directories do not come within the Act's definition of "telecommunications services" and, therefore, supports the Joint Board's recommendation to exclude white pages directories from the list of supported services.⁽²³⁹⁴⁾

21. Access to Operator Service. CWA argues that access to operator service should include "initial contact with a live operator," which, it contends, is "indispensable for users in public health or safety emergencies."⁽²³⁹⁵⁾

22. Access to Interexchange Service. USTA supports the Joint Board's recommendation that the Commission include access to interexchange service within the definition of universal service.⁽²³⁹⁶⁾ GCI opposes providing universal service support for access to interexchange service on the grounds that interexchange service is competitive and is not currently subsidized.⁽²³⁹⁷⁾

23. Equal Access to Interexchange Service. Ameritech argues that the principle of competitive neutrality requires that, in areas where the incumbent LEC has the obligation to offer equal access to interexchange service providers, other carriers receiving universal service support in that area also should be obligated to provide equal access.⁽²³⁹⁸⁾ Noting that incumbent LECs have incurred costs associated with upgrading their networks to offer equal access and that end-user customers have come to expect this service, GVNW and TCA contend that the principle of competitive neutrality mandates that competitors be required to offer equal access.⁽²³⁹⁹⁾ GVNW urges the Commission to include equal access in the definition of universal service and establish an implementation deadline by which all eligible carriers must provide such access.⁽²⁴⁰⁰⁾ Western Alliance maintains that the exclusion of equal access from the list of core services would ensure that wireless carriers qualify for universal service support at the expense of rural consumers who, as a result of such a determination, may be denied the substantial benefits of equal access.⁽²⁴⁰¹⁾ WorldCom asserts that the Joint Board's recommendation not to support equal access is inconsistent with the principle of competitive neutrality in that it favors one discrete class of carriers over all other carriers that seek to provide equal access as part of universal service.⁽²⁴⁰²⁾ WorldCom recommends that the Commission either: 1) support equal access only to the extent that eligible carriers are able to provide it; or 2) support equal access "across the board" but permit CMRS providers to file for waivers from this requirement.⁽²⁴⁰³⁾

24. CTIA and Vanguard argue that wireless carriers should not be required to provide services or functionalities, such as equal access, that they are not currently able or required to provide.⁽²⁴⁰⁴⁾ Similarly, PCIA contends that the Joint Board properly recognized that, under section 332(c)(8), CMRS providers are not "required to provide equal access to common carriers for the provision of toll services."⁽²⁴⁰⁵⁾ Vanguard asserts that including equal access within the list of supported services would be inconsistent with Congress's intent to maximize consumer choice because doing so would limit the ability of CMRS providers to offer universal service in areas where they are best equipped to provide service.⁽²⁴⁰⁶⁾ PCIA asserts that because sections 332(c)(8) and 254 were enacted together as part of the 1996 Act, the Commission must interpret these sections under principles of statutory construction so that neither is nullified.⁽²⁴⁰⁷⁾ By exempting CMRS providers from equal access obligations while creating a universal service program consistent with section 254, PCIA asserts that the Joint Board's recommendation represents a permissible construction of the two provisions.

25. Advanced Services. APC and Business Software Alliance concur with the Joint Board's recommendation that the Commission not support advanced services such as ISDN, end-to-end digital service and call waiting on the theory that the Commission must carefully choose the services designated for support in order to limit the overall size of the universal service support mechanisms.⁽²⁴⁰⁸⁾ In contrast, ITC argues that the statutory principle of "access to advanced services" is missing from the proposed definition of supported services.⁽²⁴⁰⁹⁾ ITC contends that supporting access to advanced services for schools and libraries, but not for carriers serving consumers in high cost areas, discriminates against "family and economic institutions of society" in favor of educational institutions.⁽²⁴¹⁰⁾ People For contends that the statutory principle promoting "access to advanced telecommunications and information services" provides authority for the Commission to support services and functionalities such as modern network facilities, Internet access availability, call tracing, and 900-number blocking services.⁽²⁴¹¹⁾ Bar of New York contends that, if access charge reform does not result in a system that permits differential pricing for voice and data calls, universal service support might be necessary to ensure access to interactive services.⁽²⁴¹²⁾ Urban League advocates including fax and modem capability, the latter of which will ensure all Americans have the ability to use electronic mail, in the definition of universal service.⁽²⁴¹³⁾

26. Iowa Utilities Board states that "advanced telecommunications and information services" should include Internet service and that the Commission should establish incentives to encourage access to Internet facilities for communities in rural areas.⁽²⁴¹⁴⁾ Arguing that information service providers merely provide conduit, and not content, People For opposes the Joint Board's conclusion that Internet access is not a "telecommunications service."⁽²⁴¹⁵⁾ Accordingly, People For urges the Commission to reject the Joint Board's recommendation and include Internet service within the definition of universal service.⁽²⁴¹⁶⁾ In the alternative, People For requests that the Commission define Internet service as a "telecommunications service" not presently designated for universal service support.⁽²⁴¹⁷⁾

27. Taking issue with the view expressed by People For, NCTA contends that Internet access is not a telecommunications service.⁽²⁴¹⁸⁾ NCTA asserts that the Joint Board correctly recognized that information and enhanced services provided over the facilities of common carriers are treated, for regulatory purposes, as separate and distinct from the basic telecommunications capacity used to transmit those services.⁽²⁴¹⁹⁾ Whereas a common carrier's basic transmission capacity is a telecommunications service that must be made available to any information service provider under tariff, NCTA maintains, a common carrier's Internet access service is not a telecommunications service.

28. Other Services. Catholic Conference advocates supporting voice messaging services for individuals without residences and contends that this service meets each of the criteria enumerated in section 254(c)(1).⁽²⁴²⁰⁾ CWA recommends that the Commission add "prompt access to repair bureaus and business offices" to the list of supported services.⁽²⁴²¹⁾

29. Universal Service Alliance urges the Commission to reject the Joint Board's recommendation to exclude consideration of disabilities-related issues and to provide universal service support to make specialized customer premises equipment, such as TTYs, telephone signaling devices, telebraille machines and volume control telephones, accessible and affordable to consumers with disabilities in all states.⁽²⁴²²⁾ In addition, Universal Service Alliance favors supporting toll charges associated with TTY and relay service calls.⁽²⁴²³⁾ Universal Service Alliance argues that, contrary to the Joint Board's representation, the Commission's proceeding to implement section 255 is narrowly focused on making telecommunications equipment usable by consumers with disabilities and does not encompass numerous issues raised by the section 254 mandate that all persons have access to basic and advanced telecommunications services.⁽²⁴²⁴⁾

30. Offering Supported Services on a Stand-Alone Basis. GTE suggests that eligible carriers should be required to offer the services designated for support under section 254(c)(1) on a "stand-alone" basis and at an "affordable" price, and Ameritech, TCA and CWA concur with this proposal.⁽²⁴²⁵⁾ GTE states that this requirement would prevent carriers from "cherry picking" select customers by offering the designated services only in conjunction with other, higher priced services.⁽²⁴²⁶⁾

31. Treatment of Wireless Providers. TCA generally contends that wireless providers receive preferential treatment in the Joint Board's recommended definition of universal service.⁽²⁴²⁷⁾ CTIA urges the Commission to reject the arguments of TCA and others because, CTIA argues, by advocating an expansive list of services required of eligible telecommunications providers, these parties seek to prevent wireless providers from becoming eligible for universal service support.⁽²⁴²⁸⁾

C. Feasibility of Providing Designated Services

1. Comments

32. Limitations on Carriers' Ability to Provide Designated Services. CTIA asserts that it is unfair to require wireless providers to offer E911 service at present in light of the Commission's recent decision in CC Docket 94-102 to give wireless carriers a five-year grace period in which to complete the technical upgrades necessary to achieve E911 capability.⁽²⁴²⁹⁾ According to CTIA, requiring eligible carriers to provide E911 service would not only exclude wireless carriers from becoming eligible for support in the near term, but would also undermine the Commission's decision in CC Docket 94-102.⁽²⁴³⁰⁾

33. Transition Period for Conversion to Single-Party Service. GTE argues that additional state commission action should not be necessary to authorize universal service support for party-line customers when a state regulatory agency has previously established a transition period for offering single-line capability that extends beyond January 1, 1998, the recommended date for implementation of the new high cost support mechanisms.⁽²⁴³¹⁾ In addition, GTE, referring to the Joint Board's recommendation that "carriers may offer consumers the choice of multi-party service in addition to single-party service and remain eligible for universal service support," urges the Commission to clarify that carriers will remain eligible for universal service support not only for single-line customers, but also for each party-line customer that is offered single-line service, but chooses to subscribe to party-line service.⁽²⁴³²⁾ GTE maintains that carriers should not bear the burden of initiating a proceeding before state commissions when customers choose party-line service.⁽²⁴³³⁾

D. Extent of Universal Service Support

1. Comments

34. Limiting Support for Services Carried on a Single Residential Connection. There is considerable record support for the Joint Board's recommendation not to support additional residential connections.⁽²⁴³⁴⁾ PageMart argues that supporting the provision of multiple lines is a benefit that extends "far beyond the universal service mandate to connect the greatest number of residences to the telephone system."⁽²⁴³⁵⁾ Cox argues that second connections do not promote universal service goals because they are not necessary to ensure access to the telephone network.⁽²⁴³⁶⁾ In addition, Cox contends that second lines should not be supported because they are a "significant source of profits to telephone companies."⁽²⁴³⁷⁾ According to Cox, it costs little to provide a second line because conventional loops have the capacity to provide two lines when they are installed, but telephone companies generally charge the same amount for a second line as they do for the first.⁽²⁴³⁸⁾ Sprint asserts that giving ILECs flexibility in pricing second lines will eliminate the need for universal service support for second lines.⁽²⁴³⁹⁾

35. Ad Hoc, arguing against support for additional lines, contends that there is no evidence that the number of consumers who subscribe to secondary lines constitute a "substantial majority" pursuant to section 254(c)(1)(B).⁽²⁴⁴⁰⁾ Further, Ad Hoc argues, even if a "substantial majority" of consumers subscribes to a second line, such additional lines should not be supported because they are not "essential to education, public health, or public safety" consistent with section 254(c)(1)(A).⁽²⁴⁴¹⁾ According to Ad Hoc, secondary lines have never been a core universal service and excluding them from support is consistent with past and present universal service policy.⁽²⁴⁴²⁾ In addition, Ad Hoc characterizes as "speculative" arguments that carriers have difficulty differentiating between primary and secondary lines.⁽²⁴⁴³⁾ According to Ad Hoc, billing systems are presently capable of distinguishing between primary and secondary residential lines or can be modified to add this capability.⁽²⁴⁴⁴⁾ Time Warner proposes that the universal service administrator and carriers work together to address administrative issues.⁽²⁴⁴⁵⁾ Specifically, Time Warner contends, without further elaboration, that assigning one customer voucher "per household in an eligible area" would eliminate the need for the universal service administrator to track "a customer's migration from one carrier to another."⁽²⁴⁴⁶⁾ Time Warner argues that, under this approach, "it would not matter which of multiple carriers serving the high-cost customer was providing the primary line and which was providing the second line."⁽²⁴⁴⁷⁾

36. Sprint and Teleport suggest that the Commission use a customer certification method to identify primary lines that are eligible for high cost support.⁽²⁴⁴⁸⁾ Specifically, Teleport suggests a plan wherein customers should designate one carrier as their primary local exchange carrier.⁽²⁴⁴⁹⁾ Under this plan, support would be provided to the carrier designated by the customer for the provision of the designated services carried on one connection.⁽²⁴⁵⁰⁾ Teleport further suggests that customer information already maintained by local exchange and interexchange carriers in the Customer Account Record Exchange ("CARE") database be used in conjunction with information relating to high cost areas included in the cost models to create a Universal Service Database ("USDB").⁽²⁴⁵¹⁾ According to Teleport, the CARE database, which includes the service address for every customer in a local exchange carrier's service territory, is automated and readily available.⁽²⁴⁵²⁾ Teleport suggests that the fund administrator check each carrier's request for funding for a particular address against the records in the USDB to determine the validity of the request.⁽²⁴⁵³⁾ Using this approach, multiple support requests for one address or requests for addresses not in the USDB would be denied pending further investigation by the administrator, with state commission and FCC intervention required only in disputed cases.⁽²⁴⁵⁴⁾ Teleport recommends that the universal service administrator or another entity designated by the Commission conduct periodic, random audits to discourage fraud.⁽²⁴⁵⁵⁾ Teleport urges the Commission not to countenance the misuse of universal service support simply because it may be impossible to identify and punish every instance of fraud.⁽²⁴⁵⁶⁾

37. Similarly, MFS proposes a plan wherein customers who are served by more than one carrier designate one carrier as their primary local exchange carrier for universal service purposes.⁽²⁴⁵⁷⁾ Under the MFS proposal, the fund administrator would enter nine-digit zip codes into a national database.⁽²⁴⁵⁸⁾ The database would identify the zip codes corresponding to high cost areas and could be designed to match high cost census blocks or wire centers with the appropriate nine-digit zip codes.⁽²⁴⁵⁹⁾ The database would also include the customer's last name and street address in those instances in which the nine-digit zip code is insufficient to identify a specific household.⁽²⁴⁶⁰⁾ The universal service support administrator could provide carriers with a listing of end users residing in high cost areas, which carriers could match against their billing database, or the carriers could submit claims for support by providing the administrator with an electronic listing of their customers by nine-digit zip code drawn from their billing records.⁽²⁴⁶¹⁾ The fund administrator would use the customer's nine-digit zip code to determine whether the carrier is eligible to receive high cost support and would use the customer's name to identify more precisely the connection for which the carrier is requesting support.⁽²⁴⁶²⁾ According to MFS, carriers already use zip codes for billing purposes and have an incentive to retain customer zip codes because the US Postal Service offers postage discounts to bulk-billers that use zip codes.⁽²⁴⁶³⁾ MFS also argues that a system using zip codes would be automated and auditable.⁽²⁴⁶⁴⁾

38. Conversely, several commenters oppose the Joint Board's recommendation not to provide universal service support beyond that provided for designated services carried on a single residential connection.⁽²⁴⁶⁵⁾ Some parties, including some rural LECs, assert that the cost of providing additional lines will increase if these lines are not supported.⁽²⁴⁶⁶⁾ In addition, Minnesota Coalition argues that eliminating support for additional residential lines would discourage LECs from installing sufficient facilities to accommodate second lines.⁽²⁴⁶⁷⁾ Similarly, GVNW argues that if, in the future, the definition of universal service is modified to include Internet access over separate facilities, eligible carriers will not have adequately invested in the facilities necessary to provide this service.⁽²⁴⁶⁸⁾ California SBA argues that, under the Joint Board's recommendation, there will be no economic incentive for new local service providers to build new facilities to compete with incumbent LECs because support levels will be "unrealistically low."⁽²⁴⁶⁹⁾ Western Alliance, for example, estimates that one of its members will have to triple the rate currently charged for a second residential connection if universal service support is not available for that connection.⁽²⁴⁷⁰⁾ Western Alliance contends that, if that same member's state commission permitted it to rebalance rates in order to make up for the loss of support for additional residential connections, the member would be required to increase all of its local service rates by 61 percent.⁽²⁴⁷¹⁾ Such "revenue dislocation," Western Alliance contends, might amount to an unconstitutional taking.⁽²⁴⁷²⁾

39. Evans contends that, unlike small rural LECs, large, geographically diversified RBOCs may be able to cross-subsidize rates for second lines within cost areas with revenues generated in the RBOC's low cost service areas in order to keep rates low for second lines.⁽²⁴⁷³⁾ Staurulakis argues that incumbent LECs would be disadvantaged because customers will have an incentive to purchase second lines from competitive LECs, which could purchase bundled discounted services from the incumbent LEC and resell this service to customers as second lines.⁽²⁴⁷⁴⁾ TDS argues that most loop costs are incurred when installing the first line and that the incremental cost of additional connections is less than half the cost of installing the first connection.⁽²⁴⁷⁵⁾ Accordingly, TDS asserts, the Joint Board's recommendation to limit support to single connections will not reduce per-line support costs in proportion to the number of second or additional lines for which support would be eliminated under the Joint Board's proposal.⁽²⁴⁷⁶⁾ Rather, TDS contends, incumbent LECs will be encouraged to overprice additional lines to prevent the loss of support that should be directed almost entirely to the first line.⁽²⁴⁷⁷⁾ GVNW contends that, "at a minimum, costs associated with multiple lines should be incrementally identified while fully attributing joint and common costs associated with multiple lines to the first line."⁽²⁴⁷⁸⁾

40. Roseville Tel. Co. argues that if multi-line business and residential lines are deemed ineligible for support, the proxy model should be adjusted to exclude the costs of providing services over these additional lines.⁽²⁴⁷⁹⁾ Roseville Tel. Co. contends that restricting support to single connections would require the establishment of separate revenue benchmarks for determining the amount of support an eligible carrier should receive under a proxy model because, it argues, multi-line businesses and residences with second lines would have significantly different toll usage levels than other business and residential customers.⁽²⁴⁸⁰⁾ According to Roseville Tel. Co., ILECs do not have access to customer toll billing records to estimate access revenues by customer class because IXCs have assumed the billing function for most large toll users, and the special traffic studies needed to determine these estimates would be costly and unreliable.⁽²⁴⁸¹⁾

41. Some commenters argue that a system that limits support to single residential connections would be difficult to administer and bill."⁽²⁴⁸²⁾ SBC contends that ILECs will be unable to determine whether a particular dwelling has been divided or whether more than one household occupies a dwelling, and, thus, would have difficulty determining which residences have multiple connections.⁽²⁴⁸³⁾ John Staurulakis contends that it would be especially difficult to make such a determination when individuals residing in group homes have separate telephone lines.⁽²⁴⁸⁴⁾ Some parties question how the primary line will be determined if a customer obtains two lines, each from a different carrier.⁽²⁴⁸⁵⁾ According to PacTel, if the first line obtained in a multi-connection residence is always considered the single connection eligible for support, then the incumbent provider will have a competitive advantage.⁽²⁴⁸⁶⁾ Conversely, TCA argues that the supported line should be the one that is installed first.⁽²⁴⁸⁷⁾ SBC characterizes the Joint Board's suggestion that carriers use subscriber billing information as an "unworkable" method for determining the number of connections to a location, and argues that such an approach will become "even more unworkable" as competition develops.⁽²⁴⁸⁸⁾ According to GTE, service providers have no means, other than querying the customer, to determine whether a request for service involves a primary or secondary connection.⁽²⁴⁸⁹⁾

42. Western Alliance opposes limiting support to single residential lines because, it contends, additional residential connections meet each of the criteria set forth in section 254(c)(1).⁽²⁴⁹⁰⁾ California SBA argues that the proposal to limit support to single residential connections violates the principles set forth in sections 254(b)(1)-(3) by failing to provide access to affordable telecommunications services in high cost areas.⁽²⁴⁹¹⁾ GTE and TCA assert that the recommended limitation will have the practical effect of impeding access to and use of information services, in conflict with section 254(b)(2) because families will be discouraged from adding second lines to access on-line information services.⁽²⁴⁹²⁾ Evans Tel. Co. and NRPT argue that eliminating support for additional residential lines will violate section 254(b)(3) because rural consumers will pay far more for secondary connections than will urban subscribers.⁽²⁴⁹³⁾ Similarly, Lufkin-Conroe and RTC maintain that limiting universal service support to single lines will deny rural residents access to services and rates that are reasonably comparable to those of their urban counterparts.⁽²⁴⁹⁴⁾ TDS argues that the statute requires rural services and rates to be reasonably comparable to those in urban areas and, therefore, does not authorize regulators to decide that merely some portion of rural rates and services should be comparable to urban rates and services.⁽²⁴⁹⁵⁾ ITC contends that rural consumers, especially students, have a greater need than their urban counterparts for second lines that enable access to on-line information services at home because they generally live far from schools and libraries.⁽²⁴⁹⁶⁾ U S West asserts that the recommended approach would be neither specific nor predictable, contrary to the principle set forth in section 254(b)(5).⁽²⁴⁹⁷⁾

43. SBC argues that, if the Commission elects not to support additional lines, as recommended by the Joint Board, the Commission must "preempt all pricing constraints on non-supported telephone exchange service unless upon implementation, the commission in a particular state has established an intrastate fund to support those federally unsupported services."⁽²⁴⁹⁸⁾ Similarly, USTA contends that if carriers cannot receive support for second lines, incumbent LECs should be given pricing flexibility to ensure that the costs of those lines can be fully recovered.⁽²⁴⁹⁹⁾ According to U S West, second and multiple lines should be deregulated in high cost areas if they are not supported.⁽²⁵⁰⁰⁾ TDS argues that if the long-established practice of averaging local rates for all lines were changed and additional lines were priced at cost, the result would be to increase the rates for all primary residential lines -- the lines that incur the most cost -- unless additional support is available for initial connections.⁽²⁵⁰¹⁾ Ohio PUC proposes that, if funding is extended to second residential lines, then the Commission require as a pre-condition for universal service eligibility that carriers provide the second line at the same recurring and non-recurring rate to end users and offer promotions on a non-discriminatory basis for both the primary and secondary lines.⁽²⁵⁰²⁾

44. Limiting Support for Services Provided to the Primary Residence. Various parties support the Joint Board's recommendation that eligible carriers receive support for providing designated services to a residential subscriber's primary residence, but not to second or vacation homes.⁽²⁵⁰³⁾ California DCA favors this proposed limitation because of the reduced amount of support it anticipates that this approach will require.⁽²⁵⁰⁴⁾ Ameritech contends there are "no good public policy reasons" for funding a second line to a subscriber's summer residence.⁽²⁵⁰⁵⁾ APT asserts that supporting service to a second residence is inconsistent with section 254(c)(1)(A) because it is not "essential to education, public health, or public safety."⁽²⁵⁰⁶⁾ Taking the Joint Board's proposal a step further, California DCA questions how the Commission can justify supporting even one connection to the residence of consumers who can afford a second or vacation home.⁽²⁵⁰⁷⁾

45. MFS also concurs with the recommendation to limit support to one connection to a subscriber's primary residence and proposes a plan wherein customers who are served by more than one carrier designate one specific carrier as their primary local exchange carrier for universal service purposes.⁽²⁵⁰⁸⁾ As discussed in paragraph 70, supra, MFS proposes a plan wherein the fund administrator would cross-reference the nine-digit zip codes of subscribers with census blocks or wire centers located in high cost areas.⁽²⁵⁰⁹⁾ MFS contends that using the nine-digit zip code for a customer's billing address, rather than for the service address, will minimize the likelihood that support would be provided for second or vacation homes because, MFS argues, customers who maintain more than one residence are likely to have their bills sent to their primary residence.⁽²⁵¹⁰⁾

46. Teleport urges the Commission to adopt a system that allows consumers to certify that a supported service is being provided only to their primary residence.⁽²⁵¹¹⁾ Teleport further recommends that the fund administrator or some other entity conduct periodic audits to discourage fraud.⁽²⁵¹²⁾

47. Other commenters oppose limiting the number of residences for which a carrier may receive support.⁽²⁵¹³⁾ Several parties contend that identifying a subscriber's "primary" residence is administratively unworkable.⁽²⁵¹⁴⁾ RTC states that any mechanism implemented to determine the number of homes owned by each subscriber would be so complex that it would fail a cost/benefit analysis.⁽²⁵¹⁵⁾ Texas PUC and U S West argue that the administrative difficulties associated with the Joint Board's recommendation outweigh any arguments in favor of limiting support.⁽²⁵¹⁶⁾ Some parties question how ILECs would be able to determine whether their customers own an additional residence in another carrier's service area, or own residences in more than one spouse's name.⁽²⁵¹⁷⁾ Western Alliance argues that the administrative costs involved in determining whether a subscriber's residence is "primary" will reduce the carrier's net universal service support amount.⁽²⁵¹⁸⁾ RTC, arguing that resort areas are often occupied by permanent residents, contends that MFS' proposal to use nine-digit zip codes would deny support to families that need it.⁽²⁵¹⁹⁾ RTC contends that the Recommended Decision "illegally introduces means testing into the high cost support mechanism."⁽²⁵²⁰⁾ Some parties raise privacy concerns because, they argue, an investigation into consumers' property ownership would be required to limit support to the primary residence.⁽²⁵²¹⁾ Similarly, Minnesota Coalition argues that rural LECs are not in a position to monitor the living habits of their customers.⁽²⁵²²⁾ Western Alliance and U S West urge the Commission, if it adopts the Joint Board's recommendation, to allow carriers to rely on a customer's self certification that a specified line is serving a primary or second residence.⁽²⁵²³⁾ GTE contends that consumers, particularly those who understand the system, will be motivated to declare a vacation home in a high cost area as the consumer's primary residence.⁽²⁵²⁴⁾

48. GTE opposes the Joint Board's recommendation that ILECs use billing information to identify a consumer's primary residence. GTE argues that billing information does not answer "dozens of other questions" such as whether more than one household shares a dwelling and whether another carrier is already providing service to a customer's "primary" residence in a different state.⁽²⁵²⁵⁾ GTE further states that the Commission must address certain "real-life, practical" considerations such as whether individuals may self-certify to their status and whether carriers must retain records for audit purposes.⁽²⁵²⁶⁾

49. Minnesota Coalition argues that eliminating support for second homes will impose a disproportionate burden on rural ILECs because these ILECs serve many vacation and second homes.⁽²⁵²⁷⁾ Minnesota Coalition asserts that the primary residence limitation would violate the statutory requirement that support be "predictable" because support for rural LECs would fluctuate when subscribers "change their residential status or move away from a residence previously occupied."⁽²⁵²⁸⁾ The requirement that support be "sufficient" would also be violated, Minnesota Coalition contends, because eliminating support for residences that were previously eligible for support would reduce a carrier's level of support without a corresponding reduction in expenses.⁽²⁵²⁹⁾ Similarly, Western Alliance and Evans Tel. Co. argue that an ILEC would lose compensation for costs incurred when it installs a new line to provide service to a primary residence if the residence is subsequently sold to a subscriber who uses it as a second residence.⁽²⁵³⁰⁾ Silver Star Tel. Co. notes that ILECs are required to serve second and vacation homes as part of their COLR obligations and thus, it argues, they should be eligible to receive support for serving additional residences.⁽²⁵³¹⁾ U S West contends that the COLR obligation should be changed if the Joint Board's recommendation is adopted.⁽²⁵³²⁾ SBC argues that limiting support to primary residences would be confiscatory because it would deny incumbent LECs a reasonable opportunity to recover the costs of providing service.⁽²⁵³³⁾ USTA argues that if carriers cannot receive support for serving second residences, incumbent LECs must be given pricing flexibility to ensure that the costs of these lines are fully recovered.⁽²⁵³⁴⁾

50. Evans Tel. Co. contends that the Joint Board's proposal violates section 254(b)(3) because consumers who own second residences in high cost areas will be subject to higher rates for second lines than those who own second residences in low cost areas.⁽²⁵³⁵⁾ Evans Tel. Co. asserts such a result constitutes a violation of the principle of "reasonably comparable" services and rates for urban and rural consumers.⁽²⁵³⁶⁾ Silver Star Tel. Co. argues that subscribers require the same access to health, emergency, and community services when they inhabit a second residence as they do when they are at their primary residence.⁽²⁵³⁷⁾ Lufkin-Conroe contends that, because second or vacation homes may be occupied for only part of the year, their owners may elect to forego telephone service if rates increase significantly.⁽²⁵³⁸⁾ The absence of telephone service, Lufkin-Conroe argues, could result in delayed access to emergency services with the potential resulting loss of life or property.⁽²⁵³⁹⁾

51. Supporting Designated Services Carried to Single-Connection Businesses. As a preliminary matter, Georgia PSC urges the Commission to clarify the distinction between the terms "single-connection" and "single-line."⁽²⁵⁴⁰⁾ According to Georgia PSC, the category of single-connection businesses is more limited than that of single-line businesses because a business may have several "single-line" connections.⁽²⁵⁴¹⁾ In general, several commenters agree that support should be provided for designated services provided to single-connection businesses.⁽²⁵⁴²⁾

52. Several commenters, however, advocating a more restrictive approach, take issue with the Joint Board's recommendation that universal service support be available even for single-connection businesses.⁽²⁵⁴³⁾ Ameritech argues that supporting business services constitutes a substantial policy shift and would "inevitably and significantly" increase the size of the support mechanisms.⁽²⁵⁴⁴⁾ According to Ameritech and LCI, telephone service should be considered a cost of starting and operating a business that should not be supported by federal universal service mechanisms.⁽²⁵⁴⁵⁾ Ameritech argues that small businesses already get a "quasi-subsidy" in the form of a tax deduction, which is not available to residential consumers, and receive assistance from mechanisms such as Small Business Administration loans and other state and federal programs.⁽²⁵⁴⁶⁾

53. Ameritech also argues that there is nothing in the legislative history of the 1996 Act that indicates that Congress intended to use section 254 to subsidize business development.⁽²⁵⁴⁷⁾ NTIA and BANX contend that supporting business connections would be inconsistent with section 254(c)(1)(B) that states that, in defining universal service, the Commission should consider the extent to which telecommunications services "have, through the operation of market choices by customers, been subscribed to by a substantial majority of residential customers."⁽²⁵⁴⁸⁾ APT contends that the Joint Board failed to demonstrate that services to single-connection businesses are "essential" so as to warrant their support pursuant to section 254(c)(1).⁽²⁵⁴⁹⁾ LCI argues that when Congress believed that special circumstances required support to be extended to non-residential subscribers -- such as schools, libraries and health care providers -- it expressly provided for such support.⁽²⁵⁵⁰⁾

54. According to Teleport, there is no evidence to suggest that businesses are unable to pay cost-based rates for their services.⁽²⁵⁵¹⁾ Similarly, Sprint contends that there is no information in the record to confirm the hypothesis that small businesses will forego local telephone service in high cost areas unless such service is supported.⁽²⁵⁵²⁾ ACTA contends that a general rule providing for support to single-line businesses is overly broad. Thus, ACTA proposes an alternative method pursuant to which the demonstrated need of a business for support determines whether a business single-connection line will be supported.⁽²⁵⁵³⁾ Maryland PSC asserts that any business customer could benefit from universal service by obtaining single lines from multiple carriers or attaching a PBX to a single business line.⁽²⁵⁵⁴⁾ Maryland PSC favors allowing the competitive marketplace to control costs for businesses.⁽²⁵⁵⁵⁾ California PUC argues that in California, unlike residential measured rate service, the measured business rate does not include any calling allowance, so all local calls made on business lines result in revenue for the LEC.⁽²⁵⁵⁶⁾ Accordingly, California PUC opposes the Joint Board's recommendation to support businesses with single connections.

55. In contrast, several parties urge the Commission to support services provided to businesses with multiple connections and oppose the Joint Board's recommendation to limit support to services provided to businesses with single connections.⁽²⁵⁵⁷⁾ Many commenters argue that such a limitation would harm rural economies.⁽²⁵⁵⁸⁾ For example, Lufkin-Conroe argues that the cost of telephone service is a factor that directly influences whether a telemarketing firm or other communications-intensive business will locate or remain in a rural community.⁽²⁵⁵⁹⁾ In addition, SBA reports that, in response to a recent poll, 3.6 percent of rural businesses indicated that they would relocate or discontinue their operations if their telephone service rates increased by $10.00 per month and nearly 20 percent indicated that they would relocate or discontinue their operations if telephone service rates increased by $25.00 per month.⁽²⁵⁶⁰⁾ SBA suggests that increases of these proportions are possible as a result of the Joint Board's recommendation to deny support for services provided to businesses with multiple connection. Some commenters insist that absent federal support, carriers will be required to increase rates for businesses with multiple connections.⁽²⁵⁶¹⁾ In addition, Minnesota Coalition argues that ILEC investments that were made when a business had only a single line would lose support when a second line is added.⁽²⁵⁶²⁾ Roseville Tel. Co. contends that a system that limits support to businesses with single connections would be administratively difficult to administer, requiring complex and costly studies of billing records.⁽²⁵⁶³⁾ Minnesota Coalition asserts that, under the Joint Board's proposal, business customers with multiple connections would be encouraged to mischaracterize themselves as having only single-connections.⁽²⁵⁶⁴⁾

56. SBA argues that without support, rates charged to businesses with multiple connections will not be "affordable" for rural businesses, an outcome inconsistent with section 254(b)(1).⁽²⁵⁶⁵⁾ In addition, SBA contends that the Joint Board's proposal to limit support to businesses with single connections is inconsistent with promotion of access to advanced telecommunications services, a principle found in section 254(b)(2), because the proposal creates a disincentive for rural businesses with single connections to add connections to accommodate fax lines or modems.⁽²⁵⁶⁶⁾ According to Evans Tel. Co., it is not clear whether Congress intended business customers to be considered "consumers" for purposes of section 254(b)(3), but that the provisions of sections 254(b)(1) and (2) clearly apply to businesses.⁽²⁵⁶⁷⁾ RTC and SBA contend that businesses with multiple connections should be considered "consumers" for which services and rates should be "reasonably comparable" in urban and rural areas, a principle found in section 254(b)(3).⁽²⁵⁶⁸⁾ SBA contends that the Recommended Decision imposes a distinction among classes of "consumers" where none is warranted and none was intended by Congress.⁽²⁵⁶⁹⁾ SBA contends that the legislative history of section 254 indicates that some members of Congress intended universal service support to be available for small businesses.⁽²⁵⁷⁰⁾ RTC argues that all business lines in high cost areas should be supported because Congress recognized the differences between business and residential lines when it chose not to limit toll rate averaging to residential service.⁽²⁵⁷¹⁾

57. Western Alliance argues that most rural businesses with multiple lines are small businesses that use additional lines to record messages, send facsimiles or use on-line services.⁽²⁵⁷²⁾ TDS states that "few businesses are able to get by with only a single connection in the current information-laden business environment."⁽²⁵⁷³⁾ SBA, noting that businesses with multiple connections include city halls, police stations, churches, school boards, and other public bodies, asserts that rural businesses with multiple lines share the same need for access to health, safety, and employment services as residential subscribers do.⁽²⁵⁷⁴⁾ SBA proposes that carriers receive universal service support for all connections provided to these institutional users.⁽²⁵⁷⁵⁾ SBA also contends that significant telephone rate increases are likely to be as cost-prohibitive for businesses with many lines as they would be for businesses with only one.⁽²⁵⁷⁶⁾ Evans Tel. Co. suggests that the Commission expand upon the Joint Board's recommendation by supporting services provided to businesses with no more than five connections.⁽²⁵⁷⁷⁾

58. A few parties propose alternatives to the Joint Board's recommendation regarding support for businesses with single connections. California SBA recommends that businesses located in high cost areas that employ fewer than 100 employees and earn less than $10 million in gross annual revenues "be eligible for universal service support for all business lines."⁽²⁵⁷⁸⁾ California SBA recommends that businesses should be required to certify under penalty of perjury that they meet these criteria "before they are eligible for support."⁽²⁵⁷⁹⁾ In addition, the state Joint Board members propose that the Commission adopt the three-year transition period recommended by the Joint Board, during which high cost support for rural telephone companies would extend to all of a carrier's working lines. In addition, SBA proposes that carriers serving businesses with $5.0 million or less in annual gross receipts receive universal service support for an unlimited number of connections.⁽²⁵⁸⁰⁾ In addition, SBA recommends that carriers serving all other businesses receive support for up to five connections for those businesses to ensure that business connections used for fax machines, computer modems and credit card and check approval verification are supported.⁽²⁵⁸¹⁾ SBA also suggests that, if support to multiple-connection businesses is reduced, the dollar amount of support a carrier would lose per line should be capped and additional universal service support should available to make up the difference between the cap amount and the previous amount of support the carrier received.⁽²⁵⁸²⁾ The state Joint Board members further propose that the ongoing cooperative state-Commission review of the forward-looking cost methodologies also include a review of whether support should be limited to residential and single connection businesses for rural carriers.⁽²⁵⁸³⁾

59. Level of Support for Business Connections. CNMI, Interior, and TCA argue that the amount of support provided should be the same whether a connection serves a business or residential customer.⁽²⁵⁸⁴⁾ SBA and CNMI argue that the Joint Board's rationale for supporting businesses with single connections, i.e., that they have been treated similarly in the past, warrants making support for businesses with single connections match the support for primary connections to residences.⁽²⁵⁸⁵⁾ In addition, CNMI argues that providing a reduced amount of universal service support for services provided to businesses with only one line would permit business rates to remain disproportionately high, substantially increase the costs of small, start-up businesses and, thereby, discourage entrepreneurship.⁽²⁵⁸⁶⁾ SBA opposes the Joint Board's suggestion that, as competition develops, it may be unnecessary to provide any support for businesses with a single connection in the future, stating that small businesses are vulnerable to rate increases and have a limited ability to pass on increased costs to their customers.⁽²⁵⁸⁷⁾

60. United Utilities disagrees with the Joint Board's conclusion that services provided to businesses with a single connection should be supported at a reduced rate because business rates are higher than residential rates.⁽²⁵⁸⁸⁾ Business rates are higher, United Utilities argues, because there are implicit subsidies built into these rates that help keep residential rates low.⁽²⁵⁸⁹⁾ According to United Utilities, these implicit subsidies will be eliminated when "competition and the unbundling of rates make support flows explicit" and, thus, the Joint Board should not have recommended reduced support for business connections based on the fact that business rates are currently higher than residential rates.⁽²⁵⁹⁰⁾ Conversely, Texas PUC agrees with the Joint Board's recommendation that businesses with a single line should be supported at a reduced rate.⁽²⁵⁹¹⁾

E. Quality of Service

1. Comments

61. Federal Role. CWA contends that the Commission should establish federal performance-based service quality standards on which all telecommunications providers must report and for which they are accountable.⁽²⁵⁹²⁾ According to CWA, the Joint Board's recommendation that "states may adopt and enforce service quality standards" does not ensure the "mandate" of section 254(b)(1) that "quality services should be available at just, reasonable, and affordable rates."⁽²⁵⁹³⁾ Relying on data compiled by NARUC, CWA maintains that many states do not have quality standards and those that do have standards do not necessarily have comprehensive standards.⁽²⁵⁹⁴⁾ CWA suggests that the Commission establish a special task force or delegate the responsibility of developing comprehensive service quality standards to the Network Reliability Council.⁽²⁵⁹⁵⁾ Moreover, CWA urges the Commission to require all carriers that receive universal service support to meet federal service quality standards in each of the four calendar quarters preceding the receipt of such support. CWA would deny support to carriers that fail to meet this threshold and require those carriers to pay a penalty to the universal service administrator that would be used to support universal service.⁽²⁵⁹⁶⁾

62. State Roles. A few parties suggest that the Commission permit states to implement carrier performance standards.⁽²⁵⁹⁷⁾ For example, California DCA argues that while the nation as a whole may need federal mandates to foster competition and achieve universal service goals, the states are well-equipped to implement the details of those policies.⁽²⁵⁹⁸⁾ Ohio PUC agrees with the Joint Board's recommendation that states submit service quality data to the Commission, but urges the Commission to determine the type of data it would expect state commissions to provide.⁽²⁵⁹⁹⁾ CWA argues that, if it relies on state commissions to monitor service quality, the Commission should require states to impose on competitive LECs the same quality standards they impose on incumbent LECs .⁽²⁶⁰⁰⁾

63. Quality of Service Reporting Requirements. North Dakota PSC contends that information pertaining to service quality should be made public in order to enable comparisons between the performance of different telecommunications carriers.⁽²⁶⁰¹⁾ According to North Dakota PSC, providing consumers with easy access to publicly available data on the performance of various carriers could spur carriers to compete for customers on the basis of service quality.⁽²⁶⁰²⁾ Further, North Dakota PSC contends that the Commission should collect quality of service data in addition to that already submitted through mechanisms such as ARMIS because only one LEC in North Dakota is required to file ARMIS data and state law exempts telephone companies serving fewer than 8000 lines from quality service oversight by the North Dakota PSC.⁽²⁶⁰³⁾ Moreover, North Dakota PSC maintains that there is no industry organization in North Dakota that collects and publishes service quality data.⁽²⁶⁰⁴⁾

F. Reviewing the Definition of Universal Service

1. Comments

64. In General. GVNW argues that, if anticipated revenues are not "sufficient," carriers will not invest in advanced services because they will not expect to recover costs, including a reasonable profit.⁽²⁶⁰⁵⁾ Accordingly, GVNW argues that if, in the future, the definition of universal service is modified to include additional services, those carriers that have not invested in advanced services will no longer qualify to receive support because they will be unable to provide all of the newly designated services.⁽²⁶⁰⁶⁾

65. Periodic Reassessment. Some commenters suggest that the definition of universal service should be revised periodically.⁽²⁶⁰⁷⁾ According to CNMI, periodic revisions to the definition are appropriate because of the pace and scope of change in the telecommunications market and the provision in section 254(c) that describes the definition of universal service as "an evolving level of telecommunications services."⁽²⁶⁰⁸⁾ A few parties concur with the Joint Board's recommendation to convene a Joint Board no later than January 1, 2001 to revisit the definition of universal service.⁽²⁶⁰⁹⁾

66. In contrast, People For contends that "periodically" means more than one review after four years.⁽²⁶¹⁰⁾ Instead, People For urges a biennial review which, it argues, is necessary to keep universal service policies current.⁽²⁶¹¹⁾ Using the growth of Internet deployment in the last four years as an example, People For asserts that the definition of universal service should be reviewed every two years.⁽²⁶¹²⁾ Illinois CC asserts that the Commission should revisit the definition of universal service pursuant to section 254(c)(1) after the Joint Board has evaluated an alternate definition of services to be supported and the costs associated with supporting those services.⁽²⁶¹³⁾

V. AFFORDABILITY

A. Overview

67. The following is a summary of the comments related to the issue of affordability.

B. Affordability

1. Comments

68. In General. Several parties express concern regarding the relationship between expanding the level of universal service funding, and the affordability of rates for telecommunications consumers who, they argue, ultimately must pay for an expanded funding obligation.⁽²⁶¹⁴⁾ These parties contend that if universal service support is not carefully targeted and overall funding levels are not appropriately circumscribed, then telephone service will become unaffordable for increasing numbers of subscribers.⁽²⁶¹⁵⁾ Citizens Utilities, while conditionally accepting the Joint Board's general conclusion that current rates are affordable, argues that the Commission must consider whether rates will remain affordable in the competitive environment, as well as the potential impact of rate increases on telecommunications services subscribers.⁽²⁶¹⁶⁾ Similarly, Puerto Rico Tel. Co. asserts that in order to fulfill the statutory goal of "just, reasonable and affordable" rates, universal service mechanisms must mitigate the effect of any rate increases to prevent the loss of subscribers.⁽²⁶¹⁷⁾ According to Puerto Rico Tel. Co., Congress specifically directed the Joint Board and Commission to "ensure that universal service is achieved" because, it argues, the combined effect of new regulations in the areas of universal service, interconnection pricing, and access charge reform "is likely to place unavoidable upward pressure on consumer rates."⁽²⁶¹⁸⁾

69. Factors Affecting Affordability. Several parties support the Joint Board's general finding that the definition of affordability must take into account both rate levels and non-rate factors.⁽²⁶¹⁹⁾ With respect to specific factors affecting affordability, numerous commenters support the Joint Board's inclusion of local calling area size or local calling scope among the factors that must be considered in determining affordability.⁽²⁶²⁰⁾ Minnesota Coalition argues that the prices rural consumers pay for extensions of local calling scope, such as Extended Area Service, should be factored into a determination of affordability.⁽²⁶²¹⁾ A few parties argue that, in determining rate affordability, the Commission should consider whether consumers have the ability to contact their "community of interest," i.e., hospitals, schools and other essential services, by placing local calls.⁽²⁶²²⁾

70. In addition, several parties favor considering income levels when assessing rate affordability.⁽²⁶²³⁾ People For contends that the Commission should establish a formula based on a fixed or progressively increasing percentage of disposable income that would guide the states in determining whether rates are affordable.⁽²⁶²⁴⁾ According to People For, this approach would be equitable because, it argues, consumers with the lowest income levels are least able to afford telecommunications services.⁽²⁶²⁵⁾ Minnesota Coalition supports the Joint Board's decision not to recommend the adoption of a national median level of income for purposes of assessing affordability because, it argues, such a standard would tend to "overestimate the price at which service is affordable when applied to a service area having an income level that is significantly below the national median."⁽²⁶²⁶⁾ Consistent with the Recommended Decision, some parties also favor consideration of the cost of living,⁽²⁶²⁷⁾ population density,⁽²⁶²⁸⁾ and other socioeconomic factors⁽²⁶²⁹⁾ among the factors that affect affordability.

