November 23, 1998
We continue to support the use of a forward-looking model to calculate support, although we recognize that until a reliable model is developed, the current mechanism should continue on an interim basis. We specifically recommend that inputs to the model must not be proprietary, rather they must be fully open for testing and comment.
We have established a framework whereby total high cost support is developed using an average cost on a study area basis in conjunction with a nationwide average cost benchmark. Each state is expected to support its own high cost requirement up to a reasonable level. The remaining support constitutes the federal support to be distributed to the carriers in that state for intrastate purposes. I look forward to working with the commission to develop the final parameters for this framework that will ensure reasonable comparability.
We anticipate that the federal fund established to distribute high cost support to the state jurisdiction will be reasonably close to the current level. This is appropriate given the general absence of competition at the local level.
Further, the recommendation focuses on reasonable comparability and not on the elimination of implicit support. In my view, this approach is appropriate. Section 254 does not require that regulators take measures to identify and eliminate all "implicit support." Previously, universal service support, including LTS and DEM have been made explicit. It is my belief that no further actions are required of this kind. Competition will eliminate any "implicit support" that is implicit within rates. Regulators should not attempt to do this because they are unable to replicate the market, a market that does not exist and that they do not fully understand. Such an approach could make matters worse, creating perverse incentives and perhaps resulting in unnecessarily high rates. Competition holds the promise of lower, not higher rates.
Consistent with our view on implicit support, there is no recommendation that a state remove implicit support or that a state establish a universal service fund. Each state is free to address its own universal service requirements as it sees fit. Similarly with respect to the interstate jurisdiction, we do not recommend that the commission identify and eliminate implicit support from interstate access rates. Competition for access at the federal level has not evolved any more than local competition at the state level. If the Commission decides to transfer some revenues that are now generated through access charges into the universal service fund, there is a danger that access rates now subject to price cap adjustments will be shielded and protected from appropriate reductions. Further, any consideration of access charge reductions should take into account the fact that the Commission's July, 1998 report, "Trends in Telephone Service," revealed that 68 percent of the total loop costs reflected in access revenues are borne by universal service. Since the loop has consistently been recognized as a joint and common cost, the current allocation does not appear to comply with section 254(k). That section provides that universal service shall bear no more than a reasonable share of joint and common costs. If the Commission moves some portion of access charges into the universal service fund, it should seriously consider making an offsetting reduction to the Subscriber Line Charge.
Finally, we recommend that carriers that recover their universal service contributions through a line item on the customer's bill should do so in a manner that is truthful and not misleading. Misleading and confusing consumer bills are a serious problem. Because of its urgency, the Commission should act promptly on this issue.
I look forward to continuing to work with the Commission on this most important issue of ensuring that all consumers have affordable and reasonably comparable rates and that the Act does what it was intended to do, protect consumers as the market develops.