71. Affordability of Current Rates. Bell Atlantic contends that the existing nationwide subscribership level is high and stable, and, thus, indicates that current rates are affordable.⁽²⁶³⁰⁾ In contrast, Governor of Guam argues that the Commission should conclude that where existing rates are not affordable or reasonably comparable to urban rates, such as in Guam, rates in such areas can be supported by universal service support mechanisms.⁽²⁶³¹⁾

72. Link Between Subscribership and Affordability. Various parties agree with the Joint Board's finding that a correlation exists between affordability and subscribership levels.⁽²⁶³²⁾ People For, however, urges against basing any definition of affordability solely on subscribership levels.⁽²⁶³³⁾ According to People For, a high subscribership level does not reveal whether the average family is spending a disproportionate amount of its disposable income on telecommunications services.⁽²⁶³⁴⁾ People For urges the Commission to consider income levels in conjunction with subscribership levels in determining affordability.⁽²⁶³⁵⁾

73. Puerto Rico Tel. Co., stating that its subscribership has not yet reached an acceptable level, argues that the Joint Board's proposal that the Commission work with states that have declining subscribership levels ignores the fact that certain regions currently have a low subscribership level.⁽²⁶³⁶⁾ Puerto Rico Tel. Co. suggests that "if the subscribership level in an eligible carrier's service area is more than five percentage points below the national average," then the local rate should be deemed presumptively not affordable.⁽²⁶³⁷⁾

74. State and Federal Roles in Ensuring Affordability. Bell Atlantic supports the recommendation that states exercise primary responsibility for determining the affordability of rates within their respective jurisdictions.⁽²⁶³⁸⁾ Minnesota Coalition favors the Joint Board's decision not to recommend the establishment of a nationwide affordable rate and argues that such a general rate would fail to consider the impact of local characteristics on affordability.⁽²⁶³⁹⁾ Some parties concur with the Joint Board's conclusion that state commissions have the ability, knowledge, and expertise to measure and evaluate the factors affecting affordability.⁽²⁶⁴⁰⁾ Washington UTC also agrees with the Joint Board's recommendation that the Commission work together with states to determine the cause of a decrease in a state's subscribership level and the implications for affordability in that state.⁽²⁶⁴¹⁾ People For argues that declining income levels, and not just declining subscribership levels, should trigger Commission review of affordability in a given state.⁽²⁶⁴²⁾ Bell Atlantic argues that only if subscribership rates drop by a "statistically significant amount over a period of time," and the state asks for federal help, should the Commission offer to work with the state to determine and remedy the problem.⁽²⁶⁴³⁾

75. Measuring Level of Support Based on Affordability or Subscribership Levels. Puerto Rico Tel. Co. maintains that the Joint Board has failed to propose how a determination at the state level that rates are not affordable will be addressed by federal universal service mechanisms.⁽²⁶⁴⁴⁾ Puerto Rico Tel. Co. argues that merely "identifying" whether rates are affordable does nothing to ensure that rates are affordable.⁽²⁶⁴⁵⁾ Puerto Rico Tel. Co. suggests that the Commission use affordability, as measured by subscribership levels, to determine the level of support payments available to carriers serving areas where rates are not affordable.⁽²⁶⁴⁶⁾ Interior likewise urges the Commission to provide universal service support for rates that are not affordable or reasonably comparable.⁽²⁶⁴⁷⁾ MFS, arguing generally in favor of retaining current levels of high cost support, states that increases in total high cost support should occur only when there is a decline in subscribership or when there is a substantial change in a factor affecting affordability.⁽²⁶⁴⁸⁾

VI. Carriers Eligible for Universal Service Support

A. Overview

76. The following is a summary of the comments relating to the issues of: Eligible Telecommunications Carriers, Service Areas, and Unserved Areas.

B. Eligible Telecommunications Carriers

1. Comments

a. Eligibility Criteria

77. Adoption of Section 214(e)(1) Criteria. A broad cross-section of commenters supports the Joint Board's recommendation that the Commission adopt the criteria in section 214(e)(1) as the rules governing eligibility.⁽²⁶⁴⁹⁾ CNMI asserts that the Joint Board correctly determined that section 214(e) prevents carriers from offering differential rates or cream-skimming.⁽²⁶⁵⁰⁾ CompTel states that section 214(e) contains neutral, objective criteria.⁽²⁶⁵¹⁾ SBC notes that the Joint Board's recommendation that the Commission adopt the criteria in section 214(e) as the sole criteria for eligibility is inconsistent with its recommendation that all eligible carriers must offer Lifeline service.⁽²⁶⁵²⁾

78. Statutory Construction of Section 214(e). CompTel, WorldCom, AT&T, and GCI assert that the states and the Commission are precluded from adopting eligibility requirements that exceed those contained in section 214(e).⁽²⁶⁵³⁾ Two states and two incumbent LECs disagree and urge the Commission to clarify that states may impose equitable, competitively-neutral conditions on carriers wishing to become eligible for support for federal and state universal service funds.⁽²⁶⁵⁴⁾ GTE asserts that the use of the phrases "a carrier that receives such support" and "any such support . . ." in section 254(e) instead of the phrase "such eligible carrier" shows that more than eligibility is required to receive support.⁽²⁶⁵⁵⁾ GTE also suggests that, as it has in the Lifeline program, the Commission has the authority to condition acceptance of federal funds upon compliance with federal guidelines.⁽²⁶⁵⁶⁾ GTE contends that accepting the arguments of CompTel and WorldCom would convert section 214(e) into an entitlement, and would prevent states and the Commission from carrying out their obligations under section 254(i).⁽²⁶⁵⁷⁾ GTE further asserts that converting section 214(e) into an entitlement would preclude adoption of its proposed competitive bidding mechanism and therefore would violate the Commission's duty to fully consider all reasonable alternatives.⁽²⁶⁵⁸⁾

79. Additional Obligations as a Condition of Eligibility. Several incumbent LECs assert that the provisions of section 214(e)(1) are insufficient to further universal service goals, and suggest that all eligible carriers should comply with carrier of last resort (COLR) obligations, or with requirements identical to those imposed on incumbent LECs at the state or federal level with respect to pricing, terms, conditions, provisioning, and quality standards.⁽²⁶⁵⁹⁾ GTE suggests that the terms of the obligation to serve should be set by each state, subject to broad federal guidelines.⁽²⁶⁶⁰⁾ GTE, along with several other commenters, disagrees with the Joint Board's conclusion that the requirements of section 214(e)(1) will prevent carriers from "cherry-picking" by offering differential rates.⁽²⁶⁶¹⁾ GTE asserts that, in order to prevent carriers from creating specialized service packages designed to attract only the most profitable customers, the Commission should require each carrier to offer a service package that includes only the federally-supported services on a stand-alone basis at a price determined to be "affordable" by the state commission.⁽²⁶⁶²⁾

80. Several incumbent LECs assert that the Joint Board's recommendation not to impose additional criteria is in conflict with its recommended principle of competitive neutrality because some carriers must perform more burdensome and costly functions than other carriers for the same compensation.⁽²⁶⁶³⁾ Ameritech explains that incumbent LECs incur higher costs than other carriers because their unique regulatory obligations require them to: 1) support a network that is capable of handling traffic at the busiest times; 2) incur financial risk associated with the inability to cease providing service if providing service becomes financially detrimental; 3) incur financial risk associated with stranded investment; and, 4) at least with respect to some incumbent LECs, provide equal access.⁽²⁶⁶⁴⁾ In its Cherry-Wildman Report, Ameritech asserts that imposing COLR obligations asymmetrically on some carriers without compensating those carriers for the costs of those obligations is not sustainable.⁽²⁶⁶⁵⁾ Ameritech asserts that an asymmetrical burden will favor less efficient firms that are free from such burdens, and asserts that, in extreme circumstances, carriers that retain these obligations may be driven from the industry altogether.⁽²⁶⁶⁶⁾

81. PCIA disagrees with the proposals to impose additional eligibility criteria and asserts that competitive neutrality does not require that all carriers be subject to the same regulation, rather it requires that the Commission account for the fact that different carriers operate in different competitive environments.⁽²⁶⁶⁷⁾ MFS asserts that the Commission should not impose COLR obligations as a component of eligibility because such a requirement would be administratively difficult to implement, and would not be competitively neutral because it would create a cost disadvantage for some carriers that might otherwise serve low-income and high cost customers.⁽²⁶⁶⁸⁾

82. GTE, SBC, and USTA further assert that incumbent LECs with COLR obligations are likely to be forced to serve the least profitable customers because they believe that, unless symmetrical regulations are imposed, competitive carriers will be able to "cream-skim" the most profitable customers.⁽²⁶⁶⁹⁾ They allege that averaged levels of universal service support COLR carriers receive are unlikely to be sufficient for serving just the highest cost customers in an area.⁽²⁶⁷⁰⁾ Ameritech and GTE observe that if all subscribers could be served at cost or at a profit, states would not need to impose COLR obligations.⁽²⁶⁷¹⁾

83. WinStar asserts that the Commission should amend the Joint Board's recommendation that, to be eligible, a carrier must offer service to all low-income customers in a service area because, as a practical matter, it may be technically infeasible for a wireless carrier to offer service to some customers.⁽²⁶⁷²⁾ SBC opposes WinStar's argument, stating that this obligation is one of the risks associated with being a facilities-based carrier, and part of the obligation incumbent LECs shoulder every day.⁽²⁶⁷³⁾

84. Several commenters suggest other criteria that they believe should be imposed upon eligible carriers. SBC and USTA assert that if it fails to ensure that eligible carriers comply with some level of regulation regarding quality of service and affordability, the Commission will also fail to ensure that carriers provide "quality" services, as required by the first universal service principle.⁽²⁶⁷⁴⁾ The Ohio PUC suggests that, in order to qualify as eligible, non-rural carriers should be required to provide interconnection to other certified local carriers and to unbundle and resell their services because it believes this would further the principle of competitive neutrality.⁽²⁶⁷⁵⁾ MFS asserts that the Commission should adopt, as a prerequisite for receipt of federal funds, the standards that the Rural Utilities Service (RUS) imposes upon its borrowers.⁽²⁶⁷⁶⁾ If carriers demonstrate that it is technically infeasible to meet these standards because of exogenous factors, such as limited spectrum in the case of wireless providers, MFS suggests that the Commission, consistent with the principle of competitive neutrality, grant waivers to such providers.⁽²⁶⁷⁷⁾ CWA asserts that the Commission should prevent telecommunications carriers that violate the National Labor Relations Act from receiving universal service support for the twelve-month period following a National Labor Relations Board decision of a labor-law violation.⁽²⁶⁷⁸⁾ CWA asserts that such a rule would promote competitive neutrality by preventing carriers from illegally suppressing labor costs, would promote rapid provision of high-quality services, and would increase the growth of high-wage, high-skill jobs.⁽²⁶⁷⁹⁾ CWA cites federal regulations for Head Start, the Job Training Partnership Act (JTPA), and Medicare as precedent for this recommendation.⁽²⁶⁸⁰⁾

85. Treatment of Particular Classes of Carriers. Time Warner advocates excluding carriers subject to price cap regulation from eligibility to receive universal service support. Time Warner asserts that these carriers possess sufficient flexibility to permit internal funding of universal service obligations.⁽²⁶⁸¹⁾ Time Warner suggests that, as a safety net, the Commission allow carriers subject to price cap regulation to petition state commissions to receive universal service support if they demonstrate that their universal service obligations are not allowing them to earn a fair return.⁽²⁶⁸²⁾ Sprint opposes Time Warner's position. First, Sprint asserts that most LECs' local service offerings have not been subject to price cap regulation.⁽²⁶⁸³⁾ Second, Sprint asserts that, because states require carriers to maintain low basic service prices, price cap LECs will not be able to fund universal service obligations internally.⁽²⁶⁸⁴⁾

86. Vanguard and Centennial state that the Commission should confirm the ability of wireless providers to be designated eligible for universal service support.⁽²⁶⁸⁵⁾ Centennial urges the Commission to clarify that a state may not use the terms of section 332(c)(3)(A) to deny a CMRS provider eligible status.⁽²⁶⁸⁶⁾ Celpage indicates that the "narrow" definition of eligible carriers recommended by the Joint Board precludes most CMRS providers from meeting the eligibility criteria because they will not be able to offer all the supported services.⁽²⁶⁸⁷⁾ NYNEX, supported by CWA, expresses concern that it may be difficult to determine whether a CMRS provider is actually providing service to a customer and asserts, therefore, that a wireless carrier should receive support only if the wireless carrier is a customer's primary carrier and the customer pays unsubsidized rates for its wireline service.⁽²⁶⁸⁸⁾ PCIA opposes this proposal.⁽²⁶⁸⁹⁾ PCIA states that federal laws against fraud sufficiently protect against any attempt by CMRS carriers to seek universal service support for customers that they do not serve, and asserts that additional requirements placed solely on wireless carriers would discriminate against these carriers.⁽²⁶⁹⁰⁾

87. Advertising. WorldCom suggests that the Commission should advise states not to impose specific or extensive advertising requirements, especially if they would unduly burden new entrants. WorldCom asserts that competition by itself should prove more than sufficient to spur advertising.⁽²⁶⁹¹⁾ Roseville Tel. Co. asserts that the Commission should make explicit that the section 214(e) requirement that carriers advertise in "media of general distribution" is not satisfied by placing advertisements in business publications alone, but compels carriers to advertise in publications targeted to the general residential market.⁽²⁶⁹²⁾ CPI states that although it recommended that the Commission should not create national standards for advertising, the Joint Board did not adopt any recommendation regarding the meaning of the term "throughout" as that term appears in section 214(e).⁽²⁶⁹³⁾

b. Section 214(e)(1) Facilities Requirement

88. Section 214(e)(1) Facilities Requirement. Several commenters contend that it will be difficult to determine whether the section 214(e)(1) facilities requirement has been met, and urge the Commission to clarify its meaning.⁽²⁶⁹⁴⁾ Noting that the Commission sought comment on this issue in its Infrastructure Sharing NPRM, EXCEL alleges that there is no commonly accepted definition of the term "facilities" or "facilities-based carrier."⁽²⁶⁹⁵⁾ Commenters contend that the section 214(e)(1) facilities requirement could require a carrier to perform any of the following: construct and maintain its own loop facilities serving at least 20 percent of its customers;⁽²⁶⁹⁶⁾ use its own loop and switching facilities;⁽²⁶⁹⁷⁾ use its own switch in combination with resold service;⁽²⁶⁹⁸⁾ construct a single, short loop;⁽²⁶⁹⁹⁾ install one mile of fiber;⁽²⁷⁰⁰⁾ make a de minimis use of its own facilities;⁽²⁷⁰¹⁾ use its own switch to provide exchange access for billing purposes;⁽²⁷⁰²⁾ or, own a billing office.⁽²⁷⁰³⁾ EXCEL indicates that the Commission could probably not adopt the most restrictive interpretation of the section 214(e)(1) facilities requirement -- that a carrier must use its own facilities to provide every aspect of every supported service -- because, for example, carriers would have difficulty providing access to directory assistance using their own facilities.⁽²⁷⁰⁴⁾ A number of commenters urge the Commission to determine that provisioning service through the use of unbundled network elements is sufficient to meet the section 214(e)(1) facilities requirement.⁽²⁷⁰⁵⁾ CompTel asserts that the Joint Board appears to support interpreting unbundled network elements as a carrier's own facilities when it states that a carrier may meet the eligibility criteria "regardless of the technology used by that carrier."⁽²⁷⁰⁶⁾ Lufkin-Conroe vigorously opposes classifying the purchase of unbundled network elements as sufficient to meet the section 214(e)(1) facilities requirement.⁽²⁷⁰⁷⁾ Lufkin-Conroe asserts that the purpose of the section 214(e)(1) facilities requirement, particularly when considered in combination with the requirements of sections 214(e)(3) and (e)(4), is to ensure the construction and maintenance of "adequate physical facilities to serve each area."⁽²⁷⁰⁸⁾ Lufkin-Conroe asserts that allowing a provider to obtain universal service support after purchasing just one unbundled network element does not further this purpose.⁽²⁷⁰⁹⁾ EXCEL urges the Commission to prohibit states from defining the term "facilities" differently from the definition adopted by the Commission.⁽²⁷¹⁰⁾

89. MFS suggests that the policy underlying the section 214(e)(1) facilities requirement is to prevent double recovery by preventing both a reseller and the underlying wholesaler from receiving compensation for a single customer.⁽²⁷¹¹⁾ MFS asserts the Commission should give effect to section 214(e)(1) by including "pure" resellers and limiting the potential for double recovery by explicitly reflecting subsidies on customer bills.⁽²⁷¹²⁾

90. Telco asserts that the Commission should interpret the term "facilities" consistently for purposes of sections 251(c)(2) and 214(e)(1).⁽²⁷¹³⁾ Telco asserts that, because section 251(c)(2) states incumbent LECs have the "duty to provide, for the facilities and equipment of any requesting telecommunications carrier, interconnection with the local exchange carrier's network" the Commission should determine that resellers that provide universal service through interconnection arrangements or the purchase of unbundled network elements are eligible for universal service support.⁽²⁷¹⁴⁾ TRA states that the Commission declined to impose a facilities requirement on requesting carriers under section 251(c)(3) because the Commission determined that "it would be administratively impossible"⁽²⁷¹⁵⁾ and concluded that any facilities requirement it could construct "would likely be so easy to meet it would ultimately be meaningless."⁽²⁷¹⁶⁾

91. Eligibility of Resellers. Several commenters, mostly representing incumbent LECs, support the Joint Board's conclusion that the explicit language of section 214(e)(1) precludes "pure" resellers from eligibility.⁽²⁷¹⁷⁾ On the other hand, several commenters, mostly representing resellers, indicate that the Joint Board's conclusion was not compelled by the statutory language and assert that the Commission should adopt an interpretation of section 214(e)(1) that would not exclude resellers from eligibility.⁽²⁷¹⁸⁾ EXCEL, MFS, Telco and TRA assert that excluding "pure" resellers violates the Joint Board's recommended principle of competitive neutrality.⁽²⁷¹⁹⁾ EXCEL and Telco assert it is not competitively neutral to require resellers to contribute to the fund, but not allow them to be compensated from the fund.⁽²⁷²⁰⁾ TRA and Telco assert that denying resellers eligibility will deprive higher cost customers of the lower prices and improved services brought on by competition.⁽²⁷²¹⁾ TRA indicates that the exclusion of resellers contradicts the Joint Board's finding that "wholesale exclusion of classes of carriers from eligibility is inconsistent with the plain language of the 1996 Act."⁽²⁷²²⁾ TRA states that elsewhere the Commission has determined that "competitive neutrality" means that "no carrier be significantly disadvantaged in its 'ability to compete with other carriers for customers in the marketplace.'"⁽²⁷²³⁾ Several commenters contend that EXCEL's and TRA's arguments ignore the plain language of the statute, and should not be adopted.⁽²⁷²⁴⁾ Lufkin-Conroe asserts that allowing resellers to receive universal service support would do nothing to improve the quality of service, increase access to advanced services, or enhance the comparability of rural services.⁽²⁷²⁵⁾

92. EXCEL, Telco, and TRA assert that, if the Commission feels compelled to adopt the statutory interpretation of the section 214(e)(1) facilities requirement recommended by the Joint Board, the Commission should forbear from that requirement.⁽²⁷²⁶⁾ EXCEL and Telco assert that the three statutory criteria for forbearance have been met.⁽²⁷²⁷⁾ They state that the first prong of the test is met because the restriction itself is discriminatory: resellers, unlike other carriers, will not be able to recover the costs of serving high cost consumers without universal service support.⁽²⁷²⁸⁾ EXCEL and Telco assert that the second prong is met because so long as they receive the services that are supported by federal universal service support mechanisms, it makes no difference to consumers whether the carrier is using its own facilities. Supported by TRA, EXCEL and Telco assert that enforcing the restriction may harm consumers by limiting consumers' choices and will deprive eligible consumers of the benefits of competition.⁽²⁷²⁹⁾ TRA asserts that the Commission has recognized the importance of resale as an entry vehicle for small businesses and other new entrants.⁽²⁷³⁰⁾ Finally, these commenters assert that, as the Commission found in the Local Competition Order, requiring carriers to own some local exchange facilities does not promote competition.⁽²⁷³¹⁾ Relying on the Commission's language in the Local Competition Order, cited above, TRA asserts that there is no policy rationale for requiring a carrier to own a single piece of equipment, and thus encourages the Commission to forbear from enforcing the "meaningless" section 214(e)(1) facilities requirement.⁽²⁷³²⁾

c. Requirements of Section 254(e) Pertaining to Intended Uses of Universal Service Funds

93. Ensuring Universal Service Support is Used as Intended. The North Dakota PSC supports the Joint Board's recommendation that the Commission conduct periodic reviews to ensure that universal service is being provided if a state has insufficient resources to support monitoring programs.⁽²⁷³³⁾

C. Definition of Service Areas

1. Comments

a. Non-Rural Service Areas

94. Non-Rural Service Areas. WorldCom and the Maryland PSC support the Joint Board's finding that states have primary responsibility for designating the service area.⁽²⁷³⁴⁾ AT&T asserts that, although state commissions have the authority to define service areas, if they fail to designate service areas that are coincident with the zones for unbundled network elements, this action would contravene the requirements of section 253. AT&T reasons that such a decision by a state commission might require a purchaser of unbundled network elements to pay more for that unbundled network element than it could recover from the customer and from universal service support mechanisms, thus precluding a carrier using unbundled network elements from competing in a high cost area.⁽²⁷³⁵⁾ Nextel asserts that the Commission has authority to alter rural service areas.⁽²⁷³⁶⁾

95. A number of non-incumbent LECs support the Joint Board's recommendation that the Commission encourage states to designate service areas that are not "unreasonably large."⁽²⁷³⁷⁾ PacTel indicates that any averaging of costs across a large geographical area will penalize carriers that serve states with a mix of high cost and low cost areas.⁽²⁷³⁸⁾ CTIA agrees with the Joint Board's conclusion that state designation of an unreasonably large service area may violate section 253.⁽²⁷³⁹⁾ Cox and PCIA favor service areas that are as small as possible. Cox and PCIA reason that small service areas will be easier for new entrants to serve, thus encouraging competition which will benefit consumers and, in the long run, will reduce the need for universal service support as prices are driven down.⁽²⁷⁴⁰⁾ PCIA, supported by Sprint PCS, suggests that the Commission "emphatically" recommend to the state commissions that they design all services areas, rural and non-rural, according to census blocks.⁽²⁷⁴¹⁾ WorldCom, along with APC, asserts that incumbent LECs should not be unduly advantaged by designation of service areas that correspond closely or precisely to the contours of their existing facilities.⁽²⁷⁴²⁾ Teleport asserts that service areas should be consistent with the cost study parameters adopted by the Commission to calculate the level of high cost support, and that no carrier should be required to serve an area larger than that used for the cost study area.⁽²⁷⁴³⁾ CPI suggests that the Commission adopt guidelines to assist state commissions in determining the size of each service area.⁽²⁷⁴⁴⁾

96. Ability of Commission to base support on areas smaller than state-designated service areas. SBC and Sprint PCS support the Joint Board's determination that the Commission can base high cost support on a geographic area that differs from a service area established by a state commission.⁽²⁷⁴⁵⁾ Bell Atlantic disagrees, contending that section 214(e)(5) gives the states exclusive authority to establish non-rural service areas "for the purpose of determining universal service obligations and support mechanisms."⁽²⁷⁴⁶⁾

b. Rural Service Areas

97. Service Areas Served by Rural Telephone Companies. A majority of parties who commented on this issue support the Joint Board's recommendation to adopt rural study areas as the service areas in geographic areas served by a rural telephone company.⁽²⁷⁴⁷⁾ Several entities representing the interests of rural LECs assert this decision will ensure that "cream-skimming" will not occur in rural areas.⁽²⁷⁴⁸⁾ Minnesota Coalition asserts that this decision is consistent with other provisions of the 1996 Act that make clear that competition in rural areas should not occur in a manner that harms universal service.⁽²⁷⁴⁹⁾ Minnesota Coalition also agrees with the Joint Board that adopting rural study areas as service areas would reduce the costs of implementing the program because rural LECs' accounting systems are designed to be applied to an entire study area, and adopting this approach avoids the costs and difficulties of attempting to determine embedded costs for a different service area.⁽²⁷⁵⁰⁾ ITC asserts that retaining study areas for rural carriers while allowing non-rural service areas to be variable in size may result in inequities because current study areas often incorporate a small urban area that lowers the average cost per loop, while the newly designated non-rural service areas may not.⁽²⁷⁵¹⁾ TCA expresses concern regarding the Joint Board's recommendation that "existing" rural study areas be used as rural service areas.⁽²⁷⁵²⁾ TCA indicates that when a rural study area is modified, the corresponding service area should also be modified accordingly.⁽²⁷⁵³⁾

98. Several parties, including parties representing primarily wireless interests, assert that the Joint Board neglected to account for the fact that many rural study areas are non-contiguous when it recommended that rural LECs' study areas be used as rural service areas for purposes of section 214(e).⁽²⁷⁵⁴⁾ Cox, Nextel, and Vanguard assert that adoption of this recommendation could impede wireless providers from qualifying for universal service support, in part because some wireless carriers are licensed within geographic regions with prescribed boundaries or are licensed on a station-by-station basis.⁽²⁷⁵⁵⁾ Vanguard indicates that the analysis that led the Joint Board to recommend that states not designate unreasonably large service areas also dictates that the size and distribution of rural service areas not inhibit competition.⁽²⁷⁵⁶⁾ GCI states that it is willing to provide service in all of a non-contiguous study area of a rural LEC, as long as the Commission does not impose criteria in addition to the criteria included in section 214(e)(1)(A).⁽²⁷⁵⁷⁾

99. Rather than using rural study areas, Cox suggests that new entrants should be required to serve only the entire contiguous portion of a rural LEC's study area because it will give competitors a fair chance to obtain universal service support while protecting rural carriers from "cream-skimming."⁽²⁷⁵⁸⁾ Cox suggests that this approach would be consistent with the Commission's current standards for modifying study areas which require carriers to demonstrate that modifications will not increase universal service costs.⁽²⁷⁵⁹⁾ In the alternative, Cox asserts that carriers could provide the core services throughout a service area.⁽²⁷⁶⁰⁾ Cox asserts that allowing providers to offer the core services cooperatively will alleviate difficulties in serving contiguous and non-contiguous service areas.⁽²⁷⁶¹⁾ Vanguard and Nextel support defining a service area as the area in which a service provider is seeking to serve customers, citing examples of a telephone franchise area or a wireless company's service area.⁽²⁷⁶²⁾ Nextel indicates that adopting this definition would be consistent with the competitive neutrality principle, and is also consistent with the Joint Board's recommendation regarding the analogous requirement for providers that offer supported services to schools and libraries.⁽²⁷⁶³⁾ Vanguard indicates its proposed definition of a rural service area is consistent with the language of section 214(e)(5) which recognizes that a rural LEC's study area may not be appropriate for determining universal service support eligibility.⁽²⁷⁶⁴⁾ Vanguard clarifies that CMRS service areas have been determined carefully by the Commission and that the Commission has adopted explicit build-out obligations for the provision of service throughout a given geographic region.⁽²⁷⁶⁵⁾ Thus, Vanguard asserts that if a wireless company's service area was adopted as its section 214 service area, CMRS providers would not be able to provide service only to the most lucrative consumers in an areas, as some LECs allege.⁽²⁷⁶⁶⁾

D. Unserved Areas

1. Comments

100. TCA, the lone commenter on the Joint Board recommendation on this issue, asserts that rules for unserved areas are a state matter under section 102 of the 1996 Act.⁽²⁷⁶⁷⁾ TCA indicates that any federal pronouncements in this area should state that no federal intervention is needed.⁽²⁷⁶⁸⁾

VII. RURAL, INSULAR, AND HIGH COST

A. Overview

101. The following is a summary of the comments relating to the rural, insular, and high costs issues.

B. Universal Service Support Based on Forward-Looking Economic Cost

1. Scope of Cost to be Supported

102. Forward-looking Costs. Many of the commenters agree with the Joint Board's recommendation that we base universal service support on the forward-looking costs of constructing and operating the network used to provide the services included in the list of services adopted pursuant to section 254(c)(1).⁽²⁷⁶⁹⁾ Several commenters contend that basing support mechanisms on forward-looking costs best reflects the costs of an efficient operator, thereby facilitating the transition to a competitive environment.⁽²⁷⁷⁰⁾ The Business Software Alliance and MCI contend that the use of forward-looking costs offers the correct economic incentives for carriers deciding how to invest, including whether to enter a new market.⁽²⁷⁷¹⁾ The CNMI Representative suggests that using forward-looking costs would permit support levels to reflect not only costs, but also the realities of spply and demand.⁽²⁷⁷²⁾ ITI states that the use of forward-looking costs would ensure that universal service support corresponds to the true costs of providing the service.⁽²⁷⁷³⁾ AirTouch states that using forward-looking costs, and breaking the link between the carrier's embedded costs and the support level, will create price-cap-like incentives for efficient cost reduction.⁽²⁷⁷⁴⁾

103. Other commenters disagree, however, and contend that the use of forward-looking costs will produce uncertainty and inaccuracy, because they claim that such cost figures are volatile, subjective, and unverifiable.⁽²⁷⁷⁵⁾ Several commenters argue that because they prevent carriers from recovering substantial portions of their infrastructure investment these forward-looking assumptions render it irrational to make future investments.⁽²⁷⁷⁶⁾ John Staurulakis adds that use of forward-looking costs undermines Congress's intent to promote facilities-based competition.⁽²⁷⁷⁷⁾ The California SBA contends that using the least-cost, most-efficient technology standard will likely underestimate the real cost of providing the supported services in high cost areas because few if any carriers are actually able to use such technology.⁽²⁷⁷⁸⁾ Harris agrees, stating that the newest technologies are often not available to ILECs, particularly small ILECs serving rural areas.⁽²⁷⁷⁹⁾

104. USTA, while opposing the use of forward-looking costs, states that if such costs are used, the appropriate basis for determining forward-looking economic costs is the expected cost of an actual firm in the market, not a hypothetical entrant that would instantaneously supply the entire market. USTA argues that an actual market participant, whether an incumbent or a new entrant, may be efficient in a dynamic sense, although not in the "static" sense assumed in the proxy models.⁽²⁷⁸⁰⁾ USTA notes that the telephone industry undergoes constant technological change, and asserts that the assumption of a static environment in the models poses significant cost recovery risks for ILECs, even if they are operating efficiently.⁽²⁷⁸¹⁾

105. Embedded Costs. Most ILECs contend that universal service support should be based on their embedded costs, rather than on forward-looking costs.⁽²⁷⁸²⁾ The ILECs assert that embedded costs more accurately reflect the real costs of providing service than forward-looking costs.⁽²⁷⁸³⁾ Ameritech and Puerto Rico Tel. Co. agree, stating that embedded costs accurately reflect the true costs of providing service and have been documented over time.⁽²⁷⁸⁴⁾ Tularosa Basin Tel. argues that there is no significant evidence of ILECs "goldplating" their networks through the use of universal service funds and that there is overwhelming evidence that ILECs are in fact using universal service support to bring quality services to their customers. It notes that all of its construction has been based on efficient engineering designs and competitive bidding to assure the most cost-effective infrastructure possible.⁽²⁷⁸⁵⁾

106. SBC states that nothing in the 1996 Act suggests that the Commission should jettison the use of embedded costs as a basis for support.⁽²⁷⁸⁶⁾ ITC claims that using embedded costs is the best way to ensure that funds are used to support the network and that potential new entrants receive the correct economic signals about the cost of providing service in that area.⁽²⁷⁸⁷⁾ The commenters also contend that use of embedded costs is the only way to ensure that there is a sufficient support mechanism, as required in section 254.⁽²⁷⁸⁸⁾

107. Many other parties oppose the use of embedded costs.⁽²⁷⁸⁹⁾ PageMart asserts that embedded costs include many unnecessary costs that should not be supported through universal service support mechanisms.⁽²⁷⁹⁰⁾ PCIA contends that such costs are based on obsolete rate-of-return regulation.⁽²⁷⁹¹⁾ AT&T states that use of embedded costs will not allow the support mechanism to capture the full benefits of current technology.⁽²⁷⁹²⁾ Chicago claims that basing support on embedded costs would impose enormous burdens on customers to compensate for past decision making by the ILEC, no matter how faulty those decisions were. Chicago also maintains that use of embedded costs would impose a significant barrier to entry, because support would be tied to the operating decisions of ILECs.⁽²⁷⁹³⁾ CPI expresses concern that use of a carrier's historic costs to set the support levels would subsidize the inefficient carrier at the expense of the efficient carrier.⁽²⁷⁹⁴⁾

108. Bell Atlantic proposes that the Commission use state-averaged embedded line costs as the basis for setting universal service support levels.⁽²⁷⁹⁵⁾ Bell Atlantic claims that averaging the costs within each state will eliminate any incentives not to be efficient that are built into the existing system because ILECs with obsolete technology or inefficient operations will not be rewarded with higher support payments than more efficient ILECs in the state. Bell Atlantic states that its proposal will also ensure that support flows to states that actually experience high cost, not just those that experience high costs in a theoretical model.⁽²⁷⁹⁶⁾

109. "Legacy" Costs. Several ILECs assert that the Commission should modify the Joint Board's recommended approach by providing for the explicit recovery of carriers' plant and equipment investments.⁽²⁷⁹⁷⁾ These commenters contend that carriers made these investments pursuant to federal and state regulatory directives that mandated the provision of a certain level of telephone service in high cost and rural areas. Some commenters argue that any universal service support mechanism that fails to provide for recovery of the costs of an ILEC's facilities would strand the ILEC's investment and constitute a confiscation of property, in violation of the Fifth Amendment protection against takings.⁽²⁷⁹⁸⁾

110. PacTel states that the Joint Board's recommendation that non-rural carriers move to a proxy model immediately is contrary to the Telecommunications Act and the constitutional prohibition against uncompensated takings.⁽²⁷⁹⁹⁾ Referring to plant and equipment investments as "legacy" costs,⁽²⁸⁰⁰⁾ PacTel contends that any cost proxy model used to calculate the costs of support services must allow ILECs to recover their legacy costs, or in the alternative, establish a transitional legacy cost recovery mechanism.⁽²⁸⁰¹⁾ PacTel maintains that failure to allow carriers to recover these investment costs would break a long-standing contract between government and local telephone companies, under which telephone companies are entitled to receive a fair opportunity to recover their legitimately incurred costs, including a fair return on investment.⁽²⁸⁰²⁾ PacTel explains that in exchange for that opportunity, ILECs committed to provide quality service to all consumers at rates set by regulators and assumed COLR obligations. PacTel asserts that regulators have often set rates based on social rather than economic policies and relied on the promise of a sustainable monopoly to defer recovery and keep rates below cost.⁽²⁸⁰³⁾ In addition, PacTel contends that regulatory decisions required the ILECs to recover plant and equipment investment in accordance with long depreciation schedules, and thus massive undepreciated plant and equipment remains on the ILECs' books.⁽²⁸⁰⁴⁾ PacTel states that its unrecovered investment is $4.7 billion in excess of what it should be using accepted economic depreciation methods. It adds that it does not expect to recover that investment if the Commission adopts the Joint Board's proposal.⁽²⁸⁰⁵⁾

111. As an alternative to providing for legacy cost recovery in the proxy model, PacTel proposes that the Commission establish a separate six-year transition mechanism that would permit ILECs to withdraw amounts from the high cost fund based on their legacy costs. CLECs would receive high cost assistance only from the forward-looking mechanism that would govern all eligible entities.⁽²⁸⁰⁶⁾ PacTel further argues that large carriers, as well as small, rural carriers, should be eligible to recover legacy costs during this transition, because they: (1) cannot simply replace lost revenues with revenues from other services because of the mandate that subsidies be explicit; (2) are less able to raise local rates to recover legacy costs than rural companies because of existing price caps; and, (3) have legacy costs per line that are comparable to those of rural carriers, despite a larger subscriber base.⁽²⁸⁰⁷⁾ PacTel also contends that should the current proceeding fail to address legacy cost recovery, the Commission should address this issue in the upcoming access reform proceeding or "elsewhere."⁽²⁸⁰⁸⁾

112. Regarding unrecovered investments in existing facilities, U S West recommends subtracting the amount of the investment that has been depreciated from the high cost investment differential described above, freezing this figure, and amortizing it over a short period. U S West suggests treating upgrades as new construction for universal service purposes.⁽²⁸⁰⁹⁾ U S West also contends that because the Commission stated in the Local Competition Proceeding stated that it would address embedded costs in the Universal Service Proceeding, and therefore, the Commission must provide for capital cost recovery in this proceeding.⁽²⁸¹⁰⁾

113. GTE also contends that the Commission's adoption of a proxy cost measure that systematically underestimates the ILECs' actual cost will amount to a taking of the ILECs' investments for the public good without allowing ILECs a full opportunity for recovery of prudently incurred costs.⁽²⁸¹¹⁾ GTE recommends that the Commission's methodology provide a mechanism for reconciling and justifying any differences between the cost estimates produced by a proxy model and the ILEC's embedded, prudently incurred costs.⁽²⁸¹²⁾ In particular, GTE suggests that the Commission estimate the amount of under-depreciated investment on the ILEC's books today and establish an amortization program pursuant to which these costs would be recovered through a competitively neutral funding mechanism independent of the ILECs' own rates. GTE defends the use of a separate funding mechanism on the grounds that such deferred costs are unique to ILECs and are associated with the ILECs' historical as providers of universal service.⁽²⁸¹³⁾

114. ITC states that the difference between the level of costs incurred in a regulated environment and those incurred in a competitive environment would require carriers to clear certain assets from accounts to operate competitively.⁽²⁸¹⁴⁾ ITC suggests that the Commission should establish a process by which each ILEC could establish the difference between their costs as stated in their audited financial statements related to their investment accounts and their costs as established pursuant to either a TELRIC study or proxy model reflecting these same accounts and then could recover that difference through the universal service support mechanisms over a three-year period. ITC proposes that during this period, the Commission base universal service support on forward-looking costs, in order not to duplicate the recovery of embedded costs. After the three-year period, TELRIC investment costs, based either on each carrier's individual costs or a proxy, should be used for universal service purposes.⁽²⁸¹⁵⁾

115. Several commenters criticize the ILECs' proposals for treating legacy costs.⁽²⁸¹⁶⁾ NCTA contends that the ILECs' aggregate cost of providing outside plant may have increased based on their accommodation of the demand for services beyond their universal service obligations. For example, NCTA asserts that the ILECs' facilities have been designed and constructed with far more extensive feeder and distribution capacity than would have been required to meet a "one line per household" service obligation. NCTA further contends that "neither the Act or any 'regulatory compact' ever guaranteed ILECs the unmitigated right to recover 'legacy costs'." NCTA maintains that the only guarantee a provider was given, under any version of a regulatory compact, was the opportunity to recover a reasonable return on investment and that this opportunity was not "intended to be a blank check to indemnify incumbent LECs from the consequences of their management choices."⁽²⁸¹⁷⁾ To refute the ILECs' constitutional takings argument, NCTA cites Illinois Bell Tel. Co. v. FCC,⁽²⁸¹⁸⁾ for the proposition that there is no constitutional right "to include in the rate base all actual costs for investments prudent when made." Thus, NCTA states that the ILECs' takings argument must fail in the absence of a judicial inquiry with respect to specific property, particular estimates of economic impact, and ultimate valuation of an individual ILEC's circumstances.⁽²⁸¹⁹⁾

116. CPI contends that the support mechanism does not have to compensate ILECs fully for their embedded costs, because ILECs incurred such costs in a monopoly market that did not induce efficient operation.⁽²⁸²⁰⁾ CPI also states that the Commission need not review the ILECs' embedded costs, because the Federal universal service fund should not by itself provide all of the support that is required in high cost areas.⁽²⁸²¹⁾ CPI argues that in establishing the universal service mechanism, the Commission's main purpose is not to keep ILECs whole, but to determine a method to distribute federal universal service support equitably.⁽²⁸²²⁾ Ohio PUC agrees, stating that Congress did not intend for the federal universal service mechanism to become the sole source of reimbursement for each carrier's embedded costs unrecovered in current rates.⁽²⁸²³⁾ CPI further contends that the state regulatory bodies are the appropriate fora in which to raise the issue of legacy costs, because that is where prices are set.⁽²⁸²⁴⁾

117. Construction Costs. U S West contends that the Commission should assure full recovery of a carrier's cost of constructing facilities to provide universal service at government behest.⁽²⁸²⁵⁾ Thus, U S West proposes that the universal service support mechanism should fund new, high cost construction through an up-front payment to the constructing carrier that covers the difference between the investment actually made by the carrier and the universal service investment component.⁽²⁸²⁶⁾ This amount, the high cost investment differential, would be adjusted if there was a mismatch between the asset life and the payment period. Pursuant to U S West's approach, the carrier might continue to receive universal service payments for operational expenses but would not receive further payments for facility construction.⁽²⁸²⁷⁾ U S West advocates making the ILECs' investment a benchmark that becomes an input to the forward-looking cost calculation.⁽²⁸²⁸⁾ In addition, except upon extraordinary showing, a second carrier would not be able to receive support for construction costs for a duplicative facility.⁽²⁸²⁹⁾ MFS asserts that granting ILECs a guarantee that they will recover their investment would not be competitively neutral, because new entrants are building facilities without such a guarantee.⁽²⁸³⁰⁾

2. Determination of Forward-Looking Economic Cost for Non-Rural Carriers

118. General. Many commenters support the Joint Board's recommendation to use a proxy model to calculate the cost of providing supported services.⁽²⁸³¹⁾ ALTS agrees with the Joint Board that a proxy model is the best method to estimate forward-looking costs.⁽²⁸³²⁾ LCI states that the use of a forward-looking proxy model is most consistent with the newly competitive local service environment.⁽²⁸³³⁾ AirTouch and CompTel concludes that proxy models are competitively neutral, promote efficiency, and are easy to administer.⁽²⁸³⁴⁾ The Maryland PSC supports the use of a proxy model for the Federal universal service mechanism but argues that states must be able to design their own mechanisms by which to determine the amount of state universal service.⁽²⁸³⁵⁾

119. Some commenters, however, oppose the use of a proxy model to calculate the cost of providing the supported services.⁽²⁸³⁶⁾ Roseville Tel. Co. asserts that the models are technically flawed and that the Commission should abandon them.⁽²⁸³⁷⁾ Western Alliance objecting to the use of proxies, asserts that the proposed models are not sufficiently tested or verifiable at this time.⁽²⁸³⁸⁾ Tularosa Basin Tel. and RT claim that a proxy model should not be used because a proxy model calculation will be outdated as soon as it is released, because of constant changes in technology.⁽²⁸³⁹⁾

120. Several commenters opposing the use of a proxy model claim that a model cannot assess the true costs of providing service. GTE states that the models use simple rules of thumb and construct a hypothetical network for a static 100 percent demand level service provider in an environment free uncertainty.⁽²⁸⁴⁰⁾ Several commenters argue that support should be based on the carrier's embedded costs.⁽²⁸⁴¹⁾ ITC and SBC contend that because proxy models calculate support based on the costs of a hypothetical network, the costs derived from the proxy model will not be sufficient to support the costs of a real world network, in violation of section 254.⁽²⁸⁴²⁾ Disagreeing, AirTouch and the Ohio PUC state that use of a proxy model will provide sufficient support for carriers.⁽²⁸⁴³⁾

121. Some commenters suggest that while a proxy model should not be used to determine the amount of support that a carrier receives, it could be used to identify high cost areas.⁽²⁸⁴⁴⁾ GTE and PacTel suggest that a proxy model be used to apportion embedded costs to geographic areas smaller than the current study areas. They contend that this approach satisfies the need to provide sufficient support and target that support to high cost areas that cannot be identified through ILEC cost records because there are no cost figures for small geographic areas such as CBGs or census blocks.⁽²⁸⁴⁵⁾ GSA agrees that proxy models could be used when carrier's embedded costs cannot be determined for a particular geographic area.⁽²⁸⁴⁶⁾

122. Criteria for Evaluation. Several commenters support the eight criteria for evaluating proxy models set forth by the Joint Board.⁽²⁸⁴⁷⁾ Other commenters, however, suggest changes or additions to the criteria. ALTS suggests that the fifth criterion, which concerns the estimation of costs for all subscribers in a geographic area,⁽²⁸⁴⁸⁾ should include the principle that "any model must reflect only the costs associated with the revenues against which they will be measured."⁽²⁸⁴⁹⁾ MFS and Washington UTC suggest adding a criterion that the economic costs estimated by the model should not exceed the embedded costs of the ILEC serving that area.⁽²⁸⁵⁰⁾ MFS and RTC also recommend adding that the model must reflect realistic engineering practices.⁽²⁸⁵¹⁾

123. PacTel and RTC/GVNW assert that a model's assumption must be internally consistent. They contend that because they purport to calculate the forward-looking costs of a new entrant, the proxy models must use forward-looking assumptions regarding such cost factors as a carrier's market share, cost of capital, debt-to-equity ratio, and depreciation lives.⁽²⁸⁵²⁾ PacTel contends that the currently filed proxy models violate the consistency requirement because they assume 100 percent market share for the carrier being modelled and use inputs for cost of capital, fill factors, debt-to-equity ratios, and depreciation lives of a carrier with 100 percent of the market rather than of one in a competitive market.⁽²⁸⁵³⁾ RTC/GVNW also state that market share is necessary input to a model.⁽²⁸⁵⁴⁾

124. Several commenters state that the criteria should include some requirement for validation or verification of the results of the model.⁽²⁸⁵⁵⁾ SBC suggests adding as a criterion that "the model should be able to replicate the costs experienced by incumbent LECs if the input variables reflect the equivalent values of those LECs."⁽²⁸⁵⁶⁾ SBC contends that unless the proxy model closely replicates the actual cost of providing the supported services, the model's use will not result in predictable or sufficient support, as required by section 254.⁽²⁸⁵⁷⁾ GTE states that a model's accuracy can only be verified by comparing its output to existing embedded cost information.⁽²⁸⁵⁸⁾ PacTel contends that in order to comply with section 254, a proxy model must: (1) allow ILECs to recover their legacy costs; (2) predict forward-looking costs based on actual ILEC cost information; (3) use consistent cost and demand figures; (4) include joint and common costs; and (5) be auditable, verifiable, and include mutable data inputs for relevant variables.⁽²⁸⁵⁹⁾ MFS, on the other hand, contends that the embedded costs of the ILEC should not be used to validate the results of the proxy models because those costs include of the ILEC's inefficiencies and are not the costs of an efficient, new entrant.⁽²⁸⁶⁰⁾

125. AT&T/MCI suggest that of the possible methods of verification, a comparison of model results to an engineering study of existing networks holds the most promise. According to AT&T/MCI, verification would consist of having an engineer review a selected sample of CBGs to check that current best engineering practices were used to design the network.⁽²⁸⁶¹⁾ RTC/GVNW agrees that any validation must begin at the physical-facilities level, with actual engineering studies.⁽²⁸⁶²⁾ GTE and Sprint also agree that independent engineering consultants should be used to verify the models' engineering assumptions.⁽²⁸⁶³⁾

126. Proposed Models: General. Three models were submitted to the Commission for consideration in this proceeding. The Benchmark Cost Proxy Model was submitted by Sprint, PacTel, and U S West.⁽²⁸⁶⁴⁾ The Hatfield Model 3.1 was developed by Hatfield Associates, Inc. under the sponsorship of AT&T and MCI.⁽²⁸⁶⁵⁾ The New Jersey Advocate submitted the Telecom Economic Cost Model (TECM), which was developed by Ben Johnson Associates, Inc. (Ben Johnson).⁽²⁸⁶⁶⁾

127. BANX notes that the Hatfield and the BCM2/BCPM models produce dramatically different results, even though they supposedly are modeling the same network and the same geographic level, and thus questions the use of either model for calculating the costs of the supported services.⁽²⁸⁶⁷⁾ Ameritech agrees, arguing that the current models are flawed, untested, and produce conflicting and unreliable results.⁽²⁸⁶⁸⁾ Many other commenters contend, however, that the key difference between the models is the inputs used by the models' proponents.⁽²⁸⁶⁹⁾

128. NCTA and Teleport assert that the Hatfield and BCPM models do not fully reflect the economies of scale enjoyed by an ILEC. NCTA asserts that the appropriate method for recognizing economies of scale is to take into account the difference between the stand-alone costs of a network constructed for just the supported services and the stand-alone cost of a network constructed for all services.⁽²⁸⁷⁰⁾ Similarly, Teleport contends that the Hatfield and BCPM models do not adhere to the principle of TSLRIC, because they do not estimate the costs that would be avoided if a provider stopped offering basic service yet continued to offer all its other services.⁽²⁸⁷¹⁾

129. PacTel contends that if the Hatfield and the BCPM use forward-looking costs, they should also use forward-looking demand.⁽²⁸⁷²⁾ NCTA agrees, stating that the use of cost factors that are derived from historical information, such as ARMIS data, violates the principles of a forward-looking cost model.⁽²⁸⁷³⁾ PacTel claims that while the models currently calculate costs for a carrier with 100 per cent market share, ILECs will lose market share, and therefore their forward-looking unit cost will be higher than contemplated by the models.⁽²⁸⁷⁴⁾ MCI disagrees, arguing that if the new entrants use the ILEC's unbundled network elements to provide support, the ILEC will not actually have any decline in the use of its network and the unbundled network element prices will cover the TELRIC of the loop. MCI also contends that PacTel's argument ignores market growth, and that even if an ILEC loses customers it may still see increased minutes of use of its network.⁽²⁸⁷⁵⁾

130. Most commenters agree that the smaller the geographic unit used by the model the more precise will be the cost estimates it generates. GTE contends that study areas, density zones, exchanges and wire centers are simply too large because of the potentially significant variation in the costs of serving different customers in those areas.⁽²⁸⁷⁶⁾ Some commenters assert that the CBG should be the geographic unit of analysis for the models.⁽²⁸⁷⁷⁾ Other commenters, however, argue that smaller areas, such as census blocks (CBs) or grid cells,⁽²⁸⁷⁸⁾ should be used, particularly in rural areas with very low population densities.⁽²⁸⁷⁹⁾ AT&T/MCI, while agreeing that the use of smaller areas can lead to more detailed cost estimates, warn that use of such areas makes the model more complex and requires more powerful computers, and may lead to a false sense of precision.⁽²⁸⁸⁰⁾

131. According to the commenters, a major problem with the way the models work is that they presume an even distribution of households across the geographic unit.⁽²⁸⁸¹⁾ BANX states that while a model's assumption that households are evenly distributed throughout a CBG may be reasonable for some parts of the country, it is not descriptive of areas in the Northeast and Mid-Atlantic. BANX claims that in those areas of the nation, the CBG is shaped irregularly, with many customers clustered relatively close to the central office, while other are far away. Thus, according to BANX, averaging costs by CBGs does not accurately group customers for which the cost of service is high or low.⁽²⁸⁸²⁾

132. Commenters also complain that the models do not reflect the true line counts within a CBG or for a particular wire center.⁽²⁸⁸³⁾ GTE notes that the models use the number of households in each CBG to determine residence line counts. It argues that this approach ignores differing penetration levels among CBGs.⁽²⁸⁸⁴⁾ SBC states that when it compared the lines counts for its operations in Texas to the counts in the models, it found the models' estimated line count was different by more than 10 percent for almost one-half of its approximately 500 wire centers in Texas.⁽²⁸⁸⁵⁾ GTE and Sprint note that the ILECs have line counts for each wire center, and Sprint urges the Commission to obtain those data through an information request to the ILECs.⁽²⁸⁸⁶⁾

133. The commenters all note that the model proponents are having difficulty acquiring accurate inputs for switch costs because of the lack of public information on switch costs.⁽²⁸⁸⁷⁾ Aliant and Sprint suggest that the Commission should also send a data request to ILECs and switch vendors to obtain accurate switch costs information.⁽²⁸⁸⁸⁾ BellSouth and GTE recommend using the Bellcore Switch Cost Information System (SCIS) to obtain switch cost information for use in the models.⁽²⁸⁸⁹⁾

134. Some commenters, including the ILECs, contend that the models should use inputs for such factors as cost of capital and debt-to-equity ratios that reflect a competitive market, and not the historical rates for ILECs.⁽²⁸⁹⁰⁾ ALTS contends that the models should not use the cost of capital of an average new entrant because the ILECs face less risk than a new entrant.⁽²⁸⁹¹⁾ NCTA asserts that the competition posed by resellers presents no risk to the ILEC's recovery of their capital.⁽²⁸⁹²⁾

135. Commenters also disagree on the depreciation rates used as model inputs. BANX states that proxy model advocates cannot "have it both ways," by basing costs on an ideal competitive network, while basing depreciation on a method that makes sense only for a rate-of-return regulated monopoly. BANX asserts that the models must employ accelerated depreciation methods.⁽²⁸⁹³⁾ Other commenters agree that depreciation factors used by competitive firms should be used in the models.⁽²⁸⁹⁴⁾

136. Some commenters note that the proposed models do not include wireless technologies. APC argues that the proposed models are flawed because they do not include wireless alternatives.⁽²⁸⁹⁵⁾ CTIA and Nortel agree, contending that the proposed proxy models therefore are not competitively neutral.⁽²⁸⁹⁶⁾ APC and CTIA claim that the failure to acknowledge that wireless technologies may be less expensive in some circumstances will lead to an artificially inflated fund and, in consequence, higher assessments for contributing carriers.⁽²⁸⁹⁷⁾

137. BCPM: Description of the Model. According to this model's proponents, the BCPM is a combination of, and improvement to, the best attributes of the BCM2 and CPM.⁽²⁸⁹⁸⁾ The proponents state that the BCPM differs from the BCM2 in two major ways.⁽²⁸⁹⁹⁾ First, the BCPM inputs are different from those of the BCM2. Second, the structure of the model has been changed to provide more clarity to the user concerning the use of input areas and the purpose of calculations.⁽²⁹⁰⁰⁾

138. According to its proponents, the BCPM is a geographically-based high level engineering model of a hypothetical local network that can be used to estimate benchmark costs for providing residential and business basic telephone service in small geographic areas. Small areas are used because the cost of service varies greatly even within the geographic area served by a single wire center. The BCPM assumes that all plant is installed at a single point in time throughout the nation.⁽²⁹⁰¹⁾ The model assumes the existing central office locations and boundaries throughout the county. Those data are entered into a geographic information system that associates each CBG is associated with its central office based on the centroid of the CBG. That information, plus the relative physical locations of households and central offices and CBG information are entered into the model. With this information, the BCPM designs a local exchange network using a tree and branch topology.⁽²⁹⁰²⁾

139. The proponents state that the BCPM designs a voice grade network using state-of-the-art currently available technology. The model's default values and parameters define a network capable of providing basic single-party voice grade service that allows customers to use currently available data modems for dial-up access to information services. The BCPM designs the network to eliminate problems associated with providing voice grade service over loaded loop plant.⁽²⁹⁰³⁾

140. The BCPM has three modules: (1) the investment module, used to calculate network investments; (2) the capital cost module, used to calculate capital cost factors and expenses; and (3) the reports module, which produces reports on either a CBG, CLLI,⁽²⁹⁰⁴⁾ state or company basis.⁽²⁹⁰⁵⁾ The investment module determines the investment required for the network. The module develops investment costs for the feeder and distribution by modeling a network based on the location of customers, as determined through CBG data, and the location of serving wire centers. As does the BCM2, BCPM assumes that households within a CBG are uniformly distributed. In rural areas, the modelled size of the CBG is reduced to reflect the removal of areas that do not have road access, based on the assumption that households are located within 500 feet of a road.⁽²⁹⁰⁶⁾ Costs incurred for distribution plant include the cost of the cable itself, as well as its installation and structure, and of the network interface device (NID), drop wire, drop terminal, splicing, and engineering.⁽²⁹⁰⁷⁾ Rather than the six zones used in the BCM2, the BCPM uses seven different density groups to determine for a given CBG the mixture of aerial, buried, and underground plant, feeder fill factors, distribution fill factors, and the mix of activities in placing plant, such as aerial placement or burying, and the cost per foot to install plant.⁽²⁹⁰⁸⁾ In order to provide adequate transmission capabilities for fax and dial-up modems, the model sets maximum loop lengths for copper at 12,000 feet for both feeder and distribution, which eliminates the need for loading coils.⁽²⁹⁰⁹⁾ The model uses only digital switching technology, and the cost entries are based on results from a data request that the proponents sent to ILECs.⁽²⁹¹⁰⁾

141. After the model defines the investment required for the network, the capital costs and expenses are calculated using the capital cost module. The BCPM has been designed to allow inputs for depreciation, cost of capital, and tax rates for nineteen different plant accounts, including motor vehicle, furniture, land, building, poles, and conduit. The estimates of plant lives are used to develop the depreciation rates. The lives, salvage, and costs of removal are based upon a ILEC industry data survey requesting forward-looking values. The module also incorporates the separate cost of debt and equity rates, along with the debt-to-equity ratio. Once the annual capital cost factors are developed, they are multiplied by the investment to arrive at yearly capital costs.⁽²⁹¹¹⁾ The operating expenses are expressed as an expense per line, based on ILEC estimates of forward-looking expenses per line for each Class A expense account.⁽²⁹¹²⁾

142. The BCPM's proponents state that the model includes many changes from the BCM2 and CPM.⁽²⁹¹³⁾ For instance, the BCPM associates customers with the serving wire center for the centroid of the CBG, rather than with their closest wire center. The density zone classifications from the CPM are used in the BCPM, because they are more evenly distributed and more closely matched to currently available sizes for plant, such as cable sizes, than those used in BCM2.⁽²⁹¹⁴⁾ Moreover, the BCPM expands the number of accounts with annual charge factors so that there is now a separate annual charge factor for each of the applicable USOA plant accounts.⁽²⁹¹⁵⁾ The BCPM now allows for the sharing of various structures, such as poles and conduits, and sharing percentages are established by density zone.⁽²⁹¹⁶⁾ The BCPM uses actual data the proponents requested from the ILECs and thus reflect current ILEC purchases of central office plant and outside plant, cable, and equipment.⁽²⁹¹⁷⁾ For example, the costs of a switch used in the model are derived from a switch cost curve that the proponents developed based on the data that they collected from various ILECs.⁽²⁹¹⁸⁾

143. Sprint states that the 11.4 percent cost of capital, the default value for this parameter, represents the cost incurred by an efficient entrant offering basic service in a competitive market environment. In addition, Sprint states that the 11.4 percent cost of capital is a conservative compromise between the Commission approved 11.25 percent and the estimated figure of 11.8 percent by Dr. James Vander Weide of Duke University.⁽²⁹¹⁹⁾

144. Comments on the BCPM. The Ohio PUC notes that it has selected the BCM and any subsequent revisions, such as the BCPM, to calculate of the costs for determining high cost support for its state universal service mechanism. The Ohio PUC believes that the BCM2 meets the criteria set forth by the Joint Board more fully than the Hatfield 2.2.2.⁽²⁹²⁰⁾ RUS states that the network modeled by BCPM has the architecture on which RUS loans are based in rural areas, and RUS considers that architecture to be efficient and capable of providing the supported services.⁽²⁹²¹⁾

145. RUS asserts that BCPM's assumption that all households are within 500 feet on a road is not true in many rural areas.⁽²⁹²²⁾ RUS also states that in analyzing the model, it found that the more new plant that is incorporated in a carrier's network at one time, the more that BCM2's cost estimates fell below the RUS estimated cost. It found that while there is a high correlation between BCM2 and RUS estimates of total plant in service (TPIS) for projects that added new facilities comprising less than thirty percent of the amount of pre-existing facilities, there is a much lower correlation for projects with over a 100 percent increase in TPIS.⁽²⁹²³⁾ According to RUS, this suggests that BCM2 more accurately estimates the costs for areas that need little upgrade to provide the supported services than it does for areas that need moe investment.⁽²⁹²⁴⁾

146. Nortel challenges the principle that the BCPM proponents used to cap line costs at $10,000.00 per line.⁽²⁹²⁵⁾ The cap level rests on the assumption that above that level wireless technologies would be used,⁽²⁹²⁶⁾ which Nortel asserts does not accurately represent the costs of wireless loops. Nortel claims that recent deployments of fixed wireless access systems show declining costs for wireless loops.⁽²⁹²⁷⁾ Stating that most of the carriers that borrow from it have some loops that cost over $10,000.00 and that it has found only a few instances where wireless loop plant is cheaper than wireline, RUS asserts, however, that the $10,000.00 cap is unrealistic.⁽²⁹²⁸⁾ RUS claims that the most expensive loops are usually so far apart that multiple wireless systems would be required with each serving only a few subscribers, making them economically impractical.⁽²⁹²⁹⁾ Asserting that the cost of wireless loops may be greater than the $10,000.00 cap used by BCPM, AT&T/MCI state that use of this cap may underestimate the cost of some loops.⁽²⁹³⁰⁾

147. Hatfield: Description of the Model. According to its proponents, Hatfield 3.1 is capable of estimating the forward-looking economic costs of (1) UNEs, based on TELRIC principles; (2) basic telephone service, as defined by the Joint Board in the Recommended Decision; and (3) carrier access to, and interconnection with, the local exchange network.⁽²⁹³¹⁾

148. Its proponents state that Hatfield 3.1 constructs a "bottom up" estimate of costs based on detailed information concerning customer demand, network component prices, operational costs, network operations criteria, and other factors affecting the costs of providing local service. Hatfield 3.1, according to it proponents, builds an engineering model of a local exchange network with sufficient capacity to meet total demand and to maintain a high level of service quality.⁽²⁹³²⁾

149. Hatfield 3.1 contains four modules: (1) the distribution module, which calculates distribution distances and investment; (2) the feeder module, which calculates feeder distances and investment; (3) the switching and interoffice module, which calculates switching, signaling, and interoffice investment; and (4) the expense module, which calculates the cost of capital, expenses, UNE unit costs, universal service requirements, and access costs.⁽²⁹³³⁾ The inputs for the model are contained in work files and include: (1) demographic, geographic, and geological characteristics of CBGs, which are used to locate geographically the number of customers requiring service, the wire center that serves them, and the types of terrain within the CBG; (2) interoffice distances between end office, tandems, and signaling transfer points (STPs), used in estimating route miles required for interoffice transmission facilities; (3) 1995 ARMIS data reported by LECs, which provide investment, traffic, and expense information; and, (4) adjustable inputs that allow the user to set carrier or location specific parameters, such as labor costs.⁽²⁹³⁴⁾ The inputs include the prices of various network components, with the associated installation and placement costs, as well as various capital cost parameters.⁽²⁹³⁵⁾

150. The distribution module configures the portion of the network from the serving area interfaces (SAIs) to the customer's premises. The module determines the lengths and diameters of distribution cable, the associated structures, such as poles and trenching, and the number of terminals, splices, drops, and NIDs required to provide service in the CBG. The selection of whether to serve the CBG using copper wires or fiber optic cable is made according to an adjustable parameter that specifies the maximum feeder distance to the CBG beyond which fiber is to be installed.⁽²⁹³⁶⁾ The default setting is at 9,000 feet.⁽²⁹³⁷⁾ Once the module has determined the distribution elements required, it calculates the investment costs associated with those elements, using as inputs the price for each such element.⁽²⁹³⁸⁾

151. The feeder module configures the portion of the network from the wire center to the SAIs. The feeder module uses the information from the distribution module to determine the size and type of cable required to reach the SAIs located in each CBG and also of supporting structures, such as poles, conduit, and manholes. The feeder module then calculates the investment costs associated with those elements using the price of each such element.⁽²⁹³⁹⁾

152. The switching and interoffice module computes investment costs required for end-office switching, tandem switching, signaling, and interoffice transmission facilities. It determines the required line, traffic, and call processing capacity of switches based on line totals by customer type for the serving wire center, and based on ARMIS-derived traffic and calling volume inputs. The switching and interoffice module also determines capacity and distances of interoffice transmission facilities required to provide interoffice transport.⁽²⁹⁴⁰⁾

153. The expense module uses the network investment information generated by the other modules to calculate the monthly costs for universal service, UNEs, and carrier access, including capital costs associated with the investments, such as depreciation, and the costs of operating the network, including maintenance, network operations, and general support expenses. Information on network operating and maintenance expenses is derived from ARMIS and other sources. The expense module produces reports showing the key outputs of the model, including the cost of providing universal service. While the outputs are based on investments calculated at the CBG level, the results may be displayed by individual wire center or by CBG.⁽²⁹⁴¹⁾

154. The model's proponents state that Hatfield 3.1 contains a number of significant changes from Hatfield 2.2.2.⁽²⁹⁴²⁾ Among those changes, the number of density zones was increased from six to nine.⁽²⁹⁴³⁾ Moreover, each CBG is now assigned to a wire center based on an analysis of the NPA-NXXs serving the CBG.⁽²⁹⁴⁴⁾ Estimates of the number of residence and business lines per CBG have been improved by, for example, accounting for differences in the demand for residence lines based on the age-income profile of the CBG.⁽²⁹⁴⁵⁾ According to the model's proponents, the switching system model is more sophisticated than that used in Hatfield 2.2.2 and now treats BOCs and large ILECs separately from rural ILECs. Depreciation expense calculation has been changed to reflect the use of investment levels at mid-year, rather than at the end of the year, and to adjust for net salvage value.⁽²⁹⁴⁶⁾

155. According to the proponents, Hatfield assigns joint and common costs by adding 10.4 percent to all other expenses. This mechanism is intended to capture only corporate operations expenses, and is based on an econometric study of the relationship of joint and common costs and direct expenses. Hatfield also includes general support expenses, billing, bill inquiry, and white pages listings. Its proponents argue that this approach assigns a reasonable level of overhead expenses to universal service.⁽²⁹⁴⁷⁾

156. Comments on the Hatfield Model. Several parties endorse the use of the Hatfield model.⁽²⁹⁴⁸⁾ Other commenters, however, including most ILECs, oppose the Hatfield model.⁽²⁹⁴⁹⁾ Some commenters claim that the model is biased to produce low costs because the model's proponents would benefit from a smaller universal service surcharge and lower interconnection rates.⁽²⁹⁵⁰⁾ GTE notes that several state commissions have rejected the Hatfield model and claims that no state commission has embraced or approved the underlying theory, design, or assumptions of the model.⁽²⁹⁵¹⁾

157. GTE asserts that the Commission cannot adopt the Hatfield model, because the proponents have not adequately documented the basis for choosing the default inputs and assumptions.⁽²⁹⁵²⁾ RTC/GVNW asserts that the Hatfield model is internally inconsistent because it uses ILEC embedded cost of capital and depreciation, but does not use embedded cost data.⁽²⁹⁵³⁾ BANX, SBC, and USTA contend that many of the flaws in Hatfield 2.2.2 remain on Hatfield 3.0, including (1) unreasonably long, Commission-prescribed depreciation lives that are unrealistic in a competitive environment; (2) a lower cost of capital than the Commission prescribed in a monopoly environment; (3) expenses based on historical ARMIS expense/investment ratios applied to downward-adjusted investment levels; and (4) a network design based on the economies of scale of a monopoly provider with only new facilities perfectly sized to current demand.⁽²⁹⁵⁴⁾ BANX argues that these flaws ensure that the costs calculated by the Hatfield model are far below the costs that either the ILEC or a new entrant would incur to provide telephone service.⁽²⁹⁵⁵⁾

158. RUS states that the Hatfield model loop plant with loaded coils. RUS asserts that ILECs are phasing out such loops and that no new entrant would build outside plant based on that antiquated technology. RUS also state that its loans require non-loaded loops, and claims that loaded loops cannot support the bandwidth for voice grade service recommended by the Joint Board.⁽²⁹⁵⁶⁾

159. Many commenters disagree with the structure sharing assumptions in the Hatfield model.⁽²⁹⁵⁷⁾ Aliant states that in rural areas there will be minimal sharing, due to the distinct design parameters and cost associated with facility placement for each type of utility.⁽²⁹⁵⁸⁾ RTC/GVNW contend that in rural areas carriers often cannot share structures, because there are no cable companies and the electric company often uses a different construction method than the phone company.⁽²⁹⁵⁹⁾ GTE agrees that there is limited sharing. GTE states that it pays 97.5 percent of the cost for buried plant its uses, in other words, other utilities only cover about 2.5 percent of those costs. For under ground plant GTE pays 95-99 percent, and 57-61 percent for aerial plant.⁽²⁹⁶⁰⁾ Gabel suggests that for buried cable close to 100 percent of costs should be assigned to telephone, rather than the 33 percent used in the Hatfield model.⁽²⁹⁶¹⁾

160. The model's proponents claim that in many cases criticism of the Hatfield model is misplaced, because that criticism actually relates to the default inputs used in the model. The proponents argue that because the user can adjust the inputs disagreements about the accuracy of the default inputs are no reason to discard the model.⁽²⁹⁶²⁾

161. TECM: Description of the Model. The New Jersey Advocate, who submitted the TECM, used that model in a regulatory proceeding in New Jersey in which the BCM2 and Hatfield 2.2.2 were also under consideration.⁽²⁹⁶³⁾ The TECM has also been filed in intrastate regulatory proceedings in Colorado, Idaho, Mississippi, North Carolina, and Pennsylvania.⁽²⁹⁶⁴⁾

162. According to its developer, Ben Johnson, the TECM estimates the cost of local telephone networks. It can be used to estimate the costs services such as local exchange and UNEs. The model can calculate different economic measures of cost, including: (1) long-run average cost, (2) TSLRIC, (3) TELRIC, (4) long-run marginal cost of a service, and (5) long-run marginal costs of an UNE. The TECM can analyze and compare costs under both monopoly conditions and competitive market conditions.⁽²⁹⁶⁵⁾ The model develops costs at the wire center level, although those costs can be aggregated to the study area or state level.⁽²⁹⁶⁶⁾ The TECM is usually run using the loop length data of existing wire centers; thus it is a "scorched node" model.⁽²⁹⁶⁷⁾ The user can modify numerous input values and assumptions, such as debt-to-equity ratios, economic lives, and facility utilization and sharing factors.⁽²⁹⁶⁸⁾ The model will also develop stand-alone costs of service to different market segments, such as residential and business customers.⁽²⁹⁶⁹⁾

163. Subsequent to the staff workshops on proxy models, the New Jersey Advocate submitted a revised version of the TECM in response to comments made by the workshop participants.⁽²⁹⁷⁰⁾ The changes to the model include modifications to several financial and technical assumptions. For example, new input cells were added for the loaded labor cost per hour section. These new cells allow the user to specify the additional cost of special equipment needed to perform such tasks as pole installation, trenching, and manhole installation.⁽²⁹⁷¹⁾ The user can now specify different utilization factors for feeder, feeder/distribution, and distribution cable.⁽²⁹⁷²⁾ In addition, some of the default values were modified. For example, the economic life of switching was reduced to 12 years.⁽²⁹⁷³⁾

164. Comments on the TECM. The New Jersey Advocate claims that the TECM offers some important advantages over the BCM2/BCPM and Hatfield models. According to the New Jersey Advocate, with the TECM, unlike the BCPM and Hatfield models, the user can easily develop cost estimates covering a wide range of different scenarios to reflect differences in the customer characteristics, network configurations, market shares, and whether the carrier is serving areas close to or distant from the wire center.⁽²⁹⁷⁴⁾ The New Jersey Advocate states that the TECM offers a more detailed array of financial and technical inputs than the other models. It notes, for example, that with the TECM, a user can vary the labor costs per hour to match the labor costs in a particular state. Also, the number of hours or minutes required to perform specific functions can be varied based upon climate, terrain, and other relevant factors applicable to a particular wire center.⁽²⁹⁷⁵⁾ The New Jersey Advocate contends that ability of TECM to develop more precise cost estimates will be invaluable in expanding the use of the proxy models to calculate support for rural carriers and carriers serving extreme areas such as Alaska.⁽²⁹⁷⁶⁾

165. ALTS contends that some of the assumptions used in the TECM may suggest alternate input values and for use in the BCPM and the Hatfield models. ALTS is concerned, however, that the TECM has not been as rigorously documented or tested as the other two models and may require entry of special data, many of that may not be publicly available.⁽²⁹⁷⁷⁾ RTC/GVNW also state that they have had little opportunity to review the TECM. RTC/GVNW concludes that some features of the model may be promising, but questions whether the model can be used in the universal service proceeding because note that the model is not self-contained and could not be used without supporting data from other models to supply the necessary input regarding loop lengths.⁽²⁹⁷⁸⁾

3. Determination of Forward-Looking Economic Cost for Rural Carriers

166. Developing a Forward-Looking Economic Cost Model for Rural Carriers. Commenters suggest procedures that the Commission should follow to select a cost model for rural carriers.⁽²⁹⁷⁹⁾ Iowa Utilities Board advises that to assure that the Act's requirements regarding urban and rural rate comparability are met, the Commission should initiate a proceeding in this docket that will allow all interested parties to participate.⁽²⁹⁸⁰⁾ Iowa Utilities Board further suggests that the Commission include an impact study on the rates charged to the customers of the small, rural carriers in its review of any model.⁽²⁹⁸¹⁾ Harris recommends that the Commission should ensure that small companies participate in the model selection process by making the forward-looking cost model available for testing by small companies.⁽²⁹⁸²⁾ Wyoming PSC maintains that the Commission must give state commissions a major role in the development of an acceptable proxy models for rural carriers.⁽²⁹⁸³⁾ Pacific Telecom argues that, because of the unique circumstances of rural areas, the Joint Board should establish a task force specifically to study the development and impact of a cost model for rural carriers.⁽²⁹⁸⁴⁾ Several commenters also urge the Commission to coordinate the transition to forward-looking costs for rural carriers with access charge and separations reforms because the rural carriers receive over 50 percent of their gross revenue from interexchange access charges and may lose an additional source of revenue if access charges decrease.⁽²⁹⁸⁵⁾

167. Other commenters address the characteristics that a cost model applied to rural carriers should have. TDS Telecom and RTC contend that a cost model should provide specific, predictable, and sufficient federal and state support calculations to preserve and advance universal service, enable the offering of quality services at affordable rates, support nationwide access to advanced telecommunications and information services through the availability of comparable rural and urban rates and services, provide correct signals regarding infrastructure investment.⁽²⁹⁸⁶⁾ USTA maintains that the cost model developed for rural carriers should reflect actual costs.⁽²⁹⁸⁷⁾ TCA asserts that the Commission should use a cost model for rural carriers only to identify high cost areas, while continuing to base support on actual cost, according to the model's distribution.⁽²⁹⁸⁸⁾ Wyoming PSC maintains that the Commission should reconsider the Joint Board's recommendation to apply only a single cost model to all carriers, because "one size" cannot fit all and the disparate needs of the different high cost areas must be reasonably met.⁽²⁹⁸⁹⁾

168. Parties also comment regarding the size of the geographic area on which the cost model will base the support calculation. John Staurulakis contends that the selected cost model should not be based on CBG data because census blocks are too large to identify adequately the rural carriers' existing service territory.⁽²⁹⁹⁰⁾ Instead, John Staurulakis asserts that the model should allow rural carriers the option of using their company-specific costs and recommends that the Commission conduct company-specific cost studies to ensure that the support is specific, predictable, and sufficient.⁽²⁹⁹¹⁾ NRPT recommends that the Commission recognize the differences between large, urban ILECs and small, rural ILECs and base the cost model for rural carriers on wire centers or study areas to target the support better.⁽²⁹⁹²⁾ RTC argues that to counter the effects of "cherry picking" by competitors, the cost model should permit rural carriers to receive support based on disaggregated parts of their service areas, so that they receive the actual cost of providing service in the sparsely populated parts of a study area.⁽²⁹⁹³⁾

169. John Staurulakis advises that the use of a cost model should include a "maximum shift or change" feature that is similar to the provision in section 36.154(f)(1) of the Commission's rules permitting a five percent SPF reduction in the transition to the 25 percent gross allocation factor of non-traffic sensitive costs to the interstate jurisdiction.⁽²⁹⁹⁴⁾ John Staurulakis contends that such a feature would ensure that a carrier's universal service payment does not increase or decrease by more than five percent per year to assure the predictability of the reconstituted universal service support mechanisms and protect rural carriers from major shifts in the amount of support received due to census changes, errors in census data, or other factors.⁽²⁹⁹⁵⁾ RTC also suggests that even once a validated model is developed, the Commission should allow parties to petition for waivers so that companies with cost structures not fitting within the model may obtain relief.⁽²⁹⁹⁶⁾

4. Applicable Benchmarks

170. Use of a nationwide benchmark. There is general support for the use of a nationwide benchmark.⁽²⁹⁹⁷⁾ The West Virginia Consumer Advocate contends that a nationwide benchmark will ensure that telecommunications rates will remain affordable throughout the nation and will not vary widely from state to state.⁽²⁹⁹⁸⁾ Comptel states that a single benchmark will bring uniformity and predictability to the support mechanism and reduce the possibility that the support mechanism may favor carriers operating in some regions of the country.⁽²⁹⁹⁹⁾ Comptel also contends that a nationwide benchmark will be easier to administer than regional or state wide benchmarks.⁽³⁰⁰⁰⁾ In contrast, RUS and the Georgia Consumer's Council suggest that the Commission consider regional or statewide benchmarks. They express concern that if the national benchmark is above the regional or state wide level, carriers in that region or state recover less than the reasonable costs of service.⁽³⁰⁰¹⁾

171. Average revenue-per-line benchmark. The majority of commenters appear to support the use of a revenue-based benchmark, although there is strong disagreement regarding what revenues to include in that benchmark.⁽³⁰⁰²⁾ Time Warner states that use of a benchmark that considers the revenues received by the carrier is the most efficient and fair mechanism for establishing the need for high cost support.⁽³⁰⁰³⁾ Several commenters, however, oppose the use of a revenue-based benchmark. ALLTEL and USTA contend that by using a revenue-based benchmark will permit the size of the fund to be manipulated by creating an artificially high revenue per line and thereby precluding eligible telecommunications carriers with legitimate universal service requirements from receiving funding. They also argue that revenues are not related to the cost of providing services, which is what the universal service mechanism is supposed to address.⁽³⁰⁰⁴⁾ MFS contends that revenues should not be used because the development of competition in local markets should bring down revenues, thereby increasing the support level defined by a revenue-based benchmark.⁽³⁰⁰⁵⁾

172. Many commenters agree with the Joint Board's recommendation to use a revenue-based benchmark that includes revenues from local, discretionary, and access services.⁽³⁰⁰⁶⁾ Those commenters assert that the Joint Board's recommendation recognizes that carriers receive far more revenue from their customers to cover the costs of basic service than they collect from rates for basic service.⁽³⁰⁰⁷⁾ Other commenters contend that in establishing the benchmark, the Commission should include a broader revenue base than the Joint Board recommended. Several commenters suggest that revenue from yellow pages should be included in a revenue benchmark, because yellow pages have been historically linked to residential telephone service.⁽³⁰⁰⁸⁾ Comptel and MCI argue that revenues from intraLATA toll service should be included in the benchmark because the same network components that are used for basic service are also used to make intraLATA toll calls.⁽³⁰⁰⁹⁾

173. Many commenters, including most ILECs, assert that revenues from discretionary and access services should not be included in the calculation of a benchmark.⁽³⁰¹⁰⁾ They contend that for setting the benchmark only revenues from the supported services should be considered because only the cost of providing those services is considered in establishing the costs of providing the supported services.⁽³⁰¹¹⁾ These commenters conclude that because discretionary services and access services are not among the supported services, and thus their costs are not included in calculating the cost of service, the revenues from those services should be excluded from the benchmark.⁽³⁰¹²⁾ For similar reasons, GTE argues that revenue from yellow pages should be excluded from revenue used to calculate the benchmark.⁽³⁰¹³⁾ Several commenters contend that the benchmark should not include revenues from discretionary and access services, because the proxy models calculate the costs for the supported services and do not include the costs of discretionary and access services.⁽³⁰¹⁴⁾

174. Benchmark based on rates. Only a few commenters specifically address the use of a rate-based benchmark. Urging the Commission to use as the benchmark the national average urban basic local service rate, including subscriber line charges, Sprint asserts that when the Commission and states finish their proceedings to eliminate implicit subsidies, the rates for local service will closely reflect the economic cost of service.⁽³⁰¹⁵⁾ TCA states that the benchmark should be based on a reasonable rate for basic local service alone and that the rate chosen must meet the principle of keeping rural rates comparable to urban rates.⁽³⁰¹⁶⁾ In contrast, Time Warner asserts that the Joint Board was correct to reject a rate-based benchmark because such a benchmark only reflects basic service rates and does not take into account all the revenues a carrier receives from a customer that contribute to the costs of providing basic service.⁽³⁰¹⁷⁾

175. Benchmark based on affordability. Several commenters support the use of a benchmark based on some index of affordability. Puerto Rico Tel Co. asserts that affordability must be an integral factor in determining the level of support provided for a service area.⁽³⁰¹⁸⁾ Puerto Rico Tel Co. contends that the benchmark for such areas of low penetration should be adjusted by a factor proportionate to the difference between the income level for that area and the national average income level.⁽³⁰¹⁹⁾ BellSouth contends that an affordability benchmark advances the principle of service at affordable rates included in section 254, and is not subject to the same types of manipulation that a revenue-based benchmark may be.⁽³⁰²⁰⁾ BellSouth and USTA propose that the Commission base the benchmark on one percent of household income.⁽³⁰²¹⁾ USTA argues that the use of household income is reasonable because it reflects what customers can reasonably be expected to pay for service.⁽³⁰²²⁾

176. Cost-based benchmark. Several parties contend that the benchmark should be based on the average cost of providing service, rather than on revenues. They argue that, as the Joint Board noted,⁽³⁰²³⁾ revenues are subject to great fluctuation, particularly as new competitors enter the market.⁽³⁰²⁴⁾ ALLTEL and MFS urge the Commission to base the benchmark on the national average cost of service developed by the proxy models.⁽³⁰²⁵⁾ They state that the purpose of the universal service support mechanism is to support high cost areas, not areas with low revenues.⁽³⁰²⁶⁾ The California PUC also argues that the best way to assure that the fund is directed to high costs areas is to adopt a cost-based benchmark. The Maryland PSC suggests that the Commission consider a benchmark based on the rates for unbundled network elements established by the state pursuant to arbitration proceedings.⁽³⁰²⁷⁾ RTC and several rural telephone companies assert that the benchmark should be based on average embedded costs for ILECs.⁽³⁰²⁸⁾

177. Other benchmarks. U S West recommends that the Commission adopt the Federal Funding Benchmark (FFB) of $30 that U S West proposed as the basis for distributing universal service support.⁽³⁰²⁹⁾ U S West states that its FFB will result in a reasonably sized high cost fund. It contends that there is support in the record for a $30 level because that amount is slightly lower than the highest statewide average residential rate and generally corresponds to one percent of national median household income, the benchmark proposed by some commenters.⁽³⁰³⁰⁾

178. Use of separate benchmarks for residential and single-line business services. Several commenters express support for the Joint Board's recommendation to have separate benchmarks for residential and single-line business services.⁽³⁰³¹⁾ USTA supports the use of separate benchmarks for residential and single-line business service, and argues that the former benchmark should be based on the median household income in the county.⁽³⁰³²⁾ The Maryland PSC states that if support is to be provided for single-line businesses, a separate benchmark should be established.⁽³⁰³³⁾ Roseville Tel. Co. and TDS Telecom assert that because ILECs do not keep records of revenues separately for residential and business calling, developing two benchmarks will impose difficult record-keeping and collections burdens on ILECs.⁽³⁰³⁴⁾

C. Mechanisms for Carriers Until Support is Provided Based on Forward-Looking Economc Cost

1. Non-Rural Carriers

179. Alternative Options. BANX proposes another way to determine forward-looking economic costs for use in calculating universal service support. Citing three advantages to doing so, BANX proposes that rather than proxy models, the Commission should use the rates for UNEs as the basis for calculating the cost of providing the supported services.⁽³⁰³⁵⁾ First, BANX contends that using UNEs would avoid the administrative difficulties in administering different support levels for hundreds or thousands of CBGs in each state. Second, BANX asserts that assuming that the rates for UNEs reflect states' determinations of the cost of the underlying facilities, the UNEs would have a stronger economic basis than the hypothetical costs produced by the proxy models. Finally, BANX explains that there would not be any potential arbitrage problem between the costs of UNEs and the level of universal service support.⁽³⁰³⁶⁾

2. Rural Carriers

180. In General. Rural carriers generally support the Joint Board's recommendation that a forward-lookig economic cost model not be used immediately to calculate their high cost support.⁽³⁰³⁷⁾ Most rural carriers, however, object to the scheduled transition to a mechanism for calculating support based on forward-looking costs.⁽³⁰³⁸⁾ Rural carriers also oppose the Joint Board's recommendation to fixed support levels during the transition.⁽³⁰³⁹⁾ Moreover, they join other ILEC commenters disputing the Joint Board's recommendation to make support portable to competitive carriers.⁽³⁰⁴⁰⁾ State regulatory commissions from states with many rural carriers generally agree with the rural carriers' comments regarding the Joint Board's recommendations.⁽³⁰⁴¹⁾ IXCs, CLECs, some state regulatory commissions, and others, however, generally endorse the Joint Board's recommendations regarding the support mechanism for rural carriers.⁽³⁰⁴²⁾ Some commenters contend that the Commission should immediately discontinue support based on embedded costs for all carriers.⁽³⁰⁴³⁾

181. Use of a Forward-Looking Economic Cost Model. Most rural carriers oppose the use of a forward-looking cost cost model and advocate the continued use of embedded cost to determine high cost support for all carriers.⁽³⁰⁴⁴⁾ Rural carriers and some state PUCs contend that because rural areas are more expensive to serve than urban areas, the application of current cost models to rural telephone companies produces inconsistent and insufficient cost calculations.⁽³⁰⁴⁵⁾ Parties contend that rural carriers incur much higher costs per-subscriber than their larger counterparts, because rural carriers are unable to realize the economies of scale and scope available to ILECs serving densely populated areas.⁽³⁰⁴⁶⁾ Minnesota Coalition asserts that rural carriers' small revenue bases and high costs prohibit the generation of the large cash flows necessary for them to withstand sharp reductions or fluctuations in particular revenue categories.⁽³⁰⁴⁷⁾ Minnesota Coalition also asserts that the current embedded cost mechanism must be maintained, because the pending access charge reform proceeding will eliminate the offsetting effect of access revenues to any reduction in support.⁽³⁰⁴⁸⁾ RTC expresses concern that, because the Joint Board recommends that ILECs contribute to the new universal service support mechanisms, providing support at a level other than a 100 percent of embedded cost will result in a further net reduction of support to ILECs.⁽³⁰⁴⁹⁾

182. Transition to a Forward-Looking Economic Cost. Many commenters assert that the Joint Board's recommendation to shift rural carriers to a forward-looking economic cost methodology over a six-year transition period is contrary to the requirements of the Act.⁽³⁰⁵⁰⁾ Minnesota Coalition contends that the Commission should continue to base support to rural carriers on their embedded costs because section 254 requires that support be "sufficient" to achieve rates in rural areas that are affordable and reasonably comparable to rates charged for similar services in urban areas.⁽³⁰⁵¹⁾ Similarly, ALLTEL and USTA maintain that the Commission should develop and validate a cost model that meets the criteria of section 254(b)(5) before starting the rural carriers' transition to forward-looking costs.⁽³⁰⁵²⁾ Arguing that Congress added section 254 to the Act to protect rural areas because rural areas are less likely to attract competition, some parties contend that the mandate in section 254 to preserve and advance universal service requires the exemption of rural carriers from the use of a proxy model until competition develops in rural areas.⁽³⁰⁵³⁾ Furthermore, many of these commenters state that rural carriers rely upon federal and state universal service support to maintain affordable rates and insist that a support mechanism based on forward-looking economic cost will undermine the provision of universal service by providing carriers reduced support.⁽³⁰⁵⁴⁾ Western Alliance argues that the Joint Board's recommendations if adopted, would destroy section 254's rural safeguards to the detriment of telecommunications infrastructure investment, service, quality, and rates and general economic development in rural areas.⁽³⁰⁵⁵⁾

183. Many commenters, primarily non-ILECs, support the Joint Board's recommendations to shift rural carriers gradually to a support mechanism based on forward-looking economic cost to calculate support.⁽³⁰⁵⁶⁾ MCI maintains that the reasons for adopting forward-looking costs apply equally to urban and rural areas.⁽³⁰⁵⁷⁾ Moreover, Virginia's Rural, a group of rural carriers in Virginia, support the recommended transition to cost models for rural carriers because it reflects "a proper balance in determining the universal service support for rural companies."⁽³⁰⁵⁸⁾ ITI contends that a long-run incremental cost methodology "will ensure that universal service support levels correspond to the true costs of providing universal service and thereby both encourage competition in rural areas and bolster efficiency in the provision of universal service."⁽³⁰⁵⁹⁾ In addition, the California PUC argues that, even though any reduction in support from the transition to a cost model may cause rural rates to rise, section 254(b) of the Act does not require that rates in high cost areas be the same as those in low cost areas; instead, this provision requires only that rates be reasonably comparable.⁽³⁰⁶⁰⁾ CSE Foundation avers that because the $5 billion annual rural high cost support amount it has estimated substantially exceeds the support estimates for low-income subscribers and educational institutions, the Commission should not grant any support based on embedded costs to rural carriers through a transition mechanism.⁽³⁰⁶¹⁾ Rather than recommending that rural carriers move to proxies, however, CSE Foundation advocates calculating support for all carriers on a competitive bidding system.⁽³⁰⁶²⁾

184. Length of Transition. Other carriers contend that the Commission should implement a transition period for rural carriers that is longer than the six years recommended by the Joint Board.⁽³⁰⁶³⁾ MCI, however, maintains that the recommended transition is more than sufficient to ensure that there is no harmful effect to universal service as a result of the transition to the use of forward-looking costs.⁽³⁰⁶⁴⁾ Ameritech asserts that rural carriers should begin the transition immediately upon development of a suitable cost model, instead of collecting support at protected levels for a preceding three-year period.⁽³⁰⁶⁵⁾

185. Early Use of Forward-Looking Economic Cost Methodology. The majority of commenters support permitting rural carriers to determine costs based on forward-looking economic cost prior to the date of mandatory shift to the use of proxy models, as recommended by the Joint Board.⁽³⁰⁶⁶⁾ In contrast, Maryland PSC maintains that rural carriers should not be allowed to use a cost model before the mandatory transition begins. Maryland PSC states that allowing rural carriers to do so would increase the support mechanism because only carriers that would receive more support under a cost model would switch to forward-looking costs at an earlier date.⁽³⁰⁶⁷⁾

186. Fixed Support Levels. Rural carriers generally oppose the use of fixed support levels for high loop and switching costs and LTS recovery and argue that the Commission should permit full recovery of a carrier's annual embedded costs during the transition to a proxy model.⁽³⁰⁶⁸⁾ Many commenters contend that fixing support levels during the transition to a proxy model is contrary to requirements set forth in the Act. Parties argue that fixing the support will prevent carriers from recovering costs incurred in meeting their service requirements as carriers of last resort and costs incurred as a result of state and federal regulatory directives for new services and facilities upgrades, contrary to the requirement of section 254(b)(5) that the universal service support be sufficient.⁽³⁰⁶⁹⁾ Rural Alliance asserts that the Joint Board's proposal to fix support departs from the congressional directive to preserve and enhance universal service.⁽³⁰⁷⁰⁾ Minnesota Coalition argues that the proposals to fix current support levels fail to reflect variations in calling scope, income level, and cost of living and would therefore violate the statutory requirements that rates be affordable and that rural rates be "reasonably comparable" to urban rates.⁽³⁰⁷¹⁾

187. Parties assert that fixing support levels would interrupt long-term capital improvement plans and discourage investment.⁽³⁰⁷²⁾ ICORE and Western Alliance state that the Commission should not fix support levels because rural carriers have highly volatile and unpredictable costs due to extreme weather conditions that cause equipment and repair costs to increase significantly and unpredictably.⁽³⁰⁷³⁾ ICORE contends that fixing the overall size of the support mechanism rather than protecting support on a carrier-to-carrier basis would lessen the severe impact holding support levels constant would have on high cost rural carriers.⁽³⁰⁷⁴⁾ USTA argues that holding support levels constant would remove any incentive for rural companies to serve any area with per-line costs above the protected amounts.⁽³⁰⁷⁵⁾ Evans Tel. Co. contends that protecting support would overcompensate carriers that are operating with costs reduced from costs reported in 1996 because they do not need to build additional facilities or undertake other operating costs.⁽³⁰⁷⁶⁾

188. Fixed Loop Support. Several commenters contend that, because companies may have invested substantial amounts in 1996 on the assumption that they would recover a portion of this investment from high cost support mechanisms, the mechanism for calculating protected high cost assistance to carriers with high cost loops used in 1997 should be based on 1996 loop counts, instead of the recommended 1995 counts.⁽³⁰⁷⁷⁾ Many parties also contend that the Commission should determine 1998 fixed loop support on the basis of year-end 1997 loops counts, instead of the recommended year-end 1996 counts.⁽³⁰⁷⁸⁾ GVNW proposes these modifications in order to give carriers the ability to modify their investment policies to reflect future revenue streams.⁽³⁰⁷⁹⁾ RT asserts that because the loops counts will be two years old, adoption of the Joint Board's recommendation regarding fixed loop support would result in insufficient increases in revenue to reflect a growth in loops.⁽³⁰⁸⁰⁾ RT also contends that because outside plant construction takes place in the summer, 1995 loop counts would not permit a full year of depreciation for 1995 investments.⁽³⁰⁸¹⁾ As an alternative to the Joint Board's recommendation, the ILEC Associations propose that instead of calculating support based on a protected mechanism, rural carriers receive support for their loop costs that exceed 115 percent of the 1995 nationwide average loop cost that is annually adjusted to inflation. The percentage of the above-average loop cost that rural carriers may recover from the support mechanism will remain consistent with the current provisions concerning support for high loop costs in the Commission's rules.⁽³⁰⁸²⁾ The ILEC Associations argue that their alternative proposals for high cost loop support, DEM weighting assistance, and LTS benefits address the Joint Board's concerns, while allowing rural carriers to recover their prudently invested costs and providing rural subscribers affordable service and access to advanced services.⁽³⁰⁸³⁾

189. Fixed DEM Support. Several parties offer alternative proposals to the Joint Board's recommendations. ALLTEL contends that the DEM weighting support mechanism should permit carriers to update their switching costs annually and advocates that the weighted DEM be divided by the supportable lines each year to determine the support per line.⁽³⁰⁸⁴⁾ The ILEC Associations propose that support for high switching costs should be provided by protecting the interstate allocation factor for the weighted DEM for each study area. This allocation factor would then be applied annually to traffic sensitive investment and expenses, and furthermore, all interstate allocated amounts that are in excess of the unweighted DEM would be recovered through the new support mechanisms.⁽³⁰⁸⁵⁾ Also, United Utilities recommends the adoption of actual switched minutes of use (SMOU) for allocating Category 3 switching costs because it contends that the continued use of DEM does not price interstate access services based on cost and thus, clearly violates the requirement to make all support mechanisms explicit.⁽³⁰⁸⁶⁾ Ameritech, however, asserts that because they will recover payments from the new universal service support mechanisms, rural carriers should be required to remove the effects of DEM weighting from their access rates immediately.⁽³⁰⁸⁷⁾

190. Fixed LTS Support. USTA maintains that the Joint Board's recommended methodology for assigning LTS to individual study areas would produce anomalous results, because LTS amounts would be assigned to an individual study area based on the relative size of its revenue requirement without regard to revenues received from other sources, such as the SLC and CCL charge.⁽³⁰⁸⁸⁾ The ILEC Associations propose that the level of LTS should be protected at the percentage of the total common line pool that was represented by LTS in 1996. This ratio would then be applied to the annual common line revenue requirement that NECA calculates and recovered through the new support mechanisms.⁽³⁰⁸⁹⁾ ALLTEL agrees with the Joint Board's recommendation to protect LTS at 1996 levels, because de-pooled ILECs will no longer be required to fund this support.⁽³⁰⁹⁰⁾ ALLTEL maintains, however, that the recommended method for calculating LTS recovery would produce inequitable and insufficient support for the highest cost study areas.⁽³⁰⁹¹⁾ ALLTEL suggests that the Commission should determine LTS recovery by calculating each study area's 1996 interstate common line revenue requirement at the authorized rate of return.⁽³⁰⁹²⁾ Each study areas's 1996 SLC revenues and CCL charge revenues would then be subtracted from that study area's revenue requirement, and the difference would be divided by the number of supportable lines in the study area to define the amount of support per line required to replace LTS payments.⁽³⁰⁹³⁾ ALLTEL contends that this methodology comports with the Act, because it grants study area specific LTS per line support.⁽³⁰⁹⁴⁾ Harris argues that calculating each company's fixed LTS support as its annual net settlement with the NECA Common Line Pool during a particular year, after removing out of period adjustments would be easier to implement than the Joint Board's recommended approach and would also effectively cap the SLC and CCL charge.⁽³⁰⁹⁵⁾ Harris would grant members of the Common Line Pool the choice of leaving the pool or maintaining their existing SLC and CCL charge rates and asserts that its proposal would function as an incentive for pool members electing to remain to control common line costs and stimulate demand.⁽³⁰⁹⁶⁾ Harris acknowledges that modifications might be necessary to the extent that there were any net contributors to the common line pool apart from LTS contributors.⁽³⁰⁹⁷⁾

191. IXCs, wireless providers, and others, however, support the Joint Board's recommendations regarding fixed support levels for rural carriers.⁽³⁰⁹⁸⁾ WorldCom states that it does not oppose fixed payments, provided that the support is portable to all carriers.⁽³⁰⁹⁹⁾ WorldCom expresses concern, however, that the Joint Board proposes to retain the current contribution system, which requires only IXCs to fund the mechanism, during the transition period to proxy models.⁽³¹⁰⁰⁾

192. Waivers for Unusual Operating Conditions. Cathey, Hutton contends that because some carriers may have incurred unusual expenses during the benchmark year for protecting the support, the Commission should allow carriers to submit a cost study with the costs adjusted, or "normalized" to reflect the carriers' typical cost structure to establish the protected support amount.⁽³¹⁰¹⁾ NRPT argues that protecting the support at previous years' costs will provide inadequate support to carriers that have committed to make facility upgrades over a number of years in their study area waiver applications.⁽³¹⁰²⁾ NRPT thus suggests that the support provided to carriers that have acquired rural exchanges recently include the cost data and modernization commitments made in the carriers's study area waiver.⁽³¹⁰³⁾ TDS Telecom asserts that the Commission should provide increased high cost compensation for network improvement costs and incorporate an adjustment factor increasing protected high cost compensation at a rate consistent with "healthy" investment.⁽³¹⁰⁴⁾

193. Support for New Service Areas. Some commenters contend that the mechanism set forth in the Recommended Decision would discriminate against a carrier that began operations or bought additional exchanges after the benchmark year used for protecting the support levels. These commenters explain that because such a carrier would not have historical cost data, the Recommended Decision would have required this carrier to convert immediately to a proxy model, instead of using the proposed transition mechanism.⁽³¹⁰⁵⁾ Tularosa Basin Tel. thus opposes using 1996 as the benchmark year because it began operations in 1996 and does not want to be forced to convert to a proxy mechanism before the transition period available to other qualifying rural carriers has ended. NRPT contends that when exchanges are bought in the middle of a calendar year, the additional loops should be reported as part of the acquiring company's cost study and the protected amount should be based on the acquiring company's annualized costs.⁽³¹⁰⁶⁾

194. Average Schedule Companies. Several commenters note that the Recommended Decision does not address how average schedule companies that convert to cost in 1997 will calculate their high cost support during the transition. Specifically, these commenters ask whether companies that receive only a partial year amount of universal service support payments for high loop costs will have their protected embedded universal service assistance per loop calculated on this partial year payment or will be allowed to annualize such payments to reflect a full year.⁽³¹⁰⁷⁾ Wyoming PSC contends that protecting the high cost support at a level based on 1995 embedded costs is unfair because average schedule companies that are in the process of converting to cost would appear to be precluded from receiving support for embedded costs that they have incurred, even though these costs would have been recoverable under the current support mechanisms.⁽³¹⁰⁸⁾ To address such concerns, USTA proposes that average schedule companies that convert to cost in 1997 be permitted to elect to use the proxy model or to use current costs as the basis for the protected support amount.⁽³¹⁰⁹⁾ In addition, USTA suggests that average schedule companies that remain on average schedules should also be permitted to elect a cost proxy model or use the protected embedded cost amount that is calculated according to USTA's proposal.⁽³¹¹⁰⁾ Alternatively, Rock Hill Tel. Co. suggests that ILECs that convert from average schedule to cost in 1997 should receive support on an annualized basis during the transition period beginning January 1, 1998.⁽³¹¹¹⁾ Rock Hill Tel. Co. explains that this proposal entails calculating such companies' transitional support as if they converted to "cost" status on January 1, 1997, and received an entire year of USF support.⁽³¹¹²⁾ Rock Hill Tel. Co. also contends that average schedule ILECs that convert to cost at any time during the transition period should receive support for the remainder of that period based upon their actual embedded costs in order to ensure that both average schedule and cost rural ILECs are able to avail themselves of the transition process equally.⁽³¹¹³⁾

195. Certification. AT&T contends that in order to prevent abuse, the Commission should not permit carrier self-certification and instead, should establish a formal process to verify a carrier's eligibility to receive support as a high cost rural carrier.⁽³¹¹⁴⁾ Contending that an accurate determination on eligibility is crucial, Time Warner supports AT&T's position and proposes that the Commission issue an NPRM or NOI regarding the certification process the rural carrier must undertake in order to receive support.⁽³¹¹⁵⁾ ALLTEL, however, asserts that AT&T's proposal subverts the authority the Act has given to state commissions to choose eligible carriers.⁽³¹¹⁶⁾ ALLTEL also contends that a formal certification process will result in an unjustifiable delay of a rural ILEC's certification.⁽³¹¹⁷⁾

196. Support for Competitive Carriers. The majority of rural carriers object to providing high cost support to competitive carriers by making the support portable with the customer.⁽³¹¹⁸⁾ Commenters contend that although the Joint Board relies on the principle of competitive neutrality in making this recommendation, granting support to competitive carriers based on the ILECs' support actually would be contrary to the Act and not competitively neutral, because it would give preferential treatment to competitors through an uneconomic subsidy. Many commenters maintain that study area averaging causes an ILEC to receive the same amount of support for each customer in the study area regardless of the extreme differences in its cost of providing service to rural and urban areas. Thus, these commenters contend that making the support portable would permit wireless carriers and other CLECs to receive windfall support through their ability to "cream skim" customers in lower-cost areas, where their costs would be much less than the averaged, per-line support levels applicable to the rural telephone company's entire study area.⁽³¹¹⁹⁾ These competitors, some commenters assert, would provide high-quality service to lower cost customers by making expenditures for facilities only in the densely populated centers, while providing marginal service through resale in outlying areas.⁽³¹²⁰⁾

197. Several commenters state that the Joint Board's recommendation that the Commission require competitors to advertise in the entire study area, pursuant to section 254(e), in order to be eligible for support would not prevent cream skimming. They contend that wireless carriers and other CLECs might advertise in the entire service area but would construct facilities and aggressively market service only in the profitable lower cost areas.⁽³¹²¹⁾ Furthermore, commenters contend that CLECs would discourage subscribership in remote, high cost areas by providing marginal resold service.⁽³¹²²⁾ Asserting that advertising in the entire area is not going to lead to an actual service request being made where signal strengths are inadequate, Evans Tel. Co. contends that the statutory standard requires the provision of service, rather than the advertising of services.⁽³¹²³⁾ In addition, RTC states that the absence of a requirement that the CLEC price its resold services in the high cost area at a price likely to enable it to obtain business makes the advertising requirement insufficient, because a CLEC can keep expenditures for service to high cost areas low by maintaining high rates that ensure few customers.⁽³¹²⁴⁾

198. Evans Tel. Co. contends that providing high cost support to a CLEC for a resold service would give the CLEC an unfair competitive advantage because, as the operator of the facilities, the ILEC would continue to bear all of the cost of maintaining the facilities, while the reseller would merely purchase the service at a discount off the retail rate.⁽³¹²⁵⁾ TDS Telecom thus maintains that the loss of only a few of the ILEC's high-volume, low-cost customers would increase the universal service burden that exists with respect to the ILEC's remaining higher cost customers.⁽³¹²⁶⁾ Furthermore, Western Alliance predicts that making the support portable would discourage infrastructure investment by small, rural local exchange carriers.⁽³¹²⁷⁾

199. Advocating that rural areas should be exempt from any requirement to make support portable, Evans Tel. Co. maintains that the Act specifically provides advantages and protection to rural ILECs that are not available to potential competitors in their service areas.⁽³¹²⁸⁾ Moreover, Evans. Tel. Co. states that subsidizing a single incumbent is not unfair, because it is unreasonable to support several service providers in a single service study area with a subsidy structure.⁽³¹²⁹⁾ Lufkin-Conroe contends that the Commission, by making the support in rural areas portable, should not attempt to create artificial competition in areas where competition is not yet warranted by market forces.⁽³¹³⁰⁾ Lufkin-Conroe further states that neither competition nor competitive neutrality requires or permits the Commission to favor new entrants over ILECs.⁽³¹³¹⁾ RTC contends that competitive neutrality requires that the Commission grant high cost support only to the provider who maintains the facilities and at the level of costs of the provider.⁽³¹³²⁾ ITC suggests that the Commission should exempt rural areas from a requirement to make support portable as a means recognizing the risks that ILECs incur in fulfilling their vital obligations as carriers of last resort and equalizing the burdens between ILECs and new entrants.⁽³¹³³⁾ Furthermore, John Staurulakis contends that the Commission cannot grant support to CLECs, because Congress granted only state commissions the authority to determine whether allowing more than one telecommunications carrier to provide service in a rural area is in the public interest⁽³¹³⁴⁾ John Staurulakis also asserts that the Commission should not make support portable in rural areas, because Congress has granted a presumption that rural carriers still operate in a natural monopoly for wireline service and recognize that facilities-based competition is inefficient in this type of market.⁽³¹³⁵⁾

200. Other commenters propose alternative methods for calculating the support that CLECs should receive during the transition. Minnesota Coalition asserts that CLECs should qualify for universal service support based on their actual costs.⁽³¹³⁶⁾ RUS contends that because rural areas may not attract effective competition and because the competition may be directed toward lower cost subscribers within those areas, the Commission should establish a relationship between the amount of universal service support granted and the amount of investment carriers make in infrastructure.⁽³¹³⁷⁾ RUS further suggests that if a carrier fails to make a certain level of investment, the support should be reduced to a level corresponding to actual investment, or, in some cases, additional investment should be required in order to qualify for support.⁽³¹³⁸⁾ RTC contends that the law requires that support shall be used "only for the provision, maintenance, and upgrading of facilities" and that a CLEC reselling a loop should not get the high cost support for that loop. RTC maintains that since the resale rate for the loop is based on a supported retail price, the CLEC has itself paid a rate that includes universal service support.⁽³¹³⁹⁾ TCA recommends that when a CLEC begins serving a rural study area, the defined serving area may continue to be the study area of the incumbent rural telephone company, but the portable support for access lines within the study area must vary based on the cost of providing the access lines.⁽³¹⁴⁰⁾ GVNW and RT assert that in order to minimize cream skimming, the Commission should retain the current study areas and require CLECs to serve the entire study area.⁽³¹⁴¹⁾ In addition, RTC contends that instead of only disaggregating support, through the use of a smaller geographic area than a carrier's study areas, in a proxy model's cost calculation, the Commission should recognize that disaggregating support within rural company service areas is required by cost variances that result from the clustering and dispersion characteristics of the population distribution in small communities.⁽³¹⁴²⁾ RTC and TDS also maintain that disaggregating support is necessary to prevent cream skimming by new entrants solely interested in serving the most lucrative pockets in rural areas.⁽³¹⁴³⁾

201. IXCs, wireless providers, and other potential competitors to ILECs support the Joint Board's recommendation to grant support to CLECs by making the support portable with a customer and based at the ILEC's level.⁽³¹⁴⁴⁾ MFS asserts that support must be made available to any carrier that serves a high cost customer, because universal service should focus on affordable rates, not ensuring that carriers recover their investments.⁽³¹⁴⁵⁾ Moreover, USTA recommends that support be portable, on the basis of a per-loop amount, for all eligible telecommunications carriers for the provision of service to single-line, primary residences, and single-line businesses.⁽³¹⁴⁶⁾ GCI contends that ILEC proposals to impose carrier of last resort responsibilities, service quality standards, or service area requirements on CLECs seeking to serve rural areas are contrary to the Act. GCI explains that section 214(e)(1) establishes the criteria for becoming an eligible telecommunications carrier, and Congress did not authorize the Commission to impose any other obligations.⁽³¹⁴⁷⁾ Moreover, GCI asserts that basing the support granted to competitive carriers on the costs of the ILEC is competitively neutral. GCI explains that the purpose of section 254 is to ensure service is available through competition and supported where needed, not to keep the ILEC whole or to provide special considerations to rural companies facing competition.⁽³¹⁴⁸⁾ GCI contends that making the support portable will constrain over-investment by incumbents and produce viable ILECs that will choose to continue to serve rural areas.⁽³¹⁴⁹⁾

202. Alaska and Insular Areas. Several commenters express support for the Joint Board's recommendation to allow rural carriers serving Alaska and insular areas to continue until further review to receive support based on their frozen historical benefits per line, rather then support based on a proxy model.⁽³¹⁵⁰⁾ Alaska and Alaska PUC urge the Commission to reassess the per-line amount of support after any changes to access charges and separations rules to ensure that such changes do not reduce the amount of support a rural carrier in Alaska or an insular area receives, thereby jeopardizing the affordability of rates in those areas.⁽³¹⁵¹⁾

203. While they support the Joint Board's recommended approach, Puerto Rico Tel. Co. and USTA suggest that the non-rural carriers serving Alaska and insular areas should also be exempt from having their support based on a proxy model. Puerto Rico Tel. Co. contends that treating rural carriers serving Alaska and insular areas differently than non-rural carriers serving those same areas is contrary to the plain language of the statute, which does not condition support for insular areas based on the carrier's status as a rural carrier.⁽³¹⁵²⁾ USTA recommends that the exemption for rural carriers serving Alaska and insular areas should not be limited to carriers that meet the statutory definition of "rural" in section 153(37) of the Act, but should be expanded to include carriers serving those areas with less than two percent of the Nation's subscriber lines. USTA notes that Congress adopted the two percent standard in section 251(f)(2) of the Act to recognize the particular challenges smaller ILECs face.⁽³¹⁵³⁾

204. Other commenters, while supporting the Joint Board's recommendation, argue that rural carriers serving areas other than just Alaska and traditional insular areas should also continue to receive support based on frozen historical benefits per line for more than three years after a proxy model for non-rural ILECs is first used. John Staurulakis proposes than the Commission allow all rural carriers to continue using embedded costs as the basis for universal service support, past the three-year period recommended by the Joint Board.⁽³¹⁵⁴⁾ Silver Star Tel. Co. and Harris recommend that the Commission establish criteria by which to designate rural carriers as serving an "insular" area.⁽³¹⁵⁵⁾

205. Guam Tel. Authority supports the Joint Board's proposal to freeze support based on historical per line amounts, but expresses concern that it might not be able to receive universal service support under that proposal due to its unique situation. Guam Tel. Authority explains that because of Guam's historical treatment as an international point, it has not filed a traditional access tariff, is not a member of NECA, does not serve a "study area" as defined by the Commission, and has not participated in any universal service support program.⁽³¹⁵⁶⁾ Consequently, Guam Tel. Authority requests that the Commission interpret the Joint Board recommendation to allow it to receive benefits based on per-line amounts which Guam Tel. Authority received under its previous system of subsidies.⁽³¹⁵⁷⁾

D. Competitive Bidding

206. Many of the commenters agreed with the Joint Board's analysis and its recommendation that the Commission continue to explore the use of competitive bidding to set support levels.⁽³¹⁵⁸⁾ These commenters agree with the Joint Board that competitive bidding can have significant advantages over other mechanisms to determine support levels. Airtouch and CSE Foundation note that a competitive bidding mechanism is market-based and allows the bidding carrier to determine its own costs for providing universal service to an area.⁽³¹⁵⁹⁾ Ameritech, GSA, and GTE also support competitive bidding because it could serve to constrain or reduce the size of the support mechanism, particularly over time as new and more efficient technologies are developed.⁽³¹⁶⁰⁾ AirTouch argues that the Commission could use the information on support levels developed from auctions to make adjustments to the support levels set by proxy models in non-competitive areas.⁽³¹⁶¹⁾ Several parties also argue that competitive bidding will require less administrative oversight by Federal and state regulators than other support mechanisms.⁽³¹⁶²⁾ For example, Sprint PCS notes that while a proxy model system will require regulators to assess costs, competitive bidding requires no cost studies and no regulatory intervention beyond establishing and enforcing the bidding process rules.⁽³¹⁶³⁾ GTE argues that competitive bidding is the only method for determining support that is inherently competitively neutral.⁽³¹⁶⁴⁾

207. CSE Foundation urges the Commission to evaluate the GTE proposal further.⁽³¹⁶⁵⁾ GTE states that its proposal could be a starting point for further discussion of these issues.⁽³¹⁶⁶⁾ GTE contends that its proposal is the only suggested support mechanism that is explicitly based on and clearly takes into account the benefits of competition, the gains from minimizing the cost of suppling service, and the costs to the economy of raising the necessary funding.⁽³¹⁶⁷⁾ GTE states that therefore its proposal is the only one that directly addresses the "deadweight loss" concerns raised by AirTouch.⁽³¹⁶⁸⁾ GTE argues that one aspect of its plan that has drawn much criticism -- a requirement that bidding carriers assume COLR requirements -- is necessary to make any competitive bidding system work, and notes that Ameritech agrees that an obligation to serve consistent with COLR requirements is necessary.⁽³¹⁶⁹⁾ GTE therefore urges the Commission to define the service obligations on which the participants are bidding in an auction.⁽³¹⁷⁰⁾ GTE suggests that parties be allowed to bid on per-subscriber support payments with the obligation to serve anyone requesting basic service in small (homogeneous) service areas.⁽³¹⁷¹⁾ Ameritech contends that parties should be allowed to bid on fixed-fee subsidies with the obligation to serve any customer from the "COLR pool" that is randomly assigned to it.⁽³¹⁷²⁾ Sprint PCS supports the adoption of a competitive bidding mechanism under which all eligible telecommunications carriers in an area can receive support set by the lowest bid, with the lowest bidder getting a "bonus" payment.⁽³¹⁷³⁾ AirTouch states that the bidding process will likely require simultaneous multi-round auctions for service areas so that bidders can aggregate adjacent territories and therefore achieve economies of scope and scale.⁽³¹⁷⁴⁾ GTE advocates a sealed bid auction process, whereby, the low bidder and other bidders within a specified range of the low bid will receive support equal to the highest accepted bid.⁽³¹⁷⁵⁾ Ameritech also advocates a sealed bid auction, whereby the lowest bid wins and the second lowest bidder has an option to match. Under the Ameritech proposal, the total support amount would equal the amount of the lowest bid. Ameritech contends that if there is only one ILEC in a region, then support should be on a per-subscriber basis in order to provide an incentive to other carriers to serve the entire market. Ameritech contends that a fixed-fee subsidy levels the playing field between a COLR and an non-COLR. In the case of multiple COLRs, the second lowest bidder would have an option to match and receive a fixed share of the COLR market -- for example, the lowest bidder would receive 75% of the subsidy in return for 75% of obligation and the second lowest bidder would get 25% of the COLR market and 25% of the fixed-fee subsidy.⁽³¹⁷⁶⁾

208. GTE argues that the Commission needs to include a competitive bidding mechanism in the federal universal service support plan from the outset. The primary reason GTE cites is that any mechanism based on cost estimates, such as a proxy model, will set support levels incorrectly because errors in cost estimates are inevitable.⁽³¹⁷⁷⁾ GTE also contends that it will be more difficult to alter the support levels through a competitive bidding process once the support levels developed through other mechanisms become entrenched.⁽³¹⁷⁸⁾ To that end, GTE recommends that the Commission issue a Further Notice of Proposed Rule Making in this proceeding to build upon the existing public record on the specifics of a workable competitive bidding mechanism.⁽³¹⁷⁹⁾ AirTouch, on the other hand, states that the issues involved in developing a competitive bidding mechanism are sufficiently complex that they should be addressed in a separate proceeding.⁽³¹⁸⁰⁾

209. Other commenters, however, oppose using competitive bidding to set support levels. Minnesota Coalition, RTC, and TDS Telecom argue that use of competitive bidding would violate the Act. They argue that basing support levels on the lowest bidder would not provide the "sufficient" and "predictable" support required by section 254(d).⁽³¹⁸¹⁾ Minnesota Coalition argues that the prospect of recurring reductions in support levels due to periodic re-auctions would make rural ILECs decisions to invest in infrastructure even more hazardous than use of a forward-looking cost methodology, and that such a risk is inconsistent with the Act's requirement that funding be predictable.⁽³¹⁸²⁾ TDS Telecom states that determining what support competing ILECs will receive based on the lowest bid would deny "sufficient" support to the other bidders.⁽³¹⁸³⁾ RTC contends that use of competitive bidding is also at odds with the Act's emphasis on quality services. It states that bidding will lead to a "race to the bottom" in regards to the quality of service, since the winning bidder would be the carrier that intends to commit the least amount of resources to providing service.⁽³¹⁸⁴⁾ RTC also argues that the Commission does not have the authority to compel states to use competitive bidding since the Act gives the states the authority to designate eligible carriers.⁽³¹⁸⁵⁾

210. Several commenters argue that competitive bidding should not be adopted to establish universal service support since it would only work in areas where there are competing carriers.⁽³¹⁸⁶⁾ Minnesota Coalition argues that there will likely not be competing carriers in rural areas, particularly since section 214(e)(2) does not presume that there will be multiple eligible telecommunications carriers in areas served by rural telephone companies.⁽³¹⁸⁷⁾ AT&T and Teleport argue that using competitive bidding would be complex and expensive to administer.⁽³¹⁸⁸⁾ They also argue that GTE's proposal is anti-competitive because the ILEC would receive support automatically while a competing carrier must participate in an auction to be eligible for support.⁽³¹⁸⁹⁾

211. In its reply comments, the City of Chicago disagrees with RTC that competitive bidding is in conflict with the Act. It argues that competitive bidding follows the goals of the Act by utilizing competitive forces to the maximum extent possible to provide service, and that it represents a close approximation of the conditions where competitive neutrality would prevail.⁽³¹⁹⁰⁾ Chicago also argues that it is unreasonable to assume that there will not be quality of service standards associated with the provision of universal service, and therefore RTC's concerns about the quality of service under a competitive bidding system are unfounded.⁽³¹⁹¹⁾ GTE states that its proposal considers that competition will develop in different markets at different times by not requiring an auction to set support levels until a new entrant seeks to receive universal support payments.⁽³¹⁹²⁾ GTE also states that its proposal is no more of a barrier to entry than the bidding process that goes on every day in competitive markets.⁽³¹⁹³⁾

VIII. SUPPORT FOR LOW-INCOME CONSUMERS

A. Overview

212. The following is a summary of the comments relating to support for low-income consumers.

B. Authority to Revise Lifeline and Link Up Programs

1. Comments

213. Georgia PSC contends that while the Commission may have authority separate from section 254 to modify the Lifeline program, it should heed the "clear statement from Congress" in section 254(j) that no change was intended.⁽³¹⁹⁴⁾ BellSouth asserts that section 254 contemplates distinct federal and state low-income support funds and does not evidence any congressional intent to transfer to the interstate jurisdiction full responsibility for Lifeline.⁽³¹⁹⁵⁾ Furthermore, BellSouth contends that Congress did not intend for section 254 to affect Lifeline.⁽³¹⁹⁶⁾ Bell Atlantic asserts that states should prescribe the specific services that will help maintain subscribership among low-income consumers. Bell Atlantic argues that because most of the Joint Board's proposals affect local services and under the Act states retain exclusive jurisdiction over intrastate services, the Commission lawfully may not adopt mechanisms that affect the provision of local service.⁽³¹⁹⁷⁾

C. Changes to Structure of Lifeline and Link Up

1. Comments

a. Lifeline

214. Expanding Lifeline to Low-Income Consumers Nationwide. Several commenters agree with the Joint Board that all eligible telecommunications carriers should be required to offer Lifeline so that the program is available to as many low-income consumers as possible.⁽³¹⁹⁸⁾ With respect to the Joint Board's recommendation that in order to be eligible for universal service support a carrier must offer Lifeline, TURN asks the Commission to clarify that a carrier that provides Lifeline pursuant to a state program is considered eligible for support pursuant to section 214(e)(1).⁽³¹⁹⁹⁾ TURN is concerned that a carrier offering Lifeline in accordance with California's rules, which do not require verification of customer eligibility, could be denied federal universal service support.⁽³²⁰⁰⁾

215. Many commenters support the Joint Board's recommendation to eliminate the state matching requirement and make Lifeline available in every state.⁽³²⁰¹⁾ CNMI asserts that conditioning the availability of Lifeline on state participation would violate section 254(b)(3)'s requirement that consumers in all regions of the nation should have access to affordable telecommunications services.⁽³²⁰²⁾

216. Some commenters contend that further evidence of Lifeline's effect on subscription levels is needed before expanding Lifeline to every state, especially in light of the potential increase in the size of the federal funding mechanisms.⁽³²⁰³⁾ For example, Georgia PSC and Kansas CC, emphasizing that low-income support programs must be targeted to increase subscribership, urge the Commission to compare subscription levels in states that participate in Lifeline and those that do not.⁽³²⁰⁴⁾ Additionally, Georgia PSC and New York DPS recommend that the Commission examine the role of other assistance programs available to low-income consumers in non-participating states in deciding whether to expand Lifeline to every state.⁽³²⁰⁵⁾ Georgia PSC further asserts that low-income support programs must be evaluated for their cost effectiveness and efficiency before being adopted.⁽³²⁰⁶⁾

217. Florida PSC questions whether the Joint Board's recommendation to require states to provide matching funds in order to receive support beyond the federal baseline amount, rather than requiring companies to do so by way of their rate-making process, would cause states to discontinue participation in Lifeline because of the necessity of establishing a funding mechanism for the program.⁽³²⁰⁷⁾ Florida PSC believes that it will be necessary for states to establish universal service funding mechanisms for Lifeline rather than requiring companies to fund the state's portion of Lifeline through their rates.⁽³²⁰⁸⁾

218. Georgia PSC contends that the Commission should not attempt to mandate "whether and how the states participate in the Lifeline program" and asserts that states increasingly are establishing their own explicit universal service funding mechanisms.⁽³²⁰⁹⁾ SNET, noting that the 1996 Act does not require that Lifeline and Link Up be amended, urges the Commission not to amend these programs but instead to allow the states to develop their own low-income support programs.⁽³²¹⁰⁾ BellSouth suggests that the Commission should review Lifeline after it promulgates its universal service rules, at which time it can assess the extent to which Lifeline should be modified.⁽³²¹¹⁾

219. Lifeline Support Amount. Many commenters support the Joint Board's recommendation to increase the federal Lifeline support amount to a $5.25 baseline level, with the potential for state matching, for a maximum federal support amount of $7.00.⁽³²¹²⁾ DC OPC maintains that expanding Lifeline to all states and increasing the federal baseline support to $5.25 per eligible subscriber ensures that all consumers, even in states without a matching contribution, receive adequate Lifeline assistance.⁽³²¹³⁾ NCTA asserts that the Joint Board's proposed support levels achieve the Joint Board's twin goals of extending Lifeline to every state and maximizing states' incentives to continue generating matching support.⁽³²¹⁴⁾ Furthermore, Sprint contends that an increased federal support amount is especially necessary as basic local service rates move closer to cost due to rate rebalancing, access charge reform, and changes in universal service policy.⁽³²¹⁵⁾

220. Florida PSC is confident that states currently participating in Lifeline will continue to do so if the Commission expands Lifeline to every state and eliminates the matching requirement, but Florida PSC is skeptical about whether currently non-participating states will provide matching support.⁽³²¹⁶⁾ Other commenters are concerned that increasing the federal support amount may result in states' reducing their matching contributions.⁽³²¹⁷⁾ NYNEX, CPI, and SBC therefore maintain that the Commission should decline to increase support beyond the current $3.50 in currently participating states that reduce their matching support below existing levels.⁽³²¹⁸⁾ While it maintains that this proposal would reduce a state's incentive to decrease its support amount, CPI points out that it also might "place the low-income consumer in the midst of a game of 'chicken' between the FCC and the state commissions or legislatures."⁽³²¹⁹⁾ CPI also suggests that we set the federal support amount at a rate that is a percentage of the lower of prevailing rates or the national average rate and provide additional support only if a state maintains its matching contribution.⁽³²²⁰⁾ Oregon PUC, on the other hand, maintains that the federal support amount should be the same for every state, regardless of whether a previously-participating state ceases to participate in Lifeline.⁽³²²¹⁾

221. Kansas CC suggests that the entire amount of federal funding should be conditioned on state participation in Lifeline.⁽³²²²⁾ Thus, Kansas CC suggests that for every $1.00 of state funding, federal support mechanisms should provide $2.00, not to exceed $7.00 in federal support.⁽³²²³⁾ Kansas CC maintains that federal support mechanisms doubling the state contribution "would further strengthen the incentive of states to participate in the program, while ensuring that universal service is not disproportionately funded by the federal jurisdiction."⁽³²²⁴⁾ United Utilities, on the other hand, argues that the telecommunications carrier serving qualifying low-income consumers should receive $7.00 in federal support regardless of whether a state provides matching funds, because the state in which consumers reside should not determine whether they can receive the full amount of Lifeline support.⁽³²²⁵⁾ Colorado PUC cautions the Commission to monitor the low-income support programs closely in order to avoid unintended expansion of the support mechanisms.⁽³²²⁶⁾

222. Several commenters⁽³²²⁷⁾ address the question posed in the Recommended Decision Public Notice: "How can the FCC avoid the unintended consequence that the increased federal support amount has no direct effect on Lifeline subscribers' rates in many populous states with Lifeline programs, and instead results only in a larger percentage of the total support being generated from federal sources?"⁽³²²⁸⁾ California PUC and Citizens Utilities argue that the Joint Board's recommendation to expand Lifeline to every state and increase the federal support amount without requiring funding by the states will increase the size of the federal support mechanisms unduly and may simply shift the burden of supporting low-income consumers from the state to the federal jurisdiction.⁽³²²⁹⁾ California PUC maintains that the proposed increased federal support amount would not benefit California's low-income consumers because California imposes a statewide Lifeline rate on all LECs; it asserts that increasing the federal support amount merely may result in a reduction in state funding to account for the increased funding from the federal jurisdiction.⁽³²³⁰⁾ Washington UTC, on the other hand, is confident that the $7.00 cap on the federal support amount will guard against excessive support being generated from federal sources.⁽³²³¹⁾ Citizens Utilities suggests that every state should receive $3.50 in federal support per qualifying subscriber, plus additional funding equal to the amount provided by the state, for a maximum of $5.25 in federal funds. If a state chooses not to fund all or any of the $1.75 per qualifying subscriber, Citizens Utilities suggests that federal support would be reduced proportionately to the $3.50 minimum of federal support.⁽³²³²⁾

223. CPI and MCI note that the potential "unintended consequence" of an increased federal support amount having no direct effect on Lifeline subscribers' rates and instead resulting only in a larger percentage of the total support being generated from federal sources, may occur in states that already mandate relatively low Lifeline rates.⁽³²³³⁾ CPI therefore suggests that the Commission should "limit the federal contribution [in states with low Lifeline rates] so that the price of phone service is not less than zero;"⁽³²³⁴⁾ or, in other words, the support amount should not exceed the non-Lifeline rate, which would result in a windfall for carriers. MCI asserts that any changes in Lifeline should be directed toward low-income consumers in states currently without Lifeline.⁽³²³⁵⁾ CPI emphasizes that an increased federal support amount might be more effective if, for example, Lifeline enrollment is made automatic, thereby increasing the number of people receiving Lifeline.⁽³²³⁶⁾

224. Some commenters contend that the federal support amount recommended by the Joint Board may be inadequate.⁽³²³⁷⁾ Some of these commenters maintain that in making a final determination on the federal support amount, the Commission should evaluate states' telephone rates, economic status, and other state-specific factors.⁽³²³⁸⁾ For example, Puerto Rico Tel. Co. maintains that in Puerto Rico, $5.25 in federal support is inadequate because, monthly rates could reach $30.00, and the median income level is low compared to the national median income level.⁽³²³⁹⁾ Vermont PSB, questioning whether the federal support amount would be adequate for low-income consumers living in high cost areas, argues, along with Puerto Rico Tel. Co., that this will depend on the Commission's high cost rules, competition, and access charge reform.⁽³²⁴⁰⁾ Vermont PSB maintains that the proposed federal support amount will be helpful to Lifeline consumers only if support for high cost, rural, and insular areas is sufficient to at least offset potential increases in rates resulting from competition and access charge reform.⁽³²⁴¹⁾ Wyoming PSC, which also is concerned about the sufficiency of the proposed Lifeline support amount in high cost areas, maintains that the Commission should examine states' underlying costs of providing telephone service, as well as the availability of other state funds that could provide assistance.⁽³²⁴²⁾

225. CPI proposes that the Commission mandate more federal Lifeline support for low-income consumers living in areas with the highest rates.⁽³²⁴³⁾ CPI claims that the proposed federal support amount of $5.25 will reduce the rates for low-income consumers to an average of $12.75, which it believes is unaffordable.⁽³²⁴⁴⁾ CPI therefore suggests that the Commission set the federal Lifeline support amount at half of the national average rate, or half of the prevailing rate, for the designated services, whichever is lower.⁽³²⁴⁵⁾ Thus, using a national average rate of approximately $18.00 ($14.50 plus the SLC), the resulting rate for Lifeline subscribers would be $9.00. In areas where the prevailing rate is lower than the national average, the discount would be proportionately smaller.⁽³²⁴⁶⁾ Similarly, ITC recommends that the Commission should determine an affordable Lifeline rate and set the federal support amount accordingly.⁽³²⁴⁷⁾ Alternatively, ITC recommends either: (1) establishing a capped level of local service revenue per line and then providing a fixed amount of support; or (2) determining support as a percentage of the total rate for local service.⁽³²⁴⁸⁾

226. Several commenters assert that the federal Lifeline support amount should not be increased absent further analysis demonstrating that such a change will have a significant impact on subscribership levels among low-income consumers.⁽³²⁴⁹⁾ A number of carriers and two state commissions argue that the main reason customers lose access to telecommunications service is for failure to pay toll bills, rather than because of unaffordable local rates.⁽³²⁵⁰⁾ They contend that increasing the federal support amount to $5.25 in every state may increase the overall size of the universal service support mechanisms without increasing subscribership to the same degree as, for example, mandating the availability of toll blocking for low-income consumers.⁽³²⁵¹⁾ AT&T therefore suggests that the current $3.50 federal support amount should be extended to all states for two to three years, at which time the Commission should assess whether other measures recommended by the Joint Board, such as toll limitation and no disconnection of local service for non-payment of toll charges, have resulted in a more substantial impact on subscribership.⁽³²⁵²⁾ Colorado PUC also suggests that the Commission should monitor the degree to which subscribership levels are affected by mechanisms besides increased Lifeline support, such as no disconnect for non-payment of toll charges.⁽³²⁵³⁾ Georgia PSC argues that the Commission should examine pre-paid phone cards, wireless service, and toll-limitation services before increasing the support amount.⁽³²⁵⁴⁾ SBC recommends that, in the absence of evidence supporting an increased federal support amount, federal support should remain at $3.50 and match dollar-for-dollar any state contribution over $3.50, with a maximum of $7.00 in federal support.⁽³²⁵⁵⁾ Additionally, New Jersey Advocate suggests that lower rates will not increase subscribership among low-income consumers in states such as New Jersey, in which small local calling areas result in toll charges being the main reason subscribers lose access to telecommunications services, rather than unaffordable local rates.⁽³²⁵⁶⁾ Finally, BellSouth argues that federal support cannot exceed the amount of the SLC, because the local rate includes no other federal charge that can be waived.⁽³²⁵⁷⁾

227. Making Lifeline Competitively Neutral. Many commenters support the Joint Board's recommendation to make Lifeline competitively neutral by requiring all interstate telecommunications carriers to contribute to low-income universal service support mechanisms and by allowing all eligible carriers to receive support.⁽³²⁵⁸⁾ AT&T and Sprint, for example, concur with the Joint Board that requiring all interstate telecommunications carriers to contribute would make the program competitively neutral and more consistent with the principles enumerated in section 254.⁽³²⁵⁹⁾ AT&T emphasizes, however, that a carrier offering Lifeline must offer: (1) the rate for that service less the full amount of the subsidy, so there is no windfall to the carrier; and (2) the local service that best meets customers' needs.⁽³²⁶⁰⁾ Sprint notes that requiring all interstate telecommunications carriers to contribute will help move interstate access rates closer to their economic cost and thus reduce some of the pricing distortions and incorrect market entry signals caused by implicit subsidies.⁽³²⁶¹⁾

228. California PUC submits that all carriers, not just eligible telecommunications carriers as defined in section 214(e)(1), should be able to receive support from universal service support mechanisms for providing Lifeline.⁽³²⁶²⁾ It asserts that, while the requirements for becoming an eligible carrier may be suitable for carriers seeking high cost support, they are inappropriate when applied to low-income programs.⁽³²⁶³⁾ California PUC maintains that, depending on the relationship between costs and the benchmark, eligible-carrier status may be irrelevant in urban areas where carriers do not seek high cost support.⁽³²⁶⁴⁾ BANX, on the other hand, contends that the Commission should reject California PUC's proposal to provide low-income universal service support to non-eligible telecommunications carriers.⁽³²⁶⁵⁾

229. California PUC, TURN, and California Dept. of Consumer Affairs assert that the Joint Board's recommendation to prohibit carriers operating on a purely resale basis from becoming eligible carriers will inhibit competition to serve low-income consumers.⁽³²⁶⁶⁾ TURN argues that resellers should be eligible to provide Lifeline so that resellers' customers are able to receive Lifeline.⁽³²⁶⁷⁾ TURN offers two suggestions for achieving these objectives: (1) require LECs to offer wholesale Lifeline service (with appropriate wholesale discounts based on avoided costs) to resellers and receive support from universal service support mechanisms; or (2) permit resellers to provide Lifeline and receive support for doing so.⁽³²⁶⁸⁾ California PUC supports both of the approaches suggested by TURN.⁽³²⁶⁹⁾ CPI states that nothing precludes resellers from participating in Lifeline.⁽³²⁷⁰⁾

230. Robert J. Lock argues that the Commission should reform existing programs and create opportunities and incentives for all carriers, including wireless providers, to serve low-income individuals.⁽³²⁷¹⁾ He asserts that regulatory barriers that deny wireless providers the opportunity to offer Lifeline and Link Up eliminate any incentive for these carriers to compete to serve low-income consumers.⁽³²⁷²⁾

231. WinStar contends that competitive neutrality would not be advanced if the Commission denies universal service support to carriers, such as wireless providers, that are technically incapable of offering Lifeline to certain customers or areas.⁽³²⁷³⁾ WinStar maintains that because of its 38 GHz technology, it will be unable to reach many low-income consumers living in urban areas whose access to WinStar's network is blocked by buildings or other obstructions.⁽³²⁷⁴⁾

232. Several commenters support the Joint Board's recommendation to break the link between federal Lifeline support and the SLC so that carriers that do not charge SLCs may offer Lifeline rates and receive Lifeline support.⁽³²⁷⁵⁾ BellSouth, however, disagrees with the Joint Board and asserts that federal Lifeline support should remain tied to the interstate charges paid by end users, which is presently the SLC.⁽³²⁷⁶⁾ It further states that if the Commission adopts an end user surcharge as a recovery mechanism for universal service support contributions, such surcharges could also be included in the federal baseline amount supported for Lifeline customers.⁽³²⁷⁷⁾

233. Customer Qualification to Receive Lifeline Service. AT&T and Washington UTC agree with the Joint Board that the states should specify customer qualification criteria for Lifeline.⁽³²⁷⁸⁾ Additionally, several commenters support the Joint Board's recommendation that Lifeline eligibility should be based solely on income or factors directly related to income, such as enrollment in low-income assistance programs.⁽³²⁷⁹⁾ Benton and Edgemont jointly suggest that the criteria in all states be participation in a federal means-tested assistance program by any member of a household.⁽³²⁸⁰⁾ Specifically, Benton and Edgemont suggest that Lifeline enrollment be automatic based on participation in Medicaid, food stamps, Supplemental Security Income, public housing assistance and Section 8,⁽³²⁸¹⁾ Low-Income Home Energy Assistance Program (LIHEAP), or the school lunch program.⁽³²⁸²⁾ In light of the recent restructuring of the welfare system, Benton and Edgemont also propose that recipients of an Earned Income Tax Credit be automatically enrolled in Lifeline.⁽³²⁸³⁾ Catholic Conference, however, advises the Commission not to adopt the Joint Board's suggestion to base qualification on enrollment in low-income assistance programs because of the recently-enacted welfare reform law.⁽³²⁸⁴⁾ Catholic Conference asserts that, because the new law places greater restrictions on qualification for certain low-income assistance programs, the Commission would thwart the Joint Board's goal of increasing subscribership among low-income consumers if it based Lifeline qualification on participation in state-administered welfare programs.⁽³²⁸⁵⁾ Catholic Conference therefore suggests that the Commission should impose a federal qualification rule that could be based on income and adjusted by state.⁽³²⁸⁶⁾

234. USTA and AT&T assert that the Commission should require states to verify customers' qualifications and prohibit self-certification in order to receive federal support.⁽³²⁸⁷⁾ Furthermore, California Dept. of Consumer Affairs maintains that, while California's policy of permitting consumers to self-certify that they qualify for Lifeline initially may have been necessary and appropriate in order to encourage Lifeline participation, the additional incentive to apply is no longer necessary now that the Lifeline is widely subscribed to.⁽³²⁸⁸⁾ California Dept. of Consumer Affairs suggests that if the Commission decides to require verification of Lifeline eligibility, there should be a transition period in which California could make the changes necessary to comply with this requirement.⁽³²⁸⁹⁾ California Dept. of Consumer Affairs further notes that the California PUC has directed its staff to investigate the possibility of requiring income verification.⁽³²⁹⁰⁾

235. California PUC and TURN, on the other hand, urge the Commission to continue to permit California to allow self-certification and in turn receive a reduced level of federal support, although California PUC acknowledges that it is exploring the prospect of implementing a verification program.⁽³²⁹¹⁾ Similarly, Universal Service Alliance avers that states should have the discretion to use either self-certification or income verification in determining customer eligibility, based on the asserted success of self-certification in California.⁽³²⁹²⁾

236. CPI recommends that the Commission should make Lifeline enrollment automatic, matching welfare recipient lists against telephone bills so that individuals receiving low-income assistance would automatically be enrolled in Lifeline.⁽³²⁹³⁾ As New York DPS explains, such a procedure has been implemented in New York, where NYNEX receives qualification information from the New York Department of Social Services (NYDSS) and the New York City Community Development Agency (NYCDA).⁽³²⁹⁴⁾ This information is used to enroll customers in the program automatically and also ensure that individuals stop receiving Lifeline service if they no longer qualify.

b. Link Up

237. Several commenters support the Joint Board's recommendation that Link Up should be removed from the jurisdictional separations rules and made competitively neutral, with support coming from the new universal service support mechanisms.⁽³²⁹⁵⁾ Additionally, Ohio PUC agrees with the Joint Board that the amount of Link Up support should remain unchanged.⁽³²⁹⁶⁾ Edgemont, on the other hand, contends that in order to increase subscribership, the Commission should completely eliminate service connection charges.⁽³²⁹⁷⁾ New Jersey Advocate also suggests that if they elect to receive toll limitation, Lifeline customers should not have to pay any service connection charges.⁽³²⁹⁸⁾

238. Catholic Conference and Robert J. Lock support the Joint Board's recommendation to prohibit states from restricting the number of service connections per year for which eligible low-income consumers can receive support.⁽³²⁹⁹⁾ These parties maintain that such a policy is vital for migrant farmworkers and other low-income consumers who frequently change residences.⁽³³⁰⁰⁾ Robert J. Lock, however, notes that in not placing restrictions on the number of connections permitted per year, the costs of the program will increase.⁽³³⁰¹⁾

239. Several commenters support the Joint Board's recommendation that, in order to be eligible for Link Up, consumers must meet a state-established means test or a federal default standard based on income or factors directly related to income.⁽³³⁰²⁾ California PUC, noting that California does not participate in the federal Link Up program, encourages the Commission to coordinate the revised Link Up program with existing state efforts, without duplicating resources.⁽³³⁰³⁾

D. Services Included in Lifeline and Link Up

1. Comments

240. Designated Services. Many commenters support the Joint Board's recommendation that Lifeline customers should receive all those services designated for support in high cost areas, arguing that, under section 254(b)(3), access to services should be available to "[c]onsumers in all regions of the Nation, including low-income consumers."⁽³³⁰⁴⁾ United Church of Christ further emphasizes that the deployment of the designated services in low-income areas should not lag behind their deployment elsewhere.⁽³³⁰⁵⁾

241. Toll-Limitation Services. Many commenters support the Joint Board's recommendation that Lifeline customers should receive voluntary toll limitation free of charge.⁽³³⁰⁶⁾ AT&T, SBC, Georgia PSC, and others, maintaining that toll limitation will increase subscribership among low-income consumers, point to evidence indicating that unpaid toll bills are the main reason people lose access to telecommunications services.⁽³³⁰⁷⁾ Several commenters assert that toll limitation, rather than an increased federal Lifeline support amount, may make the most significant impact on subscribership levels.⁽³³⁰⁸⁾ CNMI supports the Joint Board's recommendation that the Commission should require carriers currently incapable of providing toll limitation to add the capability in any switch upgrades.⁽³³⁰⁹⁾

242. California Dept. of Consumer Affairs, on the other hand, is concerned that the cost of providing toll limitation to Lifeline customers at no charge will unduly burden other telecommunications customers,⁽³³¹⁰⁾ and suggests that toll limitation should be provided to low-income consumers at a reduced fee so that they will better appreciate and manage the service they are receiving.⁽³³¹¹⁾

243. PacTel agrees with the Joint Board that carriers providing toll limitation as part of Lifeline should receive support from the universal service support mechanisms.⁽³³¹²⁾ PacTel argues, however, that carriers should receive support for both their start-up costs for initiating toll limitation services and lost revenue (defining lost revenue as the amount customers normally would pay for toll limitation).⁽³³¹³⁾ This support, PacTel asserts, would cover the incremental costs and the portion of joint and common costs associated with the service.⁽³³¹⁴⁾ PacTel also asserts, however, that the Commission should "allow carriers to devise specific solutions targeted at their own customers, rather than dictating a regulatory approach," citing studies concluding that consumers would prefer toll control services, rather than toll blocking. PacTel claims that consumers want services such as prepaid toll services and the ability to choose their own monthly toll cap.⁽³³¹⁵⁾

244. While Ameritech and California Dept. of Consumer Affairs support the Joint Board's recommendation that Lifeline customers should receive toll blocking free of charge, they are concerned that it may be difficult for carriers to provide toll control. Chicago, on the other hand, supports toll control and contends that it should be "made a priority" as long as CLECs and ILECs are treated alike.⁽³³¹⁶⁾ Ameritech explains that toll control requires carriers to conduct "real time recording and rating of calls" made by subscribers using carriers other than the billing LEC.⁽³³¹⁷⁾ Ameritech points out, for example, that it does not rate calls⁽³³¹⁸⁾ made using other long distance carriers, so it would be unable to block calls immediately once Lifeline subscribers had reached their limit of toll calls, if the subscriber used another carrier to place toll calls.⁽³³¹⁹⁾ For reasons similar to those Ameritech offers, California Dept. of Consumer Affairs urges the Commission not to take action regarding toll control in the absence of further analysis of the potential costs of such a policy.⁽³³²⁰⁾ Additionally, California Dept. of Consumer Affairs questions whether customers who reach their toll limit would be prohibited from placing any more calls until the bill is paid or until the beginning of the next month.⁽³³²¹⁾ In the latter case, California Dept. of Consumer Affairs maintains that customers would still be able to incur substantial toll charges.⁽³³²²⁾

245. MFS and Ohio PUC urge the Commission to adopt the Joint Board's recommendation that only low-income consumers should receive toll limitation free of charge.⁽³³²³⁾ New Jersey Advocate, on the other hand, believes that all consumers, not just low-income consumers, should receive toll limitation free of charge.⁽³³²⁴⁾ New Jersey Advocate bases its argument on New Jersey's small calling areas and the resulting number of consumers who regularly incur toll charges.⁽³³²⁵⁾

246. No Disconnection for Non-Payment of Toll Charges. A number of commenters support the Joint Board's recommendation that carriers should be prohibited from disconnecting Lifeline customers' local service for non-payment of toll charges.⁽³³²⁶⁾ Many of these commenters contend that such a policy will help increase subscribership among low-income consumers.⁽³³²⁷⁾ Ohio PUC notes that prohibiting local service disconnection for non-payment of toll charges also "contributes to a level playing field in the competitive market."⁽³³²⁸⁾ Moreover, TRA agrees with the Joint Board that a policy prohibiting disconnection of local service for non-payment of toll charges may encourage carriers to offer toll limitation to Lifeline subscribers.⁽³³²⁹⁾ AT&T notes the relationship between disconnection for non-payment of toll charges and low subscribership levels among low-income consumers, but asserts that the Commission should establish a "finite grace period after which carriers could disconnect" customers who have not paid their toll bills.⁽³³³⁰⁾

247. Some commenters seek to emphasize that a policy of no disconnection for non-payment of toll charges should apply only to Lifeline customers, as the Joint Board recommended.⁽³³³¹⁾ Moreover, WorldCom maintains that the Commission should emphasize that states are not required to adopt a no-disconnect policy for all end users.⁽³³³²⁾ DC OPC, on the other hand, contends that all customers should benefit from a policy prohibiting disconnection of local service for non-payment of toll charges.⁽³³³³⁾

248. Several commenters would support a policy prohibiting termination of Lifeline customers' local service for non-payment of toll charges as long as the customers are required to accept toll limitation.⁽³³³⁴⁾ Ameritech and MFS assert that such a condition will help guard against abuse of the no-disconnect policy.⁽³³³⁵⁾ MFS further suggests that customers and the IXC should develop an extended payment plan or agree that the charges will be forgiven before a LEC is required not to disconnect the customer's local service for non-payment of toll charges.⁽³³³⁶⁾ Sprint suggests that the toll limit be set at a level such as $10.00, which would provide adequate access to long distance service while still offering long distance carriers protection against uncollectible toll bills.⁽³³³⁷⁾

249. On the other hand, several commenters urge the Commission not to adopt the Joint Board's recommendation that carriers be prohibited from disconnecting Lifeline customers' local service for non-payment of toll charges.⁽³³³⁸⁾ Some of these parties cite a lack of evidence that such a policy would increase subscribership.⁽³³³⁹⁾ MCI, PacTel, USTA, and TRA argue that carriers in states that have implemented such a policy have experienced more uncollectible toll bills and a decline in subscribership.⁽³³⁴⁰⁾ BellSouth argues that, because Lifeline customers can control toll charges by accepting toll limitation, prohibiting disconnection for non-payment of toll charges would not advance universal service.⁽³³⁴¹⁾

250. Other parties opposing a policy of no disconnect for non-payment of toll bills argue that such a policy will generate losses for IXCs and increase toll fraud.⁽³³⁴²⁾ MCI, PacTel, and others assert that uncollectible toll bills will drive up the cost of long distance services for consumers.⁽³³⁴³⁾ GTE maintains that a no-disconnect policy will force carriers to cross-subsidize uncollectible toll bills with revenues obtained from customers who pay their toll bills.⁽³³⁴⁴⁾ GTE argues that this would create a hidden subsidy in violation of the Act's mandate that universal service be explicit and sufficient, unless support is provided to offset uncollectible toll charges incurred as a result of the prohibition.⁽³³⁴⁵⁾ PacTel argues that, in addition to support for uncollectible toll bills, universal service support mechanisms should provide support for the increased costs associated with upgrading billing and collection systems and time spent explaining the new policy to customers.⁽³³⁴⁶⁾ In the alternative, PacTel asserts, it should receive an exogenous cost adjustment as compensation for such upgrades.⁽³³⁴⁷⁾

251. PacTel asserts that it is beyond the scope of section 254 for the Commission to implement a rule prohibiting disconnection of local service for non-payment of interstate charges.⁽³³⁴⁸⁾ PacTel argues that the Joint Board goes beyond the intent of section 254 to enhance universal service by "attempting, without factual support, to devise a means for customers who have such access to remain on the network regardless of the consequences to the industry."⁽³³⁴⁹⁾ Additionally, ACTA asserts, without further elaboration, that such a policy is "constitutionally suspect."⁽³³⁵⁰⁾ GTE further contends that (1) the recommendation prohibiting disconnection for non-payment of toll charges is an "unjustifiable and unwarranted governmental intrusion into the affairs of private businesses," especially in light of the pro-competitive, deregulatory marketplace that Congress envisioned in passing the 1996 Act, and (2) merely providing the option of toll limitation does not justify a disconnection prohibition.⁽³³⁵¹⁾ GTE and PacTel argue that market-driven initiatives, rather than regulatory policies, will have a greater impact on subscribership among low-income consumers than the rule prohibiting disconnection for non-payment of toll.⁽³³⁵²⁾ GTE and PacTel therefore maintain that the Commission should let carriers and the states devise means of increasing subscribership.⁽³³⁵³⁾ PacTel, for example, claims to have improved subscribership through partnerships with community organizations.⁽³³⁵⁴⁾ WorldCom suggests that, as an alternative to a policy prohibiting disconnection of local service for non-payment of toll charges, the Commission could prohibit carriers from disconnecting Lifeline customers' access to certain critical services, such as 911 (emergency service) and 611 (telephone repair service).⁽³³⁵⁵⁾

252. PacTel argues that if the Commission adopts a no-disconnect policy, it should relax the waiver requirements proposed by the Joint Board so that carriers need only provide effective toll-limitation services to obtain a waiver.⁽³³⁵⁶⁾ PacTel opposes the waiver requirement proposed by the Joint Board that "telephone subscribership among low-income consumers in the carrier's service area must [be] at least as high as the national subscribership level for low-income consumers." PacTel argues, however, that if it adopts such a requirement, the Commission should require the difference between the national subscribership level and the level in the carrier's service area to be at least three percentage points.⁽³³⁵⁷⁾

253. Prohibition on Service Deposits. Several commenters support the Joint Board's recommendation to prohibit customer service deposits,⁽³³⁵⁸⁾ provided that the customer accepts toll limitation, where available.⁽³³⁵⁹⁾ Commenters assert that the elimination of service deposits may help increase subscribership among low-income consumers.⁽³³⁶⁰⁾ Furthermore, DC OPC notes that requiring customers to accept toll-limitation service in order to have their service deposit waived will significantly reduce the risk of uncollectible toll bills.⁽³³⁶¹⁾ Edgemont and Ohio PUC support the Joint Board's recommendation to eliminate service deposits, but they do not believe the Commission should require customers to accept toll limitation in order to benefit from this policy.⁽³³⁶²⁾

254. USTA argues that there is an insufficient correlation between toll limitation and service deposits, because customers' acceptance of toll limitation does not provide carriers with protection against customers with poor credit history.⁽³³⁶³⁾ While toll limitation may prevent toll bills from increasing, USTA argues, it does not give customers an incentive to pay outstanding balances. GTE opposes the Joint Board's recommendation that service deposits be prohibited if a customer accepts toll limitation because (1) "toll blocking service is not effective when an individual is determined to evade [toll] blocking"; and (2) the policy would not allow carriers to receive support for any losses they may incur in eliminating service deposits for Lifeline customers.⁽³³⁶⁴⁾

255. California Dept. of Consumer Affairs supports a "minimal" service deposit for Lifeline customers who elect to receive toll limitation.⁽³³⁶⁵⁾ Ameritech claims that a complete waiver of service deposits may not be appropriate in all cases, especially in jurisdictions with usage-based local rates.⁽³³⁶⁶⁾

256. Edgemont urges the Commission to find that (1) companies offering local service may only seek repayment of their own local arrearage for customers seeking to reestablish local service; and (2) companies must make reasonable repayment arrangements for both local and toll arrearages.⁽³³⁶⁷⁾ In this way, Edgemont argues, many potential Lifeline customers will be able to benefit from low-income support programs, while the companies will be able to collect on arrearages.⁽³³⁶⁸⁾

257. Special Needs Equipment for Low-income Individuals with Disabilities. A few commenters disagree with the Joint Board's recommendation that universal service support for low-income consumers with disabilities need not be addressed in this proceeding because it will be addressed in a separate proceeding to implement section 255.⁽³³⁶⁹⁾ NAD, United Cerebral Palsy Ass'n, and Universal Service Alliance maintain that basic access to voice telephony and other wireline service is often very expensive for people with disabilities.⁽³³⁷⁰⁾ Furthermore, United Cerebral Palsy Ass'n and Consumer Action assert that people with disabilities are among the poorest in the nation.⁽³³⁷¹⁾ National Telecommuting Institute proposes that employers that hire low-income, homebound individuals with disabilities should receive a waiver for all voice and data line charges incurred between the employee and company, with the service provider receiving support from universal service support mechanisms.⁽³³⁷²⁾

258. Additionally, NAD, United Cerebral Palsy Ass'n, and Universal Service Alliance disagree with the Joint Board's reliance on section 255 to address access to telecommunications services for people with disabilities.⁽³³⁷³⁾ NAD and United Cerebral Palsy Ass'n contend that, although section 255 requires access to telecommunications devices and services, it does not require the establishment of specialized customer premises equipment distribution programs or the development of funding sources for that purpose, nor provide for the needed funding to create parity in toll charges for TTY users.⁽³³⁷⁴⁾ NAD and Consumer Action also maintain that the Commission has not made clear what action it intends to take with respect to section 255, including whether it will issue a rulemaking.⁽³³⁷⁵⁾

259. Support for Non-profit Organizations. A few commenters argue that community organizations providing services to low-income individuals should receive support from universal service support mechanisms.⁽³³⁷⁶⁾ Public Advocates argues that providing universal service support to community organizations is one of the most efficient and effective ways of adhering to the statutory principle that "access to advanced telecommunications services should be provided in all regions of the nation."⁽³³⁷⁷⁾ Catholic Conference maintains that universal service support should be given to organizations and social service agencies providing voice mail to homeless individuals and migrant farmworkers.⁽³³⁷⁸⁾ Alternatively, Catholic Conference argues, universal service support should be given to such entities for providing telephone service, because many of the people they serve lack access to a residential line.⁽³³⁷⁹⁾ Alliance for Community Media suggests that universal service support should be available to community computing centers so that low-income individuals could gain access to the Internet and other advanced communications services.⁽³³⁸⁰⁾ Community Colleges argues that many community colleges constitute low-income consumers and therefore should qualify for Lifeline support.⁽³³⁸¹⁾

260. Non-Residential Services. Catholic Conference disagrees with the Joint Board's recommendation that low-income support should be limited to residential services and asserts that universal service support should be provided to low-income consumers for voice messaging service.⁽³³⁸²⁾ Voice messaging service for people who lack access to a residential line, such as homeless individuals and migrant farmworkers, meets all of the criteria enumerated in section 254(c)(1), Catholic Conference argues.⁽³³⁸³⁾ Additionally, Robert J. Lock argues that people without access to wireline technology, such as homeless individuals, could benefit from the provision of wireless technology.⁽³³⁸⁴⁾

261. Marketing and Consumer Awareness Information. Benton Foundation argues that support should be provided to ensure that competitively neutral and accurate information about universal service programs is disseminated, particularly to low-income communities.⁽³³⁸⁵⁾ Similarly, Florida PSC argues that more consumer awareness information about the existence of Lifeline and Link Up should be available.⁽³³⁸⁶⁾

262. Other Services. Seattle supports the Joint Board's recommendation that universal service support for interexchange and advanced services for Lifeline customers should not be provided at this time.⁽³³⁸⁷⁾ Urban League, on the other hand, suggests that low-income consumers should have access to advanced services through telecommunications lines with fax and modem capability.⁽³³⁸⁸⁾

IX. ISSUES UNIQUE TO INSULAR AREAS

A. Overview

263. The following is a summary of the comments relating to issues unique to insular areas.

264. CNMI largely supports the Joint Board's recommendations, but argues that its recommendation regarding toll-free access should be modified.⁽³³⁸⁹⁾ CNMI is concerned that under the Joint Board's recommendation callers in the Pacific Island territories will continue to be required to dial 880 to complete many "toll-free" calls, and thus will have to pay for the portion of those calls between CNMI and Hawaii.⁽³³⁹⁰⁾ CNMI argues that having callers from the Pacific Island territories incur a charge for a "toll-free" service while callers from other areas in the United States have true "toll-free" service constitutes unlawful discrimination under section 202,⁽³³⁹¹⁾ and violates the principle set forth in section 254(b)(3) that consumers in all regions should have access to telecommunications services that are reasonably comparable, and at rates reasonably comparable, to those in urban areas.⁽³³⁹²⁾

265. CNMI argues that if the Commission is unwilling to provide support for this service now, it should revisit this issue after August 1, 1997. By that date the Pacific Island territories will have become part of the NANP and will have integrated interexchange rates with the mainland; the Commission can then assess the effect of these changes before determining whether universal service support is necessary.⁽³³⁹³⁾ If the Commission proceeds this way, CNMI requests that the Commission clarify that interexchange carriers serving the Pacific Island territories can continue to use 880 numbers to allow consumers to access toll-free numbers on an interim basis,⁽³³⁹⁴⁾ despite MTC's assertion that carriers are prohibited from using 880 numbers once CNMI becomes part of NANP.⁽³³⁹⁵⁾ CNMI states that it is unaware of any legal restriction that would preclude the use of 880 numbers for toll-free calls between the Pacific Island territories and the mainland United States once the islands become part of NANP.⁽³³⁹⁶⁾

266. The Governor of Guam supports the recommendations of the Joint Board and commends the Board for recognizing that insular areas may require special treatment.⁽³³⁹⁷⁾ The Governor does not disagree with the recommendation to delay the examination of the issue of support for toll-free access to the Pacific Island territories, but suggests that it may be necessary to provide some safeguards in the treatment of toll-free access to the islands.⁽³³⁹⁸⁾ Specifically, the Governor suggests that toll-free service providers be required to include Guam automatically in "nationwide" service areas.⁽³³⁹⁹⁾ The Governor also suggests that consumers in the Pacific Island territories be permitted to continue using 880 or 881 during a transition period, while toll-free customers make business decisions about whether to serve the islands.⁽³⁴⁰⁰⁾ Regarding access to information services, the Governor notes that the Pacific

Island territories are in a unique position because the National Information Infrastructure (NII) "superhighway," funded, at least in part, by the National Science Foundation, has not been extended to the islands.⁽³⁴⁰¹⁾ Consequently, according to the Governor, Internet users on Guam not only pay higher rates for usage, but also get inferior services due to bandwidth congestion.⁽³⁴⁰²⁾

X. SCHOOLS AND LIBRARIES

A. Overview

267. The following is a summary of the comments relating to the issue of schools and libraries.

B. Telecommunications Carrier Functionalities and Services Eligible for Support

1. Comments

a. Telecommunications Services

268. Most commenters support the Joint Board's recommendation that all commercially available telecommunications services be eligible for universal service support.⁽³⁴⁰³⁾ USTA, for example, notes that "[t]his is a reasonable approach that provides schools and libraries with maximum flexibility to select the services they need and avoids favoring a particular service or technology."⁽³⁴⁰⁴⁾ BPL states that libraries should be entitled to select the services they need because technology advances and market needs should determine what services they choose to use.⁽³⁴⁰⁵⁾ New York Public Library asserts that "[t]he Joint Board's plan allows each library and school system to evaluate its priorities, and develop a telecommunications network that would best address those priorities."⁽³⁴⁰⁶⁾ While generally supporting the Joint Board's recommendation that all telecommunications services be eligible for support, CTIA asserts that the Commission should go beyond simply allowing schools and libraries to choose wireless services, but "should also preempt any State or local statutes or regulations which exclude, or have the effect of excluding, wireless carriers."⁽³⁴⁰⁷⁾ Ameritech states that inclusion of all telecommunications services is acceptable, as long as the fund is capped at a reasonable level.⁽³⁴⁰⁸⁾

269. While generally supporting the Joint Board's recommendations regarding the functionalities and services eligible for support, some commenters ask the Commission to focus support on T-1 or greater bandwidth services or to prefer local service over internal connections or Internet access.⁽³⁴⁰⁹⁾ New York DOE, for example, states that advanced telecommunications services should be the "major focus for funding support," with a minimum standard of T-1 or comparable bandwidth.⁽³⁴¹⁰⁾ Apple comments that, "at this juncture, universal service for a school, [or] library . . . must, at a minimum, be referenced to the equivalent of at least one dedicated T-1 (1.544 Mbps) line, with that capacity controlled by the organization consuming the service."⁽³⁴¹¹⁾ Apple also notes that, "[i]n the near future, universal service will have to comprise a full range of additional digital services, with bandwidths ranging between at least 45 and 100 Mbps."⁽³⁴¹²⁾ Vermont PSB maintains that, because financial resources are constrained, the Commission should establish a priority order to address the telecommunications needs of schools and libraries. That is, telecommunications services, including measured local usage, should be fully funded before subsidies for internal connections or Internet access are considered.⁽³⁴¹³⁾

270. Some commenters, on the other hand, oppose providing a discount for all telecommunications services.⁽³⁴¹⁴⁾ SBC contends that "such an approach would be an abdication of the Commission's responsibility under Section 254(c)(3)."⁽³⁴¹⁵⁾ SBC also states that the Joint Board's recommendation to designate all telecommunications services eligible for discounts is inconsistent with its approach to define specifically the services eligible for support under section 254(b)(1).⁽³⁴¹⁶⁾ "Adopting this recommendation of the Joint Board would violate the Act, and would be arbitrary, unreasonable, and otherwise unlawful."⁽³⁴¹⁷⁾ New York DPS contends that "[u]nder [s]ection 254(h)(1)(B), states are free (contrary to the proposal of the Joint Board) to determine `appropriate and necessary' discounts on intrastate services and thus should be able to determine which intrastate services need to be discounted."⁽³⁴¹⁸⁾ New York DPS argues, therefore, that providing discounts for all telecommunications services will limit states' flexibility to design intrastate programs.⁽³⁴¹⁹⁾

271. Ohio DOE and Ohio PUC encourage the Commission to consider the "equity" issue that applies to states, such as Ohio, that have already spent considerable amounts of money on facilities and technologies.⁽³⁴²⁰⁾ Ohio DOE, for example, asks that the Commission "make universal service support flexible and fair such that Ohio schools can build upon and enhance technologies already in place with support for recurring costs and technological options which would fill in the gaps and seams in our system."⁽³⁴²¹⁾

b. Internet Access

272. Numerous commenters support the Joint Board's recommendation to include Internet access and electronic mail within the services available to schools and libraries pursuant to the universal service discount.⁽³⁴²²⁾ EDLINC, for example, states that access to the World Wide Web and electronic mail has become a necessary and basic tool for transmitting and gathering information, and is likely to become even more important. EDLINC notes further that "[i]f schools and libraries are not eligible for discounts on what is fast-becoming a basic element in the communications network, the purpose of [s]ection 254 will not have been met."⁽³⁴²³⁾ AOL states that "[t]he Joint Board's recommendation implements the schools and libraries section of the Telecommunications Act of 1996 as its sponsors intended -- to bring the educational benefits of the Internet within the reach of all Americans."⁽³⁴²⁴⁾ NCTA asserts that section 254(h)(2) "contemplates the inclusion of `access' as part of universal service without regard to the regulatory treatment of access services."<sup>(3425)</sup> NCTA argues, therefore, that section 254(h)(2) allows the Commission to include such non-telecommunications services as Internet access "within the ambit of universal service for schools and libraries."<sup>(3426)</sup> Commercial Internet Exchange agrees and states that analysis should not focus on whether a service is a telecommunications or an information service, but rather "whether Internet access qualifies as an `advanced service' under [s]ection 254(h)(2)."⁽³⁴²⁷⁾

273. Numerous other commenters, including most of the Regional Bell Operating Companies (RBOCs), challenge the Commission's authority to designate non-telecommunications services, such as Internet access, as eligible for universal service support.⁽³⁴²⁸⁾ These commenters assert that the Act limits universal service support to telecommunications services, and that the various sections of section 254(h) referring to "services" must be read in concert. ⁽³⁴²⁹⁾ For example, BellSouth maintains that section 254(c)(1) defines universal service as "an evolving level of telecommunications services."⁽³⁴³⁰⁾ AT&T notes that the subsequent reference to "additional services" in section 254(c)(3) relates directly back to the "telecommunications services" referenced in section 254(c)(1).⁽³⁴³¹⁾

274. BellSouth adds that, while section 254(c)(3) allows the Commission to designate additional services as eligible for universal service support, that section "does not provide that such additional universal services may include non-telecommunications services."⁽³⁴³²⁾ SBC states further that any doubt about the meaning of "additional services" contained in section 254(c)(3) is removed when referring to section 254(h)(1)(B), "which discusses reimbursement for telecommunications carriers providing `any of its services which are within the definition of universal services under [[s]ection 254(c)(3)].'"⁽³⁴³³⁾ SBC asserts that inclusion of information services such as Internet access is not addressed anywhere within sections 254(c)(1), (c)(3), or (h)(1)(B).⁽³⁴³⁴⁾ PacTel states that only "[a] school's or library's purchase of telecommunications service from a telecommunications carrier to connect the school's or library's equipment to the telecommunications network for the purpose of reaching the Internet service provider could be made at discounted prices that are directly supported by the universal service fund."⁽³⁴³⁵⁾ PacTel adds that if a telecommunications carrier is also an Internet service provider and packages the telecommunications and information services together, only the telecommunications portion of the package would be eligible for universal service support.⁽³⁴³⁶⁾

275. Several commenters assert that relying on section 254(h)(2)(A) to support discounts for Internet access does not provide a sound basis for the Joint Board's recommendation.⁽³⁴³⁷⁾ BellSouth, for example, maintains that section 254(h)(2), which requires the Commission to "enhance access" to advanced telecommunications and information services, "cannot override the explicit provisions of Section 254(c)(1) limiting universal services to such telecommunications services as the Commission shall designate."⁽³⁴³⁸⁾ Ameritech states that the reference in section 254(h)(2)(A) to enhancing access to "information services," indicates that "what is meant is not that the information services themselves are included in the concept of universal service but rather `access to' those services -- i.e., the communications services that connect the educational institution to the information services," is what the statute contemplated.<sup>(3439)</sup> Citizen Utilities notes that the Joint Board distinguished between access and services in other contexts, including its recommendation to provide universal service support for access to interexchange service and access to directory assistance services, but not to provide support for those underlying services. Citizens Utilities asserts that "[t]he same logic suggests that the service provided by a telecommunications carrier in access to the Internet can be severed from the service that an Internet access provider extends over the telecommunications carrier's transmission facility. It is only the latter facility that should, under [s]ection 254(h), be the subject of funded discounts." <sup>(3440)</sup> SBC notes that section 254(h)(2)(A) "does not speak of discounts, funds for discount reimbursement or carrier contributions; it speaks only of `competitively-neutral rules.'"⁽³⁴⁴¹⁾

276. Commenters opposing universal service support for non-telecommunications services raise two final issues. First, BellSouth and GTE argue that supporting Internet access is bad public policy. BellSouth asserts that local community initiatives are available to fund such services for schools and libraries, and "[c]learly the Act did not intend to usurp local community involvement and responsibility for its schools."⁽³⁴⁴²⁾ GTE maintains that providing such support may interfere with the competitive markets currently providing non-telecommunications services.⁽³⁴⁴³⁾ Second, Netscape contends that the Recommended Decision failed to "deal with the jurisdictional issues involved in Internet access."⁽³⁴⁴⁴⁾ Since the telecommunications services underlying Internet access are arguably intrastate, Netscape maintains they are not within the Commission's authority. Netscape recommends that the Commission classify Internet access as an interstate service, since most such communications cross state lines. "Without this sort of preemption of state authority, the Commission's Internet-related decisions under [s]ection 254(h) may draw unnecessary legal challenge, compromising the goal, which Netscape shares, of making Internet access available universally to U.S. K-12 schools and libraries."⁽³⁴⁴⁵⁾

277. Numerous commenters support the Joint Board's recommendation permitting non-telecommunications carriers that provide eligible services to schools and libraries to draw from universal service support mechanisms.⁽³⁴⁴⁶⁾ TCI, for example, asserts that such a result is within the Commission's authority under section 254(h)(2)(A).⁽³⁴⁴⁷⁾ WinStar maintains that the Commission should clarify that the eligibility requirements of section 214(e) do not apply to providers furnishing supported services to schools and libraries."⁽³⁴⁴⁸⁾ Commercial Internet Exchange asserts that section 254(e) requires that only providers of core telecommunications services under section 254(c)(1) can recover some of the costs of providing those services from universal service support mechanisms. Because universal service support mechanisms are intended to provide support for the broader category of section 254(h)(2) advanced services, however, Commercial Internet Exchange contends that recovery from universal service support mechanisms is not limited to carriers eligible under section 214(e).⁽³⁴⁴⁹⁾

278. Commercial Internet Exchange also states that allowing Internet service providers to participate in the competitive bidding process and to receive universal service support for providing services to schools and libraries is mandated by the competitive neutrality requirement contained in section 254(h)(2).⁽³⁴⁵⁰⁾ Including Internet service providers in the discount program, according to Commercial Internet Exchange, will also lead to more competitive pre-discount prices for services which will, in turn, "reduce the reimbursement burden on the universal service fund for each school and library participating in the program."⁽³⁴⁵¹⁾ NetAction, while noting that allowing non-telecommunications carriers to draw from universal service support mechanisms without requiring them to contribute is "inherently unstable, and open to possible appellate challenge," states further that "[t]he Joint Board properly interpreted the Act to require competitively neutral rules to advance universal service policies, rather than limit support to providers which must meet the narrow definition of `telecommunications provider.'"⁽³⁴⁵²⁾

279. Cox submits that requiring only telecommunications carriers to contribute to universal service support mechanisms but allowing non-telecommunications providers to receive universal service support from those same mechanisms is neither inconsistent nor unfair.⁽³⁴⁵³⁾ Telecommunications carriers will contribute to universal service support mechanisms based on telecommunications revenues, not on revenues from non-telecommunications services such as Internet access.⁽³⁴⁵⁴⁾ EDLINC notes that because telecommunications carriers will not be competing with non-telecommunications carriers to provide telecommunications services, the fact that only telecommunications carriers must contribute to universal service support mechanisms based on their provision of telecommunications services does not put them at a competitive disadvantage with respect to non-telecommunications carriers, such as Internet service providers.⁽³⁴⁵⁵⁾ To the contrary, EDLINC states, the provision of universal service support for non-telecommunications services such as Internet access will be available to both telecommunications and non-telecommunications carriers. EDLINC contends that because neither entity will be required to contribute to universal service support mechanisms based on the provision of these non-telecommunications services and because both entities will be eligible to receive reimbursement from universal service support mechanisms for their provision of these services, neither party will be at a competitive disadvantage.⁽³⁴⁵⁶⁾

280. Numerous other commenters, again including most of the BOCs, challenge the Commission's authority to permit non-telecommunications carriers to draw from universal service support mechanisms.⁽³⁴⁵⁷⁾ NYNEX, for example, asserts that since providers of Internet access are "not `telecommunications carriers' that provide universal service through their own facilities" pursuant to section 214(e), nor are they "`interstate telecommunications providers' under [s]ection 254(d)," they are not eligible to receive universal service support.⁽³⁴⁵⁸⁾ PacTel agrees and quotes section 254(e), which states that "only an eligible telecommunications carrier designated under [s]ection 214(e) shall be eligible to receive specific Federal universal service support."⁽³⁴⁵⁹⁾ SBC contends that providing universal service support for non-telecommunications carriers raises such administrative problems as requiring the universal service administrator to oversee a large number of service providers and to monitor those non-regulated providers for potential fraud and abuse.⁽³⁴⁶⁰⁾

281. NYNEX notes that allowing non-telecommunications providers, such as Internet service providers, to draw from universal service support mechanisms without requiring them to contribute is also inconsistent with the concept of competitive neutrality.⁽³⁴⁶¹⁾ PacTel asserts that "[c]ompetitively neutral rules require that the category of service providers and services that receive support be the same as the category of service providers and services that provide support. Otherwise, one type of provider and service would be favored over another."⁽³⁴⁶²⁾ Netscape states that "[p]roper universal service policy for K-12 schools and libraries compels that all communications providers - regardless of regulatory classification - both contribute to and receive support from a `universal' universal service support system."⁽³⁴⁶³⁾ Netscape states further that a situation in which competitors, such as telecommunications carriers and Internet service providers, have differing universal service payment obligations "is precarious, at best, and open to substantial legal challenge, at worst."⁽³⁴⁶⁴⁾

282. Some commenters further assert that allowing non-telecommunications carriers to draw from universal service support mechanisms without also requiring them to contribute to those mechanisms would violate the United States Constitution.⁽³⁴⁶⁵⁾ SBC, for example, characterizes such a contribution mechanism as a tax, since interstate telecommunications carriers would be contributing to a fund that would be used to compensate non-telecommunications carriers "to achieve educational goals unrelated to the regulation of telecommunications."⁽³⁴⁶⁶⁾ Because, under the Origination Clause of the United States Constitution,⁽³⁴⁶⁷⁾ all federal taxes must originate in the United States House of Representatives, SBC maintains that telecommunications carriers' contributions to universal service support mechanisms would amount to an unconstitutional tax, and that all provisions of section 254 addressing schools and libraries would, therefore, comprise unconstitutional delegations of authority.⁽³⁴⁶⁸⁾ SBC urges the Commission instead to interpret section 254(c)(3) and 254(h) narrowly to avoid constitutional problems.⁽³⁴⁶⁹⁾

283. PacTel notes that permitting non-telecommunications carriers to draw from universal service support mechanisms without requiring them to contribute "would create a new subsidy for Internet access providers without addressing the implicit subsidy that LECs provide to them through the Commission's Enhanced service providers ("ESPs") exemption from access charges."⁽³⁴⁷⁰⁾ PacTel contends further that such an arrangement would violate sections 201, 202, and 254 of the Communications Act, and would also be "an unauthorized taking of LEC property in violation of the Act and of the Fifth and Fourteenth Amendments to the U.S. Constitution."⁽³⁴⁷¹⁾

284. Some commenters assert that, if the Commission adopts the Joint Board's recommendation to permit non-telecommunications carriers to draw from universal service support mechanisms, such providers must be reclassified as telecommunications providers.⁽³⁴⁷²⁾ Citizens Utilities states that such a reclassification would impose two new obligations upon such carriers: "(1) they would be required to contribute to universal service funding under [s]ection 254(d); and (2) they would be responsible for the payment of access charges, where their services are interexchange in nature, and reciprocal compensation, where their services are local exchange in nature."⁽³⁴⁷³⁾

285. Some commenters address the Joint Board's recommendation that schools and libraries be permitted to secure discounts on Internet access bundled with a minimal amount of content, but only if that bundled offering represents the most cost-effective way for the school or library to gain access to the Internet.⁽³⁴⁷⁴⁾ AOL recommends that the Commission eliminate any requirement that Internet access may be bundled with only minimal content in order to qualify for universal service discounts.⁽³⁴⁷⁵⁾ AOL asserts that such a requirement is inconsistent with the legislative intent,⁽³⁴⁷⁶⁾ impermissibly supports one model for providing information services over another,⁽³⁴⁷⁷⁾ and needlessly restricts the range of service options available to schools and libraries.⁽³⁴⁷⁸⁾ In addition, AOL recommends that the Commission replace the minimal content requirement with a per-subscription cap on fees for access to the Internet, regardless of whether that access is bundled with other content.⁽³⁴⁷⁹⁾ A per-subscription cap, according to AOL, will provide basic conduit access for schools and libraries, will give schools and libraries maximum flexibility in selecting Internet Service Providers, and will be easy to administer.⁽³⁴⁸⁰⁾ AOL states that the cap should be based on the average charge for Internet access, computed on a nationwide basis.⁽³⁴⁸¹⁾ Using several different methods of calculation, AOL estimates a current average rate of $19.95 per month.⁽³⁴⁸²⁾ Netscape states that a per-subscription cap "is a competitively neutral approach . . . far preferable to the creation of a new, factually incorrect and highly transitory system for classification of Internet providers as `content' and so-called `conduit' services."⁽³⁴⁸³⁾ CNMI, however, opposes a per-subscription cap because it may not be adequate to support Internet access for schools and libraries in rural and insular areas and because such a cap may not be consistent with section 254's requirement that schools and libraries be provided with affordable access to services eligible for universal service support.⁽³⁴⁸⁴⁾

286. Netscape suggests a modification to the minimal content requirement recommended by the Joint Board. Netscape contends that the conduit/content distinction is ambiguous and has no meaningful application in the Internet environment to the functionalities and services available today from Internet service providers and online service providers.⁽³⁴⁸⁵⁾ As an alternative, Netscape recommends that Internet access (i.e., the transport function) be differentiated from Internet services (i.e., the enhanced communications function), and that only Internet access be eligible for universal service discounts. "Under this approach, any provider offering dedicated transport facilities (T-1, 56 Kbps, frame relay, etc.) linking a user to the Internet would be considered, to that extent, to be providing `telecommunications services' subject to discount under [s]ection 254(h)."⁽³⁴⁸⁶⁾ Netscape also states that competitive neutrality precludes extending discounts only to dedicated Internet access, since many Internet service providers and Online service providers offer primarily dial-up access. Netscape does, however, support greater discounts for high-bandwidth Internet access to encourage schools and libraries to adopt broadband network solutions.⁽³⁴⁸⁷⁾

c. Intra-School and Intra-Library Connections

287. Numerous commenters support the inclusion of internal connections within the services eligible for the schools and libraries discount program.⁽³⁴⁸⁸⁾ EDLINC, for example, agrees with the Joint Board that installation and maintenance of internal connections is a service under section 254(h)(1)(B).⁽³⁴⁸⁹⁾ EDLINC states further that "[w]ithout internal connections, services cannot be delivered to classrooms, as contemplated by the legislation, making it impossible to fully integrate telecommunications into the curriculum."⁽³⁴⁹⁰⁾ United States Senator Charles S. Robb commends the Joint Board for recommending that internal connections be eligible for universal service support and "encourage[s] the FCC to adopt this recommendation in its final rules in keeping with the spirit of the law to not only provide internet wiring to the school door, but to enable our schools to afford the internal connections for the classroom where the children need them."⁽³⁴⁹¹⁾ New Jersey Advocate maintains that "[t]he discounts for the provision of Internet access and telecommunications services [will] be meaningless if schools and libraries cannot afford the cost of wiring the facilities for access."⁽³⁴⁹²⁾

288. EDLINC also asserts that the inclusion of internal connections among the services eligible for universal support is competitively neutral, since wireless technologies are not favored over wireline technologies.⁽³⁴⁹³⁾ CNMI maintains that the inclusion of internal connections is consistent with "section 254(h)(2)(A)'s far-reaching mandate" that the Commission establish rules that provide access to advanced telecommunications and information services for schools and libraries.⁽³⁴⁹⁴⁾ Great City Schools contends that there is "no debate over legal authority" to include internal connections within the class of services eligible for universal service support.⁽³⁴⁹⁵⁾

289. ITI asserts that if the Commission decides to support internal connections, the principle of competitive neutrality requires that both telecommunications carriers and non-telecommunications carriers be eligible for universal service support.⁽³⁴⁹⁶⁾ In addition, ITI asserts further that section 254(h)(2) provides the Commission with authority that is "separate and independent" from the authority granted through section 254(h)(1). ITI states that, "[b]ecause it is not so limited, [s]ection 254(h)(2) authorizes the Commission to establish a funding mechanism for reimbursement of both carriers and non-carriers who provide the advanced services identified by the Board."⁽³⁴⁹⁷⁾ CTIA contends that the Commission should adopt a "flexible approach" that allows schools and libraries to use any type of internal connections, including wireless LANs.⁽³⁴⁹⁸⁾ CTIA maintains that such an approach will result in greater competition and lower prices, and will ensure that the limited universal service funds "are spent in the most efficient manner possible."⁽³⁴⁹⁹⁾

290. Oracle seeks clarification on two points regarding internal connections. First, Oracle asks that the Commission include file server software within the definition of internal connections eligible for universal service support. Oracle defines file server software as the software "used to configure, operate and manage computer network communications."⁽³⁵⁰⁰⁾ Noting that network file servers are useless without the necessary software and that most file server hardware is sold bundled with software, Oracle argues that "the Commission should not attempt to disaggregate network file server hardware and software."⁽³⁵⁰¹⁾ Second, Oracle states that, to ensure both competitive and technological neutrality, the Commission should avoid "any limitation on the size and type of network file servers, routers and similar network technologies K-12 schools and libraries are permitted to deploy using universal service support funds."⁽³⁵⁰²⁾ Oracle maintains that the marketplace, rather than Commission regulations, should determine the network architecture that schools and libraries select.⁽³⁵⁰³⁾

291. Numerous commenters argue that the Commission should decline to adopt the Joint Board's recommendation to include internal connections within the services eligible for universal service support.⁽³⁵⁰⁴⁾ Some of these commenters contend that the Commission has no statutory authority to provide support for internal connections.⁽³⁵⁰⁵⁾ For example, AT&T states that internal connections are not telecommunications services under section 254(c)(3), and that section 254(h)(2)(A)'s directive to adopt rules to enhance "access" to advanced telecommunications and information services does not expand the Commission's authority to provide universal service support to non-telecommunications services such as internal connections.⁽³⁵⁰⁶⁾ California Dept. of Consumer Affairs maintains that "it would be wrong for the Commission to interpret a reference to `access' as Congress' grant of jurisdiction over inside wiring providers."<sup>(3507)</sup> Ameritech adds that "the `access to . . . information services' referred to in [section] 254(h)(2)(A) is most logically interpreted as applying to the network transmission components necessary for access to information services."⁽³⁵⁰⁸⁾

292. Ameritech also states that because internal connections are not telecommunications services, but rather customer premises equipment (CPE), they are clearly not eligible for universal service support.⁽³⁵⁰⁹⁾ AirTouch adds that the Recommended Decision does not provide a "workable standard" for differentiating among file servers eligible for universal service support as internal connections and personal computers ineligible for support, and concludes that funding internal connections would both violate section 254 and be "administratively unworkable."⁽³⁵¹⁰⁾ WorldCom asserts that "[h]owever laudable the Joint Board's goals may be in this area, the Commission appears to lack the statutory authority to require universal service funding of inside wiring that constitutes unregulated plant or equipment, not a telecommunications service."⁽³⁵¹¹⁾ UTC adds that "[w]hile the Joint Board's characterization of internal connections as a type of service may be accurate, this is not dispositive" because services eligible for universal service support must be telecommunications services.⁽³⁵¹²⁾ GTE maintains that providing universal service support for internal connections is inconsistent with the Commission's previous classification of inside wiring and CPE as non-common carrier services under Title II that are not subject to Commission regulation.⁽³⁵¹³⁾

293. Numerous commenters contend that permitting non-telecommunications carriers that install and maintain internal connections to draw from universal service support mechanisms violates section 254.⁽³⁵¹⁴⁾ Commenters provide essentially the same arguments that they make regarding the inclusion of Internet access among the services eligible for universal service support.⁽³⁵¹⁵⁾ NYNEX, for example, states that providers of internal connections are neither eligible telecommunications providers under section 214(e), nor are they interstate telecommunications providers under section 254(d).⁽³⁵¹⁶⁾ BellSouth contends that providers of internal connections can collect universal service support only if the Commission reclassifies the providers as telecommunications carriers and internal connections as telecommunications services, "thus ignoring its historical treatment of such services and connections as well as these statutory definitions."⁽³⁵¹⁷⁾ Bell Atlantic maintains that the Commission must limit the entities that can be reimbursed for providing internal connections to telecommunications carriers only.⁽³⁵¹⁸⁾

294. Some commenters maintain that including internal connections within the services eligible for universal service support would either greatly increase the magnitude of universal service support mechanisms or would rapidly deplete the available funds.⁽³⁵¹⁹⁾ TURN contends that the size of universal service support mechanisms would have to increase by billions of dollars if internal connections were eligible for support.⁽³⁵²⁰⁾ TURN also maintains that the impact would be felt by telecommunications consumers because carriers would have to raise rates. TURN further avers that "[t]his would place the Commission's mandate to improve affordability and advance universal service in jeopardy."⁽³⁵²¹⁾ New York DOE notes that "[w]hile the intent of the Joint Board recommendations for supporting discounts for inside wiring is laudable, it may not be practical because costs for this purpose could quickly deplete a capped national fund."⁽³⁵²²⁾ New York DOE also maintains that some schools may choose very sophisticated configurations for internal connections, placing a disproportionate burden on the fund and taking support away from the most needy schools and libraries.⁽³⁵²³⁾ PageMart adds that providing universal service support for internal connections would "not [be] economically reasonable as required by [s]ection 254(h)(2)(A)."⁽³⁵²⁴⁾

295. Some commenters assert that including internal connections among the services eligible for universal service support would not serve the public interest because, for example, it would seriously disrupt the competitive market that now exists for internal connections.⁽³⁵²⁵⁾ AirTouch, for example, notes that because the internal connections market is nonregulated and highly competitive, providing universal service support for internal connections "is likely to place significant burdens upon other telecommunications consumers: both the direct burdens of the taxes used to fund such subsidies and in indirect efficiency costs that will be triggered by the collection of such subsidies."⁽³⁵²⁶⁾ Cincinnati Bell contends that "since inside wire has been deregulated for some time and the market is clearly competitive, schools have opportunities to solicit bids from many different providers and to negotiate for discounts to meet their needs. In short, there is no need for subsidies for inside wire."⁽³⁵²⁷⁾ GTE maintains that because many internal connections providers would not meet the Act's definition of telecommunications carrier, their service would not be eligible for universal service support. The result would be that eligible telecommunications carriers would have a competitive advantage over these other, full-priced competitors in the internal connections market.⁽³⁵²⁸⁾ AT&T, on the other hand, asserts that non-telecommunications carriers providing internal connections would have a competitive advantage over telecommunications carriers providing internal connections because only the telecommunications carriers will contribute to universal service support mechanisms and large portions of the funding will likely flow to the non-telecommunications carriers. AT&T contends that such a result would not be competitively neutral.⁽³⁵²⁹⁾

296. Some commenters assert that providing universal service support for internal connections violates the principle of technological neutrality.⁽³⁵³⁰⁾ GTE, for example, asserts that the inclusion of internal connections within the services eligible for universal service support violates this principle because it "target[s] a subsidy (inside wiring support) to a characteristic (wiring) unique to a particular technology (wireline services)."⁽³⁵³¹⁾ Motorola agrees with GTE's analysis and adds that "the inclusion of internal connections in the universal service support program ignores the existence of cost-effective wireless alternatives."⁽³⁵³²⁾

297. Finally, some commenters maintain that, if universal service support is provided for internal connections, the owner of those internal connections should not be permitted to restrict access to them.⁽³⁵³³⁾ If one provider receives universal service support funds to supply internal connections to a school or library, WinStar asserts that that provider may not then restrict access to the internal connections if the school or library chooses another provider to supply its telecommunications services or Internet access. WinStar maintains that the Commission should condition the receipt of universal service funds on the requirement that the installer or owner not restrict access.⁽³⁵³⁴⁾ Similarly, if the internal connections are already in place, WinStar contends that the owner should not be permitted to prevent the school or library from choosing another provider for its telecommunications services or Internet access. If a telephone carrier owns the internal connections and currently has a tariff for those connections, it should be compensated for the use of those connections at the schools' and libraries' discounted rate and be permitted to recover the rest of the tariffed rate from the universal service support mechanism.⁽³⁵³⁵⁾ If the owner does not currently charge for the use of the internal connections, WinStar asserts that it should not be permitted to begin charging if the school or library selects an alternate service provider.⁽³⁵³⁶⁾

C. Discount Methodology

1. Comments

a. Pre-Discount Price

298. Competitive Environment. Numerous commenters support the Joint Board's recommendation that schools and libraries be required to participate in a competitive bidding process in which requests for proposals (RFPs) will be posted on a website.⁽³⁵³⁷⁾ Ameritech, for example, contends that the competitive bidding process "should encourage widespread participation and aggregation of demand, thus facilitating economic efficiency and reducing administrative costs."⁽³⁵³⁸⁾ BellSouth asserts that competitive bidding and posting RFPs on a website "will ensure that many providers will have the opportunity to submit bids, and, thus, brings to the process many benefits which can be gained through the natural operation of competitive forces."⁽³⁵³⁹⁾

299. Several commenters raise issues that they contend must be clarified so that the competitive bidding process can operate smoothly. Nextel and other commenters contend, for example, that the Commission's competitive bidding rules must state that schools and libraries need not select the provider that submits the lowest bid. These commenters argue that schools and libraries should be permitted the flexibility to determine which bid best fits their particular requirements.⁽³⁵⁴⁰⁾ AOL recommends that the Commission clarify that schools and libraries may consider such factors as amount of classroom down time, quality connections, and customer support services, in addition to the price of service, when determining which Internet subscription charge is the most cost-effective. AOL states that the alternative, which would require schools and libraries to accept the lowest bid for Internet access, would provide schools and libraries with no flexibility to choose services that best meet their needs.⁽³⁵⁴¹⁾ Community Colleges states that "[q]uality concerns must be recognized in the competitive bidding process to ensure that schools are not relegated to take service from unreliable carriers simply because they outbid competitors."⁽³⁵⁴²⁾

300. Other commenters contend that potential service providers participating in the schools and libraries competitive bidding process should be required to submit "unbundled" bids that identify the costs of all covered services separately.⁽³⁵⁴³⁾ Community Colleges asserts, for example, that providers of such services as Internet access and internal connections need not also provide the whole bundle of services that a school or library seeks in order to collect from universal service support mechanisms.⁽³⁵⁴⁴⁾ Nextel asserts that an unbundling requirement would permit new entrants, such as wireless service providers, to compete to provide advanced services.⁽³⁵⁴⁵⁾ WinStar maintains that "[s]uch an unbundling would maximize the number of competitors who could respond to RFPs and thereby maximize competition for the provision of supported services."⁽³⁵⁴⁶⁾ ALTS maintains that "[i]f the services were not bid separately, joint marketers would have an unfair competitive advantage."⁽³⁵⁴⁷⁾ NCTA notes that maximizing the number of competing bidders will result in a lower pre-discount price for schools and libraries. NCTA also notes that the use of separate RFPs for individual service offerings such as telecommunications services and internal connections "will reduce the opportunities for ILECs to make non-compensatory, cross-subsidized low bids for particular competitive components of an RFP and to make up the difference by undetected higher prices charged for monopoly services in a `package' RFP."⁽³⁵⁴⁸⁾

301. GTE and SBC raise a potential conflict between the Joint Board's recommended competitive bidding requirement and existing federal tariff restrictions applicable to ILECs.⁽³⁵⁴⁹⁾ SBC maintains that, at the present time, ILECs are limited to providing services under publicly available tariffed rates and because competitors will know precisely what an ILEC is required to bid, competitors will underbid and effectively exclude ILECs from providing services to the lucrative schools and libraries market. GTE asserts that such a result would be contrary to the intent of the Recommended Decision, which contemplates a competitive bidding process open to all carriers.⁽³⁵⁵⁰⁾ GTE and SBC state that they have attempted to have their tariff restrictions revised to allow them to respond to competitive bid requests with other than tariffed rates, but that the Commission has rejected their attempts.⁽³⁵⁵¹⁾ These carriers also note that the Court of Appeals recently remanded SBC's tariff to the Commission for further consideration because of the Commission's refusal to consider the issue of "competitive necessity."⁽³⁵⁵²⁾ GTE urges the Commission to consider the issue of "competitive necessity" in the context of ILECs providing services to schools and libraries, and emphasizes that the principle of competitive neutrality requires that tariff relief be adopted before any universal service competitive bidding requirement is adopted.⁽³⁵⁵³⁾ SBC states that "[b]y effectively excluding incumbent LECs from providing service to schools and libraries without any explanation whatsoever, the Joint Board has recommended an approach that is unreasonable, arbitrary, and otherwise unlawful."⁽³⁵⁵⁴⁾

302. USTA and EDLINC maintain that the Commission must clarify the obligations of carriers of last resort, in the event that a school or library issues an RFP and receives no bids.⁽³⁵⁵⁵⁾ EDLINC states that "[t]here must either be a carrier of last resort that will provide the requested services at an affordable rate, or all service providers serving the geographic area must be under an affirmative obligation to submit their LCPs [lowest corresponding prices] in response to an RFP."⁽³⁵⁵⁶⁾ USTA contends that the Commission must clarify "how the obligation of carriers of last resort mesh with the new universal service requirements."⁽³⁵⁵⁷⁾

303. Commenters raise several other issues regarding the competitive bidding requirement. NASTD expresses the concern that posting descriptions of services on a website for the purpose of soliciting competitive bids may not comply with the procurement code with which state and local government entities must comply.⁽³⁵⁵⁸⁾ GTE states that, if the website arrangement does not permit electronic searches or automatic retrieval of bid requests, "schools and libraries should be required to provide other forms of notification to maximize the number of bids."⁽³⁵⁵⁹⁾ NCTA asserts that requiring schools and libraries to publish notice of their service requests in their local daily newspapers for some reasonable period of time would give all potential service providers equal opportunity to bid and would increase the number of bids received by schools and libraries. According to NCTA, "[g]iven the magnitude of the support at issue and the potential for lower prices resulting from more bidders, the expense of such newspaper publication will be de minimis."⁽³⁵⁶⁰⁾ BellSouth maintains that the website could be used to post both bids and the assignment of discounts, so that carriers could verify the discount that applies to each school and library.⁽³⁵⁶¹⁾ TCI recommends requiring vendors to submit their qualifications and demonstrate that they have both the resources and the experience to provide the requested services.⁽³⁵⁶²⁾ Vermont PSB asserts that a competitive bid process is not necessary to stimulate competition, and, because of the administrative burden, recommends that the Commission adopt a waiver for schools and libraries with fewer than ten access lines.⁽³⁵⁶³⁾ Teleport and NCTA support limiting competitive bidding to one round of sealed bids, in order to minimize the burden imposed on schools and libraries,⁽³⁵⁶⁴⁾ while EDLINC asserts that the Commission should permit local conditions to prevail to determine bidding structure.⁽³⁵⁶⁵⁾

304. Numerous commenters support the Joint Board's recommendation to allow schools and libraries to participate in consortia with both eligible and ineligible entities for the purpose of aggregating demand.⁽³⁵⁶⁶⁾ EDLINC and Washington UTC, for example, agree with the Joint Board's conclusion that denying schools and libraries the efficiencies that would result from participating in consortia would not be in the public interest.⁽³⁵⁶⁷⁾ Washington UTC also agrees with the Joint Board's conclusion that the benefits of participating in consortia far outweigh the potential of abuse, stating that "[i]t is absolutely essential that schools, libraries and other public facilities participate in community-based demand aggregation efforts to ensure that advanced network services are available to all Americans."⁽³⁵⁶⁸⁾ BellSouth asserts that the market power generated by consortia may result in making services affordable without the assistance of universal service support, and suggests that the Commission consider modifying the Joint Board's recommendations regarding consortia to reflect this significant market power.⁽³⁵⁶⁹⁾

305. Lowest Price Charged to Similarly Situated Non-Residential Customers for Similar Services. Numerous commenters note that using the lowest price charged to similarly situated non-residential customers for similar services ("lowest corresponding price") to determine the pre-discount price is a concept that requires clarification.⁽³⁵⁷⁰⁾ Some commenters address the question of defining what constitutes a "similarly situated non-residential customer."⁽³⁵⁷¹⁾ ALA, for example, contends that the definition of a similarly situated non-residential customer should not be so narrow as to exclude comparable customers whose situations differ only marginally from an eligible school or library. ALA asserts that "[d]ifferences in situation should be limited to those factors that demonstrably and significantly impact the direct cost of providing a service in one area versus another and/or one customer versus another."⁽³⁵⁷²⁾ USTA asks the Commission to clarify that a carrier need only consider one of its own similarly situated customers, rather than the customer of another carrier, to determine the pre-discount price to be offered to schools and libraries.⁽³⁵⁷³⁾ Ameritech asserts that a school or library would not be similarly situated to a customer in the latter years of a multi-year contract, and that the lowest corresponding price should be based on a recently charged rate.⁽³⁵⁷⁴⁾ NTIA asserts that state public service commissions are better positioned to ascertain lowest corresponding prices because they interact with customers on a daily basis and are better able to make the necessary factual determinations.⁽³⁵⁷⁵⁾

306. EDLINC maintains that carriers should not be permitted to consider such factors as length of contract and proximity to switching facilities to determine whether a non-residential customer is similarly situated to a school or library. EDLINC maintains that, instead, the concept of similarly situated non-residential customer should be simplified to mean a user of roughly equivalent volume to that of an eligible school or library, and that the pool of similarly situated customers should include both eligible schools and libraries and ineligible entities.⁽³⁵⁷⁶⁾ To allow carriers to apply a broad range of factors in setting prices, according to EDLINC, will subvert the entire lowest corresponding price mechanism.⁽³⁵⁷⁷⁾ Recognizing EDLINC's concern that prices differ from location to location and carrier to carrier, SBC opposes EDLINC's proposal and states that there are legitimate reasons, including costs and state regulatory policies, that account for those differences in prices.⁽³⁵⁷⁸⁾ Ameritech asserts that a requirement to ignore distance factors would be misdirected because "distance is a primary factor in determining differences in nontraffic sensitive costs in many cases."⁽³⁵⁷⁹⁾

307. While maintaining that the concept of lowest corresponding price needs clarification, EDLINC continues to assert that the use of a nationally based pre-discount price is the better approach. EDLINC contends that a national pre-discount price "would ensure that rates are not computed from an artificially high base and help ensure that the final discounted rate is as low as possible" and "would allow establishment of uniform rates for the same service, thus putting schools and libraries on a more equal footing."⁽³⁵⁸⁰⁾ SBC also states that adopting EDLINC's proposal to establish a national benchmark pre-discount price would violate section 254(h)(1)(B) of the Act.⁽³⁵⁸¹⁾ Furthermore, Ameritech asserts that "in cases in which the national benchmark rate is not compensatory for the particular carrier, there would be unlawful confiscation."⁽³⁵⁸²⁾

308. ALA seeks clarification on the concept of "similar services."⁽³⁵⁸³⁾ ALA recommends that the Commission clarify that services that are otherwise similar are not made dissimilar simply because one is offered under contract and the other under tariff. ALA maintains that this clarification would be consistent with the Joint Board's recommendation that schools and libraries be afforded maximum flexibility in selecting the package of services that best meets their needs. According to ALA, such a definition "also maximizes the number of choices available to libraries thereby promoting a more competitive environment and efficient use of funds."⁽³⁵⁸⁴⁾

309. Some commenters seek clarification on the length of time that a particular lowest corresponding price would remain in effect.⁽³⁵⁸⁵⁾ USTA asserts that the lowest corresponding price applicable within 12 months of the bid should be used to compute the bid price, and that lowest corresponding price should remain in effect for the life of the contract.⁽³⁵⁸⁶⁾ EDLINC agrees, but maintains that the applicable time period should be 24 months, "to make it more likely that there will be a contract that applies to a particular service and similarly situated customer."⁽³⁵⁸⁷⁾ When the contract is renegotiated, USTA contends that a new lowest corresponding price should be calculated based on current market conditions.⁽³⁵⁸⁸⁾ PacTel concurs and maintains that the school or library contract price should remain fixed at no more than the lowest corresponding price at the time the contract is signed. The contract price should not be affected by subsequent fluctuations up or down in the prices charged to others.⁽³⁵⁸⁹⁾

310. Several commenters address what constitutes "geographic area" for purposes of determining the lowest corresponding price.⁽³⁵⁹⁰⁾ Community Colleges, for example, supports the Joint Board's recommendation that geographic area means the area in which the service provider is seeking to serve customers. Community Colleges asserts that this definition of geographic area "will create meaningful opportunities for new service providers to gain economic footholds in new markets" and will "prevent the unnecessary exclusion of new entrants that are unable to provide services throughout an incumbent LEC's entire service area."⁽³⁵⁹¹⁾ Cox recommends that the Commission more narrowly define geographic area to encompass a school district because the smaller the service area, the larger number of service providers that will be likely to bid to provide services to schools and libraries.⁽³⁵⁹²⁾ PacTel interprets the definition of geographic area to permit a carrier to consider geographic price differences when calculating the lowest corresponding price, and therefore does not require carriers to offer the same lowest corresponding price to all schools and libraries in its service area. PacTel maintains that requiring a carrier to offer the same lowest corresponding price to all schools and libraries in its service area, regardless of price differences, would be "irrational and perhaps confiscatory."⁽³⁵⁹³⁾

311. Some commenters consider the application of lowest corresponding price to areas in which there is no competition.⁽³⁵⁹⁴⁾ USTA seeks clarification on how the lowest corresponding price concept will apply when there is no competition and how the obligations of carriers of last resort interact with universal service obligations.⁽³⁵⁹⁵⁾ MCI and EDLINC maintain that TSLRIC should apply in non-competitive markets,⁽³⁵⁹⁶⁾ while BANX and SBC contend that using TSLRIC to determine the pre-discount price would violate section 254(h)(1)(B).⁽³⁵⁹⁷⁾ PacTel asserts that the lowest tariff rate in the county in which a school or library is located should constitute the lowest corresponding price in such situations, unless a cost-based agreement would produce a lower price.⁽³⁵⁹⁸⁾ PacTel also asks that the Commission clarify that carriers may rely on existing tariffs, rather than being required to file new tariffs, to determine the lowest corresponding price for services provided to schools and libraries.⁽³⁵⁹⁹⁾

312. Other commenters oppose the use of the lowest corresponding price to determine the pre-discount price for schools and libraries.⁽³⁶⁰⁰⁾ U S WEST maintains, for example, that because a carrier may not charge for some services, calculating the lowest corresponding price would be extremely difficult.⁽³⁶⁰¹⁾ WinStar asserts that the lowest corresponding price is unnecessary because competition in the bidding process will ensure that the prices offered to schools and libraries are the lowest available.⁽³⁶⁰²⁾ WinStar also maintains that, at the very least, the Commission should not require non-dominant carriers to certify that the price offered is the lowest corresponding price. WinStar maintains that such a ruling would be consistent with the Commission's decision to eliminate tariff filing requirements for non-dominant carriers, which was based in part on the conclusion that non-dominant carriers could not control the market price or set prices at exorbitant levels.⁽³⁶⁰³⁾ SBC contends that the entire lowest corresponding price concept violates the Act because the language of 254(h)(1)(B) "plainly means that the price a carrier would otherwise charge the school or library is the pre-discount price."⁽³⁶⁰⁴⁾ SBC asserts that implementation of the lowest corresponding price would "artificially lower the reimbursement level" and "appears to mandate an unfunded discount."⁽³⁶⁰⁵⁾

313. Finally, Citizens Utilities addresses concerns regarding the special circumstances under which a particular subset of schools and libraries is currently receiving below-cost rates that were established through negotiated resolution of a state commission's earnings investigation.⁽³⁶⁰⁶⁾ Citizens Utilities maintains that such rates should apply only to the schools or libraries that are part of such a regulatory bargain, and should not apply to any other school or library. That is, such a below-cost price should not be used to establish the pre-discount price for all schools and libraries within a carrier's service area.⁽³⁶⁰⁷⁾

b. Discounts

314. Numerous commenters support the Joint Board's recommendation that schools and libraries receive discounts ranging from 20 percent to 90 percent.⁽³⁶⁰⁸⁾ EDLINC, for example, states that "the wide range of the proposed discounts is essential if final discounted rates are to be affordable for all schools and libraries."⁽³⁶⁰⁹⁾ Illinois State Library asserts that the 20 percent to 90 percent discounts "will be instrumental in assisting libraries in meeting the information needs of their community of users."⁽³⁶¹⁰⁾ USTA notes that the discount matrix recommended by the Joint Board should be easy to administer.⁽³⁶¹¹⁾

315. Other commenters oppose the Joint Board's recommended discount structure.⁽³⁶¹²⁾ ALTS, for example, expresses the concern that there does not seem to be any concrete evidence that 20 percent to 90 percent discounts are necessary for schools and libraries, and warns that analysis outlining why those particular discount rates were chosen must be completed before discounts are permitted.⁽³⁶¹³⁾ LCI states that the proposed discounts are "excessive" and that no discount above 20 percent should be permitted.⁽³⁶¹⁴⁾

316. Discounts in High Cost Areas. Most commenters support giving a greater discount to schools and libraries located in high cost areas.⁽³⁶¹⁵⁾ ALA states, for example, that "[a]dditional discounts for high cost areas are not only appropriate, they are clearly called for in the law."⁽³⁶¹⁶⁾ Illinois State Library asserts that high cost of services is as important a consideration as level of economic disadvantage in making services affordable to libraries.⁽³⁶¹⁷⁾ United States Senator Charles S. Robb states that "[t]he Joint Board recognizes in its recommendations and the FCC should continue to recognize in the final rules that affordability includes not only the ability for a school to pay for services, but the total cost of obtaining services in that school's area."⁽³⁶¹⁸⁾

317. Some commenters suggest modifications to the discount structure recommended by the Joint Board.⁽³⁶¹⁹⁾ ALA, EDLINC, and NTIA, for example, contend that the discount matrix contained in the Recommended Decision fails adequately to address the needs of libraries in high cost areas. These commenters note that, for economically disadvantaged schools and libraries, there is no greater discount for those located in high cost areas than for those in low cost areas, and even in the less disadvantaged categories where there is a greater percentage discount for those in high costs areas, that additional percentage discount is not adequate to address the true cost differential.⁽³⁶²⁰⁾ ALA and NTIA assert, therefore, that the discount matrix should be adjusted to reflect a discount for schools and libraries located in high cost areas greater than the Joint Board recommended.⁽³⁶²¹⁾ NTIA recommends that the most economically disadvantaged schools receive steeper discounts based on their location in a high cost area. That is, NTIA suggests that schools with 50 percent to 74 percent of their students eligible for the national school lunch program receive discounts ranging from 75 percent if located in a low cost area, to 80 percent if located in a mid-cost area, to 85 percent if located in a high cost area. NTIA also recommends that schools with 75 percent to 100 percent of their students eligible for the national school lunch program receive discounts ranging from 85 percent if located in a low cost area, to 90 percent if located in a mid-cost area, to 95 percent if located in a high cost area.⁽³⁶²²⁾

318. EDLINC maintains that areas in which there is no competition should be treated as high cost areas because "[i]f there is no competition in an area, even the price offered to similarly-situated customers is likely to reflect the lack of competition and therefore result in a higher discount price than would be available to schools and libraries in areas where there is competition."⁽³⁶²³⁾ CNMI asserts that the discount matrix should be modified to reflect per-capita income levels. As support for that premise, CNMI states that, although just under 70 percent of children in the Commonwealth are eligible for the national school lunch program and its schools, therefore, would not qualify for the greatest discount under the Joint Board proposal, the Northern Mariana Islands have among the lowest telephone subscribership rates and some of the highest telecommunications rates in the nation.⁽³⁶²⁴⁾

319. Discounts for Economically Disadvantaged Schools and Libraries. Several commenters support the Joint Board's decision not to grant 100 percent discounts to schools and libraries.⁽³⁶²⁵⁾ Ameritech maintains that requiring schools and libraries to contribute toward the cost of covered services will encourage them to solicit the best pre-discount price and will discourage wasteful purchases.⁽³⁶²⁶⁾ BellSouth states that requiring schools and libraries to share in the expense of services will prompt them to "seek the best pre-discount price and to make informed, knowledgeable choices among their options, thereby building in effective fiscal constraints on the discount fund."⁽³⁶²⁷⁾ Other commenters, however, contend that even the highest discounts recommended by the Joint Board will not render supported services affordable to the most economically disadvantaged schools and libraries.⁽³⁶²⁸⁾ Washington SPI recommends that such schools and libraries be eligible for a Lifeline program similar to the program currently in place for eligible low-income consumers.⁽³⁶²⁹⁾

320. ALA asserts that the Joint Board's proposed discount matrix does not adequately address the needs of libraries, because ALA contends that poverty data, rather than school lunch eligibility data, should be used to determine libraries' levels of economic disadvantage. ALA, therefore, submits an alternate discount matrix that uses the percentage of residents living in poverty within a one mile radius of a library outlet to determine a library's level of economic disadvantage.⁽³⁶³⁰⁾ The matrix is based on a sample of 500 library outlets and uses 1990 U.S. Census poverty data.⁽³⁶³¹⁾ The percentage breakdowns proposed by ALA are based on the percentage breakdowns in the Joint Board's recommended discount matrix. For example, 16 percent of schools have between 50 and 74 percent of their students eligible for the national school lunch program. The Joint Board proposed giving such schools an 80 percent discount on supported services. ALA states that 16 percent of libraries have between 16 and 22 percent of the patrons within a one mile radius living at or below the poverty line. ALA recommends that such libraries also be eligible for an 80 percent discount on supported services. According to ALA, an area in which over 22 percent of the population is at or below the poverty line is considered extremely impoverished.⁽³⁶³²⁾

c. Identifying High Price Areas

321. Some commenters support the Joint Board's recommendation to use unseparated loop costs to determine the high cost discount for schools and libraries.⁽³⁶³³⁾ ALA, for example, states that unseparated loop costs "may well be a convenient and useful method of estimating eligibility."⁽³⁶³⁴⁾ Alliance for Distance Education contends that the Commission should use unseparated loop costs until review of the program in 2001.⁽³⁶³⁵⁾ West Virginia Consumer Advocate asserts that the Commission should use unseparated loop costs to develop a definition of low, high, and mid-cost schools and libraries.⁽³⁶³⁶⁾

322. Other commenters support using the same mechanism to determine high cost for schools and libraries as that used to determine high cost support for "core" services.⁽³⁶³⁷⁾ SBC asserts that using the same mechanism will be less administratively burdensome than implementing and maintaining different mechanisms.⁽³⁶³⁸⁾ USTA contends that because the Commission is currently working to develop a proxy model for the high cost portion of core services funding, there is no need to develop a separate model for schools and libraries.⁽³⁶³⁹⁾ ITC recommends using the same mechanism to determine high cost for "core" services and schools and libraries, but also recommends eliminating from the final discount matrix the mid-cost category contained in the Recommended Decision matrix.⁽³⁶⁴⁰⁾ EDLINC states that using the same high cost methodolgy for core services and for schools and libraries generally appears to be reasonable, with one exception. In some areas with developed core networks but with relatively low demand for the more advanced services to which schools and libraries may subscribe, EDLINC contends that there may not be a correlation between the cost of providing core services and the cost of providing advanced services.⁽³⁶⁴¹⁾

323. Some commenters provide alternative methods for calculating the high cost discount for schools and libraries.⁽³⁶⁴²⁾ Colorado LEHTC recommends that the Commission "consider all rural areas, as defined by the Department of Health and Human Services' Office of Rural Health Policy including the Goldsmith Modification, to be high cost areas for the purposes of the discount matrix."⁽³⁶⁴³⁾ Governor of Guam maintains that the Commission should provide for additional mechanisms, over and above the discount matrix, so that schools and libraries for which the lowest bid for services is over 115 percent of the national average, for example, should be eligible to receive discounts in addition to those contemplated in the discount matrix.⁽³⁶⁴⁴⁾ PacTel contends that all schools and libraries participating in the discount program should submit to the administrator a written statement of the retail price of a T-1 connection from the school or library to the point of presence of the nearest service provider. The administrator should be directed to sort the data and calculate dividing lines to distinguish between higher and lower cost categories to conform to the allocation percentages in the Joint Board's proposed discount matrix.⁽³⁶⁴⁵⁾ EDLINC, however, maintains that service providers, rather than schools and libraries, should be required to submit pricing information because the providers are much more familiar with their pricing structures.⁽³⁶⁴⁶⁾ Illinois State Library asserts that high cost for schools and libraries should be calculated using a population density factor.⁽³⁶⁴⁷⁾ New York DOE suggests that availability of advanced services should be considered in determining high cost for schools and libraries.⁽³⁶⁴⁸⁾ AFT states that the definition of high cost should consider factors that lead schools in densely populated, low-income areas to pay high telecommunications costs. According to AFT, these factors include the cost of providing the complex technologies required by students with disabilities and the higher costs associated with protecting and maintaining educational facilities and equipment.⁽³⁶⁴⁹⁾

324. Finally, Brooklyn Public Library asserts that the Joint Board's recommendations did not adequately consider high cost factors and to correct the flaw it perceives, proposes an alternative, two-part formula for determining the high cost discount. Brooklyn Public Library recommends calculating local baseline rates for all services. In areas in which certain advanced services, such as frame relay, are not available and the subscriber pays a "premium" rate for those advanced services, that "premium" rate should be discounted to the local baseline rate. This discounted rate would be known as the adjusted baseline rate. Brooklyn Public Library then recommends that the adjusted baseline rate be compared against a national average of local baseline rates to calculate an additional discount. These two discounts would comprise the high cost discount.⁽³⁶⁵⁰⁾

d. Identifying Economically Disadvantaged Schools and Libraries

325. Schools. Many commenters support using eligibility for the national school lunch program to determine a school's level of economic disadvantage.⁽³⁶⁵¹⁾ Great City Schools, for example, states that use of the national school lunch program "is workable, it is nationally understandable, it is uniform, and it is as fair or fairer on the whole as [any] other measure of poverty."⁽³⁶⁵²⁾ AFT notes that since eligibility for the national school lunch program is based on family income, it is "generally regarded as a good indicator of schools' and districts' ability to afford educational services."⁽³⁶⁵³⁾ Washington UTC contends that using eligibility for the national school lunch program "is likely to result in a more accurate determination of the school's need level than a measure which examines general community income."⁽³⁶⁵⁴⁾ Washington UTC further asserts that using a measure of economic disadvantage that is external to the school itself, such as average area income, is not as likely to reflect the level of poverty within schools or school districts.⁽³⁶⁵⁵⁾ USTA maintains that "[u]sing an existing and readily available metric has the advantage of being both simple and relatively inexpensive to administer."⁽³⁶⁵⁶⁾

326. Some commenters address the use of eligibility for the national school lunch program to determine discounts for non-public schools.⁽³⁶⁵⁷⁾ Great City Schools supports using eligibility for the national school lunch program and "disputes any contention that the free or reduced price lunch index and child count is not a viable measure of poverty for private and parochial schools."⁽³⁶⁵⁸⁾ Great City Schools also contends that the burden imposed on non-public schools is not great because school-wide counts of low-income children are used to determine eligibility for other federal programs, such as Title I of the Improving America's Schools Act of 1994.⁽³⁶⁵⁹⁾ Further, Great City Schools maintains that alternate methods of determining the actual number of low-income children that involve a mathematical equating of one measure of poverty with another are currently permitted by regulation.⁽³⁶⁶⁰⁾ For example, Great City Schools states that non-public schools may match children's home addresses with the home addresses of individuals on the Aid to Families with Dependent Children (AFDC) rolls, or they may conduct a survey of the income levels of their students' families to determine eligibility for the school lunch program.⁽³⁶⁶¹⁾ Great City Schools emphasizes that non-public schools must be required to use actual counts of low-income children and should not be permitted to approximate the percentage of low-income children using the zip codes of individual children's residences or the poverty level of the surrounding public school district. According to Great City Schools, allowing the use of those latter methods may overcount eligible students.⁽³⁶⁶²⁾ EDLINC suggests, however, that if it draws at least 60 percent of its students from the surrounding public school district, a non-public school should be permitted to use the same discount as the school district.⁽³⁶⁶³⁾ Great City Schools responds that EDLINC's proposal "inherently overstates virtually every private school's low income rate and allows such private schools to qualify and receive an unjustifiably high discount from the universal service fund."⁽³⁶⁶⁴⁾

327. AFT also supports the use of federally approved proxy methods to determine a school lunch count for schools that do not participate in the national school lunch program.⁽³⁶⁶⁵⁾ In addition, AFT supports the use of those same proxy methods for schools that do participate in the school lunch program, but in which students undersubscribe to the program, producing an inaccurate count of eligible students. AFT states that such schools include "some high schools, rural schools, [and] urban schools with highly transient populations."⁽³⁶⁶⁶⁾ Advantages of using federally approved proxy methods, according to AFT, include the fact that they are contained in an existing statute and are the product of a negotiated rulemaking proceeding in which schools participated, as well as the fact that schools already use the models.⁽³⁶⁶⁷⁾ EDLINC suggests that, to address the high school undercounting problem, public schools be permitted to determine high school free or reduced price lunch eligibility by using elementary school data, such as sibling count or "feeder pattern" counts.⁽³⁶⁶⁸⁾ AFT advises, however, that "expanding the use of proxies beyond those that have already been adopted could unnecessarily entangle the FCC in endless review and approval processes of many, less appropriate proxy schemes."⁽³⁶⁶⁹⁾

328. Some commenters suggest alternative approaches to determining a school's level of economic disadvantage.⁽³⁶⁷⁰⁾ GTE, for example, asserts that the universal service administrator use Census Bureau data to determine the underlying economic wealth of the geographic area served by a school.⁽³⁶⁷¹⁾ GTE states that "[t]his source has the advantage of being readily available from an expert government agency, and requires only minimal, one-time activity by the school . . . -- identification of the geographic areas used by the Census Bureau that are included within the school's serving area, based upon information provided by the fund administrator."⁽³⁶⁷²⁾ CEDR suggests using a formula that takes into account value of owner-occupied housing or median household income, and population density, to determine the applicable discount for each school district in the country.⁽³⁶⁷³⁾ The discount rate would then be applied to a "median national benchmark price for each telecommunications service existing in a competitive environment."⁽³⁶⁷⁴⁾

329. Libraries. While some commenters agree with the Joint Board's recommendation that eligibility for the national school lunch program may provide an accurate measure of a library's level of economic disadvantage,⁽³⁶⁷⁵⁾ many commenters representing the library community disagree with that premise.⁽³⁶⁷⁶⁾ ALA, for example, noting that the Act does not require that the same measure be used for schools and libraries, states that libraries may not have ready access to information that would allow them to coordinate their service areas with the applicable school district lunch data. ALA also notes that library service areas and school districts often are not identical, and further notes that whether that is the case varies greatly from state to state.⁽³⁶⁷⁷⁾ ALA and Brooklyn Public Library note that many libraries already use poverty level data for other purposes.⁽³⁶⁷⁸⁾ ALA suggests, therefore, using the poverty rate, based on U.S.Census Bureau data, of those in a library's service area to determine libraries' levels of economic disadvantage.⁽³⁶⁷⁹⁾ Specifically, ALA proposes requiring libraries to determine their levels of economic disadvantage by measuring the percentage of residents at or below the poverty line within either a one mile radius⁽³⁶⁸⁰⁾ or a two-mile radius⁽³⁶⁸¹⁾ of a public library branch or facility.

330. According to Colorado Department of Education, using a one-mile radius has several advantages: "a) precise service area boundaries do not exist for every public library outlet in the U.S.; b) in the absence of such boundaries and in the interest of fairness, some standard geographic boundary must be selected; and c) because studies of public library use have found consistently that residential proximity to a public library outlet is a major predictor of its use."⁽³⁶⁸²⁾ Colorado Department of Education also asserts that calculating poverty data for that one-mile radius is possible using geographic information systems (GIS) software.⁽³⁶⁸³⁾ According to ALA, Florida State University, which performed the analysis underlying the libraries matrix submitted by ALA, will calculate the one-mile radius poverty data for all public library outlets in the United States, and ALA will ensure that the information is readily available to all public libraries.⁽³⁶⁸⁴⁾

331. Colorado Department of Education recommends that, to be consistent with eligibility standards under the national school lunch program, the poverty-based discount for libraries should be based on 185 percent of the poverty level.⁽³⁶⁸⁵⁾ ALA notes, however, that applying the distribution of universal service discounts contained in the Joint Board's proposed discount matrix to a libraries discount matrix "should obviate the need for recalculating residential poverty data to set up library universal service discount distributions based on residents within 185% of the poverty level."⁽³⁶⁸⁶⁾

332. Some commenters provide additional alternatives to use of the national school lunch program to determine libraries' levels of economic disadvantage.⁽³⁶⁸⁷⁾ Colorado LEHTC "recommend[s] using the same income threshold as the [national school lunch program], but broadening the scope to all households in a library service area, not a school district."⁽³⁶⁸⁸⁾ Seattle suggests aggregating the discounts of the three public schools closest to a library, and also suggests considering any unusual population characteristics, such as a large senior citizen population, when calculating a library's level of economic disadvantage.⁽³⁶⁸⁹⁾ Pennsylvania Library Ass'n recommends using statistics that "determine the per capita market value in each community" to determine libraries' level of economic disadvantage.⁽³⁶⁹⁰⁾

333. Some commenters support allowing library systems to compute discounts on an individual branch basis or to compute an average discount.⁽³⁶⁹¹⁾ ALA, for example, states that a library system may have a branch in an extremely impoverished area, but the rest of the system's service area may be relatively wealthy. The system's overall poverty rate may not, therefore, adequately reflect conditions for the impoverished branch. "In such a case, ALA recommends that library systems be allowed to report each branch service area separately and allocate the discounts accordingly."⁽³⁶⁹²⁾ Washington State Library notes that such an approach would be consistent with the Joint Board's recommendation regarding computation of discounts by school districts.⁽³⁶⁹³⁾

334. Additional Considerations. EDLINC suggests that the Commission establish a "hardship appeals process," through which a school or library could apply for a greater discount. This process would be limited to schools and libraries in great need and that did not, in their own estimation, receive an adequate discount. Under EDLINC's proposal, the maximum discount would remain at 90 percent.⁽³⁶⁹⁴⁾ AFT, on the other hand, asserts that establishing a hardship appeals process at this time would raise numerous problems, including additional administrative burden and possible circumvention of the discount mechanism.⁽³⁶⁹⁵⁾ AFT suggests that the Commission defer any decision to establish a hardship appeals process until after the discount mechanism has been implemented and a "national evaluation" has been completed.⁽³⁶⁹⁶⁾

335. Some commenters oppose the Joint Board's recommendation that the Commission -- rather than the states -- dictate a schedule for providing different levels of discounts to schools and libraries based on economic disadvantage.⁽³⁶⁹⁷⁾ Cincinnati Bell, for example, contends that decisions regarding the level of discounts and how they are calculated should be left to the states. "A federal program that mandates specific discounts down to the individual school level cannot possibly lead to an efficient distribution of funds because of the vast differences between schools and education funding programs across the nation."⁽³⁶⁹⁸⁾ CSE maintains that universal service support should be available only to the schools and libraries in greatest need, and should not be available for "schools serving the wealthy."⁽³⁶⁹⁹⁾ Delaware PSC is concerned that it will become a "net loser" under the recommended schools and libraries discount structure because it is likely to contribute more money than it will receive.⁽³⁷⁰⁰⁾

336. Finally, some commenters address additional issues related to the issue of how the Commission should determine a school's or library's level of economic disadvantage.⁽³⁷⁰¹⁾ Ameritech, for example, asserts that the universal service administrator should calculate the discounts for all eligible schools and libraries and post the information on the same website on which the RFPs are published.⁽³⁷⁰²⁾ Ohio DOE urges the Commission to ensure that the schools and libraries discount program does not widen the existing disparity between economically disadvantaged schools and their more affluent counterparts. Ohio DOE recommends, therefore, that a "trust fund or other similar mechanism" be established to set aside funding for economically disadvantaged schools and to give such schools additional time to acquire the technical assistance necessary to implement a program eligible for universal service support.⁽³⁷⁰³⁾

e. Cap and Trigger

(1) Cap Level

337. Numerous commenters address the $2.25 billion annual cap on schools and libraries universal service support recommended by the Joint Board.⁽³⁷⁰⁴⁾ Washington UTC, for example, "supports the Joint Board adoption of an annual cap on schools and library support, set at a fiscally prudent level,"⁽³⁷⁰⁵⁾ while Great City Schools states that the $2.25 billion annual cap is "reasonable and defensible."⁽³⁷⁰⁶⁾ While generally supporting the concept of an annual cap, AT&T and several other commenters assert that the Joint Board's recommended cap is too high and should be reduced.⁽³⁷⁰⁷⁾ Bell Atlantic and WorldCom characterize the recommended cap as "excessive,"⁽³⁷⁰⁸⁾ while Ad Hoc contends that "the establishment of a cap does not fully address the fiscal concerns raised by the Joint Board's proposal."⁽³⁷⁰⁹⁾ California PUC fears that the estimated cost of providing discounts to schools and libraries may be higher than the $2.25 billion cap and doubts that the funding requirements for schools and libraries will be predictable or sustainable.⁽³⁷¹⁰⁾ NYNEX asserts that the $2.25 billion figure far exceeds what will be necessary to fund the eligible services, is unwieldy, and will significantly burden both carriers and consumers.⁽³⁷¹¹⁾ NYNEX recommends instead that the cap be set initially at $1.5 billion, with a goal of achieving the McKinsey full classroom model by the year 2005, and that the cap be reevaluated in 10 years.⁽³⁷¹²⁾ NYNEX also asserts that undisbursed funds in any given year should not be carried over to the next year because such a carry-over provision "is likely to make the fund increasingly burdensome as time goes on."⁽³⁷¹³⁾ ALA, however, states that "[b]arring carryover would create artificial deadlines and incentives to make hasty commitments."⁽³⁷¹⁴⁾ If the cap exceeds demand and there is a substantial amount of carryover each year, ALA recognizes that universal service support mechanisms may become unmanageable. ALA suggests that the Commission revisit the size of universal service support mechanisms at the 2001 review or, as an alternative, suggests that the Commission impose a reasonable cap on either the amount of carryover permitted each year or a limit on how long carryover funds remain available for use.⁽³⁷¹⁵⁾

338. Citizens Utilities also contends that the recommended cap will "become the funding floor or target figure that will be pursued by potential recipients" and will "become the dollar value of a politically untouchable environment."⁽³⁷¹⁶⁾ According to Citizens Utilities, lowering the cap will ensure that universal service funds are targeted to the neediest schools and libraries in high cost areas and will encourage states to fund their own schools and libraries discount programs.⁽³⁷¹⁷⁾ Ameritech argues that if the cap is not reduced, it should be divided into two components: one cap for telecommunications services and another cap for non-telecommunications services such as internal connections and Internet access. Ameritech states that "[t]his will guarantee that the subsidization of the usage of non-telecommunications products and services for certain schools will not unfairly deprive other schools of the ability to receive an appropriate subsidy for their use of telecommunications services."⁽³⁷¹⁸⁾ In addition, Ameritech recommends that the cap for non-telecommunications products and services be reduced over time because demand for internal connections "will peak initially and then decline over time."⁽³⁷¹⁹⁾

339. Other commenters oppose proposals to lower the recommended $2.25 billion annual cap and to prohibit carry-over of undisbursed funds.⁽³⁷²⁰⁾ EDLINC contends that there is general agreement that the costs calculated in the McKinsey Report are accurate and that rolling over of undisbursed funds may be particularly important in the early years of the discount program because many schools may not be ready to participate at the outset.⁽³⁷²¹⁾ NTIA adds that "[t]here is no track record for any universal service support fund for schools and libraries, so claims that the funding level has been `set too high' have no basis in fact."⁽³⁷²²⁾ New York Public Library asserts that not only should the recommended cap not be lowered, the size of universal service support mechanisms should be increased. According to New York Public Library, "the size of the universal service fund outlined in the Joint Board proposal is too small to meet adequately the needs of schools and libraries nationwide, and it recommends that strong consideration should be given to increasing the size of the fund."⁽³⁷²³⁾ TCA, on the other hand, maintains that a cap is not in the best interest of schools and libraries because it is not predictable,⁽³⁷²⁴⁾ while Time Warner asserts it would be premature to establish a cap without first adopting a working funding mechanism.⁽³⁷²⁵⁾

(2) Operation of Cap and Trigger

340. Several commenters seek clarification regarding how disbursement of the schools and libraries fund would occur under the proposed trigger mechanism and rules of priority.⁽³⁷²⁶⁾ RTC, for example, asserts that "[u]nless some method is found whereby all school and library service requests are cumulated, prioritized and allocated prior to the beginning of the year, it is apparent that a given recipient will have no practical means of determining whether the discount promised by the matrix will actually be available and hence will not be able to determine whether its telecommunications bill will be within its budget."⁽³⁷²⁷⁾ Washington Library expresses its concern that, under the rules of priority that operate when the $2 billion trigger amount is reached, libraries will be unsure whether funding will be available by the end of any given year and whether they will be guaranteed funding from one year to the next.⁽³⁷²⁸⁾ Ad Hoc maintains that the recommended cap does not address important issues such as how the first $2 billion will be rationed among eligible schools and libraries and "whether schools and libraries will have a future entitlement to the recommended discounts once the cap is exceeded."⁽³⁷²⁹⁾ NTIA contends that the recommended $2 billion trigger is set too high because the most economically disadvantaged schools and libraries represent a significant percentage of the total number of eligible schools and libraries and because they may have less access to information regarding the discount program and, consequently be less able than their more affluent counterparts to take advantage of the discounts quickly.⁽³⁷³⁰⁾

341. NTIA recommends, therefore, that the trigger be lowered from $2 billion to $1.5 billion in order to address more effectively the needs of the most economically disadvantaged schools and libraries.⁽³⁷³¹⁾ RTC suggests that discounts in the first year of the program should be limited to telecommunications services, with internal connections and Internet access phased in thereafter.⁽³⁷³²⁾ PacTel asserts that a first come, first served approach should be used in the first year of the program, while top priority should be given to economically disadvantaged schools and libraries beginning in the second year. PacTel maintains that this approach will balance the needs of the most technologically advanced schools and libraries that will be ready to participate in year one against the needs of the poorest and least technologically advanced schools and libraries that may not be ready to participate the first year.⁽³⁷³³⁾ Ad Hoc contends that first priority should be given to economically disadvantaged schools and libraries, as well as those located in high cost areas.⁽³⁷³⁴⁾ New York DOE concludes that "[s]ome accommodation should be made in each subsequent year's allocation to ensure that priority is given to institutions that did not receive discounts in previous years."⁽³⁷³⁵⁾ Seattle asserts that some limitation should be imposed on the scope of services to be funded when the cap is almost reached, so that the maximum number of schools and libraries can receive some funding.⁽³⁷³⁶⁾ BANX proposes establishing a cap on funds flowing to each state to "mitigate concerns of states regarding equitable distribution."⁽³⁷³⁷⁾

342. Finally, AT&T recommends that the Commission establish a "per-institution cap" in addition to the overall cap on schools and libraries spending.⁽³⁷³⁸⁾ AT&T maintains that a per-institution cap will ensure the equitable distribution of universal service funds. Without such a cap, AT&T contends that schools and libraries that are better organized or ready to apply for support early in the year may have an "arbitrary advantage" over other eligible institutions and may rapidly deplete the fund. AT&T also recommends that the per-institution cap vary according to factors such as the number of students served or the size of the discount to which an institution is entitled and that schools and libraries be required to obtain certification of their eligibility from the universal service administrator.⁽³⁷³⁹⁾

343. Other commenters, however, oppose the imposition of a per-institution cap.⁽³⁷⁴⁰⁾ EDLINC contends that the overall $ 2.25 billion cap will be sufficient to control the cost of the discount program. EDLINC concedes that some schools and libraries will be better prepared to take advantage of the discounts right away and, without a per-institution cap, may appear to receive a disproportionate share of the benefits in the first couple of years. EDLINC contends, however, that "in time all schools will have the opportunity to install their networks, determine the level of service they need and obtain their fair share of discounts."⁽³⁷⁴¹⁾ Colorado LEHTC adds that "capping the amount each entity may utilize from the fund is arbitrary."⁽³⁷⁴²⁾

f. Existing Contracts

344. Some commenters assert that the new universal service discounts should apply to existing special rates.⁽³⁷⁴³⁾ EDLINC, for example, maintains that a school or library should not be expected to abandon negotiated contract rates to obtain discounted rates based on prevailing pre-discount rates; instead, schools and libraries should be able to obtain the larger discounts that would result from basing the discounted rate on the negotiated contract rate."⁽³⁷⁴⁴⁾ Agreeing, Minnesota Coalition states that "existing discount arrangements are in the public interest and should not be retroactively disqualified by newly established discount arrangements."⁽³⁷⁴⁵⁾ Minnesota Coalition adds that existing discount arrangements should be presumed to be eligible for universal service funding because most such arrangements were established through competitive bidding or received close scrutiny by state agencies.⁽³⁷⁴⁶⁾ PacTel asserts that schools and libraries should be permitted to retain existing contracts, regardless of whether they were obtained through a competitive bidding process. In addition to the time and expense associated with renegotiating existing contracts and opening them to competitive bidding, PacTel contends that "[t]here is no guarantee that a new bidding process would produce rates that are even as low as the ones currently in effect, particularly if the current rate is the product of a long-term agreement that has protected the schools and libraries from rate increases."⁽³⁷⁴⁷⁾ SBC adds that the Commission lacks the authority to void or insert new terms in existing contracts.⁽³⁷⁴⁸⁾ While supporting the competitive bidding concept, Ameritech adds that the administrative strains of reopening all existing contract arrangements to competitive bidding would be "monumental."⁽³⁷⁴⁹⁾ Ameritech also asserts that schools and libraries ultimately will have the incentive to submit their requirements to a bid process to determine whether they can obtain a more favorable price.⁽³⁷⁵⁰⁾ BellSouth, on the other hand, asserts that the states should determine whether state-mandated special rates remain in effect.⁽³⁷⁵¹⁾

345. Small Cable suggests that the Commission establish a rebuttable presumption in favor of existing contracts between schools and libraries and their service providers, along with rules to ensure that existing contracts are efficient and reasonably priced.⁽³⁷⁵²⁾ Small Cable states that schools, libraries, and service providers should be required to comply with the bona fide request requirement that descriptions of services be submitted to the universal service administrator for posting on a website. Small Cable suggests that, for a specified period of time, perhaps 60 days from the date of posting, interested parties could submit objections to the existing contract based on assertions of unreasonable prices, improper cross-subsidization, or anti-competitive conduct by the parties. According to Small Cable, the administrator would determine, subject to appeal to the Commission, whether services covered by the existing contract should be eligible for universal service support, with a presumption in favor of the existing contract's eligibility. Small Cable contends that such a process would provide a level of scrutiny for existing contracts to prevent collusive or unfair arrangements between schools, libraries, and their service providers.⁽³⁷⁵³⁾

346. Other commenters assert that the Commission should ensure that schools and libraries benefit from the new universal service discounts. Community Colleges, for example, states that the Commission should adopt a "fresh look requirement" that would obligate carriers that have existing service contracts with schools and libraries to participate in a competitive bidding process. Community Colleges contends that such a requirement would be consistent with section 254(h)(2)'s requirement that the Commission establish competitively neutral rules.⁽³⁷⁵⁴⁾ New York DOE supports the "establishment of a provision that can excuse schools and libraries from current contracts if it can be demonstrated that contracts would not permit the institutions to receive lower rates under the discounted programs."⁽³⁷⁵⁵⁾ New York DOE reasons that institutions that negotiated long-term contracts prior to the passage of the 1996 Act should not be penalized.⁽³⁷⁵⁶⁾ PacTel adds, however, that mandating a "fresh look" process may have a confiscatory effect on service providers that have not yet recovered costs that were to be amortized over the length of the contract, and recommends that schools and libraries electing to re-bid an existing contract be required to reimburse the original service provider for any out-of-pocket expenses that the provider has not yet recovered.⁽³⁷⁵⁷⁾

347. Some commenters assert that universal service discounts should not be applied to existing contract rates.⁽³⁷⁵⁸⁾ Cox, for example, states that applying the discounts to existing contract rates would not be in the public interest because it would confer an inappropriate advantage upon incumbent LECs because they were most likely the only providers previously in a position to provide service to schools and libraries.⁽³⁷⁵⁹⁾ ALTS supports requiring all schools and libraries with existing contracts that were not entered into pursuant to competitive bidding to participate in the competitive bidding process in order to receive section 254(h) discounts. ALTS states that "[t]he entire purpose of providing efficient low cost services to schools and libraries would be defeated if carriers not otherwise found to be eligible under [s]ection 214(e) were prevented from bidding on individual contracts for schools and libraries."⁽³⁷⁶⁰⁾

g. Interstate and Intrastate Discounts

348. Some commenters, particularly schools and libraries groups, support the Joint Board's recommendations that the Commission provide federal universal service support to fund intrastate discounts and that states be required to establish intrastate discounts at least equal to the discounts on interstate services in order for their schools and libraries to be eligible to receive federal universal service support.⁽³⁷⁶¹⁾ New York Public Library, for example, asserts that the Joint Board's recommendations provide "a very strong incentive for states to implement significantly reduced intrastate telecommunications rates for schools and libraries as mandated in the Telecommunications Act of 1996."⁽³⁷⁶²⁾ EDLINC states that the Joint Board's approach "strikes an appropriate balance between federal and state prerogatives."⁽³⁷⁶³⁾

349. Other commenters, particularly state public utility commissions and at least one RBOC, state that the determination of state discounts should be left to the states.⁽³⁷⁶⁴⁾ SBC, for example, cites section 254(h)(1)(B) as support for the position that only states can set the intrastate discount.⁽³⁷⁶⁵⁾ Georgia PSC adds that the Joint Board's recommendation that the Commission grant waivers "does not cure the jurisdictional intrusion upon a State's discretion to make these determinations on its own."⁽³⁷⁶⁶⁾ New York DOE states that "[t]he possible loss of state authority and flexibility, and the possible loss of revenues earned within the state, far outweigh any potential gains derived from a centralized, federal administrative oversight."⁽³⁷⁶⁷⁾ New York DOE, therefore, supports allowing the states to retain the intrastate portion of revenues that would be contributed to universal service support mechanisms and maintain responsibility for distributing those funds to eligible schools and libraries within their jurisdiction.⁽³⁷⁶⁸⁾ Wyoming PSC states that it is solely within the competence of the states to determine discounts on intrastate services and that one of the strengths of the Act is that it relies on the states for their local expertise.⁽³⁷⁶⁹⁾ Wyoming PSC also asserts that "[t]he Act intends to create a federal/state partnership and does not intend to turn states into clients of the federal government."⁽³⁷⁷⁰⁾

D. Restrictions Imposed On Schools and Libraries

1. Comments

350. Eligibility. Some commenters assert that additional entities should be eligible for the schools and libraries universal service discount program.⁽³⁷⁷¹⁾ Illinois Board of Education contends that otherwise ineligible members of consortia, such as institutions of higher education, should be entitled to receive universal service discounts on the portion of services they provide to eligible students. Illinois Board of Education cites the example of colleges that provide high-speed, high-bandwidth video services to elementary and secondary students and argues that "[a]llowing these institutions targeted discounts to provide services to eligible students will encourage even more partnerships to flourish."⁽³⁷⁷²⁾ Community Colleges maintains that to the extent they teach programs focusing on basic educational skills, such as general equivalency diploma (GED) preparation, community colleges should be eligible to receive universal service support.⁽³⁷⁷³⁾ Community Colleges also asks the Commission to permit community college libraries to receive universal service support to the extent they perform the same functions as a public library.⁽³⁷⁷⁴⁾ People For and the Urban League support including a variety of community institutions and organizations, such as community computing and media centers and local Urban Leagues, among the entities eligible to receive schools and libraries discounts.⁽³⁷⁷⁵⁾ Urban League asserts that "an access policy for low-income communities solely based on access via schools and libraries will adequately serve some communities while leaving out many other communities."⁽³⁷⁷⁶⁾

351. MassLibrary and APTS assert that a consortium including eligible schools and libraries should itself be eligible to receive universal service discounts.⁽³⁷⁷⁷⁾ MassLibrary states that in Massachusetts, automated library resource sharing networks such as MassLibrary currently order telecommunications services on behalf of their members and such services can only be ordered and paid for by the consortium itself. MassLibrary expresses the concern that the Joint Board's recommendations will require such a system to dismantle in order to permit its school and library members to qualify for universal service support.⁽³⁷⁷⁸⁾ Georgia PSC also expresses concern that the consortia provision of the Recommended Decision would not permit the state's telecommunications agency to receive universal service support.⁽³⁷⁷⁹⁾ The Information Technology Division of Georgia's Department of Administrative Services (DOAS-IT), which is the state's telecommunications agency, serves as an aggregator for many local governments and their departments, including school districts. According to Georgia PSC, DOAS-IT secures term and volume discounts on telecommunications services for its customers, and if it is not eligible to participate in the schools and libraries discount program, the cost of telecommunications services will increase for members of DOAS-IT.⁽³⁷⁸⁰⁾ NASTD adds that the Commission should clarify that state government telecommunications networks that serve as aggregators for eligible schools and libraries are acceptable consortia under section 254(h) and that schools and libraries participating in a statewide public network consortium are eligible to receive universal service support in addition to any other special pricing mechanisms in place as a result of participating in such a consortium.⁽³⁷⁸¹⁾ APTS contends that Congress intended to include distance-learning consortia as entities eligible to receive universal service support and that permitting educational television station licensees to qualify for universal service discounts will carry out that intent.⁽³⁷⁸²⁾ SBC, however, states that the Act is very clear regarding the entities eligible to receive discounts under section 254(h), and "[t]he Commission has no authority to re-write the legislation by expanding this precise definition."⁽³⁷⁸³⁾

352. Some commenters maintain that the Commission should affirmatively encourage eligible schools and libraries to form partnerships with institutions of higher education.⁽³⁷⁸⁴⁾ New York DOE recognizes that the Commission cannot include post-secondary and cultural institutions as eligible entities under the schools and libraries provisions, but encourages the Commission to strengthen incentives for the development of consortia by "allow[ing] educational institutions to assume the lead role in network planning and implementation, with associated costs recoverable from the Universal Service Fund."⁽³⁷⁸⁵⁾

In addition, Benton urges the Commission to adopt clear language: (1) defining consortia of eligible and ineligible entities and which entities will be eligible for discounts; (2) delineating the potential benefits of participating in consortia; (3) addressing incentives for vendors to offer volume discounts to consortia; and (4) encouraging eligible entities to involve communities in preparing technology plans and their implementation.⁽³⁷⁸⁶⁾

353. Several commenters urge the Commission to address the eligibility of libraries in a manner consistent with the recently enacted Library Services and Technology Act.⁽³⁷⁸⁷⁾ ALA, for example, states that the Library Services and Construction Act, which was referenced in section 254(h)(4) and from which the Joint Board developed its definition of library, was repealed and replaced with the Library Services and Technology Act. ALA also states that section 254(h)(4) was amended to reflect the enactment of the Library Services and Technology Act. ALA asserts that the Library Services and Technology Act clarified the definition of library, "and was specifically linked to the Communications Act as the operative definition of libraries within universal service."⁽³⁷⁸⁸⁾ Colorado LEHTC states that academic libraries, which are included within the LSTA definition of library, "will have no difficulty in separating their costs of telecommunications services from that of the higher education institution of which they are a part."⁽³⁷⁸⁹⁾ NCLIS also notes the enactment of the Library Services and Technology Act and states that the Commission may want to review the National Center for Education Statistics' definition of public libraries in order to define libraries for the purposes of section 254(h).⁽³⁷⁹⁰⁾

354. One commenter addresses the eligibility of private and parochial schools to receive universal service support.⁽³⁷⁹¹⁾ West Virginia Consumer Advocate notes that the Elementary and Secondary Education Act, which provides the definition of elementary and secondary schools for purposes of section 254(h), states that a school's eligibility for universal service support is dependent on whether it is a school under state law.⁽³⁷⁹²⁾ Because state laws vary regarding whether private and parochial schools are schools under state law, West Virginia Consumer Advocate asks what test should be used to determine whether private or parochial schools are eligible for universal service support under section 254(h). Arguing that the intent of the law was to provide support to as many schools as possible, West Virginia Consumer Advocate asserts that "a presumption should be established that all schools are eligible for the discount under [s]ection 254 of the Act, unless it can be shown that a particular school is not providing elementary and secondary education `as determined under State law.'"⁽³⁷⁹³⁾

355. NTIA contends that the Commission should strive to ensure that schools established under tribal authority receive discounted rates under the schools and libraries program.⁽³⁷⁹⁴⁾ NTIA notes that the 187 schools funded by the Bureau of Indian Affairs are included within the total number of schools cited by the Joint Board, but that there may also be other schools established by tribes or tribal organizations that should be eligible for universal service support.⁽³⁷⁹⁵⁾ According to NTIA, "[t]elecommunications technology can help to reduce many of the disparities facing the more than 550 tribes, including geographic isolation and significantly higher rates of unemployment, poverty, and high school droputs."⁽³⁷⁹⁶⁾

356. Several commenters assert that universal service support should specifically be targeted to schools and libraries serving individuals with disabilities.⁽³⁷⁹⁷⁾ Universal Service Alliance states that "the Commission should provide universal service support for specialized equipment and additional services when needed by schools and libraries to serve children with disabilities."⁽³⁷⁹⁸⁾ Consumer Action argues that universal service support should be provided for hardware, software, and specialized customer premises equipment used by deaf and hard of hearing children.⁽³⁷⁹⁹⁾ Consumer Action also contends that rate discounts should be used to enhance access to educational technologies for children with disabilities.⁽³⁸⁰⁰⁾

357. Resale. Some commenters support the Joint Board's recommendation that all resale of discounted services be prohibited.⁽³⁸⁰¹⁾ Ameritech, for example, states that "[p]ermitting resale would either permit schools or libraries to make a `profit' on these services or would confer the benefit of the discount on otherwise ineligible parties." Other commenters, however, contend that the prohibition on resale should be more narrowly interpreted.⁽³⁸⁰²⁾ EDLINC suggests that eligible entities be permitted to apply to the Commission or the universal service administrator for waivers of the prohibition on resale if the purchaser of the discounted services is using them for "a clearly defined and segregable educational purpose."⁽³⁸⁰³⁾ Vermont PSB contends that user fees, such as computer laboratory fees, should be permitted and should not be subject to the prohibition on resale. Vermont PSB also states that, since the Joint Board recommended against providing a 100 percent discount on any services, "[s]chools and libraries should not be prohibited from charging as necessary to recover the remaining undiscounted costs."⁽³⁸⁰⁴⁾ Washington SPI emphasizes that restrictions on resale should be defined narrowly enough to permit eligible and ineligible entities to aggregate demand for telecommunications services.⁽³⁸⁰⁵⁾

358. As noted above, numerous commenters support the Joint Board's recommendation to allow schools and libraries to participate in consortia with both eligible and ineligible entities for the purpose of aggregating demand.⁽³⁸⁰⁶⁾ AT&T, on the other hand, asserts that the Commission should limit the permissible range of consortia to include only eligible schools, eligible libraries, and municipalities.⁽³⁸⁰⁷⁾ AT&T states that consortia present the risk of abuse of the prohibition on resale, as well as the possibility of significantly increasing enforcement and auditing costs.⁽³⁸⁰⁸⁾

359. Other commenters question aspects of the Joint Board's recommendation

regarding consortia and its impact upon the prohibition on resale.⁽³⁸⁰⁹⁾ Ameritech and BellSouth oppose the Joint Board's recommendation that carriers be responsible for ensuring that the appropriate discounts are applied to members of consortia because the related administrative costs would likely be reflected in higher costs for services.⁽³⁸¹⁰⁾ USTA asserts that the consortium itself, as a result of its decision to combine eligible and non-eligible entities, is the entity that must be held responsible and liable for certifying the appropriate usage of its members.⁽³⁸¹¹⁾ MassLibrary asks the Commission to clarify what the Joint Board intended when it stated that schools and libraries could join consortia with other customers "in their community." MassLibrary recommends that the Commission interpret that language to refer to a service area, rather than to a single city or town.⁽³⁸¹²⁾ Washington Library asserts that "flexibility in establishing discounts" will encourage the use of consortia. Washington Library notes, for example, that libraries within Washington State will eventually be able to take advantage of a statewide kindergarten through grade 20 (K-20) network, and it contends that libraries in that state need the flexibility to secure services through such a network and other sources.⁽³⁸¹³⁾

360. Bona Fide Request for Educational Purposes. Numerous commenters support the Joint Board's recommendation that schools and libraries be required to comply with several self-certification requirements.⁽³⁸¹⁴⁾ Ameritech maintains that the self-certification requirements will "help to ensure that universal service funds are used efficiently and only for the purposes intended" and "should create no additional burden on the school or library."⁽³⁸¹⁵⁾ Teleport contends that the self-certification requirements will "mitigate any concern that the promise of `free' money to buy attractive new telecommunications services might encourage unnecessary purchases simply because the money appears to be readily available."⁽³⁸¹⁶⁾ New York Public Library characterizes the proposed self-certification process as a "simple, efficient, and effective methodology" that lessens the administrative burden on schools and libraries.⁽³⁸¹⁷⁾ NCTA asserts that "[t]aken as a whole, these three [self-certification] requirements are the minimum requirements the Commission could adopt to safeguard the public interest in ensuring that only eligible entities receive funding, that resources are not wasted, and that applicable statutory guidelines are followed."⁽³⁸¹⁸⁾

361. EDLINC maintains that existing procurement procedures should be sufficient to ensure that telecommunications services are ordered by authorized personnel, but also understands the Joint Board's concern with the potential for waste, fraud, and abuse.⁽³⁸¹⁹⁾ EDLINC asserts, therefore, that any certification requirements adopted by the Commission should not be so burdensome as to create disincentives for schools and libraries to order discounted services, nor should such requirements increase institutional costs. EDLINC recommends that the Commission develop a short and simple self-certification form addressing eligibility.⁽³⁸²⁰⁾

362. Other commenters contend that the Commission should adopt a certification process simpler than the one recommended by the Joint Board.⁽³⁸²¹⁾ Vermont PSB expresses the concern that the self-certification process recommended by the Joint Board may be so administratively burdensome and time-consuming that needy institutions, particularly in rural areas, may be discouraged from applying for discounted services.⁽³⁸²²⁾ Vermont PSB recommends, therefore, that "[a] waiver of these various requirements or a streamlined process (akin to IRS Form 1040EZ) for small organizations may strike a reasonable balance."⁽³⁸²³⁾

363. New York DOE suggests simplifying the self-certification process by just requiring every school and library applying for discounted services to submit its technology plan to its state education agency.⁽³⁸²⁴⁾ New York DOE asserts that the technology plan would contain all of the self-certifications contained in the Recommended Decision, as well as the priorities of the state's long-range technology plan, and would result in a "comprehensive and consistent planning approach to telecommunications and technology deployment that would have learning and teaching as the focus."⁽³⁸²⁵⁾ New York DOE states further that "[t]o require a separate set of certifications for these new components of service would create a substantial reporting burden on schools and libraries and it could serve to separate this kind of accountability from those requirements already imposed by state education agencies."⁽³⁸²⁶⁾

364. On the other hand, TCI contends that self-certification is "not sufficient to protect either the amount of resources at stake or the importance of the social goals at risk."⁽³⁸²⁷⁾ TCI maintains, therefore, that a request will only be considered bona fide if it establishes that the school or library has accounted for connectivity, internal connections, hardware, software, training, overcoming societal and cultural barriers, and ongoing operations support.⁽³⁸²⁸⁾ TCI also asserts that schools and libraries must be required to submit their plans to a designated state agency for review and approval. According to TCI, "[a]bsent comprehensive and bona fide technology and service plans approved by a state representative or agency, there is grave danger that the substantial investment in educational support would be wasted."⁽³⁸²⁹⁾ EDLINC, however, asserts that the plan TCI is promoting is identical to the USTA plan that was rejected by the Joint Board and, therefore, warrants no further consideration by the Commission.⁽³⁸³⁰⁾

365. Time Warner suggests that, to avoid abuse of the discount program, the Commission should establish guidelines outlining what constitutes "educational purposes" under section 254(h).⁽³⁸³¹⁾ EDLINC and AFT, on the other hand, oppose any such efforts. "⁽³⁸³²⁾ AFT suggests that schools and libraries be required to develop their technology plans in accordance with one or more of existing federal education statutes,⁽³⁸³³⁾ while EDLINC asserts that "[b]y their very nature as schools and libraries, every activity in which such institutions engage should be presumed to be for an educational purpose."⁽³⁸³⁴⁾

366. Auditing. Some commenters address how the Commission should use audits to ensure that schools and libraries comply with the requirements of the Act.⁽³⁸³⁵⁾ Vanguard supports the Joint Board's recommendation that random audits be used to ensure compliance with Commission rules. Vanguard states further that failure to track adequately the use of universal service funds will substantially increase the size of universal service support mechanisms and may prevent eligible entities from obtaining funding.⁽³⁸³⁶⁾ TCI asserts that the Joint Board's recommendation should be expanded to require all eligible schools and libraries receiving universal service support to file annual reports, which would be subject to audit, with a designated state agency.⁽³⁸³⁷⁾ According to TCI, "[i]f such an approach were implemented, the Commission should also send a clear message that it is prepared to invoke its legal authority to fine or otherwise discipline those administrators and institutions which make misrepresentations to the Commission as to the use of the subsidized services."⁽³⁸³⁸⁾ EDLINC contends, however, that such an annual filing requirement would be "burdensome and unnecessary" because the Joint Board's recommended auditing requirement will be sufficient to address the unlikely occurrence of fraud or abuse.⁽³⁸³⁹⁾

367. Annual Carrier Notification Requirement. No parties commenting on the Recommended Decision address the issue of an annual carrier notification requirement.

E. Funding Mechanisms for Schools and Libraries

1. Comments

368. Separate Funding Mechanisms. Some commenters support the Joint Board's recommendation that the universal service administrator distribute support for schools and libraries from the same source of revenue used to support other universal service purposes under section 254.⁽³⁸⁴⁰⁾ Ameritech adds that proper accounting and targeting of the funds would have to be undertaken.⁽³⁸⁴¹⁾ Other commenters assert that the Commission should establish a separate funding mechanism for schools and libraries.⁽³⁸⁴²⁾ SNET maintains that "[t]he proposed education subsidy is new and its funding should not be commingled with the current implicit and explicit subsidies."⁽³⁸⁴³⁾ SNET also asserts that the schools and libraries discount program can be more easily evaluated if the funds are kept separately from other universal service funds.⁽³⁸⁴⁴⁾

369. Offset versus Reimbursement. Ameritech states that entities providing services at a discount should be able to receive compensation through either reimbursement or an offset to their universal service obligations. According to Ameritech, however, it would not be competitively neutral to permit entities that do not contribute to universal service support mechanisms to receive reimbursement for services provided to schools and libraries.⁽³⁸⁴⁵⁾ ITI, on the other hand, citing anti-competitive concerns, states that "the Commission cannot establish any reimbursement mechanism for carriers who provide Internet access if non-carriers who provide the same services are excluded from the mechanism."⁽³⁸⁴⁶⁾

370. GTE objects to the Joint Board's recommendation to require schools and libraries to pay only the undiscounted portion of their bill so that service providers receive the balance through either reimbursement or offset from the universal service administrator.⁽³⁸⁴⁷⁾ That is, GTE maintains that requiring service providers to modify their customer records and billing systems to reflect partial payment from schools and libraries and partial payment from the universal service administrator could discourage providers from bidding for schools' and libraries' business. GTE suggests instead that service providers be able to collect the entire amount of their bill directly from schools and libraries, leaving the educational institutions to be reimbursed by the administrator; GTE contends that this would not be unduly burdensome for schools and libraries.⁽³⁸⁴⁸⁾ EDLINC, however, states that the Joint Board considered and rejected a similar proposal.⁽³⁸⁴⁹⁾ EDLINC also asserts that GTE's proposal violates section 254(h) because eligible schools and libraries are entitled to discounts and service providers are entitled to payments from universal service support mechanisms.⁽³⁸⁵⁰⁾ Further, EDLINC states that requiring schools and libraries to pay the entire amount of their bills would be unduly burdensome to schools and libraries because they would have to budget for that substantial amount of money and await reimbursement at some much later date.⁽³⁸⁵¹⁾

F. Access to Advanced Telecommunications and Information Services

1. Comments

371. LCI proposes a definition of "advanced telecommunications services" that would not include the "core" services eligible for high cost support under section 254(c)(1). LCI states that "the Commission should clarify that `advanced telecommunications services' does not include voice grade access to the public switched network, DTMF or touch-tone, single-party service, access to emergency service, access to operator service, access to interexchange service and access to directory assistance."⁽³⁸⁵²⁾

372. New York DOE disagrees with the Joint Board's assertion that the schools' and libraries' discount program will automatically stimulate demand for more advanced services.⁽³⁸⁵³⁾ To the contrary, New York DOE asserts that the discount program may simply make more affordable the same services that service providers already provide in a particular region and may not result in broader access to advanced services. New York DOE maintains that Congress's intent in enacting section 254 was to facilitate schools' and libraries' use of technologies requiring expanded bandwidth and to increase technological sophistication, but that the Joint Board's recommendation contains no assurances that these developments will happen. According to New York DOE, "[a]t a minimum, the FCC should be expediting the development of a collaborative proceeding with consumers and providers to identify competitively neutral strategies for promoting access to and use of advanced telecommunications services for schools and libraries."⁽³⁸⁵⁴⁾

G. Sections 706 and 708 of the 1996 Act

1. Comments

373. California Dept. of Consumer Affairs and GI expect that section 706 will be addressed in a separate proceeding but nonetheless comment on its merits.⁽³⁸⁵⁵⁾ GI states that the Commission has the opportunity to advance simultaneously the goals of sections 254 and 706 by making Internet access and advanced services eligible for universal service support.⁽³⁸⁵⁶⁾ California Dept. of Consumer Affairs urges both the Commission and state commissions to implement section 706 quickly, asserting that schools and libraries will not reap the full benefits of the section 254(h) discount mechanism until section 706 is implemented.⁽³⁸⁵⁷⁾ California Dept. of Consumer Affairs also contends that section 706's definition of advanced telecommunications capability "lends support to those interested parties who argue that the Commission should not allow universal service funds to be used to fund wiring in schools because doing so favors wireline technology over wireless technology."⁽³⁸⁵⁸⁾ Further, California Dept. of Consumer Affairs states that section 706 does not contain an additional funding mechanism for providing advanced telecommunications services to schools and libraries.⁽³⁸⁵⁹⁾

374. Alliance for Public Technology and Universal Service Alliance criticize the Joint Board's recommendation that section 706 be considered in a separate proceeding.⁽³⁸⁶⁰⁾ According to Alliance for Public Technology, "[t]he Joint Board's decision to isolate [s]ection 706 for further consideration violates Congressional recognition that network deployment is an integral part of reaching the Act's goal of ensuring access to advanced telecommunications services for all Americans and will drive the nation in the direction of an information rich/poor society."⁽³⁸⁶¹⁾ Universal Service Alliance states that "[s]ections 706 and 254 should not be rigidly compartmentalized" because both statutory provisions strive to achieve the common goal of "ensuring that all Americans have access to affordable basic and advanced services in a competitive environment."⁽³⁸⁶²⁾ In its reply comments, Universal Service Alliance notes that encouraging community involvement in the integration of technology into schools and libraries is one way that the Commission could, in the context of section 254, encourage the deployment of advanced services, as contemplated in section 706.⁽³⁸⁶³⁾

375. United States Senator Charles S. Robb states that the goals of the National Education Technology Funding Corporation, which are described in section 708, should be incorporated in the universal service program for schools and libraries. Senator Robb encourages the Commission to "examine specific mechanisms, new or existing, to facilitate the purpose of this funding corporation, which includes leveraging resources to provide important assistance to elementary and secondary schools and encouraging private investment in education technology infrastructure."⁽³⁸⁶⁴⁾

H. Implementation

1. Comments

376. Numerous commenters support the Joint Board's recommendation that the Commission adopt rules that will permit schools and libraries to begin using discounted services ordered pursuant to section 254(h) at the start of the 1997-1998 school year.⁽³⁸⁶⁵⁾ New York DOE, however, notes that many schools and libraries may choose to delay investing in telecommunications and networking infrastructure until the "full impact" of the universal service proceeding is known, given the potential for significant savings. New York DOE notes further that "[t]his delay could have potentially devastating consequences for near term capacity building, precisely at the time when these services are needed the most."⁽³⁸⁶⁶⁾

XI. HEALTH CARE PROVIDERS

A. Overview

The following is a summary of the comments relating to universal service support for rural health care providers.

B. Services Eligible for Support

1. Comments

377. Medical Applications Using Telecommunications Services. Several commenters describe medical applications or functions that they assert currently use or require telecommunications services.⁽³⁸⁶⁷⁾ Some commenters ask us to designate the Advisory Committee's "market basket" of essential telemedicine services for support.⁽³⁸⁶⁸⁾ Others request additions thereto, and still others submit similar recommendations without reference to the Advisory Committee's report.⁽³⁸⁶⁹⁾ For example, Kansas Hospital Association endorses the Advisory Committee's list but would also include support for home care and "rural-to-rural" connections,⁽³⁸⁷⁰⁾ explaining that the long distances that make it difficult for rural health care providers to deliver critical home care services also cause these providers to rely on each other, rather than hospitals in urban centers, for consultations.⁽³⁸⁷¹⁾ RTC recommends its own list of services that includes clinical interactive video consultation, management and transport of patient information, links between rural facilities and library resources, access to on-line patient medical histories, and easier access to insurance data.⁽³⁸⁷²⁾

378. Nurse Practitioners list the following "basic telecommunications tools" that they assert are needed for patient care in rural, as well as urban, settings: 1) the ability to send and receive non-radiologic still images for patient assessment and consultation; 2) the ability to send and receive diagnostic quality physiologic sounds (e.g., heart, lung) from patients to health care professionals; 3) the ability to send and receive synchronous, two-way audio and video of instructional and educational quality for health professional education; 4) the ability to use high speed transmission of outputs of patient data collection and monitoring devices (e.g. EKG, vital signs); and 5) the ability to send body fluid smear images to remote diagnostic labs for assessment.⁽³⁸⁷³⁾ ITC asserts that "the quality of transmitted x-ray, CAT Scan and MRI detail must be of diagnostic quality," and that "[o]n-line video transmission of emergency room surgical procedures must be such that professional guidance can be provided from experts in the distant city."⁽³⁸⁷⁴⁾

379. Numerous commenters involved in public health fields assert that the health- related services that public health agencies provide -- including the prevention and control of epidemics, and the coordination of the public response to disasters such as toxic spills, floods, and tornadoes -- should be eligible for support. These commenters state that in times of disaster, having instant access to information from each other and agencies like FEMA, CDC, and the FDA, will prevent disease and save lives, so that the ability to communicate electronically throughout the state and nation is imperative.⁽³⁸⁷⁵⁾ Representing state and territory health officials, ASTHO asserts that the term "health care" should be interpreted broadly to include non-clinical, population-based public health services.⁽³⁸⁷⁶⁾ ASTHO adds that a "core responsibility" of the public health system is the collection and dissemination of public health data to appropriate local, state, and federal entities.⁽³⁸⁷⁷⁾

380. Determining the Scope of Necessary Telecommunications Services. In responding to the question in the Public Notice about how best to determine "the exact scope of telecommunications services necessary for the provision of health care services in a state," AHA and other commenters report difficulty in finding more than anecdotal evidence upon which to base an answer. AHA reports that it is "extremely difficult, if not impossible," to respond to the question, because health care needs and the methods of delivery of health services vary across states and among local communities.⁽³⁸⁷⁸⁾ AHA asserts that there is "very little evaluative data regarding what exactly works, what doesn't and under what circumstances with regard to telecommunications for health care" and even less regarding non-health care delivery applications for teaching and administration.⁽³⁸⁷⁹⁾ American Telemedicine states that "[t]he required connectivity speeds for the delivery of health care varies widely depending on the type of medical service being delivered, immediacy of need, and quality of equipment used on both ends of the transmission.⁽³⁸⁸⁰⁾

381. Some commenters contend that the Commission should not designate or limit services for support.⁽³⁸⁸¹⁾ U S West, for example asserts that the Commission "should avoid mandating particular services or modes of service delivery in ways that would limit customer choice, risk `locking in' obsolete technologies, or hamper the most efficient results by unwisely favoring some technologies over others."⁽³⁸⁸²⁾ Several parties maintain that support mechanisms should "permit health care service providers the flexibility to choose the service that best suits their specific needs."⁽³⁸⁸³⁾ Similarly, several parties contend that the Commission should not restrict the scope of supported services to a particular bandwidth or technology that might become obsolete.⁽³⁸⁸⁴⁾ United Services suggests that setting such limits on support might inhibit the development or deployment of new technologies.⁽³⁸⁸⁵⁾ To avoid these consequences, United Services suggests defining supported services in broad, practical terms.⁽³⁸⁸⁶⁾ West Virginia Consumer Advocate criticizes the Joint Board for implying that rural health care providers should be limited to a pre-approved menu of services.⁽³⁸⁸⁷⁾

382. Some commenters suggest limiting the definition of necessary telecommunications services in various ways. USTA states that "the statute recognizes the distinction between `necessary'. . . and . . . `desirable'" and that only necessary services should be supported.⁽³⁸⁸⁸⁾ Citing the requirement of section 254(c)(1)(C) that to be eligible for core universal service support, a telecommunications service must be "commercially available in urban areas,"⁽³⁸⁸⁹⁾ USTA and PacTel agree that "[t]o be considered a `necessary' telecommunications service," the requested service should be "commercially available and deployed within a carrier's network, and subscribed to by a majority of urban health care providers."⁽³⁸⁹⁰⁾ BellSouth agrees and would add the requirement that necessary services "in a State" must be widely deployed in telecommunications networks.⁽³⁸⁹¹⁾ SBC would limit support to only those services that 1) are "required" and "used solely" to enhance delivery of patient care or are used for patient diagnostic activities and treatment, and 2) have been subscribed to by a majority of health care providers in urban markets.⁽³⁸⁹²⁾ Several ILECs contend that only telecommunications services supporting clinical-care medical services should be eligible for support.⁽³⁸⁹³⁾ AT&T asserts that only the hospital's "administrative network, i.e., the networks used to deliver patient care, and not the alternative network used to provide telecommunications services to patients in their rooms," should be eligible for support.⁽³⁸⁹⁴⁾

383. Alternatively, some commenters propose other methods of determining which services are "necessary for the provision of health care." Some commenters suggest letting the carriers decide the level of services to be deployed to health care providers.⁽³⁸⁹⁵⁾ SBC suggests allowing carriers to work with health care providers to determine the technologies and services that will best serve their needs.⁽³⁸⁹⁶⁾ Contending that the needs for health care delivery, infrastructure, and service will vary greatly, University of Nevada School of Medicine suggests that the Commission require that a committee be established in each state to define the services and needs for that state. Under this plan, each state would provide specific recommendations to a task force appointed by the Commission, which would gather information through state offices of rural health and other telemedicine projects and meet to refine these issues in order to develop national standards and variations.⁽³⁸⁹⁷⁾

384. Limitations Based on Bandwidth. The majority of commenters agree that limitations on supported services for health care providers might appropriately be based on bandwidth.⁽³⁸⁹⁸⁾ Of these, virtually all either support, or make recommendations similar to, the Advisory Committee's recommendation,⁽³⁸⁹⁹⁾ that the Commission limit universal service support to services that employ transmission speeds up to and including 1.544 Mbps or its equivalent.⁽³⁹⁰⁰⁾ HHS agrees with the Advisory Committee's recommendation and adds that the Commission should allow providers to choose any service up to the 1.544 Mbps ceiling for any health-care-related application the provider determines to be necessary.⁽³⁹⁰¹⁾ HHS emphasizes the need to provide bandwidths high enough to transmit high-quality images and deliver fully interactive video.⁽³⁹⁰²⁾ Ameritech likewise supports a 1.544 Mbps bandwidth limitation, stating that it has noted "a number of telemedicinal applications⁽³⁹⁰³⁾ that utilize services at speeds ranging from 384 Kbps to 1.544 Mbps and that services up to and including that range should satisfy the overwhelming majority of applications."⁽³⁹⁰⁴⁾ Several other commenters agree that a full range of telemedicine services requires transmission speeds of up to 1.544 Mbps.⁽³⁹⁰⁵⁾ Nebraska Hospitals, adding that the "opposing forces operating on telemedicine" make 1.544 Mbps a reasonable bandwidth, explains that "improved compression technology has the effect of reducing required bandwidth, while on the other hand, development of new technologies in medicine increases the need for bandwidth."⁽³⁹⁰⁶⁾

385. Other commenters distinguish among different bandwidth needs for different medical functionalities.⁽³⁹⁰⁷⁾ American Telemedicine asserts that although most telemedicine functions can be accomplished with a bandwidth of 112 Kbps,⁽³⁹⁰⁸⁾ transmission speeds up to T-1 levels should be made available to "rural hospitals and academic medical centers" to facilitate live video conferencing and continuing medical education for rural health providers.⁽³⁹⁰⁹⁾ American Telemedicine contends that 1.544 Mbps capacity "is primarily needed for medical consultations requiring live, interactive video with high quality images," but that applications using "store and forward" transmission of still images require far slower transmission speeds.⁽³⁹¹⁰⁾ Kansas Hospital Association supports the Advisory committee's recommendation on supporting 1.544 Mbps services, its experts, however, agree that 384 kbps is the minimum needed for interactive video technology.⁽³⁹¹¹⁾

386. Only one commenter suggests that a bandwidth limitation at some level below 1.544 Mbps might be appropriate. U S West, which prefers that the Commission set no limit on supported services, contends that if the Commission decides to mandate a particular service, the Commission should designate Private Line Transport Service (PLTS) at 56/64 Kbps. U S West asserts that this level of bandwidth "will adequately meet the various needs of rural health care providers."⁽³⁹¹²⁾ Both PacTel and American Telemedicine, which previously suggested that limiting support to ISDN levels would be sufficient,⁽³⁹¹³⁾ now acknowledge that some carriers might find it more cost effective to provide services up to T-1 speeds⁽³⁹¹⁴⁾ and that 1.544 Mbps is necessary for some real-time interactive emergency and diagnostic-quality video applications.⁽³⁹¹⁵⁾

387. Services Requiring Bandwidth Higher Than 1.544 Mbps. Only iSCAN L.P. seeks support for services requiring bandwidth higher than 1.544 Mbps.⁽³⁹¹⁶⁾ iSCAN L.P. states that the Commission should avoid limiting services to 1.544 Mbps because iSCAN L.P. provides services at higher bandwidths that might cost less or provide higher quality.⁽³⁹¹⁷⁾ For example, iSCAN L.P. asserts that it provides a technology that offers bandwidth above 1.544 Mbps that does not require video compression equipment costing tens of thousands of dollars as do modem-based services like T-1.⁽³⁹¹⁸⁾ iSCAN L.P. further states that transmitting X-rays requires bandwidth higher than 1.544 Mbps but that the extra cost of higher bandwidth may be justified by the savings resulting from the ability of more experienced doctors to provide second opinions.⁽³⁹¹⁹⁾

388. Several commenters express doubt that services transmitting at bandwidths higher than 1.544 Mbps are necessary to provide health care services at the present time.⁽³⁹²⁰⁾ For example, Kansas Hospital Association "agree[s] completely with the Advisory Committee that the relative costs [of supporting higher bandwidths] would be higher than the benefits."⁽³⁹²¹⁾ Indeed, Kansas Hospital Association suggests that if bandwidths higher than 1.544 Mbps are supported, the opportunity cost will be that areas needing greater access to minimum-levels of bandwidth will suffer at the expense of high-bandwidth users.⁽³⁹²²⁾ Nebraska Hospitals concurs that "[s]upporting bandwidth greater than 1.544 Mbps would appear to offer relatively small additional return in improved health care to the rural residents."⁽³⁹²³⁾ Apple, which advocates limiting support to 1.544 Mbps for the present, asserts that "[i]n the near future, universal service will have to comprise a full range of additional digital services, with bandwidths ranging between at least 45 and 100 Mbps."⁽³⁹²⁴⁾

389. Bifurcated Support. Some commenters contend that we should provide different levels of support for different categories of health care providers. For example, characterizing its proposal as a cost-saving measure, AT&T asserts that "rural hospitals providing secondary care and above" should receive access to a level of service consistent with T-1 capacity (1.544 Mbps) and that rural primary care providers should receive access to telecommunications services up to ISDN or similar technology.⁽³⁹²⁵⁾

390. Internet Access. Numerous commenters agree with the Advisory Committee⁽³⁹²⁶⁾ that the telecommunications link providing access to an Internet service provider is a telecommunications service necessary for the provision of health care services by rural health care providers.⁽³⁹²⁷⁾ American Telemedicine asserts that there is no doubt that the Internet will play an increasing role in the use of telemedicine in the years ahead.⁽³⁹²⁸⁾ SBC and Georgia PSC contend that Internet access itself is not a telecommunications service and therefore is not eligible for support.⁽³⁹²⁹⁾ BellSouth and USTA, on the other hand, acknowledge that the telecommunications component of Internet access is eligible for support.⁽³⁹³⁰⁾

391. Infrastructure Development and Upgrade. Most commenting on this subject urge the Commission to reject the Advisory Committee's recommendation,⁽³⁹³¹⁾ supported by some members of Congress and Senate sponsors of the 1996 Act,⁽³⁹³²⁾ to use universal service support mechanisms to build or upgrade the public switched network or backbone infrastructure.⁽³⁹³³⁾ These commenters contend that supporting network buildout would be contrary to the provisions of section 254(h).⁽³⁹³⁴⁾ Several commenters assert that section 254(h)(1)(A) does not provide a support mechanism that would allow for network buildout or upgrade.⁽³⁹³⁵⁾ Others contend that section 254(h)(2)(A) likewise does not permit the funding of such activities that are not telecommunications services.⁽³⁹³⁶⁾ Several commenters assert that supporting network buildout and upgrade for rural areas would be too costly and would unnecessarily burden the universal service support mechanisms.⁽³⁹³⁷⁾ PacTel adds that funding network buildout would not be economically reasonable under section (h)(2)(A),⁽³⁹³⁸⁾ and NCTA asserts that alternative technologies such as broadband cable services or wireless may be more efficient than wireline services.⁽³⁹³⁹⁾

392. Several commenters contend that funding network buildout and upgrade would not be competitively neutral as required by section 254(h)(2)(A).⁽³⁹⁴⁰⁾ They assert that only ILECs would receive such support and that carriers receiving such support would receive a substantial competitive advantage, because they could use the funds that they otherwise would have used to upgrade their rural networks to support competitive services in other areas.⁽³⁹⁴¹⁾ In addition, some commenters contend that supporting network buildout and upgrade would be unfair to those carriers that have upgraded their networks without support or those that have entered into state-sponsored programs to build out the network.⁽³⁹⁴²⁾ Several commenters urge us to let natural market forces operate to provide any needed infrastructure upgrades.⁽³⁹⁴³⁾ Some assert that the availability of universal service support will provide the necessary incentive for carriers to invest in the infrastructure necessary to extend needed services to rural areas and that this deployment will be achieved at a lower cost and with less waste than if it were attempted through regulation⁽³⁹⁴⁴⁾

393. Some commenters approve of mandated extension of services to unserved areas so long as carriers are compensated for their construction costs. Ameritech distinguishes between requiring carriers to conduct general network upgrades, which it opposes, and requiring carriers to extend service, on a case-by-case basis, to currently unserved customers.⁽³⁹⁴⁵⁾ Ameritech asserts that if a health care provider requests a service "not yet available in the rural area," the rural health care provider, not universal service support mechanisms, should fully reimburse the carrier for any required "special construction charges."⁽³⁹⁴⁶⁾ U S West states that the Commission should not require services to be deployed in areas where they are not currently offered unless carriers are reimbursed from universal service support mechanisms for the up-front construction costs.⁽³⁹⁴⁷⁾

394. Support for Other Specific Services. AHA and PacTel agree with the Joint Board's recommendation to support terminating as well as originating services when terminating services are billed to the health care provider, as in the case of cellular air time charges.⁽³⁹⁴⁸⁾ AT&T and SBC support the Joint Board's recommendation that non-telecommunications services be excluded from the list of services to be supported for health care providers.⁽³⁹⁴⁹⁾

395. Use of Other Technologies. Some commenters suggest providing support for non-wireline technologies. Cylink suggests that the relative costs of providing digital links, which common carriers may employ to provide service to rural areas and to facilitate the provision of rural health care and distance-learning communications, can be reduced through the use of "unlicensed spread spectrum, non-consumer, point-to-point links" made possible with Cylink equipment.⁽³⁹⁵⁰⁾ Alaska PSC reports that it is heavily dependent on satellite communications to provide links between remote, rural health care providers and regional health care services.⁽³⁹⁵¹⁾

396. Comparative Cost of Services With Capacities of up to 1.544 Mbps. HHS agrees with the Advisory Committee that the Commission need not limit the amount of services to be funded for individual health care providers.⁽³⁹⁵²⁾ HHS contends that providing universal service funding to health care providers will not generate tremendous demand for sophisticated telecommunications services, because rural health care providers and local health departments have very limited budgets and are likely to be extremely cost conscious when requesting services.⁽³⁹⁵³⁾

397. U S West reports that the monthly cost of providing Private Line Transport Service at the DS-0 speeds (56/64 Kbps) into a Frame Relay network fifty miles away from a business customer would be approximately $180.00. Service to the same customer at DS-1 speeds (1.544 Mbps) would cost approximately $1288.06 or over seven times as much.⁽³⁹⁵⁴⁾ Citing a recent study by Abt Associates for the federal Office of Rural Health Policy, AHA states that most telemedicine networks are complex, containing an average of four-spoke sites, two hubs, and four facilities to provide and receive consultations.⁽³⁹⁵⁵⁾ Equipment costs, excluding switches and new lines, range from $134,378.00 for spoke sites to $287,503.00 for hub sites.⁽³⁹⁵⁶⁾ Reported annual transmission costs range from an average of $18,573.00 for spokes to $80,068.00 for hubs. According to AHA, many rural hospitals, even acting through a consortium, would be unable to afford these infrastructure and transmission costs absent significant relief through the universal service support mechanisms.⁽³⁹⁵⁷⁾ The Nevada Rural Hospital Project cites the equipment cost of interactive video, with appropriate diagnostic equipment, for the Nevada telecommunications project for rural providers ranging from $65,000.00 to $100,000.00 per site.⁽³⁹⁵⁸⁾ For each of its six to eight fiber-optic transmission lines with multiple switch 56 capability, the project incurred a $200.00 per line hook-up charge and a monthly charge of $40.00 per line, in addition to long distance rates, which varied by carrier and community.⁽³⁹⁵⁹⁾

398. High Plains Rural Health Network, which includes 13 rural and six urban health institutions, spends $3,934.00 per month on one in-state point-to-point telemedicine connection.⁽³⁹⁶⁰⁾ The Bassett Healthcare Telemedicine Network in New York spends from $2,198.00 to $4,087.00 per month for T-1 lines at different sites.⁽³⁹⁶¹⁾ Illinois DPH reports that it has incurred approximately $1.2 million in additional costs annually to extend high speed links to the 72 local health departments located in rural areas of Illinois. iSCAN estimates the cost of its eight Mbps channel at over $4,000.00 per month, compared to its estimate of T-1 service at $1,968.00 per month.

399. Periodic Review. Several commenters emphasize the need for regular review of the services for which health care providers may receive support.⁽³⁹⁶²⁾ AHA rejects the Joint Board's recommendation of review in the year 2001 and instead suggests that the Commission revisit the list of supported services within 18 months of issuance of the final regulations.⁽³⁹⁶³⁾ HHS, supporting the review cycle recommended by the Advisory Committee, asserts that rapid development in the health sector and evolving telecommunications technology creates a need to reassess the "market basket" of essential applications within two years.⁽³⁹⁶⁴⁾ HHS would also like a review to be completed before the end of a recently initiated three-year telemedicine demonstration sponsored by the Health Care Financing Administration, a major goal of which is to determine whether or how Medicare should cover such services.⁽³⁹⁶⁵⁾

C. Eligibility of Health Care Providers

1. Defining eligibility for health care providers.

a. Comments

400. Some commenters endorse the Joint Board's recommendation to limit eligibility to health care providers located in rural areas.⁽³⁹⁶⁶⁾ Others propose that the Commission not limit support in such a manner. DC PSC contends that economically disadvantaged health care providers as well as those in high cost areas should be eligible for universal service support, irrespective of whether they are located in rural or urban areas.⁽³⁹⁶⁷⁾ Colorado LEHTC asserts that the list of eligible health care providers should include teaching hospitals, located in urban areas, that benefit rural areas.⁽³⁹⁶⁸⁾ Community Colleges argues that community colleges located in non-rural areas that provide health care instruction via distance learning should be eligible for universal service support. According to Community Colleges, "it is the very need for affordable telecommunications services to support distance learning capabilities that requires that community colleges that serve rural areas not be forced to pay elevated prices to deliver educational programming or to provide interactive instruction."⁽³⁹⁶⁹⁾ Kansas Hospital Association urges the Commission to include urban medical schools and medical centers as eligible providers for two reasons. First, they contend that urban hospitals are the underlying source of the educational network for physicians and provide the access to specialty consultation that is not available to rural areas through any other means. Second, they assert that urban hospitals have assumed a disproportionate share of the cost of providing technology-based services to rural hospitals and providers. Much of the infrastructure investment, as well as the customer premises equipment, has been financially and technically supported by these urban facilities.⁽³⁹⁷⁰⁾

401. Similarly, Western Governors criticizes the Joint Board for "mistakenly" interpreting the term "health care provider" to include only those that are located in rural areas.⁽³⁹⁷¹⁾ Western Governors asserts that in defining an eligible provider as one that "serves persons who reside in rural areas," section 254(h)(1)(A) "does not limit the location of the provider."⁽³⁹⁷²⁾ Western Governors further contends that limiting eligibility in the way that the Joint Board recommends would thwart the purpose of the statute by, for example, "limiting the delivery of specialty care to rural areas by urban teaching hospitals."⁽³⁹⁷³⁾

402. Some commenters challenge the statutory mandate to limit subsidies to entities that serve rural areas.⁽³⁹⁷⁴⁾ HHS supports the Advisory Committee's recommendation that the Commission and Congress investigate whether incentives for the development of telehealth applications in underserved urban areas would be appropriate.⁽³⁹⁷⁵⁾

2. Defining rural areas.

a. Comments

403. Methods for defining rural areas. Two commenters generally endorse the use of the ORHP/HHS method of defining rural areas.⁽³⁹⁷⁶⁾ LCI contends, however, that the Commission should adopt a definition of "rural areas" consistent with the definition of service areas or "study areas" of rural telephone companies under the Act.⁽³⁹⁷⁷⁾ Criticizing the Joint Board's failure to recommend such an approach, LCI claims that LEC study areas are no more difficult to ascertain than boundaries of a municipality or census block.⁽³⁹⁷⁸⁾

404. The West Virginia Consumer Advocate strongly supports the Joint Board's recommendation that the Commission adopt the "Goldsmith Modification" of the MSA list in order to distinguish which health care providers are located in rural areas and are thus eligible for discounts on telecommunications services.⁽³⁹⁷⁹⁾

405. Frontier Areas. ORHP/HHS,⁽³⁹⁸⁰⁾ AHA,⁽³⁹⁸¹⁾ and High Plains RHN⁽³⁹⁸²⁾ suggest giving special consideration to the unique circumstances of "frontier" areas with extremely low population densities which they define to include areas with fewer than six persons per square mile.

406. Insular areas. CNMI points out that the proposed definitions of urban and rural would not work for CNMI in part because CNMI does not have counties.⁽³⁹⁸³⁾ CNMI argues that the Commission could declare Saipan as an urban area and Tinian and Rota as rural areas. Such a ruling, according to CNMI, would mean that the $0.25 per minute charge for inter-island calls would be eligible for support.⁽³⁹⁸⁴⁾ Similarly, Governor of Guam urges the Commission to address Guam's unique geographic situation in order to provide affordable telemedicine services.⁽³⁹⁸⁵⁾ Governor of Guam points out that Guam does not conveniently fit into the Joint Board's recommendation for determining costs based on nearby urban areas because Guam has no designated metro areas under OMB's MSA listing.⁽³⁹⁸⁶⁾ It suggests, therefore, that the Commission list as rural those insular areas not designated as metro in the OMB/MSA listing.⁽³⁹⁸⁷⁾

3. Definition of health care provider

a. Comments

407. Scott & White states that the definition of health care provider must be as broad as possible and should not be based on criteria other than geographic location and populations served.⁽³⁹⁸⁸⁾ Kansas Hospital Association contends that the Commission should include rural home care providers as eligible for universal service support.⁽³⁹⁸⁹⁾

D. Implementing Support Mechanisms for Rural Health Care Providers

1. Identifying the applicable rural rate

a. Comments

408. AT&T approves of the Joint Board's proposed method for determining the rural rate.⁽³⁹⁹⁰⁾ In contrast, Illinois CC asserts that, because of the intrastate application of section 254(h)(1)(A), "state commissions are the appropriate entities to determine the comparability of rates in urban and rural areas of a given state and to fund such programs pursuant to section 254(f) and section 254(h)(1)(A)."⁽³⁹⁹¹⁾ For that reason, Illinois CC contends that the Commission should adopt only general guidelines regarding section 254(h)(1)(A) and allow the states to establish and fund additional intrastate universal service programs "for rural and high cost areas based on local conditions if appropriate."⁽³⁹⁹²⁾

2. Identifying the applicable urban rate

a. Comments

409. Most commenters support the method for determining the urban rate recommended by the Joint Board.⁽³⁹⁹³⁾ SBC maintains that, because of average pricing constructs, many rates are already equivalent between urban and rural areas, but agrees that to the extent that they are not, the Joint Board's recommendation is a reasonable way to ensure rural and urban comparability of rates.⁽³⁹⁹⁴⁾ PacTel generally supports the Joint Board's recommendation but requests clarification as to which urban rate applies when the providing carrier does not serve the nearest urban area.⁽³⁹⁹⁵⁾ PacTel also recommends that where there are no tariffed or publicly available rates in the city nearest the health care provider, the Commission should use the tariffed or publicly available rates in the nearest city in the state where such rates are available.⁽³⁹⁹⁶⁾

410. MCI disagrees with the Joint Board's recommendation and asserts that carriers should charge rural health care providers "no more than the TELRIC rate" for the same or comparable service in the nearest urban area.⁽³⁹⁹⁷⁾

411. Rates and distance-based charges. Many commenters support eliminating what they refer to as "distance-based charges," those charges added to the usual charges for telecommunications services provided in urban areas because of a health care provider's "distant location."⁽³⁹⁹⁸⁾ The Senate sponsors of the Snowe-Rockefeller-Exon-Kerrey Amendment to the 1996 Act assert that the Act prohibits "the use of distance in determining transmission rates."⁽³⁹⁹⁹⁾ American Telemedicine asserts that because Congress's intent in passing the 1996 Act was "to increase access to quality health care by reducing the cost of telecommunications to rural providers," failure to eliminate distance-based charges for these providers would "effectively thwart the intent of Congress" because such charges are the "primary difference" between urban and rural telecommunications costs."⁽⁴⁰⁰⁰⁾ Nebraska Hospitals contends that "it is not primarily the difference in rates" that undercuts the rural health care providers' ability to provide telemedicine, but rather it is the mileage charge that makes the cost unmanageable for rural providers.⁽⁴⁰⁰¹⁾

412. Few commenters submitted information regarding the cost of eliminating distance-based charges. Nebraska Hospitals proposed that the Commission could eliminate distance-based charges by providing rural health care providers with telecommunications links to their primary source for medical consultations.⁽⁴⁰⁰²⁾ Nebraska Hospitals would calculate the "urban rate" for such telecommunications links based on the charge paid for a similar telecommunications service by the urban health care provider located the farthest distance from its serving central office. For example, Nebraska Hospitals explains that the current charge in Nebraska to connect the most distant urban hospital to its central office switch using a T-1 line is $644.64 per month. That amount would then become the charge for each T-1 circuit connecting each eligible rural health care provider to its primary source of medical consultation.⁽⁴⁰⁰³⁾ Nebraska Hospitals estimates that the annual cost of eliminating the distance-based charges in this way for all hospitals and rural health clinics in Nebraska would be $1,262,130.10.⁽⁴⁰⁰⁴⁾ These figures are based on established or likely medical consultation patterns and assume a three-year phase-in of all eligible rural health care facilities.⁽⁴⁰⁰⁵⁾ The estimate also takes into account the one-time installation costs for the necessary T-1 circuits ($183,150.94), spread over a three-year period.⁽⁴⁰⁰⁶⁾

413. Several ILECs contend that section 254(h)(1)(A) precludes the Commission from providing support that covers fully, or even partially, distance-based charges.⁽⁴⁰⁰⁷⁾ These commenters assert that the term "rates" refers to the charge for each element of a telecommunications service, rather than the total charges paid by a customer.⁽⁴⁰⁰⁸⁾ BellSouth explains that "if the rate structure for a service includes a distance sensitive component, as long as the rate for that component is the same in both urban and rural areas, then there is no rate differential."⁽⁴⁰⁰⁹⁾ PacTel adds that if, for example "an urban provider pays a rate of $10.00 per mile for a distance sensitive service, the statute's only requirement is that a rural provider pay the same $10.00 per mile rate," regardless of whether the rural provider ultimately pays a higher price based on its distance from the central office.⁽⁴⁰¹⁰⁾

414. InterLATA charges. Some commenters assert that InterLATA charges are an impediment to telecommunications use for rural health care providers.⁽⁴⁰¹¹⁾ Illinois DPH and University of Nevada School of medicine assert that interLATA charges are a major factor in telecommunications costs for rural health departments.⁽⁴⁰¹²⁾ American Telemedicine suggests exempting carriers serving rural health care providers from existing interLATA restrictions for the purpose of providing toll-free Internet access.⁽⁴⁰¹³⁾

3. Competitive bidding

a. Comments

415. Several commenters suggest that to select the carrier to provide the requested service, health care providers be required to use a process of competitive bidding much like the method the Joint Board recommended for schools and libraries.⁽⁴⁰¹⁴⁾ NCTA asserts that the Recommended Decision implies that the incumbent carrier will always be the provider of supported services and, to avoid this result, suggests that a competitive bidding process be used to select the telecommunications provider.⁽⁴⁰¹⁵⁾ NCTA contends that, under its proposal, the level of subsidy will never be larger than it would have been in the absence of competitive bidding.⁽⁴⁰¹⁶⁾ Some commenters assert that competitive bidding should not be used in areas served by rural telephone companies.⁽⁴⁰¹⁷⁾

4. Insular areas and Alaska

a. Comments

416. Insular areas. Both CNMI and the Governor of Guam assert that the unique telecommunications needs of the health care providers serving the residents of their territories were not addressed by the support mechanisms for rural health care providers recommended by the Joint Board.⁽⁴⁰¹⁸⁾ They contend that because neither Guam nor the Northern Mariana Islands contain large cities, urban areas, counties, or county equivalents identified as "metropolitan" by OMB, and because both territories are nearly completely rural in character, the methods outlined in the Recommended Decision for defining urban and rural areas and for equalizing rates between them cannot be easily applied to these insular areas.⁽⁴⁰¹⁹⁾ These commenters assert that the telemedicine needs of the insular areas are great. CNMI reports that although its three government-run health centers on the islands of Saipan, Tinian, and Rota serve 4,000 patients per month, or seven percent of its total population of 58,846, it currently lacks the facilities, medical specialists, and trained personnel to provide advanced or specialized health care.⁽⁴⁰²⁰⁾ For this reason, CNMI reports that it spent over seven million dollars in one year to transport by air 574 patients to Hawaii and Guam for medical treatment, thus subjecting "acutely ill or injured patients to treatment delays and transport-related risks to health and safety."⁽⁴⁰²¹⁾ CNMI asserts that it needs affordable telecommunications services to support high speed data transmission, provider-to-provider and provider-to-patient consultations, and diagnostic evaluations without the need for travel.⁽⁴⁰²²⁾ The Governor of Guam asserts similarly that because of the great distances to major medical centers, Guam's need for supported telemedicine applications is compelling.⁽⁴⁰²³⁾

417. Both CNMI and the Governor of Guam suggest mechanisms by which to support the cost of telecommunications services for health care providers in CNMI, Guam, and other insular areas.⁽⁴⁰²⁴⁾ The Governor of Guam suggests that the Commission designate as rural areas all those insular areas not listed as "metropolitan" areas in the OMB MSA list, and further designate a city on the west coast of the United States as the urban area for setting the "urban rate." The Governor of Guam further suggests that "for insular areas without urban medical centers," the Commission should consider designating telecommunications costs between the insular area's medical facilities and a supporting medical center in an urban area as services eligible for support.⁽⁴⁰²⁵⁾ CNMI suggests that for health care providers in the Commonwealth, the Commission should support interstate services to Guam, Hawaii, and the mainland, pursuant to section 254(h)(2)(A).⁽⁴⁰²⁶⁾ Alternatively, CNMI proposes that the Commission designate Saipan as an urban area and Tinian and Rota as rural areas. Pursuant to the latter approach, CNMI contends that universal service support mechanisms would support the $0.25 per minute charge for inter-island calls.⁽⁴⁰²⁷⁾ Both Guam and CNMI request universal service support for toll-free Internet access.⁽⁴⁰²⁸⁾

418. Puerto Rico. Puerto Rico reports that it is the largest United States possession, with a population of 3.74 million people.⁽⁴⁰²⁹⁾ The government-owned Puerto Rico Telephone Company states that it provides services over 1.25 million access lines.⁽⁴⁰³⁰⁾ Puerto Rico has metropolitan and nonmetropolitan areas with 28 municipalities listed by OMB as MSAs.⁽⁴⁰³¹⁾ Puerto Rico states that on its island are nine regional hospitals, eight of them in rural areas, and at least two medical colleges in San Juan, Puerto Rico's largest city.⁽⁴⁰³²⁾

419. Several commenters describe Alaska's particular telecommunications challenges and how they affect the ability of its health care providers to deliver health care services to Alaska residents. Alaska PUC asserts that "Alaska is the only state that is heavily dependent upon satellite communications to provide links between the majority of the remote, rural health care providers and the few regional hospitals and health care services." Alaska PUC explains that satellite transmission has several drawbacks, including time delay between the transmission and reception of signals, bandwidth restrictions, and high costs.⁽⁴⁰³³⁾ Alaska PUC further explains that where affordable connectivity is available in rural Alaska, it is often limited to 9.6 Kbps, with some locations limited to 2.4 Kbps service, which Alaska PUC asserts is insufficient bandwidth capacity to support the needs of Alaska's rural health providers.⁽⁴⁰³⁴⁾ Alaska PUC contends that, at a minimum, 128 Kbps to 384 Kbps data lines should be available at a reasonable cost for store-and-forward technologies for data transfer and that 384 Kbps to 1.544 Mbps data services are needed for video teleconferencing and teleradiology at the larger rural health care facilities that may serve as regional hubs for remote locations with limited facilities.⁽⁴⁰³⁵⁾ Alaska Telemedicine Project asserts that Alaska's telecommunications infrastructure must be improved to allow project members to send radiology images at affordable prices from all sites in rural Alaska, to perform clinical applications in collaborative arrangements, and to provide continuing medical and health care education at a distance.⁽⁴⁰³⁶⁾

420. Several commenters urge the Commission to establish a system of funding to ensure that critically needed services are both available and affordable to Alaska's rural health care providers, at rates comparable to those found for similar services in urban areas of Alaska.⁽⁴⁰³⁷⁾ Alaska PUC asserts that a support mechanism based on a comparison between the toll and local rates in urban and rural areas would be insufficient. For example, Alaska PUC urges the Commission to recognize that most urban health care providers can transmit digital data to nearby hospitals at relatively inexpensive local rates, whereas a rural health care provider sending the same data via satellite to the closest hospital incurs distance-sensitive, toll charges reported to be $5,000.00 per month or more.⁽⁴⁰³⁸⁾ Similarly, the majority of rural health care providers in Alaska incur high toll and distance-based costs to access Internet service providers, while urban based health care providers can access Internet service providers through a local call.⁽⁴⁰³⁹⁾ Alaska similarly requests support that would eliminate the difference in distance-sensitive charges between rural and urban areas and permit a carrier to acquire and deploy the infrastructure required to provide a requested service . . . at charges that are equivalent to the charges in [Anchorage]."⁽⁴⁰⁴⁰⁾ In addition, Alaska requests support to connect the state's largest urban medical center in Anchorage with advanced specialty care and medical research activities available only in large metropolitan areas outside the state such as Seattle.⁽⁴⁰⁴¹⁾ Alaska also asserts that in many of the communities in which rural health care providers are located, "existing telecommunications infrastructure is insufficient to support telemedicine."⁽⁴⁰⁴²⁾

E. Capping and Administering the Mechanisms

1. Selecting Between Combined or Separate Support Mechanisms for Health Care Providers and for Schools and Libraries

a. Comments

421. Frontier urges the Commission to combine rural health care and school and library support for federal funding purposes."⁽⁴⁰⁴³⁾ In contrast, SNET and AT&T assert that there should be a separate fund for each purpose.⁽⁴⁰⁴⁴⁾ SNET contends that the health care fund should be separate and distinct from other subsidy mechanisms, because it is an entitlement program.⁽⁴⁰⁴⁵⁾ WorldCom urges the Commission to establish a separate fund for rural health care support that uses the same mechanism as the one proposed for schools and libraries, with discounts of 20 to 90 percent based on economic need and location.⁽⁴⁰⁴⁶⁾

2. Funding Cap

a. Comments

422. Some commenters suggest capping the amount of support that can be expended on health care providers per year.⁽⁴⁰⁴⁷⁾ AT&T, supported by Georgia PSC, asserts that a total cap and a per-institution cap are necessary to control the size of the overall program and to ensure that the amounts available for support are distributed equitably.⁽⁴⁰⁴⁸⁾

F. Restrictions and Administration

1. Restrictions on Resale and Aggregated Purchases

a. Comments

423. Two commenters express concerns about how the restrictions on the resale of telecommunications services will apply when a facility is used to provide service to both an eligible health care provider and to other entities that are not eligible for universal service support. Georgia Dept. of Admin. Services seeks assurance that eligible public health care providers in Georgia will still be able to use services currently provided at volume discounted rates by DOAS-IT (Information Technology Division of the Georgia Department of Administrative Services).⁽⁴⁰⁴⁹⁾ DOAS-IT competitively procures, provides, and administers telecommunications and information system services to health care providers, public schools, technical schools and universities, law enforcement agencies and correctional facilities, and other state and local government agencies.⁽⁴⁰⁵⁰⁾ DOAS-IT secures lower prices for its members by enabling them to share facilities and aggregating volumes to secure volume discounts.⁽⁴⁰⁵¹⁾

424. Community Colleges seeks assurances that if telecommunications or advanced services are used to provide health care instruction and to support other educational activities, the Commission's rules will permit certifications that accommodate discounts on shared lines for that portion attributable to health care instruction. Community Colleges contends that, otherwise, it would be required to "over-subscribe" to telecommunications services by purchasing additional lines used solely for the provision of health care, in order to benefit from federal universal service support mechanisms.⁽⁴⁰⁵²⁾ Community Colleges suggests requiring providers that use telecommunications connections for several purposes to maintain records of use to prevent fraud or misappropriation of universal service funds.⁽⁴⁰⁵³⁾

2. Bona Fide Requests

a. Comments

425. Additional Certification Requirements. Two commenters suggest imposing certification requirements beyond those proposed by the Joint Board.⁽⁴⁰⁵⁴⁾ USTA states that "[a] bona fide request should include verifiable plans by the rural health care provider that it has considered and is able to utilize all related components of the telecommunications service needed to make the health care service function appropriately" and that it "has the necessary internal connections and customer premises equipment to make use of the requested services."⁽⁴⁰⁵⁵⁾ BellSouth suggests that the Commission establish further guidelines to prevent frivolous and wasteful requests, such as a requirement that each request be accompanied by a clear and concise statement of the health care need to be satisfied by the service. Moreover, BellSouth proposes that to establish a bona fide request, a health care provider should demonstrate that the requested service is widely used by health care providers in the state.⁽⁴⁰⁵⁶⁾

3. Selecting Between Offset or Reimbursement for Telecommunications Carriers

a. Comments

426. Several commenters disagree with the Joint Board's recommendations to treat the amount eligible for support only as an offset against the carrier's universal service support obligation and to carry any offset balances forward to future years.⁽⁴⁰⁵⁷⁾ NYNEX states that the mandatory offset rule is contrary to sections 254(h)(1)(B)(i) and (ii) of the Act, which allow a carrier the option of offset or reimbursement from the fund. NYNEX claims that it would be "confiscatory" to treat the amount eligible for support as an offset, because the carrier has no means of recovering its contributions from the ratepayers.⁽⁴⁰⁵⁸⁾

427. Several commenters contend that the Joint Board's recommendation against direct reimbursement for services and in favor of an offset violates the principle of competitive neutrality, because this approach discriminates against small carriers with universal service funding obligations insufficient to allow the carrier to receive the full offset in the current year.⁽⁴⁰⁵⁹⁾ Alaska PSC notes that some of the smallest carriers will not contribute to universal service, because of the de minimis exemption provisions discussed in the Recommended Decision at paragraph 800,⁽⁴⁰⁶⁰⁾ and therefore would never be compensated for their provision of telecommunications services at urban rates to health care providers. Moreover, Alaska PSC argues that the small companies that do contribute to universal service support mechanisms may not have the resources to fund internally the yearly difference between the discount and the contribution. According to Alaska PSC, the minimal amounts of contribution of such small carriers are unlikely ever to balance the discounts that may be made available to health care providers, leaving these companies to fund the difference.⁽⁴⁰⁶¹⁾

F. Advanced Telecommunications and Information Services

1. Comments

428. Few commenters offer a definition of the services that should be included in "advanced telecommunications and information services" as that phrase is used in section 254(h)(2). Some contend that the Commission should not attempt to designate or define specific advanced services, but instead should allow market forces to select more efficiently the best services,⁽⁴⁰⁶²⁾ or should rely on a separate proceeding under section 706 of the Act.⁽⁴⁰⁶³⁾ One commenter contends that because the statute only requires the Commission to establish rules to "enhance . . . access" to such services, rather than to support the services themselves, it can do so without specifying the services to which it is attempting to enhance access.⁽⁴⁰⁶⁴⁾

429. MCI asserts that advanced services include services such as T-1 that would permit quick transmission of images such as X-rays necessary to provide medical services such as remote consulting and diagnosis.⁽⁴⁰⁶⁵⁾ BellSouth asserts that they include the transport of data, video and imaging at speeds up to 1.544 Mbps, access to the Internet, distance learning, and many telemedicine services.⁽⁴⁰⁶⁶⁾ Frontier states that services such as Asynchronous Transfer Mode (ATM) and ISDN technology are advanced services but asserts that they should not qualify for support.⁽⁴⁰⁶⁷⁾ CCV asserts that it provides advanced services in different projects including: Interactive broadband networks providing high speed, point-to-point data and video transmission; a fiber optic system that provides multi-point data transmission among various users; broadband communications networks using cable modems and an ATM backbone to provide video and high speed data services including full access to library resources and the Internet; and point-to-point data transfer at 3 to 4 Mbps.⁽⁴⁰⁶⁸⁾

430. The comments of several commenters, including Alliance for Public Technology, BellSouth, Frontier, MCI, and USTA give support to the concept that advanced services include, at the least, the additional services supported under sections 254(c)(3) and 254(h)(1).⁽⁴⁰⁶⁹⁾

431. LCI expresses doubt about whether access to advanced services for rural health care providers would be technically feasible or economically reasonable.⁽⁴⁰⁷⁰⁾ It contends that mandating additional advanced services would involve substantial new investments that may not be sound.⁽⁴⁰⁷¹⁾

432. USTA contends that the marketplace will efficiently deploy advanced services notwithstanding Commission action.⁽⁴⁰⁷²⁾ USTA expects that, by bringing the rates for health care providers in rural areas to a level comparable to urban rates, the Act will create the market dynamics necessary to provide these same services to entire rural communities via the most efficient technology. Thus, USTA expects that increased marketplace demand and competition will ensure that rural communities will have access to a technologically advanced network in an efficient and effective manner.⁽⁴⁰⁷³⁾

433. Internet Access. Several commenters strongly endorse universal service support for toll-free Internet access.⁽⁴⁰⁷⁴⁾ American Telemedicine asserts that rural health care providers should have access to the Internet at rates comparable to those charged in urban areas and that this toll-free access "should be a national priority."⁽⁴⁰⁷⁵⁾ HHS urges the Commission to support Internet access "at local calling rates for rural health care providers."⁽⁴⁰⁷⁶⁾ Nurse Practitioners agrees that local dial-up access, without long distance charges, should be available as a health care service to all Americans.⁽⁴⁰⁷⁷⁾ Nebraska Hospitals asserts that toll-free access to the Internet is necessary to provide cost-effective use of the numerous sources of medical information and to facilitate the flow of health care-related information.⁽⁴⁰⁷⁸⁾

434. Some commenters describe specific impediments to, or suggest particular methods for, implementing full Internet access in rural areas. Wyoming PSC reports that Internet access in rural areas is usually by modem and often at speeds as low as 1200 bps because of the "continuing extensive use of analog carrier in rural local loops."⁽⁴⁰⁷⁹⁾ Wyoming PSC asserts that this situation persists because 1) ISPs are not responsible for the local loop upgrades that would allow higher speed access, and 2) LECs are reluctant to upgrade loops because of higher costs and lower subscriber density in rural exchanges.⁽⁴⁰⁸⁰⁾ NACCHO reports that approximately 75 percent of local health departments are not "on-line."⁽⁴⁰⁸¹⁾ American Telemedicine recommends that in implementing the policy of toll-free Internet access for "all health care providers," and contends that to achieve this objective, the Commission should consider a variety of approaches including: auctions for the establishment of local Internet "points of presence" throughout the country; special 800-number Internet access; wireless Internet access using cellular, satellite, or other wireless applications at local call rates; and special incentives to ILECs possibly including exemption from current restrictions on providing interLATA services.⁽⁴⁰⁸²⁾

435. Other commenters oppose supporting toll-free access to the Internet.⁽⁴⁰⁸³⁾ SBC and Georgia PSC assert that support for toll-free Internet access is not necessary, because Internet service providers are expanding rapidly and the competitive marketplace will eliminate the perceived need to support such access.⁽⁴⁰⁸⁴⁾ SBC, Georgia PSC, and Bell South contend that providing such support would reduce or "distort [Internet service providers'] incentives" to build their own facilities in rural markets.⁽⁴⁰⁸⁵⁾ Contending that section 254 allows the equalization of rates but not charges, Ameritech, BellSouth PacTel, and USTA assert that any toll added to the telecommunications portion of Internet access is not eligible for support unless the toll rate for rural areas differs from that charged in urban areas.⁽⁴⁰⁸⁶⁾

436. Cost of Providing a Toll-free Connection to an Internet Service Provider. Nebraska Hospitals suggests that the lowest cost way to assure toll-free Internet access to hospitals may be to subsidize the local phone companies at an average toll rate of $.20 per minute for an average of 15 hours access, per hospital, per month. Nebraska Hospitals estimates the cost of such a subsidy would be $3,240.00 per month, or $38,880.00 per year. Nebraska Hospitals cautions, however, that this subsidy to the phone company should continue only until toll-free access becomes available to the community.⁽⁴⁰⁸⁷⁾ Wyoming PSC urges the Commission to examine the costs of providing toll-free internet access in a manner similar to that by which it reviews the costs of providing Extended Area Service (EAS). For example, EAS implementation traditionally requires that the loss of toll revenues from extending service areas for local calls be calculated and added into an EAS surcharge for the affected exchanges. Applying this paradigm to the provision of Internet access, Wyoming PSC suggests that the Commission ascertain the actual costs involved in providing Internet service to rural health care providers rather than approximating the costs based on the loss of embedded revenue as advocated by some commenters.⁽⁴⁰⁸⁸⁾

XII. INTERSTATE SUBSCRIBER LINE CHARGES AND CARRIER COMMON LINE CHARGES

A. Overview

437. The following is a summary of comments relating to interstate subscriber line charges and carrier common line charges.

B. LTS Payments

1. Comments

438. Commenters generally agree with the Joint Board's conclusion that LTS constitutes an impermissible universal service support mechanism that must be modified to bring it into conformity with the Act.⁽⁴⁰⁸⁹⁾ No party disputes the Joint Board's recommendation on this point.⁽⁴⁰⁹⁰⁾ Puerto Rico Tel. Co. cautions that carriers that receive LTS do not also contribute to it under the current system, but would be required to do so if such support was drawn from the new mechanisms.⁽⁴⁰⁹¹⁾ Puerto Rico Tel. Co. argues that this effect should be considered in designing the new mechanisms.⁽⁴⁰⁹²⁾

C. SLC Caps

1. Comments

439. Many parties, particularly state consumer advocates and the SBA, agree with the Joint Board's recommendation to maintain or reduce the SLC for primary residential and single-line business lines.⁽⁴⁰⁹³⁾ These parties generally assert that the level of the SLC affects the affordability of local service. NASUCA argues that, through the SLC, basic exchange customers bear an unreasonable share of interstate loop costs, so that the SLC must be reduced to comply with the mandates of section 254(k).⁽⁴⁰⁹⁴⁾ Many other parties, however, argue that SLC caps should be increased.⁽⁴⁰⁹⁵⁾ These parties generally contend that the most economically efficient way to recover non-traffic sensitive (NTS) costs such as loop costs is through a flat charge on the cost-causing end user.⁽⁴⁰⁹⁶⁾ Some commenters state that lowering the SLC would increase implicit subsidies because the cap is set lower than NTS costs, resulting in a subsidy from high-volume users to low-volume users in contravention of the Act.⁽⁴⁰⁹⁷⁾ A few commenters maintain that the Commission should consider SLC cap issues in its pending access reform proceeding rather than in this proceeding.⁽⁴⁰⁹⁸⁾

D. CCL Charges

1. Comments

440. Most parties agree with the Joint Board's recognition that the usage-sensitive CCL charge represents an inefficient way to recover largely NTS loop costs.⁽⁴⁰⁹⁹⁾ Some parties argue that the usage-sensitive CCL charges are an implicit subsidy from high-volume users to low-volume users that should be eliminated to comply with the Act.⁽⁴¹⁰⁰⁾ Some agree with the Joint Board's alternative of converting the CCL charge to a per-line charge.⁽⁴¹⁰¹⁾ Others, however, find fault with the Joint Board's proposal to assess a per-line CCL charge against the PIC, claiming that assessing the charge against only IXCs would not be competitively neutral.⁽⁴¹⁰²⁾ GSA argues that the usage-based CCL charge is economically inefficient and should be eliminated altogether.⁽⁴¹⁰³⁾ A number of parties assert that the Commission should address modifications to the CCL charge structure in our pending access charge reform proceeding, rather than in this proceeding.⁽⁴¹⁰⁴⁾

XIII. ADMINISTRATION OF SUPPORT MECHANISMS

A. Overview

441. The following is a summary of the comments relating to the issue of the administration of the universal service support mechanisms.

B. Mandatory Contributors to the Support Mechanisms

1. Comments

442. Mandatory Contributors.. Several commenters to the Recommended Decision agree that "all telecommunications carriers that provide interstate telecommunications services" must contribute to the support mechanism and state that this definition should be construed broadly to increase the funding base and reduce the contribution burden on any particular category of carrier.⁽⁴¹⁰⁵⁾ Very few commenters, however, list types of carriers that should be required to contribute.⁽⁴¹⁰⁶⁾ Arch states that a broad base of funding does not necessarily ensure "equitable and nondiscriminatory" contributions. Arch asserts that if Congress had only intended to ensure a broad base of funding, it would have required all carriers to contribute to the support mechanisms.⁽⁴¹⁰⁷⁾ Four commenters approve of adopting a method similar to one used to identify contributors to the TRS fund, under which the Commission would identify an illustrative list of "interstate telecommunications," to identify mandatory contributors.⁽⁴¹⁰⁸⁾ One of these commenters, LCI, cautions that the list should not be considered exhaustive.⁽⁴¹⁰⁹⁾ On the other hand, Utah PSC counters that the Joint Board's recommended list is overly inclusive and renders almost all telecommunications services interstate.⁽⁴¹¹⁰⁾ Illinois CC argues that access service should not be included in the list of "interstate telecommunications" because it is not offered directly to the public.⁽⁴¹¹¹⁾ Keystone Communications argues that because section 254 does not define "telecommunications carrier," the Commission should apply the definition of "common carrier" or "carrier" contained in section 153(10), as opposed to providing an illustrative list of specific types of entities that must contribute.⁽⁴¹¹²⁾

443. Several commenters argue that specific types of carriers should not be required to contribute to the support mechanism.⁽⁴¹¹³⁾ Some commenters assert that contributions should only be required from facilities-